Three friends, Ashok, Lalit and Hari-teamed up to start a lobster export business. Ashok owned a ship which was used in the business for fishing as well as for transporting the processed lobsters to foreign shores. They

CS Professional · Insurance - Law & Practice · PYQS · June 2023
Three friends, Ashok, Lalit and Hari-teamed up to start a lobster export business. Ashok owned a ship which was used in the business for fishing as well as for transporting the processed lobsters to foreign shores. They insured their ship, the cargo, freight, profits and commission, for a total of ₹ 80 lakh. Expecting to obtain enormous profits on their cargo, it was overvalued by the insured. A few months later, the ship sank in mid-ocean as it had a hole. Consequently, the cargo was also lost. The insured approached the insurance company to file a claim for compensation for the lost cargo. However, the insurance company refused payment of the entire claim amount. It only made partial payment of the claim stating that the cargo was insured for an amount more than its actual market value. Moreover, investigation by the insurance company surveyor revealed that the insured had intentions to sink the ship. The vessel was retrieved by the insurance company and was offered for sale as salvage. The insured approached the court to prevent the sale of the ship. Based on the above facts: (i) Was the insurance company violating the insurance contract by refusing payment to the insured? Justify your answer.

Answer & Explanation:

An insurance contract legally binds an insurer to pay the policyholder for the damages or losses caused by the perils against which the policyholder has insured himself. In the given case, the sinking of the ship and the loss incurred by the insured was due to willful or fraudulent act of the insured and not by the perils against which the ship was insured. An insurer is not liable for refusing to accept a claim pertaining to a loss caused by the fraudulent act of the insured. Such losses are not covered by insurance policies. However, in taking over the ship to sell as salvage, the insurer was violating the insurance contract because salvage belongs to the insurer only after he has made the payment of the loss suffered to the insured. In this case, the insurer should have rejected any further dealings with the insured once it was apparent that the insured had involved in fraudulent act by intentionally causing the ship to sink to claim the insurance amount. Instead, the insurance company took over the insured's property for salvage without the latter's approval. Thus, the insurer was not acting within the framework of the insurance contract and was liable to be legally penalized.

Topics: Marine Insurance

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