The judgment in the case detailed below was over a fire insurance policy.

In a judgment delivered on June 26, 2008, K.T. Chitrasiri, Judge of the Commercial High Court of the Western Province considered and ruled on several important principles of insurance law and practices.
The judgment related to a claim of about Rs 14 million on a Fire Insurance policy. The claim was rejected by the insurer and the High Court held in favour of the insured – claimant.

Briefly the facts were as follows: The insured, was a company in the business of manufacturing furniture. In August 2002, they took a fire policy for a value of Rs. 30 million. A fire occurred on January 6, 2003 causing extensive damage to the insured property. The insured claimed Rs.13.8 million for the loss suffered.

Despite repeated requests to settle their claim and despite the insurer getting a Loss Adjuster to inspect the site and investigate the loss, the insurer rejected the claim and the insured sued. Although the insurer had rejected the claim for non-disclosure, at the trial before the Commercial High Court, the insurer took up several other defences to avoid liability. These were (i) that the loss/damages suffered had not been properly established and some of the items claimed were false; (ii) that the insured had assigned the policy to a Bank from which it had taken a loan on the mortgage of the insured factory and because of this assignment the insured had no legal capacity to maintain this action; (iii) that under Clause 13 of the insurance policy, the insured was obliged to file action within three months of the claim’s repudiation and had not done so.

Leading Counsel appeared for both parties. Former Attorney–General and President’s Counsel, Shibly Aziz appeared for the claimant and S.L. Gunasekera for the Insurer. The Claimant’s Managing Director, another Director and the Insurance Agent/Canvasser of the policy gave evidence for the Claimant, while the insurance company only led the evidence of the Loss Adjuster. As stated earlier, the Judge Mr. Chitrasiri rejected the Insurer’s defences and gave judgment for the Claimant. The judgment carefully examines each defence before rejecting it. The value of this case to the insurance industry, the business community and the legal fraternity is that it deals with several practical issues relating to fire insurance and judicial clarification of these issues is most welcome.

The insurer’s main reason for rejecting liability was that the insured had stated in the proposal form that there was no other fire insurance policy for the same property while, in fact there had been a previous policy in existence with another insurance company. Cage 14 in the proposal form was as follows: “Are there or have there been any fire insurance on the same property. No”. According to the Claimant the other policy was to expire on August 29, 2002 – just two weeks after the new policy was to be signed on August 19, 2002. Also, the Agent / Canvasser of the new insurance had been clearly informed of the policy then in existence and it was he who had told the Claimant’s Managing Director that it was not necessary to refer to or include details of the earlier policy when filling up the proposal form.

For the insurer, it was strenuously argued that withholding of this information constituted a willful non-disclosure or a false declaration which breached the fundamental principle of insurance of utmost good faith or uberrimae fidei.

However, in this case, the Insurance Agent / Canvasser volunteered evidence on behalf of the Claimant. This was unusual because in insurance litigation, Agents – although they promise policy holders to assist them to obtain their claims, do not come forward at the last moment and refuse to give either written statements or evidence to support the policy holder against the insurance company. In this case, the Commercial High Court was clearly told by the Insurer’s own Agent / Canvasser that he was informed about the earlier policy but had told the declarant of the proposal form that he need not refer to the earlier insurance and to answer in the negative.

Faced with this “unexpected” evidence, the insurer’s counsel then argued that when a Proposal form is filled up, “the Agent is an agent of the Insured and not the Insurer”. In this writer’s view, normally such an argument is correct because one cannot disclaim what is in the proposal form by arguing it was the agent who filled it up. If you sign, you are liable for what you have signed. But in the this case, this particular Agent was more than a normal agent who only helps to fill up a form. The evidence showed that he was attached to one of the Insurance Company’s suburban branches as its Group Leader. He had been assigned an Agent’s Code number. He had canvassed business exclusively for the defendant insurance company and had been specially trained as a Canvasser by them and earned commissions by such canvassing. The evidence also showed that it was by his “canvassing” that he got the plaintiff company to abandon the earlier insurer and go for a policy with the defendant company.

Justice Chitrasiri observed that the evidence clearly showed that the existence of the other fire policy had been disclosed to the insurance Agent of the defendant company who canvassed the policy at the time the proposal form was signed.

Accordingly, the Judge held that the disclosure made to the Agent by the insured about the existence of a fire policy with another insurer, was information passed to the Agent’s principal namely, the defendant insurance company. At common law, an Agent’s knowledge will be imputed to the insurer if the agent acquired that knowledge while acting within the scope of his authority, actual or ostensible. Thus, the Court concluded that full and proper disclosure had been made to the insurer despite the answer to the contrary in that particular cage of the proposal form.

Justice Chitrasiri then turned to the issue whether even if there had been a non – disclosure as alleged, whether such non – disclosure was a material one which would have affected the assessment of risk of the fire policy and the premium for which it was issued. Here, there was no evidence of any earlier fires on the said premises. Thus, in the Commercial High Court’s view while the insurance company could not say there had been a non – disclosure, even if it was so, it was not a material non – disclosure sufficient to repudiate the policy.

As regards the next issue, namely, that the property damaged by fire was covered by the policy and its value established, the Court held that the plaintiff company had discharged the burden of proof placed on it. The Court held that the entirety of the damage including the three storey building, the paint shop, storage building, raw material, spray guns, finished goods and cartons – had all been clearly set out in the schedule to the fire policy. The Court also held that the Claimant had produced balance sheets, invoices, audited accounts and proper inventories and had supplied the insurer’s Loss Adjuster with all the information he had required and had satisfactorily answered all his queries.

In rejecting the insurance company’s suggestion at the trial that the damages claimed was excessive and false, the Court also observed that this was a “belated” argument that had not been taken up before the trial, in the letter repudiating the claim or in the Answer to the Plaint.

The insurer’s next defence that the Commercial High Court rejected was that the plaintiff company had no legal capacity or what is called locus standi in judicio to file this action because it had taken a loan from a Bank and the policy had a stipulation that “any monies becoming payable under this policy, shall be paid by the Insurer to the Bank” It was argued that this was a legal assignment of the policy to the Bank and if at all it was only the Bank who could file a legal action in this matter. Justice Chitrasiri was not impressed with this defence to avoid liability. The judge held that this so called “Bank Clause” annexed to the Insurance Policy should only be considered as a security for banking facilities which the plaintiff company had obtained. It was not an absolute assignment but in reality only a security for a loan obtained from the Bank. Hence, the judge held that the “Bank Clause” did not take away the capacity of the plaintiff to file this action against the insurer. It is also noteworthy, that in this case there was evidence that the Bank had informed the plaintiff company that it had no problem with the insurer paying the claim directly to the plaintiff company.

The last defence taken up by the Insurer was that Clause 13 of the Insurance Policy imposed a condition requiring the insured to commence legal proceedings within a period of three months from the date of the rejection of the claim. The Plaintiff’s counsel in a special written submission made a devastating attack of this defence. He said it was “unheard of, a brazen violation and direct insult to the due administration of justice; it was also unfair and unreasonable and should be rejected with the contempt it deserved”.

Giving cogent reasons and citing authority, Justice Chitrasiri totally rejected this defence of the Insurer of not suing within three months. Firstly, the judge felt that the insurer should have, if at all, raised it as a preliminary issue (which it did not). Therefore, under Section 39 of the Judicature Act this defence had been abandoned by conduct. Secondly, that such a defence was unreasonable and should not bar a Court action. Thirdly, a short period of three months was palpably unjust and unfair and impossible to comply when the claim was complicated, as in this case. Fourthly, Sri Lanka’s Prescription Ordinance provides for six years for breach of contract and a clause in an insurance policy (which is a written contract) cannot restrict the provisions of the statute law.

In this writer’s opinion, in the case under discussion, the insurance company appears not to have shown the utmost good faith which it expected of its policy holder. The several legal defences taken up to avoid liability were not ethically justified. Plaintiff’s counsel described the purely technical defences (which were without any merit as an insurer “clutching at grass blades to find some ground to reject the claim” or as a Judge once remarked “trying to build bricks out of straw. It is true that once a case enters a Court, lawyers take over. A lawyer’s objective is to win the case. Sometimes they raise issues which, in hindsight, will not speak well for the industry. For instance, in this case, the insurance company should have rested their case on the reasons given for rejecting the claim in their letter of repudiation and on those alone. That would be utmost good faith on their part. However, when you study the judgement, the counsel appearing for the insurer had taken up, several “technical” defences – never disclosed before the litigation – which fortunately the judge rejected.

Normally, insurers reject fire policy claims because they are “bogus” or “fraudulent” as for instance where the fire was self induced or inventories are “inflated” to increase the loss suffered. Technical grounds for rejection are for example where inflammable material had been stored, etc. In such cases, the investigation or forensic reports provide sufficient grounds for rejection. However, this was not such a case. There was not an iota of evidence to suggest other than a genuine fire ; nor was the sum claimed “inflated”. In that context, the insured can ask why were all these technical defences taken up to avoid liability. Insurance companies cannot say that it was their lawyers appearing in Court who take up these defences and not the company. That is an argument not worth replying. Insurance companies like, perhaps banks get their money mainly from public deposits. Hence, they owe a public duty to be ethical not only in their operations but also in their litigation.

It is seldom that several important principles of insurance law come up in a single case. However, it happened in this case. If this judgement is appealed, our Supreme Court will get an opportunity to give its views on the following important insurance topics which Justice Chitrasiri so ably dealt with.

What amounts to a non-disclosure in a Fire Policy?
Even if there is a non-disclosure, must it be a material one to avoid the policy?
Are insurance agents who help to fill up proposal forms, agents of the insured or the agent of the company?
In such a case what acts or conduct of the agent would result in his knowledge being imputed to the company?

How should Loss Adjusters act? To whom are they responsible? Do they owe any duty to the insured as well? Should not their reports be available for scrutiny in the event of a litigation repudiating the policy?
Can Fire insurance policies be assigned? If so, what are the requirements for such assignment?
Can insurers unilaterally fix short limitation periods to preclude legal action by policy holders ignoring the limitation periods fixed by our Prescription Ordinance?