Hareshwar Enterprises (P.) Ltd. vs National Insurance Co. Ltd. and Ors.

COMPLAINT was filed alleging that the complainant is engaged in the business of manufacture of polyethylene, plastic films and other similar packaging materials. Maharashtra State Financial Corporation -opposite party No. 2 had advanced loan to the complainant against security of its building and plant and machinery. Thane Janata Sahakari Bank Ltd. opposite party No. 3 had also advanced money to the complainant for procurement of stock -in -trade over which it had the lien. It was alleged that complainant purchased from opposite party No. 1 -Insurance Company a policy covering the risk of fire, flood and earthquake, etc. to the factory building and plant and machinery of a sum of Rs. 60.00 lakh for the period from 5.2.1999 to 4.2.2000. Another policy covering the said risk to the stock -in -process of Rs. 20.00 lakh for the above period was further purchased. Yet other policy purchased covering the risk to stock -in -process of Rs. 20.00 lakh against the said risk was valid for the period from 17.9.1999 to 16.9.2000. It was stated that on 6.11.1999, fire broke out in the factory of complainant causing total destruction of the plant and machinery, raw material, unfinished and finished goods. Factory building was also damaged. Opposite party No. 1 Insurance Co. was intimated of the fire incident on 7.11.1999. It appointed M/s. H. Mannan and Company and Virendra Padmasi Shah -Surveyors to assess the loss. Surveyors visited the site on 9.1.1999. By the letter dated 11.11.1999 the joint Surveyors demanded certain documents and records which were submitted by the complainant. Joint Surveyors submitted the interim report on 23.3.2000. Joint Surveyors submitted the final report on 13.3.2001 to the Insurance Company. Joint Surveyors assessed the loss at Rs 1,06,00,000 excluding the loss of business and other losses. Despite receipt of final report dated 13.3.2001 the opposite party -Insurance Company neither settled nor repudiated the claim. By the letter dated 22.6.2001, the opposite party - Insurance Company informed the complainant regarding appointment of Om Nityanand Enterprises -Investigator to delay the settlement of claim. Opposite party Nos. 2 and 3 have initiated legal proceedings to realize the loan amounts. Attributing deficiency in service on the part of opposite party No. 1 -Insurance Company, direction was sought to be issued to opposite party No. 1 to pay amount of Rs. 1,25,25,319 as detailed in para No. 7 of the complaint along with interest @ 18% p.a. besides cost.

COMPLAINT was contested by all the three opposite parties by filing separate written versions. Issuance of three policies for a total sum of Rs. 1,08,00,000 was not disputed by opposite party No. 1. It was alleged that complaint is barred by limitation. On perusal of final joint survey report dated 13.3.2001 and other documents a number of stark contradictions came to the notice of replying opposite party which warranted appointment of an investigator to enquire into the complainant''s claim. Consequently, Om Nityanand Enterprises was appointed as Investigator on 17.4.2001. Complainant had not submitted the duly filled -in claim form. By the letter dated 22.6.2001 the complainant was asked to explain increase in stock from Rs. 37,000 to Rs. 53.00 lakh and why additional policy of Rs. 20.00 lakh was taken when the actual stock position on the date of purchase of additional policy was less than Rs. 25 00 lakh. Reference was made to the non -disclosure of mezzanine floor in the factory. Vide letters dated 7.3.2002, 5.4.2002 and 3.5.2002 the Investigator suggested for a joint meeting to the complainant. Along with letter dated 9.5.2002 the complainant supplied certain documents which were totally inadequate on the issues raised by the replying opposite party and the Surveyors. Investigator asked the complainant to identify the sources from which it procured Rs. 21,79,369 in August 1999, Rs. 35,10,238 in September 1999 and Rs. 53,09,250 in October 1999 to purchase the raw material. Overdraft limit provided by the Bank was only Rs. 20.00 lakh. Complainant failed to inform the Investigator about the source. Vide letter dated 30.4.2003 the Investigator intimated the complainant that in the event of non -supply of information asked for the Insurance Company will be forced to close the file as No claim''. In its report dated 22.11.2003, the Investigator reached the conclusion that fire was stage -managed and the claim is not genuine.

IN its written version, the opposite party No. 2 alleged that it had sanctioned a term loan of Rs. 60.00 lakh to the complainant out of which a sum of Rs. 44.15 lakh was disbursed. Towards security of loan the complainant had mortgaged Gala No. C -5 in Nandanvan Co. -op. Industrial Estate, at LBS Marg, Thane and the plant and machinery. Since the complainant defaulted in repayment of the dues, notice under Section 29 of the State Financial Corporation Act was issued. As on 31.7.2003 a total amount of Rs. 97,55,535 was due from the complainant. Policy was taken in the joint name of the complainant and the answering opposite party. In its written version, opposite party No. 3 alleged that it had granted cash credit limit of Rs. 20.00 lakh to the complainant. Complainant became a non -performing company since March, 2000. For recovery of the dues of Rs. 26,59,328.41 as on 30.3.2000 and further interest @ 18.25% the Bank has filed suit in Cooperative Court No. 5 in Mumbai. It was further alleged that the stocks and book debts were hypothecated by the complainant with the Bank under a Deed of Hypothecation dated 4.3.1999 which was registered with the Registrar of Companies on 11.3.1999. Replying opposite party holds second charge on the building and plan and machinery mortgaged by the complainant with opposite party No. 2. It was alleged that the complainant submitted statements of stock upto October, 1999 and the last verification of stock was done by the replying opposite party on 12.7.1999 and the same was found satisfactory.

WE have heard parties learned Counsel.

OPPOSITE party -Insurance Company alleges that fire was stage -managed while the complainant avers that it was accidental. It was contended by Shri Maibam N. Singh for the Insurance Company that the cause of fire being electric short circuit is ruled out as the main power was switched off at 19.30 hrs. on 6.11.1999 as per the TAC report; that the Police did not carry out proper investigation to ascertain the actual cause of fire and the complainant even had not submitted the claim form stating the cause of fire. It is an admitted fact that the entire factory of complainant was gutted in fire on 6.11.1999. In their final survey report dated 13.3.2001, the joint surveyor in para Nos. 4 and 5 observed: "4.1 Incident - It is reported that on 6.11.1999 at around 11.00 p.m. some persons from a nearby restaurant first noticed thick black smoke emanating from the Insured''s Gala. Being Diwali, most of the units were closed. When many people in the area approached the Insured''s Gala they noticed huge flames, from the roof. 4.2 The Fire Brigade was immediately summoned. Two/three fire tenders from Thane reached the site and used water to extinguish the fire. After continuous efforts they managed to control the fire by 500 a.m. the next day. Police have made Panchnama of the site of fire. The incident of fire is reported (with photo) in Times of India and also telecast by local cable TV. 4.3 By the time the fire was brought under control and extinguished it had gutted the entire premises."

"5. Cause of Fire 5.1 The exact point of origin and cause of fire is not known. The likely causes of fire could be either Diwali crackers falling in or electrical short circuit. The damage by fire was very severe and an inspection of the remnants could not reveal any cause. 5.2 Loss and damage in our opinion was caused by an accidental fire, an insured peril."

CASE of the complainant about fire being accidental is supported by said Para No. 5 of the report. Complainant having discharged the initial burden regarding cause of fire it was for opposite party No. 1 Insurance Company to disprove the same (see Shobika Attire v. New India Assurance Co. Ltd. and Anr., IV (2006) CPJ 3 (SC)=VI (2006) SLT 598. Insurance Company has failed to prove by adducing cogent evidence that the fire was stage -managed as claimed. On grounds of electric line of the complainant''s factory not being connected before fire, police over which the complainant did not have control having failed to report about actual cause of fire and complainant not having submitted the claim form mentioning the cause of fire, it cannot be presumed that the fire was stage managed. Fire which took place on 6.11.1999, thus, must be held to be accidental and this peril was covered by the policies.

IT is admitted case of the parties that on receipt of intimation regarding fire the opposite party -Insurance Company appointed H. Kannan and Company and Virendra Padamsey Shah as joint Surveyors to assess the loss. Portion of the joint final survey report dated 13.3.2001 dealing with assessment of loss which is material is re -produced below: "8.0 Assessment of Loss: 8.1 Stock -

8.1.1 The stock of LDPE plastic powder, granules, tubings films weighing about 73.5 MT was reported to have been gutted by fire. They were found burnt and melted in lump form. It was identifiable but could not be inventoried. All the books of accounts and records are reported to have been burnt. The Insured has submitted copies of monthly stock statement given to bankers and also copies of duplicate purchase bills from the suppliers. The audited Manufacturing and Profit/Loss Account and Balance Sheet for the year ended March, 1998 and 1999 and the monthly purchase and sales figures for the period April, 1999 to 6.11.1999 is also submitted to us.

8.1.2 The Insured was availing Cash Credit Limit from the Thane Janata Sahakari Bank Ltd., against hypothecation of stock. The insured''s stock was covered under Policy Nos. 1998/310375 and 1999/3100935 for Rs. 20,00,000 each. The bank''s interest is mentioned in Policy No. 1998/310375 only.

The stock stored/lying in the insured''s factory was totally burnt and could not be quantified. We had discussions with Branch Manager of the Thane Janata Sahakari Bank Ltd., Khopat branch to know about the physical stock position whenever the stock was inspected by the branch. We were unable to get any confirmation about the last inspection made by the bank. However, the bank has only recently confirmed that monthly stock statement was submitted by the insured and as and when they have verified the stock was found to be in order. 8.1.3 The value of stock declared to bank as on the last date of the month from April, 1999 to October, 1999 is as follows: (Rs.) April, 1999 3,02,115 May, 1999 2,49,984 June, 1999 37,135 July, 1999 1,66,128 August. 1999 21,79,369 September, 1999 35,10,238 October, 1999 53,09,250

8.1.4 As on 31.3.1999, the value of stock as per stock statement given to the bank was Rs. 2,29,716 whereas the value of stock as per audited Manufacturing Account and Balance Sheet for the year ended 31.3.1999 was Rs. 19,29,106.

8.1.5 The purchases for the months of August, 1999 to October, 1999 was more when compared to earlier months. The insured explained to us that raw material price was expected to increase in November and more stock was gradually procured. The quantity of purchases/sales from April, 1999 to 6.11.1999 was as follows: Month Purchases -Kg. Sales -Kg. April 11375 10910 May 11050 13300 June 9075 13922 July 13961 11101 August 23200 11141 September 30894 11499 October 23870 10305 Upto 6.11.1999 2106 4171 125531 86363

8.1.6 From purchase bills it was verified that the price of LDPE increased from Rs. 55 per kg in September to Rs. 66 per kg. In end of October, 1999. The last purchases made by Insured was on 4.11.1999, when the rate was Rs. 68.24 per kg. IPCL are the main suppliers of the raw materials and they have increased the price twice in October, 1999 The insured has procured the materials mainly from M/s. Cybe Corporation and M/s. J. Maheshkumar Petrochemicals (P) Ltd. who are the two leading stockists for IPCL

8.1.7 We visited the office of M/s. Cyba Corporation from whom the insured has procured 31 MT of LDPE during September, 1999 to 4.11.1999. The discussions with the owners and verification of their records indicate that M/s. Cyba Corporation has supplied the stock to the insured. The insured has made payment for the purchases made from M/s. Cyba Corporation and M/s. J. Maheshkumar Petrochemical (P) Ltd.

8.1.8 Though the purchases and sales were found to be in order as per records, we could not accept the total quantity of 73585 kgs. claimed by the insured. The opening stock considered for arriving at this balance is higher as compared to quantity declared to bank. For assessing the quantity we have taken stock quantity as on 30.4.1999 as per Bank declaration and then made addition/deletion for purchase and sale quantity during the period 1.5.1999 to 6.11.1999.

Accordingly, the quantity of stock as on date of loss is worked out as follows: Kgs. Stock quantity as on 30.4.1999 5,367.75 Add: Purchases from 1.5.99 to 6.11.99 1,14,155.60 1,19,523.35 Less: Sales from 1.5.99 to 6.11.99 75,444.73 Balance quantity on 6.11.99 44,078.62

8.1.9 We have valued the stocks as per the latest purchase rate viz at market value. The last purchases made by insured prior to loss was on 4.11.1999. The rate including Octroi is Rs. 68.238 per kg. The rate matches with the selling price fixed by IPCL. Further, the entire quantity was considered to be raw material avoiding any addition of insured''s own manufacturing cost.

8.1.10 Salvage: There was small quantity of remnants of the burnt stock, in lump/melted form. Considering the limited quantity which could be extracted and its scrap value we have deducted 1% as salvage value.

8.1.11 The Loss Assessed for Stock is as follows - Cost of 44078.620 kgs of LDPE @ Rs. 68.238 per kg. Rs. 30,07,885 Less: Salvage value -1% Rs. 30,079 Loss Assessed: Rs. 29,77,806

8.2 Plant and Machinery

8.2.1 Physical verification was carried out of the damaged/burnt machinery and tallied with the purchase bills. The machines are of local make and purchased during the period 1996 to 1999. The insured''s claim is based on original cost of the machinery. We have ascertained that the present market price is not less than the same and hence original cost forms basis of assessment. Suitable depreciation has been considered according to year of purchase.

8.2.2 The depreciated value of the Plant and Machinery installed in the insured''s factory and destroyed by fire is as follows: Year Value=Rs. At cost Rate of Depreciation Depreciated Value Rs. 1996 32,68,352 30% 22,87,846 1997 15,31,150 20% 12,24,920 1999 12,08,098 5% 11,47,693 Total 60,07,600 46,60,459

8.2.3 The details of machinery are mentioned in Annexure -1

8.2.4 The Plant and Machinery is financed by M.S.F.C. The policy No. 1998/3101374 covers Plant and Machinery for Rs. 50,00,000. The value of Plant and Machinery on depreciated value is Rs. 46,60,459. The sum insured was thus found adequate.

8.2.5 All the machines were severely gutted and damaged by fire. From their burnt condition it was evident that none of the machinery were repairable and the entire lot were having only scrap value. We have deducted 10% as salvage value.

8.2.6 The Loss Assessed for Plant and Machinery is as follows: Depreciated value of damaged machinery Rs. 46,60,459 Less: Salvage value -10% Rs. 4,66,046 Loss Assessed: Rs. 41,94,413

8.3 Building Structure: 8.3.1 The insured Gala admeasured 1950 sq. ft. of 18 ft. ht. made of brick walls and the roof was of asbestos sheet on steel frame work. The mezzanine floor was 1400 sq. ft.

8.3.2 The insured has claimed Rs. 12,50,000 for replacement of building including, mezzanine floor. AC sheet roof, steel framework, wall plastering, etc. The roof, mezzanine floor and metal trusses have collapsed and/or twisted. The flooring and wall has to be remade/plastered. According to our estimate the total cost of repairs/replacements will be 80% of the value of building structure, including mezza -nine, etc. net of salvage.

8.3 3 The Valuation and loss of building structure is as under - Cost of 1950 sq. ft. building structure @ Rs. 300 per sq. ft. Rs. 5,85,000 Cost of 1400 sq. ft. mazzinine floor @ Rs. 125 per sq ft. Rs. 1,75,000 Rs. 7,60,000 Less: Depreciation @ 78% (i.e. 2% for 9 years) Rs. 1,36,800 Depreciated value: Rs. 6,23,200

8.3.4 Loss at 80% of value, net of salvage works out to Rs. 4,98,560

8.3.5 The loss assessed is after considering salvage value for metal scrap.

8.3.6 The sum insured of Rs. 12,00,000 was adequate.

8.4 Furniture, Fixtures and Fittings -

8.4.1 As per the estimate submitted, the insured has claimed Rs. 5,10,400 for office cabin, false ceiling, furniture and fixtures, air conditioners, fax, computers, etc.

8.4.2 We have verified the damaged items. It is totally gutted and has to be treated as scrap. The furniture, fixture, air conditioner and fax machines are valued at original cost as there is no major price increase in past two/three years. Suitable depreciation has been considered according to year of purchase

8.4.3 The details of f.f.f. and other contents is as follows - Description Value Rs. DEP % Depreciation Rs. Depreciated value Rs Furniture partitions Cabins, tables, etc. 2,78,362 30 83,509 1,94,853 Air Conditioner 21,000 30 6,300 14,700 Lighting/wiring 52,461 30 15,738 36,723 2 fax machines 37,240 50 18,620 18,620 Computer 35,000 50 17,500 17,500

8.4.4 The sum insured of Rs. 4,00,000 for f.f.f. and other contents was fund to be adequate on depreciated value basis.

8.4.5 Loss assessed for f.f.f. and contents is as under - Depreciated value of and other contents Rs. 2,82,396 Less: Salvage value -3% Rs. 8,472 Loss Assessed : Rs. 2,73,924

9.0 Summary of Loss Assessed: Based on the above, insured Total Loss has been summed up on depreciated value basis as under : stocks Rs. 29,77,806 Plant and Machinery Rs. 41,94,413 Building Rs. 4,98,560 FFF and other contents Rs. 2,73,924 Less Excess Rs. 79.44,703 Rs. 19,000 Claim Assessed: Rs. 79,34,703

PLEA taken in the written version by the Insurance Company that the complainant did not identify the sources from which it procured Rs. 21,79,369 in April, 1999, Rs. 35,10,238 in September, 1999 and Rs. 53,09,250 in October, 1999 for purchase of raw materials is based on the Om Nityanand Enterprises -Investigator''s report dated 22.12.2003. Submission advanced by Mr. Singh, Advocate for the Insurance Company was that as is manifest from the joint survey report dated 13.3.2001, there was major discrepancy in the value of stocks between the audited Manufacturing and Profit and Loss Account and Balance Sheet, on one hand, and stock statements furnished to opposite party No. 3 by the complainant, on the other hand. According to the learned Counsel there was sudden increase in the value of stock in the months of August, September and October compared to previous months in 1999 and the complainant despite demand by the Investigator, had failed to identify the sources from which it procured money for making purchases of raw materials in August, September and October, 1999. It was pointed out that over draft limit of the complainant was only Rs. 20.00 lakh. Claim made was not genuine. To be only noted that though Section 64(UM) of the Insurance Act, 1938 provides for appointment of Surveyor(s) to assess the loss, it does not stipulate appointing an Investigator by the Insurer. As may be seen from aforesaid paras 8.1.4 and 8.1.8 of the report dated 13.3.2001 though the complainant''s Manufacturing and Profit and Loss Account and Balance Sheet for the relevant year was audited one and on verification purchases made from M/s. Cyba Corporation and M/s. J. Mahesh Kumar Chemicals (P) Ltd. as also the sales were found to be in order as per records, still the Joint Surveyors chose to take the stock quantity as per the stock statements submitted to opposite party No. 3 by the complainant for assessing the quantity of stock and the loss. Needless to repeat that in the written version the opposite party No. 3 - bank has alleged that complainant submitted the statement of stock up to October, 1999 which on verification by the bank were found to be in order. In this backdrop, Insurance Company cannot derive any advantage of the discrepancy in the quantity of stock in the Manufacturing and Profit and Loss Account and Balance Sheet and the monthly statements submitted to opposite party No. 3 Bank by the complainant. In the present case only the quantity of stock on date of fire has relevance and not the source from where the complainant got the money to purchase the raw materials. It may be mentioned that the joint survey report notices that the complainant had made payments for the purchases made to the said two suppliers. Except assessment of loss to the stock, the opposite party No. 1 Insurance Company has not seriously challenged the assessment as made by the Joint Surveyors of the plant and machinery, building and furniture, fixtures and fittings. Surveyor''s report dated 13.3.2001 is a valuable piece of evidence and there seems to be no cogent ground to differ with it on loss to the stock of Rs. 29,77,806 and the total loss.

IN the complaint, total amount of Rs 1,25,25,349, break -up whereof is given in para No. 17, has been claimed. We are not inclined to separately award compensation for item Nos. 3 and 4 in para No. 17. Against the policy of Rs. 60.00 lakh, opposite party No. 2 -bank is entitled to compensation in regard to the factory building, plant and machinery and furniture, fixtures and fittings which were mortgaged/hypothecated with it. Against the policy of Rs. 20.00 lakh opposite party No. 3 - bank is entitled to receive the compensation with respect to the stock which was hypothecated with it. Both the policies contained agreed bank clause. While issuing policies the opposite party - Insurance Company was aware that the complainant had taken loan from said two banks at higher rate of interest. In the facts and circumstances of case, we quantify the rate of interest @ 12% p.a. Insurance Company should have settled the claim within about two months of the receipt of the report dated 13.3.2001. Insurance Company is, thus, liable to pay interest w.e.f. 15.5.2001. It is a case of gross deficiency in service on the part of opposite party No. 1 -Insurance Company.

ACCORDINGL Y , complaint is allowed with direction to opposite party No. 1 - Insurance Company to pay out of amount of Rs. 79,34,703, a sum of Rs. 49,56,897 (Rs. 41,94,413 + Rs. 4,98,560 + Rs. 2,73,924 - Rs. 10,000) to opposite party No. 2 and Rs. 29,77,806 to opposite party No. 3 with interest @ 12% p.a. with effect from 15.5.2001 till realization. Insurance Company will further pay cost of Rs. 30,000 to the complainant. Complaint allowed.