ASSIGNMENT

In partial fulfilment of the requirements for the award of Degree of

LLB 3 years

Topic: Right of third party against insurers in Motor vehicle

insurance

Submitted By:
Gladson Rodrigues –A3256121164
Vibhati Gupta – A3256121097
Section- C
Submitted to:

Dr. Varun Srivastava

Insurance Law

Amity Law School

AMITY UNIVERSITY UTTAR PRADESH, INDIA
Introduction

The 14th century saw the introduction of insurance as a contract between two
parties in which one of the parties is an insurer, who assures the other party the
payment of a said sum of money on the happening of an event. It initially stemmed
as a contract to indemnify marine contracts as they undertook huge risks. The
amount is payable when a personal injury is caused to another due to which a legal
liability arises.

In some cases, there is a third party involved. The best example of this would be
Motor Vehicle insurance, where the claim of the driver who is not insured is
provided with coverage, despite not being covered under an insurance policy.
According to the Motor Vehicles Act of 1988, it is necessary for every driver on
the road to have insurance. The vehicle used can be for the purpose of social or
domestic movement but it has to be insured.

With regard to the background of the concept of third-party insurance, it is

important to note that there was no law for it in England before 1930. An amount
was paid by a motorist to the injured as and when liability for the same arose.

However, people realized that they did not possess sufficient financial strength to
pay the dependents of the disabled or the deceased. Due to this very reason, the
Motor Vehicles Act was enacted to provide the injured with the insured amount
from the pocket of the insured.

The simple object of these enactments was to ensure that a third party must not
bear the brunt of failed insurance premium payments by the insured. What is to be
noted is the fact that a third party can seek damages only against those offences
that have been enumerated in the Act. The Act seeks to protect the interests of third
parties, but not the insurers, or the insurance companies themselves.

Insurance can be divided into two types:

1. First-party insurance; and

2. Third-party insurance.
As the name suggests, first-party insurance provides coverage to the parties insured
according to the contract by providing them with the assured amount on the
happening of the event.

Third-party insurance for motor vehicles is a statutory requirement and benefits the
liability of the insured towards the death or disability of the third party. This is to
ensure that the insurer is paid his damages irrespective of the solvency capacity of
the driver. In this insurance contract, the insured is said to be the first party while
the second party is the insurance company. Finally, the person who claims
damages from you is the third party of the contract.

Role of third-party

In the case of National Insurance Co. Ltd V. Fakir Chand, it was held that the
term “third party” includes a wide scope of people. This includes another party
present in a vehicle or a passerby, who are the subject matters of the insurance
contract. An important fact to note is that third party insurance does not seek to
insure the insured himself but is enforceable against the rest of the world injured
by the acts of the insured. Thus, the insured is the ultimate beneficiary of third-
party insurance policies.
At the time of the payment, the insured amount is paid directly to the injured, i.e.,
the third party without falling on the hands of the insured. Since the amount of
liability cannot be directly calculated, only the legal liability is insured due to
which the amount of premium to be paid does not vary. Since it is fault-based, the
fault of the insured has to be proved along with the fact that the injury was caused
due to his actions.

Due to these reasons along with the fact that the amount to be finally paid cannot
be determined, insurance companies find this policy unpopular. An insurance
company cannot ignore its liability to the third party except when it falls under the
exceptions as provided in Section 149(2) of the Act.

Even otherwise, if the insurance company has proved its defence, it is not
completely absolved from its liability as the said amount can be recovered from the
insured or the owner of the vehicle. Thus, the onus lies on the insurance companies
to prove that the accident falls under any of the exceptions provided by the Act.
They must prove not just the exception, but also the fact that the breach of clauses
was done with the knowledge of the driver or owner. If the insurer is unable to
prove the latter, they shall still remain liable for the payment of the insurance
amount.

The concept and need for insurance

Every asset has a value attached to it, which is mostly economic in nature. There is
always a chance that these assets may be destroyed owing to incidents beyond
human control. They may also turn non-operational due to such events. According
to the type of asset, the type and proportion of the risk also differ. This is where the
concept of insurance comes into play.
It provides a sense of security to the whole section of society. The basis for
insurance is the fact that risks are always unpredictable and uncertain. When you
insure your asset, it does not mean that you are risk-free. Rather, if the asset suffers
any damage, the loss is borne by the insurance company that compensates the
insured party by making good the loss. Finally, for those belonging to lower-
income families, insurance is a good way to improve investments and savings. But
what exactly does insurance mean?

Insurance can be described as a method of social service through which the parties
involved attempt to eliminate and reduce the risk of property and life. When a
person chooses an insurance plan, the risk is shared by a large number of people
who associate themselves. These risks may include anything from burglary and fire
to the peril of the sea and death. A risk that is contingent upon the happening of
these events can be insured after the payment of a premium in accordance with the
level of risk.

There are two parties involved here, where one of the parties is the insurer, who
undertakes to pay the insured party the insured amount on the happening of the
contingent event, after the payment of the premium.

Here, the insurer agrees to pay for the financial losses which have been suffered by
the insured due to the happening of unforeseen circumstances. Those who are
subject to similar risks and create as well as contribute to the common fund which
is used to pay the insured amount to the unfortunate few who suffer losses. The
insurance is sold by the insurance company, while the policyholder is the person
who buys the insurance. In order to determine the amount to be paid as the
premium, the factor of insurance rate is used. This value depends upon the level of
coverage required by the policyholder.

Though there are many types of insurances available, this project will specifically
focus on the concept of third-party insurance and its rights with reference to motor
vehicles.

Legal requirements under the Motor vehicle Act

In accordance with the Motor Vehicle Act (hereafter referred to as the “MV Act”),
third-party insurance or liability coverage is considered to be a statutory
requirement. As the name suggests, the beneficiary of the policy is not the two
parties involved in a contract.

To put it in simpler terms, the vehicle owner and the insurance companies are not
the beneficiaries of this contract. The insured is not provided with any benefit.
Rather, it helps in covering the legal liability owed by the insurer to the third party
on account of the disability/death caused to the party by the insured’s vehicle.

This insurance cover is mandatory and non-life insurance companies are obligated
to provide it. In our country, third-party insurance can be obtained right at the time
of purchasing the vehicle from automobile drivers in accompaniment with the
registration of vehicles. It is an add on to the regular coverage that protects the
insured from theft or damage to the vehicle.

However, the price of a comprehensive cover is multiple times that of a normal

insurance cover as it is more frequently claimed than third-party claims. The
premium for third-party insurance is calculated in accordance with the rate
schedule provided by the Insurance Regulatory and Development Authority’s arm:
the Tariff Advisory Committee. Currently, this system has been done away with. It
is currently determined on the basis of the accident victim’s earning capacity.

Legal provisions

The Motor Vehicle Act of 1988 regulates motor insurance and any third-party
liabilities and rights that arise from it. However, Part XI of the Act deals
specifically with third party rights. Section 32D of the Insurance Act of 1938 also
creates an obligation on part of the insurer to provide for insurances dealing with
third party risks.

In accordance with the MV Act, there are certain requirements to be followed for
third party insurance plans, which are as follows:

Section 146 of the Act also provides that the driver of the vehicle must always
carry at least a bodily injury liability and coverage for the liability of property
damage. In the case of Govindan V. New India Assurance Co Ltd., the court held
that no clause in an insurance policy can override the third-party insurance policy.
This has been specifically mentioned as the insurance sector for motors has two
types of insurance namely the first party and the third-party insurance.

Section 147(1): An insurer authorized to do so must provide for any damage to a

third party’s vehicle caused by the insured. These policies are required to cover
any accident in accordance with the value of the liability incurred. A certificate is
to be granted in the prescribed format containing particulars as prescribed and must
be handed over to the insured.
Section 157: In accordance with this Section, the certificate of insurance can be
transferred to the new owner of the vehicle if and when the vehicle is transferred to
a new owner. In order to make the required changes with the authority in question,
the transferee is required to apply within 14 days to make the changes necessary.

In the case of Karnataka SRTC V. New India Assurance Company Ltd., the
vehicle in question was only given on hire in accordance to an agreement and was
not transferred completely. It was held by the Court that the insurer would be held
liable even in case of an agreement of lease or hire. In case of agreements for hire,
cannot be excluded merely on the basis that there is a case of extended contractual
liability. Thus, even if the transfer of the vehicle takes place even without
providing notice to the insurer, the liability of the insurer will not cease.

Rights of the third party

1. Right to remain unaffected

The right to remain unaffected arises only in three cases. The first situation
is when an award or a judgement has been given against the insured. The
second situation arises when the liability of the insurer is unlawfully
restricted. Thirdly and finally, when there is a settlement between the
insured and the insurer.

The MV Act has prescribed that an insurer can pay only up to the sum of
liability assured. If there is any award or judgement which has been passed
against the insured, the third party’s claim will not be ignored. It is not an
absolute right and can be exercised only if the insured has been notified by
the Court with regard to the proceedings.
 On granting the insurance certificate, only those clauses shall be valid which
do not hamper the insurer’s liability. Unless the third party is a party to a
settlement for a claim, the settlement will not be valid. Similarly, the death
of the insured party does not put a full stop to the ongoing cause of action
against insurers. An insured has to pay the estimated amount of damages to
the third party in case of any damage for which the insured had not taken
sufficient care to safeguard the damage or loss. Thus, in such circumstances,
the third party remains unaffected.

2. Right to receive information

Any person against whom a claim for damages is made, be it insured or

uninsured, must provide any information to the third party as and when
necessary. The insured is required to mention whether or not he has been
ensured with reference to the liability. The third party here also has a right to
know whether he has any vested or transferred rights. He also has the right
to know if there is any contract for insurance that would affect his rights
indirectly or directly.

Transfer of rights of the insured to the third party

When the third party raises a claim against the insured with respect to an event that
has been insured, the insurer undertakes to pay the damages. If the insured is
insolvent, then all the rights that he holds in relation to the insurer will be
transferred and vested to the third party in the same power.

An insurance policy cannot impose a condition changing the same. Once the rights
have been transferred, the insurer will treat the liability for damages in the same
position as he would have been to the insolvent injured. However, there may be a
situation where the liability for damages is more than the value insured. In such a
case, the insured would be liable to pay the balance or the excess value to the third
party.

Liability of insurer towards third parties

In accordance with Section 147(2) of the MV Act, a policy must cover the liability
of the accident irrespective of the amount of liability along with a limit of Rs.
6000. The High Court of Madras has opined that if the liability of the insurer does
not exist, then this bar shall cease to exist as well. It would be considered void.

Motor accidents: hit and run

Any grievous hurt that arises from a hit and run accident must be compensated for
by the insurer. If it is a case of grievous hurt, a fixed amount of Rs.12,500 is to be
paid. In the case of death, a fixed amount of Rs.25,000 is to be paid. However, if in
accordance to any other act, the compensation has been paid to the legal heirs, then
such compensation is to be refunded back to the insurer.

Case laws

National Insurance Co Ltd. V. Swaran Singh

The given case law focuses on the scope of the contractual and statutory liability
and whether a third-party claim can be excluded on the basis of third basis claims.
It was held by the Court that a contract that includes a condition taking away the
rights of the third party would be void. The exception would be in accordance with
the MV Act under the proviso of S.149(2).

An insurer cannot avoid statutory liability as they have rights against the insured
according to the proviso. If a judgement establishes the liability of the insurer, it
cannot be questioned.

National Insurance Co. Ltd. V. Laxmi Narain Dutt

The given case law explains that Section 149 of the MV Act describes the duty of
the insurer with respect to the execution of judgements in favour of third parties. It
was also held by the Court that there is no contractual liability between a third
party and the insured himself.

S. Iyyapan V. United India Insurance Co. Ltd

It was held that the intent behind ensuring compulsory third party insurance for
owners of the vehicle is to provide for any damage inflicted to the third party in the
account of the vehicle.

They must be able to get sufficient damages in case of any injuries or even death.
The intention of the legislature was to protect users of roads who are faced with the
risk of vehicles on the road. Thus, unless a third party insurance contract is in
force, a vehicle cannot be put to use.
National Insurance Co. Ltd V. Nicolletta Rohatgi

It was held that irrespective of the fact of whether the insurer is a nationalised
company or not, the intention of third party insurance is to protect the interests of
third party insurance and not the company itself.

Oriental Insurance Co. Ltd. V. Sudhakaran K.V.

This case established the difference between an owner of the vehicle and the third
party for an insurance contract. It explains that S.147 of the MV Act is to be taken
only by the owner of the vehicle. It is to be used with respect to a third party’s
reimbursement claims. It is in no way created for the benefit of the owner of the
vehicle himself.

Conclusion

Over the last couple of decades, the Indian insurance sector has grown by leaps and
bounds. Owing to increasing levels of vehicular traffic, the need for the protection
of the users of the road has increased proportionately. Thus, on a reading of this
article, we can arrive at the following conclusions:

 With regard to the difference between third-party insurance and first-

party insurance, the beneficiary of third party insurance is not the insured
himself. It is the third party who has been affected due to the actions of
the owner of the vehicle. Thus, though he is not a part of the contract
itself, he is the beneficiary of the contract.

 Secondly, the insured does not gain any benefit through third-party
insurance. Only if there is a situation where there has been no damage or
 death to the third party, the insurance amount is returned on maturity to
the insured.

 Thirdly and finally, the value of the damage itself cannot be determined
beforehand. On the happening of the event, the damages are calculated by
expert investigators from the insurer/insurance company. On the basis of
their assessment, a sum for damages is arrived at. If it is lesser than or
equal to the amount insured, they are paid from the insured amount. If it
is higher, the insured has to pay the excess amount from his pocket.
Thus, third-party insurance is considered to be essential to protect people’s
livelihood and secure their future. However, there are a couple of suggestions
which can be implemented as follows:

 The calculation method for the sum of insurance for private cars can be
tweaked to keep in mind the manufacturers’ accessories and the on-road
pricing inclusive of tax registration.

 The IRDA must create and maintain a repository that will connect a
common data pool of the insured’s driving habits. Thus, the insurance
premium to be paid shall be determined accordingly. This would be a
welcome change for policyholders who pay huge premiums.