The main legal point established is that the insurer is not liable to honor the claim when the insured fails to pay the premium or when the cheque issued towards the premium is dishonoured.

1. 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.

To 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 & 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. 4492/- towards the first instalment of the premium and the insurance company issued a cover note as contemplated in S.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 fund 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 abovesaid 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:

"Insofar as 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 recognized by S.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 of premium (as the chequ