The used car with borrowed no-claim bonus
Farhan buys a used 2019 hatchback for Rs 4.2 lakh. The seller's motor policy expired 40 days before the sale. Farhan asks POSP Nisha for 'the cheapest comprehensive cover'. Nisha issues a policy with 20% no-claim bonus on the seller's verbal assurance that he had made no claim, and does not arrange a pre-policy inspection. The car has unrepaired damage to its front bumper and bonnet, which Nisha photographs on her phone but does not disclose. Three weeks later Farhan's cousin hits a road divider; the repair estimate is Rs 78,000. The insurer's photos show the bumper damage pre-dates the policy, and its records show the seller had a claim eight months ago.
1. Identify the policy issues raised by the break in cover, the missing inspection and the existing damage.
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Three separate issues arise.
- Break in cover. The seller's policy had expired 40 days earlier. A fresh own-damage policy after a gap is not a renewal; the insurer is entitled to inspect the vehicle before accepting the risk, precisely to record its condition. No inspection means the insurer's underwriting record is incomplete and the pre-existing damage was never excluded in writing.
- Pre-existing damage. Damage that existed before inception is not a fresh loss. The photographs on Nisha's phone and the insurer's own images show the bumper and bonnet damage pre-dates the policy. The insured must prove that the claimed damage occurred during the policy period.
- Non-disclosure. Nisha knew about the damage and did not disclose it. That is a material fact for own-damage underwriting and undermines the basis of the cover.
The third-party position is unaffected here because this is an own-damage claim.
2. Was the 20% no-claim bonus legitimate, and what are the consequences of the false declaration?
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No. A no-claim bonus is a renewal discount earned by the insured's own claim-free record in the immediately preceding policy year, with continuous cover. Here there was a 40-day gap and a new owner, so the continuity required for a bonus is broken. The seller's verbal assurance is not evidence, and it was in any case false: the insurer's records show a claim eight months earlier.
The declaration is a material misrepresentation that reduced the premium. The insurer can:
- cancel or repudiate the own-damage claim on that ground;
- recover the discount that was wrongly allowed;
- treat the policy as having been obtained on a false declaration.
The fact that the bonus was 'only' 20% does not make it harmless: the premium was calculated on a false risk record. Farhan's own honesty is also relevant, since he signed the proposal containing the declaration.
3. What should Nisha have done, and how should the claim now be handled?
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Nisha should have:
- Told Farhan that the lapsed policy breaks continuity and that own-damage cover requires an inspection.
- Arranged the inspection and disclosed the existing bumper and bonnet damage so it could be recorded and excluded.
- Quoted the premium without no-claim bonus, explaining that the bonus must be earned on his own policy and cannot be imported from the seller.
- Recorded the true answers and let Farhan verify and sign the completed proposal.
On the claim, the insurer should assess only damage that is new and proveable from the post-accident images, deduct the pre-existing damage and apply depreciation. It may also repudiate because of the false no-claim bonus declaration. Nisha faces code-of-conduct action for facilitating a false declaration and failing to disclose known damage. Farhan can use the insurer's grievance officer, Bima Bharosa and the Ombudsman, but his recovery is likely to be limited to genuinely fresh damage, if anything.