The court annulled the arbitral award for misinterpretation of insurance policy terms, improper calculation of depreciation, and lack of independent reasoning in affirming mixed assessments for claims.

ORDER :

N. ANAND VENKATESH, J.

This original petition has been filed under Section 34 (2)(a)(iii) of the Arbitration and Conciliation Act, 1996 (for brevity, hereinafter referred to as ‘the Act’) challenging the arbitral award dated 02.02.2024 passed by the sole Arbitrator.

2. The respondent herein was the Claimant before the Arbitral Tribunal. The Claimant is a public limited company incorporated under the Companies Act, 1956 , engaged in the manufacture of porcelain and composite insulators, with manufacturing units at Cuddalore and Madhuranthakam. The Claimant had obtained an Industrial All Risk (IAR) Insurance Policy from the insurer bearing Policy No.150591-0000-00, which covered buildings, plant & machinery, stock and equipments for a total insured value of Rs.170.50 crores, effective from 31.07.2015 to 30.07.2016.

3. On 09.11.2015, catastrophic floods caused significant damage to the stock and fixed assets located at the Claimant’s factory in Cuddalore. In accordance with the Insurance Policy, the Claimant lodged a claim for Rs.12.57 crores from the insurer. The insurer, as per the Insurance Regulatory and Development Authority of India (Insurance Surveyors and Loss Assessors) Regulations, 2015, appointed M/s.Mehta and Padamsey as the Surveyor to assess the extent of the damages. Based on the surveyor's assessment, the Respondent made two tranches of interim payments viz.,Rs. 3 crores on 17.12.2015 and Rs.2 crores on 29.09.2016.

4. The dispute arose upon the submission of the Surveyor's Final Adjustment Report dated 11.03.2017, which assessed the insurer's net liability at Rs.5,40,95,535/-, calculating the loss entirely on a market value (MV) basis. Relying on this report, the insurer made a final settlement payment of Rs.40,51,284/- on 30.03.2017. The Claimant challenged this, asserting that the policy terms mandated a settlement based on a part reinstatement value (RIV) and part market value (MV) basis. The Claimant further contended that the Surveyor's methodology was flawed by erroneously applying the principle of underinsurance to damaged items not reinstated and by improperly inflating the escalated value by adding Rs.13.59 crores to arbitrarily reach an underinsurance of 19.31%, which exceeded the 15% waiver permitted under the policy.

5. With respect to depreciation, the Claimant relied upon a certification from Anna University regarding the useful life of the kiln furniture and also considering the operational cycles asserted that the depreciation should be fixed at 30%. Whereas the Surveyor had fixed an exorbitant depreciation value of 75% without assigning any reasons. Furthermore, the Claimant contended that the Surveyor misconstrued the phrase "under each of the items" in Section 2.2(3) of the Special Provisions of the IAR Policy, interpreting it as broader categories of items listed in the policy rather than the individual damaged items intended by the Claimant. The Claimant also contended that the Surveyor had relied on the Fixed Assets Register (FAR) to calculate underinsurance, but rejected the same for determining the fixed assets and thereby operating as an estoppel against such rejection.

6. The Claimant, vide letter dated 09.08.2017, invoked arbitration over the disputes arising out of the acceptance of the survey report and settlement of the claim. The insurer resisted arbitration on the ground that a full and final settlement had already been effected. This Court vide order dated 02.04.2019, appointed a sole Arbitrator.

7. The insurer filed the statement of defence and stated that the claimant delayed in providing the lo