In a fire insurance claim, the Supreme Court recently held that the exact cause of the fire is immaterial if the insured is not implicated as the one responsible for initiating the fire. This principle, grounded in the Canara Bank v. United India Insurance Company (2020) 3 SCC 455 case reinforces the insurer’s duty to honor the terms of the insurance policy and fulfill its obligations to the insured.
The Court observed “Therefore, it was unequivocally declared that the precise cause of a fire, whether attributed to a short circuit or any alternative factor, remains immaterial, provided the claimant is not the instigator of the fire. This case underscored the fundamental principle that an insurance company’s obligation to the insured is of much greater import….Moreover, the fire is found to have occurred within the insured warehouse and the appellant’s plea to the contrary is not believable. Therefore, it is a case of wrongful repudiation by the appellants.”
The judgment, steeped in the principles of good faith and trust inherent in insurance contracts, underscored the insurer’s fiduciary duty, particularly when the insured is not found negligent.
It stated very eloquently “In the realm of risk and uncertainty, individuals and organizations seek solace in the bastion of insurance – a covenant forged on the bedrock of trust. The trust serves as the cornerstone, forming the essence of the insurer-insured relationship. The fundamental principle is that insurance is governed by the doctrine of uberrima fides – there must be complete good faith on the part of the insured.
The heart & soul of an insurance contract lies in the protection it accords to those who wish to be insured by it. This understanding encapsulates the foundational belief that insurance accords protection & indemnification, preserving the sanctity of trust within its clauses. Effectively, the insurer assumes a fiduciary duty to act in good faith and honor their commitment. This responsibility becomes particularly pronounced when the insured, in their actions, have not been negligent. In light of the vital role that trust plays in insurance contracts, it is important to ensure that the insurer adequately fulfills the duty that has been cast on it, by virtue of such a covenant.”
The Supreme Court bench comprising Justices Hrishikesh Roy and Justice Sanjay Karol was hearing an appeal against NCDRC directing the Insurance Company to pay more than 6 crores for a fire insurance claim with 9% interest from the claim denial date within 8 weeks, or face 12% interest beyond the stipulated 8 weeks.
The case revolved around a fire that broke out on 14.03.2018, at a warehouse covered by an insurance policy with the claimant having paid Rs. 44,02,562/- for coverage against fire and safeguarding custom bonded goods. Various investigations were conducted, and 7 of the reports suggest short-circuiting as the cause of the fire. However, the forensic investigation report determined that a short-circuit was not the cause; rather, sparks from rooftop welding work may have triggered the fire. The surveyor’s report from M/s. Bhansali& Co. also aligned with such a conclusion.
On 03.10.2018, the insured raised a claim for a sum of Rs. 6,57,55,155/. But, the Insurance Company rejected the claim on 15.07.2019, citing reasons such as the insured premises at Survey No. 9/3 were not affected by the fire and the alleged negligence during roof construction, which increased the risk and voided the insurance coverage under Clause 3 of the policy’s terms and conditions.
Unsatisfied with the repudiation of the claim, the respondent filed a consumer complaint. The NCDRC ruled in favor of the claimant and held that the insurance policy covered the complainant’s warehouse and that the roofing work did not significantly increase the risk, making Clause No. 3 inapplicable. It highlighted that the approved surveyor’s report, while important, is not absolute and not binding on the parties, relying on the case of New India Assurance Co. Ltd. vs. Pradeep Kumar.
New grounds for repudiation cannot be introduced during the hearing if they were not included in the repudiation letter
The Court referred to earlier cases such as Galada Power and Telecommunication Ltd. vs. United India Insurance Co. Ltd. (2016) 15 SCC 161 and Saurashtra Chemicals Ltd. vs. National Insurance Co. Ltd. (2019) 19 SCC 70, where it was firmly established that new grounds for repudiation cannot be introduced during the hearing if they were not explicitly mentioned in the repudiation letter.
Further, the court examined the location of the fire, policy documents, the Leave & License Agreement, and communications from various departments. It concluded that the insured premises at Survey No. 9/3 was covered by the insurance policy.
Essential repair works by insured won’t amount to an alteration increasing risk of loss or damage to deny claim
The Court scrutinized Clause 3(a) of the insurance policy, which says the policy won’t apply if “there is an increased risk of loss or damage to the insured premises or goods within it.”
In the present case, the insured had undertaken repairs on the rooftop to prevent water leakage to the warehouse.
The court held that “such essential repair work on the rooftop by itself, cannot be reasonably construed to be an alteration that would increase the risk of loss or damage.”
Outlines circumstances under which the policy would cease to be applicable. It specifically addressed the repair work undertaken on the rooftop to prevent water leakage, asserting that such essential repairs did not constitute an alteration increasing the risk of loss or damage.
Significant time gap between repair work and fire, no negligence by insured
The Court referred to varying conclusions in various reports regarding the cause of the fire. While seven reports suggested a short circuit, the forensic investigation report pointed to sparks from rooftop welding work.
The Court questioned the logic of the forensic investigator’s conclusion, pointing out a significant time gap between the welding work and the fire. The Court emphasized that the evidence did not support negligence on the part of the insured.
The surveyor’s report in insurance claims is not sacrosanct and binding
The court highlighted the significance of a surveyor’s report in insurance claims, citing the Insurance Act of 1938. The Act mandates that claims exceeding Rs. 20,000 must undergo an initial assessment by an approved surveyor.
However, the Court emphasized that while the insurer has the discretion to settle the claim for a different amount, the surveyor’s report is not a conclusive and binding document.
The Court referred to New India Assurance Co. Ltd. v. Pradeep Kumar (2009) 7 SCC 787 which observed that “It is not that sacrosanct that it cannot be departed from; it is not conclusive. The approved surveyor’s report may be the basis or foundation for the settlement of a claim by the insurer in respect of loss suffered by the insured but such report is neither binding upon the insurer nor insured.”
In the present case, the court found that the surveyor’s report, although comprehensive, was inconclusive regarding the actual cause of the fire.
Claimant neither importer nor owner but merely custodian of goods: Insurance claim can include customs duty
The next issue was about the inclusion of customs duty, amounting to 2 crores in the insurance claim filed by the insured. The appellant contended that customs duty should not be part of the claim, citing the Customs Act, 1962, which specifies that only the importer is liable to pay customs duty. He argued that since no bills of entry were filed, and no assessed goods were lost in the fire, there is no customs duty liability.
However, the court agreed with the claimant who argued that Sections 22 and 23 of the Customs Act, which grant privileges related to abetment and remission, apply exclusively to ‘importers’ of insured goods. The claimant, functioning as a custodian, neither assumes the role of an importer nor owner of the goods but acts solely as a trustee on behalf of their clients.
This distinction became crucial in establishing the claimant’s right to include customs duty in the insurance claim.
In light of the above, the Court dismissed the appeal of the Insurance Company. The customs duty component of the claim was directed to be paid to the Customs Department directly.
