Consumer as king: ‘No depreciation on reinstatement policies’

Background: Indemnification by an insurance firm can be on the basis of the value of the subject matter insured, or on the basis of reinstatement value to restore the subject matter to its condition prior to the loss or damage. Where depreciation is applicable, reimbursement is according to the sum insured after deducting the depreciation. But in reinstatement policies, reimbursement is the replacement cost. Depreciation cannot be made applicable to policies issued on reinstatement basis, as per a recent ruling of the national commission in the case of New India Assurance v/s Kamboj Ultra Sound & Diagnostic.

Case Study: Kamboj Ultra Sound & Diagnostic had obtained an Electronic Equipment Insurance policy from New India Assurance for insuring its diagnostic equipment— CT MX 640 whole body CT Scanner with 8X10 multi-format camera, voltage stabilizer, lead glass and frame for lead class manufactured by Wipro GE Medical System. This equipment was installed at Jupiter Golden Hospital and was insured for Rs 65,75,000.

The equipment was initially covered under a manufacturer's warranty, and subsequently insured under an EEI Policy from January 9, 1997, to January 8, 1998. The terms of the policy stated that the coverage was on replacement basis.

On October 25, 1997, a scanning procedure came to a standstill. A Wipro engineer inspected the equipment and gave a quotation of Rs 9,15,200 for replacement of the X-Ray tube. Kamboj lodged a claim under the policy. Meanwhile, when the policy was due for renewal, the premium of Rs 99,823 was accepted with 30% loading. Later, the claim was rejected on the grounds that the tube had undergone 100% depreciation and its value was nil.

Kamboj filed a complaint before the Delhi state commission. The firm contested, saying the tube was not covered as it had completed 42,470 exposures at the time of taking the policy. It said there was an endorsement on the policy that no claim was payable for tubes that have over 40,000 exposures.

The state commission directed the firm to reimburse the replacement cost of the tube along with 12% interest and awarded Rs 50,000 towards compensation. The firm then moved the national commission.

Justice K S Chaudhari, in his August 27 order, noted that the company was aware of the extent of usage of the tube at the time of issuing the policy, but had opted to cover it. The national commission held that a question of depreciation cannot arise in a policy issued on reinstatement basis. Accordingly, it upheld the order.

Conclusion: Consumers must ensure claims are settled on the basis of policies issued.
(The author is a consumer activist and has won the govt of India's National Youth Award for Consumer Protection. His mail is jehangir.gai.articles@hotmail.com)

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