In Shamanna vs. Divisional Manager, The Oriental Insurance Co. Ltd., appeal came before the Supreme Court against the order of the Karnataka High Court revering the award passed by the Tribunal for “pay and recover” holding that the owner of the vehicle is liable to pay the compensation to the appellants/claimants. In this matter the Motor Accident Claim Tribunal had decided that the fault lay with the owner of the offending vehicle and directed the insurer to pay compensation to victim's family and recover the same from the insured who is the owner. On appeal the High Court referring to Oriental Insurance Co. Ltd. v. K.C. Subramanyam held that the discretion under Article 142 of the Constitution to direct the insurance company to make payment to the claimants and to recover the same from the owner of the vehicle is vested only with the Supreme Court,The High Court held that only the owner of the offending vehicle is liable to make the payment of the compensation amount awarded by the Tribunal.
The Supreme Court on appeal decided that in the case of third party risks, as per the decision in National Insurance Company Ltd. v. Swaran Singh, the insurer had to indemnify the compensation amount payable to the third party and the insurance company may recover the same from the insured. Doctrine of "pay and recover" was considered by the Supreme Court in Swaran Singh case wherein
the Supreme Court examined the liability of the insurance company in cases of breach of policy condition due to disqualifications of the driver or invalid driving licence of the driver and held that in case of third party risks, the insurer has to indemnify the compensation amount to the third party and the insurance company may recover the same from the insured. Elaborately considering the insurer's
contractual liability as well as statutory liability vis-a-vis the claims of third parties, the Supreme Court issued detailed guidelines as to how and in what circumstances, “pay and recover” can be ordered.
The Supreme Court considered the decision of Swaran Singh case in subsequent decision in National Insurance Co. Ltd. v. Laxmi Narain Dhut, wherein this Court held that “the decision in Swaran Singh case has no application to cases other than third party risks and in case of third party risks the insurer has to indemnify the amount and if so advised, to recover the same from the insured”. The same principle was reiterated in Prem Kumari v. Prahlad Dev and others.
In the present case, the Supreme Court found that the High Court had rejected the order of the trial court based on the reference to larger Bench made by the two-Judge Bench in National Insurance Co. Ltd. v. Parvathneni which doubted the correctness of the decisions which in exercise of jurisdiction under Article 142 of the Constitution of India directing insurance company to pay the compensation amount even though insurance company has no liability to pay stating that if the insurance company has no liability to pay at all, then, it cannot be compelled by order of the court in exercise of its jurisdiction under Article 142 of the Constitution of India to pay the compensation amount and later on recover it from the owner of the vehicle. However since the reference to the larger bench in Parvathneni case has been disposed of by keeping the questions of law open to be decided in an appropriate case, presently the decision in Swaran Singh case followed in Laxmi Narain Dhut and other cases hold the field.
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