Everyone of us in General Insurance field have seen and experienced – major claims arising out of Fire reported in Standard Fire / IAR / Project policies. Fire is a primary peril covered in insurance. In Insurance parlance, peril is what is covered in a property policy of insurance. Often we hear about another terminology - ‘Act of God’ [AOG] perils… these are not literally the act of God but often used to describe when a natural event occurs in which damage is caused. .. .. ..but, they aren’t defined anywhere in the policy !!
‘Act of God’ [what
will it be for atheists ?] ~ could be defined as natural disaster outside
human control, such as an earthquake, flood, cyclone or tsunami, for which persons are not responsible.
An Act of God may amount to an exception or an "insured peril" in an insurance
policy. This AoG may be summed up as an occurrence :
1) Where no blame can be assigned to a person. 2) That couldn't have realistically been
prevented. 3) Brought about as a direct result of natural causes. This may not
be the only appropriate definition though!
A major fire loss – often impacts the Insurer, who indemnifies the loss (cause being an accidental fortuity- and subject matter being covered under an insurance policy) – there have been disputes too – agitated before various forums. Here is a case decided recently by Supreme Court – a fire accident, but the case not involving any Insurer, though there are learnings for all.
The genesis of the present litigation had been in a fire incident that occurred in a godown of the distillery of a famous brand of liquor on 10.04.2003. As many as 35,642 cases of Indian Made Foreign Liquor of different brands got destroyed in this fire. After receiving the initial reports that the fire possibly took place due to short circuit of electricity, the Excise department proposed to recover the amount of excise duty lost, due to such destruction of liquor, from the respondent company. The respondent maintained that there was no negligence on its part and, therefore, no case for recovery of the alleged loss of excise duty was made out under Rule 7(11) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 19694 and Rule 709 of the Uttar Pradesh Excise Manual. However, the Excise Commissioner, rejected the submissions of the respondent and raised a demand to the tune of Rs.6.39 crores towards loss of excise revenue on account of destruction of liquor. Accordingly, the District Magistrate, Shahjahanpur asked the respondent to deposit the amount within one week.
Assailing the demand and recovery steps aforesaid, the liquor Company preferred a writ petition wherein, the High Court, by way of an interim order in July 2006, stayed the recovery proceedings, subject to the respondent company (writ petitioner) depositing an amount of Rs. 3 crores. A petition seeking special leave to appeal against this interim order was rejected by the Apex Court in 2006 and hence the liquor manufacturer deposited the the said amount of Rs. 3 crores with the District Magistrate, Shahjahanpur.
Then the writ petition filed by the liquor Co was allowed by the High Court in its impugned order dated 10.04.2017, essentially with findings that Rule 7(11)(a) of the Rules of 1969 was not applicable in the matter because there was no wastage in handling operations of bottling and storage of IMFL; that Rule 709 of the Excise Manual was attracted for which negligence was required to be shown; that the order passed by the Excise Commissioner was based on conjectures and without any cogent evidence about negligence on the part of the writ petitioner; and that the ‘incident was nothing but an act of God. The High Court, accordingly, set aside the impugned orders of demand and recovery towards the alleged loss of excise revenue.
However the Excise Department did not refund the amount – so the Manufacturer moved an application before the High Court whereupon, by the order dated 06.11.2019, the High Court directed the Excise Commissioner to take a decision on the application for refund within four weeks. The State Govt then filed an appeal before the Supreme Court questioning the orders of High Court maintaining that the incident in question was an act of God and not that of negligence on the part of the respondent. The appellants relied upon Rule 7(11)(a) of the Rules of 1969 and Rules 708 and 709 of the Excise Manual to contend that the respondent company is absolutely liable to pay the excise duty payable on the stock of IMFL destroyed in fire. An ancillary aspect relating to the effect of insurance coverage, only of the value of liquor, and receiving of insurance claim by the respondent company were also raised. Per contra, respondents submitted that the claim of excise duty in the present case cannot be enforced, for being not authorised by law; and that the respondent is not liable to pay excise duty on the IMFL destroyed in fire, particularly when there was no negligence on its part.
The foregoing outline would indicate that the focal point in this case is, as to whether the appellants are entitled to levy, and correspondingly, the respondent is liable to pay, the excise duty on the liquor destroyed in fire? For those of us in insurance field, the significance is on Negligence Vs Act of God.
The liquor manufacturer had obtained license of FL-3 and FL 3A under UP Bottling of Foreign Liquor Rules, 1969. According to Rule 7 (11) (a) of the abovementioned rules, the licensee is liable to pay excise duty on the wastage of more than 1%. It was responsibility of the license holder to take remedy /precautions for the safety of the alcohol kept in the godown but proper safety of the alcohol kept in the godown was not taken up. The licensee had taken the insurance of the price of alcohol, bottle, label, etc. but insurance of the excise duty imposed on the alcohol was not done. In this way, the licensee had secured value of alcohol. The licensee has not suffered any loss in this incident and whatever loss has taken place has been recovered from the insurance.
It was contended that inspite of having knowledge, the licensee has not arranged the fire proof electric equipments of good quality due to which questioned incident has taken place. The carelessness taken by the distiller in the safety of the stock of alcohol cannot be considered as Act of God.
The High Court, proceeded to analyse the impugned order dated 11.07.2006 and observed that the inferences drawn therein were lacking in material foundation and were only of conjectures and surmises. The High Court found that there was no apparent negligence on the part of the company and also recorded its conclusion that the incident was nothing but an act of God. The High Court further observed that negligence being the condition precedent for the fiscal liability in question, no such liability could be fixed unless negligence was found on the basis of some material; and held that in absence of any material to show that the loss was caused on account of any negligence on the part of the company, the demand in question was wholly illegal and unsustainable.
The High Court proceeded to set aside the demand in question with the following observations and findings: - In order to hold petitioner guilty of negligence, ECUP vide impugned order dated 11.7.2006 while admitting that police officials as well as joint inspection report, possible reason has been given as “short circuit” from electrical supply, but having said so, it has further said that (i) godown is very old and has not been properly repaired; (ii) Distillery is of British period, Distillery and Warehouse both are running in old buildings; (iii) roof of godown is made of abestos sheets and there is possibility of short circuit due to old electrical wire in the godown; (iv) Insurance of excise duty was not obtained, though spirit was insured; (v) licensee was probably negligent in maintenance of electrical equipments; (vi) licensee did not insure electrical equipments; (vii) fire proof of electrical equipments were not of good quality, and this resulted in the incident. Therefore, it is not an act of God. The court observed that there was no material on record to stress the afore-said inference drawn by ECUP could have been substantiated or to be justified. In fact, the aforesaid inference is nothing but conjectures and surmises on part of ECUP without having any material foundation.
Before the Apex Court, Learned counsel submitted that an act of God is an inevitable, unpredictable and unreasonably severe event caused by natural forces without any human interference, such as earthquake, lightning, flood etc.; it is a natural hazard outside the human control for which, no person could be held responsible. It is submitted that for the fire in distillery to be an act of God, there must have been some such incident like earthquake or lightning but no such natural forces were in operation at the time of the incident; and this incident cannot be attributed to any such force of nature but only to some human fault. Learned counsel would submit that when operation of natural forces is ruled out and the incident had, in fact, taken place, it would obviously be referred to the elements of negligence on the part of the respondent company. The learned counsel has elaborated on the submissions that negligence is a specific tort and essentially refers to a failure to exercise that care which circumstances demand.
In the long detailed judgement – the following important definitions and recordings are of great significance for the Insurers and those in the field.
“Negligence” is one such class of “wrongs” that leads to liability. The fundamental jurisprudential principle of “liability” is crisply defined in Salmond on Jurisprudence9 thus: - “Liability or responsibility is the bond of necessity that exists between the wrongdoer and the remedy of the wrong.” “Liability” arises from breach of duty, which may be in the form of an act or omission. In the present case, we are primarily concerned with the question of liability arising out of negligence. Having regard to the questions involved and the provisions applicable, it would be appropriate to take into comprehension the meaning and connotation of the term “negligence” with reference to the dictionaries, lexicons and decided cases.
In Concise Oxford English Dictionary10, the term “negligence” is defined and explained as under: - “negligence ▪ n. failure to take proper care over something. ➤ Law breach of a duty of care which results in damage.” The adjective of this expression is “negligent” and its adverb form is ‘negligently’. These expressions, for deeper understanding need to be correlated with the verb ‘neglect’ that has been defined and explained in the same dictionary as under: - “neglect ▪ v. fail to give proper care or attention to. ➤ fail to do something. ▪ n. the state or process of neglecting or being neglected. ➤ failure to do something.”
Salmond on Jurisprudence refers to a terse exposition in Grill v. General Iron Screw Colliery Co.: (1866) L.R. 1 C.P., that negligence is “the absence of such care as it was the duty of the defendant to use”; and further explains the subtle distinction of inadvertent and advertent negligence. In P. Ramanatha Aiyar’s Advanced Law Lexicon variegated connotations of the term “act of God” or Vis major are specified with reference to the treatise and citations. A few relevant aspects for the present purpose could be usefully extracted as under: -
“All natural agencies, as
opposed to human activities, constitute acts of God, and not merely those which
attain an extraordinary degree of violence or are of very unusual occurrence.
The distinction is one of kind and not one of degree. The violence or rarity of
the event is relevant only in considering whether it could or could not have
been prevented by reasonable care : if it could not, then it is an act of God
which will relieve from liability, howsoever trivial or common its cause may
have been. If this be correct, then the unpredictable nature of the occurrence
will go only to show that the act of God in question was one which the
defendant was under no duty to foresee or provide against. It is only in such a
case that the act of God will provide a defence.” R.F.V. HEUSTON. Salmond on
the Law of Torts 330 (17th ed. 1977).
· “A natural act such as a storm, floods or an earthquake which cannot be foreseen and usually absolves a person from liability if damage occurs as a result.
·
Any event so out of the ordinary that it could not have been
prevented by any amount of human care and forethought, e.g. lightning, freak
tidal waves or floods etc., which relieves a contractor, such as a freight
carrier, of any liability for losses suffered as a result of it.”
"…..The expression ‘act of God’ signifies the operation of natural force free from human intervention, such as lightning. It may be thought to include such unexpected occurrences of nature as severe gale, snowstorms, hurricanes, cyclones and tidal-bures and the like. But every unexpected wind and storm does not operate as an excuse from liability, if there is a reasonable possibility of anticipating their happening. An act of God provides no excuse, unless it is so unexpected that no reasonable human foresight could be presumed to anticipate the occurrence, having regard to the conditions of time and place known to be prevailing at…..”
Interesting ! .. .. the final verdict of the Supreme Court in the instant case as also some more interesting aspects would be posted subsequently.
9th Jan 2022.
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