'Fraudulent Insurance Claims With Staged Incidents Common' : Supreme Court Orders SIT Probe Into Fake Fire Claim

The Supreme Court recently ordered a Special Investigation Team probe into the 2011 fire at a chemical company, Sayona Colors Pvt Ltd, after finding that its insurance claim was fraudulent.

“Before parting, we deem it appropriate to observe that fraudulent insurance claims involving staged incidents are not uncommon and have serious ramifications on the integrity of the insurance system and public confidence therein”, the Court observed in the order passed on on March 17, 2026.

The Court directed the Commissioner of Police, Ahmedabad to constitute the SIT headed by an officer not below the rank of Deputy Commissioner of Police and complete the investigation within three months. The matter has been listed for July 21, 2026.

A bench of Justice Ahsanuddin Amanullah and Justice R Mahadevan set aside the order of the National Consumer Disputes Redressal Commission, which had partly allowed the company's claim.

“There is no concept of partial or equitable relief in cases tainted by fraud. Courts and adjudicatory fora cannot grant compensation merely because some loss is shown to have occurred, when the claim itself is vitiated by fraudulent conduct. An insurance contract cannot be used as an instrument of unjust enrichment”, the Court held.

The NCDRC had directed United India Insurance Co Ltd to pay Rs. 3.33 Crores with interest at 6% per annum from July 8, 2012, along with Rs. 50,000 as litigation costs.

The case arose from a fire on March 25, 2011 at the company's godown. Sayona Colors Pvt Ltd claimed that the fire was caused by a short circuit and sought Rs. 28.20 Crores towards losses.

The insurer disputed the claim and contended that it was based on a deliberate act of sabotage. It pointed out that the company had initially taken a policy for Rs. 15 crore, enhanced it to Rs. 19 crore on March 7, 2011, and also obtained another policy of Rs. 17 crore for the period from November 28, 2010 to November 27, 2011, shortly before the fire. It relied on the surveyor's findings and a report from Truth Labs to contend that the fire was not accidental.

The insurer also questioned the stock claimed to have been stored in the godown at the time of the incident. It claimed that the suppliers shown in the invoices were either non-existent or not engaged in the relevant trade. It further argued that the Gujarat Forensic Science Laboratory report which indicated the presence of ethyl alcohol, an inflammable substance, was unreliable because the samples examined had already been burnt.

The claimant company maintained that the fire occurred accidentally during the insurance period due to a short circuit. It pointed out that the incident was reported to the insurer and the police on the same day and relied on the GFSL report. On the insurer's claim against the goods stocked in the godown, the claimant stated that it had relied on affidavits of suppliers but had not independently verified their credentials.

The Court held that the claim was fraudulent. It opined that the enhancement of insurance coverage and procurement of an additional policy close to the incident raised doubts about the claim.

The Court relied on the Truth Labs report, which found hydrocarbon residues consistent with kerosene at the seat of the fire, while no such traces were found in other areas. It also noted that forensic examination of electrical systems showed no signs of short circuit or electrical malfunction.

It further highlighted delay in furnishing samples and reliance on fabricated analytical reports indicating an attempt to mislead the investigation.

The Court further noted that surveyor's report showed discrepancies between the VAT returns submitted by the Suppliers of the claimant and those filed with the Commercial Taxes Department.

Further, the suppliers, in whose names' invoices were produced to substantiate the claim, were found to be non-existent or unrelated to the claimed transactions, and the invoices produced were fabricated, the Court noted.

The Court observed that the claimant failed to rebut these findings and the material showed manipulation of accounts and violation of policy conditions.

The Court held that the fire was a deliberate act of arson carried out for unlawful gain. It said that once fraud is established, no relief can be granted and there is no concept of partial relief in such cases. “It is a settled principle that fraud vitiates all solemn acts, and no person can be permitted to take advantage of his own wrong”, the Court emphasised.

It set aside the NCDRC's order, rejected the claim in full, and absolved the insurer of liability while simultaneously ordering a CBI probe into the claimant.

Case no. – Civil Appeal No. 6100 of 2024

Case Title – United India Insurance Co. Ltd. v. Sayona Colors Pvt. Ltd.

Citation : 2026 LiveLaw (SC) 303