Supreme Court Upholds Insurer’s Depreciation Calculation in Fire Damage Claim: New India Assurance Co. Ltd. vs. Tata Steel Ltd. (2024)

Introduction

Date of the Judgment: 30 April 2024

Citation: 2024 INSC 356

Judges: Surya Kant, J. and K.V. Viswanathan, J.

When a fire destroys a factory, how should the insurance company calculate the loss? The Supreme Court of India recently addressed this question in a case involving a major industrial fire. The core issue was whether the insurance company was correct in applying a 60% depreciation rate to the damaged machinery, or whether the insured was entitled to full replacement value. This judgment clarifies the application of reinstatement value clauses in insurance policies, especially when the insured fails to fully reinstate the damaged property.

Case Background

M/s Bhushan Steel and Strips Ltd. (now Tata Steel Ltd.) had an insurance policy with New India Assurance Company Limited (NIACL) covering their machinery and equipment. The policy was valid from 29 September 1998 to 28 September 1999. On 12 December 1998, a fire severely damaged their ‘20 Hi Cold Rolling Mill’, leading to a claim of ₹35.08 crores. The insured informed NIACL about the fire on the same day.

NIACL appointed surveyors who conducted inspections and released an initial payment of ₹4,92,80,905 on 24 March 1999. The insured then placed an order with M/s Flat Products for repairs, paying an advance of ₹3.75 crores. However, the insured later agreed to a net adjusted loss of ₹20.95 crores to expedite the process.

The insured filed a consumer complaint on 30 May 2000, before the National Consumer Disputes Redressal Commission (NCDRC) when NIACL did not release the remaining amount. NIACL stated that the insured installed a new 6 Hi Cold Rolling Mill, not the original 20 Hi Cold Rolling Mill, and that the claim should be settled on a depreciated value basis.

Timeline

Course of Proceedings

The NCDRC partly allowed the insured’s complaint, awarding ₹13,15,27,000 with 10% interest from two months after the survey report of 11 December 2001. The NCDRC disagreed with NIACL’s 60% depreciation, maintaining it at 32% as initially recommended by the surveyors. The NCDRC found that NIACL’s letter to the surveyors to revise the depreciation calculation was not a healthy practice.

NIACL appealed to the Supreme Court, arguing that the depreciation should be 60%. The insured also appealed, claiming the base figure for depreciation should be ₹28 crores and not ₹20.09 crores. The insured further argued for full reinstatement value based on a recent judgment, which was not raised in the original pleadings.

Legal Framework

The insurance policy included a standard fire policy clause stating that the company will pay the value of the property at the time of destruction, the amount of damage, or at its option, reinstate or replace the property.

Clause 6 of the Conditions required the insured to provide all necessary particulars, plans, specifications, books, vouchers, invoices, and other documents related to the claim. It also stated that no claim would be payable unless these terms were complied with.

Clause 9 of the Conditions stated that if the company chooses to reinstate or replace the property, it is not bound to do so exactly or completely, but only as circumstances permit, and not exceeding the sum insured.

The policy also included a “Reinstatement Value Clause,” which stated that in the event of damage, the amount payable would be the cost of replacing or reinstating the property with the same kind or type of property, but not superior or more extensive than the insured property when new.

The Reinstatement Value Clause had special provisions:

• The reinstatement work must be completed within 12 months, or any extension granted by the company.
• The company is not liable for any payment exceeding what would have been payable without the reinstatement clause, until the expenditure is incurred.
• The clause is ineffective if the insured fails to notify the company of their intention to reinstate within 6 months, or if they are unable or unwilling to reinstate.

Arguments

Arguments of NIACL (Insurance Company):

• The insurance policy included a Reinstatement Value Clause, which stipulated that the method of indemnity was to be the cost of replacing or reinstating the damaged property with the same type of property.

• The reinstatement was to be carried out within 12 months or an extended time period.

• Until the insured incurred expenses in replacing or reinstating the property, the insurance company was not liable to pay any amount exceeding what would have been payable without the reinstatement clause.

• If the insured was unable or unwilling to replace the damaged property, the reinstatement clause became ineffective.

• The insured did not take steps for reinstatement, violating the undertaking.

• There was no delay on the part of the insurance company. An on-account payment was released on 24 March 1999.

• The insured did not provide information for about 8 months and requested an extension for reinstatement, which was granted by NIACL.

• The insured claimed to have advanced ₹3.75 crores to M/s Flat Products, but the vendor neither repaired nor replaced the insured property.

• M/s Flat Products informed the insured that they had lost their expertise.

• The insured informed NIACL about installing a 6 Hi Cold Rolling Mill (instead of the 20 Hi Cold Rolling Mill) without providing specifications.

• The Reinstatement Value Clause was rendered inoperative due to the insured’s failure to reinstate.

• The NCDRC disregarded the affidavit filed by the insurance company clarifying the standard practice for calculating depreciation.

• The surveyors did not have all the necessary material when arriving at the depreciation rate of 32%.

• The claim was settled on a market value basis by applying the necessary percentage of depreciation.

• The surveyors, in their report dated 07 December 2002, computed the depreciation rate at 60% after considering the balance life of ten years.

• The insured has no proof regarding the actual age of the mill and when it was procured.

• The recommendation of depreciation at 32% was at a premature stage and was not supported by any cogent material.

• The insured admitted that the NCDRC rightly proceeded on a depreciation basis.

• There is no ambiguity, and hence, there is no room for the applicability of the doctrine of contra proferentem.

• Under Section 64 UM (2) of the Insurance Act, 1938, the NIACL was entitled to differ from the recommendation of the surveyor.

• The judgment in Oswal Plastic Industries v. Manager, Legal Deptt N.A.I.C.O. Ltd., [2023 SCC OnLine SC 43] does not apply because it was not a case with a Reinstatement Value Clause as a special condition.

• Regulation 9(3) of the IRDA (Protection of Policyholders’ Interests) Regulations, 2002 has no application since the joint surveyors report dated 07 December 2002 was the original surveyor’s report.

• The claim for the base figure as ₹28 crores is unjustified.

Arguments of the Insured/Complainant (Tata Steel Ltd.):

• The memorandum containing the Reinstatement Value Clause was not part of the policy document issued by NIACL.

• Clause 9 of the conditions in the policy has to be read in conjunction with the Reinstatement Value Clause.

• Since the Reinstatement Value Clause was extinguished, Clause 9 of the conditions became applicable.

• In terms of Clause 9, where reinstatement/repair is not possible, the surveyor’s assessment of reinstatement has to be complied with.

• Relied on the judgment in Oswal Plastic Industries (supra).

• The interpretation of Clause 9 was laid down only by the Oswal Plastic Industries (supra) judgment.

• The inability/failure to reinstate as contemplated in the last part of Clause 9 is the failure of the NIACL.

• The Insured accepted the lower figure of ₹20.95 Crores with the hope of an expedited settlement.

• Calculating on a reinstatement basis, the surveyors in their report of 11 December 2001 arrived at the figure of ₹19.55 crores without any depreciation.

• The amount further due is ₹11,80,87,699.

• Even if the market value basis is to be applied, depreciation has to be calculated on the sum insured of ₹80 crores.

• Relied on Dharmendra Goel vs. Oriental Insurance Co. Ltd. (2008) 8 SCC 279.

• If depreciation was not to be calculated on the sum insured, then the depreciation has to be calculated on the cost of the new locally sourced 20 Hi Cold Rolling Machine which would cost ₹25 crores plus taxes totaling ₹28 crores.

• The depreciation rate was 32% as mentioned by the surveyors in their report of 11 December 2001.

• NIACL has not adduced any reasons for deviating from the recommendation of the surveyors.

• The surveyor’s response of 07 December 2002 was “a reluctant response from an embarrassed surveyor”.

• The doctrine of contra proferentem applied, and the interpretation in favor of the Insured should have been adopted.

• There was a breach of Regulation 9(3) of the IRDA Regulations.

[TABLE] of Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Was the Reinstatement Value Clause part of the policy?
2. Was NIACL justified in computing loss on a depreciation basis and fixing depreciation at 60%?
3. Is the Insured justified in claiming reinstatement value by placing reliance on the judgment in Oswal Plastic Industries (supra)?
4. To what reliefs are the parties entitled?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court distinguished Oswal Plastic Industries v. Manager, Legal Deptt N.A.I.C.O. Ltd., [2023 SCC OnLine SC 43], stating that it was not applicable due to different facts and policy conditions.
• The Supreme Court distinguished Dharmendra Goel vs. Oriental Insurance Co. Ltd. (2008) 8 SCC 279, stating that it was not applicable as the insured had agreed to a lower settlement amount.
• The Supreme Court distinguished Sri Venkateswara Syndicate v. Oriental Insurance Co. Ltd 2009 (8) SCC 507, stating that it was not applicable to the facts of the present matter.
• The Supreme Court distinguished Sumit Kumar Saha v. Reliance General Insurance Company Ltd., (2019) 16 SCC 370, stating that it was not applicable as the insured had agreed to a lower settlement amount.

The Supreme Court held that the Reinstatement Value Clause was part of the policy, but it became ineffective because the insured did not reinstate the damaged property. The Court found that NIACL was justified in settling the claim on a depreciation basis. The court held that the depreciation at 60% was justified based on the surveyor’s assessment and industry practice. The Court also held that the insured was not justified in claiming reinstatement value based on the judgment in Oswal Plastic Industries (supra).

The Court stated that the base figure of ₹20.09 crores was correct and that the insured was bound by the letter of 16 June 1999, where they agreed to the net adjusted loss of ₹20.95 crores. The Court also noted that the insured did not provide the necessary documents to prove the actual value of the damaged equipment.

The Court rejected the argument that the depreciation should be calculated on the sum insured, stating that the judgments relied upon by the insured were not applicable.

The Court rejected the argument that there was a breach of Regulation 9(3) of the IRDA Regulations, stating that the second report of 11 December 2001 was based on negotiations held up to July 1999 and that the letter of 12 November 2002 was not a case of seeking clarification of an incomplete report.

The Court set aside the findings of the NCDRC and upheld NIACL’s settlement of the claim at ₹7.88 crores.

The Supreme Court observed, “It is very clear from this letter that the Insured accepted the net adjusted loss of Rs.20.95 Crores and a letter accepting the same dated 16.06.1999 was given to the surveyor.”

The Supreme Court observed, “The NIACL was justified in writing the letter of 12.11.2002 because after reviving their demand to reinstate the plant, the Insured failed to furnish the documents required and even admittedly the plant as allegedly reinstated was of 6 Hi Cold Rolling Plant and not 20 Hi Cold Rolling Plant.”

The Supreme Court observed, “In fact, the surveyors, after receiving the letter of 10.11.2002 should have reassessed the value on depreciated value basis which would be to value the loss as per the opening clause of the policy i.e. arrive at the value of the property at the time of happening of its destruction.”

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

• The insured’s failure to reinstate the damaged property, rendering the Reinstatement Value Clause ineffective.
• The insured’s acceptance of the net adjusted loss of ₹20.95 crores, as evidenced by their letter of 16 June 1999.
• The insured’s failure to provide necessary documents, such as invoices, to substantiate their claim.
• The surveyor’s assessment of the depreciation rate at 60%, which was supported by industry practice.
• The fact that theinsured installed a 6 Hi Cold Rolling Mill instead of the original 20 Hi Cold Rolling Mill, indicating a deviation from the reinstatement requirements.
• The inapplicability of the Oswal Plastic Industries (supra) judgment due to different facts and policy conditions.
• The fact that the insured did not raise the relevant arguments before the NCDRC or in their initial appeal.
• The fact that the insured had agreed to a lower settlement amount.
• The fact that NIACL was entitled to differ from the surveyor’s initial recommendation under Section 64 UM (2) of the Insurance Act, 1938.
• The fact that there was no breach of Regulation 9(3) of the IRDA Regulations.

Ratio Decidendi

The core legal principle established by the Supreme Court in this case is that when an insurance policy includes a Reinstatement Value Clause, the insured is entitled to the reinstatement value of the damaged property only if they actually reinstate the property within the stipulated time. If the insured fails to reinstate the property, the Reinstatement Value Clause becomes ineffective, and the insurer is justified in settling the claim on a depreciated value basis. The depreciation should be calculated based on the assessed value of the property at the time of the loss, considering factors such as age, condition, and remaining useful life. The insurer is entitled to differ from the initial recommendations of the surveyor, if there is sufficient justification.

Obiter Dicta

The Supreme Court’s judgment also included the following obiter dicta:

• The Court emphasized the importance of the insured providing all necessary documents to substantiate their claim.
• The Court highlighted that the insured cannot claim reinstatement value if they deviate from the requirement by installing a different type of equipment.
• The Court reiterated that the insurer is entitled to differ from the initial recommendation of the surveyor if there is sufficient justification.
• The Court clarified that the doctrine of contra proferentem does not apply when there is no ambiguity in the policy.
• The Court reiterated that the insured is bound by the letter of 16 June 1999, where they agreed to the net adjusted loss of ₹20.95 crores.

Flowchart of the Decision-Making Process

Conclusion

The Supreme Court’s judgment in New India Assurance Co. Ltd. vs. Tata Steel Ltd. (2024) provides valuable insights into the interpretation and application of Reinstatement Value Clauses in insurance policies. The judgment clarifies that the insured’s right to claim reinstatement value is contingent upon their actual reinstatement of the damaged property within the stipulated time. The judgment also underscores the importance of the insured providing necessary documentation to substantiate their claim, and that the insurer is entitled to differ from the surveyor’s initial recommendation if there is sufficient justification.

This case serves as a significant precedent for insurance disputes involving fire damage and reinstatement clauses. It emphasizes the need for insured parties to comply with the terms and conditions of their policies and for insurers to act fairly and reasonably in settling claims.

The judgment also highlights the importance of the insured not deviating from the reinstatement requirements and that the insured is bound by the letters they issue to the insurer.