Whither Insurance Exclusions?

Doctrine of Fairness

The Supreme Court of India in the recent case M/S Texco Marketing Pvt. Ltd. vs Tata Aig General Insurance ... on 9 November 2022, stated: “10. The concept of freedom of contract loses some significance in a contract of insurance. Such contracts demand a very high degree of prudence, good faith, disclosure and notice on the part of the insurer, being different facets of the?doctrine of fairness. Though, a contract of insurance is a voluntary act on the part of the consumer, the obvious intendment is to cover any contingency that might happen in future. A premium is paid obviously for that purpose, as there is a legitimate expectation of reimbursement when an act of God happens. Therefore, an insurer is expected to keep that objective in mind, and that too from the point of view of the consumer, to cover the risk, as against a plausible repudiation.

Exclusion Clause has to be interpreted differently

The SC continued in para 11: “An exclusion clause in a contract of insurance has to be interpreted differently. Not only the onus but also the burden lies with the insurer when reliance is made on such a clause. This is for the reason that insurance contracts are special contracts premised on the notion of good faith. It is not a leverage or a safeguard for the insurer but is meant to be pressed into service on a contingency, being a contract of speculation…. An exclusion clause “has to be understood on the prism of the main contract. The main contract once signed would eclipse the offending exclusion clause when it would otherwise be impossible to execute it. A clause or a term is a limb, which has got no existence outside, as such, it exists and vanishes along with the contract, having no independent life of its own. It has got no ability to destroy it own creator, i.e. the main contract.”

Do not conjure up exclusions but rather read them down

Courts are faced with insurers resorting to denials of claim based on illusory exclusions conjured from the air. The Times of India Editorial of 29.11.2022 comments that: “A district consumer commission in Gujarat ordered an insurer to pay a health insurance policy with interest to a customer after it had denied the claim saying that the claimant’s vegetarian diet caused the underlying complication.”

The SC has been engaged with exception clauses in many cases. In another case of 2022, Shivram Chandra Jagarnath Cold Storage v. New India Assurance Co. Ltd. (2022) 4 SCC 539, the court stated: “19. Another instance where exception clauses may be interpreted to the benefit of the insured is when the exception clauses are too wide and not consistent with the main purpose or object of the insurance policy. In B.V. Nagaraju v. Oriental Insurance Co. Ltd. (1996) 4 SCC 647, a two-Judge Bench of this Court read down an exception clause to serve the main purpose of the policy.”

Different rules apply to coverage v exclusion

Courts in US are clear as stated by the Supreme Court in the case in the case State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 101 (1973). “…past authorities have made it abundantly clear that an entirely different rule of construction applies to exclusionary clauses as distinguished from coverage clauses. Whereas coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured, exclusionary clauses are interpreted narrowly against the insurer.”

Many times, insurers and lower courts do the opposite of the above. The UK Supreme Court in the case Global Process Systems Inc and another,(Respondents) v Syarikat Takaful Malaysia Berhad (Appellant) [2011] UKSC 5 stated: “Where in my view the judge erred was in giving the phrase inherent vice or nature of the subject-matter insured too wide a meaning and, as the other side of the coin, giving the risk of perils of the seas too narrow a meaning, by in effect including in the former and excluding from the latter external fortuities that were unexceptional or which were foreseen or foreseeable; and then answering the question of fact on this erroneous basis.”

Some rules of interpretation of exclusions

In the case Powers v. Detroit Automobile Inter-insurance Exchange (1986), The Supreme Court of Michigan laid down certain rules in interpreting exclusions in policies.

1.?????It is a principle of law too well established in this jurisdiction and others, to need discussion or citation of authorities, that a policy of insurance couched in language chosen by the insurer must be given the construction of which it is susceptible most favourable to the insured; that technical constructions of policies of insurance are not favoured; and that exceptions in an insurance policy to the general liability provided for are to be strictly construed against the insurer.

2.?????The courts have no patience with attempts by a paid insurer to escape liability by taking advantage of an ambiguity, a hidden meaning, or a forced construction of the language in a policy, when all question might have been avoided by a more generous or plainer use of words.

3.?????An insurer must "so ... draft the policy as to make clear the extent of nonliability under the exclusion clause."

4.?????"[T]he policyholder must be protected against confusing statements in policies, and, wherever there are two constructions that can be placed upon the policy, the construction most favourable to the policyholder will be adopted." [DeLand, supra at 18.]

5.?????An insurer may not "escape liability by taking advantage of... a forced construction of the language in a policy....". "[T]echnical constructions of policies of insurance are not favoured...."

Thus, as done by the Supreme Court of UK, when a case meets with a possibility of an exclusion as in the case Global Process Systems Inc and another,(Respondents) v Syarikat Takaful Malaysia Berhad (Appellant) [2011] UKSC 5, the court went to great lengths to examine whether the concerned exclusion of inherent vice applied and found that it did not, and hence came to the conclusion that the loss took place owing to a peril of the seas. Hence, when a claim cannot be denied under any of the exclusions properly interpreted, then the insurer does well by paying the claim.