Court directs insurer to pay compensation under Motor Vehicles Act and Employee’s Compensation Act; insurer entitled to recover amount from insured under “pay and recover” principle.
In a significant judgment delivered on 20th July 2026, the Bombay High Court (Nagpur Bench) ruled that an insurance company cannot evade its statutory liability to indemnify third parties under a motor insurance policy merely because the premium cheque issued by the insured was dishonoured. The Court held that unless the insurer follows proper cancellation procedures, including informing the Regional Transport Authority (RTA), the insurer remains liable to compensate third parties involved in accidents caused by the insured vehicle.
The appeal was filed by HDFC ERGO General Insurance Co. Ltd. challenging a compensation award of Rs. 13,60,275/- granted under the Employee’s Compensation Act, 1923 to the dependents of the deceased driver, Kishor Shende, who died in a fatal accident while driving a goods carrier vehicle insured by the appellant. The insurance company contended that since the premium cheque was dishonoured and they had informed the vehicle owner about the policy being void from inception, they were not liable to pay compensation.
However, the Court noted that the insurance policy was never formally cancelled, as there was no endorsement of cancellation on the policy and, crucially, no intimation was sent to the Regional Transport Authority as required under the Insurance Tariff Advisory Committee Rules (GR.24). The Court emphasized that the insurer’s statutory obligation under Sections 147 and 149 of the Motor Vehicles Act, 1988 to indemnify third parties exists independently of contractual disputes regarding premium payment.
The Court extensively analyzed precedents including the landmark Supreme Court judgments in Inderjit Kaur v. Oriental Insurance Co. Ltd. (AIR 1998 SC 588), United India Insurance Co. Ltd. v. Laxmamma (AIR 2012 SC 2817), and Deddappa v. Branch Manager, National Insurance Co. Ltd. (2008) 2 SCC 595. It reaffirmed that once an insurance policy is issued, the insurer cannot disclaim liability to third parties due to non-payment of premium, unless the policy is duly cancelled and the RTA notified.
Additionally, the Court applied the “pay and recover” principle laid down by the Supreme Court in National Insurance Co. Ltd. v. Challa Upendra Rao (AIR 2004 SC 4882), directing the insurance company to pay the compensation to the claimants and then recover the amount from the insured vehicle owner through execution proceedings without filing a separate suit.
The Court criticized the vehicle owner for negligence, noting that despite receiving notice of the dishonoured cheque and policy status, he failed to take corrective action or participate in the appeal proceedings.
In conclusion, the Bombay High Court dismissed the insurance company’s appeal, upheld the compensation order, and modified it to clarify that the insurer can recover the paid amount from the insured. The judgment strikes a balance between protecting third-party victims and allowing insurers recourse against defaulters, reinforcing procedural safeguards to be followed before policy cancellation.
Bottom Line:
Insurance Company cannot deny its statutory liability to indemnify third parties under a motor insurance policy, even if the premium cheque issued by the insured is dishonored, unless proper cancellation procedures, including informing the Regional Transport Authority, are followed.
Statutory provision(s):
Motor Vehicles Act, 1988 Sections 146, 147, 149; Employees Compensation Act, 1923 Section 22; Insurance Act, 1938 Section 64-VB; Tariff Advisory Committee Rules (GR.24).
