Concealed Exclusion Clauses Can't Be Used To Deny Claim In Comprehensive Insurance Policies Covering Special Perils: J&K&L High Court
Reaffirming consumer rights under insurance contracts, the Jammu & Kashmir and Ladakh High Court has held that an insurer cannot evade liability by relying on obscure or undisclosed exclusion clauses, particularly where the insurance policy is issued and marketed as a comprehensive cover for 'Standard Fire and Special Perils'.
The Court ruled that such hidden exclusions cannot be permitted to defeat the legitimate and reasonable expectations of an insured consumer.
It added,
"… insurance contracts are governed by the principle of full disclosure. While the insured must disclose material facts relating to the risk, the insurer bears an equally onerous duty to clearly notify and explain any exclusion clause".
These observations were made by a Bench of Justice Sanjeev Kumar and Justice Sanjay Parihar, while dismissing an appeal filed by National Insurance Company Limited against an order passed by the Jammu & Kashmir Consumer Redressal Commission directing the settlement of an insurance claim relating to damage caused to a residential house during the floods of September 2014.
Background:
The controversy arose from the repudiation of an insurance claim lodged by the respondents (legal heirs of the original insured), whose residential house was insured under a policy expressly described as a "Standard Fire and Special Perils Policy".
During the policy period, the insured property sustained extensive damage and ultimately collapsed due to the floods of September 2014
Following the incident, the respondents duly lodged a claim with the insurer. A surveyor was appointed, who assessed the loss at Rs. 6,08,462/-. However, despite the assessment, the insurer repudiated the liability, contending that the policy contained an endorsement excluding Storm, Tempest, Flood and Inundation (STFI) perils.
The insurer further asserted that no separate premium had been paid for STFI coverage and that the renewal of the policy implied the insured's knowledge of the exclusion.
Aggrieved by the repudiation, the respondents filed a complaint before the State Commission. The Commission accepted the plea of the respondents and held that a lay consumer cannot be expected to decipher technical terms such as "STFI" or to calculate premium variations without explicit disclosure.
The Commission directed the insurer to pay Rs. 4,76,347/- (after deducting 25% for contributory negligence). Following this order, the insurer filed the present appeal before the HC.
Court's Observations:
Upon a detailed examination of the policy documents and the record, the HC observed that when a policy is comprehensive in nature and expressly styled to cover "special perils", the insurer cannot subsequently rely on a concealed or undisclosed exclusion clause to defeat the consumer's legitimate expectations.
The Court noted that the insurer had failed to produce the original proposal form to prove that the exclusion was consented to by the insured.
The Court rejected the insurer's contention that the absence of a separate premium for STFI coverage disentitled the insured from claiming indemnification. It noted that exclusions which defeat the basic coverage of a policy may be severed by application of the "blue-pencil doctrine" where they are neither disclosed nor explained.
The Bench emphasised that insurance contracts must be construed reasonably and fairly, particularly where the insured is a consumer who relies on the insurer's representations and the apparent scope of coverage. The Court reiterated that insurers, being the drafters of standard-form contracts, bear a heightened responsibility to ensure clarity and transparency.
A crucial observation made by the Court was that the burden squarely lies on the insurer to establish that an exclusion clause was expressly disclosed and explained to the insured at the time of entering into the contract.
In the absence of cogent and convincing evidence demonstrating such disclosure, an exclusion clause cannot be enforced to deny an otherwise valid claim, the court underscored.
The Court also noted that in the present case, no premium was refunded to the insured to indicate that STFI was excluded, nor was the acronym "STFI" ever spelt out to the consumer.
The Bench further held that the insurer's argument that the damage did not fall under STFI perils was contrary to both the contractual language and the factual circumstances of the case.
The Bench strongly emphasised that insurers cannot be permitted to take advantage of obscurity or ambiguity in their own documentation to defeat genuine claims. It remarked,
"...having regard to the objectives of the Consumer Protection Act, once it is shown that the contract contains a clause which, if enforced, would allow the insurer to escape liability while benefiting from the consumer's payment of premium, such a clause must be struck down as unfair. A clause that negates the essential purpose of the contract is void and cannot be enforced".
Therefore, finding no infirmity in the order passed by the Commission, the Division Bench dismissed the insurer's appeal and directed the satisfaction of the award.
Case Title: National Insurance Company Limited Vs Bashir & Others
Citation: 2026 LiveLaw (JKL)