http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

CASE NO.: Appeal (civil)  5829 of 2007

PETITIONER: Deddappa & Ors

RESPONDENT: The Branch Manager, National Insurance Co. Ltd.

DATE OF JUDGMENT: 12/12/2007

BENCH: S.B. Sinha & Harjit Singh Bedi

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.    5829     OF 2007 (Arising out of SLP (C) NO.7746 of 2006)

S.B. Sinha, J.

1.      Leave granted.

2.      This appeal is directed against the judgment and order dated  15.6.2005 passed by a learned Single Judge of the High Court of Karnataka  in M.F.A No.5751 of 2002, whereby and whereunder an appeal preferred by  the respondent herein from the judgment and order dated 12.06.2002 passed  by the Motor Accidents Claims Tribunal in M.C.A. No.113 of 2001 was  allowed.   3.      Shantamma, daughter of the appellant herein was sleeping in her hut.   A tempo bearing No.KA 37 \026 2257 which was being rashly and negligently  driven by Respondent No.2 herein ran over her.  She died on the spot.   Household articles of the appellant also were damaged in the said accident.

4.      An application for grant of compensation was filed by the appellants  herein under Section 166 of the Motor Vehicles Act, 1988 (for short "the  Act") in the Court of C.J. (SD) & Motor Accidents Claims Tribunal at  Gangavati in the district of Koppal on 12.06.2006.   5.       The said vehicle was insured with the National Insurance Company.   A plea was taken therein by the Insurance Company that although the  vehicle in question was insured by the owner for the period 17.10.1997 and  16.10.1998, but the cheque issued therefor having been dishonoured, the  policy was cancelled and, thus, it was not liable therefor.   6.      By an Award dated 12.06.2002, the learned Motor Vehicles Accidents  Claims Tribunal allowed the said claim application directing payment of  compensation for a sum of Rs.1,58,000/- with interest @ 12% per annum  holding that the Insurer was liable to pay the said awarded amount despite  cancellation of the contract of insurance.  As noticed hereinbefore the High  Court of Karnataka on an appeal preferred by the first respondent herein  allowed the same relying on the judgment of the Karnataka High Court in  M.F.A. No.6430 of 2001.   

7.      Mr. C.M. Angadi, the learned counsel appearing on behalf of the  appellant in support of this appeal inter alia submitted that the High Court  committed a serious error in passing the impugned judgment in so far as it  failed to take into consideration that when the insurance cover was issued,  the liability of the Insurance Company subsists despite dishonour of cheque  evidencing payment of the insurance premium.   

8.      Strong reliance in this behalf has been placed on Oriental Insurance  Co. Ltd. v. Inderjit Kaur and Ors. [(1998) 1 SCC 371] and National  Insurance Co. Ltd. v. Seema Malhotra and Ors. [(2001) 3 SCC 151].  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

9.      Before embarking on the said question we may notice the admitted  facts.  Second respondent who was driving the vehicle was also the owner  thereof.   The insurance policy was to remain valid for the period 17.10.1997  to 16.10.1998.  Respondent No.3 issued a cheque on 15.10.1997. The said  cheque was presented for encashment before the Syndicate Bank.  The Bank  by its letter dated 21.10.1997 issued a ’Return Memo’ disclosing dishonour  of the cheque with the remarks "fund insufficient".  First Respondent  thereupon cancelled the policy of insurance.  The said information was  communicated to Respondent No.2.  An intimation thereabout was also  given to the R.T.O.  concerned.

10.     Before the Motor Vehicle Accidents Claims Tribunal, the insurer has  also examined witnesses, inter alia, to prove cancellation of the policy of  insurance, postal acknowledgement showing intimation thereabout which  was served to the insured and a copy of the letter dated 6.11.1997 issued to  the R.T.O. and the memo issued by the Bank as regards dishonour of the  cheque etc.

11.     Indisputably, the accident had occurred on 6.2.1998 that is much after  communication of cancellation of the policy.

12.     Keeping in view the aforementioned backdrop of all events, we may  notice the legal issues addressed before us by the learned counsel.   13.     Section 147 of the Act obligates the owner of the motor vehicle to get  the vehicle insured in so far as the claim of third party is concerned.  The  Act does not deal with contract of insurance as such.  Contract of insurance  is governed by the Insurance Act, 1938 (for short "the 1938 Act").   14.     Section 64-VB of the 1938 Act provides that no risk is to be assumed  unless premium is received in advance in the following terms:- "Section 64VB - No risk to be assumed unless  premium is received in advance - (1) No insurer shall assume any risk in India in  respect of any insurance business on which  premium is not ordinarily payable outside India  unless and until the premium payable is received  by him or is guaranteed to be paid by such person  in such manner and within such time as may be  prescribed or unless and until deposit of such  amount as may be prescribed, is made in advance  in the prescribed manner. (2) For the purposes of this section, in the case of  risks for which premium can be ascertained in  advance, the risk may be assumed not earlier than  the date on which the premium has been paid in  cash or by cheque to the insurer. Explanation.--Where the premium is tendered by  postal money order or cheque sent by post, the risk  may be assumed on the date on which the money  order is booked or the cheque is posted, as the case  may be. (3) Any refund of premium which may become  due to an insured on account of the cancellation of  a policy or alteration in its terms and conditions or  otherwise shall be paid by the insurer directly to  the insured by a crossed or order cheque or by  postal money order and a proper receipt shall be  obtained by the insurer from the insured, and such  refund shall in no case be credited to the account  of the agent. (4) Where an insurance agent collects a premium  on a policy of insurance on behalf of an insurer, he  shall deposit with, or despatch by post to, the  insurer, the premium so collected in full without  deduction of his commission within twenty-four

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

hours of the collection excluding bank and postal  holidays.

15.     The said provision, therefore, in no unmistakable term provides for  issuance of a valid policy only on receipt of payment of the premium. 16.     The question came up for consideration before this Court in Inderjit  Kaur (supra), wherein it was opined that a policy of insurance which is  issued in public interest would prevail over the interest of the insurance  company.    In that case a bus met with an accident.  The policy of insurance  was issued on 30.11.1989.  A letter stating that the cheque had been  dishonoured was sent by the Insurance Company to the insurer on  23.1.1990.  The premium was paid in cash on 2.5.1990.  The accident took  place 19.4.1990. Despite noticing Section 64-VB of the 1938 Act, but  having regard to the underlying public policy behind the statutory scheme in  respect of insurance as evidenced by Sections 147 and Section 149 of the  Act and in particular having regard to the fact that policy of insurance to  cover the bus without receiving the premium had already been issued, this  Court held that the Insurance Company was liable to indemnify the insured. 17.      We may, however, notice that in terms of sub-section (5) of Section  147 and sub-section (1) of Section 149 of the Act, the Insurance Company  became liable to satisfy awards of compensation in respect thereof,  notwithstanding its entitlement to avoid or cancel the policy for the reason  that the cheque issued for payment of premium thereon had not been  honoured.   18.     The said question, however, was left open in Inderjit Kaur (supra). 19.     The said decision proceeded on the basis that it was the Insurance  Company which was responsible for placing itself in the said predicament as  it had issued a policy of insurance upon receipt only of a cheque towards the  premium in contravention of the provisions of Section 64-VB of the 1938  Act.  The public interest in a situation of that nature and applying the  principle of estoppel, this Court held, would prevail over the interest of the  Insurance Company.   20.     The ratio of the said decision was, however, noticed by this Court  in  New India Assurance Co. Ltd. v. Rula and Ors. [(2000) 3 SCC 195].  It was  held that ordinarily a liability under the contract of insurance would arise  only on payment of premium, if such payment was made a condition  precedent for taking effect of the insurance policy but such a condition  which is intended for the benefit of the insurer can be waived by it.   

It was opined:-

"\005If, on the date of accident, there was a policy of  insurance in respect of the vehicle in question, the  third party would have a claim against the  Insurance Company and the owner of the vehicle  would have to be indemnified in respect of the  claim of that party.  Subsequent cancellation of the  insurance policy on the ground of non-payment of  premium would not affect the rights already  accrued in favour of the third party".

       The dicta laid down therein clarifies that if on the date of accident the  policy subsists, then only the third party would be entitled to avail the  benefit therof.    21.     Almost an identical question again came up for consideration before  this Court in National Insurance Co. Ltd. v. Seema Malhotra and Ors.  [(2001) 3 SCC 151], a Division Bench noticed both the aforementioned  decisions and analysed the same in the light of Section 64-VB of the 1938  Act.  It was held : "17. In a contract of insurance when the insured  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

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.    18. 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.    19. 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, the  insurer is entitled to get the money back.    20. 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".  

22.     A contract is based on reciprocal promise.  Reciprocal promises by the  parties are condition precedents for a valid contract.  A contract furthermore  must be for consideration.

23.     In today’s world payment made by cheque is ordinarily accepted as  valid tender.   Section 64VB of the 1938 Act also provides for such a  scheme. 24.     Payment by cheque, however, is subject to its encashment.  In  Damadilal & Ors. v. Parashram & Ors. [(1976) 4 SCC 855], this Court  observed : "On the ground of default, it is not disputed that  the defendants tendered the amount in arrears by  cheque within the prescribed time.  The question is  whether this was a lawful tender.  It is well- established that a cheque sent in payment of a debt  on the request of the creditor, unless dishonoured,  operates as valid discharge of the debt and, if the  cheque was sent by post and was met on  presentation, the date of payment is the date when  the cheque was posted..."

25.     Recently again in New India Assurance Co. Ltd. v. Harshadbhai  Amrutbhai Modhiya and Anr. [(2006) 5 SCC 192], although in the context  of the Workmen Compensation Act, 1923, Balasubramanyan, J opined :

"It is not brought to our notice that there is any  other law enacted which stands in the way of an

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

insurance company and the insured entering into a  contract confining the obligation of the insurance  company to indemnify to a particular head or to a  particular amount when it relates to a claim for  compensation to a third party arising under the  Workmen’s Compensation Act. In this situation,  the obligation of the insurance company clearly  stands limited and the relevant proviso providing  for exclusion of liability for interest or penalty has  to be given effect to. Unlike the scheme of the  Motor Vehicles Act the Workmen’s Compensation  Act does not confer a right on the claimant for  compensation under that Act to claim the payment  of compensation in its entirety from the insurer  himself".  

       It was further observed:- "The law relating to contracts of insurance is part  of the general law of contract. So said Roskill, L.J.  in Cehave v. Bremer. This view was approved by  Lord Wilberforce in Reardon Smith v. Hansen- Tangen (All ER p.   576 h ) wherein he said:  

"It is desirable that the same legal principles  should apply to the law of contract as a  whole and that different legal principles  should not apply to different branches of  that law."  

A contract of insurance is to be construed in the  first place from the terms used in it, which terms  are themselves to be understood in their primary,  natural, ordinary and popular sense. (See  Colinvaux’s Law of Insurance , 7th Edn., para 2- 01.) A policy of insurance has therefore to be  construed like any other contract. On a  construction of the contract in question it is clear  that the insurer had not undertaken the liability for  interest and penalty, but had undertaken to  indemnify the employer only to reimburse the  compensation the employer was liable to pay  among other things under the Workmen’s  Compensation Act. Unless one is in a position to  void the exclusion clause concerning liability for  interest and penalty imposed on the insured on  account of his failure to comply with the  requirements of the Workmen’s Compensation Act  of 1923, the insurer cannot be made liable to the  insured for those amounts.""

26.     We are not oblivious of the distinction between the statutory liability  of the Insurance Company vis-‘-vis a third party in the context of Sections  147 and 149 of the Act and its liabilities in other cases.  But the same  liabilities arising under a contract of insurance would have to be met if the  contract is valid.  If the contract of insurance has been cancelled and all  concerned have been intimated thereabout, we are of the opinion, the  insurance company would not be liable to satisfy the claim.   27.     A beneficial legislation as is well known should not be construed in  such a manner so as to bring within its ambit a benefit which was not  contemplated by the legislature to be given to the party.  In Regional  Director, Employees’ State Insurance Corporation, Trichur v.  Ramanuja  Match Industries [AIR 1985 SC 278], this Court held :  "We do not doubt that beneficial legislations  should have liberal construction with a view to  implementing the legislative intent but where such

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

beneficial .legislation has a scheme of its own  there is no warrant for the Court to travel beyond  the scheme and extend the scope of the statute on  the pretext of extending the statutory benefit to  those who are not covered by the scheme."   

       We, therefore, agree with the opinion of the High Court. 28.     However, as the appellant hails from the lowest strata of society, we  are of the opinion that in a case of this nature, we should, in exercise of our  extra-ordinary jurisdiction under Article 142 of the Constitution of India,  direct the Respondent No.1 to pay the amount of claim to the appellants  herein and recover the same from the owner of the vehicle viz., Respondent  No.2, particularly in view of the fact that no appeal was preferred by him.   We direct accordingly.

29.     We, therefore, allow the appeal with the aforementioned directions.   In the facts and circumstances of the case, however, there shall be no order  as to costs.