Depreciation to be computed only on sum insured in the absence of fraud etc. – SC

Depreciation to be computed only on sum insured in the absence of fraud, coercion or misrepresentation. Parties in insurance contract bound by sum insured – SC

ABCAUS Case Law Citation:
ABCAUS 2760 (2019) (01) SC

Important Case Laws Cited/relied upon by the parties
Sikka Papers Limited v. National Insurance Company Limited and others (2009)7 SCC 777

Dharmendra Goel v. Oriental Insurance Company Limited (2008) 8 SCC 279

The appellant had purchased one Volvo Hydraulic Excavator for a sum of Rs. 51,74,000/- including taxes. The said Excavator was insured with the respondent Insurance Company and the insurance policy thereafter stood renewed for the period of three years for insured sum of Rs. 46,56,600/-.

However, during the last year of the term of the policy, the Excavator was badly damaged in a fire and the appellant requested the Insurance Company to survey the damage and settle the claim.

The surveyor appointed by the respondent, assessed the loss at Rs. 25,24,273/- considering it a case of Constructive Total Loss. While arriving at the assessed loss, the surveyor took the new replacement cost  and made the following deductions:

(i) depreciation for the date of purchase till date of accident

(ii) Salvage recovered

(iii) under insurance on the reasoning that new replacement cost was Rs. 5,100,000/- whereas the sum insured was Rs. 4,656,000- only

Aggrieved, the appellant filed appeal before the State Consumer Disputes Redressal Commission and filed report of a surveyor appointed by him which assessed loss at Rs. 41,90,940/-

The State Commission allowed the complaint. However, the National Commission partly allowed the appeal of the Insurance Company by restricting the deductions to depreciation made by the Surveyor of the Insurance Company.

Aggrieved, the appellant approached the Hon’ble Supreme Court in the present appeal.

The appellant contended that it was a case of a total loss as accepted by both the surveyors and going by the “sum insured” as agreed by the parties, the appellant was entitled to Rs. 46,56,000/-.

It was submitted that the Insurance Company was well aware that the Excavator was of 2007 make and after deducting appropriate depreciation the value that was arrived at for the purposes of cover of insurance was Rs. 46,56,600/-.

The Hon’ble Supreme Court observed that it was not disputed that as a result of fire, the Excavator was a “total loss” and the insured would be entitled to the replacement cost of the Excavator. The dispute, however, was with respect to the amount or value that the insured was entitled to receive.

The Hon’ble Supreme Court observed that the policy in question indicated that the “year of make” of the Excavator was “2007” while the policy was for the period 22.07.2009 to 21.07.2010. The parties were aware that the Excavator was purchased in the year 2007 for Rs. 51.74 lakhs.

The Hon’ble Supreme Court opined that if the 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.

Not agreeing with the contentions of the respondent, the Hon’ble Supreme Court stated that the cases of “under insurance” stand on a completely different footing. In such cases the Insurance Company stands denied of appropriate premium. If the sum insured is, in any way, lesser than the real value of the subject matter of insurance, and if there be cases of partial replacement or partial loss, it is well accepted that the Insurance Company is entitled to proportionate deduction representing the proportion of undervaluation.

The Hon’ble Supreme Court observed that it was not the case of the Insurance Company that there was any “under insurance” in the present matter. On the other hand, the contention was that as against the sum insured which was Rs.46,56,600/- the depreciated value was Rs. 34,42,500/-.

Therefore, the Hon’ble Supreme Court opined that according to the Insurance Company, if at all it was a case of over insurance, going by the idea of receipt of premium, the Insurance Company had received more than what according to it the real value would have justified.

The Hon’ble Supreme Court stated that if both the sides, with their eyes open, had arrived at a particular figure to be the real value of the subject matter of insurance, it was 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.

The Hon’ble Supreme Court said that one may understand cases where there is non-disclosure of material facts which may go to the root of the matter and as such the sanctity of the agreement itself may get affected. But 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.

Further, it was observed that the relevant stipulation provided for calculation of actual value by deducting “proper depreciation”. However, the surveyor was calculating the depreciation from the day when the policy was entered into till the date when the accident occurred. The Hon’ble Supreme Court found such exercise was not justified as it was in the nature of not only considering the depreciation post the policy but even including the period prior thereto. The Hon’ble Supreme Court opined that such exercise was already undertaken by the parties and in their assessment the real value of the Excavator as on the day when the policy was taken out was Rs. 46,56,600/-.

The Hon’ble Supreme Court opined that in the face of the agreement and understanding, the surveyor could not have calculated depreciation for a period prior to the date of policy or contract. The purport of the depreciation clause was to arrive at proper valuation as on the day when there was total destruction. The Surveyor could have undertaken the exercise post the date of policy to assess the real value of the insured property as on the date when the fire actually took place. And for such purposes, 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 Insurance Company to disregard the figure stipulated as ‘sum insured’. The loss had to be assessed in the present case, keeping said figure in mind.

The Hon’ble Supreme Court held that except in cases where the agreement on part of the Insurance Company is brought about by fraud, coercion or misrepresentation or cases where principle of uberrima fide is attracted, the parties are bound by stipulation of a particular figure as sum insured. Therefore, the surveyor and the Insurance Company were not justified in any way in questioning and disregarding the amount of “sum insured”. Further depreciation, if any, can always be computed keeping the figure of “sum insured” in mind.

The Hon’ble Supreme Court thus opined that the starting figure, in the instant case was the figure which was stipulated as “sum insured”. Since Excavator, after the policy was taken out 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/-.

The decision of National Commission was et aside holding that the assessment made by the State Commission was quite correct and that made by the National Commission was completely incorrect.

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