Supreme Court
Non-Disclosure Of Exclusion Clauses By Insurance Companies Would Take Away Their Right To Plead Repudiation Of Contract- SC
Supreme Court

Non-Disclosure Of Exclusion Clauses By Insurance Companies Would Take Away Their Right To Plead Repudiation Of Contract- SC

Swasti Chaturvedi
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13 Nov 2022 8:30 AM GMT

The Supreme Court has cautioned the insurance companies on the mandatory compliance of disclosing the exclusion clauses to the insured as per clauses (3) and (4) of the Regulatory and Development Authority (Protection of Policy Holder's Interests, Regulation 2002) Act (IRDA Regulations, 2002).

The Court in this context observed, "Before we part with this case, 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."

The Bench comprising Justice M.M. Sundresh and Justice Surya Kant while dealing with a matter related to the fire accident claim against Tata AIG General Insurance Company Ltd. stated –

"Once it is proved that there is a deficiency in service and that respondent No. 1 knowingly entered into a contract, notwithstanding the exclusion clause, the consequence would flow out of it. … Even as per the common law principle of acquiescence and estoppel, respondent No. 1 cannot be allowed to take advantage of its own wrong, if any. It is a conscious waiver of the exclusion clause by respondent No. 1."

The Bench in this context further held –

"These findings are sufficient enough to come to the conclusion that the terms of the contract are unfair, particularly the exclusion clause, and that respondent No. 1 has indulged in unfair trade practice. In such view of the matter, the decision of the National Commission cannot be sustained as the appellant cannot be non-suited only on the ground of mere deficiency in service without taking note of the fact that it is the duty of the Forum to grant the consequential relief by exercising the power under Section 14(d) and 14(f) of the Consumer Protection Act, 1986 which mandates the payment of adequate compensation by way of an award."

Senior Advocate A.K. Ganguli appeared on behalf of the appellant while Advocate Shantha Devi R. appeared for the respondents before the Apex Court.

Facts of the Case –

The appellant secured a Standard Fire & Special Perils policy from the respondent on July 28, 2012. The policy was effective from July 28, 2012, to July 27, 2013, i.e., for a period of one year. It covered a shop situated in the basement of the building but the exclusion clause of the contract specified not covering the basement. A due inspection of the shop was done being situated on the other side of the road from the office of the company. Apart from the shop of the appellant, another shop was also insured by the company. The appellant continued to pay the premium promptly. The appellant put up further construction, for which due notice was given and due inspection was also made.

The shop met with a fire accident for which the appellant claimed compensation. The company's surveyor also inspected based on which the appellant was instructed to refurnish its shop for due evaluation. The surveyor noticed that the earlier inspections were made and that the shop was in a basement and was to the knowledge of the insurer. The claim was denied by the respondent i.e., the company while mentioning the exclusion clause.

The State Consumer Disputes Redressal Commission (State Commission) rejected the contention of the respondent on the ground that there was no adequate disclosure, the mandatory provisions have not been followed, and as such the insurer was deficient in service and indulged in unfair trade practice. Such a decision was overturned by the National Consumer Disputes Redressal Commission (National Commission) having found a deficiency in service. It placed reliance upon the exclusion clause in setting aside the decision while granting a sum of Rs.7.5 lakhs.

Hence, the appellants moved to the Supreme Court being aggrieved by the decision of the National Commission.

The issue dealt with by the Court was -

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?

The Apex Court while taking note of the above issue observed that "When a court of law is satisfied that a fraud, or misrepresentation resulted in the execution of the contract through the suppression of the existence of a mutually destructive clause facilitating a window for the insurer to escape from the liability while drawing benefit from the consumer, the resultant relief will have to be granted."

The Court further observed –

"Having noted the provision governing unfair trade practice, it is rather crystal clear that it takes in its sweep all forms of unfair trade practice. One cannot give a restrictive or narrow interpretation to this provision which starts from an invitation, preceded by an offer, followed by an acceptance, conduct, and execution of the contract. … Once, the State Commission or the National Commission, as the case may be, comes to the conclusion that the term of a contract is unfair, particularly by adopting an unfair trade practice, the aggrieved party has to be extended the resultant relief."

The Court while considering the decision of the State Commission noted that "there was no specific denial on the non-compliance of adequate notice. The National Commission has not given any finding on this aspect, though it was dealt with in extenso by the State Commission. On a reading of Section 21(A) of the Consumer Protection Act, 1986, it is clear that it is not akin to Section 96 of the Code of Civil Procedure, 1908. Even otherwise, the impugned order has not considered all the relevant materials which were duly taken note of by the State Commission."

Hence, the Court while setting aside the decision of the National Commission to a certain extent concluded –

"Non-compliance of Clauses (3) and (4) of the IRDA Regulation, 2002 preceded by unilateral inclusion, and thereafter followed by the execution of the contract, receiving benefits, and repudiation after knowing that it was entered into for a basement, would certainly be an act of unfair trade practice. This view is fortified by the finding that the exclusion clause is an unfair term, going against the very object of the contract, making it otherwise un-executable from its inception. we have no hesitation in setting aside the order passed by the National Commission. However, we are in agreement with the submission made by the counsel appearing for the respondents that the State Commission without any basis granted a sum of Rs.2.5 lakhs towards harassment and mental agony. We are of the view that no case for awarding amount under that head has been made out as the respondents merely took a legal stand."

The Court in its judgment also cautioned the insurance companies on the mandatory compliance of Clause (3) and (4) of the IRDA Regulation, 2002 while stating that "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."

Accordingly, the Apex Court partly allowed the appeal and set aside the order passed by the National Commission except to the extent of declining a sum of Rs. 2.5 lakhs.

Cause Title – M/s Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors.

Click here to read/download the Judgment



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