SC order on motor insurance compensation may affect general insurers

The recent judgment of the Supreme Court in a motor insurance compensation case may adversely impact general insurance companies as compensation payout to victims in third-party insurance claims are likely to go up, according to industry insiders.

Moreover, the SC’s observation on loss of earning capacity of a person because of physical disability caused by an accident could also impact compensations paid by insurers in cases of public liability insurance. The court said physical disability has to be judged with reference to the nature of the work the person used to do, and the award of compensation has to be assessed accordingly.  

“In fact, any physical disability resulting from an accident has to be judged with reference to the nature of the work being performed by the person who suffered disability,” a division bench of the SC observed on July 4. “The same injury suffered by two persons may affect them in different ways. Loss of leg by a farmer or a rickshaw puller may be the end of the road as far as his earning capacity is concerned. Whereas, in case of persons engaged in some kind of desk work, the loss of leg may have a lesser effect,” the court said.  

According to industry insiders, the compensation outgo for general insurers is likely to increase in third-party motor insurance claims after this judgment.  

“The calculation of compensation is already complex as there is no structured compensation table for third-party motor insurance. Now, the Supreme Court judgment has added one more dimension to it,” a senior official with a large general insurance company said.    

“Pending cases will be impacted by this judgment. It can influence future judgments. Initially, claim payouts may not substantially go up. But, this will add to our increasing claims,” the official told FE.  

As a legal requirement under the Motor Vehicles Act, a third party motor insurance policy is a mandatory one that a vehicle owner must have with him/her all the times. This type of insurance comes in handy when the insured vehicle hits another vehicle or a person, leading to injury, disability and sometimes death as well. In such cases, the victim is allowed to register a case claiming compensation. An insurer provides compensation to the third party based on the court award.

Contrary to expectations of the general insurance industry, the government last month proposed no change in annual motor third party premiums for most of the classes of vehicles for the current fiscal. In some cases, it has proposed to reduce rates.

However, motor claims ratio (third party and own-damage) went up by at least 10-15% last fiscal compared to the year before for all insurers.

“Insurance companies are seeing third party motor insurance losses since the last financial year. As interest rates on fixed deposits are going up, courts have started charging more interests while awarding compensation to the third party. Payout has already seen an increasing trend. The recent Supreme Court judgment is likely to impact us adversely,” said an official with a major general insurance company.

The court’s observation in this case could also impact compensation payouts in public liability insurance claims, where payouts are not fixed, he added.

A public liability insurance policy provides cover for any physical injury as well as property damage caused to the third party for which the policyholder is responsible.

In the case under discussion, Sarnam Singh, the appellant, met with an accident on November 24, 2013 involving a tempo, which was insured. Singh, who was working as a gunman with Bharat Hotels, suffered 85% disability in relation to his right lower limb as the same had to be amputated. His services were terminated in May 2015 on account of the inability to discharge his duties. The Motor Accident Claims Tribunal, vide its award dated April 18, 2016, awarded a compensation of Rs 34,29,800. Of that, Rs 30,84,800 was awarded while taking his functional disability at 100% with reference to the job.

The liability was put on the insurance company which insured the vehicle. The insurance company filed an appeal before the high court against the tribunal’s order. The HC in its order dated August 25, 2017, reduced the compensation taking Singh’s loss of earning capacity at 80%.

On July 4, 2023, the Supreme Court set aside the HC order and observed that the tribunal was right in assessing the loss of earning capacity of the appellant at 100% and determining the compensation accordingly.