2001 (2) TMI 917 - SC - Companies Law

Cheque 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 ? Held that - Appeal allowed. 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 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 the insurer is entitled to get the money back. However if the insured makes up the premium 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 insurance company is legally justified in refusing to pay the amount claimed by the respondents.

Summary

Issues:
1. Liability of the insurer to honor the contract of insurance when the insured's cheque for the premium is dishonored.
2. Interpretation of statutory provisions under the Motor Vehicles Act, 1988, and the Insurance Act, 1938, in relation to insurance contracts.
3. The impact of section 64VB of the Insurance Act on the insurer's liability in case of dishonored premium cheques.
4. Application of the Indian Contract Act provisions on reciprocal promises and default in insurance contracts.

Issue 1: Liability of the insurer when insured's cheque is dishonored:
The insured gave a cheque for the first premium amount, which was dishonored due to insufficient funds. The insurer disputed liability when the claim was made by the insured or legal heirs directly. The High Court held the insurer liable as it chose to cancel the policy after the cheque bounced, not before, incurring liability prior to cancellation.

Issue 2: Interpretation of statutory provisions:
The Motor Vehicles Act, 1988, mandates insurer liability against third parties. The Insurance Act, 1938, under section 64VB, requires consideration for a valid contract. The insurer's obligation is contingent on receiving the premium. The High Court held the insurer liable based on the timing of policy cancellation.

Issue 3: Impact of section 64VB of the Insurance Act:
Section 64VB prohibits assuming risk without receiving the premium. When the premium cheque is dishonored, the insurer is not obligated to honor the contract. The insurer can cancel the policy if consideration is not received. The court emphasized the importance of consideration in insurance contracts.

Issue 4: Application of the Indian Contract Act provisions:
Reciprocal promises in insurance contracts involve the insured's promise to pay the premium and the insurer's promise to provide coverage. If the insured fails to pay the premium, the insurer is not bound to fulfill its promise. The insurer can repudiate the claim and seek reimbursement if the premium is not received.

In conclusion, the Supreme Court upheld the insurer's right to repudiate the claim when the insured's premium cheque was dishonored. The court emphasized the importance of consideration in insurance contracts and the insurer's obligation to receive the premium before assuming risk. The decision reaffirmed the legal principles governing insurance contracts and reciprocal promises under the Indian Contract Act.