NATIONAL INSURANCE CO. LTD. versus SEEMA MALHOTRA AND OTHERS

Citation: [2001] 1 S.C.R. 1131 · Decided: 20-02-2001 · Supreme Court of India · Bench: K.T. THOMAS · Disposal: Appeal(s) allowed
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Judgment (excerpt)

"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 
of insurance consists of reciprocal promise, insurer need not pe1for111 his part c 
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/ D 
insurance company vide letter dated 20.01.1994 cancelled the insurance policy 
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 H 
I 131 
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. 
E 
F 
11135-C-Di 
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. 
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. 
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