Supreme Court says insurers use ‘ambiguous’ and ‘negligent’ terms to avoid liability

The Supreme Court on Monday (July 20, 2026) observed that the practice of insurers preparing “ambiguous” and “negligent” policies to escape the liabilities they should bear has caused suffering to ordinary policyholders. The court said such “uncertainty” also creates obstacles in the timely processing of road accident compensation claims.

A Bench of Justice Sanjay Karol and N. Kotiswar Singh observed that insurance companies must use clear and precise language while drafting standard insurance policies to avoid multiple interpretations. “When a party with all the authority writes an ambiguous policy, the ordinary policyholder suffers. In many cases, insurers have taken advantage of this ambiguity either to escape the liability they should have rightly borne or, on the contrary, found themselves saddled with a liability they never intended to assume simply because their policy was negligent,” the Bench observed.

The comments came as the court was hearing an appeal filed by Oriental Insurance Company against the Chhattisgarh High Court’s February 4, 2025 judgment ordering it to pay ₹32.67 lakh as compensation in a road accident claim.

The case arose out of an accident involving a company-insured vehicle carrying passengers on a religious journey to various destinations in Nepal. The vehicle crashed into a hill killing three persons, including the driver Riaz Khan and passenger Harish Yadav. Following the accident, Mr Yadav’s wife, children and mother filed a suit in the Motor Accident Claims Tribunal (MACT) seeking compensation of ₹48.99 lakh.

The tribunal ordered the owner of the vehicle to pay compensation along with interest at 6% per annum from October 22, 2011, i.e. from the date of filing of the suit. However, the High Court modified the ruling and held that the insurer is responsible for satisfying the claim instead of the vehicle owner.

MACT orders lack ‘clear rationale’

The bench also expressed reservations about the manner in which the orders were passed to the MACT, noting that many of them lacked “adequate and clear reasoning”. It said if this is not resolved, claim petitions will continue to be delayed and appeals will continue to mount.

“In certain cases that have come before this court, including the present one, the tone, content and scope of the orders made by the tribunals concerned have caused us considerable dismay. In this case, for example, the tribunal recorded the pleadings and evidence in detail. However, their correlation with the facts of the case and the effect of that correlation on the final outcome was lacking,” Karol said.

The insurance company argued that since the accident occurred outside the territory of India, the policy did not cover the insured event. The Bench, however, rejected this contention saying that if the insurer intended to exclude coverage for accidents occurring outside India, it should have “expressly stated” the same in the policy. It noted that the offending vehicle was legally allowed to travel to Nepal only after the authorities at the international border crossing were satisfied that all legal requirements had been met.

“It should have effectively and clearly communicated the terms of the contract as the terms are drafted unilaterally only by the insurer. Basically ‘Cover what you want. Exclude what you want. But make sure you do it clearly. Careless drafting could cost you’…,” the Bench said.

He added that where the terms of an insurance contract can be interpreted in more than one way, the courts should adopt the interpretation that best supports the useful objective of the Motor Vehicles Act 1988.

Accordingly, the Supreme Court has ordered that if cross-border coverage is excluded, insurance policies must state this expressly and inform policyholders that they will need to obtain a special endorsement before making an interstate trip.

“The language adopted in the policy should be clear and unequivocal and every policy, if it is intended to cover any extraterritorial jurisdiction, must be clearly mentioned… The insurer should communicate this requirement for extension of cover, as in the case of separate health insurance policies taken out for foreign travel, as it is possible that the average consumer may not be aware of the rigor of the law,” the Bench said.

“No Regulatory Clarification”

The court also pointed to the regulatory vacuum governing cross-border insurance coverage. He noted that while the Interstate Vehicle Rules, 2021 provide a legal framework for Indian vehicles to travel abroad on valid interstate permits, they do not clarify whether national insurance covers the country where the vehicle is permitted to operate.

“To date, there appears to be no clear law, binding precedent or regulatory clarification in place to clarify the extension of insurance policies for cross-border travel. This uncertainty creates hurdles in adjudicating road accident claims in a timely and efficient manner, which affects claimants the most,” the Bench said.

To address this shortcoming, the Bench recommended the Insurance Regulatory and Development Authority of India (IRDAI), the insurance sector regulator, to consider issuing a master circular standardizing cross-border coverage provisions across all motor insurance contracts.

The court therefore ordered the insurance company to submit a claim within four weeks and disposed of the appeal.

Published – 20 Jul 2026 22:36 IST