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2001(2) Supreme 92
SUPREME COURT OF INDIA
(From Jammu and Kashmir High Court)
K.T. Thomas & R.P. Sethi, JJ.
National Insurance Co. Ltd. -Appellant
versus
Seema Malhotra & Ors. -Respondents
Civil Appeal No. 1350 of 2001
(Arising out of SLP (Civil) No. 3752 of 2000)
Decided on 20-2-2001
Counsel for the Parties :
For the Appellant : P.P. Malhotra, Sr. Advocate, Shailendra Sharma and Rajiv Nanda, Advocates.
For the Respondents : Ms. Shabnam Lone and M.N. Shroff, Advocates.
In a contract of insurance when an insurer gives a cheque towards payment of premium or part of the premium, such a contract consists of reciprocal promise. The drawer of the cheque promises the insurer that the cheque, on presentation, would yield the amount in cash. It cannot be forgotten that a cheque is a Bill of Exchange drawn on a specified banker. A Bill of Exchange is an instrument in writing containing an unconditional order directing a certain person to pay a certain sum of money to a certain person. It involves a promise that such money would be paid. 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. Under Section 25 of the Contract Act an agreement made without consideration is void. Section 65 of the Contract Act says that when a contract becomes void any person who has received any advantage under such contract is bound to restore it to the person from whom he received it. So, even if the insurer has disbursed the amount covered by the policy to the insured before the cheque was returned dishonoured, insurer is entitled to get the money back. (Paras 17, 18 and 19)
However, if the insured makes up the premium even after the cheque was dishonoured but before the date of accident it would be a different case as payment of consideration can be treated as paid in the order in which the nature of transaction required it. As such an event did not happen in this case the insurance company is legally justified in refusing to pay the amount claimed by the respondents. (Para 20)
Key Points: - The judgment holds that when an insured’s cheque towards premium is dishonoured, the insurer is not liable to honour the contract of insurance against the insured (para discussing non-performance due to non-payment) (!) (!) . - Sub-section 64-VB of the Insurance Act and sections of the Contract Act govern that a contract based on reciprocal promises cannot be enforced if the consideration (premium) is not received or paid, especially when the cheque bounces (paras explaining Sections 51, 52, 54 and related analysis) (!) (!) (!) . - If the insured pays the premium later, before the accident date, the situation may differ; otherwise the insurer is justified in refusing to pay the insured claim (para 20) (!) . - The insurer remains liable to third-party claims under Motor Vehicles Act provisions, but not to the insured for non-payment scenarios (discussion around Chapter X and third-party liability) (!) (!) . - The Division Bench’s view that cancellation from the date of cheque dishonour may affect liability vs. what the Supreme Court held (insurer not liable to the insured when cheque dishonoured and cancellation occurs) (!) (!) (!) . - The appeal was allowed; the insurer’s position was upheld (final holding) (!) (!) .
JUDGMENT
Thomas, J.-Leave granted.
2. Under a contract of insurance the insured gave a cheque to the insurer towards the first premium amount, but the cheque was dishonoured by the drawee bank due to insufficiency of funds in the account of the drawer. Is the insurer liable in such a situation to honour the contract of insurance? There is no dispute that the insurer is liable as against third parties because it is covered by the statutory provisions contained in Chapter X of the Motor Vehicles Act 1988. But the insurer vehemently disputed the liability when the claim is made by the insured himself or his legal heirs, without any third party being involved. The avoid confusion we may point out that the insurance company has 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 in such accident would also be treated as third party claims.
3. A division bench of the High Court of Jammu and Kashmir held, on the facts of the case, that the insurance company is 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. 4. The question can be dealt with after summarizing the facts in this case which led to the impugned judgment of the High Court. The insured was one Yash Paul Malhotra. He and the appellant insurance company entered into an insurance contract on 21st December, 1993, by insuring a Maruti car for a sum of Rupees one lakh and fifty thousand. 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 Vehicles Act. But unfortunately, the last day in the year 1993 became the last day of the insured as well as his Maruti car because the insured died and the car was completely damaged in an accident which occurred on 31.12.1993.
5. On 10.1.1994 the bank on which the cheque was drawn by the insured sent an intimation to the insurance company that the cheque was dishonoured as there was no funds in the account of the insured. On 20.1.1994 the insurance company informed the business concern of the insured as under:
"Notwithstanding anything contained to the contrary, it is hereby agreed and declared that your cheque has been dishonoured by the bank. So we are cancelling the above said policy with immediate effect. The company is not at risk."
6. The respondents who are the widow and children of the insured, who died in the accident, filed a claim for the loss of the vehicle. When the claim was repudiated, the respondents moved the State Consumer Protection Commission. As per a judgment pronounced by the Commission the said claim was rejected. The judicial member of the State Commission, who delivered the judgment, has stated thus:
"In so far the facts of the present case are concerned, it is a settled law that the insurer even if it had issued a cover note is entitled to cancel the policy if it fails to cash the cheque for premium. The concept of contract in essence envisages a proposal, acceptance and passing of consideration. In the absence of any consideration there can be no contract and that is all what is recognised by Section 64-VB of the Insurance Act. The insurer was justified in repudiating the contract and it has done it in time and soon after the cheque bounced. In this view of the matter there is no need for us to go to any other point that may arise in this case."
7. When the respondents (legal heirs of the insured) moved the High Court of Jammu and Kashmir, the division bench which heard the matter reversed the order passed by the State Consumer Commission and held the insurance company liable to honour the claim. The Division Bench directed the State Commission to assess the compensation in accordance with law and pay the same after deducting the amount
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