SC on what is Fundamental Breach of Contract of Insurance


November 12, 2017

Lakhmi Chand vs Reliance General Insurance [(2016) 3 SCC 100]


In the instant case the issue which surfaced before the Supreme Court pertained to the breach of contract of insurance and the consequences that eventually follow. In the case the Supreme Court was confronted with the following questions:

Whether all or only the fundamental breach is material to be looked into by the insurance company before repudiating the contacts?

If the breach is not so fundamental which result in repudiation of the contract and the insurance company terminates the contract without any fundamental breach does this repudiation hold good in law?

Background of the case: The vehicle of the insured met with an accident by the gross and negligent driving of the offending vehicle which was evident from the FIR. The insured made a claim for the expense incurred towards repairing of the vehicle. The insurer appointed surveyor who assessed the loss for a sum of Rs. 90, 000/- as against the actual expense of 1.64 lakhs. The insurer appointed another surveyor who came with a finding that the vehicle in question was carrying more passengers than permitted capacity and as such there was breach of terms and condition of insurance policy and accordingly the insured owner was not entitled for compensation. Aggrieved by this, the insured filed the complaint before the District Consumer Forum which drew an inference that the insured was entitled to be compensated for 75% of the actual expense incurred by him and ordered accordingly.

The insurer appealed against the order of District Consumer Forum before the State Commission. The State Commission reversed the finding of District Forum holding that there was a breach on the part of insured disentitling him for compensation as claimed for.

On revision, the National Commission also upheld the decision of State commission. Hence this SLP was filed by the Insured before the Supreme Court.

Bench’s Verdict

The Supreme Court in the case upheld the District Consumer Forum’s order and made the following observations:

  • That the Law of Insurance is based upon the contract of indemnity whereby the Insurer indemnifies the insured against the loss as per the terms and conditions stipulated in the contract and insured cannot escape its liability unless there is a fundamental breach of contract resulting in repudiation of contract and not every breach.
  • That in the case it is admitted position that carrying of passengers more than the permitted capacity is not the cause of accident rather as per FIR the cause of accident is the gross and negligent driving by the third vehicle. Hence the causation of accident has nothing to do with fundamental breach of contract and as such there is no repudiation of contract by insured .
  • In the case, the Supreme Court also dealt with the ratio laid down in the case of National Insurance Company Limited v. Swaran Singh which related to third party claim against insurer. In the case it was held that the insured owner is liable, in that eventuality the insurer company’s liability is absolute and holding an invalid/fake driving license or disqualification of driver for driving the offending vehicle at the relevant time are not in themselves defences available to insurer against the insured or the third party who met with the accident due to rash and negligent driving by offending vehicle. Even if the insurance company is able to prove that there is breach of concerning policy conditions, the insurer would not be allowed to avoid its liability towards insures unless the said breach is so fundamental as to  be found to have contributed to the cause of the accident.
  • That the mere factum of carrying more than permitted capacity by the goods carrying vehicle by insured does not amount to fundamental breach of terms of policy. It was further held that onus to establish the fundamental breach lies with insurer and the insurer has also to prove that the damage suffered by the insured flowed from such breach.
  • That while interpreting the terms of the contract, the words used in contract should be given paramount importance and it is not open to the Court to add, delete or substitute the words used by parties at the time entering into the contract.
  • That it is trite that the law of insurance is governed by the terms and conditions of insurance contract. Therefore, Court while interpreting the contract, the terms of the contract must have been strictly construed and no exception can be made on the grounds of equity.