Insurance Contract Breach Prompts Supreme Court to Order New India Assurance to Compensate Claimant

Insurance Contract Breach Prompts Supreme Court to Order New India Assurance to Compensate Claimant

In a recent judgment, the Supreme Court upheld the National Consumer Disputes Redressal Commission's (NCDRC) order directing New India Assurance Co. Ltd. to pay ₹6,57,55,155 for a fire insurance claim. The Apex Court dismissed the insurance company's appeal, affirming the NCDRC's decision.

The respondent, M/s. Mudit Roadways procured various insurance policies to cover its leased premises, which it had leased from M/s. Platinum Logistics for warehousing purposes, paid ₹44,02,562 to New India Assurance for safeguarding custom-bonded goods and covering the risk of fire, among other perils.

During the validity of the insurance policies, a fire erupted at the insured warehouse, prompting the respondent to promptly inform the Insurance Company and the Customs authorities.

Upon receiving the Survey and Investigation Reports, the Insurance Company denied the respondent's insurance claim because the insured premises remained unaffected by the fire, and the fire originated from the insured's negligence during roof construction within a secure customs-bonded warehouse storing hazardous chemicals, with the construction work heightening the risk and leading to the termination of insurance coverage under Clause 3 of the policy's terms and conditions.

However, the NCDRC ruled in favour of the claimant, determining that the insurance policy did indeed cover the claimant's warehouse. Regarding the second issue, the NCDRC noted the considerable time lapse between the welding work and the fire incident and observed that the Forensic report was inconclusive. Consequently, the other reports suggesting an electrical short circuit as the cause of the fire were deemed to be more credible. Addressing the roofing work performed by the insured, the NCDRC concluded that it did not materially increase the risk, rendering Clause No. 3 inapplicable.

The division bench, comprising Justices Hrishikesh Roy and Sanjay Karol, emphasised that an insurance company is prohibited from introducing additional grounds for repudiation during the hearing that were not explicitly stated in the original repudiation letter.

After meticulously scrutinising the policy documents, the Leave & License Agreement, and the assorted communications from the customs, police, fire, and electricity departments, the Bench reached the definitive conclusion that the insured premises, identified and insured by the insurance company, were indeed situated at Survey No. 9/3.

Furthermore, no evidence suggested that the area where the fire erupted fell outside the purview of the insurance policy's coverage.

The Bench further noted that the insured had engaged in necessary repairs on the rooftop to prevent water seepage into the warehouse. The Court concluded that these repairs did not constitute an alteration that could amplify the risk of loss or damage, as contended by the insurance company. Consequently, the Bench affirmed the NCDRC's stance on this issue.

The Bench also cast doubt on the Forensic Investigator's conclusion, which attributed the fire to sparks from rooftop welding. The investigator's failure to consider other plausible causes, such as a short circuit, was a critical oversight. Moreover, there was no concrete evidence to support the claim that sparks from welding ignited flammable chemicals due to workers' actions. In contrast, seven out of nine reports pointed towards a short circuit as the probable cause of the fire, while two suggested negligence on the insured's part in taking inadequate precautions during warehouse construction.

The Bench observed the substantial time gap between the welding work and the fire incident and concluded that this lack of a logical explanation rendered the insurance company's grounds for repudiation unreasonable and unacceptable.

The Bench also pointed out that the surveyor's report, while comprehensive, did not hold the status of an infallible document and that contrary evidence, such as an investigation report, could be used to challenge its findings. The crucial question was whether the investigation report was essential for determining the fire's cause or if the surveyor's report alone sufficed. In light of this, the Bench concluded that the surveyor's report, despite its comprehensiveness, was inconclusive in identifying the actual cause of the fire. Given that the surveyor's report heavily relied on the findings of the Forensic Examiner, placing undue reliance on it was deemed imprudent.

The Bench further invoked the precedent set in Canara Bank v. United India Insurance Co. Ltd. LQ/SC/2020/180], stressing that the precise cause of the fire, whether attributed to a short circuit or any other factor, remained irrelevant as long as the claimant was not responsible for igniting the fire. This case underscored the fundamental principle that an insurance company's duty to the insured holds paramount importance.

“In the realm of risk and uncertainty, individuals and organisations seek solace in the bastion of insurance – a covenant forged on the bedrock of trust. Trust serves as the cornerstone, forming the essence of the insurer-insured relationship,” the Bench stated.

The Bench reiterated the bedrock principle that insurance contracts are inherently governed by the doctrine of uberrimae fidei, which mandates the utmost good faith from the insured. In turn, the insurer assumes a fiduciary obligation to act with integrity and uphold its contractual commitments, especially when the insured is not found to have acted negligently.

Consequently, the appeal of the Insurance Company was dismissed. Notwithstanding the dismissal, the Court clarified that to eliminate any ambiguity, the customs duty component of the claim should be settled directly with the Customs Department.