Case: National Insurance Co. Ltd Vs. Yellamma

2. Respondent No.2 was the owner of a Mini Bus. An insurance policy in respect of the said vehicle was sought to be taken by him. For the said purpose, the second respondent issued a third party cheque towards payment of insurance premium. The Development Officer of the appellant by inadvertence issued a cover note. However, when the said mistake came to his notice, the respondent No.2 was contacted by the Development Officer. He was asked to pay the amount of premium. It was not tendered and in stead the respondent No.2 is said to have returned the original cover note and took back the cheque. The original cover note as also all the duplicate copies thereof was cancelled. The said insurance cover was issued for the period 3.9.1991 to 2.9.1992. On or about 12.9.1991, the said vehicle met with an accident. First respondent who suffered an injury therein filed a claim petition in terms of the provisions contained in Section 166 of the Motor Vehicles Act, 1988 (the Act). An award for a sum of Rs.43,000/The Tribunal, in its award, categorically held:The petitioners have produced Ex.P.7 the Xerox copy of the cover note Ex.R.1. There is all the chances of the owner of the vehicle having taken Xerox copy of the cover note Ex.R.1 and returning the original cover note Ex.R.1 to the insurance company as deposed by RW.1. If really the cover note was not cancelled, the original cover note should have been with the insured and respondent No.3 could not have produced the original cover note Ex.R.1. Hence, the case of 3rd respondent that the owner of the vehicle had given third party cheque and that later he had taken back the cheque and returned the original cover note Ex.R.1 to the insurance company and that the insurance company has cancelled cover note is more probable. As Ex.P.7 is the Xerox copy of the original cover note Ex.R.1 and as the original cover note Ex.R.1 and its copies Exs.R.2 to R.4 have been produced by the insurance company, the argument of the learned counsel for the petitioners that respondent No.3 is liable to pay the compensation cannot be accepted. Hence, from the above discussion, I hold that there was no valid insurance policy as on the date of the accident and as such the respondent No.3 is not liable to pay any compensation to the petitioners3. Second Respondent did not prefer any appeal there against. First Respondent only preferred an appeal questioning the quantum of compensation. The High Court, by reason of the impugned judgment, while enhancing the amount of compensation to a sum ofThe above provision disclose that a policy can be issued against the issuance of cheque and the liability commences from the date of issuance of cheque and not from the date of its encashment. There is no provision in law that the consideration for policy should flow only from the insured and not from the third party. The development officer has acted in a hasty manner. No attempt was made to present the cheque for encashment. If the cheque was encashed it was well and good for the insurer otherwise steps could have been taken for cancellation of the policy Ex.R.1. The reason that the cheque is not issued by the insured is not a ground for valid cancellation. The endorsement of cancellation is vague, it does not bear the date. The officer who has made endorsement of cancellation is not examined. The endorsement of the insured is not taken on the policy to substantiate that the cancellation was with due notice and knowledge by the insured. Therefore, under the above circumstances, the very cancellation of the policy for untenable reason is bad in law. The accident has occurred within 15 days from the date of issue of cover note. Hence, the insurer is liable to pay the compensation.

Court's reasoning:
9. In this case, there cannot be any doubt or dispute whatsoever that no privity of contract came into being between the appellant and the second respondent and as such the question of enforcing the purported contract of insurance while taking recourse to Section 147 of the Motor Vehicles Act did not arise. Second respondent did not contest the case at any stage. It did not adduce any evidence before the Tribunal. It does not appeal from the judgments of the High Court. No argument in the appeal was advanced in his behalf. Before us also, no appearance has been made on behalf of the respondent No.2 despite service of notice10. The accident took place in the State of Karnataka. Respondent No.2 is a resident of Ludhiana. The transaction in question was purported to have been entered in Ludhiana. First respondent, therefore, in our opinion, may not be in a position to enforce the award as against the respondent No.211. In the peculiar facts and circumstances of this case, we are, therefore, of the opinion that the interest of justice would be sub served if we, in exercise of our jurisdiction under Article 142 of the Constitution of India, direct that the awarded amount be paid by the appellant to the first respondent with liberty to it to recover the same from the second respondent by initiating an appropriate proceeding in this behalf6. The High Court, however, wrongly proceeded on the premise that a cheque could be issued by a third party. A contract of insurance like any other contract, is a contract between the insured and the insurer. The amount of premium is required to be paid as a consideration for arriving at a concluded contract. If the insurer insists that a cheque should be issued only by the insured and not by a third party, no exception thereto can be taken. The fact remains that the cheque was not encashed. Concededly, the insured did not make any payment. Section 64VB of the Insurance Act mandates that before a contract of insurance comes into being, the premium should be received by the insurer in advance, stating: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 insurerWhere 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 be7. The question came up for consideration recently before this Court in Deddaooa & Ors. v. Branch Manager, National Insurance Co. Ltd. [(2008) 2 SCC 595] , wherein upon noticing the precedents which were operating in the field, it was clearly held:18. The ratio of the said decision was, however, noticed by this Court in New India Assurance Co. Ltd. v. Rula and Ors. [(2003) 3 SCC 195]. It was held that ordinarily a liability under the contract of insurance would arise only on payment of premium, 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. It was opined:13...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 oft of premium 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 the policy subsists, then only the third party would be entitled to avail the benefit thereof.