Case: SHREE AMBICA MEDICAL STORES Vs. THE SURAT PEOPLES CO-OPERATIVE BANK LTD

2. On 31 May 1998, the appellants and the first respondent entered into an agreement for a cash credit facility. In terms of clause 15 of the agreement, the appellants were under an obligation to insure the goods which were hypothecated to the bank. Clause 15 also contained a stipulation that in the event that the appellants failed to insure the goods, it was open to the bank to secure a cover of insurance for the goods and to recover the expenses incurred along with the premium from the appellants. The clause is extracted below:(15) We have to insure the goods given in hypothecation to the Bank against fire etc. at our own costs in favour of the Bank and if we fail to take insurance then the Bank can take the insurance and can recover all the expenses incurred and also the premium amount borne by them from us as the Bank has Right as per this Document3. The first respondent bank has stated that it was acting as a corporate agent of the insurer and, as a matter of routine practice, obtained policies for all its borrowers. As a practice, the first respondent upon receipt of an intimation, would remit the premium payable on behalf of the borrowers. The same course of action was followed by the first respondent under the lending facility granted to the appellants. The first respondent obtained the first insurance policy for the period 1998-99 in the sum of Rs 60 lakhs from the insurer, who is the third respondent to the appeal. The insurance policy covered a specific location of the borrower where the goods were stored, namely: 12/1123-1124, Basement, Meghdoot Apartment, Surat4. The policies of insurance for the succeeding years 1999-2000, 2000-2001 and 2001-02 covered the goods of the borrower stored at the above premises. From 2001, the insurance policy was renamed as a Standard Fire and Special Perils Policy. The perils insured included those occasioned by storm, tornado, flood and inundation. These together are referred to as STFI Perils. In 2001-02 the value of the insurance cover was enhanced by an amount of Rs 25 lakhs so as to increase the total sum insured to Rs 85 lakhs. For 2002-03, the insurer issued a policy covering a sum insured of Rs 25 lakhs in terms of the same location at Meghdoot Apartment, Surat noted above. However, a separate insurance cover in the amount of Rs 60 lakhs was issued in respect of the goods stored at following location: B-205, Plot No 17-B, Village Karnaj5. Similarly, for 2003-04 and 2004-05 there were two insurance covers; one in the amount of Rs 25 lakhs in respect of the location at Meghdoot Apartment, Surat and the second in the amount of Rs 60 lakhs covering the location at B- 205, Plot 17-B, Village Karnaj. For 2005-06 and 2006-07, the position of the insurance cover is reflected in an extract from a tabulated chart filed by the insurer6. For 2005-06, the location contained in the policy with a sum insured of Rs 60 lakhs was changed from B-295, Plot 17-B, Village Karnaj to 12/1123-1124, Basement, Meghdoot Apartment, Surat. Thus, both the policies for 2005-06 covered the same location. For 2006-07, the same position continued for both the insurance covers7. On 3 August 2005, the first respondent while filling up the proposal form handed over a cheque of Rs 29,038 to the insurer for a cover which would also extend to STFI perils. On 26 September 2005, the premium of Rs 992 covering STFI perils was refunded by the insurer to the bank by a cheque which was deposited by the bank in the appellants account. Hence for 2005-06, the policy cover of Rs 60 lakhs extended to fire and allied perils but specifically excluded STFI perils8. On 7 August 2006, the city of Surat was hit by floods. The appellants claim that as a result of the floods the goods which were stored in their premises were destroyed. The appellants made a claim to the insurer for an alleged loss of Rs 78,66,857. A surveyor was appointed by the insurer to inspect the extent of damage. The insurer accepted and paid the claim of Rs 23 lakhs under the policy cover of Rs 25 lakhs but repudiated the entire claim under the policy cover of Rs 60 lakhs. There was an exchange of correspondence between the bank and the insurer. The bank, by its letter dated 11 November 2006, submitted that it was surprised as to how the policy cover of Rs 60 lakhs had contained an exclusion of STFI perils despite the fact that both the policies had been renewed under a common proposal form and through a single cheque. An affidavit dated 6 September 2007 of the Manager of the bank was filed stating that the bank was a corporate agent and was working on behalf of the insurer. The insurer repudiated the claim of the appellants on 24 June 20089. A consumer complaint was instituted by the appellants on 26 July 2008 before the State Commission, Gujarat alleging that the insurer had committed an unfair trade practice by repudiating the claim under the insurance cover of Rs 60 lakhs10. In its written statement before the State Commission, the bank stated that according to the terms of the agreement governing the grant of credit facilities, the primary duty of obtaining a cover of insurance for the hypothecated goods was that of the appellants as borrowers. For 2005-06, the bank had renewed the policies of Rs 60 lakhs and Rs 25 lakhs. However, the insurer had excluded STFI perils while issuing a policy cover of Rs 60 lakhs. According to the bank, a copy of the policy was given to the appellants from which the exclusion of STFI perils would have been evident. Moreover, a part of the premium which was returned by the insurer was deposited by the bank in appellants account, which should have been in the knowledge of the appellants. The bank therefore denied that it was guilty of any deficiency of service. The bank, however, stated that it had not been served with any notice by the insurer explaining why the STFI perils were excluded from the policy of Rs 60 lakhs. The bank denied that its officers or staff had mistakenly indicated the location of the place of business in the proposal form associated with the policy cover where STFI perils had been excluded11. The defence of the insurer was that for the period between 1 August 2005 and 31 July 2006 the policy cover of Rs 60 lakhs specifically excluded STFI perils from the coverage. The insurer stated that upon receiving the claim, it had appointed a surveyor and the claim on account of damage due to flooding had been accepted in respect of the policy cover of Rs 25 lakhs. However, the policy cover of Rs 60 lakhs specifically excluded the STFI perils and the insurer had refunded the premium of Rs 992 paid for an STFI cover by a cheque dated 26 September 2005 which had been accepted and deposited by the bank in the appellants account without any protest. The insurer denied its liability on the ground that the policy cover of Rs 60 lakhs excluded STFI perils12. The State Commission, by its order dated 14 February 2019, allowed the complaint only against the bank and its manager, who were directed to pay an amount of Rs 55,66,877 together with interest of 9 percent per annum and damages on account of mental agony of Rs 25,000. The State Commission held that the insurer could not be held liable since STFI perils had been excluded from the policy cover of Rs 60 lakhs and the excess premium of Rs 992 had been refunded to the bank on 26 September 2005. The bank was however, held liable on the ground that it had deposited the cheque of Rs 992 for return of the premium amount without making enquiries from the insurer. The State Commission further held that the bank had made an error in filling up the proposal form sent to the insurer and as a consequence the bank was liable to compensate the appellant13. The National Commission reversed the judgment of the State Commission. It observed that the bank had sought an insurance cover to the extent of Rs 85 lakhs which covered STFI perils and had also deposited a cheque of Rs 29,038 towards the premium of the policy. The National Commission observed that though it had been argued by the bank as well as the complainant that the insurer could not have excluded the STFI cover while renewing the policy, no rule or regulation mandating the insurer to accept the entire proposal had been brought to its notice. Before the National Commission, reliance was sought to be placed on the general rules and regulations framed by the Tariff Advisory Committee which came into force on 31 March 2001. The regulations, in so far as is material, provided that it is permissible to exclude STFI perils at the inception of the policy. The National Commission noted that even according to these regulations, deletion of STFI perils from a policy was permissible when a new policy was issued. The National Commission held that since a new address of the location was contained in the proposal form submitted for 2004-05, a fresh policy was issued, and the insurance company was entitled to exclude the STFI cover. The National Commission also noted that the policy of Rs 25 lakhs which at the time of renewal contained the same location, the STFI perils had specifically not been excluded14. The National Commission noted that there was no protest either from the bank or the borrower to the exclusion of STFI perils by the insurer. It noted that no loss was sustained in the first year of the exclusion of STFI perils and it was only in the subsequent year that the loss was sustained. Consequently, the National Commission held that having accepted the policy without the STFI cover, both the bank and the borrower were estopped from questioning the terms of the policy. The National Commission held that the bank had specifically stated in its reply before the State Commission that a copy of the insurance policy was given to the borrowers and that the premium amount which was returned back by the insurance company had been credited to their account. It noted that the receipt of the insurance policy had not been specifically denied in the rejoinder filed by the complainants before the State Commission though there was a vague denial of the averments in the corresponding paragraph of the reply. In this background, the National Commission observed that the appellants did not take up the issue of the exclusion of the STFI perils with the insurer nor did they call upon the bank to do so. It was noted that though the appellants received the premium amount in their account, they did not seek any explanation in regard to the refund of the premium. In this view of the matter, the National Commission allowed the appeal filed by the bank and set aside the State Commissions order.

Court's reasoning:
21. In the present case, the policy of insurance with a cover of Rs 60 lakhs for the period 2004-05 was issued for the location at B 205, Plot No 17-B, Village Karnaj. The insurance policy for 2005-06 was sought for different premises situated at 12/1123-1124, Basement, Meghdoot Apartment, Surat. The address mentioned in the policy for 2004-05 differs from that of 2005-06. The insurer proceeded on the basis that this was a fresh contract of insurance. Theinsurance policy for 1 August 2005 to 31 July 2006 was issued with the exclusion of STFI perils. This is clear from the use of words Warranted that STFI risk is excluded from the risk in the above insurance policy. 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 extra premium of Rs 992 was refunded by the insurer to bank and the bank deposited the amount in the appellants account23. The above provision states that no risk can be assumed by the insurer unless the premium payable is received in advance. Sub-Section (3) of Section 64 (VB) provides for refund of the premium amount to the insured in case of cancellation or alteration of the terms and conditions of the policy. In the present case, the premium of Rs 992 to cover STFI perils was refunded by the insurer to the bank and the amount was deposited in the insureds account. The proposal does not conclude the contract. A contract postulates an agreement between the parties. In the present case, the insurer while issuing the new policy at a fresh location specifically excluded STFI perils and refunded the premium. The insured at the time when the loss occurred was covered by a policy that excluded STFI perils. Therefore, the insurer cannot be held to be liable. To hold to the contrary would be rewriting the agreement between the parties and creating a fresh contract to which the parties had not agreed25. The appellants have placed reliance on the decision of this Court in Biman Krishna Bose v United India Insurance Co Ltd (2001) 6 SCC 477 ,20. This Court, while interpreting the contract of insurance must interpret the words of the contract by giving effect to the meaning and intent which emerges from the terms of the agreementThe court through its interpretative process cannot rewrite or create a new contract between the parties. The court has to simply apply the terms and conditions of the agreement as agreed between the partiesThe 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. This being the position, it is not open to the appellants to disavow knowledge of the exclusion of the STFI perils in the insurance cover of Rs 60 lakhs which was issued for 2005-06 and renewed for 2006-0726. The above case, as the extract indicates, dealt with a situation where the act of the insurer in refusing to renew the mediclaim policy was held to be arbitrary. This Court noted the serious consequence flowing out of the arbitrary refusal to renew the contract since it would result in the exclusion of the cover and the rejection of the claim in respect of a disease which the insured had contracted during the period when the policy was not renewed. The situation in the present case is clearly distinguishable. The terms and conditions of the new policy specifically excluded STFI perils and evidently there was a change in the obligations of the insurer. There was no renewal but the issuance of a new policy. The change in the location of the premises in the present case led to the issuance of a new policy. It was open to the insurer to specifically exclude STFI perils as a commercial decision. The appellants had knowledge of the exclusion of the STFI perils as they were provided with a copy of the policy and also received the refund of the premium. Having lodged no protest with the insurer during 2005-06 or in the renewed term of 2006-07, the insured cannot lay a claim that they had no knowledge that the STFI cover was excluded from the insurance cover. Nothing prevented the appellants from either approaching the insurer or any other insurance company for obtaining a policy that covered STFI perils.