Where an insurance company issues third-party insurance cover to the owner of a vehicle on the basis of cheque payment, it will be liable to compensate the third-party's claim if the latter meets with an accident, even if the cheque for the premium amount is dishonoured.

Only if the insurance company has cancelled the policy following such dishonour and has intimated the owner before the accident, can it reject such a claim.

This verdict of the Supreme Court in United India Insurance vs Laxmamma is bound to result in insurers pulling up their socks and not issuing the policy until the premium cheque has actually been encashed on presentation.

The owner of the vehicle took an insurance policy for a year by paying the premium through a cheque, on the basis of which the insurer issued a policy, including third-party liability, under the Motor Vehicles Act that mandates third-party insurance. But the cheque bounced.

An accident occurred resulting in the death of the relative of the respondent, thus entitling her family to compensation.

The insurance company, however, cancelled the policy after the date of the accident and brought the factum of cancellation due to dishonour of the cheque, a few days later.

But its goose was cooked; because of this delinquency, it had to pay up, despite not having got the premium.

( The author is a New Delhi-based chartered accountant )

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