Supreme Court Interprets “Terrorism” in Insurance Policy: Narsingh Ispat Ltd. vs. Oriental Insurance Company Ltd. (2022)

Date of the Judgment: May 02, 2022

Citation: [Not Available in Source]

Judges: Abhay S. Oka, J., Ajay Rastogi, J.

Can an insurance company deny a claim by citing a “terrorism exclusion clause” when the incident does not conclusively prove a terrorist act? The Supreme Court of India addressed this question in a case where a factory was attacked by a mob, resulting in significant damage. The court examined whether the incident qualified as an “act of terrorism” as defined in the insurance policy’s exclusion clause. The judgment was delivered by a two-judge bench comprising Justice Abhay S. Oka and Justice Ajay Rastogi, with Justice Abhay S. Oka authoring the opinion.

Case Background

Narsingh Ispat Ltd. (the appellant) had a Standard Fire and Special Perils Policy with Oriental Insurance Company Ltd. (the respondent) covering their engineering workshop and plant in Jharkhand. The policy, effective from June 28, 2009, to June 27, 2010, insured the property for Rs. 26,00,00,000 against fire, lightning, explosion, riots, and strikes. On March 23, 2010, the appellant’s factory was attacked by a group of 50-60 people who damaged the factory, machinery, and equipment. The appellant claimed that the mob demanded money and jobs for local people and that the incident was to terrorize the management and workers, forcing them to pay a ransom. The appellant filed a claim with the respondent, but the insurance company rejected it, citing a “Terrorism Damage Exclusion Warranty” clause in the policy.

Timeline

Course of Proceedings

The National Consumer Disputes Redressal Commission (the Commission) dismissed the appellant’s complaint, agreeing with the insurance company that the damage was due to an act of terrorism, thus falling under the exclusion clause. The appellant then appealed to the Supreme Court of India.

Legal Framework

The core of the dispute revolves around the interpretation of the “Terrorism Damage Exclusion Warranty” clause in the insurance policy. This clause states:

“Notwithstanding any provision to the contrary within this insurance it is agreed that this insurance excludes loss, damage cost or expense of whatsoever nature directly or indirectly caused by, resulting from or in connection with any act of terrorism regardless of any other cause or event contributing concurrently or in any other sequence to the loss. For the purpose of this endorsement an act of terrorism means an act, including but not limited to the use of force or violence and/or the threat thereof, of any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s), committed for political, religious, ideological or similar purpose including the intention to influence any government and/or to put the public, or any section of the public in fear. The warranty also excludes loss, damage, cost or expenses of whatsoever nature directly or indirectly caused by, resulting from or in connection with any action taken in controlling, preventing, suppressing or in any way relating to action taken in respect of any act of terrorism.”

The court also considered the clause related to “Riot, Strike and Malicious Damage” which states:

“V. Riot Strike and Malicious 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)total or partical (sic) cessation of work or the retardation or interruption or (sic) cessation or any process or operations or omissions of any kind. b)Permanent or temporary dispossession resulting from confiscation, commandeering, requisition or destruction by order of the Government or any lawfully constituted Authority. c)Permanent or temporary dispossession of any building or plant or unit of (sic) machinery resulting from the unlawful occupation by any person of such building or plant or unit or machinery or prevention of access to the same. d)Burglary, housebreaking, theft, larceny or any such attempt or any omission of any kind of any person (whether or not such act is committed in the course of a disturbance of public peace) in any malicious act. If the Company alleges that the loss/damage is not caused by any malicious act, the burden of proving the contrary shall be upon the insured.”

Arguments

Appellant’s Arguments:

• The appellant argued that the police registered a First Information Report (FIR) against unknown persons and later filed a closure report stating that the accused could not be traced.
• The appellant contended that the Investigation Report submitted by the respondent’s investigator did not conclusively prove that Maoist activists or any such activists made the attack.
• The appellant submitted that the incident was not a terrorist act within the meaning of the Exclusion Clause, relying on the FIR, closure report, and investigation report.
• The appellant argued that the burden was on the insurance company to prove that the Exclusion Clause was applicable.
• The appellant cited the case of National Insurance Co. Ltd. v. Ishar Das Madan Lal [(2007) 4 SCC 105], stating that any ambiguity in the insurance contract should be construed in favor of the insured.
• The appellant pointed out that the surveyor appointed by the respondent quantified the damage at approximately Rs. 89,00,000.

Respondent’s Arguments:

• The respondent argued that the attack on the factory by 120 people with weapons was an act of terrorism to terrorize the workers and management.
• The respondent submitted that the police applied Sections 147, 148, 149, 323, 307, 379, 427, 435 and 447 of the Indian Penal Code along with Section 17 of the Criminal Law (Amendment) Act, 1908, which indicates that it was an unlawful association.
• The respondent contended that the application of the Criminal Law (Amendment) Act, 1908, showed that the loss was due to a terrorist act.
• The respondent argued that the burden was on the appellant to prove liability under the policy, which they failed to do.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

1. Whether the incident at the appellant’s factory constituted an “act of terrorism” as defined in the insurance policy’s exclusion clause, thereby justifying the insurance company’s repudiation of the claim.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

Cases:

• National Insurance Co. Ltd. v. Ishar Das Madan Lal [(2007) 4 SCC 105] – Supreme Court of India: The court relied on this case to emphasize that in case of ambiguity, the insurance contract should be construed in favor of the insured, and the burden is on the insurer to prove that the exclusion clause applies.
• United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694 – Supreme Court of India: Cited in National Insurance Co. Ltd. v. Ishar Das Madan Lal for the principle of construing insurance contracts in favor of the insured.
• Peacock Plywood (P) Ltd. v. Oriental Insurance Co. Ltd. (2006) 12 SCC 673 – Supreme Court of India: Cited in National Insurance Co. Ltd. v. Ishar Das Madan Lal for the principle of construing insurance contracts in favor of the insured.
• United India Insurance Co. Ltd. v. Kiran Combers & Spinners (2007) 1 SCC 368 – Supreme Court of India: Cited in National Insurance Co. Ltd. v. Ishar Das Madan Lal for the principle of construing insurance contracts in favor of the insured.

Statutes:

• Section 23 of the Consumer Protection Act, 1986: This section provides for appeals against the orders of the National Consumer Disputes Redressal Commission.
• Sections 147, 148, 149, 323, 307, 379, 427, 435 and 447 of the Indian Penal Code: These are the sections applied by the police in the FIR.
• Section 17 of the Criminal Law (Amendment) Act, 1908: This section deals with unlawful association and was cited by the respondent.
• Section 15 of the Criminal Law (Amendment) Act, 1908: This section defines unlawful association and was cited by the respondent.

Authority Analysis Table

Judgment

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

How each authority was viewed by the Court?

• The court followed National Insurance Co. Ltd. v. Ishar Das Madan Lal [(2007) 4 SCC 105]*, reiterating that the burden is on the insurer to prove the applicability of an exclusion clause, and any ambiguity should be construed in favor of the insured.
• The court also relied on United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694*, Peacock Plywood (P) Ltd. v. Oriental Insurance Co. Ltd. (2006) 12 SCC 673* and United India Insurance Co. Ltd. v. Kiran Combers & Spinners (2007) 1 SCC 368*, which were cited in National Insurance Co. Ltd. v. Ishar Das Madan Lal, for the principle of construing insurance contracts in favor of the insured.

What weighed in the mind of the Court?

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

• Definition of Terrorism in the Policy: The court emphasized that the definition of “act of terrorism” in the insurance policy’s exclusion clause was exhaustive. The definition required the act to be committed for political, religious, ideological, or similar purposes.
• Burden of Proof: The court reiterated the principle that the burden of proving the applicability of an exclusion clause lies with the insurer. The insurance company failed to demonstrate that the incident at the appellant’s factory met the definition of an act of terrorism as defined in the policy.
• Interpretation of Insurance Contracts: The court relied on the principle that any ambiguity in an insurance contract should be construed in favor of the insured.
• Survey and Investigation Reports: The court noted that the survey reports did not provide any factual findings regarding the incidents. The Investigation Report itself concluded that it was not conclusively proved that the persons involved in the incident belonged to Maoist or similar groups.
• Coverage for Violent Means: The court observed that the policy explicitly covered damages caused by external violent means, including riots.

Sentiment Analysis Table

Fact:Law Ratio Table

Logical Reasoning

Judgment

The Supreme Court set aside the judgment of the National Consumer Disputes Redressal Commission. The court held that the insurance company had failed to prove that the incident at the appellant’s factory was an “act of terrorism” as defined in the insurance policy. The court noted that the policy covered damage caused by external violent means, including riots. The court restored the appellant’s complaint and directed the Commission to decide the matter afresh. The court also directed the respondent to deposit Rs. 89,00,000 with the Commission, which was the amount assessed by the surveyor.

The court stated, “The respondent has not discharged the burden of bringing the case within the four corners of the Exclusion Clause.”

The court also stated, “When the policy itself defines the acts of terrorism in the Exclusion Clause, the terms of the policy being a concluded contract will govern the rights and liabilities of the parties.”

Further, the court observed, “The policy covers explicitly a liability arising out of the damage to the property of the insured due to riots or the use of violent means.”

Key Takeaways

• Insurance companies must clearly prove that an exclusion clause applies to deny a claim.
• The definition of “terrorism” in an insurance policy is critical and must be interpreted strictly.
• Ambiguities in insurance contracts are to be construed in favor of the insured.
• Insurance policies covering damage from “riots” or “violent means” should be honored unless the exclusion clause is clearly applicable.
• Survey and investigation reports must provide concrete factual findings to support a claim denial.

Directions

The Supreme Court directed the following:

• The National Consumer Disputes Redressal Commission’s order was set aside, and the appellant’s complaint was restored.
• The Commission was directed to decide the complaint afresh, considering the observations made in the Supreme Court’s judgment.
• The respondent was directed to deposit Rs. 89,00,000 with the Commission within one month, with liberty to the appellant to apply for withdrawal.

Development of Law

The ratio decidendi of this case is that the burden of proving the applicability of an exclusion clause in an insurance policy lies with the insurer, and any ambiguity in the contract must be interpreted in favor of the insured. The Court also clarified that the definition of “terrorism” in an insurance policy is exhaustive and cannot be substituted with definitions from penal statutes. This judgment reinforces the principle of strict interpretation of exclusion clauses in insurance contracts and ensures that policyholders are not denied coverage unless the exclusion is clearly applicable.

Conclusion

The Supreme Court’s judgment in Narsingh Ispat Ltd. vs. Oriental Insurance Company Ltd. clarifies that insurance companies cannot deny claims by vaguely invoking “terrorism” exclusion clauses. The court emphasized that the definition of “terrorism” in the policy is paramount and must be strictly adhered to. This ruling protects the rights of insured individuals and ensures that insurance companies honor their contractual obligations, particularly in cases of damage caused by violent means, unless a specific exclusion is clearly proven.