Motor Accident Tribunals Cannot Impose Penal Interest on Compensation Awards Without Statutory Authority.

On 11 October 2004, Ram Lakhan Shukla died in a motor accident involving Jeep No. M.P.-17-A-5096.

The vehicle was owned by respondent No. 7, driven by respondent No. 8, and insured with Oriental Insurance Company.

The deceased’s legal representatives filed a claim petition under Section 166 of the Motor Vehicles Act, 1988.

The Motor Accident Claims Tribunal awarded ₹2,73,000 with interest at 6% per annum in favour of respondent Nos. 1, 2, 5 and 6, with a stipulation that interest would increase to 9% per annum if payment was not made within 60 days.

The Insurance Company appealed under Section 173 of the Act, seeking exoneration on the ground that the vehicle was carrying 16–17 passengers although its permit allowed only nine passengers.

Whether the Insurance Company was liable to indemnify the claimants despite the offending vehicle carrying more passengers than permitted under its transport permit?

Whether the Claims Tribunal could impose penal interest at 9% per annum for failure to deposit the compensation within 60 days?

Section 147(1)(b)(ii) of the Motor Vehicles Act, 1988 requires insurance coverage for death or bodily injury to passengers of a public service vehicle, while Section 149 imposes on the insurer the obligation to satisfy judgments and awards to the extent of the risk covered by the policy.

Relying on National Insurance Co. Ltd. v. Anjana Shyam, AIR 2007 SC 2870, the Court held that an insurer’s liability in cases of overloading is limited to the number of passengers legally permitted and insured, and that liability for excess passengers ordinarily remains with the owner.

The Court also relied on United India Insurance Co. Ltd. v. K.M. Poonam, 2011 AIR SCW 2802, concerning the insurer’s obligation to satisfy awards initially, with liberty to recover amounts beyond its contractual liability from the owner.

Further, following National Insurance Co. Ltd. v. Keshav Bahadur, (2004) 2 SCC 370, the Court held that there is no legal basis for imposing penal interest as an enhanced rate merely for delayed payment of compensation.

The Court accepted that the Jeep was carrying 16–17 passengers although its permit authorised only nine, thereby establishing a violation of the permit conditions.

However, the insurance policy covered the risk of 18 passengers, and the claim in the present case arose from the death of one passenger, Ram Lakhan Shukla.

Applying the principles in Anjana Shyam and K.M. Poonam, the Court concluded that the deceased’s compensation fell within the insurer’s liability for the covered passenger risk.

Accordingly, the permit violation did not justify exonerating the Insurance Company in respect of this particular claim.

As to interest, the Court held that the Tribunal’s direction increasing the rate from 6% to 9% per annum if payment was not made within 60 days constituted penal interest.

Since such penal interest had no legal basis and was unnecessary in the circumstances, that condition was liable to be deleted.

The award was affirmed insofar as it required the Insurance Company to indemnify respondent Nos. 1, 2, 5 and 6 for the compensation awarded for Ram Lakhan Shukla’s death, notwithstanding the vehicle’s violation of its permitted passenger capacity.

However, the direction imposing penal interest at 9% per annum for non-payment within 60 days was set aside.

The ordinary interest awarded by the Tribunal otherwise remained undisturbed.