Case: National Insurance Co. Ltd Vs. Sujir Ganesh Nayak &amp; Co

Act, there is a specific article for filing a suit for damages due under the contract of insurance. Any clause in the contract of insurance curtailing the period of limitation will be hit by Section 28 of the Contract Act. If clause 19 of the contract of insurance is construed in such a way, it limits the period of limitation to twelve months from the date of happening of the loss or damage and it would seriously prejudice the rights of the insured. The insurer can very well defeat the claim of the insured by rejecting the claim after the period of 12 months from the date of happening of the loss." 21. The High Court started with the analysis as to whether the clause restricts the period of limitation or extinguishes the right but ultimately rests its conclusion on the finding that the contract is unconscionable - a ground which is not contended for by the parties. The High Court further proceeds to say : "Under Article 44 (b) of the Limitation Act, the period of limitation runs from the date of rejection of the claim. Thereafter, it is clear that clause 19 of the contract of insurance only prescribes the period during which the claim is to be preferred by the insured before the insurance company and it does not, in any way, curtail the period of limitation prescribed under the Limitation Act for filing a suit of that nature." 22. The clause before this Court in Food Corporations case (1994 AIR SCW 1827), extracted hereinbefore can instantly be compared with the clause in the present case. The contract in that case said that the right shall stand extinguished after six months from the termination of the contract. The clause was found valid because it did not proceed to say that to keep the right alive the suit was also required to be filed within six months. Accordingly, it was interpreted to mean that the right was required to be asserted during that period by making a claim to the Insurance Company. It was, therefore, held that the clause extinguished the right itself and was, therefore, not hit by Section 28 of the Contract Act. Such clauses are generally found in insurance contracts for the reason that undue delay in preferring a claim may open up possibilities of false claims which may be difficult of verification with reasonable exactitude since memories may have faded by then and even ground situation may have changed. Lapse of time in such cases may prove to be quite costly to the insurer and, therefore, it would not be surprising that the insurer would insist that if the claim is not made within a stipulated period, the right itself would stand extinguished. Such a clause would not be hit by Section 28 of the Contract (Act). 23. Keeping the above legal distinction in mind we may now consider the facts of the present case. The two insurance policies were both for a period of twelve months and bore a Riot and Strike endorsement covering damage caused by riot and strike to the property of the insured. On account of the strike in the unit from 26-3-1977, the production had come to a halt and as the management was not allowed to remove the goods the unit suffered heavy damage and loss for which a claim was made which claim was rejected by the insurer. The insured served notice and then filed a suit. One of the ground on which the suit was contested by the insurance company was based on the language of clauses 19 and 12 extracted earlier. 24. Clause 19 in terms said that in no case would the insurer be liable for any loss or damage after the expiration of twelve months from the happening of loss or damage unless the claim is subject of any pending action or arbitration. Here the claim was not subject to any action or arbitration proceedings. The clause says that if the claim is not pressed within twelve months from the happening of any loss or damage, the insurance company shall cease to be liable. There is no dispute that no claim was made nor was any arbitration proceeding pending during the said period of twelve months. The clause, therefore, has the effect of extinguishing the right itself and consequently the liability also. Notice the facts of the present case, the insurance company was informed about the strike by the letter of 28-4-1977 and by letter dated 10-5-1977. The insured was informed that under the policy it had no liability. This was reiterated by letter dated 22-9-1977. Even so more than twelve months after on 25-10-1978 the notice of demand was issued and the suit was filed on 2-6-1980. It is precisely to avoid such delays and to discourage such belated claims that such insurance policies contain a clause like clause 19. That is for the reason that if the claims are preferred with promptitude they can be easily verified and settled but if it is the other way round, we do not think it would be possible for the insurer to verify the same since evidence may not be fully and completely available and memories may have faded. The forfeiture Clause 12 also provides that if the claim is made but rejected, an action or suit must be commenced within three months after such rejection; failing which all benefits under the policy would stand forfeited. So, looked at from any point of view, the suit appears to be filed after the right stood extinguished. That is the reason why in Vulcan Insurance Case (AIR 1976 SC 287 ) (supra), while interpreting a clause couched in similar terms this Court said : "It has been separately held that such a clause is not hit by Section 28 of the Contract Act." Even if the observations made are in the nature of obiter dicta we think they proceed on a correct reading of the clause.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]19. From the case law referred to above the legal position that emerges is that an agreement which in effect seeks to curtail the period of limitation and prescribes a shorter period than that prescribed by law would be void as offending Section 28 of the Contract Act. That is because such an agreement would seek to restrict the party from enforcing his right in Court after the period prescribed under the agreement expires even though the period prescribed by law for the enforcement of his right has yet not expired. But there could be agreements which do not seek to curtail the time for enforcement of the right but which provides for the forfeiture or waiver of the right itself if no action is commenced within the period stipulated by the agreement. Such a clause in the agreement would not fall within the mischief of Section 28 of the Contract Act. To put it differently, curtailment of the period of limitation is not permissible in view of Section 28 but extinction of the right itself unless exercised within a specified time is permissible and can be enforced. If the policy of insurance provides that if a claim is made and rejected and no action is commenced within the time stated in the policy, the benefits flowing from the policy shall stand extinguished and any subsequent action would be time-barred. Such a clause would fall outside the scope of Section 28 of the Contract Act. This, in brief, seems to be the settled legal position. We may now apply it to the facts of this case.Clause 19 in terms said that in no case would the insurer be liable for any loss or damage after the expiration of twelve months from the happening of loss or damage unless the claim is subject of any pending action or arbitration. Here the claim was not subject to any action or arbitration proceedings. The clause says that if the claim is not pressed within twelve months from the happening of any loss or damage, the insurance company shall cease to be liable. There is no dispute that no claim was made nor was any arbitration proceeding pending during the said period of twelve months. The clause, therefore, has the effect of extinguishing the right itself and consequently the liability also. Notice the facts of the present case, the insurance company was informed about the strike by the letter of 28-4-1977 and by letter dated 10-5-1977. The insured was informed that under the policy it had no liability. This was reiterated by letter dated 22-9-1977. Even so more than twelve months after on 25-10-1978 the notice of demand was issued and the suit was filed on 2-6-1980. It is precisely to avoid such delays and to discourage such belated claims that such insurance policies contain a clause like clause 19. That is for the reason that if the claims are preferred with promptitude they can be easily verified and settled but if it is the other way round, we do not think it would be possible for the insurer to verify the same since evidence may not be fully and completely available and memories may have faded. The forfeiture Clause 12 also provides that if the claim is made but rejected, an action or suit must be commenced within three months after such rejection; failing which all benefits under the policy would stand forfeited. So, looked at from any point of view, the suit appears to be filed after the right stood extinguished. That is the reason why in Vulcan Insurance Case (AIR 1976 SC 287 ) (supra), while interpreting a clause couched in similar terms this Court said : "It has been separately held that such a clause is not hit by Section 28 of the Contract Act." Even if the observations made are in the nature of obiter dicta we think they proceed on a correct reading of the clause.