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Chapter Introduction
Learning Outcomes
With the liability insurance cover, an insured can be relaxed knowing that if any
untoward incident happens, resulting third party damages can be compensated
under the insurance.
1. Legal liability
Definition
b) Civil liability: Here action is brought by one party against another and
dealt with according to law, resulting in payment of damages or
compensation to the aggrieved party.
Insurance coverage is provided only for civil liability claims. Any liability arising
out of criminal act cannot be covered under insurance.
3. Civil liability
a) It may arise under common law which may be defined as a body of law
Consisting of past court decisions, customs and usages recognized by
courts.
Example
A person may be liable to pay damages to another person under common law for
negligently causing bodily injuries and/or property damage.
b) Civil liability may also arise under statutory law, i.e. under an Act of
Parliament.
Example
Example
Under Public Liability Insurance Act 1991, insured owner handling hazardous
substances has a ‘no fault’ liability (liability irrespective of negligence) for
accidents occurring during such handling.
c) Thirdly, civil liability may also arise under a contract between two
parties.
Example
A builder has made a contract with the owner to complete his building within a
stipulated period. If the contractor fails to complete the building on time, then
he has a civil liability to the owner.
4. Liability insurance
It can be classified into two types based on the category of liability covered:
b) Insurance covering Tort liability i.e. common law judgments e.g. public
liability, professional liability, product liability etc.
Example
Rajat , while driving his father’s car, hit Jyoti who was crossing the road at that
time. Rajat has a public liability for injuries caused to Jyoti under common law.
It was Rajat’s duty of to take care of the public while driving. He breached that
duty and hit Jyoti, who can file a lawsuit against him for damages.
Moreover, as the car was owned by Rajat’s father, he also has a statutory
liability to Jyoti under the Motor Vehicles Act. According to this Act, the owner
of the vehicle is responsible for any damages caused by his vehicle.
Therefore, through this example, it is clear that Rajat was liable to Jyoti under
common law due to not following his public duty properly and at the same time,
his father was also liable for this act under statutory law even when he was not
personally involved in this act.
Public liability insurance first originated in the UK in 1875, when the first policy
was issued to cover liability to third parties arising out of the use of horse
driven vehicles. By the year 1876, Boiler policies issued by the engineering
offices had begun to include an indemnity for damage to surrounding property.
This was followed by third party (lift) policies which were issued in 1888.
Thereafter, builders and contractors began to demand this kind of insurance
protection.
The Employers’ Liability Assurance Corporation Ltd founded in 1880 was the
first company to transact this business. With the passing of the Workmen’s
Compensation Act, 1906, many of the fire insurance companies entered the
field of employer’s liability insurance. The Accident Offices Association also
played an important part in the development of the business, particularly in the
matter of rating.
The passing of the Employers’ Liability Act, 1880 indirectly created a demand
for public liability (general) policies also the act highlighted the fact that
employers had potential liabilities towards third parties as well. As a result,
general public liability policies came into effect. Various legal decisions led to
the development of property owners’ indemnities, school authorities’
indemnities , sportsmen’s indemnities for public liability risks etc.
The National Insurance (Industrial injuries) Act, 1946, was passed following the
Beveridge report in 1942. Beveridge report recommended the inclusion of
provision for industrial accident or disease within a unified social insurance
scheme by replacing the scheme of the Workmen’s Compensation Act. This new
Act repealed the earlier statutes like the Employer’s Liability Act, 1880 and the
Workmen’s Compensation Act, 1906, with the result the workmen’s
compensation business could no longer be transacted by commercial insurers.
Employers, however, still remained liable in damages under common law for
employment accidents and the necessary cover was provided by insurers under
employers’ liability policies.
In course of time there was a steady increase in common law claims against the
employers and a need was felt for compulsory insurance. The Employers’
Liability (Compulsory Insurance) Act, 1969 became operative from 1st January,
1972. This Act requires every employer carrying on business in Great Britain to
take insurance coverage from an authorised insurer against liability for bodily
injury or disease sustained by his employees and arising out of in the course of
their employment. The Act further provides that a fixed amount of insurance
coverage can be taken for claims relating to any one or more of the employees
arising out of any one occurrence.
In India, the passing of Workmen’s Compensation Act, 1923, and the Motor
Vehicles Act, 1939, had a significant effect on the origin and growth of
employer’s liability insurance and public liability insurance respectively - The
Motor Vehicles Act 1939 introduced motor third party insurance on a compulsory
basis and helped to emphasise the need for protection of public liability risks in
other areas of economic activities.
The Bhopal tragedy in 1984 brought into focus new hazards to life and property
and generated an increasing demand for public liability insurance. Other
contributory factors for the demand were increasing public awareness of legal
rights and remedies, public interest litigation and judicial activism.
Example
A person died during his hernia operation due to the medical practitioner’s fault
when performing his surgery. The deceased person’s family sued the doctor in
court. The doctor became legally liable to pay damages to the deceased
person’s family in respect of his error / omission. He had also incurred legal
costs and expenses to defend his case. This resulted in major financial loss for
the doctor.
This was a case of civil liability, and the insurance company provides coverage
for such claims. If the doctor would have taken a professional liability insurance
to cover claims resulting from any errors or omissions while rendering
professional services, then he would have been saved from the above financial
losses.
Test Yourself 1
I. Act
II. Clause
III. Responsibility
IV. Amount
Liability insurance contracts, like other insurance contracts, are subject to the
provisions of The Indian Contract Act, 1872. These contracts are also subject to
the special principles developed under common law such as insurable interest,
indemnity, subrogation, contribution and utmost good faith. In this Learning
Outcome, we will discuss all these basic principles with particular reference to
their application to liability insurance.
1. Insurable interest
Insurable interest is the legal right to insure. The three essentials of insurable
interest are:
Thus, the insured has an insurable interest in the financial loss that may be
caused to him due to legal liability. Legal liability may arise when a person has
to pay damages and incur legal costs and expenses, as a result of accidental
damage to third parties’ property or accidental bodily injuries to third
parties.
Likewise, the employer has a potential legal liability towards his employees in
respect of work-related personal injuries. The law gives him a right to insure
that liability.
In addition to the insured, there may be some other parties who have insurable
interest in the legal liability.
Example
Example
2. Indemnity
The object of this principle is to ensure that the insured’s loss is made good
in such a way that financially the insured is neither better off nor worse off as
the result of the loss. In effect, insured is prevented from making a profit or
deriving any undue benefit out of the insurance contracts.
Example
Unfortunately, the use of this drug resulted in ill health of many people. Those
people filed lawsuits against the company due to which the company had to
incur legal expenses with the consent of the insurer to defend their case. The
company lost the case and was required to pay compensation to all the people
who suffered.
The total amount of claims along with all the legal costs were Rs.1,210,000. As
the indemnity limit was Rs.1,000,000 only, the insurer paid up to that amount
and the rest of the amount of Rs.210,000 was paid by the company.
On the other hand, if the total amount of claims along with the legal costs
would have been Rs.850,000, then the insurance company would have paid only
Rs.850,000 and not Rs.1,000,000 as the insured (the drug manufacturing
company) cannot make profit out of the liability insurance contract.
The maximum limit of liability or the amount of the sum insured under the
policy is stated as limit of indemnity. Generally, the liability policies have two
types of limits:
i. Any One accident limit (AOA) which is the maximum liability of the
insurer for all claims arising out of a single accident and
ii. Any one period (AOP) limit (also known as Any one Year (AOY) limit)
which is the maximum liability of the Insurer for all claims arising out of
all accidents during the policy period.
The AOA and AOY limits are generally offered in the ratio of 1:1, 1:2, 1:3 or 1:4.
These ratios are provided in terms of amounts and not in terms of number of
claims in a year.
It is very important to choose the limits properly while proposing for insurance.
The selection of the limits of indemnity is the choice of the Insured. Some of
the factors that may be considered while deciding on the limits are:
It is important to note that the selection of the limits of indemnity is the choice
of the insured.
The decision on the indemnity limits should take into account the following
factors:
a) Organisation’s business
b) Organisation’s risk exposure, asset size or magnitude of operations and
shareholding pattern of proposer
c) The public perception
d) The income levels of the population in surrounding areas
e) Organisation’s customers, and
f) Its ability to pay the premium.
g) Whether the limit is inclusive of defense cost or exclusive
h) Number of persons/locations provided protection
i) Territory and jurisdiction covered
Under liability insurance, the payment is made on behalf of and through the
insured to the persons other than the insured i.e. third parties or employees, as
the case may be. Insured has, as such, no direct financial interest in the claim
settlement. Therefore, the application of the principle of indemnity in liability
insurance is simple and straightforward, without any complications.
As regard to the legal costs and expenses incurred by the insured, currently the
insurers are including these expenses in the limit of indemnity provided in the
policy. This indemnity is indeed very useful nowadays, due to high costs of
litigation. It is particularly useful in cases where a third party may resort to
litigation to claim damages from the insured, even though the latter may
eventually be absolved from any legal liability. In such cases, the insured may
not be able to recover costs and expenses from the third party. The insurers in
that case would conduct the defence of such claims and bear these costs and
expenses. In Workmen’s Compensation Insurance, legal costs of defence are
paid in addition to the compensation.
3. Subrogation
Definition
Example
A retailer of beauty products has taken a product liability policy to cover the
sums which he may become legally liable to pay as damages. The insurance
company has paid a claim to a customer on behalf of the retailer for a defective
product.
The retailer also has the right to recover these damages from the wholesaler or
manufacturer who supplied the defective products. However, according to the
principle of subrogation, the retailer’s rights of recovery against the wholesaler
or manufacturer for delivery of such products will be transferred to the insurer.
The insurer is entitled to recover the loss from the wholesaler or manufacturer
by exercising these rights as they have already paid the loss of the retailer.
4. Contribution
This principle applies when more than one policy exists covering the same loss.
Contribution is the right of an insurer who has paid a loss under a policy to
recover a proportionate amount of the loss from other insurers who are also
liable for the loss. The right of contribution flows from and supports the
principle of indemnity. Therefore if the same subject matter is insured with
more than one insurer under common law, the insured can recover his entire
loss (subject to policy limits) from any one insurer, who can later recover
proportionate shares of the loss from the other interested insurers. This
common law position is modified in liability insurance policies as a clause to
ensure that each insurer pays their own rateable share of loss.
The commercial contracts are mostly governed by the legal principle of ‘let the
buyer beware’. However, the insurance contracts, as they are essentially of a
fiduciary nature, i.e. based on mutual trust, are subject to the common law
principle of ‘utmost good faith’. According to this principle, the proposer who
knows or, ought to know, all material information about the risk proposed
for insurance is legally obliged to disclose all such information to the insurers.
Material information consists of all the facts that can influence the decision of a
prudent insurer in deciding whether or not to accept the risk proposed for
insurance and also to decide the premium rates and terms of acceptance.
This duty of disclosure of material facts which arises under common law is
considerably extended in liability insurance where, invariably, the proposer is
required to answer questions in a proposal form. This form incorporates a
declaration to the effect that the answers are warranted to be true and
complete and shall form the basis of the contract and that all the statutory
provisions are complied with.
The legal effect of this declaration is to render the contract voidable at the
option of the insurer if any answer is inaccurate or incorrect, irrespective of the
fact, whether the answer is material to the risk or not. Thus, the implied duty
of utmost good faith under common law is converted into a contractual duty
of utmost good faith in liability insurance.
Example
The insurer provided them with a proposal form, which requires answering
questions in detail about their premises and business. There was a section in the
proposal form asking if there is any welding, gas cutting or hot work being
undertaken and if so, what are the precautions taken. . The company declared
in the form that they do not have any such activities. The insurer on the basis
of the information provided in the proposal form provided a liability insurance
policy.
The company placed a claim on the insurer for the damages paid on death of a
visitor in their premises due to gas cutting activity. The insurer after examining
all the facts denied the claim as there was a material misstatement of
information by the insured.
Whereas majority of risks are insured on the basis of the proposal form, some of
the large or complicated risks or risks with extra- hazardous features are also
subject to survey and a risk inspection report by the official of the insurers. In
such cases, the insurers are deemed to have obtained all the material
information during the inspection of the premises to the extent, the insured has
facilitated proper inspection and has not withheld any information from or given
wrong information to the survey official during risk inspection.
Example
A condition in the industrial risks public liability insurance policy provides that
"the insured shall give notice as soon as reasonably practicable of any fact,
event or circumstance which materially changes the information supplied to the
company at the time when this policy was effected and the company may
amend the terms of this policy according to the materiality of such change."
Test Yourself 2
The insured has _________________ in the financial loss that may be caused to
him due to legal liability.
I. A contribution
II. An insurable interest
III. A responsibility
IV. An indemnity limit
It should be noted that the liability policies are also issued in Motor, Marine Hull
and Aviation insurance. Liability coverage is available in Householders’ and
Shopkeepers’ Comprehensive Policies too.
Extensions of liability cover are also available under material damage policies.
Some examples are as follows:
Contractors’ Risks
Erection Risks
Boiler explosion
Example
There are various types of liability insurance products available in the market,
each of them providing different scope of coverage.
Public liability insurance policy is also available in the market to cover the legal
liability risk of paying damages to third parties as a result of accidental death,
bodily injury or damage to property belonging to a third party.
a) Claims are paid to persons other than the insured i.e. member of the
public or the insured’s employees, as the case may be, but on behalf of
the insured.
Example
Under liability insurance, coverage is provided for claims of the third party who
is usually not known at the time of entering into an insurance contract.
For example, if a person hits and injures someone while driving his car, he
becomes legally liable to pay damages to the injured. If he had a liability
insurance coverage for such risk, then in that case the insurer will not pay the
insured, but will pay directly to the injured on behalf of the insured. The third
party here, i.e. the injured was not a party and known at the time of the
insurance contract.
c) Claims are negotiated and settled with the consent of insurers by the
insured who is required, by policy conditions, to co-operate with the
insurers in this respect.
d) Legal costs of the insured incurred with the written consent of the
insurers are reimbursed under the policy.
Example
Foreign tourists may be injured at tourist locations but may choose to file for
compensation in their respective country. The jurisdiction clause ensures that
the case is filed locally or as agreed between insured and insurer.
Test Yourself 3
Which of the following is not covered under the scope of liability insurance?
Summary
b) Legal liability is classified into criminal liability and civil liability. Civil
liability is insurable, but criminal liability is not.
d) The Public Liability Insurance Act, 1991 provides for immediate relief to the
victims affected by accidents involving hazardous substances or as a result
of handling hazardous substance.
h) The basic principles of liability insurance are the same as other insurance
contracts such as insurable interest, indemnity, subrogation, contribution
and utmost good faith.
a) Under liability insurance, claims are paid to persons other than the insured,
i.e. member of the public or the insured’s employees, as the case may be,
but on behalf of the insured.
i) Claims are settled and negotiated under liability insurance by the insured
with the consent of insurers. Legal costs incurred by the insured are also
reimbursed under the policy with the written consent of the insurers.
Answer 1
Answer 2
The insured has an insurable interest in the financial loss that may be caused to
him due to legal liability.
Answer 3
Self-Examination Questions
Question 1
The Public Liability Insurance Act, 1991 provides for immediate relief to the
victims affected by ____________________.
I. Road accidents
II. Accidents involving hazardous substances
III. Errors or omissions committed by medical practitioners
IV. Natural calamites
Question 2
Question 3
____________ is the transfer of rights and remedies of the insured to the insurer
who has indemnified the insured in respect of the loss.
I. Surrender
II. Subrogation
III. Utmost good faith
IV. Liability insurance
Question 4
The principle of indemnity provides that an insured can recover his financial loss
only to the extent of _________________.
Question 5
I. Legal liability
II. Financial liability
III. Creditors’ liability
IV. Business loss
Answer 1
The Public Liability Insurance Act, 1991 provides for immediate relief to the
victims affected by accidents involving hazardous substances or as a result of
handling hazardous substances.
Answer 2
Answer 3
Subrogation is the transfer of rights and remedies of the insured to the insurer
who has indemnified the insured in respect of the loss.
Answer 4
The principle of indemnity provides that an insured can recover his financial loss
only to the extent of his insurable interest.
Answer 5
LEGAL BACKGROUND
Chapter Introduction
This chapter will discuss the legal aspects related to liability insurance. It will
provide you knowledge about the law of torts and the type of torts like
negligence and nuisance. It will also discuss the types of damages and their
settlement methods, types of defences to resist negligence allegations and
various laws and statutes applicable to liability.
Learning Outcomes
Devendra Kumar Patni was the proprietor of a cinema Hall. The step provided
at the exit door of the theatre was around one foot above the ground. Further,
the exit path was blocked by a car which was parked negligently. Due to this,
Nirmaladevi fell and broke her leg while leaving the cinema.
She filed a case against the proprietor. The motor car owner was held liable for
the damages. However, he made an out-of-court settlement by paying some
amount of money. It was held by the court that the accident was caused by the
defendant’s negligence in not providing proper step and the danger of accident
was further aggravated by wrong parking of the car, which the proprietor could
have prevented. Accordingly, the cinema proprietor was held liable to pay
damages.
The common law applied by the Indian Courts is largely based on the English
Common Law, which is a body of law consisting of past legal decisions, and
customs, usages and conventions recognised by law. In the absence of any
statutory law or customary law in India, Indian courts, mostly, apply English
common law depending on the circumstances of the case.
Public liability insurance is concerned with the legal liabilities of the insured,
arising mainly under the law of torts which forms part of the common law.
1. Tort
Definition
‘Tort’ means a civil wrong arising out of a breach of some duty which leads to a
civil cause of action and for which damages or compensation are recoverable.
The law of ‘tort’ imposes a duty on each person to regulate his actions and
behaviour in such a manner so as not to cause injury to other persons or damage
to their property.
a) Libel
b) Slander
c) Assault
Example
Ajay was running a company manufacturing milk products. There was strong
competition in his region from one company, which was owned by David.
Ajay got a story published in the local newspaper that the milk products sold by
David’s company are not fresh and are sold even after they are past their expiry
date.
This is an example of tort in the form of libel. David can sue Ajay for this act.
The distinction between ‘tort’ and ‘crime’ must be noted. A tort is a breach of
private rights of individuals which affect only the victims.
Secondly, in ‘tort’ the action is brought by the injured party who is paid
compensation by the wrong doer, as awarded by a civil court whereas in ‘crime’
the prosecution is conducted by the state and the wrong doer is punished by
fine and/or imprisonment.
Table 2.1
Tort Crime
Grounds Civil wrongdoing Criminal wrongdoing
Victim Individuals Society
Examples Assault, defamation, battery Murder, rape, burglary
Initiating party Victim The State
Action taken Suits in court Prosecution by State
Purpose Compensation to injured Punishment to criminal
Law Common law The Penal Code
Standard of proof Balance of probabilities Beyond all reasonable doubt
In ‘tort’ the duty that is broken is imposed by the law and is applicable to all
members of the society, whereas in a contract this duty arises out of agreement
between the parties concerned and applies to definite person or persons.
Example
Sudesh sold a table to Ketan under a contract for Rs. 20,000. He told Ketan that
it is an antique table, but it was actually a normal wooden table worth
Rs.5,000. So, it was a breach of contract through misrepresentation as Sudesh
had entered into a contract with Ketan.
Ketan was entitled to goods worth Rs.20,000, therefore his damages were
Rs.15,000. Ketan can sue Sudesh in the court for breach of contract and is
entitled to damages incurred by him of Rs.15,000.
Table 2.2
4. Statutory law
Liabilities may also arise under statutory law. Statutory law is the law as
enacted by the legislature e.g., The Public Liability Insurance Act, 1991, The
Motor Vehicles Act, 1988, The Workmen’s Compensation Act, 1923 etc.
i. Law of torts
ii. Statutes and
iii. Law of contracts
5. Types of torts
Liability insurance is mainly concerned with two types of‘torts’ viz. negligence
and nuisance. These torts are defined and discussed in detail in the Learning
Outcomes.
Test Yourself 1
Which of the following act is not an example of tort?
I. Assault
II. Battery
III. Burglary
IV. Slander
1. Negligence
Definition
Negligence is defined as the breach of a duty caused by the omission to do
something which a reasonable man, guided upon those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing
something which a prudent and reasonable man would not do.
A civil action for negligence can be taken when the following conditions are
satisfied:
iv. Causal connection between the breach of duty and the injury or
damage.
Example
If a person is driving a car, it is his duty to follow the rules. If he violates any of
these rules, such as jumping the red signal, and hits someone, then it will be
considered negligence on behalf of that driver.
In this case, the driver has a duty of care towards the pedestrians while driving
a car. He breached that duty and as a consequence, injured someone.
There was a clear causal connection between his breach of duty, i.e. jumping
the red signal, and the injuries of the pedestrian.
As all the conditions are satisfied, a civil action can be taken against him for
negligence.
a) Duty of care
The issues such as when does the duty of care arise and to whom is the duty
of care owed were considered in Donoghue v. Stevenson (1932). It was the
earliest and the most important English case on negligence. The facts of the
case were:
Case study
The House of Lords decided that a general duty of care is owed by people not to
injure their legal neighbour who could reasonably be foreseen as likely to be
affected by their acts or omissions. Legal neighbours are those who can be
closely and directly affected by an act or omission and they ought reasonably to
be in contemplation to be affected at the time that the tort (act or omission) is
committed. Therefore, this decision has come to be known as Lord Atkin’s
‘neighbour principle.’
Example
The owners of a property have a duty to use their own property in such a way
as not to cause injury to the persons or property of another. However,
persons who use dangerous things such as explosive materials, fire-works
or gas are bound to exercise more than ordinary care in their control over
such properties. Moreover, a higher degree of care and skill is expected from
members of the learned profession such as doctors, solicitors, etc. in their
professional work. Therefore, if a doctor, while operating a patient, mistakenly
removes the wrong kidney, then it is a breach of duty caused by negligence.
Case study
In the case of Breton v. Stone (1951) a cricket ball travelled 100 yards
over a fence 17 feet high and hit the plaintiff walking on the road nearby.
The House of Lords held that there was no negligence on the part of the
defendants. The court observed "It seems to me that a reasonable man, taking
account of the chances against an accident happening, would not have felt
himself called on either to abandon the use of the ground for cricket or to
increase the height of his surrounding fences. He would have done what the
appellants did. In other words, he would have done nothing.
The degree of care required from owners or occupiers of real property (i.e.
land, building, etc.) varies according to the different classes of
persons in regard to whom it is to be exercised.
i. Trespassers
ii. Licensee
iii. Invitees
iv. Passers-by
The occupier’s duty towards them is to keep the property in a good state of
repair. This duty also extends to take care against what may happen beyond
the property limits where a person may be lawfully passing.
v. Children
c) Injury or damage
The third pre-requisite to take a civil action against negligence is that the
plaintiff must prove that he has suffered injury or damage as a consequence
of the breach of duty of care. Injury could be death or bodily injury and
associated pain and suffering, economic losses such as loss of actual
earnings or earning capacity etc. Damage could be damage to property also
Before 1961, under English Law, a person was responsible for all the direct
and natural consequences flowing from his negligence, whether they were
reasonably foreseeable or not. The plaintiff could recover if there was
unbroken sequence of events between the original act of negligence and the
consequent loss. This position changed in 1961 with the decision of the
Judicial Committee of the Privy Council in Overseas Tank-ship (U.K.) Ltd. v.
Morts Dock & Engineering Co. Ltd. commonly known as the Wagon Mound
Case.
Case study
The appellants were the charters of the vessel "Wagon Mound". Due to their
negligence some bunkering oil spilled into the waters of the Sydney harbour and
spread on to a wharf where the respondents were repairing a ship
“S.S Corrimal” by oxy-acetylene welding. A spark from the welding process
accidentally set fire to the oil floating on the water which damaged the wharf
and the “S.S Corrimal”.
The damage was held not to be foreseeable as seafaring and other expert
opinion then prevailing was that the oil was not inflammable on water. The
Judicial Committee held that the appellants were not aware nor could they
reasonably have been aware that the oil could have ignited on water. This
decision introduced the test of reasonable foreseeability in place of the ‘direct
consequence’ test applied by courts earlier. Prior to 1961, it did not matter
that damage was unlikely or out of proportion to the degree of negligence so
long as a direct causal connection existed.
The test of foreseeability which was referred to in the House of Lords in the
Heron II, 1967 is as follows:
"The defendant will be liable for any type of damage which is reasonably
foreseeable as liable to happen in even the most unusual case, unless the
risk is so small that a reasonable man would in the whole circumstances feel
justified in neglecting it."
Under common law, the burden of proving negligence rests with the person
who has suffered injury or damage. In other words, the injured has to
establish that the defendant owed him a duty of care, which was breached
and that the breach was the proximate cause of the injury or damage.
Example
Ravi was walking down a street, when suddenly a flower pot from the balcony of
Mukesh’s residence fell on him, which injured him.
Generally, it is the duty of the injured to prove the negligence. However, in this
case, the circumstances of the accident itself prove the negligence on the part
of the owner of the residence, i.e. Mukesh. Therefore, it is not necessary for
Ravi to prove negligence on the part of Mukesh so long as he proves the
occurrence of the accident itself. Thus, the burden will be shifted to Mukesh to
prove that he was not negligent.
This is according to the common law rule of ‘res ipsa loquitur’ (the thing speaks
for itself). According to this rule, the mere fact of the accident constitutes
prima facie evidence of negligence. The rule applies where the accident is more
probably due to the negligence than to any other cause and the circumstances
leading to the accident are within the control and management of the
defendant. The following case illustrates the application of this principle.
Case study
ii. The act is committed in the course of and within the scope of
employment.
However, the employer is usually held liable for the consequences of the
acts even if:
This is based on the principle that the employer is financially stronger than
the employee and is better able to bear the damages. The employee, of
course, is personally liable for his own negligence.
Example
One of the delivery persons hit another vehicle while driving recklessly to
deliver the pizza on time. In this case, the pizza company will be held liable for
the negligence of its employee’s act and will have to pay compensation for the
damages suffered by the injured.
However, if the same employee hits a pedestrian while driving the company’s
vehicle on a holiday, then the employer will not be held liable as the employee
was not performing his duty at the time of accident.
ii. Where the contractor’s work involves extra hazardous acts, etc.
Example
Vinay hired an independent contractor to dig a sewer line near his house. The
contractor started working but did not take proper precautionary measures for
the passers-by against the danger of falling into an open ditch.
Maya fell into that ditch and sustained severe injuries. In this case, Vinay is
liable as it was his duty to take care of the passers-by. Thus, he is liable to pay
compensation for damages to Maya although he will be indemnified by the
contractor.
2. Nuisance
Definition
a) Public nuisance
This has been defined by Section 268 of the Indian Penal Code as follows:
Definition
A person is guilty of a public nuisance who does any act or is guilty of illegal
omission, which causes any common injury, danger or annoyance to the public
or to the people in general who dwell or occupy property in the vicinity or
which must necessarily cause injury, obstruction, danger or annoyance to
persons who may have occasions to use any public right.
Public nuisance cannot be the basis of a civil cause of action and is dealt
with by the State as a crime.
b) Private nuisance
It arises out of the use of one’s own property in such a way as to cause
physical injury to the property of another or interfere with his health or
comfort.
The distinction between nuisance and negligence must be noted. Liability for
nuisance may arise in spite of the fact that the person had taken all possible
care. In fact, generally speaking, the duty on the part of the wrong doer is
absolute and liability arises if damage is proved. Whereas in the case of
negligence, liability arises only if a person fails to exercise that degree of care
which was demanded for a particular situation.
Action for nuisance is sustainable only when there is actual damage which may
be physical damage to premises or property of another or interference with the
enjoyment of the premises.
Test Yourself 2
Which of the following cases laid down the fundamental principle for deciding
the duty of care?
I. Donoghue v. Stevenson
II. Breton v. Stone
III. Wagon Mound Case
IV. Rylands v. Fletcher
Test Yourself 3
1. Damages
The term ‘damages’ means the pecuniary compensation awarded by the court in
a civil action to the victim, for loss or injury suffered due to breach of contract
or tort.
Damages for personal injury (fatal or non-fatal) claims fall into two categories:
a) Special damages
b) General damages
The elements which may be taken under general damages may expand
depending upon the court’s perception of the losses suffered by the victim.
The distinction between special damages and general damages is that the
former can be calculated accurately from records of actual expenses
incurred or financial losses (e.g. loss of salary etc.) suffered whereas the
latter are estimated by the courts taking into account a number of factors
relevant to individual cases.
Case study
In Hirjee Veerji and Co. V. Smt. Saroja Narayan Shetty case, the husband of the
plaintiff, Narayan Shetty, died after his car was hit by the appellant’s lorry. The
plaintiffs, which included the deceased’s wife, one minor son, two daughters
and mother of the deceased claimed Rs. 230,000 as pecuniary loss to the estate
of the deceased and Rs. 20,000 as compensation for the pain and suffering of
the deceased prior to death and also for shortening the expected life.
The court decided that the appellant has to pay Rs.149,400 as compensation to
the plaintiffs under various heads of general damages. The court calculated the
amount as follows:
Narayan died at the age of 45 years, and considering that he would have earned
income for his family till the age of 60 years had he been alive, the court
calculated that the net gain to the family due to the deceased’s income was
Rs.1,000 per month for the next 15 years. Thus, the total financial loss
estimated was Rs.180,000. The court decided that the plaintiffs are also
entitled to the amount of Rs.1,000 as damages for the pain and suffering of the
deceased before he died and Rs.9,000 for loss of expectancy of life. The total
compensation was calculated as Rs.190,000.
The court further found that the company for which the deceased was working
would pay a sum of Rs.1,000 per month for 2 years after his death as award for
his meritorious services. As this award was received due to the death of the
deceased, the court deducted this amount from the total compensation of
Rs.190,000, making the amount payable as Rs.166,000.
The court made a further deduction of 10% as the plaintiffs were getting the
total compensation in lump sum. Hence, the plaintiffs finally received
Rs.149,400 for the pecuniary loss caused to them due to Narayan Shetty’s
death.
a) Multiplier method
It is also known as Lord Wright’s formula and is mostly used. Under this
method, firstly the loss of annual dependency amount from the deceased’s
income is ascertained, out of which the amount the victim would have spent
on him is deducted. Lump sum compensation is awarded to the dependants
to cover the damage for this loss of income. The lump sum amount is
calculated by applying a proper multiplier to the amount of one year’s
dependency. This multiplier is known as year’s purchase factor.
b) Nance’s method
This method was evolved by Viscount Simon K. C. and it also starts with the
basic dependency amount. Even though this amount is required to be
multiplied by the figure of expected useful life of the deceased, Viscount
Simon had rightly added that there should be a proper discounting of this
amount on two grounds:
i. That the sum was spread over a period of years and so equivalent
amount in the form of lump sum should be worked out, and
ii. Further allowance must be made because of uncertainties due to
premature death, remarriage of widow, acceleration, etc.
3. Property damage
4. Punitive damages
The point to be noted is that the punitive damages are specifically excluded
from the scope of cover under liability insurance policies.
Example
A drug manufacturer produced defective drugs and placed them in the market
without sufficient clinical trials. A physician prescribed that medicine to his
patient, without attempting to try out alternative treatments.
The patient faced severe health problems due to the drug and sued the
company in the court for damages. The court decided that the drug
manufacturer acted recklessly and thus levied a heavy fine against the company
to be awarded to the individual who faced the damages. The physician was also
required to pay some compensation to that person for his negligence.
5. Structured settlements
Example
At the age of 32, David was seriously injured in a car accident when another car
hit his car. He acquired a severe spinal cord injury due to this accident which
made him permanently unable to work. The other driver was insured and thus
his insurance company defended the claim on his behalf.
IC-74 LIABILITY INSURANCE 39
CHAPTER 2 DAMAGES AND DEFENCES
The insurance company paid an immediate lump sum of Rs.50,000 for meeting
the medical expenses. The insurance company further purchased a personal
injury annuity, which will pay Rs.20,000 per month to David for as long as he
lives to meet his monthly expenses.
6. Defences
It means that “to him who is willing there can be no injury”. If a person
voluntarily consents to run a risk, he has no right of action against
anyone for injuries suffered as result of his actions.
Example
b) Inevitable accident
Example
Uday was driving his car, when his car brake fails and he hits a pedestrian
crossing the road. The servicing of his car was done just a week ago, so this
event was unforeseen for Uday. He was not negligent and the accident which
happened was inevitable.
This has been defined as an event due to natural causes directly and
exclusively without human intervention. Examples of acts of God are storms,
earthquake, lightening etc.
d) Emergency
e) Contributory negligence
If the plaintiff suffers injury or damages partly due to his own fault and
partly due to the fault of the defendant, the damages will be reduced
according to the blame attaching to the plaintiff.
Example
f) Contracting out
Example
Disclaimer notices in the lift: "Passengers should travel at their own risk and
responsibility."
Disclaimer notices in trains: “All baggage remains under the sole responsibility
of passengers. The authority shall not be responsible for any loss or damage to
such luggage. Passengers shall be liable for any injury, damage or loss caused
due to failing to take reasonable care of luggage”.
g) Limitation
Example
If damages are awarded to an injured person for bodily injuries on the basis of
medical evidence, a fresh action cannot be brought on the basis of subsequent
medical opinion establishing that injuries suffered were more serious than
originally agreed.
Test Yourself 4
Which of the following does not fall into the category of pecuniary damages?
This Act provides that, if the death of a person is caused by wrongful act,
neglect or default, an action for damages is maintainable by the legal heirs of
the deceased against the party causing injury. Damages are awarded by the
court in proportion to the financial loss resulting from such death to the
survivors.
The Act abolished the long standing rule of common law according to which a
civil action for damages ends with the death of any of the person, on whom or
by whom the tort was committed.
The principle of strict liability was laid down in the English case Rylands v.
Fletcher (1868). This principle made an important departure from the law of
negligence prevailing at that time.
Case study
The judge then introduced a new principle of law, which was subsequently
confirmed by the House of Lords, and held Rylands liable. The judge observed:
"We think that the true rule of law is that the person who for his own purposes
brings on his land, and collects and keeps there anything likely to do mischief if
it escapes, must keep it in at his peril, and, if he does not do so, he is prima
facie answerable for all the damage which is the natural consequence of its
escape. The neighbour who has brought something on to his own property
(which was not naturally there) harmless to others so long as it is confined to his
own property, but which he knows will be mischievous if it gets on to his
neighbour’s, should be obliged to make good the damage which ensues if he
does not succeed in confining it to his own property."
i. There must be an escape from the land, something likely to cause harm.
ii. A non-natural use of that land. This means that something must be
brought on to the land "which was not naturally there."
In the above case, water was brought on to the land but the rule would not have
applied if escape of water was from a natural lake on the land.
Case study
In Mukesh Textile Mills (P) Ltd. v. H.R. Subramanya Sastry (1987) case, the
plaintiff owned large tracts of land adjacent to the defendant’s sugar factory.
The land was cultivated by a water channel which ran between the sugar
factory and the plaintiff’s land.
Rats had burrowed holes into the earthen embankment of the tank used for
storage of molasses, a by-product of sugar manufacture. As a result, the tank
collapsed and released a large quantity of molasses into the land of the plaintiff
through the water channel, causing damage to the standing crops of paddy and
sugarcane.
"The liability of the appellant rests at least on two principles. One is that the
appellant, who had stored large quantities of molasses in a mud tank, had the
duty to take reasonable care in the matter of maintaining state of good repair
of the embankments of the tank. The duty, no doubt, is not simply to act
carefully but not to cause injury carelessly.
Both from the foreseeability test and of initial causation, it must be held that
the appellant is liable. Appellant could reasonably have foreseen that damage
was likely to be caused if there was a breach of the tank. There was clearly a
duty-situation and appellant had omitted to do what a reasonable man, in those
circumstances, would have done or would not have omitted to do.
ii. Does the rule in Rylands v. Fletcher apply or is there any other principle
on which the liability can be established?
44 IC-74 LIABILITY INSURANCE
VARIOUS LAWS AND STATUTES RELEVANT TO LIABILITY CHAPTER 2
Case study
The Court held in the case of Shri Ram Foods and Fertilisers Industries that:
"The rule in Rylands v. Fletcher evolved in the 19th Century at a time when all
these developments of science and technology had not taken place. Thus, it
cannot afford any guidance in evolving any standard of liability consistent with
the constitutional norms and the needs of the present day economy and social
structure. We have to evolve new principles and lay down new norms which
would adequately deal with the new problems which arise in a highly
industrialised economy. We cannot allow judicial thinking to be constricted by
reference to the law as it prevails in England or for the matter of that in any
other foreign country. We have to build up our own jurisprudence".
The Court, therefore, evolved a new principle of liability which English Courts
have not done.
The Court further mentioned: “We would also like to point out that the
measure of compensation in the kind of cases referred to in the preceding
paragraph must be co-related to the magnitude and capacity of the enterprise
because such compensation must have a deterrent effect. The larger and more
prosperous the enterprise, the greater must be the amount of compensation
payable by it for the harm caused on account of the accident in the carrying on
of the hazardous or inherently dangerous activity by the enterprise".
4. Law of limitation
All legal liability case has a timeline for filing a claim. Unless otherwise
specifically provided the limits are as per the statute of limitation, which is
presently three years for India. The European Union has a limit of six years.
So claimants filing for compensation must do so within this period from the date
of loss. Thereafter the case becomes time-barred.
It is to be noted that courts take a sympathetic view of such delays in filing and
very often courts permit applications for condoning delay.
In another order (relating to the same case of Shriram Food and Fertilisers Ltd.)
dated February 17, 1986, the Supreme Court permitted Shriram to reopen their
caustic chlorine plant, laying down certain conditions required to be strictly and
scrupulously followed by them.
Case study
Condition (5) in the case of Shriram Food and Fertilisers Ltd. reads as follows:
"The Management of Shriram will obtain an undertaking from the Chairman and
Managing Director of the Delhi Cloth Mills Ltd., which is the owner of the
various units of Shriram, as also from the officer or officers who are in
actual management of the caustic chlorine plant, that in case there is any
escape of chlorine gas resulting in death or injury to the workmen or to the
people living in the vicinity, they will be personally responsible for payment of
compensation for such death or injury and such undertaking shall be filed in
court within one week from today."
Subsequently, the Supreme Court modified the above order as follows:
Thus, the civil liability of corporation for torts also attached to directors and
other officers of the Corporation, who are thus subject to personal civil liability
for corporate torts. This has resulted in the need for Directors and Officers
liability policy.
46 IC-74 LIABILITY INSURANCE
VARIOUS LAWS AND STATUTES RELEVANT TO LIABILITY CHAPTER 2
6. Statutory Liability
The Public Liability Insurance Act, 1991 imposes ‘no-fault’ liability in respect
of handling of hazardous substances as specified in the Act. (This Act is
dealt in detail with in a subsequent chapter).
Definition
a) Any goods for a consideration and includes any user of such goods, but
does not include a person who obtains such goods for resale or for any
commercial purpose such as retailer, or
b) Hires or avails of any services for a consideration and includes
beneficiary of such services.
8. ‘Trader’ in relation to any goods means a person who sells or distributes any
goods for sale and includes the manufacturer thereof, and when such goods
are sold or distributed in package form, includes the packer thereof.
a) Redressal agencies
For the purposes of the Act, consumer disputes redressal agencies are
established as follows:
i. District forum
The final authority established under the Act is the National Commission. It
also has original appellate as well as supervisory jurisdiction. It would hear
the appeals from the order passed by the State commission and in its
original jurisdiction it will entertain disputes, where goods/services and
the compensation claimed exceeds Rs.100 lakhs. An appeal shall lie within
30 days from the order of the National Commission to Supreme Court.
All the three redressal agencies have the powers of a Civil Court.
The procedure for filing a complaint is very simple in all the above three
redressal agencies. There is no fee for filing a complaint or filing an appeal
whether it is before the State Commission or the National Commission. The
complaint can be filed by the complainant himself or by his authorised
agent. It can be filed personally or can even be sent by post. It may be
noted that no advocate is necessary for the purpose of filing a complaint.
The time limit for filing a complaint is two years from the date of incident
causing loss.
If the forum is satisfied that the goods complained against suffer from any
of the defects specified in the complaint or if any of the allegations
contained in the complaint about the services are proved, the forum can
issue an order directing the opposite party to do one or more of the
following things namely,
This Act applies to insurance services also as they are included in the
definition of ‘service’ under the Act. The Consumer Protection Act also has
relevance to products liability insurances and professional indemnities.
Cases may be filed in the consumer forum for injuries etc. caused by
defective products, medical negligence etc.
8. Other statutes
The other statutes which have a bearing on public liability insurance are as
follows:
The Central and State Pollution Control Boards are established under this
Act. The function of the Board, inter alia, is to control sewage and industrial
effluent discharge. The consent of the Board is required to establish any
industry which is likely to discharge sewage or trade effluent.
This Act is structured along the lines of the Water Act but in relation to air
pollution.
The 1987 amendment to the Act has introduced special provisions relating to
hazardous activities. For example, the ‘Occupier’ of a factory involving
a hazardous process shall disclose in the prescribed manner all
information regarding the hazards and the measures to overcome such
hazards to the workers, the Chief Inspector of Factories, the local
authority and the general public in the vicinity.
Have fixed certain responsibilities on the consignor, the transporter and also
the driver for the safe carriage of hazardous goods.
Test Yourself 5
Which of the following cases resulted in the need for Directors and Officers
liability policy?
I. Rylands v. Fletcher
II. M.C. Mehta V. Union of India
III. Mukesh Textile Mills (P) Ltd. v. H.R. Subramanya Sastry
IV. Mulchand Nemichand v. Basdeo Ramsarup
Summary
a) Tort is a civil wrong arising out of a breach of some duty leading to civil
cause of action and for which damages are recoverable. It can take the form
of libel, slander or assault.
c) Tort also varies from breach of contract because in tort, there is no privity
or connection between the parties as there is in a contract.
l) The principle of strict liability was laid down in Rylands v. Fletcher case
where a new principle of negligence was introduced. According to it, a
person will be liable to pay damages if there is an escape from his land,
something which is likely to cause harm and there is a non-natural use of
that land.
52 IC-74 LIABILITY INSURANCE
SUMMARY CHAPTER 2
m) The law of absolute liability and directors’ and officers’ personal liability
principles were introduced in the case of Shriram Food and Fertilisers Ltd.
n) The Consumer Protection Act, 1986 was passed to provide for better
protection of the interest of consumers and for the settlement of
consumer’s disputes.
o) There are many other statutes introduced by the Government which have an
impact on public liability insurance such as The Environment (Protection)
Act, 1986 and The Central Motor Vehicles Rules, 1989 and 1993.
Answer 1
Answer 2
The Donoghue v. Stevenson case laid down the basic principle for deciding duty
of care such as when does the duty of care arise and to whom is the duty of
care owned.
Answer 3
A person is responsible for all the reasonable foreseeable consequences from his
negligence.
Answer 4
Pain and suffering does not fall into the category of pecuniary damages because
it is difficult to measure it.
Answer 5
The M.C. Mehta V. Union of India case in 1986 had laid down the principle of
attaching the civil liability of corporation for torts to directors and other
officers of the Corporation, which has resulted in the need for Directors and
Officers liability policy.
Self-Examination Questions
Question 1
Question 2
Question 3
Which of the following conditions is not required to take a civil action for
negligence?
Question 4
The act or omission which unlawfully interferes with another person’s use or
enjoyment of land or of some right in connection with it is ______________.
I. Negligence
II. Nuisance
III. Crime
IV. Breach of duty
Question 5
I. Claimant
II. Appellant
III. Civil action
IV. Breach of contract
Question 6
Question 7
Which of the following damages are not covered under the scope of a liability
insurance policy?
I. Compensatory damages
II. Structured settlement
III. Punitive damages
IV. Property damages
Answer 1
A contract usually involves a connection between the two parties only, whereas
in tort, no such connection is required.
Answer 2
Answer 3
Answer 4
Answer 5
Answer 6
Answer 7
Punitive damages are specifically excluded from the scope of coverage under a
liability insurance policy.
LIABILITY UNDERWRITING
Chapter Introduction
Learning Outcomes
To assess the risk properly, underwriters must be aware of the specific liability
risks that are associated with the industries, professionals or individuals. They
should also have knowledge about the various liability laws which are applicable
for their clients. They are required to evaluate past judgments and settlements
for risk management by evaluating frequency and severity of the losses. They
should also update themselves regularly about the current development in the
court judgements for related liability cases. This will help them to price the risk
properly, especially for high risk applicants.
There are many more factors which should be taken into consideration by
underwriters while accepting the risk and pricing it accordingly. We will discuss
all these in detail in this chapter.
The first stage of risk evaluation for the liability underwriter is assessing the
physical hazard. Underwriter normally assesses the physical risk on the basis of
information furnished by the insured in the signed proposal form and by way of
risk survey.
a) Proposal form
This should include all the operations of the insured within India and also
outside India. Specific information about the activities in USA and Canada
must also be obtained. It should be noted that the claims arising out of the
business described in the proposal form shall only be the subject of
indemnity.
Necessary clarification from the proposer must be obtained if there had been
any such instances. Where explanation given by the proposer is inadequate,
it is necessary to obtain information directly from the previous insurers.
Example
Secondly, they may also check whether a law firm is involved mainly in routine
cases or in complex cases. Higher chances of dispute and resulting claims arise
in the case of a law firm handling complex cases than a firm handling routine
cases. Hence, all this information can provide a better estimate of the physical
risk involved.
b) Risk inspection
Example
Risk engineers, while performing surveys for a business under liability insurance,
are required to mainly look into third party issues which may result in claims.
For example, in a construction business, the risk engineers will be mainly asked
to consider those risks in a project that could create third party liabilities, and
thus claims. Hence, they will mainly pay attention towards safety of the third
parties and their property, and measures taken by the business for their safety
while preparing their inspection reports.
a) Jurisdiction
Example
b) Litigious societies
A society is said to litigious when the members of the society are well
informed about their legal rights and the courts are very sympathetic to the
claimant.
Example
In today’s litigious societies, people are well aware about their legal rights
which have resulted in large lawsuits even for small mishaps. For example,
earlier parents were not much bothered about how their kids were treated in
the school and had full faith in the teachers and the education system.
However, nowadays the scenario has changed. If a teacher takes some students
on a field trip and a student is injured there, parents of that student can sue
that teacher for negligence and the teacher might have to pay for the damages.
Therefore, insurance companies have to consider these risks as this has given
rise to claims.
c) Class actions
In class action suits, all potential claimants with the same interest and cause
band together to sue in the court. Representative cases are selected and used
to establish the principle of liability. Once this is done, the remaining claimants
do not have to prove causation or liability.
Example
A mobile company had set up many towers illegally in a residential area for
increasing their network coverage. The illegal setup resulted in harm to the
environment and people living there in the form of cancer and other health
ailments. Therefore, all the people who suffered in that area sued together
against the mobile company in the court as a class action.
Test Yourself 1
Liability policies are normally termed as ‘long tail’ policies. This means there is
time gap between the creation of liability, to the discovery of the liability, and
up to the settlement or discharge of the liability.
If the liability has been ‘incurred but not reported’ (IBNR) between its creation
and discovery, then it indicates that the liability has been latent in this period.
Risks with high level of latency are difficult to evaluate. To minimise the known
latency exposure, the underwriter would choose a ‘trigger’ in the operative
clause, which in turn acts as the basis on which the policy will operate.
ii. Occurrence: This means that a loss incurred during policy period are
covered by the insurance contract, no matter when the claim is actually
reported. It is commonly used in public and product liability insurance.
iii. Manifestation: The manifestation trigger means that the policy will
respond to an event that becomes manifest to the insured during the
period of insurance. This trigger is seldom used by insurers.
iv. Losses discovered: Under this trigger losses that are discovered during
period of insurance are covered. Although not used by direct insurers,
this is common form in the reinsurance market.
v. Claims made: With this trigger, the policy indemnifies the insured
against claims that are made against them during the period of insurance
provided that the injury or damage must have also occurred during that
period. Insurers normally use this trigger in most of the policies cases.
This enables the insurer to limit their exposure to latency losses because
at the end of the policy period insurer is certain that no further claim
can be made against that policy.
Claims made policy can also be extended to cover losses which occurred before
the inception of the policy. This is termed as ‘Retroactive cover’ and the period
since the policy will respond is known as ‘Retroactive date’. In that case, the
injury/damage occurred after the retroactive date provided in the policy but
before the end of the policy period are considered.
The major difference between the claims made and occurrence is thus that
occurrence contracts are forward looking whereas claims made contract are
retrospective.
Example
Bell & Co., which is in the business of manufacturing electricity goods, had
purchased a product liability insurance policy on July 1, 2012 for one year which
was based on the claims made. The retroactive date of the policy was January 1,
2012.
A customer made a claim against the company on December 15, 2012 for the
injuries occurred on May 10, 2012 due to the goods that were purchased by the
company. The occurrence of the injury is after the retroactive active, i.e.
January 1, 2012 but before the end of the policy period and the claim was also
made during the policy period, so the insurance company will cover the
damages.
On the other hand, if the claim was made by the customer on the same date,
i.e. December 15, 2012 but for the injuries occurred on November 30, 2012,
then the insurance company would not cover the losses as the damages
occurred before the retroactive date.
i. Advantages
ii. Disadvantages
Insurance companies who accepted the risk many years ago may no
longer be in business.
The limits on occurrence policies are likely to be inadequate if a
claim is made many years after a policy has expired.
Example
Krishna owns a farmhouse in Kerala that has a number of coconut trees. He had
taken a public liability insurance policy to cover injury or damages caused to the
public by the trees. The policy was occurrence-based and the policy period was
from July 1, 2012 to June 30, 2012.
i. Advantages
ii. Disadvantages
It is common under all liability policies for insurers to provide cover against
legal expenses. Depending on the frequency of claims and the legal expenses in
the given jurisdiction, underwriter offers two different bases for coverage;
In the first case claimant’s costs awarded against the defendant and the cost
incurred in the defending the action by the insured are payable over and above
the limits of liability in case the award of damages exhaust the limit of liability.
Example
Ram & Sons Ltd., engaged in manufacturing and selling of sports goods,
purchased a product liability insurance policy of Rs.500,000, which provides
coverage for defence costs within the insurance limit of liability.
One of the customers of Ram & Sons Ltd. Sued the company for the severe
injuries caused due to a defective skating product. The damages awarded were
Rs.450,000 and the costs incurred in defending the case by Ram & Sons were
150,000. Thus, the total damages were Rs.600,000.
The insurance policy provided coverage for defence costs within limits of
liability, therefore defence cost will be covered only up to the balanced limit
available i.e. Rs.50,000 (Rs.500,000 – Rs.450,000) and the balance defence costs
of Rs.100,000 will have to be borne by Ram & Sons Ltd.
However, if Ram & Sons Ltd. would have taken a product liability insurance
policy covering defence costs in addition to the limit of liability, then the entire
costs of Rs.600,000 would have been covered by the insurance company.
An admitted policy is the one which will respond to and defend claims in a given
territory or group of territories. A non-admitted policy is the one issued in the
insured’s territory and will not respond to or defend claims in another territory.
All the claims under non-admitted policies would be dealt by the insured locally
and the insurer’s involvement in the claims handling will be at arm’s length.
The legal liability will also be determined in accordance with local laws. These
facts should be known to the insured at the policy inception stage.
In some of the regulated markets the terms of coverage and/or the indemnity
provided is restrictive. This coverage may not be sufficient to the insured’s
needs. In such situation, the insured arranges additional cover normally in their
home territory to top up the local policies. These policies are known as DIC/DIL
policies. DIC/DIL policies can be issued on either an admitted basis or non-
admitted basis.
It is pertinent to note that that at times the local policies has cover that is
wider than the master policy. In such situation either ‘reverse DIC’ or ‘follow-
form’ is used. In the first case, the master policy is endorsed to extend the
wider cover for that specific territory. In the second case, the difference in
conditions is deleted from the master policy i.e. the master policy follows the
form of the local policy.
Example
Jayesh has a limestone mineral factory in the Bhuj region of Gujarat which is
very prone to earthquakes. He has taken a standard liability insurance policy for
covering damages. But, the event of an earthquake was specifically excluded
from it. Hence, for covering the damages to his business in the event of an
earthquake, he has taken a DIC insurance coverage, which helps to fill the gap
in the master policy.
5. Umbrella policies
Umbrella policies are akin to DIC/DIL policies with the difference that it covers
more than one class of business. It has its origin in USA and was designed to
provide uniform standard of cover amongst various states having different
regulations.
The umbrella policy operates in two parts. The first part is follow-form DIL
cover over the schedule of underlying policies. The second part of an umbrella
policy is a broad-form general liability cover that stands alone and operates on
DIC basis around the first part of the umbrella policy.
Example
One day, she hits another car on the highway due to which a woman and her
child were severely injured. The other party sued Jennifer in the court for the
damages and after a few months of litigation, the suit was settled for
Rs.500,000. The legal expenses incurred by Jennifer in defending the case were
about Rs.75,000. Her primary insurance policy paid up to the indemnity limit of
Rs.200,000.
Luckily, Jennifer had an umbrella policy which paid the additional damages of
Rs.375,000, otherwise she would have been in a bad position financially.
Test Yourself 2
Which of the following triggers is used to cover the loss by the insurance
contract in the same year in which it is incurred irrespective of when the claim
is actually reported?
I. Causation trigger
II. Occurrence trigger
III. Claims made trigger
IV. Losses discovered trigger
The three important factors for determining the combined operating ratios are:
The first two ratios are easy to be ascertained. But, the determination of claims
cost and IBNR poses a lot of challenges to the underwriter.
Provision for IBNR is determined on a portfolios basis with the input from
actuaries and would form part of the rating. The following factors are generally
taken into account:
The past claims statistics for a particular portfolio from a groups of related risks
can be used in analysing the claims cost. Claims cost need to be analysed with
specific reference to different types of losses such as:
Frequency losses
Severity losses
Latency losses, and
Catastrophe losses
In liability lines the rating media is fixed on the level of business activity which
is appropriate for the portfolio. By using the economic measures, underwriters
try to ensure that over a period of time the variables with which the
underwriter is dealing remain pari passu with each other. Nevertheless, the
rates need to be reviewed regularly to align the same with the social economic
changes.
Example
A liability underwriter will take into account the annual wages for rating and
pricing the premium for the employer’s liability policies. Similarly, for the
public and products liability policies, turnover will be considered and for
professional indemnity policies (e.g. lawyers, architects etc.) fees/revenues will
be taken into account.
Often the underwriter is also faced with the problem due to the volatility of
these economic measures. In such circumstances, underwriter resort to physical
measures such as number of beds in a hospital, the number of seats in a cinema
hall, the number of rooms in a hotel etc.
The pricing of liability proposals also depends upon the indemnity limits.
Underwriters often limit their exposure by applying a limit to any occurrence,
aggregate limit of all occurrences during the period of insurance or by a
combination of the both. These limits vary with the class of risks and the
geographical location of the insured. For risks where standard limits are
inadequate, underwriters offer higher limits at additional premium. Such
additional premium would vary depending on the jurisdiction e.g. jurisdiction of
USA/ Canada attracts higher loading.
a) Co-insurance
In liability business, coinsurance (where two or more insurers share the risk)
method or risk sharing is not common on the primary layer. The complexity
in dealing with the claims and the possible differences of opinion makes this
method of risk sharing less attractive. However this method is often
preferred in layered program.
b) Facultative reinsurance
Example
Now, if a fire breaks out resulting in loss of say Rs.8,000,000, then the primary
insurance company will pay 80% of the damages, i.e. 6,400,000 and reinsurance
will share the remaining 20% damages of Rs.1,600,000.
c) Layered program
In layered programs, one insurer takes the primary layer and balance
indemnity is provided in layers ‘in excess of’ or ‘over’ the primary
insurance. The indemnity under various layers can be covered by individual
insurer or co-shared by a group of insurers. An insurer participating in a
layer would assume liability in excess of the primary layer or the primary
plus underlying excess of loss layer. The monetary value at the bottom of
the layer that this insurer is writing is referred as the ‘attachment point’.
The excess of loss layers normally uses the follow-form of primary layer.
Test Yourself 3
An underwriter, while developing the pricing strategy for the company, has to
ensure that the ______________________ is within 100% of profitability of each
and every portfolio.
Summary
b) The proposal form includes information such as name and address of the
proposer, business of the proposer, claims history, insurance history,
estimated annual turnover, period of insurance and limit of liability.
e) Claims made policy covers all the losses occurred during the policy period,
provided the claims are also reported during the policy period whereas
occurrence policy covers all the losses occurred during the period
irrespective of when the claim is actually reported.
g) Umbrella policies are akin to DIC/DIL policies with the difference that it
covers more than one class of business.
Answer 1
The underwriting process does not involve collecting the premium. However, it
involves fixing the premium to commensurate with the hazard/exposure.
Answer 2
Occurrence trigger is used to cover the loss by the insurance contract in the
same year in which it is incurred irrespective of when the claim is actually
reported.
Answer 3
An underwriter, while developing the pricing strategy for the company, has to
ensure that the net combined operating ratio is within 100% of profitability of
each and every portfolio.
Self-Examination Questions
Question 1
Question 2
A ________________ is a form of lawsuit where a large group of people
collectively file a claim to the court for the same interest.
I. Class action
II. Litigious action
III. Jurisdiction action
IV. Society action
76 IC-74 LIABILITY INSURANCE
PRACTICE QUESTIONS AND ANSWERS CHAPTER 3
Question 3
The policies which provide additional coverage and cover more than one class of
business are known as ___________________.
Question 4
Question 5
Which of the following methods is used as a mean of risk management and risk
sharing where the indemnity/limit of liability required by a large client exceeds
the capacity of a single insurer?
I. Admitted method
II. Defence method
III. Facultative method
IV. Claims paid method
Question 6
Which of the following ratios is not used to calculate the net combined
operating ratio for determining the profitability of an insurance portfolio?
I. Expense ratio
II. Premium received ratio
III. Commission ratio
IV. Incurred claims ratio
Answer 1
A full description of all the operations and activities of the proposer within India
and also outside India is required to be filled in the proposal form.
Answer 2
A class action is a form of lawsuit where a large group of people collectively file
a claim to the court for the same interest.
Answer 3
The policies which provide additional coverage and cover more than one class of
business are known as umbrella policies.
Answer 4
The major difference between claims made and occurrence policy is that claims
made contracts are retrospective whereas occurrence is forward looking.
Answer 5
Answer 6
STATUTORY LIABILITY
Chapter Introduction
In this chapter, we will look at the various laws creating compulsory liability on
organisations and businesses. The law lays down the nature of the liability and
where the responsibility will lie. The law also lays down the procedure for
claiming and the extent of the liability.
1. The various provisions of Public Liability Insurance Act, 1991 and the
features of Compulsory Public Liability Insurance Policy, and National
Environment Tribunal Act 1995
2. The various provisions of Workmen’s Compensation Act, 1923 and the
features of Employers’ Liability Insurance Policy and
3. The features of Carriers Legal Liability Insurance Policy
4. The features of Multimodal Transport Operator Liability Insurance Policy
Learning Outcomes
a) The liability arises by a specific legislation like say for example Public
Liability Act, Workmens’ Compensation Act etc.
b) The compensation payable is fixed by amount or by a structured
formula. It is thus limited and can be quantified.
c) The claim for compensation is on an “occurrence basis”. This means that
the cause for the claim and the liability limit arises on the date of event
causing loss.
Example
A workman is exposed to chemicals which over a period of time results in his
illness and subsequent permanent disablement. The disablement may be
certified after he has left his employment but its cause has been the exposure
at his workplace. Thus he can claim from his employer for disability under the
workmens’ compensation act during the years of his employment, even though
he is no longer in employment.
d) The authority for hearing such cases and the procedures for claiming are
specified in the legislation. They can be termed as fast-track courts. This
results in speedier settlements.
The relevant provisions of the Public Liability Insurance Act, 1991 and the Rules
framed under it are examined first and against this background, the insurance
policy is explained.
1. Preamble
The Preamble states that it is, "An Act to provide for public liability insurance
for the purpose of providing immediate relief to the persons affected by
accident occurring while handling any hazardous substance and for matters
connected therewith or incidental thereto".
Note: The purpose of this law is for providing immediate relief to persons
affected by use of hazardous materials. It does not apply to employees of the
organisation handling hazardous materials.
The Act commences with various definitions. Some of these definitions are
incorporated in the insurance policy and are dealt with later.
3. No fault liability
Section 3 provides that where death or injury to any person (other than a
workman) or damage to any property has resulted from an accident, the owner
shall be liable to give such relief as is specified in the Schedule of the Act.
In any claim for relief, the claimant shall not be required to establish that the
death, injury or damage was due to any wrongful act, neglect or default of any
person (This is known as ‘No-fault’ liability).
Table 4.1
b) However, if the owner, liable to give claim for relief, is also liable to pay
compensation under any other law, the amount of such compensation
shall be reduced by the amount of relief paid under this Act.
Note: The amount of compensation under this law is very negligible, but the
claimant is not debarred from claiming under other forums. In case a suit is
filed under common law, the court award in the suit will deduct the amount
paid under the Public Liability Act.
6. Compulsory insurance
The insurance policy has to be taken for an amount not less than the amount of
the paid-up capital of the undertaking handling any hazardous substance and
owned or controlled by the owner.
If the owner is not a company, paid-up capital means the market value of all
assets and stocks of the undertaking on the date of contract of insurance.
The liability of the insurer shall not exceed the limit of indemnity specified in
the Policy.
Rule 10 framed under the Act provides that the maximum aggregate liability of
the insurer to pay relief under an award to the several claimants arising out of
an accident shall not exceed rupees five crore and in case of more than one
accident during the currency of the policy or one year, whichever is less, shall
not exceed rupees fifteen crores in the aggregate.
Rule 10 provides that any award for relief which exceeds the amount payable
under the insurance policy shall be met from the relief fund and in case the
award exceeds the total of the amount of insurance and the Relief Fund, the
amount which falls short of such sum payable shall be met by the owner.
Note: Insurance for this liability is compulsory and is to the extent of the paid-
up capital of a limited Company. However the extent of the insurer’s liability is
a maximum of Rs. 5 crores for Any One Accident (AOA) and Rs. 15 crores for Any
One Year (AOY). It is important to note that the Act lays down an AOY limit of
Rs. 50 crores whereas the Rules framed for the Act lays down the insurer’s limit
as a maximum Rs. 15 crores AOY.
8. Exemptions
9. Claims procedure
The Collector, having jurisdiction over the area in which the accident occurs,
is empowered to hold an enquiry into any claim under the Act and to make an
award of relief which appears to him to be just and to specify the person to
whom the amount of relief shall be paid.
An application for claim for relief may be made in prescribed form (within 5
years of the occurrence of the accident) by:
The Collector shall verify the occurrence of any accident in his jurisdiction
when it comes to his notice and cause publicity in order to invite application for
claim for relief.
On receipt of an application, the Collector who has the powers of a Civil Court
shall, after giving notice of the application to the Owner and after giving the
parties an opportunity of being heard, hold an inquiry into the claim and may
make an award determining the amount of relief which appears to him to be
just and specifying the person to whom such amount of relief shall be paid.
The Collector shall arrange to deliver copies of the award to the parties
concerned expeditiously and in any case within a period of fifteen days from the
date of the award.
a) The insurer, who is required to pay any amount in terms of such award shall,
within a period of thirty days of the date of announcement of the award
deposit that amount in such manner as the Collector may direct.
b) The Collector shall arrange to pay from the Relief Fund, in terms of such
award and in accordance with the scheme made under the Act, to the
claimants such amount in such manner as may be specified in that scheme.
Note: The authority to hear the claims and to decide the compensations is the
Collector/revenue official of the district where the incident occurred.
Test Yourself 1
I. Rs. 25,000
II. Rs. 50,000
III. Rs. 75,000
IV. Rs. 1,00,000
Now that we have understood the relevant provisions of the Public Liability
Insurance Act, 1991 and the rules framed under it, let us now learn about
compulsory public liability insurance policy.
1. Definitions
The definitions are dealt with first for a better understanding of the Operative
Clause. Definitions (b) to (e) are as per the Act.
Definitions
a) “Act" unless otherwise specifically mentioned shall mean the Public Liability
Insurance Act, 1991 as amended from time to time.
d) "Hazardous substance" and group means the items listed out and grouped
under Public Liability Insurance Act, 1991 and the Rules framed thereunder.
e) "Owner" means a person who owns, or has control over handling any
hazardous substance at the time of accident and includes:
i. In the case of a firm, any of its partners;
ii. In the case of an association, any of its members, and,
iii. In the case of a company, any of its directors, managers, secretaries or
other officers who is directly in charge of, and is responsible to the
company for the conduct of the business of the company
2. Operative clause
a) First part
b) Second part
The second part of the clause provides that the insurance company will
indemnify the insured owner against the statutory liability arising out of
accidents occurring during the currency of the policy due to handling
hazardous substances as provided for in the Public Liability Insurance Act
and the Rules framed thereunder; and subject to the terms, exceptions and
conditions of the policy.
86 IC-74 LIABILITY INSURANCE
COMPULSORY PUBLIC LIABILITY INSURANCE POLICY CHAPTER 4
3. Exclusions
Some of the policy exclusiona and the reasons for such exclusions are given
below:
The words ‘wilful’ or ‘intentional’ are important and to pay claims in such
cases would be against public policy.
The insured has to declare in the proposal form that all statutory provisions
are complied with. Non-compliance would mean breach of utmost good
faith.
Payment of claims for fines, etc. would be contrary to public policy; so also,
claims for punitive damages which are awarded by a court as punishment.
In other words, the policy pays only in respect of Statutory Liability under
the Act.
Sub-Section (1) provides that the right to claim relief under the Act shall be
in addition to any other right to claim compensation under any other law
(e.g. common law).
Sub-Section (2) provides that, where the owner liable to give claim for relief
under the Act, is also liable to pay compensation under any other law, the
amount of such compensation shall be reduced by the amount of relief paid
under the Act.
Example
Where the third party is able to sustain a claim against the owner on the basis
of negligence and is awarded by a court of law; damages higher than the
amount of relief provided under the Act, the Act policy will indemnify the
owner to the extent provided in the Act. The excess liability will have to be
borne by the owner himself. The owner can avail of a separate Public Liability
Policy.
4. Conditions
a) Notification condition
The insured owner has to give written notice to the insurance company of
any claim made against him or of any event which may give rise to a claim in
the future.
In addition, the insured owner has to give to the insurance company the
copies of notice of applications forwarded by the Collector and provide any
other information required by the insurance company.
The insured owner cannot, on his own admit liability to the third party for
the claim without the consent of the insurance company.
This condition provides that there shall be no liability under the policy for a
claim made after 5 years from the date of accident. This is as per the
provisions of the Act.
The insured owner has to keep record of annual turnover and declare it at
renewal of the policy. The insurance company has a right to call for such
record. Turnover is one of the factors on which premium is charged.
e) Contribution
This is the usual contribution condition, specifying that if there is any other
public liability Insurance policy covering same liability, the Insurance
company shall not be liable to pay more than its rateable proportion of such
liability
This condition provides for cancellation of the policy by the insured owner
by 30 days written notice. Refund of premium is made according to short
period scale subject to there being no claim under the policy.
If liability for the claim is disclaimed by the insurance company, the insured
owner has to file a civil suit in a court of law within 12 months from the
date of such disclaimer; otherwise the claim becomes ‘time-barred’ and
cannot be recovered or made the subject matter of any suit.
i) Fraudulent claims
According to this condition the company shall not pay any claim (a) if it is
fraudulent or (b) there has been non-disclosure of material facts.
Any word or expression to which a specific meaning has been given in the
Act or the Rules or the Policy or the Schedule, shall have the same meaning
wherever the word or expression occurs in the policy.
k) Disputes resolution
5. Premium
The premium is based on the Limit of Indemnity ‘any one accident’ (AOA) and
the turnover. The premium rates were based on a market agreement entered
into by the four public sector insurers when the Law came into place. Currently
insurers are charging premium as per the rating guidelines filed by them with
Indian regulator.
6. Proposal Form
The Act imposes ‘no - fault’ liability in respect of hazardous substance as in the
case of PLI Act. The compensation is payable under all or any of the heads
specified in the Schedule to the Act as follows:
a) Death
b) Permanent, temporary, total or partial disability or other injury or
sickness
c) Loss of wages due to total or partial disability or permanent or
temporary disability
d) Medical expenses incurred for treatment of injuries or sickness
e) Damages to private property
f) Expenses incurred by the Government or any local authority in providing
relief, aid and rehabilitation to the affected persons
g) Expenses incurred by Government for any administrative or legal action
or to cope with any harm or damage, including compensation for
environmental degradation and restoration of the quality of
environment
h) Loss to Government or Local authority arising out of, or connected with,
the activity causing damage
i) Claims on account of any harm, damage or destruction to the fauna
including milch and draught animals and aquatic fauna
j) Claims on account of any harm, damage or destruction to flora including
aquatic flora, crops, vegetables, trees and orchards
k) Claims including cost of restoration on account of any harm or damage
to environment including pollution of soil, air, water, land and eco-
systems
l) Loss and destruction of any property other than private property;
m) Loss of business or employment or both
n) any other claim arising out of or connected with, any activity of handling
of hazardous substance
The Act provides for establishment of Tribunals to deal with claims for
compensation and to make award determining the amount of compensation and
specifying the person to whom it shall be paid.
Test Yourself 2
I. Risks related to war and nuclear risks are covered at standard rates.
II. Risks related to war and nuclear risks are covered with extra premium.
III. Risks related to war and nuclear risks are covered under riders.
IV. Risks related to war and nuclear risks are excluded.
After learning about compulsory public liability insurance policy now we will
learn about employers’ liability insurance policy. But before having a look at the
features of employers’ liability insurance policy, it is essential that we
understand the relevant provisions of Workmen’s Compensation Act, 1923.
1. Employer’s liability
The employers’ legal liability for `employment’ accidents may arise as follows:
The employers’ liability towards the employees for employment accidents arises
out of his negligence; claims for compensation by the employees are sustainable
only if the injury or death is attributed to the negligence of the employer.
In other words, the injured employees have to establish negligence on the part
of the employer. This would mean long drawn out litigation which is a time
consuming and expensive process.
The above discussed object was achieved by the Workmen’s Compensation Act,
1923, (as amended from time to time).
The object of this Act as stated in the Gazette of India 1922 - Part V is as
follows:
The growing complexity of industry in this country, with the increasing use of
machinery and consequent danger to workmen along with the comparative
poverty of the workmen themselves renders it advisable that they should be
protected, as far as possible, from hardship arising out of accidents. A
legislation of this kind helps to reduce the number of accidents in a manner
that cannot be achieved by official inspection, and to mitigate the effect of
accidents by provision for suitable medical treatment, thereby making industry
more attractive to labour and increasing its efficiency. The Act provides for
cheaper and quicker disposal of disputes relating to compensation through
special tribunals than was possible under the civil law.
The Act accepts the principle that when the employer on his own responsibility
and for his own profit sets in motion agencies which create risks for others, he
ought to be responsible for the consequence of his actions. “The Act has its
roots in charity, sympathy and the advancement of socialistic ideas”.
Note:It is important to note that the above three defences are not available
to the employer if the injury results in death.
The Act incorporates the list of injuries which are deemed to result in
permanent total disablement or permanent partial disablement, with
percentage of loss of earning capacity indicated against each.
Case Law 1
In Laxmibai Atmaram v. Bombay Port Trust, 1954, the Bombay High Court held,
where a workman suffers from a heart aliment dies on account of excessive
strain associated with the work, the accident occurred out of employment.
Case Law 2
The following case law will explain the interpretation of courts on the phrase
‘arising out of and in the course of employment’. The facts of N. L. Malhari v.
Post Master General Bangalore in Karnataka High Court were as follows:
Malhari was one of the mazdoors employed by the Posts and Telegraphs
Department for the erection of telephone lines along the railway track. One day
while he was returning with a bucket of water which he had collected from a
stationary engine, he was knocked down by an incoming passenger train and was
killed. Compensation was claimed on his behalf on the ground that the accident
arose out of and in the course of employment.
The Deputy Commissioner held that “in the absence of evidence that one of the
duties of Malhari was to fetch water for cleaning the insulators it could not be
said that the accident arose out of and in the course of employment.” The
Commissioner gave his decision on the additional ground that there was
negligence on the part of Malhari.
“It was Malhari’s duty as a Mazdoor to obey all directions which had any
association with or were necessary for the work for the completion of which he
had been employed, and, one such is obviously a direction to bring water on
being asked to do for cleaning the insulators which had to be fixed on the
telephone lines. The Court took the view that Malhari was indeed asked to bring
water for cleaning the insulators.... the duty to bring water when asked to do
so, was one of the conditions of employment”.
94 IC-74 LIABILITY INSURANCE
WORKMEN’S COMPENSATION ACT, 1923 CHAPTER 4
Case Law 3
In Divisional Personnel Officer, Southern Railway vs. Karthiayani (1987) the facts
were: Drinking water was provided by the Railway for the workmen. The drum
containing water was kept in the railway premises for that purpose. The
deceased workman was at the relevant time within the railway premises after
collecting the tools for proceeding to work spot. The death was caused by
gastro-enteritis which itself was caused by the contaminated water which the
deceased had drunk a few hours before his death. Contamination of the water
was thus the direct immediate and proximate cause of his death. Death arose
out of and in the course of employment. The High Court held that the
Commissioner rightly found that the Railway was liable in terms of Section 3 of
the Act to pay compensation.
Case Law 4
In the course of one such trip the deceased who was in the lorry saw a wild
rabbit passing on the road and he attempted to hit it and in this attempt he fell
down from the lorry and met with a fatal accident.
The commissioner held that the injury to the workman arose by accident out of
and in the course of employment. On appeal, the High Court observed, it was
not part of the duties of a workman to hit a wild rabbit running across the road.
His act does not arise out of the employment. It is not even connected in a
causal manner with the work for which he is employed. The principle is that if
the workman was responsible for an act unconnected with his duties and
that resulted in the injury, the employer is not liable. One of the principles
upon which the right of workman to compensation is held to be justified is
whether the immediate act which led to or resulted in the accident had some
form of causal relation with the performance of these duties and such causal
connection would be held to exist if the immediate act which led to the
accident is not so remote from the sphere of his duties or the performance
thereof as to be regarded as something foreign to them.
IC-74 LIABILITY INSURANCE 95
CHAPTER 4 WORKMEN’S COMPENSATION ACT, 1923
There should be at least a causal relation between the accident and the
duties which he is required to perform by the employer. The act should not be
foreign to the employment. There should be nexus between the injury and the
work that the workman had to perform. The act of hitting a rabbit while the
truck was in motion was wholly unconnected with the duties of workman. The
injury caused by the accident to the respondent cannot be said to arise out of
and in the course of employment.
Case Law 5
On the question when does employment commence and terminate for the
purpose of the Act, the case A.C. Roy & Co. (P) Ltd. v. Taslim and another is
relevant. The facts of the case were as follows:
“Taslim worked as a Khamali and belonged to the reserve pool of the Calcutta
Dock Labour Board. He was booked by the board to work for the appellant A.C.
Roy and Co (P) Ltd., in the vessel S. S. KHAYBAR. He went on foot to attend to
the shift duty via the public road which leads to the gate of the Docks. While on
the public road and just at the gate he was knocked down by a taxi. Taslim
made an application for compensation before the Commissioner Workmen’s
Compensation against the Board and the appellant. Both the appellant and the
Board contested the application on the following grounds:
b) Did the alleged accident arise out of and in the course of employment?
c) While considering the first point the High Court of Calcutta observed:
“An employee works for his master. There is a time and place for his work.
The employment has a spatiotemporal setting. It courses through the
working hours and places of work. The course of employment embraces
working hours and place of work and extends to such time and as may
reasonably be considered to be accessory thereto....... “The employment
commences at the end of his journey from house and stops at the
commencement of his return journey. A personal injury caused to the
employee by accident in a public street or in a public place does not arise
in the course of his employment unless the employee is then rendering
service to his employer or is then discharging some obligation imposed
upon him by the contract of employment”.
The High Court also quoted the observations of the Supreme Court in the
case Saurashtra Salt Mfg. Co. v. Bai Valu Raja and others:
Finally, the Court held “.... the notional extension of location of his
employment cannot be stretched to the gate of the docks. It might extend
to berth Number 27 in which the ship was docked. In any event the ‘gate
was abutting on a public road and that is where the workman met with the
accident. In our opinion, the doctrine which is now well established, that a
workman going to or coming from the place of employment on a public
street is not necessarily doing so in course of his employment, and the
principles as have been laid down in Supreme Court decision in Saurashtra
Salf Mfg. Co., case must be applied. It must be held, therefore, the
workman has not been able to prove that the accident arose out of or in
course of his employment.
Section 3(5) of the Act provides that if the workman chooses to file a suit for
compensation for injury in a Civil Court, his remedy under the W.C. Act is lost
to him. On the other hand, he cannot file a suit in a Civil Court:
7. Amount of compensation
The amounts of compensation, specified in the Act vary for death, permanent
and temporary disablement (total or partial).
a) Death compensation
The age is specified in the first column and the ‘relevant factor’ is specified
in the second column in Schedule IV of the Act. Age considered is completed
years of age of the workman on his last birthday immediately preceding the
date on which the compensation fell due.
Age not more than Factor Age not more than Factor
16 228.58 41 181.37
17 227.49 42 178.49
18 226.38 43 175.54
19 225.22 44 172.52
20 224.00 45 169.44
21 222.71 46 166.29
22 221.37 47 163.07
23 219.35 48 159.80
24 218.47 49 156.47
25 216.91 50 153.09
26 215.28 51 149.57
27 213.57 52 146.20
28 211.79 53 142.68
29 209.92 54 139.13
30 207.98 55 135.56
31 205.95 56 131.95
32 203.85 57 128.33
33 201.66 58 127.71
34 199.40 59 121.05
35 197.06 60 117.41
36 194.64 61 113.77
37 192.14 62 110.14
38 189.56 63 106.52
39 186.91 64 102.93
40 184.17 65 or more 99.37
Note: Where the monthly wages of a workman exceed Rs. 4000/; his monthly
wages for computing compensation for death and permanent disablement is
deemed to be Rs. 4,000/- only). The limit of monthly wages for the purpose of
calculation of compensation has been revised to Rs. 8000/- with effect from
31/05/2010 vide notification Number 1047 dated 31st May 2010.
i. From the date of disablement where such disablement lasts for a period
of 28 days or more, or
ii. After the expiry of a waiting period of three days from the date of
disablement where such disablement lasts for a period of less than 28
days; and thereafter half-monthly during the disablement or during a
period of 5 years, whichever period is shorter.
The beneficiary according to the Act is the workman as defined to the Act and
in the case of death dependants who are defined in the Act.
Where the amount of any lumpsum as compensation has been agreed, whether
by way of redemption of a half-monthly payment or otherwise, a memorandum
has to be sent by the employer to the Commissioner who shall record, after
being satisfied as to its genuineness and that agreement was not obtained by
fraud or undue influence or other improper means (Section 28).
a) Timely payment
b) Provisional payment
If payment is not made within one month the employer would be liable to
pay interest and in case the delay is unjustified, he has to pay further
amount by way of penalty subject to a maximum of 50% of the amount
payable as ordered by the Commissioner.
Case Law 6
In this context, the decision of the Supreme Court in Ved Prakash Gang vs.
Premi Devi and others is important. The Court held that the insurance
companies were liable to meet whatever liability was incurred by the insured
employer under the provisions of the W.C. Act in terms of the compensation
along with interest thereon as imposed by the Commissioner but not the amount
of penalty imposed on the insured employers.
Where the employer (referred to in the Section as Principal) contracts with any
other person (referred to as Contractor) for the execution of the whole or part
of any work which is ordinarily part of the business of the principal, the
principal shall be liable to pay compensation to workmen employed by the
Contractor.
The workman has a right to recover compensation from the Contractor instead
of the Principal (Section 17)
If the insured employer becomes insolvent his rights under the insurance policy
against the insurers are transferred to and vest in the workman who can recover
the claim from the Company subject to the terms and conditions of the policy.
It is to be noted that the law holds employers liable for employment related
accidents and diseases. Insurance is not compulsory. As this is a legal liability
the cause of action is between employee and employer. In the normal course
the insurer cannot be impleaded in such cases. However judgements over the
years have allowed insurers, where insurance is in force; to be jointly
impleaded and to deposit the compensation in court.
The Workmen’s Compensation Act nomenclature has changed to the above with
effect from 18th January 2010. Various changes brought about through this
amendment are as under:
Test Yourself 3
Under the provisions of the Employee’s Compensation Act, 2009, how much is
the minimum amount payable on the death of an employee while performing his
duties?
I. Rs. 1,00,000
II. Rs. 1,20,000
III. Rs. 1,40,000
IV. Rs. 1,60,000
1. Preamble
2. Operative clause
Now this policy witnesseth that if at any time during the period of insurance any
employee in the insured’s immediate service shall sustain personal injury by
accident or disease arising out of and in the course of his employment by the
insured in the business and if the insured shall be liable to pay compensation for
such injury either under:
Provided always that in the event of any change in Law(s) or the substitution of
other legislation. Therefore this policy shall remain in force but the liability of
the insurance company shall be limited to such sum as the insurance company
would have been liable to pay if the Law(s) had remained unaltered.
3. Features
a) The policy is contract of indemnity designed to pay all sums which the
insured is legally liable to pay the employees in his immediate service in
respect of personal injury (which includes death) by accident or disease
‘arising out of and in the course of the employment’.
b) The policy covers the insured’s liability arising under either common
law or the laws set out in the schedule viz. Workmen’s
Compensation Act - 1923, and the subsequent amendments of the said
Act prior to the date of the issue of the policy, and the Indian Fatal
Accidents Act - 1855.
d) Costs and expenses incurred by the insured with the consent of the
insurance company, to defend any claims from employees, are paid in
addition.
4. Exceptions
The insurance company shall not be liable under this policy in respect of:
d) Any sum which the insured would have been entitled to recover from any
party but for an agreement between the insured and such party.
iii. Exception c: Appears in all legal liability policies. This exception makes
it clear that the policy is concerned only with the insured’s liability
arising under specified laws and not with any liability assumed by him
under any agreement or arrangement.
iv. Exception d: The effect of this exception is to prevent the insured from
waiving his possible rights of recovery against any party by entering into
an agreement with such party.
The first premium and all renewal premiums that may be accepted are
to be regulated by the amount of wages and salaries and other earnings
paid by the insured to employees during each period of insurance. The name
of every employee together with the amount of wages, salary and other
earnings shall be properly recorded and the insured shall at all times allow
the insurance company to inspect such records and shall supply the company
with a correct account of all such wages, salaries and other earnings paid
during any period of insurance within one month from the expiry date of
such period of insurance.
If the amount so paid shall differ from the amount on which premium has
been paid the difference in premium shall be met by a further proportionate
payment of the company or by a refund by the company as the case may be.
Premiums for this class of insurance are calculated on the amount of total
earnings of the employees. At the inception of the policy the premium is
calculated for obvious reasons on the estimated earnings of the employees
during the period of insurance.
The other conditions are those which usually appear in liability policies.
d) Condition 1: Says that the policy and the schedule shall be read
together and the words and expressions used will have the same meaning
wherever they occur.
i) Condition 9: Compliance with the terms of the policy and the truth of
the answers in the proposal form are condition precedent to liability
under the policy.
6. Rating
This class of insurance was governed by the Tariff but now falls under the File &
Use guidelines of the IRDA. The policy wordings continue to apply. Most insurers
continue to use the occupation, classifications and rates of the erstwhile tariff
for determining premiums with minor modifications based on their individual
experience.
7. Forms
Notes:
b) Table B Policies cannot be issued to cover employees who fall within the
definition of ‘Workmen’ under the W.C. Act, 1923, as amended.
8. Premium calculation
The premium rates are in Rupees per mille and are to be calculated on the total
earnings of the employees. In certain cases, however, the rates are quoted per
capita (per head) e.g. domestic servants in private residences.
The terms earnings, wages, salaries are defined to mean the employees’ total
remuneration including overtime value of board and/or lodging, housing
accommodation, bonus and all other benefits which can be estimated in
money. Contribution paid by employees for pension, provident fund or
income tax deducted at source are not to be deducted from the total
earnings.
The rate of premium depends on the nature of work carried on by the insured.
These are determined on the basis of each trade or occupation. Within each
trade or occupation, if there are significant variations of hazards there may be
sub-divisions of risks, with differential rates.
The cover under Table B is on the basis of ‘negligence’ under Common Law,
whereas under Table A Policy the cover is in respect of liability under Common
Law (i.e. negligence) as well as under the W.C. Act (i.e. irrespective of
negligence). Hence Table A rates are higher than Table B cover.
Based on the nature of the risk, endorsements are incorporated in the policy.
These endorsements are closely linked with the rates that are charged for a
particular class of risk and they are designed to exclude liability in connection
with work for which a higher rate is applicable.
9. Extensions
Table ‘A’ policies may be extended to cover insured’s liability for contractor’s
workmen. It has been seen that Exception ‘B’ of the policy excludes from the
scope of the cover the insured’s liability to employees of contractors. However,
on payment of additional premium it is possible to extend the indemnity
granted under the policy to cover the legal liability of the insured to ‘Workmen’
employed by contractors. This Extension applies only in respect to work
performed by the contractors for the insured in the business and occupations
covered by the policy.
Secondly, the extension applies only with regard to claims under the Workmen’s
Compensation Act, 1923, with subsequent amendments prior to the date of the
issue of the policy. The premium for this extension is calculated at the
appropriate tariff rate upon the total amount of the contract, if the contract is
for labour only. Where the contract is for labour and material premium is
calculated upon the percentage of the full contract price to be determined
upon the merits of each case. However, where the insured is able to furnish the
returns of the actual wages paid to contractors employees, premium is
calculated upon the amount of such wages.
Compensation for occupational diseases (See exclusion (e) of the policy), may
be covered at an additional premium of 50% of the standard rate.
The percentage extra premium ranges, from 20% to 45% for a limit per case.
Note: W C Act of 1923, did not impose any obligation on employer regarding
reimbursement of medical expenses incurred by the worker. Coverage for
medical expenses for a limited extent ranging from Rs 80/- to Rs 2400/- per
case was being provided by the Insurers as an extension under W C policies.
However, as per the Workmen’s Compensation (Amendment) Act 2009, “the
employee shall be reimbursed the actual expenditure incurred by him for
treatment of injuries caused during course of employment”. This provision
mandates that employer shall be liable for the medical expenses incurred by the
employee without any ceiling on the expenses. Following this, some of the
Insurers are providing wider medical expenses cover under W C policies as
extension by suitable loading of premium. The cover could be for unlimited
amount or with a limit which varies from Insurer to Insurer.
a) The name and business address of the proposer are required for the
purpose of identification and incorporation in the policy.
i. Clerical
ii. Commercial Travellers
iii. Employees engaged with wood-working machinery including machinists
and machinists labours, and
iv. Other categories to be specified
i. Name of Contractors
ii. Nature of Work sublet
iii. Estimated amount of contract (a) labour only (b) labour and material
IC-74 LIABILITY INSURANCE 109
CHAPTER 4 EMPLOYERS’ LIABILITY INSURANCE POLICY
g) The other questions relate to past insurance history, total wages paid
and accidents of employees during the past 3 years. Particulars of the
latter are subdivided into fatal, permanent disablement and temporary
disablement.
11. Claims
The Workmens’ Act requires the employer to deposit compensation for death
within a month of the event, delays invite interest and penalties. The onus is
therefore on the employer to arrange for all documents and make payment in
the court.
This is a social legislation for all industrial workers where notified. All industries
and organisation coming within the ambit of the scheme are required to be
registered and all employees details with eligible family member details to be
provided. Establishments once enrolled will continue to be part of the scheme.
It is a contributory scheme and deductions towards membership are
compulsorily deducted from enrolled employee wages. The scheme overrides
the Workmen's Compensation Act. In effect persons covered under the ESIS are
not eligible for Workmen’s Compensation benefits.
a) Applicability
As per the amendment effective from 2010, all the factories employing 10 or
more employees are eligible for this scheme irrespective of whether it is
using power or not. The wage limit for eligibility is Rs. 15000/- per month
b) Benefits
The scheme provides for all hospitalisation treatment of the member and
dependents. In addition allowance for diseases and long term ailments are
also provided to members. The scheme extends to provide compensation for
employment related accidents and occupational diseases. In the event of
death from such ailments dependents are provided an allowance.
It is thus observed that the ESIS provides wider benefits than the WC Act for
the members covered. However the monthly wage eligibility limits the
beneficiaries. Persons over this wage limit would be eligible to Workmen’s
Compensation benefits.
Test Yourself 4
Which of the below is correct with regards to the premium calculation under
the Employer’s Liability Insurance Policy?
I. The premium rates are to be calculated based on the age of the employees
II. The premium rates are to be calculated on the total number of employees
III. The premium rates are to be calculated on the total earnings of the
employees
IV. The premium rates are to be calculated based on the health status of the
employees
1. Coverage
a) Basic
b) Wider
2. Exclusions
a) Riot and strike (available as add-on), war perils, nuclear and radiation
perils, contractual liabilities, liability to own, employees, agents and
sub-agents and their properties and belongings
b) Losses due to inherent defects, mechanical or electrical derangements
c) Consequential loses
d) Carriage of illegal, illicit or smuggled goods
3. Duration of cover
The cover is during transit, incidental storage, transshipments and upto seven
days after reaching final place.
4. Conditions
It will be observed that the policy follows the coverage under road transit
marine insurance.
5. Rating
The Multimodal Transportation of Goods Act 1993 provides for legal liability for
loss or damage to cargo. It provides for the creation of a licensed operator
called the MTO who could be held responsible for the loss or damage to the
cargo entrusted to them for transportation. One of the requirements of the MTO
license is the insurance to cover the liability that arises on them. Arising out of
this need the MTO liability insurance policy has been devised.
Although the MTO Act came into effect in 1993, Indian insurers were not
providing this cover till 2001. Currently few insurers are offering this cover in
the market. In the light of above Ministry of Finance had given special
dispensation allowing foreign insurers to directly underwrite this business.
2. Coverage
a) Cargo liability
Under this section indemnity is provided to the insured for its legal liability and
claims expenses in respect of claims which arise from:
iii. The Cargo’s contribution to general average and salvage which the
insured is unable to recover from a customer, agent or sub-contractor.
iv. Under this section claim expenses related to the following is also
payable:
Provided that such claim expenses described above is subject to a sub limit
of indemnity and sub-deductible as specified in the insurance schedule.
Under this section indemnity is provided to the insured for its legal liability
and claims expenses in respect of a claim arising from an accident whilst
directly performing an insured service causing:
c) Professional indemnity
This is generally an extension under the policy and shall apply only if it has
been noted and included within the insurance schedule. Under this
extension indemnity provided is for the legal liability for a claim and claims
expenses arising from:
v. A misdirected claim against the insured, being one which results from:
This is also an extension under the policy and shall apply only if it has been
noted and included within the insurance schedule.
Cover provided under this extension is for legal liability for a claim and
claims expenses arising from an unintentional breach of any regulation legal
or statutory provision resulting in fines, customs duty, sales, excise tax,
value added tax or similar fiscal charges or other penalty imposed by an
Authority on the insured or other persons acting within their authority on
the insured’s behalf provided that such breach relates directly to:
3. General exclusions
n) any claim made by one insured against any other or any claim made by
an associated, parent or subsidiary company or by any person or entity
having a financial or executive interest in the insured’s operation.
i. Caused by an event which is sudden and accidental, and such event first
commenced on an identified specific date during the period of
insurance; and
ii. The event is discovered and made aware to the insured within seven
days after it first commenced, unless such arises from cargo not in the
insured’s care, custody or control; and
iii. Reported to the company as required under the terms and conditions of
the insurance contract;
ii. Any act of terrorism, which means an act including but not limited to the
use of force, violence or the threat of violence of any person or group of
persons whether acting alone or on behalf of or in connection with any
organisation or government committed for political, religious, ideological
or similar purposes including the intention to influence any government
and/or to put the public or any section of the public in fear
4. Rating
The economic measure for rating MTO business is determined either by:
Test Yourself 5
Summary
b) The amount of relief payable under the PLI Act is specified under the
provisions of Section 3.
c) According to Section (4) of the PLI Act, the liability has to be compulsorily
insured under a contract of insurance.
d) Rule 10 framed under the PLI Act provides the maximum aggregate liability
of the insurer has to pay relief under an award to the several claimants
arising out of an accident
f) The Collector (who has the powers of a Civil Court), is empowered to hold
an enquiry into any claim and to make an award of relief which appears to
him to be just.
g) The operative clause of the Compulsory Public Liability Policy provides that
the insurance company will indemnify the insured owner against the
statutory liability arising out of accidents occurring due to handling
hazardous substances subject to the terms and conditions of the policy.
m) For Employers’ Liability Insurance Policy, most insurers continue to use the
occupation, classifications and rates of the erstwhile tariff for determining
premiums with minor modifications based on their individual experience.
n) For Employers’ Liability Insurance Policy, the premium rates are in Rupees
per mille and are to be calculated on the total earnings of the employees.
o) The proposal form contains details like name and business address of the
proposer, Full particulars of proposer’s trade or occupation, schedule of
employees, factory details with details of all equipment, tools and
machinery used and some other details that the insurer may need.
r) The scheme provides for all hospitalisation treatment of the member and
dependents. The scheme also provides some other benefits.
u) The premium is charged on the indemnity limit selected. The policy comes
with certain terms and conditions.
v) The Multimodal Transportation of Goods Act 1993 provides for legal liability
for loss or damage to cargo.
Answer 1
Answer 2
Answer 3
Under the provisions of the Employee’s Compensation Act, 2009, the minimum
amount payable on the death of an employee while performing his duties is Rs.
1,20,000.
Answer 4
Under the Employer’s Liability Insurance Policy the premium rates are to be
calculated on the total earnings of the employees.
Answer 5
Self-Examination Questions
Question 1
As per provisions of Section 3 of the Public Liability Insurance Act, 1991, if there
is damage to a person’s property, then how much is the maximum amount of
relief payable?
I. Rs. 3,000
II. Rs. 6,000
III. Rs. 9,000
IV. Upto the actual amount of damage without any maximum limit
Question 2
Question 3
Which of the below statement is true with regards to the timeframe within
which a claim should be made from the date of accident under the Compulsory
Public Liability Insurance Policy?
I. There is no timeframe within which a claim should be made from the date of
accident
II. The claim should be made any time before the renewal of the policy
III. The claim should be made within one year from the date of accident
IV. The claim should be made within five years from the date of accident
Question 4
I. One of the conditions of the policy allows the insured to cancel the policy
with 30 days written notice to the insurer. Premium is refunded according to
short period scale subject to there being no claim under the policy.
II. One of the conditions of the policy allows the insured to cancel the policy
with 30 days written notice to the insurer. But there will be no refund of
premium under any circumstances.
III. Insured cannot cancel the policy till the time of renewal. Only the insurance
company can cancel the policy before renewal by giving 30 days written
notice. Also there will be no refund of premium under any circumstances.
IV. Either party can cancel the policy with 60 days written notice to the other
party. If the insurer cancels the policy, then there will be refund of
premium on proportionate basis and if the insured cancels the policy then
there will be no refund of premium under any circumstances.
Question 5
Answer 1
As per provisions of Section 3 of the Public Liability Insurance Act, 1991, if there
is damage to a person’s property, then the maximum amount of relief payable is
Rs. 6,000.
Answer 2
If a person claims compensation under any other law for the time being in force
then the court award will deduct the amount paid under the Public Liability
Insurance Act, 1991.
Answer 3
Under the provisions of the Compulsory Public Liability Insurance Policy, a claim
should be made within 5 years from the date of accident. As per one of the
conditions of the policy there shall be no liability under the policy for a claim
made after 5 years from the date of accident.
Answer 4
One of the conditions of the policy allows the insured to cancel the policy with
30 days written notice to the insurer. Premium is refunded according to short
period scale subject to there being no claim under the policy.
Answer 5
Chapter Introduction
This chapter discusses the industrial and non-industrial risks, the difference
between the two and the various clauses in a public liability policy including
exclusions, conditions applicable and the various extensions of coverage
available under a public liability policy (for both industrial and non-industrial
risks).
It also aims to provide you with knowledge about the detailed information which
is collected from the proposer through proposal forms for both industrial and
non-industrial risks.
Learning Outcomes
b) Non-industrial risks are the risks other than industrial risks and
include the following:
The policy form for an industrial risk consists of various clauses which will
now be discussed.
Note 2: The policy wordings, clauses, deductibles etc. discussed here are as per
the market agreement between the general insurers in the past and the actual
wordings being used by the Insurers now may differ from these wordings based
on the filed wordings.)
The clause further specifies that the Insurance company will indemnify the
Insured against their legal liability (other than liability under the Public
Liability Insurance Act, 1991, or any other Statute based on ‘No-fault’
liability) to pay compensation including claimant’s cost etc. anywhere in India
according to Indian Law.
(Note: The words in the bracket do not appear in the operative clause of the
Non-Industrial Risks Policy. Instead, Exclusion 8.16 of the policy provides for the
same.)
2. Indemnity (clause 2)
The clause provides that the indemnity applies to claims arising out of accidents
occurring in the insured premises, during the period of insurance; first made in
writing against the Insured during the policy period.
The definitions given in the second part of the clause are discussed below which
will help to understand the provisions of the main clause.
The term ‘Injury’ has been given a specific meaning in the policy. In this
context reference should also be made to exclusion in clause 8.5(a) which
provides that the policy does not cover liability arising out of personal
injuries such as libel, slander, false arrest, wrongful detention etc. and
mental injury, anguish or shock resulting there from.
The term ‘property’ generally refers to all the legal rights possessed by a
person in respect of material and immaterial things, including copyrights
etc. However, property here means only tangible or material property.
The meaning of the term will be clear when it is read with exclusion 8.5(b)
of the policy which provides that the policy does not cover liability arising
out of ‘infringement of plans, copyright, patent, trade name, trademark,
registered design’. At law, these also come under the term ‘property’.
d) ‘Product’ means any tangible property after it has left the custody or
control of the Insured, which has been designed, specified, formulated,
manufactured, constructed, installed, sold, supplied, distributed,
treated, serviced, altered or repaired, by or on behalf of the Insured,
but shall not mean food and beverages supplied by or on behalf of the
Insured, primarily to the Insured employees as a staff benefit.
Secondly, food and beverages supplied as a staff benefit are not products
within the meaning of the definition. Thus, liability for claims for injury
arising out of food poisoning, for example, is covered under the policy.
Example
A policy taken for one year may have the policy period commencing at 11 A.M.
on 1.1.2012 and expiring at midnight on 31.12.2012.
(Note: This date is relevant for the coverage under the policy and is
explained later.)
Example
If the policy period was from 1 January 2012 to 31 December 2012 and it was
renewed the next year from 1 January 2013 to 31 December 2013, then under
the renewed policy, the retroactive date will be 1 January 2012, i.e. the
beginning date of the initial policy, and it will continue to be retroactive date
under all subsequent renewals.
In the early days of liability insurance, the term ‘accident’ was given its
popular meaning as "an unlooked for mishap, or an untoward event which is
neither expected nor designed". However, due to various developments in
case laws in the U.K., U.S.A. etc. it was later felt necessary to have a more
precise and specific definition.
Example
An industrial air pollution which occurs continuously may cause illness to the
people in the area. This is not ‘accidental’. However, if there is a breakdown
of plant due to an accident, resulting in air or other pollution which causes
injury, illness etc. it is considered to be accidental.
Example
An event which satisfies the first pre-requisite may result in instant injury,
death or damage to property. However the same event, such as accidental
pollution may expose the persons to continuous for intermittent or repeated
exposure and may eventually, result in death, injury, illness or damage to
property (for example, a person may suffer from asthma or cancer due to such
pollution). This is also covered by the definition.
Example
If the policy is taken for the first time the period of policy is, say, 1 January
2012 to 31 December 2012. The retroactive date will be 1 January 2012. If
accidents occur during 2012 and claims are made against the insured during
2012, the policy coverage applies.
If the policy is renewed for the period 1 January 2013 to 31 December 2013, it
will cover the accidents which occur during 2013 and claims for which are also
made against the insured during 2013.
However, if accidents have occurred during 2012, and claims are made against
the insured during 2013, the 2013 renewed policy will cover these claims also
because the retroactive date under the renewed policy is 1 January 2012 (the
original date of commencement of the first policy). This date will continue to
be the retroactive date in all subsequent renewals without any break in the
period of cover.
This clause provides that the Insured may notify the company in writing during
the policy period, of any specific event or circumstance which may give rise to a
claim in the future, that is, after the expiry of the policy period.
Acceptance of such notice by the company would mean that the company
agrees to deal with such claims which may be lodged in the future as if they
were first made against the insured during the policy period.
However, this extension is not for an indefinite period but is subject to the
maximum time limit laid down in the Indian Limitation Act.
132 IC-74 LIABILITY INSURANCE
INDUSTRIAL AND NON-INDUSTRIAL RISKS AND CLAUSES OF A PUBLIC LIABILITY POLICY CHAPTER 5
This clause provides for extension of time limit for notification of claims for the
accidents which had taken place during the period of insurance, but could not
be made during the policy period. This extension of time limit applies only in
the event of non-renewal or cancellation of the policy, either by the company
or by the Insured. The time limit is generally for maximum of 90 days from the
date of expiry or cancellation of the policy, as the case may be.
b) Such claims shall be dealt with as if they were made on the last day of
the expiring policy period and subject to the limit of indemnity and its
terms and conditions applicable as on that date.
Example
The company received a claim on 15 September 2012 from Suresh for injuries
caused to him while in their premises on 31 March 2012 due to a wet and
slippery floor.
The insurance company shall accept the claim under the extended claim
reporting clause as it was made within 90 days of the expiry date and no other
insurance was in the force during that period. Moreover, the claim will be
treated as if it was made on the last day of the period of insurance, i.e. 30 June
2012, and will be subject to the indemnity limits, terms and conditions
applicable on that date.
This clause provides that the indemnity under the policy also extends to cover
liability of;
The Insured named in the policy is entitled to indemnity under the policy. This
named Insured usually a limited company is a separate legal entity.
However, it is possible that in some cases, claims based on negligence etc. may
be made against the insured company’s officials personally. Thus, this clause
extends the benefit of cover to such officials.
Example
Many firms provide recreation facilities for the employees (e.g. cricket,
football, hockey, etc.) and auxiliary services such as first aid, ambulance,
firefighting etc. The officers, committees etc. in charge of such facilities and
services may incur personal legal liability for any negligence while acting in
their respective capacities.
The clause 4.2 extends the indemnity to the officers, committees and members
of the Insured’s canteen, social, sports, medical and fire fighting and welfare
organisations in their respective capacities as such. In the event of death of
such persons to be indemnified, the indemnity is still available to the personal
representatives of the estate of such person (i.e. legal heirs).
This clause is incorporated in the policy where more than one Insured is covered
under the Policy.
In certain circumstances, the insured persons can have a claim against each
other for injury or damage falling within the scope of the policy. These are
called ‘cross claims’ and the payment of such claims is provided by ‘cross-
liabilities clause’.
These costs are collectively termed as ‘defence costs’ and are payable provided
they are incurred with the prior consent of the company.
This clause provides that the company’s total liability to pay compensation,
claimant’s costs and defence costs shall not exceed the indemnity limit stated
in the Schedule.
The aggregate limit represents the company’s total liability during the policy
period and the limit ‘any one accident’ applies to any one claim or series of
claims arising from one originating cause.
An accident may result in one claim from one injured person or several claims
from more than one person injured. Again a single accident may result in a
series of claims one after another.
Example
A fire may cause injuries to several persons and/or property damage. The fire
may also result in an explosion leading to another set of claims for personal
injuries and/or property damage.
According to this clause, all such claims are added together and treated as one
claim, for the purpose of application of limit of indemnity ‘any one accident’.
Such claim is deemed to have been made on the day when the first claim in the
series was made in writing.
However, there is no coverage for claims arising from one specific cause which
are made later than 3 years after the first claim of the series.
The Insured shall bear as compulsory excess the amount or percentage of the
limit of indemnity as stated in the Schedule.
At the option of the Insured, the policy shall be subject to a voluntary excess as
mentioned in the Schedule.
Both the clauses, 7.2 and 7.3 provide that the compulsory excess and voluntary
excess if any, shall be applicable to both:
b) Property damage claims inclusive of defence costs arising out of ‘any one
accident’.
Test Yourself 1
I. A steel mill
II. A cement industry
III. A warehouse
IV. A textile unit
Test Yourself 2
The indemnity clause of a public liability policy covers claims arising out of:
I. Infringement of copyrights
II. Wrongful detention
III. Pollution
IV. Products in the insured’s custody
Clause 8 in the policy specifies 15 exclusions which are discussed below. The
students should also refer to the Policy Form in Appendix-1 for the details.
The below mentioned exclusions are applicable for a public liability policy.
b) Clause 8.2: These are acts of God such as flood, storm, hurricane,
cyclone etc. which may cause catastrophic losses. However, earthquake
risk may be covered on payment of extra premium.
Further, the Insured has to declare that all statutory provisions have
been complied with. If not, it would be breach of utmost good faith. It
should be noted, however, that the exclusion applies only when non-
compliance is intentional.
Example
A small grocery shop owner suffered heavy financial losses due to loss of
business resulting from opening of a big supermarket nearby. In this case, if the
shopkeeper files a claim against the supermarket, the insurance company will
not cover such liability as it is a loss of pure financial nature and there was no
actual or physical damage to the property.
e) Clause 8.5: This excludes personal injuries like libel, slander, false
arrest etc… This must be read with the definition of ‘injury’ and
‘damage’. The exclusion reiterates, for the sake of emphasis, what is in
the definitions such as libel, slander, false arrest, infringement of
copyrights.
g) Clause 8.7: This exclusion relates to war and invasion risks which are not
regarded as insurable risk under normal commercial insurance policies.
h) Clause 8.8: It states about nuclear and radiations risks which are also
regarded as uninsurable risks under normal commercial insurance
policies.
i) Clause 8.9: This exclusion removes from the policy, third party liability
arising out of motor vehicles which has to be compulsorily insured under
the provisions of the Motor Vehicles Act, 1988.
l) Clause 8.12: This excludes liability for damage to property owned by the
Insured or hired by him or in his custody. Such property may be covered
under a material damage policy, e.g. Fire Policy.
iii. Premises tenanted by the Insured (but not liability arising under any
tenancy agreement).
The proviso offers a practical solution when the Insured and the company
have difference of opinion as to when injury or damage occurred in
circumstances of continual or continuous inhalation, ingestion etc. following
the covered accident (e.g. pollution accident).
This is the common principle of good faith which says the Insured "must act
as if he is uninsured". It means that the Insured must take all reasonable
steps and care to prevent accidents as he would have taken if he had no
insurance protection.
2. Conditions (clause 9)
The student should refer to the policy form in Appendix 1 for details about the
conditions and study the following notes.
a) Clause 9.1: This is the notification condition which provides that the
Insured shall;
ii. Give such additional information as the company may require and
forward to the company every summons etc. And all documents relating
to the event immediately they are received by the Insured.
Notice is required even when a formal claim is not made against the Insured.
There may be occurrences which may result in claims in the future.
b) Clause 9.2: This condition provides that the Insured cannot make any
offer or admit liability without the written permission of the company.
i. The company has the right (but not an obligation) to defend the claim in
the name of the Insured and has full discretion in the conduct of any
proceedings and in the settlement of the claim.
ii. Having taken over the defence of any claim, the company may relinquish
the same.
iii. Amounts spent by the company in the defence, settlement etc., will
reduce the limits of indemnity under the policy.
iv. Any exercise of the rights under this condition does not modify or expand
the company’s liability for the claim.
d) Clause 9.4: This condition provides that the Insured shall give all such
information and assistance as the company may reasonably require.
Example
In case of any accident, the insurers require to know the full circumstances
surrounding the accident e.g., particulars of injuries and/or nature and extent
of damage of property, names, addresses and occupations of claimants,
particulars of medical assistance rendered to injured persons, names and
addresses of witnesses, if any, to the accident etc.
If the accident occurs in the business premises of the insured, then the insurers
may also require information regarding the Insured’s manufacturing activities,
fire prevention programme, effluent treatment system etc. which may
reasonably be required by them to decide whether the claim falls within the
purview of the policy, whether any exclusions apply or to put up an appropriate
defence on behalf of the Insured against the claimant.
Secondly, the condition provides that the company may amend the terms
of the policy according to the materiality of such change.
ii. Any lesser amount for which claim can be settled and on such payment
relinquish the conduct of such claim and absolve themselves from any
further liability for such claim.
When a claim or claims made against the Insured are for amount far
exceeding the limit of indemnity applicable (for example, when the limit of
indemnity for ‘any one accident’ is, say Rs.10 lacs, and the claims made are
for, say Rs.25 lacs or more), the insurers would be burdened with costs of
defence of the claim quite disproportionate to the limit of indemnity
selected by the Insured and on which premium is paid.
The insurers’ maximum liability for any claim (inclusive of defence costs) is
the limit of indemnity for ‘any one accident’ and pays this amount to the
Insured in full discharge of their liability for the claim.
Example
The condition further provides that the terms, conditions and exclusions,
including any word or phrase contained therein shall be interpreted according to
Indian Law.
h) Clause 9.8: This condition requires the Insured to keep accurate record
of the annual turnover, and at renewal, declare details of the same, if
required by the company. The company has a right to inspect such
records.
j) Clause 9.9A: This condition provides that the policy does not cover
liability which is insured by, or would but for the existence of this
policy be insured by any other policy, except in and respect of any
excess beyond the amount which could have been payable under such
policy.
Example
A shopkeeper has a shop package policy wherein public liability is covered for a
limit of Rs 25,000 under one of the sections. Shopkeeper has also taken a
separate public liability policy for an AOA limit of Rs 100,000/-.
If there is a third party liability claim on the shopkeeper and the compensation
payable is awarded as Rs 100,000/-, shopkeeper policy shall pay the first Rs
25,000/- and only the excess amount of Rs 75,000 shall be payable under the
separate public liability policy.
l) Clause 9.11: The amount of claim paid or payable reduces the limit of
indemnity per one year under the policy; the amount cannot be
reinstated to its original level even on payment of extra premium.
m) Clause 9.12: If the company disclaims liability for any claim and, if such
claim is not made subject matter of a suit in a court law within 12
months from the date of disclaimer, the claim is deemed to be
abandoned by the Insured.
n) Clause 9.13: The company is not liable to make any payment in respect
of any claim if it is in any manner fraudulent or if there has been any
material mis-statement or non-disclosure of any material information by
the Insured.
o) Clause 9.14: This is the policy disputes clause. The condition provides
that:
iii. All matters arising hereunder shall be determined according to the law
and practice of such court.
3. Schedule
The students should refer to Appendix-1 and be familiar with the contents of
the Schedule of the policy. In the column ‘compulsory excess’, appropriate
percentage with minimum amounts are inserted. As already explained, these
limits are different for both industrial and non-industrial risks.
Test Yourself 3
Which of the following risks is not specified as exclusion under a public liability
policy?
Test Yourself 4
According to the cancellation condition clause, the policy can be cancelled any
time by either of the party by giving a written notice of ___________.
I. 7 days
II. 14 days
III. 21 days
IV. 30 days
ii. The extended cover does not include pollution risk, howsoever caused,
unless specifically covered, on payment of extra premium.
iii. It is a condition of the extended cover that the statutory provisions, for
treatment and discharge of effluents, shall be complied with.
iv. ‘Premises’ shall be deemed to include pipelines running outside the
premises for discharge of treated effluents at a disposal point
situated within a distance of one kilometre from the premises (see
definition in the indemnity clause).
b) Pollution coverage
ii. The extension also includes the payment of the reasonable or removing,
nullifying or cleaning-up, seeping, polluting or contaminating substances,
provided pollution is caused by an ‘accident’ as defined above. These
clean-up costs are payable whether a claim has been made or not against
the Insured.
vi. It is not the intention to cover the effects of gradual pollution which may
occur on a twenty-four basis and, which is unavoidable in modern
industrial activities. This is regarded as an uninsurable risk, and is a
matter which has to be dealt both by legislation and loss prevention
measures.
vii. The extension also provides for payment of clean-up costs, whether or
not a claim is made against the Insured. It would be in the interest of the
Insured to incur and, the insurers to pay, these costs so that any
imminent hazard to third parties is prevented.
c) Earthquake risk
d) Transportation
i. The policy can be extended to include legal liability of the Insured for
iii. The coverage is applicable only for full load and part load is not covered.
iv. Pollution cover and earthquake risk can be added to the transportation
coverage.
vi. The policy can also be issued in the joint names of the insured and the
transport contractor.
e) Technical collaborators
ii. No claim is payable unless the cause of action arises in India and the
liability to pay claim is established against the Insured in an Indian
Court.
iii. All terms, exclusions, conditions etc. of the policy otherwise remain
unchanged.
The public liability policy for non-industrial risks may be extended to cover
additional liabilities. The relevant endorsements are now examined.
The limits form part of the overall limits specified in the schedule.
ii. The cover does not apply to legal liability arising out of loss of and
damage to valuables of residents/bonafide guests unless :
iii. Monies, securities, documents (including credit cards) and plans are
excluded from the cover.
b) Sports facilities
i. This extension includes legal liability of the Insured for death, bodily
injury or loss or damage to or loss of use of property arising out of
use of sports facilities.
The equipments and the premises used for sports are kept in a state
of good and proper maintenance.
Adequate guards and experienced trainers are on duty, where
necessary.
Coverage is subject to specified limits of indemnity (AOA/AOY) which
form part of the overall limits.
c) Other extensions
The following extensions are available under policies issued on all non-
industrial risks (except shops and godowns).
Legal liability for death and/or bodily injury and loss or damage to or loss
of use of property arising out of poisoning by foreign or deleterious matter
in food, beverages and/or any other edible items supplied by the Insured.
The extension is subject to the provision that the Insured shall take every
possible precaution that the food etc. supplied is free from contamination
and fit for human consumption, and
AOA and AOY limits selected form part of the overall limits of indemnity
mentioned in the Schedule.
legal liability for death bodily injury or loss of or damage to or loss of use of
property, etc. arising out of accidents (including accidents arising out of
contamination of water) in connection with the use of the swimming pool in
the Insured’s premises.
Legal liability for death etc. or bodily injury or loss of or damage to or loss
of use of property etc. arising out of accidents caused by the use of such
facilities as specified subject to the conditions that :
The limits of indemnity selected form part of the overall limits under the
policy.
Test Yourself 5
I. 0.5 kilometre
II. 1 kilometre
III. 2 kilometres
IV. 5 kilometres
Test Yourself 6
Which one of the following is not a condition for covering legal liability arising
out of loss or damage to the property in the custody of the insured?
I. The valuables are kept in the strong room/cloak room maintained by the
Insured for safe keeping.
II. The Insured maintains proper records of valuables in respect of each
resident/bonafide guest.
III. The coverage is available only for monies, securities and documents.
IV. The coverage is subject to compulsory excess of 1/4% of the limit of
indemnity.
The proposal form elicits detailed information which is relevant to rating and
underwriting the risk.
The students should carefully study the questions which are to be answered by
the proposer with respect to each plant/manufacturing unit.
b) Other Details
i. Limit of Indemnity
ii. Voluntary Excess: based on percentage of limit of indemnity per any one
accident.
c) Declaration
This clause, among other things, provides for a declaration by the proposer
that all statutory provisions relating to the business are complied with.
In respect of large risks, that is, where the limit of indemnity any one year,
exceed the prescribed figure in the market agreement, risk assessment form
has to be completed by the company’s engineers after a risk inspection of
the premises. (The student should study the form given in Appendix-3)
e) Effluent discharge
f) Compulsory insurance
g) Pollution coverage
Inflammable gases
Liquids with flash point below +55 degree celsius
Substances with explosive properties
Toxic substances with lethal does ( value below 5 mg/kg)
h) Rating
The factors which are usually taken into account for determining the
premium for industrial risks are as follows:
The proposal form for non-industrial risks elicits the information given
below.
Type of construction
Age of the building
Number of floors and height of the buildings and which floor is
occupied by the proposer
Details of other occupants
Details of lifts, elevators, escalators, etc. With make and capacity
Activities being carried on in the premises
Whether the premises/equipments/machineries are in good condition
of repair?
Details of surrounding areas/property
iii. Whether the proposer has complied with all the statutory rules
pertaining to the premises and business activities.
iv. Whether the premises have boundary/fencing.
v. Security/Safety arrangement.
vi. Details of systems for prevention of fire explosion etc.
vii. Details of "emergency plan", if any.
viii. Use of storage of gases/hazardous/toxic etc. materials and/or
equipments.
ix. Three years claims history as under:
Bodily injury
Property damage
Defence costs
a) Hotels/Motels/Club Houses/Restaurants
Health clubs
Beauty parlours
Hair dressers
Shops
Swimming pools (whether life guards provided or not)
iv. Whether the above facilities are available to residents only and their
guests or are also available to club members and their guests.
v. Other facilities (e.g. car parking): details of security measures where
applicable.
vi. Whether there is a separate strongroom/cloakroom to store items
deposited by bonafide residents/guests for safe keeping; the records
maintained in respect of items so deposited and the special security
arrangements for it.
vii. Whether cover required against risks associated with food and beverages
served by the establishment?
viii. The estimated annual turnover/revenue/receipts:
This must include all revenue earned through occupancy in the hotel, sale of
food and beverages including liquor, conferences, marriage parties, outside
catering, rental received from shopping arcades, revenue earned from
guests for using hotel facilities and sale across the counter and other
miscellaneous incomes including all levies, taxes and surcharges.
i. Whether other facilities like canteen, sports, etc. are provided and if so,
list of facilities.
ii. Whether cover needed against risks associated with food and beverages
served in the establishment?
Indoor games
Outdoor games (like mountain climbing, hang gliding, horse riding,
swimming etc.) and whether such games are taught under the
supervision of trainers and/or bodyguards.
Number of laboratories
Measures taken to prevent accident in laboratories.
If yes, the maximum quantity and value of each item stored and the
percentage value of such hazardous items to total stock.
Whether municipal and other regulations for such storage are
complied with.
3. Rating
The various factors which can influence the premium for non-industrial risks are
mentioned below.
Some of the factors mentioned above are only relevant for certain types of non-
industrial risks. For example, seating capacity is relevant to cinemas, etc. and
number of students is relevant to schools etc.
Test Yourself 7
What is the main purpose of a proposal form for a public liability policy?
Summary
a) The industrial risks cover manufacturing industries and storages which are
incidental to the manufacturing plant whereas non-industrial risks covers
businesses other than manufacturing units such as official and residential
premises, hotels, cinema halls, schools etc.
b) The policy form for a public liability policy consists of nine clauses.
8. 1 Contractual liability
8. 2 Acts of God
8. 3 Deliberate or intentional non-compliance of any statutory provision
8. 4 Loss of pure financial nature
8. 5 Personal injuries and infringement of plans, copyrights, patents etc.
8. 6 Fines, penalties and punitive damages
8. 7 War and invasion risks
8. 8 Nuclear and radiation risks
8. 9 Third party liability arising out of motor vehicles
8. 10 Transportation of hazardous substances
8. 11 Aircraft, watercraft or hovercraft
8. 12 Damage to property owned or hired by insured or in his custody
8. 13 Damage/injury prior to retroactive date
8. 14 Deliberate disregard of the management of the need to take
reasonable steps to prevent claims
8. 15 Liability insured under Workmen’s Compensation Insurance Policy.
g) The factors such as turnover, ratio of indemnity limits, add-ons and the risk
category are considered for determining the premium for industrial risks.
h) The factors used for determining the premium for non-industrial risks are
type of construction of the risk, occupancy, ratio of limits of indemnity,
turnover, seating capacity or number of students etc.
i)
Answer 1
A warehouse is generally not covered under industrial risks and is part of non-
industrial risks. However, if a warehouse is incidental to the business activities
of a manufacturing plant, then it is covered under industrial risks.
Answer 2
The indemnity clause of a public liability policy covers the claims arising out of
the product which is in the custody or control of the insured. However, if the
product has left the custody of the insured, then it is not covered under public
liability policy and is covered through a separate product liability policy.
Answer 3
Damages to premises tenanted by the insured are covered under insurance and
are not part of exclusions under a public liability policy.
Answer 4
According to the cancellation condition clause, the policy can be cancelled any
time by either of the party by giving written notice of 30 days.
Answer 5
Answer 6
The coverage is not available for legal liability arising out of loss or damage to
the monies, securities and documents of resident/ guests in the custody of the
insured.
160 IC-74 LIABILITY INSURANCE
PRACTICE QUESTIONS AND ANSWERS CHAPTER 5
Answer 7
Self-Examination Questions
Question 1
Question 2
The maximum time limit allowed for notification of claims under the extended
claim reporting clause is __________ from the date of expiry or cancellation of
the policy.
I. 30 days
II. 60 days
III. 90 days
IV. 120 days
Question 3
Where there is more than one policy covering the same liability, the insurer is
liable to pay only _______________________________.
Question 4
Question 5
The extension of coverage for sports facility under a public liability policy is
subject to all of the following conditions, except:
I. The equipment and premises used for sports are kept properly maintained.
II. Adequate guards and experienced trainers are on duty, where necessary.
III. Coverage is subject to specified limits of indemnity (AOA/AOY) which form
part of the overall limits.
IV. There is compulsory excess of 1/4 % of the limit of indemnity for any one
accident.
Question 6
Which of the following factors is not used for determining the premium for
industrial risks under a public liability policy?
Answer 1
Answer 2
The correct option is III.
The maximum time limit allowed for notification of claims under the extended
claim reporting clause is 90 days from the date of expiry or cancellation of the
policy.
Answer 3
Where there is more than one policy covering the same liability, the insurer is
liable to pay only its rateable proportion of such liability.
Answer 4
Pollution coverage does not provide coverage for injuries caused due to gradual
pollution occurring on 24 hour basis.
Answer 5
The extension of coverage for sports facility under a public liability policy is not
subject to compulsory excess of 1/4% of the limit of indemnity for any one
accident.
Answer 6
Number of employees is not used for determining the premium for industrial
risks under a public liability policy.
Chapter Introduction
This chapter discusses the need for product liability insurance, its features and
various aspects related to products liability insurance policy. The chapter also
introduces the concept of Product recall insurance.
Learning Outcomes
Products liability cover had its origin in the ‘Food and Drink’ risks. ‘Food and
drinks’ covers were added by endorsement to the public liability policies issued
to hotels and restaurants. The endorsement provided cover for legal liability for
death, bodily injury or illness caused by foreign or other deleterious matter in
food or drink sold or supplied by the insured. This cover was also demanded by
manufacturers, wholesalers and retailers engaged in the supply of food and
drink.
Eventually, the demand for such cover evolved in respect of other goods such as
woolen clothing and fur coats that caused dermatitis, a skin ailment. The
judgement given by a court in the case of Donoghue v. Stevenson further
boosted the demand for products liability insurance.
With the passage of time, as the demand for this type of cover increased from
manufacturers, wholesalers and retailers, a separate products liability policy
was devised to provide cover in respect of the products manufactured, sold,
supplied, repaired, serviced etc.
The demand for this kind of insurance protection has arisen because of a wide
variety of products. When these products are sold to the public, if they are
defective, they may cause death, bodily injury or illness to people or damage to
property. Apart from the goods, containers too can cause injury or damage.
An increasing consciousness on the part of the public of their legal rights and
remedies coupled with the emergence of consumer protection organisations in
the country have further contributed to the demand for this class of insurance.
Example
Products such as canned food stuff, aerated waters, medicines and injections,
animal and poultry feeding stuff, electrical appliances, mechanical equipment,
acids & chemicals and gas cylinders etc. manufactured and sold to the public in
the modern industrial society need this kind of insurance.
2. Legal background
A manufacturer
A wholesaler or
A retailer
Claims for injury or damage may be made against any one or two or all of the
above by the purchaser of the goods.
Liability for these claims may arise under any of the following:
Some of the provisions of this act which have relevance to the liability are
as under:
a) Section 15
Under Section 15 of the Sale of Goods Act, the seller has a responsibility to
ensure that the goods sold correspond with the description. If the sale is by
sample, then in addition to corresponding with the description, the goods
should also correspond with the sample.
b) Section 16
According to Section 16, the seller has an obligation to ensure that the
goods sold are fit for the purpose for which they are required by the buyer
and if, the goods are bought by description, that they are of merchantable
quality. This section modifies the common law maxim of ‘buyer beware’.
This provision applies whether the seller is a manufacturer or not.
c) Section 17
Section 17 provides that in contracts of sale by sample, the goods shall, not
only correspond with sample in quality, but shall also be free from defects.
d) Section 59
Section 59 confers on the buyer the right among other things, to claim
damages for breach of contract.
e) The actions under Sale of Goods Act for breach of condition or warranty
need not be based on negligence. This position applies only as between
the parties to the contract. An injured party who is not a party to the
contract may, of course, have a claim against the seller but the claim
will have to be based on negligence.
IC-74 LIABILITY INSURANCE 167
CHAPTER 6 NEED FOR AND LEGAL ASPECTS OF PRODUCTS LIABILITY INSURANCE
f) A guarantee given by the seller may include not only replacement of the
defective product but also indemnity to the buyer against any loss,
damage or injury caused by the defective product. This would be liability
assumed under contract or agreement which is excluded under the
products liability policies.
g) On the other hand, the seller may contract out of his liability by
including a disclaimer. The law does not prohibit such disclaimers so long
as the following conditions are satisfied:
i. The disclaimer is brought clearly to the notice of the buyer before the
sale is effected and
ii. The disclaimer is not contrary to public policy.
h) The buyers, too, in certain contracts, may endeavour under the terms of
purchase to transfer to the seller all liability for loss, injury or damage
suffered by the buyer. Whether the seller is liable or the buyer is liable
will have to be determined with reference to the actual circumstances
of the sale.
Thus, liability for injury or damage caused by a defective product can arise
on the basis of breach of contract as provided in the Sale of goods Act. The
protection under the Act applies only in respect of purchaser of goods and
the claimant need not prove negligence on the part of the seller.
Apart from the purchaser who is a party to the contract, claims for injury or
damage may also be preferred by a member of the public who has no
contractual relationship with the manufacturer, wholesaler or retailer e.g. a
relative or friend of the purchaser. Liability in such cases arises under the
law of tort and the principles of the law of negligence will govern the
situation.
Example
The classic English Case “Donoghue vs. Stevenson (1932)” illustrates the law in
this regard. Briefly, the facts of the case were as follows:
The Plaintiff who drank beer from a bottle of ginger beer brought by a friend
from a retailer, suffered illness because the beer contained the remains of a
snail. The defendant manufacturer was held liable. Lord Atkin in his judgement
established the following important principle.
This decision has made it clear that a manufacturer is duty bound to exercise
care in the process of manufacture. The decision has also established that
persons other than the purchaser have a direct right of recovery against the
manufacturer which right arises in tort. Subsequent developments in the English
Law have expanded the term "manufacturer" to include repairers, assemblers,
erectors etc.
Thus, the law of tort gives rise to wider liability. The person who puts goods on
to the market owes a duty of care to all persons whom he ought reasonably to
have in mind as likely to sustain injury by the use of the goods, irrespective of
whether or not such persons are parties to the contract of sale. .
i. ‘Defect’ in goods,
ii. ‘Consumer complaint,
iii. ‘Consumer dispute’
iv. ‘Manufacturer’ and
v. ‘Trader’
c) The provisions of the Act are in addition to and not in derogation of the
provisions of any other law. Therefore, the complainant has the option
to seek redress in a Civil Court.
Test Yourself 1
An injured party who is not a party to the contract may have a claim against the
seller. The claim will have to be based on which of the following?
A Products Liability Policy is, generally structured along the same lines as a
General Public Liability Policy for industrial risks (hereinafter referred to as P.L.
Policy)
Many clauses, exclusions and conditions are common to both policies. These are
pointed out wherever relevant. To avoid repetition, only those clauses and
exclusions which are special to products liability policy are now dealt with.
Further, the policy wordings discussed here are as per the market agreement
between the general insurers and the actual wordings being used by the Insurers
now may differ from these wordings based on the filed wordings.)
a) The first part of the clause refers to the business of the Insured, the
proposal and declaration and payment of premium.
b) The second part of the clause which is special to product liability policy
provides that the company will indemnify the Insured:
c) The clause further provides that the indemnity does not apply:
i. Claims arising out of accidents during the period of insurance and first
made in writing against the Insured during the Policy Period.
ii. Claims arising out of any defects in the products specified in the
schedule.
d) The definition of product is the same as under P.L. Policy but the
following sub-clause is omitted:
"But shall not mean food and beverages supplied by or on behalf of the
Insured primarily to the Insured’s employees as a staff benefit".
This clause is the same as under the P.L. Policy except that Separate
Compulsory excess are provided for different geographical locations.
Normally the excess applicable to USA/Canada are much higher when
compared to other countries.
The policy is also subject to Claims Series Clause. A claims series event is
deemed to be one claim. The date of loss shall be the date when the first claim
of the Claims Series Event is made in writing against the Insured.
Definition
A Claims Series Event is defined as a series of two or more claims arising from
one specific common cause which is attributable:
Example
a) All such claims are clubbed together for the purpose of applying the limit
of indemnity for any one accident. Thus, the Indemnity Limit applies to
any one claim or a series of claims arising from one originating cause.
b) The clause also provides for a time limitation. Claims arising from one
specific cause made after 3 years after the first claim of the series are
not covered.
Some exclusions are common to both products and public liability policies and
some are specific to products liability.
The policy is designed to pay for liability for injury or damage caused by a
defective product and not to pay for damage to the product itself.
Example
A manufacturer may have supplied a car with defective tyres. The tyres could
burst causing a collision that results in injuries to pedestrians. In such a
situation, the policy covers the liability for the injuries, but not for replacement
of tyres or repair of the car.
ii. “Liability for claims for costs arising out of the recall of any product
or part thereof”. (8.2)
After being manufactured and introduced in the market, the products may
be found to be defective. An injury or damage to third parties may or may
not have been caused.
In either case, the insured for reasons of safety may have to incur the
expense of recalling or withdrawing the products from the market. The
policy does not pay these costs of recall of the product.
A separate policy is available for covering this kind of claims (discussed later
in the chapter)
iii. "Liability for claims arising out of any product which with the
Insured’s knowledge is intended for incorporation into the structure,
machinery or control of any aircraft". (8.3)
Example
An Insured supplies components for an aircraft engine or tyres for the aircraft. A
defective part may result in damage to the aircraft or even a crash. There is a
catastrophe risk involved and such cover is arranged in the specialist aviation
insurance market. The products liability policy does not cover liability for such
claims.
Example
A burglary alarm may fail to function at the time when burglar breaks into
premises. Pesticides may fail to kill the pests. Machinery supplied to a factory
may start malfunctioning resulting in loss of production.
These examples show that these are commercial or trade risks and are
excluded under the policy.
vi. “Liabilities arising out of products which have left the custody or
control of the insured prior to retroactive date specified in the
Schedule”. (8.16)
Further, the Indemnity clause (No.2) provides that the indemnity only
applies to claims arising out of accidents.
This exclusion is, more or less, similar to exclusion 8.12 of the Industrial
Risks Policy but exceptions (a), (b), (c) thereof are not included as these are
not relevant to products liability.
5. General conditions
The conditions (1 to 14) are the same as under the Industrial Risks P.L. Policy
except that condition 9.9(a) which appears in the latter policy is not included in
the Products Liability Policy. However, the condition 9.9 (contribution clause) is
applicable for products liability policy also.
(Note: The condition 9.9 (a) under public liability policy provides that the policy
does not cover liability which is insured by, or would but for the existence
of this policy be insured by any other policy(but not a public liability policy),
except in and respect of any excess beyond the amount which could have been
payable under such policy.)
6. Underwriting
Domestic
U.S.A., Canada
OECD Countries
Other countries
9. Rating
10. Extensions
a) Technical collaborators
This is subject to the proviso that no claim shall be payable under the policy
unless the cause of action arises in India and the liability is established in an
Indian Court except for claims in respect of exports of products covered
under the policy.
c) Vendor’s clause
Any act of the vendor which changes the condition of the Products.
Any fittings and/or manual work, etc, alterations to the product by
the Vendor.
Products which have been labeled or relabeled used as a container or
part of the product by the vendor.
iv. Bodily injury or property damage occurring within the vendor’s premises.
The insurance does not apply to any person or organisation from whom the
named insured has acquired such products or any part forming part of such
products.
It may be recalled that the operative clause of the policy provides that the
indemnity does not apply to any judgment award etc. under the laws of the
U.S.A. or Canada, unless the Insured has requested for such extension.
Test Yourself 2
A Claims Series Event is defined as a series of two or more claims arising from
one specific common cause which is attributable to:
Generally, Product liability Insurance policies exclude liability for claims for
costs arising out of the recall of any product or part thereof. Some Insurers
provide cover for these product recall expenses. This cover may be provided as
part of Product liability Insurance as an extension or as a standalone “product
recall insurance policy”.
This policy indemnifies the insured for recall expenditure incurred by Insured.
Product recall insurance is typically purchased by manufacturers such as food
and beverage, toy, Automobile parts manufacturer and electronics companies to
cover costs such as customer notification, shipping costs and disposal costs.
Coverage generally applies to the firm itself, though additional coverage can be
purchased to cover the costs of third parties.
Summary
a) Liability for injury or damage caused by a defective product can arise on the
basis of breach of contract as provided in the Sale of Goods Act or tort of
negligence or under the provisions of the Consumer Protection Act.
b) Liability for defective products may arise in a variety of ways. Whether such
liability is covered under the Products Liability Policy will depend upon the
terms, exclusions and conditions of the Policy.
c) The provisions of the Consumer Protection Act, 1986 apply to claims related
to defective goods. The Consumer Disputes Redressal Forum is empowered
to issue orders as applicable in such cases.
e) Clauses that are specific to products liability policy are namely: Operative
clause, Indemnity and Indemnity Limits.
f) General conditions (1 to 14) are the same as under the Industrial Risks P.L.
Policy except that condition 9.9(a) which appears in the latter policy is not
included in the Products Liability Policy.
Answer 1
The claim by an injured party who is not a party to the contract will have to be
based on negligence.
Answer 2
Both options are causes that could give rise to a Claims Series Event.
Self-Examination Questions
Question 1
The first part of the operative clause refers to which of the following?
Question 2
Which of the following is not an exclusion common to both products and public
liability policies?
I. Nuclear risks
II. Injury to employees
III. Contractual liability
IV. Liability arising out of any product guarantee
Question 3
“Liability for claims for costs arising out of the recall of any product or part
thereof” is an example of:
Question 4
Question 5
Which of the following is a result of the judgment given by a court in the case of
Donoghue v. Stevenson?
I. Reduction in demand for public liability insurance
II. Reduction in demand for products liability insurance
III. Increase in demand for public liability insurance
IV. Increase in demand for products liability insurance
Answer 2
The correct option is IV.
Liability arising out of any product guarantee is exclusion specific to a products
liability policy.
Answer 3
The correct option is II.
“Liability for claims for costs arising out of the recall of any product or part
thereof” is an example of exclusion specific to products liability policy.
Answer 4
The correct option is IV.
Probability of loss is not a heading in the risk assessment report.
Answer 5
The correct option is IV.
The judgment resulted in an increase in the demand for products liability
insurance.
Chapter Introduction
This chapter aims to provide you with knowledge about the need for
professional indemnity Insurances, standard of care as required by the
professionals from various fields, the basis of liability for a professional person
and the policy forms and clauses in the various professional indemnity policies.
This chapter also discusses professional liability insurance offered to computer
service providers.
Learning Outcomes
Sumeet was interested in investing a lump sum amount in a plan which can
provide him with a certain level of income per year with a minimum risk of
capital loss. So he went to a financial consultant, Akshay, who ran a financial
consulting agency, to get some advice. Akshay suggested investing in a
particular fund according to Sumeet’s requirements.
However, Sumeet did not receive any yearly income from the fund, but in fact,
suffered a capital loss during the two year investment period. Akshay has not
even provided any updates to Sumeet during the investment period of two years
regarding the performance of his fund. Later, Sumeet came to know from other
sources that the fund was not performing well at the time of the original
investment.
Therefore, in this case, it is clear that reasonable judgement was not exercised
by Akshay while performing his duty as a professional, which had resulted in big
losses to his client. Sumeet filed a case against Akshay for professional
negligence and the court awarded compensation to be paid by Akshay to
Sumeet. Akshay also had to incur legal expenses in defending his case.
In this chapter, we will discuss what is the standard of duty of care expected
from professionals in performing their duty, when does a professional liability
arise, how can it be covered under insurance and how do the clauses in
professional indemnity policies differ from other liability policies.
ii. Are answerable to the governing council in the event of failure to adhere
to these practices.
Thus the medical professionals governed by the Medical Council of India or the
Engineers or Chartered accountants would be issued Professional indemnity
policies. All other professionals would be issued Errors & Omissions policies. This
is the common practice in India regarding professional indemnity policies.
2. Basis of liability
The principle regarding the standard of care was stated in this English case
concerning a doctor, in the following words:
Every person who enters into a learned profession undertakes to bring to the
exercise of it a reasonable degree of care and skill. He does not undertake,
if he is an attorney, that at all events, you shall gain your case nor does a
surgeon undertake that he will perform a cure; nor does he undertake to use
the highest possible degree of skill. There may be persons who have higher
education and greater advantages than he has, but he undertakes to bring a
fair, reasonable competent degree of skill.
For the defendant did not contract that he would bring to the performance
of his duty on this occasion an extraordinary degree of skill but only a
reasonable and ordinary proportion of it and it appears to us that it is not
only an unobjectionable mode but the most satisfactory mode of
determining this question to show by evidence whether a majority of skilful
and experienced brokers would have come to the same conclusion as the
defendant.
In this another English case, the standard of care expected from an architect
was stated as follows:
With reference to doctors, the law, as laid down by the Supreme Court of
India in this case is as follows:
A person who holds himself out ready to give medical advice and treatment
impliedly undertakes that he is possessed of skill and knowledge for the
purpose. Such a person when consulted by a patient owes him certain
duties, namely, a duty of care in deciding whether to undertake the case, a
duty of care in deciding what treatment to give or a duty of care in the
administration of that treatment. A breach of any of these duties gives a
right of action to the patient against doctor of negligence.
Example
If a patient dies or his condition gets worse as a result of any treatment, it does
not make the doctor liable for the act. It will need to be proved that the error
was committed by the doctor.
The doctors will have to exercise reasonable skill and care in performing their
duties. Therefore, unless and until it is not clear and evident that there was a
breach of accepted professional standards by the doctor while performing his
duty, he cannot be blamed for the condition of the patient.
One of the most important questions which arise in this context is that to
whom does the professional person owe this duty to exercise a fair
reasonable and competent degree of skill?
The decision in the English case Candler v. Crane Christmas & Co (1951)
illustrates this concept of privity of contract.
Case Study
The facts of the case were: the defendants, a firm of accountants and auditors
were asked by the Managing Director of a company to prepare the company’s
accounts and the balance sheet. The clerk of the firm who prepared the
accounts knew that they were required for the purpose of inducing the plaintiff
to invest money in the company. The plaintiff subscribed for shares in the
company on the basis of the draft accounts shown to him by the firm of
accountants. The company went into liquidation and the plaintiff lost the
money invested by him.
It was established that there was negligence in the preparation of the accounts
as they did not reflect a true statement of the financial affairs of the company.
The plaintiffs filed an action against the firm of accountants but the court held
that in the absence of contractual relationship between the parties, the
defendants owed no duty to the plaintiffs to exercise care in preparing the
accounts.
b) Those to whom a duty of care will arise under the circumstances coming
within the scope of Hedley Byne decision.
Under this, even in the absence of a contract, a duty of care may arise, where
there is a fiduciary relationship in which trust or confidence is placed in a
person. Such a person has to use care and skill in the conduct of duties assigned
to him. Such relationships may arise between solicitor and client, principal and
agent or trustee and beneficiary.
Case Study
The facts of the case were: in reply to an enquiry from a bank on behalf of
its customer, concerning the creditworthiness of a firm, a merchant bank stated
in writing, that the firm “was good for its ordinary business engagements”.
But the opinion was given “without responsibility”. The bank’s customer, who
relied on this information, suffered financial loss when the firm went into
liquidation. The customer sued the merchant bank for negligent misstatements
about the firm’s standing.
The action failed because of the disclaimer on the written reply. But the case is
important because of the opinions of the House of Lords which introduced the
principle, that in appropriate circumstances the professional would be liable
to persons other than his clients.
Since this judgement several English cases have been decided based on the
Hedley Byrne principle.
Case Study
In Dodds & Dodds v. Millmann (1964), the plaintiff in buying a building relied
upon an inaccurate statement made by the vendor’s estate agent regarding
projected revenues and expenses.The court held that the estate agents were
liable for damages even though they were not having any contractual
relationship with the plaintiff.
Case Study
The court held that although the applicants were not in a contractual
relationship with the valuers, there was sufficient relationship of proximity or
neighbourhood so as to put the applicants within the reasonable contemplation
of the valuer that their negligence may cause loss to the applicants.
In addition, the professional man is vicariously liable for the negligence of his
employees arising out of and in the course of their employment. Liability may
also arise under the Consumer Protection Act. It should be noted that even
service provided by the medical profession is within the scope of the Consumer
Protection Act, as per the decision of the Supreme Court of India.
Case Study
A site owner instructed an architect to plan and supervise the site
redevelopment including demolition work through contractors. The architect
failed to inspect a wall and issued a certificate that it could remain standing.
Later the wall collapsed injuring a workman. The architect was held liable
jointly with the demolition contractor. (Clay v. A.J. Crump & Sons Ltd., 1964).
Test Yourself 3
Test Yourself 1
The important decision that ‘the professional would be liable to persons other
than his clients in appropriate circumstances’ was held in which of the following
court cases?
1. Policy forms
Professional indemnity policies issued in India are generally structured along the
lines of industrial/non-industrial and products liability policies discussed in the
earlier chapters. However there are variations introduced by some insurers
based on their risk perceptions and the business category. Such forms are also
filed with the IRDA.
The headings of all clauses are almost same such as operative, indemnity, limit
of indemnity, defence costs, notification extension and extended claim
reporting, claims series, excess, exclusions and conditions. Many of these
clauses terms and conditions are also identical with those in industrial risks
policies and will be pointed out later in the chapter.
All the professional indemnity policies are almost same and differ from each
other in respect of certain clauses only. These differences will be discussed in
this chapter. Thus, to avoid unnecessary repetition, the clauses which are
explained in previous chapters will not be dealt with again. The clauses which
are special to professional indemnities will now be examined.
The policy forms for both doctors and medical establishments are similar except
in respect of ‘excess’ and some exclusions.
This clause provides that: the indemnity applies only to claims arising out of
bodily injury and/or death of any patient caused by or alleged to have been
caused by error, omission or negligence in professional service rendered or
which should have been rendered (hereinafter referred to as the ‘Act’). by:
The Insured, or
i. Such act during the period of insurance results in a claim first made in
writing against the Insured during the policy period.
ii. No liability for any claim for act committed or alleged to have been
committed prior to the retroactive date specified in the Schedule.
There is only one limit which is applicable to the policy period. This is an
overall limit which applies to all claims against the Insured, qualified
assistants, nurses, etc.
The provisions of this clause are: Where a series of losses and/or bodily
injuries and/or deaths are attributable, directly or indirectly, to the same
cause or error or omission in the discharge of professional services;
i. All such claims are added together and treated as one claim, and
ii. Such claim shall be deemed to have been made at the point in time
when the first of the claims was made in writing.
There shall, however be no coverage for claims from the same cause, which
are made later than three years after the first claim of the series.
The Insured may opt for voluntary excess which shall be applicable to each
and every claim and, in addition to the compulsory excess.
Example
The excess clause sets the payment which an insured has to pay before the
insurer starts making the payment. The excess clause in most of the policies for
medical establishments in India requires the insured to bear a compulsory
excess of 0.25% of the indemnity limit for each and every claim. The maximum
and minimum limit is also set for this excess amount. For example, the amount
of excess which the insured has to bear can be subject to a minimum of
Rs.1,500 and a maximum of Rs. 125,000.
e) Exclusions
f) Additional exclusions
g) Other exclusions
The other exclusions in both the policies are the same as under Industrial
Risks Policies and are related to:
The conditions are the same as under the Industrial Risks Policy.
The clause provides that the Indemnity applies only to claims arising
out of losses and/or damages during the period of insurance first made in
writing against the Insured during the Policy Period.
The act during the period of insurance results in a claim first made in
writing against the Insured during the policy period.
No liability for any act committed prior to the retroactive date
stated in the Schedule.
The clauses which are identical to the clauses in other policies and which
are already dealt with are: limit of indemnity clause, defence costs clause,
notification extension clause, extended claim reporting clause, claims
series clause and compulsory /voluntary excess.
c) Exclusions
The common exclusions mentioned in point 2.g above also appear in these
policies. Some of the exclusions which are specific to these policies are
mentioned below. The policy excludes claims for or in respect of:
4. Conditions
The 14 conditions mentioned in the policy are the same as under other liability
policies. These have already been dealt with in Chapter 3.
5. Proposal forms
Doctors Appendix 7
(Note: The student should be familiar with the questions in the form as these
are relevant to rating and underwriting.)
6. Rating
i. The premium rates charged for individuals are on the basis of the annual
indemnity limit.
ii. For organisations and companies, in addition to the indemnity limit,
premiums are charged on annual fees or turnover and the staff strength.
iii. In the case of medical establishments, premium rates are charged on the
basis of number of patients. Loading of premium is provided for extra
facilities like x-ray etc.
Test Yourself 2
I. The insured has to bear a compulsory excess for each and every claim.
II. The insured will have to pay from his pocket the amount of claims which
exceeds the indemnity limit.
III. The insured may opt for excess indemnity limit during the period of
insurance.
IV. The excess limit will cover the cost of defending the claims.
I.
Test Yourself 3
This policy is also termed as Tech Errors and Omissions Insurance Policy
1. Coverage
These policies are relatively of recent origin. The policy wordings and coverage
terms are likely to vary widely between different Insurers. These policies
provide coverage for legal liability of Insured to compensate others for loss
resulting from Insured’s wrongful act. The wrongful act must be by Insured in
performance of computer services for other for a fee. The wrongful act must
take place after retroactive date and before end of policy period. Wrongful act
means actual or alleged negligent act, error or omission in the performance of
computer services.
-
2. Exclusions
The common exclusions applicable for Professional Indemnity policies apply for
this policy also. Some of the additional exclusions are as under:
3. Limits of indemnity
The limits of liability applicable are for each wrongful act (AOA limit) and
aggregate limit for the policy (AOY Limit). If there are two or more professional
indemnity policies issued covering same wrongful act, the Insurers liability shall
not exceed the proportion of the loss that the policy’s applicable limit of
coverage bears to the total applicable limits of coverage under all such policies.
4. Extensions
Some common extensions which may be offered by insurers under this policy are
as under:
iii. Dishonesty of Employees covering liability of Insured from any claim for
fraud/dishonesty of any employee of Insured
5. Conditions
6. Premium
The premium generally depends on the past history of the client, contract
value/gross revenue and duration, territory and jurisdiction of coverage,
number of employees working on the project etc.
Summary
b) Negligence arises when there is a duty of care, a breach of that duty and
consequent loss or damage by the breach.
c) The duty of care is owed both to clients and also for other than clients
under certain circumstances.
g) The policy forms for both, doctors and medical establishments are similar to
other policies except in respect of ‘excess’ and some exclusions.
h) The excess clause is applicable only for medical establishments where the
insured has to bear a compulsory excess for each and every claim.
i) Claims related to violation of any law, services rendered under the influence
of intoxicants, third party public liability, AIDS, genetic injuries due to
radioactive treatments, cosmesis and services rendered prior to retroactive
date are specially excluded in a professional liability policy for doctors and
medical establishments.
j) The premium rates for individuals are charged on the basis of the annual
indemnity limit, for organisations and companies on the basis of annual
turnover and staff strength, and for medical establishments on the basis of
number of patients.
Answer 1
Answer 2
Answer 3
The excess clause in a professional liability means that the insured has to bear a
compulsory excess for each and every claim.
Answer 4
No coverage is available for the claims in the claims series which are made
more than three years after the first claim of the series.
Self-Examination Questions
Question 1
The standard of care that is expected from an architect was stated under which
of the following court cases?
I. Chapman v. Walton
II. Lanphier v. Phipos
III. Badgley v. Dickson
IV. Candler v. Crane Christmas & Co
Question 2
Professionals are liable on the basis of the principle of __________ liability for
the negligence of their employees arising in the course of their employment.
I. Indemnity
II. Vicarious
III. Equal
IV. Contractual
Question 3
Question 4
All of the following claims for doctors and medical establishments are specially
excluded under professional liability policy coverage, except:
Question 5
The premium rates of a professional liability policy for an individual are charged
on the basis of ______________.
I. Annual fees/turnover
II. Annual indemnity limit
III. Number of clients
IV. Number of years of experience
Answer 1
Badgley v. Dickson case stated the standard of care that is expected from an
architect.
Answer 2
The professionals are liable on the basis of principle of vicarious liability for the
negligence of their employees arising in the course of their employment.
Answer 3
Answer 4
The professional services rendered after the retroactive date are included under
professional liability coverage for doctors and medical establishments.
However, if they are provided prior to the retroactive date, then are specially
excluded under the professional liability policy.
Answer 5
The premium rates of a professional liability policy for an individual are charged
on the basis of the annual indemnity limit.
Chapter Introduction
The Commercial General Liability Policy (CGL Policy) is a recent entrant in the
insurance sphere in India. The demand for the policy has arisen with the
globalization of the Indian business environment. Collaborations, Franchisee-
entities and mergers with foreign entities more specifically American and West
European Corporations have resulted in a demand for the product.
This chapter will introduce you to various aspects of a CGL policy including its
coverage, structure and rating parameters.
Learning Outcome
The CGL policy is a combination policy having elements of property and casualty
liabilities and financial liability within its fold. It covers public, product and
employer liabilities as also financial liabilities.
We now study the broad contours of the policy based on generic CGL policy. The
student should keep in mind the IRDA directives on “File and Use norms” for
insurance products. Thus insurers in India may not be offering all the elements
of the product to the prospective customers. Restricted coverage may be
offered to keep the policy within reasonable costs.
Furthermore the perception of risk protection by the insuring public and the
social and legal attitude towards liability coupled by the slow pace of judicial
judgements make it difficult to price a liability product in India.
Operative clause
The Coverage under the policy is under various sections and sub-sections. Each
of these sub-sections is subject to specific terms and also common terms
applicable for all sections.
This section deals with coverage and exclusions pertaining to liabilities due to
bodily injury and property damage.
A1 - Coverage
The policy pays if the insured is legally obliged to pay damages for bodily injury
or property damage covered under the policy subject to the following:
iii. The liability is limited to Indemnity limits as per Section III of the policy.
iv. This is a legal liability policy and negligence will have to be proved to
claim damages.
In order to understand the coverage provided under a CGL policy in its proper
context, it is necessary to compare the coverage provided under public and
product liability policies. Under a public liability policy, the indemnity provided
is for a claim due to legal liability arising out of accident occurring in the
insured premises arising out of injury or damage. In case of a product liability
policy, the indemnity is for claims due to legal liability arising out of accidents
arising out of defects in products specified in the policy schedule. In contrast,
the operative clause of CGL provides cover for legal liability to pay damages
because of bodily injury or property damages. There are no limitations for cover
in terms of Insured premises or products specified as long as the occurrence and
claim are in coverage territory specified, thereby providing a wider coverage.
CGL also provides cover for supplemental payments, medical expenses and fire
damages.
Coverage under CGL policy as above is restricted to cover only third party
liabilities by subjecting to certain exclusions as below:
(Note: Though the list of exclusions are provided under a separate section
below, some of the important exclusions are discussed above for bringing in
clarity on coverage)
The insurance company has the right and duty to defend the case. However this
right will be exercised only where the law of the land permits the insurance
company to defend the case. It will end once the payouts in judgement or
settlements cross the limit of liability under the policy. Where insurers are not
permitted to defend the case they will reimburse the costs for the same that
the insured may incur.
The right to defend the case is also known as the Duty to Defend Clause. It
should be noted that the law in India does not permit insurers defending the
case except where statutorily provided. For example: Motor Third Party. Thus in
India the cause of action is between the insured and the claimant and the duty
to defend clause is not implemented.
A2 - Exclusions
b) Contractual liability
Example
An employee is alleged responsible for injuring a member of the public in the
office premises, the employee pleads innocence. As the employers’ liability
policy will be required to pay any loss, the cost of defending the case of the
employee and submitting proof of innocence will be an allowable cost, if policy
terms permit.
d) Pollution liability
Exclusions (iii) to (x) do not apply to damage by fire if premises are rented or
temporarily occupied by insured. In such cases, the limit of insurance for this
coverage applies
It can be observed that the above exclusions are very similar to those under the
general public and product liability policy mentioned in chapters 5 & 6.
B1 Coverage:
B2 Exclusions:
C1 Coverage
The policy pays medical expenses for bodily injury caused by an accident within
the covered territory and within the policy period provided the expenses are
incurred and reported to insurers within one year of the accident. The injured
will be subject to examination by insurer’s appointed physicians as and when
required. The coverage is applicable for accidents occurring:
C2 Exclusions
a) Under this coverage, the insurers will pay for all expenses incurred by
them in investigation, defence and settlement of suits including:
i. Bail bonds upto a limit for traffic violations or accidents arising out of
use of vehicles to which bodily injury liability coverage applies.
ii. Cost of bonds to release attachments within the applicable limit of
insurance
iii. Reasonable expenses incurred by the insured on request of insurer to
assist in investigation or defense including actual loss of earning upto a
per day limit as decided for time off work.
iv. Costs taxed against the insured in the suit
v. Prejudgement interest awarded against the insured on that part of the
judgement payable by insurers. If offer to settle applicable limit of
insurance then prejudgement interest based on that period of time after
the offer.
vi. All interest on the full amount of any judgement that accrues after entry
of the judgement and before insurers have paid, offered to pay, or
deposited in court the part of the judgement that is within the
applicable limit of insurance.
i. The suit against the indemnitee seeks damages for which the insured has
assumed the liability of the indemnitee in a contract or agreement that
is an insured contract.
ii. This insurance applies to such liability assumed by the insured.
iii. The obligation to defend or the cost of the defense of that indemnitee
has also been assumed by the insured under the same insured contract.
iv. The allegations in the suit and the information known by the insurer
about the occurrence are such that no conflict of interest appears to
exist between the interests of the insured and indemnitee.
v. The indemnitee and insured authorize insurers to conduct and control
the defense of that suit and agree to assign the same counsel for both.
vi. The indemnitee agrees in writing to cooperate in investigation,
settlement or defense, supplies copies of all demands, notices or
summons or legal papers connected with the suit, notify any other
insurer whose coverage is available to the indemnitee and cooperate to
coordination with other applicable insurance.
vii. The indemnitee provides written authorization to obtain records and
other information related to the suit and conduct and control of the
defense of the suit.
If the above conditions are fulfilled, the expenses related to these defence
and litigation incurred by the insurer and the indemnitee at the request of
the insurer will be payable for bodily injury or property damage liability
under section I coverage A. These expenses will not be deemed to be
damages for bodily injury and property damage and will not reduce the
limits of insurance.
Note 2: The cover provided under this section is usually for defense of
indemnitee and costs involved in investigation and collection of information
for the suit.
Test Yourself 1
The term “Insured” has various meanings under CGL policy which are given
below:
i. If Individual is the sole owner of the business, individual and spouse are
insureds
iii. In case of limited liability company, the limited liability Company and
the managers are Insureds
iv. In case of any other organization, the organization, its executive officers
and directors and stockholders are Insureds
a) Employees other than those included under A above. However, they are
not insureds for
b) Bodily injury or personal or advertising injury to:
ii. Organisation responsible for the conduct of such person if they do not
have any liability coverage for such operations.
The policy does not cover injury to co-employees or property owned, occupied
rented or in the charge of the insured or employer of the person driving.
Coverage will commence after 90 days or the end of the policy period,
whichever is earlier. Coverage A and B will not be available for offenses
committed before the acquisition of these organizations.
All such entities must be stated as named insured to qualify for the coverage
under the policy.
It will be observed from this section that the policy is required to list the names
of the insured persons eligible for benefits under the policy. The First Named
Insured being the organization entitled to most benefit of the policy. The
employees and other entities coverage is restricted under various sections.
The limits of insurance payable under the policy is the maximum liability of the
insurer irrespective of number of a) Insureds b) Claims made or suit brought c)
persons or organization making claims. In view of various coverage sections
under the policy, the limits of Indemnity applicable are of the following types:
1. Master Control Program aggregate is the maximum claim payable under the
policy
2. General aggregate Limit is the maximum payable in respect of damages
under coverage A excluding bodily injury or property damage included in the
products-completed operations hazard, damages under coverage B and
medical expenses under coverage C
3. Products-Completed operations aggregate limit is the maximum payable
under coverage A for damages because of bodily injury and property damage
included in the products-Completed operations hazard
4. Personal and Advertising Injury limit is the maximum payable under
coverage B
5. Each Occurrence limit is the maximum payable for the sum of damages
covered under coverage A and medical expenses under coverage C because
of bodily injury and property damage arising out of one occurrence
6. Premises rented to Insured limit is the maximum payable under coverage A
for damages because of property damage to any one premises rented to
Insured
7. Medical Expenses limit is the maximum payable under coverage C for all
medical expenses because of bodily injury sustained by any one person
1. Bankruptcy:
Bankruptcy of insured does not absolve insurers of their obligations under the
policy
iii. Forward copies of all demands, notices, summons in connection with the
claim
4. Other insurance
Duty to defend is not allowed if the other policy has duty to defend clause
or if defence is undertaken under this Policy, Insurer is entitled to Insured’s
rights.
This policy will pay only in excess of other policies and deductibles or self-
insurance under all other policies or insurances.
5. Premium audit
Premiums are calculated on insurers’ rules and rates. The premium charged on
the policy is an advance or deposit premium. At the end of each audit period,
the earned premium will be computed and notice will be given to insured for
payment.
This must be paid on demand. Excess between advance premium and audit
premium will be refunded. Records on the basis of which calculation of
premium is done must be maintained by the insured.
6. Representations
The statements declarations made by the insured are accurate and complete
and are the basis of the policy.
7. Separation of insured
Except with respect to the Limits of Insurance and rights or duties specifically
assigned in the Coverage Part to the Named Insured, this insurance applies to
each Named Insured independently and separately to each insured against
whom claim is made
The insured’s rights to recover payments made under the policy are transferred
to the insurers. These rights should not be impaired. The insured is required to
assist insurer to enforce these rights.
10. Cancellation
11. Changes
Insurers may examine and audit insureds books and records relating to the
policy at any time during the policy period and upto three years thereafter.
Insurers have right to conduct inspection and surveys and provide insured with
the report and recommendations. The inspections are merely for insurability
and premium purposes.
14. Premiums
First named insured is responsible for premium payment and will be entitled to
refund premiums.
Insured cannot transfer their rights and duties under the policy without insurer’s
consent. In the event of death of Individual insured, the rights may be
transferred to legal representatives only for scope of the policy, or temporarily
to executors.
2. Auto means a land motor vehicle, trailer or semitrailer designed for travel
on public roads, including any attached machinery or equipment. But not
mobile equipment.
7. Hostile fire means one which becomes uncontrollable or breaks out from
where it was intended.
a) A contract for lease of premises. However it does not include the part of
the contract that indemnifies the landlord or owner of the property for
fire damage to the premise leased to or temporarily tenanted by the
insured.
b) A side track agreement
c) An elevator maintenance agreement
d) That part of any contract where liability is assumed on behalf of others
under tort. It does not include construction, maintenance of railways,
architects engineers or surveyors for maps drawings, field orders or
specifications or directions or failure to give directions
10. Leased worker is a person leased to you by a labour leasing firm under
agreement to perform duties related to the insured’s conduct of business.
12. Local underlying policy means a primary policy effective on or after the
inception of this policy which has been issued at insurers’ direction or
coordinated specifically for this insurance program.
a) Includes all bodily injury and property damage occurring away from
premises insured owns or rents and arising out of the product or work
except:
i. When all the work called for in contract has been completed
ii. When all the work at the job site has been completed when the contract
specifies more than one jobsite
iii. When that part of the work at the job site has been put to its intended
use by any person or organization other than the contractor or
subcontractor working on the same project. Work that may need service,
maintenance, correction or repair or replacement but which is otherwise
complete will be treated as completed.
19. Suit means a civil proceeding and includes an arbitration proceeding for
such injury or damage or an alternative disputes resolution proceeding for
the same purpose.
20. Temporary worker is a substitute for seasonal or short term work conditions
21. Terrorism means the unlawful use of violence against persons or property to
further political objectives and which is intended to intimidate or coerce a
government, individual or persons to modify their behavior or politics.
Terrorism does not include any act of violence directed at a specific individual
or individuals which is motivated by personal reasons specific to the parties like
robbery murder etc.
22. Product means goods or products, other than real property, manufactured,
sold, handled, distributed or disposed by insured or trading under insured
name or insured acquired business or assets and includes containers,
materials parts or equipments furnished in connection with such goods or
products.
The product does not include vending machines or other property rented to or
located for the use of others but not sold.
1. Proposal form
A proposal form is must for this insurance. The details to be asked for in a
proposal form are mainly pertaining to insureds name, address, details of
premises, insured’s activities, turnover figures, details of products
manufactured or supplied, quality control information, past insurance, claims
history etc.. .
Students are advised to go through the sample proposal form given in Appendix-
11 for proper understanding on the details required.
2. Rating
The premium is charged on the indemnity limits and risk exposure. Various
factors used for assessing the risk exposure are as follows:
While the standard factors required for rating a risk are mentioned above some
of the risks may require additional information. For example seating capacity is
relevant to cinemas, project turnover is relevant to construction risk, number of
rooms and facilities are relevant to hotel, etc.
3. Deductible
Summary
c) The Coverage under the policy is under various sections and sub-sections.
Each of these sub-sections are subject to specific terms and also common
terms for all sections.
d) Coverage A1 deals with coverage for Bodily injury and property damage
liability and A 2 deals with exclusions applicable for this coverage.
i) Section III deals with limits of insurance applicable for different coverages
l) Details which are to be filled in the proposal form and the various rating
parameters are also discussed in the chapter
Answer 1
Self-Examination Questions
Question 1
I. 60 days
II. 6 days
III. 10 days
IV. 16 days
Question 2
The insurance company has the right and duty to defend the case. However this
right will be exercised only:
I. Where the law of the land permits the insurance company to defend the
case.
II. If the insurance company has already defended such cases earlier
III. If the case is judicial
IV. If the case involves hearing by the Insurance Tribunal
Question 3
Under Medical expenses for bodily injury caused by an accident within the
covered territory and within the policy period, expenses are incurred and
reported to insurers:
I. Immediately
II. Within one year of the accident
III. Within 1 month of the accident
IV. None of the above
Answer 1
The notice in case of non-payment of premium is 10 days and in all other cases
its 60 days.
Answer 2
The right will be exercised only where the law of the land permits the insurance
company to defend the case.
Answer 3
Expenses are incurred and reported to insurers within one year of the accident.
Chapter Introduction
Directors and officers liability policies are popular in the UK, USA and other
developed countries. These policies are relatively new in India.
This chapter will give you a basic understanding of Directors and Officers
Liability policies, the need for such policies, coverage, exclusions, various
extensions available under the policy and other aspects.
Learning Outcomes
Mr. Mohan Lal is one of the directors in ABC Ltd. One of the shareholders of ABC
company recently filed a complaint against Mohan Lal for taking a decision that
were detrimental to the long term prospects of ABC Ltd. The decision related to
the acceptance of a project was taken by Mr. Mohan Lal in his capacity as the
director of the company.
The shareholder alleged that acceptance of the project would involve huge
capital commitments and the decision is not in the interest of the company. The
company is currently heavily funded by borrowings and further borrowings may
lead the company into bankruptcy.
Directors and Officers of a company may be prosecuted for failures and civil
remedies may also be permitted against them. In this case, Mohan Lal, being a
director should have acted with diligence and carried out his duties with
reasonable care and skill.
Apart from common law responsibilities, the duties of directors under the
Companies Act relate to prudent management of the Company. These duties
can be delegatd to the members of management. Specific duties may also be
expressed in the Articles of Association.
There are no standardized policy forms. Different policy wordings are used by
different Insurers, though the basic coverage remains more or less the same.
In order to understand what the policy covers, we need to first understand the
following definitions:
Definition
2. ‘Discovery period’ shall mean the period of time specified in the policy,
immediately following termination of the policy during which claim
notification may be given by Insured to Insurer for a wrongful act occurred
prior to expiry of the policy.
3. ‘Loss’ shall mean legal liability of the Directors or Officers to pay damages
or costs awarded against them and costs and expenses incurred by the
Directors or Officers with the written consent of underwriters in respect of
investigation, defence or settlement of any claim.
4. ‘A Wrongful Act’ shall mean any actual or alleged breach of duty, breach of
trust, neglect, error, misstatement, misleading statement, omission, breach
of warranty of authority or other act done or wrongly attempted by any
Director or Officer.
3. Insuring clause
Loss arising from any Claim first made against them during the Period of
Insurance and notified to Underwriters during the Period of Insurance by
reason of any Wrongful Act committed in the capacity of Director or Officer
of the Company except for and to the extent that the Company has
indemnified the Directors or Officers.
Loss arising from any claim first made against the Directors or Officers
during the period of insurance and notified to Underwriters during the
Period of Insurance by reason of any Wrongful Act committed in the capacity
of Director or Officer of the Company but only when and to the extent that
the Company shall be required or permitted to indemnify the Directors or
Officers pursuant to the law, common or statutory, or the Memorandum and
Articles of Association.”
4. Exclusions
c) For any actual or alleged bodily injury, sickness, disease or death of any
person or any actual or alleged damage to or destruction of any tangible
property, including loss of use thereof. (This is a subject-matter of
Public Liability Policy.)
g) Made by any third party based upon breach of any professional duty
owed to such third party. (This is a subject-matter of a professional
indemnity policy.)
j) Based upon any failure or omission on the part of any Director or Officer
to effect and maintain insurance for or on behalf of the Company.
The limit of Underwriters total aggregate liability under both coverages (a) and
(b) is stated in the Schedule.
5. Claim Conditions
The policy conditions regarding claim notification and procedure is given below:
a) The Directors and Officers and the Company shall give to Underwriters
immediate notice in writing of any Claim.
b) The Directors and Officers and the Company shall give to Underwriters
written notice as soon as practicable of any circumstances of which the
Directors or Officers or the Company shall become aware which might
give rise to a Claim against the Directors or Officers, giving reasons of
the anticipation of such Claim, with full particulars as to dates and
persons involved.
Such notice having been given, any subsequent Claim made shall be
deemed to have been made during the Period of Insurance.
c) The Directors and Officers and the Company shall give Underwriters such
information and co-operation as Underwriters may reasonably require
and shall not disclose to anyone the existence of the Policy without
Underwriters consent, unless as a consequence of the requirements of
the law.
d) The Directors and Officers and the Company shall not admit liability for
or settle or attempt to settle any Claim or incur any Costs and Expenses
without the written consent of Underwriters who shall be entitled at any
time to take over and conduct the defence or settlement of any Claim.
f) Underwriters shall not settle any Claim without the consent of the
Directors or Officers or the Company. If however the Directors or
Officers or the Company shall refuse to consent to any settlement
recommended by the Underwriters and shall elect to contest or continue
any legal proceedings in connection with such Claim, then Underwriters
liability for the Claim shall not exceed the amount by which the Claim
could have been so settled inclusive of Costs and Expenses incurred with
their consent up to the date of such refusal, and then only up to the
Limit of Underwriter’s Aggregate Liability stated in the Schedule.
6. Deductibles
Test Yourself 1
I. Loss arising from any claim made by any third party based upon breach of
any professional duty owed to such third party.
II. Loss arising from any claim brought about by any Director or Officer gaining
any profit or advantage or receiving any remuneration to which he/she was
not legally entitled.
III. Loss arising from any claim where legal action or litigation is not brought in
a court of law within the Excluded Territories stated in the Schedule.
IV. Loss arising from any claim for tax or fines or penalties or punitive or
exemplary or multiple damages or any Claim deemed uninsurable under law.
1. Policy extensions
Different policy forms are in use by different insurers based on which the
coverage provided may differ. General list of important additional covers that
are possible under a D & O policy are listed below along with summary of
coverage details under the extension. It is possible that some of these
extensions may be offered as in built cover by some insurers and as additional
extensions by others. The students are advised to read the policy wordings
under different forms to understand if the coverage is already provided as in
built cover or needs to be opted as an extension.
Reasonable and necessary cost, fees and expenses incurred with prior
written consent of insurers for legally required attendance by any director
or officer at any official investigation, enquiry examination or similar such
proceedings
b) Outside directorships
This extends the cover for directors/officers of the Company while serving
as director/ officer for any other company, Organization, institute or society
provided such a position is held at the specific request of the Company. This
extension is usually subject to the other company not having insurance
coverage or is unable to indemnify the director.
c) Employment practices
e) Infringement of IPR
Defence cost and expenses for pollution related claims which is normally an
exclusion is included as coverage
This provides cover for claims against company, concerning past, present or
prospective employee of the company and arising out of actual or alleged
unfair or wrongful employment practices like discharge, dismissal,
termination, failure to promote, wrongful deprivation of career
opportunities etc.
This provides for extended time for reporting the claims which have
occurred after retroactive date and before expiry of the policy period.
Provides cover for costs associated with kidnap for ransom or distortion. This
cover is also provided by certain Insurers on standalone basis as Kidnap and
ransom insurance policy.
2. Proposal form
3. Rating
The premium chargeable under D & O Policy is based on the limit of Indemnity
and the policy excess opted. The premium rate is influenced by various risk
factors as under:
Summary
a) Directors and officers of companies may become liable to pay damages for
wrongful acts such as failure of supervision of the affairs of the company,
etc.
c) The coverage is granted in two parts under the insuring clause: Directors or
officers liability and Company Reimbursement Provision.
e) The Directors and Officers of the company would need to comply with
certain specified claim conditions.
Answer 1
Loss arising from any claim where legal action or litigation is brought in a court
of law within the Excluded Territories stated in the Schedule. (Is not is
incorrect)
Self-Examination Questions
Question 1
Question 2
There are a number of exclusions that may be present in policies. Which of the
following is not a policy exclusion to a Directors Liability policy?
I. Dishonesty of a director
II. Breach of professional duty
III. Fines penalties, etc
IV. Claims due to company reimbursement of directors liability
Question 3
One of the claim conditions is that the directors and officers of the company
shall give notice in writing of any claim made. Which of the following is the
time limit for such notice?
I. 24 hours
II. 48 hours
III. Immediately
IV. None of the above
Question 4
The Company may have to indemnify its directors and officers for any litigation
in respect of the latter’s breach of duty etc. in the conduct of the Company’s
affairs, provided that:
Answer 1
All the three options are examples of usual questions in the proposal form.
Answer 2
Answer 3
The directors and officers of the company should give notice of any claim in
writing immediately.
Answer 4
The Company may have to indemnify its directors and officers for any litigation
in respect of the latter’s breach of duty etc. in the conduct of the Company’s
affairs, provided that such obligation is expressly mentioned in the Company’s
Articles of Association
Chapter Introduction
In the last few chapters we discussed about some major types of Liability
policies. This chapter will give you a basic understanding of some other liability
insurances like E & O policy, Clinical trial Policy. We will also be discussing on
the liability insurances practices prevailing in UK and USA.
Learning Outcomes
1. Coverage
The policies are primarily on claims made basis and retroactive dates are to be
negotiated.
2. Exclusions
c) Libel or slander
3. Conditions
4. Deductible
A fixed amount
5. Proposal form
There is no standard proposal form. Insurers may call for details or documents
to ascertain the risk and exposure to decide the cover. The information called
for would range across the following:
b) The nature of business activity, the turnover and gross assets and
revenue.
h) Employee turnover
6. Rating
The premium is normally applied on the indemnity limit and the turnover. Rates
take into account the concentration or spread of clients the geographical area
of operations, the experience of the directors and employees, the claims
experience.
Test Yourself 1
Clinical trials are medical research studies involving people. It is done to test
the efficacy and safety of a drug on humans. This may be done on healthy
volunteers or patients suffering from a disease for which the medicine is being
tested. The process to be followed, type of people who may participate,
dosages and length of the study etc. are to be as per pre-defined protocols.
Clinical trials follow four phases and each phase will have a different purpose.
This involves a larger group of around 300 persons who are having the
disease or medical condition for which the medicine is being tested. In this
stage, safety and effectiveness is tested.
This is carried out on a large group of around 1000 persons from across the
world. Efficacy and effectiveness is further tested at various centres. Effect
is compared with commonly used treatments and information is collected
towards obtaining marketing approvals for the drug.
This is done after the drug obtains marketing approval. This is done for
monitoring of the efficacy and effectiveness over long term usage.
e) Ethics committee that approves the trial and has to ensure the safety of
the subject
Each of these stakeholders has responsibilities towards the human subject and
has significant liability exposure
4. Coverage
The policy covers the sum which Insured shall be liable to pay as
damages/compensation for claims made by subjects for death or injury or any
other adverse reaction in the body as a result of participation in clinical trial.
The term Insured would include all stakeholders in the trial. The cover includes
legal costs also. Breaches of data may also be covered.
The policy may be a single trial or multi trial policy. Post-trial coverage is also
offered for a limited period as decided. The territorial limits are specified
5. Exclusions
The protocols of the clinical trials, the particulars of all agencies involved in the
process, their experience and past insurance and claims history are obtained for
the purpose of this insurance
Premium rates are based on track record of the sponsor, whether single trial or
multiple trial policy, the phase of trials involved, number of subjects, their age,
details of drug etc..
1. Cybercrime liability
Some of the cyber liability exposures are Libel, hacking, inadvertent virus
transmission, copyright infringement, loss of identity.
The policy coverage is on the lines of an errors and omissions policy to cover
liabilities arising out of hacking email frauds, web developing, website
maintenance and E-commerce.
2. Stockbrokers Liability
Stockbrokers can be liable for wrong advice to clients and also failure to
execute or wrong execution of clients’ instructions to trade.
One of the conditions for the coverage is that they are registered members of a
stock exchange.
1. U K Practices
g) Professional Indemnities
i. In the U.K. mutual insurance schemes are in operation. For the medical
profession, the Medical Defence Union and the Medical Protection
Society cover their members against professional liability on a
subscription basis.
ii. Similarly, the Law Society has a mutual scheme to cover their member
solicitors.
2. U S A Practice
a) In the U.S., the policy commonly used to insure a wide range of liability
loss exposures of most organisations is the commercial general liability
(CGL) policy. The policy consists of coverage A, B and C. The details of
coverage is as discussed under Chapter 8
The facility form for operators of nuclear facilities and the suppliers’
Transporters’ forms for those that provide services, material etc. for
such facilities or transport property to and from a facility.
Test Yourself 2
Summary
c) These liabilities have not yet been tested in Indian courts of law.
i) The premium is normally applied on the indemnity limit and the turnover.
j) A clinical trials liability policy covers claims made by subjects for death or
injury or any other adverse reaction in the body as a result of participation
in clinical trial
Answer 2
Answer 3
Self-Examination Questions
Question 1
Question 2
I. Healthy Humans
II. Persons suffering from disease
III. Both of the above
IV. None of the above
Question 3
Question 4
In the case of Pollution coverage, all Pollution or Contamination that arises out
of one incident shall be deemed to have occurred on:
Answer 1
Errors and Omissions Liability policies are primarily on claims made basis.
Answer 2
Clinical trials can be carried out in both healthy humans and on persons
suffering from diseases
Answer 3
In the case of cybercrime liability, the policy coverage is on lines of Errors and
Omissions policy.
Answer 4
All Pollution or Contamination that arises out of one incident shall be deemed
to have occurred on the date that the Insured first becomes aware of such
incident.
CLAIMS
Chapter Introduction
This chapter deals with the process of liability claims management. Claims
under Public Liability Insurance Act Policy and under Employers Liability Policy
have special features of their own and are dealt with separately.
Learning Outcomes
Until this point he had bought an intangible product – a promise that the insurer
will pay his claim when the time comes. It is only when a claim occurs that the
true value of the product he had bought can be measured.
If any of the customers of Dr John make a claim and the courts after hearing of
the case conclude that there has been negligence on his part while treating the
patient, the amount awarded against the doctor shall be compensated by the
Insurer.
1. Common features
All liability claims have certain common features. Firstly the three most
important questions to be determined are:
The first question has to be decided with reference to the law governing the
particular situation. Examples of such laws are:
If the insured is not legally liable the question of claim under the policy does
not arise.
b) Is the insurer liable to the insured under the terms of the policy?
If the Insured is legally liable, the second question has to be decided with
reference to the various clauses of the policy such as operative and
indemnity clause, exclusions etc.
The amount of claim payable is also subject to the limits of indemnity under the
Policy, Voluntary/compulsory excess, if any, etc.
Apart from the three important questions features discussed above, the other
common features are:
i. An insured cannot make any admission of liability for the claim without
the written consent of insurers.
ii. The insurers reserve the right to conduct in the name of the Insured the
defence, negotiations and settlement of the claims.
There are three main phases in the processing of liability claims namely:
Notification
Investigations and
Settlement.
a) Notification
iii. Notice is required even when a formal claim is not made against the
Insured. There may be events which may result in claims in the future.
The insurers would like to be in a state of preparedness to deal with such
potential claims.
i. Particulars of Insured
Name of Insured
Address
Policy Number
Period of the Policy
Limits of Indemnity under the Policy
Has the accident caused damage to property or livestock ? If so, give name/s
and address/es of the owner/s of the property and/or livestock and full
description of the property and state the nature of the extent of damage.
Has any claim been made upon you by any person ? If so, state by whom and
give full particulars (if claim has been made in writing; attach a copy of the
notification received and of the bill, if submitted)
v. Declaration
I/We, the above named, do hereby, to the best of my/our knowledge and
belief, warrant the truth of the foregoing statements in every respect and
I/We agree that if I/We have made, or in any further declaration the
Company may require in respect of the said accident, shall make any false
or fraudulent statement, or any suppression or concealment, my/our claim
shall be absolutely forfeited, and the Policy shall be null and void.
c) Investigation
The Insurers would naturally depend upon the Insured for information
specially that which may be in the exclusive possession of the Insured.
The Insurers may require to know the full circumstances surrounding the
accident including the following details:
Example
iv. The Insurers may also demand technical information regarding the
Insured’s manufacturing activities, fire prevention programme, effluent
treatment system etc which may reasonably be required by them to
decide whether the claim falls within the purview of the policy, whether
any exclusions apply or to put up an appropriate defence on behalf of
the Insured against the claimant.
Example
In Products Liability Claims, the insurers would like to have full details of
Insured’s Product Safety Control Programme, Quality Control, Packaging and
Labelling, advice to customers as to use, product warranties, disclaimers etc.
viii. If legal liability is likely to attach to the Insured and the policy coverage
applies, insurers, with the help of legal opinion, attempt a negotiated
settlement. Litigation is expensive and involves adverse publicity. It will
be appreciated that when liability claims are involved, the Insured
would naturally be concerned about his reputation. This particularly
applies to products and professional indemnity claims.
d) Settlement
i. At this stage, the claim is paid on behalf of the Insured on the basis of
negotiations or a court award as the case may be.
ii. Payment is subject to the limits of indemnity under the Policy, claims
Series Clause and to the compulsory/voluntary excess, if applicable.
Compensation,
Claimant’s costs and
`defence costs’
This condition is necessary because claims against the Insured may be for
amount far exceeding the `any one accident’ limit.
Example
AOA limit may be Rs. 50 lacs and the claims made are for say Rs.75 lacs or
more.
Date
Signature Witness
3. Post settlement
After settlement of the claim, the aspects that need attention are:
Example
a) On payment of a claim the limit of indemnity per any one year shall
stand reduced to the extent of the amount paid;
Test Yourself 1
Under this section, we will discuss the claims procedure followed under the
following policies:
a) The procedure
i. Application for claim for relief has to be made to the collector who after
holding an inquiry may make an award determining the amount and
specifying to whom it shall be paid.
ii. The insurer, who is required to pay the relief, shall within a period of
thirty days of the date of announcement of the award shall deposit the
amount as directed by the Collector. If not, the Act provides that
amount shall be recoverable from the insurer as arrears of land revenue
or of public demand.
iii. The Rules provide that in awarding relief the Collector shall insure that
the insurers maximum liability under the policy does not exceed the
limits stipulated in the Act viz. Rs. 5 crores (a.o.a.) and Rs.15 crores
(a.o.y).
Any award in excess of these limits is met from the Environment Relief Fund and
if the award is in excess of the amount of insurance and the Relief Fund, the
excess has to be made goods by the owner.
i. The owner may be liable to pay compensation under any other law. In
such cases, compensation payable is reduced by the amount of relief
paid under the Act. However, this liability under any other law is
excluded by from Act liability under exclusion 3.
(Note: The owner can insure this liability under the Industrial Risks P.L.
Policy)
ii. Condition 9 of the policy provides that the Company shall not be liable
to pay any claim:
iii. if it is fraudulent or,
iv. There has been non-disclosure of material facts.
If the claim is preferred under the W.C. Act, the liability will be decided
with the reference to the provisions of Act. This liability is based on `no-
fault’ principle. If the claim is preferred under Common Law the principles
of the law of negligence will apply.
This depends upon the terms, exclusions and conditions of the policy.
The amount of claim payable is prescribed in the W.C. Act. If the claim is
under Common Law, the amount will depend upon the award made by a
Court of Law. Cover under the policy is for unlimited liability. In either case,
in addition to claim compensation the insurer will pay costs incurred with its
consent, in defending any claim.
The processing and settlement of claims under Common Law follow the same
procedure as in Public Liability Claims already explained
As per W C Act:
Date of accident
Circumstances of the accident
Whether it was a bona fide accident of employment
Whether it was due to misconduct or disobedience to orders and
rules on the part of the injured employee
Names of any two persons who witnessed the accident and names of
the person in superintendence
Date notice of claim received by the insured
Monthly average wages i.e. wages earned (including overtime) bonus,
food subsidy if any free quarters and any other allowance
Fatal
Permanent Total Disablement and Permanent Partial Disablement
Temporary Disablement
a) Fatal Claims
v. On the basis of the claim form, death certificate, copy of the post
mortem report, police and the evidence of deposit with the
Commissioner, the claim amount is paid to the Insured.
i. The W.C. Act contains a list of injuries which are deemed to result in
permanent total disablement and permanent partial disablement.
Example
Where multiple injuries are sustained in the same accident the aggregate of loss
of earning capacity is to be calculated.
Example
For example, if the workman loses his thumb (30%) and two fingers of one hand
(20%) the aggregate loss of earning capacity would be 50% and the amount of
compensation determined accordingly.
ii. The maximum amount payable, however, cannot exceed that amount
which, would have been payable, had permanent total disablement
resulted from the accident.
c) Memorandum of agreement
The Memorandum has to be signed by the employer and the workman and
will incorporate details such as:
d) Temporary disablement
ii. The compensation is payable from the date of disablement where the
disablement lasts for 28 days or more; if the disablement period is less
than 28 days compensation is payable after the expiry of a waiting
period of three days from the date of disablement.
iii. The compensation is paid half monthly during the period of disablement
or five years, which ever period is shorter. The compensation is based on
the period of disablement as certified in the medical certificate.
iv. The workman entitled to receive half monthly payments may redeem his
right by accepting a lump sum amount by an agreement with the
employers. If the parties do not agree, and if the half monthly payments
have been made for not less than 6 months, either of them can apply to
the Commissioner who will determine the commutation of the half
monthly payments.
Test Yourself 2
Summary
a) All liability claims have certain common features. Firstly the three most
important questions to be determined are:
b) There are three main phases in the processing of liability claims namely:
Notification
Investigations and
Settlement.
d) Sooner an investigation is conducted, the better and more accurate the data
that can be obtained.
f) After settlement of the claim the aspects that need attention are:
g) On payment of a claim the limit of indemnity per any one year shall stand
reduced to the extent of the amount paid.
i) If liability for the claim is disclaimed by the insurers, the claim is deemed to
be abandoned by the Insured unless the claim is made the subject-matter of
suit in a Court of Law within 12 calendar months from the date of
disclaimer.
The limits of indemnity apply to the total of Claimant’s cost, compensation and
Defence costs
Answer 2
Both age and wages on the date of accident are to be incorporated in the
Memorandum of Agreement.
Self-Examination Questions
Question 1
I. It is a legal requirement
II. It enables quick/smooth processing of claims
III. Both of the above
IV. None of the above
Question 2
I. Indemnity rules
II. Voluntary/compulsory excess
III. Amount claimed
IV. Regulatory limits
Question 3
I. Contribution condition
II. Proximate clause condition
III. Good faith condition
IV. Subrogation condition
Answer 1
Answer 2
The amount of claim payable is also subject to the limits of indemnity under the
Policy, Voluntary/compulsory excess, if any, etc.
Answer 3
REINSURANCE
Chapter Introduction
Just as individuals and companies feel the need to transfer risk, so do insurers.
This will happen when a risk they are offered is very large or very hazardous and
they feel it would put at risk their pool of money, unless they arrange
protection
Insurers decide how much of the risk they can safely insure and then seek cover
– called reinsurance – for the excess amount.
Learning Outcomes
This goes to show how reinsurance can save insurers from grave consequences
as a result of significant depletion of capital caused due to unexpectedly high
catastrophe claims.
1. Meaning of reinsurance
Definition
2. Objectives of reinsurance
b) Reinsurance enables the insurers to accept larger risks from the insuring
public.
3. Methods of reinsurance
This method is a time consuming process with high administrative costs. The
treaty method which is dealt with below has largely replaced the facultative
method. However, the latter method is still used to take care of extra
hazardous or special risks not covered by treaty arrangements and risks
having liabilities exceeding the protection provided under the treaty
arrangements.
b) Treaty method
Definition
i. Proportional treaties
Surplus treaty
Under a surplus treaty, the ceding company retains for its own net account a
certain amount of any risk or class of risks and the balance of the limit of
liability over this retention is reinsured, subject to the agreed limits of the
treaty.
In these, the reinsurers pay for a loss only when it exceeds an agreed limit
and only upto an agreed limit. Following are the types of non-proportional
treaties.
The Reinsurer shall pay to the Company the amount of its ultimate net loss
as hereinafter defined in excess of Rs........ arising out of any one claim or
series of claims due to the same cause, under public liability and employer’s
liability policies issued by the Company, whether direct or by way of
reinsurance, provided always that the liability of the Reinsurer shall not
exceed Rs......... in all in respect of any one occurrence.
(Note: Other liability policies may also be covered under the treaty)
The ceding company decides on the maximum amount of loss due to any one
cause or event that it is prepared to bear for its own net account. This
becomes the underlying retention or limit of the treaty.
If the ultimate net loss (as defined below) of the ceding company exceeds
this underlying figure, the reinsurer pays the excess subject to a maximum
figure which is the `overlying’ limit or the limit of the cover under the
treaty.
Definition
The term `ultimate net loss’ is defined in the treaty as the sum paid by the
ceding company in the settlement of all losses arising out of one event including
any adjustment or litigation or other expenses incurred in connection therewith
but excluding salaries of employees and office expenses of the company.
The ultimate net loss is arrived at after deduction of all recoveries in respect of
salvage or otherwise, and all claims upon other reinsurance, whether recovered
or not.
In other words, the ultimate net loss means the actual amount of the loss paid
plus legal and adjustment expenses of claim settlement less recoveries in
respect of salvage and, amounts recoverable from other reinsurances.
Example
If the underlying and overlying limits are Rs.5 lacs and Rs.15 lacs respectively,
the reinsurers will pay the ultimate net loss in excess of Rs.5 lacs but subject to
the limit of Rs. 15 lacs. The maximum amount thus payable would be restricted
to Rs.10 lacs in respect of any one occurrence, if the amount of the ultimate
net loss is Rs.15 lacs.
On the other hand, if the amount of the ultimate net loss is more than Rs.15
lacs the excess amount is borne by ceding company, in addition to, the
underlying retention of Rs. 5 lacs.
Or another excess of loss treaty may be arranged to pay Rs. 20 lacs in excess of
Rs. 20 lacs (i.e. Rs.15 lacs + Rs. 5 Lacs) .To provide further protection for
catastrophe losses, another treaty may be arranged to pay Rs. 60 lacs in excess
of Rs. 40 lacs. (i.e. Rs.20 lacs + Rs.20 lacs)
Thus, excess of loss protection can be arranged in layers. Thus, if there is a loss
of Rs. 1 crore, the reinsured will retain Rs. 5 lacs and recover Rs.95 lacs for
reinsurers under three treaties.
It will be observed that this type of treaty does not involve any proportionate
sharing of premiums under individual policies. The reinsurer receives a
percentage of the gross net premium income of the ceding company.
The reinsurer does not also pay any proportionate part of individual claims. He
pays only that part of the claim amount which exceeds the agreed underlying
figure subject to the agreed upper limit. It is for this reason that `excess of
loss’ reinsurance is termed `non-proportional’ reinsurance.
`Stop Loss’ treaty is a variation of the excess of loss treaty. This treaty
operates in respect of the annual loss ratio incurred and not in respect of
any fixed amount of the underlying retention.
The treaty is arranged to cover, say, 80% of all losses in excess of a loss
ratio, of say, 90% upto and including a loss ratio of say, 120%. The
reinsurer’s liability arises when the loss ratio exceeds the agreed
percentage.
IC-74 LIABILITY INSURANCE 275
CHAPTER 12 MEANING, OBJECTIVES AND METHODS OF REINSURANCE
It will be observed that the ceding company has to bear 20% of all losses in
excess of the agreed loss ratio. This will make the ceding company to follow
a healthy underwriting policy and effect strict control in claims settlements.
Stop Loss reinsurance is mainly suitable for a class of business in which small
losses may accumulate during a year, is not common in liability insurance in
which it is difficult to arrive at the annual loss ratio because of the
protracted nature of many liability claims which may take many years for
settlement.
This treaty however, may be suitable for products liability insurance where
there is a possibility of an aggregate of small losses which cannot be traced to
any one event or occurrence.
The stop loss reinsurance may be arranged in addition to the normal surplus or
excess of loss treaties.
Test Yourself 1
I. It enables the insurers to accept larger risks from the insuring public.
II. It provides a safeguard against serious effects of catastrophic losses.
III. It spreads a heavy loss over many insureds
IV. It helps the insurers in avoiding wide fluctuations in the loss ratio from year
to year.
There are various methods of fixing the premium payable to the reinsurers
under the treaty. A common method is to compute at a rate per cent on the
Ceding Company’s `Gross Net’ premium income which means the original gross
premium less the premium ceded under other reinsurance arrangements prior to
and for the benefit of the excess of loss treaty.
The rate of premium is arrived at on the basis of past loss experience of the
business. The `gross net’ premium of the ceding for a period of say, five years is
divided by the cost of all claims (paid & outstanding) which are in excess of the
amount of the underlying limits. This gives the so-called `burning cost’ of the
business. The burning cost expressed in terms of percentage produces the pure
premium which is loaded by some proportion (e.g. 100/70) to provide a margin
for reinsurer’s expenses, profits and possible deterioration of claim experience.
Example
Gross Premium Rs.50,00,000/-
Claims Paid & Outstanding in excess of the underlying limits Rs. 1,00,000/-
Burning Cost 100000/5000000 x 100 = 2%
Loading for Reinsurer’s expenses etc. 2 x 100 / 70 = 2.855% (Rate of Premium).
Apart from the past experience, the rate of premium is also influenced by the
underlying limit and the limit of the cover under the treaty, the risks excluded,
the underwriting limits of the ceding company etc.
In the case of Stop Loss reinsurance, the rate of premium is calculated on the
ceding company’s premium income and is based on past experience, the nature
of business, the limits of cover, etc.
Test Yourself 2
While arriving at the rate of premium on the basis of past loss experience of the
business, the `gross net’ premium of the ceding for a period of say, five years is
divided by the cost of all claims which are in excess of the amount of the
underlying limits. Such cost of claims should include:
I. Paid or outstanding
II. Paid & outstanding
III. Outstanding but not paid
IV. Paid and/or outstanding
Summary
b) The main object of reinsurance is to spread a heavy loss over many insurers.
j) There are various methods of fixing the premium payable to the reinsurers
under the treaty. A common method is to compute at a rate per cent on the
Ceding Company’s `Gross Net’ premium income
Answer 1
Answer 2
Self-Examination Questions
Question 1
Question 2
Question 3
I. Original gross premium less the premium ceded under other reinsurance
arrangements
II. Original gross premium less burning cost
III. Original gross premium less margin for reinsurer’s expenses
IV. None of the above
Question 4
Answer 1
Answer 2
`Stop Loss’ treaty operates in respect of the annual loss ratio incurred.
Answer 3
`Gross Net’ premium income means the original gross premium less the
premium ceded under other reinsurance arrangements prior to and for the
benefit of the excess of loss treaty.
Answer 4
1. Operative clause
WHEREAS the insured named in the Schedule hereto and carrying on the
business described in the said Schedule has applied to THE COMPANY LIMITED
(hereinafter called ‘the company’) for the indemnity hereinafter contained and
has made a written proposal and declaration which shall be the basis of this
contract and is deemed to be incorporated herein and has paid the premium as
consideration for or on account of such indemnity.
Now this policy witnesseth that subject to the terms exceptions and conditions
contained herein or endorsed hereon the company will indemnify the Insured
against their legal liability (other than liability under the Public Liability
Insurance Act, 1991 or any other Statute that may come into force after the
issue of this policy) to pay compensation including claimant’s costs, fees and
expenses anywhere in India, in accordance with Indian Law.
2. Indemnity
The Indemnity only applies to claims arising out of accidents occurring in the
Insured Premises during the period of insurance first made in writing against the
Insured during the policy period and the Insured is indemnified in accordance
with the Operative Clause for and/or arising out of Injury and or Damage but
only against claims arising out of or in connection with the business specified in
the Schedule and not against claims arising out of or in connection with:
d) ‘Product’ means any tangible property after it has left the custody or
control of the Insured, which has been designed, specified, formulated,
manufactured, constructed, installed, sold, supplied, distributed,
treated, serviced, altered or repaired by or on behalf of the Insured but
shall not mean food and beverages supplied by or on behalf of the
Insured primarily to the Insured’s employees as a staff benefit
e) ‘Policy period’ means the period commencing from effective date and
hour as shown in the policy schedule and terminating at midnight on the
expiry date as shown in the policy schedule
Should the insured notify the company during the policy period in accordance
with General Condition 9.1 of any specific event or circumstance which the
Company accepts may give rise to a claim or claims which form the subject of
indemnity by this policy, then the acceptance of such notification means that
the Company will deal with such claim or claims as if they had first been made
against the insured during the policy period. The extension under this clause
will be subject to the maximum time limit laid down under the Indian Limitation
Act in force from time to time.
5. Indemnity to others
Provided always that all such personnel or parties shall observe, fulfill and be
subject to the terms, conditions and exclusions of this Policy as though they
were the Insured.
6. Cross liabilities
7. Defence costs
The company will pay all costs, fees and expenses incurred with their prior
consent in the investigation, defence or settlement of any claims made against
the insured and the cost of representation at any inquest, inquiry or other
proceeding in respect of matters which have a direct relevance to any claim
made or which might be made against the insured, provided such claim or
claims are the subject of indemnity by the policy. Such costs, fees and expenses
are called ‘defence costs’.
8. Indemnity limits
For the purpose of this policy where a series of and/or several bodily
injuries and/or property damages are attributable directly or indirectly to
the same cause all such bodily injuries and/or property damages shall be
treated as one claims and such claim shall be deemed to have been made at
the point in writing. There shall, however, be no coverage for claims made
arising from one specific cause which are made later than 3 years after the
first claim of the series.
b) Compulsory excess
ii. Property damage, inclusive of defence costs arising out of any one
accident
The company’s liability shall attach for the claim in excess of such
compulsory excess (and voluntary excess, if any, opted by the insured)
c) Voluntary excess
In the event of the insured opting, the policy shall be subject to a voluntary
excess as mentioned in the schedule. This voluntary excess shall be
applicable to both:
ii. Property damage claims inclusive of defence costs arising out of any one
accident.
The company’s liability shall attach for the claims in excess of such
compulsory and voluntary excess.
9. Exclusions
d) Arising out of loss of pure financial nature such as loss of goodwill, loss
of market etc.
e) Arising out of all personal injuries such as libel, slander, false arrest,
wrongful eviction, wrongful detention, defamation etc. And mental
injury, anguish, or shock resulting thereform.
iii. This policy does not cover liability for claims arising out of
iii. Claims for damage to any bridge, weight of any motor vehicle or
trailer or of the load carried therein;
iv. Claims arising out of any motor vehicle or trailer temporarily in the
insured’s custody or control for the purpose of parking.
iii. Premises tenanted by the insured to the extent that the insured would
be held legally liable in the absence of any specific agreement.
Provided always that in the event of any injury or damage arising from
continuous or continual inhalation, ingestion or application of any substance
following the covered accident and where the insured and company cannot
agree when the injury or damage occurred, then
ii. Damage shall be deemed to have occurred when it first become evident
to the claimant even if the cause was unknown.
Such additional information as the company may require. Every claim, writ,
summons or process and all documents relating to the event shall be
forwarded to this company immediately they are received by the insured.
c) The company will have the right, but in no case the obligation, to take
over ant conduct in the name of the insured the defence of any claim
and will have full discretion in the conduct of any proceedings and in the
settlement of any claim and having taken over the defence of any claim
may relinquish the same. All amounts expended by the company in the
defence settlement or payment of any claim will reduce the limits of
indemnity specified in the schedule of the policy.
In the event the company, in its sole discretion, choose to exercise its right
pursuant to this condition, no action taken by the company in the exercise
of such right will serve to modify or expand in any manner, the company’s
liability or obligations would have been had it not exercised its rights under
this condition.
d) The insured shall give all such information and assistance as the
company may reasonably require.
f) The company may at any time pay to the insured in connection with any
claim or series of claims under this policy to which an indemnity limit
applies the amount of such limit (after deduction of any sums already
paid) or any lesser amount for which such claims can be settled and upon
such payment being made the company shall relinquish the conduct and
control of and be under no further liability in connection with such
claims.
g) The policy and the schedule shall be read together as one contract and
any word or expression to which a specific meaning has been attached in
any part of this policy or the schedule shall bear such specific meaning
wherever it may appear. The terms, conditions and exclusions of this
policy (and any phrase or word contained therein) shall be interpreted in
accordance with Indian law.
h) The insured shall keep accurate records of annual turnover which term
shall include all leviable duties and at the time of renewal of insurance
declare such details as the company may require. The company shall at
all reasonable time have free access to inspect such records.
j) This policy does not cover liability which at the time of happening of any
event resulting into such liability, be insured by or would, but for the
existence of this policy, be insured by, any other policy (but not a public
liability policy) or policies, except in respect of any excess beyond the
amount which could have been payable under such policy/policies, had
this insurance not been effected.
k) The company may cancel this policy by giving thirty days’ notice in
writing of such cancellation to the insured’s last known address and in
such an event the company will return a pro-rata portion of the premium
(subject to a minimum retention of 25 per cent of the annual premium)
for the unexpired part of the insurance.
The policy may also be cancelled by the insured by giving thirty days’ notice
in writing to the company, in which event the company will retain premium
at short-period scale provided there is no claim under the policy during the
period of insurance.
In case of any claim under the policy no refund of premium shall be allowed.
l) In the event of liability arising under the policy or the payment of claim
under the policy, the limit of indemnity per any one year under the
policy shall get reduced by the extent of quantum of liability to be paid
or actual payment of such claim. Under no circumstances, it shall be
permissible to reinstate the limit of indemnity to the original level, even
on payment of extra premiums.
n) The company shall not be liable to make any payment under this policy
in respect of any claim if such claim shall be in any manner fraudulent or
supported by any statement or device whether by insured or by any
person on behalf of the insured and/or if the insurance has been
continued in consequences of any material misstatement or the non-
disclosure of any material information by or on behalf or the insured.
Insured Name:
Address:
Policy No.:
Description of Risk:
LIMIT OF INDEMNITY
Any one accident: Rs.
Aggregate during the Policy period: Rs.
RETROACTIVE DATE
Compulsory Excess:
Voluntary Excess:
PREMIUM Rs.:
For The........................Ins.Co.Ltd.
Authorised Signatory
Address of the Policy issuing office
Liability of the company does not commence until the proposal has been
accepted and the premium paid.
6.
a) Please give full description of
activities for which cover is
required.
c) Are customers/visitors
permitted unaccompanied on
the premises?
i. Availability of service
organisation in case of such
incidents (fire brigade,
specialists in environmental
protection and toxicology)
No. of claims:
Bodily injury
Property damage
Bodily injury
Property damage
18.
a) Has your proposal or renewal
been declined or premium
been increased or special
terms been imposed by any
insurer? If so, please give
particulars.
If so, specify:
d) Mode of transportation
(whether by road/rail/pipe
line)
(Note : This transportation coverage is applicable only for full load -- part load
is not covered)
v. Whether underground/
overhead/submerged
I/We desire to effect an insurance in terms of the Public Liability Policy of the
Company against the limits of indemnity specified above. I/we hereby declare
that all statutory provisions relating to my/our business proposed for insurance
are complied with. I/we further declare that the above statements and
particulars are true, and I/we have not omitted, suppressed, misrepresented or
misstated any material fact and I/we agree that this declaration shall be the
basis of the contract between me/us and the Company, and be incorporated
therein.
Place:
Date:
2. Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to five hundred rupees.
Management
PARTICULARS OF INSURED
Premises
3. Number of storeys:
4. (For Building, for plant, approx.
storey-wise length)
7. Location of Risk:
(Please state the nearby other
risk-to East, West, North, South
etc.)
8. Particulars of surrounding
property:
(Following questions are for broad guidelines, further details if necessary may
be asked for)
2. Standard of guarding.
If so at what interval?
a) Dimensions;
b) Underground/overhead
c) Total length
d) Quantity of throughput
f) Monitoring system;
(including effluent system, its backup system and back-up system for main
plant and machinery), Please mention hazardous and risky process in detail)
Transport System
Safety System
4. Medical facilities
7. Particulars of detectors
General
Recommendation
(Recommendations must be positive and not vague)
Place:
Date:
Signature:
Name:
Liability of the Company will not commence until receipt of premium and
statutory contribution towards the Environment Relief Fund
2. Address PIN
3. Business
a) Workmen Employees
I/We hereby declare that a) all statutory provisions relating to my/our business
proposed for insurance are complied with, b) the above statements and
particulars are true. c) I/We have not omitted, suppressed misrepresented or
misstated any material fact and d) I/We agree that this declaration shall be the
basis of the contract between me/us and the Company and be incorporated
therein.
Place:
Date:
Note to Items:
1. Owner mean a person who own, or has control over handling any hazardous
substance at the time of accident and includes -
2. Paid up Capital means in the case of an owner not being a company, the
market value of all assets and stocks of the undertaking on the date of
contract of insurance.
3. Hazardous substances and Group means the items listed and grouped under
Public Liability Insurance Act, 1991 and the rules framed thereunder.
ii. For the purpose of this insurance, the term “Units” shall mean all
operations being carried out in the manufacturing complex in one
location.
There is a separate policy covering LEGAL LIABILITY other than the Act
Liability proposed for insurance in this proposal details of which can be
obtained from the Company’s offices.
5. Prohibition of rebates
b) Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to five hundred rupees.
Liability of the Company does not commence until the proposal has been
accepted and the Premium paid
a) Goods manufactured
b) Principal component:
d) Annual turnover:
e) How long has it been in the
market?
f) Expected life of use:
g) Intended use:
h) Intended customer/ultimate
user:
i) Warranties as to use:
IC-74 LIABILITY INSURANCE 313
APPENDICES APPENDIX 5- PROPOSAL FORM FOR PRODUCT LIABILITY INSURANCE
j) Technical know-how /
collaboration
b) Is it by separate leaflet or
brochures?
a) Year:
b) No of claims:
a) Domestic
b) U.S.A. / Canada
a) Domestic
b) U.S.A. / Canada
Policy Period:
I/We desire to effect an Insurance in terms of the Product Liability Policy of the
________________________Company Ltd. against the limits indemnity specified
above I/We hereby declare that all statutory provisions relating to my/our
business for Insurance are complied with. I/We further declare that all the
above statements and particulars are true, and I/We have not omitted
suppressed, misrepresented or misstated any material fact and I/We agree that
this declaration shall be the basis of the contract between me/us and the
Company and be incorporated therein.
(Give all locations and specify product at each and how they interlink)
II. Product
1. Full description:
3. Markets
5. Export Turnover
a) U.S. A. / Canada:
b) OECD
c) Other including non-OECD countries
a) Design Engineers
b) New Product Dept.
c) Manufacturing
d) Quality Control
e) Service Dept.
f) Legal Dept.
g) Advertising Dept.
h) Personnel Dept.
3. Are Quality Assurance Audits undertaken? Those should cover all aspect
referred to in the various sections of this report. How regular are these?
What is procedure for implementation of findings?
A.
1. Hazard analysis
a) Is this undertaken
B. Design
3. How are design changes handled and are systems adequate to ensure old
designs withdrawn?
C. Materials used
D. Manufacture
E. Quality control:
F. Packaging/labelling
A. Sales
5. Conditions of Sale
(Attach copy if available)
B. Distribution
4. Does the product have a shelf life? If so, state period and how this is
indicated to the customer. E.g. sell by date?
1. What facilities do the Insured have for customer enquiries relating to the
use of the product?
D. Installation:
3. Are the Insured able to trace the location of any specific product or
component after sale?
a) Complaints?
d) Claims against the Insured? Whether proven or otherwise over the past 3
years.
1. Is there any other factor likely to affect the risk (e.g. items of local
knowledge - language problem- general law management attitude
displayed by poor housekeeping etc.?
X. Conclusions:
1. Please provide:-
2. Please consider:
1. Union of India vs Union Carbide.On 3rd Dec 1984 Methyl Iso Cyanate (MIC)
leaked from a storage tank of the Union Carbide factory at Bhopal resulting
in the immediate death of 3000 persons and injuries to many others and
also property damage to some. The Supreme Court of India approved
settlement of US$ 470 million (Rs 713) crores to be distributed among the
Kin of the 3000 deceased and 105000 injured and property owners.
Unfortunately many of the victims were low income public who fled the city
and were unaware of their entitlement. Evidentiary records place the dead
and injured at 20000 and 569000 respectively. Many are still to be
compensated. The Public Liability insurance cover was a mere Rs 2.5 crores.
Pharmaceuticals:
49. In 1954 the German chemical firm of Grunenthal GmbH succeeded in the
synthetic production of thalidomide, which was put on the German market
in 1957 under the name of “Contagion” and soon found a considerable
market as one of the most effective tranquilizing and sleeping drugs.
Thalidomide drugs were sold with increasing success under about 50 trade
names in practically all Western countries apart from the U.S. When, the
drug was first connected with the increasing number of deformities in
newly-born children, the firm withdrew the drug from the market, offer
having been made liable to pay damages in millions.
52. One of the biggest US pharmaceutical firm, Merrell Dow, agreed to pay $
120m in compensation to victims of the drug Debendex which was alleged to
have caused defects to children after being taken by their mothers to
combat morning sickness during pregnancy. It is one of the largest out of
court settlements of its kind.
The firm had denied liability for any ill effects from the drug, but in order to
avoid costly litigation which might have lasted for years, it felt worth
coming to suitable arrangements with 700 American parents who claimed
their children had suffered deformities as a result.
53. “Stalinon”, a drug for the treatment of skin diseases, first marketed by a
small French firm in 1953, caused the death or serious disablement of
several hundred persons. It took several years before the adverse side -
effects of the drug were fully recognized.
Transportation Products
55. The Goodyear Tire & Rubber Company in Akron, Ohio was ordered by a
Rhode Island Superior Court to pay $ 19 million to the estate of the Formula
1 race car driver, Mark Donohue, who died in an accident in Zeltweg,
Austria, in 1975. The jury determined that the crash occurred because the
left tire of the car was defectively manufactured by Goodyear. Under Rhode
Island’s strict liability law, any manufacturer or supplier of a defective
product which caused an injury or death is liable, without negligence having
to be proven.
56. A Texan district court awarded $ 106.9 m. ($ 100 m. punitive and $ 6.9 m.
actual damages) to the family of a woman who died from burns after a car
accident. The court found the American car manufacturer 75% at fault in the
accident. He was found guilty of gross negligence in not spending $ 4 to $ 24
per car to repair a design defect that allowed the fuel tank to rupture
following the collision.
59. A 28 year old male suffered a closed head injury, a broken leg and a
collapsed lung when the motorcycle he was riding struck the rear of a car.
The plaintiff was wearing a full face helmet manufactured by the defendant
and contended that the lining of the helmet was defectively manufactured
and contributed to the extensiveness of his injuries. The defendant argued
that the plaintiff was responsible for his injuries by speeding. The award was
reduced by 50 percent to $ 5,000,000 for the plaintiff’s negligence.
60. The Oklahoma Supreme Court awarded against a car manufacturer $ 1.8
million damages to the plaintiff who suffered paralysis of arms and legs,
after he was thrown out of car in an accident. This was due to faulty design
of the lock of the front door. It was held that the door should not have
opened.
61. In April 1965 the Boeing Aircraft Corporation and an airline company were
together ordered to pay US $ 2,000,000 to the dependent of a passenger
who had died along with 43 others in a 1963 air crash. The plaintiff argued
that the manufacturer neglected to inform the airline of certain flight
characteristics which manifested themselves under certain atmospheric
conditions and which he should have been aware of.
63. 62. A 59 year old male pedestrian was severely injured by debris which had
been knocked loose by a crane. The plaintiff suffered severe facial, skull,
arm and hand fractures, brain damage, a “frozen” shoulder, and leg nerve
damage which caused a permanent limp. He contended that when a crane
pulley failed, the crane struck the building next to which he was walking.
The Plaintiff contended that the pulley was defectively designed and that
the defendant’s manufacturer was aware of internal cracking in the pulley
when it was cast.
64. A large firm in the cattle feed business in Texas had commissioned an oil
firm to produce a more suitable lubricant for its machines. During
production which involved high temperatures, a relatively small quantity of
this lubricant found its way into the cattle feed, and according to the
experts caused a dangerous disease (hyperkeratosis) in the animals fed with
the contaminated product. It took more than three years before the cause
of the disease which struck thousands of animals, resulting in claims over $
10 million was determined.
Consumer Products
65. 64. A 21 month old male infant slipped through the rungs of a highchair and
was caught by the neck on the food tray. As a result, the plaintiff suffered
permanent brain damage. He alleged that the design of the restraint
mechanism on the chair was defective. The defendant contended that the
plaintiff’s mother was negligent because she failed to properly supervise the
infant. Damage of $ 2,700,000 were awarded.
66. A man was killed when paint remover he was using exploded. It was
contended that there were insufficient warnings on the packaging that the
product could be ignited by a spark at a low temperature. The plaintiff
theorized that the explosion could have been caused by a spark produced by
a metal scraper that the decedent had been using. The defendant as7serted
that the decedent was guilty of contributory negligence and should not have
used the product near a gas furnace and water heater. The defense also
claimed that the product included adequate warning of potential hazards.
After the jury returned its verdict, the parties settled for $ 773,470. Past
and future wage: $ 1,200,000.
67. An 8 year old male was wearing a 100% cotton flannel shirt while playing
with matches. The plaintiff accidentally struck a match, and the shirt
exploded into flames. As a result of accident, the plaintiff suffered third
degree burns from his chin to his waist. He contended that the defendant’s
manufacturer was liable for his injuries because his shirt had not been
treated with a fire retardant material as required by federal law. The
defendant’s manufacturer contended that the requirements for flame
retardant treatment applied only to children’s sleepwear and not to other
articles of clothing. Settlement was to the tune of $ 2,700,000.
1. Name & Registered Address of the Insured (including names of all subsidiaries
or affiliated companies to be insured):
2. Website Address:
8. Policy Period:
10. Territory:
11. Jurisdiction:
Warehouses/Godowns/Shops/Depots/Tank
Location Manufacturing Units
Farms/Offices
No. of Nature of
No. of locations Nature of Risk
locations Risk
India
Overseas
3. Please quantify annual sales turnover of last three years (Amount in Indian
Rupees):
4. Please describe in brief surrounding areas and third party property within an
approximate radius of 2 kms from each manufacturing unit:
5. Please attach Lay-Out Plans and Risk Inspection Report of the manufacturing
units proposed for Insurance:
8. Will you, or your employees, handle or come into contact with any industrial
dust of know harmful nature (e.g. asbestos, silica, cotton), radioactive
materials, or any other substance harmful to health?
9. Extensions required:
B. Travel of Executives
3. Purpose of trips:
C. Advertising Information:
1. What percentage of your annual sales is derived directly from your web site?
3. Is music used in your advertisements? If "Yes", were all the rights secured
prior to use?
5. Have you ever been sued, or have you sued another, for copyright or
trademark infringement?
3. Please quantify annual sales turnover of last three years (Amount in Indian
Rupees):
Rest of the
Year USA/Canada/Australia UK/Europe India
World
Projected
Current
Last Year
4. Do you provide any services or treatment other than sale of products? If yes,
please describe the nature of services and estimated annual turnover:
12. Have your products ever been subject to any enquiry or investigation by any
Government agency, concerning the efficiency/adequacy or labelling,
hazardous contents or safety? If so, please give full details.
13. Are any products manufactured and sold under someone else’s label or
trademark? If yes, please give full details.
14. Does the Insured’s contract of sale agree to hold distributors harmless?
15. Does the Insured require the name of vendor to be included as a Named
Insured? If yes, pls provide the name, address and list of products to be
supplied to the vendor:
E. Quality Control:
2. Do your products comply with standards like ISI or any other Standards?
Loss Information
1. Please enter all claims or losses (regardless of fault and whether or not
insured) or any occurrences or incidents, conditions, defects, circumstances
or suspected defects, which may give rise to a claim; over the last five years
under Public Liability and/or Products Liability (Amount in Indian Rupees):
Date
Date of Amount Amount Claim
Description of Claim of
Occurrence Paid Reserved Status
Claim
I/ We declare that to the best of my/our knowledge and belief the above
statements are true and complete and will form part of the contract
between me/us and the Insurance Company.
Signature ____________________
Date ________________________________