Insurer Cannot Rely On Hidden Exclusions To Defeat Consumer's Legitimate Expectations Under Insurance Policy: J&K&L High Court

The High Court observed that the insurer's reliance on a concealed exclusion clause cannot defeat the reasonable expectations of the consumer.

The Court was hearing an appeal arising from the dismissal of a writ petition challenging the rejection of an insurance claim after a residential house collapsed due to severe rainfall. The insurer had repudiated liability by relying on an exclusion that was not proved to have been disclosed to the insured before execution of the insurance contract.

A Division Bench comprising Justice Sanjeev Kumar and Justice Sanjay Parihar, upon examining the relevant records, observed that “…when the policy is comprehensive and styled as covering special perils, the insurer cannot rely upon a concealed exclusion clause to defeat the consumer's legitimate expectations”.

The matter arose after the respondent's residential house was insured under a policy described as a “Standard Fire and Special Perils Policy”, which suffered extensive damage due to continuous rains. A claim was lodged with the insurer. A Surveyor assessed the damage, and the claim was processed, but later repudiated on the pretext that STFI coverage was not applicable as the peril allegedly did not fall within the defined provisions of the policy.

The insured approached the High Court through writ proceedings, contending that the insurer never disclosed any exclusion regarding the cause of damage and that the policy was expressly issued to cover special perils, including inundation and heavy rainfall-related destruction. The learned Single Judge found merit in the plea and directed the insurer to settle the claim, prompting the present appeal by the insurer.

The Division Bench noted that although the insurer argued that no premium was paid specifically for STFI coverage, the policy issued was comprehensive and included special perils by its very title. It held that the insurer could not rely on an undisclosed or hidden exclusion clause to defeat the legitimate expectations arising out of the policy terms.

The Bench reiterated that insurance contracts are to be construed reasonably, particularly when the insured is a consumer relying upon the manner in which a product is marketed.

The Court observed that the burden lies upon the insurer to establish that an exclusion clause was expressly informed to the insured at the time of entering the contract. In the absence of clear evidence on this aspect, such exclusions cannot be enforced to defeat an otherwise valid claim.

The insurer's stance that the damage did not fall under STFI was held to be contrary to both the contract language and the factual circumstances of continuous rainfall leading to collapse.

Referring to the principle that ambiguities in insurance contracts must be construed against the drafter, the Bench held that the insurer's repudiation was arbitrary and contrary to the statutory protections accorded to consumers.

The Court emphasised that when a policy is titled and issued as covering special perils, a technical distinction cannot be drawn later to deny indemnification. The insurer, the Court held, cannot be permitted to frustrate the core purpose of insurance by taking advantage of obscurity in its own documentation.

Dismissing the appeal, the J&K and Ladakh High Court upheld the order of the learned Single Judge and directed the insurer to settle the respondent's claim in accordance with the policy.

Case Title: National Insurance Company Limited Vs. Mala Bashir & Others