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IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 11885 OF 2018

(@ SPECIAL LEAVE PETITION (C) NO. 32577 OF 2016)

NEW INDIA ASSURANCE COMPANY LIMITED ..APPELLANT

VERSUS

RAJESHWAR SHARMA AND ORS ..RESPONDENTS

WITH

CIVIL APPEAL NO. 11886 OF 2018

(@ SPECIAL LEAVE PETITION (C) NO. 32381/2018 @ CC NO. 5127

OF 2017)

RAJESHWAR SHARMA AND ANR ..APPELLANTS

VERSUS

NEW INDIA ASSURANCE CO LTD AND ANR ..RESPONDENTS

REPORTABLE

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J U D G M E N T

Dr Dhananjaya Y Chandrachud, J

1 Delay condoned in Civil Appeal @ SLP(C)@CC 5127 of 2017.

2 These appeals arise from a judgment of a Division Bench of the High

Court of Jammu and Kashmir dated 28 July 2016. The High Court has

affirmed the decision of the Jammu and Kashmir Consumer Disputes

Redressal Commission

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by which an insurance claim was allowed in the

amount of Rs. 17.28 lacs. New India Assurance Company Limited, the insurer,

failed in its challenge to the decision of the State Commission before the High

Court. Cross-objections filed before the High Court by the insured for the grant

of interest were also rejected. Hence, there are two appeals: one by the

insurer and the second by the insured, against the judgment of the High Court.

3 The claim of the insured before the State Commission was that it owns

a building known as Patel House which is situated at Akhnoor road, Jammu.

The insured claimed that the building was constructed in 1984 with due

permission of the municipality. In 1993, additional construction was raised, it is

alleged, with the permission of the municipality. According to the insured, on a

notice issued under Section 229 of the Jammu and Kashmir Municipal

1 “The State Commission”

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Corporation Act 2000, he had approached the Jammu and Kashmir Special

Tribunal which compounded the infraction in 1996. The Municipal Corporation

initiated a demolition drive. Apprehending action against his property, the

insured instituted a suit in the Court of the First Civil Subordinate Judge,

Municipal Magistrate, Jammu where an ad-interim injunction was granted,

restraining the Corporation from proceeding, except in accordance with law.

The Municipal Corporation demolished the front portion of the building. The

insured was carrying on a business of sanitary ware in the premises. As a

result of the demolition, the insured claimed that it suffered damage in the

amount of Rs.19.55 lacs.

4 The claim before the State Commission was founded on a policy of

insurance which was obtained by the insured. The insurance policy contained

the following exclusion:

“V. Riot, Strike, Malicious and Terrorism Damage Loss of or

visible physical damage or destruction by external violent

means directly caused to the property insured but

excluding those caused by:-

a)xxxx

b)Permanent or temporary dispossession resulting from

confiscation, commandeering, requisition or destruction by

order of the Government or any lawfully constituted

Authority.”

Relying on the aforesaid exclusion, the insurer repudiated the claim on the

ground that the action of demolition was carried out by the municipal

authorities and was hence by order of a lawfully constituted authority.

5.The State Commission allowed the claim under the insurance policy in

the amount of Rs.17.28 lacs. Litigation costs of Rs.10,000/- were awarded.

The State Commission opined that the order of demolition passed by the

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Municipal Corporation had not been brought on the record and, in its absence,

the exclusion would not operate. In appeal, the High Court affirmed the view of

the State Commission, holding that it was incumbent on the insurer to

establish that the exclusion contained in the policy of insurance was attracted

by placing on record the orders of a lawfully constituted authority by which

demolition was ordered. While affirming the view of the State Commission, the

High Court held that in the absence of such an order being produced on the

record, the insurer was liable to indemnify the loss sustained by the insured.

6.The principal basis on which the complaint was allowed by the State

Commission has been called into question in these proceedings. The insurer

has submitted that it was not in dispute that the demolition was caused by the

Municipal Corporation. To substantiate this submission, the insurer relies

upon the averments contained in the consumer complaint which are extracted

below:

“5) That after the constitution of the Municipal Corporation,

Municipal Corporation had started demolition drive to

remove the encroachment and illegal constructions.

6) …..

7) That the Municipal Corporation in spite of the

injunction issued by the Court, demolished the front

portion of the building which was duly compounded by the

Appellate Court, on 18.04.2003, in violation of the Court

order and also in violation of the order already passed

compounding the constructions.

8) …..

9) …..

10) That the Municipal Commissioner, Jammu without any

authority and taking law into his own hands in violation of

the Court order dated 10.04.2003 demolished the front

portion of the building and totally damaged the Cabin

fitting, display items electric systems etc without any

notice to the complainants thereby causing a loss of Rs.

19,55,946/- which estimate was prepared after due

inspection by Sh. K R Sharma, Retired Executive

Engineer and valuator. The building and the material

including Furniture and Fixture etc. were insured by the

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respondent for an amount of Rs. 1,23,50,000/- for which

insurance covers were issued by the respondent vide

policy no. 350700/11/02/00119 for the period 03.05.2002

to midnight 02.05.2003. Copy of the estimate is enclosed.

11) That the Commissioner, Municipality and Executive

Officer to show their loyalty towards the Government in

violation of Court order and fully well knowing that the

complainants are owners of the land demolished the front

portion of the building causing total loss of Rs. 19,55,846/-

on 18.04.2003. Besides this, due to the damage to the

building, the basement has been rendered useless and

has to be dismantled which is going to cause a further loss

of Rs. 6,15,422/- to the complainants and the

complainants reserve their right to claim the said amount

as and when the basement is dismantled.”

7 In his counter affidavit filed in these proceedings, the Commissioner of

the Jammu Municipal Corporation has stated that in order to remove

encroachments/projections over public premises including over footpaths,

streets and drains, the Municipal Corporation issued a public notice on 25

January 2003 in the daily editions of ‘Kashmir Times’ and ‘Daily Excelsior’. The

notice made an appeal for the removal of projections, platforms and

encroachments which were not in conformity with the building line provided by

the Jammu Master Plan and Prevention of Ribbon Development Act 1953.

After the period stipulated in the public notice ended on 31 January 2013

demarcations were carried out in areas where there were encroachments and

the encroachers including the private respondents were directed to remove the

encroachment. In the meantime, a suit was filed by the insured, Rajeshwar

Sharma, before the First Civil Subordinate Judge, Jammu in which the

following ad interim order was passed on 11 March 2003:

“…Issue notice to the defendants to file objections to this

application on or before next date of hearing and in the

meanwhile subject to objections and till next date of

hearing the parties shall maintain status quo on spot.

However, in case any violation has been committed by the

Plaintiff in the said building the defendants shall take

action in accordance with the provisions of law…”

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8 The above order permitted the municipal authorities to take action in

accordance with the provisions of law. The Municipal Corporation claims that

it removed the new construction raised in the present case on 18 April 2003

which was found to encroach on public land and was causing an

inconvenience to the free flow of traffic on Akhnoor road. According to the

Municipal Corporation, it had not razed any part of the construction which was

carried out in 1985 and 1993 but only “the new illegal construction”. The

Municipal Corporation has also submitted that the building which has been

constructed still exists in violation of the Master Plan 1974-1994 and the

Master Plan 2021.

9 We must make it clear at the outset, that we are not in these

proceedings entering upon the validity of the action which was adopted by the

municipal authorities. A suit is pending before the civil court questioning the

legality of the action whereas the counter affidavit indicates, relief for the

restoration of the work which was removed has been sought. The issue in the

present case is confined to whether the exclusion under the policy of

insurance was attracted.

10Both the State Commission as well as the High Court were of the view

that the exclusion was not attracted having due regard to the judgment of this

Court in National Insurance Company v Irshad

2

. This Court has held that

2 (2007) 4 SCC 105

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where there is an exclusionary clause in an insurance policy, the burden lies

on the insurer to establish that the exclusion is attracted. Any ambiguity must

be construed in favour of the insured. Purporting to apply this principle, the

State Commission and the High Court held that the insurer had failed to

establish that there was an order of the Municipal Corporation for carrying out

demolition and hence the exclusion was not attracted.

11On this aspect, we find merit in the submission of the insurer that there

was no dispute about the fact that the demolition was carried out under the

authority of the Municipal Corporation. As the averments in the consumer

complaint indicate, the insured proceeded on the basis that the Municipal

Corporation had carried out the work of demolition. There could be no dispute

about the factual position since, as a matter of fact, the insured has instituted a

suit for diverse reliefs including a challenge to the action of the Municipal

Corporation. Hence the basis on which the claim was allowed is

fundamentally flawed.

12The essential aspect which needs to be considered is whether the

exclusion was attracted. Mr Jayant Bhushan, learned senior counsel

appearing on behalf of the insured submits that Clause V postulates that there

must be a “destruction by order of the government or any lawfully constituted

authority”. Learned counsel submits that the exclusion postulates that there

must be an action in accordance with law. Action according to law, in the

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submission of counsel, requires that the action of the municipal authority or

governmental authority (in the present case) should conform to the Jammu

and Kashmir Municipal Corporation Act 2000. In this submission, an act of

illegal demolition by the Municipal Corporation will not fall within the purview of

the exclusion. Hence, it has been urged, that the judgment of the State

Commission, as affirmed by the High Court, is correct.

13On the other hand, Ms.Awantika Manohar, learned counsel appearing

on behalf of the insurer has submitted that the demolition was carried out by

the Municipal Corporation. This action clearly falls within the ambit of the

expression “destruction by order of any lawfully constituted authority”. Learned

counsel submitted that the validity of the action of the municipal authority is the

subject matter of a pending suit. In determining as to whether the exclusion is

attracted, what the Court must assess is whether the demolition was carried

out by order of any lawfully constituted authority. The grounds of challenge in

the suit are distinct from the claim under the insurance policy. Hence, once it is

found that the demolition was by the order of the Municipal Corporation which

is a lawfully constituted authority under the Jammu and Kashmir Municipal

Corporation Act 2000, the exclusion is attracted.

14We find considerable merit in the submission which has been urged on

behalf of the insurer. Clause V of the insurance policy contains an exclusion,

where the destruction of the property has been caused “by order of the

government or any lawfully constituted authority”. The expression “by order

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of” means under the authority of government or of a lawfully constituted

authority. There can be no dispute about the position that the Municipal

Corporation is indeed a lawfully constituted authority, being a statutory

authority under the Jammu and Kashmir Municipal Corporation Act 2000.

From the records as well as from the pleadings before the State Commission,

there is no dispute about the fundamental position that the demolition was

carried out by the Municipal Corporation. The destruction was hence by order

of a lawfully constituted authority. Once this be the position, there can be no

manner of doubt that the exclusion under the policy of insurance was

attracted.

15The position of the common law with respect to the interpretation of

exclusionary clauses in insurance policies is no different. In Cornish v

Accident Insurance Co Ltd

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, the Court of Appeal emphasized the duty of the

insurer to except their liability in clear and unambiguous terms. The Court of

Appeal held 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. But this principle ought only to be

applied for the purpose of removing a doubt, not for the

purpose of creating a doubt, or magnifying an ambiguity, when

the circumstances of the case raise no real difficulty.”

According to The Law Relating to Accidental Insurance

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, insurers are

exempt from any liability where the loss is attributable to an excepted cause

3 Queen’s Division Bench as per Lord Lindley L.J. (1889) 23 Q.B.D. 453, 456

4 AW Baker Welford : The Law Relating to Accidental Insurance (Butterworth & Co., 1923) at page 126

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which is inserted ex abundanti cautela to make it quite clear to the assured that

the policy is not intended to cover such losses. The position is elucidated

below:

“The object of the exceptions is to define with greater

precision the scope of the policy by making clear what is

intended to be excluded and contrasting it with what is

intended to be included.

Since exceptions are inserted in the policy mainly for the

purpose of exempting the insurers from liability for a loss

which, but for the exception, would be covered by the policy,

they are construed against the insurers with the utmost

strictness and it is the duty of the insurers to except their

liability in clear and unambiguous terms. The onus of proving

that the loss falls within an exception lies upon the insurers,

unless by proving the language of the exception the assured

is expressly required to prove that, in the circumstances, the

exception does not apply.”

In 2016, the UK Supreme Court dealt with the interpretation of an exclusion

clause in a solicitors’ professional indemnity insurance policy in Impact

Funding Solutions Ltd v Barrington Support Services Ltd

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.

Dealing with the construction of insurance exclusions, Lord Toulson JSC

observed thus:

“35. The fact that a provision in a contract is expressed as an

exception does not necessarily mean that it should be

approached with a pre-disposition to construe it narrowly. Like

any other provision in a contract, words of exception or

exemption must be read in the context of the contract as a

whole and with due regard for its purpose. As a matter of

general principle, it is well established that if one party,

otherwise liable, wishes to exclude or limit his liability to the

other party, he must do so in clear words; and that the

contract should be given the meaning it would convey to a

reasonable person having all the background knowledge

5 Supreme Court as per Lord Toulson JSC (with whom Lord Mance, Lord Sumption and Lord Hodge JJSC

agreed) [2016] UKSC 57

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which is reasonably available to the person or class of

persons to whom the document is addressed… This applies

not only where the words of exception remove a remedy for

breach, but where they seek to prevent a liability from arising

by removing, through a subsidiary provision, part of the

benefit which it appears to have been the purpose of the

contract to provide. The vice of a clause of that kind is that it

can have a propensity to mislead, unless its language is

sufficiently plain. All that said, words of exception may be

simply a way of delineating the scope of the primary

obligation.”

The principles for construing insurance exclusions as laid down in Impact

Funding Solutions Ltd v Barrington Support Services Ltd

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were relied

upon by the England and Wales High Court (Commercial Court) in the case of

Crowden and Crowden v QBE Insurance (Europe) Ltd

7

.

While dealing with the question of construction of insurance exclusions, Judge

Peter MacDonald Eggers QC observed:

“65. … the Court must adopt an 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,

because insurance exclusions are designed to define the

scope of cover which the insurance policy is intended to

afford. To this end, the Court should not automatically apply

a contra proferentem approach to construction. That said,

there may be occasions, where there is a genuine ambiguity

in the meaning of the provision, and the effect of one of those

constructions is to exclude all or most of the insurance cover

which was intended to be provided. In that event, the Court

would be entitled to opt for the narrower construction…”

6 Supreme Court as per Lord Toulson JSC (with whom Lord Mance, Lord Sumption and Lord Hodge JJSC

agreed) [2016] UKSC 57

7 England and Wales High Court (Commercial Court) as per Peter MacDonald Eggers QC :[2017] EWHC 2597

(Comm)

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In the present case, there is no ambiguity in Clause V of the insurance policy.

The exclusion was clear in exempting the insurer from liability for a loss arising

from the destruction of property caused “by order of the government or any

lawful authority.”

16For the above reasons, we are of the view that both the State

Commission and the High Court were in error in allowing the claim under the

policy of insurance. We would, accordingly, have to allow the appeal filed by

the insurer, which we do by setting aside the impugned judgment of the High

Court which has affirmed the decision of the State Consumer Disputes

Redressal Commission. In consequence, the complaint filed by the insured

before the State Commission (CC 2628/2004) shall stand dismissed.

17Before concluding, we clarify that since these proceedings are confined

to the claim of the insured under the insurance policy, nothing contained in this

judgment shall affect the merits of the suit which has been instituted by the

insured against the Municipal Corporation. The appeal filed by the insurer is

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allowed. The appeal filed by the insured shall stand dismissed. There shall be

no order as to costs.

.....................................................J

[Dr Dhananjaya Y Chandrachud]

.....................................................J

[MR Shah]

New Delhi;

December 07, 2018

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