http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

CASE NO.: Appeal (civil)  3317 of 2008

PETITIONER: National Insurance Co. Ltd.

RESPONDENT: Yellamma & Anr

DATE OF JUDGMENT: 06/05/2008

BENCH: S.B. Sinha & Lokeshwar Singh Panta

JUDGMENT: J U D G M E N T REPORTABLE

CIVIL APPEAL NO.   3317            OF 2008 (Arising out of SLP (C) No.16359 of 2006)

S.B. Sinha, J.

1.      Leave granted. 2.      Respondent No.2 was the owner of a Mini Bus.  An insurance policy  in respect of the said vehicle was sought to be taken by him.  For the said  purpose, the second respondent issued a third party cheque towards payment  of insurance premium.  The Development Officer of the appellant by inadvertence issued a  cover note.  However, when the said mistake came to his notice, the  respondent No.2 was contacted by the Development Officer.  He was asked  to pay the amount of premium.  It was not tendered and in stead the  respondent No.2 is said to have returned the original cover note and took  back the cheque.  The original cover note as also all the duplicate copies  thereof was cancelled.   The said insurance cover was issued for the period 3.9.1991 to  2.9.1992.  On or about 12.9.1991, the said vehicle met with an accident.   First respondent who suffered an injury therein filed a claim petition in  terms of the provisions contained in Section 166 of the Motor Vehicles Act,  1988 (the Act).  An award for a sum of Rs.43,000/- was made.  The  Tribunal, in its award, categorically held : "The petitioners have produced Ex.P.7 the Xerox  copy of the cover note Ex.R.1.  There is all the  chances of the owner of the vehicle having taken  Xerox copy of the cover note Ex.R.1 and returning  the original cover note Ex.R.1 to the insurance  company as deposed by RW.1.  If really the cover  note was not cancelled, the original cover note  should have been with the insured and respondent  No.3 could not have produced the original cover  note Ex.R.1.  Hence, the case of 3rd respondent that  the owner of the vehicle had given third party  cheque and that later he had taken back the cheque  and returned the original cover note Ex.R.1 to the  insurance company and that the insurance  company has cancelled cover note is more  probable.  As Ex.P.7 is the Xerox copy of the  original cover note Ex.R.1 and as the original  cover note Ex.R.1 and its copies Exs.R.2 to R.4  have been produced by the insurance company, the  argument of the learned counsel for the petitioners  that respondent No.3 is liable to pay the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

compensation cannot be accepted.  Hence, from  the above discussion, I hold that there was no valid  insurance policy as on the date of the accident and  as such the respondent No.3 is not liable to pay  any compensation to the petitioners."

3.      Second Respondent did not prefer any appeal thereagainst.  Rirst  Respondent only preferred an appeal questioning the quantum of  compensation.  The High Court, by reason of the impugned judgment, while  enhancing the amount of compensation to a sum of Rs.1,50,000/-, held : "The above provision disclose that a policy can be  issued against the issuance of cheque and the  liability commences from the date of issuance of  cheque and not from the date of its encashment.   There is no provision in law that the consideration  for policy should flow only from the insured and  not from the third party.  The development officer  has acted in a hasty manner.  No attempt was made  to present the cheque for encashment.  If the  cheque was encashed it was well and good for the  insurer otherwise steps could have been taken for  cancellation of the policy Ex.R.1.  The reason that  the cheque is not issued by the insured is not a  ground for valid cancellation.  The endorsement of  cancellation is vague, it does not bear the date.   The officer who has made endorsement of  cancellation is not examined.  The endorsement of  the insured is not taken on the policy to  substantiate that the cancellation was with due  notice and knowledge by the insured.  Therefore,  under the above circumstances, the very  cancellation of the policy for untenable reason is  bad in law.  The accident has occurred within 15  days from the date of issue of cover note.  Hence,  the insurer is liable to pay the compensation."

4.      Mr. Dua, learned counsel appearing on behalf of the appellant, would  submit that keeping in view the provisions contained in Section 65(v)(b) of  the Insurance Act, 1938 and furthermore in view of the finding of fact  arrived at by learned Motor Vehicles Accidents Claims Tribunal which was  not questioned by the insured, the impugned judgment cannot be sustained.   As nobody had appeared despite service of notice on behalf of the  respondent, we requested Mr. U.U. Lalit, senior counsel to assist us. 5.      It is neither in doubt nor in dispute that all the copies including the  insurance cover which were marked as Ex.R.1 to R.4 had been produced  before the Tribunal to show that original insurance cover had been taken  back by the Development Officer concerned for one reason or the other.   The Administrative Officer of the appellant not only examined  himself before the Tribunal but also proved the note prepared by the  Divisional Manager of Ludhiana which was marked as Ex.R.5.  The  Tribunal, as noticed hereinbefore, on appreciation of the evidence produced  before it, held that the vehicle was not legally insured. 6.      The High Court, however, wrongly proceeded on the premise that a  cheque could be issued by a third party.   A contract of insurance like any other contract, is a contract between  the insured and the insurer.  The amount of premium is required to be paid  as a consideration for arriving at a concluded contract.  If the insurer insists  that a cheque should be issued only by the insured and not by a third party,  no exception thereto can be taken.  The fact remains that the cheque was not  encashed.  Concededly, the insured did not make any payment.   Section 64VB of the Insurance Act mandates that before a contract of  insurance comes into being, the premium should be received by the insurer

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

in advance, stating : "Section 64VB - No risk to be assumed unless  premium is received in advance\027(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.\027Where 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."

7.      The question came up for consideration recently before this Court in  Deddaooa & Ors. v. Branch Manager, National Insurance Co. Ltd. [(2008) 2  SCC 595], wherein upon noticing the precedents which were operating in  the field, it was clearly held : "18. The ratio of the said decision was, however,  noticed by this Court in New India Assurance Co.  Ltd. v. Rula and Ors. [(2003) 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: ’13...If, 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.  19. 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 presentation, would yield

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

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.’ 20. 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."

8.      In today’s world payment by cheque is ordinarily accepted as valid  tender but the same would be subject to its encashment.  A distinction,  however, exists between the statutory liability of the insurance company vis- ‘-vis the third party in terms of Sections 147 and 149 of the Motor Vehicles  Act and its liability in other cases but it is clear that if the contract of  insurance had been cancelled and all concerned had been intimated  thereabout, the insurance company would not be liable to satisfy the claim. 9.      In this case, there cannot be any doubt or dispute whatsoever that no  privity of contract came into being between the appellant and the second  respondent and as such the question of enforcing the purported contract of  insurance while taking recourse to Section 147 of the Motor Vehicles Act  did not arise.   Second respondent did not contest the case at any stage.  It did not  adduce any evidence before the Tribunal.  It does not appeal from the  judgments of the High Court.  No argument in the appeal was advanced in  his behalf.  Before us also, no appearance has been made on behalf of the  respondent No.2 despite service of notice.   10.     The accident took place in the State of Karnataka.  Respondent No.2  is a resident of Ludhiana.  The transaction in question was purported to have  been entered in Ludhiana.  First respondent, therefore, in our opinion, may  not be in a position to enforce the award as against the respondent No.2. 11.     In the peculiar facts and circumstances of this case, we are, therefore,  of the opinion that the interest of justice would be subserved if we, in

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

exercise of our jurisdiction under Article 142 of the Constitution of India,  direct that the awarded amount be paid by the appellant to the first  respondent with liberty to it to recover the same from the second respondent  by initiating an appropriate proceeding in this behalf. 12.     This appeal is allowed to the aforementioned extent and with the  aforementioned directions.  As the respondents have not appeared before us,  there shall be no order as to costs.