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United India Insurance Co. Ltd. v. M.K.J Corporation .
Factual and Procedural Background
The appeals stem from orders dated 12-1-1995 issued by the National Consumer Redressal Commission in Original Petitions Nos. 62 and 102 of 1993. The respondent, a leather manufacturer, held two insurance policies with the appellant-insurer covering 31-3-1986 to 31-3-1987 and 1-4-1987 to 31-3-1988. During the covered periods, a workers’ strike caused spoilage of leather that was in various stages of processing. The respondent claimed Rs 4,99,453.23 under the first policy and Rs 5,000 under the second, totaling Rs 5,04,453.23, together with interest. The Commission allowed the claim and awarded interest at 18% from one month after the date of claim.
The insurer filed the present appeals challenging liability and the award of interest. The respondent filed cross-appeals seeking an additional Rs 14,00,000 for consequential loss. Both sets of appeals were heard together because they arise from the same cause of action.
Legal Issues Presented
- Whether an exclusionary clause recommended by the Tariff Advisory Committee (TAC) — denying cover for losses resulting from cessation of work such as strikes — formed part of the insurance contract despite not being expressly incorporated, thereby absolving the insurer from liability.
- Assuming liability, from what date and at what rate is the insurer obliged to pay interest on the assessed loss?
- Whether the respondent is entitled to recover consequential loss of Rs 14,00,000 under a separate policy.
Arguments of the Parties
Appellant-Insurer’s Arguments
- The policies cover “riot, strike and malicious damage” (RSD & MD), but TAC clause (b) — which excludes liability where loss results from total or partial cessation of work or interruption of any process — is statutorily incorporated and therefore bars the claim because the damage was caused by an employees’ strike.
- Interest, if any, is payable only from the date the insurer rejected the claim, not from the date of loss.
Respondent-Insured’s Arguments
The opinion does not contain a detailed account of the respondent’s legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
1. The court acknowledged that the TAC is a statutory body whose recommendations generally bind insurers. However, it emphasized the doctrine of uberrima fides (utmost good faith): insurers must disclose all material terms to the insured before the contract is concluded. Introducing the TAC exclusion after formation would constitute a material alteration requiring mutual consent.
2. Because the insurer had not incorporated TAC clause (b) in either policy, the insured was never put on notice of the exclusion. Consequently, the clause could not be relied upon to defeat the claim. The strike-related spoilage therefore fell within the RSD & MD cover expressly purchased.
3. The surveyor’s report confirmed that the leather damage resulted from the workers’ strike. This factual finding aligned with the covered peril, reinforcing liability.
4. On interest, the court reconstructed the claim timeline: initial claim on 13-11-1989; particulars furnished August 1990; survey report on 30-10-1990. Allowing a “reasonable” two-month decision period, liability for interest began on 1-1-1991. Given that the insurer itself earns 11.3% on mandated investments, a 12% annual rate was deemed fair compensation.
5. Regarding consequential loss, the Commission had not provided separate reasons. Treating the silence as rejection, the court upheld denial of the additional Rs 14,00,000.
Holding and Implications
Appeals dismissed/allowed in part and disposed of without costs. The insurer remains liable to pay Rs 5,04,453.23 to the insured, together with interest at 12% per annum from 1-1-1991 until the date of payment. The claim for consequential loss stands rejected.
Implications: The decision reinforces that exclusionary clauses, even if derived from statutory tariff recommendations, bind insureds only when expressly incorporated into the policy. It underscores the continuing duty of good faith on insurers and clarifies that unreasonable delay in claim settlement attracts compensatory interest. No new precedent was formally established, but the ruling signals stringent scrutiny of insurers’ attempts to rely on unstated exclusions.
Order
1. We have heard learned counsel on both sides.
2. Both the appeals are heard and disposed of together since claims arising out of them arise out of the same cause of action.
3. These appeals arise from the orders dated 12-1-1995 of the National Consumer Redressal Commission (“the Commission”, for short) made in Original Petitions Nos. 62 and 102 of 1993. Admittedly, the respondent was holding two policies. First policy covered the period from 31-3-1986 to 31-3-1987 and the second policy covered the period from 1-4-1987 to 31-3-1988. During the said period, admittedly, due to the employees' strike the leather in process was damaged due to the spoilage. The respondent laid claims for damages caused during the first period for a sum of Rs 4,99,453.23 and for the second period for Rs 5000 which amount to a total of Rs 5,04,453.23 with interest from the date of the claim. The Tribunal accepted the claim and directed payment of the said amount with interest at 18% from one month after the date of the claim. The respondent's Appeals Nos. 11443-44 of 1995, though arise from the impugned order, are for the claim of consequential loss in the sum of Rs 14,00,000.
4. Shri Suri, the learned counsel for the appellant-Company, contended that insurance coverage is only for riots and strikes and malicious damages and spoilage “under spoilage Item 8” clearly enumerates as under:
“Stocks or leather of all kinds in process during soaking, liming, fleshing, tanning, wet blue, sammying, splitting, shaving, dye liquering, setting, vacuuming, drying.”
5. The learned counsel relying upon these clauses, seeks to read clause (b) of “Section 2 — Fire Policy ‘C’ of Part II — Fire Policies, Endorsements, Clauses and Warranties” as recommended by Tariff Advisory Committee constituted under Section 64(U) of the Insurance Act, 1938. Since these recommendations are made by the Advisory Committee which is a statutory authority they bind the appellant-insurer as they are an integral part of the policies referred to hereinbefore. Resultantly, by operation of clause (b), the insurance does not cover if loss or damage results from total or partial cessation of work or the retarding or interruption or cessation of any process of operation or omissions of any kind. According to the learned counsel, since the damage was caused due to the strike organised by the workmen of the insured, by operation of clause (b), the appellant-insurer is not liable for the loss to the goods while the leather remains unattended in its process during the period of strike. We are unable to agree with the learned counsel. It is true that the Advisory Committee is a statutory body which has gone in and recommended the policies for riot, strike and malicious damages. The clause would exclude the insurance company from the coverage, if the loss or damage resulted from total or partial cessation of work or the retarding or interruption or cessation of any process of operation or omissions of any kind which would include strike by its workers. This may be due to either the operational inconvenience due to non-supply of the electricity or strike by the employees or any cause but the insured must be put on notice of this clause.
6. It is a fundamental principle of Insurance law that utmost good faith must be observed by the contracting parties. Good faith forbids either party from concealing (non-disclosure) what he privately knows, to draw the other into a bargain, from his ignorance of that fact and his believing the contrary. Just as the insured has a duty to disclose, “similarly, it is the duty of the insurers and their agents to disclose all material facts within their knowledge, since obligation of good faith applies to them equally with the assured”.
7. The duty of good faith is of a continuing nature. After the completion of the contract, no material alteration can be made in its terms except by mutual consent. The materiality of a fact is judged by the circumstances existing at the time when the contract is concluded. In the present case, the introduction of the Tariff Advisory Committee document materially affects the terms of the policy, resulting in the denial of the very indemnity of claim. And this was what the appellant sought to do, at the stage of clearing of the complaint. The Commission rightly rejected the appellant's plea. Notwithstanding this, on behalf of the appellant, it was insisted that the instructions of the Tariff Advisory Committee form part of the contract. Admittedly, the appellant-insurer had not incorporated the above-quoted clause as part of the policy undertaken with the insured. Consequently, the insured is not bound by this exclusionary clause of liability since the appellant-insurer, admittedly, had undertaken liability for the riot or strike, damage due to riot or strike.
8. Since the surveyor had submitted a report after due verification that the damage to the leather was caused due to the strike organised by the workmen, in our considered view, the insurance is covered by the RSD and MD clause. Accordingly, the appellant-insurer is liable to pay the insured amount for the spoilage of the leather caused due to strike organised by the workmen.
9. It is then contended that the appellant is not liable to pay interest from the time of the loss which occurred only from the date of the claim rejected by the appellant-insurer. It is difficult to accept the contention in toto. It is axiomatic that the insured requires to lay specific claim for damages giving details of the damages caused to the leather due to the strike organised by the workmen. On preferring claim thereof, admittedly, the surveyor, which is an independent agency, should inspect the factory and submit a report. From the record, it would be clear that the claim was made for the first time on 13-11-1989. Thereafter, all the particulars were furnished by the insured-respondent in August 1990. Thereon, the surveyor inspected and submitted his report on 30-10-1990. Thereafter, the insurance company is required to take a decision. Admittedly, 5 months have elapsed for taking decision to reject the claims. We think that a reasonable time of two months would be justified for them to take a decision whether claim requires to be settled or rejected in accordance with the policy. Therefore, two months would be computed from 30-10-1990. Accordingly, we give the benefit of the time taken to decide the claim up to 31-12-1990. The appellant-insurer is liable to pay interest from 1-1-1991 till date of payment.
10. The next question is what rate of interest the insured-respondent is entitled to get? In common parlance, when the insured-respondent is deprived of the right to enjoy his money or invest the money in business, necessarily the loss has to be compensated by way of payment of interest by the insurance company. We are informed that as per the directions of the Government of India the appellant-insurance company has no option but to invest the money in the securities specified by the Government of India under which the insurance company is securing interest on investment at the rate of 11.3% per annum. Under these circumstances, the appellant-insurance company is liable to pay interest at 12% per annum from 1-1-1991 till date of payment. It is then contended that as per the policy, the respondent is entitled to consequential loss as per the independent policy. The Commission no doubt did not give any independent reason for the same but all the claims were heard and disposed of together. Under these circumstances, we are of the view that the claims must be deemed to have been rejected.
11. The appeals are accordingly disposed of but, in the circumstances, without costs.
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