Insurance Law-Supreme Court’s Recent Verdict on Interpretation of Exclusionary Clause in Policy


April 23, 2019

Case name: New India Assurance Company Limited v. Rajeshwar Sharma and Others

In the case, the Insured claimed that his business of sanitary wares suffered damages on account of illegal demolition by the Municipality in the premises. The Insured’s claim for insurance was repudiated by the Insurance company on the ground that the Policy of Insurance provided for exclusion of loss on account of “destruction by order of the Government or any lawfully constituted authority”. The State Commission however allowed the claim holding that the order of demolition passed by Municipal Corporation had not been brought on record and in its absence the exclusion would not operate.The High Court in appeal upheld the State Commission’s order and held that the insurer was liable to indemnify the loss sustained by the insured.

Bench’s Verdict

In view of the fact of the case, the Apex Court decided on the issue whether the exclusion clause under the Policy of Insurance was attracted?

While making reference to Supreme Court’s verdict in National Insurance Co. Ltd. v. Ishar Das Madan Lal, the Court noted that where there is an exclusionary clause in an Insurance Policy, burden lies on the insurer to establish that the exclusion is attracted.

Interpretation of Exclusionary Clauses- While elucidating on this point, the Court made reference to Court of Appeal’s decision in Cornish v. Accident Insurance Co. Ltd., wherein it was opined that in a case of real doubt, the Policy ought to be construed most strongly against the insurers; they frame the Policy and insert the exceptions.

That like any other provision in a Contract, words of exception or exemption must be read in context of the Contract as a whole and with due regard for purpose.

Principles for Construing Insurance Exclusions- That the Court must adopt approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract. The Court should not adopt principles of construction which are appropriate to exemption clauses i.e. provisions which are designed to relieve a party otherwise liable for breach of contract or in tort of that liability- to the interpretation of insurance exclusions.

The Supreme Court was of the view that the impugned exclusionary clause in the present case had no ambiguity and the exclusion was clear in exempting the insurer from liability for a loss arising from the destruction of property caused “by order of Government or any lawful authority.”

In view of the aforesaid the Supreme Court set aside the High Court’s order in allowing the claim of insurance and allowed the appeal filed by the Insurer.