The Insurer: Duties, Defences and Pay and Recover

Sub-section (2): notice, and the closed list of defences. No sum is payable unless the insurer had notice through the court or Tribunal of the bringing of the proceedings, and nothing is payable while execution is stayed pending appeal. An insurer so noticed is entitled to be made a party and to defend only on these grounds:

(a) breach of a specified condition of the policy, being a condition

• (i) excluding use of the vehicle (A) for hire or reward where the vehicle was not covered by a permit to ply for hire or reward, (B) for organised racing and speed testing, (C) for a purpose not allowed by the permit, in the case of a transport vehicle, or (D) without a side-car attached, in the case of a two-wheeled vehicle;
• (ii) excluding driving by a named person, by a person not duly licensed, by a person disqualified during the period of disqualification, or driving under the influence of alcohol or drugs as laid down in section 185;
• (iii) excluding liability for injury caused or contributed to by conditions of war, civil war, riot or civil commotion;

(b) that the policy is void because it was obtained by non-disclosure of a material fact or by representation of a fact false in a material particular; or

(c) non-receipt of premium as required by section 64VB of the Insurance Act 1938.

Sub-section (4): everything else is of no effect. So much of the policy as purports to restrict the insurance by reference to any condition other than those in sub-section (2) is, as respects the liabilities required to be covered by section 147(1)(b), of no effect.

Sub-section (5). A noticed insurer cannot avoid liability otherwise than in the manner provided by sub-section (2).

Sub-section (6). If the claimant does not know which company insured the vehicle, it is the duty of the owner to tell the Tribunal or court whether the vehicle was insured on the date of the accident and, if so, with which company.

Sub-section (3). A judgment from a court in a reciprocating country, conclusive under section 13 of the Code of Civil Procedure 1908, is satisfied in the same way, on similar notice.

The Explanation defines "award" as an award of the Claims Tribunal under section 168; "liability covered by the terms of the policy" as the liability covered, or which would be covered but for the insurer's entitlement to avoid or cancel; and "material fact" and "material particular" as a fact or particular of such a nature as to influence the judgment of a prudent insurer in deciding whether to take the risk and at what premium and on what conditions.

What the defences are worth: Swaran Singh

Facts. National Insurance Co. Ltd v. Swaran Singh, (2004) 3 SCC 297, decided on 5 January 2004. A group of appeals in which insurers sought to avoid liability to third parties because the driver held no licence, or a fake or invalid licence, or was disqualified.

Held.

1. The Chapter is social welfare legislation and must be interpreted to effectuate its object of relief to victims.
2. The mere absence, fakeness or invalidity of a licence, or disqualification, is not in itself a defence. The insurer must prove that the insured committed the breach, that is, that the owner was negligent and failed to exercise reasonable care in seeing that the vehicle was driven by a duly licensed driver.
3. The burden of proof is on the insurer, and no general criteria can be laid down for discharging it; it turns on the facts of each case.
4. Even a proved breach does not avail unless it is so fundamental as to have contributed to the cause of the accident; Tribunals apply the rule of main purpose and the concept of fundamental breach.
5. Where the vehicle was driven by a person holding a learner's licence, the insurer is liable to satisfy the decree.
6. The Tribunal may decide disputes between insurer and insured in the same proceeding, and its decision is enforceable like an award.
7. Where the insurer proves its defence, the Tribunal may direct that the insurer, having paid the third party, be reimbursed by the insured; if the insured does not deposit that sum within the thirty days allowed by section 168(3), it is recovered as an arrear of land revenue on a certificate under section 174.

Point 7 is what practitioners call "pay and recover". The victim is never made to bear the consequence of a quarrel between the owner and his insurer; the insurer pays first and recovers afterwards.

Section 170 again: when the insurer may fight everything

Outside section 150(2) the insurer has no general right to dispute negligence or quantum. Section 170 is the exception: where the Tribunal is satisfied of collusion between the claimant and the person against whom the claim is made, or that that person has failed to contest, it may, for reasons recorded in writing, implead the insurer, who then has the right to contest on all or any of the grounds available to the person against whom the claim is made. The cross-reference in section 170 was changed from section 149 to section 150 with effect from 1 April 2022. The provision is worked out in chapter [The Award of the Claims Tribunal].

Sections 151 to 155: the insolvency group

Section 151. Where an insured person becomes insolvent, or makes a composition or arrangement with creditors, or, being a company, goes into winding up or has a receiver or manager appointed or a floating charge enforced, then whether the liability was incurred before or after that event, the insured's rights against the insurer are transferred to and vest in the third party to whom the liability was incurred.

Section 152: duty to give information. (1) A person against whom a claim is made in respect of a section 147(1)(b) liability shall not, on demand, refuse to say whether he was insured, or would have been insured but for the insurer's avoidance or cancellation, nor refuse to give the particulars specified in the certificate of insurance. (2) On insolvency, death, or winding up, the insolvent, the personal representative, the company, the official assignee, receiver, trustee, liquidator or person in possession must give a claimant the information reasonably required to find out whether rights have vested in him under section 151 and to enforce them; and any term of a contract of insurance which purports to avoid the contract, alter the parties' rights, or prohibit the giving of that information is of no effect. (3) An insurer against whom rights may have been transferred is under the same duty. (4) The duty includes allowing contracts of insurance, premium receipts and other relevant documents to be inspected and copied.

Section 153: settlements. (1) No settlement by an insurer of a claim which might be made by a third party in respect of a section 147(1)(b) liability is valid unless the third party is a party to it. (2) The Claims Tribunal shall ensure that the settlement is bona fide, was not made under undue influence, and that compensation follows the payment schedule in section 164(1). (3) After insolvency or winding up, no agreement, waiver, assignment, disposition or payment between insurer and insured can defeat the rights transferred to the third party.

Section 154. For sections 151 to 153, "liabilities to third parties" does not include a person's liability as insurer under some other policy; and those sections do not apply where a company is wound up voluntarily merely for reconstruction or amalgamation.

Section 155. Notwithstanding section 306 of the Indian Succession Act 1925, the death of the person in whose favour a certificate of insurance was issued, occurring after the event giving rise to a claim, is not a bar to the survival of the cause of action against his estate or against the insurer.

Sections 151 to 155 exist for one reason: the victim's remedy must not depend on the solvency, the candour or the survival of the person who was insured.

A worked example

Zubeda is knocked down by a taxi. The taxi's driver holds a licence that turns out to be forged. The insurer, noticed by the Tribunal, is made a party and pleads breach of the licence condition.

Must the insurer pay? On Swaran Singh, the fake licence is not by itself a defence. The insurer must prove that the owner was negligent and failed to take reasonable care to see that the driver was duly licensed, and the burden is on the insurer.

It proves exactly that. Even then it must show the breach was so fundamental as to have contributed to the accident. If it succeeds, the Tribunal may still direct it to satisfy the award and recover from the owner, that recovery being enforceable under section 174 if not deposited within thirty days under section 168(3).

The insurer says the policy excluded night driving. Ineffective. Section 150(4): a restriction by reference to any condition outside the sub-section (2) list is of no effect as against the compulsory cover.

The owner is adjudicated insolvent before the award. Section 151 transfers his rights against the insurer to Zubeda; and by section 152 the official assignee must give her the information she needs, notwithstanding any term of the policy to the contrary.

The insurer quietly settles with the owner for a small sum. Section 153(1): a settlement of a claim which might be made by a third party is not valid unless the third party is a party to it.

The owner dies while the petition is pending. Section 155: his death after the event does not bar the survival of the cause of action against his estate or against the insurer.

The insurer's designated officer offers a settlement. Section 149(2): within thirty days, before the Tribunal. If Zubeda accepts, the Tribunal records it, the claim is settled by consent, and payment follows within thirty days; if she rejects it, the Tribunal fixes a hearing on merits.

What it does NOT mean

The insurer is not free to plead anything. Section 150(2) is a closed list and section 150(4) strikes down other restrictions.

Avoiding the policy does not defeat the victim. Section 150(1) says the insurer pays notwithstanding avoidance or cancellation.

A defence proved is not the end of the victim's money. Swaran Singh: pay first, recover from the insured.

Notice is not optional. No sum is payable under section 150(1) unless the insurer had notice through the court or Tribunal of the bringing of the proceedings.

Section 149 is not the old section 149. It is the new settlement provision; the old one is now section 150.

Quick revision

1. Section 149: designate an officer, offer settlement before the Tribunal within thirty days, acceptance is a consent settlement paid within thirty days, rejection means a hearing on merits.
2. Section 150(1): the insurer satisfies the award as if the claimant were the decree holder, notwithstanding that it could have avoided or cancelled the policy, up to the sum assured with costs and interest, including an award under section 164.
3. Section 150(2): notice through the court or Tribunal, and then only the listed defences: specified policy conditions as to use, driver and war risks; a policy void for non-disclosure or false material particular; and non-receipt of premium under section 64VB of the Insurance Act 1938.
4. Section 150(4) and (5): other restrictions are of no effect and no other route to avoid liability is open. Section 150(6): the owner must disclose the insurer.
5. National Insurance Co. Ltd v. Swaran Singh, (2004) 3 SCC 297: the breach must be the insured's, proved by the insurer, and fundamental enough to have contributed to the accident; a learner's licence does not defeat the claim; and the Tribunal may order the insurer to pay and recover from the insured.
6. Section 170: on collusion or failure to contest, and for reasons recorded in writing, the insurer may be impleaded and may then contest on every ground available to the person against whom the claim is made.
7. Sections 151 to 155: the insured's rights vest in the third party on insolvency; information must be given and documents produced; a settlement without the third party is invalid; and the death of the insured does not bar the cause of action.

Test yourself

1. What is the duty of an insurer to satisfy an award, and on what grounds may it defend? Section 150(1) provides that where a certificate of insurance has been issued under section 147(3) and a judgment or award is obtained against a person insured by the policy in respect of a liability required to be covered by section 147(1)(b) and covered by the terms of the policy, or under section 164, the insurer shall pay the person entitled to the benefit of the award, as if that person were the decree holder, any sum not exceeding the sum assured, with costs and interest, notwithstanding that the insurer may be entitled to avoid or cancel, or has avoided or cancelled, the policy. Nothing is payable unless the insurer had notice through the court or Claims Tribunal of the bringing of the proceedings, and an insurer so noticed is entitled to be made a party and to defend only on the grounds in section 150(2): breach of a specified condition of the policy excluding certain uses of the vehicle, excluding driving by a named person, by an unlicensed or disqualified person or under the influence of alcohol or drugs, or excluding war and riot risks; that the policy is void for non-disclosure of a material fact or a materially false representation; or non-receipt of premium under section 64VB of the Insurance Act 1938. By section 150(4) any other restriction in the policy is of no effect as respects the compulsory cover, and by section 150(5) the insurer may not avoid liability in any other manner.

2. Explain "pay and recover" and the decision in Swaran Singh. In National Insurance Co. Ltd v. Swaran Singh, (2004) 3 SCC 297, insurers sought to escape liability because the drivers of the insured vehicles were unlicensed, held fake licences or were disqualified. The Supreme Court held that the Chapter is social welfare legislation to be interpreted so as to effectuate the object of compensating victims; that the mere absence, fakeness or invalidity of the licence, or the driver's disqualification, is not by itself a defence; that the insurer must prove a breach by the insured, namely that the owner was negligent and failed to exercise reasonable care in seeing that the vehicle was driven by a duly licensed driver, the burden being on the insurer; and that even a proved breach does not avail unless it is so fundamental as to have contributed to the cause of the accident, the Tribunals applying the rule of main purpose. Where the driver held a learner's licence the insurer remains liable. The Court further held that the Tribunal may decide the dispute between insurer and insured in the same proceeding, and that where the insurer establishes its defence the Tribunal may nevertheless direct it to satisfy the third party's award and be reimbursed by the insured, that amount being recoverable as an arrear of land revenue on a certificate under section 174 if not deposited within the thirty days allowed by section 168(3). That direction is what is meant by "pay and recover".

3. How does the Act protect a third party where the insured becomes insolvent or dies? By a group of sections which detach the victim's remedy from the fortunes of the insured. Section 151 provides that where the insured becomes insolvent, makes a composition or arrangement with creditors, or, being a company, has a winding-up order made or a voluntary winding-up resolution passed, or a receiver or manager appointed, or a floating charge enforced, the insured's rights against the insurer in respect of the liability are transferred to and vest in the third party to whom the liability was incurred.

Section 152 obliges the person against whom the claim is made to say whether he was insured and to give the particulars in the certificate, and obliges the insolvent, the personal representative, the company or the officer in charge to give a claimant the information needed to ascertain and enforce rights vested by section 151, striking down any term of the policy that purports to prevent this and extending the duty to inspection and copying of documents. Section 153 makes a settlement by an insurer invalid unless the third party is a party to it, requires the Tribunal to be satisfied that it is bona fide, free of undue influence and in accordance with the section 164 schedule, and prevents any post-insolvency agreement or payment from defeating the transferred rights.

Section 155 provides that, notwithstanding section 306 of the Indian Succession Act 1925, the death of the person in whose favour the certificate was issued, occurring after the event giving rise to the claim, is no bar to the survival of the cause of action against his estate or against the insurer.