Compensation and Insurance

The measure of the restoration lies in the extent to which we apply social values
more noble than mere monetary profit.

Franklin D. Roosevelt

Introduction

Disasters inevitably leave victims in their wake. Compensation for victims is in the nature of a remedy to lessen the direct and secondary effects of the disaster. Providing liability for victims emerges from within the folds of law and policy. The relationship between safety and compensation is relevant in the context of lessening the probability of disasters, in the costs generated by the event, and apportionment of the cost among the various players – willing, unwilling and unaware – including the affected person, the person in control of the event, the state and third parties.

Compensation is a response to disaster that law has mandated. Judicial decisions have contributed to the laws on compensation, both in interpreting and applying them, and to provide protection from violations of rights that result in loss of life or injury. Governments have relied on ex gratia discretionary payments to meet the demands of victim-creating situations. Administrative schemes, for instance, for victims of militancy are executive-administered.

Insurance has been another option that has grown in significance over time. Statutory insurance, which makes insurance compulsory, generally requires a user of a victim-causing process or product to insure against injury or death being caused to a third person. Voluntary insurance, on the other hand, expects a person to insure against loss to oneself – either through injury or death, or through having to pay for injury caused to another. Since the insurance is nationalised, courts have tended to treat it as a part of the social security apparatus of the state. This will have to change if the insurance industry is privatised.

Natural disasters have generally remained outside the development of compensation law. This may be traced to a principle which sees ‘acts of God’ as beyond the control of human beings, and neither person nor state can be held liable for its occurrence. Since compensation grew within the area of `torts', and torts required liability, the notion of compensation to victims of natural disasters has remained within state discretion, and as expressions of compassion and of `charity'. However, a relationship is emerging between disasters and state policy; there is, in addition, the gradually unfolding of a notion of ‘culpable inaction’. These may alter the contours of the ‘acts of God’.

I- Recognition First

Statute law and judge-made law contain principles relating to compensation, as well as the use of insurance to ensure compensation to victims. A scrutiny of the legislations and decisions of courts would, therefore, delineate the scope and definition of compensation. The laws which have been influential in the development of recognition of the victim, and computation of compensation are traceable to several events. These are summarised below.

Among the early, surviving, statutory attempts at compensating loss occasioned by death is the Fatal Accidents Act (FAA), 1855 which provides for the family, or legal representatives, of the victim of an ‘actionable wrong' to recover damages for the loss sustained. From murder to motor vehicle accidents resulting in loss of life, this law has been invoked to recover damages in civil law.

In 1923, the Workmen's Compensation Act (WCA) was enacted, in part to encourage workmen to take up employments with a risk of injury and a consequent inability to earn a living. The WCA acknowledges both occupational injury and occupational disease resulting in disabling or impairing a worker from continued wage earning. This Act specifies the factors that would be relevant in computing the compensation to be paid to a disabled workman: the wage earned, the extent of disability, the age of the workman. A multiplier to compute the long-term loss was provided in a schedule to the Act. These factors have also had a pronounced influence on the computation of compensation in non-workplace related situations.

The Railways Act of 1989 assumes liability of the railways for accidents and adopts a table of compensation which focuses on the extent of disability and not on the wage loss resulting from the accident. Since 1994, there is a category of compensable event that has been introduced into the Act: the law terms it an ‘untoward incident’. This is then defined to include incidents relating to the commission of terrorist acts, robbery, riots and violent acts such as shoot-outs or arson on any train carrying passengers, or in any place within the precincts of a railway station. This is significant for, in general, the liability to pay was pinned to either the person who caused the victim-causing event to occur or on the person who benefits from the risk undertaken by the victim. In this case, the railways have been made liable for the event.

Under the Motor Vehicles Act 1988 (MVA), the insurance company is responsible for setting up a fund for paying victims of hit-and-run accidents. The MVA makes insurance compulsory. The risk-spreading is seen as imperative to reduce the severity of the secondary effects on the victim, as well as on the person found liable. Earlier, this took at least partial care of the victim when the offending vehicle was identified, but usually the victims of hit-and-run accidents were left without remedy. The law was then amended to put the onus on insurance companies to frame a scheme which would pay a compensation to victims of hit-and-run accidents.

The expansion of compensable events, and the assumption of liability that one witnesses in the Railways Act and the MVA appears to have been influenced by the railways being a service provided by the state, and insurance being a nationalised industry.

II- Language of hazards

The language of hazards has entered the parlance of the law following the Bhopal Gas Tragedy. The leakage of methyl isocyanate (MIC) from the Union Carbide plant in Bhopal left thousands dead and many more in different stages of injury, disease and disability. The extent of damage caused by a single disaster has led the law to recognise `mass tort'.

In 1987, the Factories Act 1948 was amended to make special provisions relating to hazardous processes. The locating of industries is placed in the care of Site Appraisal Committees. Information regarding dangers, including health hazards and the measures to overcome such hazards arising out of the handling of the materials or substances in the manufacture, transportation, storage and other processes is to be shared with the workers employed in the factory, the Chief Inspector of Factories, the local authority and the general public in the vicinity. The occupier of a factory is to lay down a policy with respect to the health and safety of the workers employed in the factory, and an on-site emergency plan is to be put in place before launching out on an activity involving hazardous processes. Measures for handling, usage, transportation and storage of hazardous substances inside the factory premises, and the disposal of such substances outside the factory premises, are to be laid down and publicised among the workers and the general public living in the vicinity.

There is a responsibility on the occupier to maintain health records, or medical records, of the workers in the factory who are exposed to any chemical, toxic or other harmful substances which are manufactured, stored, handled or transported; and such records are to be accessible to the workers. There is provision for a Safety Committee in which both management and workers are equally represented. The right of workers to warn about imminent danger to their lives or health and to have such warnings heeded is set out in the law.

It is only the mass tort potential of hazardous processes that has given workers the right to understand the nature of the risk with which they are faced in their work, and to be informed of what they are to do in the event of a disaster. The Bhopal Gas Disaster demonstrated that people unconnected with a process may yet become victims of an industrial disaster. Persons in the vicinity were, for the first time, included in the law. These persons are now among the categories of persons who are to be forewarned of what they ought to do to ‘overcome such hazards’ when they occur.

The Public Liability (Insurance) Act (PLIA), 1991, also a fallout of the Bhopal Gas Disaster, was, on the other hand, enacted to provide ‘immediate relief to the persons affected by accident occurring while handling any hazardous substance...’ The PLIA excludes workmen from its purview on the logic that: ‘While workers and employees of hazardous installations are protected under separate laws, members of the public are not assured of any relief except through long legal processes.’

The PLIA makes it mandatory for persons handling, or controlling, hazardous substances to take out one or more policies of insurance by which he is insured against liability to provide relief to affected persons on the principle of `no fault'. That is, the affected person does not have to establish that the accident occurred owing to the fault or negligence of the person owning or controlling the hazardous substance; this is a departure from the traditional principle of fault liability which fixes liability only where fault is proved. The statement of objects and reasons refers to the reluctance of industry to pay victims of accidents. ‘Some units’, it goes on to say, ‘may not have the financial resources to provide even minimum relief.’

The unwillingness of the insurance industry to take on unlimited liability under these policies led to the 1991 law being amended in 1992. This amendment limited the liability of the insurance companies to the extent specified in each insurance policy. An insurance policy taken out by an owner was not to be for an amount less than the amount of the paid-up capital of the undertaking handling any hazardous substance and owned or controlled by that owner, and not more than fifty crore rupees. The Rules under the PLIA provide that the maximum aggregate liability of the insurer shall not exceed five crore rupees in claims arising out of an accident. In case there are claims arising out of more than one accident during the currency of the policy, or one year, whichever is less, the liability of the insurer is not to exceed, in the aggregate, fifteen crore rupees in the aggregate.

The 1992 amendment introduced the Environment Relief Fund (ERF) into which owners were to deposit an amount equal to the premium paid to the insurer. With that, the PLIA designed a three-layered interim compensation scheme. In the first instance, the insurance company would be required to pay to the extent of its liability. Where this is insufficient to cover the amount awarded to the victims, the Collector (the authority in the PLIA to determine, award and disburse the amounts) may arrange to draw upon the funds in the ERF. In the last resort, the Collector may call upon the owner to make up the shortfall.

A schedule to the PLIA sets out the limited relief that may be paid out to persons claiming under the Act.

In 1995, the National Environment Tribunal Act (NETA) was enacted to deal with all claims arising out of an industrial disaster[1]. The tribunal is expected to deal with claims arising out of `accidents', including matters of interim compensation; to that extent, it shares common ground with the PLIA. The NETA, like the PLIA, adopts the principle of strict liability[2], and does not require the affected person to prove fault or negligence of the offending person. This does not, however, do away with the victim having to demonstrate the relationship between the offending event and the injury suffered.

There is a schedule to the NETA which sets out the categories under which compensation for damages may be claimed. It includes loss or damage to person, property, and environment and includes the expenses incurred by government in dealing with the accident.

There is no priority of claims prescribed by statute, which places all the claims on an equal plane. This implies that compensation that is to be awarded to an affected person would have to compete with governmental claims for costs of providing relief or rehabilitation.

The imposition of a fine in criminal law is another, though underused, possibility in the area of compensation. This is a provision couched in section 357 of the Criminal Procedure Code, 1974 (CrPC). The CrPC recognises three sentences that may be imposed upon conviction in a criminal trial: the death penalty, imprisonment and fine. Where a fine is imposed, and recovered, the court has the discretion to order that it be utilised to recompense the victim or the person sustaining loss as a result of the crime.

Furthermore, even if a fine is not imposed, the court may order that a specified amount be paid by the accused person to the person who has suffered loss or injury by reason of the act for which the accused person has been convicted. May be because criminal trial has tended to focus on the crime and the criminal, and reparation has been treated essentially as a civil remedy, this discretion vested in the courts has been underutilised. The necessary link between conviction and compensation also reduces the effectiveness of this provision for the victim. More recently, the Supreme Court has been urging that this provision be used more liberally.

Other laws such as the Carriage by Air Act 1972, the Marine Insurance Act 1963, Inland Vessels Act 1917, the Manoeuvres, Field Firing and Artillery Practice Act 1938 and the Seaward Artillery Practice Act 1949 have a bearing, though not significant, on the notion of compensation. Their influence on the development of the notion of compensation, and of the components that go to make up compensation has, however, not been significant. One may also refer to the Personal Injuries (Emergency Provisions) Act 1962 and its follow up legislation, the Personal Injuries (Compensation and Insurance) Act 1963, and the scheme under the latter Act. They constitute an illustration of the protection that was offered to workmen for the risks they undertook by continuing in their workplaces during war. It represents a definite effort to induce workmen not to desert their work and workplace.

III- Means and meanings

Of all the contrivances for cheating the labouring classes of mankind,
none has been more effectual than that which deludes them with paper money.

Daniel Webster

The courts have, by interpretation and application of these laws, participated in evolving the meaning of compensation in law. Courts have also relied on the dominant legislations to elicit principles for determining compensation. In this process, the factors that have gained judicial and legislative acceptance are:

A- Income replacement

This principle, evolved in a situation where there was an assumption of risk on the part of the workman and a sharing of the loss by both the workman and the employer, has been extended to situations where the victim neither knew of the risk nor gained, directly or indirectly, from assuming the risk. Where situations with a choicelessness of risk and vulnerability of populations are on the increase,
occasioned for instance by the risks posed by hazardous technology, this may need to be reworked.

Experience has shown the difficulties in relying on the income replacement criterion. When non- wage earning women have been the victims, courts have had to monetise their relevance in order to award compensation. So, the cost of hiring the services of a cook or a governess have been used as a standard for computing the loss the injury represents! It was in cases under the MVA that this surfaced time and again. The MVA now attempts to resolve the problem by adopting `notional' income for non-earning persons. In the process, it contains the first concrete, even if implicit, valuing of the economic worth of the non-wage earning woman's contribution; it has used spousal income as the basis for calculation. Where life convicts have been killed in prison, the court has had to contrive relevant standards, since income replacement cannot be applied. This problem has again surfaced where the victims have been children, and courts have often awarded nominal compensation.

Income replacement as a criterion has the effect of impoverishing the poor, particularly where the wage earned was less than the minimum wage, and secondary losses are not taken into the reckoning.

B- Expense replacement

The expenses arising out of the victim-creating event, borne by the victim, may be reimbursed by the courts. Medical reimbursement and funeral expenses are the two most frequently acknowledged costs incurred by the victim. The latter has been standardised and, the MVA, for instance, quantifies it notionally at Rs.2000.

There are problems that have dogged the exercise of determining the amount that should be compensated for medical help and treatment. The dependence on documents to prove the expense could be an obstacle to recovering the costs incurred. For example, when a child of five had his limb amputated as a result of the railways shunting operations, the judge denied reimbursement because there were no documents to back the claim[3]. Again, in cases of mass disasters, the practicability of victims obtaining documents is questionable. Then, there are issues of what constitutes reasonable costs.

What the MVA has done is to place a ceiling of Rs.15,000 on the claim for reimbursement of medical expenses. This claim is to be for ‘actual expenses incurred before death supported by bills/vouchers’. It is inevitable that this limiting of the extent of recovery of costs incurred could place a considerable burden on the victim.

C- Dependency

This is relevant only where the event results in the death of the victim. Legislations specify the categories of persons who may be dependants. They are generally confined to persons in certain legal relationships with the victim. For instance, the WCA recognises as a dependant ‘a widow, a minor legitimate or adopted son, an unmarried legitimate or adopted daughter, or a widowed mother’, and includes persons in other specified relationships with the victim only where they are actually dependent on the victim. The FAA speaks of the family or legal representatives of the victim. Persons actually dependent who do not fall within any of the recognised legal relationships invariably get excluded from entitlement to the protection of compensation. Occasionally, courts have recognised this as a problem, but the law has not been altered to provide for an inclusive category[4].

IV- Other ‘general damages’

Pain and suffering, loss of consortium, loss of affection and the actual and estimated cost of assistance due to the disability are other aspects that a compensation award may take into account, but they do not generally constitute any significant part of the award.

A- Accidents

The law has moved from fault liability to strict liability, particularly where the number of victims of a single event are expected to be large, or where a single event is repeated with such frequency that it becomes a large-scale disaster, as in motor vehicular accidents.

This shift in the notion of liability has been prompted, in great measure, by the pragmatic need of not burdening the administrative and judicial systems, and in recognition of the futility of traditional processes where such disasters occur. It has been accompanied by a number of altered perceptions: it has brought in the language of `accidents' into the law. The NETA and the PLIA, for instance, adopt this phrase. It also delinks issues of safety from issues of compensation. This means that while it becomes a relatively easier process for the victim to access compensation, the victim loses one avenue for participating in establishing the negligence or fault of the offender. This process makes a `claimant' of the victim. It is also to be observed that the victim still has to establish causation, that is, the relationship between the offending event and the effect it has had on the victim.

B- Industrial pollution

The reliance on insurance to ensure that some compensation is paid to the victims also results in risk-spreading, and the possible moral hazard of reducing the emphasis on safety unless it is balanced out by other provisions in the law. This development has not occurred: for instance, there has been no change, despite the Bhopal Gas Disaster, in the criminal law to make it possible to charge a corporation with a penal offence.

It is in the case of environmental pollution that the court has adopted the `polluter pays' principle[5], and insisted on the polluters paying out of their own resources in remedying the degradation for which their industrial units are responsible. While the `polluter pays' principle is premised on the offender having to go `deep pocket' -- that is, the loss is not shared by a community of potential offenders through a device such as insurance -- there is as yet no embargo on resorting to insurance, and consequently of risk and loss spreading.

In the context of industrial disasters, it may also be remarked that the court has cautioned that chemical industries, being ‘the main culprits in the matter of polluting the environment, there is every need for scrutinising their establishment and functioning more rigorously’[6].

C- State negligence

Courts have developed the law of compensation in cases of `constitutional tort'. Rudul Sah v. State of Bihar[7], where a person was kept in detention as being of unsound for long years after he had been declared fit, set this process in motion. Many of the cases which have been adjudicated thereafter have been of deaths in police custody, oftentimes preceded by torture. Several pertain to the abuse of power, including abduction and disappearance of persons, reportedly engineered by the police or the armed forces. After years of dealing with callous neglect or criminality of officers of the state, the principles were enunciated in the case of Nilabati Behera v. State of Orissa[8]. ‘Monetary amends’, as `exemplary damages', based generally on the income replacement criterion, was awarded by the court in Nilabati Behera to the mother of a victim of death in police custody. With this, doubts that persisted about the constitutional access to compensation have been laid to rest. Even yet, this remedy is confined to amends for wrongdoing where it fixes the liability for the public wrong on the state.

In 1985, the Supreme Court was asked to direct the state of Orissa to take steps to ameliorate the misery of the people of Kalahandi where starvation deaths, distress sale of labour and paddy, and even sale of children actuated by abject poverty was reported. In 1987, the scope of the case before the court was extended to include the people of Koraput. It was alleged that the starvation deaths were due to the ‘utter negligence and callousness’ of the administration and the government of Orissa[9]. The state averred that measures for ‘mitigating hunger, poverty, starvation deaths, etc.’, (as the court paraphrased it) were being taken, including the setting up of a Natural Calamities Committee. The court, hoping and trusting that ‘in view of the prompt action that has been taken by the government, soon the miseries of the people of these two districts will be over’, disposed of the case.

D- Bankrolling fundamental rights

It was left to the National Commission for Human Rights (NHRC) to recognise the violation of fundamental rights where starvation deaths occur. The issue of an epidemic of deaths caused, inter alia, by malnutrition resurfaced before the NHRC after it was set up in 1993. A complaint was sent to the NHRC alleging that about 400 children had died in Phulbani district of Orissa as a result of acute malnutrition, accompanied by repeated attacks of malaria, chicken-pox and various water-borne diseases. The Chief District Medical Officer, Phulbani, while averring that the number of deaths was an exaggeration, admitted that ‘in Daringbadi block, 125 children below 10 years of age died in August and September 1993’.

Finding that ‘adequate and satisfactory arrangements had not been made to prevent the calamity’, the NHRC recommended that the state government pay, within a month, Rs.6,52,000 to the 125 tribal families whose children had died.

The state government's response was chilling. Having stated that the government had already set up health centres; that doctors and para-medical staff were in position; that building up mass awareness through a health education system needed time and that natural calamities were beyond the control of the administration. And it added: the resource crunch in the state would seriously limit the capacity of the government to pursue regulatory activities if ‘every death earned lucrative compensation’.

The NHRC's insistence that it had been offered no reason to change its recommendation has, however, established that the epidemic of deaths brought on by starvation or disease is within the contours of state liability[10].

It is invariably easier to determine the existence of infringement of a right than to find the relevant parameters for determining compensation in each case. The NHRC has now standardised compensation at between Rs. 50,000 and Rs. 100,000, generally settling for the lower sum.

There is increasing attention on what is now termed ‘culpable inaction’. So far, courts have generally been responsive to complaints of abuse of power and criminality of law-enforcing agencies. More recently, petitions have been taken to court asking for compensation where the state did not prevent the occurrence of a victim-creating event. In R. Gandhi v. Union of India,[11] the Madras High Court found that the damage and loss to the properties of members of the Sikh community in Coimbatore following the assassination of Mrs. Gandhi in 1984 could have been averted if the police had acted in time. The efforts of the police were described by the court as ‘half- hearted’ and ‘lethargic and inefficient’.

In another incidence, the Andhra Pradesh High Court was called into a matter concerning the eruption of violence following the murder of a sitting MLA[12].Arson and looting was resorted to by private individuals/miscreants. Curfew was imposed, and the situation was brought under control by the police, but the violence had taken its toll. The affected persons alleged negligence of the state and its officers. They contended that the MLA had been fasting unto death for some time before his death demanding police protection, and the state could have visualised the tense situation that was bound to ensue, and ought to have taken preventive measures. The court did not accept the contention of the petitioners and said: ‘If no action was taken by the concerned officials in tackling the law and order problem after eruption of violence by private individuals, then the state is liable to pay compensation for their wilful inaction, but the state cannot be made liable in not anticipating the eruption of violence.’

This is how principles generally evolve in a conservative institution -- very slowly and through an initial resistance to expanding categories. They will have to be crafted to be judicially manageable before courts will open out to them. It is important to recognise that the state is the repository of all forms of legitimated violence, and exercise of this power by the state is justified by reference to its responsibility in maintaining law and order. The law of culpable inaction would have to develop around this recognition[13].

E- Discretionary Relief

State reaction to incidents catching the public eye and imagination has, by and large, relied on what are inaccurately termed ex gratia payments in acknowledging the loss sustained by the victim. This is discretionary relief. There is no publicly acknowledged logic for determining where ex gratia will be provided, nor any standard as to the amounts that will be paid. It is then as political expressions of compassion that it presents itself, and in the nature of largesse, than as policy. Mass disasters, particularly natural disasters such as floods, cyclones and earthquakes, witness a transfer of funds from the Centre to the affected state as a measure of relief. This is the relatively visible part of the exercise. Compensation to affected persons is only one part of what follows, and tends to lack in transparency.

What sets out as ex gratia may get to become policy where the offending act is repeated with a regularity that defies ad hoc treatment. So it happened in the case of victims of militancy, where the state was unable to treat the incidents as disparate occurrences. The states of Punjab, U.P. and Assam, for instance, formulated schemes for paying a certain sum to victims of militant violence. Victims of state violence in the same context were not covered by these schemes, and have had depend on the intervention of courts, and the exercise of their discretion.

An assessment of the state of compensation as a mechanism for relief and reparation suggests that the victim is invariably required to bear at least a part of the costs generated by the victim-creating event. Also, income replacement is a criterion that will, more likely than not, result in impoverishment of those already living marginal lives; principles of compensation need to account for this reality. Again, the relationship between deterrence and compensation, and safety and compensation, must be kept in focus to influence reduction of victim-creation. In this context, the effect that risk-spreading through insurance will have on safety and deterrence needs to be assessed.

Privatisation of the insurance industry will alter its capacity to be a social security mechanism, except to those who are able to anticipate the risk, and to insure themselves voluntarily. The experience of parliamentary negotiation between the insurance industries and potential victim-creating industries, as was seen in the PLIA between 1991 and 1992, or where Parliament enacted a responsibility for insurance companies to provide compensation to hit-and-run accident victims, will inevitably change with private insurance. The evolution of the no-fault principle is also likely to be affected.

The aspect of risk has hardly been considered while settling the parameters for compensation. In the early years of application of the WCA, the doctrine of added peril -- which disentitled an injured worker from compensation on the ground that he had taken a greater risk than he had been required by his employer to assume -- was often advanced in courts. This is among the few instances where the notion of risk was explored -- inevitably, though, at the cost of the workman! There have been no largely visible attempts since.

The amendments to the Factories Act 1948 following the Bhopal Gas Disaster, referred to earlier, are an implicit acknowledgment of the risk to strangers to a process, but even such acknowledgement is yet the exception. There is much that needs to be done, and questions concerning voluntariness of risk, the role of risk-bearers in matters of safety and protection, and the connection between poverty and risk will have to be answered. The language of `accidents', which has entrenched itself in law, will have to be re-visited. The tale of neglect of asbestosis as an affliction imposed by the industry reveals the narrow path to recognition of affected persons[14].

The process of recovering compensation is itself fraught with peril, and needs overhauling. Compensation neurosis and litigation neurosis are phrases that have entered the lexicon of disasters. Corruption and misappropriation of resources tend to dog disasters. The problem of proving causation troubles victims of mass disaster too, and alternative strategies, such as epidemiological identification of affected persons, has not even been tried. These demand close and immediate attention.

Compensation, it may be fair to be expect, ought to enable the victim to shed victim status as painlessly and immediately as is possible. Among other things, it must reflect the cost that the event has generated. In the ultimate analysis, it represents a statement of the priorities of a state and of the people who determine these priorities.