Insurer, guarantor in the line of fire

By Rakesh Rai

They don't have the luxury of a lawyer on their payrolls, which is why individuals run out of resources while taking on corporate behemoths. On the other hand, companies use their financial clout to drag the cases from the consumer court to the high court, and so on.

Thankfully, the judiciary is not blind to this exploitation. Recently, the Supreme Court slammed the tendency of insurance companies to avoid paying compensation to the insured on one pretext or the other and prolonging cases unnecessarily.

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This reprimand came when the court dismissed an appeal filed by the Oriental Insurance Company, challenging an order passed by the National Consumer Disputes Redressal Commission (NCDRC), directing it to pay Rs 21.5 lakh as compensation to Ozma Shipping.

The court said that "the insurance companies, in genuine and bona fide claims of the insured, should not adopt the attitude of avoiding payments on one pretext or the other. This attitude puts a serious question mark on their credibility and trustworthiness. Incidentally, by adopting an honest approach and attitude, the insurance companies would be able to save enormous litigation costs and interest liability .

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The compensation was awarded by NCDRC after a vessel owned by the shipping company sank with the cargo on 23 April 1988.

However, in a separate case, the court also said about accident claims, "If the insurance company has no liability to pay at all, then, in our opinion, it cannot be compelled by the order of the court in exercise of its jurisdiction under Article 142 of the Constitution of India to pay the compensation amount and later on recover it from the owner.

The judgement is significant as it counters the rulings according to which insurance companies had to first pay the compensation to the victim/dependants of an accident claim and later recover the amount from the vehicle owners responsible for the accidents. Such directions had been passed because insurance companies refused to pay compensation on the ground that the vehicle drivers/owners did not have valid driving licences.

In another case, the Supreme Court reversed a Calcutta High Court judgement by allowing an appeal filed by IDBI against a guarantor. Biswnath Jhunjhunwala, director of Modern Malleables, had stood guarantor for a loan of Rs 3 crore taken by the company in 1994. A second loan of an equal amount was taken by the company on identical terms in 1995.

The company defaulted in repayment of the principal amount, interest and other collateral dues. In 1997, IDBI issued a notice to Jhunjhunwala, invoking his personal guarantee and asked him to pay Rs 5.4 crore with interest and liquidated damages from 1 January 1997. Though the high court had appointed a receiver for taking possession of the sick company's assets, it stayed the proceedings initiated against Jhunjhunwala.

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Allowing the bank to recover money from Jhunjhunwala, the Supreme Court observed that the liability of the guarantor and principal debtor was "co-extensive and not alternative . Justice Bhandari said, "...the high court under its power of superintendence under Article 227 of the Constitution of India was not justified to stay the recovery proceedings against Jhunjhunwala. The apex court further clarified that the proceedings against the guarantor were not contingent to the failure of getting the principal debtor to pay the loan.

So think of less risky ways to help out a financially weak friend than acting as a guarantor for his loan amount. You may end up paying it.

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