"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, December 16, 2014

Settlement of Insurance Claim and the Discharge of Insurance Contract

Recently, a two judge Bench of the Supreme Court of India had the occasion in New India Assurance Co. Ltd. v. Genus Power Infrastructure (04.12.2014) to discuss the law on discharge of an insurance contract.

Facts

Genus Power Infrastructure Ltd. (Genus) purchased a Standard Fire and Special Perils Policy (Policy) from New India Assurance Co. Ltd. (NIA) for its manufacturing unit. The total sum assured under the one-year policy was Rs. 91.10 crores. Within seven months from the date of the policy, a fire explosion occurred in the adjoining terminal of the Indian Oil Corporation. This caused severe damage to the manufacturing unit of Genus. Genus notified NIA of the accident and NIA appointed a surveyor and a loss assessor. The loss as per Genus was 28.79 crores while the surveyor assessed Rs. 6.09 crores as the loss. 

Genus signed a detailed letter of subrogation duly stamped accepting Rs. 5.96 crores in full and final settlement of its claim under the Policy. After three weeks from the letter of subrogation, Genus issued a notice to NIA stating that the discharge voucher was signed under extreme duress, coercion and undue influence by NIA who took undue advantage of the financial difficulties of Genus in trying to get the amount of 5.96 crores settled under the Policy and sought nomination of arbitrator. NIA replied that there was no arbitrable dispute in view of the letter of subrogation where Genus had accepted Rs. 5.96 crores and the full and final settlement of the claim.

Genus filed a petition under S. 11 of the Arbitration and Conciliation Act, 1996 for appointment of the arbitrator. The Delhi High Court determined that there was a valid arbitration agreement and appointed an arbitrator. This order was challenged by NIA through a Special Leave Petition to the Supreme Court.

Contentions:

Following were the contentions of NIA in the SLP: 
  • The letter of subrogation was a detailed agreement signed after negotiations between the parties in the presence of two witness and should be therefore given effect. 
  • The amount was as recommended by the surveyor reduced by the mandatory reinstatement premium payable under the policy. 
  • When the company’s annual turnover was Rs. 500 crores, it is improbable that such a company would be financially coerced in giving the discharge receipt. 
Contentions on behalf of Genus were following:

NIA knew fully well that its manufacturing unit had been destroyed and therefore NIA used its dominant position to force Genus to sign the discharge voucher. 

Question: According to the Supreme Court, the following question arose for determination: 

[W]hether the discharge in the present case upon acceptance of compensation and signing of subrogation was not voluntary and whether the claimant was subject to compulsion or coercion and as such could validly invoke the jurisdiction under Section 11 of the Act.”

Decision:

Following is the summary of the court’s decision 
  • A bald plea or fraud/ coercion, duress or undue influence is not sufficient and a party which pleads that the above-stated acts have occurred should establish the same. 
  • Factually, there was no protest or demur raised around the time or soon after the letter of subrogation was signed. 
  • The notice by Genus was given only three weeks after the letter of subrogation. 
  • The financial position of Genus was not so precarious that it was left with no remedy but to accept the said letter. 
  • Since there was full and final satisfaction of the claim, noting in the policy survived and therefore, there was no arbitrable dispute for the court to exercise its power under Section 11 of the 1996 Act.
Comment

General insurance companies such as the NIA generally follow the procedure of determining the claim and informing the insured following which they give a pre-determined format of a letter of subrogation which provides, among other things, that the claim paid was in full and final settlement of the claim under the policy. Only after the signed letter of subrogation is given does the insurer makes payment of the claim. If the insured who had suffered loss (at times enormous loss) protests with the Insurance Company of the claim, even that amount would be locked up for a long time in disputes. So, the question is, as a matter of policy, should the letter of subrogation providing for full and final settlement of the claim be taken seriously? The second question is whether in such cases the insured should be asked to prove undue influence / coercion when the industry practice is well-known? 

First, given that by the very nature of the position of the parties, the insurer is in a dominant position. Two, how is the acknowledgement of full and final settlement of the claim different from an agreement that the insured will not file any suit/ invoke arbitration if the amount determined by the insurer is paid? The latter is a void agreement as it restrains legal proceedings while the former does not restrain access to legal fora but makes such access meaningless. 

What should be material is whether the protest subsequent to the letter of subrogation is genuine or merely an afterthought. From this perspective, the date of receipt of the money by the insured could be a very relevant in deciding whether the protest was in time or not. 

In this case, the court was perhaps strict in stating that the protest was belated (three weeks after the letter of subrogation). In any case, the insured should, in future, immediately (within a day or two) make a protest (through email or registered post with acknowledgement due) of the amount of loss failing which the insured may lose the opportunity to question the correctness of the surveyor’s or the insurer’s determination of loss.

1 comment:

Satheesh Kumar said...

This is not the first time that the Supreme Court (and, for that matter, National Consumer Forum) has given a similar verdict. This is well settled - clients (and their advisors) should be aware that signing a discharge voucher, encashing a cheque and later claiming that it was under duress will not work.
It is time that various fora such as FICCI, Assocham, etc got together and made a joint representation to the IRDA and GI Council to permit clients to have the liberty of accepting settlement of the UNDISPUTED amount of a claim and seek legal remedy for the remaining disputed amount.