Report No. 67
Definitions in Section 2(19) and 2(20)
6.1. Section 2(19)-"Policy of Insurance"-Introductory.-
Section 2(19) defines "policy of insurance" as including-
"(a) any instrument by which one person, in consideration of a premium, engages to indemnify another against loss, damage or liability arising from an unknown or contingent event;
(b) a life-policy and policy insuring any person against accident or sickness, and any other personal insurance."
6.2. It may be pointed out that clause (a) of the definition is not confined to 'policies', and includes any instrument by which one person engages to indemnify another. If there is an indemnity undertaken in the document, then it is a policy for this purpose, even though, in business world, the document may be distinguished from a "policy".
6.3. In relation to one class of documents, namely, letters of cover or engagement to issue a policy of insurance, the position requires detailed examination. The need for discussion arises out of the charging article-Article 47.
6.4. Article 47 of the Act-Controversy created by the exemption.-
The principal paragraph of Article 47 levies duty on various policies. Considerable confusion is created by the "general exemption" under the article, quoted below1:-
"Letter of cover or engagement to issue a policy of insurance."
"Provided that, unless such letter or engagement bears the stamp prescribed by this Act for such policy, nothing shall be claimable thereunder, nor shall it be available for any purpose, except to compel the delivery of the policy therein mentioned."
This exemption is anomalous, because, as will be shown presently, there is considerable difference between a letter of cover etc. and a policy. In fact, the very language of the exemption makes a distinction between an 'engagement' and a 'policy'.
1. This discussion applies to all policies, and is not confined to sea Insurance policies.
6.5. The exemption for letters of cover etc. would suggest that a letter of cover et would otherwise fall under the expression "policy of insurance". But, as stated by the Supreme Court in R. Ratilal & Co. v. National Security Assurance Co. Ltd., AIR 1964 SC 1396 (1398), paras. 6-10 (Case of fire insurance), while a letter of cover contains a contract of insurance, it is not a "policy of insurance" in the common understanding of that word in the trade1.
1. Emphasis supplied.
6.6 Judgment of the Supreme Court as to fire insurance.-
In the Supreme Court case (which related to fire insurance); the letter of cover was not stamped, but the plaintiff was prepared to pay the penalty under section 35, and had actually done so. The question to be decided was whether, even on payment of penalty, the letter could be admitted in evidence. This question arose because the contention of the insurance company was that since the exemption under Article 47 uses the words "bears the stamp prescribed by this Act for such policy", the stamp should have been affixed at the 'time of the letter, and the provision in section 35 for subsequent payment of penalty could not be involved in view of the special language of the exemption. This argument was negatived by the Supreme Court, by a majority judgment1.
According to the minority view, however, in view of the express wording of the exemption to Article 47, the letter could not be subsequently stamped under section 35. If the letter is intended by a person to be used for making a claim thereunder, and, therefore, to be treated as a policy, then, according to the minority view, it is incumbent on the person so intending to have the letter properly stamped for that policy from the very beginning. If it is not so stamped, it can only be used to compel the delivery of the policy, and not as a basis of the claim. If subsequent stamping of the document to convert the letter into a policy is allowed at the sweet-will of the party standing to gain, then, according to Raghbar Dayal, J. (who was in the minority), the law would lead to anomalies.
1. Sarkar and Shah, JJ.; Raghbar Dayal, J. dissented.
6.7. We are not so much concerned with the meaning of the expression "bears stamp", as with the question whether it is proper to equate a cover note with a policy. On this point, the majority as well as the minority took the same view.
The following is from the majority judgments1:
"(6) The learned trial Judge held that the instrument was not a letter of cover but it was in reality a policy of insurance, because it contained a contract of insurance. It is not in dispute that if this view is correct, then on payment of the duty and the penalty the instrument would be admissible in evidence, under section 35. The Appellate Bench of the High Court, however, was unable to accept the view of the learned trial Judge and, we think, in this the Appellate Bench was right. The fact that a letter of cover contains a contract of insurance cannot make it a policy of insurance2. As the learned Judge of the Appellate Bench rightly pointed out, the letter of cover was granted a general exemption from the liability to the duty specified in Article 47, that is to say, it was exempted from duty which would, but for such exemption, have been payable on it under that article."
"Now, under Article 47, duty was payable on various policies of insurance. It would follow that a letter of cover would have been liable to duty as a policy of insurance if the exemption had not been granted3. The letter of cover had, therefore, to contain a contract of insurance, for it would not otherwise have been liable to duty under Article 47. But it did not thereby become a policy of insurance only for then the exemption and the article would have been in conflict with each other.4 We may also mention that the word 'cover' itself indicates that property is held insured or covered by it against certain risks.
1. R. Ratilal Co., AIR 1964 SC 1396 (1398, 1399), paras. 6-10 (majority view).
2. Emphasis supplied.
3. This observation, with respect, is obscure.
4. Emphasis is supplied.
'(7) What then is a letter of cover ? How is it to be distinguished from a policy of insurance? The Act contains no definition of it or of an 'engagement to issue a policy of insurance', but the terms are well known in trade. The Act is dealing with businessmen and with mercantile documents well known to them.
"It may be shortly stated that a letter of cover no doubt contains a contract of insurance, but it is not a policy of insurance in the common, understanding of that word in the trade. It is well known that in order to obtain an insurance against the risk of fire the assured has first to send a proposal to the insurer and then the insurer takes a little time in making enquiries as to whether it would accept the proposal and undertake the obligation of covering the risk. He issues a policy only after he is satisfied that it would be a prudent business proposition to do so. Experience of trades people has, however, shown that some kind of protection for the interim period when the insurer is making the enquiries is necessary.
This protection is given by what is called a letter of cover. It is expressly a contract granting insurance for the period between its date and until a policy is prepared and delivered if one is eventually issued or otherwise a date mentioned in it, just as a period of thirty days is mentioned in the Interim Protection Note issued in his case; see Citizens Insurance Co. of Canada v. William Parsons, (1891) 7 AC 96. We think that the present Interim Protection Note satisfied the conditions which would make it a letter of cover in this sense.
"It gives protection for a period of thirty days or the period upto the date of the issue of the policy. An engagement to issue a policy means, it seems to us, more or less the same thing as a letter of cover. A letter of cover, therefore, cannot be admitted in evidence under section 35 as a policy of insurance."
The above passage shows that the Supreme Court made a clear distinction between the two concepts (cover note and policy). Some confusion was, no doubt, created by the general exemption, because the exemption itself is anomalous. We shall revert to this aspect later. The minority agreed with the view. Raghbar Dayal, J., expressly stated in his dissenting judgment that it was agreed that a cover note was not a policy. It may be mentioned that in the case before the Supreme Court, duty and penalty had already been paid in the court below, pending determination of the legal questions. The legal objection raised by the insurance company was that since the letter of cover did not "bear stamp", it could not be subsequently validated. The Supreme Court observed on this point:-
"(8) The next question is whether a letter of cover is itself an instrument chargeable with duty under the Act. It is not disputed that if it is not so chargeable, it cannot be admitted in evidence under section 35 by subsequent payment of duty and penalty. Now, section 3 specifies instruments which are chargeable with duty under the Act. It says, "subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefor respectively, that is to say-(a) every instrument mentioned in that Schedule which is executed in India on or after the first day of July 1899." July 1, 1899 is the date on which the Act came into force.
"(9) Now the contention of the respondent is that a letter of cover is not an instrument chargeable, with duty, because the General Exemption in Article 47 of the Schedule exempts it from such duty. This contention was accepted by the learned Judges of the Appellate Bench of the High Court who pointed out, "It is significant that the words used are not that such letter is chargeable with duty. The words used are "bears the stamp prescribed by the Act for such policy". On a proper interpretation this means that such letter of cover is not chargeable with duty as such under the Act but if it bears the stamp prescribed by the Act for a policy of insurance, then it will shed its inability and will become a competent document on which a claim for loss could be made." They further observed, "as no stamp is fixed for such a letter of cover being not a document chargeable with duty, the statute uses the significant words 'or bearing the stamp' and indicates the rate by saying that the stamp must be the same for such a letter of cover which is prescribed for a policy of insurance under the Act."
"In this Court Mr. Chatterjee for the respondent also advanced the same argument.
"(10) We are unable to accept the view which found favour with the Appellate Bench of the High Court. The matter was put in two ways. The first was that an instrument which is exempted from duty by Schedule I is not chargeable with duty under section 3 and a letter of cover is so expressly exempted. No doubt, if an instrument is exempted by the Schedule from duty, then it cannot be chargeable. But we do not think that a letter of cover is for all purposes exempted from duty by the General Exemption. We think the proper construction of the General Exemption clause is that the exemption is to apply only if the letter of cover is used for compelling the delivery of the policy mentioned in it.1 If it is used for any other purpose, then it is not exempted. That is why a proviso has been employed in the provision and the effect of that is to take the letter of cover out of the exemption in all other cases.
If it is taken out of the exemption, then, of course, the present argument fails. We are unable to see how a letter of cover can be said to have been exempted for all purposes, if certain things cannot be claimed under it for the sole reason that it does not bear a stamp. If it were exempted for all purposes, it would be fully enforceable even without a stamp. When "a letter of cover is not stamped, then nothing is claimable under it except the delivery of a policy. If, however, it bears the stamp prescribed for the appropriate policy, a claim can be made under it. It seems to as that if an instrument bears a stamp it has incurred the liability for the stamp duty. It has not then been exempted. Therefore, it cannot be said that a letter of cover is exempted from duty in all cases. When it is not exempted, it is an instrument chargeable to duty."
1. Emphasis supplied.
6.8. Other policies.-
This judgement is confined to fire insurance. Before this judgement, generally on the question whether a "slip" for marine insurance is a policy for the purposes of the Stamp Law judicial decisions1 did not help in creating certainty. The importance of the above point does not survive2 as regards marine insurance policies, because of specific statutory provisions governing them3. But, the point is of importance in regard to other insurance policies.
1. (a) Surajmal v. Triton Insurance Co., AIR 1925 PC 83 (84).
(b) Marine Assurance Certificate (in re:), 1895 ILR 19 Born 130 (132) (Document which does not contemplate another formal document).
(c) Tricamji v. Birji, AIR 1923 Born 142 (143): 24 Born LR 820. (Distinction between cover note and policy).
(d)Ahmed Shah v. Grindlay & Co., AIR 1944 Sind 98 (103). (Certificate of Insurance). (e) Reference, 1903 ILR 30 Cal 565 (575). (Maclean, C.J.)-"A contract for sea insurance is one thing and a policy of sea insurance another."
2. See discussion as to section 2(20)-Sea policies", infra.
3. Sections 24, 27(2) and 28, Marine Insurance Act, 1963.
In view of the above position, it was suggested to us that the present scheme of the Act is anomalous and the anomaly should be remedied. Really speaking, a letter of cover is not to be regarded as a "policy", though it may be evidence of a contract of insurance. This is clear from the relevant passage quoted from the judgment of the Supreme Court1. This being the basic nature of a cover note, a cover note, it was suggested, should not be regarded as a policy, and the definition of "policy of insurance" should be amended so as to exclude cover-notes. This would not lead to any loss of revenue, because, after the nationalisation of the general insurance business, the possibility of insurers not executing a formal policy in order to avoid stamp is almost nil.
1. Para. 6.7, supra.