The much awaited judgment of the Hon’ble Supreme Court of India in ‘National Insurance Co Ltd. vs. Harsolia Motors and Ors.” 2023 SCC OnLine SC 409, was recently pronounced. The High Court considered the vexed question of whether an insurer could seek to insulate itself from the provisions of the Consumer Protection Act 1986 (recently amended in 2019) (“the Act”) by relying on the commercial purpose definition.
Summary of the facts
The insured, a commercial company engaged in the sale of vehicles, has taken out fire insurance with the insurer. The insurance policy covered the office, showroom, garage, machinery located on the showroom premises, etc.
The insured’s office premises were damaged during the Godhra riots on 28 February 2002. The insurer rejected the insured’s claim. Consequently, the insured filed a consumer complaint before the State Consumer Forum, Gujarat (“User forum‘), seeking compensation for damages caused by the disturbance resulting in the destruction of the insured’s goods by fire. The insured claims that he is entitled to compensation in the amount of the sum insured under the insurance policy.
The Consumer Forum held that the insured was not covered by the term consumer within the meaning of the Act as the insured was a company running a business from the premises to earn profits. Accordingly, the Consumer Forum concluded that the insurance policy was taken out for commercial purpose and the appeal was not maintainable.
The insured appealed the decision of the Consumer Forum to the National Commission for the Resolution of Consumer Disputes (“National Commission‘), which reversed the Consumer Forum’s finding. The National Commission ruled that the insured is a consumer under the law and the complaint is admissible because a person who takes out an insurance policy to cover the intended risk, because the compensation for actual loss is not usually intended to generate profits. Therefore, an insurance policy is not taken out for commercial purposes.
The decision passed by the National Commission was challenged by the insurer before the Hon’ble Supreme Court of India.
The question posed by the apex court was whether the insurance policy taken by the insured (commercial enterprises) constituted hiring of services for “commercial purpose” thereby falling outside the ambit of the term “consumer” under the Act.
Discussion and findings of the court
Before arriving at its findings, the court briefly discussed the subject matter and purpose of the Act, which is legislation aimed at social benefits. It is observed that the various definitions in the Act such as consumer, service, trader, unfair trade practice are indicative that the legislature has tried to widen the scope and reach of the Act. The court recognized that the provisions of the Act must be interpreted in favor of the consumer to achieve the purpose of the enactment as it is a social benefit oriented legislation.
The substantive discussion and findings of the Supreme Court in the course of its decision are summarized below:
- Before that in Laxmi Engineering Works v. PSG Industrial Institute, (1995) 3 SCC 583, the Supreme Court dealt with the connotative extension of the term consumer. The Court held that the definition of consumer under the Act does not include a person who purchases goods or avails services for commercial purposes.
- Commercial purpose, on the other hand, means relating to or engaged in a trade where profit is the primary objective. The court in Laxmi Engineering Works (Supra) notes that the determination of whether the goods were purchased for commercial purposes is a question of fact to be decided on the facts and circumstances of each case.
- The Supreme Court then noted its earlier decision in Lilavati Kirtilal Mehta Medical Trust v. Unique Shanti Developers & Ors. (2020) 2 SCC 265, where it was noted that the purchase of goods/services must have a close and direct connection with a profit-generating activity. It has to be seen whether the dominant intention or the dominant purpose of the transaction is to facilitate some kind of profit generation for the buyer.
- Just because a person may in law be a commercial enterprise does not exclude it from the definition of a consumer. The identity of the person making the purchase or the value of the transaction is not determinative of whether it is commercial.
- The important thing is to verify the transaction for which a claim has been made by a person who declares himself to be a consumer within the meaning of the law.
- An illustration of the above finding: The case of a bank that took out a bankers indemnity insurance policy from the insurance company. The bank suffered a loss due to some of the transactions in one of its branches. The bank filed an insurance claim, saying the alleged loss was due to dishonesty on the part of the bank manager. The insurance claim was denied by the insurance company, stating that the alleged loss was due to some dishonesty on the part of the branch manager. This transaction may fall within the meaning of a commercial purpose and therefore exclude the bank from the definition of a consumer.
- In the present case, applying the principles of direct commercial purpose, it cannot be said that the predominant intention or dominant purpose of the transaction was to facilitate some kind of profit generation for the insured. Thus, the insured is a consumer within the meaning of the law.
- Normally, the insurance contract is always for indemnification of losses. The insured in the event of a loss will be fully compensated, but will never receive more than full compensation.
- Although in the present case the hiring of the insurance policy was for indemnification of risk of loss/damage and there is no element of profit generation, yet this finding is illustrative and it will be open to the court to consider the transaction on the facts of each case.
- Accordingly, the insurer’s appeal was dismissed and the State Commission was ordered to rule on the initial appeal within one year.
The judgment rendered by the Supreme Court reiterates the basic principles of insurance law which stipulate that the nature of insurance contracts are contracts of indemnity whereby one undertakes to indemnify another against loss/damage or liability arising out of an unknown event.
The insurance contract must indemnify the specified loss, no more, no less. Based on this definition, it can be argued that insurance as a service provided by insurers will attract the provisions of the Act. First, the insurer may not be able to insulate itself from the clutches of the law.
However, the decision’s conclusion sets the tone for potential arguments from insurers that the high court’s findings are merely illustrative and not a directive for all insurance transactions. If, in a given case, the insurer is able to demonstrate that the transaction in respect of which a claim is being made has a close and direct connection with a profit-generating activity, then it may potentially be able to dismiss the case of a claimant seeking to benefit the benefit of the law.
The decision of the Supreme Court in Shrikant G. Mantri v. Punjab National Bank (2022) 5 SCC 42, may also act in favor of insurers. The said decision sought to place the burden on the user to prove that the service used for commercial purposes would attract the definition of user.
Practically speaking, it may witness an increase in contentious issues as to whether the dominant intention or purpose of the transaction is to facilitate some kind of profit and whether such a transaction is excluded from the ambit of business-to-business transactions.