Policy to be useless in absence of payment of premium -- SC

Policy to be useless in absence of payment of premium -- SC
PRESS TRUST OF INDIA

NEW DELHI, FEB 20: In a significant judgement bringing out the intricacies in an insurance policy, the Supreme Court today ruled that an insurance company could refuse to honour a policy, if a premium is not paid or a cheque issued towards the premium is dishonoured.

"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," a division Bench comprising Justice K T Thomas and Justice R P Sethi said.

One Yash Paul Malhotra insured his car with National Insurance Company for Rs. 1.5 lakh on December 21, 1993, and gave a cheque of Rs. 4,492 towards the first instalment of the premium. However, on December 31, 1993, Malhotra died in a car accident and his car was completely damaged.

On January 10, 1994, the bank on which the cheque was drawn sent a communication to the Insurance Company saying that the cheque was dishonoured as there was no fund in the account of the insurer.

The widow and children filed a claim for the loss of the vehicle but the company rejected the claim. The State Consumer Protection Commission also rejected the claim.

But the Jammu and Kashmir High Court reversed the order passed by the Commission and held that the Insurance Company was liable to honour the claim.

The apex Court set aside the High Court order saying as the premium was not paid, the essence of a valid contract between the person taking a policy and the Insurance Company was violated.

Justice Thomas, writing the judgement for the Bench, said under Section 25 of the Contract Act an agreement without consideration was 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," he said.

Justice Thomas said even if the insurer has disbursed the amount covered by the policy to the insured before the cheque was returned dishonoured, the insurer was entitled to get the money back.

However, the Bench said if the insured made 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 could be treated as paid in the order in which the nature of transaction required it.

In the present case, Justice Thomas said as the consideration was not paid, the insurance company was legally justified in refusing to pay the amount claimed by the widow and children of Malhotra.

The apex Court said the essence of the insurance business was the coverage of the risk by undertaking to indemnify the insured against loss or damage and added that the company agrees to pay the damages arising out of any accident by taking a chance that no accident 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 person on the insurance policy," Justice Thomas said.

He said to ask the insurance company to bear the entire loss of damages of somebody else without the company receiving any money towards premium is contrary to the principles of equity.

This was irrespective of the fact that insurance companies were made liable to third parties on account of statutory compulsions due to the intial agreement entered between the insured and the company, the Court clarified.

Referring to payment of premium through cheque, the Court said the drawer of the cheque promises the insurer that the cheque, on presentation, would yeild the amount in cash.

When the cheque is dishonoured the promise to pay the premium was broken and as a result the insurer need not perform his part of the promise to make good the damages.