Insurance Company Not Liable To Cover Third Party Risks If Cheque Towards Premium Dishonoured: Rajasthan High Court

The Rajasthan High Court has reiterated that in an event when the insured is unable to fulfill his premium payment obligation, or if the cheque he has issued for the premium is returned unpaid by the bank, the insurer is relieved from their commitments. Consequently, the insured cannot demand fulfillment of the insurer's obligations, it clarified.

Justice Anoop Kumar Dhand made these reiterations while hearing an appeal against an order passed by the Motor Accident Claims Tribunal whereby the claim petition filed by the claimants had been allowed and the Insurance Company had been directed to pay a compensation of Rs. 1,88,000/- to the claimants.

Feeling aggrieved and dissatisfied by the above award, both the Insurance Company as well as the claimants had preferred the appeals.

Assailing the award the counsel for the insurance company submitted that the accident occurred on 28.05.1996 and that the vehicle was uninsured at the time of the accident and hence the tribunal had made an error in placing the burden of compensation payment on the insurance company.

He claim that the registered owner of the vehicle issued a cheque for insurance policy renewal, but it was dishonoured. The insurance policy was subsequently cancelled, and a notice was sent to the registered owner. However, the registered owner later submitted a demand draft for the premium amount, and a new policy was issued but the same could not be said to cover the accident claim that occurred prior to its issuance.

The counsel for the claimants disputed the arguments put forth by the insurance company's counsel and asserted that the owner of the vehicle had a valid insurance policy at the time of the accident on 28.05.1996.

He argued that the owner never received any notice from the insurance company regarding the cancellation of the policy due to a dishonoured cheque and pointed out that the notice issued by the insurance company was dated 26.06.1996, after the accident had already occurred.

The moot question that fell for adjudication before the bench was as to whether the Insurance Company is liable to cover third party risk, when the insured fails to pay the premium, or when the cheque issued by him towards the premium is returned / dishonoured by the bank?

Answering the same in negative the court said that Section 64 VB of the Insurance Act, 1938 provides that an Insurance Company will not assume / accept risk unless insurance premium is received in advance or before the date of assumption of risk.

In order to clarify the law on the subject the bench found it worthwhile to record the following observations of the Supreme Court in National Insurance Co. Ltd. Vs. Seema Malhotra and Ors. reported in (2001):

"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.”

The court also referred to United India Insurance Company Limited Vs. Laxmamma and Ors., reported in (2012) and reiterated that if the insurance cover note is issued subject to payment of cheque amount and if the cheque gets dishonoured and the insurance company cancels the insurance policy under intimation to the owner of the vehicle before the accident, then the insurance company is not liable to satisfy the award of compensation.

In view of the said legal position the bench noted that the Tribunal has not considered the evidence and witness testimony in the correct perspective. The evidence indicates that the vehicle was uninsured at the time of the accident and the tribunal has erred in ruling against the insurance company, the bench maintained.

Thus, it was held that Insurance Company is not liable to make the payment of compensation to the claimants.

Case Title: National Insurance Vs Rudi Devi.

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