A Full Bench of the Lahore High Court in the case of Universal Insurance Company considered the fire insurance policy’s conditions # 13, 18 and 19, providing for forfeiture of benefits or non-liability under the policy after a specified period.
The question for determination before the Full Bench, referred to by a Division Bench, was, whether or not the conditions of contract of insurance incorporated in the policy of insurance against the risk of fire or lightning providing for "(a) forfeiture of all benefits under the policy if no action or suit is commenced within three months of the rejection of the claim (if made) or (in case of an arbitration taking place) after the arbitrator or arbitrators or umpire shall have made their award" and stipulating that "(b) in no case whatever is the insurance company to be liable for any loss or damage after the expiration of twelve months from the happening of the loss or damage unless the claim is subject of pending action or arbitration" were void under section 28 of the Contract Act, 1872.
Section 28 of the Contract Act provides, every agreement, by which any party thereto is restricted absolutely from enforcing his right under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights is void to that extent.
The question touching the validity of the portion of the contract of insurance against damage by fire or lightning providing for forfeiture of all benefits under the policy, if no action or suit is commenced within three months of the rejection of the claim and curtailing the period during which the liability of the insurance company is sustainable has been repeatedly considered before various superior Courts of Pakistan and India for over seven decades. Many a vain attempt has been made on behalf of the concerned parties to have the contract declared void under section 28 of the Contract Act, 1872. Though the Courts have several times examined the issue at length, they have accepted the view formed, and law laid down by the Bombay High Court (Division Bench comprising of Scott, C.J., and Batchelor, J. in Baroda Spinning and Weaving Company Limited v. Satyanarayan Marine and Fire Insurance Company Limited AIR 1914 Bom. 225(2) declaring such an agreement to be valid. The usual clause of the contract of insurance relating to forfeiture of benefits under the fire insurance policy in case of failure of commencement of suit or action within three months of rejection of claim is couched in the language of clause 13 of insurance contract.
The Lahore High Court, while considering the question involved, held:
(Quote)
The import of implications and effects of the agreements and statutory provisions involving forbearance to sue for some time in the circumstances which were wholly alien to those obtaining in Baroda Spinning and Weaving Company’s case was hardly justifiable for the purpose of interpretation of the insurance agreement and section 28 of the Contract Act. When looked at the real meaning of the relevant clauses of the agreement in question, the object they intend to achieve and the intention of the parties behind them it brings us to the one and the only conclusion that the plaintiff is debarred for ever after the expiry of the stipulated time of (three or twelve months), which falls short of the statutory time of limitation, from enforcing his rights by an action in a Court of law or elsewhere. It is immaterial whether the words expressing the forfeiture of benefit or rights on the expiry of three months after rejection of claim or words limiting the time within which rights can be enforced are used; the net result and effect of the either is that the plaintiff’s choice to enforce his rights is limited to the period of three (or twelve) months and he cannot avail of the extended period of limitation allowed by the general law. The contract looked at and interpreted as a whole leads to the only conclusion that the time for enforcing plaintiff’s rights has been curtailed. Forfeiture of his rights if the action is not brought within three months is just equivalent to fixing the period within which he can enforce his rights within the bounds of three months. The distinction between the two phrases, forfeiture of benefit or rights upon the expiry of three months or limiting of time to three months within which one could enforce his rights noticed in Baroda Spinning and Weaving Company’s case is just of phraseology and artificial; the two lead to the same destination of blocking the way of the plaintiff to enforce his rights in a Court of law.
It is not permissible to frustrate and nullify the object of law by employment of selected phraseology in a contract because if such a course were to be allowed to be adopted, it would amount to giving a licence to the parties to contract out of the Limitation Act, which is otherwise forbidden by law to do. By trickery of words no one can be permitted to get at where the law forbids to tread. It would be unconscionable to rob an insured of his statutory right to bring an action within the much larger period of three years as envisaged by Article 86 of the First Schedule of the Limitation Act, 1908, and instead to force him to exercise his right within the much shorter period. A contract, like the one in hand, which essentially reduces the statutory period of limitation for enforcing one’s rights through usual legal proceedings, cannot but be adjudged to be void in the light of section 28 of the Contract Act.
The decision in Baroda Spinning and Weaving Company’s case has been frequently questioned and debated, and accepted not with absolute veneration. Nevertheless, the all important question which now arises for consideration is whether the interpretation of the law declaring the legality of the conditions of contract of insurance under review, which originating from this decision has held the field for almost three-quarters of a century, should be disturbed. Successive affirmations by judicial pronouncements have made it assimilate in the mainstream of the law of insurance and have reinforced the business community’s belief in its correctness. The people involved in the fire and lightning insurance business, insurers as well as insured, are acceptably of above average means, knowledge and intelligence and generally have ready access to legal advice. They can very well be presumed to be aware of the implications and effects of various clauses of insurance contract laying restrictive time limits for making claims and initiating actions. They have been entering into contracts, settlements and fiscal arrangements on the basis of the law propounded by the Courts. No serious inconvenience or injustice would flow from allowing the law to stand rather its overruling would be productive of inconvenience. In order to ensure certainty and consistency in the law and to preserve the sanctity of precedent as a good source of law it would be eminently just and proper to follow the principle of stare decisis as in such cases the superior Courts, to quote just a few of the distinguished pronouncements. John Bain v. Richard Fothergill L.R. 7 H.L. 158, The London Street Tramways Company Limited v. The London County Council (1898) A.C. 375, Manager Jammu and Kashmir State Property in Pakistan v. Khuda Yar PLD 1975 SC 678, Pir Bakhsh v. The Chairman, Allotment Committee PLD 1987 SC 145, have done. Consequently despite the views expressed above, we would be reluctant to cause the least disturbance to the prevailing state of law.
The cumulative effect of the clauses 13, 18 and 19 contained in the Fire Insurance Policies is that in case of rejection of claim, the action or suit is to be instituted within three months of the rejection of claim; and in case there has been an arbitration, the proceedings are to be taken under law within a period of three months otherwise all benefits under the policy shall stand forfeited. Then comes condition 18 which provides for arbitration if difference arises as to the amount of any loss or damage. Arbitration on account of other differences is not contemplated. If no claim is made at all nor action is commenced within one year, liability of company comes to an end. Then clause 19, containing the agreement of the parties, provides one year period for claiming or ascertaining that there has been loss and that the claimant is entitled to the insured sum. Once a claim is lodged and is rejected, then suit or action at law is to be initiated within three months or if arbitration clause applies, proceeding to have the arbitration proceedings commenced taken within three months, otherwise the parties agree that benefits accruing or rights under the policy shall stand forfeited. Such an agreement in the aforenoted situation is in no way in conflict with the provisions contained in Article 86(b), Limitation Act, 1908.
It will be more true to say that the Article 86(b) does not apply to the claim made and rejected in the case of fire insurance and as such no question arises of limiting the period provided by Article 86(b), Limitation Act or in other words of invoking the provisions of section 28, Contract Act, 1872.
(Unquote)
It was argued by the claimant’s counsel that omission to initiate action at law or institute a suit within the stipulated period rendering the claim barred is to be treated as fraudulent – a factor which otherwise renders the most solemn contracts void and unenforceable. This omission to act promptly is treated as an act intended to deprive the insurer opportunity to verify physical circumstances surrounding inception of loss and its magnitude and thus fraudulent in intent and rendering the entire contract void and resulting into ceasing of the liability. The Court considering this aspect of the matter held,
(Quote)
It is equally important not only to keep secure and intact the contracts but also to sanctify the covenants entered into by the parties with their consent freely and independently. It will, therefore, be seen that the judgements delivered and holding the field for the last 75 years were based on sound reasoning and the distinction pointed out for upholding the clauses contained in Fire Insurance Policies was real, sound and cogent. Moreover, the added reason viz. non-applicability of the relevant Article of the Limitation Act to the Policies in question put the matter beyond controversy.
Fire Insurance Policies are taken out by men of business and not by a common man on streets or members of general public. The men in business are expected to be aware of the terms and conditions under which they are taking out insurance of their properties. The history of the litigation for the last two decades does not show infliction of any undue hardship or injustice due to injudicious use of the objected to clauses of the Insurance Policy by the Insurers.
Inclusion of the covenant to the effect that in case of rejection of claims, action or suit be commenced within three months otherwise benefits under the policy will stand forfeited and treating the said covenant at par and of the same effect, as the covenant that any fraud or misrepresentation will render the policy void, is not without purpose rather there seems to be a great deal of sense in it particularly in the case of Fire Insurance or insurance against accident where the liability to the extent of damage caused when the matters are fresh can be measured with certain amount of accuracy. Lapse of time in such cases may result in all kinds of claims which are not capable of determination with any amount of exactitude. The omission to move within the agreed period as such is thus agreed to be treated as fraudulent vitiating the contract itself. The insurers, therefore, insist that it is in the interest of insured that the extent of loss sustained should be speedily ascertained, paid and adjusted. They claim that time frame contemplated in the covenants is necessary not only for ascertaining the extent of the damage caused but also for verification of physical circumstances surrounding inception of loss, for taking salvage protection measures including the steps to minimize the loss and also for initiating coordinated action with other insurers if so involved. Moreover, in case the liability of the Insurer is allowed to continue indefinitely or for over a period of years then rate of premium will increase manifold for no benefit to the insured. The business people will suffer. If the insurer has entertained the claim or proceeded to abide by the policy after the period prescribed thereunder, it may amount to waiver with necessary consequences.
(Unquote)
In view of the above decision of the Full Bench of the Lahore High Court, the law relating to fire insurance policy conditions # 13, 18 and 19, and as to these being valid provisions, hold the field, particularly as none of the parties to the litigation filed appeal before the Supreme Court. The Lahore High Court, while considering the fire insurance policy, also, in passing, held that under clause 18 of the insurance contract, the jurisdiction of the arbitrator is confined to determining the quantum of loss or damage suffered as a result of fire and nothing more.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.