A Breach of Condition and its Impact on the Exoneration of the Insurer
Author: Harsh Mahaseth
NALSAR University of Law, Hyderabad, India
THE INSURANCE POLICY SHOULD BE STRICTLY CONSTRUED
There is no difference between a contract of insurance and any other contract, and that it should be construed strictly without adding or deleting anything from the terms thereof
- Justice L. Nageswara Rao
In the case of M/s. Industrial Promotion & Investment Corporation of Orissa Ltd. v. New India Assurance Company Ltd. &Anr.,the the insurance policy covered any loss or damage by Burglary or Housebreaking (theft following an actual, forcible and violent entry of and/or exit from the premises) The Insurer rejected the claim of the Assured on count of there being no forcible or violent entry. The Supreme Court held that as per the insurance contract forcible entry was required for a claim to be allowed under the head burglary or housebreaking. As this was not proved, the Insurer was not liable to pay the Assured. A contract of insurance should be construed strictly and it is only when there is ambiguity or doubt should it be interpreted in the favour of the Assured. The Court further observed that if there is any ambiguity or doubt in the clause in the insurance policy then it should be interpreted in favour of the Assured. However, as no ambiguity was seen in the present case the rule of contra proferentem is not applicable. In the present case, the Court has held that a contract has to be construed strictly. An insurance contract is like any other contract should also follow this and the terms of the contract should be construed strictly.
In the case of Pappu and Ors. v. Vinod Kumar Lamba and Anr.,the owner of the vehicle had produced the insurance certificate indicating that the vehicle was comprehensively insured by the Insurer for unlimited liability. Following the National Insurance Company Ltd. case, the Supreme Court held that the Insurer shall pay the claim amount to the appellant, with the liberty to recover the same from the Assured in accordance with the law.
This has been the interpretation given for a long time. But as of late there have been deviations, especially in motor vehicle accident cases.
- A BREACH OF CONDITION EXONERATES THE LIABILITY FROM THE INSURER
In the case of MS Middle High School v. HDFC Ergo General Insurance Co Ltd, the Assured’s vehicle did not possess a permit. As such this constituted a breach of a condition of the insurance policy. The Supreme Court held that in the present case liability cannot be fastened upon the Insurer as a breach of a condition of an insurance policy exonerates the liability from the Insurer.
The Bench relied upon previous judgments by the Supreme Court in National Insurance Company Limited v. ChallaBharathamma and Others,New India Assurance Company Limited v. Asha Rani &Ors.,andNational Insurance Company Limited v. NicolletaRohtagi&Ors.
A contrary view was taken in the case of Augustine VM v. Ayyappankutty and Ors,wherein the full bench of the Kerala High Court had held that the Insurer cannot claim exoneration from its liability to indemnify the owner of a vehicle with respect to injuries to third parties due to the vehicle getting into an accident after the expiration of the validity of the fitness certificate or permit, merely on account of such technical violations. However, the Supreme Court in the present case overturned this decision.
In the MS Middle High School case, the 2-judge bench of the Supreme Court has given a judgment which gives the Insurer the flexibility to repudiate the contract as soon as a breach of the contract occurs. This could be any breach, whether fundamental to the cause of the liability or not. While the judgment seems to take into consideration the factual matrix in front of them, there is scope for this judgment to be easily misused by the Insurer to escape liability.
- THE OPPOSING VIEW: THERE MUST BE A FUNDAMENTAL BREACH OF A TERM OR CONDITION FOR THE INSURER TO BE EXONERATED FROM HIS LIABILITY
In the case of Lakhmi Chand v. Reliance General Insurance,the Assured’s vehicle met with an accident due to gross and negligent driving. The Assured made a claim to the Insurer for the expenses incurred. The Insurer appointed a surveyor who found that the Assured breached a term and condition of the insurance policy by carrying more passengers than permitted. The Insurer refused to indemnify the Assured on the count of breach of a term and condition of the insurance policy. The Supreme Court rejected the claims made by the Insurer and held that an insurer can only repudiate a contract if there is a fundamental breach of contract. Not every breach can repudiate the contract. In the present case, the permitted capacity was not the cause of the accident and hence has nothing to do with the fundamental breach of contract and as such the Insurer cannot repudiate the contract.
The Supreme Court followed in the footsteps of the ratio laid down in the case of National Insurance Company Limited v. Swaran Singh, a case wherein the Assured was holding a fake driving license and met with an accident due to rash and negligent driving. The Insurer was held liable in this case even though there was a breach of the insurance policy because the said breach was not fundamental to have contributed to the cause of the accident.
However, the Court also held that while interpreting the terms of the contracts, the words used in the contract should be given paramount importance. Therefore, the contract must be strictly construed. The Court, in this case, is contradicting itself. In the present case, the Assured did not comply with the passenger limit that was expressly mentioned in the terms and conditions; however, the Court held that this was not a fundamental breach of contract. While on the other hand, the Court is also holding that while interpreting the terms of the contract, the words of the contract should be strictly construed.
The case of Manjeet Singh v. National Insurance Company Limited and Another,follows the Lakhmi Chand decision. In this case, the driver gave a lift to some passengers who robbed the driver in the end. The Supreme Court held that the Appellant was not at fault. While the carrying of such passengers was a breach of the policy, of the limit of the number of passengers, however, this was not a fundamental breach so as to bring the insurance policy to an end and exonerate the Insurer from his liability.
In the case of HDFCERGOGeneralInsurance Company Ltd. v. Sagir Ahmed &Ors.,the Delhi High Court held that the mere fact that the driving license held by the third respondent was not meant for commercial vehicles, cannot be taken as a fundamental breach of the terms and condition of the policy. Thus, the Delhi High Court rejected the claim for the exoneration of the Insurer.
- THE INSURER HAS TO PAY THE AMOUNT TO THE THIRD PARTY BUT CAN RECOVER THE AMOUNT FROM THE ASSURED
When there is a breach against a third party and such party files a suit against both the Assured and the Insurer the Courts have held, in many instances, that the Insurer should compensate the third party, even if a wilful and conscious breach of the insurance policy of the Assured has been proved. The Courts have further held that the Insurer is entitled to recovery rights from the Assured upon compensating the third party.
In the case of HDFCErgoGeneralInsurance Co. Ltd.v.Mohd. Izajul&Ors.,the Delhi High Court has held that a breach should be conscious and willful. The Court has followed the judgment of the Apex Court in the case of Sohan Lal Passi v. P. Sesh Reddy. Following the judgement of the Supreme Court in the case of Skandia Insurance Company Limited v. KokilabenChandravadan, the Court further held that even if such a conscious and wilful breach has been established on part of the Assured, the Insurer has a statutory liability to pay the third party and has a right to recover the same amount from the Assured, either in the same proceedings or in another one. The Supreme Court in the Sohan Lal Passi case approved the decision in the Skandia Insurance case.
The Supreme Court in the case of New India Assurance Co., Shimla v. Kamla,looked into both the Sohan Lal Passi and the SkandiaInsurance cases and held that the Insurer is entitled to recover the amount from the Assured if there was a breach of the insurance policy. In this case, the Assured was driving without a valid driver’s license and hence was liable to pay the Insurer the amount that was paid to the third party.
The same reasoning has been followed by Delhi High Court in the cases of ICICI Lombard GeneralInsurance Company Ltd. v.Lal BabuJha&Ors.andTata AIG GeneralInsurance Co. Ltd. v.Vijay Kumar &Ors.
In the case of Kempaiah and Ors. v. S.S Murthy and Anr.,thedriver of the offending vehicle had a learner’s license. The Supreme Court, following the decision in the Swaran Singh case, held that the Insurer had to pay the third party the amount and later was at liberty to recover the amount from the Assured.
In the case of United India Insurance Co. Ltd. v. Kusum and Others, the driver of a minibus, which was insured, was driving rash and negligently. Due to this, the minibus met with an accident and a person died. The Insurer and the Assured were both brought to Court. The Insurer claimed that there was a breach of the policy as the driver did not hold a valid driver’s license. The Bombay High Court held that there was no willful and intentional violation of the term and conditions of the insurance policy and that the Insurer cannot avoid the liability.
In the case of The Oriental Insurance Company Limited v. Smt. Malta and Others,a truck met with an accident and the driver did not have a driving license. The Insurer claimed this to be a breach of an essential condition of the insurance policy. The Bombay High Court held that the question to be looked into was not only of a breach of a condition of the insurance policy but also whether it was a wilful breach. The Court held that there was no wilful breach and thus the Insurer was liable to pay the third party.
Warranties are generally seen in maritime insurance policies where a warranty would be the seaworthiness of the vessel. Such has been seen in numerous cases such as Peacock Plywood (P) LTD v. Oriental Insurance Co. Ltd., New India Assurance Company Limited v. Hira Lal Ramesh Chand and Others,PannalalJankidas v. Mohanlal and Another, and Syed Mohammed v. New India Assurance Co. Ltd.
Warranties are not seen as much in other insurances. There are cases where it is seen in life insurances, such as the case of MithoolalNayak v. Life Insurance Corporation of India.The case of Suraj Mal Ram Niwas Oil Mills (P.) Ltd. vs. United India Insurance Co. Ltd. and Anr.,is a unique case that involves the use of a warranty. In this case, a special condition and warranty were agreed upon that “each and every consignment” must be declared before dispatch of the goods. The Assured was obliged to declare “each and every consignment” before it was declared for dispatch. There was nothing else in the insurance policy that would give the Assured the flexibility to pick and choose what all to declare to the Insurer. As such there was a breach of warranty when the Assured only declared certain dispatches. In doing so the Supreme Court held that the Insurer was justified in repudiating the insurance policy. The Court followed the judgment given in the case of General Assurance Society Ltd. v. Chandumull Jain and Anr.
While the use of warranties has not been seen a lot in the Indian insurance contracts, the flexibility given in the MS Middle High School judgment can be equated with a warranty, where any kind of breach would constitute a reason to repudiate the contract. Such flexibility should not be allowed unless expressly mentioned in the insurance policy during the time of contract as there is scope for this judgment to be easily misused by the Insurer to escape liability.
- THE CONTROVERSY: TO EXONERATE OR NOT TO EXONERATE
There have been several cases regarding motor vehicle accidents and the Courts have given various interpretations in such cases.
In the cases of New India Assurance Co., Shimla v. Kamla, ICICI Lombard GeneralInsurance Company Ltd. v. Lal BabuJha&Ors.and Tata AIG GeneralInsurance Co. Ltd. v. Vijay Kumar &Ors., the Courts held that the driver driving without a driving license was a breach of the insurance policy and hence was liable to pay the Insurer the amount that the Insurer paid to the third party.
Both the reasoning is given in the MS Middle High School case and the Lakhmi Chand have grey areas. The Lakhmi Chand case disregards the fact that possessing a fake driver’s license would be in relation to negligent and rash driving. The MS Middle High School case has given the Insurer huge flexibility as they can repudiate the contract as soon as any breach occurs.
In the case of MS Middle High School v. HDFC Ergo General Insurance Co Ltd, the Court held that the Assured did not possess a permit which constituted a breach of a condition of the insurance policy thus exonerating the liability from the Insurer.
The Lakhmi Chand case took the view that a fake driving license does not have a fundamental connection with rash and negligent driving. In The United India Insurance case and The Oriental Insurance case, the Courts held that the Insurer will not be exonerated from its liability because not possessing a driving license did not constitute a willful and intentional breach of the insurance policy.
The Courts have in such cases have held that a fake driving license does not have a fundamental connection with rash and negligent driving. However, obtaining a driving license itself is a sign of a driver’s competency. A driving license is obtained by a person after completing a driving test, which checks the competency of a person. Only after completing a written and practical exam does the person obtain a driving license. As the Assured did not have a driving license it can be assumed that he did not have the competency to drive, therein resulting in rash and negligent driving. This in itself shows a willful and intentional breach of the insurance policy. The Courts have not dealt with the issue of why the Assured did not have a driving license. This was a question that was material to such cases. Since the Assured had a fake driving license he was not certified to drive, and if he does not know how to drive, assuming his competency, his actions will meet with an accident. As such the reasoning given in the MS Middle High School case, the New India Assurance Co., etc. case should prevail in such circumstances.
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