Bombay High Court: Policy Cancellation No Shield for Insurer Without Proper Notice to Vehicle Owner

Bombay High Court: Policy Cancellation No Shield for Insurer Without Proper Notice to Vehicle Owner

The Aurangabad Bench of the Bombay High Court has held that an insurance company remains liable under the “pay and recover” principle even after cancelling a policy, provided the vehicle owner was not notified of the cancellation before the accident.

Sitting at Aurangabad, Justice Kishore C Sant dismissed HDFC Ergo's appeal against a Motor Accident Claims Tribunal (Jalgaon) judgment. The Tribunal had directed the insurer to pay compensation to the family of a deceased accident victim, with the right to subsequently recover the amount from the vehicle owner.

Despite asserting that the insured received the cancellation notice prior to the accident, HDFC Ergo faced a crucial hurdle: lack of concrete evidence. The Court pointed out that the notice, allegedly sent, could not be served due to an incomplete address, effectively leaving the insured uninformed of the policy cancellation.

Tragedy struck on the Nashirabad road as an auto-rickshaw travelling from Jalgaon collided with a truck ahead, instantly killing a passenger. The truck's sudden braking is believed to have caused the fatal accident.

Demanding ₹25 lakh in compensation, the deceased's family filed claims against both the rickshaw owner and the insurance company. However, the insurer contested the claim, highlighting a breach of policy terms. They elaborated that the policy had been cancelled after the policyholder's cheque for premium payment bounced due to a closed account.

Splitting liability, the Motor Accident Claims Tribunal ordered the auto owner to pay ₹3.87 lakh (including no-fault compensation) while directing the insurer to initially cover the costs and seek recovery from the owner.

Dissatisfied with the Motor Accident Claims Tribunal's judgment, HDFC Ergo decided to challenge it by filing an appeal.

Representing the insurance company, Advocate Deshmukh asserted that the policy was not valid at the time of the accident due to two factors: the dishonoured cheque for the renewal premium and the subsequent expiry of the policy term.

Advocate Deshmukh pointed out that the “pay and recover” order, requiring the insurer to initially cover and later recover from the owner, was untenable without a valid policy. He further highlighted that while the insurance company attempted to notify the insured of the cancellation, the notice itself could not be delivered due to an incomplete address on the envelope.

Representing the deceased's family, Advocate Vishnu B Madan Patil asserted the absolute necessity of proper intimation for policy cancellation. He further demanded undeniable proof that the insured had actually received such a notice, emphasizing the strict legal requirements surrounding effective notice delivery.

The insured's previous policy expired on February 22, 2015. Despite issuing a renewal cheque on December 12, 2015, the accident occurred on March 28, 2015, before the renewal's completion. Notably, the insurance company attempted to send a cancellation notice on March 12, 2015, but it was not delivered due to an incomplete address.

Drawing on the Supreme Court precedent in United India Insurance Co. Ltd. v. Laxmamma and Ors., and the requirement of advance premium payment under Section 64-VB of the Insurance Act, the Court emphasised the importance of both effective policy cancellation and clear notification to the insured before the accident date for the insurer to be freed from any obligation.

The Court acknowledged the relevance of National Insurance Co. Ltd. v. Seema Malhotra and Ors., but distinguished it from the present case due to its unique features. Firstly, this case involved a claim by passengers under beneficial legislation, unlike the owner/driver situation in the Seema Malhotra case. This crucial distinction, among others, rendered the previous case not directly applicable to the current circumstances.

Finding the appellant's evidence of notified cancellation unconvincing and prioritising the rights of third-party claimants under the beneficial Motor Vehicles Act, the Court ultimately dismissed the appeal. This decision drew upon the precedent set by the Supreme Court in Oriental Insurance Co. Ltd. v. Inderjit Kaur & Ors., reaffirming the insurer's obligation to compensate third-party claimants regardless of policy disputes.

Deeming the appellant's arguments insufficient to overturn the tribunal's findings, the Court dismissed the appeal. This decision paved the way for the claimants to withdraw the compensation amount initially deposited by the appellant, along with any accumulated interest.