Are we looking at the biggest Motor Third Party Liability Claim in Indian history?

Are we looking at the biggest Motor Third Party Liability Claim in Indian history?

Perhaps.?

The unfortunate incident of the death of Mr. Cyrus Mistry, a scion of the Shapoorji Pallonji Group, and a former Chairman of Tata Sons, along with his friend and co-passenger Mr. Jahangir Pandole, has brought into focus the need for fastening seat belts for passengers of the rear seats also. At present, use of seat belts is made compulsory by law only for drivers of cars and passengers occupying the front seat. It is being said that the two would perhaps have not died if they were using the seat belts.

Another matter which has received considerable media attention is the prospect of perhaps the highest value Third Party claim in Indian history. A lot is being written, and a lot will be written on this topic in the near future. I was not planning to write on the insurance claim aspect so soon, as I did not consider it appropriate to talk of money matters so soon after the tragic loss. What prompted me to change my mind is the sometimes incorrect information being made available to readers on a subject that is of wide concern, even though the immediate context is personal to some people.

I have time and again found incorrect information on insurance in publications of general interest. But a prominent publication dedicated to insurance has recently stated that Indian Insurance laws provide that passengers who are in the rear seat of the vehicle are covered under mandatory third party cover.

Now, that is not correct.

The mandatory Third Party cover for a Private Car does not cover passengers of the vehicle. However, when a Comprehensive (a.k.a. Package Policy) is issued for a private car or a two-wheeler, the cover is extended to the occupants of the vehicle (other than the one driving), even as the Third Party premium remains the same as is for the mandatory cover.

We have just come to know from media reports that the vehicle in question was covered by Future Generali India Insurance Company. There is no mention about the type of vehicle??- whether private car or commercial vehicle, and the type of coverage - whether Third Party only or a Comprehensive Policy.?

If it was a commercial vehicle, all passengers (other than the person driving) were covered irrespective of the kind of Policy, whether Third Party only, or Comprehensive.

If the vehicle was a private car, the passengers would be covered under the Policy only if it was a Comprehensive Policy.

Considering the type of vehicle (a high-end Mercedes Benz SUV) and the financial position of the persons involved, it would be fair to assume that the vehicle had a Comprehensive Policy.

I have not yet seen any media report that mentions the owner of the vehicle.?

What is the relevance of ownership in this matter?

If Mr. Mistry was himself the owner, he had no coverage under the Policy, whether Third Party Only or Comprehensive, other than the Compulsory Personal Accident cover for the owner driver. Even the cover for owner driver would apply to him only in case he had a valid driving license for the kind of vehicle in question, irrespective of whether he was driving or travelling as a passenger. If the vehicle was a private car belonging to some person other than Mr. Mistry, he would be covered under the Comprehensive Policy. If it was a Third Party only Policy, the liability for compensation to be paid to the legal representatives of Mr. Mistry for the negligence of the driver would fall on the owner of the vehicle and the driver, jointly and severally. There would be no liability on the insurer of the vehicle.

What if the vehicle was owned by Mr. Mistry’s wife, or some other family member? Insurers are known to have argued on many occasions that a family member of the insured does not have coverage as a third party. This argument has absolutely no basis. The coverage would apply, in case of a Comprehensive Policy, just as it would if the vehicle were owned by someone who was not a family member.

What if the vehicle was owned by a Company, of which Mr. Mistry was an employee? The question is significant, and the Motor Vehicles Amendment Act, 2019 (brought into effect from 1st?April 2022), which amended certain provisions of the Motor Vehicles Act, 1988, is of relevance. Before this amendment, an employee of the insured travelling in the insured vehicle was not covered even under a Comprehensive Policy, which otherwise covered other occupants. The relevant provisions do not appear under the amended Act. It is quite likely that the insurers may cite judgements delivered under the unamended Act to deny liability in such a case. However, those judgements do not apply under the amended Act.

There are certain situations in which the insurer of the ill-fated vehicle would be liable, and certain others when there would be no liability on the insurer. In all cases, the liability of the owner and the driver cannot be denied.

What are the aspects that would have a bearing on the quantum of liability?

The age, income, and number of persons dependent on the deceased, are the three factors based on which the quantum would be calculated.

The age of the deceased is the only factor which is not expected to cause any dispute.

The media is abuzz with the estimates of the net worth of Mr. Cyrus Mistry. But what relation does net worth of the deceased have with the quantum of compensation? What is relevant is the income, and not the net worth. Though I have no information on this, I assume that most of the income in the hands of Mr. Mistry comprised of dividends of the shares owned, interest income on deposits and rent of buildings owned by him, short-term or long-term capital gains from sale of different kinds of assets, etc. Of course, certain part of his income would comprise of ‘salary’ for positions held by him in one or more companies. These are rather simplified examples of the income that could be earned by Mr. Mistry. Out of the examples considered, only the ‘salary’ part is the one that could be considered a loss to his estate. The other sources mentioned here continue to produce the income even after his death. So, the loss of income is much lower than the actual income he could be earning.

Now comes the third factor to be considered for calculating compensation, i.e., dependency. The matter is often unclear even to practitioners of the subject. The courts have developed a thumb rule for arriving at the proportion of the income of the deceased that could be considered a loss to his estate, according to the number of persons who were dependent on the deceased. Courts consider that a person does not spend on himself all of the income that he earns. The part that he spends on himself is based on the number of persons he is required to support. To arrive at the loss to the estate of the deceased, the part that the deceased was expected to spend on himself according to this rule of thumb, is deducted from his income. The balance is considered as loss to his estate, i.e., the amount that would have been available to his dependents. For this, the courts just follow the rule of thumb, and do not get into the details of what part of his income a particular person was spending on himself. Under this thumb rule, a person who has up to 3 dependents, is supposed to spend 1/3 of his income on himself. A bachelor is supposed to have no dependents. Yet he is supposed to spend only ? of his income on himself.

As mentioned above, the formula developed by the courts is only a thumb rule. Arguments may be presented in appropriate cases seeking deviation from the thumb rule.

Though the insurers have come to accept that there is a loss of ? of the income in case of bachelors, in cases where the deceased is survived by family members, none of whom were dependent on him at the time of his death, they invariably argue that no part of the income of the deceased should be considered as a loss to his estate for the purpose of arriving at the compensation. This argument is devoid of any merit.?

It is quite likely that no one was dependent on Mr. Cyrus Mistry. Even in that case, ? of his income before his death must be considered as loss to his estate. It is common for insurers to argue that no compensation is payable for loss of income in such cases. Insurers argue that only certain amounts considered as non-pecuniary losses are payable. Again, as a matter of practice across all cases, irrespective of the income of the deceased, the total for such non-pecuniary loss amounts was capped in 2017 at Rs. 70,000/-, with a fixed increase of 10% every three years.

There is another important aspect with respect to loss of income, which I haven’t come across in any case till date, but which is particularly important in case of someone like Mr. Cyrus Mistry, i.e., someone whose income is predominantly comprised of components that are not affected by his death. I will try to explain this by way of the following illustration –

Person A with up to 3 dependents had a salary income of Rs. 300/-. According to the thumb rule mentioned above, he was expected to spend Rs. 100/- on himself. So, his death caused a loss of Rs. 200/- to his dependents. This Rs. 200/- loss is sought to be compensated under the formula developed by the courts. Another person B had the same family size and the same income. But his income comprised of Rs. 200/- out of components that would not be affected by his death. It would be illogical to apply the above-mentioned thumb rule in the manner that person B spent Rs. 33/- out of his salary on himself, and Rs. 67/- on his family, while no consideration is given to his other income. This is precisely what is most likely to be argued by the insurers. Logic would suggest that he spent on himself and his family out of the total income, whatever be its source. In that case, he can be considered to have spent Rs. 100/- on himself, and Rs. 200/- on his family. Now, since only Rs. 100/- out of his income of Rs. 300/- is lost because of his death, the pecuniary loss to the family because of his death cannot be considered to be more than Rs. 100/-, which is the amount he was earning with his own efforts. In this illustration, while only 2/3 of the salary income of person A is considered as loss to the estate, 100% of the salary in case of person B is lost.

As I said, I have not yet come across any case in which this has been argued on behalf of the claimants. This argument, if accepted (I am convinced of its merit), will have a huge impact on the compensation amount in case of someone like Mr. Cyrus Mistry. The Motor Vehicle Act, 1988 talks about just compensation. It does not prescribe any formula for calculating compensation. The formula in use is devised by the court and any change in the current practise does not amount to change in law. It is just an acceptance of an argument that defines ‘just’ in a better way.

Whatever has been said about Mr. Mistry will also apply to Mr. Jehangir Pandole as well, who was also occupying the rear seat of the car. Ms. Anahita Pandole, a renowned gynaecologist of Mumbai, is reported to have been behind the wheels at the time of accident. She is reported to have been injured and is said to be receiving treatment for her injuries. Irrespective of whether the vehicle was owned by her or someone else, or whether it was covered under a Third Party Only Policy or a Comprehensive Policy, she would not be eligible for any compensation in this case. If there had been an employee driver in her place, whether under permanent or casual employment, such driver would have been eligible for compensation under the vehicle’s insurance Policy, and the limits of compensation would have been as per the Workmen’s Compensation Act, 1923, but only if it was a commercial vehicle. In case of a commercial vehicle, the liability towards the driver is built-in under the Third Party premium of the Policy, and no additional premium was required to be paid for covering this liability. Prior to the amendment of 2019 (made effective from 1st?April 2022), the paid driver would be covered even in case of a private car, but that’s not the case under the amended Act. Also, neither the driver’s own negligence would be a defence for the employer or insurer, nor the negligence of the employer was required to be proved.?

Mr. Darius Pandole, husband of Ms. Anahita Pandole, was occupying the front seat beside the driver. He is also said to be receiving treatment for his injuries. He would be eligible for compensation if the vehicle was owned by anyone other than himself. He would be eligible even if the vehicle belonged to his wife. The fact that his wife was driving the vehicle would have no bearing on his eligibility for compensation.

There may not be any petition for compensation in this case. The entitlement lies with the legal representatives (not just dependents) of the deceased, and with the injured persons themselves. I have taken the liberty to explain the motor third party liability law in the immediate context of this tragic incident. My apologies to the families and friends of the victims of the accident for taking this liberty.