Supreme Court: Enterprises can be insurance consumers

In April 2023, in a significant ruling, the Supreme Court of India held that where the purpose of an insurance cover is to indemnify the risk of loss or damages caused to an insured commercial entity, and there is no element of profit generation, such commercial entity would qualify as a “consumer” under section 2(1)(d) of the Consumer Protection Act, 1986.

However, the court made it expressly clear that this is no straightjacket formula, and that “it will always be open to be examined on the facts of each case, as to the transaction in reference to which the claim has been raised has any close and direct nexus with profit-generating activity”.

The supreme court culled out two important aspects to be looked into when deciding whether the dispute filed by a commercial entity would qualify as a consumer dispute or a commercial dispute:

• Whether the goods are purchased for resale or for commercial purposes; and

• Whether the services are availed for any commercial purpose.

The court heard a special leave petition against the 2004 order of the National Consumer Disputes Redressal Commission (NCDRC), with which it was held that for an insurance policy taken for indemnification of an actual loss and not intended to generate profits, any complaint filed in breach of such policy would be maintainable and, despite the insured being a commercial entity, would qualify as a consumer as per the 1986 act.

In this case, the insured (respondents) were entities engaged in the sale of vehicles. Respondent No. 1 took out a fire insurance policy with the appellant for a cover of INR7,538,000 (USD160,000) and respondent No. 2 for a cover of INR9 million. The goods suffered damage in the post-Godhra riots, a series of violent incidents in Gujarat, in 2002. The appellant denied the claim of respondent No.1, while admitting the claim of respondent No. 2 to the extent of INR5,429,871.

The respondents filed a complaint before the State Consumer Disputes Redressal Commission (SCDRC) under the 1986 act, but the latter held it not maintainable on the grounds that they did not fall under the definition of consumer since it was a company running a business from the premises to earn profits, and as such fell under the classification “for commercial purpose”. The complaint was held as not maintainable under the act.

An appeal preferred by the respondent before the NCDRC recorded that the expression used “for any commercial purposes” would mean that the goods purchased or services hired should be used in any activity directly intended to generate profit. However, in the present case, the policy purchased was not to be used in an activity intended to generate profit.

Therefore, the person taking the insurance policy to cover envisaged risks for indemnification of the actual loss suffered would not be considered having done so with the intention to generate profits. As such, the buyer of the policy would be covered under the definition of consumer under section 2(1)(d) of the act.

In the special leave petitions before the Supreme Court, the bench did not agree with the submission made on behalf of the appellant that if insurance claims are covered under the 1986 act, virtually all insurance matters will come within the purview of the act, and this will render the Consumer Protection Act, 2019, insignificant. The Supreme Court viewed that both these acts had a different scope and ambit, and had different remedial mechanisms, and were in different spheres, having no internal relationship.

While dismissing the special leave petitions, the court restored the complaint on the file of the SCDRC.

Given the expansion of the definition of the word “consumer”, the judgment is likely to change the way matters may be brought up for adjudication under the 2019 act, and approached for decisions. There may be an increase in consumer complaints instituted by corporates under the consumer protection laws given the amplification of rights made available to them by way of this judgment.

While dismissing the Special Leave Petitions, the Supreme Court established two rules of thumb for adjudication of similar matters in future. These were whether the insurance service has a close and direct nexus with the profit-generating entity and whether the dominant intention or purpose of purchase of an insurance policy was to facilitate profit generation. Thus, the court restored the complaint on the file of the SCDRC.