Insurance Company Liable Under 'Pay & Recover' Principle Despite Policy Cancellation If Intimation Not Received By Offending Vehicle's Owner: Bombay HC

The Bombay High Court has ruled that an insurance company, despite cancelling the policy, remains liable under the 'pay and recover' principle if the vehicle owner was not notified about such cancellation before the accident date.

Justice Kishore C Sant sitting at Aurangabad dismissed an appeal filed by HDFC Ergo contesting a judgment of the Motor Accident Claims Tribunal, Jalgaon, directing it to pay compensation to the family of the deceased in a motor accident and recover the amount later from the vehicle owner.

“the appellant could not produce evidence to show that the intimation of cancellation of policy was received by the insured prior to the date of accident. It is the case of the appellant that the intimation was sent to the insured. However, said intimation was not served for want of complete address. The fact remains that the intimation of cancellation of policy was not received by the insured”, the court observed.

The case revolved around an accident involving an auto-rickshaw and a truck, resulting in the demise of a passenger in the auto-rickshaw. The deceased was travelling in the auto-rickshaw towards Nashirabad from Jalgaon. A truck proceeding in the same direction suddenly applied breaks causing the auto-rickshaw coming from behind to collide with the truck.

The family of the deceased claimed compensation of Rs. 25 lakhs from the owner of the rickshaw and the insurance company. The insurance company raised objections to the claim on the grounds of a breach of policy terms and conditions. It submitted that it had cancelled the policy as the policyholder's cheque for payment of the premium was dishonoured due to a closed account.

The Motor Accident Claims Tribunal partially allowed the claim and held the owner of the vehicle liable to pay compensation of Rs. 3,87,000, which included 'No Fault Liability' to the claimants. The tribunal directed the insurance company to make the payment upfront and subsequently recover the amount from the vehicle owner.

The insurance company filed the present appeal challenging this decision.

Advocate Mohit R Deshmukh for the insurance company argued that the policy was not in force at the time of the accident due to the dishonouring of the premium cheque for renewal, coupled with the expiration of the policy.

It was emphasized that the pay-and-recover order could only be issued if a valid policy was in existence. He highlighted that an intimation was given to the insured about the cancellation of policy but it could not be served upon the addressee as the envelope was returned as 'address incomplete'.

Advocate Vishnu B Madan Patil for the claimants contended that proper intimation of the policy cancellation was necessary and required strict proof of the insured receiving such intimation.

The previous insurance policy of the insured expired on February 22, 2015, the insured issued a cheque for policy renewal on December 12, 2015, and the accident occurred on March 28, 2015. The intimation of policy cancellation was sent on March 12, 2015, but it couldn't be served due to an incomplete address.

The court referred to the judgment in United India Insurance Co. Ltd. v. Laxmamma and Ors., where the Supreme Court emphasized the necessity for the insurer to cancel the policy and intimate this cancellation to the insured before the accident for the insurer to be absolved of liability. The court also cited Section 64-VB of the Insurance Act, highlighting that no risk should be assumed unless the premium is received in advance.

The court distinguished the case from National Insurance Co. Ltd. v. Seema Malhotra and Ors., clarifying that it was not directly applicable as the present case involved a third-party claim under beneficial legislation, and the claimants were passengers in the vehicle, not the owners or drivers.

The court concluded that the appellant failed to provide evidence demonstrating that the insured received proper intimation of the policy cancellation before the accident. The court, considering the rights of third-party claimants under the Motor Vehicles Act, a beneficial legislation, found no merit in the appeal and dismissed it. The court relied on the Apex Court judgment in Oriental Insurance Co. Ltd. v. Inderjit Kaur & Ors. which held that under the beneficial legislation, when the claim is by third party, it is duty of the insurance company to pay the amount of compensation.

Consequently, the court held that no substantial case was made out to warrant interference with the tribunal's findings and dismissed the appeal. The court allowed the claimants to withdraw the amount deposited by the appellant, including any accrued interest.

Case no. – First Appeal No. 2929 of 2019

Case Title – HDFC ERGO General Insurance Company Ltd. v. Nayajoddin Nijamuddin and Ors.