M/s Oswal Plastic Industries vs Manager, Legal Deptt. N.A.I.C.O. Ltd.
Background
Oswal Plastic Industries had insured its factory under a Standard Fire and Special Perils Policy from the National Insurance company, on what it said was a "reinstatement value" basis, with the sum insured later raised to Rs. 4.50 crore. On 17 October 2009 a fire broke out in the factory, destroying stock and machinery; the factory claimed a loss of about Rs. 76.64 lakh. The insurer's own surveyor assessed the loss at Rs. 29,17,500 on a reinstatement basis and Rs. 12,60,000 on a depreciated basis, yet the insurer repudiated the claim entirely. The Punjab State Consumer Commission awarded the reinstatement figure of Rs. 29,17,500 with interest, but the National Commission (NCDRC) cut this to the depreciated figure of Rs. 12,60,000, reasoning that old machinery should only be replaced "as is". The factory appealed to the Supreme Court.
Decision Breakdown
The Court examined Clause 9 of Section 2 of the policy, which has two parts: first, the insurer has the option to itself reinstate or replace the damaged property instead of paying money; second, where the insurer is unable to reinstate or repair the property ("because of any municipal or other regulations ... or otherwise"), it must pay the sum that would be required to reinstate or repair the property to its former condition. Since the insurer never exercised the option to reinstate, the case fell within the second part, and the surveyor's report was the relevant evidence of the sum needed to reinstate. The Court therefore held that the insured was entitled to the reinstatement value (Rs. 29,17,500), not the depreciated value, and that the NCDRC had misread Clause 9. It agreed, however, that the factory could not claim the full Rs. 76.64 lakh cost of brand-new machinery. The NCDRC's order was set aside and the State Commission's award restored, with 7% interest from 10 November 2014 until payment.
Lesson Learnt
Read the reinstatement clause of a fire policy carefully: if the insurer does not itself reinstate the damaged property, it must pay what it would cost to restore it to its former condition, not merely the depreciated "book" value. Insurers cannot use the depreciation route to pay less than the surveyor's own reinstatement assessment.