Exclusion Clauses In Insurance Contracts To Be Construed Strictly & Against Insurer : Supreme Court

In a recent ruling, the Supreme Court reiterated that the burden of proving applicability of exclusionary clauses in insurance contracts is on the insurer and such clauses must be interpreted strictly against the insurer, as they may completely exempt the insurer of its liability.

The bench of Justices PS Narasimha and Aravind Kumar was dealing with an insurance company's appeal against an NCDRC order, which directed it to pay the insured-joint venture company after a bridge that was contracted for construction to the latter company collapsed. Taking note of the exclusionary clause in the insurance policy (which excluded cover for factors including faulty design), the court set aside the NCDRC order and observed,

"Insurance is a contract of indemnification, being a contract for a specific purpose, which is to cover defined losses. The courts have to read the insurance contract strictly. Essentially, the insurer cannot be asked to cover a loss that is not mentioned. Exclusion clauses in insurance contracts are interpreted strictly and against the insurer as they have the effect of completely exempting the insurer of its liabilities."

Facts of the case

The National Highway Authority of India (NHAI) entered into a contract with a joint venture company ("JV") for the design, construction and maintenance of a cable-stayed bridge across Chambal River in Kota, Rajasthan. In respect of the same, the appellant-insurance company issued an all-risk insurance policy, which covered the entire project amount.

In 2009, while the project was in progress, a part of the bridge collapsed, resulting in the death of 48 workmen. An Expert Committee was constituted by the Union government to investigate the cause of the collapse. Meanwhile, NHAI informed the appellant about the incident, requesting deputation of a surveyor to assess the damage caused, and seeking indemnification of the loss.

Eventually, the Expert Committee submitted a report, noting inter-alia, "The trigger for initiation of the collapse appears to have been unpredictable and sudden additional loading due to failure of supporting arrangement of the form traveller.” NHAI, on the other hand, allowed the JV to complete the remaining work under the contract.

In 2011, the appellant's surveyor submitted a report, assessing net loss @ Rs.39,09,92,828/-. It recommended rejection of the insurance claim on the ground that the JV violated the conditions of the insurance policy. When the appellant repudiated the claim based on the reports, the JV requested re-consideration. It relied on some independent reports to urge that its design of the bridge was not faulty.

On re-consideration, the appellant affirmed its earlier view. In the meantime, the JV completed the contracted work. The bridge was put to public use in 2017 and has been operating since then.

Proceedings before NCDRC

Two years after rejection of its claim, in 2019, the JV filed a Consumer Complaint before the National Consumer Disputes Redressal Commission (NCDRC) making allegations of 'deficiency in service' and unfair trade practice against the appellant.

The NCDRC held in the JV's favor, observing that the Expert Committee report was 'inconclusive' and based on the independent reports, there was no defect in the bridge design. The Commission also factored in the fact that NHAI allowed the JV to complete the remaining contract work.

NCDRC directed the appellant to pay the JV Rs.39,09,92,828/- with interest from the first date of repudiation (in 2011). Oddly, an undated addendum to the order modified the payable amount to Rs. 151,59,94,542/-. Aggrieved, the appellant moved the Supreme Court.

Observations by Supreme Court

At the outset, the Court expressed surprise at the NCDRC's addendum, which enhanced the amount payable from Rs.39,09,92,828/- to Rs. 151,59,94,542/- without hearing the parties. It was noted that the JV itself had restricted its case to Rs.39,09,92,828/-. As the JV's counsel maintained that the claim was confined to Rs.39,09,92,828/-, the court did not go into the issue further.

Moving on, the court analyzed the issue of exclusionary clauses in contracts, as the policy in the present case excluded cover in case there was damage due to faulty design, for cost of replacement, repair or rectification of defective material and/or workmanship, for cost of rectification/correction of any error during construction, etc.

Referring to the decision in Texco Marketing P. Ltd. v. TATA AIG General Insurance Company Ltd., the court reiterated that the burden of proving applicability of an exclusionary clause is on the insurer. Although, it must not be interpreted in a manner that conflicts with the main intention of the insurance.

"It is, therefore, the duty of the insurer to plead and lead cogent evidence to establish the application of such a clause. The evidence must unequivocally establish that the event sought to be excluded is specifically covered by the exclusionary clause."

It was held that the appellant sufficiently discharged the burden on it, by relying on the reports of the Expert Committee and the surveyor. The independent reports relied on by the JV, the court observed, were unexhibited documents and none of the experts were examined as witness before NCDRC. Moreover, these were theoretical in nature and not based on site-inspection (unlike the surveyor's).

Insofar as the NCDRC's finding that the Expert Committee report was inconclusive, the court referred to certain discrepancies between the approved drawing plans and the actual construction illustrated in the report. Notably, the report spoke of changes in sequence of construction without consulting/informing the design consultants of the project and changes brought about without proper technical review.

As per the report, "a combination of factors such as lack of stability and robustness in the structure, shortfall in design, lack of quality workmanship have all contributed to the collapse...the primary responsibility for the collapse lies with the contractor, M/s Hyundai and Gammon (JV) for allowing the structure to reach a vulnerable stage without taking adequate precautions with respect to stability and robustness of the partially completed structure and the shortfall in the design".

So far as the surveyor's report, the court noted that it was an evidence tendered by the appellant, which was not treated as unreliable by NCDRC. Pertinently, the surveyor report noted - (i) The sequence of operations in the construction of the Bridge were changed in actual construction, and (ii) Change in allocation of works amongst the JV Partners played a key role in the quality of workmanship.

Lastly, the fact that NHAI permitted the JV to complete the remaining work did not weigh with the court. It was noted that the continuation could have been due to various reasons.

"Even if the NHAI's decision to continue is taken to be a valid economic decision, that by itself cannot be a reason for not applying the applicable clause of the contract if such applicability is otherwise proved by cogent evidence", the court said.

Conclusion

In view of the above, the court allowed the insurance company's appeal and set aside the NCDRC's order.

Case Title: United India Insurance Co. Ltd. Versus M/s Hyundai Engineering & Construction Co. Ltd. & Ors., Civil Appeal No. 1496 of 2023

Citation : 2024 LiveLaw (SC) 409

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