ABC Insurance Limited received a proposal on 1st April, 2019 from M/s MC Pvt. Co. Ltd., a proprietary firm to take a fire and allied insurance policy. The proposer was a chemical manufacturer and their plant was commissi

CS Professional · Insurance - Law & Practice · PYQS · June 2021
ABC Insurance Limited received a proposal on 1st April, 2019 from M/s MC Pvt. Co. Ltd., a proprietary firm to take a fire and allied insurance policy. The proposer was a chemical manufacturer and their plant was commissioned in November, 2017. The proposal required coverage for: Building: ₹ 80 lakhs Plant and Machinery: ₹ 95 lakhs Stocks: ₹ 1.6 crores The insurance company issued fire and allied perils policy without carrying out any inspection. M/s. MC Co. Ltd. sent a communication on 24th September, 2019 intimating about a major fire accident in the factory in the early morning hours of 24th September. This intimation though email received by the insurance company on 24th September was followed by a detailed letter and claim form claiming full loss of the stocks of ₹ 1.4 crores in stock on that day and also damage to the Plant and Machinery estimated at ₹ 20 lakhs. The stocks were all hazardous chemicals. The claim form stated that the Fire originated in the control room and spread to the machinery and stocks. The fire brigade report also stated the probable cause of the fire also as accidental. ABC Insurance Limited deputed XYZ Surveyors to survey and assess the loss. The surveyors submitted the report assessing the losses as under: Particular | Assessed loss Plant and Machinery | ₹ 22 lakhs Stocks | ₹ 1.3 crores The insurance company immediately on receipt of the first intimation from the insured deputed its claim officer R an engineer to the factory at about 11 am of 24th September, 2019. R could meet S son of the proprietor of the firm G who was out of the factory during that time. R observed that the fire had been extinguished by that time. He also observed that the electrical wiring on the wall was at a safe distance from the machinery and stock. The insurance company while processing the claim asked for various documents from the insured which included copies of invoices, bank statements, books of accounts, electricity bills and other relevant papers from the date of inception to the date of fire. On the scrutiny of the documents submitted it was found that the purchases of the raw materials and sales of finished goods were quite high but the bank transactions were too small not justifying the volume of sales and purchases and stocks. The electricity bills were also too small as compared to the level of operations claimed by sales and purchases. Even one of the electricity bills had a remark 'premises closed'. These facts aroused suspicion in the minds of officials of the insurance company. The insurance company deputed N, a Chartered Accountant to investigate the claim. N submitted the investigation report on 5th December, 2019. The main observations from her report were: (i) Most of the purchases invoices were from non-existent parties. (ii) The GST registration numbers mentioned on the invoices were fake. (iii) The GST authorities confirmed that the numbers were fake. (iv) One of the customers mentioned in the sales invoices confirmed that he never purchased any goods from M/s MC Co. Pvt. Ltd. and he showed a letter from M/s MC Co. Ltd. that their plant was closed and not in operation, so no supplies could be made due to non-production for long. Copy of the letter was submitted with the report. ABC Insurance Limited sent a letter to M/s MC Pvt. Co. Ltd. on 8th December, 2019 repudiating the claim. The insurance company also complained to IRDAI for alleged misconduct on the part of the surveyors. However it did not lodge any police complaint against M/s MC Co. Ltd. for the alleged or attempted fraud. It however, confidentially circulated brief particulars of the claim among members of the general insurers' association. As an insurance expert you are required to comment on the following with reasons: The Insurance Company had deputed a Chartered Accountant for investigating the claim in detail. What are the reasons that led to investigation? Is the Insurance company justified in repudiating the claim? How will the insurer justify in the Consumer Court?

Answer & Explanation:

The insured M/s MC Pvt. Co. Ltd. had submitted documents containing fake registration numbers. It prima facie seems that the insured, by doing so, is trying to defraud the insurance company. Since the purchases and sales figures do not match with the accounts submitted and the invoices for purchases are fake, it all indicates that the insured only wanted to get the insurance claim by forging the documents and defrauding the insurance company. Citing these documents, the insurance company deputed a Chartered Accountant to investigate the claim. The following are the reasons that led to investigation of the claim: The insured claimed that the loss occurred due to fire which originated in the control room and spread to machinery and stocks. The fire brigade report also confirmed this. However, the claim officer of the insurance company, on his visit to the factory, found that the electrical wiring on the wall was at a safe distance from the machinery and stocks. As per his observations, it seemed that the fire was not accidental. The documents submitted include bank statements which did not show many transactions, and the figures submitted for purchase and sales were much higher as compared to the banking transactions. Electrical bills of the factory were of too small amounts as compared to the volume of operations claimed by the insured. One of the electrical bills also had a remark that the premises was closed. All these discrepancies led the officers of the insurance company to believe that there were some mala fide intentions on the part of the insured to make the claim. The insurance company was justified in investigating the claim as there were various reasons indicating that the claim made by the insured M/s MC Pvt. Co. Ltd. was not a bona fide claim. There were many documents submitted by the insured which were deviating and leading to believe that the claim could be a fraudulent claim from the insured. In case the insured approached the Court: As seen from the facts of the case, the insured M/s MC Pvt. Co. Ltd. intimated for the fire at the factory and loss resulting therefrom. He has filed a claim form showing a total loss of: Machinery: ₹ 22 Lakhs Loss of Stock: ₹ 1.30 crores. He had shown that loss being caused due to fire which resulted from electrical wiring problem and that causing loss to machinery and stock. However, after investigation by a Chartered Accountant on the claim, the insurance company has repudiated the claim. But in case the insured decides to file a complaint with the consumer forum, then the insurance company can submit all the required documents as under: Invoices of purchases and sales submitted by the insured. Bank statement submitted by the party. Electrical bills of the factory from the insured including the electrical bill showing the remark 'premises closed'. Confirmation from the sales tax authorities that the registration numbers mentioned on the purchases were fake and the suppliers mentioned in the records were non-existent. Confirmation from one of the buyers mentioned in the sales invoices that they never purchased any goods from the insured and even the insured showed its inability to supply saying the plant was closed. Report on observation made by the claims officer of the insurance company showing that the electrical wiring on the wall was at a safe distance from the machinery and stock. This observation helped to arrive at the conclusion that the loss as claimed could not occur due to accidental fire. Report of investigation submitted by the Chartered Accountant. This report would show detailed working on the amounts of purchases, sales up to the date of fire and closing stock as at the date of fire. All the above would show that: There was no accidental fire at the premises of the insured. The loss was too small an amount as compared to the amount of claim. Hence, based on the above documents and reports and working, the insurance company would be able to justify the repudiation of the claim.

Topics: Fire Insurance

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