A landmark ruling by the Madhya Pradesh High Court has clarified the liability of motor insurance companies when accidents occur outside the authorized route of a vehicle. The judgment reinforces that while insurers cannot be held directly liable for breaches of permit conditions under the Motor Vehicles Act, they remain obligated to compensate victims first and recover the amount from the owner or driver - a principle known as 'pay and recover'. This balances victim protection with contractual integrity.
Background & Facts
The Dispute
The dispute arose from a road accident on 16 February 2008, when a truck registered in Haryana, driven by respondent No.2 and owned by respondent No.3, overturned at Jamaalpura Square in Madhya Pradesh. The claimant, Nirmal, a cleaner aboard the truck, suffered grievous injuries including a fractured left hand and broken jaw. He filed a claim petition under Section 166 of the Motor Vehicles Act, 1988, seeking compensation.
Procedural History
- 2008: Accident occurred on 16 February at Jamaalpura Square, Madhya Pradesh
- 2010: Claims Tribunal awarded Rs. 1,41,300/- to claimant
- 2012: Insurance company filed appeal under Section 173 of the Motor Vehicles Act
- 2025: Respondents 2 and 3 (driver and owner) failed to appear despite service by publication
- 2026: High Court heard appeal ex parte and delivered judgment
Relief Sought
The insurance company sought to overturn the tribunal’s order holding it liable for compensation, arguing that the vehicle operated outside its permitted route, thereby breaching the insurance policy terms. The claimant sought affirmation of the tribunal’s award.
The Legal Issue
The central question was whether an insurance company can be held liable to pay compensation under Section 147 of the Motor Vehicles Act when the insured vehicle was being operated in violation of the permit conditions under Section 66, and whether the doctrine of 'pay and recover' applies in such cases.
Arguments Presented
For the Appellant
The insurance company relied on Ex.D-7 (surveyor’s report) and Ex.D-9 (RTO permit copy), which showed the vehicle was authorized only for Haryana, Delhi, Rajasthan, and Uttar Pradesh - not Madhya Pradesh. It cited Section 66 and Section 158 of the Motor Vehicles Act to establish that operating outside permitted areas constitutes a statutory breach. The policy’s endorsement referencing Chapter X and XI of the Act incorporated these conditions as implied terms. The appellant relied on Gohar Mohammed v. Uttar Pradesh State Road Transport Corporation and K. Nagendra v. New India Insurance Co. Ltd. to argue that insurers are not liable for losses arising from permit violations.
For the Respondent
The claimant’s counsel contended that Ex.D-9 was a photocopy and therefore inadmissible. He argued that the burden lay on the insurer to prove the absence of a valid permit by summoning RTO officials, which it failed to do. He further asserted that as a third-party victim, the claimant was entitled to compensation regardless of the owner’s breach, invoking the protective intent of the Motor Vehicles Act.
The Court's Analysis
The Court examined the statutory framework under Section 66 and Section 158 of the Motor Vehicles Act, 1988. It held that Section 66 mandates that no vehicle may be used as a transport vehicle except in accordance with the conditions of a valid permit. Section 158 requires production of such permit upon demand, and failure to produce it in case of an accident triggers liability. The Court emphasized that these provisions are not procedural formalities but substantive conditions of lawful operation.
"The requirement of permit is not an empty requirement of carrying permit but it enjoins on a conjoint reading of Section 66 and 158 that the vehicle must abide by the conditions of permit."
The Court found that the insurance company had discharged its burden through documentary evidence and witness testimony, including the claimant’s own admission during cross-examination that the vehicle lacked a permit for Madhya Pradesh. The owner’s failure to appear or rebut this evidence was fatal to his defense.
The Court then turned to the precedents cited. In Gohar Mohammed, the Supreme Court held that insurers are not liable when the vehicle operates outside the permitted route. In K. Nagendra, the Court clarified that while insurers are exempt from direct liability, the victim’s right to compensation must be upheld through the 'pay and recover' mechanism. The Madhya Pradesh High Court adopted this balanced approach, rejecting the insurer’s plea for complete exoneration while also rejecting the tribunal’s imposition of direct liability.
The Verdict
The appellant insurance company won. The Court held that an insurer is not liable to pay compensation directly when the vehicle operates outside its permitted route, as this constitutes a breach of statutory conditions incorporated into the policy. However, the Court directed the insurer to pay the awarded compensation to the claimant and recover the amount from the owner and driver, applying the 'pay and recover' principle.
What This Means For Similar Cases
Pay and Recover Is Mandatory, Not Optional
- Practitioners must now argue for 'pay and recover' as the default remedy in permit breach cases, not outright dismissal of claims
- Insurers cannot avoid liability entirely; they must pay victims first and then initiate recovery proceedings
- Claims tribunals and courts must explicitly direct recovery from the owner/driver in such judgments
Documentary Evidence Suffices Without RTO Testimony
- Photocopies of permits and surveyor reports, when corroborated by witness testimony, are sufficient to establish permit breach
- The burden shifts to the vehicle owner to prove valid authorization once the insurer establishes prima facie non-compliance
- Insurers need not summon RTO officers unless the claimant raises a credible dispute over authenticity
Permit Conditions Are Implied Terms in All Policies
- Even if not explicitly stated, policies referencing compliance with the Motor Vehicles Act incorporate Section 66 and Section 158 as binding conditions
- Courts will not allow insurers to evade liability on technicalities, but will not force them to bear losses from clear statutory violations
- This reinforces the principle that insurance contracts are bound by statutory mandates, not merely private agreements
