THE DEVIL IS IN THE “UNLIMITED LIABILITY”

 

Indian laws on accident claims are quite stringent. The laws were formulated by prioritizing the best interests of the victims and those who are liable to disburse the compensation, such as insurance companies. Indian laws on motor vehicle accident claims are strict but beneficial for victims in claiming their legal rights in a court of law.  Motor third party insurance or third-party liability cover, which is sometimes also referred to as the ‘act only’ cover, is a statutory requirement under the Motor Vehicle Act. It is referred to as a ‘third-party’ cover since the beneficiary of the policy is someone other than the two parties involved in the contract -the insured and the insurance company. 

 

The policy does not provide any benefit to the insured. However, it covers the insured’s legal liability for death/disability of third-party loss or damage to the third party property. Since the third-party insurance cover is mandatory, all non-life insurance companies have an obligation to provide this cover. In the Indian context, automobile dealers arrange for a comprehensive insurance cover along with vehicle registration. 

 

This comprehensive cover is an add-on to the mandatory third party cover and protects the vehicle owner from financial losses, caused by damage or theft of the vehicle. The cost of a comprehensive cover is several times that of a stand-alone third-party cover, since damage claims are more frequent than third-party claims. Until now, the premium for motor third-party insurance was calculated on the basis of a schedule of rates provided by the Tariff Advisory Committee, an arm of IRDA.  But IRDA has done away with the motor tariff. The compensation to the victim is largely decided by the earning capacity of the accident victims. 

 

Motor Insurance Contracts are subject to the basic principles applicable to property and liability insurance in general. The owner of the vehicle must bear a legal relationship to the vehicle whereby he or she stands to benefit by the safety of the vehicle, right, interest or freedom from liability and stands to lose by any loss, damage, injury or creation of liability. 

 

The Fatal Accidents Act, 1885 was enacted in India to protect the legal rights of the accident victims and their legal heirs. This Act entitles the legal heirs of a deceased accident victim to claim compensation from the person who committed negligence.

 

Section 145 to 164 of the Motor Vehicle Act provides for mandatory third party insurance, which is compulsory for a vehicle owner. This means that if you have a vehicle that you use to move in public places, you cannot do so legally unless you have an insurance policy. Typically, your insurance policy papers must always be kept in the vehicle with registration and your driving license. Section 146(1) of the Act prohibits a vehicle owner from using the vehicle in a public place without undertaking an insurance policy in compliance with the Act.  

 

Further, the Act provides for unlimited liability and limited defense of the insurance companies. Several court judgments passed by the Supreme Court have restricted the legal defense strategies put forward by various insurance companies. The liability to prove the limited defenses also rest on the insurance companies. The limited defenses allowed to be made by the insurance companies include:

Use of vehicle for racing and speed testing.

Use of vehicle not allowed by permit.

Drivers without a valid Driving license or who have been disqualified from owning Drivers license.

Void insurance policy due to non-disclosure of crucial facts.

 

What is Unlimited Liability?

Under the provisions of Motor Vehicles Act all vehicles which ply in public places shall have an insurance policy, at least to cover third party liability as specified under the Act. There are basically two types of policies available for vehicle insurance. Policy A: Third Party Insurance (Act only Policy) Policy B: Comprehensive Policy. Third party insurance policy covers only the inter-alia liability of the vehicle owner for loss or damage to life or property of the third parties whereas comprehensive insurance policy covers in addition to third party liability, loss or damage to the vehicle itself by way of accident, theft, etc and specified perils. In particular, following are the distinctive features of these two policies:

 

Section I : of Standard form of Private Car Policy ( B ) or Motor Cycle/Scooter Policy covers against loss or damage to the insured vehicle and/or its accessories whilst thereon…….

a) by fire , explosion ( both external and internal ) , self-ignition or lightning;

b) by burglary, housebreaking or theft;

c) by riot and strike;

d) by earthquake ( fire and shock damage );

e) by flood, typhoon, hurricane, storm, tempest, inundation, cyclone,  hailstorm;

f) by accidental external means;

g) by malicious act;

h) by terrorist activity;

i) whilst in transit by road, rail, inland waterway, lift, elevator or air.

 

Section II covers Liability to third parties which means this section provides indemnity to the Insured in the event of accident caused by or arising out of the use of the motor vehicle against all sums, including claimants costs and expenses, which the insured shall become legally liable to pay in respect of —

 

(i) Death of or bodily injury to any person, including occupants carried in the motor vehicle, provided such occupants are not carried for hire or reward , but not where such death or injury arises out of and in the course of the employment of such person by the Insured. Limits of Liability under this section as per M V Act, 1988 is unlimited;

(ii) Damage to property other than property belonging to the insured or held in trust or in the custody or control of the insured. Limits of Liability is Rs.6000/- in respect of any one claim or series of claims arising out of one event but Tariff however provides for increased limits up to 2 lacs for two wheelers and 7.5 lacs for all other vehicles for TP ( Third Party ) property damage, at an additional premium.

 

Who is covered under Tp Liability?

Motor third-party insurance or third-party liability cover, which is sometimes also referred to as the ‘act only’ cover, is a statutory requirement under the Motor Vehicles Act. Accident victims (or their relatives in the case of death claims) have to file a claim for compensation with the Motor Accident Claims Tribunal, present in every state. 

 

The tribunal will pass an order for compensation after hearing lawyers from both sides. Invariably, there are lawyers specialising in MACT compensation claims. These lawyers usually approach victims and offer to file a claim for compensation on their behalf. The compensation to the victim is largely decided by the earning capacity of the accident victim. 

 

According to insurance companies, the highest claims are from accidents caused by commercial vehicles which run several thousand kilometres every month. The rate hike has been the highest for commercial vehicles where prices have more than doubled. Private cars are not much affected as there is only a marginal hike. Moreover, car owners can look forward to lower rates for their comprehensive cover, despite detariffing. This will bring down their overall cost of insurance, despite an increase in the third party premium.

 

The Legal Perception:

The liability is unlimited only in case of motor vehicle. This is the only segment where the liability is unlimited. On the bottom of the insurance policy, endorsement numbers are given, limits of liability are also disclosed and the typed portion runs as under:

 

“Such amount as is necessary under Motor Vehicles Act, 1939. Limit of the amount of the company’s liability under sectionII-1(i) in respect of any one claim or series of claims arising out of one accident is unlimited. “

 

The question is whether these two recitals in the insurance policy are enough to saddle the insurance company with unlimited liability to pay compensation to the third party who was injured in this case. The Third party liability was not unlimited since beginning of the MV Act. For determining this question, section 95 (2) (b) of the old Act provided that subject to the proviso to sub section (1), a policy of insurance shall cover any liability incurred in respect of any one accident up to the following limits, namely :-

 

(b) where the vehicle in which passengers are carried for hire or reward or by reason of or in pursuance of a contract of employment,-

(i) in respect of persons other than passengers carried for hire or reward, a limit of fifty thousand rupees in all;

(ii) in respect of passengers, a limit of fifteen thousand rupees for such individual passengers.

 

Likewise, the word “unlimited” introduced in the amended Act and also in insurance policies since there is an agreement between the insurer and the vehicle owner that in the case of accident, the insurance company will be liable to unlimited extent to the third party.

 

Limited Liability under no Fault Provisions:

Motor Vehicles Act, 1939 was enacted to consolidate and amend the law relating to motor vehicles. Before that Fatal Accidents Act, 1855 governed the field. Due to proliferation of motor vehicles on the roads there has been considerable increase in the volume of traffic resulting in a corresponding increase in the motor accidents on the road. 

 

Hit and run cases are also on the rise and in many cases offending vehicles could not be apprehended. In order to meet to some extent the responsibility of the society to the deaths and injuries caused in road accidents there default of the deceased is foreign to an enquiry under Section 140 of the Act. As far as claimant is concerned, he need only  to prove two factors:

(i) death or disablement has resulted from an accident arising out of the use of the motor vehicle, and 

(ii) the claimant is the legal heir of the deceased or the disabled person, as the case may be. 

 

The Claims Tribunal shall proceed to award the claims under Section 140 of the Act on the basis of the following: 

(1) Registration Certificate of the motor vehicles involved in the accident. 

(2) Insurance Certificate/policy relating to the insurance of the vehicle against third party risks. 

(3) Copy of the First Information Report. 

(4) Post-mortem Certificate or certificate of injury from the Medical Officer, and 

(5) The nature of treatment given by the Medical Officer, who has examined the victim.

 

On the claimant producing registration certificate of the motor vehicle involved in the accident, insurance

 

In National Insurance Co. Ltd. Vs Malathi C. Salian it was held that the reason for enacting Section 163-A is to give earliest relief to the victims of the motor vehicle accidents. The Committee observed that determination of cases takes a long time and, therefore, under a system of structural compensation, the compensation that is payable for different classes of cases depending upon the age of the deceased, the monthly income at the time of death, the earning potential in the case of a minor, loss of income on account of loss of limb, etc. can be notified and the affected party can then have option of their accepting lump sum compensation under the Scheme of structural compensation or of pursuing his claim through the normal channels….such a claim would not be defeated by the owner of the vehicle or Insurance Company, as the case may be, and the claimant would get a fixed sum prescribed under Section 140(2). Sub-section (4) of Section 140 was introduced by the Legislature since claim under Section 140 would be followed by Section 166. 

 

So far as Section 140 is concerned it is well settled that the Insurance Company or the owner, as the case may be, is bound to honour and pay the compensation under Section 140(2) Rs. 50,000/- in the case of death and Rs. 25,000/- in the case of permanent disablement. Claim for any further amount could be defeated by the Insurance Company or the owner or owners of the vehicle, as the case may be, if they could establish that the death or disablement occurred due to wrongful act, neglect or default of the deceased or disabled person. 

 

So far as claim under Section 163-A is concerned claim is restricted on the basis of predetermination formula unlike in the case of application under Section 166. Sections 144,161 and 163-A have all got a purpose to achieve. 

 

The Concept of Future Liability:

The Apex court has ruled “If a person suffers permanent disability in an accident caused by a vehicle, the compensation due to him should be computed taking into account not only the victim’s present earnings but also future loss of income.” The SC distinguished between claim for damages and compensation and said damages were given for an injury whereas compensation stood on a slightly higher footing. 

 

While damages were given for atonement of injury caused, the intention behind compensation was to put back the injured party as far as possible in the same position as if the injury has not taken place, by way of grant of pecuniary relief. The case before a Bench comprising was of a painter, Yadava Kumar, who in a road accident in Karnataka suffered 30-40% permanent disability preventing him from resuming his profession or even taking up manual labour.

 

The high court granted him a compensation of Rs 72,000 rejecting his plea to consider the future loss of income as he could no longer do painting jobs. The SC took serious view of this in compassionate approach of the HC. The judgment said, “In this case, the approach of the HC in totally refusing to grant any compensation for loss of future earnings is not a correct one. While ordering National Insurance Company to pay Kumar Rs 2 lakh, which was computed by the SC after taking into account future loss of earnings. 

 

In the determination of the quantum of compensation, the court must be liberal and not niggardly in as much as in a free country, law must value life and limb on a generous scale. It goes without saying that in matters of determination of compensation, both the Motor Accident Claims Tribunal and the courts are statutorily charged with a responsibility of fixing ‘just compensation’. It is obviously true that determination of a just compensation cannot be equated to a bonanza. At the same time, the concept of ‘just compensation’ obviously suggests application of fair and equitable principles and a reasonable approach on the part of the tribunals and courts.”

 

The cap on Third Party Liability:

Motor vehicle third-party liability limit is likely to be capped at Rs 10 lakh soon, going by the recommendations of the Sundar Committee on amendment of Motor Vehicle Act third-party motor liability. So far, the motor vehicle liability is unlimited while the aircraft liability is capped at Rs 5 lakh and railway liability at Rs 2 lakh. The government had formed a 10-member committee to review the Motor Vehicle Act 1988. The committee had submitted its report to the Union ministry of road transport and highways. 

 

The committee has recommended a cap of Rs 10 lakh on third-party motor vehicle liability. Huge loss in the segment has forced the regulator to revise third-party motor premium on commercial vehicle by up to 68%. Insurers, however, argue that the increase is inadequate as the claim ratio is over 180%. The industry suffered a loss of around Rs 3,000 crore towards the extra provisions made to the third-party motor pool. The insurance regulator is taking out a peer review to recommend an increase in the provisioning for the pool. Each company contributes to the pool depending on their market share. 

 

One of the other recommendations is that a new Act called Motor Insurance Act should be brought under the ministry of finance. At present, Motor Vehicle Act comes under the ministry of transport. However, this can change soon. The amended Motor Vehicle Act, 1988, which has been passed by the Rajya Sabha and will be tabled in the Lok Sabha in the monsoon session of Parliament, places a cap on the liability of insurance companies. 

 

The insurer will be liable to pay a maximum compensation of Rs 1 lakh in case of injuries or disability, and Rs 10 lakh in case of death. This is mainly because of the Insurer lobby which is running into losses owing to the unlimited TPL presently available. This can be a serious blow to the motor insurance buyers although it is not yet clear who would pay the excess of Rs 10L liability in case of any TPL claims. 

 

Also proposed is the time limit for the claims reporting arising out of motor insurance which at present is unlimited, there is a proposal to limit it to a maximum of three years. So any reporting of claims beyond 3 years will not be entertained by Insurance companies. The opposition parties are, however, not in favour of a ceiling for compensation and are pressing for modifications. 

 

India reportedly has the highest number of road accidents in the world. The prime cause of accidents is negligence and rash driving, and thus, the law requires that the victim ought to be compensated for the loss suffered. 

 

This is where Third Party Liability insurance comes into the picture.

 

Re-fixation of awarded amount:

It was one of the highest motor accident claims an insurance company was directed to pay when the Delhi High Court held that the kin of an Indian doctor settled in America be paid over Rs 16 crore as compensation for his death in a car accident while travelling in India. However, the Supreme Court said the amount was exorbitantly high and has directed the Motor Accident Claims Tribunal (MACT) at Tis Hazari Courts to recalculate the amount payable to Patricia Jean Mahajan, wife of late Dr Suresh K Mahajan. 

 

Deciding an appeal filed by the United India Insurance Company, a Bench comprising Justice D P Mohapatra and Justice Brijesh Kumar said the amounts calculated by the single judge and the Division Bench of the High Court “are huge indeed”. While the single judge calculated the compensation at Rs 10.38 crore, the Division Bench fixed  it at Rs 16.12 crore. Justice Kumar, writing for the Bench, said “Looking at the Indian economy, fiscal and financial situation, the amount is certainly a fabulous amount  though in the background of American conditions it may not be so.”

 

Indian law on accident claims is relevant due to the higher rates of accidents leading to loss of life and property across the country. In 1988, the Government of India introduced the Motor Vehicle Act, to make the Indian laws on accident claims more effective. The Act provides for compulsory third party insurance and procedure of adjudication, to ensure relief to victims of accident cases. Also, the Act stipulates for establishment of Motor Accident Claims Tribunal to address the accident claim cases. 

 

This means that if you are a victim of a motor vehicle accident, your first point of reference to press for a claim is at the aforementioned tribunal that has been established to address similar claims. Though neither Package Policy nor Act only policy cover medical expenses, the Motor Insurance Tribunal covers medical claims on account of loss of salary income due to hospitalization or any other disability. There exists a personal accident cover under third party premium section for vehicle owner/driver who does not come under the definition of third party. 

 

The huge compensation paid to victims should be a wake-up call for owners who don’t take their vehicle insurance seriously. It is illegal to drive a motor vehicle without third-party cover, and if you forget to renew your car’s insurance, you are taking a bigger risk than you can possibly fathom. If the vehicle is involved in a fatal accident, even if someone else was driving it, you will have to pay compensation from your own pocket. In many cases, even though the victim has been at fault, courts have awarded 40-50% of the claimed amount as compensation. 

 

Third-party claims are undoubtedly a drain on insurance companies, primarily due to unlimited liability amounts. Though the premium is fixed and the liability unlimited, insurers are not losing money by giving third-party cover to private vehicles. According to the Motor Report on IRDA’s website, the total third-party premium collected from private vehicles in 2009-10 was Rs 1,393.68 crore, while the total claims added up to Rs 781.91 crore. 

 

So the insurance industry made a cool Rs 611.77 crore under this head. On the other hand, commercial vehicles have been a drain on resources for insurance companies. The recklessly driven three-wheelers used for carrying goods, for instance, brought in third-party premium of Rs 80 crore in 2009-10, but the accidents they caused led to claims worth Rs 153 crore. For passenger buses, the claims were 122% of the Rs 526 crore they brought in as premium. 

 

Till now, the claims from accidents involving commercial vehicles were paid from a common pool created by the IRDA in 2007. All insurers had to be a part of this pool and claims were paid in the ratio of an insurer’s market share. This was seen as unfair by some companies because they were forced to pay for the lax underwriting by other companies, especially public sector insurers. From April 2012 this pool has been dismantled and insurers have to settle the claims on their own.

 

If the insurance companies feel that the third-party cover is a drag on their profitability, there are other ways to ensure that victims get a fair compensation without making paupers out of vehicle owners. One good suggestion is to apply a Rs 1 cess on every litre of fuel to build a pool from which money can be paid to victims. Roughly 8,200 crore litres of motor fuel is consumed in India every year. 

 

The total third-party premium collected in 2010-11 was Rs 6,230 crore. So, a Rs 1 cess on every litre will not only help amass more than that collected by insurance companies, but will also be a more equitable arrangement. The vehicles that are used sparingly and, hence, have a lower risk, can be charged less than those that are used extensively.  Another suggestion is a one-time payment at the time of purchase based on the average age of the vehicle. It might not be feasible to offer a long-term cover from the actuarial point of view. One doesn’t know what the claims experience will be in 10-15 years. Instead, a tax benefit on this insurance be granted, which may nudge people to buy a cover for their vehicles.

 

The TP business is long-tailed, with no upper limit on the claim amount and no limit for when the claim can be filed. This makes risk evaluation and therefore, pricing extremely complicated. Third-party motor insurance is the only segment where the tariffs are set by IRDA. The recent rate increase is high, but necessary, given the unlimited claim amount for TP. The Motor Vehicle Act is expected to change/cap the claim amount so that the industry can pass on lower TP premiums to customers. Many insurance companies are keen to underwrite specific commercial vehicles that are “good risk” for their business. 

 

Author-Jagendra Kumar