Keep revising the sum insured at the time of renewal to keep it in line with inflation.
On August 29, 2023, the National Consumer Disputes Redressal Commission (NCDRC) upheld prior rulings in the New India Assurance versus Dip Bahadur Chettri case.
The case highlights the need for home insurance buyers to select this policy carefully.
Highlights of the case
Chettri bought a home insurance policy with a sum insured of Rs 10 lakh, valid from July 2005 to July 2020, for his house in Darjeeling.
An earthquake in September 2011 damaged the building, rendering it unfit for residence.
The sub-assistant engineer of Darjeeling municipality assessed the damage at Rs 32,12,514. The insured submitted a claim in December 2011.
The insurer appointed a surveyor who assessed the value of the building at Rs 13,38,000. Since the sum insured was only Rs 10 lakh, this was treated as a case of underinsurance.
The average clause was applied and then a depreciation of 59.4 per cent (as the property was 33 years old).
The surveyor assessed the insurer's liability at Rs 1,12,108. The insurer settled the claim at Rs 72,436. The insured then went to court.
Both the District Forum and the State Commission ruled in the insured's favour and ordered the insurer to pay the sum insured of Rs 10 lakh. The National Commission, too, upheld these rulings.
Key points of contention
Underinsurance: The insurer's surveyor treated this as a case of underinsurance (as the building's assessed value was higher than the sum insured). In this case, the courts ruled in the insured's favour.
The State Commission said, 'It is not at all believable that the work for which the respondent submitted an estimate of Rs 32,12,514 could be done on payment of a sum of Rs 1,12,108 only.'
The surveyor had used the PWD rate of construction to arrive at its assessment. The State Commission said it was not possible for the general public to get work done at PWD rates.
Explaining the courts' rationale, Animesh Kumar, a partner at New Delhi-based Fiducia Legal, says, "In a case where the damage is much higher than the sum insured, the insurer is liable to pay the full sum insured."
Insurance experts, however, differ, pointing to the 'average clause', which says that when the actual value of the property is higher than the sum insured, insurers pay only a proportion of the loss.
Says Kapil Mehta, co-founder and CEO, SecureNow, "Suppose the value of a property is Rs 13 lakh and the sum insured is Rs 10 lakh. If the damage is, say, worth Rs 2 lakh, the insurer is liable to pay only Rs 1.54 lakh (2 x 10/13)."
He adds that if insurers don't apply this principle, customers will remain underinsured to save on premium costs.
Depreciation: The case highlighted this issue as well.
Says Kumar, "Insurers can apply the depreciation clause, but it must be mentioned in the contract. In this case, the courts held that since the depreciation clause was not there in the contract, the insurer could not apply it."
What should you do?
When you buy home insurance, understand the basis of indemnification or how compensation will be decided (which also determines how the sum insured is decided).
"Nowadays, indemnification is mostly done on a reinstatement basis. This means the insurer will pay an amount that is adequate to reinstate the house to its former condition," says Mehta.
In the past, policies were sold under the concept of market value.
"Suppose the house's market value is Rs 10 lakh at the time of purchasing the policy. When a claim arises, say, after five years, the insurer can say that the value of the house (only the structure, which is insured, not the land), has depreciated and compensate you after applying a standard depreciation rate to the damage amount," says Mehta.
Buy a policy that will compensate you on a reinstatement basis.
"The sum insured must equal the cost of reconstructing the house. And keep revising the sum insured at the time of renewal to keep it in line with inflation," says Mehta.
Kumar emphasises reading the contract carefully and understanding its key clauses.
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Feature Presentation: Ashish Narsale/Rediff.com