Exclusion Clauses In Insurance Contracts To Be Construed Strictly & Against Insurer : Supreme Court

In a recent ruling, the Supreme Court reiterated that the burden of proving applicability of exclusionary clauses in insurance contracts is on the insurer and such clauses must be interpreted strictly against the insurer, as they may completely exempt the insurer of its liability.The bench of Justices PS Narasimha and Aravind Kumar was dealing with an insurance company's appeal against an NCDRC order, which directed it to pay the insured-joint venture company after a bridge that was contracted for construction to the latter company collapsed. Taking note of the exclusionary clause in the insurance policy (which excluded cover for factors including faulty design), the court set aside the NCDRC order and observed,"Insurance is a contract of indemnification, being a contract for a specific purpose, which is to cover defined losses. The courts have to read the insurance contract strictly. Essentially, the insurer cannot be asked to cover a loss that is not mentioned. Exclusion clauses in insurance contracts are interpreted strictly and against the insurer as they have the effect of completely exempting the insurer of its liabilities."Facts of the caseThe National Highway Authority of India (NHAI) entered into a contract with a joint venture company ("JV") for the design, construction and maintenance of a cable-stayed bridge across Chambal River in Kota, Rajasthan. In respect of the same, the appellant-insurance company issued an all-risk insurance policy, which covered the entire project amount.In 2009, while the project was in progress, a part of the bridge collapsed, resulting in the death of 48 workmen. An Expert Committee was constituted by the Union government to investigate the cause of the collapse. Meanwhile, NHAI informed the appellant about the incident, requesting deputation of a surveyor to assess the damage caused, and seeking indemnification of the loss.Eventually, the Expert Committee submitted a report, noting inter-alia, "The trigger for initiation of the collapse appears to have been unpredictable and sudden additional loading due to failure of supporting arrangement of the form traveller.” NHAI, on the other hand, allowed the JV to complete the remaining work under the contract.In 2011, the appellant's surveyor submitted a report, assessing net loss @ Rs.39,09,92,828/-. It recommended rejection of the insurance claim on the ground that the JV violated the conditions of the insurance policy. When the appellant repudiated the claim based on the reports, the JV requested re-consideration. It relied on some independent reports to urge that its design of the bridge was not faulty.On re-consideration, the appellant affirmed its earlier view. In the meantime, the JV completed the contracted work. The bridge was put to public use in 2017 and has been operating since then.Proceedings before NCDRCTwo years after rejection of its claim, in 2019, the JV filed a Consumer Complaint before the National Consumer Disputes Redressal Commission (NCDRC) making allegations of 'deficiency in service' and unfair trade practice against the appellant.The NCDRC held in the JV's favor, observing that the Expert Committee report was 'inconclusive' and based on the independent reports, there was no defect in the bridge design. The Commission also factored in the fact that NHAI allowed the JV to complete the remaining contract work.NCDRC directed the appellant to pay the JV Rs.39,09,92,828/- with interest from the first date of repudiation (in 2011). Oddly, an undated addendum to the order modified the payable amount to Rs. 151,59,94,542/-. Aggrieved, the appellant moved the Supreme Court.Observations by Supreme CourtAt the outset, the Court expressed surprise at the NCDRC's addendum, which enhanced the amount payable from Rs.39,09,92,828/- to Rs. 151,59,94,542/- without hearing the parties. It was noted that the JV itself had restricted its case to Rs.39,09,92,828/-. As the JV's counsel maintained that the claim was confined to Rs.39,09,92,828/-, the court did not go into the issue further.Moving on, the court analyzed the issue of exclusionary clauses in contracts, as the policy in the present case excluded cover in case there was damage due to faulty design, for cost of replacement, repair or rectification of defective material and/or workmanship, for cost of rectification/correction of any error during construction, etc.Referring to the decision in Texco Marketing P. Ltd. v. TATA AIG General Insurance Company Ltd., the court reiterated that the burden of proving applicability of an exclusionary clause is on the insurer. Although, it must not be interpreted in a manner that conflicts with the main intention of the insurance."It is, therefore, the duty of the insurer to plead and lead cogent evidence to establish the application of such a clause. The evidence must unequivocally establish that the event sought to be excluded is specifically covered by the exclusionary clause."It was held that the appellant sufficiently...

Exclusion Clauses In Insurance Contracts To Be Construed Strictly & Against Insurer : Supreme Court

Debby Jain

Tags