The Supreme Court has held that an agent’s implied authority cannot extend to enlarging a risk or dispensing with a statutory precondition which the principal itself is not permitted to assume.
This observation was made while hearing an appeal filed against an order passed by the National Consumer Disputes Redressal Commission, wherein the Commission had directed the appellant to pay the amount assessed by its own surveyor towards a fire loss claim.
Background of the Case
A bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh allowed the appeals filed by the New India Assurance Company against the judgment of the National Consumer Disputes Redressal Commission.
The respondent had availed a Marine Cargo Annual Turnover Policy from the appellant for an expected turnover of Rs 1200 Crores, with premium payable in two equal instalments.
A fire broke out at a Container Freight Station where the respondent had stored 41,481 cotton bales. Appellant’s own surveyor had assessed the loss to be of Rs. 22,01,29,271.
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Key Issue in the Case
However, the respondent’s turnover had crossed the insured amount of Rs 1200 Crore, and stood at Rs 1724.12 Crores on the date of fire. No additional premium had been paid at that stage.
More than a month after the fire incident, the respondent paid an additional premium of Rs 86,86,125; following an email sent by a Relationship Manager of the appellant seeking release of “another instalment based on the current turnover” to “regularise the turnover”.
The claim was later repudiated by the appellant. The NCDRC had ruled in favour of the respondent, relying on the email sent by the Divisional Manager of the appellant, which stated that after payment of second instalment, “all the transits are covered till the expiry of policy even if it crosses Rs 1200 crores.”
Supreme Court Judgment
Justice Sanjay Karol held that Section 64VB of the Insurance Act creates “a statutory embargo on an insurer assuming risk if the premium has not been paid to them, either prior to such assumption or within the stipulated time period in which it is guaranteed to be paid.”
He further held that under Section 64VB(2), “the risk cannot be assumed earlier than the date on which the premium has been paid.”
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In a separate concurring judgment, Justice Nongmeikapam Kotiswar Singh examined the principal-agent relationship under the Indian Contract Act, 1872 in detail, to test whether the officer’s email could bind the insurer.
Justice Singh noted that implied authority “may be inferred from the circumstances, the things spoken or written, or the ordinary course of dealing.” Examining Section 188, Justice Singh ruled that a Divisional Manager entrusted with administering a policy may ordinarily correspond with the insured and call for premium, but “that does not establish authority to create a new risk, enlarge the sum insured or enlarge the scope of liability of the insurer or dispense with a statutory precondition for attachment of risk.”
The concurring opinion traced the distinction between actual and apparent authority through Sections 226 and 237 of the Act. Section 226 provides that acts done by an agent within authority bind the principal as if done by the principal in person. Section 237, embodying the doctrine of holding out/agency by estoppel, provides that where an agent acts without authority, the principal is bound only if his conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority. Relying on Harshad J Shah v LIC of India, it was reiterated that actual authority flows from the principal’s manifestation to the agent.
The case highlights the importance of understanding the limits of an agent’s authority.