Exclusion Clause In The Insurance Policy And Rule Of Contra Proferentem

CONTRA PROFERENTEM :

Halsbury's Laws of England explains contra proferentem as under:-

"Where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application."

MacGillivray on Insurance Law define contra proferentem as follows:-

"The contra proferentem rule of construction arises only where there is a wording employed by those drafting the clause which leaves the court unable to decide by ordinary principles of interpretation which of two meanings is the right one. The words should receive their ordinary and natural meaning unless that is displaced by a real ambiguity either appearing on the face of the policy or, possibly, by extrinsic evidence of surrounding circumstances."

Colinvaux's Law of Insurance elaborate contra proferentem rule as: -

"Quite apart from contradictory clauses in policies, ambiguities are common in them and it is often very uncertain what the parties to them mean. In such cases the rule is that the policy, being drafted in language chosen by the insurers, must be taken most strongly against them. It is construed contra proferentem, against those who offer it. In a doubtful case the turn of the scale ought to be given against the speaker, because he has not clearly and fully expressed himself. Nothing is easier than for the insurers to express themselves in plain terms. The assured cannot put his own meaning upon a policy, but, where it is ambiguous, it is to be construed in the sense in which he might reasonably have understood it. If the insurers wish to escape liability under given circumstances, they must use words admitting of no possible doubt."

APPLICABILITY OF CONTRA PROFERENTEM:

In the case of General Assurance Society Ltd. Vs. Chandumull Jain¹ held as under:

"….. there is no difference between a contract of insurance and any other contract except that in the contract of insurance there is a requirement of uberrima fides i.e, good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the company in case of ambiguity or doubt"

In the case of United India Insurance Co. Ltd Vs. Pushpalaya Printers² while interpreting the 'impact' observed that Clause 5 speaks of "impact" by any rail/road vehicle or animal ,if the insurer had indented to exclude any damage or destruction caused on account of driving of vehicle on the road close to the building, it could have expressly excluded. The insured possibly did not understand and expect that the destruction and damage to the building and machinery is confined only to the direct collusion by vehicle moving on the road to the building or machinery. Further, "impact" by road vehicle found in clause 5 normally indicates that damage caused to the building on account of vibration by driving of vehicle close to the road is also included. In order to interpret this clause, it is also necessary to gather the intention of the parties from the words used in the policy. If the word "impact" is interpreted narrowly the question of impact by any rail would not arise as the question of a rail forcibly coming to the contact of a building or machinery would not arise. In the absence of specific exclusion and the word "impact" having more meanings in the context, it cannot be confined to forcible contact alone when it includes the meanings "to drive close", "effective action of one thing upon another" and "the effect of such action", it is reasonable and fair to hold in the context that the word "impact" contained in clause 5 of the policy covers the case of the insured to say that damage caused to the building and machinery on account of the bulldozer moving closely on the road was on account of its "impact". Although there is no ambiguity in the expression "impact", even otherwise applying the rule of contra proferentem, the use of the word "impact" in clause 5 in the instant policy must be construed against the appellant. Where the words of a document are ambiguous, they shall be construed against the party who prepared the document. This rule applies to contracts of insurance and clause 5 of the insurance policy even after reading the entire policy in the present case should be construed against the insurer.

The Hon'ble Supreme Court of India in the case of B.V. Nagaraju Vs. Oriental Insurance Company Ltd.³, while deciding the issue, whether the alleged breach of carrying passenger in goods vehicle more the number permitted in terms of the insurance policy , is so fundamental breach, so as to afford ground to the insurer to eschew liability altogether? held that the exclusion clause of the insurance policy must be read down so as to serve the main purpose of the policy on the ground that carrying of extra passengers could not contributed to the accident. The Hon'ble Supreme Court also held that the exclusion terms of the insurance policy must be read down so as to serve the main purpose of the policy that is to indemnify the insurer

Recently, the Hon,ble Supreme Court in the case of Sushlaben Indravadan Gandhi & Anr Vs. The New India Assurance Company Ltd ⁴, arising out of motor accident compensation case, applied the principle of contra proferentem and observed that in case of ambiguity, the exclusion clause are to be construed against the insurer and held that the deceased cannot be treated as regular employee. The issue before the court was whether the expression 'employment' is to be construed widely or narrowly. – if widely construed, a person may be said to "employed" by the employer even if he is not a regular employee of the employer. The Hon'ble Court further observed that the wider meaning as canvassed by the insurance company cannot be given, especially in view of the fact the wording 'in the course of' immediately before 'employment' can only meant for the person regularly employed by the employer.

LIMITATION TO THE RULE OF CONTRA PROFERENTEM

There should not automatically apply the rule of contra proferentem, the Court must adopt an approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract.In the case of Suraj Mal Ram Niwas Mills (P) Ltd Vs. United India Ins. Co. Ltd.⁵ the Hon'ble Supreme Court held that while construing the terms of a contract of insurance, the words used therein must be given paramount importance, and it is not open for the court to add, delete or substitute any words. It is well settled that since upon issuance of an insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of risks covered by the policy, its terms have to be strictly construed in order to determine the extent of the liability of the insurer. Therefore, the endeavor of the court should always be to interpret the words used in the contract in the manner that will best express the intention of the parties. In the case of Vikram Green Tech(I) Ltd Vs. New India Assurance Co. Ltd⁶ the Hon'ble Supreme Court held that an insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms. In the case of Sikka Papers Ltd Vs. National Insurance Co. Ltd⁷ the Hon'ble supreme Court held that the court while construing the terms of the insurance policy is not expected to venture into extra liberalism that result in re-writing the contract or substitute the terms which were not intended by the parties.

In the case of Export Credit Guarantee Corp. of India Ltd Vs. Garg Sons International⁸, the insured purchased a policy for the purpose of insuring shipment to a foreign Buyer. The Foreign Buyer defaulted in payment in making payment and claim was rejected on the ground that the insured failed to communicate about the default made by the foreign buyer within the stipulated time frame and non compliance of the said clause exonerate the insurer of all liability. The Supreme Court upheld the rejection of claim and held that the insured cannot claim anything more than what is covered by the insurance policy. The terms of the contract have to be construed strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely.

In the case of Oriental Insurance Co. Ltd Vs. Sony Cheriyan⁹ the insured obtained a policy for their truck, which caught fire while the same on its way carrying Ether Solvent. The insured rejected the claim on the ground breach committed by the insured by carrying hazardous goods. The policy clearly specify "Limitation of use", which indicate that policy was meant to cover only carriage of goods defined within the meaning of Motor Vehicle Act, 1988. The permit granted to insured under the Act specifies the nature of goods which could be carried "all kind of unhazardous goods including fish except those prohibited". The Hon'ble court upheld the rejection of claim by the insurer.

In United India Insurance Co. Ltd Vs. Orient Treasures (P) Ltd¹⁰ the Hon'ble Supreme Court upheld the repudiation of claim of the insured on the ground that ornaments / jewelleries were found to have been kept on the display window and sales counter at the time of the burglary , contrary to 'Jewellers Block Policy' which require insured to keep them in safe after business hour. The Court held that the loss caused to insured is excluded.

It is thus settled law that the duty of the insurer to except their liability in clear and unambiguous terms, in a case of real doubt, the policy ought to be construed most strongly against the insurers being the drafter of the policy terms including exclusion clause. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty. Even where a clause by itself is ambiguous if, by looking at the whole policy, its meaning becomes clear, there is no room for the application of the rule of contra proferentem. If one meaning is given to a clause, the rest of the policy becomes clear, the policy should be construed accordingly. It is the duty of the Court to interpret the document as is understood between the parties and regard being had to the reference to the stipulations contained in it.

Mr. Niraj Singh is a Partner at RNS Associates. The author's views are personal.

1. (1966) 3 SCR 500
2. (2004)3 SCC 694
3. (1996) 4 SCC 648
4. Civil Appeal No. 2235/2020 decided on 15.04.2020.
5. (2010)10 SCC 567
6. AIR 2009 SC 2493
7. AIR 2009 SC 2834
8. (2014)3 SCC 686
9. AIR 1999 SC 3252
10. (2016) SCC 49