AVM J. Rajendra, Avsm Vsm (Retd.), Member

1. The present Consumer Complaint has been filed under Section 21 of the Consumer Protection Act, 1986 (for short "the Act") against the Opposite Parties seeking to direct the OPs:

                          A. Direct the opposite party to pay Rs. 1,21,73,017/- being the balance amount of the actual loss after part payment made by the Ops B Ops be directed to pay the loss and other consequential losses as stated above along with 18% per annum interest from the date of loss till its realization, C That the Ops be directed to pay Rs. 25 Lacs as compensation towards harassment and mental caused to the complainant D The Ops be directed to pay the aforementioned sum along with cost of Rs. 3 Lacs.

                          E And or any other relief to the complainant and against the O.P. as this Commission deems fit and proper in the facts and circumstances of the case in the interest of Justice."

2. Brief facts of the case, as per the Complainant, are that the Complainant is a partnership firm engaged in manufacture of transformers of various capacities since the year 2009 and registered with requisite statutory authorities. The firm has obtained an insurance policy from the opposite parties (OPs) under Standard Fire and Special Perils Policy No.35030811160100000016 valid from 17.05.2016 to 16.05.2017. During the validity of the said policy, a major fire incident occurred on 09.08.2016 at the Complainant’s factory premises, resulting in extensive damage to the building, plant & machinery, finished and semi-finished goods, raw material and stock in process. The fire incident was promptly reported to Fire Brigade, Police and Insurer. The OP appointed a licensed Surveyor and the complainant submitted all requisite documents, including audited books of accounts, stock statements and financial records, fully substantiating the genuineness and magnitude of the loss. However, despite the loss being admittedly covered under the policy and duly supported by records, OPs adopted an arbitrary, unrealistic and unjustified methodology in assessment, delayed the settlement of the claim and released only a partial payment of Rs. 1,84,70,955 under protest, while illegally withholding the balance legitimate claim of Rs. 1,21,73,017. The complainant contended that the acts of OPs clearly constitute deficiency in service and unfair trade practice, causing severe financial hardship and business loss to the complainant, thereby entitling the complainant to the balance amount withheld by the OP along with interest, compensation, costs and other consequential reliefs as prayed.

3. Upon notice, the complaint was resisted by the OPs by filing their written version, wherein, the OPs contended that the present complaint is wholly misconceived, frivolous and not maintainable in law, as the complainant is a commercial entity and does not fall within the definition of a "consumer" under the Consumer Protection Act, 1986. Further, the dispute raised involves complex questions of fact and assessment of loss requiring detailed evidence, which can only be adjudicated by a competent civil court. The OPs denied any deficiency in service and contended that the claim was duly processed strictly in accordance with the terms and conditions of the insurance policy, based on an independent and statutory survey conducted under Section 64UM of the Insurance Act, 1938. After due assessment, the total loss was rightly determined and Rs.1,84,70,955 was paid to the complainant in full and final settlement, which was accepted without protest at the relevant time, thereby extinguishing any further liability of the respondent. The surveyor correctly applied the average and under-insurance clauses while assessing loss to stocks, plant and machinery and building, and the respondent has acted in bona fide, lawfully and in consonance with settled legal principles, including the law laid down by the Hon‟ble Supreme Court that the liability of an insurer is strictly governed by the terms of the policy. Accordingly, the complaint deserves to be dismissed with costs.

4. The Complainant filed Rejoinder and reiterated the facts of the complaint and filed its evidence on Affidavit and relied on the Annexure C-1 to Annexure C-20. The OPs filed their evidence on Affidavit and relied on the Annexure-OP1 and Annexure OP2.

5. The learned counsel for the Complainant reiterated the facts and background of the complaint as well as rejoinder and argued that OPs acted in a wholly arbitrary, illegal and deficient manner in settling their fire insurance claim arising out of the incident dated 09.08.2016. This was despite the existence of a valid Standard Fire & Special Perils Policy adequately covering stocks, building and plant and machinery for sum insured. He asserted that while the OPs candidly admitted that the Complainant’s books of accounts, purchase and sale records were complete, genuine and duly verified, OPs discarded the same without any justification and proceeded to assess the loss on conjectural and self-created assumptions by wrongly inflating the gross profit to 10.76% against actual 5.73%; artificially enhancing the value at risk with intent to invoke under-insurance clause, applying 25% arbitrary deductions in transformer costs, incorrect averaging of rates of undamaged raw materials, erroneous reduction in core assembly rates, and illegal application of under-insurance on plant, machinery and building despite adequate sum insured. This defeated the very principle of indemnity. OPs further compounded this illegality by making an unexplained ad hoc deduction of Rs.12.52 lakhs from the surveyor’s own assessed loss without any expert opinion or opportunity of being heard, forcing them to accept a lesser amount while under financial duress, which is well settled in law to be no bar to claiming the legitimate balance. The entire assessment is thus vitiated by non-application of mind, perversity and violation of settled insurance principles, entitling them for balance claim of Rs. 1,21,73,017 along with interest, costs and compensation.

6. On the other hand, learned counsel for OPs contended that the present complaint is not maintainable and is liable to be dismissed at the threshold. This dispute does not fall within the ambit of a "consumer dispute" under the Consumer Protection Act, 1986, since the firm availed the insurance policy for commercial purposes, thereby ousting the jurisdiction of this fora and rendering the proceedings non est. Further, the Complainant, after due assessment by a duly appointed and licensed surveyor in terms of Section 64UM of the Insurance Act, 1938, accepted Rs.1,84,70,955 in full and final settlement of the claim on 07.03.2017. Having accepted the settlement, the Complainant is estopped from raising any further claim. The surveyor rightly assessed the loss strictly in accordance with the policy terms by correctly applying the average clause and under-insurance factors after determining that the value at risk for stocks, plant and machinery, and building exceeded the respective sums insured, and the respondent insurer, upon noticing that certain transformers lying in the open area for repairs were wrongly included in the stock loss, lawfully reassessed the claim on 22.02.2017 and paid the net admissible amount, leaving no subsisting liability. The assessment being based on technical expertise and policy conditions cannot be substituted by conjectures raised by the Complainant, and as held by the Hon'ble Supreme Court in Oriental Insurance Co. Ltd. v. Sony Cheriyan (1999) 6 SCC 451, the insurance contract must be strictly construed and the insured cannot claim anything beyond the terms of the policy. Therefore, in absence of any proven deficiency in service or illegality, the complaint deserves dismissal with costs.

7. We have examined the pleadings and associated documents placed on record and rendered thoughtful consideration to the arguments advanced by the learned counsel for both parties.

8. In the case in question, the Complainant partnership firm being engaged in manufacture of transformers of various capacities, the insurance contract between the parties vide Standard Fire and Special Perils Policy No.35030811160100000016 valid from 17.05.2016 to 16.05.2017, fire incident at the premises of the insured on 09.08.2016, damage to the building, plant & machinery, finished and semi-finished goods, raw material and stock in process, the claim, appointment of the surveyor by the OP settlement of the claim for Rs.1,84,70,955 are undisputed. The Complainant stated that he has accepted the discharge under protest, and the OP had illegally withheld the balance legitimate claim of Rs. 1,21,73,017. The OP denied the claim and asserted that the claim was completely settled, and the Complainant is not entitled for compensation under the policy.

9. The issues that are to be determined are whether:

                          A. The OP/surveyor wrongly inflated the gross profit to 10.76% against actual 5.73%?

                          B. The OP/surveyor artificially enhanced the value at risk with intent to invoke under-insurance clause?

                          C. The OP/surveyor arbitrarily applied 25% deduction in the cost of transformers?

                          D. The action in averaging of rates of undamaged raw materials, erroneous reduction in core assembly rates, and illegal application of under-insurance on plant, machinery and building, despite adequate sum insured are arbitrary and violative of the policy? E. OPs further compounded these illegalities by making further ad hoc deduction of Rs.12.52 lakhs from the surveyor’s own assessed loss without any expert opinion or opportunity of being heard.

10. As regards the contention that the OP/surveyor wrongly inflated the gross profit to 10.76% against actual 5.73%, it is a matter of record in the survey report that the Complainant’s books of accounts, purchase and sale records were complete, genuine and duly verified. However, the surveyor nevertheless did not adopt the actual gross profit of 5.73% reflected in the audited records for loss assessment purpose. Instead, the surveyor recalculated the gross profit at 10.76% on what was described as a "normal trading basis", by factoring the industry norms, past trends, salvage assumptions and loading towards unaccounted overheads and process losses. This recalculated gross profit was then used to enhance the value at risk and artificially increase the theoretical closing stock valuation. In law, such substitution of valuation is permissible only when accurate accounts are not available, the accounting records filed are found unreliable or defective etc. Once the books of accounts have been acknowledged to be genuine and duly verified, introducing past averages without cogent and recorded reasons is inherently inconsistent and contrary to settled principles governing assessment of losses. Therefore, the procedure adopted by the surveyor which has been relied upon by the OP is untenable.

11. The artificial enhancement of gross profit from 5.73% to 10.76% has resulted in the value of stocks at risk to increase, which resulted the stock value to exceed the insurance cover. This further resulted in the surveyor invoking the under-insurance clause. Therefore, the increase in the assessed closing stock valuation has led to increase in the valuation of stocks at risk to exceed the sum insured under the policy. Thus, this inflated value of stocks at risk became the sole basis for invoking the average and, further, under-insurance clause, leading to a proportionate reduction of the Net Assessed Loss. Therefore, the mathematical algorithm the surveyor invoked to inflate the gross profit led to higher stock valuation as endorsed by OP verges to unfair trade practice. Thus, OP is liable to compensate the claim on this account.

12. As regards the contention that the OP/surveyor arbitrarily applied 25% deduction in the cost of transformers, it is a matter of record that the surveyor had invoked a flat reduction of 25% in the value of transformers on the premise that the affected transformers were semi- finished or under repair, which were lying in the open yard at the time of the fire. Further, these were capable of partial reuse. The surveyor further segregated the transformer components such as core, winding, oil and casing, and applied deductions on account of depreciation and salvage recoverability. The reduction was stated to represent reusability of certain components and the alleged absence of a total or constructive loss of the transformers. The same is, therefore, justified.

13. As regards the contention that the action of averaging the rates of undamaged raw materials, reduction of core assembly rates, and application of under-insurance on plant, machinery and building, despite adequate sum insured, it is a matter of record that the averaging of rates of undamaged raw materials was adopted on the ground that the purchase invoices contained reflected variations in rates for similar items. It is also revealed that the precise item-wise segregation between damaged and undamaged materials was not fully possible. On this basis, the surveyor applied a weighted average rate, stating that such averaging was necessary to avoid over-valuation of stock and to adhere to the principle of indemnity, to ensure that the insured does not derive any unintended enrichment from the claim settlement. This being a factual position, we find no irregularity on this account.

14. As regards the reduction of core assembly rates, it is seen that the rates applied for core assemblies were reduced by the surveyor on the assumption that, even after exposure to fire, the core laminations remained partially reusable. These are commonly cleaned and reassembled. Therefore, the surveyor concluded that while the cores may have been subjected to heat exposure, there was no evidence of complete metallurgical failure warranting total replacement. Treating the damage as partial rather than total, the surveyor applied reduced rates instead of replacement cost, categorizing the decision as a matter of technical assessment. We find no impropriety in this regard.

15. With respect to application of under insurance clause on plant, machinery and building, it is seen that the under-insurance clause was applied to the heads of plant, machinery and building also since the surveyor assessed the reinstatement or replacement value of these assets to be higher than the respective sums insured under the policy. Upon considering that the sums insured were inadequate vis-à-vis the assessed values, the surveyor applied the average clause, which is a standard condition in fire insurance policies, resulting in proportionate reduction of the claim under these heads as well. Therefore, the same is appropriate.

16. As regards the contention against deduction of Rs.12.52,283 from the surveyor’s assessed loss, the records reveal that the OP contended that the deduction of Rs.12,52,283 from the assessed loss was not ad hoc and same was clarified vide a reasoned communication dated 25.05.2017 explaining the basis of such deduction. The same included discrepancies in stock figures across different records, non- maintenance of complete quantitative stock registers, and greater reliance on physical verification of damaged and saved stock over book figures. The OP contended that in terms of Section 64UM(2) of the Insurance Act, 1938, the insurer is legally entitled to accept a survey report partially and to modify the assessment, provided reasons for such modification are recorded. Evidently, the OP’s contention is arbitrary and untenable being contrary to the specific stand of the surveyor that the Complainant’s books of accounts, purchase and sale records were complete, genuine and duly verified. Further, if OP considered the requirement for clarification or possible discrepancy, it was incumbent on OP to call for the same and render opportunity to the Complainant to furnish the same. There is nothing on record to state that any such procedure was followed. Therefore, the further deduction of Rs.12,52,283 Lakh from the Net Assessed Loss determined by the surveyor is violative of the policy terms.

15. As regards partial acceptance of surveyor’s report, the Hon‟ble Supreme Court in Khatema Fibres Ltd. v. New India Assurance Company Ltd., 2021 SCC OnLine SC 818, decided on 28.09.2021 has held that:

                          "32. It is true that even any inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law or which has been undertaken to be performed pursuant to a contract, will fall within the definition of the expression „deficiency‟. But to come within the said parameter, the appellant should be able to establish (i) either that the Surveyor did not comply with the code of conduct in respect of his duties, responsibilities and other professional requirements as specified by the regulations made under the Act, in terms of Section 64UM(1A) of the Insurance Act, 1938, as it stood then; or (ii) that the insurer acted arbitrarily in rejecting the whole or a part of the Surveyor’s Report in exercise of the discretion available under the Proviso to section 64UM(2) of the Insurance Act, 1938.

                          ...

                          37. Two things flow out of the above discussion, They are (i) that the surveyor is governed by a code of conduct, the breach of which may give raise to an allegation of deficiency in service; and (ii) that the discretion vested in the insurer to reject the report of the surveyor in whole or in part, cannot be exercised arbitrarily or whimsically and that if so done, there could be an allegation of deficiency in service.

                          38. A Consumer Forum which is primarily concerned with an allegation of deficiency in service cannot subject the surveyor’s report to forensic examination of its anatomy, just as a civil court could do. Once it is found that there was no inadequacy in the quality, nature and manner of performance of the duties and responsibilities of the surveyor, in a manner prescribed by the Regulations as to their code of conduct and once it is found that the report is not based on adhocism or vitiated by arbitrariness, then the jurisdiction of the Consumer Forum to go further would stop."

16. The Hon‟ble Supreme Court in New India Assurance Co. Ltd vs Pradeep Kumar, 2009 (7) SCC 787 has held as under :

                          "15. The object of the aforesaid provision is that where the claim in respect of loss required to be paid by the insurer is Rs.20,000/- or more, the loss must first be assessed by an approved surveyor ( or loss assessor) before it is admitted for payment or settlement by the insurer. Proviso appended thereto, however, makes it clear that insurer may settle the claim for the loss suffered by insured at any amount or pay to the insured any amount different from the amount assessed by the approved surveyor (or loss assessor). In other words although the assessment of loss by the approved surveyor is a pre-requisite for payment or settlement of claim of twenty thousand rupees or more by insurer, but surveyor's report is not the last and final word. It is not that sacrosanct that it cannot be departed from; it is not conclusive. The approved surveyor's report may be basis or foundation for settlement of a claim by the insurer in respect of the loss suffered by the insured but surely such report is neither binding upon the insurer nor insured."

17. It is an also matter of record that the fire accident had occasioned on 09.08.2016, the claim was preferred on 20.08.2016, vide the Discharge Voucher, the amount as settled was paid on 07.03.2017, the objection against the partial payment was raised within a few days on 18.03.2017 and this complaint was filed in February, 2018. The reasons cited by the Complainant that they were compelled to accept a lesser amount while under financial duress, is tenable and there is no bar to claiming the legitimate balance due under the contract.

18. It is an admitted position that the surveyor had enhanced gross profit on the stocks held from 5.73 to 10.76% and applied an under- insurance factor of 19.02%, which is wholly untenable and legally unsustainable. The said finding is contrary to the clear and cogent accounts and stock records produced by the Complainant, which unequivocally establish that the actual closing stock as on the date of loss was Rs.4,34,27,901. The surveyor, however, artificially enhanced the value of the closing stock by applying an average gross profit margin derived from the preceding three financial years. While the established gross profit margin on record was 5.73%, the surveyor arbitrarily increased the same to 10.76%, thereby inflating the value of the closing stock from Rs.4,34,27,901 to Rs.5,61,30,732. Such arbitrary enhancement is without any contractual or factual basis is contrary to the contemporaneous records admitted to be accurately maintained by the Complainant. In fact, as per the duly maintained books of accounts and stock registers, the value of stock held on the date of loss stood at Rs.4,34,27,901, which was well within the undisputed sum insured of Rs.4,50,00,000. Consequently, there was no inadequacy of value at risk, and thus there is no scope to invoke any under-insurance clause under the policy. Accordingly, the application of under-insurance @ 19.02%, resulting in a deduction of Rs.40,90,374, is arbitrary, erroneous and liable to be set aside. The said deduction represents an unjustified reduction of the net claim on a ground that does not exist. Thus, the Net Assessed Loss ought to have been Rs.1,74,15,275 + Rs.40,90,374 = Rs.2,15,05,649. In addition, the additional deduction of Rs.12,52,283 unilaterally made by the Opposite Party without providing any opportunity of explanation to the Complainant is also clearly in violation of the terms and conditions of the policy.

19. In view of the foregoing, after due consideration of the entire facts and circumstances of the case, including the arguments advanced by the learned counsels for both the parties, the Opposite Party Insurer is liable to compensate the Complainant for deduction made against under insurance as well as ad-hoc deduction that was made. The Opposite Party, therefore, is directed to pay to the Complainant the balance amount of the claim comprising Rs.40,90,374 towards under insurance and Rs.12,52,283/- towards ad-hoc deduction, aggregating to Rs.53,42,657, along with simple interest at the rate of 7% per annum calculated from the date of settlement of the part claim on 07.03.2017, till the date of final payment. The said amount shall be paid within a period of 60 days from the date of this order. In the event of default, the Opposite Party shall be liable to pay interest @ 10% per annum for the delayed period. The Opposite Party is further directed to pay a sum of Rs.30,000 towards costs of litigation.

20. With the above directions the Consumer Complaint No. 312 of 2018 is partly allowed.

21. All pending applications, if any, also stand disposed of accordingly.