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

"...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 insurance Regulatory and Development Authority (Protection of Policy Holder's Interests, Regulation 2002) Act are to provide all material information with respect to the policy to the insured. It is also to provide a copy of the proposal form within 30 days of acceptance. Non-compliance of the provisions of the Act would lead to the conclusion that the offending clause, even if it is the exclusion clause, cannot be pressed into service by the insurer.

Doctrine of Blue Pencil

The said doctrine strikes off the offending clause as void ab initio. An exclusion clause repugnant to the main contract ought to be effaced. Referring to the Indian Contract Act, the Court observed that when a court is satisfied that fraud or misrepresentation resulted in the execution of the contract through suppression of such an exclusion clause, which leaves room for the insurer to shun their liability, the insured is to be granted relief.

Consumer Protection Act, 2019

The Court was of the opinion that under the Consumer Protection Act, 2019 the State and National Commissioners are not only empowered to identify "any terms of the contract" as unfair, they also have the power to grant consequential relief. It stated -

"We are conscious of the fact that the aforesaid provisions have been introduced under the new 2019 Act. However, the intendment of these provisions could be seen as implied even under the prior Act, i.e. the Consumer Protection Act, 1986."

Conclusion

The Court inferred that once it is proved that there was a deficiency in service and insurer knowingly entered into a contract, it would be a conscious waiver of the exclusion clause. It was noted that though the NCDRC has indeed approved the findings of the State Commission, it has decided to set aside the order of the State Commission. Non-compliance with provisions of the IRDA Regulations, 2002; unilateral inclusion of the the exclusion clause; execution of the contract; receiving premiums; repudiation even after having the knowledge that the contract for insurance was entered into for a basement shop amounts to unfair trade practice. Moreover, the exclusion clause is unfair as it goes against the very object of the contract, making it otherwise un-executable from its inception. However, the Court held that the 2.5 lakh compensation granted by the State Commission towards harassment and mental agony was not justified.

So, while partly allowing the appeal, the Court however sustained the NCDRC order to the extent it set aside the direction to pay Rs 2.5 lakh compensation to the insured.

[Case Title: M/s. Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. And Ors. CA No. 8249 of 2022]

Citation : 2022 LiveLaw (SC) 937

For Appellant(s) Mr. A.K. Ganguli, Sr. Adv. Mr. Joydeep Sen, Adv. Mr. Rohit Dutta, Adv. Mr. Guddu Singh, Adv. Mr. Arunabh Ganguli, Adv. Ms. Shalini Kaul, AOR Ms. Priyata Chakraborty, Adv.

For Respondent(s) Mr. Ajay Bansal, Adv. Mr. Gaurav Yadava, Adv. Ms. Veena Bansal, Adv. Mr. Garvesh Kabra, AOR

Insurance Act 1938 - An exclusion clause in a contract of insurance has to be interpreted differently. Not only the onus but also the burden lies with the insurer when reliance is made on such a clause. This is for the reason that insurance contracts are special contracts premised on the notion of good faith. It is not a leverage or a safeguard for the insurer, but is meant to be pressed into service on a contingency, being a contract of speculation. An insurance contract by its very nature mandates disclosure of all material facts by both parties[ Para 11].

Insurance Act 1938 - Duty of insurer to disclose exclusion clause - 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 [Para 15]

Insurance Act-  Any non-compliance of 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 [Para 21].

Indian Contract Act 1872 - Doctrine of Blue Pencil -The said doctrine strikes off the offending clause as void ab initio. An exclusion clause repugnant to the main contract ought to be effaced [Para 22]

Consumer Protection Act 2019- Consumer Commission has power to issue directions for consequential relief if the terms of the contract are found to be unfair [Para 33 to 35]