Abstract
Exclusion clause in any contract plays a very important role in not only the interpretation of contract but also limiting the minimizing the risk emanating from the contract. It requires immaculate and impeccable drafting keeping in mind the laws of different jurisdictions, custom and trade and usage in the particular trade.
Leaving something probable or inevitable will risk the party at the same time excluding everything may invite striking down the exclusion clause itself being contrary to the main purpose of the contract.
Big concerns have additional responsibility to balance the scale when the other party to the contract is in weaker position to negotiate or actually has no room to negotiate as in adhesion contract.
The terms of the insurance contract require strict construction without eschewing or adding the words in the contract. Therefore, it is the duty of the insurers to not only except their liability in clear and unambiguous terms but to ensure that they are reasonable and not inconsistent with the terms of the main contract.
EXCLUSION
The term ‘exclusion’ is self-explanatory. It spells out the things not covered in a contract and requires more attention than any other clauses in a contract.
The terms of the insurance contract require strict construction without eschewing or adding the words in the contract. However, insurers are exempted from any liability where the loss is attributable to an excluded perils specified in the exclusion clause or not mentioned in the covered causes/perils/risks/loss. Exclusions are construed strictly; therefore, it is the duty of the insurers to except their liability in clear and unambiguous terms. Further, doctrine of ‘contra proferentem’ applies against the drafter of a document which says that ambiguity in the wording of the document is to be resolved against the party who drafted it, and this rule applies even with greater force to adhesion contracts like insurance.
In addition, the exclusion terms of the insurance policy must not violate the main purpose of the contract; else it would be either read down to give effect to the main purpose of the contract or be held in fundamental breach of contract, and will be given no effect.
Like any other provision in a contract, words of exception or exclusion must be read in the context of the contract as a whole and with due regard to the main purpose rule which says that any amount of exclusion will not save the party of a contract if it defeats the main purpose of the contract.
The exclusion clauses may also be void if interpreting their ordinary and natural meaning gives an absurd result or defeats the very purpose of the insurance contract.
These exclusions are usually covered in a separate clause – called exclusion clause. Sometimes, they may be further categorized under general exclusion and special exclusion. They may also have disguised themselves under condition, exceptions, limitation, policy terms and condition, warranties, etc. Exclusions are resorted to by the Insurers to minimize and manage their risks.
Interpretation of insurance contract is guided by some established principles e.g. contra proferentem, main purpose rule, read down, blue pencil, severability, etc. Out of them ‘Contra Proferentem’ and ‘Main Purpose’ rules are touchstones in construction of insurance contract.
DEFINITIONS OF CONTRA PROFERENTEM:
Halsbury’s Laws of England explains contra proferentem as under:
“Where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application.”
MacGillivray on Insurance Law define contra proferentem as follows:
“The contra proferentem rule of construction arises only where there is a wording employed by those drafting the clause which leaves the court unable to decide by ordinary principles of interpretation which of two meanings is the right one.”
Colinvaux’s Law of Insurance elaborate contra proferentem rule as:
“Quite apart from contradictory clauses in policies, ambiguities are common in them and it is often very uncertain what the parties to them mean. In such cases the rule is that the policy, being drafted in language chosen by the insurers, must be taken most strongly against them. It is construed contra proferentem, against those who offer it.”
JUDICIAL PRONOUNCEMENTS
In the case of General Assurance Society Ltd. Vs. Chandumull Jain1 held as under:
“….. there is no difference between a contract of insurance and any other contract except that in the contract of insurance there is a requirement of uberrima fides i.e, good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the company in case of ambiguity or doubt”
In the case of United India Insurance Co. Ltd Vs. Pushpalaya Printers2, while interpreting the ‘impact’ observed that Clause 5 speaks of “impact” by any rail/road vehicle or animal, if the insurer had indented to exclude any damage or destruction caused on account of driving of vehicle on the road close to the building, it could have expressly excluded. The insured possibly did not understand and expect that the destruction and damage to the building and machinery is confined only to the direct collision by vehicle moving on the road to the building or machinery.
Recently, the Hon,ble Supreme Court in the case of Sushlaben Indravadan Gandhi & Anr Vs. The New India Assurance Company Ltd 3, arising out of motor accident compensation case, applied the principle of contra proferentem and observed that in case of ambiguity, the exclusion clause are to be construed against the insurer and held that the deceased cannot be treated as regular employee, especially in view of the fact the wording ‘in the course of’ immediately before ’employment’ can only meant for the person regularly employed by the employer.
LIMITATION TO THE RULE OF CONTRA PROFERENTEM
In the case of Suraj Mal Ram Niwas Mills (P) Ltd Vs. United India Ins. Co. Ltd.4, the Hon’ble Supreme Court held that while construing the terms of a contract of insurance, the words used therein must be given paramount importance, and it is not open for the court to add, delete or substitute any words. Therefore, the endeavor of the court should always be to interpret the words used in the contract in the manner that will best express the intention of the parties.
In the case of Vikram Green Tech(I) Ltd Vs. New India Assurance Co. Ltd5, the Hon’ble Supreme Court held that an insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms. In the case of Sikka Papers Ltd Vs. National Insurance Co. Ltd6, the Hon’ble supreme Court held that the court while construing the terms of the insurance policy is not expected to venture into extra liberalism that result in re-writing the contract or substitute the terms which were not intended by the parties.
In the case of Export Credit Guarantee Corp. of India Ltd Vs. Garg Sons International7, the insured purchased a policy for the purpose of insuring shipment to a foreign Buyer. The Foreign Buyer defaulted in payment in making payment and claim was rejected on the ground that the insured failed to communicate about the default made by the foreign buyer within the stipulated time frame and non-compliance of the said clause exonerate the insurer of all liability. The Supreme Court upheld the rejection of claim and held that the insured cannot claim anything more than what is covered by the insurance policy. The terms of the contract have to be construed strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely.
In the case of Oriental Insurance Co. Ltd Vs. Sony Cheriyan8, the insured obtained a policy for their truck, which caught fire while the same on its way carrying Ether Solvent. The insured rejected the claim on the ground breach committed by the insured by carrying hazardous goods. The policy clearly specify “Limitation of use”, which indicate that policy was meant to cover only carriage of goods defined within the meaning of Motor Vehicle Act, 1988. The Hon’ble court upheld the rejection of claim by the insurer.
In United India Insurance Co. Ltd Vs. Orient Treasures (P) Ltd9, the Hon’ble Supreme Court upheld the repudiation of claim of the insured on the ground that ornaments / jewelries were found to have been kept on the display window and sales counter at the time of the burglary, contrary to ‘Jewelers Block Policy’ which require insured to keep them in safe after business hour. The Court held that the loss caused to insured is excluded.
MAIN PURPOSE RULE
The Hon’ble Supreme Court of India in the case of B.V. Nagaraju Vs. Oriental Insurance Company Ltd.10, while deciding the issue, whether the alleged breach of carrying passenger in goods vehicle more the number permitted in terms of the insurance policy is so fundamental breach, so as to afford ground to the insurer to eschew liability altogether? held that the exclusion clause of the insurance policy must be read down so as to serve the main purpose of the policy on the ground that carrying of extra passengers could not contributed to the accident.
The Supreme Court recently, in National Insurance Company Ltd. v/s Vedic Resorts & Hotels Pvt. Ltd. 11, has held that the burden of proof to show that a particular case falls within an exclusion clause lies upon the Insurer. In this case the Insurer issued two policies to the Insured, one to cover the building, plant, machinery, accessories and furniture and the other for two hotel buildings at the said resort with stock. As per the case of the Insured, and the FIRs filed by the Insured and the subsequent police investigation, it appears that severe loss and damage was caused to the property on account of a mob of 200-250 people who were chasing a criminal and his associates who started firing and hurling bombs when a football match was going on at a local stadium. The FIRs and the police investigation further revealed that the criminals took shelter in the resort and subsequently there were weapons and ammunition found from the electrical storeroom of the Insured hotel. The Surveyor assessed a loss aggregating to Rs.202.216 lakhs under both policies. However, the Insurance company repudiated the claim on the ground that the claim was an outcome of malicious act which fell within the exclusion under the subject polices.
The Supreme Court, upon hearing held that if the Insurer alleges that loss/damage was caused by any malicious act, the burden of proving that it was caused due to malicious acts would be upon the insurer. The Insurer had not produced any evidence to show that the incident (attack on the football field) and the resultant damage (insured property) was caused by the malicious act of the management of the Insured. Even operating under the assumption that the allegations against the criminal were true, it was inconceivable that the damage caused by the crowd to the property in chasing the criminals was a ‘malicious’ act on the part of the management of the Insured and therefore excluded under the policy.
ADHESION CONTRACT
Black’s Law Dictionary defines “Adhesion Contract” as:
“A standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms. Also termed Contract of adhesion; take it or leave it contract; leonine contract.”
These contracts are prepared by the insurer having a standard format upon which a consumer is made to sign. He 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.
Lord Denning succinctly and most aptly describes the fallacy in making an inadequate disclosure in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd. (1983) Law Reports Q.B. 284)
“None of you nowadays will remember the trouble we had – when I was called to the Bar – with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of “freedom of contract.” But the freedom was all on the side of the big concern which had the use of the printing press. No freedom for the little man who took the ticket or order form or invoice. The big concern said, “Take it or leave it.” The little man had no option but to take it. The big concern could and did exempt itself from liability in its own interest without regard to the little man. It got away with it time after time. When the courts said to the big concern, “You must put it in clear words,” the big concern had no hesitation in doing so. It knew well that the little man would never read the exemption clauses or understand them. It was a bleak winter for our law of contract……”
For example, in Glynn v. Margetson & Co. [1893 AC 351 (HL)] , AC at p. 357, Lord Halsbury, L.C. stated : (AC p. 357) ‘… It seems to me that in construing this document, which is a contract of carriage between the parties, one must in the first instance look at the whole instrument and not at one part of it only. Looking at the whole instrument, and seeing what one must regard … as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract.’
Apex Court held in Bharat Watch Company v. National Insurance Co. Ltd. 12:
“The basic issue which has been canvassed on behalf of the appellant before this Court is that the conditions of exclusion under the policy document were not handed over to the appellant by the insurer and in the absence of the appellant being made aware of the terms of the exclusion, it is not open to the insurer to rely upon the exclusionary clauses. Hence, it was urged that the decision in United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal13 will have no application since there was no dispute in that case that the policy document was issued to the insured.”
DOCTRINE OF BLUE PENCIL
The aforesaid principle evolved by the English and American Courts has been duly taken note of by this Court in Beed District Central Coop. Bank Ltd. v. State of Maharashtra14:
The “doctrine of blue pencil” was evolved by the English and American courts. In Halsbury’s Laws of England, (4th Edn., Vol. 9), p. 297, para 430, it is stated:
“Severance of illegal and void provisions – A contract will rarely be totally illegal or void and certain parts of it may be entirely lawful in themselves. The question therefore arises whether the illegal or void parts may be separated or ‘severed’ from the contract and the rest of the contract enforced without them.
“Blue pencil doctrine (test) – A judicial standard for deciding whether to invalidate the whole contract or only the offending words. Under this standard, only the offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them, as opposed to changing, adding, or rearranging words. (Black, 7th Edn., 1999).
In M/s Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors. (CIVIL APPEAL NO. 8249 OF 2022 arising out of SLP (Civil) No. 25457 of 2019) 15
The appellant secured a Standard Fire & Special Perils policy from the respondent on 28.07.2012. The policy was effective from 28.07.2012 to 27.07.2013. It was meant to cover a shop situated in the basement of the building. However, the exclusion clause of the contract specifies that it does not cover the basement. Due inspection of the shop was made which was actually situated on the other side of the road from the office of respondent No. 1. Not only this shop of the appellant, but yet another shop similarly situated, was also insured. The appellant continued to pay the premium promptly.
The appellant put up further construction, for which due notice was given and due inspection was also made. The shop met with a fire accident for which the appellant raised a claim. The surveyor of insurer also made an inspection, on the basis of which the appellant was instructed to refurnish its shop for the purpose of due evaluation. While arriving at the sum payable, the surveyor did notice the fact that the earlier inspections were made and that the fact that the shop was in a basement was to the knowledge of the insurer. The claim made was repudiated by the insurer taking umbrage under the exclusion clause.
An exclusion clause in a contract of insurance has to be interpreted differently. Not only the onus but also the burden lies with the insurer when reliance is made on such a clause. It can never be understood to mean to be in conflict with the main purpose for which the contract is entered. Such a clause has to be understood on the prism of the main contract. The main contract once signed would eclipse the offending exclusion clause when it would otherwise be impossible to execute it. It has got no ability to destroy its own creator, i.e. the main contract. When it is destructive to the main contract, right at its inception, it has to be severed.
Insurance business is plagued by misuse of the exclusion clause for wrongful repudiation of claims. Lately, it has been seen that the Insured are no longer accepting such arbitrary repudiations as mute receptor and have started approaching the courts challenging such repudiations. The recent line of judicial precedents by the Supreme Court are welcoming as they are coming down heavily on such insurers who are using the exclusion clause as a tool to repudiate claims without applying the same in the spirit of the policy.
Supreme Court in M/s Texco Marketing, also sounded 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 contract by placing reliance upon any of the terms and conditions included thereunder.