When contract of insurance is concluded?

In my view, on reading the observations of the Supreme Court in the two authorities cited hereinabove whether the case relates to general insurance or life insurance makes no difference. As observed by the Supreme Court itself in Life Insurance Corporation of India (supra) the general rule is that the contract of insurance will be concluded only when the party to whom an offer has been made accepts it unconditionally and communicates his acceptance to the person making the offer. Whether it is done by giving a cover note or by issuing a letter depends on the facts of each case. In order to hold that there was a binding contract of insurance, there must be an offer put-forward by one party to the contract and acceptance of it by another. As observed in Mac Gillivry and Parkington on Insurance Law, Eighth Edition, Chapter 2 page 87 para212, the material terms of a contract of insurance are: the definition of the risk to be covered, the duration of the insurance cover, the amount and mode of payment of the premium and the amount of insurance payable in the event of a loss. As to all these there must be a consensus ad idem, that is to say, there must be either an express agreement or the circumstances must be such as to admit of a reasonable inference.

Delhi High Court

M/S. Nibro Limited vs National Insurance Co. Ltd. on 6 March, 1990

Bench: M S Bhandare

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What is use of contra proferentem rule in interpretation of insurance contract?

We proceed to deal with the submission made by counsel for the Appellant regarding the rule of contra proferentem. The Common Law rule of construction "verba chartarum fortius accipiuntur contra proferentem" means that ambiguity in the wording of the policy is to be resolved against the party who prepared it. MacGillivray on Insurance Law[1] deals with the rule of contra proferentem as follows:

"The contra proferentem rule of construction arises only where there is a wording employed by those drafting the clause which leaves the court unable to decide by ordinary principles of interpretation which of two meanings is the right one. "One must not use the rule to create the ambiguity - one must find the ambiguity first." The words should receive their ordinary and natural meaning unless that is displaced by a real ambiguity either appearing on the face of the policy or, possibly, by extrinsic evidence of surrounding circumstances."

(footnotes omitted)

Colinvaux's Law of Insurance[2]propounds the contra proferentem rule as under: " Quite apart from contradictory clauses in policies, ambiguities are common in them and it is often very uncertain what the parties to them mean. In such cases the rule is that the policy, being drafted in language chosen by the insurers, must be taken most strongly against them. It is construed contra proferentes, against those who offer it. In a doubtful case the turn of the scale ought to be given against the speaker, because he has not clearly and fully expressed himself. Nothing is easier than for the insurers to express themselves in plain terms.

The assured cannot put his own meaning upon a policy, but, where it is ambiguous, it is to be construed in the sense in which he might reasonably have understood it. If the insurers wish to escape liability under given circumstances, they must use words admitting of no possible doubt. But a clause is only to be contra proferentes in cases of real ambiguity. One must not use the rule to create an ambiguity. On must find the ambiguity first. Even where a clause by itself is ambiguous if, by looking at the whole policy, its meaning becomes clear, there is no room for the application of the doctrine. So also where if one meaning is given to a clause, the rest of the policy becomes clear, the policy should be construed accordingly."

(footnotes omitted)

11. This court in General Assurance Society Ltd. v. Chandmull Jain and Anr., reported in [1966] 3 SCR 500 held that 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 uberima fides, i.e., good faith on the part of the insured and the contract is likely to be construed contra proferentes, i.e., against the company in case of ambiguity or doubt. It was further held in the said judgment that the duty of the Court is to interpret the words in which the contract is expressed by the parties and it is not for the Court to make a new contract, however reasonable.

SUPREME COURT OF INDIA

M/s. Industrial Promotion & Investment Corporation of Orissa Ltd. Vs. New India Assurance Company Ltd. & ANR.

[Civil Appeal No. 1130 of 2007]

L. NAGESWARA RAO, J.

Dated:22 august 2016

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What is rule of “Contra proferentem"?

 In Halsbury's Laws of England (fifth editionVolume
60 Para 105 ) principle of contra proferentem
rule is stated thus :
“Contra proferentem rule. Where there is
ambiguity in the policy the court will apply
the contra proferentem rule. Where a policy
is produced by the insurers, it is their
business to see that precision and clarity are
attained and, if they fail to do so, the
ambiguity will be resolved by adopting the
construction favourable to the insured.
Similarly, as regards language which
emanates from the insured, such as the
language used in answer to questions in the
proposal or in a slip, a construction
favourable to the insurers will prevail if the
insured has created any ambiguity. This
rule, however, only becomes operative where
the words are truly ambiguous; it is a rule for
resolving ambiguity and it cannot be invoked
with a view to creating a doubt. Therefore,
where the words used are free from ambiguity
in the sense that, fairly and reasonably
construed, they admit of only one meaning,
the rule has no application.”
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No.2140 OF 2007
United India Insurance Co. Ltd. ……Appellant(s)
VERSUS
M/s Orient Treasures Pvt. Ltd. ……Respondent(s)
Abhay Manohar Sapre, J.
Dated;January 13, 2016.
Citation:(2016)3 ALLMR441 SC
1) This appeal under Section 23 of the Consumer
Protection Act, 1986 is filed against the order dated
1Page 2
19.03.2007 of the National Consumer Disputes
Redressal Commission (hereinafter referred to as “the
Commission”), New Delhi in Original Petition No. 375
of 1999 whereby the Commission allowed the petition
filed by the respondent herein and directed the
appellant-insurance company to pay a sum of
Rs.36,10,211/- with interest @10% p.a. from
03.12.1995 till date of payment and also directed the
insurance company to pay costs assessed at
Rs.50,000/- to the respondent-Complainant herein.
2) In order to appreciate the issue involved in this
appeal, which lies in a narrow compass, it is necessary
to set out the relevant facts in brief infra.
3) The appellant herein is an insurance company
incorporated under the Companies Act having its
registered office at No. 24, Whites Road, Chennai. The
respondent herein is also a company incorporated
under the Companies Act, 1956 having its registered
2Page 3
office at Oceanic Buildings, Quilon, Kerala and its
branches inter alia at Janpriya Centre No.34, Sir
Thyagaraya Road, Pondy Bazar, Chennai.
4) The respondent herein is the complainant. They
are engaged in the business of sale of various kinds of
Jewellery. The respondent is having their jewellery
shop known as “Kanchana Mahal” which is situated
at Janpriya Centre No.34, Sir Thyagaraya Road, Pondy
Bazar, Chennai.
5) The respondent had insured their jewellery kept
in their shop with the appellant under successive
“Jewellers Block Policies” with effect from 02.07.1993
onwards. The procedure followed was that the
respondent was required to submit proposal form. On
receipt of the proposal form, the officials of the
appellant-insurance company used to inspect the shop
to verify the security and storage particulars.
3Page 4
6) The respondent filled up the insurance proposal
form by providing necessary information as mentioned
in the form. On the basis of the said proposal form,
the appellant issued an insurance policy in favour of
the respondent from 02.07.1993 to 01.07.1994. It was
then subsequently renewed for further one year, i.e.
from 02.07.1994 to 01.07.1995.
7) On 02.06.1995, the respondent alleged that there
was a burglary in their Jewellery shop. According to
the respondent, on the night of 02.06.1995, burglars
broke open the locks of shutters, entered the shop and
decamped with the gold and silver ornaments valued
at Rs.40,63,735.53. The respondent accordingly
lodged FIR at the concerned Police Station on
03.06.1995. The respondent also informed the
appellant on 03.06.1995 by a telegraphic
communication about this incident. By letter dated
05.06.1995, the appellant informed the respondent
4Page 5
that a Surveyor has been appointed to assess the loss
suffered by the respondent in the burglary. The
surveyor then inspected the site and also examined all
the relevant material, books, inventory etc. with a view
to assess the actual loss alleged to have been suffered
by the respondent and accordingly assessed the total
loss at Rs.36,10,211/. Thereafter he submitted his
report. After investigation, the police also submitted a
final investigation report on 24.06.1995 treating the
case as untraceable.
8) The respondent then submitted their claim with
the appellant on the basis of the Insurance Policy and
claimed that they are entitled to receive the value of
Jewellery which they lost in burglary committed in
their shop on 02.06.1995. On 19.01.1998, the
Divisional Manager of the Insurance Company,
Tuticorin after examining the respondent’s claim for
loss of their Jewellery repudiated the claim inter alia
5Page 6
on the ground that the stolen gold ornaments and
silver articles were found to had been kept on display
window and in the sales counters at the time of
burglary which took place in the night of 02.06.1995,
which according to appellant, was contrary to the
terms of the policy and, therefore, not covered in the
policy. In other words, such items were not insured. It
was further stated that the policy was issued subject
to the terms, conditions, warranties and exclusion
printed in the proposal form which was a part of
policy. The appellant relied on clause 12 of the policy
and stated that since the burglary in the shop took
place during night and stolen articles kept in window
display and lying out of safe in the shop were stolen,
the appellant could not be made liable to indemnify
such loss which, according to them, was not insured
and specifically excluded from the insurance policy.
6Page 7
9) Being aggrieved by the decision of the appellantInsurance
Company, the Respondent sent letters and
reminders pointing out therein the terms of the
proposal form and policy and insisted that the loss
was fully covered by the policy and hence they were
entitled to claim the value of the lost articles from the
appellant on the basis of Insurance Policy. As nothing
was done, the respondent filed a complaint before the
National Consumer Disputes Redressal Commission,
New Delhi (hereinafter referred to as “the
Commission”) being Original Petition No. 375 of 1999
claiming a sum of Rs.1,32,06,786.30.
10) By order dated 19.03.2007, the Commission
partly allowed the petition filed by the respondent and
directed the appellant-Insurance Company to pay a
sum of Rs.36,10,211/- with interest @ 10% p.a. from
03.12.1995 till date of payment and also directed the
7Page 8
Insurance Company to pay costs assessed at
Rs.50,000/- to the respondent.
11) Aggrieved by the said order, the appellantInsurance
Company has filed this appeal.
12) Dissatisfied with the claim awarded by the
Commission, the respondent has filed C.A. No. 5141
of 2007 seeking enhancement in the quantum of
claim. According to the respondent, they are entitled to
claim a sum of Rs.1,32,06,786.30 as against Rs.
36,10,211/- awarded by the Commission.
13) Heard Mr. P.P. Malhotra, learned senior counsel
for the appellant and Mr. H. Ahmadi, learned senior
counsel for the respondent.
14) Shri P.P.Malhotra, learned senior counsel
appearing for the appellant while assailing the legality
and correctness of the impugned order mainly urged
two points in support of his submissions.
8Page 9
15) In the first place, learned senior counsel urged
that the Commission erred in partly allowing the
complaint filed by the respondent herein by passing
the impugned award against the appellant. According
to learned counsel, had the Commission properly
interpreted clauses 4 and 5 of the proposal form,
which was part of the policy along with clause 12 of
the policy then in such event, the respondent's
complaint was liable to be dismissed in its entirety.
16) Elaborating the aforementioned submission,
learned counsel pointed out that the plain reading of
clauses 4 and 5 (b) with their note and clause 12 of
the policy clearly show that the respondent's claim
was excluded from the policy issued by the appellant
because it was in relation to the items which were kept
in display window and out of safe at the time of
burglary.
9Page 10
17) In other words, the submission was that the
respondent's claim was not covered under the policy
and was expressly excluded by virtue of clauses 4 and
5(b) read with clause 12 of the policy because firstly,
the burglary in the shop took place in night hours and
secondly, the stolen articles were kept in display
window and outside the safe.
18) Learned counsel, therefore, urged that due to
these two admitted facts, the note appended to clauses
4 and 5 read with clause 12 was attracted rendering
the respondent's complaint as not maintainable.
19) Learned counsel further pointed out that the
respondent despite knowing these clauses of the
proposal form/policy instead of seeking any
clarification regarding meaning of the clauses paid the
premium pursuant thereto the appellant issued the
Insurance policy on the terms and conditions set out
therein which are binding on both parties while
10Page 11
adjudicating their rights against each other arising out
of the policy.
20) Learned counsel, in the second place, submitted
that the language of clauses 4, 5 and 12 being plain,
clear and unambiguous conveying only one meaning,
the appellant had every right to rely upon these
clauses while opposing the respondent's complaint on
merits.
21) Learned counsel, therefore, submitted that in the
light of these facts, the respondent had no right to file
a complaint against the appellant seeking monetary
compensation for the loss alleged to have been
suffered by them arising out of burglary of their
articles stolen from their shop. Such claim, according
to learned counsel, was barred by virtue of clauses 4,
5 and 12 of the policy and was therefore, liable to be
dismissed as being untenable.
11Page 12
22) In support of his submission, learned counsel
placed reliance on the decisions in General Assurance
Society Ltd. vs. Chandumull Jain & Anr., AIR 1966
SC 1644 = (1966) 3 SCR 500, United India Insurance
Co. Ltd. vs. Harchand Rai Chandan Lal (2004) 8 SCC
644, Oriental Insurance Co. Ltd. vs. Sony Cheriyan,
(1999) 6 SCC 451, Rahee Industries Ltd. vs. Export
Credit Guarantee Corporation of India Ltd. & Anr.,
(2009) 1 SCC 138, Sikka Papers Ltd. vs. National
Insurance Co. Ltd. & Ors., (2009) 7 SCC 777, Vikram
Greentech India Ltd. & Anr. vs. New India
Assurance Co. Ltd., (2009) 5 SCC 599, New India
Assurance Co. Ltd. vs. Zuari Industries Ltd. & Ors.,
(2009) 9 SCC 70, Amravati District Central
Cooperative Bank Ltd. vs. United India Fire and
General Insurance Co. Ltd., (2010) 5 SCC 294, Suraj
Mal Ram Niwas Oil Mills P. Ltd. vs. United India
Insurance Co. Ltd. & Anr., (2010) 10 SCC 567,
12Page 13
Deokar Exports P. Ltd. vs. New India Assurance Co.
Ltd., (2008) 14 SCC 598, Export Credit Guarantee
Corp. of India Ltd. vs. Garg Sons International,
(2014) 1 SCC 686 and Rust vs. Abbey Life Assurance
Co. Ltd. & Anr., (1979) Vol.2 Lloyd’s Law Reports 334.
23) In reply, Mr. H. Ahmadi, learned senior counsel
appearing for the respondent while supporting the
impugned order contended that the issue involved in
this case needs to be decided in the light of the
principle underlined in the rule known as "contra
proferentem rule”. According to learned counsel, there
is an ambiguity in the language/words of clauses 4
and 5 of the proposal form and since the ambiguity
noticed created some confusion as to what these
clauses actually provide and expect the respondent to
comply at the time of filling the proposal form for
obtaining the insurance policy, this Court should
interpret the clauses by applying the principle
13Page 14
underlined in the aforesaid rule in such a way that its
benefit would go to the respondent rather than to the
appellant. It was also his submission that the
appellant being the author of the proposal and policy
are not entitled to claim the benefit of the clauses of
proposal form/policy in their favour thereby defeating
the rights of the respondent which they have got under
the policy to enforce against the appellant for claiming
the compensation.
24) Learned counsel also contended that the
respondent had intended to insure all their articles
kept in the shop regardless of timings and the manner
in keeping the articles in their shop. He also pointed
out that the respondent having paid the full premium
for the articles which were valued at Rs. 2 crore as
disclosed by the respondent in clauses 4 and 5 and
therefore the respondent was entitled to claim
compensation for the loss of the stolen items (jewelry)
14Page 15
treating them as insured and covered under the policy,
issued in their favour.
25) So far as the connected appeal filed by the
respondent-Complainant is concerned, the submission
of the learned senior counsel for the respondent was
that the Commission erred in not allowing their
complaint in its entirety despite availability of evidence
on record. Learned counsel, therefore, prayed for
dismissal of the appellant's appeal and allowing the
appeal filed by the respondent by enhancing the
quantum of compensation as claimed by the
respondent in the complaint.
26) Learned senior counsel also placed reliance on
the same decisions which were cited by learned senior
counsel for the appellant and contended that the law
laid down therein also supports the respondent's case.
27) Having heard the learned counsel for the parties
and on perusal of the record of the case including the
15Page 16
written submissions, we find force in the submissions
of learned counsel for the appellant (Insurance
company- Insurer).
28) The question which arises for consideration in
this appeal is whether the Commission was justified in
allowing the complaint filed by the respondent against
the appellant-Insurance Company in part and was,
therefore, justified in awarding a sum of
Rs.36,10,211/- to the respondent.
29) In order to answer the aforementioned question,
clauses 4, 5 of the proposal form and clause 12 of the
policy need mention infra.
(1)
4 WINDOW DISPLAY
State the approximate
value of any of article of
Jewellery or Gem stock
which will be displayed in
the window (A pad or tray
containing a number of
rings or other articles to
be counted as one
article).
(Give separate answer for
Rs.3,50,5000/-
16Page 17
each location).
Note : Window display at
night is not covered.
5 STOCK
a. What was (i) the
average daily total value
of your stock during the
past 12 months?
(ii) Will the whole of your
stock when on your
premises be kept in safe
at night and at all times
when the state value and
class of stock which will
left outside safes.
Note : We do not cover
stocks kept out of the
safe---business hours at
night.
(a)(i)New Shop
(b)(iii)New shop
(b) All stocks of
Gold, Diamond,
Gems, Silver
and other
precious
stones-kept
outside the
safeRs.2,00,00,000
(Two crores).
(2)
The company shall not be liable for
under this policy in respect of
1 to 11………….
12. Loss or damage to property, insured
whilst in window display at night or whilst
kept out of safe after business hours.”
30) Before we examine the issue involved in the case,
it is necessary to take note of the law laid down on the
subject by the Constitution Bench of this Court in
General Assurance Society Ltd. vs. Chandumull
Jain & Anr., AIR 1966 SC 1644.
31) The Constitution Bench in this case has explained
the true nature of contract relating to Insurance and
laid down the relevant factors which the courts should
keep in mind while interpreting the contract of
insurance.
32) Justice Hidayatullah, J. (as His Lordship then
was) speaking for the Bench in his distinctive style of
writing held in Para 11 as under:
“11. A contract of insurance is a species of
commercial transactions and 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 issued. 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, 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.”
33) Keeping in view the aforesaid principle of law in
mind and applying the same to the facts of the case,
we proceed to examine the issue involved in this
appeal.
34) Mere perusal of the note appended to clause 4
quoted above would go to show that the appellant
(Insurance Company) had made it clear in the
proposal form itself that "window display of articles
at night is not covered". This clearly meant that the
insurance coverage was given to the articles kept in
"window display during day time in business hours"
20Page 21
whereas insurance coverage was not given to the
articles when they were kept in "window display at
night".
35) In other words, if the burglary had been
committed during day time in business hours and in
that burglary, the articles kept in display window were
stolen then in such circumstances, the appellant was
liable to reimburse the loss to the respondent of such
stolen articles as insured articles under the policy. But
if the burglary had been committed of the articles kept
in display window during night time (after business
hours) then in such circumstances the appellant
having made it clear to the respondent in the note in
clause 4 that they would not be liable to indemnify the
loss of any such articles kept in display window after
business hours, the respondent was not entitled to
claim any compensation for the loss of any such stolen
21Page 22
articles. In other words, the insurance coverage was
not extended to such stolen articles under the policy.
36) Similarly, mere perusal of note appended to
clause 5 quoted above would go to show that the
appellant had made it clear in the proposal form itself
to the respondent that "stock which is kept out of
the safe after business hours at night" is not covered
under the policy. This clearly meant that "stock kept
out of safe during business hours", if stolen, was
insured and given coverage under the policy but if it
was kept out of safe after business hours at night,
then it was not covered under the policy and therefore,
the appellant was not liable to indemnify the loss
sustained by the respondent of any such stolen
articles.
37) In other words, if the burglary had been
committed during day time in business hours then the
appellant was liable to reimburse the loss to the
22Page 23
respondent of the stolen articles treating them as
insured articles under the policy. But if the burglary
had been committed of the stock/articles kept out of
safe after business hours at night then in such
circumstances the appellant was not liable to
indemnify the loss of any such stolen articles by virtue
of note appended to clause 5. In these circumstances,
the respondent was not entitled to claim any
compensation for the loss sustained in the burglary of
any such stolen articles.
38) In our considered opinion, there is neither any
ambiguity nor vagueness and nor absurdity in the
language/wording of note appended to clauses 4
or/and 5. On the other hand, we find that the
language/wording of the note in both the clauses is
plain, clear, unambiguous and creates no confusion in
the mind of the reader about its meaning. That apart
clause 12 of the policy, in clear terms, provides that
23Page 24
the appellant would not be liable to indemnify any loss
under the policy if such loss or damage to the insured
property occurs while the insured property was kept in
window display at night or while it was kept out of safe
after business hours.
39) This takes us to the next submission of Mr.
Ahmadi, learned senior counsel for the respondent
that we should apply the rule of contra proferentum to
interpret clauses 4 and 5 because according to him
there is an ambiguity in the language/wording of
clauses 4 and 5 and secondly, the appellant being the
author of these clauses has no right to take benefit of
the ambiguity to defeat the rights of the respondent.
Learned counsel maintained that the interpretation of
the clauses should, therefore, be made in such a way
that its benefit would go to the respondent (insured)
for claiming compensation from the appellants. We

cannot accept this submission of learned counsel for
the respondent for more than one reason.
40) In Halsbury's Laws of England (fifth editionVolume
60 Para 105 ) principle of contra proferentem
rule is stated thus :
“Contra proferentem rule. Where there is
ambiguity in the policy the court will apply
the contra proferentem rule. Where a policy
is produced by the insurers, it is their
business to see that precision and clarity are
attained and, if they fail to do so, the
ambiguity will be resolved by adopting the
construction favourable to the insured.
Similarly, as regards language which
emanates from the insured, such as the
language used in answer to questions in the
proposal or in a slip, a construction
favourable to the insurers will prevail if the
insured has created any ambiguity. This
rule, however, only becomes operative where
the words are truly ambiguous; it is a rule for
resolving ambiguity and it cannot be invoked
with a view to creating a doubt. Therefore,
where the words used are free from ambiguity
in the sense that, fairly and reasonably
construed, they admit of only one meaning,
the rule has no application.”
41) The aforesaid rule, in our considered opinion,
has no application to the facts of this case. It is for the
reason that firstly, we find that there is no ambiguity

in the language/wording used in clauses 4 and 5. In
other words, as held above, the language/wording of
clauses 4 and 5 and the note appended thereto is
clear, plain and unambiguous and carries only one
meaning. Secondly, in the absence of any ambiguity,
the respondent is not entitled to invoke the principle
underlined in the rule of contra proferentem for
interpreting the clauses of the policy and lastly,
presence of ambiguity in the language of policy being
sine qua non for invocation of the contra proferentem
rule, which is not present here, we cannot apply the
rule for deciding the issue involved in case.
42) It is a settled rule of interpretation that when
the words of a statute are clear, plain or
unambiguous, i.e., they are reasonably susceptible to
only one meaning, the courts are bound to give effect
to that meaning irrespective of consequences. In other
words, when a language is plain and unambiguous
26Page 27
and admits of only one meaning, no question of
construction of a statue arises, for the Act speaks for
itself. Equally well-settled rule of interpretation is that
whenever the NOTE is appended to the main Section,
it is explanatory in nature to the main Section and
explains the true meaning of the main Section and has
to be read in the context of main Section (See -
G.P.Singh -Principle of Statutory Interpretation
13th Edition page 50 and 172). This analogy, in our
considered opinion, equally applies while interpreting
the words used in any contract.
43) Coming now to the facts of the case, it is not in
dispute that the burglary took place in the
respondent's shop during night hours on 02.06.1995
when the burglars took away the jewelry (gold/silver
ornaments) kept in display window and jewelry lying
out of safe. The appellant was, therefore, justified in
contending that the stolen articles were not covered
27Page 28
under the policy by virtue of clauses 4, 5 of Proposal
Form and Clause 12 of the policy and no liability could
be fastened on them to indemnify the loss of such
articles for awarding any compensation to the
respondent. Indeed clauses 4, 5 and 12 were clearly
attracted in appellant’s favour.
44) We do not agree to the submission of Mr.
Ahmadi, learned senior counsel for the respondent
that once the respondent disclosed their intention to
get their stock (ornaments) valued at Rs 2 Crores
insured with the appellant by filling the details in
Columns 4 and 5 of the proposal form and once they
paid the necessary premium to the appellant, the
respondent became entitled to claim loss of the stolen
items from the appellant treating the stolen items as
insured under the policy regardless of note contained
in clauses 4 , 5 and clause 12 of the policy. In our
view, the submission has a fallacy.
28Page 29
45) Firstly, as mentioned above, if the burglary had
taken place during day time in business hours in
respect of the items kept in display window or out of
safe, the appellant was liable to compensate the
respondent for the entire loss suffered by them
treating the stolen items as insured items under the
policy. In other words, if the burglary had taken place
during business hours then item kept in display
window or those lying out of safe were covered under
the policy.
46) Likewise, if the burglary had taken place during
night in relation to the items kept in the safe, then
also the appellant was liable to compensate the loss
suffered by the respondent in burglary treating the
stolen items as insured items under the policy.
47) In both the category of cases mentioned above,
the appellant was not entitled to rely upon clauses 4, 5
and 12 to avoid their liability because both the
29Page 30
instances did not fall either in clause 4 or clause 5 or
clause 12. However, this was not the case set up by
the respondent against the appellant.
48) On the other hand, it is the case of the
respondent that the burglary took place at night and
the insured items kept in display window and some
lying out of safe were stolen. Due to these facts,
clauses 4, 5 and 12 were attracted against the
respondent.
49) In order to claim benefit of the policy, it was
obligatory upon the respondent to have removed the
insured items from display window everyday after
business hours and keep them inside safe during
night hours till opening of the shop next day. Like wise
all insured items in side the shop should also have
been kept in side the safe everyday after business
hours till opening of the shop next day. It was,
however, not done by the respondent.
30Page 31
50) A contract of insurance is one of the species of
commercial transaction between the insurer and
insured. It is for the parties (insurer/insured) to decide
as to what type of insurance they intend to do to
secure safety of the goods and how much premium the
insured wish to pay to secure insurance of their goods
as provided in the tariff. If the insured pays additional
premium to the insurer to secure more safety and
coverage of their insured goods, it is permissible for
them to do so. In this case, the respondent did not
pay any additional premium to get the coverage of even
two instances mentioned above to avoid rigour of note
of clauses 4, 5 and clause 12.
51) In view of foregoing discussion, we cannot concur
with the reasoning and the conclusion arrived at by
the Commission. The appeal filed by the insurance
company, i.e., Civil Appeal No. 2140 of 2007,
therefore, deserves to be allowed. It is accordingly
allowed. Impugned order is set aside. As a
consequence thereof, the complaint filed by the
respondent against the appellant out of which this
appeal arises is dismissed. No costs.
Civil Appeal No. 5141 of 2007
In the light of the order passed in Civil Appeal No.
2140 of 2007, it is not necessary to examine the merits
of the claim filed by the Complainant, which has been
rendered infructuous. The appeal thus fails and is
dismissed as having rendered infructuous. No costs.
 .……...................................J.
 [J. CHELAMESWAR]

 ………..................................J.
 [ABHAY MANOHAR SAPRE]
New Delhi,
January 13, 2016.

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Golden Rules for interpretation of Insurance contract

Before we examine the issue involved in the case,
it is necessary to take note of the law laid down on the
subject by the Constitution Bench of this Court in

General Assurance Society Ltd. vs. Chandumull
Jain & Anr., AIR 1966 SC 1644.
31) The Constitution Bench in this case has explained
the true nature of contract relating to Insurance and
laid down the relevant factors which the courts should
keep in mind while interpreting the contract of
insurance.
32) Justice Hidayatullah, J. (as His Lordship then
was) speaking for the Bench in his distinctive style of
writing held in Para 11 as under:
“11. A contract of insurance is a species of
commercial transactions and 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 issued. 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, 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.”
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No.2140 OF 2007
United India Insurance Co. Ltd. ……Appellant(s)
VERSUS
M/s Orient Treasures Pvt. Ltd. ……Respondent(s)

Abhay Manohar Sapre, J.
Dated;January 13, 2016.
Citation:(2016)3 ALLMR441 SC

Print Page

Golden rules for interpretation of Insurance contract

 At the outset, it may be stated that contracts of

insurance are contracts of uberrima fides and every material

fact is required to be disclosed. In United India

Insurance Co. Ltd. v. M.K.J. Corpn.(1996) 6 SCC 428

, a two-Judge Bench

has observed:-

“It is a fundamental principle of Insurance law

that utmost good faith must be observed by

the contracting parties. Good faith forbids

either party from concealing (non-disclosure)

what he privately knows, to draw the other

into a bargain, from his ignorance of that fact

and his believing the contrary. Just as the

insured has a duty to disclose, “similarly, it is

the duty of the insurers and their agents to

disclose all material facts within their

knowledge, since obligation of good faith

applies to them equally with the assured”.”

Regard being had to these principles, the authorities

cited by Mr. Gupta, learned senior counsel for the appellant

are to be seen.

 In Amalgamated Electricity Co. v. Ajmer

Municipality (1969) 2 SCR 430 = AIR 1969 SC 227

, though in a different context, it has been

held that:-

“In construing the true nature of the contract

entered into between the parties, the contract has

to be read as a whole and if so read it is clear

that what the plaintiff undertook was to pump

water from the wells in question and not to

supply any electrical energy. Hence we are in

agreement with the learned Judges of the High

Court that the plaintiff's case in this regard

should fail.”

11. In Bay Berry Apartments (P) Ltd. and Another v.

Shobha and others  (2006) 13 SCC 737

, the Court has observed that in

construing a document, the Court cannot assign any other

meaning; and a document as is well known must be

construed in its entirety.

12. In Polymer India (P) Ltd. and Another v. National

Insurance Co. Ltd. and Others  (2005) 9 SCC 174

, this Court has held

thus:-

“19. In this connection, a reference may be made

to a series of decisions of this Court wherein it

has been held that it is the duty of the court to

interpret the document of contract as was

understood between the parties. In the case of

General Assurance Society Ltd. v. Chandumull

Jain  (1996) 3 SCR 500 : AIR 1966 SC 1644

, it was observed as under:

“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.”

20. Similarly, in the case of Oriental Insurance

Co. Ltd. v. Samayanallur Primary Agricultural

Coop. Bank (1999) 8 SCC 543

, it was observed as under:

“The insurance policy has to be construed

having reference only to the stipulations

contained in it and no artificial far-fetched

meaning could be given to the words

appearing in it.”

21. Therefore, the terms of the contract have to

be construed strictly without altering the nature

of the contract as it may affect the interest of

parties adversely.”

13. Learned senior counsel for the appellant has also

drawn inspiration from the decision in General Assurance

Society Ltd. v. Chandmull Jain  (1966) 3 SCR 500 = AIR 1966 SC 1644

, rendered by the

Constitution Bench wherein it has been held that:-

“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, 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.”

14. Mr. Gupta, learned senior counsel for the appellant

has also drawn our attention to Baj (Run Off) Ltd. v.

Durham and others  (2012) UKSC 14

, wherein the Supreme Court of

United Kingdom, while interpreting the contract of

insurance has opined:-

“To resolve these questions it is necessary to

avoid over-concentration on the meaning of single

words or phrases viewed in isolation, and to look

at the insurance contracts more broadly. As Lord

Mustill observed in Charter Reinsurance Co. Ltd.

v. Fagan [1977] AC 313, 384

, all such words “must be set in the

landscape of the instrument as a whole” at p.381,

any “instinctive response” to their meaning “must

be verified by studying the other terms of the

contract, placed in the context of the factual and

commercial background of the transaction”. The

present case has given rise to considerable

argument about what constitutes and is

admissible as part of the commercial background

to the insurances, which may shape their

meaning. But in my opinion, considerable

insight into the scope, purpose and proper

interpretation of each of these insurances is to be

gained from a study of its language, read in its

entirety. So, for the moment, I concentrate on

the assistance to be gained in that connection.”

 Relying on the authorities which have been stated by

Mr. Gupta, it is submitted by him that the policy between

the parties is required to be read as a whole and on a

reading of the policy in entirety, it is clear that the

declaration of all the shipments whether covered under the

policy or not, is not mandatory and only the shipments in

respect of which claims are lodged are required to be As has been held in Chandmull Jain (supra) by the

Constitution Bench that in a contract of insurance, there is

a requirement of good faith on the part of the insured and

in case of ambiguity, it has to be construed against the

company. As per other authorities, the insurance policy

has to be strictly construed and it has to be read as a whole

and nothing should be added or subtracted. That apart, as

has been held in Polymer India (P) Ltd. (supra), it is the

duty of the Court to interpret the document as is

understood between the parties and regard being had to the

reference to the stipulations contained in it.

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2729 OF 2009

M/s. BHS Industries ... Appellant

Versus

Export Credit Guarantee Corp. & Anr. ... Respondents

Citation;(2015) 9 SCC414

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