An insurance company would be under an obligation to pay a claim only after a cheque issued towards the policy premium is encashed, the Supreme Court has said.
"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," a bench of Justices S B Sinha and L S Panta observed.
Interpreting Section 64VB of the Insurance Act, the apex court said, a contract of insurance comes into being only after the insurer gets the premium in advance.
The apex court passed the ruling while upholding the appeal filed by the National Insurance Company Limited challenging a Karnataka high court order that the liability of the insurer would commence from the date of issuance of the cheque and not from the date when it is encashed.
The high court had directed the insurance company to pay Rs 1,50,000 as a third party insurance claim to victim Yellamma, who suffered injuries in a road accident involving a mini-bus.
In this case, the insurance company had, inadvertently, issued an insurance cover for the vehicle for the period between September 3, 1991 and September 2, 1992 on the basis of a cheque for premium issued by the owner, even before it could be encashed.
However, the insurance company on realising that it had issued the cover even before encashment of the cheque requested the owner to pay it in cash. But the owner declined to do so and instead returned the original policy document and took back his cheque.
In the meantime on September 12, 1991, the vehicle was involved in an accident resulting in injuries to a woman Yellamama.
The Motor Accidents Claims Tribunal awarded a compensation of Rs 43,000 to Yellamma, but ruled that the insurance company was not liable to pay the same, as the policy had been cancelled. In other words, it fixed the liability on the owner of the vehicle.
Yellama on her part filed an appeal in the high court seeking an enhanced compensation.
While conceding her plea, the high court, however, adopted the reasoning that it was the insurance company which was liable to pay the compensation as the policy according to it came into force on the day when the cheque was originally issued.
Disagreeing with the high court's reasoning, the apex court observed, "In today's world payment by cheque is ordinarily accepted as valid tender but the same would be subject to its encashment."
The apex court said that in terms of Sections 147 and 149 of the Motor Vehicle Act, if the contract of insurance has been cancelled and all concerned had been intimated, the insurance company would not be liable to satisfy the claim.
The bench directed the insurance company to pay the compensation to Yellamma, but granted it the liberty to recover the amount from the mini-bus owner.
