Introduction

The Supreme Court has delivered an important judgment on the limits of an insurer’s liability under a turnover-linked insurance policy, holding that an insurer cannot be made liable for a risk that arose after the insured amount had been exhausted where the additional premium necessary for extending the coverage had not been paid or validly guaranteed in accordance with law.

In The New India Assurance Company Limited & Ors. v. M/S Louis Dreyfus Commodities India Pvt. Ltd., a Bench comprising Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh allowed the appeals filed by The New India Assurance Company Limited and set aside the National Consumer Disputes Redressal Commission’s direction requiring the insurer to pay a fire-loss claim assessed by its own surveyor.

The judgment is significant because it places Section 64VB of the Insurance Act, 1938 at the centre of the dispute. The provision prohibits an insurer from assuming a risk unless the premium is received or is guaranteed to be paid within the statutorily permissible framework. The Court consequently held that contractual or administrative communications by an insurer’s employee could not enlarge the insurer’s statutory liability where the employee lacked authority to create or extend such risk.

The ruling also examines important principles of agency law, apparent authority, estoppel and ratification, thereby making the judgment relevant not only to the insurance sector but also to businesses entering into commercial insurance arrangements involving variable or turnover-based coverage.

 

Background of the Dispute

M/s Louis Dreyfus Commodities India Pvt. Ltd. had obtained a Marine Cargo Annual Turnover Policy from The New India Assurance Company Limited. The policy was structured around an expected annual turnover of approximately ₹1,200 crore, with the premium payable in two equal instalments.

The nature of an annual turnover policy is particularly relevant to the dispute. Such policies are designed to provide insurance coverage for multiple consignments or transits during the policy period, with the level of exposure being connected to the insured’s turnover.

During the policy period, a substantial quantity of cotton belonging to the respondent was stored at a Container Freight Station. A fire subsequently broke out at the premises, affecting 41,481 cotton bales.

The insurer’s surveyor assessed the loss at approximately ₹22.01 crore (₹22,01,29,271).

The dispute, however, was not primarily about the quantum of physical loss. The crucial question was whether the insurance policy covered the risk at the time the fire occurred.

By the date of the fire, the respondent’s actual turnover had risen substantially beyond the policy’s insured turnover of ₹1,200 crore. It had reached approximately ₹1,724.12 crore.

Importantly, the additional premium corresponding to the increased turnover had not been paid before the fire.

It was only more than a month after the incident that an additional premium of approximately ₹86.86 lakh was paid. This payment followed communication from an officer of the insurer seeking release of another instalment based on the current turnover so as to “regularise” the turnover.

The insurer subsequently repudiated the claim.

 

Proceedings Before the Consumer Forum

The dispute eventually reached the National Consumer Disputes Redressal Commission.

The NCDRC took a different view from the insurer. Among other things, it relied upon an email issued by a Divisional Manager of the insurance company which indicated that, after payment of the second instalment, transits would remain covered until expiry of the policy even if the turnover crossed ₹1,200 crore.

The Commission treated this communication as an assurance that the insurance coverage would continue despite the turnover exceeding the originally insured amount.

It therefore directed the insurer to pay the amount assessed by its surveyor in respect of the fire loss.

The insurer challenged the NCDRC’s decision before the Supreme Court.

The litigation had already undergone earlier proceedings before the Supreme Court. In April 2024, the Court had set aside the NCDRC’s earlier order and remanded the matter for fresh consideration, specifically noting that the Commission had failed to adequately consider the applicability of Section 64VB of the Insurance Act, 1938, among other material issues. The matter subsequently returned to the Supreme Court in Civil Appeal Nos. 7687-7688 of 2025, where the Court continued examining the statutory question concerning assumption of risk and payment of premium.

 

The Central Legal Issue

The principal question before the Supreme Court was whether an insurer could be held liable for a loss occurring after the insured turnover had exceeded the sum insured, when the additional premium necessary for extending the coverage had not been paid before the loss.

The answer, according to the Court, was no.

The Court’s reasoning was substantially anchored in Section 64VB of the Insurance Act, 1938.

The provision embodies a fundamental insurance principle: an insurer cannot assume a risk without the corresponding premium being paid or validly secured in accordance with the statutory framework.

Justice Sanjay Karol described Section 64VB as creating a statutory embargo against an insurer assuming risk where the premium has not been paid in the manner contemplated by the provision.

The Court specifically relied upon Section 64VB(2), under which the risk cannot be assumed earlier than the date on which the premium has been paid.

Thus, the question was not merely whether the insurer had communicated something which could be understood as an assurance. The more fundamental question was whether such an assurance could legally create insurance coverage when the statutory condition relating to premium had not been satisfied.

 

Turnover Had Exceeded the Insured Amount

One of the most important factual findings was the substantial increase in the respondent’s turnover.

The policy contemplated an insured turnover of ₹1,200 crore.

At the time of the fire, however, the turnover had reached approximately ₹1,724.12 crore.

The difference was therefore substantial.

The Court considered that the turnover-linked sum insured had already been exhausted before the occurrence of the insured event. Consequently, if the respondent wanted the insurance coverage to extend to the increased turnover, it was required to take appropriate steps to extend the coverage and pay the additional premium, or otherwise comply with the statutory requirements concerning payment or guarantee of premium.

The subsequent payment of additional premium could not retrospectively transform an uninsured risk into an insured risk where the loss had already occurred.

This distinction is particularly important in commercial insurance because the occurrence of a loss crystallises the insurer’s exposure. A subsequent payment cannot ordinarily be used to create coverage retrospectively when the statutory requirements for assumption of risk were not satisfied at the relevant time.

 

Section 64VB: Why Premium Payment Was Decisive

Section 64VB was central to the Court’s reasoning.

The provision reflects the legislative policy that an insurance company should not be treated as having assumed a risk merely because discussions have taken place, documents have been exchanged or an employee has communicated with the insured.

Insurance is a regulated financial activity. The assumption of risk has legal and financial consequences for both the insurer and the insured.

Accordingly, the Court treated compliance with Section 64VB as a statutory requirement rather than a mere procedural formality.

The practical consequence is significant:

Where additional insurance coverage is required because the insured exposure has increased, the insured cannot assume that the insurer’s willingness to regularise the position later automatically creates retrospective coverage.

The insured must ensure that the additional coverage is validly attached before the risk materialises.

 

Internal Guidelines of the Insurer

The insurer also relied upon its internal guidelines issued in 2006.

Those guidelines specifically contemplated that premium adjustment was to be carried out only downwards, having regard to the requirements of Section 64VB.

This material became important in determining the authority of the Divisional Manager whose communication had been relied upon by the NCDRC.

Justice Karol observed that although a principal may ordinarily be liable for acts performed by its agent, such acts must fall within the authority conferred upon the agent and be undertaken in the ordinary course of the agent’s duties.

An employee cannot, merely by virtue of holding a managerial position, acquire unrestricted authority to bind the insurer contrary to the insurer’s governing rules and statutory requirements.

The Court therefore rejected the proposition that the Divisional Manager’s communication could independently enlarge the insurer’s liability.

 

Agency Law and the Limits of an Agent’s Authority

Justice Nongmeikapam Kotiswar Singh examined the principles of agency under the Indian Contract Act, 1872 in considerable detail.

The judgment makes an important distinction between an agent’s ordinary authority and an authority to undertake an exceptional act.

An agent’s authority generally extends to acts that are necessary, usual and lawful for carrying out the business entrusted to that agent.

However, the mere fact that an act relates to the principal’s business does not automatically mean that the agent possesses authority to undertake it.

In the present case, a Divisional Manager could ordinarily communicate with an insured, explain policy terms, seek payment of premium and deal with routine policy administration.

That did not necessarily confer authority to:

• create a new insurance risk;
• increase the sum insured;
• enlarge the insurer’s contractual liability;
• retrospectively extend coverage; or
• dispense with a mandatory statutory requirement.

This distinction is especially important for commercial entities dealing with large insurers. A representation by an employee must be assessed in light of that employee’s actual authority and the applicable statutory and internal framework.

 

Actual Authority and Apparent Authority

The Supreme Court also considered the distinction between actual authority and apparent authority.

Actual authority arises from the relationship between the principal and the agent. It may be expressly granted or arise by necessary implication.

Apparent authority, on the other hand, concerns the representation made by the principal to a third party that the agent possesses particular authority.

The Court emphasised that apparent authority must proceed from a manifestation attributable to the principal. An agent cannot create apparent authority merely through the agent’s own assertion of authority.

This principle was particularly relevant because the respondent relied upon the Divisional Manager’s email.

The Court concluded that the surrounding circumstances, including the insurer’s internal guidelines, did not support the conclusion that the Divisional Manager had authority to extend the coverage in the manner suggested.

 

Reliance on Harshad J. Shah v. LIC of India

While dealing with agency, Justice Karol referred to the Supreme Court’s earlier decision in Harshad J. Shah v. Life Insurance Corporation of India.

The principle emerging from that line of authority is that an insurance agent’s authority does not always need be expressly stated and may, in appropriate circumstances, be inferred from the nature of the agency and surrounding circumstances.

However, the present case demonstrated the limits of that principle.

Where the insurer’s governing rules and the statutory framework expressly restrict the authority to assume additional risk without compliance with the premium requirement, circumstances cannot simply be presumed to confer a contrary authority.

Therefore, the Court treated the agent’s authority as circumscribed by both the principal’s instructions and the governing law.

 

Estoppel Argument Rejected

The insured also relied upon the doctrine of estoppel.

Its argument was essentially that the insurer had represented that the policy would remain effective even if the turnover exceeded ₹1,200 crore and had subsequently accepted the additional premium.

The Supreme Court rejected the argument.

The Court emphasised that the doctrine of estoppel cannot be used to defeat or circumvent a mandatory statutory provision.

This is a significant aspect of the judgment.

There may be circumstances in commercial relationships where a party’s representation, conduct or acceptance of payment prevents it from taking an inconsistent position later. However, contractual doctrines cannot be invoked to create a liability that the statute itself prohibits.

The Court therefore drew a distinction between:

contractual or equitable expectations, and

mandatory statutory requirements.

Where the latter applies, the former cannot override it.

 

Why Acceptance of Premium Did Not Create Retrospective Coverage

A particularly important practical issue was the subsequent payment of the additional premium.

The respondent paid approximately ₹86.86 lakh after the fire.

The argument that this subsequent payment should regularise the coverage was not accepted.

The temporal sequence was crucial:

1. The policy contemplated turnover of ₹1,200 crore.
2. The respondent’s turnover exceeded that amount.
3. The fire occurred after the turnover had crossed the insured limit.
4. The additional premium had not been paid before the fire.
5. The additional premium was paid only after the loss.
6. The insurer subsequently repudiated the claim.

The Court therefore declined to treat the post-loss payment as creating coverage for a risk that had already materialised.

This reinforces a basic principle of insurance law: the existence and extent of coverage must be determined with reference to the policy and the legally effective assumption of risk at the time of the insured event.

 

Ratification Under Section 196 of the Contract Act

Justice Singh also examined the doctrine of ratification under Section 196 of the Indian Contract Act, 1872.

Ratification can, in appropriate circumstances, validate an act performed by an agent without authority.

However, the Court held that ratification could not be used in the present circumstances to retrospectively create insurance coverage contrary to a mandatory statutory requirement.

The subsequent endorsement increasing the sum insured was not considered sufficient to demonstrate an intention to retrospectively ratify an assurance that the additional coverage had already attached before the fire.

The Court therefore drew an important boundary around the doctrine of ratification:

Ratification may cure a defect in an agent’s authority, but it cannot cure non-compliance with a mandatory statutory requirement governing when insurance risk may be assumed.

 

The Principle of Qui Facit Per Alium Facit Per Se

The judgment also considers the familiar agency maxim:

“Qui facit per alium facit per se” — one who acts through another is treated as acting himself.

Ordinarily, the acts of an authorised agent within the scope of agency may bind the principal.

However, the Court clarified that the maxim does not mean that an agent can impose upon a principal a liability which the agent was neither authorised nor legally competent to create.

The principle is therefore subject to the scope of authority and applicable law.

In the context of insurance, this means that communications from an employee or intermediary cannot automatically enlarge the insurer’s liability where the employee lacks authority to undertake the relevant risk.

 

Surveyor’s Assessment Did Not Automatically Establish Liability

Another important aspect of the case is the distinction between assessment of loss and existence of coverage.

The insurer’s surveyor had assessed the loss at approximately ₹22.01 crore.

However, the Court did not treat the surveyor’s assessment as determinative of the insurer’s liability.

A surveyor’s assessment answers a different question: assuming the loss is covered, what is the amount of loss?

The threshold question remains:

Was the risk covered by the policy when the insured event occurred?

If the answer is no, an assessment of the quantum of physical or financial loss does not by itself create an obligation upon the insurer to indemnify the insured.

This distinction is particularly relevant in large commercial claims where survey reports may quantify substantial losses but coverage itself remains disputed.

 

Supreme Court’s Final Decision

After examining the policy, the turnover position, the premium payment, Section 64VB, the insurer’s internal guidelines, the authority of the Divisional Manager, estoppel and ratification, the Supreme Court concluded that the NCDRC had erred in fastening liability upon the insurer.

The Court accordingly:

• allowed the appeals filed by The New India Assurance Company Limited;
• set aside the NCDRC’s decision directing payment of the surveyor-assessed amount;
• held that the insurer could not be made liable for the additional risk beyond the sum insured where the corresponding premium had not been paid as required; and
• rejected the attempt to rely upon the Divisional Manager’s communication to create or retrospectively extend coverage contrary to Section 64VB.

 

Key Legal Principles Emerging from the Judgment

The decision lays down several important propositions for insurance law and commercial contracting.

1. Premium and assumption of risk are legally connected

An insurer cannot ordinarily be treated as having assumed an additional risk where the statutory conditions concerning payment or valid guarantee of premium have not been satisfied.

2. Coverage cannot automatically expand with business turnover

In a turnover-linked policy, an increase in the insured’s actual turnover does not automatically mean that the insurer’s liability expands correspondingly.

The insured must comply with the policy mechanism for increasing coverage and paying the additional premium.

3. Post-loss payment cannot automatically create retrospective coverage

Payment of an additional premium after an insured event cannot, by itself, retrospectively convert an uninsured risk into an insured risk where Section 64VB prevents such assumption of risk.

4. Employees cannot exceed their authority

An insurer’s employee may communicate with policyholders and perform routine administrative functions, but this does not necessarily confer authority to create new risks or enlarge the insurer’s liability.

5. Estoppel cannot override mandatory statutory provisions

Equitable or contractual doctrines cannot be invoked to impose an obligation prohibited by statute.

6. Ratification has limits

Ratification under the Contract Act cannot be used as a mechanism to defeat a mandatory statutory requirement relating to the assumption of insurance risk.

7. A surveyor’s report does not determine coverage

The assessment of loss is relevant only after the existence of coverage has been established.

 

Implications for Businesses and Policyholders

The judgment has considerable practical implications for companies holding Marine Cargo Annual Turnover Policies, floating policies and other forms of insurance where coverage is linked to changing turnover, declared values or exposure.

Businesses should not treat the policy’s annual limit as a flexible figure that automatically adjusts as commercial activity increases.

Instead, businesses should establish internal systems for monitoring:

• actual turnover against insured turnover;
• remaining available insurance capacity;
• additional premium obligations;
• policy endorsements;
• declarations required under the policy;
• effective dates of enhanced coverage; and
• written confirmation of coverage from appropriately authorised officers.

A particularly important lesson is that commercial correspondence should not be treated as a substitute for a valid policy endorsement or statutory compliance.

Where a business knows that its turnover has exceeded the insured limit, it should obtain formal confirmation of the increased coverage and ensure that the additional premium is paid before the expanded risk materialises.

 

Implications for Insurers

The judgment is equally important for insurers.

Insurance companies should ensure that their employees, divisional managers, relationship managers and other representatives clearly understand the limits of their authority.

Internal underwriting and premium-collection guidelines should be communicated effectively and followed consistently.

The case also highlights the importance of precise policy administration. Where a policy allows payment of premium in instalments or contains turnover-based adjustments, insurers should ensure that policyholders clearly understand:

1. the amount of coverage currently available;
2. the circumstances in which additional coverage becomes necessary;
3. when additional premium must be paid;
4. whether increased coverage is prospective or retrospective; and
5. who within the organisation has authority to approve an increase in risk.

Clear documentation can substantially reduce disputes concerning representations allegedly made by employees.

 

Conclusion

The Supreme Court’s decision in The New India Assurance Company Limited & Ors. v. M/S Louis Dreyfus Commodities India Pvt. Ltd. provides an important clarification on the relationship between premium payment, the extent of insurance coverage and statutory restrictions on assumption of risk.

The Court made it clear that where a turnover-linked sum insured has been exhausted, the insured cannot simply rely on a subsequent payment of premium or an assurance from an employee to establish coverage for a loss that occurred before the additional risk was legally assumed.

Section 64VB of the Insurance Act, 1938 operates as a significant statutory safeguard in this regard. Neither estoppel nor ratification can be employed to circumvent its mandatory requirements.

For businesses, the judgment serves as a strong reminder that insurance limits must be actively monitored and additional coverage must be formally secured before exposure exceeds the existing insured amount. For insurers, it underscores the importance of clearly defining employee authority and maintaining strict compliance with statutory and internal underwriting requirements.

Ultimately, the ruling reinforces a fundamental principle of insurance law: the insurer’s liability cannot be expanded beyond the risk legally assumed and for which the requisite premium has been paid or validly secured in accordance with law.