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Thursday, February 18, 2010

APEX COURT ON WHETHER INSURER IS A CONSUMER WITHIN PURVIEW OF CP ACT - RECOVERY, SUBROGATION AND CONSUMER PROTECTION ACT

Justice in India should be simple, speedy and cheap,” the first PM J Nehru was quoted as saying in 1995. Decades later that largely remains a pipe dream.

Cases continue to pile up in various Courts and it was reported quoting Judiciary that even where lower trial courts disposed off nearly 20 M cases last yar, 18 million fresh cases were filed. Apart from trial courts, there are many at High Courts and many pending before the Supreme Court. Civil matters takes ages and by the time judgment is pronounced, there may not be a winner.

Here is a case which is of significance to Insurer but coming as it did years after an important amendment in the statue could prove not to be of much practical use.

The year 1986 saw enactment of a social welfare legislation - Consumer Protection Act aimed at providing better protection of the interests of consumers and paved way for establishment of consumer councils and quasi judicial authorities for settlement of disputes of consumers. Who is entitled to benefit under the statute has been the subject matter of dispute in various forums and before the Apex Court also. There was an all important amendment in Sec 2(d) of the Act in 2002 by addition of words ‘but does not include a person who avails of such services from any commercial purpose’ in the definition of consumer which excluded such persons from the purview and complaints made by such persons became not maintainable. Commercial purpose would not include use by a person of goods bought and used by him and services availed by him exclusively for the purposes of earning his livelihood by means of self-employment.


One of the founding principles of Insurance is that of ‘Subrogation’. It is the principle under which an insurer having paid a loss under a Policy becomes entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. This is based on two sound principles of equity :
(a) No tort-feasor should escape liability for his wrong; (b) No unjust enrichment for the injured, by recovery of compensation for the same loss, from more than one source. The doctrine of subrogation will thus enable the insurer, to step into the shoes of the assured, and enforce the rights and remedies available to the assured.


`Right of Subrogation' is statutorily recognized and described in section 79 of the Marine Insurance Act, 1963. The Act specifies that when Insurer pays a partial loss, he acquires no title to the subject matter insured, but he is thereupon subrogated to all rights and remedies of the assured. Section 140 of Contract Act, 1872, deals with the principle of subrogation with reference to rights of a Surety/Guarantor. Subrogation, as an equitable assignment, is inherent, incidental and collateral to a contract of indemnity, which
occurs automatically, when the insurer settles the claim under the policy, by reimbursing the entire loss suffered by the assured.



In practice, to avoid any dispute with the assured as to the right of subrogation and extent of its rights, the insurers usually reduce the terms of subrogation into writing in the form of a Letter of Subrogation which enables and authorizes the insurer to recover the amount settled and paid by the insurer, from the third party wrong-doer as a Subrogee-cum- Attorney. When the insurer obtains an instrument from the assured on settlement of the claim, whether it will be a
deed of subrogation, or subrogation-cum-assignment, would  depend upon the intention of parties as evidenced by the wording of the document. The title or caption of the document, by itself, may not be conclusive. It is possible that the document may be styled as `subrogation' but may contain in addition an assignment in regard to the balance of the claim, in which event it will be a deed of subrogation-cum-assignment. It may be a pure and simple subrogation but may inadvertently or by way of excessive caution use words more appropriate to an assignment. If the terms clearly show that the intention was to have only a subrogation, use of the words "assign, transfer and abandon in favour of" would in the context be construed as referring to subrogation and nothing more.


With this lengthy background here is the recent judgment of Apex Court in Civil Appeal No. 5611 of 1999.


The cause of action arose due to a road accident involving goods of Cheran Spinning Mills, a manufacturer of cotton yarn. They availed a policy of insurance from National Insurance covering transit risks between the period 11.5.1995 and 10.5.1996 in respect of cotton yarn sent by them. They consigned hosiery cotton yarn of the value of Rs.7,70,948/- through the carrier “ETO” on 6.10.1995 for transportation and delivery to a consignee at Calcutta. The goods vehicle carrying the said consignment met with an accident and the consignment was completely damaged.


After conduct of survey, the Insurer settled the claim of Charan for Rs.447436/- in Feb 96. Upon receipt of payment, Charan executed Letter of Subrogation-cum-Special Power of Attorney in favour of the Insurer and they jointly filed a complaint under the Consumer Protection Act, 1986 against the Carrier before the District Consumer Disputes Redressal Commission, Dindigul, claiming compensation of Rs.447,436/- with interest at 12% per annum, for deficiency in service, as the damage to the consignment was due to the negligence on the part of carrier and its servants.


It was averrred that the insurer as subrogee was the co-complainant in view of the statutory subrogation in its favour. The District Forum by its order dated 8.11.1996 allowed the complaint and directed the appellant to pay Rs.447,436/- with interest at the rate of 12% per annum from the date of accident (8.10.1995) till date of payment to the Insurer, on the basis of the subrogation. The District Forum held that the failure to deliver the consignment in sound condition was a deficiency in service, in view of the unrebutted presumption of negligence arising under sections 8 and 9 of the Carriers Act, 1865.


ETO appealed before the State Consumer Disputes Redressal Commission, Madras, challenging the said order but the same was dismissed on 2.4.1998. ETO filed a revision before the National Consumer Disputes Redressal Commission which dismissed the revision petition by a short non-speaking order dated 19.7.1999 stating that they do not find any illegality or jurisdictional error in the order passed by the State commission, which was again challenged before the Apex Court.




In the Supreme Court, ETO resisted the complaint on the grounds:
(i) The Assured (consignor) had insured the goods against transit risk with the Insurer. Having received the claim proceeds, the consignor had no surviving claim that could be enforced against the carrier. At all events, as the Assured had transferred all its interest in the claim to the Insurer, it had no subsisting interest or enforceable right.


(ii) The Insurer did not entrust the consignment to the carrier for transportation. The appellant did not agree to provide any service to the Insurer. There was no privity of contract between the Insurer and ETO. As a result, the Insurer was not a `consumer' as defined in the Act and a complaint under the Act was not maintainable.


(iii) The letter of subrogation was executed by Charan Spinning (consignor), after the goods were damaged. This amounted to a transfer of a mere right to sue by the Assured in favour of the Insurer, which was invalid and enforceable.


(iv) There was no negligence on the part of its driver and the accident occurred due to circumstances beyond his control. The respondents did not place any evidence to prove any negligence, in spite of appellant's denial of negligence.


Leave was granted in this case on 27.9.1999 - meantime a three-Judge Bench of this Court rendered its decision in Oberai Forwarding Agency on 1.2.2000, making a distinction between `assignment' and `subrogation'. The Court held that where there is a subrogation simpliciter in favour of the insurer on account of payment of the loss and settlement of the claim of the assured, the insurer could maintain an action in the Consumer Forum in the name of the assured, who as consignor was a consumer. Court hadfurther held that when there is an assignment of the rights of the assured in favour of the insurer, the insurer as assignee cannot file a complaint under the Act, as it was  not a `consumer' under the Act. This Court held that even if the assured was a co-complainant, it would not enable the insurer to maintain a complaint under the Act, if it was an assignee of the claim.


In the present case, ETO contended that Oberai laid down the law correctly. It was submitted that what is executed in favour of the Insurer, though termed a `subrogation' is an assignment, and therefore, the Insurer was not entitled to  maintain any complaint before the Consumer forum. It was contended that once the goods entrusted to the appellant for transportation were lost/damaged, no `service' remained to be rendered or performed by the appellant as carrier; that what was assigned and transferred by the Assured to the Insurer was only the right to recover compensation for the loss and there was no question of Insurer being the beneficiary of any service, for which Charan Spinning had hired ETO and therefore such post-loss assignment of the right to recover compensation, did not result in the Insurer becoming a `consumer' under the Act.


The counsel for Charan Spinning and Insurers contended that the decision in Oberai required reconsideration on several grounds, set out in the reference order. The Court in the instant case looked at the following questions for consideration :
(a) Where the letter of subrogation executed by an assured in favour of the insurer contains, in addition to words referring to subrogation, terms which may amount to an assignment, whether the document ceases to be a subrogation and becomes an assignment?


(b) Where the insurer pays the amount of loss to the assured, whether the insurer as subrogee, can lodge a complaint under the Act, either in the name of the assured, or in the joint names of the insurer and assured as co-complainants?


(c) Where the rights of the assured in regard to the claim against the carrier/service provider are assigned in favour of the insurer under a letter of subrogation-cum- assignment, whether the insurer as the assignee can file a complaint either in its own name, or in the name of the assured, or by joining the assured as a co-complainant.


(d) Whether relief could be granted in a complaint against the carrier/service provider, in the absence of any proof of negligence?



It was held by the Court that the consignor could certainly maintain a complaint under the Act, seeking compensation for the loss, alleging negligence and deficiency in service. The fact that in pursuance of a contract of insurance, the assured had received from the  insurer, the value of the goods lost, either fully or in part does not erase or reduce the liability of the wrongdoer responsible for the loss. Therefore, the assured as a consumer, could file a complaint under the Act, even after the insurer had settled its claim in regard to the loss. In the course subrogation could be classified in to 3 broad categories : (i) subrogation by equitable assignment; (ii) subrogation by contract; & (iii) subrogation-cum- assignment.


In the first category, the subrogation is not  evidenced by any document, but is based on the insurance policy and the receipt issued by the assured acknowledging the full settlement of the claim relating to the loss. In the second category, the subrogation is evidenced by an instrument. The letter of subrogation is a contractual arrangement which crystallizes the rights of the insurer vis-`-vis the assignee. On execution of a letter of subrogation, the insurer becomes entitled to recover in terms of it, a sum not exceeding what was paid by it under the contract of insurance by suing in the name of the assured. The third category is where the assured executes a letter of subrogation-cum-assignment enabling the insurer retain the entire amount recovered (even if it is more what was paid to the assured) and giving an option to sue in the name of the assured or to sue in its own name.


In all three types of subrogation, the insurer can sue the wrongdoer in the name of the assured. This means that the insurer requests the assured to file the suit/complaint and has the option of joining as co-plaintiff. Alternatively the insurer can obtain a special power of Attorney from the assured and then to sue the wrongdoer in the name of the assured as his attorney.


If a letter of subrogation containing terms of assignment is to be treated only as an assignment by ignoring the subrogation, there may be the danger of document itself becoming invalid and unenforceable, having regard to the bar contained in section 6 of the Transfer of Property Act.


The Court also went on record that Insurance companies, statutory corporations and banks use standardized forms to cover all types of situations and circumstances and several of the clauses in such forms may be wholly inapplicable to the transaction intended to be covered by the document. Necessarily such redundant or inapplicable clauses should be ignored while trying examining the document and make sense out of it.


The Court pointed out that the use of the words "we hereby assign, transfer and abandon to you all our actionable rights, title andinterest" in the document, is in regard to rights and remedies against (1) railway administration (2) sea carriers (3) agents of sea carriers (4) port authorities (5) customs authorities and (6) persons whomsoever is liable in respect thereof. Even though, the matter relates to carriage of goods by road, the claims or remedies against a road carrier were not even mentioned. Excluding the irrelevant clauses, the document continues to be a letter of subrogation.


As rightly pointed out by the court a document should be transaction-specific. Or at least an effort should be made to delete or exclude inapplicable or irrelevant clauses. The Court opined that Computerisation and large legal departments should have enabled insurance companies, banks and financial institutions to (i) improve their documentation processes and omit unnecessary and repetitive clauses; (ii) avoid incorporation of other documents by vague references; and (iii) discontinue pasting or annexing of slips. But that is seldom done. If documents are clear,specific and self-contained, disputes and litigations will be considerably reduced.


Court also referred to the frequent misconstruction of para 23 of the decision in Oberai by some carriers. The said para does not mean that when the consignment is received by the carrier from the consignor and put it in the course of transportation, the carrier has provided the service and thereafter either ceases to be a service provider or ceases to be responsible for delivery of the goods, and that consequently, the consignor ceases to be a `consumer'. All that para 23 of Oberai meant was that in a contract for carriage of goods between the consignor (assured) and the carrier, if the consignor assigns the right to claim damages to an assignee, after the goods are lost or damaged, the assignee cannot claim to be a "consumer" under the Act. It impliedly meant that if the assignment had been done before the loss or damage to the goods, then the assignment would have been in regard to `property' and not a mere right to sue, and the assignee as consignee would be entitled to sue the carrier.


The Court held in this case that :
(a) The insurer, as subrogee, can file a complaint under the Act either in the name of the assured (as his attorney holder) or in the joint names of the assured and the insurer for recovery of the amount due from the service provider. The insurer may also request the assured to sue the wrong doer (service provider).


(b) Even if the letter of subrogation executed by the assured in favour of the insurer contains in addition to the words of subrogation, any words of assignment, the complaint would be maintainable so long as the complaint is in the name of the assured and insurer figures in the complaint only as an attorney holder or subrogee of the assured.


(c) The insurer cannot in its own name maintain a complaint before a consumer forum under the Act, even if ts right is traced to the terms of a Letter of subrogation-cum-assignment executed by the assured.


(d) Oberai is not good law insofar as it construes a Letter of subrogation-cum-assignment, as a pure and simple assignment. But to the extent it holds that an insurer lone cannot file a complaint under the Act, the decision is correct.


The punchline was that going by the amendment Act 62/2002 of the Act effective 15/3/2003 by addition of words "but does not include a person who avails of such services for any commercial purpose" in the definition of `consumer'. After the said amendment, if the service of the carrier had been availed for any commercial purpose, then the person availing the service will not be a `consumer' and consequently, complaints will not be maintainable in such cases. But the said amendment will not apply to complaints filed before the amendment.




The Court added that though Section 14(1)(d) of the CP Act contemplated award of  compensation to the consumer for any loss suffered by consumer due to the negligence of the opposite party (Carrier). Section 9 of Carriers Act does not lay down a preposition that a carrier will be liable even if there was no negligence on its part. On the other hand, it merely raises a presumption that when there is loss or damage or non-delivery of goods entrusted to a carrier, such loss, damage or non-delivery was due to the negligence of the carrier, its servant and agents. Thus where the consignor establishes loss or damage or non-delivery of goods, it is deemed that negligence on the part of the carrier is established. The carrier may avoid liability if it establishes that the loss, damage or non- delivery was due to an act of God or circumstances beyond its control. Section 14(1)(d) of the Act does not operate to relieve the carrier against the presumption of negligence created under Section 9 of the Carriers Act.


The Court concluded that the loss of consignment by the assured and settlement of claim by the insurer by paying Rs.4,47,436/- is established by evidence. Having regard to the presumption regarding negligence under section 9 of Carriers Act, it was not necessary for the complainants to prove further that the loss/damage was due to the negligence of the appellant or its driver. The presumption regarding negligence was not rebutted. Therefore, the District Forum was justified in allowing the complaint brought by Charan Spinning represented by the Insurer for recovery of Rs.447436/- The said order was affirmed by the State Forum and the National Forum.


The Bench stated that they found no reason to interfere with the same. The appeal was,therefore, dismissed.




THERE ARE LESSONS TO BE LEARNT FOR ALL CONCERNED.

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