In a Contract of Insurance, Parties (insurer/insured) can themselves decide on benefits #indianlaws

A contract of insurance is one of the species of commercial transaction between the insurer and insured. It is for the parties (insurer/insured) to decide as to what type of insurance they intend to do to secure safety of the goods and how much premium the insured wish to pay to secure insurance of their goods as provided in the tariff. If the insured pays additional premium to the insurer to secure more safety and coverage of their insured goods, it is permissible for them to do so. Rule of contra proferentum applies only when there is ambiguity in the policy. This rule becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt.

Supreme Court while setting aside the impugned judgment passed by National Consumer Disputes Redressal Commission (NCDRC) in the matter pertaining to repudiation of insurance claim held that “a contract of insurance is one of the species of commercial transaction between the insurer and insured. It is for the parties (insurer/insured) to decide as to what type of insurance they intend to do to secure safety of the goods and how much premium the insured wish to pay to secure insurance of their goods as provided in the tariff. If the insured pays additional premium to the insurer to secure more safety and coverage of their insured goods, it is permissible for them to do so.”

Complainant, into jewellery business has insured the jewellery kept in its shop under successive “Jewellers Block Policies”. A claim raised with the Insurer by Complainant after an incident of burglary in its Jewellery shop, was repudiated on the ground that the stolen gold ornaments and silver articles were found to had been kept on display window and in the sales counters at the time of burglary which according to insurer, was contrary to the terms of the policy and, therefore, not covered in the policy as the policy was issued subject to the terms, conditions, warranties and exclusion printed in the proposal form which was a part of policy. It was stated that since the burglary in the shop took place during night and stolen articles kept in window display and lying out of safe in the shop were stolen, the insurer could not be made liable to indemnify such loss which was specifically excluded from the insurance policy.

NCDRC in a complaint filed by complainant partly allowed the complaint and directed the Insurance Company to make payment towards loss and cost.

Both the Parties went up in appeal before the Supreme Court for setting aside of award and enhancement of sum awarded, respectively.

It was argued that jewellery articles in the display counter was never insured. What was insured was those articles which were inside the locker. The Complainant being fully aware of the relevant clauses kept paying premium and never thought it necessary to clarify on them from the insurer.  In view thereof, the clauses were binding on parties and hence such claim cannot be honoured.

Complainant contended that the issue involved in the case needs to be decided in the light of the principle underlined in the rule known as “contra proferentem rule”.  The clauses were contended to be suffering from ambiguity in the language/words of the proposal form and since the ambiguity noticed created some confusion as to what these clauses actually provide and expect the Complainant to comply at the time of filling the proposal form for obtaining the insurance policy, the clauses have to be interpreted by applying the principle underlined in the aforesaid rule in such a way that its benefit would go to the complainant rather than to the Insurer.

As held by Supreme Court in General Assurance Society Ltd. vs. Chandumull Jain & Anr. (AIR 1966 SC 1644), a cover note is a temporary and limited agreement. It may be self-contained or it may incorporate by reference the terms and conditions of the future policy. When the cover note incorporates the policy in this manner, it does not have to recite the term and conditions, but merely to refer to a particular standard policy. If the proposal is for a standard policy and the cover note refers to it, the assured is taken to have accepted the terms of that policy. The reference to the policy and its terms and conditions may be expressed in the proposal or the cover note or even in the letter of acceptance including the cover note. The incorporation of the terms and conditions of the policy may also arise from a combination of references in two or more documents passing between the parties. Documents like the proposal, cover note and the policy are commercial documents and for interpreting them commercial habits and practice cannot altogether be ignored. During the time the cover note operates, the relations of the parties are governed by its terms and conditions, if any, but more usually by the terms and conditions of the policy bargained for and to be issued. When this happens the terms of the policy are incipient but after the period of temporary cover, the relations are governed only by the terms and conditions of the policy unless insurance is declined in the meantime. Delay in issuing the policy makes no difference. The relations even then are governed by the future policy if the cover notes give sufficient indication that it would be so. In other respects there is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a requirement of uberrima fides i.e. good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the company in case of ambiguity or doubt. A contract is formed when there is an unqualified acceptance of the proposal. Acceptance may be expressed in writing or it may even be implied if the insurer accepts the premium and retains it. In the case of the assured, a positive act on his part by which he recognises or seeks to enforce the policy amounts to an affirmation of it.

It was held that it was made well clear in the proposal form itself that “window display of articles at night is not covered” and this clearly meant that the insurance coverage was given to the articles kept in “window display during day time in business hours” whereas insurance coverage was not given to the articles when they were kept in “window display at night”. If the burglary had been committed during day time in business hours then the Insurer was liable to reimburse the loss towards the stolen articles treating them as insured articles under the policy. But if the burglary had been committed of the stock/articles kept out of safe after business hours at night then in such circumstances the insurer was not liable to indemnify the loss of any such stolen articles by virtue of note appended to the policy.

As held, there was accordingly no ambiguity or vagueness or absurdity in the language/wording of note appended to relevant clauses of the policy.

On the issue of applicability of the rule of contra proferentum, the plea was declined as this rule applies only when there is ambiguity in the policy. This rule becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt.

The impugned judgment by NCDRC was accordingly set aside and the appeal filed by the Insurance Company was allowed.

[United India Insurance Co. Ltd. vs. M/s Orient Treasures Pvt. Ltd.]

(SC, 13.01.2016) – Civil Appeal No. 2140 of 2007