 "Cancellation and insurer liability")
The law of liability under motor insurance policies when the premium cheque is dishonoured differs, depending on who makes the claim and when. Claims can be categorised as own-damage claims and third-party claims, further divided into claims prior to cancellation of the policy and post-cancellation claims.
Claim for own-damage: Malhotra had insured his Maruti car with National Insurance by issuing a cheque for the premium on December 21, 1993. The car met with an accident on December 31, in which Malhotra died and the vehicle was completely damaged. On February 10, 1994, the bank dishonoured the premium cheque due to insufficient funds. On January 20, the insurance company intimated that the policy had been cancelled with immediate effect.
Malhotra's widow, Seema, and her children lodged a claim for total loss of the vehicle. As the claim was rejected, they filed a complaint before the Jammu & Kashmir State Commission. It upheld the repudiation, saying the contract had come to as end as the cheque had bounced. Seema challenged this order in the J&K High Court, which reversed it. It held the cancellation would be effective only from the date of it being intimated. The claim arising prior to the intimation would be payable.
The insurer challenged this before the Supreme Court, which observed that a policy issued on receipt of a cheque is a contract with a reciprocal promise. That is, the risk is covered subject to the cheque being honoured, resulting in premium payment. So, when a cheque is dishonoured, the premium is unpaid, and the insurer cannot be held liable for own-damage.
Third party claims pre-cancellation: In May 2004, Nagaraj was travelling by bus. The driver applied the brake suddenly and negligently. As a result, the rear door was flung open. Nagaraj was standing near it; he fell and was seriously injured, dying subsequently.
His wife, Laxmamma, and children filed a claim before the Motor Accident Claims Tribunal, Bangalore, seeking compensation of Rs 15 lakh. The case was filed jointly against the bus owner and its insurer, United India Insurance. The insurer contested the case, claiming it could not be held liable as the premium cheque had bounced and the policy was invalid.
The Accident Tribunal held the insurance company liable to pay a total compensation of Rs 6.01 crore, as the accident had occurred on May 11, 2004, while the intimation of policy cancellation was given on May 21, 2004. The insurer challenged this order in the high court but did not succeed. The matter was then taken to the Supreme Court. The insurer claimed the contract of insurance was void, as the premium had not been received. It argued the insurance company should be absolved of any liability or be permitted to pay the claimant and then recover the money from the insured. The apex court considered various precedents. It observed that Section 64VB of the Insurance Act requires the premium to received prior to assuming risk, while Section 146 mandates compulsory insurance against third-party risk. This issuance of the policy is a representation to the authorities and third parties that the vehicle is insured. The rights accruing on the date of the accident in favour of a third-party would not be affected by its subsequent cancellation. Hence, even if the policy is issued without premium having been received, the doctrine of public interest requires the insurer to be held liable to third parties for claims.
Third-party claims post-cancellation: In the case of Deddappa versus National Insurance, the insurer had intimated policy cancellation due to dishonour of the premium cheque. The accident occurred subsequently. The Supreme Court held the insurer could not be held liable even to third parties. The legal position is that in case of dishonour of a premium cheque, the insurance company would continue to be liable to third parties only till such time as intimation for policy cancellation is communicated by it to the policy holder.
Claim for own-damage: Malhotra had insured his Maruti car with National Insurance by issuing a cheque for the premium on December 21, 1993. The car met with an accident on December 31, in which Malhotra died and the vehicle was completely damaged. On February 10, 1994, the bank dishonoured the premium cheque due to insufficient funds. On January 20, the insurance company intimated that the policy had been cancelled with immediate effect.
Malhotra's widow, Seema, and her children lodged a claim for total loss of the vehicle. As the claim was rejected, they filed a complaint before the Jammu & Kashmir State Commission. It upheld the repudiation, saying the contract had come to as end as the cheque had bounced. Seema challenged this order in the J&K High Court, which reversed it. It held the cancellation would be effective only from the date of it being intimated. The claim arising prior to the intimation would be payable.
The insurer challenged this before the Supreme Court, which observed that a policy issued on receipt of a cheque is a contract with a reciprocal promise. That is, the risk is covered subject to the cheque being honoured, resulting in premium payment. So, when a cheque is dishonoured, the premium is unpaid, and the insurer cannot be held liable for own-damage.
Third party claims pre-cancellation: In May 2004, Nagaraj was travelling by bus. The driver applied the brake suddenly and negligently. As a result, the rear door was flung open. Nagaraj was standing near it; he fell and was seriously injured, dying subsequently.
His wife, Laxmamma, and children filed a claim before the Motor Accident Claims Tribunal, Bangalore, seeking compensation of Rs 15 lakh. The case was filed jointly against the bus owner and its insurer, United India Insurance. The insurer contested the case, claiming it could not be held liable as the premium cheque had bounced and the policy was invalid.
The Accident Tribunal held the insurance company liable to pay a total compensation of Rs 6.01 crore, as the accident had occurred on May 11, 2004, while the intimation of policy cancellation was given on May 21, 2004. The insurer challenged this order in the high court but did not succeed. The matter was then taken to the Supreme Court. The insurer claimed the contract of insurance was void, as the premium had not been received. It argued the insurance company should be absolved of any liability or be permitted to pay the claimant and then recover the money from the insured. The apex court considered various precedents. It observed that Section 64VB of the Insurance Act requires the premium to received prior to assuming risk, while Section 146 mandates compulsory insurance against third-party risk. This issuance of the policy is a representation to the authorities and third parties that the vehicle is insured. The rights accruing on the date of the accident in favour of a third-party would not be affected by its subsequent cancellation. Hence, even if the policy is issued without premium having been received, the doctrine of public interest requires the insurer to be held liable to third parties for claims.
Third-party claims post-cancellation: In the case of Deddappa versus National Insurance, the insurer had intimated policy cancellation due to dishonour of the premium cheque. The accident occurred subsequently. The Supreme Court held the insurer could not be held liable even to third parties. The legal position is that in case of dishonour of a premium cheque, the insurance company would continue to be liable to third parties only till such time as intimation for policy cancellation is communicated by it to the policy holder.
The writer is a consumer activist