Insurer Cannot Repudiate Claim Saying Damage In Equipment Was Discovered Only After Policy Was Issued : Supreme Court

The Supreme Court on Thursday (November 13) allowed the insurance claim of a company whose boiler had exploded, rejecting the insurer's contention that it was not liable to indemnify the loss since the defect in the boiler was discovered only after the insurance policy had been issued.

“A subsequent discovery of damage or corrosion cannot be a ground to repudiate an insurance claim, as it would defeat the very purpose of the insurance contract,” observed a bench of Justices P.S. Narasimha and Manoj Misra while hearing a case in which the insurer-National Insurance Co., had denied liability based on defects discovered in the boiler after the accident.

Rejecting this approach, the Court held that an insurer cannot escape its obligation to compensate the insured by relying on its own failure to conduct due diligence before issuing the policy. If such defects went unnoticed prior to policy issuance, the insurer cannot later benefit from its own lapse.

"It is expected that an insurer would accept a proposal of insurance on being satisfied with the condition of the subject matter of insurance. Otherwise, the purpose of an insurance, which is to tide over financial implications of an unforeseen event such as an accident, would stand frustrated.", the court observed.

The dispute arose from a boiler explosion at the appellant's sugar factory on May 12, 2005. The boiler, insured for ₹1.60 crore with National Insurance Co. Ltd., saw its claim repudiated under Exclusion Clause 5 of the Boiler and Pressure Plant Policy, which excluded damage from corrosion or wear unless it caused an explosion. The insurer's surveyor attributed the blast to corrosion in decades-old tubes. While the Maharashtra State Commission in 2012 awarded ₹49 lakh to the factory for deficiency in service, the NCDRC in 2020 overturned that decision, siding with the insurer and dismissing the claim as barred by the exclusion clause.

Setting aside the NCDRC's decision, the judgment authored by Justice Misra found the insurer's objection to be an afterthought, stating that a latent defect, which becomes visible only after a blast, cannot be used to repudiate a claim.

The purpose of insurance is to indemnify the holder against unforeseen events. The discovery of corrosion post-accident, without proof of fraudulent suppression by the insured, could not defeat the main purpose of the insurance contract, the court added.

“Besides above, mere discovery of corrosion on underlying parts while making a survey is not conclusive to hold that there was infraction of duty to make a fair disclosure for the simple reason that those underlying parts got noticed only because tubes slipped off on account of the explosion. Whether those defects were noticeable even before the explosion, is a question which cannot be determined in absence of proper pleading and evidence. Here, as we have observed, there was no denial of an explosion. Appellant's specific case was that an explosion took place resulting in tubes slipping off from boiler's main body. This plea of appellant was not traversed. Even survey report was placed on record at the appellate stage and not before. There is no plea that insured played fraud upon the insurer either by not allowing an inspection or by submitting a false data. All of this shows that the first respondent was interested in somehow defeating the claim of the appellant not on facts but on pleas taken as an after-thought.”, the court observed.

Reiterating that the insurer can “repudiate the claim on limited grounds such as, (a) by pleading and proving that there was a failure on part of the insured in making disclosure of a material fact which renders the contract voidable at the instance of the insurer; and (b) by demonstrating that the terms and conditions of the contract of insurance exclude such claims.”, the Court found none of the grounds satisfied in the present case.

Accordingly, the appeal was allowed, and the case was restored to the NCDRC's file for computation of the compensation amount.

Cause Title: KOPARGAON SAHAKARI SAKHAR KARKHANA LTD (NOW KNOWN AS KARMAVEER SHANKARRAO KALE SHAHKARI SHAKHAR KARKHANA LTD.) VERSUS NATIONAL INSURANCE CO. LTD. & ANR.

Citation : 2025 LiveLaw (SC) 1100

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For Petitioner(s) Mr. Shekhar G. Devasa, Sr. Adv. Ms. Rajshri A. Dubey, Adv. Mr. Abhishek Chauhan, Adv. Mr. Amit P. Shahi, Adv. Mr. H.B. Dubey, Adv. Mr. Amit Kumar, Adv. Mr. Shashi Bhushan Nagar, Adv. Ms. Jashmita, Adv. Mr. Prashant, Adv. Mr. Gaurav sharma, Adv. Mr. Yogesh Malhotra, Adv. Mr. Ashutosh Dubey, AOR

For Respondent(s) Mr. Gaurav Sharma, AOR Mr. Sushant Kishore, Adv. Mr. Adarsh Dubey, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR