The Rusted Coil Line: Betterment or Insured Peril?
A steel fabricator's coil slitting line suffered a breakdown when a bearing seized, scoring two drive shafts and contaminating the hydraulic circuit with metal particles. The policy is an engineering breakdown cover with a sum insured of INR 42 million on the plant. The loss adjuster's survey records: replacement cost of the two shafts INR 3.1 million, hydraulic flush and filter replacement INR 0.6 million, and a recommendation to upgrade the bearing housings to a sealed design at an additional INR 0.9 million because the existing open housings are 'inherently prone to ingress'. The machine is 11 years old; its depreciated value is INR 14 million. The insured argues the sealed housings should be paid because the failure would not recur otherwise. The underwriter's file shows the risk was accepted without a condition survey and the proposal form described maintenance as 'regular' with no records attached.
1. Identify the insurable elements of the claim and separate out the items that should be excluded or apportioned, giving your reasoning.
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The insured peril is the accidental mechanical breakdown of the bearing; the consequential damage to the shafts and the hydraulic contamination are direct physical damage flowing from that event and are prima facie payable.
- Shafts (INR 3.1m) and hydraulic flush (INR 0.6m): payable, subject to the deductible and to the basis of settlement (reinstatement vs. depreciated).
- Sealed housings (INR 0.9m): this is an improvement over the original design, not restoration to pre-loss condition. It is betterment and is excluded unless a specific 'improvement/upgradation' extension applies. The insured's argument that it prevents recurrence is an argument for risk improvement, not for indemnity - indemnity restores the pre-loss state, it does not fund upgrades.
- Maintenance: 'regular' maintenance with no records is an unverifiable warranty-type statement. If the seized bearing was overdue for lubrication, the insurer may raise breach of a maintenance condition, but the burden is on the insurer to show the failure was caused by that breach. On these facts the survey does not establish the cause as lack of lubrication, so a maintenance defence is weak.
Conclusion: admit INR 3.7m less deductible; decline the INR 0.9m upgrade; flag the maintenance representation for the renewal file rather than for repudiation.
2. The insured elects reinstatement. The machine's depreciated value is INR 14m against a sum insured of INR 42m. Explain how the basis of settlement and any underinsurance affect the amount payable, and what you would do about the gap.
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Two separate issues are being conflated.
Basis of settlement. If the policy is on reinstatement value, the measure is the cost of replacing/restoring the damaged parts to a condition equal to but not better than new, not the depreciated value of the whole machine. The INR 14m figure is the depreciated value of the entire plant and is irrelevant to valuing two shafts. So the shaft item is measured at INR 3.1m (new replacement of the damaged components), less salvage and deductible.
Underinsurance / average. Average applies to the subject matter insured against the sum insured. The sum insured of INR 42m is on the plant; the damaged parts are worth INR 3.7m. There is no indication the sum insured is less than the reinstatement value of the plant, so no average should be applied. If a condition of average existed and the plant's reinstatement value exceeded INR 42m, the claim would be reduced proportionately - but that requires evidence of the plant's full reinstatement value, which the file lacks.
Action: obtain a valuation of the plant's reinstatement cost. If it exceeds the sum insured, apply average proportionately and explain the calculation to the insured; if not, pay in full. Do not use depreciated value as a proxy for underinsurance.