Motor Insurance – Insurance Law and Practice Important Questions

Question 1.
Write short notes on the following:
(ii) Underlying principles of motor vehicle insurance policies.
Answer:
Underlying principles of motor vehicle insurance policies
Like any other contract, motor insurance contract should have basic conditions that go to satisfy law of contracts. In addition to these, Motor Insurance contracts are subject to certain additional principles of common law which are known as fundamental or basic principles of law of insurance.

These are:

  • Utmost good faith
  • Insurable interest
  • Indemnity; and
  • Proximate cause.

In Motor insurance contracts good faith is required to be observed but in a more meticulous way. The proposer has a legal duty to disclose all material information about the subject matter of Insurance to the insurers who do not have this information.

Question 2.
Attempt the following:
(ii) What factors are considered in deciding the compensation by the Motor Accident Claims Tribunal (MACT)?
Answer:
Factors for deciding the compensation by the Motor Accident Claims Tribunal (MACT)
The courts consider the following factors in deciding the compensations:

  • Age of the injured/deceased (death cases)
  • The income of the deceased
  • Economic dependency of the claimants to the deceased
  • Nature of permanent disablement
  • Other expenses, e.g. medical, loss of estate, funeral expenses, etc.

Question 3.
Which Section of the Motor Vehicles Act, 1988 talks about ‘hit and run accident’? What is the payment of compensation provided under this section?
Answer:
Section 161 of Motor Vehicles Act, 1988 talks about compensation in case of “Hit and Run” Motor Accident. Section 161 (b) has defined ‘Hit and Run Motor Accident’ as an accident arising out of the use of a Motor Vehicle or Motor Vehicles, the identify whereof cannot be ascertained in spite of reasonable efforts for the purpose.

The compensation (solarium) payable under this section is as under:

  • Fixed sum of ₹ 50,000 (earlier it was ₹ 25,000) in respect of death of any person resulting from Hit and Run Accident.
  • A fixed sum of ₹ 25,000 (earlier it was ₹ 12,500) in respect of grievous hurt to any person resulting from Hit and Run Motor Accident.
  • Compensation known as solarium is payable out of solarium fund established by Central Government with effect from 1st October 1982.

The Indian Insurers would now pay compensation as per the scheme framed by the Central Government.

Question 4.
What is the amount of compensation payable under the Motor Vehicles Act, 1988 in respect of death of any person?
Answer:
Section 140 of the Motor Vehicles Act, 1988, provides for liability of the) owner of the Motor Vehicles to pay compensation in certain cases, on the principle of no-fault. The amount of compensation so payable is ₹ 50,000 for death of any person resulting from an accident arising out of the use of the motor vehicles.

The principle of “no-fault” means that the claimant need not prove negligence on the part of the motorist. Liability is automatic is such cases. Further, under Section 141(1) of the said Act, claims for death or permanent disablement can also be pursued under other provisions of the Act on the basis of negligence (fault liability).

Question 5.
What are the liabilities that require a compulsory cover under a policy of motor insurance? Discuss.
Answer:
Section 146 of the Motor Vehicles Act, 1988 states that no person shall use, other than as a passenger or allow to use a motor vehicle in a public place unless a policy of insurance which covers the liability to third party on account of death or bodily injury to such third party or damage to any property of a third party arising out of the use of the vehicle in a public place.

Therefore, it is mandatory for the owner of any motor vehicle to obtain, at the minimum, a policy from any General Insurance Company holding a valid license from IRDAI, which covers the risk of death or bodily injury to a third party arising out of usage of the vehicle in a public place.

The liabilities that require a compulsory insurance under a motor policy are:

  • Death or bodily injury of any person including the .owner of the goods or his authorized representative carried in the carriage
  • Damage to any property of a third party
  • Death or bodily injury of any passenger of a public service vehicle
  • Liability under the Workmen’s Compensation Act, 1923 in respect of death or bodily injury of the paid driver of the vehicle, conductor, ticket examiners (public service vehicles) and workers carried in a goods vehicle.

Question 6.
Name the persons who can make an application for compensation for an accident involving death or bodily injury to persons arising out of the use of motor vehicles? State the relevant provisions of the Motor Vehicles Act, 1988.
Answer:
The following persons can make an application for compensation for an accident involving death or bodily injury to persons arising out of use of Motor Vehicles under Section 166 of the Motor Vehicle Act, 1988:

  • by the person who has sustained the injury; or
  • by the owner of the property; or
  • where death has resulted from the accident, by all or any of the legal representatives of the deceased; or
  • by any agent duly authorised by the person injured or all or any of the legal representatives of the deceased.

Question 7.
(a) Rajat had personal accident policy. He suffered accidental injuries and was taken to hospital. While undergoing treatment, he contracted an infectious disease, which caused his death. Mohan, son of Rajat, lodged a claim against the insurance company. Whether the claim is payable to him? Analyse the situation from ‘proximate cause’ and ‘remote cause’ points of view.

(b) Dinesh was travelling with his son in his own car. The car met with an accident and his son died in the accident. Whether Dinesh will get claim for third party damages?
Answer:
(a) In a decided case, the court has ruled that the claim is not payable under a personal accident policy because the “proximate cause” of death was the disease and the original accident only a remote cause.

(b) Under such circumstances despite the fact that the child is a third party and also the liability has been incurred by insured (father) to child; the claim will not be payable to the father because he cannot be the claimant. However, the court may admit the claim from mother of the child, as she is not the insurer of the vehicle.

Question 8.
A drunken driver jumped a red light and smashed into Lalit’s car. The cost of repair of the car is ₹ 5,000. He has an insurance for his car with ₹ 250 deductible. Is Lalit eligible to be compensated both from the negligent driver’s insurer’ and his own insurer to escape deductible amount?
Answer:
Lalit will be paid damage loss by his insurance company. He will have to bear the cost of ₹ 250/- himself being the amount deductible from the amount of insurance claim. He cannot claim the cost of repair of his car both from the negligent driver’s insurer as well as his own insurer.

Question 9.
Ramesh, a senior executive working in Delhi, purchased a Tata Sumo vehicle from Prime Motors on 27th September 2014 for a sum of ₹ 7,80,000. After getting the vehicle registered, Ramesh on 29th September 2014 got the vehicle bearing no. DL2C-J-7250 insured comprehensively with Bright Insurance Co. for the period from 29th September 2014 to 28th September 2015.

On 8th November 2014, Ramesh paid a visit to Noida for official work. He parked and locked the car on the side road adjoining the office and went for work at around 10.30 AM. After finishing his work around 3:30 PM, he came out to return to Delhi. To his surprise, he found the vehicle missing.

He searched for the car frantically and on not finding it, lodged an FIR with the Noida police station for the missing car. Next day, he also informed Bright Insurance Co., the insurer in writing about the said theft of the vehicle. Despite vigorous efforts of the police, the vehicle could not be traced. Hence, after 90 days, the Noida police gave a non-traceable certificate/report to Ramesh, the complainant. Ramesh, thereafter, again pursued the matter of settlement of claim with the insurance company and submitted a copy of the purchase invoice of the vehicle along with driving license, proof of road tax payment and other relevant documents including the final report in support.

Despite passage of over 21 days, the insurance company did not respond positively and kept delaying the matter on one pretext or the other. Aggrieved by this inaction on the part of the insurer, Ramesh after five weeks, filed a complaint with the District Forum. During the pendency of the complaint, the insurance company repudiated the claim on the ground that the vehicle was being used as a Taxi by Ramesh.

The District Forum, after hearing both sides on 29ih March 2015 allowed the complainant and directed the insurance company to pay Ramesh, the insured declared value of the vehicle, i.e., ₹ 7,80,000 along with interest @ 6% p.a. from four months after the date of lodging of claim till realisation. The District Forum also awarded ₹ 7,000 as costs.

The insurance company, being aggrieved with this decision, filed an appeal before the State Commission. The plea highlighted the fact that the insurer was not liable to reimburse the loss of stolen vehicle as the same was being used as a taxi. This plea was rejected by the State Commission by observing that theft of the vehicle had nothing to do with the use of the vehicle.

The appeal, therefore, was dismissed and the awarded amount was ordered to be released by Bright Insurance Co. to Ramesh. The insurance company being still not satisfied filed a revision petition before the National Forum. During arguments, both sides vehemently advocated their views.

Finally, it was pointed out by the counsel of the insured that in the decided case of ‘National Insurance Company Ltd. vs. Nitin Khandelwal’ in 2008 (CPJ ISC 2008-SEC-259), the Supreme Court had held that, “ in a case where the vehicle had been snatched or stolen, the breach of condition is not germane and the insurance company is liable to indemnify the owner of the vehicle where the insured owner has obtained a comprehensive policy for the vehicle in question.”

In view of the aforesaid judgment of the apex court in the earlier order of the State Commission in the ‘Nitin Khandelwal case of 2008’, the counsel for the insurance company did not press the point that insurer was not liable to reimburse for the stolen vehicle because it was being used as a taxi. Hence, the claim of Ramesh was finalised at 75% on ‘non-standard basis’ as upheld earlier by the Supreme Court in 2008 plus cost.

In light of the above, answer the following questions:
(a) Do you agree with the stand taken ultimately by the insurance company to settle the claim on a ‘non-standard basis’? Give reasons.
(b) In the case cited above of the apex Court in 2008, the claim was finalised at 75% being ‘non-standard basis’. On consideration of the totality of the facts and circumstances in such cases, the law seems to be well settled that in case of theft of a vehicle, the nature of use of the vehicle cannot be looked into and the insurance company cannot repudiate the claim on this basis. If that be the case, should such claim be settled only on a ‘non-standard basis’? Comment.

(c) Extending the logic further, could the claim of Ramesh be not settled at 100% had his counsel pressed for the same? Elaborate with reasoning.

(d) What do you understand by ‘standard claim’ and ‘non-standard claim’?

(e) If you were the adjudicating authority and a case of this nature is brought before you for decision, what would be your stand? Elaborate with reasons.

(f) Is it not desirable for insurers to implement the philosophy of ‘under promise and over delivery’ in settlement of claims? Comment.
Answer:
(a) The stand taken at first instance by the Insurance Company to repudiate liability on the ground that the vehicle was used as a Taxi by Mr. Ramesh is totally baseless and is not based on facts which have emerged in the present case.

The liability under the policy, therefore, was dear and the Insurance Company should have honoured its liability rather than going to the various forums initially and thereafter in a review petition before the National Forum.

Though the Supreme Court in 2008 in “Nitin Khandelwal Case” had already laid down that “in a case, where the vehicle had been snatched or stolen, the breach of condition is germane and the Insurance Company is liable to indemnify the owner of the vehicle where the insured owner had taken a comprehensive policy for the vehicle in question”.

The court had taken a view that the breach of the policy condition regarding the hire of the vehicle for a commercial purpose has no bearing on its theft and, hence, would be irrelevant.

The Supreme Court in “Nitin Khandelwal Case” left the question “whether the state commission was justified in allowing the claim of the respondent on the non-standard basis” open as the claimant had not filed any appeal against the said order. The insurance company would be bound to pay the insured declared value of the vehicle and not 75% on non-standard basis.

Further, the National Consumer Disputes Redressal Commission in case of “Rekha Sardana Vs. Oriental Insurance Co. Ltd. & Ors” in 2010 held the same as mentioned above. Thus, keeping in mind the above, I do not agree with the stand taken ultimately by the insurance company to settle the claim on non-standard basis.

(b) The Supreme Court has held in “Nitin Khandelwal Case” in 2008 that “where the vehicle is snatched or stolen, the breach of condition of policy is not germane; that the insurance company is liable to indemnify the owner of the vehicle when the insurer has obtained comprehensive policy for the loss caused to the insurer”. If the Supreme Court’s decision is viewed in totally, it becomes clear that in case of theft of a vehicle the nature of use of the vehicle cannot be looked into and the breach of such a condition is not germane and hence the Insurance Company is liable to indemnify the owner for the loss suffered by him.

However, in the present case, since there is no evidence of breach of usage condition, the claim will have to be paid. Further, as per rules, even if is presumed that there is a breach of any condition, a claim cannot be rejected for breach of a policy condition unless such breach is the cause of the loss. When there is no nexus between the breach and the loss, the claim has to be settled on a non-standard basis.

Therefore, in the present case, as there is no evidence of misuse of vehicle as taxi, the claimant is liable for total loss payment and not only the total loss suffered by him as a result of theft and not merely settlement on 75% “Non-Standard basis”, as the present facts of the case do not qualify under the guidelines for non-standard claims as mentioned below:
Where a breach of warranty or policy condition arises and where such breach is of a technical nature or is evidently beyond the control or knowledge of the insured or is considered after rectifying the policy and collecting additional premium where due.

In settling the claim, a deduction may be made from the assessed claim amount equivalent to the extra premium due for three years or three times the additional premium due for voyage which would have been charged had correct information been available originally.

(c) Yes, the claim of Ramesh could have settled at 100% of insured declared value and not 75% on non-standard basis as it was held by National Consumer Disputes Redressal Commission in case of “Rekha Sardana Vs. Oriental insurance Co. Ltd. & Ors” that insurance company would be bound to pay the insured declared value of the vehicle.

(d) The term non-standard claim is not defined anywhere. The term is used in various decided cases by various forums. Based on those, “Non-Standard Claims” are those claims where the breach of warranty is of a technical nature and is not material to the loss.

A Standard Claim is one where there is neither a breach of condition nor of warranty and the claim falls fully under the terms and conditions of an Insurance Contract and is payable in full. The conclusion is that a claim cannot be rejected for breach of a policy condition unless such breach is the cause of the loss. When there is no nexus between the breach and the loss, the claim has to be settled on a non-standard basis.

(e) If I were the Adjudicating Authority and the claim of this nature was brought before me, for decision, I would have settled the claim at 100% being a standard claim as there has been no violation of any warranty or condition of a Motor policy, as there is no evidence or proof to evidence such breach or violation of usage clause. The claim was lodged in time, regular follow-up was done by the insured, the delay and lack of decision making was only on the part of the Insurance Company and therefore they have to face the consequences. Hence, the payment must include the interest component and the costs.

(f) Insurers the world over, suffer from an “Image” problem. They are prompt in collection of premium but take their own time in meeting their liability under a claim. There is thus, a need for Insurers to realize that they are “Custodians of Public Fund”. The money that they collect from the customer is a “Trust Money” and is to be safely invested to meet future liabilities under the policy contract. Hence they should endeavour to “under promise and over deliver” rather than “Over Promise” and “Under Delivery” which appears to be the present norm in the market.

Question 10.
Inder had purchased a bus by taking a hire-purchase loan from Swami Financiers. The bus was used as a private service vehicle and not as public transport. It was insured under a comprehensive motor policy issued by Sun India Insurance Co. Ltd. The bus met with an accident and an insurance claim was lodged. The insurer appointed a licensed surveyor who assessed the loss at ₹ 1,26,500. Out of this, the company deducted ₹ 33,125 on the ground that the driver of the bus did not have an endorsement on his driving licence to drive a transport vehicle. The balance of the amount was paid by the insurer to Swami Financiers. Aggrieved by this, Inder filed a complaint before the Consumer Forum.
You are required to answer the following –
(i) Can an insurance claim be paid to the financier and not to be insured?
(ii) What are the exclusions under a comprehensive motor insurance policy?
(iii) What are the common reasons for the repudiation of claims under motor insurance policies?
Answer:
(i) No, the action taken by the Company is not justified for the following reasons:

  • Firstly, if a person has a licence to drive a heavy goods carriage vehicle, it also means that he/she was entitled to drive a transport vehicle, including a public service vehicle, hence repudiation of the claim on this ground or reason is not tenable.
  • Secondly, the company is also not right in making a part payment of the amount of loss. The Commission should direct the insurance company to pay the balance amount and the Consumer Forum may decide such interest and costs.
  • Thirdly, the practice adopted by insurance companies of directly paying to the financer, without informing the insured or without his consent, cannot be justified. If the insurance policy is taken in the name of the vehicle purchaser, there is no question of paying the amount straightaway to the financier.

(ii) The common exclusions or limitations in a motor insurance policy are as follows:

  • Consequential loss depreciation, wear and tear, mechanical and electrical breakdown, failures or breakages.
  • Damage to tyres and tubes (5% in case of mishap).
  • Accidental loss or damage under the influence of intoxicating liquor or drugs.
  • Method of Valuation-claim amount is to also limited by the valuation method, for example at retail value (the price a dealer pays on purchase of car), or market value (generally the mid-point between trade and retail). These values affect the premiums and what the insurer will pay out when on claim.
  • “No water damage” exclusion damage to an engine.
  • Excesses or sometimes multiple excesses exclusion. Sometimes, in addition to standard excess, extra excesses may be imposed like others may apply. For example, young or new drivers who haven’t had a license for a certain number of years can be liable for an additional excess.
  • If the Policyholder has had an accident within six months of obtaining cover, or between midnight and 6 am the most dangerous time on the road-an excess may apply.
  • And some insurers levy an additional excess on drivers older than of a certain age.

(iii) Some of the Common reasons for the repudiation of motor
accident claims include the following:

  • When losses or claims are caused by unlicensed driver.
  • When the vehicle is unroadworthy vehicle-e.g. wipers not working, smooth tyres.
  • Reckless or negligent driving-e.g. “Failure to take care” clause which refers to recklessness, which is not to be confused with negligence, and “Breach of road traffic regulations” clause, exceeding the speed limit at the time of an accident.
  • Drunk driving by the drivers.
  • Driver not the “regular driver”- some policies cover the regular driver only, or a named driver or any licenses driver.
  • Total-loss policy-which applies only when the insurer deems the vehicle to be a total write-off.
  • Tracker device not fitted, if it is mandatory.
  • Vehicle inspection not carried out, as per the rules, is insurers insist on inspecting the vehicle at inception of the policy. This is so that there can be no disputes about pre-existing damage to the vehicle. If the Policyholder neglects to comply, there will be breach of contract and the claim may be rejected.

Material non-disclosure at under writing stage, with regards to claims record, a break in insurance cover, prior applications for cover being rejected, and judgments on credit record are all material to the assessment of risk, and it is imperative that the Policyholders should disclose such information. For example, people with a bad credit record have a higher propensity to file fraudulent claims than people with a clean credit record.

Vehicle used for business should be disclosed to the insurer. Vehicle not parked securely at night-if the Policyholder claims that car is parked securely-in a garage or off the street at night and in the event of theft, it is found it was regularly in the street, claim could be rejected.

Security device not fitted, if that is mandatory that a vehicle should be fitted with an alarm or a gear lock and if it is not complied the claim can be rejected.

Question 11.
The deceased, XYZ was pursuing B.Tech. 3rd year from an Engineering Institute. XYZ had lost his life in a motor vehicle accident which occurred on 19m June 2011 at 10.40 A.M. near Haridwar. The Motor Accident Claims Tribunal (the Claims Tribunal) awarded a compensation of ₹ 19,50,000 to the parents of the deceased. The insurance company being Secure General Insurance Company Ltd. filed a petition claiming that the compensation awarded is exorbitant and excessive.

The Claims Tribunal assumed the minimum income of the deceased as ₹ 25,000 per month, deducted ₹ 2,500 towards liability of income tax, deducted 50% towards personal and living expenses and applied a multiplier of 14 as per the age of the deceased’s mother (41 years) and computed the loss of dependency as ₹ 18,90,000. The Claims Tribunal further added a sum of ₹ 35,000 towards loss of love and affection, ₹ 15,000 for funeral expenses and ₹ 10,000 towards loss of estate. It was urged on behalf of the insurance company that the assumption of income of ₹ 25,000 per month was on the higher side, particularly in view of the fact that the deceased, XYZ has not been able to clear all the subjects even in the first semester and the second semester.

Based on the above, answer the following questions:
(a) Discuss the rationale behind the computation of compensation decided by the Claims Tribunal. Is the insurance company justified in its arguments?
(b) Discuss the role of Motor Accident Claims Tribunal (MACT) and the powers accorded to it by the Motor Vehicles Act, 1988 in settlement of disputes and claims.
Answer:
(a) In the above case, the compensation for death of the deceased student is calculated on the basis of the Theory of Human Life Value.

  • HLV can be defined as the capitalized value of the net future earnings of an individual.
  • It is the probable income of the insured person or the total income then the person is likely to earn during the remaining part of working life.
    E.g. A person aged 24 will work till 60 years of age. If he is expected to earn ₹ 90 lakhs throughout life, then his HLV is ₹ 90 lakhs.
  • To calculate HLV, it is necessary to make provision for important events in one’s dependents’ lives.
  • It is then necessary to calculate present household expenses, integrate the effect of inflation on expenses, and then to find out the current value of personal expenses, taking into account the current value of current liabilities and medical expenses.
  • In the given case the HLV is computed for deceased XYZ by the Court on the same grounds.
  • The Claims Tribunal assumed the minimum income of the deceased as ₹ 25,000 per month, deducted ₹ 2,500 towards liability of the income tax, deducted 50% towards personal and living expenses and applied a multiplier of 14 as per the age of the deceased’ mother (41 years) and computed the loss of dependency as ₹ 18,90,000.
  • The Claims Tribunal further added a sum of ₹ 35,000 towards loss of love and affection ₹ 15,000 for funeral expenses and ₹ 10,000 towards loss of estate.
  • Notwithstanding the Insurance Company repudiated the claim pointing out the amount is not fair and needs to be taken on lower compensation amounts.
  • But, the tribunal repudiated the claim of the company and has directed the compensation as per the figures arrived at by the Tribunal.

(b) Commonly, in motor accident compensation cases, especially the third-party liability compensation amounts, the award is pronounced by the Motor Accident Claims Tribunal (MACT). After payment of the claim to the injured party or his legal heirs etc. The insurer can initiate action against the erring party i.e. the owner of the insured vehicle.

Modes of Recovery Include:

  • Excess/deductible: That portion of the claim which is to be borne by the insured is called an excess or deductible.
  • Subrogation: Rights and remedies action against the third party.
  • Contribution: This occurs when the insured property is insured by more than I insurer- in such cases recovery would be made by the lead insurer from the co-insurer.
  • Reinsurance: Reinsurance is the most common method of risk transfer – where the risk is re-insured with re-insurers and after the claim, the same is recovered from them after payment to insured.

Motor Accidents Claims Tribunal (MACT) deals with matters related to compensation of motor accidents victims or their next of kin. The tribunal deals with claims relating to loss of life/property and injury cases resulting from Motor Accidents.

MACT Courts are presided over by Judicial Officers from the State Higher Judicial Service. Now, these courts are under direct supervision of the Hon’ble High Court of the respective state.
The Victim himself or through an advocate, in case of personal injury, can approach the MACT.
The application for claim can be made either by the victim, or the Legal heirs of the victim, or an advocate in the case of death. A minor applicant below the age of 18 years should make an application through an advocate. The claim can be made by the owner of the vehicle in case of property damage.

Claim arise when:

  1.  The insured’s vehicle is damaged or any loss incurred.
  2. Any legal liability is incurred for death of or bodily injury.
  3. Or damage to the third party’s property.

The claim settlement in India is done by opting for any of the following by the insurance company:

  • Replacement or reinstatement of vehicle
  • Payment of repair charges

In case, the motor vehicle is damaged due to accident it can be repaired and brought back to working condition. II the motor vehicle cannot be repaired, then the insured can claim for total loss or for a new vehicle. It is based on the market value of the vehicle at the time of loss. Motor insurance claims are settled in three stages.
In the First Stage:

  • The insured will inform the insurer about loss.
  • The loss is registered in claim register.

In the Second Stage:

  • The automobile surveyor will assess the causes of loss and extent of loss. He will submit the claim report showing the cost of repairs and replacement charges etc.
    In the Third Stage:
  • The claim is examined based on the report submitted by the surveyor and his recommendations.
  • The insurance company may then authorize the repairs. After the vehicle is repaired, insurance company pays the charges directly to the repairer or to the insured if he had paid the repair charges.
  • Section 110 of Motor Vehicle Act, 1939 empowers the State Government in establishing motor claim tribunals. These tribunals will help in settling the third party claims for the minimum amount.

Question 12.
Mr. Rajiv Shukla residing in Delhi purchased on 9th May, 2016 a Honda Car for ₹ 8,00,000. The vehicle was registered as DL 2CJ 8745. He, thereafter, applied for a comprehensive insurance policy with Pioneer General Insurance Co. Ltd. and after ascertaining the annual premium, issued a cheque in favour of the insurance company for ₹ 19,000 as premium for a comprehensive coverage of the vehicle for a period of twelve months commencing from 11th May 2016. The insurance company accordingly issued Mr. Shukla with a comprehensive motor policy for the period from 11th May, 2016 to 10″ May 2017.

On presentation of the cheque issued by Mr. Shukla by the Insurance company, it was dishonoured on 14’h May, 2016 on the ground “insufficiency of funds” and an intimation was sent to Mr. Shukla by the insurance company on 16m May, 2016.

Meanwhile, while returning from his office on 15th May 2016, the vehicle that was driven by Mr. Shukla met with an accident and suffered damages. A third party walking on the road also sustained injuries and had to be hospitalised. The accident was reported by Mr. Shukla to the police and a FIR was also lodged.
On the basis of the above facts, answer the following questions:
(i) Does Mr. Rajiv Shukla have a valid claim in respect of damage to his car DL 2CJ 8745 as a result of the above accident?
(ii) Discuss the concept of liability of third party claims.
(iii) Does the person walking on the road who sustained injuries and had to be hospitalised, have a right as third party to claim for injury under the policy?
Answer:
(i) Section 64VB of Insurance Act, 1938 prohibits insurance companies ‘ accepting a risk on an insurance policy without receiving the consideration (Premium) in advance. The insurer cannot assume any risk earlier than the date on which the premium has been paid in cash or cheque to the insurer.

Here in the present case, payment by cheque by Mr. Shukla is a reciprocal promise to be simultaneously performed. When the insured failed to pay the premium or whether cheque issued by him was returned dishonoured by the Bank, the insurer was not justified in seeking reimbursement of the claim in the absence of any consideration.

In this case, Mr. Shukla is not liable to take claim from the insurance in respect of damage of his car DL 2CJ 8745 because his cheque get dishonoured.

As per the law if the insured cheque get dishonoured due to insufficient fund in the account than court will not consider this case as it is the negligent of the insured and insured is not liable to claim from insurance company.
But in case if the cheque get dishonoured due to any other reason like signature not matching or any spelling mistakes on the cheque than in these cases insured is liable to claim from the insurance company.

(ii) Third parties have a right to claim compensation for the loss suffered by them as a result of an accident. The damages suffered by the third parties create liabilities upon the owners of the vehicle as such deal with the liabilities of the owners to the third parties. The presence of an insurance policy in operation is enough to move the claim of payment to the third party.

Liability in respect of damage to property [S.147(2)] For damage to property of a third party under Motor Vehicle Act, 1939 the limit of liability is ₹ 6,000 in all, irrespective of the class of the vehicle. Under Motor Vehicle Act, 1988 the position as laid down by Section 147 (2) in regard to liability is as under:

  • For death or personal injury to a third party, the liability of the insurer is the amount of liability incurred, i.e. for the whole amount of liability.
  • For damage to property of a third party the liability of the insurer is limited to ? 6,000 as was under the Motor Vehicle Act, 1939.
  • It is a rule specified in Motor Vehicle Act, 1988 that no person should use a motor vehicle in a public place unless there is an Insurance Policy in force in relation to the use of the vehicle. The main object of the provision is that third parties who suffer injuries due to use of the vehicle, may be able to get damages from the owners. The rights of third party to get indemnified can be exercised only against the insurer of the vehicle.

The fact that there was a Policy issued in respect of the vehicle involved in the accident is enough for injured third party to maintain a claim against the insurer. The Third Party is not concerned whether the premium was paid or not as long as the policy has been issued.

Where a judgement or an award has been given against a insured person in respect of a third party liability covered under the insurance policy, then, notwithstanding the rights or the insurer to avoid or cancel the insurance policy, the insurer shall be liable to pay to the person entitled to the benefit of decree (third party), as if the insurer were the judgement debtor, together with any amount payable in respect of costs and any sum payable along with interest.

Hence, the person who sustained injuries while walking on the road can file a claim for injuries with the insurer and be indemnified as per provisions of law.

Question 13.
Mr. Ajay a Company Secretary is also a fellow member of The Insurance Institute of India. He joined ABC Limited as a Manager in 2006 and got promoted as a Senior Manager in October 2011. His promotion entitled him to buy a car. He bought a Hyundai EON car. He took lessons from a driving class and got a Learner’s Driving licence. The car purchased and registered in October 2011 was insured with FG Insurance comprehensively.

During December 2011 while reversing his new car (EON) parked on a gradient facing west-east inside the company’s car shed lost control over the vehicle and dashed the rear of an Esteem Vehicle (parked East-West). Due to the impact ESTEEM vehicle had also touched another car Santro nearby. Esteem car was insured by the owner comprehensively with TAIG Insurance. Mr. Ajay immediately informed the security of the company ABC Limited as the parking shed belonged to ABC Limited and the executives and managers were authorised to park their vehicles in the big parking shed partly open and partly covered with asbestos sheets.

Mr. Ajay the insured had only a LLR (Learner’s Licence) and yet to get a permanent driving licence. However, at the time of accident, he was accompanied by Mr. Sanjay who was having a permanent driving licence and sitting adjacent to Mr. Ajay while he was driving. Mr. Sanjay drove the vehicle after the accident to the dealer cum repairing centre and left the vehicle at dealer’s garage to have the vehicle repaired.

As there was no injury to any person and the accident happened inside the parking shed owned by ABC Limited, it never occurred to Mr. Ajay that he should lodge a FIR/Panchnama. Mr. Ajay took moral responsibility in taking the lead and reported the claim to TAIG Insurance (Insurer of ESTEEM) after ascertaining the name of the insurer and the insured from the records available with ABC Limited. As the ESTEEM vehicle was very old vehicle, total repair expenses exceeded the assessment of the surveyor and Mr. Ajay had to reimburse ₹ 10,000/- to the extent repair expenses exceeded the claim assessment of the surveyor and reimbursed by the insurer to the owner of ESTEEM vehicle.

The owner of Santro Vehicle did not prefer a claim with his insurers but claimed the repair expenses from Mr. Ajay, the owner of EON vehicle. Mr. Ajay reimbursed ₹ 5,000/- to the owner of the Santro vehicle.
Mr. Ajay got the repair expenses of EON from FG insurance. Repair expenses to the ESTEEM vehicle were reimbursed partially by TAIG Insurance to the extent assessed by the surveyor and repair expenses over and above the surveyor’s assessment was borne by Mr. Ajay (₹ 10,000/-) and similarly, he had also paid ₹ 5,000/- to the owner of Santro vehicle as stated above.

Mr. Ajay got his EON car repaired and wanted FG insurance.
(i) To reimburse ₹ 10,000/- the excess of repairers bill over and above what had been admitted by TAIG Insurance.
(ii) To reimburse ₹ 5,000/- the amount of repair expenses paid to the Santro owner.
The policy issued by FG Insurance for EON car was comprehensive and showed TPPD of ₹ 7,50,000/- and obtained premium for the same in addition to collecting OD premium for the car.

Mr. Ajay contended that it was not any compromise to the third party(ies) (owners of ESTEEM and Santro vehicles) but had reimbursed the excess of the repairer’s bill over and above allowed by TAIG Insurance for ESTEEM and since Santro owner did not prefer a claim with the insurers.

Please answer the following:
(a) Explain the principles of insurance with reference to Motor underwriting in detail explaining the different types of cover. Comprehensive, ACT only.

(b) Why did the owner of SANTRO vehicle did not prefer a claim with his insurers?

(c) What is NCB in Motor underwriting parlance? Will Mr. Ajay be entitled to NCB during the renewal of policy for EON? What are the various slabs of NCB in motor insurance?

(d) Why did FG insurance admit the damages to the EON car while Mr. Ajay the owner cum driver had only a Learner’s licence (LLR) and not a permanent licence?

(e) What is TPPD? What prevented Mr. Ajay from filing a FIR/Panchnama?

(f) Explain the process of preferring a Third-party property Damage claim.

(g) Explore the possibility of FG Insurance repudiating/ admitting the claim of ₹ 15,000/- for reimbursement to the respective third parties for the property damage to their vehicles.
Answer:
(a) Motor Insurance being a contract like any other contract has to fulfil the requirement of a valid contract as laid down in the Indian Contract Act, 1872. In addition, it has certain special features common to other insurance contracts.

They are as under:
(i) Principle of Utmost Good Faith
(ii) Principle of Insurable Interest
(iii) Principle of Indemnity
(iv) Principle of Subrogation and Contribution
(v) Principle of Proximate Cause

(i) Principle of Utmost Good Faith: The principle of utmost good faith casts an obligation on the insured to disclose all the material facts. These material facts must be disclosed to the insurer at the time of entering into the contract. All the information given in the proposal form should be true and complete, e.g. the driving history, physical health of the driver, type of the vehicle etc. If any of the material facts declared by the insured in the proposal form are incorrect or inappropriate by the insurer at the time of the claim it may result in the claim being repudiated.

(ii) Principle of Insurable Interest: In a valid insurance contract, it is necessary on the part of the insured to have an insurable interest in the subject matter of insurance. The presence of insurable interest in the subject matter of insurance gives the person right to insure. The interest should be pecuniary and must be present at inception and throughout the term of the policy. Thus, the insured must be either benefitted by the safety of the property or must suffer a loss on account of damage to it.

(iii) Principle of Indemnity: Insurance contracts are contracts of indemnity. Indemnity means making good of the loss by reimbursing the exact monetary loss. It aims at keeping the insured in the same position as he was before the loss occurred and thus, prevent him from making any profit from the insurance policy.

(iv) Principle of Subrogation and Contribution: Subrogation refers to transfer of insured’s right of action against a third party who caused the loss. Thus, the insurer who pays the loss can take up the insured’s place and sue the party that caused the loss in order to minimize his loss for which he has already indemnified the insured. Subrogation comes in the picture only in case of the damage or loss due to a third party. The insurer derives this right only after the payment of damages to the insured.
Contribution ensures that the indemnity provided is proportionately borne by all the insurers in case of double insurance.

(v) Principle of Proximate Cause: The legal doctrine of proximate cause is based on the principle of cause and effect. To be proximate the cause must be immediate effect but not a remote or distant one.

Different Types of Cover:
The All India Motor Tariff governs motor insurance business in India. According to the Tariff, all classes of vehicles can use two types of policy forms.

They are:
Form A which is known as ACT Policy is a compulsory requirement of the Motor Vehicle Act. Use of vehicles without such insurance is a penal offence.

Form B which is also known as Comprehensive cover is an optional cover.
1. Liability Only Policy: This covers third-party liability and/or death and property damage. Compulsory personal accident covers for the owner in respect of owner-driven vehicle is also included.
2. Package Policy: This covers loss or damage to the vehicle insured in addition to 1 above.
3. Comprehensive Policy: Apart from the above-mentioned coverage it is permissible to cover private cars against the risk of fine and/or theft and their party/theft risks.

Every owner of motor vehicles has to take out a policy covering third party risks but insurance against other two risks is optional. When insurance policy covers third party risks, third party who has suffered any damages can sue the insurance company even though it is not a party to the contract of insurance.

Insurance policies for the vehicles subject to the purchase agreements, lease agreements and Hypothecation are to be issued in the joint names of the hirer and the owner, lessee and the lessor, owner and the pledgee respectively. In case of policy renewal, a notice of one month in advance is issued by the insurer. The notice gives the details of premium payable for renewal.

(b) The owner of Santro Car might have opted to refrain claiming from his insurers on account of:

  • The policy taken might be only “ACT POLICY” not covering own damage portion of the car.
  • The owner shall be deprived of “NCB” No Claim Bonus or a reduced slab of NCB should a claim be preferred.

(c) In motor insurance, No Claim Bonus (NCB), is the insurer’s reward to the policyholder for not making a claim in the preceding years. That is, NCB- which is a discount ranging from 20-50% on premium payable cannot be claimed as a right but has to earned by maintaining a claim-free record. When you buy your first comprehensive motor insurance policy, you are normally (except in the rare case of NCB transfer) not eligible for any NCB discount on the premium paid because you have no claim-free record as such.

Mr Ajay shall not be entitled to no claim bonus (NCB) at the time of next renewal as it is a discount which is available for not making a claim in the preceding year but Mr. Ajay had taken a claim from FG Insurance covering third party claim also. within 90 days of the expiry date of the previous policy.

The insured is entitled for no claim bonus (NCB) on the own damages section of the policy, it no claim is made or pending during the preceding year (s) as per the following table:

Period of Insurance (% of NCB on Own Damage Premium)
No claim made of pending during the preceding full year of insurance 20%
No claim made or pending during the preceding 2 consecutive years of insurance 25%
No claim made or pending during the preceding 3 consecutive years of insurance 35%
No claim made or pending during the preceding 4 consecutive years of insurance 45%
No claim made or pending during the preceding 5 consecutive years of insurance 50%

No Claim Bonus will only be allowed provided the policy is renewed within 90 days of the expiry date of the previous policy.

(d) As per Motor insurance policies, when a learner is driving alone with Learner’s license and met with an accident then he/ she is not entitled for the claim and the company has the right to refuse for the claim but in case any person accompanying with him/her with permanent driving licence and expert in driving, then insurance company is entitled to give the claim to the insure. In this case, Mr. Ajay was accompanied by Mr. Sanjay who had a permanent driving licence and expertise in driving and sitting on the adjacent seat, therefore, Mr. Ajay is entitled to claim for the losses incurred due to accident.

(e) TPPD in Motor insurance refers to Third Party Property Damage. A third-party car insurance plan provides coverage against any legal liability arising out of injuries to a third party when the policyholder is at fault. It covers damages and injuries caused by the insured vehicle, to a third-party person or property. As per the Motor Vehicles Act, 1988, it is mandatory for every motor vehicle owner to buy at least third-party insurance coverage in India.

Mr. Ajay did not file FIR/Panchnama because:

  • The accident took place inside the parking shed owned by ABC Limited.
  • Nobody sustained any bodily injury.
  • It did not occur to the insured that a FIR/Panchnama would be a pre-requisite for staking a claim with MACT (Motor Accident Claims Tribunal).

(f) The following process should be followed in cases of third-party loss/damage:
Insured should intimate to the police about the accident resulting into a third party damage.

In case the insured receives MACT’s (Motor Accident Claims’ Tribunal) notice from third party all such notice (s) should be forwarded by the insured to the insurance companies with the following information:

  • Details about the accident resulting in third party claim
  • Insurance Policy Details
  • Details of the Driver who was driving at the time of accident
  • Driver’s Driving licence particulars
  • Any other information asked by the insurer.

The insurance company then generally deputes an investigator and advocate to investigate about the accident and present the insurance company’s case before the MACT. Any award passed by the MACT is paid by the insurance company as per the policy terms and conditions. Insurers can regret their inability to honor the third party property damage reimbursement directly settled by the insured under the pretext of compromise. Such claim are required to be received through the competent authority (MACT).

(g) FG Insurance can repudiate the claim stating their inability to honour TPPD reimbursement settled by insured as the claims are required to be received through the competent authority.

FG Insurance can also settle the claim as one-time exception as exgratia after receiving a representation from the insured and getting a notarized affidavit from the concerned third party (ies) that their claims have been fully and finally settled by the insured and that they would not be staking any further claims in this regard.

The competent authority to sanction such exgratia cases shall be Managing Director of insurance company. FG insurance should also satisfy themselves by getting the copy of the bank statement from the insured showing the debits with the respect to the payments made by third parties.

Question 14.
Rajesh purchased a bus by taking a loan from ABC Limited. The bus was being used as private service vehicle and not as a public transport vehicle. It was insured under a comprehensive insurance policy issued by XYZ Insurance Limited. The bus met with an accident, for which insurance was claimed.

The insurance company appointed its Surveyor, who assessed the loss at ₹ 1,26,500. However, the insurance company deducted ₹ 33,125 from the assessed amount on the ground that the driver did not have an endorsement on his licence to drive a transport vehicle. Even this amount was not paid to Rajesh, but was paid directly to the Finance Company.
Advise:
(i) Was the insurance company right in deducting the amount of ₹ 33,125 from the claim amount?
(ii) Is it right on the part of the insurance company to pay the claim amount directly to the Finance Company and not to the insured?
Answer:
(i) No, the insurance company was not right in deducting the amount of 233,125/- from the claim amount on the ground that the driver did not have an endorsement on his licence to drive a transport vehicle. Once a person had a licence to drive a heavy goods carriage vehicle, it would mean that he was entitled to drive a transport vehicle.

Due to this entitlement with the driving licence, the driver was allowed to drive the bus which met with the accident. The insurance company in such a case was liable to pay the full amount of claim and was not justified in deducting the amount of 233,125. The aggrieved insured person should filed a complaint at the appropriate forum so that the insurance company pays the balance amount along with interest at 12 per cent and cost of 5,000.

(ii) No, the insurance company is not right in paying the claim amount directly to the finance company without informing the claimant. Even if the insurance company intended to make the claim payment to the finance company it should have informed the claimant insured and asked for his consent to do so. The insurance company and the financier cannot act in isolation without even informing the insured who has made the claim for the loss.

In such case the insurance company should have either paid the daim amount to the insured or should have properly communicated with the claimant and asked for his written consent/no objection certificate to ‘ pay the claim amount to the finance company.

Question 15.
Ajay purchased a bus on a hire purchase loan from XYZ Finance Limited. The bus was used as private service vehicle only. The vehicle was insured under a comprehensive motor policy issued by ABC Insurance Limited. The vehicle met with an accident. Ajay filed a claim with ABC Insurance Ltd. who appointed a licensed Surveyor to assess the claim. The loss was assessed at ₹ 1,65,000. The insurance company deducted ₹ 46,000 on the ground that the driving license of the driver was not endorsed for driving of transport vehicle.

The insurance company paid the balance amount of claim of ₹ 1,19,000 directly to the financiers XYZ Finance Ltd. Ajay filed a complaint before the Consumer Forum. As an Insurance Expert, you are required to advice on the following:
(a) Is the insurer justified in repudiating the claim? Comment also on the actions of the insurer in the case cited.
(b) Discuss the scope of coverage available in a comprehensive motor insurance policy. Why is motor insurance mandatory in India unlike in other countries?
Answer:
(a) In the above case, the insurer is not rightly justified in repudiating the claim. Some of the common reasons for repudiation of motor accident claims include the following:

  • When losses or claims are caused by unlicensed driver.
  • When the vehicle is unroadworthy vehicle -e.g. wipers not working, smooth tyres etc.
  • Reckless or negligent driving e.g. “Failure to take care” clause which refers to recklessness, which is not to be confused with negligence.
  • “Breach of road traffic regulations” clause exceeding the speed limit at the time of accident.
  • Drunk driving by the drivers who are not “regular drivers”. In this regards some policies cover the regular driver only or a named driver or any licensed driver.
  • Total loss policy – which applies only when the insurer deems the vehicle to be a totally depreciated. ‘
  • Vehicle inspection not carried out as per the rules. Insurers insist on inspecting the vehicle at inception of the policy. This is required to avoid any disputes in future about the pre-existing damages to the vehicle. If the policyholder neglects to comply, there will be breach of contract and the claim may be rejected.
  • Material non-disclosure at the time of underwriting stage- With regards to the claims record, a break in insurance cover, prior applications for cover being rejected and judgements on credit record are all material to the assessment of the risk and it is imperative that the policyholders should disclose such information.
  • Vehicles used for business should be disclosed to the insurer.
  • Vehicle not parked securely at night. If the policyholder claims that the car is parked in a garage or off the street at night, and in the event of the theft, it is found that it was regularly in the street, claim could be rejected.
  • Security device not fitted, in case it is mandatory that a vehicle should be fitted with an alarm or a gear lock and it does not comply with the claim can be rejected.

Further, the action taken by the company is not justified for the following reasons:
First, if a person has a license to drive a heavy goods vehicle, it also means that he is entitled to drive a transport vehicle including a public service vehicle, hence repudiation on this ground is not tenable.
Secondly, the company is also not right in making a part payment of the amount of loss. The commission should direct the insurer to pay the balance amount including interest and costs.

Thirdly, the practice adopted by insurance companies of directly paying to the financier without informing the insured or without his consent cannot be justified. If the insurance policy issued in the name of the vehicle purchaser there is no question of paying the amount directly to the financier.

(b) A comprehensive motor insurance policy is a combination of a motor insurance for own-damage cover plus a third-party insurance policy. A comprehensive motor policy also does not cover all losses, the common exclusions or limitations in a motor insurance policy are as under:

  • Consequential loss depreciation, wear and tear, mechanical and electrical breakdown, failures or breakages.
  • Damages to tyres and tubes (50% in case of mishap).
  • Accidental loss or damage under the influence of intoxicating liquor or drugs-Excesses or sometimes multiple excesses exclusion. Sometimes, in addition to standard excess, extra excess may be imposed.
  • If there is an accident within six months of obtaining cover or between midnight and 6 am- the most dangerous time on the road- an excess may apply.

Motor cover is a statutory requirement under the Motor Vehicles 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 i.e. 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 third party property.

Motor insurance, as the name suggests,insurance of motor vehicles and are broadly classified as follows:

  1. Private Cars.
  2. Motorcycles and Motor scooters.
  3. Commercial vehicles – subdivided into Goods carrying vehicles, Passenger carrying vehicles, and
  4. Miscellaneous vehicles.

The coverage available under Motor insurance include.
Liability Coverage:
When involved in an accident and if it is concluded that accident took place because of fault/negligence, the liability coverage will be of use.

The following benefits are offered by the liability insurance plan:

  • Covers the repair/replacement cost of the damaged property (of third-party).
  • Covers the medical bills of the third party due to hospitalization or medical treatment.
  • Vehicle owners should buy minimum liability insurance as per the legal obligation and the insurance policy will cover the same.
  • The liability coverage will include the third-party injury, death or damage to the third party property.
  • Liability coverage is mandatory as per the Motor Vehicle Act, 1988.

Collision Coverage:
If purchased ‘collision coverage’ the insurance company will bear the car repair expenses after the accident. In some cases, the cost of repairs will exceed the current market value of the vehicle. In such circumstances, the insurance company will pay the current market value of the car.

The collision cover should be subscribed as per the age of your vehicle. If you are buying an insurance policy for a brand new vehicle you should ensure that the collision coverage is included. If there is a lien on your vehicle, you should buy collision cover. The collision cover can be as low as possible for old vehicles.

Personal Injury Coverage:
In addition to the mandatory liability insurance, you can include certain coverage to overcome various risk factors. Personal injury protection will cover all the costs associated with the accident. The medical bills of the driver and other passengers will be covered by the personal injury protection. Regardless of whose fault, the insurance company will pay the medical bills.

Comprehensive Coverage:
Form B which is also known as Comprehensive Policy is an optional cover. A comprehensive insurance coverage will include all kinds of risk factors that are associated with your vehicle, driver, passengers, third-party vehicle, third-party driver, third-party vehicle passengers and third party property. The insurance policy will also cover the following risk factors:

Weather damage, Floods. Fire, Theft:
In a country like India, people have not fully understood the necessity of insurance. Most of the people take insurance because there are tax sops attached, in case of general insurance the government does not make any policy mandatory except Motor third party liability insurance. This is because the Motor vehicle Act it is mandatory that no vehicle can ply on the road without a valid third party insurance cover.

In order to ensure the safety of the common public this policy has been made mandatory. However, it in the interest of the society that in India at least some policies should be made mandatory like Term life insurance plans, Health insurance policy, Personal accident insurance plans and Disability income insurance plans.

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