Whose insurance is it anyway?

This insight piece has been prepared by colleagues Sumeet Lall (Partner) and Sidhant Kapoor (Senior Associate) in our New Delhi associated office, CSL Chambers, who examine the latest verdict of the Supreme Court of India relating to the contours of an exclusion clause in a Standard Fire & Special Perils policy.

Background

Recently, the Hon’ble Supreme Court of India in Texco Marketing Pvt. Ltd. v. Tata AIG General Insurance Co. Ltd. and Ors. Civil Appeal No. 8249 of 2022, examined the contours of an exclusion clause in a Standard Fire & Special Perils policy.

The authors examine the latest verdict of the Supreme Court and adumbrate its potential effects for the stakeholders who are looking at or are already involved in contentious issues over operability of insurance policy terms, conditions and exclusions.

A contract of insurance is and always continues to be one for indemnity of the defined loss, no more, no less. Unless a contract of insurance is vitiated by reason of any fraudulent act on the part of the insured, the insurer is supposed to pay but for any legitimate objections as regards thereto.

Happening of the event against which insurance cover has been taken does not by itself entitle the assured to claim the amount stipulated in the policy. The insured is entitled to indemnification subject to the limitations of the contract and upon proof of the actual loss suffered by the insured.

Supreme Court’s latest decision in Texco (Supra)

Facts

In the case at hand, the insured secured a Standard Fire & Special Perils policy from the insurer, which was meant to cover a shop situated in the basement of the building. However, the exclusion clause stipulated that it does not cover the basement. The insured promptly paid premium to the insurer.

Ultimately, the shop met with a fire accident for which the insured raised an insurance claim. The surveyor noted that earlier inspections were made, and the insurer was aware that the shop was in a basement. Yet, taking umbrage under the exclusion clause, the insurer repudiated the insured’s claim. This resulted in the insured approaching the concerned consumer forum.

The State Consumer Disputes Redressal Commission (‘State Commission’) rejected the insurer’s defence to the insured’s claim and held the insurer liable for deficiency in service and unfair trade practice. The National Consumer Disputes Redressal Commission (‘National Commission’) overturned the State Commission’s decision. The National Commission found favour with the insurer’s reliance on the exclusion clause although it was noted that the shop was inspected prior to the execution of the insurance contract and thereafter.

It is in this backdrop that the matter reached the Supreme Court.

Issue

Whether an exclusion clause destroying the very contract knowingly entered, can be permitted to be used by a party who introduced it, became a beneficiary and then avoids its liability?

Findings

After expounding the gravamen of the case, the Supreme Court proceeded with its analysis and the same is summarized as follows.

• Contracts of insurance are standard form/adhesion contracts which are to be signed by the party in a weaker position, who has little choice about the terms.
• The concept of freedom of contract loses some significance in a contract of insurance. The consumer is made to sign these standard form contracts and such consumer has very little choice to negotiate the terms of the contract.
• The obvious intendment in a contract of insurance is to cover any contingency that might happen in the future. A premium is paid for that purpose, as there is a legitimate expectation of reimbursement when an act of god happens.
• An exclusion clause in a contract of insurance must be interpreted differently. Insurance contracts are premised on the notion of good faith. The burden lies on the insurer while relying on an exclusion clause. Such clause is not meant to safeguard the insurer but to be pressed into service on a contingency.
• An exclusion clause should be understood on the touchstone of the doctrine of reading down in the light of the underlining object and intendment of the contract. A party, who relies upon the exclusion, shall not be the one who committed an act of fraud, coercion or misrepresentation, particularly when the contract along with the exclusion clause is introduced by it. Such exclusion clause has no independent life of its own and cannot destroy the main contract. When it is destructive to the main contract, right at its inception, it has to be severed, being a conscious exclusion, though brought either inadvertently or consciously by the party who introduced it.
• The principles of common law relating to fairness must apply with greater rigor in standard form contracts such as insurance contracts.
• A very high standard of good faith, disclosure and due compliance of notice is required on the part of the insurer rights from the intention to execute the contract.
• There is an onerous responsibility on an insurer while dealing with an exclusion clause. The insurer is statutorily mandated as per Clause 3 of the Insurance Regulatory and Development Authority (‘IRDAI’) (Protection of Policy Holder's Interests, Regulations 2002) (‘Regulations’) to provide all material information in respect of a policy to the insured to enable him to decide on the best cover that would be in his interest.
• Clause 4 of the Regulations enjoins a duty upon the insurer to furnish a copy of the proposal form within thirty days of the acceptance by the insured, free of charge. Any non-compliance, will entail that the offending clause, cannot be pressed into service by the insurer against the insured.
• The doctrine of blue pencil attains relevance while dealing with the exclusion clause in the present case for striking off the offending clause being void ab initio.
• If the Court is satisfied that a fraud or misrepresentation resulted in execution of the contract through the suppression of existence of a mutually destructive clause facilitating a window for the insurer to escape from the liability while drawing benefit from the consumer, the resultant relief will have to be granted.
• The scheme of the Consumer Protection Act, 2019, is to facilitate the State Commission and National Commission to exercise jurisdiction over a contract which is unfair and grant consequential relief.

In no uncertain terms, the Supreme Court has cautioned the insurance companies to mandatorily comply with Clause 3 and 4 of the Regulations. It has observed that non-compliance by the insurance companies would result in effacement of their rights to plead repudiation of contract by placing reliance upon any of the terms and conditions included thereunder.

Ultimately, the decision of the National Commission was set aside by the Supreme Court and the appeal was allowed in part.

A critique

With utmost respect to the decision rendered by the Supreme Court, the authors opine that the verdict could pave the way for multifarious disputes between insurers and insureds, where the insureds could seek to vindicate their duty of good faith by simply seeking a declaration that the insurance contract is an unfair one.

Moreover, while the decision at hand extensively discusses the compliance of certain Clauses under the Regulations, it appears that there is no mention of the amended Regulations of 2017, which have superseded the 2002 Regulations. Consequently, the obligation of compliance with the superseded Regulations arguably militates against the object and scope of the 2017 Regulations[1], which oblige the insureds to supply all material information to the insurers to enable them to undertake risks.

An examination of the 2017 Regulations further reveals that it permits insurers to waive exclusions specific to the policy upon payment of additional premium. Accordingly, insureds could seek endorsements in insurance policies which enhance coverage and carve back cover for claims which are originally excluded.

Further, it is envisaged that the brokers licensed under the IRDAI aid and assist insureds in seeking placement of risks and provide adequate information which would assist insureds in determining the level of insurance cover and other modalities regarding the insurance products. Therefore, for commercial products such as Standard Fire & Special Perils policies, can it be asserted that insureds have little choice to negotiate the terms of the contract except to sign on dotted lines.  

In view of the above, it can be argued that the object of imposing fetters on insurers in unilaterally relying on exclusions which snipe against the main purpose of the policy is laudable. At the same time, it could invite frivolous, vexatious and fraudulent claims from recalcitrant litigants, who may simply seek to rely on the Supreme Court’s decision in isolation in their endeavour to further such claims.

In that event, the question also arises whether the insurers are disentitled to question or even reject insurance claims where the actual loss is not proven, although material information in the opinion of the insureds was not provided to them. Would the Supreme Court’s previous decisions upholding the duty of disclosure of material information by insureds to the insurers not create a vacuum for Courts in adjudicating claims in the future.

 Additionally, the position of law that an insured cannot claim anything more than what is covered by the insurance policy and the terms of such contract have to be construed strictly still holds the field. In these circumstances, it will be onerous for both parties, insurers and insureds to reconcile the observations of the Supreme Court made in different points in time.

On the applicability and reliance on exclusions clauses too, a previous coordinate bench decision of the Supreme Court in New India Assurance Company Limited and Ors. v. Rajeshwar Sharma and Ors. (2019) 2 SCC 671 may be highlighted since it has not found mention in Texco (Supra). In this case, the Supreme Court relied upon a 2016 judgment of the UK Supreme Court which observed that the mere fact that a provision in a contract is expressed as an exception does not necessarily mean that it should be approached with a pre-disposition to construe it narrowly.

Conclusion

Insurance policies are not intended to generate profits. There are insureds who have been seeking cover for envisaged risks with the same insurers for years. In those circumstances, to preclude insurers from relying on exclusion clauses, may be a recipe for comfort for insureds, who could simply plead ambiguity and lack of material information and seek the blue pencil test to be applied in a blanket manner. Hopefully, a subsequent decision by the Hon’ble Apex Court would harmonize the interests of insurers/insureds in unison.  

Authored by CSL Chambers, New Delhi: Sumeet Lall (Partner - Sumeet.Lall@cslchambers.com), Sidhant Kapoor (Senior Associate - Sidhant.Kapoor@cslchambers.com) – should you have any queries relating to the content of this insight piece or require further information, please don’t hesitate to contact us. 

Authors
	Sumeet Lall Partner, CSL Chambers Sumeet.Lall@cslchambers.com		Sidhant Kapoor Senior Associate, CSL Chambers Sidhant.Kapoor@cslchambers.com
**CSL Chambers, is an associated firm of Clyde & Co LLP, a Full Service Global Law Firm. For any inquiries, please feel free to contact the authors.