Principle of ‘Pay and Recover’ Must Apply Even Under Liability-Only Policies: Supreme Court Enhances Compensation in Motor Accident Claim

“Excluding Insurance Liability Where Coverage Exists for Third Parties Defeats Statutory Object”, On 17th July 2025, the Supreme Court of India delivered a notable judgment, expanding the interpretation of insurance liability in motor accident claims. The Court ruled that even when a vehicle is covered under a “Liability Only Policy” and passengers are not explicitly covered, the insurer must first compensate the claimants and then recover the amount from the vehicle owner. Terming it as a case warranting the application of the “pay and recover” principle, the Court enhanced the compensation from ₹19,53,000 to ₹26,97,500, securing the rights of the deceased’s family under the Motor Vehicles Act, 1988.

The tragic incident occurred on 27th November 2013, when Gokul Prasad, a 32-year-old cloth seller, lost his life in a fatal road accident. He was returning home in a TATA 407 truck, which met with an accident due to rash and negligent driving. His legal heirs, the appellants, approached the Motor Accident Claims Tribunal under Section 166 of the Motor Vehicles Act, 1988, claiming compensation of ₹49,26,000.

The Tribunal, while recognizing negligence, limited compensation to ₹19,53,000 holding the insurance company not liable, as the vehicle was a commercial vehicle covered only under a “Liability Only Policy”, without any premium paid for passengers or the driver. The High Court affirmed the Tribunal’s view, absolving the insurer of liability and fastening it solely on the driver and owner.

At the heart of the appeal before the Supreme Court lay a crucial legal question—whether the insurance company can be directed to first pay the compensation despite the policy limitations, and thereafter recover it from the owner.

Justice Sanjay Karol, writing for the Bench, observed: “The principle of ‘pay and recover’ is not a mere judicial innovation, it stems from a statutory duty to protect third-party rights under the Motor Vehicles Act, 1988.”

The Court emphasized that even under liability-only policies, courts must ensure the compensation reaches the victims promptly.

On the issue of driving license, the Court applied the latest interpretation from the Constitution Bench in Bajaj Alliance General Insurance Co. Ltd. v. Rambha Devi (2024), affirming that: “A driver holding a valid Light Motor Vehicle (LMV) license can drive a transport vehicle like TATA 407 (under 7500 kg) without requiring separate authorization.”

The Supreme Court conducted a comprehensive examination of the principle of “pay and recover” relying on precedents including National Insurance Co. Ltd. v. Baljit Kaur and Anu Bhanvara v. IFFCO Tokio General Insurance Co. Ltd.

The Court unequivocally held: “The insurer is liable to indemnify the compensation amount to the claimants and shall be entitled to recover the same from the owner of the offending vehicle.”

Interestingly, the Court also observed: “The driver, possessing a valid LMV license, cannot be held liable, since his license was legally sufficient for the vehicle involved.”

Furthermore, the Court found the previous computation of compensation under conventional heads outdated. Referring to National Insurance Co. Ltd. v. Pranay Sethi (2017) and United India Insurance Co. Ltd. v. Satinder Kaur (2021), the Court increased compensation towards loss of estate, consortium, and funeral expenses by 10% in light of inflation adjustments.

Summarizing its findings, the Court held: “Courts below erred in denying insurance liability despite the overarching protective objective of the Motor Vehicles Act. Compensation must be just, fair, and promptly payable to the victims.”

In a critical pronouncement enhancing victims’ rights, the Supreme Court ruled in favour of the appellants, increasing their compensation to ₹26,97,500 with 6% interest per annum. The insurer was directed to pay this sum within four weeks and recover the amount from the vehicle owner.

This judgment fortifies the jurisprudence that procedural lapses like policy exclusions cannot come in the way of rightful compensation for victims. The Supreme Court’s approach ensures balance—prompt relief to the claimants while reserving the insurer’s right to recovery.

Date of Decision: 17th July 2025