IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA F.A.O. No. 200 of 2010 Alongwith FAO No.201 of 2010 Judgment reserved on : 01.8.2011 Date of decision: 24.8.2011 Oriental Insurance Company Ltd. (in both cases) ….Appellant(s) …Versus… Smt.Rani and others (in both cases) ….Respondents Coram The Hon’ble Mr. Justice Deepak Gupta, Judge. Whether approved for reporting?1 Yes Counsel for the Appellant(s): Mr.Deepak Bhasin, Advocate. Counsel for the Respondent(s): None for respondent No.1. Mr.Jagdish Thakur, counsel for R-2. Deepak Gupta, J. 1. Both these appeals are being decided by a common judgment since they arise out of the same accident and following identical question is involved in the same: “Whether on 16.10.2000, that is the date of the accident, Bus No.DL-1PA-2788 was covered by a valid insurance policy or not?” 2. The facts relevant for decision of this question are that admittedly the cover note was issued by the Insurance Company on 23.9.2000 for insuring the vehicle in question. It is also not disputed that the cheque for 1 Whether the reporters of the local papers may be allowed to see the Judgment? yes 2 payment of premium, on presentation. was dishonoured by the Bank. The memo (Ext.R-3) dishonouring the cheque (Ext.R-2) is dated 10.10.2000. The cheque was presented on 10th October, 2000 itself and on the same date was dishonoured. The owner of the vehicle was informed about the cancellation of the policy on 24.11.2000 vide endorsement Ext.R-4 and the Registering Authority was also informed about the said cancellation. As stated above, the accident had already taken place on 16.10.2000 before the policy was actually cancelled but after dishonour of the cheque. 3. The case of the owner is that he never received intimation about dishonour of the cheque till 24.11.2000. It is urged on behalf of the Insurance Company that it stands proved that the owner had again deposited the insurance premium on 31.10.2000 after the accident and therefore he was aware about the dishonour of the cheque even prior to the intimation by the Insurance Company. Sh.Deepak Bhasin, learned counsel for the Insurance Company has placed great reliance on Ext.R-10 which is the second insurance cover note for the same vehicle issued on 31.10.2000. 3 4. Learned counsel for the parties have referred to various judgments. 5. In United India Insurance Co. Ltd. vs. Ayeb Mohammed and others, 1991 ACJ 650 a two Judge Bench of the Apex Court held that once the cheque was dishonoured and in absence of payment the cover note became ineffective. It was further held that since the fact that cheque had bounced was a matter within the knowledge of the insured, no special notice was required to be issued to the insured. 6. This point again came up for consideration before the Apex Court in Oriental Insurance Co. Ltd. vs. Inderjit Kaur and others, (1998) 1 SCC 371. In this case the premium for the policy was paid by cheque. The policy was issued on 30.11.1989. A letter was sent by the Insurance Company to the insured on 23.1.1990 informing him that the cheque had been dishonoured and that the Company was not at risk. The premium was paid in cash on 2.5.1990. In the meantime on 19.4.1990 the accident took place. A three Judge Bench of the Apex Court considered the provisions of Section 64-VB of the Insurance Act as well as Sections 147 and 149 of the Motor Vehicles Act. The Apex Court held that the observations in the 4 case of United India Insurance Co. Ltd. vs. Ayeb Mohammed and others,(Supra) did not lay down the correct law. The Court held as follows: “9.We have, therefore, this position. Despite the bar created by Section 64-VB of the Insurance Act, the appellant, an authorized insurer, issued a policy of insurance to cover the bus without receiving the premium therefore. 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.” 7. In New India Assurance Co. Ltd. vs. Rula and others, (2000) 3 SCC 195, the apex Court dealt with a similar point. In that case the vehicle was insured on 8.11.1991 and met with an accident on same day at mid night. The cheque was later on dishonoured on 5 16.11.1991. The facts of this case were different from the earlier case as in this case at the time of accident the Insurance Company had not cancelled the policy of Insurance. The Apex Court after considering the provisions of the Contract Act and the Motor Vehicles Act held as follows: “10.The contract of insurance in respect of motor vehicles has, therefore, to be construed in the light of the above provisions. Section 146(1) contains a prohibition on the use of the motor vehicles without an insurance policy having been taken in accordance with Chapter XI of the Motor Vehicles Act. The manifest object of this provision is to ensure that the third party, who suffers injuries due to the use of the motor vehicle, may be able to get damages from the owner of the vehicle and recoverability of the damages may not depend on the financial condition or solvency of the driver of the vehicle who had caused the injuries. 11.Thus, any contract of insurance under Chapter XI of the Motor Vehicles Act, 1988 contemplates a third party who is not a signatory or a party to the contract of insurance but is, nevertheless, protected by such contract. As pointed out by this Court in New Asiatic Insurance Co. Ltd. v. Pessumal Dhanamal Aswani, AIR 1964 SC 1736, the rights of the third party to get indemnified can be exercised only against the insurer of the vehicle. It is thus clear that the third party is not concerned and does not come into the picture at all in the matter of payment of premium. Whether the premium has been paid or not is not the concern of the third party who is concerned with the fact that there was a policy issued in respect of the vehicle involved in the accident and it is on the basis of this policy that the claim can be maintained by the third party against the insurer.” 6 8. The Apex Court followed the judgment in Inderjit Kaur’s case (Supra) and held thus: “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.” 9. A similar point was raised before the Apex Court in National Insurance Co. Ltd. vs. Seema Malhotra and others, (2001) 3 SCC 151. In this case the policy was issued on 21.12.1993 against a cheque issued on the same date. The vehicle met with an accident on 31.12.1993 and the insured also died in the accident. The cheque was dishonoured on 10.1.1994. The widow and children of the insured filed a claim with regard to the loss of the vehicle before the Consumer Protection Commission. The J&K State Consumer Protection Commission rejected the claim on the ground that since the cheque had bounced there could no legal contract between the parties. The matter was 7 then taken up by the claimants before the High Court of Jammu and Kashmir. The High Court directed that the claim should be assessed and after deducting the amount of premium the balance amount should be paid to the claimants. The Insurance Company aggrieved by the said judgment filed an appeal before the Apex Court. After considering the entire law on the subject the Apex Court held as follows: “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 case. 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 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.” 8 10. This judgment has to be read in the context that it was a claim filed on behalf of the legal heirs of the insured for own damage claim and the principle does not apply to 3rd party risk under the Motor Vehicles Act. 11. In Mittar Singh Vs. Gian Chand and others 2005(2) SLC 267 this Court held as follows:- “22. A reading of the various judgments of the Apex Court makes it abundantly clear that the Insurance Company cannot escape its liability to pay compensation to third parties even if it has cancelled the policy because the third parties who benefit under the terms of the contract cannot be put to risk. The Insurance Companies, once they accept premium in cheque and issue a cover note or a policy of insurance take the risk of paying the amount of compensation, if any, payable to third parties even if the cheque bounces. Third party insurance is compulsory under the Motor Vehicles Act. The purpose of this is that people who suffer in accidents are able to recover the amount of compensation from the Insurance Companies. Therefore, as has been held by the Apex Court in Inderjit Kaur’s case (supra) and in Rula’s case (supra) it is the Insurance Company who was responsible for its predicament. However, both in Inderjit Kaur’s case (supra) and in Rula’s case (supra) the Supreme Court has made it abundantly clear that the Insurance Company is not absolved of its obligations to third parties under the policy because it does not receive premium. The remedy of the Insurance Company lies against the insured. It is, thus, obvious that though the Insurance Company may not be able to avoid its liability as far as third parties are concerned it can take steps to recover the amount from the insured. The Apex court in Seema Malhotra’s case (supra) has clearly held that when 9 the insured fails to pay the premium promised he cannot claim performance from the insurer in such a situation. The cases of third parties stand on a different footing from the cases by the insured. The insured cannot be heard to say that he must be indemnified even if the cheque issued by him for payment of premium has been dishonoured.” 12. Similar view was taken by this Court in FAO No.187 of 2003 titled National Insurance Company Ltd. vs. Naresh Kumar and others and other connected matters decided on 5.10.2007. 13. The question as to what is the effect of dishonour of a cheque again came up for consideration before the Apex Court in Daddappa and others vs. Branch Manager, National Insurance Co. Ltd., 2008 ACJ 581, wherein after discussing the entire law the Apex Court held as follows: “26. We are not oblivious of the distinction between the statutory liability of the Insurance Company vis-`-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. 27. A beneficial 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 contemplated by the legislature to be given to the party. In Regional Director, Employees' State Insurance Corporation, 10 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 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." We, therefore, agree with the opinion of the High Court.” 14. The present case is squarely covered by the judgment of the Apex Court in National Insurance Co. Ltd. vs. Abhaysing Pratapsing Waghela and others, 2008 ACJ 2697. In the case before the Apex Court the insurance cover had been taken out on 23.1.1995. The insurance premium was paid by cheque. The cheque when presented to the bank for clearance was dishonoured. The accident took place on 27.1.1995 and thereafter the insured paid the premium in cash again on 30.1.1995. The Apex Court held as follows: “16. Indisputably, 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 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 Input Advice cum Receipt, it contained the Cover Note No. 279106. We, therefore, 11 have to suppose that a Cover Note had, in fact, been issued. If a 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. 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 the 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 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 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. We may place on record that an 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 same subserves a constitutional goal, namely, social justice. A contract of insurance covering the third party risk must, therefore, be viewed differently vis-`- vis a contract of insurance qua contract.” 12 15. It is thus apparent that the Apex Court further clarified that if a cover note is issued it remains valid till it is cancelled and the Insurance Company cannot escape its liability with regard to third party claims unless it has specifically cancelled the policy and intimated the insured. 16. A learned single Judge of this Court in United India Insurance Co. Ltd. vs. Sandhya Devi and others, 2009 ACJ 1867, held that even if the Insurance Company informs the insured about the cancellation of the policy but does not inform the Registering Authority about the cancellation of the policy then also it cannot escape its liability. 17. The facts which stand established in the present case are that the Insurance Company had not cancelled the policy on the date when the accident took place. It is for the Insurance Company to decide whether they should accept premium by cheque or not. However, once the Insurance Company decides to accept the premium by cheque then it takes the risk that the cheque may bounce. Third party rights are created as soon as a policy or cover note is issued. The Insurance Company cannot on the pretext, that the cheque has bounced, disclaim its liability without 13 cancelling the policy. Every vehicle is statutorily required to be insured for third party claims. An Act policy is a must and a person not having such a policy is guilty of an offence under the Motor Vehicles Act and can be penalized. No person is permitted to ply a vehicle without having a valid policy. Therefore, once the Insurance Company issues the policy it cannot turn around and say that it is not liable for third party risk without showing that it has cancelled the policy and intimated the insured and the concerned Registering Authority about the cancellation of the policy. The mere fact that the insured again paid the premium does not in any way help the case of the Insurance Company. 18. In view of the above discussion, I find no merit in the appeals which are accordingly rejected. No costs. August 24, 2011 ( Deepak Gupta ), J. PV