Supreme Court clarifies insurance exclusion for demolition by lawful authority in consumer case (7 December 2018)

LEGAL ISSUE: Whether an insurance company is liable to pay for damages when the insured property is demolished by a lawfully constituted authority, given an exclusion clause in the insurance policy.

CASE TYPE: Consumer Law, Insurance Law

Case Name: New India Assurance Company Limited vs. Rajeshwar Sharma and Ors.

Judgment Date: 7 December 2018

Date of the Judgment: 7 December 2018

Citation: (2018) INSC 1044

Judges: Dr Dhananjaya Y Chandrachud, J and MR Shah, J

When can an insurance company deny a claim for damages to a property? The Supreme Court of India recently addressed this question in a case where a building was demolished by a municipal corporation. The core issue was whether the insurance company was liable to pay for the damages, given an exclusion clause in the policy that exempted losses caused by order of a lawfully constituted authority. This judgment, authored by Justice Dr. Dhananjaya Y Chandrachud, clarifies the interpretation of such exclusion clauses in insurance policies. The bench comprised Justices Dr. Dhananjaya Y Chandrachud and MR Shah.

Case Background

Rajeshwar Sharma owned a building in Jammu, known as Patel House. He claimed that the building was initially constructed in 1984 with municipal permission, and additional construction was done in 1993, also with permission. In 1996, after a notice under Section 229 of the Jammu and Kashmir Municipal Corporation Act 2000, the Jammu and Kashmir Special Tribunal compounded an infraction. In 2003, the Municipal Corporation initiated a demolition drive, and despite an interim injunction from the Court of the First Civil Subordinate Judge, Municipal Magistrate, Jammu, the front portion of the building was demolished. Sharma, who ran a sanitary ware business in the premises, claimed damages of Rs. 19.55 lacs due to the demolition. Sharma had an insurance policy with New India Assurance Company Limited.

Timeline

Course of Proceedings

The State Commission allowed Sharma’s claim for Rs. 17.28 lacs, stating that the Municipal Corporation’s demolition order was not on record, and therefore, the exclusion clause in the insurance policy would not apply. The High Court affirmed this decision, emphasizing that the insurer had to prove the exclusion by producing the demolition order. The insurer then appealed to the Supreme Court, arguing that the demolition was carried out by the Municipal Corporation, a lawfully constituted authority, which should trigger the exclusion clause. The insured also filed cross-objections before the High Court for the grant of interest, which were rejected.

Legal Framework

The case revolves around the interpretation of an exclusion clause in the insurance policy. The relevant clause stated:

“V. Riot, Strike, Malicious and Terrorism Damage Loss of or visible physical damage or destruction by external violent means directly caused to the property insured but excluding those caused by:-

a)xxxx

b)Permanent or temporary dispossession resulting from confiscation, commandeering, requisition or destruction by order of the Government or any lawfully constituted Authority.”

This clause excludes coverage for damages caused by “order of the Government or any lawfully constituted Authority.” The Jammu and Kashmir Municipal Corporation Act 2000 establishes the Municipal Corporation as a lawfully constituted authority.

Arguments

Arguments of the Insured (Rajeshwar Sharma)

• The insured argued that the exclusion clause requires a lawful order, implying that the demolition must be in accordance with the Jammu and Kashmir Municipal Corporation Act 2000.
• The insured contended that an illegal demolition by the Municipal Corporation would not fall under the exclusion.
• The insured relied on the fact that the Municipal Corporation demolished the building despite an interim injunction, indicating the demolition was not done lawfully.

Arguments of the Insurer (New India Assurance Company Limited)

• The insurer argued that the demolition was carried out by the Municipal Corporation, a lawfully constituted authority under the Jammu and Kashmir Municipal Corporation Act 2000.
• The insurer submitted that the exclusion clause applies as the demolition was “by order of any lawfully constituted authority.”
• The insurer stated that the legality of the demolition was a separate issue, and the exclusion clause should be applied based on the fact that the demolition was by a lawfully constituted authority.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether the exclusion clause in the insurance policy was attracted, given that the demolition was carried out by the Municipal Corporation.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

The Court also considered the following legal provision:

• Jammu and Kashmir Municipal Corporation Act 2000: The Court noted that this Act establishes the Municipal Corporation as a lawfully constituted authority.

Judgment

How each authority was viewed by the Court?

• National Insurance Company v Irshad [(2007) 4 SCC 105]*: The Court distinguished this case, noting that while the burden is on the insurer to prove the exclusion, the fact of demolition by a lawful authority was not disputed in the present case.
• Cornish v Accident Insurance Co Ltd [(1889) 23 Q.B.D. 453]*: The Court referred to the principle that insurers must except their liability in clear and unambiguous terms, but noted that this principle should not be used to create a doubt where none exists.
• The Law Relating to Accidental Insurance by AW Baker Welford*: The Court cited this work for the principle that exceptions are construed strictly against insurers, but also that the purpose of exceptions is to define the scope of the policy.
• Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57*: The Court used this case to highlight that exclusion clauses should be read in the context of the contract as a whole and that words of exception may simply be a way of delineating the scope of the primary obligation.
• Crowden and Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm)*: The Court referred to this case, which stated that insurance exclusions should be sensitive to their purpose and that the contra proferentem approach should not be automatically applied.

What weighed in the mind of the Court?

The Supreme Court focused on the clear wording of the exclusion clause in the insurance policy. The court emphasized that the demolition was carried out by the Municipal Corporation, which is a lawfully constituted authority under the Jammu and Kashmir Municipal Corporation Act 2000. The court reasoned that the exclusion clause applied because the destruction was by order of a lawfully constituted authority, irrespective of the legality of the demolition itself. The court also noted that the insured himself acknowledged that the demolition was by the Municipal Corporation in his complaint.

The court’s reasoning was primarily based on the legal interpretation of the exclusion clause and the undisputed fact that the demolition was by a lawfully constituted authority. The factual aspects of the case, such as the details of the demolition and the interim injunction, were secondary to the legal analysis.

Logical Reasoning

The court rejected the argument that the demolition had to be lawful in the sense of being in accordance with law. The court stated that the exclusion clause was triggered by the fact that the demolition was by a lawfully constituted authority, irrespective of the legality of the action itself. The court also noted that the insured himself acknowledged that the demolition was by the Municipal Corporation in his complaint.

The Supreme Court overturned the decisions of the State Commission and the High Court. The Court held that the insurance company was not liable to pay for the damages because the demolition was carried out by a lawfully constituted authority, which was explicitly excluded under the policy.

The Court quoted the following from the judgment:

“The expression “by order of” means under the authority of government or of a lawfully constituted authority.”

“From the records as well as from the pleadings before the State Commission, there is no dispute about the fundamental position that the demolition was carried out by the Municipal Corporation. The destruction was hence by order of a lawfully constituted authority.”

“In the present case, there is no ambiguity in Clause V of the insurance policy. The exclusion was clear in exempting the insurer from liability for a loss arising from the destruction of property caused “by order of the government or any lawful authority.””

There were no dissenting opinions in this case.

Key Takeaways

• Insurance policies are interpreted based on their clear wording, and exclusion clauses are given their plain meaning.
• If an insurance policy excludes damages caused by a lawfully constituted authority, the insurer is not liable if such an authority causes the damage, regardless of the legality of the authority’s action.
• The burden of proving an exclusion clause lies with the insurer, but this burden is met when the facts clearly indicate that the exclusion applies.
• The legality of an action by a lawfully constituted authority is a separate issue from whether the exclusion clause in an insurance policy applies.

Directions

The Supreme Court set aside the judgment of the High Court and dismissed the complaint filed by the insured before the State Commission.

Development of Law

The ratio decidendi of this case is that an insurance policy exclusion for damages caused by a lawfully constituted authority applies when the damage is caused by such an authority, irrespective of the legality of the authority’s action. This clarifies that the focus is on the identity of the entity causing the damage, not the legality of the action itself. This case does not change the previous position of law, but it clarifies the interpretation of exclusion clauses in insurance policies.

Conclusion

The Supreme Court ruled in favor of the insurance company, clarifying that when a property is damaged by a lawfully constituted authority, the insurer is not liable if the policy contains a clear exclusion for such damages. The Court emphasized that the exclusion clause was clear and unambiguous and that the demolition was carried out by a lawfully constituted authority, the Municipal Corporation. This judgment underscores the importance of clear and unambiguous language in insurance policies and clarifies the interpretation of exclusion clauses related to actions by lawful authorities.

Category

FAQ

Q: What was the main issue in this case?
A: The main issue was whether an insurance company was liable to pay for damages when the insured property was demolished by a municipal corporation, given an exclusion clause in the policy.

Q: What did the insurance policy exclude?
A: The policy excluded losses caused by “order of the Government or any lawfully constituted Authority.”

Q: What was the Supreme Court’s decision?
A: The Supreme Court ruled that the insurance company was not liable because the demolition was carried out by a lawfully constituted authority, which was explicitly excluded under the policy.

Q: What is a lawfully constituted authority?
A: In this case, the Municipal Corporation was considered a lawfully constituted authority under the Jammu and Kashmir Municipal Corporation Act 2000.

Q: Does this mean the Municipal Corporation’s action was legal?
A: No, the legality of the Municipal Corporation’s action was a separate issue. The Court focused on the fact that the demolition was by a lawfully constituted authority, which triggered the exclusion clause, irrespective of the legality of the action.

Q: What does this ruling mean for future insurance claims?
A: This ruling clarifies that insurance companies can deny claims if the policy has a clear exclusion for damages caused by a lawfully constituted authority, even if the authority’s action is later found to be illegal.