The Supreme Court held that in insurance contracts, both parties (insurer and insured) must observe good faith and disclose all material facts. This obligation not only applies at the beginning of the contract, but throughout its existence, and even after.

The Bench comprising Justice A.S. Bopanna and Justice Sanjay Kumar noted, “ is the fundamental principle of insurance law that utmost good faith must be observed by the contracting parties; that good faith forbids either party from non-disclosure of the facts which the party knows; and that the insured has a duty to disclose and similarly it is the duty of the insurance company to disclose all material facts within their knowledge since the obligation of good faith applies to both equally. This obligation and duty would rest on both parties not only at the inception of the contract of insurance but throughout its existence and even thereafter”.

Advocate Sridher Potaraju appeared for the Appellant and Advocate A.K De appeared for the Respondent.

The Appellant registered a partnership firm for the cultivation of prawns and got it insured by the Respondent Insurance Company for a period of five months. There was an outbreak of a bacterial disease called ‘White Spot Disease’, leading to the death of most of the prawns. The Appellant, thereafter, invoked their insurance policy, but the claim was rejected on the ground that the Appellant did not maintain records properly. The Appellant filed before the National Consumer Disputes Redressal Commission (NCDRC), wherein NCDRC ordered the Respondent to pay compensation and calculated the amount to be paid. The Appellant was aggrieved by the amount of compensation set by NCDRC and filed before the Apex Court. The Court directed the NCDRC to recalculate the compensation, but the Appellant, still aggrieved by the amount finalised, filed a Civil Appeal challenging the impugned order.

The Court noted that the insurance policy provided a method of compensation for the admissible loss that can be calculated in three ways: input cost method, unit cost method, and fortnightly valuation method. The Appellant’s calculations, which the NCDRC recorded in the impugned order are accurate. The Input Cost Method resulted in a loss of ₹75,98,361, while the Unit Cost Method resulted in a loss of ₹75,87,750. The Fortnightly Valuation Method resulted in a loss of ₹79,20,000. The Appellant is entitled to the lowest of the three valuations, which is ₹75,87,750, the Court stated.

“Therefore, the three ways of computing the admissible loss are: - (i) Input Cost Method: 80% of the value of inputs on the date of the loss. (ii) Unit Cost Method: The actual survival number is calculated on the date anterior to the loss. The prevailing average body weight is applied to that number and then multiplied by the unit cost of ₹.150 per kilogram. (iii) Fortnightly Valuation Method: As the crop period was up to ten fortnights, the maximum claim admissible in the first fortnight is 25% of the sum assured and scales up through the fortnights proportionately”, the Bench observed.

The Court placed reliance on General Assurance Society Limited Vs. Chandumull Jain and another [AIR 1966 SC 1644], Jacob Punnen and another Vs. United India Insurance Company Limited [(2022) 3 SCC 655] and Modern Insulators Limited Vs. Oriental Insurance Company Limited [(2000) 2 SCC 734] and noted that despite clear evidence of total loss suffered by the Appellant and a death certificate furnished by independent authorities, the insurance company/Respondent refused to honour the claim, citing unfounded reasons. The Appellant is entitled to Rs. 45,18,263.20 as the balance amount due and payable. The insurance company is also responsible for paying interest on the delayed payment.

Accordingly, the Court disposed of the Appeal and directed the Respondent to remit the abovementioned sum to the Appellant.

Cause Title: M/S. Isnar Aqua Farms v United India Insurance Co. Ltd. (2023 INSC 680)

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