M/S. National Insurance Co. Ltd vs Bharat Heavy Electricals Ltd

Order dated 21.12.2009 passed by the State Consumer Disputes Redressal Commission, Andhra Pradesh, (in short 'the State Commission') in Consumer Complaint No.45 of 2006 has been challenged in appeal by the appellant M/s. National Insurance Co. Ltd. on the ground that damage caused to the machinery is not due to any peril operating under the insurance policy, rather, it is covered under the exclusion clause given in the policy.

Brief facts of the case are that complainant/respondent is a Government of India Enterprise situated at Vishakhapatnam 530 012 (A.P). The appellant/opposite party is a registered insurance company. Complainant is engaged in manufacturing of heavy engineering equipments for oil refineries, steel plants, fertilizers, defence etc. Complainant secured a contract with IOCL and in the pursuance of the contract, it placed a purchase order with M/s. Ingersoll R Ahmedabad, the supplier, for design, manufacture, supply, and supervision for erection, field testing and for commission of two air compressors. Thereafter, complainant took Marine-Cum-Erection Insurance Policy No.550704/04/2000/500058 from the opposite party/appellant for a period from 19.1.2001 to 18.01.2004 Total sum insured was Rs.86,36,50,000/- at a premium of Rs.39,81,945/-. On 23.6.2002, when IOCL, EIL, with the complainant opened one of the compressor for joint inspection, they found accumulation of rain water and patches/pitting in 1st and 3rd stages of the air compressor. Complainant informed the opposite party about the damage on 24.6.2002 and vide letter dated 25.7.2002 lodged a claim with it. Thereafter, complainant lodged a claim of Rs.67,00,330/- towards the damage caused to one of the compressors due to accumulation of rain water in it. Surveyor assessed the loss of Rs.48,26,000/- instead of Rs.67,00,330/-. Allegedly, claim was not settled by the opposite party. Claim was repudiated by the opposite party vide letter dated 13.9.2004. It intimated the complainant that the loss falls under the exclusion Clause of Section 1 of Part 2 i.e. "normal wear and tear gradual deterioration due to atmospheric conditions or otherwise rust scratching of painted or polished surfaces or breakage of glass." Alleging deficiency in service on the part of the opposite party the complainant filed a consumer complaint before the State Commission. The State Commission vide its order dated 21.12.2009 allowed the complaint and passed the following order:-

"16. In the result the complaint is allowed in part granting Rs.48,26,000/- together with interest @9% p.a. from the date of repudiation viz, 13.9.2004 till the date of realization together with costs of Rs.5,000/-. Time for compliance four weeks."

Aggrieved by the order of the State Commission dated 21.12.2009, the Insurance Company has preferred the appeal before this Commission.

Heard the learned counsel for the parties and perused record.

Learned counsel for the appellant stated that the compressor which was erected after 13 months of the delivery, due to atmospheric conditions got rusted and this has to be treated as normal wear and tear and therefore, it is covered under the exclusion clause No.(c) of Section I of the policy. In fact, there were many lacunae in the report of the surveyor and therefore, not satisfied with the report of the surveyor, the Insurance Company sought clarification from the surveyor vide their letter dated 24.3.2004 as under:-

"With reference to your above cited survey report, we request you to kindly clarify on the following aspects of 'admissibility of claim' to enable us to proceed further.

The consignment in packed condition was reportedly stored in the site for nearly 70 days before erection and the commissioning reportedly started after one year of erection i.e. on 23//06/2002 and loss was reportedly discovered on 26th July 2002. In this connection, we advise you to comment on the admissibility of claim under Exclusion (c) to Section I (material damage) of Part II of the MCE policy which runs as follows.

"(c) normal wear and tear gradual deterioration due to atmospheric condition otherwise rust scratching of painted or polished surface or breakage of glass."

We also request to kindly comment on the admissibility of claim under the Warranty stated in the Terms and Conditions of Marine Cover Part I- which runs as follows

"Warranted excluding the risk of pitting and oxidization unless directly caused by operation of an insured peril..."

Please also confirm whether Ingersoll R and is liable to make good the attributed defective machinery in the terms of sale between M/s BHPV and M/s. Ingersoll and responsibilities of suppliers based on the Guarantee Certificate Dt. 30-04-2001 between them.

With regard to assessment of loss, the salvage value of the high priced items of pinions, bearings etc. was not considered which could be quantified by negotiation with the suppliers IR, as the same could be reused by manufacturers elsewhere by repairs due their Domain knowledge.

We would also request your observations on 'the period of cover' applying to Part II in the policy schedule (cold/hot testing, commissioning after one month of erection as per provisions stated therein).

As per the condition of the policy "Insured shall take all reasonable precaution and comply with manufacturers requirements". In view of inadequate precautions taken resulting in damages of rusting and pitting in the instant case, the General condition No.3 of MCE policy is violated. We request you to make your observations on this aspect keeping in view the circumstantial evidence.

We observe that the claim started as marine loss with letter to carriers issued by the client (though after 13 months of material reaching the site), intimation letter of client of the claim as transit damage and your appointment for Marine claim by Gauhati RO. The manufacturers also could not decide as to when & how the damage occurred as per their report. However, your conclusion is as "loss attached during Storage". Please clarify as to how the same was concluded keeping in view the circumstances of loss detected.

We request you to kindly sent your specific clarifications on above points, specially w.r.t. admissibility of claim, with documentary evidences, alongwith a copy of machine design of the Air Compressor for our further processing of the claim.

An early reply shall be highly appreciated keeping in view the closing of financial year."

The surveyor sent clarification vide letter dated 28th April, 2004 as follows:-

"01. The loss had arisen owing to accidental ingression of water into the oil reserve. There is no ordinary gradual detoriation due to atmospheric condition or otherwise rust scratching etc. The rusting of internal components cannot take place due to atmospheric condition. It is a high rainfall area and the water must have ingressed in substantial quantity accidentally during storage. The rusting of the internal components is a gradual process but the chain of loss began only after accidental ingression of water in the oil reserve. Hence the proximate of loss is accidental ingression of water in the oil reserve and the claim do not fall under Exclusion © to Section-I. Logically, had there been no ingression of water the internal components would not have got damaged.

Pitting is the scouring of the metal owing to oxidation known as rusting in common parlance. In the given circumstances pitting can take place only when the trapped water is tinged with some acid. This is possible only during storage because traces of acid will always be present in the atmosphere surrounding the Refinery. Here the pitting has taken place because of oxidation. Oxidation has taken place because of the ingression of water acidic trace which has accidentally entered and it do not fall under exclusion.

BHPV Ltd. is a Engineering Company which is managed by professional Engineers. There are a team of Engineers and Technical personnels with long experience who supervise and organise erection of such projects which requires expertise, experience, skill and knowledge of high order. The vendor ie IR had supplied 2 nos. of identical compressors. Both the compressors were transported by the same carriers. They were sent from the same works and reached at the same time. Both the compressors were stored identically at the site side by side. After both the compressors were erected and trial run was done, one compressor worked smoothly whereas the one under claim developed problems. There was no negligence as such because we are made to understand that these equipments are stored at sites in similar fashion wherever project work goes on. It is a pure accident that due to some circumstances in one of the compressors the water entered into the oil reserve causing all the damage.

.. As it is a high rain fall area we feel that during the period of storage rain water tinged with traces of acid had ingressed into the reservoir of compressor. During sunny day the water must have got heated up and the vapour must have condensed on the internal steel components. The cycle of ingression, evaporation & condensation must have gone for quite some time which have causes such heavy oxidation and pitting. Considering all these aspects we concluded that the loss had taken place during storage."

After receiving the letter, Insurance Company sought some clarification from the surveyor again which was provided by the surveyor however, the insurance company did not agree with the report of the surveyor and appointed an expert Mr. Mehta who vide his letter dated 30.06.2004 gave the report which was accepted by the Insurance Company. On the basis of the expert report, the claim was repudiated. It was stated by the learned counsel for the appellant that the Insurance Company has a right to reject the report of the first surveyor and can appoint another surveyor/investigator/expert. In support of his argument, the learned counsel relied upon the decision of the Hon'ble Supreme Court in Venkateswara Syndicate Vs. Oriental Insurance Company Ltd. & Anr, III (2009) CPJ 81 (SC), wherein the following has been observed:-

"23. .....Section 64UM (2) of the Insurance Act, 1938, reads that 'No claim in respect of a loss which has occurred in India and requiring to be paid or settled in India equal to or exceeding twenty thousand rupees in value on any policy or insurance, arising or intimates to an insurer at any time after the expiry of a period of one year from the commencement of the Insurance (Amendment) Act, 1968 shall, unless otherwise directed by the Authority, be admitted for payment or settled by the insurer unless he has obtained a report on the loss that has occurred from a person who holds a licence issued under this section to act as a surveyor. In our considered view, the Insurance Act only mandates that while settling a claim, assistance of surveyor should be taken but it does not go further and say that the insurer would be bound whatever the surveyor has assessed or quantified, if for any reason, the insurer is of the view that certain material facts ought to have been taken into consideration while framing a report by the surveyor and if it is not done, it can certainly depute another surveyor for the purpose of conducting a fresh survey to estimate the loss suffered by the insured. In the present case, the insurer has stated in the courter affidavit filed before the National Commission and even before us, why the appointment of second surveyor was necessitated and also has given valid reasons for appointing second surveyor and also has assigned valid reason for not accepting the report of joint surveyor. The correspondence between the insurer and the surveyors would indicate the particulars differed by the insurer for differing with the assessment of loss made by the surveyors. The option to accept or not to accept the report is with the insurer. However, if the rejection of the report is arbitrary and based on no acceptable reasons, the Courts or other forums can definitely step in and correct the error committed by the insurer while repudiating the claim of the insured. We hasten to add, if the reports are prepared in good faith, due application of mind and in the absence of any error or ill motive, the Insurance Company is not expected to reject the report of the surveyors."

On the other hand, the learned counsel for the respondent stated that the surveyor has clearly indicated in the survey report that rusting inside the compressor has resulted due to leakage of water inside during the storage and therefore, the loss is covered under the policy. The surveyor has assessed loss of Rs.48,26,000/- and the State Commission has allowed only this amount. Thus, there is no error in the order of the State Commission and the same needs to be upheld as the loss has occurred during the storage before erection and thus the same is covered under the policy. The exclusion clause relating to wear and tear is not applicable in the present case as the compressor was not in operation.

I have carefully considered the arguments advanced by the learned counsel for the parties and examined record. The main thrust of the appellant is that the loss is covered under the exclusion clause No.(c) of Section I which reads as under:

"(c) normal wear and tear gradual deterioration due to atmospheric condition otherwise rust scratching of painted or polished surface or breakage of glass."

From the above, it seems that the whole clause relates to losses due to wear and tear and no separate sub-clause or wordings can be interpreted independently of normal wear and tear. This is one interpretation of the whole clause and there may be some more which I will discuss later. This is so because the clause contains several phrases like "wear and tear", "gradual deterioration due to atmospheric condition", "otherwise rust", "scratching of painted or polished surface" and "breakage of glass". Except before "breakage of glass", there is no comma or the word "or" in between these phrases. So they may be considered as one part relating to wear and tear. Clearly the words wear and tear are not defined in the policy, however, they have to be given their natural meaning. Wear and tear can happen generally when a machine is in operation i.e. it is being used. In the present case, compressor was not in use before erection and therefore there can be no question of any wear and tear in the compressor. The policy covers period till erection and hence, I am of the opinion that the loss is not covered under the exclusion clause in this interpretation of the clause.

Another interpretation of this clause can be if one considers all these phrases not connected to each other. In such situation, the meaning of separate phrase "otherwise rust" is not clear. If one considers the full phrase as "gradual deterioration due to atmospheric condition otherwise rust", then it can be interpreted with two meanings. In the first meaning, the word "otherwise" can be interpreted as "leaving" or "except". In this interpretation, the "rust" would not be covered in the exclusion. So the claim becomes admissible. The second interpretation of this phrase can be that rust arising out of any reason even other than " gradual deterioration" would be covered under this exclusion clause. If this is the case, then the same should have been mentioned as "rust" as a separate condition of exclusion. Thus, if the Insurance Company keeps an ambiguous clause, the benefit has to be given to the insured by accepting the interpretation favouring the insured. In saying so, I am supported by the decision of the Hon'ble Supreme Court in United India Insurance Co. Ltd. Vs. Pushpalaya Printers, 2004 CTJ 421 (Supreme Court) (CP) wherein the following has been observed:-

"6. ........ It is also settled position in law that if there is any ambiguity or a term is capable of two possible interpretations one beneficial to the insured should be accepted consistent with the purpose for which the policy is taken, namely, to cover the risk on the happening of certain event. Although there is no ambiguity in the expression "impact", even otherwise applying the rule of contra proferentem, the use of the word "impact" in Clause 5 in the instant policy must be construed against the appellant. Where the words of a document are ambiguous, they shall be construed against the party who prepared the document. This rule applies to contract of insurance and Clause 5 of the insurance policy even after reading the entire policy in the present case should be construed against the insurer. A Constitution Bench of this Court in General Assurance Society Ltd. V. Chandumull Jain & Anr. 1966 (3) SCR 500, has expressed that "in a contract of insurance, there is requirement of uberrima fides i.e. good faith on the part of the assured and the contract is likely to be construed contra proferentem i.e. against the company in case of ambiguity or doubt."

From the facts of the case, it is clear that the Insurance Company, even after receiving all the clarification from the surveyor, did not accept the surveyor's report and appointed another surveyor in the name of an expert. Under Section 64 UM of the Insurance Act, 1938, Insurance Company has a right to discard the report of a surveyor and to appoint another surveyor but second surveyor can only be appointed with the permission of the Insurance Regulatory and Development Authority (IRDA). In the present case, after receiving the clarifications from the surveyor, it is not clear on what ground the report of the surveyor was not accepted by the Insurance Company. Thus, the State Commission has rightly taken a view that the Insurance Company has wrongly appointed the second surveyor i.e. the expert on whose report the decision has been taken. It is important to note that the surveyor has given the following remarks at the end of his report dated 27.01.2004:-

"REMARKS:

The loss do not fall under any of the exclusions of the policy.

There is no breach of policy terms and conditions in our opinion.

The risk has been reinstated to the satisfaction of the insured.

There is no under insurance.

The salvage value have been deducted.

We have verified the originals of all the Annexures attached with the report."

In the circumstances, State Commission has rightly accepted the report of the surveyor which seems quite reasonable and logical. The State Commission has only awarded the claim which has been assessed by the surveyor and therefore, no interference is required in the order passed by the State Commission.

Based on the above discussion, I do not find any merit in the present appeal and the same is dismissed with no order as to cost.