Holding

An insurer is legally justified in refusing to honour an insurance contract and may cancel the policy when the premium cheque is dishonoured, rendering the contract void under Section 64‑VB of the Insurance Act.

Summary

The insured, Yash Paul Malhotra, entered into a motor insurance contract on 21‑12‑1993, gave a cheque for the first premium and received a cover note. He died in a road accident on 31‑12‑1993, and the insurer discovered that the cheque had bounced on 10‑01‑1994, cancelling the policy on 20‑01‑1994. The legal heirs claimed compensation, which the State Consumer Commission rejected, but the High Court reversed and ordered payment after deducting the premium. The Supreme Court held that under Section 64‑VB of the Insurance Act and the reciprocal‑promise principles of the Contract Act, the insurer is not obliged to perform when the premium is not actually received, and may lawfully cancel the policy. Consequently, the appeal was allowed and the High Court judgment set aside.

Issues considered

The insurer's liability to honour a motor insurance contract when the premium cheque is dishonoured.
Interpretation of Section 64‑VB of the Insurance Act, 1938 in relation to premium payment by cheque.
Application of the reciprocal‑promise provisions of the Contract Act (ss. 51, 52, 54, 65) to insurance contracts.

Legislation cited

Indian Contract Act, 1872s. 25, s. 51, s. 52, s. 54, s. 65
Insurance Act, 1938s. 64-VB(1), s. 64-VB(2)
Motor Vehicles Act, 1988s. 147(5), s. 149(1)

Subjects

insurancepremiumcheque dishonourcontract of insurancereciprocal promiseSection 64-VBliabilitymotor vehicle insuranceconsumer protectionpolicy cancellation

Judgment

\
"II NATIONAL INSURANCE CO. LTD. A
v.
SEEMA MALHOTRA AND OTHERS

FEBRUARY 20, 2001

[K.T. THOMAS AND R.P. SETHI, JJ.] B

Insurance Act, 1938-Section 64-VB (!)and (2) Contract of Insurance-
Cheque towards payment of Pre1i1ium dishonoured-Liability of insurer to
honour the contract-held, not liable to honour the contract, since contract
c
.
of insurance consists of reciprocal promise, insurer need not pe1for111 his part
of promise-Contract Act, 1872-Sections 51,52 and H

'Y' and appellant entered into an insurance contract on 21<12.1993. On
the same day 'Y' paid the cheque towards first premium and the insurance
company/appellant issued the cover note. 'Y' died on 31.12.1993. The appellant/
insurance company vide letter dated 20.01.1994 cancelled the insurance policy D
in view that the cheque paid towards first premium was dishonoured on
10.01.1994. Respondents, the legal heirs of the insured filed their claim,
which was repudiated. Respondents then filed their claims in the State
Consumer Protection Commission, which was rejected on the ground that
even if the Insurance Company had issued the cover note, it is entitled to E
cancel the policy if it fails to cash the cheque for premium. Respondent
moved High Court, which reversed the order of the commission holding that
the insurance company is still liable because it chose to cancel the policy
w.e.f. the date of bouncing of the cheque, whereas the liability was incurred
• prior to it, and directed the commission to assess the compensation in
accordance with law and directed the Insurance Company to pay the same F
after deducting the amount of premium (paid through the dishonoured cheque).
Hence this appeal.

Allowing the Appeal, the Court

HELD : I. The insurance company is legally justified in refusing to G
~ pay the amount claimed by the respondents. When the insured fails to pay the
premium promised, or when the cheque issued by him towards the premium
is returned dishonoured by the bank concerned the insurer need not perform
his part of the promise. The corollary is that the insured cannot claim
performance from the insurer in such a situation. In a contract of insurance
I 131
H
1132 SUPREME COURT REPORTS [200 I] I S.C.R.

A when an insured gives a cheque towards payment of premium or part of the
premium, such a contract consists of reciprocal promise. The drawer of the
cheque promises the insurer that the cheque, on presentation, would yield
the amount in cash. A cheque is a Bill of Exchange drawn on a specified
banker. A Bill of Exchange is an instrument in writing containing an
B unconditional order directing a certain person to pay a certain sum of money
to a certain person. It involves a promise that such money would be paid.
[1138-B; 1137-H; 1138-A[

2. The essence of the insurance business is the coverage of the risk by
undertaking to indemnify the insured against loss or damage. They agree to
C pay the damages arising out of any accident that might happen. Motivation of
the insurance business is that the premium would turn to be the profit of the
business in case no damage occurs. Such business of the insurance company
can be carried on only with the premium paid by the insured persons on the
insurance policy. The only profit, if at all the insurance company makes, of
the insurance business is the premium paid when no accident or damage
D occurs. But to ask the insurance company to bear the entire loss or damages
of somebody else without the company receiving a pie towards premium is
contrary to the principles of equity, though the insurance companies are
made liable to third parties on account of statutory compulsions due to the
initial agreement, entered between the insured and the company concerned.
11135-C-Di
E
Oriental Insurance Co. ltd v. !nderjit Kaur, [19981 1 SCC 371 and
New India Assurance Co. ltd. v. Ru/a and Ors., [200013 SCC 195, referred
to.

F
3. Even if the insurer has disbursed the amount covered by the policy to
the insured before the cheque was returned dishonoured, insurer is entitled
'
to get the money back. Under Section 25 of the Contract Act an agreement
made without consideration is void. Section 65 of the Contact Act says that
when a contract becomes void any person who has received any advantage
under such contract is bound to restore it to the person from whom he received
G it.11138-C!

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1350 of
2001.

From the Judgment and Order dated 27.9.99 of the Jammu and Kashmir
H High Court in C.l.M.A. No. 46of1999.
NATIONAL INSURANCE CO. LTD. v. SEEMA MALHOTRA [THOMAS, J] J 133

P.P. Malhotra, Shailendra Shanna and Rajiv Nanda for the Appellant. A
Ms. Shabnam Lone and M.N. Shroff for the Respondents.

The Judgment of the Court was delivered by

THOMAS, J. Leave granted.
B
Under a contract of insurance the insured gave a cheque to the insurer
--r towards the first premium amount, but the cheque was dishonoured by the
drawee bank due to insufficiency of funds in the account of the drawer. Is
the insurer liable in such a situation to honour the contract of insurance?
There is no dispute that the insurer is liable as against third parties because
it is covered by the statutory provisions contained in Chapter X of the Motor C
Vehicles Act 1988. But the insurer vehemently disputed the liability when the
claim is made by the insured himself or his legal heirs, without any third party
being involved. To avoid confusion we may point out that the insurance
company has no dispute that the claims, if any, made by the kith and kin of
the insured for the injuries sustained by them in the accident including the D
claims made by the legal representatives of the deceased in such accident
would also be treated as third party claims.

A Division Bench of the High Court of Jammu and Kashmir held, on the
facts of the case, that the insurance company is still liable because it chose
to cancel the policy with effect from the date of bouncing of the cheque, E
whereas the liability was incurred prior to it.

The question can be dealt with after summarizing the facts in this case
which led to the impugned judgment of the High Court. The insured was one
Yash Paul Malhotra. He and the appellant insurance company entered into an
insurance contract on 21st December, 1993, by insuring a Maruti car for a sum F
of Rupees one lakh and fifty thousand. On the same day, the insured gave
a cheque for Rs.4492 towards the first instalment of the premium and the
insurance company issued a cover note as contemplated in Section 149 of the
Motor Vehicles Act. But unfortunately, the last day in the year 1993 became
the last day of the insured as well as his Maruti car because the insured died
and the car was completely damaged in an accident which occurred on /G
31.12.1993.

On 10.1.1994 the bank on which the cheque was drawn by the insured
sent an intimation to the insurance company that the cheque was dishonoured
as there was no funds in the account of the insured. On 20.1. 1994 the
insurance company informed the business concern of the insured as under: H
1134 SUPREME COURT REPORTS [200 I) I S.C.R.

A "Notwithstanding anything contained to the contrary, it is hereby
agreed and declared that your cheque has been dishonoured by the
bank. So we are cancelling the above said policy with immediate
effect. The company is not at risk."

The respondents who are the widow and children of the insured, who
B died in the accident, filed a claim for the loss of the vehicle. When the claim
was repudiated, the respondents moved the State Consumer Protection
Commission. As per a judgment pronounced by the Commission the said
claim was rejected. The judicial member of the State Commission, who delivered
the judgment, has stated thus:
c "In so far the facts of the present case are concerned, it is a settled
law that the insurer even if it had issued a cover note is entitled to
cancel the policy if it fails to cash the cheque for premium. The
concept of contract in essence envisages a proposal, acceptance and
passing of consideration. In the absence of any consideration there
D can be no contract and that is all what is recognised by section 64-
VB of the Insurance Act. The insurer was justified in repudiating the
contract and it has done it in time and soon after the cheque bounced.
In this view of the matter there is no need for us to go to any other
point that may arise in th is case."

E When the respondents (legal heirs of the insured) moved the High
Court of Jammu and Kashmir, the Division Bench which heard the matter
reversed the order passed by the State Consumer Commission and held the
insurance company liable to honour the claim. The Division Bench directed
the State Commission to assess the compensation in accordance with law and
pay the same after deducting the amount of premium (as the cheque was
F dishonoured). The following reasoning was mainly adopted by the learned
judge of the Division Bench for holding that the insurance company is liable
on the fact situation:

"While ordering the cancellation of policy in question, respondent
insurance company instead of cancelling the same due to dishonour
G
of cheque of the premium from the date it was issued i.e. 21.12.1993,
chose to cancel it 'with immediate effect'. This clearly indicates that
till the issuance of this communication, respondent insurance company
itself treated the policy subsisting. Besides this, it had not chosen to
treat the same cancelled from the date of issue. In the face of this
H position, this case need not detain us any further and for th is reason
·-,
/

NATIONAL INSURANCE CO LTD. v. SEEMA MALHOTRA [THOMAS, J.] 1135

the argument addressed on behalf of the insurance company based A
on section 64- VB of the Insurance Act also does not hold good.
There was nothing which prevented the insurance company to have
informed the appellants that the policy stood cancelled from the date
of its issuance, and as such it is not liable for the payment of any
compensation."
B
The direction that insurance company can now deduct the premium
amount from the compensation to be fixed is no solace to the insurer. The
essence of the insurance business is the coverage of the risk by undertaking
to indemnify the insured against loss or damage. They agree to pay the
damages arising out of any accident by taking a chance that no accident C
might happen. Motivation of the insurance business is that the premium
would turn to be the profit of the business in _case no damage occurs. Such
business of the insurance company ~n be carried on only with the premium
paid by the insured persons on the insurance policy. The only profit, if at all
the insurance company makes, of the insurance business is the premium paid
when no accident or damage occurs. But to ask the insurance company to D
bear the entire loss of damages of somebody else without the company
receiving a pie towards premium is contrary to the principles of equity, though
the insurance companies are made liable to third parties on account of statutory
compulsions due to the initial agreement, entered between the insured and the
company concerned.
E
A three-Judge Bench in Oriental Insurance Co. ltd. v. !nderjit Kaur,
[1998] 1 SCC 371 left this point unconsidered. In that case also the premium
was paid by cheque which was later dishonoured and the insured was intimated
about it by the insurance company two months after the vehicle got involved
in the accident. When a claim was made by the legal heirs of the driver who F
died in the accident the insurance company resisted the claim on the strength
of Section 64-VB of the Insurance Act of 1938. Repelling the contention of
the insurance company, the three-Judge Bench held thus:

"We have, therefore, this position. Despite the bar created by Section
64- VB of the Insurance Act, the appellant, an authorised insurer, G
issued a policy of insurance to cover the bus without receiving the
premium therefor. By reason of the provisions of Sections 147(5) and
149(1) of the Motor Vehicles Act, the appellant became liable to
indemnify third parties in respect of the liability which that policy
covered and to satisfy awards of compensation in respect thereof
notwithstanding its entitlement (upon which we do not express any H
1136 SUPREME COURT REPORTS [2001] I S.C.R.

A opinion) to avoid or cancel the policy for the reason that the cheque
issued in payment of the premium thereon had not been honoured."

Thus, the three-Judge Bench refrained from expressing any opinion on
the question of insurer's entitlement to avoid or cancel the policy as against
the insured when the cheque issued for payment of the premium was
B dishonoured.

Subsequently the same question was mooted before a two-Judge Bench
of this Court in New India Assurance Co. Ltd v. Ru/a and ors., [2000) 3 SCC
195 but the question of insurer's right to repudiate the claim as against the
C insurer in a similar situation did not arise therein and hence the Bench parried
the question.

Thus the question has now to be considered as the same is the crux
of the issue involved in this case. As pointed out earlier the insurance is a
contract whereby one undertakes to indemnify another against loss, damage
D or liability arising from an unknown or contingent event and is applicable only
to some contingency or act to occur in future. We have to consider how far
the legislature has controlled the insurance business. Section 2(9) of the
Insurance Act defines "insurer", inter a/ia, as "any body corporate carrying
on the business of insurance which is a body corporate incorporated under
any law for the time being in force in India." Section 2(d) of the Act says that
E "every insurer shall be subject to all the provisions of this Act in relation to
any class of insurance business so long as his liabilities in India in respect
of business of that class remain unsatisfied or not otherwise provided for."

It is in the aforesaid context that we have to consider the impact of
Section 64-VB of the Insurance Act. As sub-sections (I) and (2) of the said
F
section alone are material for the purpose we extract them herein:

"(I) No insurer shall assume any risk in India in respect of any
insurance business on which premium is not ordinarily payable outside
India unless and until the premium payable is received by him or is
G guaranteed to be paid by such person in such manner and within such
time as may be prescribed or unless and until deposit of such amount,
as may be prescribed. is made in advance in the prescribed manner.

(2) For the purposes of this section, in the case of risks for which
premium can be ascertained in advance, the risk may be assumed not
H earlier than the date on which the premium has been paid in cash or
NA TI ON AL INSURANCE CO. LTD. v. SEEMA MALHOTRA [THOMAS, J.] 1137

by cheque to the insurer." A
Sub-section (I) is not applicable to cases in which premium is ordinarily
payable outside India. In other words, the insurer has no liability to the
insured unless and until the premium payable is received by the insurer. As
the premium can be paid in cash or by cheque, what is the position when the
cheque issued to the insurer is dishonoured by the drawee bank? B
Sections 51, 52 and 54 of the Indian Contract Act can profitably be
referred to for the purpose of deciding the point. They are subsumed under
the sub- title "Performance of reciprocal promises" in the said Act. Section
51 deals with a contract concerning reciprocal promises to be simultaneously C
performed and in such a contract the promisee is absolved from performing
his promise unless the promisor is ready or willing to perform his part of the
promise. Section 52 says that where the order in which reciprocal promises
are to be performed has not been expressly provided in the contract such
promise shall be performed in that o_rder which the nature of the transaction
warrants it. Illustration (b) given to Section 52 highlights the utility of the D
provision. That illustration is as follows: A and B contract that A shall make
over his stock-in-trade to B at a fixed price, and B promise to give security
for the payment of the money. A's promise need not be performed until the
security is given, for the nature of transaction requires that A should have
security before he delivers up -his stock.
E
Section 54 of the Contract Act is to be read in that background. It is
extracted below: ·

"When a contract consists of reciprocal promises, such that one of
them cannot be performed, or that its performance cannot be claimed
till the other has been performed, and the promisor of the promise last F
mentioned fails to perform it, such promisor cannot claim the
performance of the reciprocal promise, and must make compensation
to the other party to the contract for any loss which such other party
may sustain by the non-performance of the contract."

In a contract of insurance when an insurer gives a cheque towards
G
payment of premium or part of the premium, such a contract consists of
reciprocal promise. The drawer of the cheque promises the insurer that the
cheque, on presentation, would yield the amount in cash. It cannot be forgotten
that a cheque is a Bill of Exchange drawn on a specified banker. A Bill of
Exchange is an instrument in writing containing an unconditional order directing H
1138 SUPREME COURT REPORTS [2001] I S.C.R.

A a certain person to pay a certain sum o: money to a certain person. It involves
a promise that such money would be paid.

Thus, when the insured fails to pay the premium promised, or when the
cheque issued by him towards the premium is returned dishonoured by the
bank concerned the insurer need not perform his part of the promise. The
B corollary is that the insured cannot claim performance from the insurer in such
a situation.

Under Section 25 of the Contract Act an agreement made without
consideration is void. Section 65 of the Contract Act says that when a
contract becomes void any person who has received any advantage under
C such contract is bound to restore it to the person from whom he received it.
So, even if the insurer has disbursed the amount covered by the policy to
the insured before the cheque was returned dishonoured, insurer is entitled
to get the money back.

D However, if the insured makes up the premium even 11fter the cheque
was dishonoured but before the date of accident it would be a different case
as payment of consideration can be treated as paid in the order in which the
nature of transaction required it. As such an event did not happen in this case
the insurance company is legally justified in refusing to pay the amount 1
claimed by the respondents.
E
In the light of the above legal position we uphold the contention of the
appellant insurance company. We, therefore, allow this appeal and set aside
the impugned judgment of the Division Bench of the High Court. The order
passed by the State Consumer Commission will stand restored.

F K.K.T. Appeal allowed.