Insurance company or broker may have to pay a penalty or compensation for mental harassment to the policyholder

These are some of the changes proposed in the draft Insurance Ombudsman Rules (Amendment) proposed by the Ministry of Finance.

These are some of the changes proposed in the draft Insurance Ombudsman Rules (Amendment) proposed by the Ministry of Finance. After consultation with stakeholders, the draft will be notified by the ministry. The original rules were first published in 2017. Changes have been proposed in the areas of handling complaints and the appointment and operation of the Insurance Ombudsman.

One of these changes is related to the award of compensation. Under the draft, the Insurance Ombudsman will not award damages in excess of the loss suffered by the complainant as a direct result of the cause of action, subject to the maximum amounts payable under the policy, including bonus, interest, etc., as per the policy terms and conditions.

“In case of undue hardship suffered by the complainant due to any unjust, arbitrary or malafide action of the insurer/insurance broker, the Insurance Ombudsman may also, for reasons recorded in writing, impose a penalty on such insurer/insurance broker, payable to the complainant, up to the extent of 100 percent of the amount awarded, subject to a maximum of ₹20 lakh for consequential damages and/or ₹1 lakh for mental harm, harassment,” the proposal said. As per the current provision, the Ombudsman cannot award damages in excess of ₹50 lakh (including any relevant costs).

It has also been proposed that the ruling of the Insurance Ombudsman will be binding on the insurers or insurance broker, as the case may be, unless appealed, and in case of non-compliance with the ruling within the period, the insurer or insurance broker will have to pay a penalty to the complainant in addition to interest. As of date, only interest is provided.

Video conference

Draft has directed that the Insurance Ombudsman shall register any complaint immediately and within a period not exceeding one working day from the date of receipt of the complaint. The Insurance Ombudsman may allow the insurer (including its agents and intermediaries) or insurance broker to be heard by videoconference.

It is proposed to add two new provisions. One of them is about authorizing the Insurance Ombudsman to process complaints for a settlement through mediation or awarding an award. The second new provision reads: “The Insurance Ombudsman may recommend to the IRDAI to impose a penalty on insurers or insurance brokers where he is of the opinion that the said insurer or insurance broker has repeatedly acted in a manner which is arbitrary, unjust or tantamount to intimidation of policyholder(s) or if the insurer or insurance broker fails to comply with recommendations or rewards of the Insurance Ombudsman,” the report said.

Another new provision is about setting up of an Appellate Authority, to be constituted by IRDAI. This must be set up within six months from the date of notification of the rules. The Appellate Authority may entertain any appeal filed against the award granted by the Insurance Ombudsman and the IRDAI may also set up multiple Appellate Authority benches.

Published on November 26, 2025