Supreme Court Rules Insurance Claim Invalid for Property Demolished by Municipal Authorities

The case of New India Assurance Company Limited vs. Rajeshwar Sharma & Ors. revolved around an insurance claim dispute where the insured property was demolished by municipal authorities. The Supreme Court, in its judgment dated December 7, 2018, ruled that the insurance claim was invalid as the damage was caused by a lawfully constituted authority, which was explicitly excluded under the insurance policy.

The Court reversed the decisions of the Jammu and Kashmir Consumer Disputes Redressal Commission and the Jammu and Kashmir High Court, clarifying that insurers are not liable for losses arising from actions taken by government authorities.

Background of the Case

The dispute involved a commercial property known as Patel House on Akhnoor Road, Jammu, which was owned by the respondent, Rajeshwar Sharma. The property was insured under a policy issued by New India Assurance Company Limited. On April 18, 2003, the Jammu Municipal Corporation demolished the front portion of the building as part of an anti-encroachment drive.

The insured filed a claim under the insurance policy, stating that the demolition caused damage amounting to Rs. 19.55 lakhs. The insurance company repudiated the claim, citing an exclusion clause in the policy, which barred claims arising from government-ordered destruction.

The insured then approached the State Consumer Disputes Redressal Commission, which ruled in his favor and awarded Rs. 17.28 lakhs. The insurer challenged the order before the Jammu and Kashmir High Court, which upheld the decision. The matter then reached the Supreme Court.

Legal Issues Considered

The Supreme Court examined the following key legal issues:

• Whether the exclusion clause in the insurance policy applied to the case.
• Whether the insurer was liable to indemnify the insured despite the exclusion.
• Whether the demolition by municipal authorities constituted an action by a “lawfully constituted authority.”

Arguments by the Appellant (Insurance Company)

The insurance company, represented by Senior Counsel, argued:

• The policy explicitly excluded claims arising from destruction by order of a lawfully constituted authority.
• The insured himself admitted that the demolition was carried out by the Jammu Municipal Corporation.
• The exclusion clause was unambiguous, and the claim was rightfully denied.
• The insured had an alternative remedy in the form of a civil suit against the municipal authorities.

Arguments by the Respondent (Insured)

The insured, represented by Advocate Jayant Bhushan, countered:

• The municipal demolition was illegal and conducted in violation of a court order.
• The insurer failed to prove that a formal demolition order was issued.
• The exclusion should not apply because the insurer did not establish that the demolition was legally justified.
• The damage to the insured property should be covered as it was unforeseen and not due to the insured’s actions.

Supreme Court’s Judgment

The Supreme Court, comprising Justices Dhananjaya Y. Chandrachud and M.R. Shah, ruled in favor of the insurance company. The key observations included:

• “The exclusion clause explicitly bars claims arising from destruction by order of the government or any lawfully constituted authority.”
• “There is no dispute that the demolition was carried out by the Jammu Municipal Corporation, which is a statutory authority.”
• “The insured himself admitted in pleadings that the municipal corporation demolished the property.”
• “Once the exclusion applies, the insurer has no liability to indemnify the loss, irrespective of the legality of the municipal action.”

Key Takeaways from the Judgment

• Exclusion Clauses in Insurance Policies Are Enforceable: Courts will uphold exclusions when they are clear and unambiguous.
• Municipal Demolitions Are Not Insurable Events: Insurance policies do not cover damage resulting from actions taken by government authorities.
• Burden of Proof on Insured: If an insured party claims a loss is covered despite an exclusion, they must provide strong evidence.
• Alternative Remedies Available: The insured had a legal remedy against the municipal authorities but chose to claim from the insurer instead.

Final Directions

The Supreme Court ruled:

• The orders of the State Consumer Disputes Redressal Commission and the High Court were set aside.
• The insured’s claim was dismissed.
• The insurance company was not liable to pay any compensation.
• The insured’s pending civil suit against the municipal authorities would proceed independently.

Conclusion

This judgment reinforces the principle that insurance companies are not liable for losses arising from government-ordered actions when explicitly excluded in policies. The decision highlights the importance of clearly defined exclusions in insurance contracts and the necessity for insured parties to seek the appropriate legal remedy when facing municipal actions.

The ruling serves as a precedent for similar cases involving insurance claims arising from property demolitions by municipal authorities.

Petitioner Name: New India Assurance Company Limited.
Respondent Name: Rajeshwar Sharma & Ors..
Judgment By: Justice Dhananjaya Y. Chandrachud, Justice M.R. Shah.
Place Of Incident: Jammu, Jammu and Kashmir.
Judgment Date: 07-12-2018.

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