Allahabad High Court Imposed A Huge (?) Cost on The Petitioner Insurer

Recently, the Allahabad High Court imposed a cost of Rs. 5,00,000/- on United India Insurance Company Ltd for having kept alive a litigation through successive writ petitions in a motor accident liability matter, in which the tribunal had given an ex-parte judgement in August 2001. The application filed by the insurer for recall of the ex-parte order of the tribunal along with the application for condonation of delay was filed in Jan 2002. It was rejected by the tribunal in Feb 2003.?

The decision of the High Court to impose exemplary cost on the insurer is a very welcome step. While there could be some matters where the dispute is on account of a genuine difference of opinion on the interpretation of contract or law, not all disputes are of such nature. Very often we come across matters in which the position taken by the insurers is such that it is difficult to imagine how an institution made up of subject matter experts could have taken such a position. The abuse of the process of law is quite evident in these matters. It is in such cases that the courts must impose exemplary costs, particularly those which are dragged through the hierarchy of courts up to the highest level.

We very often find that –

Insurance claims are denied on the ground that the insured was negligent. Motor claims are denied saying that the insured’s driver was negligent.

Motor vehicles suffering loss while they are in the repairer’s workshop are denied saying that such losses are the liability of the workshop.

When a paid driver of the insured runs away with the vehicle, claims are denied on the ground that the insured had himself handed over the vehicle to the person.

In case of theft by employee driver, sometimes the First Information Report is registered under Sec 405 (Breach of Trust) of the Indian Penal Code, and not under Sec 378/379 (theft). Claims are denied on the pretext that breach of trust was not a covered peril, hence it is not covered.

Children of the second wife of the deceased are said to be not entitled to compensation in a motor third party liability claim.

Family members of the insured are claimed not to be covered third parties in motor vehicles insurance.

In a motor vehicle accident claim, where the owner of the vehicle has died in the accident, it is said that the claim would be paid only after the claimant got the vehicle registered in his name.

In policies where the name of the nominee of the insured is already mentioned, the claimant is asked to produce succession certificate / legal heir certificate.

A maternity claim under a Health Insurance Policy is not paid if the patient was discharged within 24 hours of admission.

It is possible to go on and on with this list. Some such reasons of repudiation may not come to my mind as I write this piece. But I am sure, the readers who have been at the receiving end, can add many more.

All such cases are fit for imposing exemplary costs, even if the period may not be as much as that in the United India Insurance case mentioned above. The delay, particularly the intentional delay caused by litigation on frivolous grounds, causes untold miseries to the claimants, which are never compensated adequately. Whenever the courts award insured’s legal costs to be paid by the respondent, the amount is hardly ever in line with the actual cost. Unnecessary adjournments must be discouraged, and when permitted, must carry costs. This, however, applies both ways, and costs must be imposed on the claimant for adjournments, even if the eventual decision is in his favour. But the most crucial of all is the interest awarded.

The judgements sometimes do mention that the interest is awarded as simple interest. Most often there is no such mention. But in all cases, the interest is always calculated on simple interest basis. For some unfathomable reason, the Indian legal system does not recognise compound interest, except where compound interest is payable under terms of a contract. In the mentioned case, the Motor Accident Claims Tribunal had made an award of Rs. 11,94,472/- with simple interest @ 10% per annum. The interest that the insurer will pay for the 23-year period @10% per annum is Rs. 27,47,286/-. At the same rate, for the same period, the interest at on compound basis would be Rs. 95,01,192/-, a good Rs. 67,53,906/- more than the simple interest amount. If the matter were delayed by one more year, there would be an addition of Rs. 1,19,447/- to the simple interest that would eventually be paid by the insurer. But if the payment were to be on compound interest, this addition would be Rs. 10,69,566/-!

The Allahabad High Court has imposed a cost of Rs. 5,00,000/- on the insurer, which is to be paid to the claimants. This additional cost imposed is being considered high enough to be newsworthy! But is it enough to have an impact on the behaviour that it seeks to discourage?

Money is most valuable when it is needed, and it is no doubt that the family that lost its bread earner was most in need of the compensation when the income support was snatched from them. While they were deprived of the succour that the compensation would bring, the insurer enriched itself by investing the amount that should have been paid to the claimants. And this investment earned them compound interest, not simple interest. Had the claimants been paid in time, they too would have earned compound interest too, not simple interest.

Some could say that the current rate of interest is way below 10% awarded by the MACT in this case. But this petition for compensation was filed in 1999 and the award was made in 2001. The interest payable by the State Bank of India in long term deposits at that time was about 15%. The rate remained above 10% for a considerably long period. Averaging out for the period, it would still not be less than 10%, the rate that was awarded by the tribunal.

There is a very strong case for declaring by statute for all interest to be calculated only on compound basis (whether in case of insurance claim dispute or delay in payment for any other reason) unless the parties have agreed otherwise.