Bombay High Court Rejects Insurer’s Attempt To Deny Claim Over Premium Handling Lapse

The Bombay High Court (BHC) has ruled that an insurer cannot refuse to honour an insurance claim by citing non-receipt of premium when the lapse was caused by its own failure to properly process the premium cheque, according to a recent report by LiveLaw. The decision makes it clear that insurers cannot fall back on internal inefficiencies after having treated a policy as valid and acted on that basis.

The case arose from a dispute between a cooperative housing society and its insurer following flood damage that occurred soon after the renewal of a fire insurance policy. While the insurer argued that the policy stood cancelled because the premium cheque was not realised, the court found that the explanation did not stand up to scrutiny when examined against the insurer’s own conduct.

Sequence Of Events That Triggered The Dispute

In July 2005, the society paid the renewal premium by cheque, and the insurer went ahead with the renewal. Shortly thereafter, severe flooding caused extensive damage to the insured property, prompting the society to submit a claim.

Only after the claim was lodged did the insurer raise the issue of the premium cheque allegedly not being realised. It claimed that the cheque had been dishonoured and that, as a result, the policy had automatically stood cancelled even before the loss occurred. On this basis, the insurer sought to avoid any liability.

The High Court found gaps in this version. It noted that the insurer had not placed on record convincing contemporaneous evidence to show that the cheque was returned due to lack of funds. Bank records suggested that a sufficient balance was available in the society’s account at the relevant time. The court also took note of the fact that the cheque was deposited belatedly, a delay attributable to the insurer’s own processes, with flood-related disruptions further complicating routine banking operations.

Conduct That Undermined The Insurer’s Defence

A key factor in the court’s reasoning was the insurer’s behaviour after the loss. Even while taking the position that the policy was no longer in force, the insurer went ahead and had a surveyor inspect the loss and continued to deal with the claim for some time, a contradiction the court was quick to note.

The insurer argued that, under the law, coverage cannot begin unless the premium has first been paid. The court, however, clarified that the legal requirement is satisfied when the premium cheque is received before the risk period begins. If the cheque is not realised because of the insurer’s own delay or mishandling, that failure cannot be used against the insured.

The court emphasised that permitting insurers to repudiate claims in such circumstances would amount to allowing them to benefit from their own shortcomings, an outcome incompatible with basic principles governing insurance contracts and consumer protection.

The court upheld the consumer commission’s order and told the insurer to pay about Rs 34.78 lakh, along with costs, saying the dispute had dragged on far too long.

Why This Judgment Is Important

The ruling leaves little room for insurers to fall back on their own paperwork lapses. Once a policy is renewed and acted upon, claims cannot later be pushed aside on technical grounds. It also underlines that sloppy premium handling can come at a real cost.