The National Consumer Disputes Redressal Commission (NCDRC), New Delhi, has held that Section 64VB of the Insurance Act read with Rule 58 of the Insurance Rules is mandatory and cannot be waived by past practice of accepting bank guarantees, yet directs refund of premium with interest and compensation for the insurer’s failure to disclose the legal consequences to the insured.
The Commission said that an insurer cannot assume risk unless premium is received in advance or guaranteed to be paid within the time prescribed under Section 64VB of the Insurance Act, 1938 read with Rule 58 of the Insurance Rules, 1939, which mandates payment before the end of the calendar month next succeeding the month in which risk is assumed. Even where an insurer has accepted bank guarantees and deferred premium payment for multiple policy years, such past practice cannot legitimise an arrangement that is contrary to mandatory statutory provisions, and no estoppel can be raised against the operation of law.
Moving further, the Court explained that the 120-day bank guarantee facility offered through an e-mail for the 2014-15 policy cannot be automatically carried forward to subsequent renewals in the absence of a fresh communication from the insurer agreeing to defer premium payment beyond the statutory period. The Court found that despite knowing the correct legal position, the insurer accepted premium beyond the statutory cut-off date and failed to notify the insured of the consequences, thereby misleading the insured and breaching the fundamental principle of utmost good faith in insurance contracts.
While the claim repudiation was upheld, the insurer was directed to refund the premium of Rs.28 lakh with 12% interest per annum and pay Rs.43 lakh as compensation, reflecting the premium collected for the prior year which, by the insurer’s own admission, had also been issued in violation of Rule 58.
The Division Bench comprising AVM J. Rajendra, AVSM VSM (Retd.) (Presiding Member) and Justice Anoop Kumar Mendiratta (Member) noted that Section 64VB(1) of the Insurance Act, 1938 prohibits an insurer from assuming any risk unless the premium is received in advance or guaranteed to be paid in the prescribed manner and within the prescribed time. Rule 58(i) of the Insurance Rules, 1939 permits risk to be assumed before receipt of premium only if the entire premium is guaranteed by a Banking Company to be paid before the end of the calendar month next succeeding the month in which the risk is assumed.
The Commission observed that there was no separate communication from OP for the policy in question agreeing to defer premium payment for 120 days against the Bank Guarantee. The 120-day Bank Guarantee facility was based merely on the earlier practice adopted for the 2014-15 policy. The Commission placed reliance on the Madras High Court decision in Shriram Investments Ltd. v. Oriental Insurance Co. Ltd. [1999 SCC OnLine Mad 963], which held that even though insurance companies had been acting upon bank guarantees for many years, they could not be compelled to act against the statute, and that Sub-section (2) of Section 64VB does not prescribe bank guarantee as a mode of payment.
The Commission took serious exception to the conduct of OP. It noted that despite knowing the correct legal position, OP had accepted the premium beyond Nov 30, 2016, and even after being informed of the fire loss on Oct 29, 2016, failed to notify the Complainant that the premium would not be accepted beyond the statutory cut-off date. The Commission observed that the fundamental principle of utmost good faith in insurance contracts was completely overlooked by OP, and that OP was under a bounden duty to inform the Complainant about the limitation on acceptance of premium and the consequences thereof. The Commission also noted that, by OP’s own admission, the policy for 2015-16 with premium of Rs. 43 lakhs had similarly been issued in violation of Rule 58, since the premium was deposited after the expiry of the next succeeding month.
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Briefly, Neo Essel Dispoware Pvt Ltd., a Kolkata-based manufacturer of food-grade plastic, took successive Industrial All Risk (IAR) policies from Oriental Insurance Company Limited (OP) for the years 2014-15, 2015-16, 2016-17 and 2017-18. For each policy, the premium was paid against a Bank Guarantee facility of 120 days, originally offered by OP through an e-mail.
The policy in dispute was issued for the period Oct 17, 2016, to Oct 16, 2017, with a sum assured of Rs. 96.08 crores for fire, Rs. 50.40 crores for machinery breakdown and Rs. 10 lakhs for fire loss of profit, against a Bank Guarantee of Rs. 28 lakhs furnished on 14.10.2016. A fire broke out in the insured premises on Oct 29, 2016, causing substantial loss. The Complainant initially lodged a claim of Rs. 6.09 crores, later revised to Rs. 6.12 crores. The premium of Rs. 28 lakhs were paid by cheque within the 120-day Bank Guarantee window but beyond the statutory period prescribed under Section 64VB of the Insurance Act, 1938 read with Rule 58 of the Insurance Rules, 1939.
OP repudiated the claim by letter dated May 08, 2018, citing non-compliance with the statutory requirement of advance payment of premium. The Complainant then approached the National Consumer Disputes Redressal Commission (NCDRC), seeking the claim amount with 12% interest, declaration of validity of the subsequent policy, and compensation for harassment and litigation costs.
