Holding

A contract of insurance is not formed unless the premium is actually received as consideration; a third‑party cheque that is not encashed does not satisfy this requirement, so no valid policy existed and the insurer is not liable, though it must pay the award with liberty to recover from the third‑party payer in the interest of justice.

Summary

The insurer, National Insurance Co. Ltd., issued a cover note for a mini‑bus after receiving a third‑party cheque for the premium, but the cheque was never encashed and the cover note was cancelled. The bus met with an accident and the victim, Yellamma, claimed compensation under s.166 of the Motor Vehicles Act, 1988. The Motor Vehicles Tribunal held no valid policy existed, and the High Court reversed that, holding a third‑party cheque could constitute consideration. The Supreme Court clarified that a contract of insurance requires actual receipt of premium; a cheque not encashed does not constitute payment, so no privity of contract existed between insurer and the third‑party payer and the insurer was not liable under s.147/149. However, invoking Article 142, the Court directed the insurer to pay the award to the victim with liberty to recover the amount from the third‑party payer. The appeal was partly allowed.

Issues considered

The validity of an insurance contract where the premium is tendered by a third‑party cheque that is not encashed
Whether the insurer is liable under s.147/149 of the Motor Vehicles Act, 1988 in the absence of a valid policy
Whether privity of contract exists between the insurer and a third‑party payer of premium
The applicability of Section 64VB of the Insurance Act, 1938 regarding receipt of premium as a condition precedent
The propriety of directing payment of the award by the insurer with liberty to recover from the third‑party payer under Article 142 of the Constitution

Legislation cited

Constitution of Indias. Article 142
Indian Contract Act, 1872s. 25, s. 65
Insurance Act, 1938s. 64VB
Motor Vehicles Act, 1988s. 147, s. 149, s. 166

Subjects

insurance contractthird‑party chequeconsiderationprivity of contractMotor Vehicles ActliabilityArticle 142premium paymentpolicy cancellationclaim petition

Judgment

[2008} 7 S.C.R. 860

NATIONAL INSURANCE CO. LTD.
.... ¥·
A
v.
YELLAMMA & ANR.
(Civil Appeal No. 3317 of 2008)
MAY 6, 2008
B
[S.B. SINHA AND LOKESHWAR SINGH PANTA, JJ.] _._

Contract of insurance - Insurance policy in respect of
bus- Issue of third party cheque by purported insured towards
payment of insurance premium - Cheque not encashed by
c insurer as it was third party cheque and allegedly returned -
Accident of bus - Claim petition - MACT allowed claim but
held insurer not liable to pay compensation on ground that
there was no valid insurance policy - Appeal by victim - No
appeal by purported insured - High Court held that there was
D no provision that consideration for policy should flow from
insured and not from third party - On appeal, Held: Contract .... ~
of insurance like any other contract is a contract between
insured and insurer - Amount of premium is required to be
paid as consideration for arriving at concluded contract - If
E insurer insists that cheque should be issued only by insured
and not by third party no exception thereto can be taken - No
privily of contract came into being between insured and insurer
and as such question of enforcing purported contract of
insurance while taking recourse to s.147 of Motor Vehicles
F Act did not arise - Accident took place in Kamataka and
insured was resident of Ludhiana and transaction was
~ ~
purported to have been entered in Ludhiana - Victim,
therefore, may not be in a position to enforce award against
insurer- In peculiar facts and circumstances of case, interest
of justice would be served if in exercise of jurisdiction under
G
Article 142, it is directed that award be paid by insurer with
liberty to it to recover same from purported insured - Motor
Vehicles Act, 1988- ss.147 and 166- Constitution of India,
1950-Article 142.

H 86G
NATIONAL INSURANCE CO. LTD. v. YELLAMMA 861

-.
&ANR.
Respondent no. 2 sought to take insurance policy in A
respect of mini bus owned by him and issued a third party
cheque towards payment of insurance premium.
The Development Officer of the appellant-insurer
issued a cover note. However, when he noticed that it was
a third party cheque, he contacted respondent no.2 to pay B
_..
the premium amount. It was not tendered and instead the
respondent no.2 allegedly returned the original cover note
and took back the cheque. The original cover note as also
all the duplicate copies thereof were cancelled.
The said insurance cover was issued for the period
c
3.9.1991 to2.9.1992. On or about 12.9.1991, the said vehicle
met with an accident. First respondent who suffered an
injury filed a claim petition in terms of the provisions
contained in s.166 of the Motor Vehicles Act, 1988. An
D
award for a sum of Rs.43,000/- was made. The Tribunal
~
'"'" however held that there was no valid insurance policy as
on the date of accident and as such insurer was not liable
to pay any compensation to the victim. Second
Respondent did not prefer any appeal thereagainst. First
Respondent only preferred an appeal questioning the E
quantum of compensation.
High Court while enhancing the amount of
compensation to Rs.1.50 lacs held that there is no
provision in law that the consideration for policy should F
't .. flow only from the insured and not from the third party
and since the accident has occurred within 15 days from
the date. of issue of cover note, the insurer was liable to
pay the compensation. Hence, the present appeal.
Partly allowing the appeal, the Court G
HELD: 1. It is neither in doubt nor in dispute that all
: the copies including the insurance cover had been
..... produced before the Tribunal to show that original
insurance cover had been taken back by the Development H
862 SUPREME COURT REPORTS [2008] 7 S.C.R.

A Officer concerned for one reason or the other. The
Administrative Officer of the appellant not only examined
himself before the Tribunal but also proved the note
prepared by the Divisional Manager. The Tribunal, on
appreciation of the evidence produced before it, held that
B the vehicle was not legally insured. The High Court,
however, wrongly proceeded on the premise that the
cheque could be issued by a third party. A contract of
insurance like any other contract, is a contract between
the insured and the insurer. The amount of premium is
C required to be paid as a consideration for arriving at a
concluded contract. If the insurer insists that a cheque
should be issued only by the insured and not by a third
party, no exception thereto can be taken. The fact remains
that the cheque was not encashed. Concedely, the insurer
did not make any payment. [Paras 5, 6) [866-A-E]
0
Deddaooa & Ors. v. Branch Manager, National Insurance
Co. Ltd. (2008) 2 SCC 595 - referred to.
2. In today's world payment by cheque is ordinarily
accepted as valid tender but the same would be subject
E to its encashment. A distinction, however, exists between
the statutory liability of the insurance company vis-a-vis
the third party in terms of ss. 147 and 149 of the Motor
Vehicles Act and its liability in other cases but it is clear
that if the contract of insurance had been cancelled and
F all concerned had been intimated th~reabout, the
insurance company would not be liable to satisfy the
claim. [Para 8] [869-C, D]
3. In this case, there cannot be any doubt or dispute
G whatsoever that no privity of contract came into being
between the appellant and the second respondent and
as such the question of enforcing the purported contract
of insurance while taking recourse to s.147 of the Motor
Vehicles Act did not arise. Second respondent did not ~
.•
H contest the case at any stage. It did not adduce any
NATIONAL INSURANCE CO. LTD. v. YELLAMMA 863
_.. & ANR. [S.B. SINHA, J.]

evidence before the Tribunal. It did not appeal from the A
judgments of the High Court. No argument in the appeal
was advanced in his behalf. No appearance has been
made on behalf of the respondent no.2 despite service of
notice before this Court also. [Para 9] [869-E, F, G]
___.. -ol 4. The accident took place in the State of Karnataka. B
Respondent no.2 is a resident of Ludhiana. The
transaction in question was purported to have been
entered in Ludhiana. First respondent, therefore, may not
be in a position to enforce the award as against the
respondent no.2. In the peculiar facts and circumstances c
of the case, therefore, the interest of justice would be
subserved if in exercise of jurisdiction under Article 142
of the Constitution of India, it is directed that the awarded
amount be paid by the appellant to the first respondent
with liberty to it to recover the same from the second D
~ ·:r respondent by initiating an appropriate proceeding in this
behalf. [Paras 10,11] [869-G, A, B, C]
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 3317
of 2008
E
From the Order dated 23.3.2005 of the High Court of
Karnataka, Bangalore in M.F.A. No. 1110/2000
M.K. Dua, Kishore Rawat and Dhiraj for the Appellant.
Uday Umesh Lalit, (A.C.) for the Respondents. F
\
~ ~

The judgment of the Court was delivered by
S.B. SINHA, J. 1. Leave granted.
2. Respondent No.2 was the owner of a Mini Bus. An
insurance policy in respect of the said vehicle was sought to be G
taken by him. For the said purpose, the second respondent
~
_.;.
issued a third party cheque towards payment of insurance
premium.
The Development Officer of the appellant by inadvertence
H
864 SUPREME COi JRT ~EP0PTS f20081 7 '.'.) (': p

A issued a cover note. However. when the said mistake came to
his notice, the respondent No.2 was contacted by the
Development Officer. He was asked to pay the amount of
premium. It was not tendered and in stead the respondent No.2
is said to have returned the original cover note and took back
a the cheque. The original cover note as also all the duplicate _... \.
copies thereof was cancelled
The said insurance cover was issued for the period
3.9.1991 to29.1992. On or about 12.9.1991, the said vehicle
met with an accident. First respondent who suffered an injury
C therein filed a claim petition m terms of the provisions contained
1n Section 166 of the Motor Vehicles Act, 1988 (the Act). An
award for a sum of Rs.43,000/- was made The Tribunal, in its
award, categorically held
"The petitioners have produced Ex P. 7 the Xerox copy of
D
the cover note ExR .1. There is all the chances of the
owner of the vehicle having taken Xerox copy of the cover
note Ex.R.1 and returning the original cover note Ex.R.1 to
the insurance company as deposed by RVV 1. ff really the
cover note was not cancelled. the original cover note should
E have been with the insured and respondent No.3 could
not have produced the original co·1er note EY.R 1. Hence,
the case of 3rd respondent that the owner of the vehicle
had given third party cheque and that later he had taken

F
back the cheque and returned the 6riginal cover note
Ex.R.1 to the insurance company and that the insuran('.e
.(
company has cancelled cover note is more probable As
Ex.P.7 is the Xerox copy of the original cover note Ex.R.1
and as the original cover note Ex.R.1 and its copies
Exs.R.2 to R.4 have been produced by the insurance
G company, the argument of the learned counsel for the
petitioners that respondent No.3 is liable to pay the ....
compensation cannot be accepted. Hence, from the above
discussion, I hold that there was no valid insurance policy
· as on the date of the accident and as such the respondent
H , No.3 is not liable to pay any compensation to the
.
,
NAl IONAL INSURANCE CO. LTD v. YELLAMMA 865
& ANR [S.S. SINHA, J.]

petitioners." A
J ~econd Respondent did not prefer any appeal
thereagainsf. Rirst Respondent only preferred an appeal
questioning the quc:1nturn of compensation
11.t I ilgl 1Li.,ur l. Ly 1eason of the impugned judgment, s
w1t11e enhancing the arnount ot compensation to a sum of
Rs.1,50,000/ , held :
''The above provision disclose that a policy can be issued
against the issuance of cheque and the liability commences
from the date of issuance of cheque and not from the date C
of its encashment. There is no provision in law that tfle
consideration for policy should flow only from the insured
and not from the third party. The development officer has
acted in a hasty manner. No attempt was made to present
the cheque for encashment. If the cheque was encashed D
it was well and good for the insurer otherwise steps could
have been taken for cancellation of the policy Ex.R .1. The
reason that the cheque is not issued by the insured is not
a ground for valid cancellation. The endorsement of
cancellation is vague, it does not bear the date. The officer E
who has mac.le endorsement of cancellation is not
exarnined. The endorsement of the insured is not taken
on the policy to substantiate that the cancellation was with
due notice and knowledge by the insured. Therefore, under
the above circumstances, the very cancellation of the policy F
for untenable reason is bad in law. The accident has
occurred within 15 days from the date of issue of cover
note. He11<.:e. the insurer is liable to pay the compensation."
4 Mr Dua, learned coU11sel appearing on behalf of the
appellant, would submit that keeping in view the provisions G
contained in Section 65(v)(b) of the Insurance Act, 1938 and
furthermore in view of the finding of fact arrived at by learned
Motor Vehicles Accidents Claims Tribunal which was not
questioned by the insured, the impugned judgment cannot be
sustained. H
866 SUPREME COURT REPORTS [2008] 7 S. C.R.

A As nobody had appeared despite service of notice on
behalf of the respondent, we requested Mr. U.U. Lalit, senior
counsel to assist us.
5. It is neither in doubt nor in dispute that all the copies
including the insurance cover which were marked as Ex. R.1 to
B R.4 had been produced before the Tribunal to show that original
insurance cover had been taken back by the Development
Officer concerned for one reason or the other.

The Administrative Officer of the appellant not only
c examined himself before t:ie Tribunal but also proved the note
prepared by the Divisional Manager of Ludhiana which was
marked as Ex.R.5. The. Tribunal, as noticed hereinbefore, on
appreciation of the evidtnce produced before it, held that the
vehicle was not legally insured.
D 6. The High Court, however, wrongly proceeded on the
premise that a cheque could be issued by a third party.
A contract of insurance like any other contract, is a contract
between the insured and the insurer. The amount of premium is
E required to be paid as a consideration for arriving at a concluded
contract. If the insurer insists that a cheque should be issued
only by the insured and not by a third party, no exception thereto
can be taken. The fact remains that the cheque was not
encashed. Concededly, the insured did not make any payment.
F Section 64VB of the Insurance Act mandates that before
a contract of insurance comes into being, the premium should
be received by the insurer in advance, stating :
"Section 64VB - No risk to be assumed unless
premium is received in advance- (1) No insurer shall
G 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 guaranteed to be paid by such person
in such manner and within such time as may be prescribed
H or unless and until deposit of such amount as may be
NATIONAL INSURANCE CO. LTD. v. YELLAMMA 867
& ANR. [S.B. SINHA, J.]
~

prescribed, is made in advance in the prescribed manner. A
(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 earlier than the date on which the
premium has been paid in cash or by cheque to the insurer.
~ ~-
B
Explanation.-Where the premium is tendered by postal
money order or cheque sent by post, the risk may be
assumed on the date on which the money order is booked
or the cheque is posted, as the case may be."

7. The question came up for consideration recently before c
this Court in Deddaooa & Ors. v. Branch Manager, National
Insurance Co. Ltd. [(2008) 2 SCC 595], wherein upon noticing
the precedents which were operating in the field, it was clea[Jy

.. r
held:
"18. The ratio of the said decision was, however, noticed
by this Court in New India Assurance Co. Ltd. v. Ru/a and
D

Ors. [(2003) 3 sec 195]. It was held that ordinarily a
liability under the contract of insurance would arise only on
payment of premium, if such payment was made a
condition precedent for taking effect of the insurance policy E
but such a condition which is intended for the benefit of
the insurer can be waived by it. It was opined:
'13 ... If, on the date of accident, there was a policy of
insurance in respect of the vehicle in question, the F
.,. third party would have a claim against the Insurance
Company and the owner of the vehicle would have to
be indemnified in respect of the claim of that party.
Subsequent cancellation of the insurance policy on
the ground of non-payment of premium would not G
affect the rights already accrued in favour of the third
party.'
The dicta laid down therein clarifies that if on the date of
accident the policy subsists, then only the third party would
be entitled to avail the benefit therof. H
868 SUPREME COURT REPORTS (2008] 7 S.C.R

A 19. Almost an identical question again came up for
... .
consideration before this Court in National Insurance Co.
Ltd. v. Seema Malhotra and Ors. ((2001) 3 SCC 151], a
Division Bench noticed both the aforementioned decisions
and analysed the same in the light of Section 64-VB of the
B 1938 Act. It was held:
'17. In a contract of insurance when the 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
c insurerthat•he 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 t~ill of exchange is an instrument in writing
containing an unconditional order directing a certain
D person to pay a certain sum of money to a certain
person. It involves a promise that such money would
be paid.
18. Thus, when the insured fails to pay the premium
...
-
promised, or when the cheque issued by him towards
E 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.
F
19. Under Section 25 nf 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 such contract is bound to restore
G
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, the insurer is entitled to get
the money back.
H
NATIONAL INSURANCE CO. LTD. v. YELLAMMA 868
& ANR. [S.B. SINHA, J.]

20. However, if the insured makes up the premium A
even after 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 B
Insurance Company is legally justified in refusing to
pay the amount claimed by the respondents.'
20. A contract is based on reciprocal promise. Reciprocal
promises by the parties are condition precedents for a
valid contract. A contract furthermore must be for C
consideration."
8. In today's world payment by cheque is ordinarily
accepted as valid tender but the same would be subject to its
encashment. A distinction, however, exists between the statutory
0
liability of the insurance company vis-a-vis the third party in terms
of Sections 147 and 149 of the Motor Vehicles Act and its liability
in other cases but it is clear that if the contract of insurance had
been cancelled and all concerned had been intimated
thereabout, the insurance company would not be liable to satisfy E
the claim.
9. In this case, there cannot be any doubt or dispute
whatsoever that no privity of contract came into being between
the appellant and the second respondent and as such the
question of enforcing the purported contract of insurance while F
taking recourse to Section 147 of the Motor Vehicles Act did
not arise.
Second respondent did not contest the case at any stage.
It did not adduce any evidence before the Tribunal. It does not
appeal from the judgments of the High Court. No argument in G
the appeal was advanced in his behalf. Before us also, no
appearance has been made on behalf of the respondent No.2
despite service of notice.
10. The accident took place in the State of Karnataka. H
870 SUPREME COURT REPORTS [2008] 7 S.C.R.

,... ,,•
A Respondent No.2 is a resident of Ludhiana. The transaction in I
question was purported to have been entered in Ludhiana. First
respondent, therefore, in our opinion, may not be in a position
to enforce the award as against the respondent No.2.
11. In the peculiar facts and circumstances of this case,
8 we are, therefore, of the opinion that the interest of justice would
be subserved if we, in exercise of our jurisdiction under Article
142 of the Constitution of India, direct that the awarded amount
be paid by the appellant to the first respondent with liberty to it
to recover the same from the second respondent by initiating
C an appropriate proceeding in this behalf.

12. This appeal is allowed to the aforementioned extent
and with the aforementioned directions. As the respondents have
not appeared before us, there shall be no order as to costs.
D D.G. Appeal partly allowed.