In certain cases, insurers need to pay only depreciated value

Bimal Bhowick was working as director of health and family welfare, government of Tripura. He purchased a colour doppler (echo cardiograph) from Philips India in 1996. This machine was insured with National Insurance. According to the renewed policy for 2005-2006, the machine was insured for Rs 12 lakh.

The machine developed certain defects, due to which the quality of images became poor. The engineer deputed by Philips inspected the machine and reported the transducer required replacement, which would cost Rs 1.2-1.3 lakh plus installation charges of Rs 20,000. Bhowmick intimated this to the insurance company.

Philips later informed the doctor it would not be possible to repair the machine as the company had discontinued manufacturing the same model, and so its spare parts were no longer available. Contending that the machine was now a total loss, Bhowmick asked the insurance company to pay the entire sum insured of Rs 12 lakh. The company refused to do so, and instead offered only Rs 2 lakh. Feeling aggrieved, the doctor filed a complaint before the West Tripura District Forum.

The insurance company contested the complaint, saying the complaint was not maintainable, as the machine was used for a commercial purpose. On the quantum, the insurance company argued that as the machine could not be repaired, its depreciated value was being offered. Considering the machine was nine years old, the company argued its offer was fair and reasonable.

The Forum directed the insurance company to pay Rs 28 lakh. In appeal, the State Commission set aside the Forum's order, holding the complaint was not maintainable, as the machine was put to commercial use.

Bhowmick, filed a revision petition before the National Commission, which observed insurance is not for commercial purpose, but for indemnification of loss. So, disputes relating to insurance are maintainable under the Consumer Protection Act.

In respect of the amount of the claim, the Commission observed that the sum insured is to be equivalent to the replacement cost of the machine. So, the policy of Rs 12 lakh was to cover the cost of replacing the machine. When replacement is impossible as its manufacture had been discontinued, the only alternative was to pay the depreciated value of the machine.

The Income Tax Act provides for 15 per cent depreciation for plant, machinery and motor vehicles. Even if a lower rate of depreciation of 10 per cent is considered, the depreciated value of the colour doppler machine costing Rs 12 lakh would be less than Rs 2 lakh after nine years of use. In its order of November 26, 2015, delivered by Ajit Bharihoke and Rekha Gupta, the National Commission concluded the insurance company's offer to settle the claim at the depreciated value was correct. The Commission held that the amount of Rs 2 lakh offered by the insurance company was reasonable and directed Bhowmick to accept it.

The author is a consumer activist