INTRODUCTION

In a recent decision in M/s Texco Marketing Pvt. Ltd. v TATA AIG General Insurance Company Ltd. & Other, the Hon'ble Supreme Court of India (SC), 2022 SCC OnLine SC 1546, whilst adjudicating a dispute in relation to an insurance claim, analyzed the validity of exclusion clauses which run contrary to the object of the main contract.

It was observed that such contracts, for instance insurance contracts, are usually one sided and in the form of adhesion contracts or standard form contracts in which the insurer being the dominant party dictates the terms and conditions leaving the insured with very little choice and/or bargaining power in which the insured can only either accept the same or leave it.

Thus, in the present judgement, the SC highlighted the duty of insurance companies to disclose all material terms of the policy to the insured, in accordance with the Insurance Regulatory and Development Authority (Protection of Policyholders' Interests) Regulations, 2002 (Regulations) and the doctrine of 'uberrimae fidei' or utmost good faith.

BACKGROUND

On 28 July 2012, Texco Marketing Pvt Ltd (Appellant) obtained a standard fire and special perils policy (Policy) from TATA AIG General Insurance Company Limited (Respondent) (the Appellant and the Respondent are collectively referred to as Parties) for its shop situated in the basement of a building. The Policy was issued after due inspection of the shop by the Respondent. However, the exclusion clause of the Policy specified that it does not cover the basement. In addition to this shop, the Respondent had insured another shop of the Appellant which was similarly situated in the basement. The Appellant paid the premium on time and also gave notice of an additional construction taking place in the shop which was also inspected by the Respondent.

Subsequently, the shop met with a fire accident and the Appellant raised a claim for the same under the Policy. The Surveyor appointed by the Respondent to assess the claim realized that the Respondent was aware about the shop situated in the basement due to earlier inspections conducted by it. Placing reliance on the exclusion clause in the Policy, the Respondent denied the Appellant's claim.

The Appellant challenged the denial of its claim. The State Consumer Disputes Redressal Commission (SCDRC) passed an order rejecting the Respondent's contention holding that there was no adequate disclosure and as such the Respondent was deficient in service and indulged in unfair trade practice. In the appeal filed before the National Consumer Disputes Redressal Commission (NCDRC), the NCDRC, setting aside the decision rendered by the SCDRC, upheld the exclusion clause of the Policy while granting a sum of Rs. 7.5 lakhs to the Appellant for deficiency in service. Hence the present appeal before the SC.

QUESTION FOR CONSIDERATION

Whether an exclusion clause in a contract can be used by a party who knowingly entered into the contract, introduced the clause and became a beneficiary, and then avoids its liability by placing reliance on the clause?

DECISION OF THE SC

  • The SC laid emphasis on wide array of judgements to hold that an exclusion clause cannot be relied upon by the Respondent when they are inconsistent with the main purpose for which the contract was entered into by the Parties. SC relied on the 'main purpose rule' which essentially states that regard must be given to the main purpose of the contract and clauses inconsistent with the main purpose must be read down. SC also noted that when exclusion clause "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." In furtherance of this, the SC also invoked the 'Doctrine of Blue Pencil' which examines treatment and existence of those clauses which are repugnant to the main contract and can be done away with, while retaining the other terms, as such repugnant clauses are detrimental to the execution of the main contract and defeat the very objective of the contract.
  • The SC upheld the prime importance of principles of good faith which is found in the legal maxim 'uberrimae fidei' and how the same should be maintained and kept in mind by the Parties entering into an insurance contract which is a special contract intended to benefit a consumer. The SC opined that the Respondent has a duty towards disclosing material facts and furnishing a copy of the exclusion clause to the Appellant which makes the contract unenforceable on the date on which it is executed. In case a due procedure of fairness is not followed by the Respondent, the exclusion clause should be treated as non-existent. For the benefit of an insurance contract, the term 'material fact' was ascertained to mean any fact which has a bearing on the insurance contract and the risk covered under the same.
  • The SC ruled against the decision of the NCDRC stating that they did not consider the aspect of duty to disclose which should have been followed by the Respondent. In fact, the Appellant was not made aware about the terms of the exclusion clause which were in fact taken under scrutiny by SCDRC.
  • The SC considered clauses 3(2) and 3(4) of the Regulations to analyse the Respondent's duty to disclosure of material information regarding the policy to the Appellant along with Respondent's duty of attaching a certificate at the end of the proposal form declaring that the contents of the policy have been explained to the Appellant properly and the Appellant understands the significance of the proposed contract fully.
  • The SC also highlighted clause 4 (Proposal of Insurance) of the Regulations which casts a duty on the Respondent to present a copy of the proposal form, free of cost to the Respondent within 30 days of their acceptance.
  • The SC while discussing the ambit of various sections of the Indian Contract Act 1872 (ICA) held that a voidable contract (as defined under section 2(i) of ICA) i.e., a contract enforceable at the instance of one party but not at the option of others if consented to fraudulently (as defined under section 17 of ICA) or by misrepresentation (as defined under section 18 of ICA) becomes voidable at the option of the party whose consent was obtained through such means (as defined under section 19 of ICA). It was held that once it is proved in the court of law that fraud or misrepresentation existed at the time of the execution of the contract by suppressing the existence of an exclusion clause, in such scenarios, relief will be granted to the party who has been aggrieved by such fraud and/or misrepresentation.
  • SC further noted that NCDRC and SCDRC under section 58 (Jurisdiction of National Commission) and section 47 (Jurisdiction of State Commission) of the Consumer Protection Act 1986 (CPA 1986) are empowered to not only identify an unfair contract but also to examine the issues regarding the terms of the contract and decide if they are unfair (under section 46 of CPA 2019) and conclude that an unfair trade practice has been adopted (under section 2(1)(r) of the CPA 1986 and under section 47 of CPA 2019) which has caused grave injustice to the consumer for which relief will be granted.
  • In conclusion, the SC issued a 'word of caution' to all the insurance companies to comply with the Regulations which mandate fair and open disclosure of all material terms of the policy, non-compliance of the which will leave the insurer remediless when denying and/or rejecting a claim.

CONCLUSION

The judgement reiterates the importance of harmonious interpretation of inconsistent clauses in a contract with specific attention to the main purpose of the contract. In light of the said principles, the judgment decides the enforceability of exclusion clauses, which are usually for the benefit of one party and may be onerous on the other party, especially when proper notice of the presence of such exclusion clauses is not provided.

Moreover, it comes as a landmark judgement in the field of insurance law as insurance contracts which fall under the umbrella of adhesion contracts are usually one-sided, non-negotiable and bind unwitting consumers to fine print terms, leaving the latter remediless and absolving such insurance companies from their liability to pay.

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