The Hindu Business Line : Insurance policy cancelled `behind the back'

AN INTERESTING question of `vast legal importance' came up before the Kerala High Court in Oriental Insurance Co Ltd vs Sivankutty. A Division Bench of the court had sent this poser for reference: "Whether the insurer is liable to pay compensation to the injured in a motor vehicle accident even if it has cancelled the policy issued in relation to the offending vehicle for non-payment of premium (the cheque issued towards payment of premium having been dishonoured), in respect of accident that has taken place within the period specified in the policy but that has taken place after the cancellation?"

Background

On December 23, 1991, at Ranni junction, on the Erumeli route, a lorry coming in the opposite direction hit a bus and caused `injuries and fracture' to a bus passenger. The lorry had insurance cover from November 5, 1991 to November 4, 1992. However, the cheque issued for the premium was dishonoured, and Oriental intimated the lorry owner of the bouncing on November 19, 1991. Ten days later, Oriental cancelled the policy, intimating the owner and the RTO. Within less than a month the accident took place.

Applying the apex court's earlier decisions, such as in Inderjit Kaur and Rula, The Motor Accidents Claims Tribunal, Pathanamthitta, ruled that the accident had occurred solely on account of the negligence of the lorry driver, resulting in vicarious liability for the owner. The compensation payable by Oriental to the injured was fixed at Rs 2,22,000, despite cancellation of the policy. Oriental challenged the award; and the question of law involved in the suit came to be referred to the Full Bench for an authoritative pronouncement.

Provisions and precedents

The court studied the Sections in the Motor Vehicles Act 1988 about insurance, such as147 on requirements of policies and limits of liability; and 149 specifying duty of insurers to satisfy judgments and awards against persons insured in respect of third party risks.The earliest decision of the apex court on a similar issue was in United India Insurance Co Ltd vs Ayeb Mohammed (1992), where the company was held not to be liable. However, six years later, a three-member Bench overruled the same in Oriental Insurance Co Ltd vs Inderjit Kaur, and said that the insurance company was not absolved of its obligation to third parties under the policy because it did not receive the premium, and that its remedies in this behalf lay against the insured.

By issuing an insurance policy upon receipt only of a cheque towards the premium, in contravention of the provisions of Section 64-VB of the Insurance Act, the company was responsible for its predicament, the court opined. The public interest that a policy of insurance serves must, clearly, prevail over the interest of the insurance company, said the apex court.

Whether the cheque is cashed and, if not, whether the policy is cancelled are all matters within the knowledge of the contracting parties, namely, the insurer and the insured, observed the High Court in the current case, frowning on "cancelling the policy behind the back of the beneficiaries who are the public at large."

The situation is not akin to that of an owner of a vehicle not having taken any insurance at all for the vehicle as on the date of the accident, noted the court. By no means can an insurer who has issued a policy of insurance for a motor vehicle receiving cheque towards payment of premium be allowed to disown liability to third party. "Their remedies have to be worked out against the insured," ruled the court.

LawLane@TheHindu.co.in

D. Murali

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