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CASE NO.:

Appeal (civil) 1350 of 2001

PETITIONER:

NATIONAL INSURANCE COMPANY LTD.

Vs.

RESPONDENT:

SEEMA MALHOTRA AND ORS.

DATE OF JUDGMENT: 20/02/2001

BENCH:

K.T. Thomas & R.P. Sethi.

JUDGMENT:

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THOMAS, J.

Leave granted.

Under a contract of insurance the insured gave a cheque

to the insurer towards the first premium amount, but the

cheque was dishonoured by the drawee bank due to

insufficiency of funds in the account of the drawer. Is the

insurer liable in such a situation to honour the contract of

insurance? There is no dispute that the insurer is liable

as against third parties because it is covered by the

statutory provisions contained in Chapter X of the Motor

vehicles Act 1988. But the insurer vehemently disputed the

liability when the claim is made by the insured himself or

his legal heirs, without any third party being involved. To

avoid confusion we may point out that the insurance company

has no dispute that the claims, if any, made by the kith and

kin of the insured for the injuries sustained by them in the

accident including the claims made by the legal

representatives of the deceased in such accident would also

be treated as third party claims).

A division bench of the High Court of Jammu and Kashmir

held, on the facts of the case, that the insurance company

is still liable because it chose to cancel the policy with

effect from the date of bouncing of the cheque, whereas the

liability was incurred prior to it.

The question can be dealt with after summarizing the

facts in this case which led to the impugned judgment of the

High Court. The insured was one Yash Paul Malhotra. He and

the appellant insurance company entered into an insurance

contract on 21st December, 1993, by insuring a Maruti car

for a sum of Rupees one lakh and fifty thousand. On the

same day, the insured gave a cheque for Rs.4492/- towards

the first instalment of the premium and the insurance

company issued a cover note as contemplated in Section 149

of the Motor Vehicles Act. But unfortunately, the last day

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in the year 1993 became the last day of the insured as well

as his Maruti car because the insured died and the car was

completely damaged in an accident which occurred on

31.12.1993.

On 10.1.1994 the bank on which the cheque was drawn by

the insured sent an intimation to the insurance company that

the cheque was dishonoured as there was no funds in the

account of the insured. On 20.1.1994 the insurance company

informed the business concern of the insured as under:

Notwithstanding anything contained to the contrary, it

is hereby agreed and declared that your cheque has been

dishonoured by the bank. So we are cancelling the above

said policy with immediate effect. The company is not at

risk.

The respondents who are the widow and children of the

insured, who died in the accident, filed a claim for the

loss of the vehicle. When the claim was repudiated, the

respondents moved the State Consumer Protection Commission.

As per a judgment pronounced by the Commission the said

claim was rejected. The judicial member of the State

Commission, who delivered the judgment, has stated thus:

In so far the facts of the present case are concerned,

it is a settled law that the insurer even if it had issued a

cover note is entitled to cancel the policy if it fails to

cash the cheque for premium. The concept of contract in

essence envisages a proposal, acceptance and passing of

consideration. In the absence of any consideration there

can be no contract and that is all what is recognised by

section 64-VB of the Insurance Act. The insurer was

justified in repudiating the contract and it has done it in

time and soon after the cheque bounced. In this view of the

matter there is no need for us to go to any other point that

may arise in this case.

When the respondents (legal heirs of the insured) moved

the High Court of Jammu and Kashmir, the division bench

which heard the matter reversed the order passed by the

State Consumer Commission and held the insurance company

liable to honour the claim. The Division Bench directed the

State Commission to assess the compensation in accordance

with law and pay the same after deducting the amount of

premium (as the cheque was dishonoured). The following

reasoning was mainly adopted by the learned judge of the

division bench for holding that the insurance company is

liable on the fact situation:

While ordering the cancellation of policy in question,

respondent insurance company instead of cancelling the same

due to dishonour of cheque of the premium from the date it

was issued i.e. 21.12.1993, chose to cancel it with

immediate effect. This clearly indicates that till the

issuance of this communication respondent insurance company

itself treated the policy subsisting. Besides this, it had

not chosen to treat the same cancelled from the date of

issue. In the face of this position, this case need not

detain us any further and for this reason the argument

addressed on behalf of the insurance company based on

section 64- VB of the Insurance Act also does not hold good.

There was nothing which prevented the insurance company to

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have informed the appellants that the policy stood cancelled

from the date of its issuance, and as such it is not liable

for the payment of any compensation.

The direction that insurance company can now deduct the

premium amount from the compensation to be fixed is no

solace to the insurer. The essence of the insurance

business is the coverage of the risk by undertaking to

indemnify the insured against loss or damage. They agree to

pay the damages arising out of any accident by taking a

chance that no accident might happen. Motivation of the

insurance business is that the premium would turn to be the

profit of the business in case no damage occurs. Such

business of the insurance company can be carried on only

with the premium paid by the insured persons on the

insurance policy. The only profit, if at all the insurance

company makes, of the insurance business is the premium paid

when no accident or damage occurs. But to ask the insurance

company to bear the entire loss of damages of somebody else

without the company receiving a pie towards premium is

contrary to the principles of equity, though the insurance

companies are made liable to third parties on account of

statutory compulsions due to the initial agreement, entered

between the insured and the company concerned.

A three-Judge Bench in Oriental Insurance Co. Ltd. vs.

Inderjit Kaur (1998 (1) SCC 371) left this point

unconsidered. In that case also the premium was paid by

cheque which was later dishonoured and the insured was

intimated about it by the insurance company two months after

the vehicle got involved in the accident. When a claim was

made by the legal heirs of the driver who died in the

accident the insurance company resisted the claim on the

strength of Section 64-VB of the Insurance Act of 1938.

Repelling the contention of the insurance company, the

three-Judge Bench held thus:

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

therefor. 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.

Thus, the three-Judge Bench refrained from expressing

any opinion on the question of insurers entitlement to

avoid or cancel the policy as against the insured when the

cheque issued for payment of the premium was dishonoured.

Subsequently the same question was mooted before a

two-Judge Bench of this Court in New India Assurance Co.

Ltd. vs. Rula and ors. {2000 (3) SCC 195} but the

question of insurers right to repudiate the claim as

against the insurer in a similar situation did not arise

therein and hence the Bench parried the question.

Thus the question has now to be considered as the same

is the crux of the issue involved in this case. As pointed

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out earlier the insurance is a contract whereby one

undertakes to indemnify another against loss, damage or

liability arising from an unknown or contingent event and is

applicable only to some contingency or act to occur in

future. We have to consider how far the legislature has

controlled the insurance business. Section 2(9) of the

Insurance Act defines insurer, inter alia, as any body

corporate carrying on the business of insurance which is a

body corporate incorporated under any law for the time being

in force in India. Section 2(d) of the Act says that every

insurer shall be subject to all the provisions of this Act

in relation to any class of insurance business so long as

his liabilities in India in respect of business of that

class remain unsatisfied or not otherwise provided for.

It is in the aforesaid context that we have to consider

the impact of Section 64-VB of the Insurance Act. As

sub-sections (1) and (2) of the said section alone are

material for the purpose we extract them herein:

(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 insurer.

Sub-section (1) is not applicable to cases in which

premium is ordinarily payable outside India. In other

words, the insurer has no liability to the insured unless

and until the premium payable is received by the insurer.

As the premium can be paid in cash or by cheque, what is the

position when the cheque issued to the insurer is

dishonoured by the drawee bank?

Sections 51, 52 and 54 of the Indian Contract Act can

profitably be referred to for the purpose of deciding the

point. They are subsumed under the sub- title Performance

of reciprocal promises in the said Act. Section 51 deals

with a contract concerning reciprocal promises to be

simultaneously performed and in such a contract the promisee

is absolved from performing his promise unless the promisor

is ready or willing to perform his part of the promise.

Section 52 says that where the order in which reciprocal

promises are to be performed has not been expressly provided

in the contract such promise shall be performed in that

order which the nature of the transaction warrants it.

Illustration (b) given to Section 52 highlights the utility

of the provision. That illustration is as follows: A and B

contract that A shall make over his stock-in-trade to B at a

fixed price, and B promise to give security for the payment

of the money. As promise need not be performed until the

security is given, for the nature of transaction requires

that A should have security before he delivers up his stock.

Section 54 of the Contract Act is to be read in that

background. It is extracted below:

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When a contract consists of reciprocal promises, such

that one of them cannot be performed, or that its

performance cannot be claimed till the other has been

performed, and the promisor of the promise last mentioned

fails to perform it, such promisor cannot claim the

performance of the reciprocal promise, and must make

compensation to the other party to the contract for any loss

which such other party may sustain by the non-performance of

the contract.

In a contract of insurance when an insurer 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 cash. 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.

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.

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, insurer is entitled to get the money back.

However, if the insured makes up the premium even after

the cheque was dishonoured but before the date of accident

it would be a different case as payment of consideration can

be treated as paid in the order in which the nature of

transaction required it. As such an event did not happen in

this case the insurance company is legally justified in

refusing to pay the amount claimed by the respondents.

In the light of the above legal position we uphold the

contention of the appellant insurance company. We,

therefore, allow this appeal and set aside the impugned

judgment of the Division Bench of the High Court. The order

passed by the State Consumer Commission will stand restored.

J

( K.T. Thomas )

J

New Delhi; ( R.P. Sethi )

February 20, 2001.