# GENERAL ASSURANCE SOCIETY Ltd v. CHANDUMULL JAIN AND ANR

- **Citation:** [1966] 3 S.C.R. 500
- **Court:** Supreme Court of India
- **Decided:** 1966-02-07
- **Case number:** Civil Appeal No. 886 of 1963
- **Bench:** P. B. Gajendragadkar, K. N. WANCllOO, M. Hidayatullah, V. Ramaswami, P. Satyanarayana Raju
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/general-assurance-society-ltd-v-chandumull-jain-and-anr-3581
- **Pages:** 17

## Headnote

•
lnsurcuzce-Accep1'111ct' and covers notes issued by insurer-J'olicy
1101 i.ssued--Conditions of policy whether applicable to contract-Condition ttllowing parties to cancel contrc1c1 whether reasonab/e--Cancel/ation by
insurer u•hen
~·alid.
Letters of acceptance of the proposals and cover notes were is~ued by
the appellant Society purporting to insure certain houses belonging to the
respondents against damage from fire, flood etc.
According to the covernotes the insurance was subject to the 'usual conditions of the Society"s
polices.'
However, the Society had not issued the policies by the time
the Ganges,
near the banks of which the houses stood,
began to
got into flood.
Soon thereafter the society cancelled the risk. relying on
condition ( 10) of its Fire policy.
The houses were washed away and
the rc:,pondents filed a suit in the High Coun demanding payment under
the policies.
The trial Judge dismissed it but the High Court decreed it.
The questions that fell for determination were, whether Condition (10)
of the Fire policy was applicable to tho facts of the case, whether the said
condition wa<; reasonable, and v.1hether 1hc cancellation of the policy by
the society was valid :
Hfil..D: (i) Looking at tho proposal, the letter of acceptance and the
cover notes it was clear that a contract of insurance under the ;:;tandard
policy of fire and extended to cover flood, cyclone, etc., had come into being.
The fact that the policy was not actually delivered made no difference
becau<;e when a contract of insurance is complete, it is in1materi:!l whether
tho policy is actually delivered after the loss, and for the same reason the
rights of the parties arc governed by the policy lo be, between acceptance
and delivery of the policy.
Even if no terms are spccifted the term~ contained in a policy cust-Omarf-ly issued in such a case, apply.
Jn the present
caS"e the cover notes clearly said that the usual terms of the
society's
policie~ would apply.
Condition (JO) was a usual condition of such
policies and therefore 1t could be invoked by the Society.
[510 B: 51~
D-GJ
(ii- There i" nothin~ wrong in incJuding in a. contract or in~urance a
mutual condition for the cancellation of the contract.
Condition ( 10)
of the Fire policy gave equal right< of cancellation to both panics and
was not unreasonable.
[513 B-C)
(iii) A condition such a<; Condition (10) is intended lo cancel the
risk but not to avoid liability for Joss which has taken place. or to avoid
risk when it
i<1 alrcadv turning into a loss.
Cancellation is rea'ionab1y
possible before the liability under the policy has commenced or h.., become
inevitable, and it is a q~tion of fact in each CMO whether the cancellation is legitimate or illegitimate.
On the facts of the case it could not
tie said that the societv cancelled the policies after the loss had already
commenced or had hecome inevitable.
The cancellation was therefore
vaM.
[514 H-515 C: 515 GJ
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ASSURANCE soc. v. CHANDUMULL (Hidayatullah, !.)
501
Sun Fire Office v. Hart &: Ors. (1889) 14 A. C. 98 a d The
Central Bank of India v. Hartford Fire Insurance Co. Ltd. n. I. R.
(1956) S. C. 1_288, relied on.
A

## Text

_Characters 0–39,942 of 44,697. This is a partial read: ask again with offset=39942 for what follows._

GENERAL ASSURANCE SOCIETY Ltd.
v.
CHANDUMULL JAIN AND ANR.
February 7, 1966
[P. B. GAJENDRAGADKAR, C. J., K. N. WANCllOO, M.
HIDAYATULLAH, V. RAMASWAMI AND P. SATYANARAYANA
RAJU, JJ.]
•
lnsurcuzce-Accep1'111ct' and covers notes issued by insurer-J'olicy
1101 i.ssued--Conditions of policy whether applicable to contract-Condition ttllowing parties to cancel contrc1c1 whether reasonab/e--Cancel/ation by
insurer u•hen
~·alid.
Letters of acceptance of the proposals and cover notes were is~ued by
the appellant Society purporting to insure certain houses belonging to the
respondents against damage from fire, flood etc.
According to the covernotes the insurance was subject to the 'usual conditions of the Society"s
polices.'
However, the Society had not issued the policies by the time
the Ganges,
near the banks of which the houses stood,
began to
got into flood.
Soon thereafter the society cancelled the risk. relying on
condition ( 10) of its Fire policy.
The houses were washed away and
the rc:,pondents filed a suit in the High Coun demanding payment under
the policies.
The trial Judge dismissed it but the High Court decreed it.
The questions that fell for determination were, whether Condition (10)
of the Fire policy was applicable to tho facts of the case, whether the said
condition wa<; reasonable, and v.1hether 1hc cancellation of the policy by
the society was valid :
Hfil..D: (i) Looking at tho proposal, the letter of acceptance and the
cover notes it was clear that a contract of insurance under the ;:;tandard
policy of fire and extended to cover flood, cyclone, etc., had come into being.
The fact that the policy was not actually delivered made no difference
becau<;e when a contract of insurance is complete, it is in1materi:!l whether
tho policy is actually delivered after the loss, and for the same reason the
rights of the parties arc governed by the policy lo be, between acceptance
and delivery of the policy.
Even if no terms are spccifted the term~ contained in a policy cust-Omarf-ly issued in such a case, apply.
Jn the present
caS"e the cover notes clearly said that the usual terms of the
society's
policie~ would apply.
Condition (JO) was a usual condition of such
policies and therefore 1t could be invoked by the Society.
[510 B: 51~
D-GJ
(ii- There i" nothin~ wrong in incJuding in a. contract or in~urance a
mutual condition for the cancellation of the contract.
Condition ( 10)
of the Fire policy gave equal right< of cancellation to both panics and
was not unreasonable.
[513 B-C)
(iii) A condition such a<; Condition (10) is intended lo cancel the
risk but not to avoid liability for Joss which has taken place. or to avoid
risk when it
i<1 alrcadv turning into a loss.
Cancellation is rea'ionab1y
possible before the liability under the policy has commenced or h.., become
inevitable, and it is a q~tion of fact in each CMO whether the cancellation is legitimate or illegitimate.
On the facts of the case it could not
tie said that the societv cancelled the policies after the loss had already
commenced or had hecome inevitable.
The cancellation was therefore
vaM.
[514 H-515 C: 515 GJ
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ASSURANCE soc. v. CHANDUMULL (Hidayatullah, !.)
501
Sun Fire Office v. Hart &: Ors. (1889) 14 A. C. 98 a d The
Central Bank of India v. Hartford Fire Insurance Co. Ltd. n. I. R.
(1956) S. C. 1_288, relied on.
A
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 886 of 1963.
Appeal from the judgment and decree dated 13th/14th July,
1961 of the Calcutta High Court in Appeal No. 44 of 1959.
C. B. Agarwala, B. M. Agarwala and I. N. Shroff, for tile
appellant .
Niren De, Additional Solicitor General, G. L. Sanghi, Nirmal
Kumar Ghosal, J.B. Dadachanji, 0. C. Mathur and Ravinder Narain,
for the respondents.
The Judgment of the Court was delivered by
Hidayatullah J. This appeal is taken from a judgment of the
High Court of Calcutta, July 13 and 14, 1961, by which a Divisional
Bench of the High Court, reversing the judgment of a learned single
Judge of the same Court, decreed the respondents' claim for damages. The circumstances were these. The appellant is a general
insurance company. On June 2, 1950 the respondents submitti!d
proposals to the company with a view to insuring certain houses in
Dhullian bearing Holding Nos. 274, 274/-A-B-C-and D and 273,
273/A-B-C and D, for Rs. 51,000 and Rs. 65,000 respectively
against fire and including loss or damage by cyclone, flood and/
or change of course of river or erosion of river, landslides and
subsidence. The town of Dhulian is situated on the banks of the
Ganges and for several years the river had been changing its course
and in 1949 a part of the town was washed away. The insurance
was obviously effected with this risk in sight. The period of insurance was to be from June 3, 1950 to June 2, 1951. The Company
accepted the proposals by two letters (Ex. D.) on June 3, 1950 and
the letters stated that in accordance with the proposal the assured
was held covered under cover notes enclosed with the letters. At
the back of these letters of acceptance, there was description of the
houses and an endorsement which read:
"Including Cyclone, Flood and/or loss by change of
course of river diluvium and/or Erosion of River Landslide
and/or subsidence. It is further noted that there is a
thatched building of residence within 50 ft. of the above
premises."
Two interim protection cover notes Nos.~18848 and 18850 in respect of the two proposals were filed by the insurance company
along with the written statement and they were said to be copies of
cover notes sent with the letters of acceptance, but they bore the
date June 5, 1950. There is some dispute as to whether they were
at all enclosed with the reply showing aceeptance of the proposals.
MIOSup. Cl/66 ·· 2
502
SUPREME COURT Rl!POllTS
[ 1966] 3 S.C.R.
Of the two cover notes, which are identical except for details we
may read one only:
"Messrs. Chandmull Lal
Chand, P.O.
Dhulian
Murshidabad being desirous to effect an Insurance from
loss by Fire, for Rs. 51,000 on the following Property viz.:
One Pucca built and roofed bldg. (C. J. Vizandah)
holding No. 274, 274A, 274B and 274C occpd. as residence
and/or shop for the storage of Hydrogenated G nut oil
(vanaspati) and safety matches also situate at Dhulian,
Ward No. IV, District Murshidabad.
A
II
Incl. Loss or damage by cyclone flood and/or change
c
of course of river and/or Erosion of river, landslides and/or
subsidence.
It is further noted that there is a thatched bldg. of
residence within 50 ft. of the above premises.
for one year from 3rd June, 1950 to 3rd June, 1951.
The said property is hereby held insured against
damage by Fire, subject to the terms of the Applicant's
proposal and to the usual Conditions of the Society's policies. It is, however, expressly stipulated that this protection Note cannot, under any circumstances be applicable
for a longer period than Thirty Days, and that it is also
immediately terminated before that date by delivery of the
policy, or ifthe Risk be declined by the notification of such
declinature.
Prem : Rs. 892-8-0 Fire @. 28 as
~~
Prem : Rs. 382-8-0 Flood and other risks
12 as%
Premium : Rs. 1,275-0-0."
On June 7, the assured sent the premia by cheque. As no policy
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was received by them, the assured wrote a letter on July I (Ex. A/g)
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asking for the policy or for extension of the cover notes. This was
not done.
On July 6, 1950 th~ Company wrole to the assured two identicallv worded letters (except for changes in amounts and numhers
of ihc polici~s) which read•
..
Calcutta 6th July. 1950
. .......... .
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ASSURANCE soc. v. CHANDUMULL (Hidayatullah, J.)
503
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To
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M/s Chandmull Lal Chand,
P.O. Dhulian,
Murshidabad.
Dear Sir,
In accordance with the inspection report lodged with
this Co. we cancel the risk from 6th July, 1950 as noted
c
below.
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The relative Endorsement is under preparation and
will be forwarded to you in due course.
Nature of Alteration:
Yours faithfully,
(Sd.)/- Illegible
Ag.
Manager & Underwriter.
The above cover note is cancelled by the General
Assurance Society Ltd. as from 6th July, 1950."
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On July 15, 1950 the assured wrote to say that they held the Company bound because although there was no erosion by the river
when the proposals were submitted and accepted, the Company
was trying to get out of the contract when the river was eroding the
banks. They ended this letter by saying:
"Now when the erosion and/or change of course of
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river and/or subsidence have commenced, it is quite
impossible to take any precautionary measure or to reinsurc the same with any other office of Insurance at this
stage."
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On July 17, 1950 the Company prepared an endorsement for the
policies cancelling the risk and sent the endorsements to the assured.
The endorsement read:
..
In the name of :-Messrs. Chandmull Lal Chand, P.O.
H
Dhulian, Murshidabad.
It is hereby declared and agreed that as from 6th July 1950
the insurance by this policy is cancelled by The General
584
SUPl.BMB COVRT l.BPOaTS
(1966) 3 S.C.R.
Assurance Society Ltd., Calcutta, and a refund premium
of Rs. . . . . . . . . . is hereby allowed to the assured on a
pro rata basis.
(St!)/- Illegible.
Ag. Manager &: Underwriter.
Calcutta,
"
In reply the latter said that as the risk had already "commenced"
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and "taken place", there could be no cancellation as there wa~ no
time left for the assured to take precautionary measures by reinsuring. In reply the Company referred to condition JO of the P'ire
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policy under which the Company claimed to cancel the policy at
any time.
Conditic.n JO of the fire Policy read:
"10. This insurance may be terminated at any time
at the request of the Insured, in which case the Society
will retain the customary short period rate for the time
the policy has been in force.
This insurance may also
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at any time be tt:rminated at the option of the Society, on
notice to that effect being given to the Insured, in which
case the Society shall be liable to repay on demand a ratable
proportion of the premium for the unexpired terme from
the date of the cancclment."
In reply the assured wrote on August 2 .that the condition did not
apply to any risk except that of fire and could not, in any event,
protect the Company after the risk had commncced. On 13th
and 15th August the houses were washed away.
After unsuccessfully demanding payment under the policies, the assured filed the
present suit on the Original Side of the Calcutta High Court. It
was dismissed with costs by G. K. Mitter J. but on appeal the claim
was decreed to the extent of Rs. 1,10,000 with costs, the decretal
amount to carry interest at 3 % per annum. The High Court
certified the case as fit for appeal and the present appeal has 1-n
filed by the Company.
Before we deal with the question in dispute we may say a ftvr
words about the position of the Gange-; river in relation to ae
Dhulian town in general and the insured houses in particalar.
The town of Dhulian is situated on the bank of the river vrhich,
for several years, has been changing its course and eroding the bank
on the side of Dhulian. In 1949 there was much erosion and the
river had come as close as Ii to 2 furlongs from the town and a few
of the godowns lying close to the hank had been washed away.
There is ample material to show what the condition of the river in
relation to the insured houses was between June 2, 1950 when the
proposal for insurance was made and August 13/15 when the houses
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ASSURANCE soc. v. CHANDUMULL (Hidayatullah, !.)
505
were washed away,
with particular reference to the 18th June,
1950 when one P. K. Ghose (D.W. 2) visited Dhulian to make local
iaquiries on behalf of the Company and the 6th July when the
Company cancelled the riil' and withdrew the cover. The evidence
comes from both sides but is mostly consistent. Lalchand Jain
(P.W. 1) for the assured stated that on the 2nd of June the houses
were 400/450 feet away from the bank of the river (Q. 73) and on
tliat date there was no erosion because the river was quite calm
(Q. 132). This continued to the second week of June (Q. 136).
The river began to rise in the 3rd week of June but there was no
eroliion (Q. 137). Erosion began by the end of June (Q. 142)
aad the current was then swift (Q. 144) and the right bank started
to be washed away. Houses within 10-50 feet of the bank were first
alfccted in the last week of June (Q. 180). At that time the insured
hou11ei; were 400/450 feet away. Even on July 15, 1950 the distance
between these houses and the river was 250 feet (Q. 179). Surendranath Bhattacharjee (P.W. 2), Overseer and Inspector, Dhulia
Municipality 11tated that the erosion started four or five days afte1
Rathajatra which took place on or about June 20, 1950. Bijoy
Kumar (P.W. 4), Retired Superintending Engineer is an important
witne11s.
He submitted three reports Exs. F, G and H to Government on May 27, 1949, November 4, 1949 and September 11, 1950.
In these reports he gives a description of the scouring of Dhulian
town on August 5, 1950. He said nothing about the state of affairs
in the first week of July which he would undoubtedly have said if
er<>iion had already begun then. With his report submitted on
September 11, 1950, he sent a letter of 9th August, in which he said
tb.at he had visited Dhulian Bazar on August 5, 1950 and found that
tile iCOUring of the compound of the Police Station at the junction
of the Ganges and Bagmari rivers had begun a fortnight earlier and
that scouring must have been at the rate of 20-25 feet per day.
From this evidence it is possible to form an opinion about state of
the river on or about July 6, 1950. To that we shall come later.
The learned single Judge at the trial held that condition 10 of
the policy applied to all the risks covered by the policy and not the
risk from fire only. Although the policy was not ready, the proposal not having been declined during the period of the cover note,
the learned Judge held, the policy was bound to issue and the extent
of the protection would thus be according to the company's usual
terms and subject to the conditions in the policy. Relying, therefore, upon the dicta of the Judicial Committee in the Sun Fire
Office v. Hart & Ors.(1), the learned Judge gave a wide meaning to
condition 10 and held that the Company was within its rights in
cancelling the policy as
and when it did. The learned Judge
pointed out that the condition was a usual provision in a policy of
fire insurance and an assurer cancelling the policy under that
(I) (1889) 14 A. C. 98.
506
SUPREME COURT REPORTS
[1966] 3 S.C.R.
condition, need give no reasons and every defence was open to him
and the reasons, if given, could not be examined in a court of
law. Finally, the fact that no reasons were given or that the report
of Ghose was not produced or that Ghose did not support Dangnli,
the Manager, was held to be immaterial because reasons like motives_, were held to be immaterial. The suit was accordingly dismissed
with costs. An appeal under the letters patent was filed against the
judgment of the learned single Judge.
The appeal was heard by P. B. Mukharji and S. K. Dalla JJ.
The judgment on appeal was delivered by Mukharji J.
In dealing
with the cancellation of the policy the learned Judge considered
the matter with and without condition 10. He first considered
whether condition JO of the policy at all applied. The learned
Judge gave eight reasons why it did not. To those reasons we will
come presently. The conclusion of the learned Judge was that
the policy had not come into existence and did not govern this
contract of insurance. As the cover note was only for a month and
on its terms had ceased to be operative, a contract of insurance
absolute for one year W'lS spelled out from the letter of acceptance
which was said to govern the relations of the parties between July
3, 1950 (the date of the expiry of the cover note) and July 6, 1950
(when the policy was cancelled) and till 13/15th August, 1950 when
the houses were washed away.
Condition 10 was thus held to be
not applicable. However, assuming that it did, the learned Judge
held that it was unreasonable and the concellation having been
done when the loss had already commenced or became so proximate
that it could be said to have almost commenced, the Company
could not be allowed to invoke it. In reaching this conclusion the
decision 0f the Judicial Committee was not accepted and the width
of the condition was cut down. In the result the claim of the
assured was decreed in the sum of Rs. I, 10,000 with costs in the
appeal and the suit.
There is a preliminary question of fact to which the courts
below have addressed themselves. It is whether the cover notes
accompanied the letters of acceptance of the proposals. The learned single Judge seems to imply that they did and the Division Bench
holds that they did not. This has led to a divergence of opinion on
whether condition 10 of the Fire Policy which enables determination
of the policy at will on both sides, at all operated. How this finding leads to a discussion on the applicability of condition 10, is a
very important circumstance and we shall now attempt to do, what
we have not done yet, namely, analyse the reasons given in the two
decisions of the High C'our.t.
The letters of acceptance stale that the "relative cover" in
each case was enclosed. These letters were dated June 3, 1950 and
stated that the assured was covered against risk from June 3, 1950
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ASSURANCE soc. v .. CHANDUMULL (Hidayatullah, !.)
507
to June 3, 1951 and the endorsement at the back of the letters has
been reproduced by us earlier. That endorsement did not state
· any terms and it did not refer to the terms or conditions of any
policy. The cover notes, of which one has also been reproduced in
full, held the property insured for a period of 30 days only "subject
to the terms of the applicants' proposal and to the usual conditions
of the Societies Policies". The learned single Judge held that the
letters of acceptance incorporated and attracted by reference the
terms and conditions of the cover notes and through them the terms
and conditions of the policy and further held that the relationship
could be declined within 30 days under the terms of the cover note
but if not so declined, the relationship would be governed by the
terms and conditions of the policy for the whole of the period of
insurance. In reaching this conclusion the learned single Judge
held that the cover notes must have accompanied the letters of
acceptance and in this way condition 10 was allowed to play its
part.
The Divisional Bench took a different view of the matter. The
learned Judges noted that the letters of acceptance spoke of risk for
a whole year and stated that the "relative covers" were enclosed.
The cover notes, it was pointed out, bore the date 5th June and must
have been sent later than June 3rd, the date of the acceptance of
the proposals. The learned Judges observed that the "relative
cover" ought to have been a cover for a whole year and if it was
for a month only it could not be a "relative cover" because the
letter of acceptance undertook the risk for the whole year. Next
they held that as the cover notes did not accompany the letters of
acceptance, there was no notice to the assured that the terms and
conditions of any policy would govern the contract'. They found
fault with the word 'policies' in the phrase 'usual conditions of the
Societies policies' because the word indicated a plurality of
policies and not a standard policy. They commented that the
standard fire policy applied condition 10 to fire risk and not to risk
by flood, cyclone etc. They found the expression 'the said properties are hereunder held insured for damage by fire' insufficient
to cover other risks although they admitted that the cover notes
spoke of loss or damage by flood, cyclone etc. They next pointed
out that the words of the cover note were not "all the conditions of
the policy" but only "usual conditions" and by referring to books
on the law of insurance they concluded that condition 10 which gave
a right to either party to terminate the policy at will, could not be
considered a 'usual' condition. They observed that this was not a
condition usually included in English policies and appeared to be in
vogue in colonial and underdeveloped countries. They felt that
if the fire policy was extended to cover risk of flood, etc., the new
risks should have been made expressly subject to condition 10 just
as fire risk was made subject to it and that by merely extending a
508
SUPllBMB COOR r llBPOll rs
(1966) 3 S.C.ll.
fire policy to cover other risks, the assured was made to amend
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and construe each separate clause.
Holding condition 10 to be
l!DICUOnable they held that the company could not cancel the policy
on the 6th July because till then there was no policy in existence and
the cover note which referred to the policy had automatically
worked itself out. They finally held that the cancellation, in any
event, was after the risk bad commenced and could not be upheld.
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For these reasons the claim was decreed. The Trial Judge had
found that there was no attempt to fix the amount of damages but
the Divisional Bench reconsidered the matter and gave its own find·
ings.
Although the DiTisional Bench went i1:1to a detailed discussion
(some of which was perhaps not altogether necessary) the problem
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of liability in thi1> case was well-scanned by counsel appearing for the
p11rties. They argued the case under three distinct heads which
arc:
(a) Did condition 10 apply to the facts;
(b) If it did, how ii it •o be construed; and
(c) Was the cancellation of the policy valid in law?
We ahall consider the matter under these three broad heads.
The application of condition 10 depends on how far the terms
of Ille policy can be 1>aid to be incorporated in this contract of insurance bctwten the parties. The facts relating to the formation of the
contract arc clear except on the one point relating to the cover notes,
ud that, in our opinion, has been given undue prominence by the
Diviaional Bench. It makca no essential difference whether th~
cover notei accompanied the letters of acceptance or were sent two
days later. It is poSiible that the letters of acceptance themselves
wc.:e sent on June 5. It often happens that two letters delivered at
the 1>1me time bear different dates. The letters of acceptance
referred to 'relative covers', but the word 'relative' is not to be
stretched too far. Ill use here is an instance of unnecessary legalese
and it docs not add to the purport of the communication that a
coTCt note was being 1>Cnt. It is obvious that if in the period durins
which the cover note was operative there was refusal to insure, the
Ullurcd could not have demanded a policy or insisted that there was
ianrancc without a policy, standard or otherwise, and not subject
to any conditions by reason of the acceptance. The cover notes
could have been sent later without imp: iring the effect of the reference to them in the letters of acceptance. By the fortuitous chance
of omission to enclose the cover notes the assured did not get any
additional rights under the letters of acceptance. Insurance of
property is not a bet but a well-known commercial deal. Acceptance
of tile proposal read with the cover notes clothed the assured with a
right to demand a policy in relation to the kind of insurance he
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ASSURANCE soc. v. CHANDUMULL (Hidayatu/lah, !.)
509had bought and he could only claim to be covered against risk in
the manner laid down in the policy. To avoid this consequence
the learned Additional Solicitor-General, arguing on behalf of the
the assured, faintly suggested that the endorsement at the back of
the letter of acceptance was the cover note and it did not refer to
any policy. This position was clearly unsustainable. The cover
notes were an integral part of the acceptance of the proposals and
the two had to be read together.
A contract of insurance is a species of commercial transaction!
and there is a well-established commercial practice to send cover ·
notes even prior to the completion of a proper proposal or while
the proposal is being considered or a policy is in preparation for
delivery. 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
incorporateil the policy in this manner, it does not have to recite the
torms and conditions, but merely to refer to a particular standard
policy. If the proposal is for a standard policy and the cover note
rc:Cers to it, the assured is taken to have accepted the terms of that
policy. The reference to the policy and its terms and conditions
aay 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 to interpret them commercial
habits and practice cannot altogether be ignored. During the time
tile 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
tl!is happens the terms of the policy arc incipient but after the period
of temporary cover, the relations are governed only by the terma and
conditions of the policy unless insurance is declined in the meanti111e.
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 ia a requirement of uberrima fides i.e., good faith on the part of the asaurcd
and the contract is likely to be construed contra proferentem that is
apinst the company in case of ambiguity or doubt. A contract is
fonned when there is an unqualified acceptance of the proposal.
Acceptance may be expressed in writing or it may even be implied
if the inaurer 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. This position
was clearly recognised by the assured himself, because he wrote,
510
SUPREME COURT REPORTS
[1966] 3 S.C.R.
close upon the expiry of the time of the cover notes, that either
a policy should be issued to him before that period had expired or
the cover note extended in time.
In interpreting documents relating to a contract of insurance, the duty of the court is to interpret
the words in which the contract is expressed by the parties, because
it is not for the court to make a new contract, however reasonable,
if the parties have not made it themselves.
Looking at the proposal,
the letter of acceptance and the cover notes, it is clear that a contract
of insurance under the standard policy for fire and extended to
cover flood, cyclone etc. had come into heing.
The letters of acceptance clearly mentioned that cover notes
were being sent. The contract of imurance was based upon the
cover notes for the period covered by the cover notes.
Nothing
happened in the 30 days during which the cover notes operated. It is
true that the letters of acceptance showed that the risk was covered
for the whole year and not for 30 days. This was an unfortunate
way of expressing that the acceptance of the proposal would operate
in the first instance for 30 days only during which the company
would be free to decline the policy. The four essentials of a contract
of insurance are, (i) the definition of the risk, (ii) the duration of the
risk, (iii) the premium, and (iv) the amount of insurance. See
Macgillivray on Insurance Law (5th Edn.) Vol. I, paragraph 656,
page 316.
But the policy which is issued contains more than these
essentials because it lays down and measures the rights of the parties
and each side has obligations which are also defined.
In a policy
against fire the puroose is not so much to insure the pwperty but to
insure the owner of the property against los>.
The policy not only
defines the risk and iis duration but also la~, down th; 'pccial
terms and conditions under which the policy may he enforced on
either side.
Even if the letter of acceptance went beyond the cover
notes in the matter of duration, the terms and conditi0ns of the
proposed policy would govern the case because when a contract
of insuring property is complete, it is immaterial whether the policy
is actually delivered after the loss and for the same reason the rights
of the parties are governed by the policy to be, between acceptance
and delivery of the policy.
Even if no terms are specified the terms
contained in a policy customarily issued in such ca=, would apply.
There is ample authority for the proposition. In Corpu' Juris
Secundum lYol. 44, p. 953) the following occurs:
"Where the contract to insure or issue a policy of fire
insurance does not specify the terms and conditions of the
policy, it is a general rule that the parties will be presumed
to have contemplated a form of policy containing such conditions and limitations as are usual in 5uch cases ...... "
See also Richards on Insurance (5th fdn.) Vol. 3, p. 1296,
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ASSURANCE soc. v. CHANDUMULL (Hidayatullah, !.)
511
paragraph 390. In Eames v. Home Insurance Co. (1) the Supreme
Court of the United States observed:
"If no preliminary contract would be valid unless it
specified minutely the terms to be contained in the policy
to be issued, no such contract could ever be made or would
ever be of any use. The very reason for sustaining such
contracts is, that the parties may have the benefit of them
during that incipient period when the papers are being
perfected and transmitted. It is sufficient if one party
proposes to be insured, and the other party agrees to
insure, and the subject, the period, the amount and the
rate of insurance is ascertained or understood, and the
premium paid if demanded. It will be presumed that they
contemplated such form of policy, containing such conditions and limitations as are usual in such cases, or have
been used before between the parties. This is the sense
and reason of the thing, and any contrary requirement
should be expressly notified to the party to be affected
by it.
Jn General Accident Insurance Corporation v. Cronk(2), it was
also ruled that a person making a proposal must be taken to have
applied for the ordinary form of policy issued by the company.
It is only when there is a condition precedent that the policy must be
delivered that the assurer is not on the risk otherwise he is. See
Macgillivray (Vol. I, p. 325, paragraph 675). In such a case
acceptance is merely an intimation that the assurer is willing to issue
a policy but there will be no binding contract (ibid paragraph 679,
p. 328). In the present case, there was no such condition prtcedent
and the company was on risk throughout. As insurance was asked
for on the policy of the company the usual policy would have issued
and as the insurance was from June 3, 1950 the policy would have
related back to that date. The insurance of the policy does not add
to the contract. The incipient terms and conditions of the contract
, later merge in the policy and the terms and conditions then become
express.
The attempt of the assured in this case, therefore, has been to
establish that the cover notes having expired, did not bind the parties
and the reference to the policy being in the cover notes and not in the
letters of acceptance, the terms and conditions of the policy were
not attracted. We are satisfied that this is not the true position.
The letters of acceptance expressly mentioned the cover notes and
the cover notes expressly mentioned the policy. Therefore both
during the period of 30 days when the cover notes operated and also
thereafter, the terms and conditions of the policy governed the relationship between the parties. We have already held that as there
--
(!) 24 Led. 298.
(2) [1901] 17 T.LR. 233.
St2
SUPR.BME COURT RiPORTS
(1966] 3 S.C.R.
was only oPe standard fire-policy, the use of the plural word 'policies'
made no difference and the delay in sending the cover notes, if any,
was also immaterial. The terms and conditions of the usual poli"y
accordingly governed the relations of the parties, and made condition IO applicable.
It was, however, contended that the policy itself never came
into existence, because it was cancelled before it was issued and the
endorsement of cancellation was engrossed and incorporated with
the making of the policy. It was argued that condition 10 would
not come into operation at all, because the policy itself was cancelled before it was engrossed. In other words, the contention is that
condition ( 10) could not operate between the parties till the policy
was signed and delivered to the as.5ured and as this never happened
the cancellation was improper. This argument is scarcely open,
because, the assured is ob•10usly basing his suit on the policy.
In his plaint he invoked the policy. The assured cannot austain
tho suit except by basing it upon the policy, because unless one reads
tho policy and the terms on which it was effective, mere reading of
the proposals and the letters of acceptance would not give any
terma. Further when a contract of insuring property is complete,
it Ii immaterial whether the policy is delivered or not for the rights
of the parties are regulated by the policy which ought to be delivered.
fn this way also the terms and conditions of the standard fire-policy
would apply even though the policy was not issued.
It was next contended that the expression "usual conditions of
the Society'' policies" could not be read to include condition 10
which was not a usual condition where it gives a right to tenninate the policy at will to tho company. Thia j., not correct. Such
a condition is mentioned in almost all the books on the law of
Insurance. See Halsbury's Laws of England (3rd Edn.) Vol. 22,
PlllC 245 paragraph "474; Macgillivray on Insurance Law (5th
&In.) Vol. 2, page 963, paragraph 1981; Welford & Otter-Barry's
Fire Insurance (4th Edn.) pp. 178, 179; and Richard~ on Insurance
(5th Edn.) Vol. 3, p. 1759, paragraph 531. In TM Sun Fire Office
v. Hart and Othersf..1) such a condition is not only mentioned but also
discussed. An identical condition in a fire policy was also mentioned and discussed in a decision of this court reported in The Centr•I
Bank oflndia Ltd. v. Hartford Fire Insurance Co. Ltd.(2). There was
thus nothing unusual in the inclusion of such a condition in the
policy and the reference to the usual conditions would, therefore,
include a reference to condition (10).
This condition gives mutual rights to the parties to cancel the
policy at any time. To the assurer it gives a right to cancel the
policy at will. It was contended that such a condition was so
unreasonable that it could not be allowed to stand. It was argued
(I) [18891 t4 A.C. 98.
(2) A.1.R. (19S6) S.C. 1288.
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ASSURANCE SOC. v. CHANDUMULL (Hidayatullah, I.)
513
on the authority of Sze Hai Tong Bank Ltd. v. Rambler Cycle Co.
Ltd.(') that the extreme width of the condition must be cut down~
an implied limitation which was that the main object and intent of
the contract should not be allowed to be defeated and that object
and intent was the insuring of the property against floods and cancellation of the policy when floods llad started would defeat the
main object and intent of the contract. This argument mixes up two
situations. The first is a question of pure principle. There is
nothing wrong in including such a mutual condition for the cucellation of the insurance. An assured may like to invoke such a
condition when the policy is found to differ from the policy he
agreed to accept or it contained a term or condition to which lie
did not agree. He may not accept the same policy from another
company to which he did not make a proposal. He may invoke this
condition if the company transfers its assets and business to another.
Just as the assured may like to terminate the policy without assigning any reasons and at his will, the assurer may also do likewise.
Such a clause was considered by the Privy Council in Sun Fire
Office v. Hart(2). That was a case of a policy of insurance against
lire. Certain fields of sugar cane were insured against fire.
After
insurance 3 fires happened and an anonymous letter was received
that more fires would take place.
The policy contained a
condition that the insurers might terminate the policy by notice
'by reason of such change, or from any other cause whatever' and
the insurers cancelled the policy under that condition. The object
of such a condition was stated by Lord Watson to be-
" .... to enable the insurers to release themselves
from their contract during its currency, leaving it in full
vigour down to the time of notice. The words in which
the power of determination is expressed, taken by themselves, are very wide and comprehensive. According
to their primary and natural meaning, they import that,
in order to justify the exercise of the power, nothing is
required except the existence of a desire, on the part
of the insurers, to get rid of future liability, whether such
desire be prompted by causes which prevent the policy
attaching, or by any other cause whatever."
IR dealing with the further question whether any reasons should
be assigned and if so assigned whether they should be such as must
satisfy a court of law, it was further observed:
"The question remains whether the clause gives the
insurers the right to act upon their own judgment, or
whether they are bound, if so required, to allege and prove
to the satisfaction of a Judge or Jury, not only that a
(!) [1959] A.C. 576.
(2) [1889] 14 A.C. 98.
514
SUPREME COURT REPORTS
(1966] 3 S.C.R.
desire exists on their part, but that they have reasonable
grounds for entertaining it. If the determination of the
policy would be for the advantage of its business, that
would obviously be a reasonable ground for the office
desiring to put an end to it; and a priori, one would suppose
that the insurers themselves must be the best if not the
only capable judges of what will benefit their business.
An insurance office may deem it prudent, and resolve to
limit its outstanding engagements, and, unless the words
of the clause clearly imply the contrary, it cannot be
presumed that the parties meant to make such a question
of prudent administration the subject of inquiry in a court
of law."
The learned Judges of the Divisional Bench did not follow the
decision of the Judicial Committee because they found it unacceptable. But a similar view of an identical condition was taken
by this Court in the Hartford Fire Insurance Co. case {I). Sarkar J.
there pointed out that a clause in this form was a common term in
policies and must therefore be accepted as reasonable and that the
right to terminate at will cannot, by reason of the circumstances,
be read as a right to terminate for a reasonable cause. In that case
the Hartford Office insured certain goods against fire between
March 20, 1947 and March 1948 in the town of Amritsar. The
policy was extended to loss by riot or civil commotion. Riots
occurring in July 1947 in the Punjab, a godown in Bakarwana Bazar
in Amritsar where insured goods were stored was looted and some
goods were lost.