Refining the “Pay-and-Recover” Doctrine: The Principle of Irretrievable Partial Disbursement – Commentary on National Insurance Co. Ltd. v. Sunita Devi & Ors. (2025 INSC 951)

1. Introduction

The Supreme Court’s decision in National Insurance Company Limited v. Sunita Devi & Ors. introduces a nuanced refinement to the well-established pay-and-recover doctrine under the Motor Vehicles Act, 1988 (“MV Act”). The case arose out of a fatal motor accident that occurred on 22 August 2005, leading to a compensation award of ₹8.23 lakhs by the Motor Accident Claims Tribunal (“MACT”). Although the insurer successfully proved that the policy had been cancelled prior to the accident because the premium cheque had bounced, both the MACT and the Delhi High Court directed the insurer to satisfy the award first and then recover the amount from the owner. In appeal, the Supreme Court balanced three competing interests—third-party victims, the insurer whose policy stood rescinded, and the vehicle owner—by affirming a new principle: where the insurer has already deposited a part of the compensation during the litigation and that amount has been disbursed to the claimants, such amount becomes irretrievable from the claimants. Instead, the insurer may seek reimbursement from the vehicle owner, while the claimants themselves must pursue any remaining award directly against the owner.

2. Summary of the Judgment

• The policy in question had been validly cancelled after the premium cheque was dishonoured; notice of cancellation was served on both the owner and the Regional Transport Officer (RTO) well before the accident.
• In principle, the insurer was not liable to compensate the third-party victims because the contract of insurance had been rescinded for failure of consideration.
• However, 50 % of the compensation had already been deposited by the insurer pursuant to interim orders, and this amount was withdrawn by the claimants.
• The Court held that the disbursed 50 % could not be clawed back from the claimants; instead, the insurer could recover that sum from the vehicle owner.
• The remaining 50 % of the award could be enforced by the claimants directly against the owner, not the insurer.
• Appeal disposed of on the above terms; no order as to costs.

3. Analysis

3.1 Precedents Cited

The Court relied heavily on three earlier decisions:

1. National Insurance Co. Ltd. v. Seema Malhotra (2001) 3 SCC 151 – affirmed the position that an insurer is not liable where premium remains unpaid due to dishonoured cheque.
2. Deddappa & Ors. v. National Insurance Co. Ltd. (2008) 2 SCC 595 – recognised rescission of policy on non-payment of premium but, using Article 142, directed the insurer to first pay the award and then recover it from the owner.
3. United India Insurance Co. Ltd. v. Laxmamma & Ors. (2012) 5 SCC 234 – crystallised the pay-and-recover doctrine: insurer must satisfy the award if cancellation notice has not reached the insured before the accident.

The present judgment acknowledges the doctrinal lineage but introduces an additional layer: when payment has already been made voluntarily or under interim directions and reached the claimants, that portion is insulated from recovery against them.

3.2 Legal Reasoning

• Rescission of Contract: The dishonour of the premium cheque led to failure of consideration, automatically rescinding the policy (Sections 147 & 149 MV Act read with general contract principles).
• Notice Requirement: Adequate notice of cancellation to the owner and RTO satisfied the test laid down in Laxmamma; therefore, the insurer’s statutory liability toward third-party risks stood extinguished before the accident.
• Equitable Balancing under Article 142: While prior cases used Article 142 to protect third-party interests through pay-and-recover, the Court here adopted a more granular solution—protecting only the amount already disbursed, rather than the entire award.
• Doctrine of Irretrievable Disbursement (New Principle): Once compensation is bona fide disbursed to victims, it should not be clawed back, even if later findings absolve the paying party. The burden shifts to the legally responsible wrongdoer (vehicle owner) without unsettling sums already received by innocent victims.

3.3 Impact

4. Complex Concepts Simplified

• Pay-and-Recover Doctrine: A judicial device whereby the insurer—though technically not liable—must first satisfy the compensation award to a third party and later recover the sum from the vehicle owner. It balances speedy relief to victims with eventual indemnity to the insurer.
• Rescission for Failure of Consideration: If the premium cheque bounces, the policy is treated as never having come into force; both parties are discharged from their contractual obligations.
• Section 147 MV Act: Mandates compulsory insurance against third-party risk. However, if no valid policy exists on the accident date, statutory coverage lapses.
• Article 142 of the Constitution: Enables the Supreme Court to pass “complete justice” orders that may transcend strict statutory confines.
• Irretrievable Disbursement (New Term): A payment that cannot be reclaimed from the recipient once made and withdrawn, particularly when the recipient is an innocent third-party victim.

5. Conclusion

National Insurance Co. Ltd. v. Sunita Devi does not dismantle the established pay-and-recover doctrine but fine-tunes it by recognising the concept of irretrievable partial disbursement. The Supreme Court held that, where an insurer has already parted with funds that have reached the hands of third-party claimants, equity forbids recovering those funds from them—even if the insurer is later found not liable due to policy cancellation. Instead, recovery lies against the actual wrongdoer—the vehicle owner—while any unpaid balance of the award must also be pursued against that owner. This calibrated approach protects innocent victims from the vagaries of litigation, safeguards insurers from unfounded long-term liability, and reinforces owner accountability. Future cases will likely cite this judgment when crafting nuanced remedies in situations involving cancelled policies, bounced premium cheques, or other defenses that emerge after partial satisfaction of awards.