Fire Insurance Policy - what is flood ?- what is Inundation ! - Apex Court judgment

Insurance has evolved over the years – there are lot of terms, conditions, wording- all capable of being understood and interpreted in varied manner.  In a recent judgement noteworthy for the interpretation of the peril  termed as ‘Flood & Inundation’ – the Supreme Court has dwelt at length – significant for the Insurers, Intermediaries and insuring public.  Before you read the extract of that judgment, a detailed introduction, I feel, is necessary.  Please do read on :

Fire insurance contract  is "an agreement, whereby Insurer in return for a consideration undertakes to indemnify the other party against loss or damage to  defined subject-matter being by fire or other named perils”.  The contract of insurance involves all the elements of an ordinary contract and insurance contracts. In India, now we have the ‘Standard Fire and Special Perils Policy’ being used by all the General Insurers.  Contrary to common belief, a Fire insurance policy offers indemnity not only against fire but against certain other specified perils that includes ‘water perils’ as well. The term Fire for the purpose of a policy has a wider meaning that that ordinarily associated with the word fire. Fire is the rapid oxidation of a material in the chemical process of combustion, releasing heat, light and various reaction.

For those new to Insurance, the Insurance contract i.e., Policy document is drafted by the Insurer and any discrepancy in interpretation is certain to be held against the party drawing the contract wording. The Indian market now predominantly follows the “All India Fire Tariff” effective 2001. The Tariff has been subjected to revisions and amendments from time to time. During 1980s, the Fire Tariff presented bewildering demonic proportions being of big volume and too difficult even for the Insurers. During those days, there were restrictions of ‘night work’, usage of petrol / flammable material, material in open and for each of these there were restrictions by way of warranties and additional premium.

The Tariff was largely simplified and released with a new look effective April 1987 when there were three variants Fire Policy A, B & C. The first two, broadly, covered residences and non manufacturing / storage risks. Based on the perils covered, B & C offered similar protection. Policy A covered 9 perils : Fire, Lightning, Explosion/Implosion, RSMD, Impact damage, Aircraft damage, STFI, Subsidence & Landslide and Earthquake Fire & Shock. B covered only first six perils. C covered first six but the latter 3 could be extended upon payment of additional premium.

The Standard Fire and Special Perils Policy (Material damage) which came into effect from April 2003, defines Fire as : other than destruction or damage caused to the property insured by (a) its own fermentation, natural heating or spontaneous combustion (b) its undergoing any heating or drying process (c) burning of property insured by order of any Public Authority. This is a named peril policy specifying 12 perils.  The peril group VI. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation (termed STFI peril) has been widely discussed upon. contention. Another interesting aspect is Insurers bitten by frequent losses were charging premium compulsorily for this group of peril – with the introduction of IIB rates, there is sigh of relief and Insures would perhaps return to the tariff regime of premium rates !

What is covered under this ‘STFI’ and more specifically what is defined as ‘inundation’ has been clearly elaborated by the Apex Court Bench judgement dated 28^th Jan 2020 in an appeal preferred by The Oriental Insurance Co Ltd against JK Cement.

The cause of action arose when Nimbahera had heavy rains on 29.08.2003 and 30.08.2003, some of the coal was washed off, and the stock of coal suffered damage.  A claim was preferred by the policy holder, the surveyor assessed the loss at  Rs.58,89,400/-  - upon receipt of the FSR, the Insurer sought a clarification from the surveyor, as to whether the loss could be said to have been caused by “Flood and Inundation” in terms of the wording of the insurance policy.  They also hired a Chartered Accountant. The  surveyor reaffirmed its stand that the losses in question were payable to the Respondent as per the terms and conditions of the policy. On the other hand, the Chartered Accountant hired by the Appellant reported that he was unable to verify the declarations because the Respondent had not provided the necessary documents to him.

In Dec 2004, Insurers repudiated the claim on the ground that the loss caused to it did not fall within the scope of the policy, having occurred due to heavy and extraordinary rain and not ‘flood’ or ‘inundation’.  Aggrieved by this repudiation, the Respondent filed a consumer complaint before the NCDRC seeking compensation to the tune of Rs.1.32 crores. Vide the impugned order dated 18.11.2008, the NCDRC allowed the complaint to the extent of the loss assessed by the surveyor, i.e. Rs.59,89,400/-  and directed the Appellant to pay the said amount along with interest  at the rate of 9% per annum. The Insurers went on appeal filing petition before the Apex Court.

Counsel for Insurer argued that the terms ‘flood’ and ‘inundation’ refer to two significantly different phenomena that cannot be equated with each other. He contended that the term ‘flood’ refers to overflowing of water bodies such as rivers, ponds, lakes etc. Accordingly, he submitted that since it was not the case of the Respondent that there was a water body near the factory which had overflown into the coal yard, the loss cannot be said to have been caused by a ‘flood’. With respect to the term ‘inundation’, he argued that the same refers to ‘accumulation of water’ and could thus not be applied to the instant case as the coal had merely been washed off due to heavy rains.

Per contra, learned counsel for the Respondent submitted that even if the Appellant’s definition of ‘inundation’ as ‘accumulation of water’ were to be accepted, the surveyor’s report had clearly observed that that there was an accumulation of water in the coal yard, thereby making the policy applicable.  It was also brought to the attention of the Court  that the surveyor had relied on the rainfall data of Nimbahera for 29.08.2003 and 30.08.2003, as received from the Meteorological Department of the Government of India, to conclude that that there were adequate rains in the area to cause floods/inundation. It was also submitted that the Appellant could not have appointed a second surveyor unilaterally, as the procedure under Section 64 UM of the Insurance Act, 1938, requiring permission from the Insurance Regulatory and Development Authority before appointing a second surveyor, had not been followed.

The Court noted that Insurers  had only appointed a Chartered Accountant for the purposes of verifying the accounts books of the Respondent regarding its daily stock of coal. In their considered opinion, the appointment of a Chartered Accountant for this limited purpose is not tantamount to the appointment of a surveyor.  The quantum of loss was not in dispute but the central Q was -  whether the loss   occurred due to ‘flood’ or ‘Inundation’.

The Court delved on  the dictionary meanings of the terms ‘flood’ and ‘inundation’.

 The word ‘flood’ is defined in the Concise Oxford English Dictionary, 8th edition (1990) as follows: “…1  an overflowing or influx of water beyond its normal confines, esp. over land; an inundation. b the water that overflows. 2  an outpouring of water; a torrent (a flood of rain)…” Particularly in the context of insurance contracts, Stroud’s Judicial Dictionary, 5th edition (1986) defines the word ‘flood’, in reference to Young v. Sun Alliance and London Insurance, [1977] 1 W.L.R. 104, an English case decided by the Court of Appeal, and reads as follows:

 “Flood” in an insurance policy meant a large movement or irruption of water, and did not cover mere seepage from a natural source...”  The word ‘inundate’ is defined in the Concise Oxford English Dictionary, 8th edition (1990) as follows: “…1 flood; 2 overwhelm (inundated with enquiries)…” Further, per Black’s Law Dictionary, 9th edition (1990), the word ‘inundate’ means: “To overflow or overwhelm; esp. to flood with water” . Simply put, a flood may be described as overflow of water over land. Floods can be broadly divided into the following categories: coastal floods, fluvial floods (river floods), and pluvial floods (surface floods).

                             So far as the term ‘inundation’ is concerned, it can be used to refer to both the act of overflow of water over land that is normally dry and to the state of being inundated. Inundation can also be intentional, which is sometimes carried out for military purposes, as well as for agricultural and river  management purposes.  It flows from the above discussion that overflow of water due to a flood may result in the state of inundation. As discussed above, floods are of different types, and may be caused due to several factors complementing each other. Usually, non-coastal floods originate from rainfall, but the magnitude of rainfall sufficient to cause a flood, and the damage that a flood causes, may vary depending on a variety of aspects such as the location of land,  the water retention capacity of the soil, and the density of population and man made construction in the area, among other things. In rare cases, a non-coastal flood may also occur without any rainfall. For instance, shortcomings in the construction of a dam may lead to its complete breakdown, resulting in a flood.

In the impugned case, Insurers were not contending that coal was not properly stacked or alleging any negligence on the part of the claimant.    The only arguments advanced by the Appellant were : firstly, that the terms ‘flood’ and ‘inundation’ cannot be equated, and, secondly, that ‘flood’ needs to be understood in a narrow sense to refer only to the overflowing of a water body, and to exclude instances where overflowing of water occurs due to excessive rainfall.

The Honble Court inferred that the terms ‘flood’ and ‘inundation’ are often used synonymously to refer to the act of overflowing of water over land that is generally dry. Therefore, the first argument of the Appellant cannot be sustained.   Similarly, given the detailed discussion on pluvial floods, which occur independently of a water body, it is clear that floods are not restricted to overflow of water bodies. Thus, the second argument raised by the Appellant also lacks merit.  Furthermore, the second argument made by the Appellant seems tenuous even if we look into the intent of the parties entering into the contract, as it has not come on record that there was any water body near the coal yard or the factory premises. In such a scenario, where there was no risk of water from a water body overflowing onto the dry land where the coal yard was located, it could not have been the intention of the parties entering into the contract to give a restrictive meaning to the term ‘flood’. Such a narrow interpretation would lead to the conclusion that the insertion of the term ‘flood’ was superfluous, which could not have been the case.

In the impugned case, Insurer did not dispute heavy rains in the Nimbahera region which was the affected premises.  The surveyor too had observed that there had been heavy rainfall in the area causing flood-like condition that resulted in some of the coal kept in the insured premises being washed off.  The FSR  also stated that there was accumulation of water due to the heavy rains, that had caused the coal to get washed off.

The NCDRC in the following cases: (i) Bajaj Allianz General Insurance Co. Ltd. v. M/s. Gondamal Hardyal Mal, [2009] NCDRC 127, (ii) Oriental Insurance Co. Ltd. v. M/s Sathyanarayana Setty & Sons, [2012] NCDRC 124, and (iii) Oriental Insurance Co. Ltd. v. M/s R.P. Bricks, [2013] NCDRC 494, had held that damage caused by heavy rainfall would not fall beyond the ‘flood and inundation’ clause of the Standard Fire and Special Perils insurance policies.  This was also put forth by the learned counsel appearing for the Respondent that the aforesaid view has been consistently taken by the NCDRC. The aforementioned view of the NCDRC supports the impugned judgment and the same cannot be said to be erroneous. The Apex Court Bench decreed that in view of the foregoing, the appeal by the Insurer is dismissed.  The Court directed the Insurer to pay the sum awarded by the NCDRC within a period of eight weeks from the date of this order, to the Respondent.

There are learnings for everyone concerned.

With regards – S. Sampathkumar

30^th Jan 2020.

Biblio : Civil Appeal no. 7402/2009 – decided by  Bench:  Hon’ble Mohan M. Shantanagoudar, R. Subhash Reddy