Not buying add-on cover can prove costly sometimes

Dalas Biochem had taken a Fire and Floater Special Perils Policy from United India Insurance. The policy, which had a coverage of ~13 crore, and was valid from January 13, 2010, to January 12, 2011, covered risk for chemical as well as bulk drug manufacturing at the insured’s manufacturing unit at Bhiwadi in Alwar District of Rajasthan.

On July 10, 2010, while raw material was being transported from the godown to the manufacturing unit, one can of Phosphorus Oxychloride fell while it was being loaded into a truck. The chemical leaked. On coming into contact with the moisture in the atmosphere, it caught fire, resulting in a lot of goods getting damaged and burnt.

The insurer was immediately informed about the accident. It appointed a surveyor to assess the loss. The insured produced all the necessary documents in support of the claim. The surveyor estimated the loss at ~2,714,357. After deducting the salvage value of ~10 lakh, the final net loss was pegged at ~1,714,357.

The insurer, however, repudiated the claim on the ground that the policy did not cover the risk. So, the insured filed a complaint before the District Consumer Forum claiming the amount of net loss as assessed by the surveyor, along with compensation and costs.

The insurer questioned the maintainability of the case on the ground that the amount of total loss exceeded the pecuniary limit of the District Forum. On merits, the insurer argued that the fire had occurred due to spontaneous combustion, which was not covered by the policy.

The District Forum ordered the insurer to pay ~1,714,357 as assessed by the surveyor, along with 15 per cent interest. It also ordered ~3,000 to be paid as compensation for mental agony.

The insurer appealed against this order to the Rajasthan State Commission, which dismissed the appeal, and imposed a further cost of ~10,000.

United India then approached the National Commission through a revision petition. The insurer argued that the policy specifically excluded spontaneous combustion, unless additional premium was paid to include it as an add‑on cover. It pointed out that in this case, the insured had stated that “fumes were generated due to fermentation and spontaneous combustion”, resulting from the chemical coming in contact with atmospheric moisture.

The National Commission observed that it was not a Marine Policy, so the damage caused while loading would not be covered. It held that the risk would be limited to the coverage under the Fire Policy. It observed that the liability under the policy can neither be extended nor curtailed, but would have to be determined strictly in accordance with the terms of the contract of insurance, as laid down by the Supreme Court in the Oriental Insurance vs Sony Cheriyan case. It noted that Phosphorus Oxychloride is a hazardous material. When it is exposed to atmospheric moisture, there is no fire, but the chemical reaction produces heavy fumes, smoke and vapour, which are so irritating that a person cannot breathe without a special mask. So, the Commission concluded that the loss was due to spontaneous combustion.

Accordingly, by its order of April 8, 2022, delivered by the bench of C Viswanath and Justice Ram Surat Ram Maurya, the National Commission held the claim was not payable since add-on cover for spontaneous combustion had not been obtained. It upheld the contention of the insurer and set aside the orders of the District Forum and the State Commission and dismissed the complaint.

The National Commission observed that liability under the policy could neither be extended nor curtailed, but would be determined according to the terms of the contract