Confusion when RIV is mixed with condition 9 of the SF&SP Policy – Supreme Court Judgement

The Supreme Court of India in the case M/s Oswal Plastic Industries v. Manager, Legal Dept. NAICO Ltd. examined the RIV issue in a fire claim. The insurer in this claim, despite the reports of the surveyor and investigator repudiated the claim. The State Commission relying upon the surveyor report and the loss assessed by the surveyor on the basis of the reinstatement value, awarded a sum of Rs. 29,17,500 being the reinstatement value. The NCDRC on appeal by the insurer allowed the said appeal and modified the order passed by the State Commission reducing the award to Rs. 12,60,000, being the market value. The insured stated before the court that they had purchased the machinery to replace the damaged machinery at the cost of Rs. 1,34,07,836/.

The insured went before the SC pleading that depreciated value was contrary to Clause 9 of the policy. It was submitted (by whom is not clear) the clause only gives option to the insurer to reinstate or replace the damaged/destroyed property. It was submitted that as the company has not reinstated the property, the clause itself was not applicable. The insurer pleaded that on true interpretation of Clause 9 of Section 2 of the insurance policy, the NCDRC has not committed any error in awarding the depreciated value, as also the insured/insurer had not reinstated the machines.

The SC only took up the issue in para 5 of the Judgement whether “on true interpretation of relevant clause of insurance policy, in case of damage of the plant and machinery due to fire, the complainant shall be entitled to the reinstatement value or the depreciated value?” Emphasising the term “otherwise” in Section 2 of the clause, the company shall be liable to reinstate or repair as if the same could lawfully be reinstated. The SC has taken that the insurer was unable to reinstate. If the property has not been reinstated, how is it that the surveyor assessed the reinstatement value as Rs. 29,17,500. The relevant clause in the Reinstatement Value Clause (RIV) states: “2. Until expenditure has been incurred by the Insured in replacing or reinstating the property destroyed or damaged the Company shall not be liable for any payment in excess of the amount which would have been payable under the policy if this memorandum had not been incorporated therein.”

It is strange that the RIV clause was not referred anywhere in the Judgement. Does it mean the insurer forgot to attach the clause in the policy and the parties therefore relied on condition 9 for a solution? Accordingly, the SC stated that as per second part of Clause 9 of Section 2 of the policy, the complainant shall be entitled to the reinstatement value and not the depreciated value. The SC clearly stated: “The short question which is posed for consideration of this Court is whether in the facts and circumstances of the case and on true interpretation of relevant clause of insurance policy, in case of damage of the plant and machinery due to fire, the complainant shall be entitled to the reinstatement value or the depreciated value?”

A true interpretation of condition 9 has been given by the High Court of South Africa in the case Watson v. Renasa Insurance Co. Ltd. (2019) “[22] As alluded to above, the term “reinstatement” may be employed, and operate in consequence, in two quite distinct ways. First, and as in this case, insurance policies frequently give the insurer the option of reinstating the property insured instead of paying a money indemnity to the insured. This “usual reinstatement clause” renders the insurer’s obligation in terms of the insurance contract a facultative obligation. ‘The clause is intended to benefit the insurers and to protect them from liability to pay the full pecuniary value of the loss, if the loss can be more cheaply made good otherwise. (Anderson v Commercial Union Assurance Co (1885) 55 IJQB 146 CA). Hence, the assured cannot take advantage of the clause and insist on reinstatement if the insurers do not elect to reinstate; nor on the other hand, can he prevent them from reinstating if they have elected to do so’. (Ivamy: General Principles of Insurance Law 6th Ed p 484) Their purpose is to protect insurers against excessive demands and fraudulent claims.

[23] Should the insurers so elect, they thereby substitute a different mode of discharging their obligation under the policy. Their contract is no longer a contract to pay a sum of money, but a contract to reinstate the property insured (Ivamy op cit p 485 ). Once having elected, they cannot withdraw from such election and are obliged to reinstate the property adequately regardless of the cost, and they are further liable for the consequences of a failure to perform such reinstatement adequately (Ivamy op cit., p485; Davidson v Guardian Royal Exchange Assurance [1979] 1 Lloyd’s Rep 406). The terminology of these usual clauses frequently distinguishes between “replacing” or “rebuilding” (in the case of total destruction of the insured property) and “reinstating” or “repairing”, in case of damage which is capable of reinstatement or repair (Anderson v Commercial Union Assurance Co Ltd (supra) at 146).

In view of the above, it may be seen that there is no reference in the Judgement of the SC that the insurer elected to reinstate, and the insured also stated that they purchased machinery etc. at huge cost. It can be presumed that the insurer may have failed to bring before the SC the true position of this standard clause found in many countries since long. It may be useful, if the insurer could examine the need to file a review petition before a larger Bench and get the SC to reinterpret condition 9 in line as per its full context .