Supreme Court Upholds Insurance Claim, Dismissing New India Assurance Appeal: Mudit Roadways Case

Date of the Judgment: 24 November 2023

Citation: 2023 INSC 1022

Judges: Hrishikesh Roy, J. and Sanjay Karol, J.

Can an insurance company introduce new reasons for denying a claim after initially rejecting it? The Supreme Court of India recently addressed this question in a case involving a fire insurance claim. The core issue was whether the insurance company could reject the claim based on reasons not initially provided in their repudiation letter and the extent to which a surveyor’s report is binding. The two-judge bench of Justices Hrishikesh Roy and Sanjay Karol delivered the judgment, with Justice Hrishikesh Roy authoring the opinion.

Case Background

M/s. Mudit Roadways (the respondent) had purchased several insurance policies from New India Assurance Co. Ltd. (the appellant) to cover their warehouse at Village Veshvi, Taluka Uran, District Raigad, Maharashtra. These policies included:

• A Standard Fire and Special Perils Policy for ₹6 Crores (19.06.2017)
• A Customs Duty Package Policy for ₹20 Crores (30.09.2017)
• Another Standard Fire and Special Perils Policy for ₹150 Crores (30.11.2017)
• An Additional Endorsement to the Customs Duty Package Policy for ₹75 Crores (29.12.2020)

The insured premises consisted of 106,750 sq. ft. of covered area and 15,000 sq. ft. of open area. On 14.03.2018, a fire broke out at the warehouse. The respondent informed both the Insurance Company and the Customs authorities. M/s. J.C. Bhansali and Co. were appointed as surveyors to assess the loss. The respondent filed a claim for ₹6,57,55,155.

Timeline

Course of Proceedings

The respondent, dissatisfied with the rejection of their claim, filed a complaint under the Consumer Protection Act, 1986, citing service deficiencies and unfair trade practices by the appellant. The Insurance Company defended their decision by referring to the reports of M/s. J. Basheer & Associates and M/s. J.C. Bhansali & Co., arguing that the fire was due to negligence during roof welding and that the affected warehouse was not covered by the policy.

The National Consumer Disputes Redressal Commission (NCDRC) ruled in favor of the complainant, concluding that the insurance policy covered the warehouse and that the cause of the fire was more likely an electrical short circuit than negligence during welding. The NCDRC also held that the roof repair work did not significantly increase the risk, and therefore, Clause no. 3 of the insurance policy was inapplicable. The NCDRC directed the Insurance Company to pay the claim amount with interest.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 64(UM)(4) of the Insurance Act, 1938: This section mandates that claims above ₹20,000 must be initially assessed by an approved surveyor. It also states that the insurer has the discretion to settle the claim for a different amount than assessed by the surveyor. The provision states:
  
  “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”.”
• Clause 3 of the insurance policy: This clause specifies conditions under which the insurance coverage would cease, including alterations to the insured premises that increase the risk of loss or damage. The clause states:
  
  “3. Under any of the following circumstances the insurance ceases to attach as regards the property affected unless the insured, before the occurrence of any loss or damage, obtains the sanction of the Company signified by endorsement upon the policy by or on behalf of the Company: – (a) If the trade or manufacture carried on be altered, or if the nature of the occupation of or other circumstances affecting the building insured or containing the insured property be changed in such a way as to increase the risk of loss or damage by Insured Perils. (b) If the building insured or containing the insured property becomes unoccupied and so remains for a period of more than 30 days. (c) If the interest in the property passes from the insured otherwise than by will or operation of law. ”
• Sections 12, 23, and 46 of the Customs Act, 1962: These sections deal with the liability for customs duty, remission of duty on lost or destroyed goods, and the procedure for filing a bill of entry for imported goods, respectively.
• Section 15(1)(b) of the Customs Act, 1962: This section specifies that duty rates for warehoused goods are determined when a bill of entry for home consumption is filed.

Arguments

Arguments by the Appellant (New India Assurance):

• The fire was caused by the negligence of the insured during roof repair work, specifically welding, near flammable chemicals. They relied on the forensic investigator’s report which ruled out short circuit.
• The surveyor’s report indicated that the fire occurred due to negligence in not taking adequate precautions during roof repair work, which increased the risk of loss.
• The insurance policy did not cover the fire-affected warehouse, as the policy was limited to the office and warehouse not affected by the fire.
• The claim for customs duty was erroneous, as the duty liability rests only upon the importer under Sections 12 and 46 of the Customs Act, 1962. They argued that compensating the insured for destroyed imported goods was unjustified under Section 23 of the Customs Act, 1962, and would amount to unjust enrichment.
• They contended that the doctrine of waiver as applied in Galada Power & Telecommunication Ltd. vs. United India Insurance Co. Ltd. [(2016) 15 SCC 161], had been overruled and a legal submission can be urged at any stage of proceedings.

Arguments by the Respondent (M/s. Mudit Roadways):

• The insurance company cannot introduce new grounds for rejecting the claim beyond those mentioned in the initial repudiation letter.
• The fire occurred at the insured premises located at Survey No. 9/3, as evidenced by the Leave & License Agreement, Customs Department approvals, and various communications.
• The welding work concluded well before the fire incident, making it illogical to attribute the fire to welding sparks. The cause of fire was rightly attributed to an electrical short-circuit.
• Multiple reports from government departments and independent surveyors supported the conclusion that the fire was caused by a short circuit.
• The roof repair work was necessary to address water leakage and did not increase the fire risk. Thus, there was no violation of the insurance policy conditions.
• The benefit of Sections 22 & 23 of the Customs Act 1962 is only available to importers and not those who hold such goods in trust for their clients. The respondent had also given an undertaking that they would not claim a remission or abatement on the customs duty payable.
• The respondent relied on Canara Bank vs. United India Insurance Company [(2020) 3 SCC 455] to argue 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 and Khatema Fibres Ltd. vs. New India Assurance Co. Ltd. & Anr. [2021 SCC OnLine SC 818] to argue that the surveyor’s report was not sacrosanct.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the Complainant’s Warehouse located at Survey No. 9 Hissa 3 (9/3) Village Veshvi, Tal -Uran, District – Raigad was insured by the Opposite Party;
2. What was the cause of fire incident that occurred on 14.03.2018?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• New India Assurance Co. Ltd. vs. Pradeep Kumar [(2009) 7 SCC 787] (Supreme Court of India): This case established that while a surveyor’s report is a prerequisite for settling insurance claims, it is not binding on either the insurer or the insured. The court stated that:
  
  “…although assessment of loss by approved surveyor is a prerequisite for payment or settlement of claim of twenty thousand rupees or more by insurer, yet surveyor’s report is not the last and final word. It is not that sacrosanct that it cannot be departed from; it is not conclusive. The approved surveyor’s report may be basis or foundation for settlement of a claim by the insurer in respect of loss suffered by insured but such report is neither binding upon the insurer nor insured.”
• Galada Power & Telecommunication Ltd. vs. United India Insurance Co. Ltd. [(2016) 15 SCC 161] (Supreme Court of India): This case held that an insurance company cannot introduce new grounds for repudiation beyond those mentioned in the initial repudiation letter.
• Saurashtra Chemicals Ltd. vs. National Insurance Co. Ltd. [(2019) 19 SCC 70] (Supreme Court of India): This case reiterated the principle that new grounds for repudiation cannot be introduced during the hearing if they were not included in the repudiation letter.
• JSK Industries Pvt. Ltd. vs. Oriental Insurance Co. Ltd. [2022 SCC OnLine 1451] (Supreme Court of India): This case reaffirmed that an insurance company cannot resist a claim petition on grounds beyond those cited while repudiating a claim.
• Canara Bank vs. United India Insurance Company [(2020) 3 SCC 455] (Supreme Court of India): This case held that an insurance company cannot escape liability if there is no evidence that the insured caused the fire, irrespective of the actual cause. The court stated:
  
  “In any event, neither in the report of M/s Truth Labs nor in the other reports by the Insurance Company is there anything to show that the insured had set the cold store on fire. Whether the fire took place by a short circuit or any other reason, as long as insured is not the person who caused the fire, the Insurance Company cannot escape its liability in terms of the insurance policy. We reject the contention of the Insurance Company that the fire was ignited by the use of kerosene and hence it is not liable.”
• Khatema Fibres Ltd. vs. New India Assurance Co. Ltd. & Anr. [2021 SCC OnLine SC 818] (Supreme Court of India): This case held that the surveyor’s report was not sacrosanct and therefore could be departed from if needed.

Statutes:

• Insurance Act, 1938: Specifically, Section 64(UM)(4) was considered regarding the necessity of a surveyor’s report for claims above ₹20,000.
• Customs Act, 1962: Sections 12, 15(1)(b), 22, 23 and 46 were considered regarding the liability for customs duty, remission of duty on lost or destroyed goods, and the procedure for filing a bill of entry for imported goods.

Table of Authorities and Their Treatment:

Judgment

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

How each authority was viewed by the Court?

• The Court followed New India Assurance Co. Ltd. vs. Pradeep Kumar [(2009) 7 SCC 787]*, stating that a surveyor’s report is not binding, and contrary evidence can be considered.
• The Court relied on Galada Power & Telecommunication Ltd. vs. United India Insurance Co. Ltd. [(2016) 15 SCC 161]*, Saurashtra Chemicals Ltd. vs. National Insurance Co. Ltd. [(2019) 19 SCC 70]*, and JSK Industries Pvt. Ltd. vs. Oriental Insurance Co. Ltd. [2022 SCC OnLine 1451]* to hold that the insurance company cannot introduce new grounds for repudiation beyond those mentioned in the initial letter.
• The Court followed Canara Bank vs. United India Insurance Company [(2020) 3 SCC 455]*, stating that the insurance company is liable if the insured did not cause the fire, irrespective of the actual cause.
• The Court followed Khatema Fibres Ltd. vs. New India Assurance Co. Ltd. & Anr. [2021 SCC OnLine SC 818]*, stating that the surveyor’s report was not sacrosanct.
• The Court interpreted Section 64(UM)(4) of the Insurance Act, 1938 as mandating a surveyor’s report but not making it binding.
• The Court held that Clause 3 of the insurance policy, regarding alteration of insured premises, was inapplicable in this case.
• The Court considered Sections 12, 15(1)(b), 22, 23 and 46 of the Customs Act, 1962, regarding customs duty liability and remission, and concluded that the customs duty should be paid directly to the authorities.

What weighed in the mind of the Court?

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

• Inconclusive Forensic Report: The forensic report, which suggested welding as the cause of the fire, was deemed inconclusive due to the significant time gap between the welding work and the fire.
• Multiple Reports Suggesting Short Circuit: Several reports from government departments and independent surveyors indicated that the fire was likely caused by an electrical short circuit.
• No Evidence of Negligence by the Insured: The court found no substantial evidence to support the claim that the insured was negligent, and the roof repair work was considered necessary and not a risk-increasing alteration.
• Adherence to Legal Precedents: The court adhered to established legal principles, particularly the principle that an insurance company cannot introduce new grounds for repudiation beyond those mentioned in the initial letter.
• Principle of Good Faith: The court emphasized the fiduciary duty of the insurer to act in good faith and honor their commitment, especially when the insured has not been negligent.

Sentiment Analysis Ranking of Reasons:

Fact:Law Ratio Table:

Logical Reasoning:

Conclusion

The Supreme Court’s judgment in New India Assurance Co. Ltd. vs. M/S. Mudit Roadways underscores several crucial aspects of insurance law and consumer protection:

• Binding Nature of the Repudiation Letter: Insurance companies are bound by the grounds stated in their initial repudiation letter and cannot introduce new reasons for rejecting a claim during subsequent proceedings.
• Surveyor’s Report is Not Conclusive: While a surveyor’s report is a necessary requirement for settling insurance claims, it is not binding and can be challenged if there is contrary evidence.
• Burden of Proof: The burden of proof lies with the insurance company to demonstrate that the insured was negligent or violated the terms of the policy.
• Good Faith Obligation: Insurance companies have a fiduciary duty to act in good faith and honor their commitments unless there is clear evidence of fraud or policy violation by the insured.
• Consumer Protection: The judgment reinforces the principle that insurance policies are contracts of utmost good faith, and any ambiguity should be interpreted in favor of the insured.

The Supreme Court’s decision reinforces the importance of transparency and accountability in the insurance industry and ensures that consumers are not unfairly denied their legitimate claims. It also serves as a reminder that while surveyor reports are important, they are not the final word in determining insurance liability.

Key Takeaways:

• Insurance companies cannot introduce new grounds for repudiation beyond the initial letter.
• Surveyor’s report is not binding and can be challenged.
• Insurance companies must act in good faith and honor legitimate claims.
• Consumers are protected from unfair denial of claims.