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CASE NO.: Appeal (civil) 7359 2000

PETITIONER: ORIENTAL INSURANCE CO.  LTD.

       Vs.

RESPONDENT: CHERUVAKKARA NAFEESSU & ORS.

DATE OF JUDGMENT:       14/12/2000

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

JUDGMENT:

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     SETHI,J.

     Leave  granted.  What is the extent of liability of an insurance  company  towards the third party as  per  Section 95(1)(b) of the Motor Vehicles Act, 1939 (hereinafter called "the  Act") and what are its rights in case of payment of an amount  in  excess of the limits of the liability under  the insurance  policy vis-Ã -vis the insured?, are the  questions to  be  determined  in this appeal.  It has been  argued  on behalf  of the insurance company that under the terms of the insurance  policy  in the instant case, the company was  not liable  to pay more than Rs.50,000/-, being the limit of its liability.  The excess amount of the award was to be paid by the  insured  for  which the Tribunal was not  competent  to issue  directions  against  the appellant-company.   On  the other hand counsel for the insured has submitted that as per avoidance   clause   in    the    insurance   company,   the appellant-company  was liable to indemnify the whole  extent of  liability towards the claim notwithstanding the limit of liability of the insurance.  In this case the claim petition was filed by the legal heirs of C.  Abdul Shukkoor, who died in  a road accident on 6.7.1988.  The accident was caused by an  auto-rickshaw bearing Registration NO.KRN 1859 which was insured with the appellant-company.  The respondents claimed Rs.2  lakhs  as compensation.  The  appellant-company  filed their   reply  specifically  stating   therein  that   their liability  was  limited to Rs.50,000/- under the  policy  of insurance.    The  Claims  Tribunal   passed  an  award   of Rs.1,94,150/-  and  fastened  the entire  liability  on  the appellant-company.   The  appeal filed against the order  of the Claims Tribunal was dismissed vide the judgment impugned in  this  appeal.  Admittedly, the insurance policy in  this case  is of a date prior to the coming into force of the new Motor  Vehicles  Act  on  1.7.1989.  The  liability  of  the insurance  company  to  satisfy  judgments  against  persons insured  in respect of the third party risk is covered under Section  96  of the Act, sub-section (1) of which  provides: "96.   Duty of insurers to satisfy judgments against persons insured  in  respect of third party risks _ (1) If, after  a

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certificate  of insurance has been issued under  sub-section (4)  of Section 95 in favour of the person by whom a  policy has been effected, judgment in respect of any such liability as is required to be covered by a policy under clause (b) of sub-section  (1) of Section 95 (being a liability covered by the  terms  of  the policy) is obtained against  any  person insured  by  the  policy,  then,  notwithstanding  that  the insurer  may  be  entitled to avoid or cancel  or  may  have avoided  or cancelled the policy, the insurer shall, subject to  the  provisions  of  this section,  pay  to  the  person entitled  to the benefit of the decree any sum not exceeding the  sum  assured  payable  thereunder, as if  he  were  the judgment-debtor,  in respect of the liability, together with any  amount payable in respect of costs and any sum  payable in  respect  of  interest  on  that sum  by  virtue  of  any enactment relating to interest on judgments."

     Under  the  insurance  policy the limit  of  company’s liability  in  respect of any one claim or series of  claims arising  out of one event is Rs.50,000/- only.  However, the avoidance  clause of the policy provides:  "Nothing in  this policy  or the endorsement hereon shall affect the right  of any person indemnified by this policy or any other person to recover  an  amount under or by virtue of the provisions  of the Motor Vehicles Act, 1939, Section 96.

     BUT  the  insured shall repay to the company all  sums paid  by  the company which the company would not have  been liable to pay but for the said provisions."

     Section  II  of  the policy deals with  "liability  of third  party"  and provides that the company will  indemnify the  insured against all sums including claimants costs  and expenses  which  insured  become legally liable  to  pay  in respect  of  the  death of or bodily injury  to  any  person caused  by or arising out of the use of the motor vehicle or damage  to  the  property caused by such  use.   A  conjoint reading of all the terms of the policy of insurance executed in  this case indicate that the total extent of liability of the  insurance  policy  is Rs.50,000/- but  the  company  is liable  to indemnify the insured against all sums  including claimant’s  costs and expenses which insured becomes  liable to  pay  and nothing in the policy affects the right of  any person  indemnified  by  the policy or any other  person  to recover  an  amount under or by virtue of the provisions  of Section  96  of the Act.  However, the insured is liable  to repay  to the company all sums paid by the company which the company  would  not  have  been liable to pay  but  for  the condition  of  liability relating to third  party.   Dealing with  such  a situation this Court in New Asiatic  Insurance Co.   Ltd.v.  Pessumal Dhanamal Aswani & Ors.  [AIR 1964  SC 1736]  held:   "The Act contemplates the possibility of  the policy  of insurance undertaking liability to third  parties providing  such  a  contract  between the  insurer  and  the insured,  that  is, the person who effected the  policy,  as would make the company entitled to recover the whole or part of  the  amount  it  has paid to the third  party  from  the insured.   The  insurer thus acts as security for the  third party with respect to its realising damages for the injuries suffered,  but  vis-a-vis the insured, the company does  not undertake  that  liability  or  undertake it  to  a  limited extent.   It  is in view of such a possibility that  various conditions  are  laid down in the policy.  Such  conditions,

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however,  are  effective  only between the insured  and  the company,  and  have  to  be  ignored  when  considering  the liability  of  the  company to the third parties.   This  is mentioned  prominently in the policy itself and is mentioned under  the heading ’avoidance of certain terms and rights of recovery’,  as well as in the form of "An Important Notice", in  the  Schedule to the policy.  The avoidance clause  says that  nothing in the policy or any endorsement thereon shall affect  the right of any person indemnified by the policy or any  other person to recover an amount under or by virtue of the  provisions  of  the  Act.  It also  provides  that  the insured  will repay to the company all sums paid by it which the  company  would not have been liable to pay but for  the said provisions of the Act.  The ’Important Notice’ mentions that  any  payment  made by the company by reason  of  wider terms  appearing in the certificate in order to comply  with the  Act is recoverable from the insured, and refers to  the avoidance clause.

     Thus  the contract between the insured and the company may  not  provide for all the liabilities which the  company has to undertake vis-Ã -vis the third parties, in view of the provisions  of the Act.  We are of the opinion that once the company  had undertaken liability to third parties  incurred by  the persons specified in the policy, the third  parties’ right  to  recover  any  amount under or by  virtue  of  the provisions  of  the Act is not affected by any condition  in the  policy.   Considering this aspect of the terms  of  the policy,  it  is reasonable to conclude that proviso  (a)  of para  3  of  Section II is a mere  condition  affecting  the rights  of  the  insured  who effected the  policy  and  the persons  to whom the cover of the policy was extended by the company,  and  does  not come in the way of  third  parties’ claim  against the company on account of its claim against a person  specified  in  para 3 as one to whom  cover  of  the policy was extended."

     Relying  upon the aforesaid judgment and referring  to the  avoidance clause, a three-Judge Bench of this Court  in Amrit  Lal Sood and another v.  Smt.Kaushalaya Devi Thapar & Ors.   [AIR  1998  SC  1433] held:  "In the  policy  in  the present case also, there is a clause under the heading:

     "AVOIDANCE  OF CERTAIN TERMS AND RIGHTS OF RECOVERY  - which reads thus:  Nothing in this policy or any endorsement hereon  shall affect the right of any person indemnified  by this  policy or any other person to recover an amount  under or  by  virtue of the provisions of the Motor Vehicles  Act, 1939,  Section 96.  But the Insured shall pay to the company all  sums  paid by the company which the company  would  not have been liable to pay but for the said provisions."

     The above clause does not enable the insurance company to  resist  or  avoid the claim made by the  claimant.   The clause  will  arise  for  consideration only  in  a  dispute between  the insurer and the insured.  The question  whether under  the said clause the insurer can claim repayment  from the  insured is left open.  The circumstances that the owner of  the vehicle did not file an appeal against the  judgment of  single Judge of the High Court under the Letters  Patent may  also  be  relevant  in  the event of  a  claim  by  the insurance  company against the insured for repayment of  the amount.  We are not concerned with that question here."

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     The  reliance of the learned counsel for the appellant on  T.Shantharam v.  State of Karnataka & Ors.[1995 (2)  SCC 539  and  National Insurance Co.  Ltd., New Delhi v.   Jugal Kishore  &  Ors.   [1988 (1) SCC 626] is of no help  to  him inasmuch  as in those cases the effect of judgment in  Amrit Lal  Sood’s case has not been considered.  In T.Shantharam’s case   the   court  was  dealing   with  the  effect  of   a comprehensive  policy vis-a-vis the liability of the insurer in respect of third party risk on the basis of the estimated value  of the vehicle and found that the limit of  liability with regard to third party risk does not become unlimited or higher  than  the  statutory liability only  on  account  of entering  into  a comprehensive policy.  It was pointed  out that  the  comprehensive policy only entitles the  owner  to claim  reimbursement of the entire amount of loss or  damage suffered  upto the estimated value of the vehicle which  did not  mean the limit of liability with regard to third  party risk  becoming  unlimited  or   higher  than  the  statutory liability.   In the case of National Insurance Co.  Ltd.  v. Jugal  Kishore & Ors.  (supra) this Court observed that  the liability  under  the policy could not exceed the  statutory liability  under  Section 95 of the Act only on  the  ground that  the insured had undertaken Comprehensive insurance  of the  vehicle.  The payment of higher premium on that  score, however,  did  not  mean that the limit  of  liability  with regard  to third party risk became unlimited or higher  than the  statutory  liability  fixed under  sub-section  (2)  of Section  95  of the Act.  In the facts and circumstances  of this  case we find that despite holding the liability  under the  policy limited to the extent of Rs.50,000/-, the Claims Tribunal  and  the  High  Court   were  not  unjustified  in directing  the  appellant-company  to pay the whole  of  the awarded  amount  to  the  claimants  on  the  basis  of  the contractual obligations contained in clauses relating to the liability  of  the  third   parties  and  avoidance  clause. However,  the  Claims Tribunal and the High Court  were  not justified  in rejecting the right of the appellant-  company to  recover  from  the  insured the excess  amount  paid  in execution  and discharge of the award of the Tribunal.   The appeal  is  accordingly allowed holding that the  appellant- company  is  liable  to pay the entire award amount  to  the claimants.   Upon  making  such payment  the  appellant  can recover the excess amount from the insured by executing this award  against  the insured to the extent of such excess  as per Section 174 of the Motor Vehicles Act, 1988.  No costs.