Insurer Liable To Pay Third Party And Recover From Insured Even In Case Of Breach Of Condition Under Act Policy and Contractual Policy: Karnataka HC [Read Judgment]

The Karnataka High Court last week held that under the Motor Vehicles Act, 1988, the insurer is liable to pay the third party and recover from the insured even if there is breach of any condition both under the Act policy and the contractual policy, unless fraud or collusion is established.

The Full Bench of the High Court was considering the following questions referred to by a Single Judge-

1. If it is shown the insurance policy is not 'Act' policy in terms of Sections 145 and 147 of the Motor Vehicles Act, but a contractual policy issued collecting extra premium indicating insurance company has enlarged its liability, will not the insurance company be liable to pay and recover even if there is any breach by the insurer?

2. In such cases, is not the rule to 'pay and recover' applicable in view of the mandate in Section 149, M.V.Act that upon issuance of policy, the insurer is bound to discharge the award as if it were a judgment debtor?

Section 147 provides that a policy of insurance must be a policy which—

(a) is issued by a person who is an authorised insurer; and

(b) insures the person or classes of persons specified in the policy to the extent of the amount of liability incurred, or in respect of damage to any property of a third party, a limit of rupees six thousand:

(i) against any liability which may be incurred by him in respect of the death of or bodily injury to any person, including owner of the goods or his authorised representative carried in the vehicle or damage to any property of a third party caused by or arising out of the use of the vehicle in a public place;

(ii) against the death of or bodily injury to any passenger of a public service vehicle caused by or arising out of the use of the vehicle in a public place.

Section 149 imposes the Duty on Insurers to satisfy judgments and awards against persons insured in respect of third party risk. Sub-section (1) of the provision stipulates that If, after a certificate of Insurance has been issued in favour of the person by whom a policy has been effected, judgment or award in respect of any such liability as is required to be covered by a policy is obtained against any person insured by the policy, then, notwithstanding that the insurer may be entitled to avoid or cancel the policy, the insurer shall pay to the person entitled to the benefit of the decree any sum assured payable thereunder, as if he were the judgment debtor, in respect of the liability.

The bench noted that Section 149 (2) of the Act provides the grounds or defences, on the basis of which the insurer can defend the action; can avoid the liability under the Act. They are stated in sub-section (2)(a) of Section 149 of the Act: the first is a condition excluding the use of the vehicle (i) for hire or reward, where the vehicle is, on the date of the contract of insurance a vehicle not covered by a permit to ply for hire or reward, or (ii) for organised racing and speed testing, or (iii) for a purpose not allowed by the permit under which the vehicle is used, where the vehicle is a transport vehicle, or (iv) without side-car being attached where the vehicle is a motor cycle; or a condition excluding driving by a named person or persons or by any person who is not duly licensed, or by any person who has been disqualified for holding or obtaining a driving licence during the period of disqualification; or a condition excluding liability for injury caused or contributed to by conditions of war, civil war, riot or civil commotion. Sub-section (2)(b) speaks of the situation where the policy is void on the ground that it was obtained by the non- disclosure of a material fact or by a representation of fact which was false in some material particular.

Sub-section (4) asserts that so much of the policy as purports to restrict the insurance of the persons insured thereby by reference to any condition other than those in clause (b) of sub-section (2) shall be of no effect.

The High Court appreciated that Sub-section (7) makes it clear that the Insurance Company which has been given notice of award will not be entitled to avoid its liability, except on the aforesaid grounds.

Observations of the Court

The three-judge bench arrived at the following conclusions-

1. Having regard to Section 149(1) r/w Section 149(7) whenever a case falls under Section 149(2)(a) and the same is successfully established or proved by the Insurance Company, as per the twin tests laid by the Supreme Court in National Insurance Co. Ltd. v. Swaran Singh, nevertheless, the insurer or Insurance Company is liable to satisfy the award vis-à-vis a third party and is entitled to recover from the insured. This is irrespective of, the policy being an Act policy in terms of Section 147 pertaining to compulsory coverage of risks of third parties and other classes of persons stated therein or a policy covering other risks by specific contract being entered into in that regard and where additional premium is paid by the insured i.e., a contractual policy.

"Even where the insurer is able to prove breach on the part of the insured

concerning the policy condition regarding holding of a valid licence by the driver or his qualification to drive during the relevant period, the insurer would not be allowed to avoid its liability towards insured unless the said breach or breaches on the condition of driving licence is/ are so fundamental as are found to have contributed to the cause of the accident", the Apex Court had laid down in Swaran Singh.

2. The Insurer is liable to pay the third party and recover from the insured even if there is breach of any condition recognized under Section 149 (2), even if it is a fundamental breach (that is breach of condition which is the cause for the accident) and the insurer proves the said breach in view of the mandate under Section 149(1) of the Act. But, no such order can be passed against the insurer, if, on the facts and circumstances of a case, a finding is given by the court that the third party (injured or deceased) had played any fraud or was in collusion with the insured, individually or collectively, for a wrongful gain to themselves or cause wrongful loss to the insurer.

3. The Court can also fasten the absolute liability on the insurer, if there is any breach of condition which is enumerated under Section 149(2) of the Act or any other condition of the policy if the Insurance Company has waived breach of any such condition or has taken the special responsibility to pay by collecting extra premium by covering any type of risk depending upon facts of each case.

4. Thus, the rule of pay and recover is applicable in view of the mandate in Section 149(4) of the Act and even if there is a breach of the terms of the insurance policy, the insurer is bound to satisfy the judgment and award as if it were a judgment debtor, even if it satisfies the twin tests enunciated by the Hon'ble Supreme Court under Section 149(4)(a) of the Act.

5. Before passing any order on the Insurance Company to pay and recover, the Court has to examine the facts and circumstances of each case and if it finds that the victim, injured or the deceased, in a particular case, was solely or jointly responsible for breach of such fundamental condition by playing fraud or in collusion with the insured, the Court may exercise its discretion not to fasten the liability on the insurer.

6. However, the court should not adopt the above guideline as a general rule in all cases, but only under peculiar facts and circumstances of each case and on giving appropriate reasons.

7. If the Insurance Company makes out a case under Section 149(2)(b) of the Act, then also the Insurance Company has to satisfy the award so far as third party is concerned, as it is the duty of the Insurance Company to indemnify the insured on the basis of the policy of the insurance and even when the contract of insurance itself is void, nevertheless the liability to indemnify the insured would arise and insurer is entitled to recover from the insured.

8. Thus, in a case where Section 149(2)(b) applies and the Insurance Company successfully establishes that the policy is void, in such a case also, the insurer is not absolved of its liability to satisfy the judgment or award as rights or obligations would flow even from a policy which is void vis-à-vis third party. In such a case, the insurer is not completely absolved of its liability, the insured would have to satisfy the award vis-à-vis the third party and recover from the insured the amount paid to the third party and may also have a right to seek damages from the insured.

9. The judgment of the Division Bench of this Court in Subramanyam, holding that a pay and recovery order cannot be made as there is no liability to pay or satisfy the award or decree in respect of a case falling under Section 149(2) is not correct. Hence, that portion of the judgment in Subramanyam, which states that if the case falls within the scope of Section 149(2) of the Act and the insurer is successful in establishing any of the defences as stated therein, it would be completely absolved of its liability to satisfy the award is also not correct and to that extent, it is held to be bad in law.

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