Interest is always a factor for Insurers to bear in mind when dealing with a disputed claim, but it is particularly relevant in the Indian context where Insurers face the risk of significant interest payments when defending disputed claims, and also when delaying claims payment in non-litigious claims.
Dealing first with litigation, as of 31st March 2007 there were some 26.5 million cases awaiting determination in the Courts, with an estimated further 4-6 million cases before other quasi-judicial tribunals. The total number of available judges to hear these cases is 4,500, which equates to an average of over 6,500 cases per judge.
Against that background, it is not uncommon for cases to take at least 8 years to be finally resolved, and in many cases significantly longer. With such timeframes to deal with interest becomes a major issue. The types of awards are in the discretion of the Courts and vary from case to case, but there is a discernable shift to using interest as a means of compensating a successful litigant for the delays inherent in the system. For example:
In Meenakshi Sharma v LIC(decided by the National Commission in May 2006), the Court held that interest awarded by the State Commission at 6%pa was ‘absolutely inadequate’ and substituted a rate of 10%pa.
In Manalal Prabhudayal v Oriental Insurance (decided by the Supreme Court in August 2006), an arbitrator had awarded interest at 12%pa from the date of the cause of action to the date of payment. In the first appeal, this was reduced to 6%pa for the period from the date of the award to the date of payment. On the second appeal the Supreme Court reinstated the 12%pa rate throughout, holding that it saw no reason to interfere in the arbitrator’s exercise of its discretion.
In a non-insurance case, Rakesh Kumar Jain v State of Uttar Pradesh (2007) the Supreme Court awarded the principal sum plus interest at 18%pa.
In Peacock Plywood Ltd v The Oriental Insurance Co (2006), the Supreme Court in appeal restored the order of the trial court which awarded the principal claim to the Insured together with interest at the rate of 18%pa.
In Universal Paper Mills v Oriental Insurance Co (2006), the loss occurred in 1993, the litigation was commenced in 1998 and was finally decided in 2006. The Commission awarded c. US$74,000 to the Insured together with interest at 9% per annum from 1994 (roughly three months after the loss adjusters report was submitted) until payment. At the time of the decision, the interest payable was c. US$82,000 which exceeded the principal claim amount.
In Mullangie Spintex Pvt Ltd v New India Assurance Co (2007), the loss occurred in 1998, the complaint was instituted in 1999 and was finally decided in 2007. The Commission awarded a principal claim of c. US$355,000 to the Insured together with interest at the rate of 12% per annum from 1998 (roughly six months after the loss adjusters report was submitted) until its payment. At the time of the decision, the interest payable was c. US$384,274, which again exceeded the principal claim.
Even where there is no litigation, interest can still become an issue. The IRDA is the insurance industry regulator. If an offer to settle is made by an Insurer, and accepted by the Insured, then in the event of a delayed payment the IRDA Regulations require an Insurer to pay interest at 2% above the bank rate in force at the beginning of the financial year in which the claim was made.
The length of time taken to determine litigation and the rates of interest awarded by the Courts are therefore important factors to bear in mind in deciding whether to litigate in India, but as will have been seen interest is an equally important consideration even where claims are not disputed but payments are delayed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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