General Assurance Society Ltd. Vs.
Chandumull Jain & ANR  INSC 36 (7 February 1966)
07/02/1966 HIDAYATULLAH, M.
GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N.
CITATION: 1966 AIR 1644 1966 SCR (3) 500
Insurance-Acceptance and covers notes issued
by insurer- Policy not issued-Conditions of policy whether applicable to
contract-Condition allowing parties to cancel contract whether
reasonable-Cancellation by insurer when valid.
Letters of acceptance of the proposals and
cover notes were issued by the appellant Society purporting to insure certain
houses belonging to the respondents against damage from fire, flood etc.
According to the cover notes 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 get
into flood. Soon thereafter the society cancelled the risk, relying on
condition (10) of its Fire policy. The houses were washed away and the
respondents filed a suit in the High Court 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 the facts of the case, whether the said condition was
reasonable, and whether the cancellation of the policy by the society was valid
HELD : (i) Looking at the proposal, the
letter of acceptance and the cover notes it was clear that a contract of
insurance under the standard 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 because when a contract of insurance 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 a case, apply. In
the present case the cover notes clearly said that the usual terms of the
society's policies would apply. Condition (10) was a usual condition of such
policies and therefore it could be invoked by the Society.
[510 B; 512 D-G] (ii- There is nothing wrong
in including in a contract of insurance a mutual condition for the cancellation
of the contract. Condition (10) of the Fire policy gave equal rights of
cancellation to both parties and was not unreasonable. [513 B-C] (iii) A
condition such as Condition (10) is intended to cancel the risk but not to
avoid liability for loss which has taken place, or to avoid risk when it is
already turning into a loss. Cancellation is reasonably possible before the
liability under the policy has commenced or has become inevitable, and it is a
question of fact in each case whether the cancellation is legitimate or
illegitimate. On the facts of the case it could not be said that the society
cancelled the policies after the loss had already commenced or had become
inevitable. The cancellation was therefore valid. [514 H-515 C; 515 G] 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.
1. R. (1956) S. C. 1288, relied on.
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 L N.
Shroff, for the 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
Hidayatallah 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 submitted
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
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.118848 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 acceptance of the proposals.
110Sup. CI/66-2 502 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
Incl. Loss or damage by cyclone flood and/or
change 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,
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 if the
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 was received by them, the
assured wrote a letter on July 1 (Ex. A/g) asking for the policy or for
extension of the cover notes. This was not done.
On July 6, 1950 the Company wrote to the
assured two identi- cally worded letters (except for changes in amounts and
numbers of the policies) which read Calcutta 6th July, 1950 503 TO 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
The relative Endorsement is under preparation
and will be forwarded to you in due; course.
Yours faithfully, (Sd.)/- Illegible Ag.
Manager & Underwriter.
Nature of Alteration:
The above cover note is cancelled by the
General Assurance Society Ltd. as from 6th July, 1950." 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 river and/or subsidence have commenced, it is quite impossible to
take any precautionary measure or to rein sure the same with any other office
of Insurance at this stage.
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,
It is hereby declared and agreed that as from
6th July 1950 the insurance by this policy is cancelled by The General 504
Assurance Society Ltd., Calcutta, and a refund premium of Rs.......... is
hereby allowed to the assured on a pro rata basis.
Ag. Manager & Underwriter.
Calcutta, In reply the latter said that as
the risk had already "commenced' and "taken place", there could
be no cancellation as there was no time left for the assured to take
precautionary measures by reinsuring. In reply the Company referred to
condition 10 of the Fire policy under which the Company claimed to cancel the
policy at any time.
Condition 10 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 at any time be terminated 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 terms from the date of the concealment." 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
commenced. 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 been filed by the Company.
Before we deal with the question in dispute
we may say a few words about the position of the Ganges river. in relation to
the Dhulian town in general and the insured houses in particular. The town of
Dhulian is situated on the bank of the river which, 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 1- 1/2 to 2 furlongs from
the town and a few of the godowns lying close to the bank 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 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 inquiries on behalf of the Company and the 6th July when the
Company cancelled the risk 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 that 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 erosion
(Q. 137). Erosion began by the end of June (Q. 142) and 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 affected in the last week of June (Q. 180).
At that time the insured houses were 400/450
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 stated that the erosion
started four or five days after Rathajatra which took place on or about June
20, 1950. Bijoy Kumar (P.W.4), Retired Superintending Engineer is an important
witness. 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 erosion had already begun then. With his report submitted on
September 11, 1950, he sent a letter of 9th August, in which he said that he
had visited Dhulian Bazar on August 5, 1950 and found that the scouring 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 (1) (1889) 14 A. C. 98.
506 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 Dangali, 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. Datta 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 10 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 was
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 cancellation having been lone 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 of
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.
1,10,000 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
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,
analyses the reasons given in the two decisions of the High Court.
The letters of acceptance state 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 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
The Divisional Bench took a different view of
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 but that the words of the cover note wore not
"an 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 fire policy to cover other
risks, the assured was made to amend and construe each separate clause. Holding
condition 10 to be unreasonable 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 hold that the cancellation, in any event, was after the risk
had commenced and could not be upheld. For these reasons the claim was decreed.
The Trial Judge has found that there was no attempt to fix the amount of
damages but the Divisional Bench reconsidered the matter and gave its own
Although the Divisional Bench went into a
detailed discussion (some of which was perhaps not altogether necessary) the
problem of liability in this case was well- scanned by counsel appearing for
the parties. They argued the case under three distinct heads which are:
(a) Did condition 10 apply to the facts;
(b) If it did, how is it to be construed;
and (c) Was the cancellation of the policy
valid in law? We consider the matter under these three broad heads.
The application of condition 10 depends on
how far the terms of the policy can be said to be incorporated in this contract
of insurance between the parties. The facts relating to the formation of the
contract are clear except on the one point relating to the cover notes, and
that, in our opinion, has been given undue prominence by the Divisional Bench.
It makes no essential difference whether the. cover notes accompanied the
letters of acceptance or were sent two days later. It is possible that the
letters of acceptance themselves were sent on June 5. It often happens that two
letters delivered at the same time bear different dates. The letters of
acceptance referred to 'relative covers', but the word 'relative is not to be
stretched too far. Its use here is an instance of unnecessary legalese and it
does not add to the purport of the communication that a cover note was being
sent. It is obvious that if in the period during which the cover note was
operative there was refusal to insure, the assured could not have demanded a
policy or, insisted that there was insurance 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 impairing 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 got any additional
rights under the letters of acceptance. Insurance of property is not a bet but
a well-known commercial deal.
Acceptance of the proposal read with the
cover notes clothed the assured with a right to demand a policy in relation to
the kind of insurance he 509 had 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 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 transactions had 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 incorporates the policy in this manner, it does not have to
recite the term and conditions, but merely to refer to a particular standard
policy. If the proposal is for a standard policy and the cover note refers to
it, the assured is taken to have accepted the terms of that policy. The
reference to the policy and its terms and conditions may 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 the 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
When this happens the terms of the policy are
incipient but after the period of temporary cover, the relations are governed
only by the terms and conditions of the policy unless insurance is declined in
the meantime. 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 is a requirement of uberrima fides i.e., good faith
on the part of the assured and the contract is likely to be construed contra
proferentem that is against the company in case of ambiguity or doubt. A
contract is formed when there is an unqualified acceptance of the proposal.
Acceptance may be expressed in writing or it may even be implied if the insurer
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 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 being.
The letters of acceptance clearly mentioned
that cover notes were being sent. The contract of insurance 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. 1, 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 purpose is not so much to insure the property but to insure
the owner of the property against loss. The policy not only defines the risk
and its duration but also lays down the special terms and conditions under
which the policy may be enforced on either side. Even if the letter of
acceptance went beyond the cover notes in the matter of duration, the terms and
conditions 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 cases, would apply.: There is ample authority for
the proposition. In Corpus Juris Secundum (Vol. 44, p. 953) the following
"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 such cases......
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.
In 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. 1, 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 precedent 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 (1) 24 led.
8. (2)  17 T.L.R. 233.
512 was only one 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
policy accordingly governed the relations of the parties, and made condition 10
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
assured and as this never happened the cancellation was improper. This argument
is scarcely open, because, the assured is obviously basing his suit on the
policy. In his plaint he invoked the policy.
The assured cannot sustain the suit except by
basing it upon the policy, because unless one reads the policy and the terms on
which it was effective, mere reading of the proposals and the letters of
acceptance would not give any terms. Further when a contract of insuring
property is complete, it is immaterial whether the policy is delivered or not
for the rights of the parties are regulated by the policy which ought to be
delivered. In 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's policies" could not be read to
include condition 10 which was not a usual condition where it gives a right to
terminate the policy at will to the company.
This is not correct. Suck a condition is
mentioned in almost all the books on the law of Insurance. See Halsbury's Laws
of England (3rd Edn.) Vol. 22, page 245 paragraph 474; Macgillivray on
Insurance Law (5th Edn.) Vol.
2, page 963, paragraph 1981; Welford &
Otter-Barry's Fire Insurance (4th Edn.) pp. 178, 179; and Richards on Insurance
(5th Edn.) Vol. 3, p. 1759, paragraph 531. In The Sun Fire Office v. Hart and
Others(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 Central Bank of India Ltd.v.Hartford
Fire Insurance Co.Ltd.(2). Therewas 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 (2) A.I.R.
(1956) S.C. 1288.
(1)  14 A.C. 98.
513 on the authority of Sze Hai Tong Bank
Ltd. v. Rambler Cycle Co. Ltd.(1) that the extreme width of the condition must
be cut down by 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 had started would defeat the main object and intent of the
contract. This argument mixes up two situations. The first is a question of
There is nothing wrong in including such a
mutual condition for the cancellation of the insurance. An assured nay like to
invoke sit 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 he 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
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 fire. 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- 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." in 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 (1)  A.C. 576.
(2)  14 A.C. 98.
514 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 (1). 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. The Hartford Office was informed and on August
7 1947 they wrote saying that the goods be removed to a safe place or the
policy would stand cancelled after August 10, 1947, under condition 10 which
was similar to condition 10 here. On August 15, 1947, the goods were lost by
fire. The Hartford Office was held to be protected by the said condition. The
reason of the rule appears to be that where parties agree upon certain terms
which are to regulate their relationship, it is not for the court to make a new
contract, however reasonable, if the parties have not made it for themselves.
The contract here gave equal rights to the parties to cancel the policy at any
time and the assurers could therefore invoke the condition to cancel the
it was contended (and it has been so held by
the Divisional Bench) that this cancellation was ineffective, because risk had
already commenced and the policy could not be cancelled after the liability of
the company began. As a general proposition, this is perfectly right. Condition
10 is intended to cancel the risk but not to avoid liability for loss which has
taken place or to avoid risk which is already turning into loss. It is obvious
that (1) A.I.R. 1956 S.C. 1288.
515 a fire policy cannot be cancelled after
the house has caught fire. But it is equally clear that unless the risk has
already commenced or become so imminent that it must inevitably take place,
such a clause can be invoked. If property is insured against flood, it is not
open to the insurance company to send couriers on motor cycles ahead of the
floods to cancel the policy. But if it is thought that a particular dam was not
quite safe, the insurance company will be entitled to cancel the policy against
flood before the dam has actually started to crumble or has crumbled.
Cancellation is reasonably possible before
the liability under the policy has commenced or has become inevitable and it is
a question of fact in each case whether the cancellation is legitimate or
In the present. case, it was always clear
that the Ganges would get into the floods in the rainy season, but it was not
clear that it would begin to erode the bank in such a way that these houses,
which were at a distance of 400/500 feet from the bank would inevitably be
washed away. The question thus is whether the cancellation was done after
liability of the assurer under the policy had commenced or the loss had become
inevitable. Here we must look at the evidence which was summarized earlier.
We are concerned with two dates in particular
and they are June 18, 1950 when Ghose visited Dhulian and July 6 when the
policy was cancelled. The houses according to Lalchand Jain (P.W. 1) were
400/500 feet away when the proposal was made.
The river remained calm till the second week
of June. It only began to rise in the third week of June. Thus on June 18, when
Ghose visited the place, there was no flood and no erosion. Ghose's report has
not been produced but he could have only estimated the possibility of loss and
Even in the third week of June there was no
erosion and it began by the end of June. Even on July 15 the distance between
the river and the houses was 250 feet (see Q. 179).
As the rate of erosion was about 20/25 feet
per day (vide Bijoy Kumar P.W. 4) the houses were 400/500 feet away even on
July 6. In these circumstances, it cannot be said that the loss had commenced
or that it had become so certain as to be inevitable or that the cancellation was
done in anticipation and with knowledge of inevitable loss. The cancellation
was done at a time when no one could say with any degree of certainty that the
houses were in such danger that the loss had commenced or became inevitable.
There is no evidence to establish this. This case, therefore, falls within the
rule of the Sun Fire Office(1) and the Hartford Fire Insurance Company(2)
cases. The assurers were, therefore, within their rights under condition 10 of
the policy to cancel it. As the policy was not ready they were justified in
executing it and cancelling it. The right of the plaintiff to the policy and to
enforce it was lost by the legal action of cancellations.
(1)  14 A.C. 98.
(2) A.I.R. 1956 S.C. 1288.
516 In the result the appeal must succeed. It
is allowed. The decree passed by the Divisional Bench is set aside and the
judgment of G. K. Mitter, J. dismissing the suit is restored. Although costs
must follow the event, we think in the special circumstances, of this case we
should make no order about costs.
M 10 Sup.Cl/66-25,00-28-1-67-GIPF.