Introduction
Under a contract of insurance, the insurer promises to pay an agreed sum of money or indemnify another party in the event of a contingent loss in return for a premium, which is paid by the insured party. Such contracts usually have ‘Exclusion Clauses’ that exclude certain risks from coverage, such as aviation, war, or preexisting conditions. In the recent judgement of Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors. (Texco Marketing Judgement), the Supreme Court has cautioned insurance companies to disclose ‘Exclusion Clauses’ to the insured individuals, failing which their right to plead repudiation of contract will be taken away.
Facts
Texco Marketing Pvt. Ltd. (Insured) had secured an insurance policy from TATA AIG General Insurance Company Ltd. & Ors. (Insurer) for its shop situated in the basement of a building. The Insurer duly inspected the shop and received the premium promptly from the Insured. However, the exclusion clause in the insurance policy specified that it does not cover the basement. This exclusion clause was not disclosed to the Insured.
The shop was gutted in a fire accident for which the Insured raised the claim. The Insurer denied the claim by relying on the exclusion clause in the insurance policy. This was challenged by the Insured before the State Consumer Disputes Redressal Commission (SCDRC), which allowed the claim of the Insured. The SCRDC decision was overturned in an appeal by the National Consumer Disputes Redressal Commission (NCDRC) which was subsequently challenged before the Supreme Court.
Ruling of the Supreme Court
The issue under consideration before the Supreme Court was whether the Insurer can rely upon the exclusion clause to avoid its liabilities. The Court delved into the concept of freedom of contract vis-à-vis insurance contracts and noted that these contracts are a type of ‘adhesion contracts.’ Such contracts are prepared by the insurer having a standard format upon which the consumer is made to sign. The consumer has very little option or choice to negotiate the terms of the contract, except to sign on the dotted lines.
The Court opined that such contracts are one sided, grossly in favour of the insurer due to the weak bargaining power of the consumer. Therefore, as the concept of freedom of contract loses some significance in a contract of insurance, such contracts demand a very high degree of prudence, good faith, disclosure and notice on the part of the insurer.
The Court also noted that the Insurance Regulatory and Development Authority (Protection of Policyholders Interests, Regulation 2002) Act (IRDA Regulations) casts a responsibility on the insurer / its agent to provide all the material information related to the policy to the consumer, which in the present case the Insurer failed to disclose. Therefore, the Insurer had violated the due procedure of fairness. The Court held that an such exclusion clause which is destructive to the main contract has to be severed.
The Supreme Court observed that the Insured acting as a consumer under the Consumer Protection Act, 1986 (Consumer Act) is at an elevated position and the Consumer Act empowers SCDRC and NCDRC to declare the terms of the contract as unfair, particularly the exclusion clause. As the Insured was not made aware of exclusion clause in the contract by which the Insurer aimed at escaping the liability for reimbursement, the contract became an ‘unfair contract.’ Accordingly, the NCDRC’s order was overturned.
The Supreme Court also issued a word of caution to all insurance companies directing them to comply with IRDAI Regulations which mandate explaining the insurance clauses to the insured and furnishing a copy of the proposal form within 30 days. Further, any non-compliance on the part of the insurance companies would take away their right to plead repudiation of contract by placing reliance on the terms and conditions (including exclusion clause) thereunder.
Conclusion
Exclusion clause in a contract law is a familiar concept if it is mutually entered by the parties. However, such clauses in the contract are to be strictly construed and interpreted by courts, especially in consumer contracts. The Supreme Court’s decision in Texco Marketing Judgement is one such landmark decision on the rights of the insured, where insurance companies illegally withhold claims settlement by relying on exclusion clauses without any fair disclosures. The Judgment upholds the fundamental principle of insurance law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the known facts.
Authors: Renjith Nair, Altamash Qureshi and Niyati Bhogayta
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