2. Legal Background

8/6/2019 2. Legal Background

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Legal Background


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Introduction

8/2/2011Shylaja Iyengar, CIRM, BIMTECH

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y Public liability insurance is concerned with Liability which

arises mainly under the Law of Torts, which forms partofEnglish Common Law consists of past legaldecisions

y The Common Law is applied by the courts in India,depending on the circumstances of the case, wherever

relevant.


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TORT


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y Acivil wrong arising out of breach of some duty

which - leads to a civil cause of action

For which damages / compensation are recoverable

y The law of tort imposes a dutyon each person to

regulate his actions and behaviour so as not to causeinjury to other persons or damage to their property


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DISTINCTION


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TORTTORT CONTRACTCONTRACT


1. Civil wrong arising out

ofbreach of duty

2. No privity is needed

3. duty that is broken isimposed by the lawapplicable to allmembers of society

enforceable atlaw based on the consentof the parties

2. Requires privity betweenthe parties

3. duty arises out ofagreement between theparties concerned andapplies to definiteperson(s)

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DISTINGUISH


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Examples ofTort


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y Libel

publication of false statement in a permanent form designed to

damage the reputation of another person

y Slander

A similar publication but in theverbal form

y An assault

unlawfully touching the person of another


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Civil Liability


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y Liabilities may also arise under Statutory Law, asenacted by the legislature. E.g.

The Public Liability Act, 1991

The Motor Vehicles Act, 1939 / 1988 The Workmens Compensation Act, 1923 etc.

y Civil Liability, therefore arises under

Law of torts

Statutes and Law of Contracts

y Liability insurance is mainly concernedwith two torts namely -1. Negligence

2. Nuisance


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A. Negligence*

y The breach of a dutycaused by the omission to

do something which a reasonable man, guided by thoseconsiderations which ordinarily regulate the conduct of humanaffairswoulddo or

doing something which a prudent and reasonable manwouldnot do.

y Put Simply, Negligence means absence ofcare.

y [Note - Negligence as used in the everyday speech is without any specific legal meaning,but generally suggests carelessness]

[* English case - Baron Alderson in Blyth vs. Birmingham Waterworks Co. (1856)]


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Negligence establish?

y Negligence can be established when the followingconditions are satisfied

1. The defendant owes a duty ofcare to the claimant

2. The defendant breaches that duty

3. That breach has causeddamage or loss to the claimant

4. There is a causal connectionbetween the breach of duty

and the injury/damage (absence of remoteness)


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1. Duty of Care

y For a claimant to succeed in an action in Negligence, itmust be shown that the defendant owes the claimant a dutyof care.

y

When does the duty of care ex

ist?T

o whom is it owed? Donoghue vs. Stevenson(1932) is the earliest and most importantEnglish case on negligence. Facts

y In what was subsequently known as the narrow rule, theHouse of Lords found that such a duty did exist.

Accordingly, manufacturers of goods must takereasonable steps to ensure that their products

do not cause injury to those that subsequently

come into contact with them


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Duty of Care

y However, Lord Atkin proposed a general maxim of lawknown as the neighbour principle in reply to the

question Who then is my neighbour? as follows

y that a general duty of care was owed to all

legal neighbours, those so closely and directly

affected by an act or omission that they ought

reasonably to be in contemplation at the timethat the tort is committed.


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2. Breach of Duty of Care

yAn action for negligence can proceed only if thereis a breach of that duty of care which will bedetermined by courts with reference to the

standard of care expected by law.y The test is the standard of care expected from a

reasonable person.

y This will be subjective and will depend on thecourts decision in a particular case

y But the courts always consider precedents i.e. pastlegal decisions


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The Degree of Care

y May vary according to particular circumstances

y No single standard of care applicable for all circumstancesand situations.

y E.g.

Owners of property have a duty of care to use their own property insuch a manner as not to cause injuryto the persons or property ofanother

Persons who use dangerous things such as explosive materials, fire-

works or gas are bound to ex

ercise more than ordinary care in theircontrol over such properties

Ahigher degree of care and skill is expected from members of thelearned profession such as doctors, solicitors etc. in theirprofessional work


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Standard of care

y An important consideration affecting the standard of care isthe likelihood of injury / damage occurring.

y An English court observed- People must guard

against reasonable probabilities but they arenot bound to guard against fantastic

possibilities.

y In the case of Breton vs. Stone (1951), 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 oneither to abandon the use of the ground for cricket or to increase theheight of his surrounding fences. He would have done what theappellants did. In other words, he would have done nothing


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The Degree of Care

y The degree of care required from owners / occupiersof real property (i.e. land, building etc) variesaccording to the different classes of persons in regard

to whom it is to be exercised Trespassers

Entry on the property is without any right of permission and at hisown risk. The duty of the occupier is not to be reckless or do anywillful act in disregard of ordinary humanity

Licensee Entry is by implied permission, but without any invitation.E.g.

Salesman soliciting orders. The duty of the occupier is to warn thelicensee of any hidden or concealed danger of which he is aware


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The Degree of Care

Invitees

Enters a property for reasons of common interest. E.g. a customerentering a shop / ticket holders in a CinemaTheatre*, Circus etc.

The duty of the occupier involves a greater degree of care and

should prevent them from any unusual danger, which he knows toexist or ought to know.

Passers-by

Duty of the occupier to keep the property in a good state of repairand the duty extends to take care against what may happen

beyond the property limits where a person may be lawfullypassing.

Towards children

Duty of care required is of higher degree than that of an adultperson. E.g. in respect of schools


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3. Injury or Damage

y The plaintiff must prove that he has suffered injury /damage as a consequence of thebreach of duty ofcare

y Injurycould be - death

bodily injury and

associated pain and suffering and

economic losses such as loss of actual earnings / earningcapacity etc.

y Damage could be damage to property


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4. Causal connection between breach & injury

y The injury / damage should be a consequence of thenegligent act.

yThere has to be a close causal relationship

between the breach of duty and the injury / damage

y Prior to 1961, under English Law, a person wasresponsible for all direct and natural consequences

flowing from his negligence, whether they werereasonably foreseeable or not.


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4. Causal connection between breach & injury

y The plaintiff could recover if there was unbrokensequence of events between the original act ofnegligence and consequent loss

y This position changed in 1961 with the decision ofthe Judicial Committee of the Privy Council in what

was commonly known as the Wagon Mound Case.

y This decision introduced the test of reasonable

foreseeabilityin place of direct consequence testapplied by the courts earlier.


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Onus of Proof

y Under common law, onus of proving negligence lies on theclaimant. For E.g.

if a passer-by is injured by a flower pot falling from a balcony of aprivate residence, The burden of proof is shifted to the owner, to

prove that he was not negligent

y According to common law rule ofres ipsa loquitor (thething speaks for itself) the accident constitutes prima facieevidence of negligence.

y The rule applies where the accident is more probably due tothe negligence than to any other cause

y The circumstances leading to the accident are within thecontrol and management of the defendant.


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Employers Liability for Employees Negligence

y According to legal doctrine respondentsuperior an employer is liable for the negligence ofhis employee.

y The employers liability arises when the followingessentials are present 1. The relationship of master and servant is established. May

be determined by

Who pays the wages and Who appoints the employee

2. The act is committed in the course of, and within the scopeof employment.


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Employers Liability for Employees Negligence

y Thus the employer is definitely held liable if negligence isinvolved when an employee performs an authorised act in -

An authorised way or

An unauthorised manner or

The act was prohibited within the scope of employment

y Even when the act is in breach of instructions, the employermay still be liable for the consequences of the acts

y This is based on the principle that the employer is -

financially stronger than the employee and is better able to bear the damages.

y The employee, of course, is personally liable for his own

negligence.


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Principals Liability for Contractors negligence

y A principal / an employer is not liable for the negligence ofan independent contractor or of his employees, arising inconnection with the performance of the contract.

y Does not mean that principal can pass on to contractor anyduty of care that attaches to him under Common Law.

y The principals liability for contractors negligence mayarise in the following circumstances Where he retains some control over the contractor or provides labour

and/or machinery

Where the contractors work involves extra hazardous acts etc.


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Principals Liability for Contractors negligence

y Liability may be joint or several, depending oncircumstances

y In practice, the principal provides in the contractthat he should be indemnified by the contractor if

principal is held liable for contractors negligence


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Fatal Accidents Act, 1855

y If a person dies as a result of a wrongful act, neglector default, then the legal heirs of the deceased willstill be eligible to take action for the damages caused

by the wrong doer.y Damages are awarded by the court in proportion to

the financial loss to the survivors resulting from thedeath.

y This Act abolished the long standing rule of commonlaw, according to which, a civil action for damagesdied with the person to whom or by whom the tort

was committed.


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Damages

y Means the pecuniarycompensation recoverableby civil action for breach of contract or for tort

y Damages for personal injury(fatal or non-fatal)claims fall into two categories


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SpecialDamages Personal Injury

General Damages personal injury

PropertyDamage

Punitive Damages


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(a) Special Damages

Actual loss of earnings, as a result of injury

Medical / nursing / other expenses necessarily incurred as aresult of the injury and

Funeral expenses

y The above are computed up to the date of settlement

of judgement


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(b) General Damages

y These comprise damages for Pain, suffering and distress

Loss of enjoyment of life and loss of amenities

Loss of recreational ability and/or

Loss of reduced expectation of life (included in fatal accidentclaims)

y Damages may also be awarded for-

The prospective loss of income

The future medical expenses Loss of opportunity in the job market (esp. if disabled)

Loss of matrimonial prospects (young / unmarried)


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Value of future losses

y is suitably adjusted by the courts upwards /downwards, to reflect

I. Immediate receipt of money with potential for earninginvestment income

II. Other benefits received by the legal heirs through successionto properties or money of the deceased

III. The changing circumstances of life E.g. widow remarrying orearly death due to other causes

IV. Inflation or the falling value of money


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Special DamagesSpecial Damages General DamagesGeneral Damages

y Can be calculated

accurately from therecords of actualexpenses incurred orfinancial losses (e.g.

loss of salary etc.)suffered

y Estimated by the

Courts taking intoaccount a number offactors relevant toindividual cases

Distinction


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These damages are known as compensatory damages


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Calculation of Compensation

y T

wo methods of calculation have been evolved Lord Wrights formula

Nances Method evolved by Viscount Simon K.C.

y However, though the methods differ slightly , the

end result arrived at is the same.


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Compensation Bodily injury

y Annual earning capacity of the deceased

(Less) Expense on self

(Multiply) by expected life

y Apply discount for contingencies Premature death

Widow remarriage

Son not contributing to parents after his own marriage

Acceleration of interest in the estate etc.

y Lump sum compensation or

y Annuity for regular payments life long


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Compensation PropertyDamage

y Property damage i.e. w.r.t. goods

y The measure of damages depends on whether damage is-

1. Repair or replacement

Damaged property is restored to its original condition

Measure of damage may also include

Depreciate in value / loss of use / loss of property / the cost of hiring

another property during the repair.

2. Total damage

The measure of damages is the value of the property

y The general principle adopted is restoration to the originalposition. But, in practice, its application may varyaccording to circumstances of each case.


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Punitive Damages

y Also called exemplary damages

y Awarded by some states in the US as an additional amount

y

Award is more as a punishment and warning to others,where the conduct has shown wilful or wanton disrespect ofsafety considerations.

y The juries in these States may multiply the basic amount ofgeneral damages by 5 /10 / 20. Hence these damages are

also known as multiplicatory damages.y [Note: These damages are specifically excluded from the scope of cover under

liability insurance policies]


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Structured Settlements

y Is payment of damages in instalments, rather thancompensation in lump sum

y

Now a common feature of liability claims in the UK and theUS of A

y This is a process by which a defendant or his insurers paydamages over a period of time, usually througharrangement ofannuity schemes.

y This method of payment is considered to bebeneficial to allparties considered, especially the claimant


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Defences

y An allegation of negligence may be resisted byraising certain defences. Common defences are

1. Volenti Non fit Injuria

(to him who is willing there can be no injury) voluntary consent to run a risk

no right of action against anyone for injuries suffered as aresult of his actions. E.g. Spectator at a motor car race/football match or similar sporting events.

Presence at such events is an implied consent to accept therisks involved


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Defences

2. Inevitable accident

An accident which occurs inspite of exercising ordinary care,

caution and skill The defendant has to prove that the accident could not have

been avoided. E.g. Hidden defect in a machinery

3. Act of God or Vis Major

An event due to natural causes directly and ex

clusivelywithout human intervention. E.g. of AOG are storms,earthquake, lightning etc.


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Defences

4. Emergency(own life is in danger) If a person in a moment of imminent danger, acts in a way

which causes injury to another, he will not be held liable innegligence if his act was not unreasonable in the difficultsituation in which he was places

5. Contributory Negligence If the plaintiff suffers injury / damages partly due to his own

fault and partly due to the fault of the defendant, thedamages are reduced according to the blame attaching to theplaintiff.


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Defences

6. Contracting out

y Persons may relieve themselves of / restrict their liabilityby incorporating conditions in the agreements entered into

with other parties.y As long as these are not contradictory to the Common Law,

they can be raised as a defence.

y It is necessary that the condition must be effectively

brought to the attention of the other party, whose consentexpressed or implied is essential Other Egs. Disclaimers notices in lift Passengers are carried at own risk

and responsibility


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Defences

7. Limitation An action can be time-barred under the provisions of the Statute of

Limitation

8. Accord andSatisfaction If a claim has been settled by agreement and a binding discharge

obtained, it cannot be reopened. Similarly, law does not allow successiveactions.

If damages are awarded for bodily injuries on the basis of medical

evidence, a fresh action cannot be brought on the basis of subsequentmedical opinion establishing that injuries were more serious than

originally agreed.


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Nuisance

y Means acts or omissions which unlawfully interfere withanother persons use or enjoyment of land or of some rightin connection with it

y N

uisance concentrates on the protection of a right orinterest normally associated with land.

y It looks more at the results of a persons actions ratherthan whether they have conformed to a standard of conduct

y It is governed by the maxim sic utere tuo ut alienumnon laedas so to use your property as not to injure yourneighbours

y Three types of nuisance we will consider only two


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Nuisance

Public Nuisance

y DefinedbySec268 ofIPC:

y A person is guilty of public nuisance whodoes any act or is guilty of illegal omission,which causes any common injury, danger orannoyance to the public or to the people ingeneral who dwell or occupy property in thevicinity or which must necessarily cause

injury, obstruction, danger or annoyance topersons who may have occasions to use anypublic right. It is a nuisance against the community as a whole, or at

least sufficiently large to constitute a class

E.g. running a brothel, selling food unfit for public

consumption, obstructing a highway etc.y Public nuisance cannot be the basis of a civil

cause of action and is dealt with by the Stateas a crime

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PrivateNuisance

y Arises out of the use of ones ownproperty in such a way as to causephysical injury to the property ofanother or interfere with his health orcomfort

E.g. wrongful escape of smoke, smell,

fumes, gas, noise etc.y As private nuisance is an act affecting

a particular individual it leads to acivil cause of action for damages

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A nuisance may be the result of negligence, and in somecircumstances, the same act or omission may be thebasis of an action for nuisance or negligenceHowever, nuisance does not form part of the law ofnegligence.


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NuisanceNuisance NegligenceNegligence

y Liability may arise inspite of thefact that the person has taken all

possible care.y The duty on the part of the wrong

doer is absolute and liability arisesif damage is proved

y Action is sustainable only whenthere is actual physical damage to

the premises / property of anotheror interference with the enjoymentof the premises

y [Note: the tort of nuisance isparticularly relevant to pollutionliability]

y Liability arises only out offailure to exercise thatdegree of care demanded

by that particularsituation

Distinction


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The Law of Strict Liability

y This principle was laid down in the English caseRylands vs. Fletcher (1868) facts Pg. 31 ofIC 74

yAccording to the principles of common law then

prevailing, there was no personal negligence onRylands part nor was he liable for the acts of hisindependent contractor

y The judge introduced a new principle of law, whichwas subsequently confirmed by the House of Lordsand held Rylands liable. Observations. Pg. 31 ofIC 74


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The Law of Strict Liability

y To apply this rule, two conditions are necessary

There must be an escape from the land, something likely to causeharm

A non-natural use of that land. This means that something must bebrought on to the land which was not naturally there.

y In this case water was brought on to the land.y [This rule would not have applied if escape of water was from a natural lake on the land]

y Other cases

y MukeshTextileMills (P) Ltd vs. H.R. Subramanya Sastry (1987) Facts and observations Pg 32 33 ofIC 74


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The Law of Absolute Liability

y Supreme Courts landmark judgement in the case ofShriram Foodsand Fertiliser Industries

Oleum gas escaped from one of the units and resulted in personal injury to anumber of persons (MC Mehta vs. Union ofIndia, 1986)

y

Questions considered by SC- What is the measure of liability of an enterprise which is engaged in a

hazardous or inherently dangerous industry if by reason of an accidentoccurring in such an industry, persons die or are injured?

y The court held that the rule in Rylands and Fletcher could not beapplied as this was evolved in the 19th century when developments in

science and technology had not yet taken place

a new principle of liability was evolved whichEnglish courts had not done


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y The Court observed - If an enterprise is engaged in hazardous / inherently dangerous industry

which is a threat to the health and safety of the persons working in thefactory and residing in the surrounding areas, then the enterprise owes

an absolute and non-delegable duty to the community to ensurethat no harm results to anyone by its activities

y The enterprise must be absolutely liable to compensatefor such harm

y

It does not suffice that the enterprise says that it had takenall reasonable care and that harm occurred without anynegligence on its part


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y Further - T

he Measu

re ofc

ompensation must be co-related to themagnitude andcapacity of the enterprise because suchcompensation must have a deterrent effect

The larger and more prosperous the enterprise, the greater mustbe the amount of compensation payable by it for the harm caused onaccount of the accident in carrying on the hazardous /inherently

dangerous activity by the enterprise


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D & O Personal Liability

y On February 17, 1986 in another order (relating to the same case),Supreme Court permitted Shriram to reopen their caustic chlorineplant laying certain conditions to be strictly and scrupulously followedby them-

y

Condition 5 - Management of Shriram would obtain an undertaking from the CMD of

DCM Ltd., (owner of Shriram units) and the Officer(s)who are actuallymanaging the caustic chlorine plant that in the event of any escape of gasresulting in death / injury of workmen / people living in the vicinity, theywould be personally liable for payment of compensation.

Later this was amended to officer who is the occupier of the caustic chlorineplant under the Factories Act 1948 and the officerwho is responsible for themanagement of the actual operation of the plant

Personal responsibility to the extent ofannual salary with allowances forpayment of compensation for death / injury


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D & O Personal Liability

y The undertaking given by the Chairman / MD / Officer(s)could include a provision that no liability would attach if he

could prove that the escape of the gas was due to an Act ofGod or vis major or sabotage.

y Thus, the civil liability of corporation of torts also attachedto Directors and other Officers of the corporation, who arethus subject to personal civil liability for corporate torts.

y This resulted in the need for Directors and Civil LiabilityPolicy


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Statutory Liability

y Public Liability Act, 1991 Imposes no fault liability in respect of handling hazardous substances

y Other statutes having a bearing on PL Insurance -

y Water (Prevention and Control of Pollution) Act, 1974 Central and State Pollution Control Boards established under this act

Function of the board control sewage & industrial effluent discharge

Consent of Board required to establish any industry likely to dischargeeffluents

y Air (Prevention and Control of Pollution) Act, 1981 This Act is structured along with lines of Water Act but in relation to air

pollution


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Statutory Liability

y The Environment (Protection) Act, 1986

Comprehensive legislation for protection of environment &

Co-ordination of activities of Pollution Control Boards constituted underWater and Air Acts

y The Factories Act, 1948 1987 amendment has introduced special provisions to hazardous

activities

Occupier to disclose all information regarding the hazards and themeasures to overcome such hazards to the workers / the ChiefInspectorate of Factories / the local authorities / the general public inthe vicinity

y The Central Motor Vehicles Rules, 1989 and 1993 Have fixed certain responsibilities on the consignor, the transporter and

also the driver for the safe carriage of hazardous goods


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The Consumer Protection Act, 1986

y Act was passed to provide for better protection of the interests of consumers and

to make provision for the establishment of consumer council and otherauthorities for the settlement of Consumers disputes

y Definitions - Goods/Consumer/Complaint/Manufacturer/Trader/Service Pg. 38 ..39 ofIC 74

y Redressal agencies established as follows All have powers of a CivilCourt-

1. District Forum

Entertains compliants where compensation claimed is less than Rs.5 lakhs. Order ofdistrict forum is final unless appeal is filed within 30 days of award. Forum empowered tosend its order/decree for execution to appropriate Civil Court

2. State Commission Entertains appeals from District Forum. Original jurisdiction to entertain claims of >Rs.5

lakhs and < Rs.20 lakhs


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y National CommissionFinal authority established under the act.

y Procedure for filing complaint

very simple for all the three redressal agencies

No fee for filing complaint / an appeal before State / NationalCommission

Complainant can file the complaint by him/herself or authorised agent

Filed personally or sent by post

No advocate is necessary for filing a complaint


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y Consumer ForumOrders

If the forum is satisfied that

Goods complained against suffer from defects specified in the complaint or

Allegations about services are proved Then forum is empowered to issue appropriate orders (PG 41 ofIC 74)

y Act applies to insurance services as they are included in thedefinition of service under the Act

y Act also has relevance to products liability insurances andprofessional indemnities


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8/ /Sh l j I CIRM BIMTECH

Any Questions?

Documents

2. Legal Background