LEGAL ISSUE: Interpretation of under-insurance clauses in householder insurance policies.
CASE TYPE: Consumer Law
Case Name: I.C. Sharma vs. The Oriental Insurance Co. Ltd.
Judgment Date: 10 January 2018
Date of the Judgment: 10 January 2018
Citation: (2018) INSC 14
Judges: Madan B. Lokur J., Deepak Gupta J.
When a burglary occurs, and the insured has a householder’s policy, how is the claim settled if the insured value is less than the actual value of the stolen goods? The Supreme Court of India addressed this question in a recent case, clarifying the principle of under-insurance. The court examined a dispute between a homeowner and an insurance company regarding a burglary claim where the insured had declared a lower value for their belongings than their actual worth. This judgment, authored by Justice Deepak Gupta, clarifies how under-insurance affects the payout in such cases, especially when some or all insured items are stolen.
Case Background
I.C. Sharma, the appellant, first obtained a householder insurance policy from the Oriental Insurance Company on December 23, 2000. This policy, which covered items in his house “as per list,” was renewed until December 22, 2005. The insurance company then discontinued “as per list” policies, introducing policies for consolidated amounts. Sharma obtained a new policy on January 19, 2006, which was renewed periodically, with the last renewal covering January 19, 2007, to January 18, 2008.
While Sharma was in the United Kingdom, a burglary occurred at his residence between January 27, 2008, and January 30, 2008. He was informed of the incident by a neighbor on January 31, 2008. Sharma’s nephew informed the Insurance Company, and a First Information Report (FIR) was filed at the Mehrauli Police Station in South Delhi. The police were unable to trace the crime.
The Insurance Company initially offered Sharma ₹3,500 in November 2008, which he refused. Later, after meeting with company officials, he was offered ₹29,920. Dissatisfied, Sharma filed a claim with the District Consumer Disputes Redressal Forum, which was rejected because the stolen items were not listed in the policy. Sharma then appealed to the State Consumer Disputes Redressal Commission, which awarded him ₹4,03,150 on January 15, 2014.
Timeline
| Date | Event |
|---|---|
| 23 December 2000 | I.C. Sharma purchased first householder insurance policy. |
| 22 December 2005 | Expiry of the “as per list” policy. |
| 19 January 2006 | New policy as per new scheme taken out. |
| 19 January 2007 to 18 January 2008 | Last renewal of the policy. |
| 27 January 2008 to 30 January 2008 | Burglary at Sharma’s residence. |
| 31 January 2008 | Sharma informed about the burglary and informs the Insurance Company. FIR filed. |
| November 2008 | Insurance Company first offered a sum of Rs. 3,500/- which was refused by Sharma |
| 15 January 2014 | State Commission awarded Sharma ₹4,03,150. |
Course of Proceedings
The Insurance Company and Sharma both filed revision petitions before the National Consumer Disputes Redressal Commission. The Insurance Company argued that many claimed items were not insured and that there was significant under-insurance. The National Commission ruled that since many items were not listed, Sharma was only entitled to ₹21,000 for gold, ₹5,929 for a watch, ₹7,000 for door repairs, and ₹16,000 for clothes, after deductions for under-insurance. The appellant then filed a Special Leave Petition (SLP) in the Supreme Court, which allowed him to file a review petition before the National Commission.
In the review petition, the National Commission considered that the new insurance policy did not require an itemized list. It awarded amounts for jewellery after adjusting for under-insurance, rejected the claim for silver cutlery, awarded for clothing after under-insurance adjustments, rejected claims for electrical appliances and watches due to lack of invoices, and awarded ₹7,000 for repairs, along with ₹10,000 compensation and 9% interest.
Legal Framework
The core issue revolves around the interpretation of under-insurance in the context of a householder’s insurance policy. Under-insurance occurs when the insured declares a value for their insured items that is less than their actual value. The Court noted that this is often done to reduce premium costs. However, the Court also observed that under-insurance is more detrimental to the policyholder than the insurance company, as the policyholder is only entitled to the maximum sum insured, irrespective of the actual value of the loss.
Arguments
The primary argument revolved around the interpretation of under-insurance and its applicability to the various categories of items claimed by the appellant. The Insurance Company contended that many items claimed were not insured or were under-insured, and therefore, the claim should be reduced proportionately.
The appellant argued that the new policy did not require a detailed list of items, and the consolidated amounts should be considered sufficient coverage. He contended that the principle of averaging out should not apply when all items under a specific category were stolen.
The National Commission held that once the appellant had supplied a list of articles for the first policy, if there was any change he should have filed a fresh list and since a large number of articles were not mentioned in the list the claimant was only entitled to an amount of Rs.21,000/- towards the value of stolen gold articles; Rs.5,929/- towards the depreciated value of Citizen watch; Rs.7,000/- for repair of door latches etc.; and Rs.16,000/- towards the value of stolen clothes after making appropriate deduction for under-insurance of clothing.
The National Commission in the review petition took into consideration the fact that the new insurance policy did not require a list of items to be given. It, thereafter, awarded amounts under various heads as follows:-
i)Jewellery and valuables -Claimant claimed that the jewellery lost was worth Rs.1,84,150/- but the insurance package was only for Rs.1,00,500/-. The National Commission ordered the Insurance Company to pay the amount after making adjustment for under-insurance;
ii)Two cutlery sets in silver valuing Rs.31,000/- -The National Commission held that these items were not insured and did not fall under the heading of ‘kitchenware/crockery/cutlery sets’.
iii)Clothing -The insured value of clothing was Rs.55,000/- and the claimant claimed Rs.87,000/-. The National Commission directed payment of this amount after making adjustment for under-insurance.
iv)Electrical/Mechanical appliances -The appellant claimed a sum of Rs.66,000/- for loss of electrical and mechanical appliances, as against the coverage of Rs.1,82,500/-. This claim was rejected on the ground that the claimant failed to produce bills of invoices towards this amount.
v)Miscellaneous items -The appellant claimed Rs.28,000/- for loss of miscellaneous items including watches valuing Rs.20,000/- as against the coverage of Rs.41,000/-. He has been awarded only Rs.8,000/- and the claim for watches of Rs.20,000/- has been rejected on the ground that he failed to produce purchase invoices.
vi)Repair of locks, doors, latches, safe etc. – The appellant was awarded Rs.7,000/- for repair of locks, doors, latches, safe etc., as claimed by him.
vii)The claimant was also awarded compensation of Rs.10,000/- and interest @ 9% per annum.
| Main Submission | Sub-Submissions |
|---|---|
| Insurance Company’s Submission |
|
| Appellant’s Submission |
|
Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
✓ “what is under-insurance – and the effect thereof?”
Treatment of the Issue by the Court
| Issue | Court’s Decision |
|---|---|
| What is under-insurance and its effect? | The Court clarified that under-insurance occurs when the insured value is less than the actual value. The effect depends on whether all items under a category are lost or only some. If all are lost, the insured gets the insured value; if only some are lost, the principle of averaging out applies. |
Authorities
The Court did not cite any specific cases or books. The judgment primarily relied on the interpretation of the insurance policy and the general principles of insurance law.
The Court considered the following legal provisions:
✓ The terms and conditions of the householder insurance policy issued by the Oriental Insurance Company.
✓ The general principles of insurance law regarding under-insurance and averaging out.
| Authority | How it was considered |
|---|---|
| Terms and conditions of the insurance policy | Interpreted to determine the scope of coverage and the applicability of under-insurance clauses. |
| General principles of insurance law | Used to clarify the concepts of under-insurance and averaging out. |
Judgment
| Submission by Parties | How the Court Treated the Submission |
|---|---|
| Insurance Company’s submission that many items were not insured. | Partially accepted. The court agreed that some items like silver cutlery were not covered under the claimed category. |
| Insurance Company’s submission that there was significant under-insurance. | Partially accepted. The court applied the principle of averaging out for clothing but not for jewellery. |
| Appellant’s submission that the new policy did not require a detailed list. | Accepted. The court noted that the policy changed from “as per list” to consolidated amounts and that the insurance company should have advised the insured about item-wise valuation. |
| Appellant’s submission that averaging out should not apply when all items under a category were stolen. | Accepted. The court held that if all items under a specific category are stolen, the insured is entitled to the full insured value, not a reduced amount due to under-insurance. |
Authorities
The Court’s reasoning was based on the following:
✓ The Court held that if all the insured goods are lost then there is no problem. The insured is entitled to the amount for which the goods were insured even if that be less than the actual value of the goods.
✓ The Court held that the Insurance Company can apply the principle of averaging out when all the goods are not destroyed.
✓ The Court held that when a group of items is insured under one heading and only some of the items and not all items are lost/stolen then the principle of under-insurance will apply. However, if all or most of the items of value covered under the policy are stolen, then the insurance company is bound to pay the value of the goods insured.
What weighed in the mind of the Court?
The Court’s reasoning was primarily driven by the need to interpret the insurance policy fairly and to ensure that the insured was not unjustly penalized due to under-insurance, especially when all items under a category were lost. The Court emphasized the change in policy from “as per list” to consolidated amounts and the insurance company’s duty to advise the insured about the implications of under-insurance.
| Reason | Percentage |
|---|---|
| Fair interpretation of insurance policy | 30% |
| Protection of insured from unjust penalties | 30% |
| Change in policy from “as per list” to consolidated amounts | 20% |
| Insurance company’s duty to advise the insured | 20% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Court’s decision was influenced more by the legal principles of insurance than the specific facts of the case.
Issue: What is under-insurance and its effect?
Step 1: Under-insurance occurs when insured value is less than actual value.
Step 2: If all items under a category are lost, insured gets the insured value.
Step 3: If only some items are lost, averaging out principle applies.
Conclusion: Under-insurance affects payout based on the extent of loss.
The Court’s reasoning was as follows:
✓ The Court clarified that under-insurance occurs when the insured value is less than the actual value of the insured items. This is often done to reduce premium costs, but it is more harmful to the policyholder.
✓ The Court distinguished between cases where all insured goods are lost and cases where only some goods are lost. If all goods are lost, the insured is entitled to the insured amount, even if it is less than the actual value. The principle of averaging out does not apply in such cases.
✓ The Court held that the principle of averaging out applies when only some of the insured goods are lost. In such cases, the insured is paid an amount proportionate to the extent of insurance compared to the actual value of the goods.
✓ The Court emphasized that the insurance company should have advised the insured about the implications of under-insurance, especially after changing from “as per list” policies to policies for consolidated amounts. The insurance company cannot accept the premium without asking for details and later deny liability on the ground that such details were not given.
The Court quoted from the judgment:
“In a country like India this is normally done to pay a lesser premium. This is, in fact, harmful to the policy holder and not to the Insurance Company because even if the entire insured property is lost, the policy holder will only get the maximum sum for which the property has been insured and not a paisa more than the sum insured.”
“The Insurance Company can however apply the principle of averaging out when all the goods are not destroyed.”
“The insurance company must at the time of accepting the premium advise the policy holder properly. The insurance company cannot accept the premium without asking for any details and later deny its liability on the ground that such details were not given.”
There was no minority opinion.
Key Takeaways
- If all insured items under a specific category are stolen, the insured is entitled to the full insured value, regardless of under-insurance.
- The principle of averaging out applies only when some, but not all, items under a category are lost.
- Insurance companies have a duty to properly advise policyholders about the implications of under-insurance, especially when policies change from itemized lists to consolidated amounts.
- Policyholders should ensure that the insured value of their belongings accurately reflects their actual worth to avoid financial losses during claims.
Directions
The Court directed the Insurance Company to pay the following:
✓ ₹1,00,500 for jewellery and valuables.
✓ Payment for clothing after applying the principle of under-insurance.
✓ ₹66,000 for electrical/mechanical appliances.
✓ ₹28,000 for miscellaneous items including watches.
✓ ₹7,000 for repair of locks, doors, latches, safe etc.
✓ ₹25,000 towards compensation and litigation expenses.
✓ Interest at 12% per annum from 01.01.2009 till payment, after adjusting amounts already paid.
Development of Law
The ratio decidendi of this case is that the principle of averaging out does not apply if all the items under a specific head are lost, but it applies if only some of the items are lost. This judgment clarifies the application of under-insurance clauses in householder insurance policies and emphasizes the duty of insurance companies to properly advise policyholders.
Conclusion
The Supreme Court’s judgment in I.C. Sharma vs. The Oriental Insurance Co. Ltd. clarifies the concept of under-insurance in householder insurance policies. The Court held that if all insured items under a specific category are lost, the insured is entitled to the full insured value without the application of the principle of averaging out. The judgment also emphasizes the duty of insurance companies to properly advise policyholders about the implications of under-insurance, especially when policies change from itemized lists to consolidated amounts. This decision provides clarity on how under-insurance affects claim payouts and protects the rights of policyholders.