Report No. 149
Defences Open to the Insurer
4.1. Section 94 of the 1939 Act made it mandatory that no motor vehicle could be used in a public place unless the user or owner thereof had taken out a policy of insurance covering risks to the insured as well as to third parties. The underlying object was that, if any third party is injured as a result of such user, he should not be left without an effective remedy. However, this protection could have been frustrated by the insurer introducing terms, conditions, exceptions, or limitations in the policy, restricting his liability or releasing him from liability altogether in certain situations. To overcome this difficulty, the Act provided that the policy taken should fulfil the requirements of Chapter VIII of the Act. These requirements were set out in section 95.
4.2. Section 96(2) further provided that an insurer could defend an action for compensation on the grounds set out therein, viz.,
(a) that the policy had been cancelled, even before the accident took place giving ruse to the liability;
(b) that there had been a breach of one of the three conditions of the policy enumerated in section 96(2)(b); and
(c) that the policy itself was void as it was obtained by non-disclosure, or mis-representation, of material facts. In these three situations, the insurer was not liable either to indemnify the insured or to satisfy any judgment obtained by a third party against the insurer.
But, where there was a violation of conditions contained in the policy other than the three mentioned in section 96(2)(b), the insurer was bound to satisfy a judgment obtained by a third party but could recover the amount paid from the insured. In other words, such restrictive conditions were binding as against the insured but was not as against third persons. This was the effect of section 96(3) which read thus:
"Where a certificate of insurance has been issued under sub-section (4) of section 95 to the person by whom a policy has been effected, so much of the policy as purports to restrict the insurance of the person insured thereby by reference to any conditions other than those in clause (b) of sub-section (2) shall, as respects such liabilities as are required to be covered by a policy under clause (b) of sub-section (1) of section 95, be of no effect:
"Provided that any sum paid by the insurer in or towards the discharge of any liability of any person which is covered by the policy by virtue only of this sub-section shall be recoverable by the insurer from that person."
4.3. In the 1988 Act, section 149 replaces the section 96 of the 1939 Act, section 149(1), (3), (4), (5), (6) & (7) of the 1988 Act re-enacts section 96(1), (2A), (4), (5) and (6) of the 1939 Act respectively with minor changes not material for our present purposes. Section 149(2), however, re-enacts section 96(2) of the 1939 Act with one major difference, viz., the omission of clause (a) thereof. Thus, section 149(2) has only two clauses (a) and (b) which correspond to clause (b) and (c) of section 96(2) of the 1939 Act.
In other words, the new Act, in enacting section 149, intended no material deviation from the provisions of section 96, save only the omission of section 96(2)(a). Section 149(4), however, repeats the language of section 96(3) of the 1939 Act verbatim, except that "sub-section (4) of section 95" and "clause (b) of sub-section (1) of section 95" have been replaced by "sub-section (3) of section 147" and "clause (b) of sub-section (1) of section 147" consequent one the re-enactment of section 95 of the old Act as section 147 with some changes.
But it retained the reference to "conditions other than those in clause (b) of sub-section (2)" overlooking that the said "clause (b)" had become "clause (a)" in the new section 149(2). This is clearly a mistake. We, therefore, recommend that, in section 149(4) of the Act, the words "clause (a) of sub-section (2)" should be substituted for the words "Clause (b) of sub-section (2)".1
1. Reference may be made, in this context, to the article by Shri M.N. Shrinivasan, AIR 1992 SCJ 18) pointing out this patent out error which calls for rectification.