Choosing Public Liability Insurance Limits

Before we proceed to the next step of selecting limits of cover in a liability policy, we need to keep certain basics in mind: 
1. For the mandatory/semi-mandatory policies - limits may already be specified in the norms - e.g. PLI Act, 1991 or wages of employees in Employee Compensation policy. For other Liability policies a specific choice has to be made.
2. Unlike single sum insured in other insurance covers, liability policies need to have two limits - AOA (Any one accident) & AOA/AOP (Any one year/period) limit. As a general practice only four ratios may be permitted in these policies - 1:1, 1:2, 1:3 & 1:4. This means that AOY can be equal to AOA, or twice/thrice or four times the AOA limit.
3. It is also to be appreciated that liability policies cover legal liability i.e. liability as per law - written or unwritten & normally established in a court of law. So, a good way to decide on the limits can be to select an amount close to what has been awarded by the court in a situation for which the liability policy is being purchased.

 Given below is a summary of the compensation award of 11.55 crore by the Supreme Court for medical negligence causing the death of Dr. Anuradha Saha, while being treated in Kolkata/Mumbai. The broad heads in the compensation awarded are:

A.  Since Dr. Saha was a practicing doctor in US, notional computation of loss of income considering different aspects detailed in step I to V. 
B.  Expenses incurred on treatment as well as on legal fee etc. - for which bills/records were available.
C.  Aspect of pain and suffering as well as loss of consortium inflicted on the family - for which no documentation is feasible & allowed by the court at its discretion.
D.  Interest on the  compensation from the date of incident to finalization of Court verdict.

The Break - Up

The compensation awarded under different heads by the Supreme Court:
  • Anuradha’s loss of income INR 5.72 crore
  • Treatment in Calcutta and Mumbai INR 7 Lakh
  • Travel and hotel expenses in Mumbai INR 6.5 Lakh
  • Loss of consortium (Deprivation of the benefits of marital relationship) INR 1 Lakh
  • Pain and Suffering INR 10 Lakh
  • Cost of litigation INR 11.5 Lakh
  • Total compensation INR 6.08 crore
  • Simple interest at 6% a year since 1998 INR 5.47 crore
  • Total, including simple interest INR 11.55 crore
How the court estimated the loss of income at 5.72 crore:

Step I : Court takes earning of the deceases to be $ 40,000 a year.

Step II : Court adds 30% (to cover future pay rises).

Step III : Court deducts 1/3 of the sum as her personal expenditure (if she had lived).
$ 52,000-1/3 x $ 52,000 = $ 34,666.66. Court rounds this off to $ 34,667.

Step IV : Cout multiplies this by 30 (assumed years of earning left).
$ 34,667 x 30 = $ 1,040,010.

Step V : Court assumes a constant value of the dollar at INR 55.
INR 55 x 1,040,010 = 5,72,00,550.

Action points:
1.  Evaluate the probability of an incident leading to a liability situation in the area of your business/ profession. 
2.  Assess the likely amount of liability compensation that may have to be paid in such a situation.
3.  The above gives you an indication of AOA limit to be selected.
4.  Evaluate the chances of multiple incidents happening in a year and decide on the AOY limit in consultation with your Insurer.

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