Mob trashed his resort. Insurer said it was his fault. Supreme Court disagreed.

When a mob trashed a resort, the insurer said it was the owner's fault. The Supreme Court disagreed.

Vedic Resorts and Hotels Pvt. Ltd. ran a resort called Vedic Village in West Bengal. It had insured its buildings, furniture, plant, machinery, and stock under two Standard Fire and Special Perils policies with National Insurance Company Ltd. On 23 August 2009, a criminal named Gaffar Molla and his associates fired guns and threw bombs at a football match near the resort. One person died. An angry mob chased Molla and his associates. They fled into the Vedic Village resort. The mob followed them and destroyed the resort's property. The police later found guns and explosives stored on the resort premises.

The resort claimed insurance for the damage. The insurer rejected the claim, arguing the damage resulted from 'malicious acts' by the resort management — harbouring criminals and storing weapons — which was excluded under the policy. A surveyor had assessed the loss at about Rs. 2.02 crore and found the claim admissible. The National Consumer Commission ordered the insurer to pay. The insurer appealed to the Supreme Court. The Supreme Court dismissed the appeal. The insurer had failed to prove the exclusion applied.

What the surveyor actually found

The surveyor appointed by the insurer assessed the aggregate loss at Rs. 202.216 lakhs. The surveyor opined that the loss was due to an insured peril. The surveyor's report was clear: the damage was caused by a mob that entered the resort premises chasing criminals. The surveyor found the claim admissible.

The insurer repudiated the claim on 6 July 2012. The repudiation invoked Clause V(d) of the policy — the exclusion for malicious acts. The insurer also alleged a breach of warranty regarding the class of construction. The resort then approached the National Consumer Disputes Redressal Commission, New Delhi, under Section 21 of the Consumer Protection Act, 1986.

The National Commission's order

On 7 January 2019, the National Commission partly allowed the complaint. It directed the insurer to pay Rs. 202.216 lakhs with 9% interest from six months after the lodgment of the claim. The Commission found no merit in the insurer's defence. The insurer appealed to the Supreme Court under Section 23 of the Consumer Protection Act, 1986.

What the insurer argued

The insurer's learned Counsel argued that the damage was caused by a 'malicious act' within the meaning of Clause V(d). The clause excluded: "burglary, housebreaking, theft, larceny or any such attempt or any omission of any kind of any person (whether or not such act is committed in the course of a disturbance of public peace) in any malicious act." The insurer contended that the resort management had harboured Gaffar Molla and his associates and stored weapons on the premises. This, the insurer argued, was a malicious act by the insured itself. The loss, therefore, fell within the exclusion.

The insurer also argued that the surveyor's report was not binding. The insurer had cogent reasons to depart from it.

What the insured argued

The insured's learned Counsel countered that the damage was caused by a mob that entered the resort premises. The mob was chasing criminals who had taken shelter. The insured had no control over the mob's actions. The insured had not committed any malicious act. The exclusion clause did not apply.

The insured also argued that the surveyor's report was based on a proper assessment. The insurer had no cogent reasons to reject it.

The Supreme Court's reasoning

Justice Bela M. Trivedi, writing for the Bench, examined Clause V(d) closely. The Court noted that the clause excluded malicious acts. But the question was: whose malicious act? The clause did not specify. The Court held that the burden of proving that the loss fell within the exclusion lay on the insurer. The insurer had to demonstrate by material evidence that the insured's own malicious act or omission caused the loss. Mere allegations or surrounding circumstances were insufficient.

The Court observed: "Even if allegations against Gaffar Molla and associates are taken at face value, damage caused by a frenzied mob chasing criminals who took shelter cannot be attributed as a malicious act of the insured resort management." This was an obiter observation, but it revealed the Court's thinking. The damage was caused by a third-party mob, not by the insured.

The Court then applied the contra proferentem rule. In case of ambiguity in an exclusionary clause, the contract must be construed in favour of the insured. The Court cited National Insurance Company Limited v. Ishar Das Madan Lal (2007) 4 SCC 105, which held: "Where an exclusionary clause is contained in a policy, the insurer must show the case falls within its purview. In case of ambiguity, the contract of insurance shall be construed in favour of the insured."

The Court also cited General Assurance Society Ltd. v. Chandumull Jain and Another AIR 1966 SC 1644, a Constitution Bench decision, which held: "There is no difference between insurance contracts and other contracts except the requirement of uberrima fides and the principle of contra proferentem — ambiguity or doubt is construed against the insurer."

On the surveyor's report, the Court held that while the report is not sacrosanct, the insurer must provide cogent and satisfactory reasons for departing from it. In the absence of such reasons, the surveyor's assessment stands. The insurer had not provided any cogent reasons.

THE PLAY: When an insurer invokes an exclusion clause, it must prove by material evidence that the insured's own act caused the loss. Mere allegations or surrounding circumstances are not enough. Ambiguity in the clause is resolved against the insurer.

Why this matters in practice

For advocates, this judgment is a reminder of the burden of proof in insurance disputes. The insurer cannot simply point to an exclusion clause and walk away. It must lead evidence to show that the loss falls within the exclusion. The contra proferentem rule is alive and well.

For CFOs and founders, this judgment offers comfort. If your property is damaged by third parties — even if those third parties were on your premises for nefarious reasons — the insurer cannot automatically deny your claim by calling it a 'malicious act' of your own. The insurer must prove your own involvement. A surveyor's report, if properly done, carries weight. The insurer cannot reject it without cogent reasons.

The judgment also clarifies that the 'malicious act' exclusion in a Standard Fire and Special Perils Policy does not cover damage caused by a mob chasing criminals who took shelter on the insured's premises. The insured's act of providing shelter — even if unwise — is not a 'malicious act' within the meaning of the clause.

The bottom line

If your insurer repudiates a claim by invoking an exclusion clause, demand that the insurer prove by material evidence that your own act caused the loss. If the clause is ambiguous, the ambiguity works in your favour. And if a surveyor has assessed your loss, the insurer cannot reject that assessment without cogent reasons.