The True Nature of Marine Insurance – Supreme Court Explains

The Supreme Court of India in the case Bajaj Allianz General Insurance vs The State of Madhya Pradesh decided on 24 April, 2020 went into the issue of the nature of transit insurance. The State of Madhya Pradesh, the insured, took a Transit (Marine) Insurance Policy from the insurer on 21.07. 2005, to cover the transportation of a Bell 430 Helicopter from Langley, Canada to Bhopal. By a letter dated 10 July 2005, the proposed route was altered as: Langley to Pithampur/Bhopal (by road/ by air). The policy was issued from 22.07.2005 for transportation of the helicopter with standard packaging for a total sum insured of Rs.20 crores. The policy was governed by clauses that included, inter alia, Institute Cargo Clauses (Air Cargo), Institute War Clauses (Air Cargo), Institute Strike Clauses (Air Cargo), and the Institute Theft Pilferage Non-Delivery Clause that listed out the terms and conditions of all damages and loss covered under the policy. The duration of the policy was to be governed in terms of Clause 5 the ICC.

On 5.10. 2005, the helicopter was transported in a knocked down state by air to New Delhi. On 13.10.2005, the helicopter was cleared by the customs and was shifted to a hangar at New Delhi. On 21.10. 2005, the helicopter was inspected by a representative of the manufacturer during routine inspection and the window of the crew door was reported to be damaged. The insured sought the permission of the Director General of Civil Aviation to fly the helicopter to Bhopal but was denied permission on account of the damage to the window of the crew door. By letter dated 22.10. 2005, the insured informed the insurer of the damage and stated that the helicopter was being assembled at the Hangar of Indamer Co. at Delhi so that the Helicopter can fly from Delhi to Bhopal. On 23.11. 2005, the insured duly informed that upon inspection, the tail boom of the helicopter was found to be damaged. A surveyor was appointed to assess the alleged damage to the window of the crew door and the tail boom of the helicopter.

The surveyor stated that the damage to window glass of pilot seat and damage to tail boom of helicopter were two separate incidents not related to each other. The replacement cost of damaged window glass of pilot seat is below Rs 10,00,000 and hence would fall under the excess in the policy. The damage to the tail boom had occurred at the hangar at IGI Airport Delhi after substantial assembly but prior to test flight and not during transit and hence would not fall under the purview of marine insurance policy as issued to the insured. Hence the insurer informed the insured that as the damage to the tail boom was not detected during transit or customs clearance and it was only detected in the third week of November 2005 before which multiple inspections had been carried out and no damage was reported earlier.

The insured however replied that even though the damage was noticed after a month of customs clearance, the policy of transit was up to Bhopal and therefore, damage to the helicopter in the month of November 2005 would also be covered under transit. The insurer repudiated the claim on the ground that the loss that occurred to the helicopter was after the duration of the policy had ended as mentioned in Clause 5 of the ICC. In the claim as it took place, the destination of the consignment of air transit was New Delhi Airport. The cargo [aircraft] was to be assembled at this location and then aircraft was to fly to Bhopal. The flight would be out of the Marine Transit scope of insurance. The named destination Bhopal of issued policy has no relevance in this context.

On repudiation, the insured filed a suit before the SCDRC, which found that the insurer was deficient in its service and directed the insurer to pay a compensation of Rs. 64,89,205 to the insured. Aggrieved by the judgment of the SCDRC, both the parties filed separate appeals before the NCDRC. The NCDRC upheld the decision of the SCDRC. Hence the insurer filed the appeal before the Supreme Court.

The issue before the Supreme Court was whether storage, unpacking and assembly of the helicopter at New Delhi would fall outside the scope of the expression ordinary course of transit, terminating coverage under the policy. The policy issued by the insurer to the insured represented a contract between the parties. The extent of the policy cover was governed by and subject to various clauses mentioned in the policy schedule which included the ICC. The ICC, inter alia, prescribed the risks covered, exclusions, duration and duties of the insurer and the insured.

The core dispute in the case was on the interpretation of the termination clause of the ICC. The SC stated that: “In order to determine whether the claim falls within the limits specified by the policy, it is necessary to define exactly what the policy covered and to identify the occurrence of a stated event or the accident prior to the expiry of the policy. Hence, while considering the rival submissions, it is necessary to preface our analysis with the provisions of the policy.”

The Supreme Court went into the analysis of Clause 5 of the ICC. So far as the termination of the transit is concerned three alternate events are put forward in Clause 5: (i) Under Clause 5.1.1, insurance terminates on delivery of the cargo to the consignees or other final warehouse or place of storage at the destination named in the policy; (ii) Under clause 5.1.2, the alternative place of delivery is to any other warehouse, premises or place of storage whether prior to or at the destination named herein which the assured chooses to use for one of two purposes namely - (a) either for storage other than in the ordinary course of transit or (b) for allocation or distribution of the cargo; and (iii) Clause 5.1.3 prescribes a period of thirty days after unloading of the insured cargo from the aircraft at the final place of discharge.

The Supreme Court referred to an 1888 decision of the Queen’s Bench Division in Bethell v Clark (1888) transit as: “The term transit does not mean that the goods must be actually moving at the relevant time: they must, however, be still in possession of the carrier. After going through many court precedents the Supreme Court clarified as under: “The ordinary meaning of "transit" essentially connotes that goods are in motion between two points, but the period of transit may continue during intervals or periods when they may be loaded or unloaded and temporarily housed provided that this is reasonably referable to the furtherance of the carriage of goods to the final destination. The notion of "in transit" accepts that the movement of the goods may be interrupted by circumstances associated with the requirements of their transportation. In context of the policy, the words in transit do not require transportation of the consignment in a single trip from the commencement to the final destination but includes those interruptions in motion that are incidental to or in furtherance of the conveyance or transportation of the consignment. The words of the policy ought to be construed so as to conform to the usual and ordinary method of pursuing the venture or operation…. Words used in the policy must be construed in their commercial setting having regard to the purpose of the policy.”

It was undisputed that at the time of customs clearance, no damage was reported. It was when the helicopter was inspected by the representative of the manufacturer during a routine inspection on 21.10.2005 that damage was reported to the window of the crew door of the helicopter. In a communication dated 21 October 2005 addressed by the representative of the manufacturer for placing an order for a crew door window, it was stated that further unpacking of the Fuselage Assembly was carried out and no other damage was evident.

Clause 5.1.2 of the ICC provides that the policy may terminate upon the assured choosing to use an alternate place of delivery, prior to the destination named therein for one of two purposes, either for storage other than in the ordinary course of transit or for allocation or distribution of the cargo. The purpose of a transit policy is to cover the carriage of goods to the final destination. In the present case, storage of the helicopter in the hangar at New Delhi awaiting replacement of the spare window cannot be said to be incidental or in furtherance of the carriage of the goods to the ultimate destination. It would be unreasonable to suggest that the transit policy intended to cover indefinite storage of the helicopter at the hangar in New Delhi not brought about by the requirements of transport but determined by commercial convenience of the respondent.

Ordinary Course of Transit

Ordinary course of transit is the period when the cargo is in the course of transportation, and not in the immediate control of the buyer or seller. After the goods cleared customs, the helicopter was in possession of the insured and it took a voluntary decision of retaining the helicopter in New Delhi on the basis of commercial convenience. As found in the earlier part of the judgment, the intention of the respondent was not to prepare the helicopter for transportation by road to Bhopal but to assemble the helicopter in New Delhi and fly it to Bhopal. Once the respondent decided to leave the goods in the hangar at New Delhi for its commercial convenience not associated with or in furtherance of the requirements of their carriage to Bhopal, the transit insurance ended.

The SC explained that according to the NCDRC, the expiry of thirty days after completion of discharge at the final port of discharge should be essentially interpreted as thirty days after reaching Bhopal and not thirty days during the course of transit which included the halt at New Delhi. The line of approach adopted by the NCDRC is evidently incorrect. While construing a contract of insurance, it is not permissible for a court to substitute the terms of the contract. The court should always interpret the words used in a contract in a manner that will best express the intention of the parties. The NCDRC has incorrectly proceeded on the path that the ordinary course of transit would include assembling of the helicopter at New Delhi and the policy covered all risks till the time the helicopter did not reach Bhopal. The interpretation adopted by the NCDRC strikes fundamentally at the purpose of the policy and is not in accordance with sound commercial principles. The interpretation altered the character of the risk insured beyond the scope of the policy as agreed between the parties.

The appeal was accordingly allowed in favour of the insurer.