LEGAL ISSUE: Whether an insurance company can exclude specific perils (STFI) from a renewed insurance policy, and if so, whether the insured is bound by such exclusion if they were aware of it.

CASE TYPE: Consumer

Case Name: Shree Ambica Medical Stores & Ors vs. The Surat People’s Co-operative Bank Limited & Ors

Judgment Date: 28 January 2020

Date of the Judgment: 28 January 2020
Citation: [Not Available in Source]
Judges: Dr Dhananjaya Y Chandrachud, J and Ajay Rastogi, J.
Can an insurance company exclude specific perils from a renewed policy? The Supreme Court of India addressed this question in a case involving a dispute over an insurance claim. The court examined whether an insurer could exclude “STFI perils” (storm, tornado, flood, and inundation) from a policy renewal and whether the insured was bound by this exclusion, especially if they had knowledge of it. The judgment was delivered by a two-judge bench consisting of Dr. Dhananjaya Y Chandrachud, J and Ajay Rastogi, J.

Case Background

Shree Ambica Medical Stores (appellants) had a cash credit facility with The Surat People’s Co-operative Bank Limited (first respondent). As part of the agreement, the appellants were required to insure their hypothecated goods. The bank, acting as a corporate agent for New India Assurance Company Limited (third respondent), obtained insurance policies for its borrowers, including the appellants.

Initially, the insurance policies covered the goods stored at “12/1123-1124, Basement, Meghdoot Apartment, Surat.” Over time, the insurance coverage evolved. By 2005-06, the appellants had two insurance policies: one for Rs 25 lakhs covering the Meghdoot Apartment location and another for Rs 60 lakhs. However, the Rs 60 lakh policy for 2005-06, while initially intended to cover the same location, specifically excluded STFI perils. The insurer refunded a portion of the premium related to STFI perils, which was deposited into the appellants’ account by the bank.

In August 2006, Surat experienced severe floods, damaging the appellants’ goods. The appellants filed a claim for Rs 78,66,857. The insurer paid Rs 23 lakhs under the Rs 25 lakh policy but rejected the claim under the Rs 60 lakh policy due to the exclusion of STFI perils. This led the appellants to file a consumer complaint.

Timeline

Date Event
31 May 1998 Appellants and the first respondent entered into a cash credit facility agreement.
1998-99 First insurance policy for Rs 60 lakhs obtained by the first respondent for the appellants.
1999-2000, 2000-2001, 2001-02 Insurance policies renewed covering goods at Meghdoot Apartment, Surat.
2001 Insurance policy renamed as ‘Standard Fire and Special Perils Policy’.
2001-02 Value of insurance cover enhanced to Rs 85 lakhs.
2002-03 Separate insurance covers issued: Rs 25 lakhs for Meghdoot Apartment, and Rs 60 lakhs for “B-205, Plot No 17-B, Village Karnaj”.
2003-04, 2004-05 Two insurance covers continued: Rs 25 lakhs for Meghdoot Apartment and Rs 60 lakhs for Village Karnaj.
2005-06 Location of Rs 60 lakh policy changed to Meghdoot Apartment, excluding STFI perils.
3 August 2005 First respondent paid Rs 29,038 to the insurer for insurance cover.
26 September 2005 Insurer refunded Rs 992 for STFI perils to the bank, which was deposited in the appellants’ account.
7 August 2006 Surat floods occurred, damaging the appellants’ goods.
11 November 2006 The bank wrote to the insurer, expressing surprise at the exclusion of STFI perils from the Rs 60 lakh policy.
6 September 2007 Bank manager filed an affidavit stating the bank was a corporate agent of the insurer.
24 June 2008 Insurer repudiated the Rs 60 lakh claim.
26 July 2008 Appellants filed a consumer complaint before the State Commission, Gujarat.
14 February 2019 State Commission allowed the complaint against the bank and its manager.

Course of Proceedings

The State Consumer Disputes Redressal Commission of Gujarat ruled in favor of the appellants, holding the bank liable for not ensuring the Rs 60 lakh policy included STFI perils. The State Commission ordered the bank to pay Rs 55,66,877 with interest, plus damages for mental agony and litigation costs. The State Commission found that the bank had erred in filling out the proposal form and had not properly enquired about the returned premium for STFI perils.

However, the National Consumer Disputes Redressal Commission reversed the State Commission’s decision. The National Commission held that the insurer was entitled to exclude STFI perils as the location of the insured goods had changed, and a new policy was issued. The National Commission also noted that neither the bank nor the borrower had protested the exclusion of STFI perils or the refund of the premium. It concluded that since the appellants received a copy of the policy and the refund, they were estopped from questioning the policy terms. The National Commission set aside the order of the State Commission.

Legal Framework

The Supreme Court considered the following legal provisions:

  • Section 64VB of the Insurance Act 1938: This provision states that an insurer cannot assume any risk unless the premium is received in advance. It also allows for the refund of premiums if a policy is canceled or its terms are altered. Specifically, “64VB. No risk to be assumed unless premium is received in advance.—(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by him or is guaranteed to be paid by such person in such manner and within such time as may be prescribed or unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner.”

  • Clauses 3(2) and 4(1) of the notification issued by the Insurance Regulatory and Development Authority (IRDA) on 16 October 2002: Clause 3(2) mandates that insurers provide all material information to enable prospects to choose the best cover. Clause 4(1) requires a written proposal for insurance and the provision of a copy to the insured within 30 days of acceptance. Specifically, “3(2) An insurer or its agents or other intermediatory shall provide all material information in respect of a proposed cover to the prospect to enable the prospect to decide on the best cover that would be in his or her interest.” and “4(1) Except in cases of a marine Insurance cover, where current market practices do not insist on a written proposal form in all cases, a proposal for grant of a cover, either for life business or for general business, must be evident by a written document. It is the duty of an insure to furnish to the insured free of charge, within 30 days of the acceptance of a proposal, a copy of the proposal form.”

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Arguments

Appellants’ Arguments:

  • The insurer did not inform them about the exclusion of STFI perils when the policy was renewed for 2005-06 and 2006-07.
  • The proposal form was not provided to them within 30 days, as required by IRDA regulations.
  • The policy issued in 2005-06 was a renewal, not a new policy, and the insurer could not exclude STFI perils.
  • The bank, acting as the insurer’s corporate agent, signed the proposal form without informing the appellants.
  • The refund of Rs 992 was made without any written intimation about the exclusion of STFI perils.
  • Relied on the judgment of the Supreme Court in Biman Krishna Bose v United India Insurance Co Ltd [(2001) 6 SCC 477], arguing that a renewal should continue the original policy terms.

Bank’s Arguments:

  • The primary duty to obtain insurance was the appellants’ responsibility as borrowers.
  • The bank did not enter an incorrect address in the proposal form.
  • A copy of the policy was given to the appellants, who should have been aware of the STFI exclusion.
  • The bank supported the findings of the National Commission.

Insurer’s Arguments:

  • The Rs 60 lakh policy for 2005-06 specifically excluded STFI perils.
  • The insurer refunded the portion of the premium related to STFI perils.
  • The refund was deposited in the appellants’ account, indicating their knowledge of the exclusion.
  • It was a commercial decision to exclude STFI perils from the Rs 60 lakh policy.

Submissions of Parties

Appellants Bank Insurer
Non-intimation of STFI exclusion during policy renewal. Primary duty to obtain insurance was the appellants’ responsibility. Rs 60 lakh policy specifically excluded STFI perils.
Non-receipt of proposal form within 30 days. Bank did not enter an incorrect address in the proposal form. Refunded premium for STFI perils.
2005-06 policy was a renewal, not a new policy. Copy of policy was given to the appellants. Refund was deposited in the appellants’ account.
Bank signed the proposal form without informing the appellants. Supported the findings of the National Commission. Commercial decision to exclude STFI perils.
Refund of Rs 992 without written intimation of exclusion.
Relied on Biman Krishna Bose v United India Insurance Co Ltd

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

  1. Whether the insurer could exclude STFI perils from the insurance policy of Rs 60 lakhs for the year 2005-06.
  2. Whether the appellants were aware of the exclusion of STFI perils from the insurance policy of Rs 60 lakhs.

Treatment of the Issue by the Court

Issue Court’s Decision Brief Reasons
Whether the insurer could exclude STFI perils from the insurance policy of Rs 60 lakhs for the year 2005-06. Yes The court held that the insurer was entitled to exclude STFI perils because the policy for 2005-06 was a new policy due to a change in the location of the insured goods.
Whether the appellants were aware of the exclusion of STFI perils from the insurance policy of Rs 60 lakhs. Yes The court found that the appellants were aware of the exclusion because they were provided with a copy of the policy and the premium for STFI perils was refunded and credited to their account.

Authorities

The Supreme Court relied on the following authorities:

Authority Court How it was used
General Assurance Society Ltd v Chandumull Jain [AIR 1966 SC 1644] Supreme Court of India The court cited this case to emphasize that the court’s duty is to interpret the contract as agreed upon by the parties and not to create a new contract.
Biman Krishna Bose v United India Insurance Co Ltd [(2001) 6 SCC 477] Supreme Court of India The court distinguished this case, which dealt with a mediclaim policy renewal, from the present case, noting that the present case involved a new policy with a change in location and exclusion of STFI perils.
Section 64VB of the Insurance Act 1938 Statute The court referred to this provision to highlight that an insurer cannot assume risk without receiving the premium in advance and that refunds are to be made to the insured in case of cancellation or alteration of terms.
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Judgment

How each submission made by the Parties was treated by the Court?

Party Submission Court’s Treatment
Appellants The insurer did not inform them about the exclusion of STFI perils during renewal. Rejected. The court held that the appellants were aware of the exclusion because they were provided a copy of the policy and received a refund of the premium.
Appellants The proposal form was not provided within 30 days. Not explicitly addressed. The court focused on the fact that the appellants had received a copy of the policy and the refund, which implied knowledge of the exclusion.
Appellants The 2005-06 policy was a renewal, not a new policy. Rejected. The court held that the change in location led to a new policy, allowing the insurer to exclude STFI perils.
Appellants The bank, as the insurer’s agent, signed the proposal form without informing them. Not considered a significant factor. The court emphasized that the appellants had knowledge of the policy terms through the policy copy and premium refund.
Appellants Refund of Rs 992 was made without written intimation about STFI exclusion. Rejected. The court held that the refund was sufficient to indicate the exclusion of STFI perils.
Appellants Relied on Biman Krishna Bose v United India Insurance Co Ltd Distinguished. The court found that the case was not applicable as that case dealt with an arbitrary refusal to renew a mediclaim policy, whereas the present case involved a new policy with a change in location and exclusion of STFI perils.
Bank The primary duty to obtain insurance was the appellants’ responsibility. Acknowledged. The court noted that the appellants had a duty to ensure the policy covered their needs.
Bank The bank did not enter an incorrect address in the proposal form. Acknowledged. The court did not find this to be a significant factor in its decision.
Bank A copy of the policy was given to the appellants. Accepted. This was a key factor in the court’s finding that the appellants were aware of the exclusion.
Insurer The Rs 60 lakh policy specifically excluded STFI perils. Accepted. The court upheld the insurer’s right to exclude STFI perils in the new policy.
Insurer The insurer refunded the premium for STFI perils. Accepted. This was a key factor in the court’s finding that the appellants were aware of the exclusion.
Insurer The refund was deposited in the appellants’ account. Accepted. This was a key factor in the court’s finding that the appellants were aware of the exclusion.
Insurer It was a commercial decision to exclude STFI perils. Accepted. The court upheld the insurer’s right to make such commercial decisions.

How each authority was viewed by the Court?

  • The Supreme Court cited General Assurance Society Ltd v Chandumull Jain [AIR 1966 SC 1644]* to emphasize that the court must interpret the contract as it is, and not create a new one.
  • The Supreme Court distinguished Biman Krishna Bose v United India Insurance Co Ltd [(2001) 6 SCC 477]*, stating that the case dealt with an arbitrary refusal to renew a mediclaim policy, which was not the case here.
  • The Court used Section 64VB of the Insurance Act 1938 to highlight that no risk can be assumed without premium and that refunds are to be made to the insured in case of cancellation or alteration of terms.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

  • Contractual Terms: The court emphasized that the terms of the insurance contract are paramount. The policy for 2005-06 explicitly excluded STFI perils, and the court was bound to uphold this exclusion.

  • Knowledge of the Insured: The court found that the appellants had constructive knowledge of the exclusion of STFI perils. This was evidenced by the fact that they received a copy of the policy and the refund of the premium, which was deposited into their account.

  • New Policy: The court held that the change in the location of the insured goods led to the issuance of a new policy, not a renewal. This allowed the insurer to change the terms of the policy, including the exclusion of STFI perils.

  • Commercial Decision: The court recognized the insurer’s right to make commercial decisions regarding the terms of the policy. The exclusion of STFI perils was deemed a valid commercial decision.

  • No Protest: The court noted that the appellants did not protest the exclusion of STFI perils during 2005-06 or in the renewed term of 2006-07. This lack of protest further supported the court’s finding that the appellants were aware of the exclusion.

Sentiment Analysis Ranking

Factor Percentage
Contractual Terms 35%
Knowledge of the Insured 30%
New Policy 20%
Commercial Decision 10%
No Protest 5%
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Fact:Law Ratio

Category Percentage
Fact 40%
Law 60%

Logical Reasoning:

Issue: Whether the insurer could exclude STFI perils?
↓
Change in Location of Insured Goods
↓
New Policy Issued, Not Renewal
↓
Insurer Entitled to Exclude STFI Perils
Issue: Whether the appellants were aware of the STFI exclusion?
↓
Appellants Received a Copy of the Policy
↓
Premium for STFI Perils Refunded and Credited to Appellants’ Account
↓
Appellants had Knowledge of STFI Exclusion

The court considered alternative interpretations but rejected them because the evidence showed that the appellants had knowledge of the terms of the policy and the refund of the premium.

The court’s decision was based on the following reasons:

  • The insurance policy for 2005-06 specifically excluded STFI perils.
  • The appellants were provided with a copy of the policy.
  • The premium for STFI perils was refunded and credited to the appellants’ account.
  • The change in location of the insured goods led to the issuance of a new policy.
  • The insurer had the right to make commercial decisions regarding the policy terms.

Key quotes from the judgment:

  • “In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the court to make a new contract, however reasonable, if the parties have not made it themselves…”
  • “The terms of the policy will govern the contract between the parties. The STFI risks were specifically excluded from the coverage of the policy.”
  • “The appellants in their rejoinder did not specifically deny the averment that they were furnished with a copy of the policy. The appellants have also not denied the fact that the premium on account of STFI perils which was refunded by the insurer was credited to their account.”

Key Takeaways

  • Importance of Contractual Terms: Insurance policies are contracts, and their terms must be strictly adhered to. Courts will interpret the contract as it is written, and not create new terms.

  • Duty to Read Policy: Insured parties have a responsibility to read and understand their insurance policies. They cannot claim ignorance of policy terms if they have been provided with a copy of the policy.

  • Impact of Policy Changes: Changes in the location of insured goods can lead to the issuance of a new policy with different terms. Insurers are entitled to make commercial decisions regarding the terms of the policy.

  • Importance of Communication: Insured parties should promptly address any discrepancies or concerns about their policy with the insurer or bank. Failure to do so may result in the insured being bound by the policy terms.

Directions

The Supreme Court did not issue any specific directions in this case. The appeal was dismissed with no order as to costs.

Development of Law

The ratio decidendi of the case is that an insurer can exclude specific perils from a new insurance policy if there is a change in the location of the insured goods, and the insured is bound by such exclusion if they had knowledge of it through a copy of the policy and a refund of the premium. This judgment clarifies that a change in location can lead to the issuance of a new policy, and the insurer is entitled to make commercial decisions regarding the terms of the policy. This decision also emphasizes the importance of the insured’s responsibility to read and understand the policy terms.

Conclusion

The Supreme Court upheld the National Commission’s decision, ruling that the insurer was not liable for the loss under the Rs 60 lakh policy because STFI perils were specifically excluded. The court emphasized that the terms of the contract govern the relationship between the parties and that the insured had knowledge of the exclusion. The Supreme Court dismissed the appeal filed by Shree Ambica Medical Stores.

Source: Shree Ambica Medical Stores vs. Surat People’s Co-operative Bank