ORIENTAL INSURANCE COMPANY LTD. vs Rishabh Refectories Ltd.

CONSUMER Complaint No.22 of 2005, filed by M/S. Rishabh Refractories Ltd, was decided by the State Consumer Disputes Redressal Commission UT of Chandigarh on 31.1.2008. The insurance claim of the Complainant Company against rain damage was allowed for a sum of Rs.19,54,666/ - together with 12% interest from two months after the date of the surveyors report i.e. with effect from 4.10.2005.

THE above verdict has been challenged by both sides. In FA No.109 of 2008, the Oriental Insurance Company Ltd, has sought reconsideration of the award by this Commission. In FA No.110 of 2008 the Complainant Company has prayed for enhancement of the award to the level of the claimed amount of Rs.80,74,646/ -, together with an increase in the rate of interest awarded by the State Commission. The facts, as presented before the State Commission are that the complainant Company has been in the business of manufacturing high quality fire bricks, insulation bricks, high aluminium bricks, salt -glazed pipes and several other types of fire and acid resistant clay insulators. ''Refractories '' are products which are manufactured from materials like clay, silica, quartz and bauxite. They can withstand very high temperatures and pressures and are essential to steel, glass and cement industries. In 2002 the Company took up its modernization with Rs.85 lakhs term loan from the State Bank of Patiala. The bank also sanctioned and extended cash credit limit of Rs.25 lakhs to the Complainant Company. The modernization plan was implemented during 2002 -2004 period, under the continuous scrutiny and supervision of the lending Bank. Further, in three policies taken in April, May and June 2004, the stocks were provided insurance cover of Rs.100 lakhs.

ON the night intervening 2/3.8.2004, there was extra ordinary rain of 330 mm in Chandigarh and its surrounding areas, which was highest in past 47 years. The rain caused huge accumulation of water on roads as well as the land. Due to the rain, water also accumulated in and around the factory land and building of the Complainant. The boundary wall of the factory premises also broke and water entered the godown and the factory premises causing huge damage to the machinery as well as the material lying in the factory premises. In addition to the damage caused to the material and machinery, the water also damaged the office record including the account books and accessories. The computers installed in the office were also damaged due to water seepage in the hard disc, data of which, despite best efforts, could not be retrieved.

AS per the Complainant, the loss amounted to Rs.80.47 Lacs. As claimed, the stock position of the Complainant Company on 31.7.2004 was Rs.1,01,34,849/ - and the stock position in the Financial Year 2004 -05, on certain dates till the date of loss, as per Stock statements was - Sr. No. Stock in Month and Year Value of Stock 1. 02nd April 04 8,00,414.00 2. 03rd May 04 23,11,048.51 3. 22nd May 04 81,23,605.00 4. July 04 1,02,07,372.50 5. 1st Aug. 04 1,01,34, 849.00

The Surveyor vide letter dated 12.8.2004 sought assistance of the Complainant by way of providing relevant documents and records. The Complainant Company informed the surveyor that it needed some time to reply as the entire records had been washed away in the floods and had to reconstruct the same was a time consuming exercise. The Complainant continued to provide documents and information required by the surveyor and on 18.1.2005, it wrote to the surveyor to settle the claim at an early date as the Company was incurring heavy financial loss.

IN view of inordinate delay in finalization of the claim, the Complainant served a legal notice on the OP on 2.2.2005 and another letter on the same issue on 12.4.2005, eliciting no response. However, vide letter dated 3.9.2005, OP communicated to the Complainant that the surveyor had assessed the damage to the tune of Rs.6.77 Lacs only. The Complainant avers that apart from the loss of Rs.80.74 Lacs suffered due to damage to the insured items, it has further suffered financial loss to the tune of Rs.33.90.

ON merits, the reply of the OP is that there has been no delay on the part of the OP in settling the claim. The delay, if any, is on the part of the Complainant due to his non cooperative approach and non production of required documents. Further, the allegations levelled against the surveyor by the Complainant have been vehemently denied. The specific case of the OP is that the surveyor observed huge purchase of raw material during the period from 1.4.04 to 2.8.04. However, no supporting documents were supplied by the Complainants to justify the same on the ground that all accounts and records had been washed away in floods. The OP has basically relied upon the surveyor ''s report filed as Annexure R -5 wherein the surveyor has mainly pointed out the following: - (a) The space in the factory premises was inadequate to hold the additional stock other than the damaged/intact stock found by the surveyor during his visit.

(b) The surveyor was never informed during his visit that 4,47,589 pieces of semi -finished refractories and 97,227 pieces of WIP/Green Mix had been washed away and this was only included in the subsequent claim form by the Complainant.

(c) The factory was capable of maximum production of 73,429 refractories per month and was, therefore, capable of producing only 2,93,716 pieces of refractories during the period of four months i.e. 1.4.04 to 2.8.04.

(d) There is wide variation in the sale purchase and stock levels shown of the coal as on 2.8.04 as also in the figures of sales, purchase and debitor/creditor details given by the Complainant.

(e) As per the surveyor, the power bill for the period 1.4.04 to 2.8.04 did not indicate any appreciable change from the power bills of the last year.

(f) He has taken 12,392 pieces of refractories kept in Hot Kiln as semi finished refractories because they were still work - in -process.

The main grounds urged in the appeal filed by OP/ Oriental Insurance Company are that - a. The State Commission was wrong in considering the stock statements for the period 3.8.2003 to 2.3.2004, as this was six months prior to the loss which occurred on 3.8.2004. The stock position of this period was of no help in assessing the loss which occurred on 3.8.2004. Correct approach would have been to consider the stock statements of a month or two, close to the date of loss.

b. It is also argued that the stock statements submitted to the bank for the period 1.4.2004 to 2.8.2004 were made available to the surveyor, They could not have been relied upon, as the bank had not carried out any stock audit and made only routine visits. Similarly, the balance sheet as on 30.6.2004 filed by the bank was provisional, unaudited and contained highly exaggerated figures of purchase and gross profit.

c. The factory premises did not have enough space to accommodate 504923 pieces of semi -finished refractory and 97277 pieces of work in progress before the flood.

IN the cross appeal filed by the Complainant seeking enhancement of compensation, the main grounds raised are - a. The State Commission was wrong in determining the stock position on the basis of average holding for the period 3.8.2003 to 2.3.2004. It should have appreciated the fact that the Complainant/appellant had availed cash credit facility from its bankers, State Bank of Patiala and therefore it was mandatory for it to submit monthly stock position to the bank. Therefore, the stock statements as on 31.7.2004 should have been relied upon by the State Commission. According to this statement the total value of finished/semi -finished goods was Rs.68,32,349/ - and of raw materials Rs.33,02,500/ -.

b. That having chosen the seven months period from 3.8.2003 to 2.3.2004 for determination of the stock holdings, the State Commission should not have further limited it to the stock level of 31.7.2004 only in cases where it showed a lower figure, by applying the principle ''''whichever is less ''''.

ON detailed consideration of evidence before it, the State Commission has arrived at the following findings of fact: - 1. The report of surveyor makes an observation that the insured premises did not have adequate space to store the finished/semi -finished goods and raw materials, claimed by the Complainant as per the stock statements given to the Bank. That the Surveyor has not placed on record any calculation or other evidence in support of the claim of inadequate space made in his report. On the other hand, Mrs. Daya Sukhija, Manager Business Re -engineering, Head Office, State Bank of Patiala has, in her cross examination, confirmed that the premises in question had adequate space for such storage.

In three insurance polices the Complainant Company had covered stocks worth Rs.1 crore against loss. It would have been illogical on the part of the Complainant to seek such a high limit of coverage if the premises did not have enough space for storage of stocks worth this amount. Even the insurance company would not be expected to extend coverage, in the absence of adequate space for stocks worth Rs.1 crore. In support, the State Commission has also relied upon a professional report filed by the Complainant before it. This report of Lieutenant Colonel A.K.Suri, Government and Banks Registered Valuer shows that the premises had adequate space to hold 13.70 lacs pieces of semi -finished goods in half the space and storage capacity for 1,000 MTs of coal and other raw materials.

The report of the surveyor does not show the basis on which it has disallowed large quantities of raw materials as well as semi -finished products. Therefore, the recommendation in the surveyor ''s report to allow only 10 MT of coal and 20 MT of other raw materials is arbitrary.

On consideration of the stock statements over a seven months period from 3.8.2003 to 2.3.2004 the State Commission has estimated the average total value of stock as about 59.94 lacs. This is much less than the stocks claimed to have been damaged/lost. It therefore observed that the Complainant has not been able to explain the sudden surge in stock holding of semi -finished products in the stock statements of 22.5.2004, 10.6.2004, 8.7.2004 and 1.8.2004. It is nearly double of the holding of semi -finished stocks till March 2004. Therefore, the State Commission has not taken the stock statements after 31.3.2004 into consideration.

It is thus a case where the loss as per the complaint was of the order of Rs.80.74 lacs; the amount recommended by the surveyor (before adjustment under the excess clause and sub -standard clause) was Rs.9.60 lacs and the amount awarded by the State Commission is Rs.19.54 lacs. During the course of consideration of the two appeals, we have carefully examined the evidence on record with reference to the finding of the State Commission and the contentions raised in the two appeals. On behalf of the Oriental Insurance Company Mr. Mahavir Singh, Sr. Advocate assisted by Mr. Abhishek Kumar & Mr.Nikhil Jain has been heard. The case of M/s. Refractories Ltd. has been argued by Mr. Joy Basu Sr. Advocate assisted by Mr. Abhinav Singh.

A perusal of the report of the insurance surveyor S.K.Bhasin shows that he had attempted to visit the insured premises of the Complainant on the day of the incident itself, but the entire stretch beyond Derabassi was under flood waters and the road was not motorable. He was therefore, forced to return on the 3rd of August, and was able to visit only on the 5th of August, 2004. This would by itself show the intensity of the rain and the extent of damage, it would have caused to a unit, which was in the business of manufacturing clay refractory bricks and other clay insulators.

IT was argued on behalf of the appellant/Complainant that the report of the surveyor claimed that the assessment was based on physical inspection of the left over stocks. However, the report gives no idea how 100% of the finished stock is found intact and undamaged. It was explained that these items are meant for insulation in units like steel, glass, cement and other manufacturing mills, which work under very high pressures and at very high temperatures. Even a hairline crack or slight chipping of sides would make them totally unusable. Our attention was drawn to the certificate of the State Bank of Patiala dated 3.4.2004 (four months before the date of loss). It certifies that the Complainant had invested Rs.86.14 lacs during 2002 -2003 and Rs.71.14 lacs during 2003 -2004 into modernization and expansion, involving upgradation of building, plant and machinery and on preoperative expenses. This included the enhanced working capital limit of Rs.65 lacs, which had been released after 15th March, 2004. Learned counsel argued that as a result of this modernization and expansion, production and therefore, consumption of raw materials had substantially increased. Hence, there was no justification in the surveyor ''s assumption of unit operation at 60% capacity even after expansion and modernization. Therefore, learned Arguing Counsel strongly contended that the figures in the Bank statements, relied upon by the Complainant, clearly showed that as a result of completion of modernization plan the levels of production and therefore inventory had substantially increased. Therefore, the State Commission by adopting figures of pre -modernization months i.e. August, 2003 to March 2004 had effectively deprived the Complainant of the gains of investment in capacity enhancement. Shri Basu argued that the report of the surveyor did refer to the enhancement of capacity from 10080 MT to 17760 MT per year. But, he has very unjustifiably limited the utilization to 60% only of the enhanced capacity.

LEARNED counsel also referred to the observation in the survey report to the effect that the premises did not have enough storage space for the quantities of semi -finished material and work in progress claimed by them. The report has also observed that storage of the quantities of coal, coal dust, fire clay bauxite powder etc. claimed to have been washed away in the flood could not have been possible in the available space. In this behalf he drew our attention to the report of Lt. Colonel A.K.Suri, Registered Valuer, which has made a detail estimation of storage capacity and given the following conclusions: - a) The location of the unit is low lying as compared to the main highway serving that area. The total area of the unit is 12,000 sq. yrds (3 acres).

b) There is also a huge storage capacity in the open area of the Unit for storage of clay and other raw materials used in the manufacturing process of refractories.

c) The finished goods sheds - three in Nos. have capacity to store more than 3.00 lacs nos. of different type of refractory bricks in addition to the open spaces capacity.

d) The unit has open space to store about 1000 MT of steam coal/coal dust etc. at any one time.

e) The unit has sufficient open space for the circulation/movement of vehicles to unload the raw material and to load the finished goods and other industrial materials. It was therefore argued that quantity reduction assumed by the surveyor on the basis of inadequacy of storage space cannot be sustained.

ON the other hand, the Arguing Counsel for the appellant/Oriental Insurance Company Mr. Mahabir Singh, vehemently argued that the assessment of surveyor was based what was actually found. The State Commission itself had given reasons for not accepting the stock statements as furnished by the Complainants to the Bank. It was further pointed out that the figures arrived at are also verified with individual suppliers to the extent of details made available by the Complainant. In this context, learned counsel pointed out that on actual verification with purchasers and suppliers the reported figures of sale of finished goods and purchase of raw materials were found to be substantially higher: - (i) Sales During 1.4.0 to 2.8.04: As per Manufacturing and Profit and loss Rs.85,64,416.00 Account for the said period submitted by Insured As confirmed by Customers Rs.58,18,517.00 (Details attached in annex -1) (ii) Purchase of Raw Material and Coal during 1.4.0 to 2.8.04: As per Manufacturing and Profit and loss Account for the said period submitted by Insured Rs.1,13,78,443.00 As confirmed by Customers Rs.92,55,424.80 (Details attached in annex -2)

State Commission and the Surveyor have both observed that even with enhancement of manufacturing capacity from 10080 MTs to 17760MTs, the stock levels at the time of loss, as claimed by the complainant, would appear to be very high. Both do not accept that in just four months it could have grown from Rs 8.00 lacs on 2.4.2004 to 101.34 lacs on 1.8.2004. Therefore, both have adopted alternative ways of determining the stocks.

FROM a detailed consideration of his report we find that while assessing the loss, the survey has relied very heavily on the following assumptions - a. While noting the enhancement of manufacturing capacity to 17760 MT level, he has assumed that its operation remained at 60%, as in previous years. We find no basis for this assumption.

b. Surveyor ''s report has proceeded on another major assumption that the premises did not have enough storage space for the quatum/volume of stocks claimed by the complainant. To counter this assumption, the complainant produced expert evaluation of Col. A K Suri, before the State Commission. We have mentioned it earlier in this order. It shows that the premises has sufficient storage space for the claimed quantum of raw materials and finished stocks. In our view, this assumption of the Surveyor is unprofessional, to say the least. No Bank would have funded modernisation and expansion of a manufacturing unit which did not have requisite storage space.

c. Having rejected the stock statements as submitted to the Bank, the Surveyor claims to have assessed the loss on his visual/physical evaluation of what remained after the damage. Neither the appeal memorandum nor the counsel for Oriental Insurance Co, have explained as to how he could, having rejected the stock statements, evaluate what he did not see. As noted earlier, the report of Col. Suri also shows that the unit was situated in a low lying area, where materials stocked in the open would be at a greater risk, in the event of high rainfall.

THEREFORE , in our view, the State Commission was right in rejecting the assessment of loss in the Surveyor ''s report. It has also observed that while listing the quantum of loss claimed, rejected and allowed, the Report does not give the basis for rejecting or limiting the claim in each item. Since the complainant too has not justified the sudden surge in stocks figures since March 2004, the State Commission has rightly refused to take the current stock reports as the basis for deciding the claim. In the impugned order, the assessment of loss has been made on the basis of average holdings as per stock statements for the period 3.8.2003 to 2.3.2004. This comprises seven months just before the steep surge in stock figures. However, we accept the logic in the contention of the complainant that having adopted it as the basis, the State Commission should not have further compared it to stock reports of 31.7.2004, merely for limiting the claim to ''whichever is less ''. This would amount to accepting the latest stock reports when un -favourable to the insured and rejecting them for the rest of the claim. Therefore, we do not agree with the State Commission on limiting the stock figure to ''whichever is less ''. With this limited modification, the computation of admissible loss is re -worked as follows - Sr. No. Description of Stock/item Average holding based on stock statements from 3.8.03. to 2.3.04 (A) Salvage/Goods intact inspected by the surveyor. (B) Quantity damaged/washed away. (C) [C= A - B] Average rate of item. (D) Amount of loss. (Rs.) (E) 1. Finished stock of refractories Rs. 1,21,000 -12392 =108608 50,370 58238 Rs.18/ - 10,48,284 2. Semi finished refractories 99,250+12392 =111642 29534 82,108 Rs.11/ -/ 9,03,188 3. Steam coal (Grade A) 322 MT 75 MT 247 Rs.3500/ - 8,64,500 4. Coal Dust 142 MT 20 MT 122 Rs.1750 2,13,500/ - 5. Fire Clay 280 MT 155 125 Rs.1000 1,25,000 6. Bauxite Powder 12 MT 2 MT 10 Rs.4000 40000/ - 7. Washed Clay Powder Nil Nil 8. HA Grock 82 MT 4 MT 78 Rs.2000 1,56,000 9 TOTAL 33,50,472

IN view of the detailed consideration above, FA/109/2008 filed by M/S Oriental Insurance Co is held to be devoid of any merit and dismissed as such, with cost of Rs.50,000/ - to be paid to the complainant. FA/110/2008 filed by M/s. Rishabh Refractories Ltd is partially allowed. The insurance company is directed to pay the complainant the enhanced sum of Rs.33,50,472/ -. The same shall be paid with interest at 9% per year from 4.8.2005. Delay, if any, shall carry additional interest at 2% for the duration of the delay.