Standard Form of Insurance Contracts and Consumer Rights- India

March 28, 2023
formation of a contract

By Nihit Nagpal and Devika Mehra 

One of the essential ingredients of the formation of a contract is “free consent” of both the parties. The same has also been provided under Section 14 of the Indian Contract Act, 1872. This implies that both the parties shall be free to negotiate upon the terms of the contract. However, there are few contracts such as Insurance Contracts, Loan/Mortgage Deed, etc. which are drafted by the company itself and the customer has no scope of negotiating the terms. Such contracts are termed as standard form of contracts or adhesion contracts. Many a times, the party which drafts such contracts are adversely benefitted with unilateral or exclusion clauses.

Recently, in M/S Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors.[1] (“Texco”), the Hon’ble Supreme Court was dealing with a case pertaining to a similar issue. In this case, the insurer issued an insurance policy to a shop owner for the shop. The insurance contract included an exclusionary clause which prevented the insurer from providing insurance amount in some situations. When a fire broke out in the shop, the shop-owner approached the insurance company for the insurance amount. However, the company invoked the exclusion clause and denied the claims of the shop-owner. The Hon’ble Supreme Court, while dealing with a civil appeal, took a critical view of the exclusion clauses in standard forms of contract.

Interpretation of Exclusion Clause in Standard form of contracts

The Court interpreted that exclusion clauses were to be interpreted as “touchstone of the doctrine of reading down in the light of the underlying object and intendment of the contract.” The Court referred to the judgment in Glynn v. Margetson & Co.[2] where it was held that entire provisions could be rejected if they defeated what was the main purpose of the contract. The Hon’ble Court held that an Exclusion Clause imposes an onus as well as the burden on the insurer when reliance is made on such a clause. This makes insurance contracts special contracts as they are premised on the notion of good faith. The exclusion clause is not a leverage or a safeguard for the insurer, but is meant to be used in case of a contingency.

Doctrine of Blue Pencil

The Blue Pencil doctrine states that if a court finds that portions of a contract are void or unenforceable, but other portions of the contract are enforceable, the court may allow the legally valid, enforceable provisions of the contract to be enforced. The Court referred to the judgment in Beed District Central Coop. Bank Ltd. v. State Of Maharashtra[3] where the court interpreted that “This doctrine holds that if courts can render an unreasonable restraint reasonable by scratching out the offensive portions of the covenant, they should do so and then enforce the remainder.” Thus the Court concluded that a clause that was detrimental to the execution of the contract ought to be effaced.

Stand taken by Insurance companies/dominating parties to contract

It is usually argued that insurance contracts are special contracts based on the principle of uberrima fides which requires full disclosure by the person who seeks insurance cover. The customer has to disclose all material facts and risks involved. In essence, it argued that insurance contracts are based on good faith and therefore, the insurer has the right to set the terms of contract merely to balance the scales of convenience and equity.

In an early English case, Carter v. Boehm[4], Lord Mansfield has succinctly explained the principle of disclosure and says that “Insurance is a contract of speculation”. He further states: “Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact, and his believing the contrary.” The principle of uberrima fidei is used as a shield to justify the stipulation of an exclusionary clause in insurance contracts.

Principles of equity and contra proferentem in contract law in India

The principle of equity applies to both parties to the contract. In an insurance contract, the insurer must do equity by keeping the terms fair, whereas the customer must do equity by making full disclosure to the insurer. Lord Denning in George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd.[5] succinctly states that Insurance contracts are “take it or leave it contracts” and the “little man would never read the exemption clauses or understand them.”

Equal bargaining power between parties to contract was explained by the Hon’ble Supreme Court in Central Inland Water Transport Co. & Anr. v. Brojo Nath & Anr.[6] The Court observed that there can be myriad situations which results in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. The Court acknowledged that if standard contracts embody the set of rules also, and provide unequal bargaining power, if unconscionable, would be unfair and unreasonable. However, the court held that each case must be judged on its own facts.

Apart from the principles of equity, the courts also apply the doctrine of contra proferentem where the contract appears to be vague. While applying this doctrine, the courts interpret the contract in a way which favours the party which has not drafted the agreement. The Indian Courts have often applied this principle in various cases while dealing with issues pertaining to insurance contracts drafted by companies. In Bank of India and Anr. v. K. Mohandas and Ord.[7], “32. The fundamental position is that it is the banks who were responsible for formulation of the terms in the contractual Scheme that the optees of voluntary retirement under that Scheme will be eligible to pension under Pension Regulations, 1995, and, therefore, they bear the risk of lack of clarity, if any. It is a well-known principle of construction of contract that if the terms applied by one party are unclear, an interpretation against that party is preferred.”

Parties who are the beneficiaries of insurance scheme often fall back on these principles to strengthen their claims whenever the contract appears to be titled towards the company.


The recent decisions of Supreme Court on contract law pertaining to insurance contracts have been progressive and has endeavoured to balance the scales of justice and equity between the contracting parties. The decision in Central Inland Water and in M/S Texco Marketing cases collectively balance the bargaining powers between parties, in order to ensure that the customer is compelled to sign merely on the dotted lines of the contract offered by the company. However, the Supreme Court and the Hon’ble High Courts have still maintained that Insurance contracts are based on risk, and equally the rights of the companies cannot be entirely curtailed to stipulate an exclusionary clause. Ultimately, contracts must be in consonance with the public policy and laws of India.

[1] M/S Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Company Ltd. & Ors.,Civil Appeal No. 8249 of 2022.

[2] (1893) A.C. 351

[3] 2006 BOMCR SC 6 542

[4] Carter v. Boehm, (1766) 3 Burr 1905

[5] George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd., (1983) Law Reports Q.B. 284.

[6] Central Inland Water Transport Co. & Anr. v. Brojo Nath & Anr., 1986 SCC (3) 156 1986

[7] Bank of India and Anr. v. K. Mohandas and Ors., (2009) 5 SCC 313.

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