Holding

The insurer is liable to pay compensation to the third‑party claimants despite not having received the premium, and its remedy is against the insured.

Summary

A bus was insured by Oriental Insurance Co. Ltd. on 30 November 1989. The premium was paid by cheque which later bounced, and the insurer sent a notice that it was not at risk. The premium was finally paid in cash on 2 May 1990, but the bus met with an accident on 19 April 1990, killing the truck driver. The driver’s widow and minor children claimed compensation, which the insurer denied on the ground that under Section 64‑VB of the Insurance Act, no risk is assumed until the premium is received. The Motor Accident Claims Tribunal and the High Court held the insurer liable, and the Supreme Court affirmed that despite the non‑receipt of premium, the insurer’s obligations to third parties arise under Sections 147(5) and 149(1) of the Motor Vehicles Act, and its remedy lies against the insured, not the claimants.

Issues considered

Whether an insurer is liable to third‑party claimants when the premium has not been received because the cheque was dishonoured, under Section 64‑VB of the Insurance Act, 1938.
Whether the provisions of the Motor Vehicles Act, 1988 (Sections 147(5) and 149(1)) override the bar created by Section 64‑VB and impose liability on the insurer.
Whether the insurer can avoid or cancel the policy for non‑payment of premium before the accident.

Legislation cited

Insurance Act, 1938s. 64-VB
Motor Vehicles Act, 1988s. 146, s. 147, s. 147(5), s. 149(1)

Subjects

insurancepremiumcheque dishonourthird‑party liabilityMotor Vehicles ActSection 64‑VBpublic interestindemnity

Judgment

ORIENTAL INSURANCE CO, LTD. A
v.
'""_°'!''
INDERJIT KAUR AND ORS.

DECEMBER 8, 1997
B
-...._ (AM. AHMADI, CJ., S.P. BHARUCHA AND S.C. SEN, JJ.]

Insurance Act, 1938-Section 64 VB-Accident Compensation
· Clai~us collided with Tntck 011 19.4.9(}-Death of Tmck D1ive,.......Premiwn
amount for insurance of the bus paid by cheque disho11oured-Subsequently c
premium amount paid in cash on 2.5.199(}-Denial of claim by the Insura11ce
Company as Premium was not paid in adva11ce---Tribunal awarded compe11-
sation--On appeal, held, insurance company not absolved of its obligation to
pay compensatio11 on the grou11d that it did not receive the premium
amount-Public interest to prevail over interest of the Insurance Com-
pany--Hence Insurance Company is liable to pay compensation-Motor D
Vehicles Act, 1988-Sections 147(5) and 149(1).
" A bus was insured with the appellant Company on 30th November
1989. The premium for the policy was paid by cheque which was
dishonoured. The appellant sent a letter stating that as the cheque was
E
dishonoured they were not at risk. Thereafter, the premium was paid in
cash on 2nd May, 1990. In the meantime, on 19th April 1990, the bus
collided with a truck and the driver of the truck died. The respondents,
widow and minor sons of the deceased filed a claim petition. The appellant
denied the claim on the ground that under the terms of Section 64-VB of
the Insurance Act, 1938 no risk was assumed by an insurer unless the F
premium had been paid in advance. The Motor Accident Claims Tribunal
rejected the appellant's contention and awarded compensation to the
claimants alongwith interest. The appeal filed before the High Court was
~ dismissed. Hence the present appeal.
i
G
The contention of the appellant was that in view of the provisions of
Section 64-VB of the Insurance Act, the appellant could not in law have
assumed any risk under the policy of insurance covering the bus until the
t premium had been paid. It was also contended that the decision of this
Court in *United India Insurance Co. was misread by the Tribunal as well
as by the High Court. H
255
256 SUPREME COURT REPORTS [1997] SUPP. 6 S.C.R.

A Dismissing the appeal, this Court

HELD : 1. The appellant Insurance Company was not absolved of its
obligation to third parties under the policy because it did not receive the
premium. Its remedies in this· behalf lay against the insured. The policy of
insurance that the appellant issued was a representation upon which
B authorities and third parties were entitled to act. [261-C-D]

Montreal Street Railway Co. v. Nonnandin, AIR (1917) Privy Council
142, referred to.

2. It was the appellant Company itself which was responsible for its
C predicament. It had issued the policy of Insurance upon receipt only of a
chec1ue towards the Premium in contravention of the provisions of section
64VB of the Insurance Act 1938. The public interest that a policy of In-
surance serves must, clearly, prevail over the interest of the appellant.
Despite the bar created by section 64-VB of the Insurance Act, the appel-
D lant, an authorised insurer, issued a policy of insurance to cover the bus
without receiving the premium thereof. By reason of the provisions of
section 147(5) and 149(1) of the Motor Vehicles Act, 1988 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 entitlewent to avoid or cancel the policy for the reason
E that the cheque issued in payment of the premium thereon had not been
honoured. [261-A-C; G-H)

*United India Insurance Co. Ltd. v.Ayeb Mohammed & Ors., (1991) 2
ACJ 650, dissented from.

F CIVIL APPELLATE JURISDICTION : Civil Appeal No. 8570 of
1997.

From the Judgment and Order dated 30.11.93 of the Punjab & • j
Haryana High Court in F.A.O. No. 1819 of 1993.
"'
G Jitendra Sharma, B.K. Pal and Parmanand Gaur for the Appellant.

The Judgment of the Court was delivered by

BHARUCHA, J. Leave granted.

H This appeal is heard by a Bench of 3 Judges because learned counsel
O.I.C. LTD. v. INDERJITKAUR [BHARUCHA,J.] 257
for the appellant, the Oriental Insurance Co. Ltd., had submitted that the A
decision of this Court in United India Insurance Co. Ltd. v. Ayeb
Mohammed & Ors., (1991) 2 AC.I 650, had been misread by the Motor
Accic.lent Claims Tribunal and the High Court and that, while the appellant
would pay the amount of compensation awarded in this matter, it
desired, in view of the general importance of the question, an B
authoritative pronouncement.

For the purposes of the appeal, therefore, very few facts are relevant.
A bus met with an accident. Its policy of insurance was issuec.l by the
appellant on 30th November, 1989. The premium for the policy was paid
by cheque. The cheque was dishonourec.l. A letter stating that it had been C
dishonoured was sent by the appellant to the insurec.l on 23rd January,
1990. The letter claimed that, as the cheque had not not been encashec.l,
the premium on the policy had not been received and that, therefore, the
appellant was not at risk. The premium was paic.l in cash on 2nd May, 1990.
In the meantime, on 19th April, 1990, the aecic.lent took place; the bus D
collie.led with a truck, whose driver died. The truck driver's widow and
minor sons filed the claim petition. The appellant denied the claim
asserting that under the terms of Section 64-VB of the Insurance Act, 1938,
no risk was assumed by an insurer unless the premium thereon had been
received in advance. The Motor Accident Claims Tribunal rejected the E
appellant's contention and awarded the claimants compensation in the sum
of Rs. 96,000 with interest at the rate of 12 per cent per annum from the
date of the petition, to be paid by the insured and the appellant jointly and
severally. The appe?I filed by the appellant before the High Court of
Punjab & Haryana was summarily dismissed, and it is that order which is
now under challenge.
F

Mr. Jitender Sharma, learned counsel for the appellant, relied upon
Section 64-VB of the Insurance Act. It reads thus :

"64-VB. No 1isk to be assumed unless premium is received in G
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 H
258 SUPREME COURT REPORTS (1997) SUPP. 6 S.C.R.

A until deposit of such amount as may be prescribed, is made m
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
B
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 of account of cancellation of a policy or alteration in its
terms of and conditions or otherwise shall be paid by the insurer
D 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.

E (4) Where an insurance agent collects a premium on a-policy
of insurance on behalf of an 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 (5) The Central Government may, by rules, relax the require-
ments of sub-section (I) in respect of particular categories of
insurance polices."

Mr. Sharma submitted that, in view of the provisions of Section
G 64-VB of the Insurance Act, the appellant could not in law have assumed
any risk under the policy of insurance covering the bus until the premium
had been paid. The premium had not been paid inasmuch as the cheque
that had been given to the appellant by the insured in payment of the
premium had been dishonoured. The appellant was, therefore, not at risk
H and not liable to pay any part of the compensation that had been awarded.
0.l.C. LTD. v. INDERJIT KAUR [BHARUCHA, J.] 259
Mr. Sharma relied upon the decision in the case of United India A
Insurance Co. Ltd. v. Ayeb Mohammed (ibid). The Orissa High Court had
upheld the award of compensation in the sum of Rs. 15,000 against the
insurer on the footing that it had issued a cover note undertaking the risk.
The insurer's stand was that ·the cheque covering the premium had
bounced and, in the absence of payment, the cover note it had issued had B
become ineffective and there was no policy which obliged it to pay the
compensation. The view of the High Court was that, in the absence of steps
to cancel the cover note, the insurer's liability continued, although the
bouncing of the cheque and the steps taken by the insurer cancelling the
risk note had, this court said, been found as a fact. The insurer had issued
a notice to the registering authority and the parties that the cheque had ·
c
bounced and the liability had ceased but the High Court had recorded a
finding that the notice of cancellation had not been served on the insured.
This Court then said :

"The fact that the cheque had bounced was a matter within the D
knowledge of the insured. At any rate, there would be that
presumption and, therefore, in ordinary circumstances no special
notice would be required.

5. Since Mr. Madan had told us at the commencement of the E
hearing of the matter that the amount being small he was not
, interested in disputing the liability to pay in this case but the insurer
would like to have the principle of law decided, we do not think
it is necessary to issue notice to the respondents.
F
6. In the setting indicated we are of view that the High Court
was not right in holding that in the absence of steps for
cancellation of the cover note, the risk would be subsisting but
as Mr. Madan has himself stated, we do not interfere with the
decision of the High Court requiring the sum of Rs. 15,000 to ·
be paid by the insurer." G

We find it is difficult to conclude that the judgment in the case of
U11ited India I11sura11ce Company Ltd. v. Ayeb Mohammed decides a
principle of law because no notice had been issued on the special leave
petition. At the same time, the opinion is expressed in the judgment that H
260 SUPREME COURT REPORTS [1997] SUPP. 6 S.C.R.

. A the High Court was in error in holding that, in the absence of steps to
cancel the. cover note, the risk would subsist.

Chapter II of the Motor Vehicle Act, 1988, provides for the
insurance of motor vehicles against third party risks. Section 146
thereunder states that no person shall use or cause or allow any other
B
person to use a motor vehicle in a public place unless there is in force in
relation to the use of the vehicle a policy of insurance that complies with
the requirements of the Chapter. Section 147 sets out the requirements of
policies and the limits of liability. A policy of insurance, by reason of this
provision, must be a policy which is issued by a person who is an authorised
C insurer. Sub-section 5 reads thus :

"(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
D 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."

Section 149 refers to the duty of insurers to satisfy judgments 'and
E awards against persons insured in respect of third party risks. Sub-section
(1) thereof reads thus :

•
"(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, judg_ment or award in respect of any
F such liability as is required to be covered by a policy under
clause (b) of sub-section (1) of section 147 (being a liability
covered by the terms of the policy) [or under the provisions of
section 163AJ is obtained against any person insured by the
policy, then, notwithstanding that the insurer may be entitled to
G 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
H any amount payable in respect of costs and any sum payable in
O.l.C. LTD. v. INDERJITKAUR [BHARU.CHA,J.] 261

respect of interest on that sum by virtue of any enactment relating A
to interest on judgments."

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 there- B
for. By reason of the provisions of Section 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 opinio11) to avoid or cancel the policy for the
reason that the cheque issued in payment of the premium thereon had not C
been honoured. ,

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 D
under the policy because it did not receive the premium. Its remedies in
this behalf lay against the insured.

We may note in this connection the following passage in the case of
Montreal Street Railway Company v. Nonnandin, A.LR. (1917) Privy Coun-
d ~ E
"When the provisions of a statute relate to the performance of a
public duty and the case is such that to hold null and void acts
·done in neglect of this duty would work serious general incon-
venience or injustice to persons who have no control over those F
1 entrusted with the duty and at the same time would not promote
the main object of the Legislature, it has been the practice to hold
such provisions to be directory only, the neglect of them, though
punishable, not affecting the validity of the acts done."

It must also be noted that it was the appellant itself who was G
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. H
262 SUPREME COURT REPORTS [1997] SUPP. 6 S.C.R.
A We are of view, in the circumstances, that the observations in the
case of United India Insurance Co. Ltd. v.Ayeb Mohammed do not lay down
good law.

The appeal is dismissed. The respondents not having appeared, there
shall be no order as to costs.
B
S.V.K.I. Appeal dismissed.