Effect Of Under-Insurance

Source: The Hitavada      Date: 12 Feb 2018 10:59:04












The only legal issue which arose for consideration in this case was “What is under-insurance and the effect thereof? Under–insurance basically means that the insured has taken out an insurance policy in which he has valued the insured items for a sum which is less than the actual value of the insured item.

DEALING with the effect of under-insurance in the judgement of the case – I.C. Sharma v. The Oriental Insurance Company Ltd., delivered on January 10, 2018, Justice Madan B. Lokur and Justice Deepak Gupta, at the Supreme Court, have held that the claim could not be rejected only on the ground that the claimant failed to produce bills of invoices towards the amount claimed.

The appeal, in this case, filed by the complainant-consumer was directed against the order passed on September 29, 2014, by the National Consumer Disputes Redressal Commission, which had disposed of the revision petition filed by the parties and also against the order of February 22, 2016 passed while disposing off the review petition of the appellant. The only legal issue which arose for consideration in this case was “What is under-insurance and the effect thereof? Under–insurance basically means that the insured has taken out an insurance policy in which he has valued the insured items for a sum which is less than the actual value of the insured item.

In a country like India this is normally done to pay a lesser premium. This is, in fact, harmful to the policy holder and not to the Insurance Company because even if the entire insured property is lost, the policy holder will only get the maximum sum for which the property has been insured and not a paisa more than the sum for which it was insured. If all the insured goods are lost, then there is no problem, the insured is entitled to the amount for which the goods were insured even if that be less than the actual value of the goods. However, the Insurance Company can apply the principle of averaging out when all the goods are not destroyed.

What this means is that if the value of the goods is more than the sum for which those are insured then it is presumed that the policy holder has not taken out insurance policy for the un-insured value of the goods. The claim is allowed by applying the principle of averaging out, that is, the insured is paid an amount proportionate to the extent of insurance as compared to the actual value of the goods insured.

Therefore, when a group of items is insured under one heading and only some of the items and not all items are lost/stolen then the principle of under-insurance will apply. However, if all or most of the items of value covered under the policy are stolen, then the insurance company is bound to pay the value of the goods insured. On applying this principle to the facts of this case:

(I) Jewellery and valuables -The entire jewellery and valuables were insured for Rs. 1,00,500, but the claim was that value of the jewellery stolen was Rs. 1,84,150. In this case the entire jewellery was stolen. Therefore, the averaging out clause will not apply and the claimant is entitled to a sum of Rs.1,00,500 under this head.
(ii) Silver cutlery sets – The case of the claimant was that these were insured under the head of ‘kitchenware/crockery/cutlery’ items. According to him, the value of these sets is Rs. 31,000.

Obviously kitchenware/crockery/cutlery will include many other items lying in the kitchen and in the dining room. Silver cutlery sets would normally fall under the head ‘jewellery and valuables ‘and since the claimant has been awarded the maximum amount payable under that head, now he cannot divert the claim for silver cutlery to the head ‘kitchenware/crockery/cutlery’.

The court took judicial notice of the fact that in any middle class household kitchenware/crockery/cutlery would vale more than Rs. 18,000. It is obvious that silver cutlery valuing more Rs. 31,000 could not be insured under the head ‘kitchenware/crockery/cutlery, which was valued only for Rs. 18,000. Therefore, the National Commission was right in holding that there was no coverage for this item.

(iii) Clothing – The appellant claims that he has suffered a loss of Rs. 87,000, as against the coverage of Rs. 55,000. However, on perusing the statement of the appellant himself it is found that he had shown Rs. 87,000 to be the value of only six items of clothing. There must have been many other items of clothing in the house and when all the clothing has been insured under one heading, it will include clothing items of all types, both expensive and in-expensive. Admittedly, all items of clothing were not stolen and, therefore, in this case the principle of under – insurance will have to apply and the National Commission was right in directing that the payment be made after applying principle of under-insurance.

(iv) Electrical/Mechanical appliances – The coverage under this head was Rs. 1,82,500/- and the claimant claimed only Rs. 66,000/- and he gave the details of the items. This claim was rejected only on the ground that he had not produced invoices of the same. The case of the appellant was that those items were gifted by his son. The items such as CD changer, video camera, DVD player, Camera etc. could be found in any middle class household. It is not the case of the Insurance Company that these items were not stolen. The claim should not have been rejected only on the ground that invoices were not produced.

The affidavit of the appellant clearly indicates both the nature of the items lost and the value thereof. This is supported by corroborative evidence of the list of items given to the police. Once the insurance company itself changed its policy from ‘as per list policies’ to ‘policies for consolidated amounts’, then an insured is not expected to give the item-wise details along with the valuation. It can be also added that if the insurance company desires that item-wise valuation should be given for items over and above a certain value then it is the duty of the insurance company to advise the insured at the time of issuing the first policy of insurance at the time of each renewal.

The insurance company must at the time of accepting the premium advice the policy holder properly. The insurance company cannot accept the premium without asking for any details and later deny its liability on the ground that such details were not given.Therefore, the Court accepted the claim of the claimant. He is entitled to Rs. 66,000/-under this head.

Miscellaneous items - On the same reasoning as under:
(v) The Court accepted the claim of the appellant of Rs. 20,000/- for loss of 4 watches and, therefore, held him entitled to Rs. 28,000/- under this head.
(vi)Repair of locks, doors, latches, safe etc.- The Claimant had been already awarded Rs. 7,000 for this purpose.
The court, in addition to this, also awarded to the claimant Rs. 25,000 towards compensation and litigation expenses etc. On these amounts, the appellant has been held entitled to interest at 12 pc per annum from January 1, 2009 till payment.

The Insurance Company has been permitted to adjust/deduct the amount already paid/deposited by it. The Supreme Court disposed of the appeal in these terms. The appellant appeared in person.