New Asiatic Insurance Co. Ltd vs Pessumal Dhanamal Aswani And Ors

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 1043-1044 of 1963

Decision Date: 24 April 1964

Coram: Raghubar Dayal, K.C. Das Gupta

In this case, the Supreme Court of India heard a petition filed by New Asiatic Insurance Co. Ltd against Pessumal Dhanamal Aswani and others, and delivered its judgment on 24 April 1964. The bench that decided the matter included Raghubar Dayal and K.C. Das Gupta, among others. The petitioners were identified as New Asiatic Insurance Co. Ltd, while the respondents were Pessumal Dhanamal Aswani and the accompanying parties. The decision is reported in 1964 AIR 1736 and 1964 SCR (7) 867. The dispute arose under the Motor Vehicles Act of 1939, specifically sections ninety‑three to ninety‑six, which deal with the scope of liability in motor‑vehicle accidents.

The factual background was that a person designated A had obtained a comprehensive insurance policy for his car from the petitioner. A permitted another person, B, who already held a separate insurance policy with a different insurer for his own vehicle, to drive A’s car. While B was driving, the car met with an accident that caused the death of a passenger identified as C and inflicted serious injuries on another passenger identified as D; both C and D were occupants of the vehicle at the time of the crash. The legal representatives of the heirs of C and D instituted suits seeking damages. Pursuant to section ninety‑six of the 1939 Act, notices were served on the petitioner. The petitioner responded by filing a Chamber Summons, contending that the notices were defective in law, and alternatively sought permission to defend the suits in the name of the driver B. The court initially concluded that the notices were indeed defective. The plaintiffs then filed Letters Patent appeals, which succeeded, resulting in the dismissal of the Chamber Summons and an order directing the trial judge to hear the petitioner’s alternative prayer. The petitioner subsequently appealed that order by obtaining special leave.

The petitioner’s principal contention was that paragraph four of B’s own insurance policy, issued by the other insurer, indemnified B for any liability he might incur while personally operating a private car that did not belong to him or that he had not hired under a hire‑purchase agreement. Accordingly, the petitioner argued that B was not included among the persons covered by paragraph three of A’s policy, which the petitioner had issued subject to proviso (a) to that paragraph. The respondents countered that the proviso in paragraph three was not intended to limit the class of persons insured; instead, it was a condition affecting the insurer’s liability toward any driver who was otherwise entitled to indemnity under a separate policy.

The court held that, after a consideration of sections ninety‑three, ninety‑four, ninety‑five and ninety‑six of the Motor Vehicles Act, if the terms of paragraph three of the policy can be interpreted to make B the insured person, then the insurer is liable to satisfy any decree entered against B. The court further observed that when an insurer agrees with the policyholder to provide coverage against liability to third parties, the insurer assumes the entire liability of the policyholder. It is open …

The Court observed that when a motor insurance policy extends indemnity beyond the insured to other persons, it may not limit the right of a third party to claim damages from the insured; that right of the third party to recover damages from the insured remains undisputed. A proviso that seeks to exempt certain persons from the general class defined in the policy must be linked to considerations affecting that exemption and cannot be used to affect the classified person’s entitlement to indemnity from any other insurer. The Court further held that clause (4) of section II of the other insurer’s policy does not convert that policy into a policy within the meaning of the relevant provision of the Motor Vehicles Act, specifically section 94, as it relates to the vehicle of the first insured whose use gave rise to the liabilities litigated in the two suits. Accordingly, such a policy and any indemnity it provides cannot be employed to create sub‑classes of drivers that are specified in the policy issued to the first insured by the appellant. The Court also affirmed that the High Court was correct in finding that the appellant had insured the second driver pursuant to paragraph 3 of section II of that policy and that the appellant therefore falls within the definition of “insurer” under section 96 of the Act.

The appeals, granted special leave, were filed under Civil Appeals Nos. 1043‑1044 of 1963, challenging the judgment and decree dated 8 April 1963 of the Bombay High Court in Appeals Nos. 10 and 11 of 1962. Counsel for the appellant appeared for both appeals, while counsel for the first respondent and for respondents numbered two through seven also appeared as indicated in the record. The judgment was delivered on 24 April 1964. The factual background presented that S. N. Asnani owned a Chevrolet car bearing registration number AA 4431 and had insured it with New Asiatic Insurance Co. Ltd. under a policy dated 26 November 1957. Asnani allowed Pessumal Dhanamal Aswani to drive the car. While Pessumal was driving, accompanied by Daooji Radhamohan Meherotra and Murli Dholandas, the vehicle met with an accident that caused Meherotra’s death and injuries to Murli. Pessumal owned a Pontiac car insured with Indian Trade & General Insurance Co. Ltd. under policy No. Bombay P.C. 42733‑2 dated 18 November 1957. The heirs of Meherotra instituted suit No. 70 of 1959 against Pessumal for damages of Rs 2,50,000 with interest, and Murli instituted suit No. 71 of 1959 against Pessumal for damages of Rs 1,50,000. Notices issued under section 96(2) of the Motor Vehicles Act, 1939, were served on New Asiatic Insurance Co. Ltd., the notices being directed to the company because the defendant’s liability to third parties had been covered under its policy.

The company was covered by policy number MV/4564. After the suit was instituted, the company issued a Chamber Summons. In that proceeding the company argued that the notice served under section 96 (2) of the Motor Vehicles Act, 1939 was legally defective and therefore ought to be set aside. The company further contended that it could not be held liable for any judgment that might be rendered against the defendant in the underlying suit. In an alternative prayer, the company sought either to be joined as a defendant in the suit or to be authorised to defend the suit in the name of the defendant. Justice Tarkunde held that the notices issued to the company under section 96 (2) of the Act were indeed bad in law and consequently set them aside. Following that decision, the plaintiffs filed Letters Patent Appeals. Those appeals were allowed and the Chamber Summonses were dismissed. The trial judge was then directed to consider the alternative prayers contained in the Chamber Summonses and to issue the appropriate orders. The present appeals were filed against that order, after the company obtained special leave to appeal.

The policy provides, subject to the limitations of the indemnity granted by the relevant section, that the company will indemnify any driver who operates the motor car on the insured’s order or with the insured’s permission, provided that the driver is not already entitled to indemnity under another policy and that the driver, as if he were the insured, observes, fulfils and is subject to the terms, exceptions and conditions of the policy to the extent they are applicable. Further, the policy states, again subject to the same limitations, that the company will indemnify a driver of a private motor car—excluding a motor cycle—that does not belong to the driver and is not hired to the driver under a hire‑purchase agreement. Under the heading “Avoidance of certain terms and right of recovery,” the policy expressly provides that nothing in the policy or any endorsement shall affect the right of any person indemnified by the policy, or any other person, to recover an amount under the provisions of the Motor Vehicles Act, 1939, section 96. However, the insured is required to repay to the company any sums paid by the company that the company would not have been liable to pay but for those statutory provisions. Condition 6 further provides that if, at the time any claim arises, there exists any other insurance covering the same loss, damage or liability, the company will not be liable to pay or contribute more than its rateable proportion of the loss, damage, compensation, costs or expenses, subject always to the proviso that nothing in this condition imposes any liability on the company that would not otherwise arise under proviso (a) of Section II‑3 of the policy.

The schedule of the insurance policy contains a clause designated as sub‑paragraph (b) which provides that the insured is permitted to drive a motor car that does not belong to him and that has not been hired by him under a hire‑purchase agreement, on the condition that the driver possesses a valid licence to operate the motor car, or has previously held such a licence and is not disqualified from obtaining or retaining it. At the conclusion of the schedule the policy presents a notice stating that the insured will not be indemnified if the vehicle is used or driven in a manner that does not conform to the schedule. The notice further explains that any sum paid by the insurer because of broader terms appearing in the certificate, which are required to satisfy the Motor Vehicles Act of 1939, is recoverable from the insured, and it refers the reader to the clause titled “Avoidance of certain terms and right of recovery.” The appellant argues that, based on paragraph 4 of a separate policy issued to Pessumal by another insurer, Pessumal was indemnified for any liability incurred while he personally drove a private motor car that was neither his nor hired under a hire‑purchase agreement. Accordingly, the appellant contends that Pessumal should not be counted among the persons indemnified in paragraph 3 of the policy issued by the present company, relying on proviso (a) to paragraph 3 which reads: “provided that such driver is not entitled to indemnity under any other policy.” The respondent counters this argument by asserting that the proviso is not intended to limit the class of persons covered by paragraph 3, which is limited to drivers of the Chevrolet car insured under the policy; rather, the proviso serves only as a condition affecting the insurer’s liability toward a driver who already holds entitlement to indemnity under another policy. The dispute therefore turns on whether Pessumal falls within the class of persons indemnified by paragraph 3 of the company’s policy. To resolve this issue, the Court proceeds to set out the pertinent provisions of the Motor Vehicles Act that bear on the matter. Chapter VIII of the Act provides for insurance of motor vehicles against third‑party risks, and Section 93 defines the terms “authorised insured,” “certificate of insurance,” and “reciprocating country.” Section 94(1) declares that no person shall use a motor vehicle, or permit any other person to use it in a public place, unless a policy of insurance complying with the requirements of the chapter is in force for that use. The section includes an explanation that a person who drives a motor vehicle merely as a paid employee, while a required policy is in force, will not be deemed to be violating the subsection unless he knows or has reason to believe that no such policy exists. Section 94(2) clarifies that the provision does not apply to any vehicle owned by the Central Government or a State Government and used for governmental purposes unrelated to any commercial enterprise.

The Court noted that the appropriate Government could, by order, grant an exemption from the operation of sub‑section (1) to any vehicle owned by specified authorities, provided that such an order would not be made unless the authority had established and maintained a fund in accordance with rules made under this Act to meet any liability arising from the use of any of its vehicles that the authority or its employees might incur to third parties. Section 95 required that, in order to satisfy the requirements of this Chapter, a policy of insurance must be issued either by a person who is an authorised insurer or by a co‑operative society authorised under section 108 to transact the business of an insurer, and that the policy must insure the person or class of persons specified in the policy to the extent prescribed in sub‑section (2) against any liability that may be incurred by them in respect of death or bodily injury to any person caused by or arising out of the use of the vehicle in a public place. The Court further explained that a policy would have no effect for the purposes of this Chapter unless, and until, the insurer issued a certificate of insurance in the prescribed form to the person by whom the policy was effected; the certificate had to contain the prescribed particulars of any conditions subject to which the policy was issued and any other prescribed matters, and different forms, particulars and matters could be prescribed in different cases. Notwithstanding any other law, a person issuing a policy of insurance under this section was liable to indemnify the specified person or class of persons for any liability that the policy purported to cover. Section 96 provided that, after a certificate of insurance had been issued in favour of the person by whom a policy was effected, if a judgment was obtained against any insured person for a liability that was required to be covered by the policy, then, notwithstanding that the insurer might be entitled to avoid or cancel, or might have avoided or cancelled the policy, the insurer was required, subject to the provisions of this section, to pay to the person entitled to the benefit of the decree any sum not exceeding the sum assured payable thereunder, as if the insurer were the judgment debtor, together with any amount payable for costs and any interest payable on that sum.

The judgment explained that any amount an insurer is required to pay under sub‑section (1) must be calculated together with interest in accordance with any statutory rule that governs interest on judgments. The Court further held that an insurer may be obligated to make a payment only when the insurer has received formal notice, through the Court, of the initiation of the proceedings that will result in the judgment. This notice may be given either before the proceedings commence or after they have begun. Additionally, the insurer may also be bound to pay where the judgment is stayed because an appeal is pending, provided that the insurer was given notice of the proceedings. Once such notice has been served, the insurer is entitled to be joined as a party to the suit and is permitted to defend the action on any of the grounds that are subsequently listed in the provision.

The Court then considered the effect of a certificate of insurance that has been issued under sub‑section (4) of section 95 to the individual who effected the policy. It was held that any part of the policy that seeks to limit the coverage of the insured persons by referencing conditions that are not contained in clause (b) of sub‑section (2) shall have no effect with respect to the liabilities that are required to be covered by the policy under clause (b) of sub‑section (1) of section 95. In other words, such restrictive conditions are rendered ineffective for those specific liabilities. The Court added a proviso that if the insurer pays any sum, either wholly or partially, toward satisfying a liability of a person that is covered solely because of this sub‑section, the insurer retains the right to recover that sum from the person who caused the liability.

Moving on to the situation where the insurer’s liability under this section exceeds the amount for which the insurer would otherwise be liable under the policy, the Court stated that the insured person has the right to recover the excess amount from the person who incurred the liability. In practical terms, if the statutory provision imposes a larger payment obligation on the insurer than the policy itself would have required, the insurer may seek reimbursement of the additional amount from the individual whose actions gave rise to the loss, thereby ensuring that the insurer is not unduly burdened beyond the scope of the original policy.

The Court further clarified that an insurer who has received notice as described in sub‑section (2) or sub‑section (2A) cannot avoid its liability to any person entitled to the benefit of a judgment referred to in sub‑section (1) or sub‑section (2A) except in the manner expressly provided for in sub‑section (2). The same restriction applies if the corresponding law of the State of Jammu and Kashmir or the law of a reciprocating country offers a different method of avoidance; the insurer must still follow the procedure laid down in the relevant sub‑section. This provision prevents insurers from escaping their statutory duties by relying on alternative avoidance mechanisms that are not specified in the enactment.

Finally, the Court examined Chapter VIII of the Act, which deals with insurance of motor vehicles against third‑party risks. The heading of the chapter indicates that its purpose is to assure that third parties who suffer loss or injury because of the use of a motor vehicle are able to obtain compensation regardless of the financial condition of the driver who caused the damage. The Court emphasized that the provisions of Chapter VIII must be interpreted in a way that furthers this objective. Accordingly, Section 94 imposes a mandatory prohibition on the use of a motor vehicle by any person unless there exists a policy of insurance that complies with the requirements set out in Chapter VIII. The insurance policy must therefore provide coverage for any liability that the driver may incur toward third parties while operating the vehicle, ensuring that the victims can recover damages without being dependent on the driver’s personal assets.

In this case the Court explained that Section 94 of the Act obliges a person who intends to use a motor vehicle to possess a policy of insurance that relates specifically to the use of that vehicle by that person and that the policy must satisfy the requirements set out in Chapter VIII. The policy must therefore provide coverage for any liability that the person may incur toward a third party while operating the vehicle. Although the policy must be attached to the particular vehicle, it may identify the insured either by naming the individual directly or by referring to a class of persons to which the driver belongs, because it may be impracticable to list every possible driver who might use the vehicle with the owner’s permission. Consequently, the insurance contemplated by Section 94 must be a policy that insures a specific car.

Section 95 then prescribes the conditions that any insurance policy issued for a particular vehicle must meet. First, the policy must state the name of the person or the class of persons who are covered with respect to their liability to third parties. Second, the policy must set out the extent of that liability, which must correspond to the limits specified in sub‑section (2) of the same section. Third, the policy must cover liability that the identified person or class may incur for death or bodily injury to any other person that arises out of the use of the insured vehicle in a public place. Sub‑section (4) requires the insurer to issue a certificate of insurance in the form prescribed by the Motor Vehicles Third Party Insurance Rules, 1946, and to deliver that certificate to the person who effected the policy. The prescribed form mandates that the certificate list the persons or classes entitled to drive the vehicle, and the authorized insurer must also certify that both the policy and the certificate have been issued in accordance with Chapter VIII of the Act. Sub‑section (5) imposes a duty on the insurer to indemnify the person or class named in the policy for any liability that the policy purports to cover. In other words, if the policy provides coverage for the insured’s liability to third parties, the insurer is bound to compensate the insured or the specified class for such liability. Section 96(1) further provides that the insurer must pay any decree obtained by the person entitled to the benefit of the decree for liability covered by the policy, even if the insurer might otherwise have been entitled to avoid or cancel the policy. Thus, once a certificate of insurance has been issued in conformity with sub‑section (4) of Section 95, the insurer is obligated to satisfy any decree relating to the covered liability.

In this case, the Court explained that the insurer was required to satisfy any decree obtained by a person who suffered injuries from the use of the insured vehicle, provided that the decree was against a person who was covered by the policy. However, the insurer’s liability to satisfy such a decree arose only after the insurer had been served with a notice issued under subsection (2) of section 96, which informed the insurer about the proceedings in which the judgment was rendered. Accordingly, a notice under subsection (2) of section 96 had been served on the insurance company, and the appellant challenged the allegation that Pessumal was a person insured under the policy that covered the Chevrolet car, because the appellant argued that the consequential liability would arise only if the plaintiffs’ claim succeeded against Pessumal. The Court noted that, based on the various provisions of the Act, the appellant did not dispute the proposition that if Pessumal could be regarded as the “person insured” within paragraph 3 of the policy, then the insurer would be bound to satisfy any decree passed against Pessumal. Consequently, the principal issue before the Court was whether Pessumal fell within the description given in paragraph 3 of Section II of the policy. Paragraph 3 of that section provided that the insurer would indemnify any person who drove the motor‑car on the insured’s order or with the insured’s permission. The Court observed that Pessumal had driven the car with the permission of Asnani, who had effected the insurance policy, and therefore, under the terms of paragraph 3, the insurer had undertaken to indemnify Pessumal. The appellant, however, submitted that paragraph 3 should not be interpreted as the sole definition of the class of persons covered, because the class of drivers was further qualified by proviso (a). The appellant argued that only those drivers who were not entitled to indemnity under any other policy were to be covered, and that drivers who could claim indemnity from another policy were excluded from the general class of drivers covered by paragraph 3. The Court rejected this argument. It held that proviso (a) did not create a separate classification of drivers; rather, it placed a limitation on the driver’s right to recover damages from the insurer. The provision meant that a driver who could obtain indemnity from another insurer under another policy was not entitled to indemnity from the present insurer. The Court clarified that this limitation affected the contractual relationship between a particular driver and the insurer, and did not alter the driver’s liability to a third party for injuries caused, liability which was covered by section 94 of the Act and by the policy issued by the insurer. The Court further explained that when the insurer agrees with the policyholder to insure him against liability to third parties, the insurer assumes the entire liability of the policyholder. The insurer may, however, decide not to extend that indemnity to

The Court explained that if an insurance contract extended coverage to persons other than the insured, it could not limit the right of a third party who was entitled to damages to recover those damages from the insured, a right that was not contested. A proviso that was intended to exempt certain persons from the general classification had to be linked to the considerations that gave rise to the exemption and could not be connected to the right of those classified persons to obtain indemnity from any other insurer. In this regard, the Court referred to proviso (b), which could not in any circumstance be treated as a proviso dealing with the classification of persons who were to be indemnified. That proviso stated that any person who was indemnified under paragraph 3 would have to observe, fulfil and be bound by the terms, exceptions and conditions of the policy to the extent that those provisions could apply to him.

The Court further held that clause (4) of Section II of the policy issued to Pessumal by the other company did not make that policy a policy within the meaning of section 94 of the Act as it related to the Chevrolet car whose user Pessumal was held liable for in the two suits. The paragraph in question indemnified the insured, namely Pessumal, only while he was personally driving any private motor car. It did not provide indemnity for liability that arose when he was driving a particular car. Consequently, and in accordance with the earlier discussion, the Court concluded that Pessumal’s policy could not be regarded as a policy of insurance in relation to the Chevrolet car as required by section 94 of the Act. Such a policy, and any indemnity flowing from it, could not be employed to create a sub‑classification of drivers identified in the insurer’s own policy. The Act, however, envisaged that an insurance policy could assume liability to third parties by establishing a contract between the insurer and the insured – that is, the person who effected the policy – thereby allowing the insurer to recover, in whole or in part, the amount it had paid to the third party from the insured. In this sense, the insurer functioned as security for the third party in obtaining compensation for injuries suffered. By contrast, with respect to the insured, the insurer either did not assume that liability or assumed it only to a limited degree. Accordingly, various conditions were inserted into the policy to reflect this possibility. Those conditions, the Court observed, operated solely between the insured and the insurer and had to be disregarded when assessing the insurer’s liability to third parties. This limitation was expressly set out in the policy under the heading “Avoidance of certain terms and rights of recovery” and also appeared as an “Important Notice” in the policy schedule. The avoidance clause expressly stated that nothing in the policy or any endorsement thereon would affect the right of any person indemnified by the policy, or any other person, to recover an amount under or by virtue of the provisions of the Act. It also

The policy provides that the insured must repay to the insurer any sums that the insurer has paid, which the insurer would not otherwise have been obligated to pay but for the provisions of the Act. The Important Notice states that any payment made by the insurer because of broader terms appearing in the certificate, in order to comply with the Act, is recoverable from the insured and it refers to the avoidance clause. Consequently, the contract between the insured and the insurer may not contain all the liabilities that the insurer is required to assume with respect to third parties, because the Act imposes additional obligations. The Court held that once the insurer has undertaken liability to third parties that arise from the persons specified in the policy, the right of those third parties to recover any amount under, or by virtue of, the provisions of the Act is not diminished by any condition contained in the policy. In view of this aspect of the policy terms, it is reasonable to conclude that proviso (a) of paragraph 3 of Section II is merely a condition that affects the rights of the insured who purchased the policy and the persons to whom the insurer extended coverage, and it does not impede a third party’s claim against the insurer based on the insurer’s liability to a person described in paragraph 3 as being covered by the policy.

The appellant contended that the owner of a car is not required to obtain an insurance policy that indemnifies the owner himself or any person permitted to drive the car, and that failure to insure the car while using it exposes the owner to prosecution under section 125 of the Act. While this statement is correct, it does not bear on the issue before the Court. The owner, Asnani, did obtain insurance for his car with respect to liability to third persons. The Court therefore had to consider whether, by assuming that liability, the insurer could be said to have insured Pessumal, who drove the car with Asnani’s permission. The appellant also argued that the Act does not obligate an insurer to require the car owner to secure the broadest possible policy covering every person who drives the car with the owner’s permission. The policy, however, expressly agreed to indemnify drivers who operate the car with the insured’s permission. The question, then, is whether that undertaking extends to Pessumal. Finally, the Court noted that the question concerning the appropriate stage at which the issue raised by the insurer in the Chamber notice should be decided was raised during the hearing, but the Court declined to give an opinion on that procedural point in the present case. The Court expressed the view that the High Court…

In this case, the Court affirmed that the insurance company had indeed provided insurance coverage to Pessumal because paragraph three of Section II of the policy expressly extended protection to any person who operated the vehicle with the permission of the policyholder. The Court observed that the wording of that paragraph clearly indicated that the company’s undertaking covered drivers such as Pessumal, and therefore the contractual relationship satisfied the statutory requirement that an insurer must be a party who agrees to indemnify against specified risks. The Court further held that this contractual coverage fell within the meaning of the term “insurer” as defined in section 96 of the Insurance Act, which embraces any entity that undertakes to compensate a third party for loss arising out of an insured risk. Accordingly, the Court concluded that the company qualified as an insurer with respect to the claim brought by Pessumal and was therefore liable under the Act. On the basis of this conclusion, the Court ordered that the appeals filed by the respondents be dismissed in their entirety. The order also specified that the costs of the hearing be awarded to the successful party, for a single set of costs, in accordance with the usual rule that the losing side should bear the expenses of the successful side. In sum, the Court dismissed both appeals and granted the costs as directed, thereby bringing the proceedings to an end.