CASE NO.: Appeal (civil) 1112 2000 PETITIONER: M/S HANIL ERA TEXTILES LIMITED Vs. RESPONDENT: ORIENTAL INSURANCE CO. LTD. & ORS. DATE OF JUDGMENT: 29/11/2000 BENCH: M.J.Rao, G.G.Balakrishnan JUDGMENT:
K.G. BALAKRISHNAN, J.
The appellant is a manufacturer of cotton, polyester,
woollen and viscose yarns and their blends. It is a hundred
per cent export-oriented unit and has got two manufacturing
mills, one engaged in the manufacture of spinning acrylic
yarn (Mill A) and the other for spinning cotton yarn and
various blended yarn (Mill B). Appellant started production
of these yarns in 1994 and in the same year had taken 12
fire insurance policies for a total assured sum of Rs.
125.72 crores. These policies were initially valid from
January 1994 to October 1995 and were later renewed from
time to time. These policies covered raw materials, stocks,
plant and machinery, accessories, spares, building etc.
While issuing the policies, the officials of the respondent
Insurance Company had visited the premises of the appellant
factory and inspected machinery, building, stock etc. and
the premia payable by the appellant were fixed accordingly.
Mill ‘B’ has a Blow-room since cotton processing requires
the said facility. The officials of the respondent
Insurance Company inspected and verified the Blow- room and
the respondent informed the appellant on 22.11.1994 that the
property situated in the Blow-room in Mill ‘B’ attracted a
higher premium of Rs. 8.9 per thousand instead of Rs. 2.5
per thousand charged earlier and accordingly an additional
sum of Rs. 93,316/- was required to be paid by the
appellant. The appellant paid the additional premium of Rs.
93,316/- as demanded by the respondent Insurance Company.
A major fire accident occurred in Mill ‘B’ on 24.12.94
destroying the stocks, machinery and building therein.
Admittedly, the Blow-room was not affected by fire. The
appellant immediately reported the matter to the respondent
Insurance Company. The surveyors visited the Mill on
6.1.1995 to assess the extent of damage caused by the fire.
Having taken several months to complete their report, the
Surveyors ultimately assessed a net claim of Rs.
3,68,60,231/-, though, according to the appellant’s
estimate, the loss was around Rs. 7 crores.
On 24.1.95, the respondent Insurance Company informed
the appellant that a sum of Rs. 49,89,463/- should be paid
as additional premium as the Tariff Advisory Committee (TAC)
approved type Automatic Diversion System or Co-2 Flooding
System in the Chute Feeding arrangement between the
Blow-room and the Carding Section was not installed in the
Mill and in the absence of the fire protection system as
prescribed under the TAC regulation, premium at the rate of
Rs. 8.9 per thousand would be applicable to the entire
factory w.e.f. 1.1.95, excluding the raw material in
godown. Subsequently, on 13.7.95, the respondent Insurance
Company again addressed a letter to the appellant stating
that the earlier letter for payment of Rs. 49.89,463/- was
cancelled and a sum of Rs. 1,13,13,344/- was to be paid by
the appellant as the entire factory building, including the
Blow-room was a single communicating structure and,
therefore, the premium at a higher rate of Rs. 11.73 per
thousand was applicable to the entire area. This was based
on the alleged inspection by the engineers of the respondent
Insurance Company along with the engineers of the Tariff
Advisory Committee (TAC) and the Loss Prevention Association
of India Ltd. (LPA) after the date of the fire. The
appellant was not agreeable to pay the additional amount so
required to be paid to the respondent Insurance Company and
contended that the Blow-room was segregated in all respects
and the TAC approved fire- fighting equipment had been
installed by the appellant. On 19.9.96, the respondent
Insurance Company informed the appellant that the competent
authority had approved the settlement of the fire claim for
Rs. 2,94,10,834/- and an amount of Rs. 73,67,636/- was due
towards customs liability. The respondent Insurance Company
sought to claim a deduction of Rs. 1,20,77,614/- towards an
alleged short-charged premium. Thus, on 27.11.96, the
appellant received a cheque for Rs. 1,71,33,220/- out of a
total claim of Rs. 3,68,60,231/-. The respondent Insurance
Company required the appellant to give an undertaking for a
deduction of the short- charged premium. Aggrieved by the
same, the appellant preferred a complaint before the
National Consumer Disputes Redressal Commission and prayed
that the respondent Insurance Company be directed to pay an
amount of Rs.1,23,97,036/- with 24% interest from 24.12.94
till the date of payment. The appellant also prayed for
payment of interest @ 24% for the delayed payment of Rs.
1,73,33,220/- and also sought other incidental reliefs.
The respondents 1 to 4 (collectively referred to as
‘the respondent Insurance Company” in the Judgment) filed a
joint reply before the Commission, wherein the allegations
made in the complaints were denied and it was submitted that
the withholding of the sum of Rs. 1.20,77,614/- was for
adequate reasons and there was no deficiency of service
alleged by the complainant. It was also denied that the
demand for the additional premium was an afterthought. The
respondent Insurance Company further stated that the said
premium had to be charged in accordance with the Fire
Tariffs prescribed by the Tariff Advisory Committee, a
statutory body set up under the Insurance Act, 1938, as it
was obligatory for all insurance companies to charge premium
in accordance therewith. For charging the Tariff premium,
it was immaterial whether the fire originated in the main
area and not in the Blow-room or whether the Blow-room was
totally unaffected by the fire. The Fire Tariffs also
provide for the manner in which the various sections of the
multiple occupancy risk will be segregated from each other.
It is only when the segregation is done in the manner
provided for by the rules that varying rates of premium can
be charged for each section of a building independently on
its own merits. The premises of the appellant factory were
inspected in March 1994 and the Blow-room was not
operational. In view of the Tariff provisions and on the
fact of non-segregation of the Blow-room from the main area,
an amount of Rs. 1,13,13,344/- had to be short-charged
towards premium. A copy of the report of the Government
Audit Party was produced by the respondent Insurance Company
before the National Commission. The respondent Insurance
Company contended that the Blow-room was not segregated from
the main room and, therefore, the appellant was liable to
pay the additional premium.
After hearing both the sides, the Commission came to
the conclusion that the enhancement of the premium was based
on the application of the TAC Regulations and it was the
duty of the respondent Insurance Company to have inspected
and monitored the Complainant Company even prior to the
incidence of fire, but that cannot be said to be a
deficiency of service qua the Complainant. The respondent
Insurance Company had every right to claim any shortage of
premium at a later date even after the issue of the
policies, if it was found due and recoverable subsequently
under the TAC Regulations. The Commission held that the
appellant was not entitled to any other relief sought for in
the complaint. The complaint was accordingly dismissed
without costs. Aggrieved by the same, the present appeal is
filed.
We heard counsel on either side elaborately. The
learned senior counsel for the appellant contended that the
respondent Insurance Company charged a higher rate of
premium for the Blow-room, whereas the rest of the area was
permitted to be insured at a lower premium and this is
indicative of the fact that the Blow-room was separated and
segregated from the rest of the area. The learned senior
counsel for the appellant further urged that six fire-proof
doors had been installed to protect the Blow-room area and,
therefore, the contention of the respondent that the
Blow-room and the rest of the area was a single
communicating structure is not correct. The learned counsel
for the respondent, on the other hand, contended that the
higher rate of premium was charged in respect of the
Blow-room on the assumption that the appellant would make
the Blow-room a segregated portion. The respondent’s
counsel contended that the Blow-room started operation
somewhere in April, 1994, and even though the appellant was
advised to furnish the separate values of the bifurcation,
the same was not furnished. Meanwhile, some of the policies
became due for renewal from 1.11.1994 and the renewal was
done on a provisional basis. The information relating to
bifurcation was given by the appellant only on 14.11.94 and
as the Insurance Company had not admitted but only assumed
that the Blow- room was segregated from the rest of the area
of the mill, the additional premium of Rs. 93,316/- was
demanded by the respondent for insurance from 1.11.94. The
contention of the respondent’s counsel is that the Blow-room
was segregated from the rest of the area with fireproof
doors only after the incident of fire.
It was urged by the respondent’s counsel that based on
the recommendations of the Tariff Advisory Committee, the
appellant was asked to pay the additional premium of Rs.
1,13,13,344/- as according to the respondent Insurance
Company, the appellant should have observed the TAC approved
type of Automatic Diversion System or Co-2 Flooding system
in the Chute Feeding arrangement between the Blow-room and
the Carding Section, but this was not done by the appellant
prior to the occurrence of the fire and the Blow-room was
not segregated from the rest of the area. Therefore, the
additional premium of Rs.1,13,13,344/- was liable to be paid
by the appellant.
In this case, it is not disputed that the appellant
had valid insurance policies during the period when the fire
occurred in the Mill. According to the appellant, the loss
suffered by the appellant was around Rs.7 crores. However,
the independent surveyor assessed the loss at
Rs.3,68,60,231/. Even according to the respondent, the
amount payable under the insurance policies was settled at
Rs. 2,94,10,834/- vide its letter dated 19th September 1996
and by the same communication the appellant was informed
that a sum of Rs. 1,20,77,614/- would be deducted. The
dispute relates only to the question whether the appellant
was in fact liable to pay the additional premium of Rs.
1,13,13,344/-. This claim was based on the basis that the
appellant had not segregated the Blow-room from the rest of
the area and therefore, the entire area attracted premium at
the rate of Rs.11.73 per thousand. It may be noted that
initially the entire area was insured @ Rs.2.5 per thousand,
and subsequently the officers and engineers of the
respondent Insurance Company visited the premises of the
appellant factory and vide communication dated 22.11.1994,
the Blow- room was separately insured at the higher rate of
Rs. 8.9 per thousand. In the letter dated 22.11.94
addressed to the appellant, it was stated that: “We are in
receipt of your letter dated 14th November, 1994 furnishing
separate values in respect of the properties situated in the
Blow-room area of your factory referred to herein above.
The additional premium in respect of the said property comes
to Rs. 93,316/- as per the premium computation shown
hereunder.” Therefore, it is clear that the Blow-room was
taken as a separate portion segregated from the rest of the
factory premises.
The fire occurred on 24.12.1994 and the surveyors M/s
Mehta & Padamsey Pvt. Ltd. visited the premises on
6.1.1995. In the report of the Surveyors, dated 16.5.1996,
it was stated that the Blow-room was connected with the
process area via the opening meant for the fireproof doors.
It was also stated that the entire main factory building,
including the area of the Blow-room was a single
communicating structure. But, on the other hand, it is
pertinent to note that the representatives of the Loss
Prevention Association of India Ltd. also visited the
factory premises and in paragraph 7.1 of their report , it
is stated by them as under:
“As mentioned earlier, various sections of the factory
were not segregated from each other (except Blow Room which
was segregated by means of double fire-proof doors). So the
fire spread very quickly from the stock of raw material to
the finished product stack which was located at the other
end of the section named ‘Mixing Conditioning Department.”
[emphasis supplied]
When the appellant raised objections regarding the
opinion expressed by the surveyors, M/s Mehta & Padamsey
Pvt. Ltd., a revised report was given on February 11, 1997,
wherein it was stated that in the absence of verifiable
records, the only date when it is possible to state with
certainty that the Blow-room was segregated, is January 6,
1995, but this opinion was not based on any available
records or data.
It is of primary importance to note that the fire had
not spread to the Blow-room area. That raises a strong
presumption that the Blow-room was segregated even before
the accident. The appellant had also produced documents to
show that they had installed the fireproof doors to protect
the Blow-room. The next important fact was that the
respondent demanded a higher rate of premium for the
Blow-room in November 1994 and this is prima facie
indicative of the fact that the Blow-room was separated from
the rest of area. The observations of the representatives
of the Loss Prevention Association of India Ltd., who
visited the factory on 6.1.1995, cannot be lightly
disregarded. Therefore, it is clear that the attempts of
the respondent Insurance Company to show that the appellant
had not taken effective steps to segregate the Blow-room
cannot succeed.
The respondent Insurance Company claimed the
additional premium of Rs. 1,13,13,344/- on the basis of the
recommendations of the Tariff Advisory Committee, and it
seems that the Comptroller and Auditor General had also
recommended that this additional premium should be paid by
the appellant. According to the opinion of the Tariff
Advisory Committee, the Blow-room was not segregated and the
entire main factory, including the building and the
Blow-room, was a single communicating structure and,
therefore, premium at the higher rate of Rs. 11.73 per
thousand should have been charged for the entire area and
this higher rate of Rs. 11.73 was reduced to Rs. 8.9 per
thousand by the Tariff Advisory Committee with effect from
1.4.1994. It was made clear that the revised lower rate of
Rs.8.9 per thousand would apply to the new business or
renewals falling due on or after 1.4.94. It is also the
case of the respondent Insurance Company that the
TAC-approved type Automatic Diversion System or Co-2
Flooding System in the Chute Feeding arrangement between the
Blow-room and the Carding Section was not installed. It is
pertinent to note that the appellant was never informed that
these arrangements have to be made. The respondent
Insurance Company has also not produced any correspondence
to show that when the insurance policies in question were
issued, the appellant was informed about these matters or
that the appellant refused to comply with these
requirements.
Learned Author E.R. Hardy Evamy, in his book relating
to Fire & Motor Insurance, 2nd Edition, on page 7, has
observed:
“The contract of fire insurance, like other contracts
of insurance, differs from any ordinary contract in that it
requires, throughout its existence, the utmost good faith
(uberrima fides) to be observed on the part of both the
insured and the insurers.
In addition to the ordinary obligation, which exists
in every contract that all representations made by the
parties during the negotiations leading up to the contract
shall be honestly made, it is an implied term of the
contract of fire insurance that the person seeking the
insurance shall communicate to the insurers all matters
within his knowledge which are in fact material to the
question of the insurance, and not merely all those which he
believes to be material.”
There is no case that the insured had suppressed any
material, whereas the respondent Insurance company had not
apprised the insured about the Automatic Diversion System or
the Co-2 Flooding System in the Chute Feeding Arrangement.
The special precautions to be made on the basis of the
report of the TAC are generally matters within the knowledge
of the insurers and the contract of insurance being a
contract of utmost good faith, ordinarily, these matters
should have been brought to the notice of the insured before
the policy was issued in his favour. It is also important
to note that the respondent Insurance Company did charge a
higher rate of premium for the “Blow-room”. There is
nothing to indicate that it was done on a provisional basis
or that the insured suppressed any material facts. In fact,
the engineers of the respondent Insurance Company visited
the appellant’s factory prior to the issuance of the
policies and charged a higher rate of premium for the
Blow-room. When premium is thus demanded and collected at a
higher rate, it is an indication regarding the nature of the
contract that subsists between the parties, namely, that the
insurer was aware of the higher risks involved. In
Halsbury’s Laws of England, Vol. 25, at Para 458, the
following observations are made:
“The rate of premium in fact charged may give rise to
important inferences. The materiality of a representation,
which has been made, may be inferred from a reduced rate of
premium being charged. Similarly, ignorance on the part of
the insurers of some matter supposed to be well known may be
inferred if they charge no more than the ordinary rate of
premium, while an exceptionally high rate of premium may be
indicative of their acceptance of the risk as hazardous
without requiring disclosure of the precise facts making it
so.”
It is clear that the respondent Insurance Company
recovered the premium at a higher rate for the Blow-room and
this can only be on the basis of the acceptance of the fact
that the Blow-room was a separate unit. Therefore, the
contention of the respondent that the Blow-room and the rest
of the area was a single communicating structure cannot be
accepted.
On reappraisal of the evidence, including various
correspondences between the insured and the insurer, it is
clear that the appellant had segregated the Blow-room from
the rest of the area even prior to the occurrence of fire.
The fact that the respondent charged a higher rate of
premium after having inspected the premises, and the report
of the Loss Prevention Association of India Ltd. that the
Blow-room was segregated by means of double fire-proof doors
and the fire had not spread to this area, strengthen the
plea of the appellant as regards the Blow-room. It is also
to be noted that the respondent Insurance Company received
the separate values of bifurcation as early as on 14.11.94
without any demur and went ahead with the issuance of policy
charging premium at a higher rate for the Blow-room. The
belated steps taken by the respondent to charge premium at
still higher rate for the entire area was not justified
under law. It may be noted that out of Rs. 1,13,13,344/-,
an amount of Rs. 43,99,003/- was sought to be levied as
premium due for the period 1993-94. This amount was sought
to be recovered from the appellant apparently much after the
lapse of the validity period of those policies. Therefore,
we hold that a sum of Rs. 1,20,77,614/- due to the
appellant was illegally withheld by the respondent.
In the result, the respondent Insurance Company is
directed to pay an amount of Rs. 1,20,77,614/- to the
appellant with 12% interest per annum from 14.3.97, that is
the date of the complaint filed by the appellant before the
National Consumer Disputes Redresssal Commission, up to the
date of payment. The appellant would also be entitled to
proportionate costs from the respondent Insurance Company.
The appeal stands allowed to the extent indicated above.