The Jammu & Kashmir and Ladakh High Court held that insurance companies cannot deny claims under comprehensive insurance policies by relying on exclusion clauses that are not clearly disclosed or explained to the insured. The Division Bench comprising Justice Sanjeev Kumar and Justice Sanjay Parihar delivered this ruling while dismissing an appeal filed by an insurance company against an order of the State Consumer Redressal Commission. The dispute arose from the repudiation of an insurance claim related to damage caused to a residential house due to floods.
The insured had taken a policy described as a standard fire and special perils insurance policy for the residential house. During the subsistence of the policy, the house suffered extensive damage and eventually collapsed due to floodwaters. After the incident, the legal heirs of the insured lodged a claim with the insurance company. A surveyor appointed by the insurer assessed the loss and quantified the damage. Despite the assessment, the insurer repudiated the claim on the ground that the policy contained an endorsement excluding coverage for losses caused by storm, tempest, flood, and inundation.
The insurance company argued that the exclusion applied because no separate premium had been paid for coverage against flood-related perils. It was further contended that the insured was aware of the exclusion clause, as reflected in the renewal of the policy. Aggrieved by the repudiation, the legal heirs approached the State Consumer Redressal Commission, challenging the denial of the claim.
The State Consumer Redressal Commission allowed the complaint, holding that a consumer could not be expected to understand technical abbreviations or decipher complex exclusion clauses unless they were clearly disclosed. The Commission observed that when a policy is marketed as comprehensive, a reasonable consumer would expect it to cover major natural calamities, including floods. The Commission directed the insurer to pay compensation after making a deduction for contributory negligence.
Challenging this decision, the insurer filed an appeal before the High Court. While examining the appeal, the High Court observed that insurers cannot rely on concealed or undisclosed exclusion clauses to defeat legitimate claims under comprehensive policies. The Court noted that the insurer failed to produce the original proposal form to demonstrate that the exclusion clause was specifically brought to the notice of the insured and accepted at the time of entering into the contract.
The Court rejected the insurer’s argument that the absence of a separate premium automatically disentitled the insured from claiming compensation. It held that exclusion clauses that defeat the very purpose of a comprehensive policy cannot be enforced if they are not clearly communicated. The Court further observed that technical abbreviations relating to exclusions were not explained to the insured, nor was there any evidence that the insured had knowingly consented to such exclusions.
The High Court emphasized that insurance contracts are standard-form contracts drafted by insurers, and therefore the burden lies on the insurer to establish that all exclusions were explicitly disclosed and explained. In the absence of such proof, exclusion clauses cannot be used to deny valid claims. The Court also noted that no refund of premium was made to indicate that flood-related risks were intentionally excluded from coverage.
The Bench held that clauses which negate the essential purpose of an insurance contract are unfair and unenforceable. It observed that allowing insurers to rely on ambiguous or hidden exclusions would defeat consumer protection principles. Finding no error in the order passed by the State Consumer Redressal Commission, the High Court dismissed the insurer’s appeal and upheld the direction to satisfy the claim.
The judgment reaffirmed that comprehensive insurance policies must be interpreted in a manner that protects the reasonable expectations of consumers and that insurers cannot escape liability through undisclosed or ambiguous exclusion clauses.
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