Date of the Judgment: January 30, 2019
Citation: Civil Appeal No. 1299 of 2019 (Arising out of Special Leave Petition (Civil) No. 27695 of 2018)
Judges: Uday Umesh Lalit, J., R. Subhash Reddy, J.
Can an insurance company disregard the ‘sum insured’ agreed upon in a policy and instead assess loss based on depreciation? The Supreme Court addressed this question in a case involving a total loss of a hydraulic excavator. The court held that the sum insured should be the basis for calculating compensation in total loss cases, unless there is fraud, coercion, or misrepresentation. This judgment clarifies the obligations of insurance companies and protects the rights of the insured.
Case Background
On March 27, 2007, Sumit Kumar Saha (the appellant) purchased a Volvo Hydraulic Excavator for ₹51,74,000, including VAT. Immediately after the purchase, the excavator was insured with Reliance General Insurance Company Ltd. (the respondent) under a “Contractor, Plants & Machinery Insurance Policy.” The policy was renewed, and for the period from July 22, 2009, to July 21, 2010, the sum insured was ₹46,56,600 with a premium of ₹33,700. The policy specified the ‘year of make’ of the excavator as ‘2007’. The policy included provisions for calculating indemnity in case of damage or total loss.
The excavator was later moved to a different location, which was duly communicated to the respondent. On June 30, 2010, the excavator was severely damaged in a fire at the changed location. An FIR was lodged on July 1, 2010, and the respondent was immediately notified about the damage and requested to survey the loss.
The respondent appointed a surveyor on July 7, 2010. The surveyor, Cunningham Lindsey, assessed the loss at ₹25,24,273, considering it a case of constructive total loss. The surveyor calculated the depreciated value of the excavator at ₹34,42,500 after applying 32.5% depreciation, and after adjusting for under insurance and deductible, recommended a payment of ₹25,24,273. The appellant disagreed with this assessment and filed a case before the State Consumer Disputes Redressal Commission, West Bengal.
Timeline
| Date | Event |
|---|---|
| March 27, 2007 | Appellant purchased a Volvo Hydraulic Excavator for ₹51,74,000. |
| Shortly after March 27, 2007 | Excavator insured with Reliance General Insurance Co. Ltd. |
| July 22, 2009 to July 21, 2010 | Insurance policy renewed with sum insured at ₹46,56,600. |
| June 30, 2010 | Excavator severely damaged in a fire. |
| July 1, 2010 | FIR lodged; insurance company notified. |
| July 7, 2010 | Respondent appointed a surveyor to assess the loss. |
| April 13, 2011 | Respondent’s surveyor assessed loss at ₹25,24,273. |
| Later in 2011 | Appellant filed a case before the State Consumer Disputes Redressal Commission, West Bengal. |
| December 4, 2013 | State Commission ruled in favor of the appellant, awarding ₹41,90,940. |
| February 16, 2018 | National Commission partly allowed the appeal, awarding ₹34,17,500. |
| January 30, 2019 | Supreme Court set aside the National Commission’s decision and restored the State Commission’s order. |
Course of Proceedings
The appellant, dissatisfied with the surveyor’s assessment, filed a complaint before the State Consumer Disputes Redressal Commission, West Bengal. The appellant argued that the excavator was a total loss and he was entitled to the insured amount of ₹46,56,600. The State Commission allowed the complaint and directed the respondent to pay ₹41,90,940, along with interest and compensation. The State Commission reasoned that the depreciation should be applied only from the date of renewal of the insurance to the date of the accident, and that the salvage wreck was the property of the insurance company.
The respondent appealed to the National Consumer Disputes Redressal Commission, which partly allowed the appeal. The National Commission held that the insurance company was responsible to indemnify the loss on the basis of the replacement of the damaged machine in the same condition at which it was at the day of the accident. They calculated the depreciated value of the new machine at ₹34,42,500 and directed the respondent to pay ₹34,17,500 after adjusting for salvage value.
The appellant then appealed to the Supreme Court, challenging the National Commission’s decision.
Legal Framework
The insurance policy included the following key provisions:
- Sum Insured: The sum insured should be equal to the cost of replacement of the insured property by new property of the same kind and capacity, including freight, dues, customs duties, and erection costs.
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Basis of Indemnity:
- In cases where damage can be repaired, the company will pay expenses to restore the machine to its condition immediately prior to the accident, plus dismantling and re-erection costs.
- In cases of total destruction, the company will pay the actual value of the item immediately before the loss, calculated by deducting proper depreciation from the replacement value.
- If the sum insured is less than the amount required to be insured, the company will pay only in such proportion as the sum insured bears to the amount required to be insured.
The core issue revolves around the interpretation of these clauses, particularly how depreciation should be calculated and whether the ‘sum insured’ should be the basis for determining the compensation in case of a total loss.
Arguments
Appellant’s Arguments:
- The appellant argued that the excavator was a total loss, and he was entitled to the sum insured of ₹46,56,600, as agreed upon in the policy.
- The insurance company was aware that the excavator was a 2007 model, and the sum insured was arrived at after deducting appropriate depreciation.
- The appellant relied on the judgment in Dharmendra Goel v. Oriental Insurance Company Limited [(2008) 8 SCC 279], which held that an insurance company is bound by the value it accepts for the insured item.
Respondent’s Arguments:
- The respondent contended that despite the sum insured, the actual value of the excavator should be determined after appropriate depreciation, as indicated by its surveyor.
- The respondent relied on the decision in Sikka Papers Limited v. National Insurance Company Limited and others [(2009) 7 SCC 777] to argue that the actual value after depreciation should be considered.
- The respondent argued that the surveyor correctly assessed the loss based on the depreciated value of the excavator.
| Main Submission | Appellant’s Sub-Submissions | Respondent’s Sub-Submissions |
|---|---|---|
| Basis of Compensation |
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| Depreciation Calculation |
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| Reliance on Case Law |
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Issues Framed by the Supreme Court
The primary issue before the Supreme Court was:
- Whether the insurance company was justified in disregarding the “sum insured” agreed upon in the policy and instead assessing the loss based on the depreciated value of the excavator.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Brief Reasoning |
|---|---|---|
| Whether the insurance company was justified in disregarding the “sum insured” and assessing loss based on depreciation? | The Court held that the insurance company was not justified in disregarding the sum insured. | The Court reasoned that the sum insured represents the agreed value of the insured property and should be the basis for calculating compensation in total loss cases, unless there is fraud, coercion, or misrepresentation. The court emphasized that the depreciation must be calculated from the date of the policy, not the date of purchase. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | Legal Point | How it was used by the Court |
|---|---|---|---|
| Dharmendra Goel v. Oriental Insurance Company Limited [(2008) 8 SCC 279] | Supreme Court of India | Value of insured vehicle accepted by the insurance company | The Court relied on this case to support its view that the insurance company is bound by the value it accepts for the insured item at the time of policy renewal. |
| Sikka Papers Limited v. National Insurance Company Limited and others [(2009) 7 SCC 777] | Supreme Court of India | Under insurance and deduction for wear and tear | The Court distinguished this case, stating that it dealt with under insurance and was not relevant to the present matter where there was no under insurance. |
| Clause (b) of Provision -Basis of Indemnity | Insurance Policy | Calculation of actual value by deducting “proper depreciation” | The Court interpreted this clause to mean that depreciation should be calculated from the date of the policy, not the date of purchase. |
Judgment
The Supreme Court analyzed the submissions made by both parties and the authorities cited.
| Submission | How it was treated by the Court |
|---|---|
| Appellant was entitled to the sum insured of ₹46,56,600. | The Court agreed with the appellant, holding that the sum insured should be the basis for compensation in a total loss case. |
| The insurance company was bound by the value it accepted for the insured item. | The Court affirmed this, citing Dharmendra Goel v. Oriental Insurance Company Limited. |
| The respondent’s surveyor’s assessment of loss based on depreciation. | The Court rejected the respondent’s argument, stating that the surveyor could not disregard the sum insured and should have calculated depreciation from the date of policy, not the date of purchase. |
| The respondent’s reliance on Sikka Papers Limited v. National Insurance Company Limited and others. | The Court distinguished this case, stating that it dealt with under insurance and was not relevant to the present matter. |
The Court held that the insurance company was not justified in disregarding the sum insured. The Court emphasized that the sum insured represents the agreed value of the insured property and should be the basis for calculating compensation in total loss cases, unless there is fraud, coercion, or misrepresentation. The Court found that the surveyor of the insurance company was wrong in calculating depreciation from the date of purchase, instead of the date of policy.
The Court observed that the relevant stipulation in the policy, namely clause (b) of Provision – Basis of Indemnity, speaks of calculation of actual value by deducting “proper depreciation”. The surveyor of the Insurance Company had worked the figure of depreciation by starting with the figure of Rs.51 lakhs as the cost of a new Excavator and then deducting 32.5% by way of depreciation assuming the life of Excavator to be 10 years. The Court noted that the surveyor’s calculation was incorrect as it considered the depreciation from the date of purchase of the excavator, instead of the date of the policy. The Court held that the depreciation should have been calculated from the date of policy to assess the real value of the insured property as on the date when the fire actually took place.
The Court stated:
“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, is it 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 loss had to be assessed in the present case, keeping said figure in mind.”
“Having considered the entire matter, in our view, 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.”
The Court concluded that the assessment made by the State Commission was correct, and the assessment made by the National Commission was incorrect. The Court set aside the National Commission’s decision and restored the State Commission’s order.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the principle that parties to a contract are bound by the terms they agree upon, particularly the ‘sum insured’ in an insurance policy. The court emphasized the importance of fairness and reasonableness in insurance contracts, and that unless there is fraud, coercion, or misrepresentation, the insurance company cannot unilaterally reduce the compensation based on its own depreciation calculations. The Court also relied on the principle that depreciation should be calculated from the date of policy and not the date of purchase.
| Sentiment | Percentage |
|---|---|
| Emphasis on ‘Sum Insured’ | 40% |
| Contractual Obligations | 30% |
| Fairness and Reasonableness | 20% |
| Correct Depreciation Calculation | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Court’s decision was heavily influenced by the legal principle of upholding the terms of a contract, specifically the sum insured agreed upon by the parties. While factual aspects of the case, such as the fire incident and the surveyor’s report, were considered, the legal interpretation of the insurance policy and the application of relevant precedents played a more significant role in the Court’s reasoning.
Logical Reasoning
Key Takeaways
- For Policyholders: The ‘sum insured’ in an insurance policy is a crucial factor in determining compensation for total loss claims. Insurance companies cannot unilaterally reduce the compensation based on depreciation calculated from the date of purchase of the insured item.
- For Insurance Companies: Insurance companies must honor the ‘sum insured’ agreed upon in the policy unless there is fraud, coercion, or misrepresentation. Depreciation should be calculated from the date of policy, not the date of purchase.
- General Principle: Parties to a contract are bound by the terms they agree upon.
Directions
The Supreme Court set aside the decision of the National Commission and restored the judgment and order passed by the State Commission, directing the insurance company to pay the appellant ₹41,90,940.
Development of Law
The ratio decidendi of this case is that in cases of total loss, the ‘sum insured’ in an insurance policy is the basis for calculating compensation, unless there is fraud, coercion, or misrepresentation. The court also clarified that depreciation should be calculated from the date of policy, not the date of purchase. This judgment reinforces the principle of contractual obligation and ensures that insurance companies cannot unilaterally reduce the compensation by disregarding the sum insured.
Conclusion
The Supreme Court’s judgment in Sumit Kumar Saha vs. Reliance General Insurance Co. Ltd. clarifies the importance of the ‘sum insured’ in insurance policies for total loss claims. The court emphasized that insurance companies are bound by the terms of the contract, and unless there is evidence of fraud, coercion, or misrepresentation, they cannot unilaterally reduce the compensation by disregarding the sum insured. This decision protects the rights of policyholders and promotes fairness in insurance contracts.