Supreme Court - 'cause of loss' of Fire and its relevance

Policies are contract of Insurance – any claim is adjusted by Technical experts interpreting in their own way the fine prints of policy which are full of ‘thou shalts’ and ‘thou shalt nots’ – many a times Courts step in practically excusing a man for not reading or understanding them.   Innovations may not be needed but some old thinking will have to redefined.  The Court judgements sometimes are what common man would see it – the bulk opinion ie., the opinion of the vast majority of people. It is not for us to say whether they are right or wrong but they are interpretations given without any bias, rather interpreting against the originator of the contract.

In India, we have the Standard Fire & Special perils policy – which as the name suggests, insures the risk of Fire and some other allied perils that include some water and some wind as well.  In property insurance – there are named perils (SFSP) and coverage on All risks – rather exclusions driven.

To get indemnity under a named peril policy – the claimant needs to establish that the loss to the insured property was caused by a fortuity that is a peril named in the insurance policy.  (you may think it to be other after reading fully the recent judgement of the Supreme Court – but there are many finer aspects considered that are interesting and are learning to all concerned)

It is a case of an Appeal filed by PSU Insurer -   this appeal challenging the 10.8.2022 order of the National Consumer Disputes Redressal Commission (NCDRC) which partially allowed the consumer complaint directing the Insurance Company to pay Rs.6,57,55,155/- for a fire insurance claim with 9% interest from Page 2 of 33 claim denial date within 8 weeks, or face 12% interest beyond the stipulated 8 weeks.

The claim had been repudiated by the Insured to which the claimant protested.  The repudiation itself was based on some critical aspects

-          the insured premises not affected due to alleged fire. (stating that the part as described in the policy was not affected while the damaged part was not defined to be insured)

-           The root cause of the fire incident was due to the negligence on the part of the Management in not taking adequate precautions when the construction work was going on that too in a secured customs bonded warehouse where many hazardous chemicals were stored:

Stating the two important aspects, the Insurance Company sought to deny the claim on specific grounds  :  (i) that the location of fire was part of the premises not covered under the insurance policy, and (ii) that there was negligence on the part of the insured in carrying out repairs at the roof of the warehouse which caused the fire. 

The Apex Court dwelt at length various aspects of the case.  Court observed that looking at the policy documents, the Leave & License Agreement and various communications received from the customs, police, fire & electricity departments, it is reasonable to   conclude that the insured premises was the one that was identified and insured at Survey No. 9/3, by the insurance company. Needless to say, there is nothing to conclude that the area where the fire occurred on 14.03.2018 was not covered by the said insurance policy.

The Court then analysed the condition of the policy -  Clause 3(a) states that the insurance policy would cease to be applicable or cover the insured premises in certain cases where there is an increased risk of loss or damage to the insured premises or goods within it. In this case, the insured had undertaken repairs on the rooftop to prevent water leakage to the warehouse. 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, as has been urged by the insurance company. In our assessment, the said repair work would not fall in the category of an alteration which would increase the risk insured for the warehouse premises. Therefore, no infirmity is seen with the view taken by the NCDRC on the same. 

The Court came down heavily on multiple Survey reports / Investigation reports and other  tabulated summary of reports  which revealed multiple and conflicting findings. Seven of the reports suggest short-circuit as the cause for fire. The 23.04.2018 report of the Electrical Inspector highlighted that a short-circuit around 4:30 pm on 14.03.2018, led to sparks in M/s. Mudit Roadways' warehouse. Consequently, the falling electrical sparks ignited the boxes, papers, and chemicals. The Assistant Manager of the Jawaharlal Nehru Trust also affirmed that the fire was triggered by an electrical short-circuit, as observed by the fire-fighting teams at site. 

The learned counsel for the claimants relied on Canara Bank vs. United India Insurance Company to contend that the insurance company cannot escape its liability if there is nothing to prove that the fire was caused by the insured itself, irrespective of what the cause of fire was. Reliance was also placed on Khatema Fibres Ltd. vs. New India Assurance Co. Ltd. & Anr.4 to argue that the surveyor’s report was not sacrosanct and therefore, could be departed from, if needed.

According to the Insurance Act 1938, an approved surveyor's assessment is necessary for a claim. The claimant however contended that the surveyor's report is not definitive. The key question is the extent to which the report is binding and under what conditions can it be overridden in. To address this, Section 64(UM)(4) of the Insurance Act, 1938 can be usefully read which concerns surveyors and loss assessors  64-UM. (4) No claim in respect of a loss which has occurred in India and requiring to be paid or settled in India equal to or exceeding twenty thousand rupees in value on any policy of insurance, arising or intimated to an insurer at any time after the expiry of a period of one year from the commencement of the Insurance (Amendment) Act, 1968, shall, unless otherwise directed by the Authority, be admitted for payment or settled by the insurer unless he has obtained a report, on the loss that has occurred, from a person who holds a licence issued under this section to act as a surveyor or loss assessor (hereafter referred to as “approved surveyor or loss assessor”): Provided that nothing in this sub-section shall be deemed to take away or abridge the right of the insurer to pay or settle any claim at any amount different from the amount assessed by the approved surveyor or loss assessors”." The above provision mandates that claims above Rs. 20,000 must be initially assessed by an approved surveyor. It is noteworthy that the insurer has the discretion to settle the claim for a different amount, than what is assessed by the surveyor.

The Court unequivocally concluded 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. The NCDRC’s judicious application of this binding precedent appears to be well-merited. 

The upshot of the above discussion is that the reports suggesting electrical short circuit as the trigger for the warehouse fire, is found to fit in with the attendant circumstances. As a corollary, the fire at the warehouse cannot be attributable to any negligent act of the insured. 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 following mention of the Court is noteworthy :  No legal infirmity is thus seen with the impugned decision favouring the respondent’s insurance claim. In the realm of risk and uncertainty, individuals and organisations seek solace in the bastion of insurance – a covenant forged on the bedrock of trust. 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 uberrimae fidei – there must be complete good faith on the part of the insured.v 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 honour 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 fulfils the duty that has been cast on it, by virtue of such a covenant. 

This may not go well with most Insurers who would be inclined to interpret the condition in a traditional manner.  May be as we read analyse and understand the finer aspects of judgements, more clarity would come to us.

 
With regards – S Sampathkumar
29.11.2023
Citation : Supreme Court of India  Civil Appeao 339/2023 – New India Assurance Vs Mudit Roadways.