Surveyors as Keeper of Indemnity in Insurance

Insurance Act, Section 64UM, deals with the need to appoint surveyors. It indicates that surveyor is an essential part of assessing an insurance claim. As courts say the surveyor is duty bound to give a correct report. It would appear insurers feel that it is not so in some cases. However, courts are clear that an insurer cannot appoint a second surveyor just as a matter of course. Some insurers appoint the second surveyor as a sort of appellate surveyor. Courts have stated that an insurer cannot appoint a fresh surveyor to act as an appellate surveyor of the first surveyor. This is particularly so when the scene of loss is without evidence of loss owing to the passage of time. When the second surveyor has no occasion to examine the loss scene some judges have held that such report of the second surveyor is nothing but an empty formality. Such exercises can be “a wholly cursory investigation which has quite aptly been described as "tailor-made"” for the insurer as stated by the Supreme Court in one case. In the case Ashwani Textiles v. Oriental Insurance Co. Ltd and Anr.  it was held that without complying with all the requirements of Section 64 UM of the Insurance Act, 1938 the appointment of the 4th Surveyor was absolutely unfair and unauthorised. Imagine 4 surveyors for one claim with four possible indemnity amounts! As reported in a case in 2010, surveyors can be creative because in the concerned case a legal opinion was obtained from Retd. Chief Justice of the SC, Mr. Justice Y.V. Chandrachud, who agreed that the surveyor/investigator “had attempted to kill a cat disguising it as tiger”.

However, it is not only insurers who are at fault in confusing the indemnity scene with appointing more than one surveyor. It is seen that even senior surveyors may have no clue at times on how to assess a proper indemnity.

Case I – at Delhi High Court 2010

The insured was in the business of Red Sanders Wood. They took a fire policy for the stock of Red Sanders Wood stored in a godown. The total sum insured was Rs. 37 crores. On 29th June 1996, an accidental fire broke out at the godown. The insured had claimed Rs. 40.17 crores.

The insurer appointed two surveyors as joint surveyors and also a retired Additional IG (Prisons) as investigator. The Joint Surveyors submitted their final survey report assessing the loss at Rs.1.43 crores. However, the insurer repudiated the claim on the ground of non-compliance with the terms and conditions of the fire policy, based on the report of the investigator. Aggrieved by the repudiation of its claims, the insured filed an appeal before the IRDAI, and the IRDAI on its part appointed two surveyors for re-survey and loss assessment. One of these surveyors assessed the claim for Rs.21.01 crore, but the other only for Rs. 2.21 crores. IRDAI ordered the insurer to pay Rs. 2.21 as assessed by the second surveyor.

Aggrieved by the above order, the insurer filed an appeal under Section 110H of the Insurance Act to the Appellate Authority in the Ministry of Finance, who then directed the IRDAI to appoint yet another set of surveyors. The IRDAI appointed another set of surveyors and they assessed the loss at Rs. 7.95 crs. The IRDAI rejected this assessment and directed the insurer to pay the earlier amount of Rs. 2.21 crs. However, the Appellate Authority overruled it and ordered the insurer to pay Rs. 7.95 crs as assessed by the last set of surveyors.

63 UM of the Insurance Act provides that the insurer can pay or settle any claim at any amount different from the amount assessed by the approved surveyor or loss assessor. This is a right but it also carries a responsibility for fair terms and fair conduct. In the case Sri Venkateswara Syndicate v Oriental Insurance (2009) 8 SCC 507, the SC said that “the option to accept or not to accept the report is with the insurer. However, if the rejection of the report is arbitrary and based on no acceptable reasons, the courts or other forums can definitely step in and correct the error committed by the insurer while repudiating the claim of the insured. We hasten to add, if the reports are prepared in good faith, with due application of mind and in the absence of any error or ill motive, the insurance company is not expected to reject the report of the surveyors.”

Case II again is a case in Delhi HC in 2019

It is not only insurers who are favoured with one-sided reports. In another case in which the insured was a manufacture of Polyester Staple Fibre, POY, Polyester Chips etc, a fire took place and the manufacturing activity remained stalled for 238 days, but the LOP policy had a maximum indemnity period of 6 months only, so the interruption of business as per policy was for 182 days. In addition, the insured had a stock in hand of 52,000 metric tonnes of products which was sufficient to meet any sale requirement for a substantially long period. The insured filed a provisional loss of profits claim (under the Fire Loss of Profit Policy) for Rs.25 crores on the basis of reduction in output. The surveyor assessed the LOP loss on the basis of turnover at about Rs. 5.11crs based on the turnover method. The insured did not accept the same and raised the claim to Rs. 72.94 crs., whereas the surveyor’s final assessment was only for Rs. 5.11 crs. In view of this the insured appointed their own surveyor who was renowned in LOP claim assessment, who assessed the loss for Rs.35.79 crs. The matter went for arbitration, where the arbitrator sided with the insured and awarded the matter for Rs. 32.44 crs.

The insurer appealed before the Delhi HC and later on the insured also appealed before the Division Bench. The insurer said that the award was contrary to the fundamental policy of insurance law which is that a contract of insurance is one for indemnity, whereas the Tribunal premised on the basis that the LOP was not an indemnity policy but one of reimbursement. The court ordered that the award by the tribunal ought to be set aside.

Therefore, it is quite obvious from the above that there is a need to take the concept of indemnity more properly and with a sense of fairness to the principles and practices concerned. The surveyors have to play a critical role to ensure this, and hence their standards of practice have to be of the highest quality and is fair to both parties. Only this can ensure that the industry’s sense of ensuring full trust in the insurance system by the insuring public will be held high.