Insurance Company Not Liable If Policy Cancelled Due To Premium Cheque Dishonour: Madhya Pradesh HC

The Madhya Pradesh High Court has ruled that an insurance company cannot be held liable to compensate third parties, even under the 'pay and recover' doctrine, if the insurance policy was duly cancelled and the insured was intimated following the dishonour of a premium cheque prior to the accident.

Justice Vinay Saraf dismissed a miscellaneous appeal filed by a claimant seeking to fasten liability on the insurer. The court examined whether the Motor Accident Claims Tribunal was correct in exonerating the insurance company when the premium cheque had bounced and the policy was cancelled months before the incident occurred.

The Doctrine of Pay and Recover and Policy Cancellation

The Court observed that while the doctrine of 'pay and recover' is a beneficial principle intended to protect third parties, it cannot be applied when the contract of insurance itself stands voided due to non-payment of premium and subsequent intimation. The court noted that the Motor Vehicles Act, 1988 and the General Clauses Act, 1897 play a crucial role in determining the validity of such service of notice.

The Court, in its reasoning, observed: "The dates are also material in the present case. The policy was cancelled on 20/10/2008 and the intimation was posted on 24/10/2008, whereas the accident occurred on 29/01/2009 i.e. after a period of three months and it cannot be accepted that despite dishonour of cheque of premium and cancellation of policy, the Insurance Company was continued to be liable to the third party."

Judicial Precedents on Insurer's Liability

The Court distinguished the present case from Oriental Insurance Co. Ltd. Vs. Mahesh Prasad Rawat and Others, noting that in the latter, there was no proof of intimation to the insured. It also referred to Oriental Insurance Co. Ltd. Vs. Inderjit Kaur and Others and New India Assurance Co. Ltd. Vs. Rula and Others regarding the application of the pay and recover principle. However, the Court relied heavily on the principles in National Insurance Co. Ltd. Vs. Swaran Singh and Others ( "(2004) 3 SCC 297": 2004 CaseBase(SC) 114) and Amrit Paul Singh and Another Vs. Tata AIG General Insurance Company Limited and Others ( "(2018) 7 SCC 558": 2018 CaseBase(SC) 1249) to establish that a fundamental statutory infraction or a cancelled policy shifts the burden away from the insurer.

The Court further noted the recent Supreme Court view in National Insurance Company Limited Vs. Sunita Devi and Others ( "2025 SCC OnLine SC 1647": 2025 CaseBase(SC) 750), which held that if a policy is cancelled due to a bouncing cheque and intimation is sent, the insurer is not liable. Other cases cited by the appellant, including S. Latha and Another Vs. United India Insurance Co. Ltd. and Others and Lakhmi Chand, were deemed distinguishable on facts.

Court Directions

The Court has the following directions:

"In view of the above conspectus, no case for interference is made out. The Tribunal has not committed any error in exonerating the Insurance Company from the liability to pay the compensation to the claimant. Similarly, Tribunal has not committed any error in not passing any award of pay and recover. With the aforesaid, present appeal is dismissed. No order as to costs. Memo of costs be prepared."

Background:

The dispute arose from an accident on January 29, 2009, when the appellant, sitting in a loading rickshaw, was injured after being hit by a truck. The claimant sought Rs. 10,00,000/- in compensation. The Motor Accident Claims Tribunal awarded Rs. 1,47,460/- but exonerated the Insurance Company (Respondent No. 3) because the premium cheque issued by the owner had been dishonoured on October 13, 2008. The insurer proved they had sent a cancellation notice via registered post to the insured and the RTO on October 24, 2008.

The appellant argued that the insurance company failed to prove the actual service of the notice. However, applying Section 27 of the General Clauses Act, 1897, the Court held there is a presumption of service for registered posts unless proved otherwise. Since the accident occurred three months after the policy was cancelled, the Court found no reason to apply the 'pay and recover' rule and upheld the Tribunal's decision.

Case Details:
Case No.: MISC. APPEAL No. 498 of 2012
NeutralCitation: 2026:MPHC-IND:16723
Case Title: BHAIRAM Vs. SURESH AND 2 ORS. AND OTHERS
Appearances:
For the Petitioner(s): Shri R. N. Dave - Advocate
For the Respondent(s): Shri Pradip Kumar Gupta - Advocate for respondent No.3

Source: 2026 CaseBase(MP) 68