Critique of Supreme Court Judgement in United India Insurance v. Leisure Wear Exports

I was already writing this article when I launched my newsletter. I had expected to post this as my first article on the newsletter soon after. Some personal issues held me back for a few days. Here I am back before you. I hope to hear your views.

A few days back, I was reading a judgement delivered by the Supreme Court of India in 2016. Though United India Insurance v. Leisure Wear Exports Ltd. is a dispute on a Marine claim, the SC judgement is limited to the question of assignment of the Marine Policy.

The bare facts –

An Indian exporter had consigned goods to a buyer in Moscow. There was no dispute that the goods were short delivered. After the consignees did not receive the claim payment, they wrote a letter to the consignors (insured) authorizing them to collect the claim from the insurers. The insured’s claim was allowed by the State Consumer Commission Redressal Commission (SCDRC). The insurer’s appeal was dismissed by the National Consumer Disputes Redressal Commission (NCDRC). Hence, the appeal before the SC.

While not disputing the loss and the coverage, the insurers argued that the insured had already assigned the Policy in favour of the consignee. Hence, the insured had no right to claim under the Policy. The matter before the SC was whether the State Commission and National Commission were right in holding that the insured did have a right to claim. The merits of the Marine claim itself were not contested before the SC.

Sec 17 & 52 of the Marine Insurance Act, 1963 (MIA) have been discussed.

17. Assignment of interest.—Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there be an express or implied agreement with the assignee to that effect. 

But the provisions of this section do not affect transmission of interest by operation of law. 

52. When and how policy is assignable.—(1) A marine policy may be transferred by assignment unless it contains terms expressly prohibiting assignment. It may be assigned either before or after loss. 

(2) Where a marine policy has been assigned so as to pass the beneficial interest in such policy, the assignee of the policy is entitled to sue thereon in his own name; and the defendant is entitled to make any defence arising out of the contract which he would have been entitled to make if the suit had been brought in the name of the person by or on behalf of whom the policy was effected. 

(3) A marine policy may be assigned by endorsement thereon or in other customary manner. 

It is necessary to reproduce Para 25 & 26 of the judgement to point out the source of the misunderstanding –

25) It is not in dispute that there is no express agreement between the respondent (insured) and M/s Magna Overseas (consignee) agreeing to transfer insureds rights under the contract of insurance in favour of M/S Magna Overseas (consignee). Under these circumstances, by virtue of Section 17, the respondent is legally entitled to retain, enjoy and exercise all those rights, which are available to them under the contract of insurance, which they have entered into with the appellant despite making the assignment of their policy in favour of the assignee. 

26) Section 17, in terms, recognizes and permits the insured to make assignment of their contract of insurance policy in favour of an assignee and at the same time allows the insured even after making an assignment to retain all those rights which are available to them under the contract of insurance with the Insurer (appellant). In other words, in terms of Section 17, even after making an assignment by the insured of their contract of insurance policy, the rights of insured under the contract of insurance policy are not assigned in favour of assignee by the deed of assignment but they are continued to remain with the insured.

In Para 25 of the judgement, the SC recognises that the insured (consignor) had assigned the Policy in favour of the consignee. In the same para, the SC says that the insured will continue to have the benefit of the Policy it had arranged with the insurer, as there was no agreement with the consignee that the insured would assign the Policy in its favour. In my opinion, the Court has missed the distinction between assignment of ‘subject matter of insurance’ and assignment of the Policy. Sec 17 says that when the insured assigns the subject matter insured (i.e. the cargo), the interest in the Policy is not necessarily transferred to the buyer. For such interest (i.e. the interest in the Policy) to be transferred, there has to be either a specific assignment of the Policy, or an express or implied agreement (a sale on CIF terms would amount to such agreement) with the assignee to that effect. Since the SC has recognised that the Policy was assigned, I understand that such a document would have existed. 

When the Policy was assigned by the insured to the consignee, which the SC does recognise, the insured lost the right to claim against the insurer. The SC in its 2010 judgement in Economic Transport Organisation v. Charan Spinning Mills has stated – 

An `assignment' on the other hand, refers to a transfer of a right by an instrument for consideration. When there is an absolute assignment, the assignor is left with no title or interest in the property or right, which is the subject matter of the assignment. 

However, the insured could have re-acquired the right to sue for the claim in either of the two situations –

a)     The consignee appointed the insured as its agent / attorney to collect the claim / sue the insurer for the claim.

b)    The consignee re-assigned the Policy to the insured after the loss.

It appears that the Policy did not carry an endorsement by the consignee, assigning back the Policy in favour of the insured. Such an assignment is permitted under Sec 52 of the MIA. It could have been done in favour of any person whatsoever, including the insured. All rights of the assignor (the consignee in this case) would get transferred to the assignee (which happened to be the consignor, but could have been any other person as well, at the choice of the assignor). 

The other way the right to sue would accrue to the insured is by way of the consignees authorising them to do so, as mentioned in a) above.

Now, lets see Para 27 of the judgement -

27) We are, therefore, of the considered view that firstly, we do not find that the respondent (insured) assigned the contract of insurance policy in favour of their consignee as contended by the appellant. Secondly, even assuming that the respondent (insured) assigned the contract of insurance policy in favour of their consignee, yet the assignment so made did not have any adverse effect on the rights of the insured under the contract of insurance policy as the rights continued to remain with them by virtue of Section 17 of the Act.

Here, the SC contradicts itself in saying that the insured has not assigned the Policy in favour of the consignee, a fact that the Court had recognised in Para 25. Of course, the Court says that even if the insured had assigned the Policy in favour of the consignee, such assignment did not have an adverse effect on the rights of the insured against the insurer. The SC has itself explained in its earlier judgement in Economic Transport that assignment transfers all rights to the assignee and no rights are retained by the assignor.

The SC has taken note of the letter issued by the consignee authorising the insured to file a complaint before the Consumer Commission for recovery of compensation. By relying on the consignee’s authorisation letter for the insured to have the locus to file the complaint, the SC is indeed accepting that the benefits under the Policy had been assigned by the insured to the consignee.

Even though I agree with the final outcome of the judgement that the insured had the right to sue the insurer in this case, I do not agree with the view that the complaint filed by the insured was maintainable because it was saved by Sec 17 of the MIA. Rather than being saved by Sec 17, it could either be on the basis of assignment back under Sec 52 or on the basis of the consignee’s authorisation letter.

I would like to point to something which sometimes does cause misunderstanding in matters of assignment of Marine Policies. Sec 6(e) of the Transfer of Property Act, 1882 says that a mere right to sue cannot be transferred. A post loss assignment of the Marine Policy would amount to a mere right to sue. But then, a look at Sec 90 of the MIA clarifies any doubt on the matter.

90. Certain provisions to override Transfer of Property Act, 1882.—Nothing in clause (e) of section 6 of the Transfer of Property Act, 1882 (4 of 1882), shall affect the provisions of sections 17, 52, 53 and 79.