The contract of insurance, unlike other civil contracts, is the contract of Indemnity, whereby in consideration of the premium, the insurer expressly undertakes and promises to pay or make good the loss or damage. The amount recoverable is measured by the extent of the assureds’ pecuniary loss up to the specified sum insured.
Indemnity means that the assured is adequately indemnified either by payment in cash or reinstatement against loss of property and so is restored to his original position which he occupied at the time of loss by the purchase of an equivalent or by reinstatement of the property destroyed. The amount of the indemnity must be sufficient for the purpose. Any shortfall of reimbursement either by amount or by inferior replacement of subject matter insured will be violation of the fundamental principle of the contract of insurance.
The principle of indemnity also stipulates that the assured is not to derive any benefit of betterment due to such repair or replacement and as such should make an allowance of benefit derived to the insurer. The benefit so derived is measured by the enhancement or increase in value of the subject matter being the difference between the value just before the loss and after the repair or replacement.
In order to defeat the purpose of the contract of indemnity, the surveyors and insurers have come out with a fanciful idea of depreciation which they deduct virtually from each and every claim on the pretext that the assured has derived benefit of betterment due to repair or replacement and deprive the policy holders of their rightful indemnity under the policy of insurance.
The surveyor/s and the insurer while deducting any amount of so called depreciation will have to show as to how the claimant is benefited after the repair or replacement in enhancement of the value of the subject matter. Simple presumption, without any evidence is not sufficient to create a benefit for betterment.
It is commonly known that:
1. A repaired vehicle even with new parts fetches less value than an accident free vehicle. The replacement of any new part/s after an accident, do not enhance the value of such vehicle.
2. A repaired wall or door in a building does not enhance the value of building, even with new bricks and fiberglass doors.
3. A repaired electrical apparatus or Television similarly will not fetch more value than what it could have before the loss.
4. A repaired portion of machinery or equipment in a factory does neither results in increase in value nor better efficiency in producing more units of product. These examples could be countless in policies of insurance.
From the above it can be concluded that actually the repaired article is less efficient and less valuable and therefore the assured is neither benefited by its betterment nor is at advantage in its enhancement of value.
REINSTATATEMENT OR REPLACEMENT AS NEW POLICIES: The insurer promises to indemnify the insured new for old in case of loss or damage to the insured subject matter to the extent of specified sum insured specially, in House hold, Buildings and Machinery policies. But as they say the old habits die very hard, they insert a clause in certain sections of the policies for deduction of depreciation by certain percentage per year aggregating to 50%. Even without a clause, the deduction is justified by the insurer as depreciation for the use of subject matter insured and technological advancement as benefit of betterment and deprive the Policy holder of rightful indemnity.
The Factual Example of adjustment of claim under Householders policy with reinstatement value clause by Bajaj Allianz Gen. Ins. Co. Ltd.
The Policy: House Holders Reinstatement Policy – Insured item T.V 42” sum Insured 60,000 insured since last 8 years- Premium rate @1%. Claim – Total Loss.
Insurers’/surveyors’ adjustment of claim payable:
Subject: Re: claim under House holders’ policy OG-17-1901-4091-00000235
Dear Sir, Please find the loss assessment :- As described earlier service engineer informed that all damaged parts of television had got damaged and not available in the market right now and the television unit needs to be replaced with new one. Hence we are recommending settlement of the loss on constructive total loss basis. Our inquiries revealed that the above mentioned television is old model and the same model is not available in the market right now i.e discontinued model. Now a days the technological upgraded Full HD LED television are available in market for Rs.39,990/. For arriving at present replacement value of similar type of television; we have deducted the technology up-gradation @50% on upgraded model. Hence, the present replacement value of similar type of television works out to Rs.19,995/- and the same is taken for assessment basis.
The above television is adequately insured at this present replacement value. The above television is about eight year old; therefore depreciated value of television with maximum depreciation @50% works out to Rs.9,997/-.We have estimated salvage value for television of Rs.250/-.Therefore, amount of loss after deducting salvage value works out to Rs.9,747/-. After deducting excess of Rs.2,500/-(5%of the loss amount minimum to Rs.2,500/-) the net adjusted loss works out to Rs.7,247/-.
With this analogy, if Taj Mahal was destroyed or damaged due to insured perils and with application of deduction for depreciation, the claim payable will be NIL.
Surveyors’ Report of claim adjustment will be as follows:
Dear Sir, Please find the loss assessment :- Taj Mahal was build by Shah Jehan in the year 1643 but was completed in 1653. The monument is as old as 364 years. As per the UNESCO World Heritage estimates, the present replacement cost will be Rs. 53.8 Billions.
Policy No. 0000000? Sum Insured Rs. 54 Billions. adequately covered. Similar monument could be built at Rs. 50 Billion. Assessment: Rs. 50 Billion
1. Considering the importance of monument 1% depreciation per annum of assessed amount for use and age, 364 yrs …… 182 Billions
2. Technological up gradation in Marble, Cement etc. 10% ……. 5 Billions
3. Salvage of marble jalis, motifs, decorations, paintings 10% —- 5 Billions
4. Policy Excess 5% ………………….. …………. 2.5 Billions
5. TOTAL Depreciation 194.5 Billions
Claim Payable NIL (Negative Indemnity -144.5 Billions
The insurer writes to the assured: As per direction of the Insurance Regularity Authority, we have accepted the report of recommendations of the Surveyor. The claim payable is nil. The claim file is closed.
To conclude, any deduction of depreciation whether express or presumed violates the fundamental principle of Indemnity and is illegal, depreciating the value of subject matter insured either as at sum insured under unvalued policies or valued at in valued policies, after the loss, is found no where either in insurance law or policies of insurance. The contract of insurance is indemnity and nothing less than indemnity.
