Among the costliest mistakes Indian business owners can make are those pertaining to business insurance. Companies may be subject to serious financial and legal repercussions, if they have inadequate coverage, ignore legal requirements, or implement business risk management strategies poorly. Businesses are required to maintain policies that align with their operational risks, contractual obligations, and statutory duties under Indian law, specifically the Insurance Act, 1938, and regulations issued by the Insurance Regulatory and Development Authority of India (IRDAI).
The most frequent insurance mistakes and how to prevent them are broken down in detail below.
- Ignoring or Not Enough Insurance for Required Policies
Many companies believe that one general liability policy will be adequate. This poses a legal as well as a financial risk.
- Commercial vehicles are required to have current third party liability insurance under the Motor Vehicles Act of 1988.
- Regulations specific to a given industry may mandate public liability coverage or professional indemnity insurance.
Advice for risk management: Perform a formal risk audit that addresses contracts, supply chains, personnel, assets, and specialised exposures like maritime or cyber risks.
- False statements and failure to disclose facts
The foundation of Indian insurance law is the idea of uberrima fides, or the highest good faith. Any material fact that is omitted or misrepresented can make a policy null and void.
In the case of New India Assurance Co. Ltd. v. Hira Lal Ramesh Chand, the Supreme Court reiterated that truthful disclosure is a requirement for legitimate coverage.
Advice for risk management: Include all pertinent information in proposal forms and alert insurers as soon as there is a significant change, such as a move, the purchase of assets, or an increase in the number of employees. - Disregarding Policy Ambiguities and Exclusions
Because business owners fail to notice exclusions or ambiguous clauses, many claims are unsuccessful. Courts have ruled that particular policy language takes precedence over broad interpretations, most notably in Oriental Insurance Co. Ltd. v. Narsingh Ispat Ltd.
Advice for risk management: Consult a licensed broker or insurance attorney to go over the terms of your policy line by line. Close coverage gaps by negotiating endorsements. - Outdated Insurance That Isn’t Appropriate for Today’s Risks
New locations, digital systems, and more employees all introduce new risks as business operations change. However, a lot of policies don’t change for years, which exposes people to risk.
Advice for risk management: Every year or following a significant operational change, review and update policies. - Not Consulting a Professional
Contracts for insurance are complicated legally. It’s simple to miscalculate coverage needs in the absence of professional guidance. Licensed brokers are allowed by the IRDAI to offer advice on claims processing, compliance, and product selection.
Advice for risk management: To guarantee compliance and the best possible protection, retain an experienced broker or attorney with an IRDAI license. - Selecting Insurance Companies Without Examining Claim History
If the insurer has a bad settlement history, a low premium is useless. Poor claim handling frequently leads to disputes, as demonstrated by cases such as United India Insurance Co. Ltd. v. Sathish Kumar.
Advice for risk management: Before choosing an insurer, look at IRDAI’s data on claim settlement ratios and industry comments. - Ignoring Tax and Regulatory Compliance Issues
Recent amendments have strengthened consumer protection and raised compliance requirements, such as the Insurance Laws (Amendment) Act, 2015 and its follow up changes in 2022. Penalties and tax obligations may result from noncompliance.
Advice for risk management: Keep premium accounting open and transparent, make sure insurance transactions comply with GST, and refrain from dishonest tactics that might draw attention from the authorities. - Using Just Basic Coverage
A portion of the risk spectrum is covered by fire and general liability insurance. Important extras could be:
- Professional Indemnity (E&O): for IT companies, consultants, solicitors and architects.
- Cyber liability is essential for companies that rely heavily on data.
- Disaster related income loss is covered by business interruption.
- Management is shielded from personal liability claims by directors and officers (D&O).
- Undervalued Assets
The “average clause”, which lowers claim payouts proportionately, is activated when property is insured for less than its market value.
Advice for risk management: Regularly carry out expert appraisals and modify insurance amounts to account for asset upgrades and inflation. - Inadequate Claims Documentation
The significance of strong evidence in insurance disputes has been acknowledged by the Supreme Court. Payouts may be significantly delayed or decreased if reports, invoices, or proof of loss are missing.
Advice for risk management: From the first day of a claim, keep both digital and hard copies of all documents, including invoices, surveyor reports, FIRs, and photographs.
Conclusion
According to Indian insurance law, avoiding business insurance errors is not only a matter of financial prudence but also a legal requirement. Effective business risk management advice is based on proactive compliance, truthful disclosure, frequent policy reviews, and professional advice.
Indian business owners can protect themselves from operational disruption and legal liabilities by identifying coverage gaps, accurately valuing their assets, and collaborating with reliable insurers. The most astute companies in the highly regulated and dynamic insurance sector are those that view risk management as an integral component of their expansion plan rather than an afterthought.
