Court’s Decision
In a significant ruling reinforcing the principle of fairness in motor insurance liability, the Supreme Court, in a judgment delivered by Justice K. Vinod Chandran and Justice N.V. Anjaria, allowed a batch of appeals challenging the “pay and recover” directions issued by the Allahabad High Court in favour of the insurer. The Court held that the owner of a vehicle cannot be held liable merely because the driver was later found to possess a fake licence, unless the insurer proves that the owner failed to exercise due diligence when hiring or entrusting the vehicle to the driver.
The Court observed:
“The insurer must establish that the insured had deliberately committed breach in entrusting the vehicle to a driver who had a fake licence. Suspicion cannot replace proof.”
Accordingly, the Court set aside the High Court’s directions allowing recovery from the truck owner while upholding the compensation awards determined by the Motor Accident Claims Tribunal (MACT).
Facts
The case arose out of a tragic road accident on January 26, 1993, at about 2 a.m., when a truck collided with a Matador van at an intersection, resulting in nine deaths and two injuries to the passengers in the van. Claims were filed before the Tribunal by the injured and by the families of the deceased.
Both the truck and the Matador van were insured. The Tribunal held that the drivers of both vehicles were compositely negligent, apportioning fault in the ratio 75:25 between the truck and the van. It directed both insurers to pay compensation accordingly.
However, during the proceedings, the insurer of the truck alleged that the driver’s licence was fake and sought to recover the amount from the owner. While the Tribunal rejected this contention and held that the insurer was liable to indemnify the owner, the High Court reversed this finding, concluding that the owner had colluded with the driver and allowed the insurer’s pay and recover plea.
The truck owner appealed to the Supreme Court, challenging this recovery order.
Issues
- Whether the insurer was entitled to recover the compensation amount from the vehicle owner when the driver’s licence was found to be fake.
- Whether the owner’s act of producing the driver’s licence before the Tribunal could amount to collusion.
- Whether the High Court erred in inferring lack of due diligence or breach of policy conditions without any direct evidence.
Petitioner’s Arguments
The petitioner, represented by Senior Advocate Gopal Shankaranarayan, argued that the High Court erred in presuming collusion between the owner and the driver without any evidence. It was submitted that the Tribunal had carefully examined the two licences produced, one from the owner and another allegedly seized by the police, and found no deliberate breach by the owner.
The petitioner pointed out that the District Transport Officer (DTO), Gurdaspur, had issued a certificate validating the driver’s licence (No. 5288) as genuine, which was renewed from 1991 to 1997. The alleged discrepancies relied on by the High Court—such as interpolations in the licence register—were unsubstantiated and insufficient to presume fraud or collusion.
He emphasized that the law laid down in United India Insurance Co. Ltd. v. Lehru (2003) 3 SCC 338, National Insurance Co. Ltd. v. Swaran Singh (2004) 3 SCC 297, PEPSU RTC v. National Insurance Co. Ltd. (2013) 10 SCC 217, and IFFCO Tokio General Insurance Co. Ltd. v. Geeta Devi (2023 SCC OnLine SC 1398) clearly establishes that the insurer must prove a willful breach of the policy terms and that mere possession of a fake licence does not automatically absolve the insurer of liability.
The owner’s act of producing the licence before the Tribunal, the counsel argued, showed diligence, not collusion, since it demonstrated that the company had verified the existence of a licence at the time of employment.
Respondent’s Arguments
Dr. Manish Singhvi, Senior Advocate for the insurance company, contended that both licences produced — one by the owner and one by the police — were found to be fake upon verification by the licensing authorities of Alwar and Gurdaspur. He argued that the owner’s representative, not the driver, produced the licence, which suggested active involvement or collusion.
The insurer argued that under Section 149(2) of the Motor Vehicles Act, 1988, it was entitled to avoid liability where the driver did not hold a valid and effective licence. It was submitted that the High Court had rightly drawn adverse inferences from the owner’s conduct and the evidence of the DTO Clerk, who denied issuing the licence.
The insurer therefore maintained that the High Court’s pay and recover direction was justified.
Analysis of the Law
The Supreme Court meticulously analyzed the legal position governing insurer liability when the driver holds a fake or invalid licence. Referring to Section 149(2)(a)(ii) of the Motor Vehicles Act, the Court emphasized that the insurer must not only establish the invalidity of the licence but also prove that the insured committed a willful breach by knowingly allowing an unlicensed driver to operate the vehicle.
Quoting Lehru, the Court reiterated:
“Even if the licence is fake, the insurance company is liable to pay compensation unless it is proved that the insured deliberately violated the policy condition.”
Further, relying on Swaran Singh, the Court clarified that while an insurer can raise the defence of fake licence, the owner’s liability depends on whether he took reasonable care at the time of employment. If the employer examines a driver’s licence that appears genuine, the insurer cannot later deny indemnity merely because the licence was later discovered to be fake.
Precedent Analysis
- United India Insurance Co. Ltd. v. Lehru (2003) 3 SCC 338 – Held that insurers cannot escape liability merely because the driver’s licence was fake; the owner’s due diligence at the time of employment is the key factor.
- National Insurance Co. Ltd. v. Swaran Singh (2004) 3 SCC 297 – A three-judge Bench clarified that whether a fake licence absolves the insurer depends on whether the owner was at fault. The burden lies on the insurer.
- PEPSU RTC v. National Insurance Co. Ltd. (2013) 10 SCC 217 – The Court protected the employer when the driver had long service and training, holding that the owner was not negligent merely because the licence was later found fake.
- IFFCO Tokio General Insurance Co. Ltd. v. Geeta Devi (2023 SCC OnLine SC 1398) – Reaffirmed that insurers cannot demand recovery without proving the owner’s knowledge of fake licence; “verification with the RTO” is not a statutory obligation.
The Supreme Court in the present case found these precedents squarely applicable, emphasizing that the insurer must prove absence of due diligence, which it had failed to do.
Court’s Reasoning
The Bench found several factual and evidentiary flaws in the insurer’s case. The Court observed that:
- The DTO’s certificate (Exhibit R-1) validated the licence issued to the driver and showed a renewal till 1997.
- The High Court’s reliance on interpolations in the licensing register was misplaced, as even the DTO Clerk admitted during cross-examination that multiple entries had alterations and that no payment record existed for the unrelated date 21.08.1990.
- The Court criticized the insurer’s argument of collusion as pure conjecture, noting that the owner being a company acted through representatives and its diligence could not be doubted merely because it produced the licence itself.
Importantly, the Bench highlighted that the insurer had neither pleaded nor proved that the owner failed to conduct due diligence. The absence of examination of the driver before the Tribunal did not imply bad faith, as he may have avoided testimony due to fear of self-incrimination given the pending criminal proceedings.
The Court categorically held:
“The insurance company must prove absence of due diligence in employing the driver or entrusting the vehicle. Such evidence is totally absent in the present case.”
Conclusion
The Supreme Court allowed the appeals, setting aside the High Court’s directions granting recovery rights to the insurer. The Court held that:
- The owner had not committed any breach of policy conditions;
- The insurer failed to establish collusion or negligence; and
- The owner’s production of the licence demonstrated diligence, not complicity.
Consequently, the insurance company was directed to bear the liability in full, and the Tribunal’s original award remained undisturbed.
Implications
This ruling strengthens the protection afforded to vehicle owners under the Motor Vehicles Act by clarifying that insurers cannot automatically recover compensation merely upon discovering a fake licence. It reinforces the principle that the burden of proof lies squarely on the insurer to demonstrate willful breach or lack of diligence.
The judgment safeguards good-faith vehicle owners from arbitrary recovery claims and ensures that third-party victims continue to receive timely compensation without being caught in insurer-owner disputes.
FAQs
1. Can an insurer deny liability if the driver’s licence is fake?
Not automatically. The insurer must prove that the vehicle owner knowingly employed an unlicensed driver or failed to exercise due diligence.
2. Is the owner required to verify the licence with the RTO?
No. The Supreme Court held that neither the Motor Vehicles Act nor insurance policies impose such a duty on owners.
3. What happens if the insurer fails to prove willful breach?
If due diligence by the owner is established or unchallenged, the insurer must pay the compensation and cannot recover the amount from the insured.
