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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

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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

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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

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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

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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

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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

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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.