Supreme Court: Exclusion clauses in insurance contract should be interpreted strictly as they may absolve all the liabilities of the insurer

In the matter of United India Insurance Company Limited v. M/s. Hyundai Engineering and Construction Company Limited and Others [Civil Appeal No. 1496 of 2023], decided on May 16, 2024, the Division Bench of the Supreme Court reiterated that the insurer has the burden of proving applicability of exclusionary clauses in insurance contracts and such clauses must be interpreted strictly against the insurer, as they may completely exempt the insurer of its liability.

Facts

The National Highway Authority of India (“NHAI”) awarded a contract valued at INR 213,58,76,000 for design, construction, and maintenance of a cable-stayed bridge across the river Chambal on NH-76 at Kota, Rajasthan to the joint venture of M/s. Hyundai Engineering and Construction Company Limited and M/s. Gammon India Limited (“Respondents”). As per the contract, the construction was to be completed within 40 months. United India Insurance Company Limited (“Appellant”) issued the Contractor’s Insurance Policy covering the interest of NHAI as principal and of the Respondents. Construction for the bridge was commenced in December, 2007. However, during the construction process a part of said bridge collapsed on December 24, 2009, which resulted in the tragic death 48 workers. The Ministry of Road Transport and Highways, Government of India constituted an expert committee to investigate the cause of collapse. After investigation, the final report was submitted wherein the Respondents were found liable for the loss of 48 lives due to defects in construction design. Subsequently, an FIR was lodged against the Respondents under Sections 304 (Punishment for culpable homicide not amounting to murder) and 308 (Attempt to commit culpable homicide) of the Indian Penal Code.

NHAI informed the Appellant about the said incident on December 29, 2009 and requested the appointment of the surveyor to assess the damages. The surveyor commenced his work on January 6, 2010 and issued a letter seeking additional details and clarifications from the Respondents. In response, the Respondents submitted a claim amounting to INR 151,59,94,542. Surveyor in its report recommended to repudiate the insurance claims as Respondents had violated the conditions of insurance policy and there was a net loss of INR 39,09,92,828. Based on the said reports, Appellant rejected the insurance claim vide its letter dated April 24, 2011.

By a letter dated June 17, 2011, the Respondents requested the Appellant to reconsider the repudiation, to which the Appellant agreed to reconsider. The Appellant re-considered the claim, and by a letter dated April 17, 2017 informed the Respondents that the original decision of repudiation is affirmed. After 2 years of repudiation, Respondents on January 24, 2019 filed a consumer complaint bearing no. No. 160 of 2017 before the National Consumer Disputes Redressal Commission (“NCDRC”) against the Appellant. They alleged deficiencies in services of Appellant and unfair trade practices in rejecting the claim.

NCDRC rejected the preliminary objections of the Appellant and relied upon the reports of independent experts cited by the Respondents. These reports indicated no flaws in design of the project. NHAI allowed the Respondents to continue the said construction. Consequently, NCDRC held that the Appellant is obligated to pay claim of INR 39,09,92,828. Furthermore, an undated addendum to the judgment unilaterally altered the judgement, increasing the obligation to INR 151,59,94,542 from the previously specified amount.

Aggrieved by the decision of the NCDRC, the Appellant filed an appeal challenging the said decision of the commission.

Issues

Whether the Appellant is liable to pay the insurance claim.
Whether the defects in design led to the collapse of the bridge.

Arguments.

Contentions of the Appellant:

The Appellant justified its repudiation by citing the affidavit provided by Mr. S. Anantha Padmanabhan, who was examined as a witness. The said affidavit includes the surveyors report and expert committee report. The Appellant also submitted that there is sufficient evidence to justify repudiation of the claim on the basis of the exclusion clause in the insurance policy.

Contentions of the Respondents:

The Respondents relied on the judgement of the Supreme Court in Texco Marketing Private Limited v. TATA AIG General Insurance Company Limited [(2023) 1 SCC 428] (“Texco Case”) to highlight the proof of burden that an exclusionary clauses place on an insurance company.

The Respondents submitted that the findings of the independent experts’ report clearly establishes that they are not at fault regarding the design issue. Specifically, they referenced reports made by 1. Mr. Jacques Combault; 2. M/s. SETRA/CETE (French Ministry of Transportation Technical Department); 3. M/s. Halcrow Group Limited and 4. AECOM Asia Company Limited.

Furthermore, the Respondents contended that the reports of the surveyor and expert committee are inconclusive and remain open-ended; failing to hold them accountable for the negligence.

Observations of the Supreme Court

The Supreme Court observed that the Apex Court noted in the Texco Case that burden of proving the applicability of an exclusion clauses rests with the insurer. In National Insurance Company Limited v. Ishar Das Madan Lal [2007 (4) SCC 105] it was held that evidence must clearly establish that the event sought to be excluded is included in the exclusionary clauses. Further, the Apex Court noted that findings from the expert committee reports which concluded that the said bridge had collapsed due to structural instability, design flaws and poor workmanship.

The Supreme Court also noted that independent experts relied upon by the Respondents were not marked as exhibits. They were not adduced in evidence as none of these experts was examined as a witness. Given these circumstances the Supreme Court concluded that the Appellant has discharged the burden of proof as set out in the Texco Case.

Additionally, the Supreme Court also relied upon National Insurance Company Limited v. Hareshwar Enterprises Private Limited [(2021) SCC Online SC 628] and National Insurance Company Limited v. Vedic Resorts and Hotels Private Limited [2023 SCC OnLine SC 648] wherein it was held by this court that surveyor report is credible and reliable evidence. Further, the Supreme Court observed that independent experts report was on a theoretical basis while the surveyor conducted onsite inspections and the expert committee comprised of experts from the field of civil engineering. The Supreme Court observed that NCDRC failed to examine the independent experts and their reports.

Decision of the Supreme Court

In light of the above-mentioned observations, it was held that NCDRC fell in error of law in allowing the said consumer complaint. Therefore, the Supreme Court allowed the appeal and set aside the decision of NCDRC. Further, the Supreme Court held that an insurance is a contract of indemnification, being a contract for a specific purpose which is to cover defined losses and thus, exclusion clause must be construed strictly against the insurer.

VA View:

By overturning the decision of NCDRC and referencing its previous judgments in
Texco Case, the Supreme Court underscored the need for substantial evidence in such disputes.The Supreme Court’s preference for thorough onsite inspections instead of theoretical reports also highlights the importance of robust evidence in such matters.

This judgement has set a precedent for future insurance claims disputes involving such largescale construction projects by emphasizing the need to strictly comply with the contractual terms and thorough scrutiny of exclusion clauses.

For any query, please write to Mr. Bomi Daruwala at [email protected]