In a landmark decision on the rights of the insured, the Supreme Court (SC) ruled that the exclusion clause cannot be permitted to be used by a party, that introduced it (insurer), becomes a beneficiary and then avoids its liability (of claim settlement). While allowing the complainant relief as provided in the law from Tata AIG General Insurance Company Ltd (Tata AIG), the apex court also warned insurance companies to strictly follow Clauses (3) and (4) of the Insurance Regulatory and Development Authority of India (IRDA) Regulation, which are related to explaining the clauses included in the policy and furnishing a copy of the proposal form within 30 days to the insured.
The case is related to an insurance claim filed by Texco Marketing Pvt Ltd about a fire accident in its shop located in the basement. The insured property was opposite the office of Tata AIG, which knew about the property's location and still issued a policy. However, when Texmo Marketing filed the claim for the fire accident, Tata AIG rejected it using the exclusion clause mentioned in the policy, which says there would be no liability to pay (the claim) if the insured property was located in the basement.
While arriving at the sum payable, the surveyor of Tata AIG did notice the fact that the earlier inspections were made and that the fact that the shop was in a basement was known to the insurer. However, the claim made was repudiated by Tata AIG, under the exclusion clause.
In an order issued last week, the SC bench of justice Surya Kant and justice MM Sundresh observed, "He (the consumer) has very little option or choice to negotiate the terms of the contract except to sign on the dotted lines. The insurer, who, being the dominant party, dictates its own terms, leaving it upon the consumer either to take it or leave it. Such contracts are obviously one-sided, grossly in favour of the insurer due to the weak bargaining power of the consumer."
Further, the bench says, "Non-compliance of Clauses (3) and (4) of the IRDA Regulation, 2002 preceded by unilateral inclusion, and thereafter followed by the execution of the contract, receiving benefits, and repudiation after knowing that it was entered into for a basement, would certainly be an act of unfair trade practice. This view is fortified by the finding that the exclusion clause is an unfair term, going against the very object of the contract, making it otherwise un-executable from its inception."
The apex court, while setting aside an order passed by the National Consumer Disputes Redressal Commission (NCDRC), says, "The decision of the NCDRC cannot be sustained as the appellant cannot be non-suited only on the ground of mere deficiency in service without taking note of the fact that it is the duty of the Forum to grant the consequential relief by exercising the power under Section 14(d) and 14(f) of the Consumer Protection Act, 1986 which mandates the payment of adequate compensation by way of an award."
Once there is deficiency, the existence of unfair terms in the contract and unfair trade practice on the part of the other party, adequate compensation has to be paid.
After Tata AIG rejected its claim, Texco Marketing filed a case before the State Consumer Disputes Redressal Commission (SCDRC). The state commission rejected Tata AIG's contention on the premise that there was no adequate disclosure and the mandatory provisions had not been followed; as such, the insurer was deficient in service and indulged in unfair trade practice.
However, NCDRC overturned the decision of the state commission. Having found a deficiency in service, it placed reliance upon the exclusion clause in setting aside the decision of the state commission while granting Rs7.5 lakh.
Texco Marketing then approached the apex court, challenging the order passed by NCDRC. During the hearing, SC delved into whether an exclusion clause destroying the very contract knowingly entered can be permitted to be used by a party who introduced it, becomes a beneficiary and then avoids its liability.
The apex court noted that these contracts are prepared by the insurer having a standard format on which a consumer is made to sign.
The bench also discussed in detail the exclusion clause in an insurance contract. It says, "It is the foremost duty of the insurer to give effect to a due disclosure and notice in its true letter and spirit. 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."
Discussing the Consumer Protection Act, SC also noted that Sections 47 and 58 of the Act had been introduced to facilitate the state commission and the NCDRC to exercise jurisdiction over an unfair contract. "...the power is not only with respect to identifying a contract as unfair or not, but also to grant the consequential relief."
"Once it is proved that there is a deficiency in service and that respondent No1 (Tata AIG) knowingly entered into a contract, notwithstanding the exclusion clause, the consequence would flow out of it," the apex court says, adding, "We have already discussed the scope and ambit of the provisions under the Indian Contract Act. Even as per the common law principle of acquiescence and estoppel, respondent No1 cannot be allowed to take advantage of its own wrong, if any. It is a conscious waiver of the exclusion clause by respondent No1."
"Under the impugned order, we have already taken note of and discussed the findings of the state commission, which are indeed approved by the NCDRC. These findings are sufficient enough to come to the conclusion that the terms of the contract are unfair, particularly the exclusion clause, and that respondent No1 has indulged in unfair trade practice," SC says.
The bench then set aside the order passed by NCDRC except to the extent of declining Rs2.5 lakh towards harassment and mental agony.
"Before we part with this case, 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 the contract by placing reliance upon any of the terms and conditions included thereunder," the apex court warned.
(Civil Appeal No8249 of 2022 Date: 9 November 2022)