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CASE NO.: Appeal (civil) 1350  of  2001

PETITIONER: NATIONAL INSURANCE COMPANY LTD.

       Vs.

RESPONDENT: SEEMA MALHOTRA AND ORS.

DATE OF JUDGMENT:       20/02/2001

BENCH: K.T. Thomas & R.P. Sethi.

JUDGMENT:

L...I...T.......T.......T.......T.......T.......T.......T..JJ U D G M E N T

THOMAS, J.

Leave granted.

   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).

   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.

   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 Section  149 of  the Motor Vehicles Act.  But unfortunately, the last day

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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.

   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.

   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.

   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  cheque was dishonoured).   The  following reasoning  was  mainly adopted by the learned judge  of  the division  bench  for holding that the insurance  company  is liable on the fact situation:

   While  ordering the cancellation of policy in question, respondent  insurance company instead of cancelling the same due  to dishonour of cheque of the premium from the date  it was  issued  i.e.   21.12.1993,  chose to  cancel  it  with immediate  effect.   This clearly indicates that  till  the issuance  of this communication respondent insurance company itself  treated the policy subsisting.  Besides this, it had not  chosen  to  treat the same cancelled from the  date  of issue.   In  the face of this position, this case  need  not detain  us  any  further and for this  reason  the  argument addressed  on  behalf  of  the insurance  company  based  on section 64- VB of the Insurance Act also does not hold good. There  was nothing which prevented the insurance company  to

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have informed the appellants that the policy stood cancelled from  the date of its issuance, and as such it is not liable for the payment of any compensation.

   The  direction that insurance company can now deduct the premium  amount  from  the compensation to be  fixed  is  no solace  to  the  insurer.   The  essence  of  the  insurance business  is  the  coverage of the risk  by  undertaking  to indemnify the insured against loss or damage.  They agree to pay  the  damages  arising out of any accident by  taking  a chance  that  no accident might happen.  Motivation  of  the insurance  business is that the premium would turn to be the profit  of  the  business in case no  damage  occurs.   Such business  of  the insurance company can be carried  on  only with  the  premium  paid  by  the  insured  persons  on  the insurance  policy.  The only profit, if at all the insurance company makes, of the insurance business is the premium paid when no accident or damage occurs.  But to ask the insurance company  to bear the entire loss of damages of somebody else without  the  company  receiving a pie  towards  premium  is contrary  to the principles of equity, though the  insurance companies  are  made liable to third parties on  account  of statutory  compulsions due to the initial agreement, entered between the insured and the company concerned.

   A three-Judge Bench in Oriental Insurance Co.  Ltd.  vs. Inderjit   Kaur  (1998  (1)  SCC   371)  left   this   point unconsidered.   In  that case also the premium was  paid  by cheque  which  was  later dishonoured and  the  insured  was intimated about it by the insurance company two months after the  vehicle got involved in the accident.  When a claim was made  by  the  legal  heirs of the driver who  died  in  the accident  the  insurance company resisted the claim  on  the strength  of  Section  64-VB of the Insurance Act  of  1938. Repelling  the  contention  of the  insurance  company,  the three-Judge Bench held thus:

   We  have,  therefore, this position.  Despite  the  bar created  by  Section  64-  VB  of  the  Insurance  Act,  the appellant,  an  authorised  insurer,   issued  a  policy  of insurance  to  cover the bus without receiving  the  premium therefor.   By  reason of the provisions of Sections  147(5) and  149(1) of the Motor Vehicles Act, the appellant  became liable  to  indemnify  third  parties   in  respect  of  the liability which that policy covered and to satisfy awards of compensation   in   respect   thereof  notwithstanding   its entitlement  (upon  which we do not express any opinion)  to avoid  or  cancel the policy for the reason that the  cheque issued  in  payment  of  the premium thereon  had  not  been honoured.

   Thus,  the  three-Judge Bench refrained from  expressing any  opinion  on  the question of insurers  entitlement  to avoid  or cancel the policy as against the insured when  the cheque issued for payment of the premium was dishonoured.

   Subsequently  the  same  question was  mooted  before  a two-Judge  Bench  of this Court in New India  Assurance  Co. Ltd.   vs.   Rula  and  ors.  {2000 (3)  SCC  195}  but  the question  of  insurers  right  to repudiate  the  claim  as against  the  insurer in a similar situation did  not  arise therein and hence the Bench parried the question.

   Thus  the question has now to be considered as the  same is  the crux of the issue involved in this case.  As pointed

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out  earlier  the  insurance  is   a  contract  whereby  one undertakes  to  indemnify  another against loss,  damage  or liability arising from an unknown or contingent event and is applicable  only  to  some contingency or act  to  occur  in future.   We  have to consider how far the  legislature  has controlled  the  insurance  business.  Section 2(9)  of  the Insurance  Act  defines insurer, inter alia, as any  body corporate  carrying on the business of insurance which is  a body corporate incorporated under any law for the time being in force in India. Section 2(d) of the Act says that every insurer  shall be subject to all the provisions of this  Act in  relation  to any class of insurance business so long  as his  liabilities  in  India in respect of business  of  that class remain unsatisfied or not otherwise provided for.

   It  is in the aforesaid context that we have to consider the  impact  of  Section  64-VB of the  Insurance  Act.   As sub-sections  (1)  and  (2) of the said  section  alone  are material for the purpose we extract them herein:

   (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.

   Sub-section  (1)  is  not applicable to cases  in  which premium  is  ordinarily  payable outside  India.   In  other words,  the  insurer has no liability to the insured  unless and  until  the premium payable is received by the  insurer. As the premium can be paid in cash or by cheque, what is the position   when  the  cheque  issued   to  the  insurer   is dishonoured by the drawee bank?

   Sections  51,  52 and 54 of the Indian Contract Act  can profitably  be  referred to for the purpose of deciding  the point.   They are subsumed under the sub- title Performance of  reciprocal promises in the said Act.  Section 51  deals with  a  contract  concerning   reciprocal  promises  to  be simultaneously performed and in such a contract the promisee is  absolved from performing his promise unless the promisor is  ready  or  willing to perform his part of  the  promise. Section  52  says that where the order in  which  reciprocal promises are to be performed has not been expressly provided in  the  contract  such promise shall be performed  in  that order  which  the  nature of the  transaction  warrants  it. Illustration  (b) given to Section 52 highlights the utility of the provision.  That illustration is as follows:  A and B contract that A shall make over his stock-in-trade to B at a fixed  price, and B promise to give security for the payment of  the money.  As promise need not be performed until  the security  is  given, for the nature of transaction  requires that A should have security before he delivers up his stock.

   Section  54  of the Contract Act is to be read  in  that background.  It is extracted below:

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   When  a contract consists of reciprocal promises,  such that   one  of  them  cannot  be  performed,  or  that   its performance  cannot  be  claimed  till the  other  has  been performed,  and  the promisor of the promise last  mentioned fails  to  perform  it,  such   promisor  cannot  claim  the performance  of  the  reciprocal   promise,  and  must  make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract.

   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.

   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.

   In  the light of the above legal position we uphold  the contention   of  the  appellant   insurance  company.    We, therefore,  allow  this  appeal and set aside  the  impugned judgment of the Division Bench of the High Court.  The order passed by the State Consumer Commission will stand restored.

                            J                              ( K.T. Thomas )

                            J New Delhi;                        ( R.P. Sethi ) February 20, 2001.