Case Note & Summary
The petitioner, United Phosphorous Limited, was in the business of pesticides and chemicals. It purchased a Gas Turbine Engine from GE Packaged Power Inc., USA, which was installed at its plant in Jhagadia, Gujarat. The petitioner had a maintenance and operations contract with General Electric Energy Plant Operations LP. In the first quarter of 1999, a lube oil failure led to the engine being returned to GE and a replacement engine being delivered and commissioned. On 22 February 2001, the petitioner obtained an Industrial All Risk Policy from the respondent insurer, United India Insurance Company Ltd., covering material damage and business interruption for the period 22 February 2001 to 20 February 2002. On 25 April 2001, the engine suffered a breakdown due to high lube oil temperature and was sent to Air India Workshop for repairs. After repairs, the engine worked smoothly from June to September 2001. On 16 September 2001, there was a heavy breakdown due to high lube oil temperature and failure of 4B bearings in the sump B area, causing the engine to trip and shut down. The petitioner informed the respondent the next day, and the respondent appointed surveyors. GE required the engine to be sent to Houston for repairs, which cost USD 1,044,000. The petitioner claimed this amount under the policy. The respondent repudiated the claim, citing an exclusion clause for wear and tear. The dispute was referred to arbitration. The majority arbitrators upheld the repudiation, holding that the breakdown was due to wear and tear and thus excluded. The petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The court considered whether the breakdown was excluded by the wear and tear clause. The court held that the exclusion for wear and tear applies only to gradual deterioration, not to a sudden and unforeseen breakdown. The insurer failed to prove that the breakdown was due to wear and tear. The court set aside the award and restored the claim, directing the respondent to pay the claim amount with interest.
Headnote
A) Insurance Law - Interpretation of Exclusion Clauses - Wear and Tear Exclusion - The court considered whether the breakdown of a gas turbine engine due to bearing failure was excluded under the policy's wear and tear clause. The court held that the exclusion for wear and tear applies only to gradual deterioration over time, not to a sudden and unforeseen breakdown. The insurer failed to prove that the breakdown was due to wear and tear rather than a fortuitous event. (Paras 10-15) B) Insurance Law - Burden of Proof - Exclusion Clauses - The burden of proving that a loss falls within an exclusion clause lies on the insurer. The court held that the insurer did not discharge this burden as there was no evidence to show that the bearing failure was a result of wear and tear rather than a sudden accident. (Paras 12-14) C) Insurance Law - Industrial All Risk Policy - Scope of Coverage - An Industrial All Risk Policy covers all risks of physical loss or damage unless specifically excluded. The court held that the breakdown was a fortuitous event covered by the policy, and the exclusion for wear and tear did not apply. (Paras 8-10)
Issue of Consideration
Whether the breakdown of the gas turbine engine due to bearing failure was excluded from coverage under the Industrial All Risk Policy by virtue of the wear and tear exclusion clause.
Final Decision
The court allowed the arbitration petition, set aside the majority arbitral award, and restored the claim of the petitioner. The respondent was directed to pay the claim amount of USD 1,044,000 with interest at 9% per annum from the date of the award until payment.
Law Points
- Interpretation of exclusion clauses in insurance contracts
- Distinction between wear and tear and sudden breakdown
- Burden of proof on insurer to establish exclusion
- Policy must be read as a whole
- Industrial All Risk Policy covers fortuitous events
