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Insurance; Cancellation by insurer when valid

The Supreme Court of India in General Assurance Society Ltd Vs. Chandumull Jain, AIR 1966 SC 1644 : 1966 (3) SCR 500 : 1966 (36) CC 468 : 1966 ACJ 267 held that there is nothing wrong in including in a contract of insurance a mutual condition for the cancellation of the contract.

A full bench comprising of Chief Justice P.B. Gajendragadkar, Justice K.N. Wanchoo, Justice R. Sathyanarayan Raju, Justice Vaidynathier Ramaswami and Justice M. Hidayatullah who delivered the judgment observed that condition (10) of the Fire policy gave equal rights of cancellation to both parties and was not unreasonable.

Condition allowing parties to cancel contract whether reasonable

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 covernotes 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.

The Apex Court held that 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.

Conditions of Insurance policy whether applicable to contract

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.

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.

Relied on

  1. Sun Fire Office v. Hart & Ors. (1889) 14 A. C. 98
  2. The Central Bank of India v. Hartford Fire Insurance Co. Ltd. n. 1. R. (1956) S. C. 1288
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