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Tuesday, June 21, 2011

Madras High Court on whether Insurers can revise Motor TP Premium

Daily we do many transactions – right from buying  things like milk, vegetables,  food…. Pay for services like transportation, cleaning …. And more… commercially everything comes at a price !!  The price obviously is not the cost of the product. The pricing strategies can be complex but the straightforward rule would that the price would cover all costs, expenses and include some amount of profit otherwise the trade could not sustain. 

The Insurer sells promises of indemnification called policies – the return is premium and the premium should be so priced to include the claim costs + costs of administration + expenditure involved in running the business + some amount of profit, lest the Company’s running would be unviable.  Here the costs of claims are not easily determinable.  They depend on the exposure, probability, severity and other things which will have a direct bearing on the claims cost.  Ideally the premium should develop on an actuarily determined rate considering empirical evidence and the probabilities of occurrence.  For the policy holder, the outgo towards insurance coverage is pre-determined though the exposure the probable outgo for any Insurer would not be. 

In any market place, pricing is the process of what the Company decides to levy in exchange of its products.  Amongst various methods there is premium pricing i.e., charging a higher price citing the uniqueness of the product or service.  The examples are Cunard Cruises, Sheraton Hotels, Concorde flights, Private luxury buses, Blue Dart Courier, Nalli Silks  and Saravana Bhavan hotels.  But when it comes to Insurers deciding their premium rates, lot of dust is raised and it becomes the subject matter in Court of Law.  For long there existed All India Motor Tariff and only PSU Insurers to contend with.  Now there are umpteen Insurers to chose with and here is some history of what occurred recently. 

It will be too rudimentary for those in Insurance field to read about the two types of policies – Liability only Policy otherwise called Act Only policy and Package policy which besides liability covers loss or damage to vehicle insured [called own damage].  The Motor vehicles Act in India mandates that any vehicle on public road should have a policy of insurance and further specifies under Sec 147 the requirements of policies and limits of liability.  In order to comply with the requirements of the chapter, the policy must be one issued by an authorized Insurer and provides coverage against liability that may be incurred by the vehicle owner in respect of the liabilities that are specified therein – which includes the death of or bodily injuries to third parties. 

The Insurers are already reeling under heavy losses in the Motor portfolio, especially as arising out of the outgo in respect of thirdparty claims as adjudicated before the Motor Accidents Claims Tribunals.  The governing body IRDA proposed upward revision of rates  and there was resistance from the insuring public.  There were petitions filed against the Insurers [35 respondents in all] challenging the premium increase filed by various associations which included  : Erode District Bus Owners Association, Federation of Bus Operators   Association of Tamil Nadu, Association of Management of Coimbatore, as also by Educational Institutions like Anna University Affiliated Colleges, Federation of Associations of Private Schools in Tamil Nadu, Federation of Associations of  Matriculation Higher Secondary Schools,Coimbatore District Auto Workers Union (Affiliated with CITU)

In all these writ petitions, the crux was challenging the order of 15.4.2011 issued by Insurance Regulatory and Development Authority (IRDA) constituted under the Insurance Regulatory and Development Authority Act, 1999. By the impugned order, the IRDA had fixed the Motor Insurance Premium Rates for third party liability only cover.   The question was whether the fixation of premium rates for third party liability by the IRDA was without jurisdiction and whether it is arbitrary and violative of Article 14 of the Constitution as well as ultravires of the  provisions of the Insurance Act, 1938?
In the Madras High Court of Judicature  The Hon’ble Mr.  Justice  K Chandru  stated it could not said that the procedure adopted was contrary to the spirit of law or opposed to the dictum laid down by the Apex Court. Here are some excerpts from his judgment::-

The order of IRDA had referred to the Exposure Draft on Review of Motor Insurance Premium rates for Third Party Liability Cover dated 4th January 2011, which was published in its website.  IRDA had notified by  virtue of the power vested in the Authority under Section 14(2)(i) of the IRDA Act, 1999 that with effect from 25.04.2011, the rates of premium applicable to Motor Third Party Liability Insurance business shall be as set out as indicated.   The Authority had noted that Motor Third Party premiums were revised in the past at 4/5 year intervals. Such long intervals between rate revisions cast an avoidable strain on policyholders as well as on the insurance companies. Premiums need to be reviewed regularly depending upon the average claims which have been awarded by the various courts, frequency of claims for each class of vehicle and inflation amongst other factors. During the consultation process, certain stakeholders had also suggested that an annual review would ease the burden of adjusting to changes in premia consequent to changes in these financial parameters.  The authority had arrived at a  formula for the revision of rates based on settled parameters.

It also set out that considering  the mandatory nature of Motor Third Party Insurance, insurers are advised to ensure that Motor Third Party Insurance is made available at their underwriting offices and that requests for insurance are processed expeditiously and policies are issued promptly. The Authority will treat any complaint of non-availability of insurance or use of methods to deny/delay the client seeking insurance cover, seriously.
Some of the arguments on behalf of various plaintiffs were :

-  that fixation of premium is vfested with TAC and not IRDA
-  that for goods vehicles TP liability formed part of the basic TP premium whilst in passenger vehicles, it was on passenger risk and hence grossly unjust
-  that there  is 60% increase in the current premium which affects the livelihood of the motor vehicle operators.
-  schools are not to be treated like other regular passenger vehicles as the school buses are used only for fetching students in mornings and evenings and that many of the schools were run as charitable organisations without any profit motive.
-  that there can be only one component of premium. 
The learned counsel for IRDA [the mercurial MB Raghavan]  submitted that authorities had taken pains to collect scientific data on the liability to be incurred by the insurers and also the quantum of expenditure that had gone up considerably for the insurer to meet the third party liability both due to increased volume of accidents as well as elaborate interpretations of Courts regarding accident policy. Extensive consultation was also done with the association of stake holders. The present fixation of premium is based on scientific data. It must also be noted that there cannot be any judicial review in this matter and the issue involved is purely contractual.

It was further submitted that Section 147 of the Motor Vehicles Act contemplates two types of liability. Therefore, the premium had taken into account the entire liability arising out of Sections 146 and 147 of the Motor Vehicles Act.

It was further contended that unlike before there is no Government monopoly in the insurance sector and it is an opened up sector facing stiff competitions from foreign companies in this area. Instead of allowing the individual companies to deal with the insured, the IRDA being the regulatory authority as well as the development authority in the insurance sector was created so that there will be uniformity in the rate. This is very much essential because of compulsory insurance. The present premium fixed hardly taken into account the liability of the insurance company and  most of the public sector companies are bound to subsidize the motor insurance with the income derived from the other insurances. If it is left to the market fluctuation while fixing the premium, then the premium rates will go up much higher. It is only because of the controlling authority in the form of IRDA, the insurance premiums are fixed at reasonable rates.
TheHon'ble Justice in his order  recalled the  various stages of development with reference to the motor insurance. Before the Insurance Act, 1938 was introduced, the law relating to the insurance in the colonial India was covered by the Provident Insurance Societies Act which regulated the Life Insurance Companies. It is only in the year 1968, the idea of Tariff Advisory Committee was evolved and an amendment was made by the Central Act 62 of 1968. Under Section 64-UC, the power of the Advisory committee to regulate rates and advantages were also made. After these amendments were made, the Tariff Advisory Committee started fixing premium for the insurers of various types of insurance business.  In the year 1990, premium was fixed by the Committee, the matter was challenged in various High Courts by the transport operators and referred to the judgment of   The Supreme Court in Jt. Council of Bus Syndicate v. Union of India reported in 1992.

The Hon’ble Justice further observed that the functions of the insurance companies are governed by statute. A contract of insurance, therefore, must subserve the statutory provisions. It must indisputably be construed having regard to the larger public policy and public interest guiding nationalisation of the insurance companies. Insurance sector is regulated. The provisions of the Insurance Act are applicable to all insurance companies irrespective of the fact as to whether they are in public sector or private sector. It has a tariff policy. It is completely under the control of the Regulatory Authority. The tariff has to be fixed by the Authority. What should be the reasonable tariff would again be the subject-matter of exercise of jurisdiction by the Authority. So far as non-tariff policies are concerned, the insurance companies may charge tariff but the terms and conditions thereof are regulated by the Authority

Hon’ble Justice concluded that “ We have, therefore, no hesitation to hold that in issuing a general life insurance policy of any type, public element is inherent in prescription of terms and conditions therein. The appellants or any person or authority in the field of insurance owe a public duty to evolve their policies subject to such reasonable, just and fair terms and conditions accessible to all the segments of the society for insuring the lives of eligible persons. The eligibility conditions must be conformable to the Preamble, Fundamental Rights and the Directive Principles of the Constitution. The term policy under Table 58 is declared to be accessible and beneficial to the large segments of the Indian society. The rates of premium must also be reasonable and accessible. Accordingly, we hold that the declaration given by the High Court is not vitiated by any manifest error of law warranting interference. It may be made clear that with a view to make the policy viable and easily available to the general public, it may be open to the appellants to revise the premium in the light of the law declared in this judgment but it must not be arbitrary, unjust, excessive and oppressive...."
        Even if the parameters shown by the Supreme Court are applied, the petitioners have not made out any case. The impugned order is based upon rational classification and subject to sound reasoning and evolved after public consultation with the stake holders. In view of the above, all the writ petitions will stand dismissed. The petitioners are given eight weeks time to pay the balance of the premium amounts to the respective insurers without fail. However, there will be no order as to costs. Consequently, connected miscellaneous petitions stand closed.
The foregoing is an attempted gist of the Judgment of  The Hon’ble Mr Justice K Chandru in respect of W.P.Nos.10908, 11844, 12262, 12267, 12332, 12388,12626, 12632, 12633, 12634, 12656, 12657, 12658, 12703, 12704, 12746, 12747, 12759, 12937, 12938, 12939, 13031 and 13144 of 2011  and M.P.NOs .2,3,2,3,2,3,2,2,3,2,2,2,2,2,2,2,2,2,2,2,2,2,1,1,1,2,2,2, 1,2,3 and 2 of 2011 – in the High Court of Judicature of Madras – and is not purported to be a full reproduction of the Judgment.  

With regards – S.Sampathkumar.

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