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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3589 OF 2012
(Arising out of SLP(C) No. 23511 of 2009)
United India Insurance Co. Ltd. …. Appellant
Versus
Laxmamma & Ors. ….Respondents
JUDGMENT
R.M. Lodha, J.
Leave granted.
2. The only question that arises for consideration in this
appeal by special leave is: whether the appellant, United India
Insurance Company Limited (insurer) is absolved of its obligations to
the third party under the policy of insurance because the cheque
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given by the owner of the vehicle towards the premium got
dishonoured and subsequent to the accident, the insurer cancelled
the policy of insurance.
3. The above question arises in this way. M. Nagaraj
(husband of respondent no. 1 and father of respondent nos. 2 and 3)
was travelling in a bus bearing registration no. KA 018116 on May
11, 2004. At about 8.50 a.m. on that day due to negligent application
of brake by the bus driver, the back door of the bus suddenly
opened and M. Nagaraj standing near the door fell down. He
sustained grievous injuries and subsequently died. The respondent
nos. 1 to 3, to be referred as claimants, filed a claim petition before
the Motor Accident Claims Tribunal, Bangalore (for short, ‘Tribunal’)
seeking compensation of Rs. 15 lakhs. The present appellant,
insurer was impleaded as respondent no. 2 while the owner of the
bus was impleaded as respondent no. 1. The owner and the insurer
contested the claim petition on diverse grounds. The insurer raised
the plea in the written statement that the insurance policy dated April
14, 2004 issued by it covering the said bus for the period April 16,
2004 to April 15, 2005 was not valid as the premium was paid
through cheque and the cheque got dishonoured and, therefore,
there was no liability on it to cover the third party risk.
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4. The Tribunal on recording the evidence and after hearing
the parties held that the claimants were successful in proving that on
May 11, 2004 at 8.50 a.m. the deceased M. Nagaraj was travelling
in the bus and he fell down from the bus through the door by sudden
application of brake negligently by the driver and died due to the
injuries sustained in that accident. The Tribunal also recorded the
finding of fact on examination of the documentary and oral evidence
that cancellation of policy because of non-payment of the premium
was done by the insurer after the accident had taken place and
intimation of cancellation was given to the owner on May 21, 2004
whereas accident took place on May 11, 2004. The Tribunal, thus,
held that the insurer was liable to the claimants. The Tribunal in its
award dated June 28, 2006 held that claimants were entitled to
compensation in the sum of Rs. 6,01,244/- and apportioned that
amount amongst claimants. Aggrieved by the award of the
Tribunal, the insurer preferred appeal before the High Court. The
High Court dismissed the insurer’s appeal on November 11, 2008. It
is from this order that the present appeal has arisen.
5. Mr. A.K. De, learned counsel for the appellant
strenuously urged that having regard to the undisputed fact that the
cheque issued by the owner of the vehicle towards the premium for
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insurance of vehicle was dishonoured, the contract of insurance
became void and the insurer could not be compelled to perform its
part of promise under the policy. He submitted that no liability can be
fastened on the insurers qua third party if the policy of insurance is
rendered void for want of consideration to the insurer. Learned
counsel submitted that the view taken by this Court in Oriental
Insurance Co. Ltd. v. Inderjit Kaur and others
1
has been diluted by the later decisions of this Court in the case of
National Insurance Co. Ltd. v. Seema Malhotra and others
2
and
Deddappa and others v. Branch Manager, National Insurance Co.
Ltd.
3
. In the alternative, learned counsel for the insurer submitted
that if the Court holds that the insurer is liable to pay compensation
to the claimants, the amount so paid by the insurer to the claimants
must be allowed to be recovered from the insured.
6. Mr. P.R. Ramasesh, learned counsel for respondent no.
4 (owner) supported the view of the High Court. He submitted that
on the date of the accident, the policy was subsisting and the liability
of the insurer continued and, therefore, the insurer cannot recover
the amount paid to the claimants from the insured.
1
(1998) 1 SCC 371
2
(2001) 3 SCC 151
3
(2008) 2 SCC 595
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7. Section 64-VB of the Insurance Act, 1938 (for short,
‘Insurance Act’) provides as under :
“64-VB. No risk to be assumed unless
premium is received in advance.- (1) No
insurer shall assume any risk in India in
respect of any insurance business on which
premium is not ordinarily payable outside
India unless and until the premium payable is
received by him or is guaranteed to be paid
by such person in such manner and within
such time as may be prescribed or unless
and until deposit of such amount as may be
prescribed, is made in advance in the
prescribed manner.
(2) For the purposes of this section, in the
case of risks for which premium can be
ascertained in advance, the risk may be
assumed not earlier than the date on which
the premium has been paid in cash or by
cheque to the insurer.
Explanation.- Where the premium is tendered
by postal money order or cheque sent by
post, the risk may be assumed on the date
on which the money order is booked or the
cheque is posted, as the case may be.
(3) Any refund of premium which may
become due to an insured on account of the
cancellation of a policy or alteration in its
terms and conditions or otherwise shall be
paid by the insurer directly to the insured by
a crossed or order cheque or by postal
money order and a proper receipt shall be
obtained by the insurer from the insured, and
such refund shall in no case be credited to
the account of the agent.
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(4) Where an insurance agent collects a
premium on a policy of insurance on behalf
of an insurers, he shall deposit with, or
dispatch by post to, the insurer, the premium
so collected in full without deduction of his
commission within twenty-four hours of the
collection excluding bank and postal
holidays.
(5) The Central Government, may, by rules,
relax the requirements of sub-section (1) in
respect of particular categories in insurance
policies.
(6) The Authority may, from time to time,
specify, by the regulations made by it, the
manner of receipt of premium by the insurer.”
The above provision states that no risk is assumed by the insurer
unless premium payable is received in advance.
8. The Motor Vehicles Act, 1988 (for short, ‘the M.V. Act’) in
Chapter XI deals with insurance of motor vehicles against third party
risks. Section 145 in that Chapter provides for definitions:
(a) authorised insurer, (b) certificate of insurance, (c) liability,
(d) policy of insurance, (e) property, (f) reciprocating country and
(g) third party.
9. Section 146 mandates insurance of a motor vehicle
against third party risk. Inter alia, it provides that no person shall use
the motor vehicle in a public place unless a policy of insurance has
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been taken with regard to such vehicle complying with requirements
as set out in Chapter XI. The owner of vehicle, thus, is statutorily
mandated to obtain insurance for the motor vehicle to cover the
third party risk except in exempted and exception categories as set
out in Section 146 itself.
10. Section 147 makes provision for requirements of policies
and limits of liability. Sub-section (5) thereof is relevant for the
present purposes which reads as follows :
“S. 147. – Requirements of policies and limits of liability.-
(1) ) to (4) xxx xxx xxx xxx xxx xxx
(5) Notwithstanding anything contained in any law for the time
being in force, an insurer issuing a policy of insurance under
this section shall be liable to indemnify the person or classes of
persons specified in the policy in respect of any liability which
the policy purports to cover in the case of that person or those
classes of persons.”
11. Section 149 deals with the duty of insurers to satisfy
judgments and awards against persons insured in respect of third
party risks. Sub-section (1) which is relevant for the present
purposes reads as under:
“S.149.- Duty of insurers to satisfy judgments and awards
against persons insured in respect of third party risks.-
(1) If, after a certificate of insurance has been issued under
sub-section (3) of section 147 in favour of the person by whom
a policy has been effected, judgment or award in respect of
any such liability as is required to be covered by a policy
under clause (b) of sub-section (1) of section 147 (being a
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liability covered by the terms of the policy) or under the
provisions of section 163A is obtained against any person
insured by the policy, then, notwithstanding that the insurer
may be entitled to avoid or cancel or may have avoided or
cancelled the policy, the insurer shall, subject to the provisions
of this section, pay to the person entitled to the benefit of the
decree any sum not exceeding the sum assured payable
thereunder, as if he were the judgment debtor, in respect of
the liability, together with any amount payable in respect of
costs and any sum payable in respect of interest on that sum
by virtue of any enactment relating to interest on judgments.”
12. The above provisions came up for consideration in the
case of Inderjit Kaur
1
. That was a case where a bus met with an
accident. The policy of insurance was issued by the Oriental
Insurance Company Limited on November 30, 1989. The premium
for the policy was paid by cheque but the cheque was dishonoured.
The insurance company sent a letter to the insured on January 23,
1990 that the cheque towards premium had been dishonoured and,
therefore, the insurance company was not at risk. The premium was
paid in cash on May 2, 1990 but in the meantime on April 19, 1990
the accident took place, the bus collided with the truck and the truck
driver died. The truck driver’s wife and minor sons filed claim
petition. A three-Judge Bench of this Court noticed the above
provisions and then held in paragraphs 9, 10 and 12 (pages 375
and 376) as under :
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“9. We have, therefore, this position. Despite the bar created
by Section 64-VB of the Insurance Act, the appellant, an
authorised insurer, issued a policy of insurance to cover the
bus without receiving the premium therefor. By reason of the
provisions of Sections 147(5) and 149(1) of the Motor Vehicles
Act, the appellant became liable to indemnify third parties in
respect of the liability which that policy covered and to satisfy
awards of compensation in respect thereof notwithstanding its
entitlement (upon which we do not express any opinion) to
avoid or cancel the policy for the reason that the cheque
issued in payment of the premium thereon had not been
honoured.
10. The policy of insurance that the appellant issued was a
representation upon which the authorities and third parties
were entitled to act. The appellant was not absolved of its
obligations to third parties under the policy because it did not
receive the premium. Its remedies in this behalf lay against the
insured.
12. It must also be noted that it was the appellant itself who
was responsible for its predicament. It had issued the policy of
insurance upon receipt only of a cheque towards the premium
in contravention of the provisions of Section 64-VB of the
Insurance Act. The public interest that a policy of insurance
serves must, clearly, prevail over the interest of the appellant.”
13. In Inderjit Kaur
1
, the Court invoked the doctrine of public
interest and held that the insurance company was liable to
indemnify third parties in respect of the liability which the policy
covered despite the bar created by Section 64-VB of the Insurance
Act. The Court did leave open the question of insurer’s entitlement
to avoid or cancel the policy as against insured when the cheque
issued for payment of the premium was dishonoured.
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14. In New India Assurance Co. Ltd. v. Rula and others
4
, the
Court was concerned with a question very similar to the question
posed before us. That was a case where the insurance policy was
issued by the New India Assurance Co. Ltd. in terms of the
requirements of the M.V. Act but the cheque by which the owner
had paid the premium bounced and the policy was cancelled by the
insurance company but before the cancellation of the policy,
accident had taken place. A two-Judge Bench of this Court
considered the statutory provisions contained in the M.V. Act and
the judgment in Inderjit Kaur
1
. In paragraph 13 (at page 200), the
Court held as under :
“13. This decision, which is a three-Judge Bench decision,
squarely covers the present case also. The subsequent
cancellation of the insurance policy in the instant case on
the ground that the cheque through which premium was
paid was dishonoured, would not affect the rights of the
third party which had accrued on the issuance of the
policy on the date on which the accident took place. If, on
the date of accident, there was a policy of insurance in respect
of the vehicle in question, the third party would have a claim
against the Insurance Company and the owner of the vehicle
would have to be indemnified in respect of the claim of that
party. Subsequent cancellation of the insurance policy on the
ground of non-payment of premium would not affect the rights
already accrued in favour of the third party”
(Emphasis supplied)
15. In Seema Malhotra
2
, the Court was concerned with the
question whether the insurer is liable to honour the contract of
4
(2000) 3 SCC 195
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insurance where the insured gave a cheque to the insurer towards
the premium amount but the cheque was dishonoured by the drawee
bank due to insufficiency of funds in the account of the drawer. In the
case of Seema Malhotra
2
, the above question arose from the
following facts : the owner of a Maruti car entered into an insurance
contract with National Insurance Company Limited on December 21,
1993; on the same day the owner gave a cheque of Rs. 4,492/-
towards the first instalment of the premium; the insurance company
issued a cover note as contemplated in Section 149 of the M.V. Act;
the car met with an accident on December 31, 1993 in which the
owner died and the car was completely damaged; on January 10,
1994 the bank on which the cheque was drawn by the insured sent
an intimation to the insurance company that the cheque was
dishonoured as there were no funds in the account of the drawer and
on January 20, 1994 the business concern of the owner was
informed that the cheque having been dishonoured by the bank, the
insurance policy is cancelled with immediate effect and the company
is not at risk. The widow and children of the owner filed a claim for
the loss of the vehicle with the insurance company. When the claim
was repudiated, they moved the State Consumer Protection
Commission (for short, ‘Commission’). The Commission rejected the
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claim of the claimants and held that insurer was justified in
repudiating the contract as soon as cheque got bounced. The
claimants moved the Jammu and Kashmir High Court. The High
Court reversed the order of the Commission and held that the
insurance company chose to cancel the insurance policy from the
date of issuance of communication and not from the date the cheque
was issued which got bounced. The matter reached this Court from
the above judgment of the High Court. The Court referred to Section
64-VB of the Insurance Act, Sections 25, 51,52,54 and 65 of the
Indian Contract Act and the decisions of this Court in Inderjit Kaur
1
and Rula
4
and held (at pages 156 and 157) as under :
“17. In a contract of insurance when the insured gives a
cheque towards payment of premium or part of the premium,
such a contract consists of reciprocal promise. The drawer of
the cheque promises the insurer that the cheque, on
presentation, would yield the amount in cash. It cannot be
forgotten that a cheque is a bill of exchange drawn on a
specified banker. A bill of exchange is an instrument in writing
containing an unconditional order directing a certain person to
pay a certain sum of money to a certain person. It involves a
promise that such money would be paid.
18. Thus, when the insured fails to pay the premium promised,
or when the cheque issued by him towards the premium is
returned dishonoured by the bank concerned the insurer need
not perform his part of the promise. The corollary is that the
insured cannot claim performance from the insurer in such a
situation.
19. Under Section 25 of the Contract Act an agreement made
without consideration is void. Section 65 of the Contract Act
says that when a contract becomes void any person who has
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received any advantage under such contract is bound to
restore it to the person from whom he received it. So, even if
the insurer has disbursed the amount covered by the policy to
the insured before the cheque was returned dishonoured, the
insurer is entitled to get the money back.
20. However, if the insured makes up the premium even after
the cheque was dishonoured but before the date of accident it
would be a different case as payment of consideration can be
treated as paid in the order in which the nature of transaction
required it. As such an event did not happen in this case, the
Insurance Company is legally justified in refusing to pay the
amount claimed by the respondents.”
16. In Deddappa
3
, the Court was concerned with the plea of
the insurance company that although the vehicle was insured by the
owner for the period October 17, 1997 to October 16, 1998 but the
cheque issued therefor having been dishonoured, the policy was
cancelled and, thus, it was not liable. That was a case where for the
above period of policy, the cheque was issued by the owner on
October 15, 1997; the bank issued a return memo on October 21,
1997 disclosing dishonour of the cheque with remarks “fund
insufficient” and the insurance company, thereafter, cancelled the
policy of insurance by communicating to the owner of the vehicle and
an intimation to the concerned RTO. The accident occurred on
February 6, 1998 after the cancellation of the policy.
17. The Court in Deddappa
3
again considered the relevant
statutory provisions and decisions of this Court including the above
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three decisions in Inderjit Kaur
1
, Rula
4
and Seema Malhotra
2
. In
para 24 (at page 601) of the Report, the Court observed as under:
“24. We are not oblivious of the distinction between the
statutory liability of the insurance company vis-à-vis a third
party in the context of Sections 147 and 149 of the Act and its
liabilities in other cases. But the same liabilities arising under a
contract of insurance would have to be met if the contract is
valid. If the contract of insurance has been cancelled and all
concerned have been intimated thereabout, we are of the
opinion, the insurance company would not be liable to satisfy
the claim.”
Then in para 26 (at page 602), the Court invoked extraordinary
jurisdiction under Article 142 of the Constitution of India and directed
the insurance company to pay the amount of claim to the claimants
and recover the same from the owner of the vehicle.
18. We find it hard to accept the submission of the learned
counsel for the insurer that the three-Judge Bench decision in
Inderjit Kaur
1
has been diluted by the subsequent decisions in
Seema Malhotra
2
and Deddappa
3
. Seema Malhotra
2
and
Deddappa
3
turned on the facts obtaining therein. In the case of
Seema Malhotra
2
, the claim was by the legal heirs of the insured for
the damage to the insured vehicle. In this peculiar fact situation, the
Court held that when the cheque for premium returned dishonoured,
the insurer was not obligated to perform its part of the promise.
Insofar as Deddappa
3
is concerned, that was a case where the
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accident of the vehicle occurred after the insurance policy had
already been cancelled by the insurance company.
19. In our view, the legal position is this : where the policy of
insurance is issued by an authorized insurer on receipt of cheque
towards payment of premium and such cheque is returned
dishonoured, the liability of authorized insurer to indemnify third
parties in respect of the liability which that policy covered subsists
and it has to satisfy award of compensation by reason of the
provisions of Sections 147(5) and 149(1) of the M.V. Act unless the
policy of insurance is cancelled by the authorized insurer and
intimation of such cancellation has reached the insured before the
accident. In other words, where the policy of insurance is issued by
an authorized insurer to cover a vehicle on receipt of the cheque
paid towards premium and the cheque gets dishonored and before
the accident of the vehicle occurs, such insurance company cancels
the policy of insurance and sends intimation thereof to the owner,
the insurance company’s liability to indemnify the third parties which
that policy covered ceases and the insurance company is not liable
to satisfy awards of compensation in respect thereof.
20. Having regard to the above legal position, insofar as
facts of the present case are concerned, the owner of the bus
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obtained policy of insurance from the insurer for the period April 16,
2004 to April 15, 2005 for which premium was paid through cheque
on April 14, 2004. The accident occurred on May 11, 2004. It was
only thereafter that the insurer cancelled the insurance policy by
communication dated May 13, 2004 on the ground of dishonour of
cheque which was received by the owner of the vehicle on May 21,
2004. The cancellation of policy having been done by the insurer
after the accident, the insurer became liable to satisfy award of
compensation passed in favour of the claimants.
21. In view of the above, the judgment of the High Court
impugned in the appeal does not call for any interference. Civil
appeal is dismissed. However, the insurer shall be at liberty to
prosecute its remedy to recover the amount paid to the claimants
from the insured. No order as to costs.
….……………………. J.
(R.M. Lodha)
...……………………..J.
(H. L. Gokhale)
NEW DELHI
APRIL 17, 2012.
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