Supreme Court clarifies insurance exclusion clause related to excavations: Sangrur Sales Corporation vs. United India Insurance Company Limited (17 January 2020)

Supreme Court Interprets Insurance Policy Exclusion Clause: Sangrur Sales Corporation vs. United India Insurance Company Limited (2020)

Date of the Judgment: 17 January 2020
Citation: (2020) INSC 17
Judges: Dr. Dhananjaya Y Chandrachud, J and Hrishikesh Roy, J

Can an insurance company deny a claim when damage is caused by excavation work on a neighboring property? The Supreme Court of India recently addressed this issue, clarifying the interpretation of an exclusion clause in a standard fire and special perils insurance policy. This case revolves around whether an insurance company can deny a claim when the insured’s property is damaged due to excavation work on an adjacent property. The Supreme Court, in this judgment, interpreted the insurance policy in favor of the insured, holding that the exclusion clause should not apply to excavations carried out by third parties.

Table of Contents

Case Background

The appellant, Sangrur Sales Corporation, had a shop in Sangrur, Punjab, which was insured under a “Standard Fire and Special Perils Insurance Policy” with the first respondent, United India Insurance Company Limited. The policy was valid from 21 June 2011 to 20 June 2012, with the shop insured for Rs 18,00,000. On 29 March 2012, the shop collapsed due to excavation work on an adjacent plot. The appellant filed a First Information Report on 30 March 2012 and informed the insurer about the loss. The insurance company rejected the claim on 11 May 2012, leading to the filing of a consumer complaint.

Timeline

Date	Event
21 June 2011	Insurance policy commenced.
20 June 2012	Insurance policy expired.
29 March 2012	Appellant’s shop collapsed due to excavation on adjacent plot.
30 March 2012	First Information Report lodged; insurer notified of loss.
11 May 2012	Insurance claim repudiated by the insurer.
5 May 2016	State Consumer Disputes Redressal Commission, Punjab upheld the order of District Forum.
7 March 2018	National Consumer Disputes Redressal Commission reversed the order awarding the claim.
17 January 2020	Supreme Court allowed the appeal.

Course of Proceedings

The District Consumer Disputes Redressal Forum, Sangrur, initially allowed the claim, ordering the insurance company to pay Rs 18,00,000 with interest. The State Consumer Disputes Redressal Commission, Punjab, upheld this order. However, the National Consumer Disputes Redressal Commission (NCDRC) reversed the order, leading the appellant to appeal to the Supreme Court.

Legal Framework

The core of the dispute lies in the interpretation of Clause VIII (e) of the insurance policy, which deals with exclusions related to subsidence and landslide. The relevant part of the insurance policy states:

“In consideration of the insured named in the Schedule hereto having paid to the United India Insurance Company Limited (hereinafter called the Company) the full premium mentioned in the said schedule, the company agrees, (subject to the conditions and exclusions contained herein or endorsed or otherwise expressed hereon) that if after payment of the premium the Property insured described in the said Schedule or any part of the such property to be destroyed or damaged by any of the perils specified hereunder during the period of insurance named in the said schedule or of any subsequent period in respect of which the Insured shall have paid and the Company shall have accepted the premium required for the renewal of the policy, the Company shall pay to the Insured the value of the Property at the time of the happening of its destruction or the amount of such damage or at its option reinstate or replace such property or any part thereof.”

Clause VIII of the policy states:

“VIII. Subsidence and Landslide including Rock slide: Loss, destruction or damage directly caused by subsidence of part of the site on which the property stands or land slide/rock slide excluding:
a) the normal cracking, settlement or bedding down of new structures
b) the settlement or movement of made up ground
c) coastal or river erosion
d) defective design or workmanship or use of defective materials
e) demolition, construction, structural alterations or repair of any property or groundworks or excavations.”

The exclusion in sub-clause (e) is central to the dispute which relates to “demolition, construction, structural alterations or repair of any property or groundworks or excavations.”

Arguments

The insurance company argued that the loss was due to excavation work, which is excluded under Clause VIII (e). The NCDRC agreed with this interpretation, stating that the exclusion clause clearly covers losses caused by excavation work, regardless of who is carrying out the work.

The appellant contended that the exclusion clause should only apply when the insured is carrying out the excavation work on their own property. They argued that since the excavation was being done by a third party on a neighboring property, the exclusion should not apply.

Main Submission	Sub-Submission	Party
Interpretation of Clause VIII (e)	Exclusion applies to any excavation work, regardless of who carries it out.	Insurance Company
Interpretation of Clause VIII (e)	Exclusion applies only when the insured carries out excavation on their own property.	Appellant

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was the interpretation of Clause VIII (e) of the insurance policy, specifically whether the exclusion for “excavations” applies when the excavation is carried out by a third party on a neighboring property, and not by the insured on their own property.

Treatment of the Issue by the Court

Issue	Court’s Decision	Reason
Whether the exclusion for “excavations” applies when the excavation is carried out by a third party on a neighboring property?	No, the exclusion does not apply.	The exclusion clause should be interpreted to apply only when the insured is carrying out the excavation on their own property. The words “of any property” qualify the words preceding them namely, “demolition, construction, structural alterations or repair” and not the words that follow.

Authorities

The Supreme Court relied on the principle that in case of ambiguity in an insurance policy, the interpretation that benefits the insured should be adopted. The court cited the case of United India Insurance Co Ltd v Pushpalaya Printers [(2004) 3 SCC 694], Supreme Court of India, to support this principle.

Authority	Court	How it was used
United India Insurance Co Ltd v Pushpalaya Printers [(2004) 3 SCC 694]	Supreme Court of India	The Court cited this case to support the principle that in the event of ambiguity, the construction beneficial to the insured should be accepted.

Judgment

Submission	How the Court Treated the Submission
The insurance company argued that the exclusion clause applied to any excavation work.	The Court rejected this interpretation, holding that the exclusion clause should only apply to excavations carried out by the insured on their own property.
The appellant argued that the exclusion clause should not apply to excavation work done by a third party on a neighboring property.	The Court accepted this argument, stating that the exclusion clause should be read in a manner that benefits the insured.

The Supreme Court held that the NCDRC erred in applying the exclusion clause to a situation where the excavation was being carried out by a third party on an adjacent property. The Court emphasized that the exclusion should apply only when the insured is carrying out the excavation on their own property. The court observed:

“In the absence of a specific qualification indicating that the exclusion will apply to an excavation being carried on by a third party, the reasonable construction of sub-clause (e) of Clause VIII is that it should apply only to a situation where the excavation is being carried on by the insured himself in his own property. Significantly, the words “of any property” qualify the words preceding them namely, “demolition, construction, structural alterations or repair” and not the words that follow.”

The Court further stated that:

“It is well-settled that in the event that the two constructions are possible or in the event of an ambiguity, that construction which is beneficial to the insured should be accepted consistent with the purpose for which the policy was taken, namely to cover the risk on the happening of a certain event.”

The Supreme Court allowed the appeal, set aside the NCDRC’s judgment, and restored the order of the District Forum, as affirmed by the State Consumer Disputes Redressal Commission.

The Court also held that:

“The error of the NCDRC lies in reading the exclusion in regard to excavations as being applicable in a situation such as the present where the cause which resulted in the damage was a work of a third party which was carrying on an excavation in independent premises. It is not in dispute that no part of the excavation was attributable to any act or omission on the part of the appellant. Hence, to read the exclusion, as being attracted in the present case, would not be to a reasonable construction of the policy of insurance.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to interpret insurance policies in a manner that protects the insured, especially when there is ambiguity in the policy language. The Court emphasized that exclusion clauses should be construed strictly and that any ambiguity should be resolved in favor of the insured. The Court also took into account the fact that the insured was not at fault and had no control over the excavation work being carried out on the adjacent property.

Sentiment	Percentage
Interpretation of Exclusion Clause	40%
Beneficial Construction for Insured	30%
Third-Party Action	30%

Ratio	Percentage
Fact	30%
Law	70%

Issue: Interpretation of Clause VIII(e)

↓

Was the excavation done by the insured on their property?

↓

No, excavation was by a third party on adjacent property.

↓

Exclusion clause does not apply.

↓

Insurance company liable to pay claim.

Key Takeaways

Insurance policies should be interpreted in a way that benefits the insured, especially when there is ambiguity in the language.
Exclusion clauses in insurance policies should be construed strictly and should not be extended beyond their clear and unambiguous meaning.
An insurance company cannot deny a claim when the damage is caused by a third party’s actions on a neighboring property, unless the policy specifically states so.

Directions

The Supreme Court set aside the judgment of the National Consumer Disputes Redressal Commission and restored the order of the District Forum, as affirmed by the State Consumer Disputes Redressal Commission.

Development of Law

The Supreme Court’s judgment clarifies that exclusion clauses in insurance policies must be interpreted narrowly and in favor of the insured. This ruling reinforces the principle that insurance policies are meant to protect the insured against risks, and exclusion clauses should not be interpreted to defeat this purpose unless explicitly stated. This case also highlights that the words “of any property” qualify the words preceding them namely, “demolition, construction, structural alterations or repair” and not the words that follow.

Conclusion

The Supreme Court’s decision in this case provides clarity on the interpretation of exclusion clauses in insurance policies, particularly in the context of damage caused by third-party actions. The Court’s emphasis on construing insurance policies in favor of the insured ensures that policyholders receive the protection they are entitled to under their policies. This judgment underscores the importance of clear and unambiguous language in insurance contracts and protects the interests of the insured.