Insurance – Policy issued on receipt of cheque and subsequently dishonoured but vehicle ply on road without valid insurance – HC found that 2002 Notification of Online mode of payment of insurance premium kept in the dark

It is common experience and knowledge that an insurance policy is issued on receipt of cheque and subsequently the cheque is dishonoured.  However, such a vehicle continue to ply on the road and the law enforcement agencies such as police and transport could not verify whether policy was cancelled or not on that day.  Secondly, by issuing insurance policy without receiving the payment the insurers allow the vehicles ply on the road without valid insurance.

The court observed that when insurance policy was issued on receipt of cheque and it was subsequently dishonoured, law enforcement agencies such as police and transport authorities could not prevent those vehicles from plying on the road since the insurance policy already issued was shown to them.

They could not be expected to verify whether the policy was cancelled or not on that date. By issuing the insurance policy without receiving the payment, the insurers were indirectly allowing the vehicles to ply on the road without valid insurance.   In case the policy was cancelled subsequently due to dishonour of cheque, etc., the insurer had to absolve itself of liability to prove that it had sent mandatory notice to the owner and driver of the offending vehicle.

Insurance Regulatory and Development Authority (Manner of Receipt of Premium) Regulations came into force on 17.10.2002, approving payment of premium through cash, banking negotiable instruments such as cheques, demand drafts, pay orders, banker’s cheques drawn on any scheduled bank in India, postal money orders, credit or debit cards, bank guarantee or cash deposit, internet, e-transfer, direct credits via standing instructions, proposer, policyholder or life insured through bank transfer and any other method of payment approved by the authority.

In the instant case, the insurer denied liability in view of dishonour of cheque, cancellation of policy informed to the owner / RTO  and absence of valid insurance on the date of accident.   The claimants are third parties.

Judgment dated 29.9.2023 – M/s. Royal Sundaram Alliance Insurance Company Ltd Vs. Poolraj and others in C.M.A. (MD) Nos.1173, 1174 and 1175 of 2012 with connected matters.