Supreme Court on Contract of Insurance and its Interpretation

 

INTRODUCTION

 

Today, I will talk about the case of Life Insurance Corporation of India & Another v. Sunita, 2021 SCC OnLine SC 1013, wherein the Hon’ble Supreme Court discussed the importance of good faith in a Contract of Insurance.

 

IMPORTANT DEFINITIONS

 

Before adverting any further, let us understand the plain meaning of ‘insurance’. It is defined as “a contract by which one party undertakes to indemnify another party/insured against risk of loss, damage, or liability arising from the occurrence of some specified contingency, and usually to defend the insured or to pay for a defence regardless of whether the insured is ultimately found liable.”

 

In the same manner, ‘life insurance’ is generally understood as “an agreement between an insurance company and the policyholder to pay a specified amount to a designated beneficiary on the insured’s death.”

 

Thus, I hope that the meaning of a contract of insurance is clear by now. Now, let us understand the meaning of ‘good faith’ or bona fide or uberimma fides. ‘Good faith’ has been defined as “a state of mind consisting in: -

 

1. Honesty in belief or purpose;

2. Faithfulness to one’s duty or obligation;

3. Observance of reasonable commercial standards of fair dealing in a given trade or business; or

4. Absence of intent to defraud or to seek unconscionable advantage.”

 

Hence, in this context, let us understand the importance of ‘good faith’ in a contract of insurance, with the help of the observations by the Court.

 

OBSERVATIONS BY THE COURT

 

Firstly, the Court cited the case of Vikram Greentech Ltd. v. New India Assurance Co. Ltd., (2009) 5 SCC 599, wherein it was observed that “an insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms and by itself. In a contract of insurance, there is requirement of uberrima fides i.e., good faith on the part of the insured. Except that, in other respects, there is no difference between a contract of insurance and any other contract.”

 

Secondly, the Court laid down the four essentials of a contract of insurance as follows: -

 

a. The definition of the risk.

b. The duration of the risk.

c. The premium.

d. The amount of insurance.

 

According to the Court, “since upon issuance of the insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of the risks covered by the insurance policy, its terms have to be strictly construed to determine the extent of liability of the insurer.”

 

And lastly, the Court explained that “the endeavour of the court must always be to interpret the words in which the contract is expressed by the parties. The court while construing the terms of policy is not expected to venture into extra liberalism that may result in rewriting the contract of substituting the terms which were not intended by the parties. The insured cannot claim anything more than what is covered by the insurance policy.”

 

HELD BY THE COURT

 

Therefore, in light of the above-stated enunciation of law, the Court held that “it is clear that the terms of insurance policy have to be strictly construed, and it is not permissible to rewrite the contract while interpreting the terms of the Policy.”

 

Those were the observations by the Court. So, what are my concluding remarks?

 

CONCLUDING REMARKS

 

We see that a Contract of Insurance is not much different from a General Contract, the only difference is that the interpretation of an insurance contract has to be made strictly and liberal interpretation that adds or subtracts something in the contract that was not originally intended is impermissible.

Book Referred To: Black's Law Dictionary, Eighth Edition.