The judgment established the principle of utmost good faith in the contract of insurance, emphasizing the duty of the insurer to communicate all material matters to the insured and the inferences drawn from the rate of premium charged.

K.G. Balakrishnan, J.—The appellant is a manufacturer of cotton, polyester, woollen and viscose yarns and their blends. It is a hundred per cent export-oriented unit and has got two manufacturing mills, one engaged in the manufacture of spinning acrylic yarn (Mill A) and the other for spinning cotton yarn and various blended yarn (Mill B). Appellant started production of these yarns in 1994 and in the same year had taken 12 fire insurance policies for a total assured sum of Rs. 125.72 crores. These policies were initially valid from January, 1994 to October, 1995 and were later renewed from time to time. These policies covered raw materials, stocks, plant and machinery, accessories, spares, building etc. While issuing the policies, the officials of the respondent-Insurance Company had visited the premises of the appellant factory had inspected machinery, building, stock etc. and the premia payable by the appellant were fixed accordingly. Mill ‘B’ has a Blow- room since cotton processing requires the said facility. The officials of the respondent- Insurance Company inspected and verified the Blow-room and the respondent informed the appellant on 22.11.1994 that the property situated in the Blow-room in Mill ‘B’ attracted a higher premium of Rs. 8.9 per thousand instead of Rs. 2.5 per thousand charged earlier and accordingly an additional sum of Rs. 93,316/- was required to be paid by the appellant. The appellant paid the additional premium of Rs. 93,316/- as demanded by the respondent-Insurance Company.

2. A major fire accident occurred in Mill ‘B’ on 24.12.1994 destroying the stocks, machinery and building the rein. Admittedly, the Blow-room was not affected by fire. The appellant immediately reported the matter to the respondent-Insurance Company. The Surveyors visited the Mill on 6.1.1995 to assess the extent of damage caused by the fire. Having taken several months to complete their report, the Surveyors ultimately assessed a net claim of Rs. 3,68,60,231/-, though according to the appellants estimate, the loss was around Rs. 7 crores.

3. On 24.1.1995, the respondent- Insurance Company informed the appellant that a sum of Rs. 49,89,463/- should be paid as additional premium as the Tariff Advisory Committee (TAC) approved type Automatic Diversion System or Co-2 Flooding System in the Chute Feeding arrangement between the Blow-room and the Carding Section was not installed in the Mill and in the absence of the fire protection system as prescribed under the TAC Regulation, premium at the rate of Rs. 8.9 per thousand would be applicable to the entire factor w.e.f. 1.1.1995, excluding the raw material in godown. Subsequently, on 13.7.1995, the respondent- Insurance Company again addressed a letter to the appellant stating that the earlier letter for payment of Rs. 49,89,463/- was cancelled and a sum of Rs. 1,13,13,344/- was to be paid by the appellant as the entire factory building, including the Blow-room was a single communicating structure and, therefore, the premium at a higher rate of Rs. 11.73 per thousand was applicable to the entire area. This was based on the alleged inspection by the engineers of the respondent-Insurance Company alongwith the engineers of the Tariff Advisory Committee (TAC) and the Loss Prevention Association of India Ltd. (LPA) after the date of the fire. The appellant was not agreeable to pay the additional amount so required to be paid to the respondent-Insurance Company and contended that the Blow-room was segregated in all respects and the TAC approved fire-fighting equipment had been installed by the appellant. On 19.9.1996, the respondent-Insurance Company informed the appellant that the Competent Authority had approved the settlement of the fire claim for Rs. 2,94,10,834/- and an amount of Rs. 73,67,636/- was due towards customs liability. The respondent-Insurance Company sought to claim a deduction of Rs. 1,20,77,614/- towards an alleged short- charged premium. Thus, on 27.11.1996, the