Insurers cannot avoid third-party liability based on invalid driving licenses or unproven allegations of fake insurance cover notes.

On October 19, 2006, Rajubhai Jivabhai Jadav died following a collision between his motorcycle and a rickshaw driven in a rash and negligent manner.

The Motor Accident Claims Tribunal (MACT), Bhavnagar, awarded the claimants ₹6,37,000 with 9% interest but exonerated the respondent insurance company and the vehicle owner from liability.

The Tribunal’s exoneration was based on two grounds: first, that the driver lacked a valid license for the specific class of vehicle at the time of the accident; and second, that the insurance cover note (Exh. 83) was allegedly fake or part of a batch of lost documents.

The claimants appealed the exoneration of the insurer.

1. Whether the insurance company can be exonerated from liability toward third parties on the ground that the driver did not possess a valid transport vehicle endorsement at the time of the accident.

2. Whether the insurance company successfully proved that the insurance policy (cover note) was fake so as to avoid liability.

The court applied the principle of "Pay and Recover" as established by the Hon’ble Supreme Court in National Insurance Company Limited v. Swaran Singh & Ors. (2004) 3 SCC 297, which held that a breach of policy conditions, such as an invalid or absent driving license, is not a primary defense against third-party claims; rather, the insurer must prove the insured's negligence in exercising reasonable care.

Under the Indian Evidence Act and the Motor Vehicles Act, the burden of proof lies on the insurer to substantiate claims of a "fake" policy through material evidence and witness testimony.

The High Court found the Tribunal’s finding on the insurance policy perverse because the insurer failed to claim the policy was "fake" in its written statement and produced no witnesses or specific evidence to invalidate the cover note placed on record by the claimants at Exh. 83.

An undated letter to the police regarding lost cover notes was deemed insufficient as no further action was taken against the vehicle owner for misuse.

Regarding the license, the court noted that while the driver only had a non-transport (MCWG) license at the time of the accident and obtained the transport endorsement later, this breach of policy condition does not allow the insurer to bypass its statutory liability to third parties.

Applying Swaran Singh, the court reasoned that the insurer must first satisfy the award to the victims and then seek recovery from the owner.

It held that the respondent no. 2 (Insurance Company) is liable to satisfy the award in the first instance given the claimants are third parties.

The High Court directed the insurance company to deposit the compensation amount with 9% interest within six weeks, granting them the liberty to subsequently recover the amount from the owner and driver through an execution petition before the Tribunal.