Claim settlement – the mode of Indemnity by an Insurer !! - the need for clear and unequivocal terms

Insurance is a contract of indemnity – the policy evidencing the contract entered into between the Insurer and Insured incorporates that the Insurance Company upon receipt of full premium would subject to insuring terms and conditions would pay to the Insured the value of the property if the property insured be damaged or destroyed by any of the perils insured against.

Some of the foregoing would change, if the policy is not ‘specified perils’ policy but one covering ‘all risks’ which would be driven by exceptions or exclusions, so named in the policy.  Most of the policies also mention the mode of such indemnity either in the operative clause or elsewhere – ‘option to reinstate or replace such property or any part thereof’. 

In the Standard Fire & Special Perils Policy, there is a condition stating that ‘the company may at its option, reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage or join with any other company or Insurer……………’.  A similar condition that the Company may at its option repair reinstate or replace the vehicle insured is incorporated in the Motor Package policy as well. 

As experienced in India – these options are not exercised.  The insured repairs or reinstates and based on the invoices and bills, the indemnity amount is arrived at and payment through cheque is effected either direct to the policy holder or to the repairer or to the Financiers, wherever their interests are incorporated in the Policy.  Not to confuse with the extent of liability which could as well the amount of repairs, even where the Insured chooses to replace a property.

When a loss occurs, most Insureds prefer changing their equipment and claiming ‘new for old’ which may not be what the policy provides for – the Insurers’ liability would only be limited to the value of the property before the occurrence of accident, which would be market value which is value less depreciation.  When the damage warrants repair, naturally the liability would be considered for and up to the amount that would be incurred had it been repaired, even though physically, the equipment might have been replaced anew.

Even where the policies provide for ‘new for old’ [very common in Marine Hull] the decision on whether it should be repairs or replacement / reinstatement is retained with the Insurers.  This is understood to be largely practised in many countries.   Where insurers opt for repairs at their preferred place, there could be implications – the minimum being the responsibility for correction of deficiencies.  On the other hand, if the policyholder opts particular repairer should carry out the work, then the policyholder will be responsible for the quality of that work.  This does not however mean that every estimate of repairs is regarded as chosen contract !

Each claim is independent and throws out myriads of possibilities – when replacements are suggested by the Insurer, it has to be a reasonable replacement which could be hard to come by, especially if the subject matter of insurance is a weird thing like an antique jewellery or a masterly crafted piece.   There could also be circumstances where the policyholder may not wish to reinstate or replace the goods lost either because the circumstances have changed or due to  the sentimental value – cash settlement could be easiest way out.  

It is reported that in a recent Appeal decision in Australia where Court observed that the Insurers if they elect the option of repairs, such election has to meet the requirements of being clear and unequivocal. 

This was a case of an Airlines having a Policy with a leading Insurer covering its Cessna 208 aircraft for a value of $1.8 million.    Arising out of a damage in an accident, the aircraft owner preferred a claim for damages.  The insurance policy allowed for Insurers to elect to “pay for, repair, or pay for the repair of, accidental loss of or damage to” to the aircraft. 

Upon exercise of this option, the owners were not convinced that a repair would return the aircraft to the condition it was prior to the ditching and preferred a claim for the full insured value, a claim for a Total loss.  The Insurers wanted the repairs to be done and obtained a quote for repairs.  It was argued on behalf of Insurers that they had  elected to repair the aircraft as communicated in their letters to the Insured.   The policy holder was also required to instruct the repairer nominated by the Insurer to proceed with the repairs,  owners sign an authority to repair and sign an assurance as to the quality of works as performed by the repairers.   

The Primary Judge held that this did not constitute the option to repair by the Insurer as the instructions were not given by the Insuers themselves but instead instructed the aircraft owner to do.  The Insurers went on appeal on whether the  primary judge had erred in making this determination.

The Court of Appeal concurred with the decision of the primary judge in that the purported election to repair the aircraft by QBE was invalid.  In making this determination, the Court was guided by general principles for election that “a party can only be held to have elected ‘if he has so communicated his election to the other party in clear or unequivocal terms’”.  The requirements imposed by  the Insurers in the instant case amounted to a qualified election and therefore, was deemed to be ineffective.  Another lesson that the Insurers have to be  cautious to only make demands of the insured which comply with the terms of the insurance policy and word their communication appropriately.

Every claim presents a new facet and provides newer opportunity of learning.

Regards – S. Sampathkumar.