Supreme Court: Subsequent Discovery Of Damage Or Corrosion Can’t Be Used To Repudiate Claim As It Defeats Main Purpose Of Insurance Contract

The Supreme Court held that a subsequent discovery of damage or corrosion cannot be used to repudiate the claim as it would defeat the main purpose of the insurance contract.

The Court was deciding Civil Appeals preferred by a company, arising from a Consumer Complaint against the Insurance Company before the Maharashtra State Consumer Dispute Redressal Commission, Mumbai, Circuit Bench at Aurangabad.

The two-Judge Bench comprising Justice P.S. Narasimha and Justice Manoj Misra observed, “Notably, the boiler in question was certified and registered; the insurance policy was issued after the certificate of registration was provided; and the accident occurred while the certificate of registration was subsisting. In such circumstances, burden was heavy on the insurer to prove that the boiler was not worthy of insurance cover or that such cover was obtained by misrepresentation or suppression of material facts or by playing fraud. Nothing of the kind has been pleaded or proved by the insurer. A subsequent discovery of damage or corrosion cannot be used to repudiate the claim as it would defeat the main purpose of the insurance contract.”

The Bench said that once a proposal is accepted by the insurer and formalities are complete, in absence of plea and evidence of fraud or misrepresentation making the contract voidable at the instance of the insurer, the insurer cannot be permitted to wriggle out of its liability under the contract.

Senior Advocate Shekhar G. Devasa appeared for the Appellant, while AOR Gaurav Sharma appeared for the Respondents.

Brief Facts

The State Commission had partly allowed the complaint and awarded Rs. 49 lakhs as compensation to the Appellant-Complainant with an interest @ 6% per annum till realization of the awarded amount. Against this, two Appeals were filed before the National Consumer Disputes Redressal Commission (NCDRC). One Appeal was by the Appellant for enhancement of compensation, whereas another was by the Respondent-Insurance Company against the award of compensation. The NCDRC allowed the Respondent’s Appeal and dismissed that of the Appellant. This was under challenge before the Apex Court.

The Appellant had obtained an insurance policy from the Respondent, which provided insurance cover to a Boiler for a specific period. The risk covered loss/damage up to Rs. 1.60 crores. Subsequently, a blast/explosion took place in that boiler and intimation of the same was provided to the Boiler Inspector as also to the Respondent. Based on the surveyor’s report, the Appellant’s claim was repudiated by the Respondent. This led to the filing of consumer complaint.

Reasoning

The Supreme Court after hearing the contentions of the counsel, noted, “A proposer is under a duty to disclose to the insurer all material facts as they are within its knowledge. The proposer is presumed to know all the facts and circumstances concerning the proposed insurance. Whilst the proposer can only disclose what is known to him the proposer’s duty of disclosure is not confined to his actual knowledge. Rather, it also extends to those material facts which, in the ordinary course of business, he ought to know. However, the proposer is not under a duty to disclose facts which he did not know and which he could not reasonably be expected to know at the material time.”

The Court added that the proposer need not disclose matters already known to the insurer or matters as to which the insurer has waived information and an insurer is deemed to know of matters of common knowledge and matters of which he ought to be aware as an insurer in that line of business.

“Further, if the insurer while accepting the proposal form does not ask the insured to clarify any ambiguities then the insurer after accepting the premium cannot urge that there was a wrong declaration made by the insured. … An exclusion clause in the policy is to be construed in a manner that it does not defeat the main purpose of the contract and could even be read down to serve the main purpose of the policy that is to indemnify the policy holder”, it reiterated.

The Court elucidated that mere discovery of corrosion on underlying parts while making a survey is not conclusive to hold that there was infraction of duty to make a fair disclosure for the simple reason that those underlying parts got noticed only because tubes slipped off on account of the explosion.

“Therefore, once a certificate of registration for use of such boiler is issued, during currency of that certificate, the boiler concerned would be considered, prima facie, fit for usage. In such circumstances, to substantiate that the insured suppressed information of boiler being unworthy of use, burden would be very heavy on the insurer, particularly, when the accident occurs during currency of its registration”, it said.

The Court observed that despite a certificate of registration, an insurer may refuse insurance based on its own inputs about the condition of the boiler and this is because whether an insurer should take the risk or not is best left to its wisdom.

“However, when an insurer accepts the risk, it can repudiate the claim on limited grounds such as, (a) by pleading and proving that there was a failure on part of the insured in making disclosure of a material fact which renders the contract voidable at the instance of the insurer; and (b) by demonstrating that the terms and conditions of the contract of insurance exclude such claims”, it further noted.

The Court remarked that merely by saying that some of the tubes were of 1986 and, therefore, had outlived their life, the insurer cannot escape from its liability.

“… the ground of non-disclosure to repudiate the contract, in our view, is completely unsustainable, particularly, in absence of pleading and evidence that by playing fraud the appellant prevented a meaningful inspection of the boiler in question”, it held.

Conclusion

The Court also noted that a defect may not be visible unless the boiler is dismantled and therefore, when a registered boiler explodes within its serviceable period, it is quite possible that its shortcomings may go unnoticed.

“… it would be extremely unjust to non-suit a claim on discovery of defects post the blast in absence of any specific material that such defects cannot be an outcome of the blast or explosion”, it added.

The Court was of the opinion that in absence of a stand that the boiler and its parts had a prescribed life and that the boiler had outlived its prescribed life, or that there was a failure on part of the insured in making full and complete disclosure, making the contract voidable, exclusion clause 5 could not have been pressed into service to repudiate the claim of the insured.

“… the insurer was not justified in repudiating the claim by invoking the exclusion clause 5. … Accordingly, we are of the view that NCDRC was not justified in setting aside the order of the State Commission and discarding the claim of the appellant by relying on exclusion clause 5 (supra)”, it concluded.

Accordingly, the Apex Court allowed the Appeals, set aside the impugned Judgment, and restored the Appeals on the file of NCDRC for a consideration only on the quantum of compensation.

Cause Title- Kopargaon Sahakari Sakhar Karkhana Ltd v. National Insurance Co. Ltd. & Anr. (Neutral Citation: 2025 INSC 1315)

Appearance:

Appellant: Senior Advocate Shekhar G. Devasa, AOR Ashutosh Dubey, Advocates Nitin Gaware, Abhishek Chauhan, Rajshri Dubey, Amit P Shahi, Amit Kumar, Rahul Sethi, Shashibhushan Nagar, Sumant A Khan, Sona Khan, H B Dubey, and Rishabh Bhardwaj.

Respondents: AORs Gaurav Sharma, Aaditya Aniruddha Pande, Advocates Adarsh Dubey, Siddharth Dharmadhikari, and Shrirang B. Varma.

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