The only legal issue which arises for consideration is "what is under-insurance-and the effect thereof?". Under-insurance basically means that the insured has taken out an insurance policy in which he has valued the insured items for a sum which is less than the actual value of the insured item. In a country like India this is normally done to pay a lesser premium. This is, in fact, harmful to the policy holder and not to the Insurance Company because even if the entire insured property is lost, the policy holder will only get the maximum sum for which the property has been insured and not a paisa more than the sum insured. To give an example, in case a person takes out the householder policy covering fire insurance and gives the value of the structure of his house and goods stored therein at Rs. 50,00,000/- even though the value of the same is Rs. 1,00,00,000/- then even if the entire house and goods are completely lost in a fire, he cannot get an amount above Rs. 50,00,000/- even though the value may be more.
9. If all the insured goods are lost then there is no problem. The insured is entitled to the amount for which the goods were insured even if that be less than the actual value of the goods. In case a person gets a painting insured for Rs. 1,00,000/- though the value of the same is Rs. 10,00,000/-, if the painting is lost the insured is entitled to Rs. 1,00,000/- only. If all the insured goods falling under one head are stolen or lost then the insurance company cannot apply the principle of averaging out because, though the loss may be Rs. 10,00,000/-, the claimant will get only one Rs. 1,00,000/- as per the value assessed and the insurance premium paid by him.
10. The Insurance Company can however apply the principle of averaging out when all the goods are not destroyed. Supposing the entire house was insured for Rs. 50,00,000/-, but on valuation it is found that the value of the structure and the goods was Rs. 1,00,00,000/- and if the policy holder claims that he has suffered loss of Rs. 40,00,000/- then he will be entitled to only Rs. 20,00,000/-, by applying the principle of averaging out. What this means is that if the value of the goods is more than the sum for which they are insured then it is presumed that the policy holder has not taken out insurance policy for the un-insured value of the goods. The claim is allowed by applying the principle of averaging out, i.e. the insured is paid an amount proportionate to the extent of insurance as compared to the actual value of the goods insured.
11. To clarify the matter further, we may give another example. Supposing, the insurer owns two paintings of Rs. 5,00,000/- each but pays premium for insurance cover of Rs. 1,00,000/- for both the paintings. If one painting is lost, even though the value of the painting may Rs. 5,00,000/- he will not get Rs. 1,00,000/- but will get only Rs. 50,000/-, as proportionate amount. Therefore, when a group of items is insured under one heading and only some of the items and not all items are lost/stolen then the principle of under-insurance will apply. However, if all or most of the items of value covered under the policy are stolen, then the insurance company is bound to pay the value of the goods insured.
IN THE SUPREME COURT OF INDIA
Civil Appeal No. 3167 of 2017
Decided On: 10.01.2018
I.C. Sharma Vs. The Oriental Insurance Co. Ltd.
Madan B. Lokur and Deepak Gupta, JJ.