Who Pays When Insurance Policy is Cancelled Before Accident? SC Balances Law and Equity

In a ruling that balances strict contractual liability with the equitable rights of accident victims, the Supreme Court on August 8, 2025 held that while an insurer stands absolved in law from paying third-party compensation once a motor insurance policy is validly cancelled due to non-payment of premium and the cancellation is duly intimated before an accident, the court may still, in the interest of justice, direct the insurer to pay first and recover later from the vehicle owner.

A Bench of Justices K. Vinod Chandran and N. V. Anjaria delivered the decision while hearing an appeal by National Insurance Company Limited challenging a Delhi High Court judgment that upheld a Motor Accident Claims Tribunal (MACT) award in favour of the dependants of Dheeraj Singh, a 36 year old computer engineer who died in a road accident on August 22, 2005.

Singh was riding his motorcycle with a pillion passenger when a speeding truck (registration number HR 46 A 1020) hit the vehicle from behind, causing him to fall and be run over.

The MACT found the truck driver solely negligent and, applying a multiplier of 17 based on Singh’s age and his monthly income of Rs. 3,364, awarded a total compensation of Rs. 8,23,000 to his widow Sunita Devi and other legal heirs.

Before the Tribunal and the High Court, the insurer’s principal defence was that the policy covering the offending truck had been cancelled more than three months prior to the accident.

The premium cheque issued by the vehicle owner had bounced for insufficient funds, and, on May 4, 2005, the company had issued a cancellation letter, which was duly communicated to the owner and to the Regional Transport Officer (RTO).

The insurer relied on National Insurance Co. Ltd. v. Seema Malhotra (2001) 3 SCC 151, Deddappa v. Branch Manager, NICL (2008) 2 SCC 595, and United India Insurance Co. Ltd. v. Laxmamma (2012) 5 SCC 234 to argue that no liability to pay or deposit compensation could arise when the contract of insurance had already been rescinded for failure of consideration.

In Seema Malhotra, the Court had held that dishonour of the premium cheque exonerated the insurer from performing its part of the contract. In Deddappa, it went further to declare the policy rescinded in such circumstances but, invoking Article 142 of the Constitution, directed the insurer to pay compensation first and recover from the vehicle owner.

Laxmamma reiterated the statutory principle that an insurer’s liability towards third parties subsists unless cancellation and intimation occur before the accident, while also applying the “pay and recovery” approach.

The claimants argued that the direction to the insurer to pay first was justified in the interests of justice and that the company had already deposited half of the award with interest, which they had withdrawn.

The Bench, after examining the evidence, accepted that the insurer had proved the cancellation of the policy due to the dishonoured cheque and had communicated it to all concerned well before the accident. On strict legal principles, this would absolve the company from liability.

However, drawing from Deddappa and Laxmamma, the Court emphasised that in similar situations it had consistently exercised discretion to protect the immediate rights of victims by ordering payment first, followed by recovery from the vehicle owner.

“Depositing of the compensation amount by the Insurance Company as above could be well said to be conforming the law laid down by this Court,” the Bench observed, adding that permitting recovery from the claimants for amounts already withdrawn would be “not only harsh but would amount to setting the clock back.”

Accordingly, the Court ruled that:

The 50% compensation already deposited by the insurer with interest and withdrawn by the claimants would remain with them, and no recovery would be allowed from their share. The insurer could recover that 50% amount, with interest, from the owner of the offending truck in accordance with law. The remaining 50% of the compensation, with interest, could be recovered directly by the claimants from the truck owner.

The bench reiterated two key principles; first, that valid cancellation of a policy before an accident can shield the insurer from primary liability; and second, that courts may still invoke the “pay and recovery” doctrine to ensure victims are not left uncompensated while lengthy recovery proceedings unfold.

Case Title: National Insurance Company Limited v. Sunita Devi & Ors.

Date of Judgment: August 8, 2025

Bench: Justices K. Vinod Chandran and N. V. Anjaria