Many of the insured consumers have faced situations where the insurance companies fail to honour their commitments under the insurance contracts on one or the other pretext especially of the hidden exclusion clause in the contracts. Much to the dismay of the insured consumer, the insurance companies walk away from their obligations, basis these exclusion clauses in the insurance contracts. But this may hopefully change in the future owning to the recent Supreme Court's judgment in the matter of Texco Marketing Pvt. Ltd. versus TATA AIG General Insurance Company Ltd. & Ors.1
Texco Marketing Pvt. Ltd. ("Appellant") secured a Standard Fire & Special Perils Policy ("Policy") for its shop from TATA AIG General Insurance Company Ltd. ("Respondent") The shop was situated in the basement of a building. However, the exclusion clause of the insurance contract specified that the Policy did not cover the basement. Due inspection of the shop was made, which was situated on the other side of the road from the office of the Respondent. The Appellant continued to pay the premium. Subsequently, the shop met with a fire accident. While making evaluation for sums payable, the surveyor of Respondent inspected the shop and did notice the fact that the earlier inspections were made and the fact that the shop was in a basement was to the knowledge of the insurer. Still the claim of the Appellant was repudiated by the Respondent seeking protection under the exclusion clause.
Before the State Consumer Disputes Redressal Commission ("SCDRC"), the contention of the Respondent was rejected and it was held that there was no adequate disclosure, and the insurer was deficient in service and indulged in unfair trade practice. In appeal, the National Consumer Disputes Redressal Commission ("NCDRC") set aside the decision of SCDRC by placing reliance upon the exclusion clause, despite recording the finding that there was deficiency in service. The Appellant aggrieved by the decision of the NCDRC challenged the same before the Hon'ble Supreme Court ("SC").
The Apex Court considered the issue as to whether an exclusion clause destroying the very contract knowingly entered, could be permitted to be used by a party who introduced it, received premiums and then used it to avoid its liability. The SC, while setting aside the order of NCDRC, analysed several key concepts, doctrines, and laws relevant to an insurance contract to uphold the rights of the insured person and enforce obligations of the insurance companies. Some of the key principles upheld by the SC are discussed below:
Adhesion Contract: The SC noted that the insurance contracts belong to a category of adhesion contracts i.e., these contracts are prepared by the insurer having a standard format in which the consumer has very little option or choice to negotiate the terms of the contract, except to sign on the dotted lines. The concept of freedom of contract loses some significance in a contract of insurance. Such contracts demand a very high degree of prudence, good faith, disclosure and notice on the part of the insurer. As premium is paid to address any contingency that might happen in future there is a legitimate expectation of reimbursement when an act of God happens. Therefore, an insurer is expected to keep that objective in mind, from the consumer's point of view to cover the risk, as against a plausible repudiation.
Exclusion Clause: The SC emphasised that exception clauses must be interpreted to the benefit of the insured when the exception clauses are too wide and not consistent with the main purpose or object of the insurance policy, i.e., an exclusion clause must be understood on the prism of the main contract. Not only the onus but also the burden lies with the insurer when reliance is made on such a clause.
Duty of Disclosure, Good Faith and Notice: The SC emphasised on the doctrine of utmost good faith in the matters of insurance contracts starting from the execution of the contract. A disclosure should be a norm, especially so, as the insurer is statutorily mandated as per the Insurance Regulatory and Development Authority (Protection of Policy Holders' Interests) Regulations, 2002 ("IRDA Regulations, 2002") to provide all material information in respect of a policy to the insured to enable him to decide on the best cover. The SC held that non-compliance of the IRDA Regulations, 2002 preceded by unilateral inclusion, and thereafter followed by the execution of the contract, receiving benefits, and repudiation after knowing that it was entered into for a basement, would certainly be an act of unfair trade practice.
Indian Contract Act, 1872 ("ICA"): The SC noted that ICA debars a party deriving benefit from his wrongdoing and once a court of law is satisfied that a fraud, or misrepresentation resulted in the execution of the contract through suppression of the existence of a destructive clause (facilitating the insurer to escape from the liability while drawing benefit from the consumer), the resultant relief in favour of the insured consumer will have to be granted.
Consumer Protection Act, 2019 ("CPA"): The SC noted that under the CPA, both SCDRC and NCDRC, have ample powers to declare "any terms of the contract" being unfair to any consumer to be null and void, if in its opinion, its introduction by the insurer has certain elements of unfairness. The consequence of the declaration of that term as unfair, would make the contract active and executable to the benefit of the consumer. Therefore, this provision takes care of a possible mischief by the insurer as against the consumer.
The Texco judgment has significant ramifications for the liability of insurance industry owing to the extensive interpretation of exclusion clauses in insurance contracts. Notably, the SC in its judgment has issued a 'word of caution' to all the insurance companies to comply with the provisions of the IRDA Regulations, 2002 which mandate fair and open disclosure of all material terms of the policy. Any non-compliance on the part of the insurance companies would take away their right to plead repudiation of contract by placing reliance upon any of the terms and conditions included thereunder.
The Texco judgment has given a fresh perspective to exclusion clauses in the context of the insurance policy and brought much needed relief to the insured consumers. The SC has even extended the scope of the common law principle of acquiescence and estoppel to disallow insurers from taking advantage of their own wrong by using exclusion clause in ways repugnant to the main purpose of the contract.
1 Civil Appeal No. 8249 of 2022 [Arising out of SLP (Civil) No. 25457 of 2019]) (2022 SCC OnLine SC 1546
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