Under-Insurance and a Flood Claim in Barpeta
A hardware shop in Barpeta insures its stock against fire and flood for a sum insured of ₹8 lakh. On the day of a flood, the stock actually at risk is worth ₹12 lakh. The flood damages stock that had cost ₹6 lakh. The shopkeeper had bought the policy through an agent who told him, 'Insure for ₹8 lakh; the premium will be lower and you will still get full claim for small losses.' The insurance company applies the average clause and offers a lower amount. The shopkeeper argues that he paid premium regularly and the flood was not his fault. He also spent ₹25,000 on removing debris and ₹15,000 on temporary storage. The policy covers removal of debris but not storage. He wants to know whether to accept the offer or approach the consumer commission.
1. Compute the claim payable under the average clause and explain the principle of indemnity.
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Average clause. The clause applies when the sum insured is less than the actual value of the property at risk. The claim is reduced in proportion: claim = (sum insured ÷ actual value) × loss. Here, sum insured = ₹8 lakh, actual stock = ₹12 lakh, and loss = ₹6 lakh. Claim = (8 ÷ 12) × ₹6,00,000 = ₹4,00,000. The insurer pays ₹4 lakh, not ₹6 lakh. The shopkeeper bears the remaining ₹2 lakh because he was under-insured.
Debris removal. The policy covers debris removal of ₹25,000. If the average clause is applied to the whole claim, the recoverable debris amount is (8 ÷ 12) × ₹25,000 = ₹16,667. The total claim would then be about ₹4,16,667. Temporary storage of ₹15,000 is not covered, so it is not payable.
Principle of indemnity. Insurance aims to restore the insured to the same financial position as before the loss, not to make a profit. The shopkeeper cannot recover more than the actual loss, and under-insurance means he shares the loss. Paying premium regularly does not remove the average clause; the clause is part of the contract. The agent's advice was wrong and increased the shopkeeper's exposure.
2. Was the agent's advice correct? Explain the consequence of under-insurance and how the shopkeeper should have chosen the sum insured.
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The agent's advice was not correct. A lower sum insured reduces premium, but it also reduces the claim when the average clause applies. The agent seems to have treated the policy as if it would pay any 'small loss' in full. That is misleading. If the actual stock is ₹12 lakh and the sum insured is ₹8 lakh, the shop is under-insured by one-third. For every loss, the insurer pays only two-thirds and the shopkeeper bears one-third.
Consequence. The shopkeeper bears ₹2 lakh of the ₹6 lakh stock loss, plus ₹8,333 of the debris removal if the clause is applied, and the entire ₹15,000 storage cost. The cash shortfall may delay restocking and affect the next season's business.
How to choose the sum insured. The sum insured should reflect the maximum value of stock likely to be held during the policy period, not the value on the day the policy is bought. The shopkeeper should review stock values at peak season, include goods in transit or in godowns if covered, and update the sum insured when prices rise. He should also read the policy's average clause and ask for it in writing. A higher sum insured costs more premium but avoids a proportional cut in the claim.
3. Is the shopkeeper a 'consumer' under the Consumer Protection Act, 2019 for insurance services? Advise on the remedy and the forum.
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Yes. A person who buys an insurance policy for consideration is a consumer of a service. Insurance is not a free service, and the policyholder can complain of deficiency in service, unfair trade practice, or restrictive trade practice.
Remedy. The shopkeeper should first write to the insurer and the agent, asking for the claim calculation and the policy clause applied. He should use the insurer's grievance redressal system and keep copies of the policy, premium receipts, photographs, stock records, and the agent's statement. If the insurer has applied the average clause correctly, the commission may not increase the claim merely because the flood was not the shopkeeper's fault. But if the agent misrepresented the cover, the shopkeeper can plead unfair trade practice or deficiency in service and claim the shortfall, mental agony, and costs.
Forum. The claim is about ₹4.17 lakh, which is within the pecuniary jurisdiction of the District Consumer Disputes Redressal Commission (up to ₹50 lakh). The complaint should be filed within two years from the date of the insurer's refusal or deficient settlement. The shopkeeper can file where he resides or where the insurer has an office. He should not accept the offer in writing without first getting the calculation checked.