“It is entrenched in our jurisprudence that an ambiguous term in an insurance contract is to be construed harmoniously by reading the contract in its entirety. If after that, no clarity emerges, then the term must be interpreted in favour of the insured, i.e., against the drafter of the policy.”
A three Judges’ Bench of the Supreme Court of India, whilst deciding an appeal from the order of National Consumer Disputes Redressal Commission (“NCDRC”), held that the rules of harmonious construction and contra proferentem have to applied in case of ambiguity in an insurance policy.
An Insurance contract or a policy is a commercial contract where an insurer, charges a premium to cover a risk for the insured and indemnifies the insured in case of a loss or an injury.
When the time comes for honouring claims notified under a policy, it is often seen that coverage is denied by an insurer by interpreting ambiguous terms of the policy in their favour. As in the case of any commercial contract, there are often instances where there is apparent ambiguity in terms, we have seen instances where insurers interpretation, render such ambiguous term otiose or results in denial of coverage.
In the recent case before the Supreme Court, Haris Marine Products (“Haris Marine”), an exporter of fish meat and fish oil, had taken a credit risk insurance policy from Export Credit Guarantee Corporation (“ECGC”), to cover any failure of payment by a foreign buyer against the consignment exported by Haris Marine. On account of default by a foreign buyer after delivery of consignment i.e., on January 21, 2013, Haris Marine made a claim under the policy. ECGC denied coverage to Haris Marine on the ground that the consignment despatched on December 13, 2012 as per the date of the “Onboard Bill of Lading” i.e., one day prior to the effective date of the policy being December 14, 2012.
The controversy before the Supreme Court was, whether the date of issuance of “Onboard Bill of Lading” i.e., December 13, 2012 would be construed as a date of “Despatch” (as defined under the policy) or; the date of issuance of Mate’s Receipt i.e. December 15, 2012, issued by the Master of the vessel, after completion of the loading of the consignment or; the date of failure to make payment by the foreign buyer, to assess coverage under the policy.
The Supreme Court observed that the definition of “Despatch” was ambiguous in respect of the actual date when the consignment can be construed to be despatched, to assess coverage under the policy issued by ECGC. The Supreme Court after careful consideration of the facts, held that the date of failure to make payment by the foreign buyer would be relevant for the purposes of assessment of the coverage and not the date of loading of the goods.
The Supreme Court discussed a catena of judgments on the above issue more particularly in the context of insurance policies and reiterated that when there is an ambiguity in the terms of the policy which is capable of two possible interpretations, the interpretation favourable to the insured and consistent with the purpose of the policy ought to be taken.
The Supreme Court observed that in case of an ambiguity in the terms of a contract, the party who was in charge of drafting the contract cannot take benefit of such ambiguity. Insurance policies are standard form contracts, and the insured has little or no say in the language of the policy and also does not have any bargaining power to modify the terms of the policy. In such a scenario, the rule of contra proferentem would come to the rescue of the insured from an unfavourable interpretation of an ambiguous term/s of a policy, to which it did not agree.
The Supreme Court held that ECGC denied coverage to Haris Marine on an incorrect interpretation of an ambiguous term of the policy and set aside the order passed by NCDRC. Furthermore, ECGC was directed to pay the claim amount of Rs.2.45 crores with interest at 9% p.a. to Haris Marine.
The judgment of the Supreme Court has not only reiterated the quintessential rule of contra proferentem in the context of an insurance policy but also encouraged that terms of a policy ought to be interpreted to further its purpose instead of getting entangled in ambiguity (in the terms of the policy) and deny coverage. The Supreme Court whilst emphasising on strict interpretation of the terms of the policy, leaned towards harmonious construction in case of ambiguity and application of the rule of contra proferentem in favour of the insured.
The judgment of the Supreme Court is a very welcome move as applicability of the rule of contra proferentem is extremely pertinent to any standard form contract. A party that has no say in drafting of a contract cannot be made victim of ambiguous terms in such a contract. In the context of insurance, this rule gains even more importance as an insured is paying premium (and often hefty premiums) to secure risk under insurance policies and thus, it is extremely prejudicial to later be made subject to creative interpretation of ambiguous policy terms by insurers to deny liability. Given that the dictate of the Supreme Court is clear, it is incumbent on insurers to be mindful of the manner in which insurers interpret ambiguous policy terms. This approach would also be in line with the general principle of good faith that is otherwise the bed rock of a contract of insurance.
 Haris Marine Products vs. Export Credit Guarantee Corporation (ECGC) Ltd. Civil Appeal No.4139 of 2020