KNOTTY ISSUES IN AUDIT OF T.P.CLAIMS IN INSURANCE COMPANIIES
The audit of divisional offices of the insurance companies is primarily an audit of trial balance and it involves checking of claims under different types of business undertaken by the insurance companies namely fire, motor and miscellaneous etc. The claims of higher amount settled at head office or regional office. Motor business contributes significantly to the premium but at the same time is also prone to a high loss ratio on account of third party liability and the reasons for high incurred ratio in such cases is on account of unlimited liability, delay in payments by the insurance companies resulting in interest outgo, upward revision of premium on account of malus clause, improper handling of court cases by advocates of the insurance companies besides delaying compromises where there is possibility to strike compromises and thereby reduce the burden of interest and protracted litigation in courts.
The provisioning in respect of motor third party claims constitutes a major chunk of the provisioning in the accounts. Third party insurance is compulsory under the Motor Vehicle Act, 1988. In view of the practical problems faced by the insured persons IRDA made it compulsory for the insurance companies to insure all motor third party risks and that shall be sharable in the TP pool both in respect of the risk and reward. The auditor should observe in respect of TP pool that a company creates Premium Deficiency Reserve of hundred percent of pure premium income of pool for first year of operation and seventy five percent in the second year and build up an actuary team after second year to examine data to build up IBNR/Premium Deficiency model. There is now no denial of insurance risk by any company in respect of third party in view of TP pool.
Important Sections of MV Act, 1988:
There are many sections that have a direct bearing on the issues that arise in respect of estimation of the liability correctly under the claims preferred under MACT, WC Act, 1923 and Lok Adalat etc., and as an auditor there is every possibility that an auditor should be aware of their implication in his auditing function. Section 3, 140, 142, 146, 147, 149, 160, 163A, 166, 168, 169, 170, 171, 173, 174 are some of the sections which are quite important and their efficacy should be known before hand by the auditor of the insurance company.
Section 2 is important in respect of the definitional part of the terms used in the Motor Vehicle Act, 1988 as falling in the Chapter-I. It defines certificate of registration, conductor, axle weight, gross vehicle weight, heavy goods vehicle, articulated vehicle, contract carriage, fares, goods, motor vehicle, motor cab, omnibus, maxi-cab, owner, light motor or medium motor vehicle, heavy passenger motor vehicle, learner’s license, licensing authority, permit, transport vehicle, un-laden weight, stage carriage, public place, registering authority, tractor etc. S.2 should be read with S.10 (2) describing licenses under broad heads which the Government may lay down for different categories of vehicles.
Section 3 defined in Chapter-II states that no person shall drive a motor vehicle in public place unless he holds an effective driving license and where he drives a transport vehicle a driving license so authorizing him specifically in that respect except a motor cab hired for own use or rented under any scheme u/s.75(2). It is to be seen that no person under the age of twenty years shall drive a transport vehicle in any place. No person under eighteen years of age shall drive a motor vehicle in any public place. A motor cycle without gear may be driven by person who has attained the age of sixteen years.
Section 146 read with S.147 makes it abundantly clear that the insurance must be procured by the owner of the vehicle. The section states, “No person shall use, except as a passenger, or cause or allow any other person to use, a motor vehicle in a public place, unless there is in force in relation to the use of the vehicle by that person or that other person, as the case may be, a policy of insurance complying with the requirement of this Chapter.” The explanations exclude Centre or State Government owned vehicle unless user is for purposes connected with commercial enterprise. The section also excludes a person who drives the motor vehicle being a paid driver without knowing that the policy which is required under the section necessarily is not in existence.
Section 147 speaks about the requirement of a policy and limits of liability. S.147 (1) states, “In order to comply with the requirements of this Chapter, a policy of insurance must be a policy which a) is issued by a person who is an authorized insurer; b) insures the person or class of person or clauses specified in the policy to the extent specified in the sub-section (2):(i) against any liability which may be incurred by him in respect of the death of or bodily injury to any person or damage to any property of a third party caused by or arising out of the use of the vehicle in a public place; (ii) against the death or bodily injury to any passenger of a public service vehicle caused by or arising out of the use of the vehicle in a public place: Provided that a policy shall not be required:(i) to cover liability in respect of the death, arising out of and in the course of his employment, of the employee of a person insured by the policy or in respect of bodily injury sustained by such an employee arising out of and in the course of his employment other than a liability arising under the Workmen’s Compensation Act, 1923 (8 of 1923) in respect of the death of, or bodily injury to, any such employee (a) engaged in driving the vehicle, or (b) if it is a public service vehicle engaged as a conductor of the vehicle or in examining tickets on the vehicle or (ii) to cover any contractual liability. The Section 147(2) states that subject to the provision of sub-section (1) a policy of insurance referred to sub-section (1) shall cover any liability incurred in respect of any accident, up to the following limits, namely:
(a) Save as provided in clause (b), the amount of liability incurred; (b) in respect of damage to any property of a third party, a limit of rupees six thousand.
Further it is stated that a policy shall be required to be effected by issue of a Certificate of Insurance by the insurer with prescribed particulars and lying down conditions and prescribed matters. It is S.147(4) which speaks of cover note if not followed by issue of insurance policy within prescribed period then the insurer shall send within seven days of the expiry of the period of validity of the cover note the fact to the registering authority with whom the vehicle is registered. S.147(5) lays down the liability of the insurer saying that an insurer shall be liable to indemnify the person or the class of person specified in the policy in respect of liability which the policy purports to cover notwithstanding any thing contained in any other law for the time being in force. This has an overriding effect so far as the liability to indemnify under the policy of insurance is concerned.
Briefly, Section 146 makes it mandatory to have the third party risk insured before the use of the vehicle is permitted at a public place. Section 147 makes the liability certain in respect of any bodily injury or death of any person or damage to the property of the third party by use of vehicle in public place.
S.148 speaks about the validity of insurance policy issued in reciprocating countries.
S.149 is an important section which casts duty upon the insurers to satisfy the judgments and awards in respect of person insured with regard to third party risks. In case of liability under a judgment or award under the terms of insurance as per S.147(1)(b) has been obtained against any person insured by the policy and in whose favour a certificate of insurance has been issued under S. 147(3) then notwithstanding that the insurer may be entitled to avoid or cancel or may have avoided or cancelled the policy, the insurer shall subject to the provision of this sub-section, pay the person entitled to the benefit of the decree any sum not exceeding the sum assured payable thereunder as if he were the judgement debtor in respect of the liability, together with any amount payable in respect of costs and any sum payable in respect of interest on that sum by virtue of any enactment relating to interest on judgements.
S.149 (2) makes provision for sending of notice to the insurer compulsory in respect of any proceedings that are to be commenced for judgement or award by the court so as to make the award payable by the insurer. This could become a ground for the insurer for denying its liability under the Act if there is non compliance in this respect beside other grounds as provided that there was a breach of specified condition of the policy with respect to (i) conditions for excluding the vehicle for hire or reward or for a permit to ply for hire or reward or for organized racing and speed testing or for a purpose not allowed by the permit under which the vehicle is used in case of the vehicle being a transport vehicle or ride car being attached where the vehicle is a motor cycle or a condition deriving by a named person/persons or by a person who is not duly licensed or by any person who is disqualified for holding or obtaining a driving license during the period of disqualification or a condition for excluding a liability for injury caused or contributed to by reason of war, civil war, riot or civil commotion. The policy may be void on the ground that the material grounds were not disclosed while taking the policy or misrepresentation of certain fact which was false in material particulars. The insurer is entitled to recover any amount paid excess in respect of a liability incurred by a person insured by a policy apart from the liability under this section under the policy then the insurer shall be entitled to recover the excess from that person. S.149 sub section (4) read with proviso gives the right of recovery to the insurer where liability falls under S. 147(1) clause (b) even though certificate of insurance issued purports to restrict insurance of the persons insured thereby by reference to any condition other than those in clause (b) of sub section (2) as shall be as respect such liability as are required to be covered by policy under clause (b) of S.147 (1) as aforesaid be of no effect.
S.158(6) filing of the information by the police authorities in respect of an accident and failing to do so the courts may require the police authorities to file the same.
S. 166(2) states that any application under sub-section (1) shall be made at the option of the claimant either to the Claims Tribunal having jurisdiction over the area in which accident occurred or to the Claims Tribunal within the local limits of whose jurisdiction the claimant resides or carries on business or within the local limits of whose jurisdiction the defendant resides. This is made possible after amendment that came in to force in 1994 and therefore there is no time limit and jurisdiction restriction for filing motor third party claims in the Tribunals. S.168 enjoins the Tribunal to make an award determining the amount which appears to be just. The award to be just is not defined. It is beneficial legislation but neither a source of profit to the claimants nor be a punitive to the person liable to pay the same and should be fair and reasonable.
S. 169(2) deals with filing of a petition by the advocate of the insured for supply of better particulars of the policy as per the claim filed by the claimant.
An insurer may file petition under section 170 of MV Act with a prayer to contest the case on all or any of the grounds that are available to the person against whom the case has been made. Such a situation may arise where the person making the claim and the person against whom the claim is made are compromising or there is collusion among them or the person against whom the case is filed is not contesting the case.
S.173 relates to appeals before the high courts against the award of a Claims Tribunal within ninety days of the date of the award by the aggrieved person. The award made by Claims Tribunal can be recovered as an arrear of land revenue on making an application by the person entitled to it.
The auditor has to see the circumstances where the insurer has a right to recovery and the same needs to be followed legally by it or its lawyer. The grounds which are statutorily provided under the foregoing section where circumstances admit also need to be taken care of to deny liability and based on legal position as emerging from the decided case laws on the issue and thus requiring no provisioning to be made except under no fault liability where circumstances warrant. The auditor shall go through the head office’s technical department’s instructions on various issues and case laws as are holding the sway currently.
Insurance Act 1938, IRDA Act, 1999, General Insurance Business (Nationalisation) Act, 1972 have significant role to play in regulating insurance business. IRDA has the role of regulating authority which has come out with other regulations on licensing of insurance agents, third party administrators, surveyors and loss assessors, form of annual statements of accounts and record, preparation of financial statements and audit report of insurance companies, reinsurance, assets, liability and solvency margin, appointment of actuary, life insurance and insurance brokers etc. There is Foreign Exchange Management (Insurance) Regulations, 2000 and Memorandum of Exchange Control Regulations relating to General Insurance in India that too has a bearing on the insurance business. Anti Money Laundering provisions are also applicable. Code of Civil Procedure, 1908 also becomes applicable in the matter of filing written submissions and additional submissions and taking evidence on oath and enforcing attendance of the witnesses and compelling the discovery and production of documents for such purposes as may be prescribed. Claims Tribunal is a civil court for the purpose of S.195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1994).
Auditable Records and Documents:
The auditors should be sufficiently aware of the various records maintained by the insurance companies and many of them are mandatory and provide ample source of information to the auditors to carry out his verification and attestation function. The records that are relevant for third party claims are:
Claims Intimation Register, Cover Note Control Register, Summons Register, Orphan Claim Register, Own Damage Claim Register, MACT Award Register, Survey report, Investigation Report, Policy Documents, Section 64VB Compliance Certificate, Summons/Advocate Register, Lok Adalat Claims Register, Workmen Compensation Claim Register, Subrogation Register, Salvage Register, Surveyors’ Rotation Register, Proceeding of Divisional or Regional In-house Conciliatory Committee (DICC/RICC), surveyor fee and investigation fee as also advocate fee are normally fixed for different classes of business and Governing Board of GIPSA approves the structure of the survey fee for preliminary as well as final surveys depending on categories of surveyors namely A,B,C and investigation fee from time to time as also expenses. In respect of third party investigations the schedule of fee happens to be Rs.1000 plus the expenses on conveyance by public transport as is laid down and in exceptional circumstances they are reimbursed two wheeler, car, and taxi with prior approval of the competent authority. The insurance companies transactions are captured daily on their system operated on GENISYS or INLIAS software and the auditors should be able to test check the efficacy and effectiveness of the operations by loading dummy for premium of a particular class or the cover note entries and the provisioning particulars as per the final claim amount etc. The insurance companies have system of providing for claims in respect of other offices or branches if it is dealing with a particular claim depending upon the place of accident taking place in their area of operation and the same is intimated to the policy issuing office and after payment the documents are sent to the said office. There is a practice to handle high court cases by the regional office close to high court and large claims are being handled by the head office under its supervision.
Third Party Insurance Claims:
It is compulsory for a owner of the motor vehicle to have the insure of his motor vehicle before his vehicle is taken out to a public area as per the Motor Vehicle Act S.146 read with S.147 and the insurance companies are required to cover the same. Where an accident is caused by the negligence of the owner of the vehicle or his driver, the injured person can have recourse to compensation under law of torts and where the negligence is not traceable or it is due to act of god then the injured or his legal representatives can have no recourse than to suffer such loss themselves though there comes to the rescue the no fault liability as per the law and there is now growing tendency amongst the courts in India to ask the insurance companies to first pay then recover. In such situations the role of the auditors becomes more important to examine all such cases so that the recovery process starts and appropriate entries are also passed as and when the right to enforce such payment arises. This would be important for the insurance company also to lodge the law suit for recovery otherwise it may lose heavily in not recovering its lawful dues.
The third party claim must be captured at the earliest so that appropriate provisioning is possible in respect the same. There is a provision in the Motor Vehicle Act, 1988 under section 158(6) where under the police authorities are supposed to file the information with regard to any accident and they can be required to do so by courts in case any failure by them. The insurers can have their information network through the investigators or the insurer’s advocates to collect accident information either through the court or through the local police official at district level at superintendent of police’s office. It is not uncommon to see that most TP cases arise out of own damage claims called OD claims. The auditors while checking such claims should see if third party losses are reported by the surveyors or not. The insurance company should insist its surveyors to report third party losses wherever these occur as they normally do not report such losses in their survey reports.
The information in respect of the motor third party claim may be received from the insured directly by virtue of own damage or from the claimant or Labour Court or MACT Court’s notice or through the police department’s accident report.
The nature of claim under motor accident claims falls under three categories:
1. Accidents resulting in death 2.Accidents resulting in injury 3.Accidents resulting in property damage.
The accidents that cause death are subjected to prescribed guidelines under section 163A of the Motor Vehicle Act, 1988 read with Second Schedule thereto determining the multiplier and the principal liability is arrived at as under when the liability to pay is certain:
Annual Income x Age-wise Multiplier x Dependency.
Annual income is to be determined on lawful basis as laid down by the courts. In case where the injured victim had no income prior to accident then notional income as laid down by Apex Court in the case of Maju Devi V. Musafir Paswan reported in 2005 ACJ 99 regardless of the age of the victim at Rs.15000 per annum.
In case where the injured or the victim had no stable income prior to accident then it would be Rs.24000 per annum if the victim is skilled labourer, carpenter, mason, rickshaw-puller, and occupations of similar nature including the professionals or businessmen who are not income tax assessees. The wages prescribed in the Minimum Wages Act is also to be kept in mind.
In the case of a driver, conductor, and khalasi of taxi, truck, autos the income is taken at Rs.30000/- per annum. If the income in these cases is not stable it becomes necessary to take in to account the state wise minimum wages as per the Minimum Wages Act.
In case of the professionals or businessmen who are income tax assessees, their average income of last three financial years that precedes the date of accident is taken as per the income tax returns submitted and duly verified the insurance company.
Lastly where the accident victim has stable income arising out of employment of regular nature immediately preceding the accident then his actual income is to be considered.
Dependency factor is 2/3rd where the deceased is married but the same is taken as 1/3rd where he is unmarried.
Multiplier is to be chosen according to the age of the claimant only and this is important point to remember in fatal cases. The age of the accident victim is not to be considered in line with the decision of the Apex Court reported in 1996 ACJ 831 in the case of UPSRTC V. Trilok Chandra & Others.
Additional compensation is also to be given for the following:
- Funeral Expenses Rs.2000 but it may be more subject to actual.
- Loss of Estate Rs.5000/-
- Loss of Consortium Rs.5000/-
The compensation as stated above applies where the victim is married and in case he is unmarried the claimants would not be allowed loss of consortium.
Where Summons have been served on the insurance company but the required claim petition is not enclosed then if there are multiple petitioners in it on a motor accident claim tribunal case then it can be safely assumed that there are as many heirs of a deceased and on the other hand a single claimant would imply the injured himself. In such cases outstanding liability has to be created soon for No Fault Liability for a sum of Rs.50000 or Rs.25000 as may be the case.
In case the Summons have been received but there is no accompanying claim petition or if there is claim petition but the policy particulars are not given, it is a case of “Orphan Claim” and the same may be so registered as orphan claim only. The insurance company should in that case appoint an advocate to file petition under section 169(2) of the MV Act for disclosure of better particulars by the claimant.
The aspect of provisioning should be with respect to the award amount which shall include the accrued interest as laid down in the judgement of the tribunal and legal fee.
The claims where the accident results in injury, the settling of claim may require the insurance company to hone better skills and it need to appoint a doctor in the very beginning of the case than appointing an investigator who will conduct investigations into the disability arising out of an accident or the injury and determining the liability arising therefrom.
In simple injury of non-grievous nature the principal liability of the insurance company can go up to an amount of Rs.10000 depending upon the gravity of the injury. An additional amount of Rs.1000 may be provided for the “pain and suffering”.
In case of grievous injury it may be permanent total disablement resulting in loss of earning and employment or permanent partial disablement.
Permanent total disablement resulting in loss of earning or employment the same is to be worked out as under:
Annual Income of injured x Age-wise multiplier
The basis for determining annual income of the injured is already dealt with above and the age-wise multiplier is taken as per Schedule Second S.163A of the Motor Vehicle Act, 1988.
Additional benefit of pain and suffering should be provided for looking to the cases of a similar nature of disablement dealt in awards given by the tribunals. The judgement of the Supreme Court in R.D.Hattangadi V. Pest Control (India) Pvt. Ltd. reported in 1993 ACJ is relevant.
Permanent partial disablement with percentage of disability specified by the doctor on panel as per document submitted by the claimant as under:
Annual Income of injured x Age-wise Multiplier Sch.2 of MV Act, 1988 x Percentage of Specified Disability
Additional benefit for pain and suffering may also be provided.
Close Proximity Cases: The accident cases of motor vehicle that arise within five days from the inception or start of the policy are termed as close proximity cases and require special attention and for this reason these cases are settled at regional or head office of the insurance company depending upon the magnitude of liability. In close proximity cases there may be chances of back dating the policy cover with the connivance of the insured and the agent or development officer. In such cases the insurer should collect supporting documents to establish said fact and to take necessary defense. The tribunals may still ask the insurer to deposit the amount fixing the liability even after a specific defense having been taken. The award is therefore required to be deposited in order to file a case before the appellate court as is also held in the case of National Insurance Company V. Bhagu Devi & Ors., 2000ACJ1037 that decided the case pertaining to obtaining of a fraudulent cover. If, later on, the insurance company succeeds it shall be able to realize the amount from the insured as per the ruling in the case of Oriental Insurance Company Ltd. V. Nanjappan 2004 ACJ 721.
Important Case Laws:
In New India Assurance Co.Ltd. V. Prabhu Lal decided on 30th of November, 2007 the Supreme Court held that insurer can not be held responsible in cases where a driver driving a transport vehicle did not have transport endorsement as per the Motor Vehicle Act, 1988 and in OIC V. Sohan Singh case too it was held by National Commission vide its order passed on 26th of April, 2007 that license issued for LMV does not allow the driver to drive a transport vehicle and it further held that pay and recover concept can not be made applicable in respect of motor own damages.
In SLP filed before Supreme Court it had held in its order passed on 2nd of March, 2007 in NIC Ltd.V. Laxmi Narain Dutt that the judgement delivered in the case of NIC Ltd. V. Swaran Singh (2004) 3SCC297 was in respect of TP Claims and is not applicable to Own Damage Claims. This has the same effect as had been held by National Commission in OIC V. Sohan Singh and is further distinguished by the Apex Court from its judgement in Swaran Singh’s case. Insurance companies can repudiate its liability based on the principle of utmost good faith as held in Arjandass BrijLal & Company by NCDRC in its order dated 4th of December, 2006.Most of the cases that bring enormous liability on the insurers can be observed in the case of goods carrying commercial vehicle which violate policy conditions and carry passengers therein causing TP Claims of huge proportion when the mishap or accident results in the death of these passengers in such goods carrying vehicle. This gives rise to TP Claims. In OIC V. Pabindra Narain Uzir decided by NCDRC on 13th of October, 2006 the liability was turned down by the Commission based on the concept of violation of Policy condition of “limitation as to use”. In OIC Ltd. V. Vimla Devi SC decided on 9th February, 2009, accepted the plea of appellants and remitted back the case of passengers in goods carrying commercial vehicle to MACT for consideration. In NIC Ltd V. Meena Aggarwal Civil Appeal 396 of 2009 Supreme Court set aside the order of National Commission where award was given for own damage of Maruti van used as taxi but insured as personal use of vehicle and driver did not have a valid license. S.163A was inserted with effect from 14th November, 1994 wherein compensation is based on structured formula but this not so for S.166 of the Act for determining the compensation. The second schedule may serve as a guide but not as invariable ready reckoner but in fatal accident cases the accepted measure of compensation to the dependents is the pecuniary loss suffered and abrupt termination of life as held in Mg. Director TNSTC Ltd. V. K.I Bindu and Ors.(2005)8SCC473. Insurer will not be allowed to avoid its liability if the accident is caused by unforeseen intervening causes like mechanical failure having no nexus with driver not possessing requisite type of license as averred in Swaran Sing’s case.
Compromise or Settlements in Alternate Redressal Forums: It is possible to mitigate long drawn process of litigation by taking recourse to the mechanism which offers legal sanctity and results in early settlement of cases where the insurer finds the payable prima facie. This goes to reduce legal costs and interest as well as unexpected award amounts which the Claims Tribunals may pass. Lok Adalat is an effective forum where the cases can be compromised by both the parties and it has the jurisdiction to determine a dispute and come to a settlement between the parties. An award given by it shall be deemed to be a decree of the Civil Court and is binding on the parties to the dispute and no appeal shall be preferred to any Court against the award. The origination of the forum can be traced to “Legal Services Authorities (Amendment) Act” which came in to force on 11th of June, 2002 in terms of the definition given U/S.22A of Public Utility Service. S.152 of Motor Vehicle Act, 1988 as amended enables disposal of MACT Claims through Jald Rahat Yojana scheme of GIC for non fatal claims at pre litigation stage not involving minors. No consent award is necessary as it is a pre litigation stage compromise but its sanctity can be brought by taking shelter under S. 22C (1) of the Legal Services Authorities (Amendment) Act, 2002 for making an application through due process of law for consent award.
The audit of insurance companies involves whole gamut of laws having bearing on the working of insurance companies, the knowledge of Motor Vehicle Act, 1988 and the legal pronouncements of Claims Tribunal, High Courts and Supreme Court. The provisioning of claims in respect of third party or motor own damage should be very appropriately made and even amended in the light of facts and circumstances from time to time so that their effect on profitability is measured precisely and adequately. This is an onerous task and requires skill and competency of the auditor who may embellish his task by adequate knowledge of laws applicable to insurance companies.