“Defect Discovered After Policy Issuance Cannot Defeat Coverage”: Supreme Court Allows Insurance Claim In Boiler Explosion Case; Quashes NCDRC Order
Kiran Raj
The Supreme Court Division Bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra allowed the insurance claim of a company whose boiler had exploded, rejecting the insurer’s argument that it was not liable to indemnify the loss since the defect was discovered only after issuance of the policy. The Court overturned the National Consumer Disputes Redressal Commission’s decision that had denied compensation and ruled that the insurer could not rely on the exclusion clause to repudiate the claim. It noted that the explosion occurred during the subsistence of the boiler’s valid fitness certificate and that no evidence of suppression or misrepresentation by the insured had been established. The matter was remitted to the NCDRC for determination of compensation.
The appellant, a cooperative sugar factory, obtained an insurance policy from the first respondent, an insurance company, covering its Boiler No. GT-23 for a sum of Rs. 1.60 crores for the period between February 1, 2005 and January 31, 2006. On May 12, 2005, an explosion occurred in the boiler during the subsistence of a valid fitness certificate issued by the Boiler Inspector on November 17, 2004. The incident was reported to the insurer, which appointed a surveyor to assess the loss. The surveyor concluded that the damage resulted from corrosion and wear of boiler tubes, and the insurer repudiated the claim by invoking exclusion clause 5 of the Boiler and Pressure Plant (BPP) policy, stating that the loss was due to gradual deterioration and not covered under the policy.
The appellant filed a consumer complaint before the Maharashtra State Consumer Disputes Redressal Commission alleging deficiency in service. The State Commission found that the repudiation was unjustified, noting that the explosion occurred during the validity of the boiler’s certificate and within the policy period, and partly allowed the claim with compensation. On appeal, the National Consumer Disputes Redressal Commission (NCDRC) reversed the decision, holding that the accident was excluded under clause 5 since the tubes had slipped off due to corrosion, not explosion.
Before the Supreme Court, the appellant contended that the insurer had issued the policy after verifying the boiler’s condition and could not deny liability on grounds of wear and tear discovered later. It argued that the explosion itself was undisputed and that clause 5 did not apply when the defect followed an explosion. The insurer maintained that the survey reports proved the accident resulted from corrosion and deterioration, which were excluded risks. The Court considered the provisions of the Indian Boilers Act, 1923 and the Consumer Protection Act, 1986.
The Court observed that “there is no serious challenge to the factum of an explosion in the boiler resulting in damage including tubes slipping off.” It noted that the insurer, in its written statement, did not deny that an explosion had occurred but relied on corrosion as the cause of failure.
The Bench stated that “a contract of insurance is a contract based on utmost good faith, and if utmost good faith is not observed by either party the contract may be avoided by the other party.” It further recorded that “the onus of proving that the insured has failed to perform the duty of disclosure or has broken a condition relating to disclosure lies on the insurer.”
The Court observed that “a proposer is under a duty to disclose to the insurer all material facts as they are within its knowledge,” but “the proposer is not under a duty to disclose facts which he did not know and which he could not reasonably be expected to know at the material time.”
It was stated that “an exclusion clause in the policy is to be construed in a manner that it does not defeat the main purpose of the contract and could even be read down to serve the main purpose of the policy that is to indemnify the policyholder.”
The Court observed that “it is expected that an insurer would accept a proposal of insurance on being satisfied with the condition of the subject matter of insurance. Otherwise, the purpose of an insurance, which is to tide over financial implications of an unforeseen event such as an accident, would stand frustrated.”
The Bench further observed that “mere discovery of corrosion on underlying parts while making a survey is not conclusive to hold that there was infraction of duty to make a fair disclosure for the simple reason that those underlying parts got noticed only because tubes slipped off on account of the explosion. Whether those defects were noticeable even before the explosion, is a question which cannot be determined in absence of proper pleading and evidence. Here, as we have observed, there was no denial of an explosion. Appellant's specific case was that an explosion took place resulting in tubes slipping off from boiler's main body. This plea of appellant was not traversed. Even survey report was placed on record at the appellate stage and not before. There is no plea that insured played fraud upon the insurer either by not allowing an inspection or by submitting a false data. All of this shows that the first respondent was interested in somehow defeating the claim of the appellant not on facts but on pleas taken as an after-thought.”
The Court also recorded that “an insurer can repudiate the claim on limited grounds such as, (a) by pleading and proving that there was a failure on part of the insured in making disclosure of a material fact which renders the contract voidable at the instance of the insurer; and (b) by demonstrating that the terms and conditions of the contract of insurance exclude such claims.”
Finally, the Bench observed that “the subsequent discovery of damage or corrosion cannot be used to repudiate the claim as it would defeat the main purpose of the insurance contract.”
The Supreme Court stated: “For all the reasons above, these appeals are allowed.” It declared that “the impugned judgment and order of NCDRC is set aside.” The Bench directed that “since NCDRC did not address the claim of either side on the quantum of compensation payable, we deem it appropriate to restore the appeals on the file of NCDRC for a consideration only on the quantum of compensation payable to the appellant.” It further ordered that “rest of the issues stand closed.”
“The appeals are allowed in the aforesaid terms. First Appeal No.580/2012 and First Appeal No.166/2013 are restored on the file of NCDRC, New Delhi for considering the quantum of compensation payable to the appellant. All other issues stand closed. Pending application(s), if any, shall also stand disposed of.”
Advocates Representing the Parties:
For the Petitioners: Mr. Shekhar G. Devasa, Sr. Adv. Ms. Rajshri A. Dubey, Adv. Mr. Abhishek Chauhan, Adv. Mr. Amit P. Shahi, Adv. Mr. H.B. Dubey, Adv. Mr. Amit Kumar, Adv. Mr. Shashi Bhushan Nagar, Adv. Ms. Jashmita, Adv. Mr. Prashant, Adv. Mr. Gaurav sharma, Adv. Mr. Yogesh Malhotra, Adv. Mr. Ashutosh Dubey, AOR
For the Respondents: Mr. Gaurav Sharma, AOR Mr. Sushant Kishore, Adv. Mr. Adarsh Dubey, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR
Case Title: Kopargaon Sahakari Sakhar Karkhana Ltd. (now known as Karmaveer Shankarrao Kale Sahkari Sakhar Karkhana Ltd.) v. National Insurance Co. Ltd. & Anr.
Neutral Citation: 2025 INSC 1315
Case Number: Civil Appeals arising out of SLP (C) Nos.1377–1378 of 2022
Bench: Justice Pamidighantam Sri Narasimha, Justice Manoj Misra
