Insurers Can't Repudiate Contract If Exclusion Clauses Are Not Disclosed To Insured As Per IRDA Regulations : Supreme Court

The Supreme Court, on Wednesday, cautioned all insurance companies that if they do not mandatorily comply with Clause (3) and (4) of the Regulatory and Development Authority (Protection of Policy Holder's Interests, Regulation 2002) Act (IRDA Regulation, 2002) then their right to repudiate insurance contract taking recourse to any terms and conditions, including the exclusion clauses, would be taken away. "...we would like to extend a word of caution to all the insurance companies on the mandatory compliance of Clause (3) and (4) of the IRDA Regulation, 2002. Any non-compliance on the part of the insurance companies would take away their right to plead repudiation of contract by placing reliance upon any of the terms and conditions included thereunder."These clauses of IRDA Regulations mandate that the insurer should disclose all material information to the insured, including the exclusion clauses."Any non-compliance(with IRDA Regulations), obviously would lead to the irresistible conclusion that the offending clause, be it an exclusion clause, cannot be pressed into service by the insurer against the insured as he may not be in knowhow of the same", the Court observed. A Bench comprising Justices Surya Kant and M.M. Sundresh indicated the same while passing a judgment in a matter wherein the insurer had invoked exclusion clause in the insurance contract without complying with the IRDA Regulation, 2002 first. The Bench had noted that an exclusion clause which destroys the main contract rights, at its inception is unfair and cannot be acted upon. Factual Background M/s. Texco Marketing Pvt. Ltd. secured a Standard Fir And Special Perils policy from TATA AIG General Insurance Ltd, which was effective from 28.07.2012 to 27.07.2012. The policy was purchased for a shop in a builder's basement. However, the exclusion clause of the contract specified that the policy does not cover the basement. Due inspection of the shop was made before the execution of the contract. Texco (insured) paid premium, but when there was a fire at the basement shop, the claim for insurance was repudiated by TATA AIG (insurer) on the pretext of the exclusion clause. The State Consumer Disputes Redressal Commission allowed the complaint filed by the insured on the ground that there was lack of adequate disclosure on the part of the insurer regarding the exclusion clause; the insurer was deficient in serve and indulged in unfair trade practice. The National Consumer Disputes Redressal Commission set aside the order of the State Commission granting a sum of Rs. 2.5 lakhs to the insured. Analysis by the Supreme Court Issue Whether an exclusion clause destroying the very contract knowingly entered, can be permitted to be used by a party who introduced it, becomes a beneficiary and then to avoid its liability? Adhesion Contract The Apex Court noted that insurance contracts are largely adhesion contracts, also known as Standard-Form Contracts. Though the contact is voluntary in nature, the insurer dictates the terms of the contract and the bargaining power of the insured is too little. It was of the opinion that in insurance contracts the concept of freedom of contract loses significance. The Court observed that the premium is paid with the legitimate expectation of reimbursement to cover contingencies in the future. Exclusion Clause Since insurance contracts are premised on the notion of good faith, the burden lies on the insurer when exclusion clause is relied upon. The Court noted that the party relying upon the exclusion clause must not be the one committing fraud, coercion or misrepresentation. The exclusion clause cannot destroy the main contract rights at its inception, if so, it needs to be severed. The Court added - "The main contract once signed would eclipse the offending exclusion clause when it would otherwise be impossible to execute it. A clause or a term is a limb, which has got no existence outside, as such, it exists and vanishes along with the contract, having no independent life of its own. It has got no ability to destroy its own creator, i.e. the main contract." Duty of Disclosure, Good Faith and Notice The Apex Court emphasised on the common law principles of fairness which includes disclosure, good faith and notice. It noted that in case of a standard form contract, such as an insurance contract these principles ought to be applied with more rigour, especially when an exclusion clause is inserted. The Court was of the view - "When an exclusion clause is introduced making the contract unenforceable on the date on which it is executed, much to the knowledge of the insurer, non-disclosure and a failure to furnish a copy of the said contract by following the procedure required by statute, would make the said clause redundant and non-existent." The insurer statutorily bound by Clause 3(ii) of the...

Insurers Can't Repudiate Contract If Exclusion Clauses Are Not Disclosed To Insured As Per IRDA Regulations : Supreme Court

Sohini Chowdhury

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