The Hindu : National : Insurer’s liability begins only from cheque encashment

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Insurer’s liability begins only from cheque encashment

J. Venkatesan

New Delhi: An insurance company’s liability for motor vehicle accidents will begin only from the date of encashment, and not from the date of issue, of the cheque given by the insured towards premium, the Supreme Court has held.

In a recent judgment, a Bench consisting of Justices S.B. Sinha and L.S. Panta said: “In a contract of insurance when the insured gives a cheque towards payment of premium, such a contract consists of a reciprocal promise. The drawer promises the insurer that the cheque, on presentation, would yield the amount in cash. When the insured fails to pay the premium promised or when the cheque issued by him is returned dishonoured by the bank, the insurer need not perform his part of the promise.”

The Bench said: “Ordinarily a liability under the contract of insurance would arise only on payment of premium, if such payment was made a condition precedent for the insurance policy taking effect. If on the date of accident the policy subsists, then only the third party would be entitled to avail [himself/herself of] the benefit thereof.”

In the instant case, a minibus owner took out a policy with the National Insurance Company for the period September 3, 1991- September 2, 1992, and issued a cheque towards premium. A policy cover note was issued. The Development Officer later realised that it was a cheque issued by the third party and not by the insured, and cancelled the policy. The insured then took back the cheque. However, within 15 days of the issuance of the cover note, the bus met with an accident and Yellamma, a passenger, suffered injuries.

A tribunal awarded her Rs. 43,000 as compensation. On appeal, the Karnataka High Court enhanced it to Rs. 1.50 lakh.

Disposing of the appeal against this judgment, the apex court 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. If the insurer insists that a cheque be issued only by the insured and not by a third party, no exception thereto can be taken. In this case, the cheque was not encashed. Concededly, the insured did not make any payment.”

The Bench said the appellant was not liable to pay the compensation amount. “However, in the peculiar facts and circumstances of this case, we are of the opinion that the interest of justice would be subserved if we, in exercise of our jurisdiction under Article 142 of the Constitution [power to render complete justice] direct that the awarded amount be paid by the appellant to the first respondent [Yellamma] with liberty to it to recover the same from the minibus owner by initiating an appropriate proceeding in this behalf.”

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