Thanks for the comments folks. I sent and had a discussion with Reliance GIC today. They were saying that anything that is damaged inside engine is not the liability of the insurance company and they would not consider the car for total loss (as the estimate 231000 is less than 75% of the IDVof 384000). They said that the engine is usually a wear and tear item so according to IRDA they are not liable. Now they suggested I go either go for a repair or for a net off salvage sale. They said they would intimate agencies who would bid for the car in case of net off salvage case and we would get the money from the highest bidder plus the insurance company's liability.

In case of repair they would only be liable to 231000-(50% depreciation on plastics parts)-(20% depreciation on metal parts)-(all consumables used in the process, like bearings, sealing, packing, coolant, oil, A/c air, A/c charging etc.) this would come to somewhere around 80000 to 90000 and we would get back around 140000 from insurance.

I would ask for your expert opinion on this issues. They also said that if anything in the engine is gone, then we have to fix it using our money and they would not be liable for it. Is it right?