The Rajasthan High Court has reiterated the principle that an insurance company cannot be held liable for compensation if the insured fails to fulfill their premium payment obligation or if the issued cheque for the premium is returned unpaid by the bank.
The court's clarification came during the hearing of an appeal against an order issued by the Motor Accident Claims Tribunal, which directed the insurance company to pay Rs. 1,88,000/- as compensation to the claimants.
Brief Facts of the Case
The counsel representing the insurance company argued that the accident in question occurred on May 28, 1996, and at that time, the vehicle was uninsured. The tribunal erred in placing the burden of compensation payment on the insurance company. The registered owner of the vehicle had issued a cheque for the renewal of the insurance policy, but it was dishonored. The insurance policy was subsequently canceled, and a notice was sent to the registered owner. However, the registered owner later submitted a demand draft for the premium amount, and a new policy was issued. Nonetheless, the court held that the new policy could not cover the accident claim that had occurred prior to its issuance.
The claimants' counsel disputed the arguments put forth by the insurance company's counsel and asserted that the owner of the vehicle had a valid insurance policy at the time of the accident. They argued that the owner never received any notice from the insurance company regarding the cancellation of the policy due to a dishonored cheque. They also highlighted that the notice issued by the insurance company was dated June 26, 1996, after the accident had already occurred.
High Court's Observation
The crucial question before the bench was whether the insurance company is liable to cover third-party risks when the insured fails to pay the premium or when the issued cheque for the premium is returned dishonored by the bank. The court answered this question in the negative, referring to Section 64 VB of the Insurance Act, 1938, which states that an insurance company will not assume or accept risk unless the insurance premium is received in advance or before the date of assumption of risk.
To support its stance, the court referenced the observations of the Supreme Court in the case of National Insurance Co. Ltd. v. Seema Malhotra and Ors. (2001), stating that when the insured fails to pay the promised premium or when the cheque issued by them for the premium is returned dishonored by the bank, the insurer is not obligated to fulfill their part of the promise. The insured cannot claim performance from the insurer under such circumstances.
The court also referred to the case of United India Insurance Company Limited v. Laxmamma and Ors. (2012) and restated that if an insurance cover note is issued subject to the payment of a cheque, and if the cheque is dishonored, leading to the insurance company canceling the policy and informing the vehicle owner before the accident, then the insurance company is not liable to satisfy the compensation award.
Based on these legal positions, the bench found that the tribunal had not considered the evidence and witness testimony accurately. The evidence indicated that the vehicle was uninsured at the time of the accident, and thus, the tribunal's ruling against the insurance company was erroneous.
Consequently, the Rajasthan High Court concluded that the insurance company is not liable to make the payment of compensation to the claimants, settling the dispute over premium payment obligations in insurance policies.
Case Title: Ramesh Chandra vs. National Insurance Company Limited
Case Details: CMA-1956/2002
Coram: Hon'ble Mr. Justice Anoop Kumar Dhand
Advocates for Petitioner: Mr. Ganesh Joshi, Adv.
Advocates for Respondent: Mr. Lokesh Gaur, Adv., Ms. Sapna Saxena, Adv.
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