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Tuesday, August 30, 2016

Supreme Court on Burglary in Insurance Policies ~ 'contra proferenterm' rule !

Insurance is  a contract and every contract  should be interpreted strictly !

Underwriters evaluate the risk and the premium is based on exposure, the probable chance of occurrence, frequency and severity.  Burglary insurance provides indemnity for loss or damage to property insured from the premises insured directly resultant from acts of burglary. From an Insurance angle, it is not the value of the goods that alone that matters.  Goods that can be sold easily in retail and grey markets [eg. Cigarette packs / batteries] are bad risks as compared to those which cannot be sold easily [eg. Special medicines].  Smaller items with high value [eg.,diamond rings] are worser risk than bulky items like machinery. Again those who have ready market in retail [eg mobile phones] are  bad risks as compared to those which cannot be sold so easily [say precision machinery].  In contrast, exhibition items / objects with antique value are higher risks unless proper security arrangements are in place. 

Often the terms are used interchangeably and interpreted loosely.  People tend to claim all losses as genuine, without looking into the terms of coverage.  In a peril defined policy, occurrence being genuine alone would not warrant consideration – loss or damage should be attributable to an insured peril. 

Section 378 of IPC defines theft and section 379 talks of the punishment for theft. Sec445 is House breaking.—A person is said to commit “house-breaking” who commits house-trespass if he effects his entrance into the house or any part of it in any of the six ways described; or if, being in the house or any part of it for the purpose of committing an offence, or, having committed an offence therein, he quits the house or any part of it in any of such six ways !! .. .. however, Insurance Policies define ‘Burglary’.  The policy interprets ‘burglary’ as to mean actual theft or an attempt thereat:
a)  accompanied by an actual forcible and violent entry into or exit from any building at the premises or
b)  following assault or violence to any person  or threat thereof.

Here is a recent deliverance of the Supreme Court of India, that should bring cheers to Insurers. [Civil Appeal no. 1130 of 2007] :  M/s. Industrial Promotion & Investment Corporation of Orissa Ltd. Vs. New India Assurance Company Ltd. & ANR.

The appeal was made by Industrial Promotion & Investment Corpn of Orissa, a wholly owned Public Sector Undertaking of the Government of Orissa.  They had extended a term loan of Rs. 40,74,000/- to M/s. Josna Casting Centre Orissa Pvt. Ltd.  As the party defaulted, the Industrial Corpn.  took over the assets in 1992.  They insured the assets against Fire and Burglary policies. At the time of auctioning the seized assets in 1997 it was observed that some parts of the plant and machinery were missing from the factory premises. FIR was filed at Balasore and Insurance claim lodged for a value of 34.40 lakhs under Burglary policy  - the claim was repudiated by Insurers stating loss was not within the purview of Policy.  The Appellant filed application before MRTP Commission, which too was rejected.  They preferred appeal in the Apex Court. 

The Counsel for appellant contended that policy covers burglary and applying the rule of contra proferentem ’ the words 'theft following an actual forcible and violent entry/or exit from the premises' are with reference only to house breaking and not burglary. He contended that forcible and violent entry is not necessary for making a valid claim under the policy and that it would be sufficient if  there is theft of certain goods from the factory premises, which fact has been proved by the Appellant. Mr. Mehta stated that clauses in the case  in United India Assurance Co. Ltd. v. Harchand Rai Chandan Lal and urged  that the Commission committed an error in relying upon the said judgment to reject the Claim Application for the Appellant.

Advocate representing the Insurer submitted that there is no difference and urged that an insurance policy is akin to a commercial contract and has to be construed strictly. He  submitted that a forcible entry and/or exit is compulsory for maintainability of a claim under the policy.

The Hon’ble Court held that there is no error committed by the MRTP Commission in rejecting the Claim of the Appellant. It is clear from the facts of the present case that the Appellant has made out a case of theft without a forcible entry. The case of the Appellant is that forcible entry is not required for a claim to be made under the policy. Following the well-accepted principle that a contract of insurance which is like any other commercial contract should be interpreted strictly, we are of the opinion that the policy covers loss or damage by burglary or house breaking which have been explained as theft following an actual, forcible and violent entry from the premises. A plain reading of the policy would show that a forcible entry should precede the theft, and unless they are proved, the claim cannot be accepted.

The Court added that a comparison of the terms as defined in the policy in the case of United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal (supra) and the scope of cover in the proposal form in the instant case are similar.  In the earlier case it was held that  "The policy is a contract between the parties and both parties are bound by the terms of contract.

As per the definition of the word "burglary", followed with violence, makes it clear that if any theft is committed it should necessarily be preceded with violence i.e. entry into the premises for committing theft should involve force or violence or threat to insurer or to his employees or to the members of his family. Therefore, the element of force and violence is a condition precedent for burglary and housebreaking. The term 'burglary' as defined in the English Dictionary means an illegal entry into the building with an intent to commit crime such as theft. But in absence of violence or force the insurer cannot claim indemnification against the insurance company.

The terms of the policy have to be construed as it is and we cannot add or subtract something. Howsoever liberally we may construe the policy but we cannot take liberalism to the extent of substituting the words which are not intended. It is true that in common parlance the term "burglary" would mean theft but it has to be preceded with force or violence. If the element of force and violence is not present then the insurer cannot claim compensation against theft from the insurance company.

The policy may be so framed as to apply only to violent entry from the outside; or the violent entry into a room within the insured premises may be sufficient. In any case, the violence must be connected with the act of entry; if the entry is obtained without violence, the subsequent use of violence to effect the theft, as for instance where a show-case is broken open, does not bring the loss within the policy.

The Court further dealt  with the submission made by counsel for the Appellant regarding the rule of contra proferentem. The Common Law rule of construction "verba chartarum fortius accipiuntur contra proferentem" means that ambiguity in the wording of the policy is to be resolved against the party who prepared it. MacGillivray on Insurance Law deals with the rule of 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. "One must not use the rule to create the ambiguity - one must find the ambiguity first." The words should receive their ordinary and natural meaning unless that is displaced by a real ambiguity either appearing on the face of the policy or, possibly, by extrinsic evidence of surrounding circumstances."

Court in a classical deliverance said – the  assured cannot put his own meaning upon a policy, but, where it is ambiguous, it is to be construed in the sense in which he might reasonably have understood it. If the insurers wish to escape liability under given circumstances, they must use words admitting of no possible doubt, expressed by the parties and it is not for the Court to make a new contract, however reasonable.

The Court referring to another case : United India Vs  Orient Treasures (P) Ltd. held that there is no ambiguity in the insurance policy and so the rule of contra proferentem was not applicable.  The Court upheld the  order of the MRTP Commission and dismissed the Appeal with no order as to costs.

With regards – S. Sampathkumar
30th Aug 2016.
Photo credit : Independent.co.uk

The judgement of the Apex Court is largely reproduced  

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