Report No. 70
Transferee's Right Under Policy
As between the transferor and the transferee of immovable property, a number of situations arise where the adjustment of claims becomes necessary in regard to immovable property. Many such problems are sought to be dealt with in sections 54-55-the latter section, incorporating a large number of provisions which constitute a Code for regulating the relations between the seller and the purchaser of tangible immovable property.
Similarly, in sections 108 to 112, there is given, in relation to lessee an elaborate set of provisions regulating the inter-relationship of lessor and lessee. Certain matters of a general nature were considered appropriate for being dealth with in the present Chapter by way of working out the mutual rights of the transferor and the transferee. Section 49 addresses itself to one specific problem, namely, what happens to rights under a policy of insurance against loss or damage by fire in regard to immovable property which is transferred for consideration?
The section deliberately avoids any provisions for gifts-probably on the assumption that since the principal property itself is transferred for love and affection or on other non-mercenary considerations, the rights under a policy of insurance would also be expressly provided for if necessity arises.
44.2. Section 49.- Section 49 reads-
"49. Where immovable property is transferred for consideration, and such property or any part thereof is, at the date of the transfer, insured against loss or damage by fire, the transferee, in case of such loss or damage, may, in the absence of a contract to the contrary, require any money which the transferor actually receives under the policy, or so much thereof as may be necessary, to be applied in reinstating the property."
44.3. Period to which section 49 applicable-first view.-
There seems to be considerable misconception as to the setting in which section 49 is to operate. Does it deal with the period between the contract for transfer and the actual transfer? Or, does it deal with the situation after the completed transfer? The first view seems to have been taken in a Rangoon case,1 and it is sometimes stated that the section is based upon the dissenting judgment of James, L.J., in Rayner v. Preston, (1881) 18 Ch D 1. .The English case was, however, concerned with the sale of property where damage by fire occurs after the contract but before the completion of the sale.
The majority of the judges of the Court of Appeal in that case, with James, L.J. dissenting, held that the purchaser was not entitled to the benefit of insurance money. James, L.J., in his dissenting judgment, took the view that though the seller in a contract of sale was not technically a trustee, yet, once a contract is completed by an actual conveyance, then that relates back to the contract and then it is ascertained that the relation was of trustee and beneficiary. The legal estate, it is now ascertained, was in the vendor, but the beneficial interest was in the purchaser.
"This being the relation between the parties", James, L.J. continued, "I hold it to be a universal rule of equity that any right which is vested in a trustee-the benefit of which accrues to a trustee, from whatever source or under whatever situation of legal ownership of the property-that right and that benefit he takes as trustee for the beneficial owner." We shall revert to the merits of this point later, but, at present, it is enough to say that the English case was not concerned with post transfer position.
44.4. Period to which section applicable-second view.-
The second view of section 49 is that the section deals with completed transfers. This view gets support from the words "is transferred" which occur in the section. However, a query then could naturally arise-why would the transferor get it insured after he has already dealt with the property? The answer would be that where the transfer is by mortgage or lease, the mortgagor or the lessor would have an insurable interest. He would recover the amount from the insurer on the basis that he has suffered a loss.
If so, he should transfer it to the transferee. Also, it can be suggested that if the policy has not been transferred as such, and the transferor, even by way of sale, recovers the amount, he should be made to apply it as provided in the section. It is to be noted that under section 55(5)(c), the purchaser is to bear the loss occurring to the property after purchase. Section 49 does not exclude sales of immovable property, which is an aspect which might require consideration.
44.5. Need for amendment to guard against non-receipt.-
After transfer, the purchaser is liable to bear the loss arising from destruction or deterioration of the property, not caused by the seller1. In England, the purchaser becomes, in equity, the owner of the property by mere force of the contract, but in India, this doctrine of the Court of Chancery has been expressly departed from2. Now, while it is clear that the transferor may be compelled to apply the insurance money which he actually receives under the policy in reinstating the property,3 what is to happen if he declines to receive it from the insurer?
Having once completed the sale of the property and received the purchase-money, the vendor may well decline to enforce payment of the insurance money, and the insurer may equally decline to make payment; for the contract being one of indemnity the insurer is not bound to pay when the assured has already recovered full value of the property4. Of course, if the vendor's right under the policy has been assigned over to the purchaser, there is no difficulty.
But, if no such assignment has been made, the solution of the problem is only possible by describing the position of the vendor and purchaser as that of trustee and cestui que trust, as long as the contract is in fiedi and therefore, "any benefit which accrues to a trustee from whatever source or under whatever circumstances, by reason of his legal ownership of the property, that right and that benefit he takes as trustee for the beneficial owner"5.
In this view, the vendor is both-(a) bound to recover the amount due under the policy, and (b) to pay it over to the purchaser, or, as is enacted in the section, to apply it towards re-instating the property. The balance, if any, may have to be repaid to tie insurer. On the other hand, the purchaser may compel the insurer to pay and the vendor to receive the money, if necessary, though he cannot recover it himself6.
1. Section 55(5)(c).
2. Section 54.
4. Castellain v. Preston, 11 QBD 380; West of England & Co. v. Issaacs, (1986) 2 QB 377 (383), o.a. (1897) 1 QB 226.
5. Rayner v. Preston, 18 Ch D 1 (13, 14) (James, Li.).
6. Chetty v. Motor Union Insurance Co., AIR 1923 Rang 6.
44.6. Rule not in conformity with English rule.-
The section states a rule departing from the decided cases in England1, where the contract for fire-insurance is held to be a contract for mere personal indemnity2. Applying3 the same principle, it is further settled in England that where a vendor receives his purchase-money without any abatement on account of damage by fire pending completion, the insurance company is entitled to recover from the vendor, out of the purchase-money, a sum of equal to the insurance money upon the principle of subrogation.4 But, in English conveyancing practice, it was usual, even before 1925, to insert a clause providing for reinstatement, in case of destruction, and such a condition was then, of course, enforced.5
The position has been further modified by the Law of Property Act, 1925, section 47, to be mentioned later.
1. North of England & Co. v. Archangel & Co., LR 10 QB 249, following Pawls v. Innes, 11 M&W 10; Poole v. Adams, 12 WR (Eng) 683; Colingridge v. Royal Exchange Assurance Corporation, 3 QBD 173.
2. Darrel v. Tibbitts, 5 QBD 560.
3. See Gour.
4. Castellain v. Preston, 11 QBD 380.
5. (a) Garden v. Inaram, 23 LJ Ch 478; (b) Less v. Whiteley, LR 2 Eq 143.
44.7. Pausing of risk.-
In England, since in equity, the property at once belongs to the purchaser, the risk also passes to him at once.1 Thus, if a house has been sold and is, without fault of the vendor, destroyed by fire before completion, the purchaser must nevertheless pay the full purchase-money and take the land as it is.
It is important for a purchaser of buildings to insure at once in his own name, since he undertakes the risk of accidents before he takes the property itself He cannot take the benefit of any insurance maintained by the vendor in the vendor's name alone; for insurance is normally only a personal indemnity against loss, and since the vendor is entitled to the whole purchase-money and so loses nothing, he can recover nothing under this policy2.
If the vendor does, in fact, obtain payment of the insurance money, the insurers can recover it3. Even if they do not, equity does not require the vendor to pay the money to the purchaser, for his qualified trusteeship extends only to the land, and not to the proceeds of a personal contract of insurance4.
1. Megarry & Wade Real Property, (1966), pp. 584-586.
2. See Castellain v. Perston, (1883) 11 QBD 380.
3. Castellain v. Preston, (1883) 11 QBD 380.
4. Rayner v. Preston, (1881) 18 Ch D 1 (Majority view).
44.8. Section 47, Law of Property Act, 1925.-
It is, therefore, essential for the purchaser, if he wishes to insure buildings, to take out insurance on his own account. A common practice is to arrange, with the consent of the insurers, for the vendor's existing insurance to be extended to cover the purchaser. Before 1926 it was usual to stipulate that this should be done and that the purchaser should pay the premium as from the date of the contract1.
It is now provided by the Law of Property Act2 that any insurance money which becomes payable under the vendor's policy in respect of damage to the property after the date of the contract shall be paid by the vendor to the purchaser at completion, subject to-(a) the terms of the contract, (b) any requisite consents of the insurers, and (c) the payment by the purchaser of his share of the premium. Where, therefore, the insurers consent to include the purchaser in the insurance, it is now unnecessary to make further terms about the insurance money or premium. Where the insurance is left in the vendor's name only, section 47 will not normally apply at all for if the vendor can prove no personal loss, no insurance money will ever become payable under the Policy3.
1. Williams Vendor & Purchaser, pp. 88, 89.
2. Section 47, Law of Property Act, 1925.
3. Megarry and Wade Real Property, (1966), p. 586.
44.9. Position in England-Effect of assignment or insurable interest.-
In England, the position in the law of insurance1 is this. Where the assignment is by the voluntary act of the assured, e.g., in the case of a sale or a gift, the validity of the policy depends upon whether the assured, after the assignment, retains his insurable interest in the subject-matter.
An absolute conveyance of the subject-matter from the assured to a purchaser, accompanied by the receipt of the agreed price, divests the assured of his interest in the subject-matter2. He cannot, therefore, in the event of its subsequent destruction, e.g., by fire, recover upon any policy by which it may have been insured, since he has suffered no loss, and there is consequently nothing to which the right of indemnity can attach.3
1. Ivamy General Principles of Insurance Law, (1966), p. 256.
2. Collingridge v. Royal Exchange Assurance Corporation, (1877) 3 QBD 173 (fire insurance) per Lush. J., p. 177, where the fire took place after the conveyance.
3. Rayner v. Preston, (1881) 18 Ch D (CA) (per Cotton L.J.). "The fact that the insured had parted with all interest in the property insured would be an answer to the claim on the principle that the contract is one of indemnity only".
44.10. Effect of contract on validity of insurance.-
The validity of a policy is not affected by the mere fact that the assured has entered into a contract to convey the subject-matter of insurance1, even though, as between the assured and the purchaser, the risk has been passed to the purchaser2.
The existence of the contract does not, in itself, divest the assured of his insurable interest, which continues by reason of his legal ownership of the subject-matter; and he acquires a further interest arising out of the possibility of the purchaser refusing to carry out the contract, and thereby throwing the loss on him3.
1. Collingridge v. Royal Exchange Assurance Corporation, supra (fire insurance).
2. Phoenix Insurance Co. v. Spconer, (1905) 2 KB 753, per Bicham, J., p. 756.
3. Castellian v. Preston, (1883) 11 QBD 380 (CA) (fire insurance) per Brett, L.J., p. 385.