The word ‘reinstatement’ in the insurance context should be used judiciously, as it is open to varied interpretation when viewed as a policy option. We find an interesting observation in the policy’s preamble. The preamble of the Standard Fire and Special Peril policy ‘states that
“In Consideration of the Insured named in the Schedule hereto having paid to the The Insurance Company Limited ………) that if, after payment of the premium, the Property insured described in the said Schedule or any part of such Property be destroyed or damaged by any of the perils specified hereunder during the period of insurance named in the said schedule or………………… the Company shall pay to the Insured the value of the property at the time of the happening of its destruction or the amount of such damage or at its option reinstate or replace such property or any part thereof’.
The word ‘Reinstate’ used here has a specific meaning, as explained in the concluding part of this article.
There are instances when the insured insists on a cash settlement for claims that are highly unreasonable for several reasons. Fire insurers don’t prefer settling a claim on a ‘Reinstatement Basis’ for building or machinery damages. As we know, the insured cannot insist on the insurer for an indemnity/ settlement of a claim based on reinstatement rather than a cash settlement. The above insertion also doesn’t make the policy a contract of reinstatement until the insurer elects to exercise its option to reinstate; the policy remains a contract to pay money as an indemnity.
The Standard Fire policy doesn’t stipulate a time limit for exercising the reinstatement option, but it must be done in a reasonable time. It is interesting to note the effect of the election to reinstate. Once elected, the policy becomes a contract to reinstate, and it ceases to be a contract for a cash payment. Once committed, the insurer cannot back out. If the insurer fails, it becomes liable to the insured in damages. Restoring a property to its pre-fire condition is a daunting task. Inefficient workmanship can land them in trouble and invite large compensation claims. As such, most fire insurers show apathy to elect to reinstate
We will discuss a case that highlights some issues related to Reinstatement.
Factual Background – M/s Oswal Plastic Industries took a Standard Fire and Special Policy on a ‘Reinstatement Value Basis effective from 02.07.2009 from N.A.I.C.O.Ltd. At the outset, the sum insured was Rs. 2.5 Cr, which was subsequently raised to Rs 4.5 Cr. On 17.10.2009, a fierce fire broke out on the factory premises, damaging material, stock, and machinery, valued by the insured at Rs. 76,64,000/. The surveyor appointed assessed the loss, on a reinstatement value basis at Rs. 29,17,500/and on a depreciated or indemnity value at Rs. 12,60,000/
The insurance company repudiated the claim despite a surveyor’s report certifying the loss. M/S Oswal Plastic Industries, the insured and the original complainant in this case, filed a complaint before the State Consumer Disputes Redressal Commission, Punjab, claiming Rs. 76,64,000/- plus interest. The complainant, M/S Oswal Plastic Industries, also maintained they had purchased the machinery to replace the damaged machinery at the cost of Rs. 1,34,07,836/ which
The State Commission, in its order dated 10.11.2014, agreed with the surveyor’s report based on the reinstatement value, and awarded a sum of Rs. 29,17,500/together with 9% interest from the date of the repudiation letter dated 28.10.2010. The State Commission also awarded Rs. 1 lakh in compensation and Rs. 11,000 as litigation expenses.
The State Commission didn’t consider Rs. 76,64,000/, as demanded by the complainant, but considered Rs. 29,17,500 – the amount arrived by the surveyor on a reinstatement value basis.
The distressed insurer, dissatisfied with the above judgment of the State Commission, appealed before the National Consumer Disputes Redressal Commission. The National Commission perused the impugned judgment (a judgment that is challenged) and the order. The National Commission allowed the insurer’s appeal. However, it amended the order passed by the State Commission, awarding 29,17,500/by observing that the complainant shall be entitled to the depreciated value, not the reinstatement value. The National Commission also turned down the award of Rs. 1 lakh in compensation.
The original complainant, M/S Oswal Plastic Industries, had reasons to be aggrieved by the above judgment of the National Commission, which awarded Rs. 12,60,000/only instead of Rs. 29,17,500. As the award was based on depreciated value rather than reinstatement value, the insured appealed to the highest Court of the land against the National Commission’s judgment.
Issues of Contention – The issue of contention was the proper interpretation of Condition No. 9 of the Standard Fire and Special Peril Policy. The bone of contention was whether the Insured is entitled to payment on a reinstatement value basis or on a depreciated basis.
In addition, was Condition No. 9 correctly interpreted by the Court?
What is Condition No. 9 of the SFSP Policy …?
Let us examine the policy wordings:-
“If the Company at its option, reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage, or join with any other Company or Insurer(s) in so doing, the Company shall not be bound to reinstate exactly or completely but only as circumstances permit and in reasonably sufficient manner, and in no case shall the Company be bound to expend more in Reinstatement than it would have cost to reinstate such property as it was at the time of the occurrence of such loss or damage nor more than the sum insured by the Company thereon. If the Company so elect to reinstate or replace any property the insured shall at his own expense furnish the Company with such plans, specifications, measurements, quantities and such other particulars as the Company may require, and no acts done, or caused to be done, by the Company with a view to Reinstatement or replacement shall be deemed an election by the Company to reinstate or replace.
If in any case the Company shall be unable to reinstate or repair the property hereby insured, because of any municipal or other regulations in force affecting the alignment of streets or the construction of buildings or otherwise, the Company shall, in every such case, only be liable to pay such sum as would be requisite to reinstate or repair such property if the same could lawfully be reinstated to its former condition”.
Point 1 – It is the Insurance Company that chooses, as per this condition option, reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage.
Therefore, there is clarity about who can choose Reinstatement.
Point -2 in no case shall the Company be bound to expend more in Reinstatement than it would have cost to reinstate such property as it was at the time of the occurrence of such loss or damage, nor more than the sum insured by the Company thereon.
Therefore, there is clarity about the manner in which the loss is to be made good.
Point -3: No acts done, or caused to be done, by the Company with a view to Reinstatement or replacement shall be deemed an election by the Company to reinstate or replace.
It is clear that the Company doesn’t bind itself vis–à–vis the election to reinstate or replace by any of its actions done or caused to be done.
Point -4 –‘If in any case the Company shall be unable to reinstate or repair the property ……. Company shall, in every such case, only be liable to pay such sum as would be requisite to reinstate or repair such property if the same could lawfully be reinstated to its former condition.
It is also very clear that, if the insurance company fails to reinstate or repair, it is liable to pay the amount that would be lawfully required to reinstate the property to its former condition.
Points raised by the original complainant, M/S Oswal Plastic Industries
The complaint contended that the judgment and order passed by the NCDRC, awarding the depreciated value rather than the reinstatement value, were contrary to Condition 9 of the policy, which guarantees payment on the reinstatement value basis. It strongly argued for payment based on the reinstatement value of Rs. 29,17,500/-
The complainant maintained that the machinery was purchased to replace the damaged machinery for Rs. 1,34,07,836/, demonstrating their genuine intent to reinstate.
The complainant referred to the case of Canara Bank Vs. United India Insurance Company Limited and Ors.; 2020 (3) SCC 455, which held that the coverage provisions should be interpreted broadly and that, in case of any ambiguity, the insured should benefit from it.
Points raised by the Insurance Company
It strongly argued that the National Commission ( NCDRC) was right in its observation that the goods insured were to be replaced on an “as is basis”, i.e., if the machinery is old machinery, it is to be replaced by old machinery – thus imposing depreciation while assessing the loss.
It contended that the actual Reinstatement was not carried out by either the insured or the insurer – a payment on a reinstatement basis will necessitate determining the value of the old machinery on a replacement basis by applying depreciation from its current value.
Therefore, it pleaded that the National Commission was right in its observation that the assessment should be restricted to Rs. 12,60,000/ on the depreciated value basis.
The observation of the Supreme Court
Based on the threadbare examination clause, the Court concluded that the insurance company had the option to reinstate or replace property damaged or destroyed, rather than pay the amount of loss or damage. In doing so, it will ensure that a reasonably sufficient manner is adopted so that the property damaged is restored to its pre-fire condition within the bounds of the sum insured.
If the insurer is unable to repair the property insured because of any municipal or other regulations in force or otherwise, the insurer will be liable to pay a requisite sum to reinstate or repair such property if the same could lawfully be reinstated to its former condition.
Even though the complainant claimed Rs. 76,64,000 as the value of the new machinery, both the State Commission and the NCDRC held that this was untenable. The Supreme Court agreed with the above contention that the complainant shall not be entitled to the said amount. However, the Court averred that in cases where a company is unable to reinstate or repair the insured property, the insurer shall be liable to pay the requisite sum to reinstate or repair such property to its former condition. As such, the insurer will have to pay Rs. 29,17,500, arrived at on a reinstatement value basis with interest @ 7% from the date of the State Commission’s order, i.e., 10.11.2014, till the actual payment is realised. Thus, the appeal of the insured was allowed, and the National Commission’s award was set aside, with the State Commission’s judgment restored with some changes.
Author’s Insight
The above case didn’t touch upon ‘The Reinsurance Memorandum or ‘ Reinstatement Value Clause that the policy, it seems, was subjected to. The word ‘ reinstatement’ used in the preamble of the policy and in Condition. 9 implies physical action, meaning thereby that the insurer undertakes to restore the damaged property to its former condition or pre-fire condition physically. Nothing of that sort happened in the case mentioned above . The Reinstatement Value clause is one way to mitigate loss by moderating the indemnity clause. It is a monetary action, not a physical one.
In the next issue, I will discuss the effect of this clause.
To be Continued
Authored by:
Dr Abhijit K. Chattoraj, Chartered Insurer
