Holding

The insurer is liable to reimburse the third‑party claim because the cover note constitutes a valid certificate of insurance that remains effective until cancelled, irrespective of the initial cheque dishonour.

Summary

The first respondent, a third‑party rider, suffered severe injuries when a truck insured by National Insurance Co. Ltd. (the appellant) collided with his vehicle. A cheque for the vehicle's premium was tendered before the accident but was later dishonoured; nevertheless, the insurer issued a cover note and, after the accident, accepted the premium in cash. The appellant contended that the dishonoured cheque meant no insurance contract existed and thus it was not liable to reimburse the third‑party claim. Both the Motor Vehicles Accident Claims Tribunal and the Gujarat High Court held that the issuance of a cover note, which under Section 145(1)(b) and (d) of the Motor Vehicles Act, 1988 constitutes a certificate of insurance and remains valid until cancelled, made the insurer liable under Sections 146 and 147. The Supreme Court affirmed this view, stating that a contract of insurance covering third‑party risk is not purely contractual but is imbued with statutory purpose, and the insurer’s liability persists despite the initial cheque default. Consequently, the appeal by the insurer was dismissed, upholding the lower courts' orders to reimburse the third‑party claim.

Issues considered

What is the effect of a dishonoured cheque on the existence and enforceability of an insurance contract when a cover note has been issued?
Does a cover note issued under the Motor Vehicles Act, 1988 qualify as a certificate of insurance and/or an insurance policy for the purposes of Sections 145, 146 and 147?
Is the insurer liable to reimburse a third‑party claim when the premium is later paid in cash after the cover note has been issued?

Legislation cited

Insurance Act, 1938s. 54(v), s. 64VB
Motor Vehicles Act, 1988s. 145(1)(b), s. 145(1)(d), s. 146, s. 147, s. 149

Subjects

Motor Vehicles Actthird‑party insurancecover notepremium paymentcheque dishonourinsurer liabilitystatutory insurance

Judgment

[2008] 12 S.C.R. 1049

NATIONAL INSURANCE CO. LTD. A
v.
ABHAYSING PRATAPSING WAGHELA AND ORS.
(Civil Appeal No. 5305 of 2008)
AUGUST 29, 2008
B,
[S.8. SINHA AND CYRIAC JOSEPH, JJ.]

Motor Vehicles Act, 1988 - ss.145(1)(b) and (d), 146
and 147 - Accident - Third party claim - Cheque issued
towards premium of insured vehicle, dishonoured - But 'Cover c
Note' issued therefor - After the accident, premium amount
paid in cash - Liability of insurer to reimburse third party
claim - Held: Insurer is liable to reimburse the third party
claim having issued 'Cover Note' - 'Cover Note' would come
within the purview of definition of 'Certificate of Insurance' and
0
'Insurance Policy' - A contract of insurance for the purpose of
covering third party risk could not be purely contractual - It is
to be contra-distinguished from the contract covering liability
of the owner of the vehicle.
Respondent No.1 sustained severe injuries in an E
accident caused by the insured vehicle (a truck).
Respondent No.1 made a third party claim. A cheque was
issued with the Insurance Company five days prior to the
date of accident towards premium of the offending
vehicle. On receipt of the same a 'Cover Note Number' F
was given by the Insurance Company. The cheque was
dishonoured. However, three days after the date of the
accident, premium amount was paid in cash. Claims
Tribunal as well as High Court held that the Insurance
Company was obliged to reimburse the third party claim G
in view of the fact that it had issued 'Cover Note'. Hence
the present appeal.
Dismissing the appeal, the Court

1049 H
1050 SUPREME COURT REPORTS [2008] 12 S.C.R.

A HELD: 1. Chapter XI of Motor Vehicles Act, 1988
provides for insurance of motor vehicles against third
party risks. The first respondent is a third party in relation
to the contract of insurance which had been entered into
by and between the appellant and the owner of the vehicle
B in question. A document was produced before the
Tribunal. Even according to the appellant, although it was
only a Motor Input Advice cum ·Receipt, it contained the
Cover Note Number. It is, therefore, to be supposed that
a Cover Note had, in fact, been issued. If a Cover Note
c had been issued which in terms of clause (b) of sub-
section 1 of Section 145 of the Act would come within the
purview of definition of Certificate of Insurance; it also
would come within the purview of the definition of an
Insurance Policy. If a· Cover Note is issued, it remains
valid till it is cancelled. Indisputably, the insurance policy
0
was cancelled only after the accident took place. A finding
of fact, therefore, has been arrived at that prior to the
deposit of the premium of insurance in cash by the owner
of the vehicle, the cover note was not cancelled. [Paras
E 13 and16] [1055,B; 1056,H; 1057,A·C]
2. A contract of insurance is, no doubt, to be governed
by the terms thereof, but a distinction must be borne in
mind. between a contract of insurance which has been
entered into for the purpose of giving effect to the obje.ct
F and purport of the statute and one which provides for
reimbursement of the liability of the owner of the vehicle
strictly in terms thereof. In that limited sense, a contract
of insurance entered into for the purpose of covering a
third party risk would not be purely contractual. An
G ordinary contract of insurance does not have a statutory
flavour. The Act merely imposes an obligation on the part
of the insurance company to reimburse the claimant .both
in terms of the Act as also the Contract. So far as the
liability of the insurance company which comes within
the purview of Sections 146 and 147 is concerned, the
H
NATIONAL INSUR. CO. LTD. v. ABHAYSING 1051
PRATAPSING WAGHELA & ORS.

~ ""--1 same subserves a constitutional goal, namely, social A
justice. A contract of insurance covering the third party
risk must, therefore, be viewed differently vis-a-vis a
contract of insurance qua contract.[Para 17] [1057,D-G]
National Insurance Co. Ltd. v. Laxmi Narain Dhut (2007)
3 SCC 700; Oriental Insurance Co. Ltd. v. Meena Variyal and B
' -l Ors. (2007) 5 sec 428; Oriental Insurance Co. Ltd. V.
Sudhakaran K. V and Ors. 2008 (8) SCALE 402; Oriental
Insurance Co. Ltd. v. lnderjeet Kaur (1998) 1 SCC 71 - relied
on.
c
United India Insurance Company Ltd. v. Rattan Singh
and Ors. AIR 1993 MP 197; Oeddappa and Ors. v. Branch
Manager, National Insurance Co. Ltd. (2008) 2 SCC 595 -
referred to.
Case Law Reference D
AIR 1993 MP 197 Referred to Para 10
(2007) a sec 100 Relied on Para 18
(2001) 5 sec 428 Relied on Para 18
2008 (8) SCALE 402 Relied on Para 18 E

(1998) 1 sec 11 Relied on Para 18
(2008) 2 sec 595 Referred to Para 18
CIVILAPPELLATE JURISDICTION : Civil Appeal No. 5305 F
of 2008
From the final Judgment and Order dated 6.07.2006 of
the High Court of Gujarat, at Ahemdabad in First Appeal No.
2069 of 2006
Pankaj Bala Verma, Kiran Suri and S.J. Amith for the G
1
~ Appellant.
Jatin Zaveri for the Respondents.
The Judgment of the Court was delivered by
H
1052 SUPREME COURT REPORTS [2008] 12 S.C.R. ~

~

A S.B. SINHA, J. 1. Leave granted. r'L,_
2. What would the effect of dishonour of a cheque when
subsequently the amount of premium has been accepted in
cash by the insurer is the question involved herein.

B 3. First respondent was driving a moped on 27.1.1995.
An accident took place on the said date as the said vehicle
was hit by a truck bearing registration No.GJ 6T 7000 which
r·
was allegedly being driven in a rash and negligent manner. The
said truck first dashed against an Ambassador car and then hit .~
...-
c the moped which was being driven by the respondent as a
result whereof he suffered severe injuries.
4. For the purpose of getting the said truck insured, a
cheque was tendered to the officers of the appellant company
on 23.1.1995. As noticed herein before the accident took place
D on 27.1.1995. The cheque when presented to the bank for
clearance was allegedly dishonoured. On 30.1.1995; however, -I
the amount of premium was paid in cash and received. ·~

5. The Motor Vehicle Accident Claims Tribunal as also the
High Court, however, opined that having regard to the fact that
E a cover note had been issued by the appellant, it was legally
obligated to reimburse the claim of a third party.
6. Ms. Pankaj Bala Verma, learned counsel appearing on
behalf of the appellant, would submit that in terms of Section
F 64VB of the Insurance Act, a contract of insurance issued would
be valid only when the cheque issued towards payment of the t·
premium is honoured. The learned counsel would urge that
cheque is an instrument in terms whereof payment is guaranteed
and it is accepted as a valid payment only on that premise but
G when it is dishonoured, the contract being without consideration
need not be performed. It was furthermore contended that the )c,
learned Tribunal as also the High Court committed a serious
error insofar as they failed to correctly read the Motor Input
Advice cum Receipt showing that the insurance was valid from
23.1.1995 to 22.1.1996. It was submitted that no cover note, in
H
NATIONAL INSUR. CO. LTD. v. ABHAYSING 1053
"
PRATAPSING WAGHELA & ORS. [S.B. SINHA, J.]
..._ -{
fact, was issued; and what was issued was merely a money A
receipt which itself shows that the same was valid subject to
the realization of the amount.
7. Strong reliance in this behalf was placed on Deddappa
& Ors. V Branch Manager, National Insurance Company Ltd.
[(2008) 2 sec 595]. B
-1,
8. Mr. Jatin Zaveri, learned counsel appearing on behalf
of the respondent, on the other hand, contended that a cover
note, in fact, was issued on 23.1.1995 in favour oflhe insurer.
The learned counsel submitted that not only the said fact was c
admitted in the pleadings of the insurance company but also
the witness examined on behalf of the appellant took the same
stand before the Tribunal as also before the High Court. Our
attention in this behalf has also been drawn to the grounds of
appeal taken in the Special Leave Petition.
D
~ 9. The objection taken by the appellant in its written
~
statement reads as under :
"It is hereby submitted that in this case applicant had not
produced any documentary evidence pertaining to policy
of involved vehicle except Cover Note, and in legal sense E
cover note is not authentic document, more over this cover
note which was produced by the applicant shows cheque
payment and if cheque does not realized then the contract
of insurance does not exists and hence replying opponent
does not liable to pay compensation and it is established F
"'
~
principal that if replying opponent does not received
premium that its liability does not exists. And in this regard
replying opponent reserves it all right without prejudice
this averments."
G
10. Appellant, therefore, proceeded on the basis that a
cover note was, in fact, issued. Yet again, a similar contention
has been raised before the Tribunal as would appear from the
following excerpts from the award:

"However, as per the contention raised by the Ld. Advocate H
1054 SUPREME COURT REPORTS [2008) 12 S.C.R. ~

~ .......
A for the applicant, the contract of insurance and policy the
alleged vehicle were not in existence as on the date/date
of occurrence; that the cheque issued was dishonoured
and, therefore, the cover note it had issued becomes
ineffective and as such, no policy obliging to pay the
B compensation by the insurer exists on the day of
occurrence and therefore, the opponent No.3 cannot be
held liable to indemnify the third party and/or the Insurer
be absolved of its obligations to third party because of
non-receiving of the premium. In support thereof, the Ld. I-
,
c Advocate for the opponent No.3 placed strong reliance
on the propositions of law laid down in 2002 (1) AJR 168,
1991 ACJ 650."
Apart from the same, even before us in the Special Leave
Petition, the appellant, after quoting a decision of the Madhya
D Pradesh High Court in United India Insurance Company Ltd.
V Rattan Singh & Ors. [AIR 1993 MP 197], stated the following: 7-

"Similar is the case in hand and ·is squarely covered by
...
this judgment. It is also a case where it had not issued any
policy but was cover note and that too was cancelled when
E the cheque was bounced and also prior to the date of
accident itself."
11. A bare perusal of the receipt would show that not only
the same contains a column relating to "Class Code" but also
F a "Cover Note Number". No contention had been raised that ><
the number purported to be noted against the column of "Cover ~
Note Number", in fact, represented the class code. "Class code"
has been stated within a box being 217, The purported "Cover
Note" said to be bearing no. 279106 is rubber stamped. It is
not within the box meant to state the "Class Code". No material
G
has been placed before the Tribunal to state the "Class Code" k_
number would not only be contained within the box but also
woulc be rubber stamped separately.
12. We might have accepted the explanation of the
H appellant before us that the sald number 279106 is, in fact,
NATIONAL INSUR. CO. LTD. v. ABHAYSING 1055
PRATAPSING WAGHELA & ORS. [S.B. SINHA, J.]
"---(
continuation of the class code No.217, but, as indicated A
hereinbefore, the stand taken by the appellant not only before
the courts below but also before us is otherwise.
13. The Motor Vehicles Act, 1988 (for short, "the Act") was
enacted to consolidate and amend the law relating to motor
vehicles. Chapter XI of the Act provides for insurance of motor B
--K. vehicles against third party risks.
Section 145 of the Act is the definition section; clause (b)
whereof defines 'certificate of insurance' to mean a certificate
issued by an authorized insurer in pursuance of sub-section (3) c
of Section 147 and includes a cover note complying with such
requirements as may be prescribed, and where more than one
certificate has been issued in connection with a policy, or where
a copy of a certificate has been issued, all those certificates or
that copy, as the case may be.
D
~ Clause (d) of Section 145 defines 'policy of insurance' to
.,,. include 'certificate of insurance' .
Section 146 of the Act mandates that no person, except
as a passenger, shall use or cause or allow any other person
to use, a motor vehicle in a public place, unless there is in force E
in relation to the use of the vehicle by that person or that other
person, as the case may be, a policy of insurance complying
· with the requirements of this Chapter.

Section 147 provides for the requirements of policies and F
-~ limits of liability in the following terms :

"(a) is issued by a person who is an authorised insurer; or

(b) insurer the person or classes of persons specified in
the policy to the extent specified in sub- section (2)-
G
(i) against any liability which may be incurred by him in
respect of the death of or bodily injury to any person,
including owner of the goods or his authorised
representative carried in the vehicle or damage to any
property of a third party caused by or arising out of the H
1056 SUPREME COURT REPORTS [2008] 12 S.C.R.

A use of the vehicle in a public place;
(ii) against the death of or bodily injury to any passenger
of a public service ve.hicle caused by or arising out of the
use of the vehicle in a public place."
B A proviso has been appended thereto, which reads as
under:
"Provided that a policy shall not be required-
(i) to cover liability in respect of the death, arising out of
c and in the course of his employment, of the employee of
a person insured by the policy or in respect of bodily injury
SU$tained by such an employee arising out of and in the
course of his employment other than a liability arising under
the Workmen's Compensation Act, 1923 (8 of 1923) in
respect of the death of, or bodily injury to, any such
D
employee-
(a) engaged in driving the vehicle, or
(b) if it is a public service vehicle engaged as conductor
of the vehicle or in examining tickets on the vehicle, or
E
(c) if it is a goods carriage, being carried in the vehicle, or
(ii) to cover any contractual liability."
14. An insurance company, however, is entitled to deny its
F liability to indemnify the owner of the vehicle on limited grounds
as provided for under sub-section (2) of Section 149 thereof. f
15. One of the grounds which are available to the insurance
company to deny its statutory liability as envisaged under sub-
section (2) of Section 149 of the Act is that the policy is void on
G the ground that it was obtained by the non-disclosure of a material
fact or by a representation of fact which was false in some
material particulars.
16. Indisputably, the first respondent is a third party in
relation to the contract of insurance which had been entered
H
NATIONAL INSUR. CO. LTD. v. ABHAYSING 1057
PRATAPSING WAGHELA & ORS. [S.B. SINHA, J.]
... --{ into by and between the appellant and the owner of the vehicle A
in question. We have noticed hereinbefore that a document
was produced before the Tribunal. Even according to the
appellant, although it was only a Motor lnputAdvice cum Receipt,
it contained the Cover Note No. 279106. We, therefore, have
to suppose that a Cover Note had, in fact, been issued. If a B
Cover Note had been issued which in terms of clause (b) of
sub-Section 1 of Section 145 of the Act would come within the
purview of definition of certificate of insurance; it also would
come within the purview of the definition of a insurance policy.
If a Cover Note is issued, it remains valid till it is cancelled. c
Indisputably, the insurance policy was cancelled only after the
accident took place. A finding of fact, therefore, has been arrived
at that prior to the deposit of t~e premium of insurance in cash
by the owner of the vehicle, the cover note was not cancelled.
17. It is in the aforementioned situation, we are of the D
:y opinion, that the judgment of the High Court cannot be faulted.
No doubt, a contract of insurance is to be governed by the
"'. terms thereof, but a distinction must be borne in mind between

... a contract of insurance which has been entered into for the
purpose of giving effect to the object and purport of the statute r-
and one which provides for reimbursement of the liability of the
c:

owner of the vehicle strictly in terms thereof. In that limited sense,
. a contract of insurance entered into for the purpose of covering
a third party risk would not be purely contractual. We may place
on record that an ordinary contract of insurance does not have F
a statutory flavour. The Act merely imposes an obligation on the
part of the insurance company to reimburse the claimant both
in terms of the Act as also the Contract. So far as the liability
of the insurance company which comes within the purview of
Sections 146 and 147 is concerned, the same subserves a
G
constitutional goal, namely, social justice. A contract of insurance
covering the third party risk must, therefore, be viewed differently
vis-a-vis a contract of insurance qua contract.

18. In National Insurance Co. Ltd. v. Laxmi Narain Dhut
[(2007) 3 SCC 700], this Court opined: H
1058 SUPREME COURT REPORTS [2008] 12 S.C R.

A "23. As noted above, there is no contractual relation ~
between the third party and the insurer. Because of the
statutory intervention in terms of Section 149, the same
becomes operative in essence and Section 149 provides
complete insulation.
B 24. In the background of the statutory provisions, one thing
is crystal clear i.e. the statute is beneficial one qua the x-
third party. But that benefit cannot be extended to the owner
of the offending vehicle. The logic of fake license has to
be considered differently in respect of third party and in
c respect of own damage claims."
The same view was reiterated in Oriental Insurance Co.
Ltd. v. Meena Variyal & Ors. [(2007) 5 SCC 428] stating:
"14. The object of the insistence on insurance under
D Chapter XI of the Act thus seems to be to compulsorily
cover the liability relating to their person or properties of y,
third parties and in respect of employees of the insured .,
employer, the liability that may arise under the Workmen's

.....
Compensation Act, 1923 in respect of the driver, the ~.

E conductor and the one carried in a goods vehicle carrying
goods."
This Court in Oriental Insurance Co. Ltd. v. Sudhakaran
K. V. and Ors. [2008 (8) SCALE 402] held:

F "14. The provisions of the Act and, in particular, Section
147 of the Act were enacted for the purpose of enforcing ,.
.}-

the principles of social justice. It, however, must be kept
confined to a third party risk. A contract of insurance which
is not statutory in nature should be construed like any other
contract."
G
;~
This Court in Oriental Insurance Co. Ltd. v. lnderjeet Kaur
{(1998) 1 sec 71] held that once a certificate of insurance is
issued, the insurance company would not be absolved of its
obligations to third parties
H
NATIONAL INSUR. CO. LTD. v. ABHAYSING 1059
PRATAPSING WAGHELA & ORS. [S.B. SINHA, J.]
'
.~
t Yet again in Deddappa & Ors. V. Branch Manager, A
National Insurance Co. Ltd. ((2008) 2 SCC 595], having regard
to the provisions contained in Section 54(v) of the Insurance
Act, 1938, in the fact situation obtaining therein, it was opined:

< "A contract is based on reciprocal promise. Reciprocal
promises by the parties are condition precedents for a B
-t: valid contract. A contract furthermore must be for
,; consideration."
,.

19. We, therefore, in the facts and circumstances of the
case, are unable to agree with the contention of the learned c
counsel for the appellant.
In any event, this is a case where this Court should not
exercise its discretionary jurisdiction under Article 136 of the
(
I Constitution of India as only a sum of Rs.46,000/- is awarded
in favour of respondent No.1. D
k
,. 20. In our opinion, the impugned judgment does not warrant
any interference. The Appeal is dismissed with costs. Counsel's
• fee assessed at Rs.25,000/-.
K.K.T. Appeal dismissed. E
~

;