THE BURNT CROPS - A SUPREME COURT OF INDIA CASE

The most basic principles of insurance are utmost good faith and insurable interest. Any insurance contract could become meaningless if the aforesaid elements are not entirely met with.

The Supreme Court of India, in Canara Bank v. M/s United India Insurance Co. Ltd. & Ors., 2020, discussed, at lengths, some of the most pressing questions faced when it comes to determining insurable interest and what material facts are to be disclosed by the insured to fall within the purview of the legal doctrine of utmost good faith.

THE PARTIES

There are three main parties involved, in addition to the insurance company.

1.      Farmers

2.      Cold Storage Unit Owners

3.      The Bank

It is the cold storage unit that had taken the comprehensive insurance policy. It was insured with the United India Insurance Company Limited, hereinafter referred to as ‘the insurance company’

Role of the involved parties

The farmers had stored their agricultural produce in a cold store run by a partnership firm under the name and style of Sreedevi Cold Storage, hereinafter referred to as ‘the cold store’. These farmers also obtained loans from Canara Bank, hereinafter referred to as ‘the Bank’.

The Tripartite Agreement

A tripartite agreement had been entered into by each one of the farmers while taking a loan from the Bank and hypothecating the agricultural produce which was stored in the cold store. The farmer, the Bank, and the cold store were parties to the tripartite agreement.

It is pertinent to note that the cold store, while levying the general charges had also charged the insurance premium paid by it.

THE INCIDENT

A fire took place in the cold store in 2014. The entire building of the cold store and the entire stock of agricultural produce was destroyed.

THE ISSUES

The insurance company rejected the claim based on following alleged aspects:

1.      Non-accidental nature of fire.

2.      No insurable interest of farmers.

3.      No privity of contract between farmers and the insurance company.

4.      Fraud and material misrepresentation.

5.      Non-disclosure of material facts.

The supreme court rejected all the baseless arguments put forward by the insurance company.

Non-accidental nature of fire

Both the State Commission and the National Commission had come to the conclusion that the fire was an accidental fire and occurred due to a short circuit. Furthermore, there had been no evidence that the insured had set the cold store on fire.

Thus, whether the fire took place by a short circuit or any other reason, as long as insured is not the person who caused the fire, the insurance company cannot escape its liability in terms of the insurance policy.

Farmers had no privity of contract and are not a party to the insurance policy

The court held that it is not necessary that there should be privity of contract between the insurance company and the claimants. Pursuant to the definition of consumer under the Consumer Protection Act, 1986, beneficiaries, who can take benefit of the insurance availed by the insured, are included. As far as the present case is concerned, under the  tripartite agreement entered between the Bank, the cold store and the farmers, the stock of the farmers was hypothecated as security with the Bank and the Bank had insisted that the said stock should be insured with a view to safeguard its interest.

The tripartite agreement had a clause that read as follows:­

“WHEREAS the Third Party has agreed to insure the produce/goods stored in the cold storage to indemnify the produce in case of any casualty or accident by any means to cover the risk and also to cover the loan amount to avoid loss at the cost of the Second Party till the release order or repayment of the loan amount.”

The court ruled the aforesaid clause in unambiguous terms binds the cold store to insure the goods, to indemnify the produce, to cover the risk and cover the loan amount. This insurance policy has to be taken at the cost of the second party, which is the farmer. Therefore, there can be no manner of doubt that the farmer is a beneficiary under the policy. The farmer is, therefore, a consumer and had insurable interest.

Fraud and Material Misrepresentation

It was alleged by the counsel for the insurance company that the insurance company was not informed by the Bank, the cold store or the farmers that the farm produce or the insured goods belong to the farmers and therefore the policy is voidable.

It is pertinent to note here that the insurance policy had an Agreed Bank Clause. The clause clearly indicated that it was agreed by the insurance company that upon any amount being payable under the policy in question, the same would be paid to the Bank and the amount so paid “may relate to the interests of other parties”. Thus, the assumption of the insurance company that it had insured the goods belonging to the cold store itself has no factual basis. Furthermore, it was held:

The insurance company before us is one of the largest nationalised insurance companies and a presumption has to be drawn that it must have verified the details before insurance policy was issued. If verification had been done by a visit to the cold store, it could have been easily found out who are the owners of the stock. In case, the insurance company has chosen not to verify the stock it cannot take advantage of its own negligence. The principle of uberrima fides has no application because the cold store had declared all necessary facts. The bank clause clearly indicated that the goods were hypothecated/pledged to the Bank. Therefore,  the insurance company now cannot turn around and claim that the names of the owners were not supplied to it at the time of insurance. We also cannot lose sight of the fact that the insurance policy was renewed at least twice. Therefore, the policy was in existence for 3 years and it is in the 3 rd year that the fire took place. If the insurance company chooses not to even write a letter to the insured or take any steps to verify the value of the goods and ownership of the goods, it cannot now turn around and urge that it was not aware about the nature or ownership of the goods.

Non-­disclosure of material facts

It was alleged by the insurance company that while submitting the proposal form the cold store had not listed out the names of the parties who had an insurable  interest including the financial institutions. It is, therefore, submitted that the cold store deliberately did not disclose the fact that the produce belonged to the farmers.

The court held:

The insurance company itself could have also taken some initiative in the matter. To make a contract void the non­disclosure should be of some very material fact. No doubt, it would have been better if the Bank and the insured had given at least 1 tripartite agreement to the insurance company but, in our view, in the peculiar facts of this case, not disclosing the tripartite agreement or the names of the owners cannot be said to be such a material fact as to make the policy void or voidable. We are clearly of the view that there is no fraudulent claim made. There is no false declaration made and neither is the loss and damage occasioned by any wilful act or connivance of the insured.

THE JUDGMENT

Granting the judgment against the insurers, the court ruled that the insurance company is liable to indemnify the cold store with regard to the value of the goods and since the farmers are the beneficiaries under the policy, they are entitled to get the amount payable under the policy.

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