Court case(2004) 3 SCC 297

A batch of appeals reached a three-judge bench of the Supreme Court in which insurers had been held liable to pay compensation to third-party victims of motor accidents although, the insurers said, the vehicles were being driven by persons who had no valid driving licence - the licences were fake, had expired, were for a different class of vehicle, or were learner's licences. The insurers relied on the condition in the policy and on the statutory defence (then s. 149(2)(a)(ii) of the Motor Vehicles Act 1988, now s. 150(2)(a)(ii)) that the vehicle was driven by a person not duly licensed, and contended that they could not be made liable. Divergent decisions of smaller benches had to be reconciled.

The Court held that the provisions on compulsory insurance are beneficial legislation for the protection of third parties, and that the statutory defences must be strictly proved by the insurer. Mere absence, fakeness or invalidity of the driver's licence is not enough: the insurer must prove that the insured owner was guilty of negligence and failed to exercise reasonable care in the matter of fulfilling the condition of the policy regarding the use of the vehicle by a duly licensed driver. An owner who employed a driver after satisfying himself that the licence appeared genuine is not in breach. The breach must be so fundamental as to have contributed to the cause of the accident. A learner's licence is a licence for the purpose of the Act. Even where the insurer succeeds in its defence against the insured, the Tribunal may direct the insurer to satisfy the award in favour of the third party and to recover the amount from the owner in the same proceedings, by executing the award, without filing a separate suit.