Judgment:
Rajendra Babu, J.
1. In this reference, under section 7 of the Karnataka High Court Act, 1961, the question that arises for consideration is:
'When a registered owner of a motor vehicle, covered by an insurance policy, transfers the vehicle to another, but does not secure certificate of transfer of the insurance policy covering the vehicle to the transfer of the vehicle, whether the insurance company is liable to answer the liability arising out of the vehicle but during the period for which the insurance policy had been issued ?'
2. The facts of the case have been fully set out in the order of reference and, therefore, it is not necessary for me to reiterate the same. A Division Bench of this court in United India five and General Insurance Co. Ltd. v. Chennamma [1981] 1 Kar LJ 245 held that in the case of transfer of a motor vehicle, unless a notice in the prescribed form was given to the insurance company concerned under section 103a of the Motor vehicles Act, 1939 (hereinafter referred to as 'the Act'), and the certificate of transfer of insurance was issued or deemed to have been issued by the force of the said provision, the policy of insurance lapses and, consequently the insurance company cannot be saddled with any liability arising out of an accident to motor vehicle which had been transferred to some other person prior to the date of the accident. One of the learned judges (Kodandaramayya J.) who constituted the Full Bench of the Andhra Pradesh High court in Madineni Kondaiah V. Yaseen Fatima [1986] ACJ 1 ; [1986] 60 Comp Cas 762, took the view that when the policy of insurance obtained by the original owner of the vehicle is a composite one covering the risks for his person, property and third party claim, on passing of title, the transferee cannot enforce his claim in respect of any loss or damage to the person and the vehicle unless there is novation, but in so far as third party risks is concerned, the proprietary interest in the vehicle is not necessary and the principal liability continues till the transferor discharges the statutory obligation under sections 29A and 31 read with section 94 of the Act and, therefore, till he complies with the requirement of section 31 of the Act, the public liability will not crease and that constitutes the insurable interest to keep the policy alive in respect of third party risk. The learned judge further held that it must be deemed that the transferor allowed the purchaser to use the vehicle in a public place in the said transitional period and, accordingly, till compliance with section 31 of the Act, the liability of the transferor subsists and the policy is in operation so far as it relates to third party risks
3. On the basis of this judgment, the Division Bench which heard the matter in the first instance felt that the decision in Chennamma's case [1981] 1 Kar LJ 245 may require reconsideration and referred the question set out above for our opinion.
4. A perusal of the facts in the Andhra Pradesh High Court decision will show that the vendee of the vehicle used the same without obtaining a fresh insurance policy to protect third party interests and the vendee further did not lodge before the registering authority any information as required under section 31 of the Act for purposes of purposes of transfer of registration of the vehicle in his name. In the present case, there is no dispute that the ownership of the vehicle had been transferred by the registering authority under the Act though the insurance had not been taken by the transferee-owner. The vehicle belonged to one Pyarejan who sold the same in favour of Mohamad Ruknoddin prior to the date of accident and there is no dispute that the name of Mohamad Ruknoddin was entered as the registered owner in the registration certificate of the vehicle on September 14, 1983, the date of the accident. Therefore, whatever observations have been made in the decision of the Andhra Pradesh High Court, they are in the context of there being no transfer of registration in the name of the purchaser of the vehicle and hence can have no application to situation with which we are concerned.
5. Even otherwise, let us consider the effect of the judgment rendered by the justice Kodandaramayya of the Andhra Pradesh High court. The policy of insurance issued to Pyarejan is in respect of the vehicle specified with details as to its name, compositeness, year of manufacture, value, type of body seating capacity, whether it was a new or a second-hand vehicle and provides for comprehensive risk covering even third party risks. The proposer was , inter alia, asked whether he was the sole owner of the vehicle and whether the vehicle was registered in his name and the said Pyarejan provides answers in that regard. The proposal and declaration stipulated in the policy formed the basis of the contract and was deemed to be incorporated therein. The indemnity under the policy relates to loss or damage of the insured vehicle and in the event of accident caused by or arising out of the use of the vehicle. the liability for all sums including the claimant's costs and the expenses which the insured is obliged to pay. Certain general exception to that liability under the policy and conditions some of which were intended to comply with the provisions of the Act were also incorporated as terms of the policy. It could be seen that the policy issued to the said Pyarejan is thus in compliance with the provisions of section 95 (1) (b) of the Act. if the policy was in force on the date of accident, there could be no question of the insurance company's liability to third party risks being doubted. There is no term in the contract of insurance in the present case providing for continuance of policy on transfer of ownership of vehicle by the insured during the currency of the policy. Chapter VIII of the Act deals with insurance of motor vehicles against third party risks and it mandates that motor insurance against third party risks is compulsory for use of a motor vehicle in a public place and section 95(1) (b) indicates the kinds of risk such a party should cover in respect of a particular class of vehicles and in respect of the said Pyarejan's vehicle, the policy should indemnify him to the extent specified in the section against any liability which may be incurred by him in respect of death of or bodily injury to, any person caused by or arising our of the use of the vehicle in a public place. The said chapter also makes it clear that the policy should be in express terms and it insures the person referred to in it and in respect of the vehicle to which it relates.
6. A contract of insurance is between the insurer and the insured, the subject-matter is the vehicle specified in it and it is the risk arising out of its use that the insurer undertakes to compensate against. Where such a contract provides for indemnity to the assured against third party risk, the third party who is stranger to the contract cannot enforce it against the insurer. Neither the general principles of law relating to contracts nor the common law gives a third party a cause of action against the insurer. If a third party risk arises under the policy, it is entirely a matter between the insurer and the insured governed by the terms of the policy. Section 96 (1) of the Act makes it obligatory on the part of the insurer to meet or satisfy an award made by the Accident claims Tribunal against the person insured in respect of such third party risks. Thus , for the purpose of section 96(1), the insurer could be deemed to be a judgment debtor. Under section 96(2) of the Act, the insurer can be made a party so that he may defend the action by the third party against the insured which also enumerates the grounds the insurer may take up for defending himself. The scheme of the provision is that no insurer who had notice under section 96(2) is entitled to avoid liability to the party otherwise than in the manner provided for in sub-section (2) thereof. Thus, after the insured has parted with his vehicle, he has no longer any insurable interest to which the policy in his favour can relate and continue to have force. When an insured has parted with his vehicle to which the policy can relate and continue to have force affecting thereby the basis of contract of insurance as also the specified vehicle there is no interest to which the indemnity relates as is clear from the details required to be set out in the policy. It is with reference to those details and the history of the vehicle and its owner including claims or no claims in the past that premium payable on the insurance is determined and the contract is formed. Thus in the absence of an express stipulation in the policy to the contrary, the moment the insured parts with his vehicle. the policy relating to it laps inasmuch as the vehicle is the subject-matter or the very foundation of the contract of insurance. Neither section 96(1) nor 96(2) of the Act results in a policy of motor insurance continuing to operate and not lapse, notwithstanding the fact that the insured, during the currency of the policy, has parted with the owner ship of the vehicle to which the insurance relates. section 96(1) itself proceeds on the basis that there is a subsisting policy and the words to the effect 'being a liability covered by the terms of policy' are of particular significance. It is no doubt true that where an insurer has been given notice of action, the grounds of his defence in the action are limited to those stated in section 96(2) and it is not open to the insurer to avoid his liability under the policy but the continued ownership of the vehicle with the insured is basic to the subsistence of the policy and once the subject matter of the policy is gone, as, when parted with by the insured, the policy automatically lapsed and there stated by Raoul Colinvaux in his classic text The Law of Insurance, 5the edition, at page 430 (para 20-17) :
'Sale of car ends policy- The main cover will usually by reference to a specified car, owned by the policyholder. The whole policy will then only remain effective while he retains an interest in that car. Even if it contains an extension in respect of the use by the policyholder of any car being used at the time of accident `instead of the insured car', this extension will creases to be effective once he has parted with the car insured.
While complete change of ownership of a vehicle will put an end to the policy, this is not so when the additional partner joins a partnership in whose name a vehicle is insured.'
7. Section 102 of the Act is to the effect that if death of the insured occurs after the happening of an event giving rise to a claim under chapter VIII of the Act the cause of action survives against the estate of the insured. If the death of the insured occurs before the happening of such an event, then, of course, the policy of insurance ipso facto lapses and will be of no effect in respect of liability arising thereafter. But the insolvency of an insured does not terminates the contract of insurance on that account. Section 97(1) provides that if an insured incurs liability to third party, his rights against the insurer under the contract in respect of the liability shall, not withstanding anything to the contrary in any provision of law, transferred to and vest in the third party to whom the liability was so incurred.
8. The leading case on the point is that of peters v. General Accident Fire and Life Assurance Corporation Ltd. [1938] 2 All ER 267 (CA) which is to the effect that insurers are also not liable if the owner of the vehicle has sold it and handed the insurance policy to the buyer but the buyer has not taken a policy of his own; this causes to be the owner of the vehicle insured. Hector Hughes in his book Law Relating to Road User' Rights and Liabilities of Insurance states the law on the matter thus: Where the assured parts with his interest no one else may recover unless there be the insurer's consent to the assignment of policy and where the insurer does so consent, a new contract comes into existence. So also in Rogerson v. Scottish Automobile and General Insurance Co. Ltd. [1931] 1 All Ee Reprint 606 (HL), it was held that if the insured parts with the ownership of the insured vehicle, the policy of insurance relating to it at once lapses. This is how Lord Buckmaster, in the House of Lords, expressed his views:
'To me this policy depends upon the hypothesis that there is, in fact, an insured car. When once the car which is the subject of this policy so far as the car is concerned is at an end'.
9. This decision has been consistently followed by all the English courts. The Court of Appeal in Tattersall v. Drysdale [1935] All ER Reprint 112 was concerned with a clause in the policy extending the cover against third party risks to a temporary user by the insured of another car and during the continuance of the policy, the insured sold the car covered by the policy, the subject-matter of insurance. An accident having occurred while the insured used another car, he made a claim and in such circumstances, justice Goddard held :
'The policy insured the plaintiff in respect of the ownership and user of specified car and, when he divested himself of his interest in the car, the extension clause creased to have effect'.
10. The learned judge was influenced by the decision of the House of Lords referred to earlier that the subject-matter of insurance was the specified car and that as the assured had parted with it, he was no longer interested in the policy. The learned judge further observed:
'The true view is that the policy insures the assured in respect of the ownership and user of a particular car, the premium being calculated, as was found in Rogerson's case [1931] 1 All ER Reprint 606 partly on value and partly on horse power... To construe this policy otherwise would be to hold in effect that two distinct insurances were granted one in respect of the scheduled car, and another wholly irrespective of the ownership of any car'.
11. The English courts were also concerned with the provisions analogous to the provisions of section 96(1) of the Act and, therefore, the view expressed by this court that, on parting with a vehicle by a seller to a purchaser, unless there is compliance with section 103A of the Act, the insurance company will not be liable to a third party is correct.
12. We are also fortified in this view by a decision of a Full Bench of the Delhi High Court in Anand Sarup Sharma v. P. P. Khurana [1989] 65 Comp Cas 413 (Delhi) [FB], which held that the third party liability of an insurance company ends on transfer of the vehicle by the insured. This decision of the Delhi High Court refers practically to all the decisions of the High Courts in India on the subject and they are : Oriental Fire and General Insurance Co. Ltd. V. Smt. Vimal Rai, : AIR1973Delhi115 , Precto pipe co. v. National Insurance Co. Ltd. [1984] ACJ 218 (P & H), Labh singh v. Smt. sunehri Devi [1989] 65 Comp Cas 273 (P & H). National Insurance Co. Ltd V. Labanya Roy [1985] ACJ 720 (Cal), South India Insurance Co. Ltd. v. Purna Chandra Misra, : AIR1973Ori166 , Shantilal Mohanlal v. Aher Bhawanji Malde : AIR1985Guj164 [FB] Balwant singh v. Jhannubai [1980] ACJ 126 (MP), Govind Singh v. A. S. Kailasam [1875] ACJ 215 (Mad) B. P. Venkatappa Setty v. B N. Lakshmiah [1973] ACJ 306 (Mys) Smt. Gulab Bai Damodar Tapse v. Peter K. Sunder [1975] ACJ 100 (Bom) and Automobiles Transport (Rajasthan) pvt. Ltd. V. Dewalal .
13. The Gujarat High Court in Shantilal Mohanlal v. Aher Bhawanji Malde [1985] 58 Comp Cas 717 [FB] took the view that the policy of insurance is with respect to the insured person and not the vehicle and the liability of the insurer cease on transfer of ownership of the vehicle. So did several other High Courts as stated earlier.
14. However, learned counsel for the claimants contended that, in view of the new trend set up in Skandia Insurance Co. Ltd. v. Kokilaben Chandravdan [1987] 62 Comp Cas 138 (SC) ; AIR 1987 SC 1184, there being an obligation to take out an insurance policy covering third party risks without which the motor vehicle cannot be used and since the insurance policy can not provide for exclusion of liability other than what is authorised by section 96, except to the extent permitted by section 96, it will be the obligation of the insurance company to satisfy the judgment against persons insured against third party risks. He urged that we should not permit the insurance company to raise the contention that there is no obligation to fulfil the decree passed in a claim arising out of an injury by a vehicle to a third party as, otherwise, it would defeat the very purpose of the law providing for compensation. The problem that cropped up in that case was, although the owner of a vehicle has vicarious liability for the negligence of the driver, if the driver had authorised the cleaner inasmuch as the owner would never give permission to the cleaner to drive the vehicle, he would not be held to have violated the conditions of the policy. It was contended on behalf of the insurance company that the insurance company was not liable in that case in view of the exclusion clause as, at the point of time, when the accident occurred, the person who had been driving the vehicle was not the person duly licensed to drive the vehicle and once it was established that the accident occurred when an unlicensed person was driving the vehicle at the time of the accident, this would exonerate the insurance company from its liability. The Supreme Court, in that decision, held that, in view of the difficulty in recovering moneys either from the owner or from the driver of a vehicle which was involved in an accident to a third party, in most cases an award made by a court decreeing damages would only result in an exercise in futility and make a mockery of injured victims or the dependants of the deceased. When there is an obligation on the part of the insured not to use the vehicle without third party insurance being in force, the insurance policy might provide for liability walled in by conditions which may be specified in the contract of policy. In order to make the protection real, the Legislature provided that the judgment obtained shall not be defeated by the incorporation of an exclusionary clause other than those authorised by section 96 and that except and save to the extent permitted by section 96, it will be the obligation of the insurance company to satisfy the judgment obtained against persons insured against third party risks. All that is spelt out in the aforesaid decision is that, in the event of there being an insurance policy in force, the insurance company cannot provide for an exclusion clause contrary to section 96(2) of the Act. Beyond that, there is no other immunity to the insurance company and the exclusion clause will have to be read down to the extent it is inconsistent with the main purpose of third party risks being covered under the compulsion of law. But the question that arises for consideration in the present case is whether there is any insurance contract and not in what manner the clauses therein have to be read and what are the defences open to the insurance company. The existence or otherwise of an enforceable insurance contract falls outside the scope of section 96(2) of the Act are available to an insurance company, the condition precedent to invoke such defences is the existence of an enforceable insurance policy and an obligation on the insured to fulfil such a contract. In the absence of existence of a contract or if a contract had lasped, to read it down in the face of defences open under section 96(2) has no relevance at all. A Policy of insurance is the result of a contract between an insured and an insurer against liability by the latter. If such a contract is in respect of a motor vehicle, sub-section (5) and sub-section (1) (b) of section 95 of the Act provide that it must cover any liability which may be incurred by him with respect to death or bodily injury to a third party. Every such contract involves a proposal and acceptance and there must perforce be a proposer and an acceptor. It is difficult to accept that a contract exists between an insurance company and an unknown person. Neither section 94 nor section 95 nor section 96 has the effect of modifying this basic postulate. The insurer is liable to pay for the tort committed by the owner of the vehicle or his agent who is the assured. If such assured is the seller of the vehicle, can he be made liable for an accident which takes place after the sale of vehicle The discussion made above would make it clear that the ownership of a vehicle being one of the most important ingredients of an insurance contract in respect of a motor vehicle, it is impossible to accept that the buyer would be liable. for, what is covered under the policy is the liability of the insured and not of the purchaser. On the transfer of a vehicle, section 31 of the Act provides for giving effect to necessary changes, that is, transfer to be effected in the registration certificate. In the same manner,the Act also provides separately for transfer of an insurance policy if, during its currency, the vehicle is sold to another party. If the Act contemplated that transfer of the vehicle should necessarily result in the transfer of policy of insurance, it would have provided for that b y suitable provision. But, on the other hand two separate provisions deal with the two aspects separately. Further, the insurance policy taken out in respect of a vehicle after the sale of that vehicle can be made to cover another vehicle owned by the insured. Therefore, it is not always automatic that on the sale of a vehicle, the insurance policy also gets transferred. Therefore, the philosophy or the doctrine developed in Skandia Insurance Co,'s case [1987] 62 Comp Cas 138 (SC) which bars an insurance policy from containing terms contrary to section 96(2) of the Act has no application to the controversy arising in this case.
15. In this context, it is necessary to refer to one other aspect of the matter, namely, that the Motor Vehicles Act, 1939, has been repealed and a new Act has been enacted, that is, the Motor vehicles Act, 1988 ; under section 157 of the new Act, it is provided that where a person in whose favour the certificate of insurance has been issued, transferred to another person the ownership of the motor vehicle in respect of which certificate of insurance and policy is taken, the certificate of insurance and the policy described in the certificate shall be deemed to have been transfered to the person to whom the motor vehicle has been transferred with effect from the date of such transfer. In view of the fact that there has been a change in law, date of such transfer. In view of the fact that there has been a change in law, that is, even without an assignment, the law provides for transfer of a policy from july 1, 1989, when the new Act came into force and the fact that so far as this state is concerned, the law had been as was stated in B. P. Venkatappa Setty V. Lakshmiah [1973] ACJ 306 (Mys) and in United India General and Fire Insurance Co. Ltd. V. Chennamma [1981] 1 Kar LJ 245 and the same having held the field and the preponderance of authority referred to above also has been in favour of the view we have taken, we do not think it would be necessary to take any other view or differ from the view expressed in the aforesaid two decisions of this court. In the result, we answer the liability arising out of an accident met with by the vehicle after the transfer of ownership but during the period for which the insured policy is issued. The insurer is entitled to avoid the liability against third party risks on the plea that the insured had sold the vehicle covered by the insurance policy before the date of the accident without intimation by the owner.