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5 Recent Litigations in the Supreme Court and What They Mean for Policyholders

I. Claims can be rejected if material information is not disclosed when buying insurance

Reliance Life Insurance v. Rekhaben Nareshbhai Rathod

This case was about a basic principle of insurance law: if the insured does not reveal important information when signing an insurance contract, the insurer can reject policy claims.

In this case, Mrs Rathod’s spouse had bought life insurance from Reliance Life Insurance in September 2009. However, Mrs Rathod had taken a life insurance policy from Max New York Life Insurance Co. Ltd. in July 2009. Reliance. After the death of her spouse, Mrs Rathod made a claim under the policy in February 2010. While Reliance was making a decision on this claim, Max informed it of the previous insurance. Because Mrs Rathod had not revealed this information, Reliance rejected her claim.

The District Commission dismissed Mrs Rathod’s complaint because of her failure to disclose information. However, both the State and National Commissions allowed the appeal noting that “the omission of the insured to disclose a previous policy of insurance would not influence the mind of a prudent insurer. In appeal, the Supreme Court (SC) reversed this decision. It noted that not disclosing insurance obtained earlier was the suppression of a material fact, which would allow Reliance to reject the claim. Giving a wrong answer or not revealing important facts in the proposal form cancels the policy since it goes against “good faith”.

II. Insurance company must provide all reasons for rejecting a claim in the initial rejection letter

Branch Manager, Bajaj Allianz Life Insurance Company Ltd. and Ors. Dalbir Kaur

The SC set aside a verdict from the National Consumer Disputes Redressal Commission (NCDRC) in this case. It noted that an insurance contract is of “utmost good faith” and anyone who wants life insurance must disclose all important facts. The NCDRC had dismissed Bajaj Allianz’s plea against an order asking it to pay a full death claim with interest to the mother of the deceased. The SC bench headed by Justice D. Y. Chandrachud was hearing a plea by Bajaj Allianz against this NCDRC verdict.

The SC noted that a proposal form specifically asks about pre-existing conditions to help the insurer evaluate risk. The proposer had not revealed that he was suffering from a pre-existing illness and was vomiting blood barely a month before the issuance of policy. Alcohol abuse had caused his pre-existing ailment. The insurer did not have these details. The court decided to set aside NCDRC judgement as it did not lay down the correct principle of law.

The insured person’s mother was 70 years old and had lost the support of her son. Considering this, the court used its jurisdiction under Article 142 of the Constitution to not to recover the paid out amount.

III. Unless the insured is duly informed, exclusionary clauses are not applicable

Saurashtra Chemicals Ltd. v. National Insurance Co. Ltd.

Saurashtra Chemicals bought a standard fire and special perils policy from National Insurance for the coal and lignite in its factory compound. It paid an additional premium to cover the risk of loss to the stock from spontaneous combustion.

The Sick Industrial Companies Act had declared Saurashtra Chemicals  a sick unit. They had closed the factory from 17 February 2006 to 9 August 2006. It reopened on 10 August 2006. Between 11 August and 20 August 2006, a spontaneous combustion destroyed some coal and lignite . National Insurance received a notice of the loss and damage. A surveyor assessed the total loss at Rs. 63,43,679.

However, National Insurance rejected the claim saying there was no loss as specified in the policy because spontaneous combustion had not resulted in a fire.

Saurashtra Chemicals then filed a consumer complaint before the NCDRC. National Insurance responded stating:

  1. No claim could be paid since the loss by spontaneous combustion was not covered.
  2. Since Saurashtra Chemicals had closed the factory for almost 6 months, the insurance cover ceased to operate. The policy stated that insurance would end if the building that had the insured property was unoccupied for more than 30 days.
  3. Delay in claim by more than 30 days, violating condition no. 6(i) of the policy’s general conditions.

The NCDRC did not accept the first and second reasons. However, it found the third reason valid. It dismissed the complaint on breach of condition No. 6(i) of the policy since the insured did not submit the notice of the loss in writing within 15 days of the incident.

Saurashtra Chemicals filed an appeal in the SC. The SC noted that the rejection letter did not mention the delay as a reason for rejection. National Insurance first mentioned the delay in its reply before the NCDRC. Therefore, SC allowed Saurashtra Chemicals’ appeal.

New India Assurance Co. Ltd. v. Paresh Mohanlal Parmar

Mr Parmar bought a burglary and housebreaking insurance policy for 5 June 2003 to 4 June 2004 from New India Assurance for Rs. 20 lakh. During this period, there was a theft in Mr Parmar’s warehouse. He reported the theft to the police and shared the information with New India Assurance. Their surveyor visited and submitted his preliminary report. New India Assurance claimed there was no forced entry because a duplicate key had been used to open the warehouse. It rejected the claim.

The State Commission dismissed Mr Parmar’s complaint. He then went to the NCDRC. It noted that the warehouse lock was found on the street and the culprit had been convicted under Section 454 IPC. Thus, it ruled that the culprit had forced open the warehouse . It also found that New India Assurance had not made Mr. Parmar aware of the relevant terms and conditions of the policy.

New India Assurance filed an appeal in the SC. Mr Parmar argued that he had not been provided with the policy’s terms and conditions. Thus, they could not reject his claim. The SC could not find any evidence to the contrary. It noted that the insurer(s) had to prove that the insured was aware of the policy’s terms and conditions when the insurer issued the policy. The SC thus supported the NCDRC order to pay the claim.

IV. Determining whether the insured is a regular employee and the use of the contra proferentum rule

Sushilaben Indravadan Gandhi and Anr. v. New India Assurance Co Ltd and Ors.

A doctor travelling in a hospital vehicle died in an accident caused by the driver’s carelessness. The hospital’s arrangement was that New India Assurance would pay compensation for those not employed by the hospital. Workmen Compensation Act, 1923 covered the employees. The main issue, in this case, was whether the doctor was a hospital employee.

The SC first examined the hospital contract. Was it a “Contract for Service,” which suggests a relationship between equals on professional terms, or “Contract of Service,” which implies a master-servant relationship? The SC ruled that the they could not treat the doctor as a regular hospital employee. His contract clearly showed that his services were provided as an independent professional. The SC thus applied the contra proferentem principle. This states that the exclusion clause must be read against the insurer. The SC thus allowed compensation of INR 37.6 lakh to the appellants.

The SC thus clarified the position on ambiguous policy, where the contra proferentem rule will be applied. In cases of ambiguity in the policy wording, the ruling would be against the party that has prepared the contract; in most cases, this is the insurance company.

The SC also made it clear that doctors must be considered professionals. Their terms of service were different from those of general hospital employees.