Case Title: M/s. Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. And Ors. CA No. 8249 of 2022
Summary
The Supreme Court issued a warning to insurance companies that failure to comply with Clause (3) and (4) of the Regulatory and Development Authority (Protection of Policyholders Interests, Regulation 2002) Act (IRDA Regulation, 2002) would result in the forfeiture of their right to revoke insurance contracts using any terms and conditions, including exclusion clauses. The IRDA Regulations require insurers to provide the insured with all pertinent information, including any exclusion clauses. Any non-compliance would lead to the irresistible conclusion that the offending clause, be it an exclusion clause, cannot be pressed into service by the insurer against the insured as they may not be in knowhow of the same.
In a judgment regarding an insurance case in which the insurer invoked an exclusion clause without first complying with the IRDA Regulation, the Supreme Court examined whether a party that introduced the exclusion clause, which subsequently becomes a beneficiary, could utilize it to avoid liability, despite the fact that it destroys the contract it knowingly entered into. The court placed significant emphasis on the common law tenets of fairness, namely notice, good faith, and disclosure. The court concluded that when an exclusion clause is introduced making the contract unenforceable on the date on which it is executed, much to the knowledge of the insurer, non-disclosure and a failure to furnish a copy of the said contract by following the procedure required by statute would make the said clause redundant and non-existent.
The Supreme Court upheld the National Consumer Disputes Redressal Commission’s decision to reverse the directive to reimburse the insured Rs. 2.5 lakhs, while partially granting the appeal.
About the case
On Wednesday, the Supreme Court issued a warning to all insurance companies that failure to comply with Clause (3) and (4) of the Regulatory and Development Authority (Protection of Policyholders Interests, Regulation 2002) Act (IRDA Regulation, 2002) would result in the forfeiture of their right to revoke insurance contracts using any terms and conditions, including exclusion clauses. “…we wish to advise all insurance companies with a word of caution regarding the compulsory observance of Clauses (3) and (4) of the IRDA Regulation, 2002.
The insurance companies’ failure to comply would result in the forfeiture of their ability to assert repudiation of contract by relying on any of the terms and conditions contained therein. The aforementioned provisions of the IRDA Regulations require the insurer to provide the insured with all pertinent information, including any exclusion clauses. “Any non-compliance(with IRDA Regulations), obviously would lead to the irresistible conclusion that the offending clause, be it an exclusion clause, cannot be pressed into service by the insurer against the insured as he may not be in knowhow of the same” , according to the Court.
In a judgment regarding an insurance case in which the insurer invoked an exclusion clause without first complying with the IRDA Regulation, 2002, a bench consisting of Justices Surya Kant and M.M. Sundresh stated the same thing. The Bench had observed that an exclusion clause that, from the outset, revokes the fundamental contract rights is unjust and unenforceable. A Factual Context Effective from July 28, 2012 to July 27, 2012, M/s Texco Marketing Pvt. Ltd. obtained a Standard Fire and Special Perils policy from TATA AIG General Insurance Ltd. A builder’s basement shop was the intended recipient of the purchased policy. The basement is not, however, covered by the policy, as stipulated in the contract’s exclusion clause. The shop underwent a thorough inspection prior to the contract’s execution. Texco, the insured party, remitted the premium.
However, in the event of a fire at the basement shop, TATA AIG, the insurer, rejected the insurance claim under the pretext of the exclusion clause. The State Consumer Disputes Redressal Commission granted the insured’s complaint on the grounds that the insurer failed to adequately disclose the exclusion clause; the insurer also engaged in unfair trade practices and provided inadequate service. The National Consumer Disputes Redressal Commission reversed the State Commission’s decision to award the insured Rs. 2.5 lakhs. An examination conducted by the Supreme Court Concerning This Can a party that introduced the exclusion clause, which subsequently becomes a beneficiary, utilize it to avoid liability, despite the fact that it destroys the contract it knowingly entered into? Adhesion Agreement Standard-form contracts, or adhesion contracts, comprise the majority of insurance agreements, according to the apex court. The insurer dictates the terms of the contract, despite the voluntary nature of the contact; the insured has insufficient bargaining power. It was believed that the concept of freedom of contract loses significance in insurance contracts.
The Court noted that the premium is paid with a valid anticipation of reimbursement in order to provide for future contingencies. Clause of Exclusion Due to the fact that insurance contracts are founded upon the principle of good faith, the insurer bears the burden when an exclusion clause is invoked. The Court observed that in order to be in violation of the exclusion clause, the party relying on it cannot have engaged in fraud, coercion, or misrepresentation. Initially severing the exclusion clause would result in the loss of the principal contract rights; such a termination would be necessary. “Once signed, the principal contract would supersede the objectionable exclusion clause, which would otherwise be unenforceable,” the court continued. A clause or term is a component that lacks an independent existence beyond the contract; as such, it exists and ceases to exist with the agreement. It lacks the capability to annihilate its own architect, which is the primary contract.” Disclosure Obligation, Good Faith, and Notice The Supreme Court placed significant emphasis on the common law tenets of fairness, namely notice, good faith, and disclosure.
It was noted that these principles should be applied more rigorously to standard form contracts, such as insurance contracts, particularly when an exclusion clause is included. The Court was of the opinion that “When an exclusion clause is introduced making the contract unenforceable on the date on which it is executed, much to the knowledge of the insurer, non-disclosure and a failure to furnish a copy of the said contract by following the procedure required by statute, would make the said clause redundant and non-existent.” Insurer obligations stipulated in Clause 3(ii) of the Insurance Regulatory and Development Authority (Protection of Policyholders Interests, Regulation 2002) Act require the insurer to furnish the insured with all pertinent information pertaining to the policy.
Another requirement is the submission of a duplicate of the proposal form within thirty days of its acceptance. Failure to adhere to the stipulations of the Act would result in the insurer being unable to enforce the contested clause, including the exclusion clause. Principle of the Blue Pencil This doctrine declares the infringing clause null and void from the outset. Eliminate an exclusion clause that is in opposition to the terms of the primary contract. The Court made reference to the Indian Contract Act and stated that the insured is entitled to relief when a court is convinced that fraud or misrepresentation occurred during the execution of the contract by suppressing an exclusion clause that allows the insurer to avoid liability.
The 2019 Consumer Protection Act The Court reached the conclusion that the State and National Commissioners, as authorized by the Consumer Protection Act of 2019, possess not only the authority to declare “any terms of the contract” unjust but also the authority to award consequential relief. The document read, “We acknowledge that the aforementioned provisions were implemented as part of the 2019 Act.” Notwithstanding this, the prior Act, namely the Consumer Protection Act of 1986, may have implicitly intended these provisions. To conclude, After establishing a deficiency in service and the insurer’s knowledge of entering into a contract, the court deduced that such conduct would constitute a deliberate waiver of the exclusion clause.
It is worth mentioning that while the NCDRC has granted approval to the State Commission’s findings, it has chosen to vacate the State Commission’s order. Unfair trade practice includes noncompliance with the provisions of the IRDA Regulations, 2002; unilateral inclusion of the exclusion clause; contract execution; premium receipt; and repudiation despite knowledge that the insurance contract was entered into for a basement shop. Furthermore, the exclusion clause is unjust because it contradicts the very purpose of the agreement, rendering it non-exécutable from the start. Nevertheless, the Court determined that the State Commission’s award of Rs. 2.5 lakh in compensation for psychological distress and harassment was unjustified. Therefore, the Court upheld the NCDRC order to the extent that it reversed the directive to reimburse the insured Rs 2.5 lakh, while partially granting the appeal.
