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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.