This article has been written by Kalpalathikaa M.

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. 

This article seeks to explain the relevance and the importance of third-person insurance and its importance with respect to the Motor Vehicles Act, 1988 with the help of case laws

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

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. 

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.

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