SC ruling on insurance coverage

By T. Padmanabha Rao

NEW DELHI, FEB. 21. When a cheque issued by an insured to an insurer (a general insurance company in this case) towards the `first premium amount' is dishonoured by the drawee-bank due to insufficiency of funds in the account of the drawer (insured), the insurer is not liable in such a situation to honour the `contract of insurance', the Supreme Court (SC) has ruled. There is no dispute that the insurer is liable as against `third parties' because it is covered by relevant `statutory provisions' in the Motor Vehicles Act, 1988, the bench said.

The bench added that the insurance company (appellant) had no dispute that the claims, if any, made by the kith and kin of the insured for the injuries sustained by them in the accident including the claims made by the legal representatives of the deceased (insured) in such accident would also be treated as `third party' claims.

But the insurer vehemently disputed the liability when the claim was made by the insured himself (in a given case) or his legal heirs, without any third party being involved, the bench said.

Delivering the judgment, Mr. Justice K.T. Thomas set aside a verdict of the Jammu and Kashmir High Court which held that on the facts of the case, the appellant was still liable because it chose to cancel the policy with effect from the date of bouncing of the cheque, whereas the liability was incurred prior to it.

The bench, which included Mr. Justice R.P. Sethi, in allowing an appeal from the insurance company, restored an order of the State Consumer Protection Commission, which held that the insurer was justified in repudiating the contract of insurance in this case, in view of Section 64 VB of the Insurance Act, 1938 in the absence of passing of `consideration' (under the Contract Act) due to the bouncing of `cheque' towards the premium amount.

A purchaser of a motor vehicle (insured, since deceased) and the appellant company entered into an `insurance contract' in December 1993 by insuring the vehicle for a sum of Rs. 1,50,000. On the same day, the insured gave a cheque for Rs. 4,492 towards the first instalment of the premium and the insurance company issued a `cover note' as contemplated in Section 149 of the Motor Vehicle Act. But unfortunately, on December 31, 1993, the insured died in an accident, in which the car was also completed damaged.

On January 10, 1994, the bank on which the cheque was drawn by the insured sent an intimation to the insurance company (appellant) that the cheque was dishonoured as there were no funds in the account of the insured. On January 20, 1994, the insurance company informed the business concern of the insured that in view of the bouncing of `cheque' (paid towards first instalment of the premium), the said insurance policy was cancelled with ``immediate effect''.

The widow and the children of the insured filed a claim for the loss of the vehicle. When the claim was repudiated, the respondents moved the State Consumer Protection Commission, which rejected the claim. When the respondents moved the HC, it reversed the order passed by the consumer council and held the insurance company liable to honour the claim. Hence the present appeal before the SC.

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