SUPREME COURT UPHOLDS INSURANCE COMPANY’S REPUDIATION OF MARINE POLICY DUE TO NON-DISCLOSURE OF MATERIAL FACT
In a recent case of Hind Offshore Pvt. Ltd. vs IFFCO – Tokio General Insurance Co. Ltd. Civil Appeal No. 7228 of 2015, a two Judge Bench of the Supreme Court comprising of Justice A.S. Bopanna and Justice M.M. Sundresh passed a Judgment dated 09-08-2023 and observed that in case of failure to disclose essential material facts regarding worthiness of ship, the insurance company is discharged from liability.
i) In the present case, the Appellant-Hind Offshore Pvt. Ltd. entered into a Bareboat Charter Party Agreement dated 02-10-2006 with Astron Equities S.A, the registered owner of a sea vessel called M.V. Sea Panther (Vessel) to hire the said Vessel. Generally, a bareboat charter party agreement is an arrangement for the chartering / hiring of a vessel / ship / boat whereby, the owner does not provide any crew or provisions to the person hiring the vessel.
ii) The Appellant-Hirer purchased a Marine Hull Insurance Policy (Policy) for the said Vessel from the Respondent- IFFCO – Tokio General Insurance Co. Ltd (Insurer) which covered various risks including ‘perils of the seas’ for Rs. 8,26,92,000/- for a period starting from 09-11-2005 to 08-11-2006. The said Policy was subject to the Vessel possessing a Class Warranty, whereby, the Appellant-Insured made promise to the Insurer regarding the proper condition or operation of the Vessel.
iii) During the subsistence of the Policy, the Vessel suffered major damage to its port main engine, while on a voyage from Singapore to Mumbai on 22-02-2006. As per the Surveyor’s preliminary inspection of 22-04-2006, it was opined that the crankshafts and connecting rods were beyond repair. However, due to urgent commercial commitments, the main port engine was temporarily repaired.
iv) Thereafter, the Appellant-Insured submitted an Invoice with the Respondent-Insurer of Rs. 1,32,66,803/- towards the cost to be incurred for the complete repairs of the Vessel. The Insurer, based on the Surveyor’s recommendation, issued a Cheque dated 09-06-2006 of Rs. 1,00,00,000.00 towards advance for replacing the engine crank shaft and other components in the Vessel.
v) Thereafter, the Appellant-Insured entered into a fresh Marine Hull Insurance Policy for Rs. 8,26,92,000/- (Insured Amount) for the period starting from 09-11-2006 to 08-11-2007. The American Bureau of Shipping (ABS) conducted a survey of the Vessel on 29-09-2006 and 14-10-2006 and issued a Class Warranty / Certificate dated 19-10-2006 (Warranty), thereby extending the said Warranty till 30-06-2009. The said Certificate constituted a representation by ABS regarding structural and mechanical fitness of the Vessel.
vi) However, on 03-12-2006, the Vessel was struck by a tug boat in Mumbai, as a result of which the Vessel sank with all the cargo on board. Hence, the Appellant-Insured submitted a Claim with the Insurer for the entire Insured Amount owing to the total loss of cargo and Vessel.
vii) Upon receipt of the Claim, the Insurer got a survey conducted to assess the loss. As per the Surveyor’s Report, (a) the Appellant or the owner of the Vessel did not inform ABS about the previous damage to the Vessel’s main port engine and hence, ABS had issued the Class Warranty / Certificate dated 19-10-2006 based only on their inspection. (b) Further, as per ABS, if they are not informed or reported about the damage sustained by the Vessel to its Hull or Machinery, then the Class Certificate would deem to be automatically suspended. (c) It was concluded in the Surveyor’s Final Report dated 19-02-2007 that the Vessel cannot be recovered and that the permanent repairs to the Vessel, at the said stage, won’t be effective, as the same ought to have been done after the first accident itself, which was not done by the Appellant-Insured. (d) Thus, the Surveyor recommended that the Insurer recovers the advance Rs. 1 Crore, earlier paid to the Appellant-Insured, vide Cheque dated 09-06-2006.
viii) But as the Appellant-Insured’s Claim was not settled by the Respondent-Insurer, hence, the Appellant filed a Consumer Complaint No.166 of 2008 before the Hon’ble National Consumer Disputes Redressal Commission (NCDRC) against the Respondent thereby claiming a total sum of Rs.16,62,51,467/- comprising of (a) Rs.8,26,92,000/- towards loss of Insured Vehicle, (b) Rs.5,41,98,144/- for loss of earnings, (c) Interest on the Insured Vehicle @ 18% and (d) the cost of proceedings i.e. Rs.2,93,61,324/-.
ix) The NCDRC passed an Order dated 15-05-2015 and dismissed the said Complaint.
Supreme Court Observations
Aggrieved by the NCDRC Order dated 15-05-2015, the Appellant-Insured filed Civil Appeal No. 7228 of 2015 before the Hon’ble Supreme Court of India. The Apex Court vide Order dated 09-08-2023 and made the following observations:
1) That as per Section 35 of the Marine Insurance Act, 1963 (Act) (Nature of warranty), a warranty is a condition which has to be exactly complied with, whether it is material to the risk or not. Hence, if an insured breaches a warranty, the insurer is discharged from its liability w.e.f. from the date of breach of warranty. Moreover, if the ship is sent into the sea in an unseaworthy condition, with the privity of the insured, in such circumstance as well, the insurer gets discharged from its liability in respect of any loss attributable to such unseaworthiness.
2) Further, as per the ABS Rules for Building and Classing Marine Vessels, the classification of a vessel / class certificate issued by ABS in respect of a vessel, will get suspended or cancelled in case, the defects or damage pertaining to the ship or vessel are not reported to ABS before issue of such class warranty / certificate.
3) That as per the requirements of the Warranty, the Insured ought to have informed the Surveyor- ABS about any shortcoming or defects or damage caused to the Vessel prior to issue of such Class Warranty / Certificate, as the insurance coverage was to be provided by the Respondent-Insurer based on such Class Warranty / Certificate, which is supposed to be issued by the Surveyor only after taking into consideration all aspects including the defects, if any, brought to the notice of the Surveyor.
4) That after the first accident, although the Insured had informed the Respondent-Insurer about the damage caused to the port main engine of the Vessel, based on which the Insurer had issued a Cheque of Rs. 1,00,00,000.00 towards advance for preliminary repairs, but the Insured had the responsibility to subsequently get the complete repair / replacement of the damaged parts done. “The entire onus cannot be on the insurer to check as to whether subsequently the engine had been replaced by utilising the amount received.”
5) Further, if the Appellant-Insured failed to subsequently get the complete repair of the Vessel done, the same ought to have been brought to the knowledge of ABS-Surveyor, which the Appellant failed to do. Hence, there is a breach of Warranty by the Appellant-Insured in terms of Section 35 of the Marine Insurance Act and ABS Rules for Building and Classing Marine Vessels. Consequently, the Class Warranty / Certificate issued by ABS in respect of the Vessel, is deemed to have been automatically invalidated.
Thus, based on the aforesaid observations, the Supreme Court held that as the Appellant-Insured had breached the terms of the Class Warranty / Certificate, hence, the Insured’s Claim cannot be allowed. As a result, the Apex Court dismissed the Insured’s Appeal and upheld the NCDRC Order dated 15-05-2015 that had dismissed the Insured’s Complaint.
In insurance matters, ‘uberrimae fides’ which means action taken in utmost good faith. In the event that the insured fails to make material disclosures regarding the quality, warranty, capacity, capability, defect etc of the product, in this case, the ship, the insurer will be well within its rights to repudiate a claim for failure to make correct disclosures that the insured is bound to do under the law. In this case as well, the Insured failed to act in good faith, which resulted in rejection of its claim by the Insurance Company and the same was subsequently upheld by the Supreme Court.
The Indian Lawyer
Sushila Ram Varma
The Indian Lawyer
 Section 35 of the Marine Insurance Act, 1963: Nature of warranty-
(1) A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.
(2) A warranty may be express or implied.
(3) A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.