Decided on: August 8, 2025
Corum: Justice K. Vinod Chandran, Justice N.V. Anjaria
Citation: 2025 SCC OnLine SC 1647
Refining the “Pay and Recover” Doctrine in Cancelled Insurance Policies
Facts
The case originated from a fatal motor accident that occurred on August 22, 2005, in which one Dheeraj Singh (a 36-year-old computer engineer) died after his motorcycle was hit by a truck. The Motor Accident Claims Tribunal (MACT), Delhi, awarded a total compensation of ₹8,23,000/- to Sunita Devi and other legal heirs of the deceased.
The appellant, National Insurance Company Limited (the insurer of the offending vehicle), contested its liability before the MACT and the Delhi High Court, arguing that the insurance policy for the truck had been cancelled prior to the accident due to the dishonour of the premium cheque.
The insurer provided evidence that the policy was cancelled on May 4, 2005, and that both the vehicle owner and the Regional Transport Officer (RTO) were duly informed of this cancellation. Despite the policy cancellation being proven, both the MACT and the Delhi High Court directed the insurer to first satisfy the award and then recover the amount from the vehicle owner.
During the litigation, 50% of the total compensation, along with interest (₹4,11,500 + interest), had already been deposited by the insurer pursuant to an interim court order (dated July 27, 2007) and was subsequently withdrawn by the claimants.
Issues
The core issue before the Supreme Court was whether the insurance company could avoid its liability to pay compensation to the third-party victims when the insurance policy for the offending vehicle was cancelled before the accident due to the non-payment of the premium (bounced cheque). A nuanced aspect was also the recoverability of the compensation amount already disbursed to the claimants.
Court Analysis
The Supreme Court partly allowed the appeal filed by the National Insurance Company Limited. The Court affirmed that the cancellation of an insurance policy due to a bounced cheque or non-payment of premium, when properly intimated before the accident, would, in principle, absolve the insurer from liability to pay motor accident compensation.
However, the Supreme Court refined the “pay-and-recover” doctrine, balancing the interests of third-party victims, the insurer, and the vehicle owner. The Court held that the 50% of the compensation amount already deposited by the insurer and withdrawn by the claimants could not be recovered from the claimants. Instead, the insurer was granted the liberty to recover this 50% amount, along with interest, from the owner of the offending vehicle. For the remaining 50% of the compensation (₹4,11,500 + interest), the claimants were directed to recover it directly from the vehicle owner in accordance with the law.
Reasoning
The Supreme Court’s reasoning was based on several principles:
Validity of Policy Cancellation
The Court confirmed that the insurance policy was legally cancelled due to the dishonoured premium cheque, and proper intimation was given to the owner and the RTO well before the accident. Therefore, in principle, the insurer was not liable as the contract of insurance had been rescinded for failure of consideration.
Protection of Third-Party Victims (Pay and Recover Doctrine)
Despite the valid cancellation, the Court upheld the “pay and recover” approach to protect the third-party victims. This doctrine ensures that the immediate need of accident victims for compensation is met, even if the insurer has a valid defence against the insured. The Court reiterated that third-party rights cannot be defeated by policy cancellation after the policy is issued.
Irretrievable Partial Disbursement
A key refinement introduced was the principle of “irretrievable partial disbursement”. The Court observed that once a portion of the compensation had been deposited by the insurer under interim orders and disbursed to the claimants, it would be “harsh” and would amount to “setting the clock back” to permit recovery of that amount from the vulnerable claimants. Equity forbids recovering funds that have already reached the hands of third-party claimants.
Recovery from Vehicle Owner
Since the insurer was not primarily liable due to the cancelled policy, the ultimate liability rested with the vehicle owner, who was responsible for ensuring a valid insurance policy. Thus, the insurer was permitted to seek reimbursement for the disbursed amount from the vehicle owner, and the claimants were directed to pursue the remaining compensation directly from the owner.
This decision clarified the application of the “pay and recover” doctrine, particularly concerning amounts already disbursed to claimants, by emphasizing that such disbursed amounts are irretrievable from the claimants, shifting the recovery burden entirely to the vehicle owner.