Aastha Thakur
Published on: 11 November 2022 at 13:47 IST
The Supreme Court directed all insurance companies that if they fail to adhere with the Clause (3) and (4) of the of the Regulatory and Development Authority (Protection of Policy Holder’s Interests, Regulation 2002) Act (IRDA Regulation, 2002) then their right to repudiate insurance contract regarding any terms and conditions, would be taken away.
“…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.”
The said clauses binds the insurer to divulge all the relevant material information, including the exclusion clauses.
The bench of Justices Surya Kant and MM Sundresh ruled that, “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 Bench had emphasized that an exclusion clause that negates the major contract rights is unjust and unenforceable.
Case Background
M/s. Texco Marketing Pvt. Ltd. Secured a Standard Fir and Special Perils policy from TATA AIG General Insurance Ltd, effective from 28.07.2012 to 27.07.2012. The policy was purchased for the shop in the basement. However, the exclusion clause of the contract categorically mentions that the policy does not cover the basement. Texco (here, insured) paid the premium of insurance policy, but the insurer revokes his contract under the exclusion clause.
The aggrieved party, here filed the complaint at State Consumer Disputes Redressal Commission on the ground that there was lack of information on the part of the insurer regarding exclusion clause. However, when this matter was challenged before National Consumer Disputes Redressal Commission. The order was set aside awarding the monetary amount of Rs. 2.5 lakhs.
The main issue in this matter was in relation to the exclusion clause, does it destroy 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.
The Court observed that, as insurance contracts are based on good faith, the burden falls on the insurer when the issue of the exclusion clause is raised. The Court also highlighted that the party heavily relying on the exclusion clause must not be the one committing fraud, coercion, or misrepresentation. An exclusion clause cannot negate the main contract clauses; otherwise, it needs to be severed. The Court also 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.”
Further, the Court regarding standard form contract observed that rules must be applied more strictly, especially when an exclusion provision is inserted. It stated that –
“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.”
Here, the insurer is statutorily bound by Clause 3(ii) of the Insurance Regulatory and Development Authority (Protection of Policy Holder’s Interests, Regulation 2002) Act to provide all material information with respect to the policy to the insured.
Hence, the offending clause, even if it is the exclusion clause, would not be enforceable if there is non-compliance of the provisions of the Act.
The Court also drew its attention towards the Consumer Protection Act of 2019, where the State and National Commissioners encompass the power to grant consequential relief in cases where the contract clauses seem to be unjust.
It stated –
“…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.”
Hence, the Court concluded that the exclusion clause is unfair as it goes against the very object of the contract, making it otherwise un-executable from its inception.
The court ruled that the state commission’s compensation award of 2.5 lakh for harassment and mental anguish was not justified.
Therefore, the Court partially upheld the appeal while upholding the NCDRC ruling insofar as it reversed the directive to pay the insured Rs 2.5 lakh in compensation.