Summary
Tata AIG issued a fire policy on a shop that it had inspected and knew to be in a basement. The policy contained a clause excluding basements. After a fire, the insurer repudiated the claim on that clause. The National Commission found deficiency in service but upheld the exclusion and allowed only Rs 7.5 lakh. The Supreme Court restored the State Commission's award, except Rs 2.5 lakh for mental agony. An insurance policy is a contract of adhesion, and an exclusion clause must be read down to fit the contract's main purpose. An insurer that knowingly insures the excluded risk, does not disclose the clause as the IRDA Regulations require, and keeps the premium waives the clause and cannot rely on it.
Issues
- Whether an insurer which knowingly insured a shop situated in a basement, despite an exclusion clause for basements in its own standard-form policy and without due disclosure, could repudiate the fire claim on that clause.
Provisions considered
- Regulations 3 and 4, IRDA (Protection of Policyholders' Interests) Regulations, 2002The insurer must give all material information, explain the proposal form and furnish its copy; non-compliance bars reliance on the exclusion clause. (¶¶ 21, 39, 42)
- Sections 2(i), 10, 17, 18 and 19, Indian Contract Act, 1872A party whose consent was caused by fraud or misrepresentation may insist on performance, and the wrongdoer cannot take advantage of the contract being voidable. (¶¶ 23, 24, 25, 26, 27)
- Sections 2(1)(g), 2(1)(r) and 14(d), (f), Consumer Protection Act, 1986On finding deficiency and unfair trade practice, the forum must grant consequential compensation; the power to declare contractual terms unfair was implicit in the 1986 Act. (¶¶ 28, 29, 35, 38)
- Sections 2(46), 49(2) and 59(2), Consumer Protection Act, 2019Statutory recognition of the Commissions' power to declare unfair contractual terms null and void. (¶¶ 30, 31, 33, 34, 35)
Held
- Insurance contracts are standard-form contracts of adhesion in which freedom of contract loses significance; the insurer bears the onus and burden when relying on an exclusion clause, which must be read down consistently with the main purpose of the policy, and a clause destroying the contract at its inception must be severed under the blue pencil doctrine, waiver, acquiescence and estoppel also applying. (¶¶ 9, 10, 11, 12, 22)
- Utmost good faith imposes reciprocal duties of disclosure, and the insurer must bring an exclusion clause to the insured's notice; where it introduces a clause making the contract unenforceable on execution to its knowledge and fails to disclose it and furnish documents as the IRDA Regulations require, the clause is redundant. (¶¶ 14, 15, 17, 20, 21)
- Both forums found that the insurer knew the shop was in a basement, had inspected it before and after the contract and insured a similar shop; having knowingly entered the contract and collected premiums, the insurer waived the exclusion, and its repudiation was an unfair trade practice entitling the insured to consequential compensation. (¶¶ 36, 37, 38, 39)
- The State Commission had no basis to award Rs 2.5 lakh for harassment and mental agony, the insurer having merely taken a legal stand; insurers are cautioned that non-compliance with Regulations 3 and 4 takes away their right to plead repudiation on policy terms. (¶¶ 40, 41, 42)
Result
Civil Appeal No. 8249 of 2022 partly allowed; the National Commission's order dated 31.01.2018 in First Appeal No. 275 of 2016 set aside and the State Commission's award restored, except the Rs 2.5 lakh for harassment and mental agony.