Supreme Court clarifies insurance liability in hospital negligence case: Sheth M L Vaduwala Eye Hospital vs. Oriental Insurance Company Limited (2021) INSC 755

Date of the Judgment: 11 December 2021
Citation: (2021) INSC 755
Judges: Dr Dhananjaya Y Chandrachud, J and A S Bopanna, J.

Can an insurance company be held liable for the negligence of a hospital when the insurance policy was obtained by the doctors working at the hospital? The Supreme Court of India addressed this question in a recent judgment, clarifying the scope of professional indemnity insurance policies. The court held that the insurance company was not liable to indemnify the hospital for negligence, as the policies were obtained by the doctors and not the hospital itself. The judgment was delivered by a two-judge bench comprising of Justice Dr. Dhananjaya Y Chandrachud and Justice A.S. Bopanna.

Case Background

M/s Sheth M L Vaduwala Eye Hospital, a charitable hospital, organized an eye camp between 21 and 23 June 2000, where cataract surgeries were performed on 112 patients. Unfortunately, many patients suffered eye infections and vision loss due to alleged negligence, including the use of non-sterilized equipment, contaminated medicines, and inferior quality lenses.

Following complaints, the State Government formed a committee to investigate the matter. Simultaneously, the Jagrut Nagrik Trust, a consumer organization, filed twenty-four complaints against the hospital and the Oriental Insurance Company Limited. The insurance policies in question were professional indemnity policies obtained by the doctors to cover claims of professional negligence. However, the doctors were not made parties to the proceedings before the District Consumer Disputes Redressal Forum, Vadodara, though they did file affidavits.

Timeline

Course of Proceedings

The District Consumer Disputes Redressal Forum, Vadodara, found the hospital and the insurer jointly and severally liable based on the Enquiry Committee’s report, which highlighted negligence in the hospital’s practices. The District Forum ordered a compensation of Rs 1,70,000 to each of the twenty-four complainants, along with other costs and interest. The hospital did not challenge this order.

The insurance company appealed to the State Consumer Disputes Redressal Commission, Gujarat, which dismissed the appeal, upholding the District Forum’s decision. The State Commission emphasized the hospital’s negligence, citing the use of untrained staff, adulterated medicines, and non-standard lenses.

Subsequently, the insurance company filed a revision before the National Consumer Disputes Redressal Commission (NCDRC). The NCDRC set aside the orders against the insurer, clarifying that the liability was on the hospital. The NCDRC noted that the insurance policies were obtained by the doctors, not the hospital, and there was no specific allegation of negligence against any of the doctors.

Legal Framework

The case primarily revolves around the interpretation of professional indemnity insurance policies and the principles of vicarious liability and negligence. The key issue is whether the hospital could claim indemnity under the insurance policies obtained by its doctors.

The Bombay Public Trust Act 1961, under which the hospital was registered, is also relevant to the case, as it establishes the hospital’s status as a charitable institution.

Arguments

Appellant (Hospital) Arguments:

• The hospital argued that it was a beneficiary of the insurance policies since the doctors were working at the hospital.
• The hospital contended that the doctors had participated in the proceedings by filing affidavits, making it appropriate for the District Forum to impose joint and several liability on the hospital and the insurer.
• The hospital asserted that the NCDRC was wrong in reversing the findings of the District Forum and the State Commission.

Respondent (Insurance Company) Arguments:

• The insurance company argued that there was no privity of contract between the insurer and the hospital.
• The insurance company stated that the professional indemnity policies were obtained by the doctors, not the hospital, and there was no insurance cover for the hospital or its staff.
• The insurance company submitted that the NCDRC was justified in directing that the insurer was not liable to indemnify the hospital.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues in the judgment. However, the core issue before the court was:

• Whether the hospital could claim to be indemnified by the insurance company under the professional indemnity policies obtained by the doctors working at the hospital?

Treatment of the Issue by the Court

Authorities

The Supreme Court did not cite any specific cases or books in this judgment.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the insurance policies were obtained by the doctors to cover their own professional negligence, and not to cover the negligence of the hospital itself. The Court emphasized that there was no privity of contract between the hospital and the insurance company. The Court also noted that the finding of negligence was specifically against the hospital and its staff, not the doctors.

The Court reasoned that the insurance policies were specifically meant to cover the professional obligations of the doctors, and not the operational negligence of the hospital. The court noted that the finding of negligence was against the hospital, and not the doctors. The court stated that, “The finding is that the hospital and its staff were negligent in the conduct of the cataract surgeries. The specific finding is that the equipment which was used were not properly sterilized, the staff was not properly trained and the medicines which were administered were not of the requisite quality and were contaminated.”

The Court also observed that, “The hospital was not the beneficiary of the insurance policies which were obtained by the doctors to cover the discharge of their own professional obligations.”

The Court further stated that, “There was a manifest error on the part of the District Forum as well as the State Commission. The NCDRC had a valid basis to exercise its revisional jurisdiction.”

The Court did not find any reason to interfere with the NCDRC’s order, which had rightly held that the insurer could not be held liable under the insurance policies.

Key Takeaways

• Professional indemnity insurance policies obtained by doctors do not automatically extend to cover the negligence of the hospital where they work.
• The principle of privity of contract applies, meaning that only the parties to the insurance contract are bound by it.
• Hospitals cannot claim indemnity under insurance policies obtained by their doctors unless they are specifically named as beneficiaries.

Directions

The Supreme Court clarified that the dismissal of the appeals would not prevent the hospital from pursuing legal action against other persons who may have been negligent. The Court also confirmed that the amount deposited by the hospital as per the interim order would be disbursed to the claimants.

Specific Amendments Analysis

Not Applicable

Development of Law

The judgment clarifies that professional indemnity insurance policies are specific to the individuals who obtain them and do not automatically extend to the organizations where they work. This reinforces the principle of privity of contract in insurance law. The ratio decidendi is that an insurance policy taken by a doctor does not extend to the hospital where the doctor works unless the hospital is specifically named as a beneficiary.

Conclusion

The Supreme Court upheld the NCDRC’s decision, clarifying that the insurance company was not liable to indemnify the hospital for negligence. The court emphasized the lack of privity of contract and the specific nature of the professional indemnity policies. This judgment underscores the importance of carefully reviewing insurance policies and ensuring that appropriate coverage is in place for all potential liabilities.

Category:

• Consumer Law
  • Consumer Protection Act
  • Negligence
• Insurance Law
  • Professional Indemnity Insurance
  • Privity of Contract

FAQ

Q: What is professional indemnity insurance?
A: Professional indemnity insurance is a type of liability insurance that protects professionals against claims of negligence or malpractice arising from their professional services.

Q: Can a hospital claim insurance benefits under a doctor’s policy?
A: No, a hospital cannot automatically claim benefits under a doctor’s professional indemnity policy unless the hospital is specifically named as a beneficiary in the policy.

Q: What does “privity of contract” mean?
A: Privity of contract means that only the parties who are signatories to a contract are bound by its terms and can enforce it.

Q: What should hospitals do to ensure they are covered for negligence?
A: Hospitals should obtain their own insurance policies that specifically cover their operational negligence and liabilities.

Q: What is the significance of this judgment?
A: This judgment clarifies that professional indemnity insurance policies are specific to the individuals who obtain them and do not automatically extend to the organizations where they work.