Liability Of Insurer Continues Notwithstanding The Contract Of Transfer Of Vehicle #indianlaws

Liability of insurer continues notwithstanding the contract of transfer of vehicle, such contractual liability cannot be said to be excluded by virtue of second proviso to Section 147(1) of the Motor Vehicles Act of 1988. Hire purchase agreement, an agreement for lease or an agreement for hypothecation are covered under Section 2(30) of the Act of 1988. A person in possession is considered to be an owner of the vehicle under such agreements. In case such contractual liability is excluded then anomalous results would occur and financer under hire purchase agreement would be held liable and so on. An agreement for lease on hire cannot be said to be contract envisaged for exclusion under contractual liability in second proviso to Section 147(1) of the Act of 1988.

In the event of there being a lease agreement between registered owner of the vehicle and hirer, who becomes liable to compensate claimants in claim petition arising due to road accident? The question came up before the Supreme Court in the instant appeal wherein the Court had to decide that whether in the wake of lease agreement entered into by registered owner with Karnataka State Road Transport Corporation (‘KSRTC’), the registered owner and insurer along with KSRTC can be fastened with the liability to make payment to the claimants and whether KSRTC can recover the amount from registered owner and its entitlement to seek indemnification from insurer?

In the instant matter, an accident was caused by the bus driven under the control of KSRTC vide hire agreement. The bus owned by ‘R2’ was duly insured. The claim tribunal allowed the claim petition preferred by the claimants by awarding compensation with interest. In view of the agreement between KSRTC and R2, the liability was fastened upon the owner and the insurer of the vehicle jointly and severally to make the payment of compensation and not on KSRTC. Insurer preferred an appeal before the High Court which while allowing the same vide impugned judgment held that the liability to make the payment of compensation would be that of KSRTC alone.

KSRTC contended that in view of the lease agreement for hire between the KSRTC and the owner, the owner could not escape the liability to make the payment of compensation. As such, the insurer was liable to indemnify the owner and to make the payment of compensation. This was countered by the insurer on the ground that since the vehicle was being plied under the complete control and supervision of KSRTC, it could not escape from the liability to make the payment of compensation.

The term ‘owner’ is defined under Section 2(30) of the Motor Vehicles Act, 1988 as per which ‘owner’ means a registered owner and where the agreement on hire-purchase or an agreement of hypothecation has been entered into or lease agreement, the person in possession of the vehicle is treated as an owner.

Further, Section 146 of the Act of 1988 necessitates for insurance against third party risk. Motor vehicle cannot be used in a public place without policy of insurance though there are exemptions carved out to the vehicles owned by the Central or State Governments and used for government purposes. Under sub-Section (3) of Section 146, it is open to the appropriate Government to exempt the vehicle owned by the Central or State Governments if it is used for Government purposes or any local authority or any State transport undertaking.

As per the statutory requirement under Section 147, the policy of insurance must be a policy which is issued by authorised Insurer and insures the person or class of persons specified in the policy to the extent specified in sub-section (2)(i) against any liability which may be incurred by him in respect of the death of or bodily injury to any person, including owner of the goods or his authorised representative carried in the vehicle or damage to any property of a third party caused by or arising out of the use of the vehicle in a public place; and (ii) against the death of or bodily injury to any passenger of a public service vehicle caused by or arising out of the use of the vehicle in a public place.

As rules of exception the policy shall not be required to cover any contractual liability. Limits of the liability have been provided in Section 147(2) and Section 147(5) provides that notwithstanding anything contained in any law for the time being in force, an insurer shall be liable to indemnify the person or classes of persons specified in the policy in respect of any liability which the policy purports to cover in the case of that person or those classes of persons.

Section 157 of the Act 1988 deals with the deemed transfer of certificate of insurance according to which a certificate shall be deemed to have been transferred in favour of the person to whom the motor vehicle is transferred with effect from the date of its transfer.

The main question for consideration before the court was to determine as to whether the registered owner and insurer can escape the liability in view of the provisions contained in the Act and in view of the terms and conditions of the lease agreement and further whether claimant can also recover the amount from KSRTC.

Supreme Court reversed the finding of High Court as being not sustainable. As per the Act of 1988, no vehicle can be driven without insurance as provided in Section 147 and relevant clause of the lease agreement clearly stipulated that it would be the liability of the owner to provide the comprehensive insurance covers for all kind of accidental risks to the passengers, other persons/property. It was further held that hiring of public service vehicles is not prohibited under any of the provisions of the aforesaid laws. It could not be said to be inconsistent user by KSRTC. The agreement was not shown to be illegal in any manner whatsoever nor was shown to be one opposed to the public policy.

It was observed that the policy of insurance is contractual obligation between the insured and the insurer. It was not shown that while entering into the agreement of lease for hiring the buses, any of the provisions contained in the insurance policy was violated or that owner could not have given bus on hire as per any provision of policy. It was the liability of the registered owner to provide the bus regularly, to employ a driver, to make the payment of salary to the driver and the driver was required to be duly licensed and not disqualified as provided in the agreement though buses were to be plied on the routes as specified by the KSRTC and hiring charges were required to be paid to the registered owner. Accordingly, in the absence of any stipulation prohibiting such an arrangement in the insurance policy, in view of agreement of lease, the registered owner owned the liability to pay. The insurer also cannot also escape the liability. Even if there is a transfer of the vehicle by sale, the insurer cannot escape the liability as there is deemed transfer of the certificate of insurance. In the instant case there was no complete transfer of the vehicle as it was given on hire for which there is no prohibition and no condition/policy of insurance was shown to prohibit plying of vehicle on hire. The vehicle was not used for inconsistent purpose. Thus, in the absence of any legal prohibition and any violation of terms and conditions of the policy, more so, in view of the provisions of Section 157 of the Act of 1988, it was held that the insurer cannot escape the liability.

The court then dealt with the issue of exclusion of contractual liability under second proviso to Section 147(1). The combined reading of Section 147 with Section 157 leaves no room for any doubt that there is deemed transfer of policy in case of transfer of vehicle. Hence, liability of insurer continues notwithstanding the contract of transfer of vehicle, such contractual liability cannot be said to be excluded by virtue of second proviso to Section 147(1) of Act of 1988. Hire purchase agreement, an agreement for lease or an agreement for hypothecation are covered under Section 2(30) of the Act of 1988. A person in possession is considered to be an owner of the vehicle under such agreements. In case such contractual liability is excluded then anomalous results would occur and financer under hire purchase agreement would be held liable and so on. An agreement for lease on hire cannot be said to be contract envisaged for exclusion under contractual liability in second proviso to Section 147(1) of the Act of 1988.

The KSRTC can also be treated as owner for the purposes of Section 2(30) of the Act of 1988 plying the buses under lease agreement. The insurance company had insured the vehicle and taken the requisite premium and it was not a case set up by the insurer that intimation was not given to the insurance company of the hiring arrangement. Even if the intimation had not been given, the insurer could not escape the liability to indemnify as in the case of hiring of vehicle intimation is not required to be given. It is only in the case of complete transfer of the vehicle when change of registration particulars are required under Section 157 of the Act, an intimation has to be given by the transferee for effecting necessary changes in the policy. Even otherwise, that would be a ministerial act and the insurer cannot escape the liability for that reason. When the KSRTC has become the owner of the vehicle during the period it was on hire with it for the purpose of Section 2(30) of the Act by virtue of provisions contained in Section 157 of the Act, the insurance policy shall be deemed to be transferred. As such, insurer is liable to make indemnification and cannot escape the liability so incurred by the KSRTC.

It was accordingly held that the registered owner, insurer as well as KSRTC would be liable to make the payment of compensation jointly and severally to the claimants and the KSRTC in terms of the lease agreement entered into with the registered owner would be entitled to recover the amount paid to the claimants from the owner as stipulated in the agreement or from the insurer. The appeals were, accordingly, allowed.

[Managing Director, KSRTC vs. New India Assurance Co.Ltd. & Anr.]

(SC, 27.10.2015)

Civil Appeal No.5293 of 2010