No sub-limits in policy? Avg clause can't apply

According to the National Commission, the average clause couldn't apply since the policy didn't have individual coverage limits for building, stock, and packaging material

Markandeshwar Food & Allied Products had taken four Standard Fire and Special Perils policies from New India Assurance. One of the policies was for Rs  2 crore. It covered the entire stock, including milk, ghee and other dairy products, as well as packaging materials. The policy was valid from November 11, 2011, to November 10, 2012.

On February 7, 2012, during the tenure of the policy, a fire broke out in the insured premises. The fire brigade and police were intimated. The incident was also reported to the insurer, who appointed a surveyor.

According to the survey report, the loss was assessed at Rs 56,42,954 after deducting the salvage value for the stock and the building. The loss of packing material was assessed at Rs 40,17,572, but payment of only Rs 3,46,961 was recommended after applying the average clause and the excess clause. On the basis of the survey report, the insurer offered to pay Rs 13,20,454 towards settlement of the claim.

Dissatisfied with the amount offered, the insured filed a complaint before the Haryana State Commission, challenging the applicability of the average clause. The insured contended that the claim must be settled for total loss amounting to Rs 78,74,014. The insurer contested the case, contending that the average clause had been rightly applied as packaging material was covered only in one of the four policies. It argued that even though loss of packaging material amounted to Rs 58,26,450, the claim payable would be merely Rs 3,65,222 due to the applicability of the average clause.

The Haryana State Commission did not agree with the insurer’s arguments and ordered it to pay the balance amount of Rs 40,17,572 towards loss of packaging materials. Both the insured and the insurer challenged the order in appeal. The insured contended that the State Commission ought to have awarded compensation when it found that there was deficiency in service in settlement of the claim. The insurer’s stand was that the complaint ought to have been dismissed.

The insurer argued that packaging material was covered in just one of the four policies. Since this policy also covered stocks and buildings, the coverage should be considered on average basis. The National Commission observed that it was irrelevant whether the other three policies covered packaging material or not, since the claim was being considered only under one policy which covered this risk. It rejected the insurer’s argument regarding the applicability of the average clause, observing that there was no break-up or bifurcation given under the policy to indicate the individual coverage limits for building, stock, and packaging material. So, it held that the overall sum insured of Rs 2 crore was adequate to cover the entire stock of packaging material, and the average clause would not be applicable.

Accordingly, by its order of January 3, 2023, delivered by Justice Deepa Sharma, the National commission dismissed the insurer’s appeal and held that the State Commission had rightly held the insurer liable to pay the remaining amount for the loss of packaging material. 

In addition, the National Commission allowed the insured’s appeal, holding it entitled to compensation in the form of interest at 9 per annum from the date of filing of the complaint till payment. It granted three months’ time for compliance. In case of a delay, the interest rate would be enhanced to 12 per cent per annum.

The writer is a consumer activist