M/S HANIL ERA TEXTILES LTD.versusORIENTAL INSURANCE CO. LTD. AND ORS.

A                     MIS HA NIL ERA TEXTILES LTD.
                                    v.
                 ORIENT AL INSURANCE CO. LTD. AND ORS.

                                NOVEMBER 29, 2000

B         [M. JAGANNADHA RAO AND K.G. BALAKRISHNAN, JJ.]


          Consumer Protection Act, 1986-Deficiency in Service-Insurance
     Company inspecting Mill premises prior to issuing policy-Charging extra
C   premium for blow room double protection-Premises damaged due to fire-
     Blow room remaining intact-Insurance company demanding higher premium
    for entire Mill premises as premium short paid after the accident-National
    Commission dismissing the complaint holding there is no deficiency in
    service-Held, charging premium at a higher rate belatedly is not sustainable-
    Insurance company directed to pay claim with interest.
D
           The appellant took 12 fire insurance policies with the Respondent for
     his Mill premises. These policies were renewed from time to time. Before
    issuing the policies the officials of the Respondent had visited the premises
    of the Appellant and premia payable was fixed after the inspection. The officials
    of the Respondent inspected and verified the blow room in Mill Band they
E   informed the appellant in Nov. 1994 that it attracted a higher premium than
    that charged earlier and accordingly an additional sum was paid by the
    appellant Due to a major fire accident, the stocks, machinery and building in
    Mill B were destroyed except the blow room. The surveyors assessed the
    damage. After that, the Respondent demanded an additional amount in Jan,
F   1995 towards absence of fire protection as prescribed by the Tariff Advisory
    Committee. The Respondent again made a demand for a huge sum in July
    1995 on the basis that the entire factory building including the blow room
    was a single communicating structure. The appellant did not pay the additional
    amount and contended that the blow room was segregated in all respects and
    the Tariff Advisory Committee approved fire fighting equipment had been
G   installed by them. While fianlising the fire claim the Respondent deducted a
    sum towards short charged premium and demanded the appellant to give an
    undertaking for the deduction. The appellant filed a complaint before the
    National Consumer Commission and sought a direction for payment of the
    difference with interest. The Respondent contended that there is no deficiency
H   in service and there were good reasons for their deduction and that the blow
                                          156
            HANIL ERA TEXTILES LTD."· ORIENTALINSURANCE CO. LTD.            J57

room was not separated from the main area and the appellant is liable for the      A
additional premium. The Commission held that the enhancement of the
premium was based on the application of the regulations and it was the duty
of the Respondent to have inspected and monitored the appellant even prior to
the incident of fire, but that cannot be said to be a deficiency in Service. The
Commission held that the appellant was not entitled for any relief and dismissed   B
the complaint

      In Appeal to this Court, the appellant contended that the respondent
charged a higher !ate of premium for the blow-room and the rest of the area
was charged less which would indicate that it was segregated from the rest of
the area, that six fire proof doors had been installed to protect the blow-room    C
area and there fore it was not correct to say that the entire area was a single
communicating structure. The Respondent contended that the higher rate of
premium was charged for the blow-room on the assumption that the appellant
would make it segregated, that even after the functioning of the blow-room
the separate values were not furnished, that the renewal w~s done on a
provisional basis, that since the information was provided only in Nov., 1994      D
and as the respondent had only assumed the segregation, an additional
premium was demanded and that the blow-room was segregated with fire proof
doors only after the fire, and therefore additional premium is to be paid.

      Allowing the Appeal, the Court                                               E
       HELD : 1. It is of primary importance to note that the fire had not spread
to the blow-room area. It raises a strong presumption that the blow-room was
segregated even before accident. The appellant had also produced documents
to show that they had installed the fire proof doors to protect the blow-room.
The fact that the respondent demanded a higher rate of premium for the blow- F
room in Nov., 1994 is indicative of the fact that it was separated from the rest
of the area. The observations of the representatives of the Loss Prevention
Association of India Ltd. cannot be ignored. Therefore, it is clear that the.
attempts of the Respondent to show that the appellant had not taken effective
steps to segregate the blow-room cannot succeed. (163"0-E)                        G
      2. It is clear that the Respondent 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. [165-D)                       H
     158                      SUPREME COURT REPORTS [2000] SUPP. S S.C.R.

A         Fire & Motor Insurance by E.R. Hardy Evamy, 2nd Edn Page, 7,
     Halsbury's Laws of England, Vol 25, Para 458, referred to

           3. 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
B    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. The Respondent received the separate values of
     bifurcation without any demur and went ahead .with the insurance policy of
C    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. The amount was sought to be recovered from the
     appellant much after the lapse of the validity period of those policies. Therefore
     the sum due to the appellant was illegally withheld by the respondent. [165-E-G]

D          (fhe Court directed the respondent to pay an amount ofRs.1,20,77,614
     to the appellant with 12% interest p.a. from the date of complaint upto the
     date of payment)

           CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1112 of2000.

E         From the Judgment and Order dated 2.12.99 of the National Consumer
     Dispute Redressal Commission, New Delhi in O.P. No. 75of1997.

        Dr. A.M. Singhvi, Sridhar Y. Chita:Je, Ms. Tashi Battia and Abhijatt
    Medh for the Appellant.

           Krishna Rawat, Deepak Rawat and M.K. Dua for the Respondents.
F
           The Judgment of the Court was delivered by

           K.G. BALAKRISHNAN, J. The appellant is a manufacturer of cotton,
   polyester, woollen and viscose yams and their blends. It is a hundred per cent
G .export-oriented unit and has got two manufacturing mills, one engaged in the
   manufacture of spinning acrylic yam (Mill A) and the other for spinning
   cotton yam and various blended yarn (Mill B). Appellant started production
   of these yams 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 I 994 to October 1995 and were later renewed from
H time to time. These policies covered raw materials, stocks, plant and machinery,
   HANIL ERA TEXTILES LTD." ORIENTAL INSURANCE CO. LTD. [BALAKRISHNAN, J.]   ]59

accessories, spares, building etc. While issuing the policies, the officials of    A
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           B
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.
                                                                                   c
      A major fire accident occurred in Mill 'B' on 24. I 2.94 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     D
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 the appellant
 that a sum of Rs. 49,89,463 should be paid as additional premium as the Tariff E
 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, F
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. I, 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 G
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 oflndia 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 w~s se!7re11ated in all respects and the H
     160                    SUPREME COURT REPORTS [2000] SUPP. 5 S.C.R.

A 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
B   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
C   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 I to 4 (collectively referred to as 'the respondent
D 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
E 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
F 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 be charged for each section of a building independently
G 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
H respondent Insurance Company contended that the Blow-room was not
  HANIL ERA TEXTILES LTD. "· ORIENTALINSURANCE CO. LTD. [BALAKRISHNAN, J.J   J6 J

segregated from the main room and, therefore, the appellant was liable to pay       A
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           B
incidence bf 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         C
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       D
 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       E
 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         F
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            G
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                     H
    162                      SUPREME COURT REPORTS (2000] SUPP. 5 S.C.R.

A   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
    type of Automatic Diversion System or Co-2 Flooding system in the Chute
    Feeding arrangement between the Blow-room and the Carding Section, but
B   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
C   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
D   whether the appellant was in fact liable to pay the additional premium of
    Rs. I, 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
E   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 Blo.w-
F   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.

G          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
H   is pertinent to note that the representatives of the Loss Prevention Association
  HANIL ERA TEXTILES LTD. 1•. ORIENTAL INSURANCE CO. LTD. [BALAKRISHNAN, J.)   J6J
of India Ltd. also visited the factory premises and in paragraph 7.1 of their        A
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 materiai to the finished product stack which was        B
       located at the other end of the section named 'Mixing Conditioning
       Department."
                                                          [emphasis supplied]

       When the appellant raised objections regarding the opinion expressed          C
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
                                                                                     D
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
                                                                                     .E
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           F
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.            G
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 wi:s         H
    164·                     SUPREME COURT REPORTS (2000] SUPP. 5 S.C.R.

A   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.
B   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.

C         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
D           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 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
E           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
F   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
G   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
H   ™°w-room. When premium is thus demanded and collected at a higher rate,
   HANIL ERA 'fEXTILES LTD. 1•. ORIENTAL INSURANCE CO. LTD. [BALAKRISHNAN, J.] \   65
it is an indication regarding the nature of the contract that subsists between          A
the parties, namely, that the insurer was awirre 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,           B
        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       C
        disclosure of the precise facts making it so."

      It is clear that the respondent Insurance Company Tecovered 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            D
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 E
 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 the separate values of bifurcation as early as on F
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 G
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             H
    166                     SUPREME COURT REPORTS [2000) SUPP. 5 S.C.R.

A 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.

    V.M                                                           Appeal allowed.