Insurance Article, The Insurance Times 2020, The Insurance Times February 2020

Law in India relating to Property Insurance

A home is a place, which provides every person the warmth and peace that one looks forward to at the end of a hard day’s work. However, every home can also be threatened with burglary, damages caused by natural and man-made disasters. To secure everyone’s home of any threat, the home insurance policies or property insurance policies are offered by different insurance companies which eventually provide security to the structure and/or contents of the home against unforeseen calamities.

Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or boiler insurance. Property is insured in two main ways—open perils and named perils.

Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism, and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage-causing events as fire, lightning, explosion, and theft.

Fire insurance business in India is governed by the All India Fire Tariff that lays down the terms of coverage, the premium rates and the conditions of the fire policy. The fire insurance policy has been renamed as “Standard Fire and Special Perils Policy”. The risks covered are as follows:

  • Dwellings, offices, shops, hospitals:
  • Industrial, manufacturing risks
  • Utilities located outside industrial/manufacturing risks
  • Machinery and accessories
  • Storage risks outside the compound of industrial risks
  • Tank farms/gas holders located outside the compound of industrial risks.

Here are few Supreme Court Cases in India relating to property insurance. The courts had protected the interests of the policy holders. New India Assurance Company Limited v Abhilash Jewellery [III (2009) CPJ 2 (SC)] – Date of Decision: 22.01.2009

The complainant/respondent, who had taken a jeweller’s block policy, lodged a claim with the opposite party insurer for loss of gold ornaments. The insurer repudiated the claim on the ground that the loss occurred when the gold was in the custody of an apprentice, who was not an employee (because the policy stipulated that for indemnification of the loss, the property insured had to be “in the custody of the insured, his partner or his employee”). The National Commission allowed the complaint holding that an apprentice was an ’employee’ since section 2(6) of the Kerala Shops and Commercial Establishments Act (as well as some other statutes) defined an ’employee’ to include an ‘apprentice’. The Supreme Court, however, held that the word ’employee’ in the contract of insurance mentioned had to be given the meaning in common parlance. The definition in the local Act, including an ‘apprentice’ in the category of ’employee’, was only a ‘legal fiction’, which is a concept in law and could not be applied to an insurance contract. The Court, therefore, allowed the appeal.

Supreme Court of India

General Assurance Society Ltd vsChandumull Jain AndAnr on 7 February, 1966

Equivalent citations: 1966 AIR 1644, 1966 SCR (3) 500

The appellant is a general insurance company. On June 2, 1950 the respondents submitted proposals to the company with a view to insuring certain houses in Dhullian bearing Holding Nos. 274, 274/-A-B-C-and D and 273, 273/A-B- C and D, for Rs. 51,000 and Rs. 65,000 respectively against fire and including loss or damage by cyclone, flood and/ or change of course of river or erosion of river, landslides and subsidence. The town of Dhulian is situated on the banks of the Ganges and for several years the river had been changing its course and in 1949 a part of the town was washed away. The insurance was obviously effected with this risk in sight. The period of insurance was to be from June 3, 1950 to June 2, 1951. The Company accepted the proposals by two letters (Ex. D.) on June 3, 1950 and the letters stated that. In accordance with the proposal the assured was held covered under cover notes enclosed with the letters. At the back of these letters of acceptance, there was description of the houses and an endorsement which read:

“Including Cyclone, Flood and/or loss by change of course of river diluvium and/or Erosion of River Landslide and/or subsidence. It is further noted that there is a thatched building of residence within 50 ft. of the above premises.”

Two interim protection cover notes Nos.118848 and 18850 in respect of the two proposals were filed by the insurance company along with the written statement and they were said to be copies of cover notes sent with the letters of acceptance, but they bore the date June 5, 1950. There is some dispute as to whether they were at all enclosed with the reply showing acceptance of the proposals. 110Sup. CI/66-2 of the two cover notes, which are identical except for details we may read one only:

“Messrs.ChandmullLal Chand, P.O. DhulianMurshidabad being desirous to effect an Insurance from loss by Fire, for Rs. 51,000 on the following Property viz.:

One Pucca built and roofed bldg. (C. J. Vizandah) holding No. 274, 274A, 274B and 274C occpd. as residence and/or shop for the storage of Hydrogenated G nut oil (vanaspati) and safety matches also situate at Dhulian, Ward No. IV, District Murshidabad. Incl. Loss or damage by cyclone flood and/or change of course of river and/or Erosion of river, landslides and/or subsidence. It is further noted that there is a thatched bldg. of residence within 50 ft. of the above premises, for one year from 3rd June, 1950 to 3rd June, 1951.

The said property is hereby held insured against damage by Fire, subject to the terms of the Applicant’s proposal and to the usual Conditions of the Society’s policies. It is, however, expressly stipulated that this protection Note cannot, under any circumstances be applicable for a longer period than Thirty Days, and that it is also immediately terminated before that date by delivery of the policy, or if the Risk be declined by the notification of such declinature.

Prem :Rs. 892-8-0 Fire @ 28 as % Prem : Rs. 382-8-0 Flood and other risks 12 as% Premium : Rs. 1,275-0-0.”

On June 7, the assured sent the premia by cheque. As no policy was received by them, the assured wrote a letter on July 1 (Ex. A/g) asking for the policy or for extension of the cover notes. This was not done.

On July 6, 1950 the Company wrote to the assured two identi- cally worded letters (except for changes in amounts and numbers of the policies) which read Calcutta 6th July, 1950 TO M/s ChandmullLal Chand, P.O. Dhulian, Murshidabad.

Dear Sir, In accordance with the inspection report lodged with this Co. we cancel the risk from 6th July, 1950 as noted below. The relative Endorsement is under preparation and will be forwarded to you in due; course.

Yours faithfully, (Sd.)/- Illegible Ag.Manager & Underwriter.

Nature of Alteration:

The above cover note is cancelled by the General Assurance Society Ltd. as from 6th July, 1950.”

On July 15, 1950 the assured wrote to say that they held the Company bound because although there was no erosion by the river when the proposals were submitted and accepted, the Company was trying to get out of the contract when the river was eroding the banks. They ended this letter by saying:

“Now when the erosion and/or change of course of river and/or subsidence have commenced, it is quite impossible to take any precautionary measure or to rein sure the same with any other office of Insurance at this stage.

On July 17, 1950 the Company prepared an endorsement for the ‘policies cancelling the risk and sent the endorsements to the assured. The endorsement read:

In the name of :-Messrs.ChandmullLal Chand, P.O.

Dhulian, Murshidabad.

It is hereby declared and agreed that as from 6th July 1950 the insurance by this policy is cancelled by The General Assurance Society Ltd., Calcutta, and a refund premium of Rs………. is hereby allowed to the assured on a pro rata basis.

(Sd)/- Illegible.

Ag.Manager & Underwriter.

Calcutta, In reply the latter said that as the risk had already “commenced’ and “taken place”, there could be no cancellation as there was no time left for the assured to take precautionary measures by reinsuring. In reply the Company referred to condition 10 of the Fire policy under which the Company claimed to cancel the policy at any time. Condition 10 of the Fire Policy read:

“10. This insurance may be terminated at any time at the request of the Insured, in which case the Society will retain the customary short period rate for the time the policy has been in force. This insurance may also at any time be terminated at the option of the Society, on notice to that effect being given to the Insured, in which case the Society shall be liable to repay on demand a ratable proportion of the premium for the unexpired terms from the date of the cancelment.”

In reply the assured wrote on August 2 that the condition did not ,apply to any risk except that of fire and could not, in any event, protect the Company after the risk had commenced. On 13th and 15th August the houses were washed away. After unsuccessfully demanding payment under the policies, the assured filed the present suit on the Original Side of the Calcutta High Court. It was dismissed with costs by G. K. Mitter J. but on appeal the claim was decreed to the extent of Rs. 1,10,000 with costs, the decretal amount to carry interest at 3%, per annum. The High Court certified the case as fit for appeal and the present appeal has been filed by the Company.

Before we deal with the question in dispute we may say a few words about the position of the Ganges river. in relation to the Dhulian town in general and the insured houses in particular. The town of Dhulian is situated on the bank of the river which, for several years, has been changing its course and eroding the bank on the side of Dhulian. In 1949 there was much erosion and the river had come as close as 1- 1/2 to 2 furlongs from the town and a few of the godowns lying close to the bank had been washed away. There is ample material to show what the condition of the river in relation to the insured houses was between June 2, 1950 when the proposal for insurance was made and August 13/15 when the houses were washed away, with particular reference to the 18th June, 1950 when one P. K. Ghose (D.W. 2) visited Dhulian to make local inquiries on behalf of the Company and the 6th July when the Company cancelled the risk and withdrew the cover. The evidence comes from both sides but is mostly consistent. Lalchand Jain (P.W.1) for the assured stated that on the 2nd of June the houses were 400/450 feet away from the bank of the river (Q. 73) and on that date there was no erosion because the river was quite calm (Q. 132). This continued to the second week of June (Q. 136). The river began to rise in the 3rd week of June but there was no erosion (Q. 137).

Erosion began by the end of June (Q. 142) and the current was then swift (Q. 144) and the right bank started to be washed away. Houses within 10-50 feet of the bank were first affected in the last week of June (Q. 180). At that time the insured houses were 400/450 feet away. Even on July 15, 1950 the distance between these houses and the river was 250 feet (Q. 179). SurendranathBhattacharjee (P.W.2), Overseer and Inspector, Dhulia Municipality stated that the erosion started four or five days after Rathajatra which took place on or about June 20, 1950. Bijoy Kumar (P.W.4), Retired Superintending Engineer is an important witness. He submitted three reports Exs. F, G and H to Government on May 27, 1949, November 4, 1949 and September 11, 1950. In these reports he gives a description of the scouring of Dhulian town on August 5, 1950. He said nothing about the state of affairs in the first week of July which he would undoubtedly have said if erosion had already begun then. With his report submitted on September 11, 1950, he sent a letter of 9th August, in which he said that he had visited Dhulian Bazar on August 5, 1950 and found that the scouring of the compound of the Police Station at the junction of the Ganges and Bagmari rivers had begun a fortnight earlier and that scouring must have been at the rate of 20-25 feet per day. From this evidence it is possible to form an opinion about state of the river on or about July 6, 1950.

The learned Judges of the Divisional Bench did not follow the decision of the Judicial Committee because they found it unacceptable. But a similar view of an identical condition was taken by this Court in the Hartford Fire Insurance Co. case (1). Sarkar J. there pointed out that a clause in this form was a common term in policies and must therefore be accepted as reasonable and that the right to terminate at will cannot, by reason of the circumstances, be read as a right to terminate for a reasonable cause. In that case the Hartford Office insured certain goods against fire between March 20, 1947 and March 1948 in the town of Amritsar. The policy was extended to loss by riot or civil commotion. Riots occurring in July 1947 in the Punjab, a godown in Bakarwana Bazar in Amritsar where insured goods were stored was looted and some goods were lost. The Hartford Office was informed and on August 7 1947 they wrote saying that the goods be removed to a safe place or the policy would stand cancelled after August 10, 1947, under condition 10 which was similar to condition 10 here. On August 15, 1947, the goods were lost by fire. The Hartford Office was held to be protected by the said condition. The reason of the rule appears to be that where parties agree upon certain terms which are to regulate their relationship, it is not for the court to make a new contract, however reasonable, if the parties have not made it for themselves. The contract here gave equal rights to the parties to cancel the policy at any time and the assurers could therefore invoke the condition to cancel the policy.

It was contended (and it has been so held by the Divisional Bench) that this cancellation was ineffective, because risk had already commenced and the policy could not be cancelled after the liability of the company began. As a general proposition, this is perfectly right. Condition 10 is intended to cancel the risk but not to avoid liability for loss which has taken place or to avoid risk which is already turning into loss. It is obvious that (1) A.I.R. 1956 S.C. 1288, a fire policy cannot be cancelled after the house has caught fire. But it is equally clear that unless the risk has already commenced or become so imminent that it must inevitably take place, such a clause can be invoked. If property is insured against flood, it is not open to the insurance company to send couriers on motor cycles ahead of the floods to cancel the policy. But if it is thought that a particular dam was not quite safe, the insurance company will be entitled to cancel the policy against flood before the dam has actually started to crumble or has crumbled. Cancellation is reasonably possible before the liability under the policy has commenced or has become inevitable and it is a question of fact in each case whether the cancellation is legitimate or illegitimate. In the present.case, it was always clear that the Ganges would get into the floods in the rainy season, but it was not clear that it would begin to erode the bank in such a way that these houses, which were at a distance of 400/500 feet from the bank would inevitably be washed away. The question thus is whether the cancellation was done after liability of the assurer under the policy had commenced or the loss had become inevitable. Here we must look at the evidence which was summarized earlier.

We are concerned with two dates in particular and they are June 18, 1950 when Ghose visited Dhulian and July 6 when the policy was cancelled. The houses according to Lalchand Jain (P.W. 1) were 400/500 feet away when the proposal was made. The river remained calm till the second week of June. It only began to rise in the third week of June. Thus on June 18, when Ghose visited the place, there was no flood and no erosion. Ghose’s report has not been produced but he could have only estimated the possibility of loss and no more. Even in the third week of June there was no erosion and it began by the end of June. Even on July 15 the distance between the river and the houses was 250 feet (see Q. 179). As the rate of erosion was about 20/25 feet per day (vide Bijoy Kumar P.W. 4) the houses were 400/500 feet away even on July 6. In these circumstances, it cannot be said that the loss had commenced or that it had become so certain as to be inevitable or that the cancellation was done in anticipation and with knowledge of inevitable loss. The cancellation was done at a time when no one could say with any degree of certainty that the houses were in such danger that the loss had commenced or became inevitable. There is no evidence to establish this. This case, therefore, falls within the rule of the Sun Fire Office(1) and the Hartford Fire Insurance Company(2) cases. The assurers were, therefore, within their rights under condition 10 of the policy to cancel it. As the policy was not ready they were justified in executing it and cancelling it. The right of the plaintiff to the policy and to enforce it was lost by the legal action of cancellations.

(1) [1889] 14 A.C. 98.

(2) A.I.R. 1956 S.C. 1288.

In the result the appeal must succeed. It is allowed. The decree passed by the Divisional Bench is set aside and the judgment of G. K. Mitter, J. dismissing the suit is restored. Although costs must follow the event, we think in the special circumstances, of this case we should make no order about costs.

Appeal allowed.

In conclusion it can be said that in many cases relating to property insurance the validity of cancellation of policies had been scrutinized by the Supreme Court of India based on the level of risks in the context of contingencies and genuineness of damages. So decisions had gone sometimes in favour of the policy holders in other times in favour of the insurance companies.

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