The Supreme Court has allowed an appeal filed by New India Assurance Company Ltd. and set aside the National Consumer Disputes Redressal Commission’s (NCDRC) order directing the insurer to pay ₹2.40 crore in connection with a 2009 factory fire.
The bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva has observed that the insurer was justified in repudiating the claim after survey and investigation reports disclosed serious discrepancies concerning the cause and extent of the fire, the stock allegedly destroyed, the company’s accounting records and the statements made in support of the insurance claim.
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The petitioner had taken over a sick industrial unit in 2005 and was engaged in manufacturing paper boards using waste paper and other materials. Its Najibabad factory consisted of an open yard and three godowns, including two pucca godowns and a tin shed.
The company had obtained two fire insurance policies from New India Assurance. The stock was insured for ₹13 crore for the period from December 30, 2008 to December 29, 2009, while the building, plant and machinery were insured for ₹14 crore from February 28, 2009 to February 27, 2010.
On May 7, 2009, a fire broke out in the waste paper yard of the factory, damaging raw material and the tin shed. The insurer was informed on the same day and appointed a preliminary surveyor.
The insured subsequently lodged a claim, which eventually stood at ₹7.31 crore, along with interest and other damages.
The preliminary surveyor, R.C. Bajpai, reported that the matter required detailed investigation to rule out the possibility of a deliberate fire and a hypothetical loss. Although he tentatively assessed the net loss at ₹56.46 lakh, his report highlighted several abnormalities concerning the fire and the stock claimed to have been destroyed.
The insurer thereafter appointed Royal Associates, an investigative and detective agency. Its report stated that the exact cause of the fire remained unclear. It also noted that the affected tin shed was situated in an isolated portion of the factory, there was no electricity connection there and smoking was prohibited within the factory premises.
The investigation further found that the fire station was only around 6–7 kilometres away, yet information was given approximately one hour after the fire was detected.
A final surveyor, Aditi Consultants Pvt. Ltd., was subsequently appointed. Its report quantified the net loss at approximately ₹46.09 lakh, comprising ₹34.59 lakh towards damaged waste paper and ₹11.50 lakh towards the tin shed. It also concluded that the books appeared to have been manipulated to inflate the insurance claim.
Insurer repudiated the entire claim
New India Assurance repudiated the claim on June 28, 2010. It relied upon the survey findings and alleged violations of the policy conditions, including manipulation of accounts, doubtful stock records, an unexplained cause of fire and delay in informing the fire station.
The insurer specifically invoked the policy conditions relating to false declarations and compliance with requirements concerning the submission of particulars and documents supporting the claim.
NCDRC had directed payment of ₹2.40 crore
The dispute eventually reached the NCDRC through Consumer Complaint No. 66 of 2011.
The NCDRC took the view that since the cause of the fire was unknown, the insured was not required to establish the exact cause or prove the genuineness of the fire. It also found no deliberate delay in informing the fire brigade.
The Commission proceeded to assess the loss and directed the insurer to pay ₹2.40 crore with interest within 45 days. It also awarded ₹3 lakh as compensation for deficiency in service and ₹1 lakh towards litigation costs.
The insurer challenged this order before the Supreme Court, while Hemkund Duplex and Board also appealed, seeking enhancement of the compensation.
Supreme Court examines whether repudiation was justified
The Supreme Court, comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva, identified the first question as whether the insurer was justified in repudiating the claim in its entirety.
The Court held that the facts weighed heavily against the insured.
It noted that the preliminary surveyor had highlighted substantial inconsistencies in the claimed loss. The amount reportedly communicated to the media was ₹15 crore, the amount initially reported to the insurer was ₹10 crore, the claim form showed ₹8.45 crore and the claim was subsequently reduced to ₹7.31 crore.
The surveyor also found discrepancies between the stock recorded in the books and the physical stock found during verification.
Court relies on survey reports and investigation findings
The Supreme Court observed that the reports of the surveyors and investigating agency contained several circumstances that could not simply be ignored.
Among other things, the Court noted:
- the cause of the fire remained unexplained;
- there was no electricity connection in the affected area, ruling out a short circuit;
- smoking was prohibited inside the factory;
- the fire station was only 6–7 kilometres away but was informed after a substantial delay;
- the fire-fighting efforts were found questionable;
- the condition of the tin shed did not correspond with the extent of destruction claimed;
- large quantities of Hessian bags were found at the location without adequate accounting;
- the stock in the books did not correlate with physical stock;
- substantial quantities of the claimed stock appeared to be old or unusable material; and
- the accounts disclosed unusual variations in consumption and yield.
The Court also considered evidence suggesting that the tin shed had been broken down with a JCB before the fire, contrary to the version that it had collapsed because of the fire.
False declarations found to violate policy conditions
A significant aspect of the judgment concerned Policy Conditions Nos. 6 and 8.
Condition No. 6 required the insured to provide a detailed and truthful account of the loss and furnish documents, records, invoices and other information reasonably required by the insurer.
Condition No. 8 provided for forfeiture of policy benefits where the claim was fraudulent, false declarations were made or fraudulent means were used to obtain benefits.
The Supreme Court found that these conditions had been breached.
The Court compared the statements made by the management with statements recorded from workers and supervisors. According to the workers, usable raw material was normally stored in the two pucca godowns and not in the tin shed. The tin shed was used for unusable waste material that had been accumulated for a long period.
The Court found that the statements of the Vice President and General Manager, which suggested that usable raw material had been stored in the burnt shed, were contradicted by the evidence of workers and accountants.
Abnormal accounting figures also weighed against the insured
The Court further considered discrepancies in the company’s consumption and sales figures.
The surveyor had noted that the raw-material-to-sales percentage fell from 32.30% in 2007-08 to 19.29% in 2008-09. The report also pointed to the absence of a stock register and stock movement register, arbitrary consumption figures and the absence of a reliable system for recording or weighing waste paper.
The surveyor concluded that the records appeared to have been maintained in a manner that created book stock without corresponding physical stock.
Surveyor’s report is not conclusive, but cannot be ignored
The Supreme Court also examined the legal position governing surveyors under Section 64UM of the Insurance Act, 1938.
The Court reiterated from earlier judgments that while a surveyor’s report is not sacrosanct or conclusive, it is an important piece of evidence. An insurer or consumer forum may depart from it, but the report cannot be arbitrarily rejected.
The Court referred to earlier decisions including New India Assurance Co. Ltd. v. Pradeep Kumar, Khatema Fibres Ltd. v. New India Assurance Co. Ltd., and Sri Venkateswara Syndicate v. Oriental Insurance Co. Ltd. on the role of surveyors and the circumstances governing reliance upon their reports.
In the present case, the Supreme Court noted that the insured had received the survey and investigation reports but had not identified any specific statutory deficiency in the manner in which the surveyors conducted their work. Despite this, the NCDRC had effectively brushed aside both surveyors’ reports.
Unknown cause of fire does not automatically establish insurer liability
The Court also considered precedents dealing with fire insurance claims where the precise cause of a fire cannot be established.
It noted that where a fire is established but there is no allegation or finding that the insured caused or instigated it, the precise cause may ordinarily be immaterial. However, the Court clarified that where the facts provide reasonable grounds to suspect that the insured may have been responsible for the fire, or where there are serious irregularities surrounding the claim, the insurer may deny liability on the basis of those circumstances.
In the present case, the Court found several circumstances pointing towards serious doubts regarding the fire and the genuineness of the claimed loss.
Supreme Court sets aside NCDRC order
Ultimately, the Supreme Court held that the repudiation of the claim on the ground of breach of Policy Conditions Nos. 6 and 8 was sustainable.
The Court observed that the insured had made incorrect factual statements to support its insurance claim and that such conduct violated the policy conditions requiring truthful disclosure. It held that where an insured makes false averments to bolster its claim in breach of the policy conditions, the insurer is entitled to reject the claim on that ground.
The Court therefore concluded that the NCDRC was not justified in brushing aside the surveyors’ findings or granting the insured a clean chit before assessing its alleged loss.
The ₹50 lakh deposited by the insurer pursuant to the Supreme Court’s interim order was directed to be returned with accrued interest. The parties were directed to bear their own costs.
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