Supreme Court Clarifies ‘Flood and Inundation’ in Insurance Policy: Oriental Insurance vs. J.K. Cement (28 January 2020)

Date of the Judgment: 28 January 2020

Citation: [Not Provided in Source]

Judges: Mohan M. Shantanagoudar, J., R. Subhash Reddy, J.

Can heavy rainfall, causing water accumulation and damage, be considered a ‘flood’ or ‘inundation’ under a standard fire and special perils insurance policy? The Supreme Court of India recently addressed this question in a case involving a cement manufacturer and an insurance company. The core issue revolved around whether the damage to the cement company’s coal stock, caused by heavy rains, fell within the policy’s coverage for losses due to “Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation.” The bench comprised Justices Mohan M. Shantanagoudar and R. Subhash Reddy, with the majority opinion authored by Justice Mohan M. Shantanagoudar.

Case Background

M/s. J.K. Cement Works, the Respondent, operates a cement factory in Nimbahera, Rajasthan, which includes an open coal yard. The Respondent had purchased a Standard Fire and Special Perils insurance policy from the Appellant, Oriental Insurance Company Limited, for their coal stock, covering the period from 20 November 2002 to 19 November 2003. The policy included coverage for damages caused by “Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation.”

On 29 and 30 August 2003, heavy rains in Nimbahera caused some of the coal stock to be washed away and damaged. The Respondent informed the Appellant on 1 September 2003 and requested a surveyor. The surveyor assessed the loss at Rs. 58,89,400/- in a report submitted on 29 March 2004.

The Appellant sought clarification from the surveyor regarding whether the loss was caused by “Flood and Inundation” as per the policy. They also hired a Chartered Accountant to verify the Respondent’s declarations. On 13 August 2004, the surveyor reaffirmed that the losses were payable under the policy. However, on 2 September 2004, the Chartered Accountant reported an inability to verify the declarations due to a lack of necessary documents from the Respondent.

Ultimately, on 14 December 2004, the Appellant repudiated the Respondent’s claim, stating that the loss was due to heavy rain, not ‘flood’ or ‘inundation’. Aggrieved, the Respondent filed a consumer complaint before the National Consumer Disputes Redressal Commission (NCDRC), seeking compensation of Rs. 1.32 crores. The NCDRC allowed the complaint on 18 November 2008, directing the Appellant to pay Rs. 58,89,400/- with 9% interest from 1 June 2004.

Timeline:

Arguments

Appellant’s Arguments (Oriental Insurance Company Limited):

• The terms ‘flood’ and ‘inundation’ are distinct and should not be equated.
• ‘Flood’ refers to the overflowing of water bodies like rivers, ponds, and lakes.
• Since no water body overflowed into the coal yard, the loss was not caused by a ‘flood’.
• ‘Inundation’ means ‘accumulation of water’ and does not apply to the coal being washed away by heavy rains.

Respondent’s Arguments (M/s. J.K. Cement Works):

• Even if ‘inundation’ means ‘accumulation of water’, the surveyor’s report confirmed water accumulation in the coal yard.
• The surveyor relied on rainfall data from the Meteorological Department to conclude that there was enough rain to cause floods/inundation.
• The Appellant could not unilaterally appoint a second surveyor (Chartered Accountant) without permission from the Insurance Regulatory and Development Authority as required under Section 64-UM of the Insurance Act, 1938.

Innovativeness of the argument: The Respondent’s argument that even if the definition of ‘inundation’ as ‘accumulation of water’ is accepted, the surveyor’s report confirms such accumulation, was a direct response to the Appellant’s narrow interpretation of the terms in the policy. The argument that the Appellant could not appoint a second surveyor without permission, although not directly related to the core issue, was an attempt to show that the Appellant’s actions were not in accordance with the correct procedure.

Submissions Table

Issues Framed by the Supreme Court

The central question that remains to be considered is whether the loss caused to the Respondent occurred due to ‘flood’ or ‘Inundation’.

Treatment of the Issue by the Court

Authorities

The Court referred to the following authorities:

• Concise Oxford English Dictionary, 8th edition (1990): Defined ‘flood’ as “an overflowing or influx of water beyond its normal confines, esp. over land; an inundation” and ‘inundate’ as “flood” and “overwhelm”.
• Stroud’s Judicial Dictionary, 5th edition (1986): Defined ‘flood’ in the context of insurance policies, referencing Young v. Sun Alliance and London Insurance, [1977] 1 W.L.R. 104, as “a large movement or irruption of water, and did not cover mere seepage from a natural source.” (Court of Appeal, England)
• Black’s Law Dictionary, 9th edition (1990): Defined ‘inundate’ as “To overflow or overwhelm; esp. to flood with water.”
• Bajaj Allianz General Insurance Co. Ltd. v. M/s. Gondamal Hardyal Mal, [2009] NCDRC 127: Held that damage caused by heavy rainfall would fall under the ‘flood and inundation’ clause. (National Consumer Disputes Redressal Commission)
• Oriental Insurance Co. Ltd. v. M/s Sathyanarayana Setty & Sons, [2012] NCDRC 124: Held that damage caused by heavy rainfall would fall under the ‘flood and inundation’ clause. (National Consumer Disputes Redressal Commission)
• Oriental Insurance Co. Ltd. v. M/s R.P. Bricks, [2013] NCDRC 494: Held that damage caused by heavy rainfall would fall under the ‘flood and inundation’ clause. (National Consumer Disputes Redressal Commission)

Authorities and Submissions Treatment

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court used the dictionary definitions of ‘flood’ and ‘inundation’ to establish that they can be used synonymously.
• The Court distinguished the definition of ‘flood’ in Stroud’s Judicial Dictionary and Young v. Sun Alliance and London Insurance, [1977] 1 W.L.R. 104 from the present case, emphasizing that the present case was not about mere seepage.
• The Court relied on the definition of ‘inundate’ in Black’s Law Dictionary to support the interpretation that it means ‘to flood with water’.
• The Court cited the NCDRC cases Bajaj Allianz General Insurance Co. Ltd. v. M/s. Gondamal Hardyal Mal, [2009] NCDRC 127, Oriental Insurance Co. Ltd. v. M/s Sathyanarayana Setty & Sons, [2012] NCDRC 124, and Oriental Insurance Co. Ltd. v. M/s R.P. Bricks, [2013] NCDRC 494 to support the view that damage caused by heavy rainfall falls under the ‘flood and inundation’ clause.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The Court emphasized that the terms ‘flood’ and ‘inundation’ are often used synonymously and that a narrow interpretation of ‘flood’ would be superfluous.
• The Court highlighted that floods are not restricted to the overflow of water bodies but can also include pluvial floods caused by heavy rainfall.
• The Court noted that the surveyor’s report confirmed the accumulation of water in the coal yard due to heavy rains, which falls under the definition of ‘inundation’.
• The Court also considered the intent of the parties entering the contract and concluded that a restrictive meaning to the term ‘flood’ would not be appropriate in the given context.
• The Court relied on the consistent view taken by the NCDRC in similar cases.

Fact:Law Ratio

The Court’s reasoning was a mix of factual analysis and legal interpretation, with a slightly higher emphasis on legal considerations.

Logical Reasoning

Key Takeaways

• The terms ‘flood’ and ‘inundation’ in insurance policies can be interpreted broadly to include damage caused by heavy rainfall, not just overflowing water bodies.
• Insurance companies cannot take a narrow and restrictive interpretation of ‘flood’ to deny claims where heavy rainfall has caused damage.
• The Court’s decision reinforces the principle that insurance policies should be interpreted in a way that benefits the insured, especially in consumer-related matters.
• This judgment provides clarity on the scope of coverage under standard fire and special perils insurance policies, particularly in relation to natural calamities.
• The consistent view taken by the NCDRC on this issue has been upheld by the Supreme Court, providing a precedent for future cases.

Directions

The Appellant was directed to pay the sum awarded by the NCDRC within a period of eight weeks from the date of the order, to the Respondent.

Development of Law

The ratio decidendi of this case is that the terms ‘flood’ and ‘inundation’ in insurance policies should be interpreted broadly to include damage caused by heavy rainfall and not just the overflowing of water bodies. This decision clarifies the ambiguity surrounding these terms and provides a precedent for future cases. The Supreme Court upheld the view consistently taken by the NCDRC, thus solidifying the position of law on this issue.

Conclusion

The Supreme Court dismissed the appeal, affirming the NCDRC’s decision. The Court clarified that ‘flood’ and ‘inundation’ should be interpreted broadly to include damage from heavy rainfall, not just overflowing water bodies. This ruling ensures that insurance policies cover losses from pluvial floods and protects policyholders from narrow interpretations of policy terms.

Category:

• Insurance Law
  • Standard Fire and Special Perils Insurance Policy
  • Flood and Inundation Clause
• Consumer Law
  • Consumer Protection Act
  • National Consumer Disputes Redressal Commission (NCDRC)
• Insurance Act, 1938
  • Section 64-UM, Insurance Act, 1938

FAQ

Q: What does this judgment mean for my insurance policy if it covers ‘flood’ and ‘inundation’?

A: This judgment clarifies that ‘flood’ and ‘inundation’ can include damage caused by heavy rainfall, not just overflowing water bodies. If your policy covers these perils, you may have a valid claim even if the damage was due to heavy rain accumulation.

Q: Can insurance companies deny claims by narrowly defining ‘flood’?

A: No, insurance companies cannot deny claims by narrowly defining ‘flood’ to only include overflowing water bodies. The Supreme Court has clarified that ‘flood’ includes pluvial floods caused by heavy rainfall.

Q: What should I do if my insurance claim for rain damage was previously denied?

A: If your claim was denied based on a narrow interpretation of ‘flood’, you may consider re-evaluating your case in light of this judgment. Consult with a legal professional for guidance.

Q: Does this judgment apply to all types of insurance policies?

A: This judgment specifically deals with standard fire and special perils insurance policies. However, the principles of interpretation may be relevant to other policies with similar clauses. Check the specific terms of your policy.

Q: What is the significance of the NCDRC’s role in this case?

A: The NCDRC’s consistent view on this issue was upheld by the Supreme Court, solidifying the position of law and providing a precedent for future cases. This reinforces the importance of consumer protection in insurance matters.