Method of Calculating Compensation in Vehicle Accidents


The key judgments in regard to fixation of compensation in motor vehicle accident cases are: Sarla Verma v Delhi Transport Corporation & AnrReshma Kumari & Ors v Madan Mohan & Anr and National Insurance Co. Ltd. v Pranay Sethi & Ors.

The Pranay Sethi judgement by a five-judge bench of the Supreme Court (SC) laid down some broad guidelines for assessing the amount of compensation to be paid to the accident victims in areas where there were divergent approaches.

In Pranay Sethi case states that the Tribunals shall ordinarily follow the standards prescribed in the judgment in Sarla Verma case in regard to multiplier, subject to the observations made in Reshma Kumari case, in regard to arriving at a just and predictable compensation.

The multiplier method originally applied in General Manager, KSRTC, Trivandrum v Susamma Thomas (AIR 1994 SC 1631) and reaffirmed by the Sarala Verma, Reshma Kumari and Pranay Sethi judgements is the right method according to SC in determining compensation under Section 166 of the M V Act.

Mode of calculating compensation in death cases

Calculate the multiplicand: To calculate just compensation in a death case, the first thing to be done is to calculate the annual income or dependency or multiplicand, after deducting the tax.

Deduct the personal expenses: Then deduct the personal expenses and living expenses from it. The resultant amount is termed as annual income or multiplicand or dependency. For this exercise the claimant must establish the age of the deceased, the income of the deceased and the number of dependents.

Ascertain multiplier: Then, ascertain the multiplier from the column 4 in the table in Sarala Verma judgement based on the age of the victim.

And finally multiply the annual income or dependency or multiplicand with the multiplier.

Add future prospects: Then, add Future Prospects to the above amount of dependency based on the basis of percentage provided in the Pranay Sethi judgement.

In short: When the annual income or multiplicand is multiplied with multiplier and added with Future Prospects, the net loss of dependency will be arrived at.

Along with that amount, add Loss of Estate, Funeral Expenses, Loss of Consortium as allowed in the Pranay Sethi judgement to arrive at the net compensation.

Deduction of personal & living expenses to find out the income

The Sarla Verma judgement, in its paragraph 14 and 15, lays down the method of deduction of personal & living expenses to ascertain the annual income or mulplicand is as follows:

Where married: Where the deceased was married, the deduction towards personal and living expenses of the deceased should be one-third where the number of dependent family members is 2 to 3, one-fourth where the number of dependent family members is 4 to 6, and one-fifth where the number of dependent family members exceeds six.

Where bachelor: Where the deceased was a bachelor and the claimants are the parents, the deduction follows a different principle. In regard to bachelors, normally, 50% is deducted as personal and living expenses, because it is assumed that a bachelor would tend to spend more on himself. Even otherwise, there is also the possibility of his getting married in a short time, in which event the contribution to the parent(s) and siblings is likely to be cut drastically. Further, subject to evidence to the contrary, the father is likely to have his own income and will not be considered as a dependant and the mother alone will be considered as a dependant. In the absence of evidence to the contrary, brothers and sisters will not be considered as dependants, because they will either be independent and earning, or married, or be dependent on the father.

Even if the deceased is survived by parents and siblings, only the mother would be considered to be a dependant, and 50% would be treated as the personal and living expenses of the bachelor and 50% as the contribution to the family.

However, where the family of the bachelor is large and dependent on the income of the deceased, as in a case where he has a widowed mother and large number of younger non- earning sisters or brothers, his personal and living expenses may be restricted to one-third and contribution to the family will be taken as two-third.

Table of Multiplier being used in deciding loss of dependency

The multiplier to be used should be as mentioned in Column (4) of the table in Sarla Verma judgement concurred by Pranay Sethi judgement.

The table starts with an operative multiplier of 18 (for the age groups of 15 to 20 and 21 to 25 years), reduced by one unit for every five years, that is M-17 for 26 to 30 years, M- 16 for 31 to 35 years, M-15 for 36 to 40 years, M-14 for 41 to 45 years, and M-13 for 46 to 50 years, then reduced by two units for every five years, that is, M-11 for 51 to 55 years, M-9 for 56 to 60 years, M-7 for 61 to 65 years and M-5 for 66 to 70 years.

Future prospects to be applied in lieu of future increase

The Pranay Sethi case settled the issue of fixation of Future Prospects in cases of deceased who is self-employed or on a fixed salary.

In regard to Future Prospects the judgement states as follows:

On permanent job: While determining the income, if the deceased had a permanent job and was below the age of 40 years, an addition of 50% of actual salary to the income of the deceased should be made towards future prospects.

If the age of the deceased was between 40 to 50 years, then the addition should be 30%.

In case the deceased was between the age of 50 to 60 years, the addition should be 15%.

The actual salary should be read as actual salary less tax.

Self-employed & on a fixed salary: In case the deceased was self-employed or on a fixed salary, an addition of 40% of the established income should be made where the deceased was below the age of 40 years.

An addition of 25% where the deceased was between the age of 40 to 50 years and 10% where the deceased was between the age of 50 to 60 years should be regarded as the necessary method of computation. The established income means the income minus the tax component.

Future prospects to be factored in permanent disability

The Karnataka High Court recently has held in its judgement that Loss of future prospects has to be factored in, even if it is not a case of death but a case of injury without amputation resulting in whole body disability, which ultimately has a bearing on the reduced earning capacity.

Conventional heads: Loss of estate, loss of consortium & funeral expenses

The confusion pertaining to grant of loss of estate, loss of consortium and funeral expenses has been nearly solved in the Pranay Sethi judgement. The amount fixed for conventional heads such as loss of estate, loss of consortium and funeral expenses are Rs. 15,000/-, Rs. 40,000/- and Rs. 15,000/- respectively.

The amounts should be enhanced at the rate of 10% in every three years since the year of Pranay Sethi judgement.

Loss of estate includes the expenditure on medicines, treatment, diet, doctor’s fee etc which had been met from and depleted the estate of the injured who died subsequently.

Loss of consortium, means the loss of spouse’s affection, comfort, solace, companionship, society, assistance, protection, care and sexual relations during the future years. It is a non-pecuniary head of damage. Since the legal representative would be adequately compensated for the pecuniary loss, it would not be proper to award a major amount under this non-pecuniary head.

Compensation in personal injury cases

In the case of grievous injury and permanent disability other items can be added in arriving at just compensation.

In personal injury cases, the compensation will be awarded only for expenses relating to treatment etc, loss of earnings and damages for pain and suffering.

But in serious injury cases when medical evidence corroborates with claimant’s evidence compensation will be granted under loss of future earning, future medical expenses, loss of amenities and loss of expectation in life.

The principle of compensation in injury cases is that the award must be just. It means that compensation should, to the extent possible, fully and adequately restore the claimant to the position prior to the accident. The object of awarding damages is to make good the loss suffered as a result of wrong done as far as money can do so, in a fair, reasonable and equitable manner.

The court or tribunal shall have to assess the damages objectively based on the nature of disability and its consequences. A person must be compensated for his inability to lead a full life, his inability to enjoy those normal amenities which he would have enjoyed but for the injuries, and his inability to earn as much as he used to earn or could have earned.

The SC, in Pappu Deo Yadav v Naresh Kumar,reminds the tribunals that they should be mindful that a serious injury not only permanently imposes physical limitations and disabilities but too often inflicts deep mental and emotional scars upon the victim. The attendant trauma of the victim’s having to live in a world entirely different from the one she or he is born into, as an invalid, and with degrees of dependence on others, robbed of complete personal choice or autonomy, should forever be in the judge’s mind, whenever tasked to adjudge compensation claims.

Principles in assessing future earnings in injury cases

The principles to be followed in assessing future earnings in injury cases are detailed in para 13 of the SC judgement in Rajkumar v Ajay Kumar [(2011)1 SCC 343] and they are as follows:

  • All injuries (or permanent disabilities arising from injuries), do not result in loss of earning capacity.
  • The percentage of permanent disability with reference to the whole body of a person, cannot be assumed to be the percentage of loss of earning capacity. To put it differently, the percentage of loss of earning capacity is not the same as the percentage of permanent disability (except in a few cases, where the Tribunal on the basis of evidence, concludes that percentage of loss of earning capacity is the same as percentage of permanent disability).
  • The doctor who treated an injured-claimant or who examined him subsequently to assess the extent of his permanent disability can give evidence only in regard the extent of permanent disability. The loss of earning capacity is something that will have to be assessed by the Tribunal with reference to the evidence in entirety.
  • The same permanent disability may result in different percentages of loss of earning capacity in different persons, depending upon the nature of profession, occupation or job, age, education and other factors.

The defence the insurance firms can raise

Insurance companies can defend the case on the following grounds:

  • the vehicle is not under permit to ply on the date
  • using the vehicle for a purpose not permitted
  • Driving of vehicle by a person not licensed
  • Policy itself is obtained by fraud or by providing false data
  • The passenger is a gratuitous one, including a second pillion rider

If the deceased in the accident is a child

In an accident the compensation is assessed based on his earning capacity and his age. But when a child dies in an accident, then while deciding the compensation child’s educational qualification, his performance in school will have to be considered. If the child was good in his studies, then he would get more compensation.  But there is no standard way of calculating claim in case of death of a child.

In the case of permanent disability of a child, the SC in Master Mallikarjun v National Insurance Company Ltd provides different slabs for different age group. The SC adds that the appropriate compensation on all other heads in addition to the actual expenditure for treatment, attendant, etc., should be, if the disability is above 10% and up to 30% to the whole body, Rs.3 lakhs; up to 60%, Rs.4 lakhs; up to 90%, Rs.5 lakhs and above 90%, it should be Rs.6 lakhs. For permanent disability up to 10%, it should be Re.1 lakh, unless there are exceptional circumstances to take different yardstick.

In proving disability it is always better to bring the doctor as a witness to prove the extent of disability directly rather than with the certificate alone.

If the deceased is an unemployed house wife

If the victim is not the earning member of the family, the compensation cannot be reduced on that pretext.

So, in 1994, the legislature had fixed the income of a non-earning person at Rs 15,000/- per month and in case of a spouse, it would be one-third income of the spouse if he is an earning member, as per the Schedule II of the M V Act. The Schedule II has been removed by the 2019 amendment of the M V Act.

However, some High Courts started fixing higher notional income, such as Rs 25,000/, based on increasing living expenses for such persons having no income.

The SC in Kurvan Ansari v Shyam Kishore Murmu says that in spite of repeated directions, the Scheduled-II of MV Act (deleted in 2019 M V Act amendment and had errors) was not amended and therefore, fixing notional income of Rs 15,000 per annum for non-earning members is not just and reasonable. Hence, the SC decided to take the notional income of a deceased child at Rs 25,000 per annum, assuming it as a non-earning member.

Contributory negligence will result in reduction of amount

Negligence is failure of a person to take reasonable care. Negligence is of two types: composite negligence or contributory negligence.

Composite negligence is the negligence in which a third person gets injured without his own negligence but due to the negligence of the other persons and the inter se liability will be fixed proportionate to their contribution.

Negligence of the injured which contributed to the accident along with negligence of the other is contributory negligence. In contributory negligence one person gets injured due to his negligence and the negligence of another person and the compensation will be granted based on the per centage of their contribution of negligence. If the applicant’s contributory negligence is assessed as 50 per cent, then the amount of compensation for which he is entitled will be reduced to one-half of what is fairly assessed.

When a person is employed by a master, the master is responsible for paying compensation under vicarious liability.

Additional reading

  1. Sarla Verma v Delhi Transport Corporation & Anr (2009) 6 SCC 121,
  2. Reshma Kumari & Ors v Madan Mohan & Anr
  3. National Insurance Co. Ltd. v Pranay Sethi & Ors (2017) 16 SCC 680
  4. Bajaj Allianz General Insurance Company Pvt Ltd. v Union of India
  5. Gohar Mohammed v UP State Road Transport Corporation [CA No 9322 of 2022 delivered on 15th December 2022]
  6. Rajkumar v Ajay Kumar [(2011)1 SCC 343]
  7. General Manager, KSRTC, Trivandrum v Susamma Thomas (AIR 1994 SC 1631)
  8. Motor Vehicle Act, 1988
  9. Motor Vehicle (Amendment) Act, 2019