While asking an Insurance Company to satisfy the award passed in favour of the legal heirs of a man whose insured house suffered substantial damage due to floods, the Jammu & Kashmir and Ladakh High Court has held that a clause allowing the insurer to escape liability while benefiting from the consumer’s payment of premium must be struck down as unfair and is void.

The High Court was considering an appeal challenging the order of the Jammu & Kashmir Consumer Redressal Commission, Srinagar (Commission), whereby the complaint filed by the respondent was allowed, and the appellant Insurance Company was directed to pay an amount of Rs 4,76,347 as compensation for the damage caused to the respondent’s residential house during the floods of September 2014.

The Division Bench of Justice Sanjeev Kumar and Justice Sanjay Parihar held, “Having regard to the objectives of the Consumer Protection Act, once it is shown that the contract contains a clause which, if enforced, would allow the insurer to escape liability while benefiting from the consumer’s payment of premium, such a clause must be struck down as unfair. A clause that negates the essential purpose of the contract is void and cannot be enforced.”

Advocate N. A Dandru represented the Appellant, while Advocate Irfan Rasool represented the Respondent.

Factual Background

The respondents are the legal heirs of late Shad Mohd Bashir, who had insured his residential house with the appellants since 2009. The policy was renewed annually, covering the risks enumerated therein. During this subsisting policy period, the insured house suffered substantial damage due to the September 2014 floods. The respondents, as legal heirs, sought indemnification of the loss. The appellants registered the claim and appointed a surveyor who assessed the loss at Rs 6,08,462. The appellants, however, repudiated the claim on the ground that the policy was a Standard Fire Policy, which excluded STFI (Storm, Tempest, Flood and Inundation) perils.

While deciding the complaint, the Commission noted the appellants’ plea that the policy had been renewed uninterruptedly since inception, STFI perils had been excluded in all earlier years, and the insured was fully aware of this exclusion. On this basis, the appellants argued that the respondents could not plead ignorance regarding the exclusion. The Commission held that although the policy contained an endorsement excluding STFI perils, the respondents were not entirely free from negligence. Holding them contributorily negligent, the Commission reduced the assessed loss by 25%, and directed the appellants to pay Rs. 4,56,347, along with Rs. 20,000 as litigation compensation.

Reasoning

Reiterating the principles governing the interpretation of insurance contracts, the Bench explained that such contracts are standard-form, drafted unilaterally by the insurer, leaving the consumer with no bargaining power and only a “take it or leave it” choice. “Courts have consistently treated such contracts as contracts of adhesion, inherently tilted in favour of insurers. It is also not in dispute that a Standard Fire and Special Perils Policy ordinarily cover a wide range of risks, including storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation, as is evident from Clause VI of the appellants’ own policy document", it added.

Referring to various judgments, the Bench reaffirmed that the insurance contracts are governed by the principle of full disclosure. While the insured must disclose material facts relating to the risk, the insurer bears an equally onerous duty to clearly notify and explain any exclusion clause. “This requirement has been given statutory recognition in the IRDA (Protection of Policyholders’ Interests) Regulations, 2002, which mandate that where a proposal form is not filled by the insured, a certificate must be incorporated certifying that its contents were fully explained. Clause IV further requires the insurer to furnish a copy of the proposal form to the insured within thirty days of acceptance”, the order read.

“Consequently, the appellants cannot draw support from the argument that no premium was paid for STFI coverage. When the policy is comprehensive and styled as covering special perils, the insurer cannot rely upon a concealed exclusion clause to defeat the consumer’s legitimate expectations”, it further added.

Considering that the policy described itself as a comprehensive Standard Fire and Special Perils Policy and even the acronym “STFI” was not spelt out, the Bench held that the insured could not be presumed to have understood the exclusion. “The proposal form having not been produced, the Commission’s findings cannot be termed perverse. On the contrary, the Commission’s application of 25% contributory negligence based on the surveyor’s report remains unchallenged by the respondents. We find no infirmity in the reasoning", the Bench mentioned.

Noting that the appellants had failed to prove that the exclusion of STFI perils was ever fairly disclosed to the insured, the Bench dismissed the appeal. “The appellants shall satisfy the award. The statutory deposit shall be transmitted to the Commission, which shall release the amount to the respondents”, it ordered.

Cause Title: National Insurance Company Limited v. Mala Bashir (Case No.: FAO(D) No. 13/2024)

Click here to read/download Order


Justice Sanjeev KumarJustice Sanjay PariharJammu & Kashmir & Ladakh High Court

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.