Is the Insured a Consumer?

The much-awaited verdict 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 Apex Court has addressed the piquant question of whether an insurer can seek to insulate itself from the provisions of the Consumer Protection Act, 1986 (as recently amended in 2019) (‘Act’) by relying on the definition of commercial purpose.

Summary of facts

The insured, a commercial entity engaged in the business of sale of vehicles took out a fire insurance policy with the insurer. The insurance policy covered the office, showroom, garage, machinery lying in the showroom premises etc.

The office premises of the insured were damaged during the Godhra riots on 28 February 2002. The insurer denied the insured’s claim. Consequently, the insured instituted a consumer complaint before the State Consumer Forum, Gujarat (‘Consumer Forum’), seeking compensation of damage caused on account of the riots which resulted in the insured’s goods being destroyed by fire. The insured averred that it was entitled to be indemnified the insured sum under the policy of insurance.

The Consumer Forum, held that the insured is not covered under the expression consumer in terms of the Act since the insured is 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 complaint is not maintainable.

The insured challenged the decision of the Consumer Forum before the National Consumer Disputes Redressal Commission (‘National Commission’), which reversed the finding of the Consumer Forum. The National Commission held that the insured is a consumer under the Act and the complaint was maintainable since a person who takes a policy of insurance to cover envisaged risk, for indemnification of actual loss suffered is not ordinarily intended to generate profits. Therefore, an insurance policy is not taken for commercial purposes. 

The judgement passed by the National Commission was assailed by the insurer before the Hon’ble Supreme Court of India.

Issue

The issue framed by the Apex Court was whether the insurance policy taken by the insured (commercial enterprises) amounts to hiring of services for ‘commercial purpose’ thereby excluding it from 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 object and purpose of the Act, which is a social benefit- oriented legislation. It was observed that various definitions under the Act such as consumer, service, trader, unfair trade practice, is indicative that the legislature has attempted to widen the ambit and reach of the Act. The Court acknowledged that the provisions of the Act have to be construed in favour of the consumer to achieve the purpose of enactment as it is a social benefit-oriented legislation.

The material discussion and findings of the Apex Court in the course of its judgment are summarized below:

• Previously, in Laxmi Engineering Works v. P.S.G. Industrial Institute, (1995) 3 SCC 583, the Supreme Court dealt with the connotative expanse of the term consumer. The Court had held that the definition of a consumer under the Act does not include a person who buys any goods or avails any services for any commercial purpose.
• In turn, commercial purpose means connected with or engaged in commerce where profit is the main aim. The Court in Laxmi Engineering Works (Supra) observed that the determination of question whether the goods are bought for a commercial purpose is a question of fact to be decided in the facts and circumstances of each case.
• Thereafter, the Supreme Court noted its earlier decision in Lilavati Kirtilal Mehta Medical Trust v. Unique Shanti Developers and Ors. (2020) 2 SCC 265, where it was observed that the purchase of goods/services should have a close and direct nexus with a profit generating activity. It has to be seen whether the dominant intention or dominant purpose for the transaction was to facilitate some kind of profit generation for the purchaser.
• Merely because a person under the Act may be a commercial enterprise, it is not excluded from the definition of consumer. The identity of the person making the purchase or the value of the transaction is not conclusive to the question of whether it is for a commercial purpose.
• What is important is to examine the transaction in reference to which the claim has been filed by a person who claims to be a consumer under the definition of the Act.
• Illustration for the above finding: The case of a bank which had taken bankers indemnity insurance policy from the insurance company. The bank suffered a loss owing to some of the transactions in one of its branches. The bank raised an insurance claim stating that the alleged loss was due to dishonesty of the bank manager. The insurance claim was repudiated by the insurance company stating that the alleged loss was because of some dishonesty of the branch manager. This transaction could fall within the connotation of a commercial purpose and therefore, exclude the bank from the definition of a consumer.  
• In the present case, applying the principles of direct nexus to commercial purpose, it cannot be said that the dominant 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 definition of the Act.
• Ordinarily, an insurance contract is always to indemnify losses. The assured in the case of a loss shall be fully indemnified but shall never be more than fully indemnified.
• Although, in the instant case, hiring the insurance policy was for indemnifying a risk of loss/damages and there is no element of profit generation, yet, this finding is illustrative and it will be open for a Court to examine the transaction on the facts of every case.
• Accordingly, the appeal of the insurer was dismissed and the State Commission was directed to decide the original complaint within one year.

Conclusion

The judgment passed by the Supreme Court does reiterate the fundamental principles of insurance law, which provide that the nature of insurance contracts are contracts of indemnity where one undertakes to indemnify another against loss/damage or liability arising from an unknown event.

The insurance contract is to indemnify the defined loss, no more, no less. Based on this definition, it is arguable that the insurance as a service rendered by insurers will attract the provisions of the Act. On the first blush, an insurer may not be able to insulate itself from the clutches of the Act.

However, the conclusion in the judgment sets the tone for potential arguments by insurers that the findings of the Apex Court 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 reference to which a claim has been raised has a close and direct nexus with profit generating activity, then it may potentially succeed in non-suiting a complainant seeking to avail the benefit of the Act.

The judgment of the Apex Court in Shrikant G. Mantri v. Punjab National Bank (2022) 5 SCC 42, may also inure to the benefit of insurers. In the said judgment, the onus was sought to be laid on a consumer to demonstrate that the service availed for a commercial purpose would attract the definition of a consumer.

Practically speaking, one could witness an increase in contentious issues on the question whether the dominant intention or purpose for the transaction was to facilitate some kind of profit and if such transaction is excluded from the purview of business-to-business transactions.

Authors
	Sumeet Lall Partner, CSL Chambers Sumeet.Lall@cslchambers.com		Sidhant Kapoor Senior Associate, CSL Chambers Sidhant.Kapoor@cslchambers.com
	Shireen Kapur Associate, CSL Chambers Shireen.Kapur@cslchambers.com
**CSL Chambers, is an associated firm of Clyde & Co LLP, a Full Service Global Law Firm. For any inquiries, please feel free to contact the authors.