National Insurance Co. Ltd. Vs. Yellamma & ANR  INSC 820 (6 May 2008)
S.B. Sinha & Lokeshwar Singh Panta
REPORTABLE CIVIL APPEAL NO. 3317 OF 2008 (Arising out of SLP (C) No.16359 of
2006) S.B. Sinha, J.
1. Leave granted.
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
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/- was made. 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
3. Second Respondent did not prefer any appeal there against. Rirst
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 of Rs.1,50,000/-, held :
"The 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 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
4. Mr. Dua, learned counsel appearing on behalf of the appellant, would
submit that keeping in view the provisions contained in Section 65(v)(b) of the Insurance Act,
1938 and furthermore in view of the finding of fact arrived at by learned
Motor Vehicles Accidents Claims Tribunal which was not questioned by the
insured, the impugned judgment cannot be sustained.
As nobody had appeared despite service of notice on behalf of the
respondent, we requested Mr. U.U. Lalit, senior counsel to assist us.
5. It is neither in doubt nor in dispute that all the copies including the
insurance cover which were marked as Ex.R.1 to R.4 had been produced before the
Tribunal to show that original insurance cover had been taken back by the
Development Officer concerned for one reason or the other.
The Administrative Officer of the appellant not only examined himself before
the Tribunal but also proved the note prepared by the Divisional Manager of
Ludhiana which was marked as Ex.R.5. The Tribunal, as noticed hereinbefore, on
appreciation of the evidence produced before it, held that the vehicle was not
6. 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 :
"Section 64VB - 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 insurer.
Explanation.Where 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 be."
7. 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 of non- payment 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 therof.
19. Almost an identical question again came up for consideration before this
Court in National Insurance Co. Ltd. v. Seema Malhotra and Ors.
[(2001) 3 SCC 151], a Division Bench noticed both the aforementioned
decisions and analysed the same in the light of Section 64-VB of the 1938 Act.
It was held:
'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 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.
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
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
20. 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.' 20. A contract is based on reciprocal promise.
Reciprocal promises by the parties are condition precedents for a valid
contract. A contract furthermore must be for consideration."
8. In today's world payment by cheque is ordinarily accepted as valid tender
but the same would be subject to its encashment. A distinction, however, exists
between the statutory liability of the insurance company vis- `-vis the third
party in terms of Sections 147 and 149 of the Motor Vehicles Act and its
liability in other cases but it is clear that if the contract of insurance had
been cancelled and all concerned had been intimated thereabout, the insurance
company would not be liable to satisfy the claim.
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 notice.
10. 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.2.
11. In the peculiar facts and circumstances of this case, we are, therefore,
of the opinion that the interest of justice would be subserved 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 behalf.
12. This appeal is allowed to the aforementioned extent and with the
aforementioned directions. As the respondents have not appeared before us,
there shall be no order as to costs.
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