Referring to the settled principle of the Apex Court in Sikka Papers Limited v. National Insurance Company Ltd. [(2009) 7 SCC 777], the Delhi High Court has that under-insurance occurs when the amount of insurance is less than the full value of the property insured, leading to partial loss claims being scaled down by average. The pro-rata formula for deducting under-insurance was upheld as the correct method of computation.
Since the value of the insured unit admittedly stood at Rs. 5400 crores against a sum insured of Rs. 2347,32 crores, the premium on 56.53% of the value remained unpaid, making averaging out of the assessed loss imperative. The arbitral tribunal’s refusal to apply the averaging principle on the ground that the claim was for repair rather than replacement and that the cover was for the entire unit was held to be contrary to both the statutory framework and the express terms of the policy, rendering the award patently illegal.
A Single Judge Bench of Justice Avneesh Jhingan observed that noted that Clause 10 of the General Conditions of the Insurance Policy provides that where the value of the insured property at the time of fire or commencement of any destruction or damage is collectively of greater value than the sum insured, the insured shall be considered as being his own insurer for the difference and shall bear a rateable proportion of the loss accordingly.
The Court clarified that Section 64VB(1) of the Insurance Act, 1938 provides that no insurer shall assume any risk unless and until the premium payable is received by him or is guaranteed to be paid in the prescribed manner and within the prescribed time. The undisputed facts were that the value of the coal/lignite based electric generation unit in the Captive Power Plant was Rs. 5400 crores, whereas the sum insured was Rs. 2347.32 crores, and the surveyor assessed “under insurance” at 56.53%, which assessment was accepted by the tribunal.
The Court observed that the tribunal considered the initial repair offer of Rs. 4.02 crores made by BHEL and took note that on account of “under insurance” the deduction to be made was of Rs. 63.10 lakhs, but did not make the deduction on the ground that the final bill submitted by BHEL was higher and that the insurance cover was for the entire unit and not only for the GT. The Court held that the acceptance of the initial bill for repair by BHEL was an assessment of loss to be decided on evidence adduced and was not a relevant fact for not averaging out the “under insurance”, and that the tribunal travelled beyond Section 64VB of the Insurance Act and ignored Clause 10 of the General Conditions.
Since no premium was received for the difference between Rs. 5400 crores and Rs. 23,47.32 crores, the risk in respect of the difference amount was not insured as stipulated in Clause 10, and consequently NACL was its own insurer for the difference amount and had to bear the rateable proportion of the loss. The Court further noted that the contention of NACL that “under insurance” was assessed on replacement value and not for the purpose of repair was ill-founded, since the value of the asset is to be determined at the time of obtaining insurance cover and the loss is to be assessed on occurrence of the event of destruction or damage.
Briefly, the dispute arose out of a Standard Fire and Special Perils Insurance Policy issued by HDFC Ergo General Insurance Company Limited to National Aluminium Company Limited (NACL) covering the Electric Generation Stations-coal/lignite based at the Captive Power Plant, Angul, Odisha, for the period June 01, 2017 to May 31, 2018, with a sum insured of Rs. 2347.32 crores against a premium of Rs.1.51 crores. On July 11, 2017, a fire broke out in the Generator Transformer for Unit-08 (GT-8) of the Captive Power Plant, following which a surveyor was appointed by the insurer to assess the loss and the damaged GT-8 was sent to Bharat Heavy Electricals Limited (BHEL), Jhansi for assessment.
BHEL by its final offer dated Aug 17, 2018 estimated the cost of repair at Rs. 4.02 crores exclusive of GST and transportation charges, with transportation charges separately estimated at Rs. 26.15 lakhs. NACL initially submitted a claim of Rs. 6.65 crores, which was subsequently revised to Rs. 6.95 crores, and the final claim bill was submitted on March 05, 2019 along with supporting invoices.
The surveyor submitted a provisional assessment report assessing the loss at Rs. 23.52 lakhs and recording that it was a case of “under insurance”, which NACL rejected. The surveyor then submitted the final report recording “under insurance” of 56.53%, upon which the insurer rejected the claim relating to the transformer, and informed NACL that a cheque of Rs. 23.51 lakhs were being sent towards settlement. NACL invoked arbitration under clause 13 of the General Conditions of the Insurance Policy, and the arbitral tribunal by its majority award held that deduction for “under insurance” was not justified on the grounds that the claim was allowed towards repair and not replacement and that the insurance cover was for the entire unit and not only for the GT, awarding a sum of Rs. 4.25 crores along with simple interest @ 7.5% per annum in case of failure to pay within four months, and Rs. 10 lakhs towards litigation costs.
The minority view held that in a case of “under insurance”, proportional deduction towards the “under insurance” is justified. Aggrieved by the majority award, HDFC Ergo filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996.
