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Exemption clause in Insurance contracts to be construed against Insurer in case of ambiguity: SC

May 12, 2020

By Nihit Nagpal and Nishtha Das

While deciding on a motor vehicle accident insurance compensation, which happened 23 years ago, the Supreme Court has now given an interpretation on exemption clause in Insurance contracts. In the case of Sushilaben Indravadan Gandhi and anr v. The New India Assurance Co Ltd and Ors[1]., the Hon’ble Supreme Court applied the well-settled principle that in case of an ambiguity, an exemption of liability clauses in insurance contracts are to be construed against the insurance company.

Brief facts of the case –

  1. The insured in the above case was an eye doctor who unfortunately died in a motor vehicle accident. He was travelling in a vehicle owned by the hospital where he worked and due to the negligent driving of the driver, the vehicle met with an accident.
  2. According to the existing insurance arrangement of the hospital, the insurance company (hereinafter referred to as ‘Respondents/ insurer’) was liable to pay compensation for those other than persons employed by the hospital, who were otherwise covered under the Workmen Compensation Act, 1923.
  3. Pursuant to the above, the primary issue in this case was whether the deceased was an employee of the hospital or not. The entire equation for payment of compensation was dependent on this vital question. As, if the doctor was held to be employee, there would be no coverage as per the insurance contract.

Submission made by the Appellants (wife of the deceased insured) –

The Appellants made the submission that the deceased was not an ordinary employee for the hospital. He was a professional who was rendering consultancy services and was not covered under the general scheme of insurance as availed by the hospital. Therefore, the insurer had to pay for the compensation to the Appellants, as the insured was not covered under the Workmen Compensation Act, 1923.

Submission made by the Respondents –

The Respondents submitted that the insured was to be considered as a regular employee of the hospital as he had entered into an agreement with the hospital in exchange of his services. Therefore, it was the hospital which was responsible for compensating the deceased and not the Respondents and the insurance agreement covered only those who were not regular employees of the hospital.

Decision by the Motor Accidents Claims Tribunal –

The Tribunal examined the applicability of ‘Contract for Service’ and ‘Contract of Service’ in the instant case. Accordingly, the Tribunal held that the employment arrangement between the deceased and the hospital was a “Contract for Service” as opposed to a “Contract of Service”. Therefore, the insurer was held liable to pay for the compensation.

Appeal to the Hon’ble Gujrat High Court –

The insurer filed an appeal in the Hon’ble High Court against the decision of the Tribunal, where the Court took a contrary view stating that since the contract was a contract of service, the Insurance Company could not be held liable, thereby disposing the insurer of its liability.

Appeal to the Hon’ble Supreme Court –

Aggrieved by the above decision of the High Court, the widow of the deceased (hereinafter referred to as ‘Appellants’ approached the Hon’ble Supreme Court.

Observations of the Hon’ble Supreme Court –

  1. Firstly, the Hon’ble Court examined the contract of the deceased with the hospital and whether it would fall under ‘Contract for Service’ or ‘Contract of Service’. A ‘Contract of Service’ implies a master-servant relationship, whereas a “Contract for Service” suggests a relationship between equals on professional terms.
  2. After examining a plethora of judgments in this regard, the Apex Court held that the deceased could not be treated as a regular employee of the hospital.
  3. Also, the contract of the deceased and the hospital clearly depicted that the services of the deceased qualified to be services rendered from an independent professional.
  4. Conclusively, the Apex Court applied the principle of contra proferentum which states that the exclusion clause has to be construed against the insurer.
  5. The Apex Court accordingly allowed the compensation of approximately INR 37.6 lakhs to the appellants.

The Apex Court has now clarified the position on ambiguous policy, where the Courts will apply the contra proferentem rule. The Rule determines that the ambiguity in the wording of the policy is to be resolved against the party who has prepared the contract, in most cases insurance companies being such parties.

The Apex Court has also clarified that medical professionals are not be understood as regular employees of an establishment. They are to be considered as professional whose terms to service differ from general employees. The above decision is now expected to strengthen insurance consumers and bring clarity to some of the blurred insurance contracts which do not cover exemption clauses in entirety.

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[1] Civil Appeal No. 2235 of 2020

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