Insurer Cannot Repudiate Claim Based on Defects Discovered Post-Explosion if Boiler Was Certified Fit: Supreme Court

The Supreme Court of India, in a significant ruling on insurance law, has held that an insurer cannot repudiate a claim by invoking an exclusion clause for pre-existing defects, such as corrosion or wear and tear, if those defects were only discovered after an explosion and the insured object, in this case, a boiler, was certified as fit for use under a statutory regime.

The judgment was delivered by a bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra in a civil appeal filed by Kopargaon Sahakari Sakhar Karkhana Ltd. against the National Insurance Co. Ltd.

The Court set aside an order by the National Consumer Disputes Redressal Commission (NCDRC) that had dismissed the factory’s claim. The Supreme Court restored the matter to the NCDRC for the limited purpose of determining the quantum of compensation payable to the appellant.

Background of the Case

The case originates from a Consumer Complaint (No. 7 of 2007) filed by the appellant, Kopargaon Sahakari Sakhar Karkhana Ltd., before the Maharashtra State Consumer Dispute Redressal Commission (State Commission).

The relevant facts are:

1. The appellant obtained a Boiler and Pressure Plant insurance policy from the National Insurance Co. Ltd. (the first respondent) for its Boiler no. GT-23, covering loss or damage up to Rs. 1.60 crores for the period from February 1, 2005, to January 31, 2006.
2. The boiler was registered under the Indian Boilers Act, 1923, and had a valid fitness certificate issued on November 17, 2004.
3. On May 12, 2005, during the currency of the policy, a blast or explosion occurred in the boiler.
4. The insurer appointed a surveyor and subsequently repudiated the appellant’s claim via a letter dated June 22, 2005. The repudiation was based on Exclusion Clause 5 of the policy.
5. The insurer’s letter claimed the surveyor found that two boiler tubes had “slipped off” due to “wasting of tube material… due to corrosion which is a slow deterioration over a period of about 20 years,” and that many tubes fitted in 1986 had “served their useful life.”
6. After a fresh representation and a report from a joint surveyor, the claim was again rejected on July 3, 2006.
7. The appellant filed a complaint with the State Commission, which partly allowed it, awarding Rs. 49 lacs as compensation. The State Commission found deficiency in service, noting the boiler had a valid fitness certificate and the insurer should have inspected the boiler before issuing the policy.
8. Both parties appealed to the NCDRC. The NCDRC, by its order dated November 9, 2020, allowed the insurer’s appeal and dismissed the appellant’s, thereby setting aside the compensation award. The NCDRC relied on survey reports to conclude the accident occurred due to tubes slipping off, which it held was a risk excluded by Clause 5.

The appellant then challenged the NCDRC’s order before the Supreme Court.

Submissions of the Parties

For the Appellant (Kopargaon Sahakari Sakhar Karkhana Ltd.):

• Learned counsel Shri Shekhar G. Devasa argued that the insurance policy was issued after the Boiler Inspector had certified the boiler as fit under the Boilers Act.
• He contended that the NCDRC’s finding of “no explosion” was perverse, as the insurer’s own repudiation letter did not deny an explosion.
• Relying on Canara Bank vs. United India Insurance Company Limited (2020) 3 SCC 455, it was argued that a prudent insurer should have inspected the boiler before issuing the policy and cannot “take advantage of its own negligence” after the fact.
• It was also submitted that the survey report relied upon by the NCDRC was not before the State Commission and was introduced “after more than a decade.”

For the Respondent (National Insurance Co. Ltd.):

• Learned counsel Shri Gaurav Sharma argued that the appeal should not be entertained, and the appellant should be relegated to the High Court, citing Universal Sompo General Insurance Company Limited vs. Suresh Chand Jain (2023) SCC OnLine SC 877.
• He maintained that survey reports are prepared by experts and must be given due weight, as held in Sikka Papers Limited vs. National Insurance Company Limited.

Supreme Court’s Analysis and Findings

The Supreme Court, in its judgment authored by Justice Manoj Misra, first addressed the “factum of explosion.” The Court noted that the appellant had made a specific plea in its complaint of a “loud explosion,” and this plea was “not traversed by the first respondent in its written statement.” Therefore, the Court proceeded on the basis that “there is no serious challenge to the factum of an explosion.”

The central issue was the application of Exclusion Clause 5, which excluded defects due to “wearing away or wasting of the material… whether by leakage, corrosion… (unless such defects, fractures, failure or bulging result in explosion or collapse)”.

The Court laid down the following key principles:

1. Onus on Insurer and Duty of Disclosure: The Court reiterated that insurance is a contract of “utmost good faith” and the onus is on the insurer to prove that the insured failed to disclose a material fact. The proposer’s duty to disclose “is not confined to his actual knowledge” but also to facts “which, in the ordinary course of business, he ought to know.” However, this duty “is not under a duty to disclose facts which he did not know and which he could not reasonably be expected to know,” such as latent defects.

2. Effect of Statutory Certification (Boilers Act): The Court placed significant weight on the fact that the boiler was registered and certified under the Boilers Act. “Therefore, once a certificate of registration for use of such boiler is issued, during currency of that certificate, the boiler concerned would be considered, prima facie, fit for usage. In such circumstances, to substantiate that the insured suppressed information of boiler being unworthy of use, burden would be very heavy on the insurer, particularly, when the accident occurs during currency of its registration.”

3. Insurer’s Duty of Diligence: The Court held that the insurer cannot simply claim non-disclosure of defects it could have discovered with “ordinary diligence.” “Here, there is nothing on record to indicate that insurer was deprived or denied an opportunity to inspect the boilers to enable it to take a decision whether it was worthy to take the risk.” The Court found the ground of non-disclosure “completely unsustainable,” noting there was no evidence that information about the age of the boiler or its parts was ever sought by the insurer.

4. Post-Accident Discovery of Defects: The Court held that defects discovered after an event like an explosion cannot be used to justify repudiation, as the explosion itself may expose latent defects. “A defect may not be visible unless the boiler is dismantled… Those shortcomings may get exposed only on explosion. The survey reports are not categoric that there was no explosion.” The judgment stated, “it would be extremely unjust to non-suit a claim on discovery of defects post the blast.”

5. Exclusion Clause Not Applicable: The Court found that the insurer was not justified in invoking the exclusion clause. “A subsequent discovery of damage or corrosion cannot be used to repudiate the claim as it would defeat the main purpose of the insurance contract. In our view, therefore, in absence of a stand that the boiler and its parts had a prescribed life and that the boiler had outlived its prescribed life, or that there was a failure on part of the insured in making full and complete disclosure… exclusion clause 5 could not have been pressed into service to repudiate the claim of the insured.”

The Court also declined the respondent’s prayer to relegate the appellant to the High Court, stating that as pleadings were complete, doing so “would only delay the decision.”

The Decision

The Supreme Court allowed the appeals and set aside the impugned judgment and order of the NCDRC.

The Court held that the NCDRC “was not justified in setting aside the order of the State Commission and discarding the claim of the appellant by relying on exclusion clause 5.”

However, the Court noted that “since NCDRC did not address the claim of either side on the quantum of compensation payable,” the appeals (First Appeal No. 580/2012 and First Appeal No. 166/2013) were restored to the file of the NCDRC “for a consideration only on the quantum of compensation payable to the appellant.” All other issues were declared closed.