HDFC ERGO GENERAL INSURANCE COMPANY LIMITED Vs NATIONAL ALUMINIUM COMPANY LIMITED

*** IN THE HIGH COURT OF DELHI AT NEW DELHI**

%

Judgment reserved on: 10.08.2026

Judgment pronounced on: 19.08.2026

CNR No. DLHC010323242023

O.M.P. (COMM) 327/2023 &I.A. 15613/2023

HDFC ERGO GENERAL INSURANCE COMPANY

LIMITED.....Petitioner

Through: Mr. Gopal Jain, Sr. Adv. with

Mr. Rijul Singh Uppal & Ms.

Kriti Sharma, Advs.

versus

NATIONAL ALUMINIUM COMPANY

LIMITED .....Respondent

Through: Mr. Abhishek Gupta, Mr.

Dhruv Tiwari & Mr. A.S.

Vamsi Krishna, Advs.

CORAM:

HON'BLE MR. JUSTICE AVNEESH JHINGAN

J U D G M E N T

This petition is filed under Section 34 of the Arbitration and

Conciliation Act, 1996 (for short 'the Act') against the arbitral award

dated 17.05.2023, rectified on 16.06.2023 (for brevity 'the award').

The facts shorn of unnecessary details are that the

respondent/National Aluminium Company Ltd. (hereinafter referred to

as ‗NACL‘) obtained a Standard Fire and Special Perils Insurance

Policy (for short ‗insurance policy‘) for Electric Generation Stations- coal/lignite based at the Captive Power Plant, Angul, Odisha (for short

‗CPP‘) from the petitioner/HDFC Ergo General Insurance Company

Ltd. (hereinafter referred to as ‗insurer‘). The sum insured under the

policy was of Rs.23,473,242,000/-. The policy was effective from

01.06.2017 to 31.05.2018 and the premium of Rs.1,51,92,298/- was

paid.

2.1 On 11.07.2017, a fire broke out in the Generator Transformer

(for short ‗GT‘) for Unit-08 of the CPP (hereinafter referred to as

‗GT-8‘). A surveyor was appointed by the insurer to assess the loss.

In a joint meeting held between the surveyor and the NACL it was

decided that the damaged GT-8 be sent to Bharat Heavy Electricals

Limited, Jhansi (for short ‗BHEL‘) for assessment of the loss.

2.2 On 04.09.2017, the NACL purchased a new GT and GT-8 was

sent to BHEL on 24.03.2018. BHEL by final offer dated 17.08.2018

estimated the cost of repair at Rs.4,02,13,786/- exclusive of GST and

transportation charges. The transportation charges were estimated at

Rs.26,15,000/-.

2.3 The NACL initially on 15.09.2018 submitted a claim of

Rs.6,65,84,669/-towards the repair of GT-8. The claim was

subsequently revised to Rs.6,95,35,369/-. The final claim bill was

submitted on 05.03.2019 along with the supporting invoices.

2.4 The surveyor submitted a provisional assessment report dated

29.06.2019, assessing the loss at Rs.23,52,397/- and recorded that it is

a case of ‗under insurance‘. The NACL on 28.10.2019 rejected the offer to settle claim at provisional assessment of Rs.23,52,397/-.

2.5 The surveyor submitted the final report dated 31.03.2020 (for

short ‗final report‘) wherein it was observed that: (i) transformer

cannot function without the bushing; (ii) the bushing was an integral

part of the transformer; and (iii) the statements of BHEL employees

were not agreed to. The final report recorded ‗under insurance‘ of

56.53%. Relying upon the final report, the insurer on 05.05.2020

rejected the claim relating to the transformer.

2.6 On 30.06.2020, the insurer informed the NACL that a cheque of

Rs.23,51,687/-, as assessed by the surveyor was being sent towards

settlement of the claim.

2.7 Vide notice dated 16.01.2021 the arbitration under clause 13 of

the General Conditions of the Insurance Policy (for short ‗GC‘) was

invoked at the instance of the NACL. The proceedings culminated in

an impugned award wherein the majority members of the tribunal held

that deduction for ‗under insurance‘ was not justified, for the reasons

that (i) the claim was allowed towards repair and not replacement; and

(ii) that the insurance cover was for entire unit and not only for the

GT. A sum of Rs.4,25,66,183/- was awarded and in case of failure to

pay the amount awarded within four months, simple interest @ 7.5%

per annum was to be paid from 18.09.2023 till realization. A sum of

Rs.10,00,000/- was awarded towards litigation costs. On the other

hand, the minority view relying upon the decisions in Sikka Papers

Limited v. National Insurance Company Ltd. &Ors., (2009) 7 SCC

777 and I.C. Sharma v. Oriental Insurance Company Limited,

(2018) 2 SCC 76 held that in a case of ‗under insurance‘, the

proportional deduction towards the ‗under insurance‘ is justified.

Hence, the present petition is filed.

3. Learned senior counsel for the insurer relies upon the decisions

of the Supreme Court in Sikka Papers Limited (supra) and I.C.

Sharma (supra) to fortify the contention that in case of ‗under

insurance‘, the claim has to be averaged out in proportion of under

insurance.

3.1 It is contended that the tribunal accepted the report of the

surveyor recording ‗under insurance‘ of 56.53% but failed to average

out the claim awarded.

3.2 The submission is that clause 10 of the GC was ignored and the

award suffers from patent illegality.

4. Per contra, the scope of interference under Section 34 of the

Act is limited. The submission is that the award should not be

interfered with unless the conclusion arrived at is perverse. Remedy

under Section 34 cannot be equated with appellate jurisdiction and the

court cannot reappreciate evidence. Every error of law or fact do not

justify setting aside an arbitral award. Reliance is placed upon the

decisions of the Supreme Court in Prakash Atlanta (JV) v. National

***Highways Authority of India,***2026 INSC 76, Ramesh Kumar Jain v.

Bharat Aluminium Company Limited, 2025 SCC OnLine SC 2857,

Consolidated Construction Consortium Limited v. Software

Technology Parks of India , (2025) 7 SCC 757 and ParsaKente

Collieries Limited v. Rajasthan Rajya Vidyut Utpadan Nigam Limited, (2019) 7 SCC 236.

4.1 It is submitted that there cannot be deduction on account of

‗under insurance‘ as value was assessed on the replacement value and

not on the repair value. Reliance is placed upon Questions 41 to 45 of

the cross-examination of the surveyor in support of the contention that

‗under insurance‘ was determined on the replacement value. The

questions relied upon and answers thereto are quoted below:

―41. Is it correct that the Insured/Claimant got the

plant insured on the basis of depreciated value?

Ans. Yes.

Is it correct that under insurance determined by

you acting as Surveyor is on the basis of reinstatement

value?

Ans. Yes.

Will you please explain that dichotomy?

Ans. The computation of under insurance has to be

done on the basis of reinstatement value as provided in

the policy wordings itself.

Please explain the term ―reinstatement value‖?

Ans. When one is putting up a plant there are many

aspect of costs which needs to be incurred. They will be

as below:-

i. Cost as per invoice for replacement

ii. Taxes & Duties

iii. Transportation cost

iv. Loading/Unloading cost

v. Erection cost‘

vi. Commissioning include cost for operating

media such as Oil and or refrigerator etc.

Less credits for the Taxes as allowed by the

prevalent Taxation Laws.

The above cost from (i) to (vi) put together less the

credit for the taxes as allowed by the prevalent Taxation

Laws, makes the ―reinstatement value.‖

Is it correct that ―under insurance‖ is calculated on

reinstatement value basis when the insurance claim is

raised on reinstatement basis / replacement, but not

otherwise?‖

Ans. Yes, it is correct.‖

Before proceeding further, it would be appropriate to reproduce

the relevant portion of the surveyor report dated 31.03.2020, Clause

10 of the GC and Section 64VB of The Insurance Act, 1938 (for short,

‗the Insurance Act‘) –

―Surveyor Report dated 31.03.2020

Valuation

Insured - NALCO has confirmed that they have taken the

sum insured in the policy based on book value

(depreciated) basis. lnsured has a 10 x 120 MW coal fired

power station. Based on our experience with similar claims

and prevalent prices in market, we have estimated the

reinstatement value to be at Rs.4.5 Crores per MW, i.e.

Rs.54,000,000,000/-. Comparing the same with sum

insured at Rs. 23,473,242,000/-, we observed that there is

significant underinsurance i.e. 56.53%. After adjusting for

underinsurance at Rs.6,310,503/-, the assessed loss works

out to Rs. 4,852,397/-.

B) General Conditions Of The Insurance Policy

10) lf the property hereby insured shall at the breaking out

of any fìre or at the commencement of any destruction of

or damage to the property by any other peril hereby insured against be collectively of greater value than the

sum insured thereon, then the insured shall be considered

as being his own insurer for the difference and shall bear a

rateable proportion of the loss accordingly. Every item, if

more than one, of the policy shall be separately subject to

this condition.

Section 64VB Of The Insurance Act, 1938

64VB. No risk to be assumed unless premium is

received in advance—(1) No insurer shall assume any

risk in India in respect of any insurance business on which

premium is not ordinarily payable outside India unless and

until the premium payable is received by him or is

guaranteed to be paid by such person in such manner and

within such time as may be prescribed or unless and until

deposit of such amount as may be prescribed, is made in

advance in the prescribed manner.

(2) For the purposes of this section, in the case of risks for

which premium can be ascertained in advance, the risk

may be assumed not earlier than the date on which the

premium has been paid in cash or by cheque to the insurer.

Explanation. —Where the premium is tendered by postal

money order or cheque sent by post the risk may be

assumed on the date on which the money order is booked

or the cheque is posted as the case may be.

(3) Any refund of premium which may become due to an

insured on account of the cancellation of a policy or

alteration in its terms and conditions or otherwise shall be

paid by the insurer directly to the insured by a crossed or

order cheque or by postal money order and a proper receipt

shall be obtained by the insurer from the insured, and such

refund shall in no case be credited to the account of the

agent.

(4) Where an insurance agent collects a premium on a

policy of insurance on behalf of an insurer, he shall deposit

with, or dispatch by post to, the insurer, the premium so collected in full without deduction of his commission

within twenty-four hours of the collection excluding bank

and postal holidays. (5) The Central Government may, by

rules, relax the requirements of sub-section (1) in respect

of particular categories in insurance policies.

(6) The Authority may, from time to time, specify, by the

regulations made by it, the manner of receipt of premium

by the insurer.‖

Clause 10 of the GC provides that where the value of the

insured property is greater than the insured value, the insured shall be

treated as the insurer for the difference and has to bear the

proportionate part of the loss.

6.1 Section 64VB(1) of the Insurance Act provides that the risk

shall be covered on receipt of the premium payable or guaranteed to

be paid in the prescribed manner and within the prescribed time or

until such amount is deposited in advance.

The undisputed facts are that the value of the coal/lignite based

electric generation unit in the CPP was Rs.54,000,000,000/- whereas

the sum insured was Rs.23,473,242,000/-. The surveyor assessed

‗under insurance‘ at 56.53% and the tribunal accepted the report of the

surveyor. The dispute only pertains to deduction to be made for ‗under

insurance‘. The loss assessed is not disputed by either of the parties.

7.1 The relevant portion of the majority award is reproduced below:

―153.........As pointed out earlier, the insured value comes

to Rs.2078.00 crore. Underinsurance occurs when the

amount of insurance is less than the full value of the

property insured and means that the insured pays a lessor premium than what should have been required to be paid

and the full value being disclosed as the rate fixed is on the

basis of full value being insured. As per the case of the

Claimant and the evidence of CW-1, the Claimant has

followed the procedure that is being followed in NALCO

for the purposes of valuation. It may be that NALCO has

its own procedure for assessing the valuation for the

purposes of insurance, the Claimant, however, should have

followed the standard insurance guidelines concerning

valuation and underinsurance. Accordingly, the claim for

underinsurance as assessed by the surveyor is accepted.‖

The tribunal considered the initial repair offer of

Rs.4,02,13,786/- made by BHEL vide letter dated 17.08.2018 and took

note that on account of ‗under insurance‘ the deduction to be made is

of Rs.63,10,503/-. The deduction was not made on the ground that the

final bill submitted by BHEL was higher and that the insurance cover

was for the entire unit and not only for the GT. The acceptance of

initial bill for repair by BHEL is an assessment of loss to be decided

on evidence adduced and is not a relevant fact for not averaging out

the ‗under insurance‘. The tribunal travelled beyond Section 64VB of

the Insurance Act and ignored Clause 10 of the GC. There was no

premium received for the difference between Rs.54,000,000,000/- and

Rs.23,473,242,000/-, the risk in respect of the difference amount was

not insured as stipulated in Clause 10 of the GC. The NACL was its

own insurer for the difference amount and had to bear the relatable

proportion of the loss.

The Supreme Court while dealing with a challenge to the

deduction made from the repair bill on account of ‗under insurance‘ considered the following two issues in Sikka Papers Limited (supra):-

―10. We heard the learned counsel for the parties. In the

light of the contentions advanced before us, the following

two questions arise for our consideration:

(one) Whether the insurer was justified in accepting

report dated 15-5-2000 submitted by the surveyor who had

assessed the loss of Rs.14,45,000/- after deducting about

Rs.10,55,000/- from Rs.25,00,000/- i.e. actual amount paid

by the complainant for repairing the diesel generating set ?

(two) Whether the insurer was justified in deducting an

amount of Rs.3,71,509.50 (25.71%) as under insurance

from the loss assessed at Rs.14,45,000/- by the surveyor in

its report dated 15-5-2000 ?‖

9.1 While deciding the second issue, the Supreme Court held that

where the sum insured is less than the required insurance, the insurer

is liable to pay only the proportionate amount. The pro-rata formula

applied by the surveyor for deducting the ‗under insurance‘ was

upheld. The relevant portion is quoted below:

―23. In Dictionary of Insurance (2nd Edn.) by C. Bennett,

―underinsurance‖ is explained thus:

―underinsurance occurs when the amount of insurance is

less than the full value of property insured and means that

the insured pays a smaller premium than that required as

the rate is fixed on the basis of full values being insured. It

leads to partial loss claims being scaled down by average

(qv.).‖

The expression ―average‖ is explained thus:

―In non-marine property insurance if a sum insured is

‗subject to average‘, and the sum insured is less than the value at risk at the time of loss, the claim will be reduced

in the same proportion. The measure combats

underinsurance.‖

As per the invoice, the diesel generating set and the

alternator was purchased by the complainant in the year

1997 for Rs 45,25,000. The complainant, however, got the

insurance cover valuing diesel generating set (Rs

26,00,000) and alternator (Rs 9,00,000), in all for Rs

35,00,000. Apparently, therefore, there is an element of

underinsurance. There is merit in the contention of learned

counsel for the insurer that the value of the item is always

declared by the insured at the time of issuance of the

insurance policy while the element of underinsurance is

calculated by the insurer at the time of assessment of loss.

Although on behalf of the complainant, it was

contended that underinsurance, if any, must be calculated

at the time of issuance of policy and could not be deducted

at the time of assessment of the loss but we find it difficult

to accept the same. The policy provides that if the sum

insured is less than the amount required to be insured, the

insurer will pay only in such proportion as the sum insured

bears to the amount insured. In accordance with the said

provision in the policy if the surveyor applied the pro rata

formula and deducted 25.71% from the loss so assessed i.e.

Rs 3,71,509.50 from the sum payable as underinsurance,

such deduction cannot be faulted.‖

The Supreme Court in I.C. Sharma (supra) while dealing with

the issue of ‗under insurance‘ and the effect thereof held that the

principle of averaging out has to be applied in case of ‗under

insurance‘. Where all the goods are not destroyed the loss assessed is

to be averaged out with the ‗under insurance‘. In case of total loss, the

amount insured is to be paid irrespective of the actual value. The relevant paragraphs are as under:

―8. The only legal issue which arises for consideration is

―what is underinsurance — and the effect thereof?‖

Underinsurance basically means that the insured has taken

out an insurance policy in which he has valued the insured

items for a sum which is less than the actual value of the

insured item. In a country like India this is normally done

to pay a lesser premium. This is, in fact, harmful to the

policyholder and not to the Insurance Company because

even if the entire insured property is lost, the policyholder

will only get the maximum sum for which the property has

been insured and not a paisa more than the sum insured.

To give an example, in case a person takes out the

householder policy covering fire insurance and gives the

value of the structure of his house and goods stored therein

at Rs 50,00,000 even though the value of the same is Rs

1,00,00,000 then even if the entire house and goods are

completely lost in a fire, he cannot get an amount above Rs

50,00,000 even though the value may be more.

9**.** If all the insured goods are lost then there is no problem.

The insured is entitled to the amount for which the goods

were insured even if that be less than the actual value of

the goods. In case a person gets a painting insured for Rs

1,00,000 though the value of the same is Rs 10,00,000, if

the painting is lost the insured is entitled to Rs 1,00,000

only. If all the insured goods falling under one head are

stolen or lost then the insurance company cannot apply the

principle of averaging out because, though the loss may be

Rs 10,00,000, the claimant will get only one Rs 1,00,000

as per the value assessed and the insurance premium paid

by him.

10**.** The Insurance Company can however apply the

principle of averaging out when all the goods are not destroyed. Supposing the entire house was insured for Rs

50,00,000, but on valuation it is found that the value of the

structure and the goods was Rs 1,00,00,000 and if the

policyholder claims that he has suffered loss of Rs

40,00,000 then he will be entitled to only Rs 20,00,000, by

applying the principle of averaging out. What this means is

that if the value of the goods is more than the sum for

which they are insured then it is presumed that the

policyholder has not taken out insurance policy for the

uninsured value of the goods. The claim is allowed by

applying the principle of averaging out i.e. the insured is

paid an amount proportionate to the extent of insurance as

compared to the actual value of the goods insured.‖

The contention of learned counsel for the NACL that the ‗under

insurance‘ was assessed on replacement value and not for the purpose

of repair, is ill-founded. The value of the asset is to be determined at

the time of obtaining insurance cover and the loss is to be assessed on

occurrence of the event of destruction or damage. At the time of

insurance admittedly the value of the insured unit was

Rs.54,000,000,000/-whereas the sum insured was

Rs.23,473,242,000/-. Consequently the premium on 56.53% of the

value of the unit was not paid and the loss assessed has to be averaged

out accordingly.

There is no quarrel with the proposition pressed by learned

counsel for the NACL that the scope of interference under Section 34

of the Act is limited and the case laws relied upon in support of this

proposition. In the present case the award is contrary to the statutory

provisions of the Insurance Act and has travelled beyond the terms of the insurance policy, particularly clause 10. The award suffers from

patent illegality and is set aside.

The petition is allowed. Pending application is also disposed of.

AVNEESH JHINGAN, J

AUGUST 19, 2026

Ch

Reportable:-Yes