Exemption Clauses In Insurance Contracts Are To Be Construed Against Insurer In Case Of Doubt : SC [Read Judgment]

In a notable judgment in a motor accident compensation case, the Supreme Court applied the well-settled principle that exemption of liability clauses in insurance contracts are to be construed against the insurance company in case of ambiguity.

Based on this principle of contra proferentum, a bench comprising Justices R F Nariman and S Ravindra Bhat restored the liability of New India Assurance Company Ltd to pay compensation of roughly Rs 37.6 lakhs and interest thereon with respect to a motor vehicle accident which took place twenty three years ago.

The deceased in the case was one Dr. Alpesh Gandhi, an 'honorary' ophthalmic surgeon at the Rotary Eye Institute, Navsari. He died in an accident while travelling in a mini-bus owned by the Rotary Eye Institute, which was caused due to the negligent driving of the driver of the mini-bus.

The main issue in the appeal before the Supreme Court was whether Dr. Gandhi should be treated as a regular employee of the Rotary Eye Institute or an independent professional giving service on contract.

The liability of the insurer was dependent on this question. Because, as per the insurance contract, the insurer was not liable for claims with respect to those under the employment of the Rotary Eye Institute.

The insured in the case, the Eye Institute, had paid additional premium as per IMT-5 endorsement, as per which the insurer was liable to pay compensation for bodily injury as sustained by any passenger other than a person in the employ of the insured coming within the scope of the Workman Compensation Act,1923.

If the doctor was held to be employee, there would be no coverage as per the insurance contract.

The Motor Accidents Claims Tribunal held the insurer to be liable after holding the employment arrangement between the doctor and the hospital to be a "Contract For Service" as opposed to a "Contract Of Service".

In the appeal by the insurer, the High Court took a contrary view. Challenging this, the claimant, the widow of Dr. Gandhi, approached the SC.

"The vexed question that arises for consideration is as to whether Dr. Alpesh Gandhi could have been said to have been in the employ of the Respondent No. 3 on the date of the accident, as a result of which the limitation of liability provision in favour of the Respondent No. 1 as set out hereinabove would kick in", observed the SC. 

Firstly, the bench examined the contract between Dr.Gandhi and the Eye Institute to see whether it would be a "Contract For Service" or "Contract Of Service".

A "Contract Of Service" implies a master-servant relationship, and a "Contract For Service" suggests a relationship between equals on professional terms.

After examining a catena of decisions explaining the tests for determining a "Contract For Service", the Court concluded that Dr. Gandhi cannot be treated as a regular employee of the Eye Institute.

"The terms of the contract make it clear that the contract is one for service, and that with effect from the date on which the contract begins, Dr. Gandhi shall no longer remain as a regular employee of the Institute, making it clear that his services are now no longer as a regular employee but as an independent professional", the Court observed.

The contract entered into between the parties is one between an Institute and an independent professional, the bench said.

At this juncture, the Court applied the contra proferentum principle to state that the exclusion clause has to be construed against the insurer.

"Even otherwise, it is well-settled that exemption of liability clauses in insurance contracts are to be construed in the case of ambiguity", the bench observed.

The judgment quoted from precedents such as Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New India Assurance Co. Ltd. (2016) 15 SCC 315, United India  Insurance Co. Ltd. v. Orient Treasures (P) Ltd. (2016) 3 SCC 49, General Assurance Society Ltd. v. Chandumull Jain (1966) 3 SCR 500, which explained the principle.

Where there is ambiguity in the policy the court will apply the contra proferentem rule. It  means that ambiguity in the wording of the policy is to be resolved against the party who prepared the contract.

The Court quoted from General Assurance Society Ltd. v. Chandumull Jain (1966) 3 SCR 500 as follows :

""in a contract of insurance there is 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 light of this, the Court observed :

"assuming that there is an ambiguity or doubt, the contra proferentum rule referred to hereinabove, must be applied, thus making it clear that such "employment" refers only to regular employees of the Institute, which, as we have seen hereinabove, Dr. Alpesh Gandhi was certainly not".

Case Details
Title  : Sushilaben Indravadan Gandhi and another Vs The New India Assurance Co Ltd and Others
Case No : Civil Appeal No. 2235 of 2020
Bench      : Justices R F Nariman and S Ravindra Bhat
Appearances : Vikas Kochar for appellant

Click here to download judgment

Read Judgment