Court’s Decision
The Supreme Court upheld the principle that while cancellation of an insurance policy due to non-payment of premium absolves an insurer from liability in law, the Court can still direct payment to third-party claimants under the “pay and recover” doctrine. Here, the insurer had already deposited 50% of the awarded compensation with interest, which the claimants had withdrawn. The Court ruled that this amount should not be recovered from the claimants but could be recovered from the vehicle owner. The remaining 50% compensation was directed to be recovered by the claimants directly from the vehicle owner.
Facts
A road accident on 22 August 2005 claimed the life of a 36-year-old computer engineer earning ₹3,364 per month. The Motor Accident Claims Tribunal awarded ₹8,23,000 as compensation. The insurer contended it was not liable as the policy had been cancelled before the accident due to the premium cheque being dishonoured for insufficient funds, with cancellation intimated to the owner and RTO. The Tribunal held the driver solely negligent, acknowledged the cancellation, but applied the “pay and recover” principle, directing the insurer to pay first and recover from the owner. The High Court upheld this decision.
Issues
- Whether the insurer is liable to pay compensation when the insurance policy had been cancelled prior to the accident due to dishonoured premium payment.
- Whether the “pay and recover” principle should apply despite such cancellation.
Petitioner’s Arguments (Insurer)
The insurer argued that:
- The premium cheque was dishonoured, leading to cancellation of the policy well before the accident.
- Cancellation was duly intimated to the vehicle owner and the RTO.
- Relying on National Insurance Co. Ltd. v. Seema Malhotra (2001), Deddappa v. National Insurance Co. Ltd. (2008), and United India Insurance Co. Ltd. v. Laxmamma (2012), the insurer contended that non-payment of premium extinguished its liability, and no direction to “pay and recover” should be given.
Respondent’s Arguments (Claimants)
The claimants argued that:
- The Tribunal and High Court correctly directed payment by the insurer to protect third-party rights.
- The insurer had already deposited 50% of the compensation, which had been withdrawn.
- Any recovery from claimants after such withdrawal would be unjust and contrary to the interests of justice.
Analysis of the Law
The Court examined Sections 147(5), 149(1), and 166 of the Motor Vehicles Act, 1988, which govern insurer liability towards third parties. It noted that:
- Cancellation of a policy due to dishonoured premium before an accident generally absolves the insurer of liability.
- However, courts have consistently exercised equitable jurisdiction under Article 142 of the Constitution to direct payment by the insurer to third parties, ensuring justice and later allowing recovery from the insured.
Precedent Analysis
- Seema Malhotra (2001): Held that dishonour of premium cheque discharges insurer from liability.
- Deddappa (2008): Recognised insurer’s right to avoid liability due to dishonoured cheque but directed “pay and recover” to protect third parties.
- Laxmamma (2012): Reaffirmed that insurer’s liability subsists unless policy cancellation is communicated before the accident; reiterated “pay and recover” principle.
Court’s Reasoning
The Court found that:
- The policy had been validly cancelled over three months before the accident.
- Cancellation was communicated to both the owner and the RTO, satisfying legal requirements.
- Nevertheless, following Deddappa and Laxmamma, the Court deemed it just to protect third-party claimants by upholding the “pay and recover” order.
- Recovery from claimants for the already withdrawn 50% would be inequitable and would “set the clock back.”
Conclusion
The Supreme Court ruled:
- No recovery from claimants for the 50% compensation already paid and withdrawn.
- The insurer may recover that 50% from the vehicle owner.
- The remaining 50% compensation to be recovered by the claimants directly from the vehicle owner.
Implications
This judgment reinforces that while insurers can avoid liability where premiums are unpaid and cancellation is duly communicated, courts may still protect third-party victims by ordering payment under “pay and recover.” It balances contractual rights of insurers with the social objective of the Motor Vehicles Act to safeguard accident victims.
Cases Referred
- National Insurance Co. Ltd. v. Seema Malhotra (2001) — Dishonoured premium cheque discharges insurer’s liability.
- Deddappa v. National Insurance Co. Ltd. (2008) — Applied “pay and recover” despite policy cancellation.
- United India Insurance Co. Ltd. v. Laxmamma (2012) — Liability subsists unless cancellation communicated before accident; reaffirmed “pay and recover.”
FAQs
1. Can an insurer be made to pay if the premium cheque bounces before an accident?
Yes, while legally absolved, courts may direct payment to protect third-party victims, allowing later recovery from the insured.
2. What is the “pay and recover” principle?
It is a judicial directive where the insurer first pays compensation to victims and later recovers the amount from the vehicle owner.
3. Does policy cancellation always protect insurers from third-party claims?
Only if cancellation is duly communicated before the accident; otherwise, liability towards third parties may subsist.