Holding

The insurer is not contractually liable because the policy was invalid under Section 64‑VB, but the Court, exercising power under Article 142, directed payment of the compensation and recovery from the vehicle owner.

Summary

The appellant's daughter was killed when a tempo, owned and driven by Respondent No.2, ran over her. The vehicle was insured with National Insurance Co., but the insurer claimed the policy was cancelled because the premium cheque was dishonoured, invoking Section 64‑VB of the Insurance Act, 1938. The Motor Accidents Claims Tribunal held the insurer liable for the compensation; the Karnataka High Court reversed that decision. On appeal, the Supreme Court held that a policy of insurance is not valid until the premium is actually received, so the insurer was not contractually liable. However, invoking its extraordinary jurisdiction under Article 142 of the Constitution, the Court directed the insurer to pay the compensation to the claimants and to recover the amount from the vehicle owner. The appeal was allowed.

Issues considered

Whether the insurer is liable to a third‑party claimant when the insurance policy is cancelled due to a dishonoured premium cheque.
Interpretation of Section 64‑VB of the Insurance Act, 1938 in relation to the validity of an insurance contract.
Interaction between the statutory liability under Sections 147 and 149 of the Motor Vehicles Act, 1988 and the contractual liability under the insurance policy.
Whether the Supreme Court may, under Article 142, order payment of compensation despite the contract being invalid.

Legislation cited

Constitution of Indias. Article 142
Indian Contract Acts. 25, s. 65
Insurance Act, 1938s. 64-VB
Motor Vehicles Act, 1988s. 147, s. 149, s. 166

Subjects

insurance contractthird‑party liabilitypremium dishonourSection 64‑VBMotor Vehicles ActArticle 142policy cancellationcompensation

Judgment

DEDDAPPA & ORS. A
v.
~ THE BRANCH MANAGER, NATIONAL INSURANCE CO.
LTD.
DECEMBER 12, 2007 B
[S.B. SINHA AND HARJIT SINGH BEDI, JJ.]

Insurance Act, 1938 - s. 64-B - Contract ofinsurance - Third
·1
party insurance - Under Motor Vehicles Act - Liability of insurer
- Motor accident - Claim for compensation - Plea of insurer that c
accident having taken place after cancellation ofpolicy in view of
dishounour of cheque towards premium, it was not liable - Motor
accident tribunal holding that insurer was liable despite dishounour
of cheque - High Court reversing order of tribunal - On appeal,
held: Third party liability of the insurer arising under insurance D
contract, would be met only if the contract is valid - In the instant
~ case policy was not valid as premium could not be said to have been
received in view of dishonour of cheque - However, in the facts of
the case, direction issued to insurer to pay the claim amount, and
later recover the same from the owner ofthe vehicle- Motor Vehicles E
Act, 1988 - ss. 147 and 149 - Constitution ofIndia, 1950 - Article
142 ~ Contract.
A tempo, driven by respondent No. 2 ran over the daughter
of the appellant-claimant while she was sleeping in her hut. She F
died on the spot. Appellant fded application claiming compensation
u/s 166 of Motor Vehicles Act, 1998. Respondent-insurance
company took the plea that although vehicle in question was
insured for the relevant period, but the cheque issued therefore
having been dishonoured, the policy was cancelled and thus it was G
not liable. The insurer also examined witnesses, to prove
cancellation of policy by producing the Postal acknowledgment
y showing intimation thereabout which was served to the insured
and a copy of letter to RTO and the memo issued by the Bank as
287 H
288 SUPREME COURT REPORTS [2007] 13 (Addl.) S.C.R.

A regards dishonour of the cheque. Tribunal allowed the claim holding
that insurer was liable to pay the awarded amount despite
cancellation of the contract of insurance. High Court allowed the
appeal preferred by the insurance company. Hence the present
appeal.
B
Allowing the appeal, the Court
HELD: 1.1 Section -64-VB of Insurance Act in no
unmistakable terms provides for issuance of a valid policy only
on receipt of payment of the premium. There is distinction between
c the statutory liability of the insurance company vis-a-vis a third
party in the context of Sections 147 and 149 of Motor Vehicles
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
D concerned have been intimated thereabout, the insurance company
would not be liable to satisfy the claim. [Paras 15 and 26) [292-F]
[297 A-·B] x
New India Assurance Co. Ltd. v. Ru/a and Ors. 2000 (3) SCC
195; National Insurance Co. Ltd. v. Seema Malhotra and Ors. 2001
E (3) SCC 151 - relied on.
Oriental Insurance Co. Ltd. v. Inderjit Kaur and Ors. 1998 (1)
SCC 371; New India Assurance Co. Ltd. v. Harshadbhai Amrutbhai
Modhiya and Anr. 2006 (5) SCC 192 - referred to.
F 1.2 A contract is based on reciprocal promise. Reciprocal
promises by the parties are condition precedents for a valid
contract. A contract furthermore must be for consideration. In
today's world payment made by cheque is ordinarily accepted as
valid tender. Section 64-VB of the Insurance Act also provides
G for such a scheme. Payment by cheque, however, is subject to its
encashment. [Paras 22, 23 and 24) [295 C-D)
Damadilal and Ors. v. Parashram and Ors. 1976 (4) SCC 855
- referred to.
1.3 A beneficial legislation should not be construed in such
H
DEDDAPPA& ORS. v. THE BRANCH MANAGER, 289
NATIONAL INSURANCE CO. LTD. [SINHA, J.]
.... a manner so as to bring within its ambit a benefit which was not A
'
~
contemplated by the legislature to be given to the party. [Para 27]
[297 B-C]
Regional Director, Employees' State Insurance Corporation,
Trichur v. Ramanuja Match Industries AIR 1985 SC 278- relied on. B
2. However, as the appellant hails from the lowest strata of
society, in a case of this nature, the Court should, in exercise of
its extra-ordinary jurisdiction under Article 142 of the Constitution
oflndia, direct the Respondent No.1 to pay the amount of claim
to the appellants herein and recover the same from the owner of c
the vehicle viz., Respondent No.2, particularly in view of the fact
that no appeal was preferred by him. [Para 28] [297 E-G]
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 5829
of2007. D
-i From the Judgment and Order dated 15.06.2005 of the High
Court ofKamataka at Bangalore in Miscellaneous First Appeal No.
5751 of 2002.
C.M. Angadi and Rameshwar Prasad Goyal, for the Appellants. E
Mrs. Pankaj Bala Verma, Kiran Suri and Dr. Laxmi Shastri, for
the Respondent.
S.B. Sinha, J. 1. Leave granted.
2. This appeal is directed against the judgment and order dated F
15.6.2005 passed by a learned Single Judge of the High Court of
Kamataka in M.F.ANo.5751 of2002, whereby and whereunder an
appeal preferred by the respondent herein from the judgment and order
dated 12.06.2002 passed by the Motor Accidents Claims Tribunal in
M.C.A. No.113 of2001 was allowed. G

3. Shantamma, daughter of the appellant herein was sleeping in
v her hut. A tempo bearing No.KA 37 - 2257 which was being rashly and
'
negligently driven by Respondent No.2 herein ran over her. She died on
the spot. Household articles of the appellant also were damaged in the H
290 SUPREME COURT REPORTS [2007] 13 (Add!.) S.C.R.

A said accident.
4. An application for grant of compensation was filed by the
appellants herein under Section 166 of the Motor Vehicles Act, 1988
(for short "the Act") in the Court of C.J. (SD) & Motor Accidents
B Claims Tribunal at Gangavati in the district ofKoppal on 12.06.2006.
5. The said vehicle was insured with the National Insurance
Company. A plea was taken therein by the Insurance Company that
although the vehicle in question was insured by the owner for the period
17.10.1997 and 16.10.1998, but the cheque issued therefor having
C been dishonoured, the policy was cancelled and, thus, it was not liable
therefor.
6. By an Award dated 12.06.2002, the learned Motor Vehicles
Accidents Claims Tribunal allowed the said claim application directing
D payment of compensation for a sum ofRs.1,58,000/-with interest@
12% per annum holding that the Insurer was liable to pay the said
)-
awarded amount despite cancellation of the contract of insurance. As
noticed hereinbefore the High Court ofKamataka on an appeal preferred
by the first respondent herein allowed the same relying on the judgment
E of the Karnataka High Court in M.F.A. No.6430 of2001.
7. Mr. C.M. Angadi, the learned counsel appearing on behalf of
the appellant in support of this appeal inter alia submitted that the High
Court committed a serious error in passing the impugned judgment in so
far as it failed to take into consideration that when the insurance cover
F was issued, the liability of the Insurance Company subsists despite
dishonour ofcheque evidencing payment of the insurance premium.
8. Strong reliance in this behalf has been placed on Oriental
Insurance Co. Ltd. v. Inderjit Kaur and Ors. [(1998) 1 SCC 371]
G and National Insurance Co. Ltd. v. Seema Malhotra and Ors. [(2001)
3 sec 151].
9. Before embarking on the said question we may notice the .,, .
admitted facts. Second respondent who was driving the vehicle was also
the owner thereof. The insurance policy was to remain valid for the
H
DEDDAPPA&ORS. v. THEBRANCHMANAGER, 291
NATIONAL INSURANCE CO. LTD. [SINHA, J.]
period 17.10.1997 to 16.10.1998. Respondent No.2 issued a cheque A
on 15.10.1997. The said cheque was presented for encashment before
the Syndicate Bank. The Bank by its letter dated 21. l 0.1997 issued a
'Return Memo' disclosing dishonour of the cheque with the remarks
"fund insufficient". First Respondent thereupon cancelled the policy of
insurance. The said information was communicated to Respondent No.2. B
An intimation thereabout was also given to the R.T.O. concerned.
10. Beforethe Motor Vehicle Accidents Claims Tribunal, the insurer
has also examined witnesses, inter alia, to prove cancellation of the
policy of insurance, postal acknowledgement showing intimation C
thereabout which was served to the insured and a copy of the letter
dated 6.11.1997 issued to the R.T.0. and the memo issued by the Bank
as regards dishonour of the cheque etc.
11. Indisputably, the accident had occurred on 6.2.1998 that is
much after communication of cancellation of the policy. D

12. Keeping in view the aforementioned backdrop of all events,
we may notice the legal issues addressed before us by the learned
counsel.
13. Section 147 of the Act obligates the owner of the motor E
vehicle to get the vehicle insured in so far as the claim of third party is
concerned. The Act does not deal with contract of insurance as such.
Contract of insurance is governed by the Insurance Act, 193 8 (for short
"the 193 8 Act").
F
14. Section 64-VB of the 1938Act provides that no risk is to be
assumed unless premium is received in advance in the following terms:-
"Section 64VB - No risk to be assumed unless premium is
received in advance -
G
(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 H
292 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.

A 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
B 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
c 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
D 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.
(4) Where an insurance agent collects a premium on a policy of
E insurance on behalfofan insurer, he shall deposit with, or despatch
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.
F 15. The said provision, therefore, in no unmistakable term provides -;·
for issuance of a valid poliCy only on receipt of payment of the premium.
16. The question came up for consideration before this Court in
Inderjit Kaur (supra), wherein it was opined that a policy of insurance
which is issued in public interest would prevail over the interest of the
G insurance company. In that case a bus met with an accident. The policy
ofinsurance was issued on 30.11.1989. A letter stating that the cheque
had been dishonoured was sent by the Insurance Company to the insurer
on 23.1.1990. The premium was paid in cash on 2.5.1990. The accident
took place 19.4.1990. Despite noticing Section 64-VB of the 1938
H
DEDDAPPA&ORS. v. THE BRANCH MANAGER, 293
NATIONAL INSURANCE CO. LTD. [SINHA, J.]
Act, but having regard to the underlying public policy behind the statutory A
~ scheme in respect of insurance as evidenced by Sections 147 and Section
149 of the Act and in particular having regard to the fact that policy of
insurance to cover the bus without receiving the premium had already
been issued, this Court held that the Insurance Company was liable to
indemnify the insured. B

17. We may, however, notice that in terms of sub-section (5) of
Section 147 and sub-section (1) of Section 149 of the Act, the Insurance
Company became liable to satisfy awards of compensation in respect
thereof, notwithstanding its entitlement to avoid or cancel the policy for c
the reason that the cheque issued for payment of premium thereon had
not been honoured.
18. The said question, however, was left open in Jnderjit Kaur
(supra).
D
19. The said decision proceeded on the basis that it was the
-~ Insurance Company which was responsible for placing itself in the said
predicament as it had issued a policy of insurance upon receipt only of
a cheque towards the premium in contravention of the provisions of
Section 64-VB of the 193 8 Act. The public interest in a situation of that E
nature and applying the principle of estoppel, this Court held, would
prevail over the interest of the Insurance Company.
20. The ratio of the said decision was, however, noticed by this
Court in New India Assurance Co. Ltd. v. Rula and Ors. [(2000) 3
sec 195]. It was held that ordinarily a liability under the contract of F
' insurance would arise only on payment ofpremium, if such payment was
made a condition precedent for taking effect of the insurance policy but
such a condition which is intended for the benefit of the insurer can be
waived by it.
G
It was opined:-
" .. .If, on the date of accident, there was a policy ofinsurance in
respect of the vehicle in question, the third party would have a
claim against the Insurance Company and the owner of the vehicle
H
294 SUPREME COURT REPORTS [2007] 13 (Addl.) S.C.R.

A 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 ofpremium would not affect the rights already accrued
in favour of the third party".
The dicta laid down therein clarifies that if on the date of accident
B
the policy subsists, then only the third party would be entitled to avail the
benefit thero£
21. Almost an identical question again came up for consideration )·
before this Court in National Insurance Co. Ltd. v. Seema Malhotra
C and Ors. [(2001) 3 SCC 151], a Division Bench noticed both the
aforementioned decisions and analysed the same in the light of Section
64-VB of the 1938 Act. It was held:
"17. In a contract of insurance when the insured gives a cheque
D 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
E 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
F dishonoured by the bank concerned the insurer need not perform
I
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
G without consideration is void. Section 65 of the Contract Act says
that when a contract becomes void any person who has 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
H the cheque was returned dishonoured, the insurer is entitled to get
DEDDAPPA&ORS. v. THE BRANCH MANAGER, 295
NATIONAL INSURANCE CO. LTD. [SINHA, J.]
the money back. A

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 B
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".
22. A contract is based on reciprocal promise. Reciprocal promises
by the parties are condition precedents for a valid contract. A contract C
furthermore must be for consideration.
23. In today's world payment made by cheque is ordinarily accepted
as valid tender. Section 64VB of the 1938 Act also provides for such
a scheme. D
24. Payment by cheque, however, is subject to its encashment. In
Damadilal & Ors. v. Parashram & Ors. [(1976) 4 SCC 855], this
Court observed :
"On the ground of default, it is not disputed that the defendants E
tendered the amount in arrears by cheque within the prescribed
time. The question is whether this was a lawful tender. It is well-
established that a cheque sent in payment of a debt on the
request of the creditor, unless dishonoured, operates as valid
discharge of the debt and, if the cheque was sent by post and F
was met on presentation, the date ofpayment is the date when the
cheque was posted ... "
25. Recently again in New India Assurance Co. Ltd. v.
Harshadbhai Amrutbhai Modhiya and Am: [(2006) 5 SCC 192],
although in the context of the Workmen Compensation Act, 1923, G
Balasubramanyan, J opined :
"It is not brought to our notice that there is any other law enacted
which stands in the way of an insurance company and the insured
entering into a contract confining the obligation of the insurance H
l -
296 SUPREME COURT REPORTS [2007] 13 (Addi.) S.C.R.

A company to indemnify to a particular head or to a particular amount
when it relates to a claim for compensation to a third party arising
under the Workmen's Compensation Act. In this situation, the
obligation of the insurance company clearly stands limited and the
relevant proviso providing for exclusion ofliability for interest or
B penalty has to be given effect to. Unlike the scherre of the Motor
Vehicles Act the Workmen's Compensation Act does not confer
a right on the claimant for compensation under that Act to claim
the payment ofcompensation in its entirety from the insurer himself'.

c It was further observed:-
"The law relating to contracts of insurance is part of the general
law of contract. So said Roskill, L.J. in Cehave v. Bremer. This
view was approved by Lord Wilberforce in Reardon Smith v.
Hansen-Tangen (All ERp. 576 h) wherein he said:
D
"It is desirable that the same legal principles should apply to
the law of contract as a whole and that different legal ,-1_-

principles should not apply to different branches of that
law."
E A contract of insurance is to be construed in the first place from
the terms used in it, which terms are themselves to be understood
in their primary, natural, ordinary and popular sense. (See
Colinvauxs Law ofInsurance, 7th Edn., para2-01.)A policy
of insurance has therefore to be construed like any other contract.
F On a construction of the contract in question it is clear that the
insurer had not undertaken the liability for interest and penalty, but
had undertaken to indemnify the employer only to reimburse the
compensation the employer was liable to pay among ot'1er things
underthe Workmen's CompensationAct. Unless one is in a position
G to void the exclusion clause concerning liability for interest and
penalty imposed on the insured on account ofhis failure to comply
with the requirements of the Workmen's Compensation Act of y

1923, the insurer cannot be made iiable to the insured for those
amounts.""
H
J--
DEDDAPPA& ORS. v. THE BRANCH MANAGER, 297
NATIONAL INSURANCE CO. LTD. [SINHA, J.]
26. We are not oblivious of the distinction between the statutory A
~~ liability of the Insurance Company vis-a-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 B
the opinion, the insurance company would not be liable to satisfy the
claim.
1
27. Abeneficial legislation as is well known should not be construed
in such a manner so as to bring within its ambit a benefit which was not c
contemplated by the legislature to be given to the party. In Regional
Director, Employees' State Insurance Corporation, Trichur v.
Ramanuja Match Industries [AIR 1985 SC 278], this Court held :
"We do not doubt that beneficial legislations should have liberal
construction with a view to implementing the legislative intent but D
where such beneficial .legislation has a scheme of its own there is
-;_
no warrant for the Court to travel beyond the scheme and extend
the scope of the statute on the pretext of extending the statutory
benefit to those who are not covered by the scheme."
E
We, therefore, agree with the opinion of the High Court.
28. However, as the appellant hails from the lowest strata of
society, we are of the opinion that in a case of this nature, we should,
in exercise of our extra-ordinary jurisdiction under Article 142 of the
~
Constitution of India, direct the Respondent No. I to pay the amount of F
claim to the appellants herein and recover the same from the owner of
the vehicle viz., Respondent No.2, particularly in view of the fact that no
appeal was preferred by him. We direct accordingly.
29. We, therefore, allow the appeal with the aforementioned G
directions. In the facts and circumstances of the case, however, there
shall be no order as to costs.
K.K.T. Appeal allowed.
H