Sum Insured Must Meet Indemnity Commitments

Insures always face a battle when customers feel that they have been short changed. It is a pain for insurers in the claims vertical to face the ire of consumers because of issues of underinsurance and depreciation, which is very common. This happens even when the insured has courted underinsurance in the quest for lower premium.

At the same time court battles are seen rising where it seen that insurers have a poor understanding of indemnity in the context of the sum insured chosen/agreed mutually. Traditionally insurers have been tight-fisted in the matter of claim indemnity. To achieve the object of paying as less as possible, they would indiscriminately use the principles underinsurance and depreciation, wear and tear, latent defects etc. There is much confusion about underinsurance. In an Arbitration case, where the author was Arbitrator, it was seen that the surveyor, a senior and respected professional, had deducted underinsurance from the claim which he himself had declared as total loss. When asked why he had done this, he stated (in the capacity of a witness) that it is the industry practice for many years!

There is little clarity across portfolios on the relation between sum insured in the respective policy in relation to the indemnity to be allowed.

1.      Motor OD Claim

The Supreme Court in the case Dharmendra Goel vs Oriental Insurance Co. Ltd, (2008) examined the issue of the reasonableness of the indemnity vis-à-vis the sum insured as allowed by the insurer. In 2000, the insured had purchased a new Tata Sumo vehicle for a sum of Rs. 4,30,000/-. The vehicle was renewed without break for the next year and was again renewed for 2002- 2003 on the value assessed by the insurer at Rs.3,54,000/- The vehicle met with an accident on 10th September, 2002. The insurer appointed a Surveyor to assess the loss. The surveyor assessed the claim for total loss at Rs. 1,80,000/- and after assessing the salvage value at Rs. 85,000 and assessed cash loss basis at Rs.1,04,433.53/-. However, However, the insurer repudiated the claim on the plea that the driver did not have a valid driving licence.

The insured filed a complaint before the District Consumer Forum but the Forum dismissed it asking him to go the Civil Court. Aggrieved the insured filed an appeal before the State Commission. The Commission found that the driver did have a valid driving licence on the date of the accident and directed the insurer to pay to the insured Rs. 1,04,043/- with interest @ 6% p.a. Dissatisfied by this, the insured filed a revision petition before the NCDRC claiming of Rs. 3,54,000, which partly allowed the appeal and granted a settlement of Rs.1,80,000/- with interest @12% p.a. Not satisfied, the insured filed appeal in the Supreme Court.

The insured stated that the insurer themselves had issued the policy for a sum of Rs.3,54,000/- and had also accepted a premium on that basis and hence an amount below that amount was wholly unjustified. It was argued that surveyor's conclusions had no basis. The insurer, however, pointed out that the insured, had at the NCDRC given up the claim for Rs.3,54,000/- and limited it to Rs.1,80,000/-. The Supreme Court ruled that as the insurer itself had accepted the value of the vehicle at Rs.3,54,000/- it could not claim that the value of the vehicle on total loss basis on the date of the accident was only Rs.1,80,000/-. The court noted that the cost of the new vehicle was Rs.4,30,000/- and it was renewed first for a value of Rs.3,59,000/- and then at the renewal for 2002 the value was reduced by only Rs.5,000/- to Rs.3,54,000/-. The SC accordingly said that “We are, therefore, unable to accept the company's contention that within a span of seven months from 13th February 2002 to the date of the accident, the value of the vehicle had depreciated from Rs.3,54,000/- to Rs.1,80,000/-.”

The insurer argued that as the insured had agreed for Rs. 1,80,000 before the NCDRC, it could not claim anything beyond that figure. The SC, however, found on reading of the order of the NCDRC that the primary claim made by the insured was for Rs.3,54,000 in a repeated manner. Even otherwise, “we believe that in such matters, the court must take a realistic view and if a particular claim of compensation is possible on the material on record, it should not be denied on hyper technical pleas, as has been argued”. Still the insurer pleaded for further depreciation as the accident had happened after 7 months. The SC accepted this reduced the award by Rs.10,000!!!

2.      Contractors Plant & Machinery (CPM) Policy Claim

Supreme Court in the case Sumit Kumar Saha vs Reliance General Insurance (2019) examined various aspects of indemnity under a CPM Policy. In 2007 the insured purchased an Excavator for Rs.51,74,000/-. It was insured with the insurer by a CPM Policy. The policy was renewed for 2009-2010, at a sum insured was Rs.46,56,600. On 30.06.2010 the Excavator was badly damaged in a fire. On 07.07.2010 the surveyor was appointed to survey the loss.

In due course, the insurer informed that the loss was assessed by the surveyor for Rs.25,24,273. The indemnity was assessed after looking at both types of settlements viz. in Partial Loss (PL) and Constructive Total Loss (CTL) basis. It was seen that PL will be more than the insured value. Hence CTL settlement was considered. The Gross Loss was estimated at Rs.5,100,000.00 at new replacement value and as the excavator was in operation for 3 years and 3 months, considering the life of such excavator to be 10 years, the depreciation worked out to 32.5%. Hence, the depreciated value was Rs.3,442,500.00 and after salvage of Rs.650,000, the surveyor assessed the loss was Rs.2,792,500.00 and considering an underinsurance to the extent of 8.71% as the new replacement cost was Rs.5,100,000.00, and the sum insured was only Rs.4,656,000.00. So, the net adjusted was assessed at Rs.2,524,273.00.

The insured being aggrieved filed a case before the SCDRC and placed on record the report of a surveyor appointed by him. The insured’s surveyor had assessed the loss on two counts, namely “loss assessed on repairing basis” at Rs.94,64,357.70 and on “total loss basis” at Rs.41,90,940.00. On total loss basis the present depreciated cost of the Excavator as declared to the Insurer and accepted by them was Rs. 46,56,600.00, less: 10% depreciation for usage from the date of insurance to the date of accident came to Rs. 41,90,940. As to underinsurance the insured’s surveyor opined that it was not applicable as the machine has been totally burnt. The SCDRC allowed the claim for Rs.41,90,940/- with interest @ Rs.8% p.a. from the date of filing of the claim. The insurer was also directed to pay a sum of Rs.1,00,000 as compensation for harassment, mental agony and financial loss, apart from another sum of Rs.5,000 as costs. The insurer appealed before the NCDRC which was partly allowed and directed the insurer to pay a sum of Rs.34,17,500/-. This decision was appealed by the insured.

The SC saw that it is common ground that the Excavator was a “total loss” and so the insured would be entitled to the replacement cost. The parties were aware that the Excavator was purchased in the year 2007 for Rs.51.74 lakhs. If the policy contract mentioned the sum insured to be Rs.46,56,600/- the parties must be deemed to be aware about the significance of that sum and the fact that it represented the value of the Excavator as on the date when the coverage was obtained. In this the court referred to the case Dharmendra Goel (as above) The SC found that  as both the sides, with their eyes open, had arrived at a particular figure to be the real value of the subject matter of insurance, is it not open to any party to dispute said sum and contend that the real value was something different from what was declared by the parties to be the sum insured. If both the parties had agreed and arrived at an understanding, which understanding was otherwise not vitiated by any misrepresentation, fraud or coercion, the parties must be held bound by stipulation of such figure. This was the idea and the underlying principle in Dharmendra Goel (supra) according to the SC.

Since the parties had taken a sum insured factoring in the depreciation as on date of insurance, the surveyor could not have calculated depreciation for a period before the date of the policy. The assessment must start with the amount described as “sum insured” on the day when the contract was entered into. It was not open to the Surveyor or to the Insurer to disregard the figure stipulated as ‘sum insured’. The SC said that the surveyor and the Insurer were not justified in any way in questioning the amount of “sum insured”. Further depreciation, if any, can always be computed keeping the figure of “sum insured” in mind. The starting figure, therefore, had to be the figure which was stipulated as “sum insured”. Since the Excavator, after the policy was taken was used for eleven months, there must be some reasonable depreciation which ought to be deducted from the “sum insured”. The surveyor appointed by the insured was right in deducting 10% and in arriving at the figure of Rs.41,90,940/-. Accordingly, the SC allowed the appeal.

3.      Health Insurance

The Supreme Court in the case Kanwaljit Singh vs National Insurance Company Ltd. (2019) went into the issue indemnity in relation to the sum insured. The facts were that since 2007-2008, the insured had been taking individual Mediclaim Policies for himself and his family members. The dispute was for the year 2014-15, in respect insured’s son. The individual Mediclaim Policies of the son from 2007-2008 to 2013-2014 was for different sum insured, varying from Rs.50,000 in 2007-2008 to Rs.2,54,000/- in 2013-2014. In the year 2014-2015, the insured took a Family Mediclaim Policy for a sum insured of Rs.5,00,000/-.

During this period (2014-15), his son fell sick and had to undergo treatment. The total amount of medical bill came to Rs.8,55,226/-. The insured lodged a claim for the amount, which was initially repudiated without assigning any reason. However, later considering that the there was an individual medical claim policy in the year 2009-2010 for Rs.55,000/-, the insurer paid Rs.27,550/- as final payment of the claim. The insured filed a complaint before the District Forum claiming an amount of Rs.5,00,000. The District Forum, however, held that four years prior to his hospitalisation he was duly insured for Rs.1,07,500/-, the amount payable would be 50% of such sum insured for the year 2010-2011, which comes to Rs.53,750/-.

Challenging the said order, the insured went to the SCDRC which allowed the claim  in full, i.e. Rs.5,00,000/. Besides this, the Insurer was also directed to pay Rs.30,000/- as compensation for mental agony and harassment, plus Rs.10,000/- as litigation cost. Aggrieved the insurer filed appeal before the NCDRC, which upheld the order of the District Forum. So, the insured challenged the order in the Supreme Court. The SC found that the Mediclaim Policy of the son was continuously taken for varying sum insured since 2007-2008 till 2014-2015. It was also not disputed that at the time of taking the initial Mediclaim Policy for the year 2007-2008, the he did not have any pre-existing disease. In the year 2014-2015, at the time of renewal, that the insured had taken the Family Mediclaim Policy, for a total sum insured amount of Rs.5,00,000/-. Under the terms of the Policy, the total expenses incurred for any one illness would be limited to 50% of the sum insured for the family and so the SC allowed Rs. 2,50,000 as the claim payable and in addition, ordered Rs.50,000/- towards mental agony and harassment, plus Rs.30,000/- towards costs of litigation.

Fire Insurance

Supreme Court of India in the case Canara Bank vs M/S United India Insurance Co. Ltd (2020) where farmers, who had grown Byadgi Chilli Crop during the year 2012--2013, stored the produce in a cold store run by Sreedevi Cold Storage. They had also obtained loans from Canara Bank, where each farmer was given loan on security of the agricultural produce stored in the cold store. A fire took place in the cold store on the night of 13.01.2014. The entire building of the cold store and the entire stock of agricultural produce was destroyed. However, the claim was repudiated by the insurer mainly on the ground that the fire was not an accidental fire. It was held by the SC that the grounds for repudiation was wrong.

The farmers in their appeal had claimed that as per policy the value of the goods was to be assessed on the date of fire and the value was not to be assessed as mentioned on the date when the goods were stored in the cold store. The SC went into the policy issued and found that the coverage clause left no manner of doubt that the insurer had agreed to either reinstate the goods or replace the same or pay to the insured the value of the property at the time of happening of its destruction or damage.

Though the SC held that in terms of the clause discussed above the insurance company is liable to pay the value of the goods as on the date of the fire, the SC also felt that the NCDRC was right when it came to the conclusion that it was not possible to award an amount based on the variety wise. The NCDRC was right in that the difference between minimum price for which this product was sold during the period 14.12.2013 to 14.01.2014 and the maximum price for the same agricultural produce during this period was so high that without exactly knowing what was the quality of agricultural produce, it would not be possible to ascertain what was the price on the date of fire. To give an example, Byadgi chillies have a price range of Rs. 3,200 per quintal to Rs. 17,300 per quintal i.e. Rs.32 per kilogram to Rs.173 per kilogram. There is no way for any Court to determine what the exact price would have been without having the benefit of the quality of produce. Unfortunately, even in the warehouse receipts there is no gradation or reflection of the quality of the produce. Accordingly, the SC affirmed the decision of the NCDRC that the value of the goods as reflected in the warehouse receipts should be taken to be the value on the date of fire. The SC added that this value is not very different from the median value for most of the products. We rely upon the value given in the warehouse receipts because that was the value which was given by the farmers, not knowing that their product is going to be burnt, and was accepted by the cold store, which must have known the value of the product in the local market and accepted by the Bank, which on the basis of such surety advanced the loan.