NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

TRIMESTER-XIII

PROJECT OF

TRANSPORT LAW INCLUDING CARRIAGE OF GOODS

ON

THIRD PARTY INSURANCE UNDER MOTOR VEHICLES ACT, 1988

SUBMITTED BY: SUBMITTED TO:

HARSHA JESWANI Prof. NEHA SHARMA

ROLL NO: 2013BA.LL.B. 47

 ACKNOWLEDGEMENT

A research project like this is never the work of anyone alone. The contribution of many
different people, in different ways, makes these works possible and so is with this project. I
would like to extend my appreciation to such people. Thanking God for the wisdom and
perseverance that he has been bestowed upon me during this research project, and indeed,
throughout our lives: “one can do everything through him who gives us strength”. My
friends, as they always are, have been very helpful in making of this project and consequently
I thank them for their continual support and encouragement throughout. And also I would
like to take this special opportunity to thank Prof. NEHA SHARMA for providing such a
good topic and such an opportunity to discuss on this issue of Third Party Insurance under
Motor Vehicles Act, 1988 . Indeed, without her guidance, I would not have been able to put
my labour in this topic. The experience throughout has been very interesting and rewarding
one. I’ve learnt a lot form this topic. I would also like to thank all those people whom I
cannot name but who have directly or indirectly helped me throughout the project

Harsha Jeswani

2013BALLB47

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT ......................................................................................................... 2

TABLE OF CONTENTS ........................................................................................................... 3

ABSTRACT ............................................................................................................................... 5

INTRODUCTION ..................................................................................................................... 5

MOTOR INSURANCE CLAIM ............................................................................................... 7

BREAKING DOWN ‘THIRD PARTY INSURANCE’............................................................ 8

What is Third Party Insurance? ............................................................................................. 8

THE PHILOSOPHY OF THIRD PARTY INSURANCE......................................................... 9

SALIENT FEATURES OF THIRD PARTY INSURANCE .................................................. 11

HISTORICAL BACKGROUND OF THIRD PARTY INSURANCE ................................... 11

RELEVANT PROVISIONS OF MOTOR VEHICLES ACT, 1988 ....................................... 13

INSURER: SCOPE OF DEFENCE ......................................................................................... 14

Settlement between insurers and insured persons................................................................ 15

DRIVING LICENSE AS A DEFENCE .................................................................................. 16

NATURE AND EXTENT OF INSURER’S LIABILITY....................................................... 17

INSURER’S LIABILITY TO VEHICLE-OWNER ................................................................ 18

Liability in respect of damage to property [S.147 (2)] ........................................................ 19

THE MOTOR VEHICLES (AMENDMENT) BILL, 2016 .................................................... 20

SALIENT FEATURES OF THE BILL-.................................................................................. 20

1. Limits on insurer’s liability. .......................................................................................... 20

2. Enabling insurer to seek exoneration from liability for non-receipt of premium- ........... 21

3. Hit and Run Scheme ...................................................................................................... 21

4. Motor Vehicle Accident Fund ....................................................................................... 21

KEY ISSUES AND ANALYSIS............................................................................................. 21

ANOMALIES ENCOUNTERED IN DEALING WITH THE THIRD PARTY RISKS ........ 23

Frauds in MACT Claims ...................................................................................................... 23

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 Delay in settlement of awards .............................................................................................. 24

Delay in Investigation of MACT Claims .............................................................................. 24

Settlement through Alternative Forum ................................................................................. 25

NEED FOR REFORM ............................................................................................................. 25

CONCLUSION ........................................................................................................................ 26

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 CONCEPT OF THIRD PARTY INSURANCE UNDER THE MOTOR VEHICLES
ACT, 1988

ABSTRACT

The Motor Vehicles (MV) Act, 1988 mandates payment of compensation to the victims of
accidents arising out of the use of a motor vehicle or motor vehicles, in public places by the
owner or owners, as the case may. The MV Act further provides that no person shall use a
motor vehicle in public places without a policy of insurance complying with the requirements
of the MV Act. In such a policy of insurance, the insurer agrees to indemnify the user of the
vehicle against the legal liability to pay compensation payable to the victims (third parties) of
accidents (death, injury, disability, property damages, etc.) arising out of the use of the motor
vehicle. Apart from the legal liabilities to third parties, the general insurers also cover
pecuniary losses arising out of damages to the vehicle of the insured. This insurance cover is
commonly known as Own Damage Cover. The motor insurance portfolio has, thus, two
distinct sections - one relating to the cover for the vehicle and its physical damage (OD) and
the other relating to injury or death of other parties (TP). The cover for OD is optional and
the cover for TP is mandatory. The Motor Third Party policies have to comply with the
requirements of the MV Act. The compensation payable to the claimants is determined by the
Motor Accident Claims Tribunals (MACT) established under the MV Act. The motor portfolio
constitutes around 40 per cent of the non-life insurance premium underwritten in India. The
motor policies were governed by the tariff prescribed by Tariff Advisory Committee. This
research paper is an attempt to analyse the third party motor claims in Indian industry and
for this purpose the author has studied various provisions under The Motor Vehicles Act,
1988 that deal with third party insurance claims in India and judicial decisions related to it.

INTRODUCTION

India is the 5th largest insurance market in Asia owing to its $30 billion insurance industry.
Moreover, while growing to higher disposable incomes and savings and increasing
urbanization and awareness, the insurance is expected to grow radically in the new future.
Motor insurance is the largest business segment in the insurance sector in India as it

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constitutes 44% of the total product mix which includes fire, marine and life insurance. 1 In
India, under the provisions of the Motor Vehicles Act, 1988, it is mandatory that every
vehicle should have a valid Insurance to drive on the road. Any vehicle used for social,
domestic and pleasure purpose and for the insurer's business motor purpose should be
insured.

Insurance is a contract whereby one party, the insurer, undertakes in return for a
consideration, the premium, to pay the other, the insured or assured, a sum of money in the
event of the happening of a, or one of various, specified uncertain events. Insurance
developed from the fourteenth century as a means of spreading huge risks attendant on early
maritime enterprises; life and fire insurance developed later. The main classes of insurance
are life and other personal insurance, marine insurance, accident or property insurance and
liability insurance when the sum becomes payable when legal liability is incurred as for
personal injuries or professional negligence to another.

Motor third-party insurance or third-party liability cover, which is sometimes also referred to
as the ‘act only’ cover, is a statutory requirement under the Motor Vehicles Act. It is referred
to as a 'third-party' cover since the beneficiary of the policy is someone other than the two
parties involved in the contract i.e. the insured and the insurance company. The policy does
not provide any benefit to the insured; however it covers the insured's legal liability for
death/disability of third party loss or damage to third party property.

Therefore in case of third party insurance or liability insurance “the assured himself is
covered against legal liability which he may incur to a third party and the establishment of
such liability by the third party, not merely suffered by the third party, is an essential
perquisite to a claim in the policy. The claims ratio for third-party motor insurance has been
as high as 140 per cent for insurance industry, that is, for every Rs 100 that is collected by the
insurers, Rs 140 is paid out as claims. Third-party premiums are pooled into an account that
is managed by General Insurance Corporation of India, the Indian reinsurer.

1
Annual Report of the Ministry of Finance (Section 3, Insurance Division,
finmin.nic.in/the_ministry/dept_eco_affairs/budget/annual_report/9596ea3.pdf).

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 MOTOR INSURANCE CLAIM

To understand the meaning of Third Party Insurance, one needs to know first that what all
things are covered under motor insurance claim.

Any Motor Insurance Claim involves damage to insured’s vehicle, damage to the third party
motor vehicle, injury or death of the third party, this where a third party claims compensation
for injuries/death caused due to the negligence. The insured will refer all claims for third
party claims against them to professional insurance. Insured shall not enter into any
negotiation or agree to settle the claim outside insurance without the corporations consent.

A comprehensive motor insurance policy typically has two insurance covers bundled together
-the third party insurance and the first party insurance also called own damages cover.
Some also come with a built-in personal accident cover. As the names suggest, the ‘own
damages’ and ‘personal accident’ insurance components are to cover your losses i.e. damage
to your car or personal injuries, disability and death, respectively. 2

A first party insurance claim is between the insurance company and the policyholder. These
claims are contractual by nature and are contingent on the specific language of the insurance
policy (i.e. contract). An example of a first party insurance claim would be a homeowner who
suffers fire damage to his or her home. In this case, the homeowner will make a claim with
the insurance company to cover the damage and repairs.3 While the first party insurance is an
optional cover, third-party insurance is compulsory for all vehicle-owners as per the Motor
Vehicles Act. For this reason, standalone third party insurance policies are often called 'Act
only' insurance. Your third party insurance does not cover you and your motor vehicle. It
covers your legal liability for the damage you may cause to a third party only - bodily injury,
death and damage to third party property - while using your vehicle.4 Thus Third-
party insurance is a policy that protects against the actions of another party. One of the most
common types is third-party automobile insurance, which offers insurance coverage that
protects against claims of damages or losses incurred by a driver who is not the insured, the
principal, and is not covered in the insurance policy. The driver who caused damages is the
third party.
2
Chandralekha Mukerji, Claiming Compensation under Third-party Motor Insurance, The Economic Times,
Sep 24, 2015
3
Arnold & Itkin, Understanding First Party vs. Third Party Insurance Claims, Aug, 05, 2015 available at:
http://www.arnolditkin.com/personal-injury-blog/2015/august/understanding-first-party-vs-third-party-insuran/
4
Supra Note1

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 BREAKING DOWN ‘THIRD PARTY INSURANCE’

WHAT IS THIRD PARTY INSURANCE?

A third party insurance policy is a policy under which the insurance company agrees to
indemnify the insured person, if he is sued or held legally liable for injuries or damage done
to a third party. The insured is one party, the insurance company is the second party, and the
person you (the insured) injure who claims damages against you is the third party. 5 It is a
claim which made by someone who is not the policyholder or the insurance company (the
insurance company can be referred to as the second party). It is referred to as a 'third-party'
cover since the beneficiary of the policy is someone other than the two parties involved in the
contract (the car owner and the insurance company). The policy does not provide any benefit
to the insured. However, it covers the insured's legal liability for death/disability of third-
party loss or damage to third-party property.6 Under your third party insurance, a third party
can file a claim for compensation for injury, death, property damage caused by your car. The
case for claiming compensation under third party will be filed against you and your insurer.
According to Section 145(g) of The Motor Vehicles Act, 1988 “Third party” includes the
Government.7 “Third party” should include everyone (other than the contracting parties to
the insurance policy), be it a person traveling in another vehicle, one walking on the road or a
passenger in the vehicle itself which is the subject matter of insurance policy. 8
Third Party Insurance covers:
a) Personal Injury
b) Property damage
Third Party Insurance cover for Personal Injury includes:
1. Liability for death or injury to third parties
This means that you are insured against death or injury (caused by your vehicle) to
pedestrians, occupant of other vehicles, and outsiders other than passengers, for unlimited
amounts. Passengers of private vehicles and pillion riders are also deemed covered.
2. Liability to employees connected with operation of the vehicle

5
Kumar, Jagendra. "Challenges and Opportunities for Indian Motor Third Party Insurance Pool" Shriram Group
Companies, Jaipur. Bimaquest 8 (2008).
6
http://economictimes.indiatimes.com/definition/3rd-party-insurance
7
Section 145- Definitions: In this Chapter, — (g) “third party” includes the Government.
8
National Insurance Co. Ltd. v. Fakir Chand, AIR 1995 J&K 91.

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This means you are insured against death or injury (caused by your vehicle) to the vehicle's
drivers, cleaners, conductors, and coolies etc., employees used in the operation of the vehicle.

THE PHILOSOPHY OF THIRD PARTY INSURANCE

To understand the philosophy of compulsory third party insurance, it is profitable to travel

back a bit in time to common law. In common law, in order to provide succor to the victims
of increasing number of motor accidents, statutory enactments were made to amend the
traditional norms of tort law. Thus, English Fatal Accidents Act 1846 was passed to get over
the principle in tort law that a tortious claim would extinguish upon the expiry of the claimant
thereby enabling the legal heirs of a deceased victim of road traffic accident to claim
compensation. However, it was found that in several cases the owner of the motor vehicle did
not have adequate means to satisfy the award of compensation, and the therefore the
claimants found it difficult to actually enjoy the benefits of the award. In order to prevent the
award of compensation remaining as a mere paper relief, the Parliament thought it fit to
statutorily mandate that all motor vehicles should be provided with insurance coverage for
third party risks. Still, another difficulty persisted, inasmuch as there was nothing in law
entitling the claimant to bring an action against the insurer of the vehicle, as the claimant was
a total stranger to the insurance contract, and there was no privity of contract between the
claimant and the insurer. Therefore, the Third Parties (Right against Insurers) Act 1930 was
passed conferring the right on claimants to initiate action against the insurers for claiming
compensation. Yet, there was another issue to be addressed, as there were possibilities of
insurer limiting his liability in the insurance contract, and providing for several escape
clauses therein to evade liability. Hence, the conditions of insurance policy and limit of
coverage had to be statutorily prescribed so as to avoid such a mischief. Likewise, the
situations wherein the insurer could avoid liability for breach of conditions were also
statutorily prescribed.

In India, Motor Vehicles Act was modeled on the English Statues and provided for dealt with
compulsory insurance coverage as regards third party claims. The main objectives of
compulsory third party insurance, as explained by 85th Report of the Law Commission of
India are as follows –
1. To enable a claimant to claim whatever sum he is in law entitled to, despite the
inability of the owner or driver to pay.

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 2. To prevent the insurer from escaping liability on ground of breach on the part of the
insured of any term of the contract.
3. To entitle the claimant to recover compensation directly from the insurer, modifying
the general law of contract that a third party cannot sue on contract (85th Report of
the Law Commission of India, para 1.5).

The motive and philosophy behind compulsory insurance has been explained by the Supreme
Court in Skandia Insurance Co.Ltd v. Kokilaben Chandravan9 in the following terms.
“Ordinarily it is not the concern of the legislature whether the owner of the vehicle insures
his vehicle or not. If the vehicle is not insured any legal liability arising on account of third
party risk will have to be borne by the owner of the vehicle. Why then has the legislature
insisted on a person using a motor vehicle in a public place to insure against third party risk
by enacting S.94. Surely the obligation has not been imposed in order to promote the
business of the insurers engaged in the business of automobile insurance. The provision has
been inserted in order to protect the members of the Community travelling in vehicles or
using the roads from the risk attendant upon the user of motor vehicles on the roads. The law
may provide for compensation to victims of the accidents who sustain injuries in the course of
an automobile accident or compensation to the dependants of the victims in the case of a fatal
accident. However, such protection would remain a protection on paper unless there is a
guarantee that the compensation awarded by the Courts would be recoverable from the
persons held liable for the consequences of the accident. A Court can only pass an award or
a decree. It cannot ensure that such an award or decree results in the amount awarded being
actually recovered, from the person held liable who may not have the resources. The exercise
undertaken by the law Courts would then be an exercise in futility. And the outcome of the
legal proceedings which by the very nature of things involve the time cost and money cost
invested from the scarce resources of the Community would make a mockery of the injured
victims, or the dependents of the deceased victim of the accident, who themselves are obliged
to incur not inconsiderable expenditure of time, money and energy in litigation. To overcome
this ugly situation the legislature has made it obligatory that no motor vehicle shall be used
unless a third party insurance is in force.”

Thus, it is clear from the above exposition of law made by the Supreme Court that the
intention behind compulsory third party insurance is not to promote the profit motive of

9
1987 AIR 1184

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insurers, but to provide for protection to innocent victims of road accidents. The real intent is
to ensure that the compensation awarded by the Tribunal is made a reality by enabling the
claimants to actually recover it without many hassles. That intent is totally frustrated by the
proposed amendment.

SALIENT FEATURES OF THIRD PARTY INSURANCE

1. Third party insurance is compulsory for all motor vehicles. 10 Third party risks
insurance is mandatory under the statute. This provision cannot be overridden by any
clause in the insurance policy.
2. Third party insurance does not cover injuries to the insured himself but to the rest of
the world who is injured by the insured.
3. Beneficiary of third party insurance is the injured third party, the insured or the policy
holder is only nominally the beneficiary of the policy. In practice the money is always
paid direct by the insurance company to the third party (or his solicitor) and does not
even pass through the hands of the insured person.
4. In third party policies the premiums do not vary with the value of what is being
insured because what is insured is the “legal liability” and it is not possible to know in
advance what that liability will be.
5. Third party insurance is almost entirely fault-based that is you have to prove the fault
of the insured first and also that injury occurred from the fault of the insured to claim
damages from him.
6. Third party insurance involves lawyers’ aid.
7. The third party insurance is unpopular with insurance companies as compared to first
party insurance, because they never know the maximum amounts they will have to
pay under third party policies.

HISTORICAL BACKGROUND OF THIRD PARTY INSURANCE

Prior to 1930, there was no law of compulsory insurance in respect of third party rights in
England. As and when an accident took place an injured used to bring action against the
motorist for recovery of damages. But in many cases it was found that the owner of the
offending vehicle had no means to pay to the injured or the dependant of the deceased and in

10
G.Govindan v. New India Assurance Co.Ltd., AIR 1999 SC 1398.

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such a situation the claimants were unable to recover damages. It is under such circumstances
that various legislations were enacted. To meet the situation it is for the first time “the Third
Parties Rights against Insurance Act, 1930” was enacted in England. The provision of this
Act found place in S.97 of the Act11 which gave to the third party a right to sue insurer
directly. Subsequently, “The Road Traffic Act, 1930” was enacted which provided for
compulsory insurance for Motor Vehicles. The provisions of this Act were engrafted in S.95
of the Motor Vehicles Act, 1939 and S.146 of the Motor Vehicles Act, 1988. It is relevant
that under S.38 of the English Act of 1930, certain conditions of insurance policy were made
ineffective so far as third parties were concerned .The object behind the provision was that
the third party should not suffer on account of failure of the insured to comply with those
terms of the insurance policy.

Subsequently in 1934, the second Road Traffic Act was enacted. The object of this legislation
was to satisfy the liability of the insured. Under this enactment three actions were provided.
First was to satisfy the award passed against the insured. The second was that, in case the
insurer did not discharge its liability the claimant had the right to execute decree against the
insurer. However, in certain events, namely, what was provided in section Ss.96(2)(a) which
corresponds to section 149 (2)(a) of the Act12, the insurer could defend his liability. The third
action provided for was contained in S.10(3) of the Road Traffic Act. Under this provision,
the insurer could defend his liability to satisfy decree on the ground that insurance policy was
obtained due to misrepresentation or fraud. This provision also found place in S.149 (2)(b) of
the 1988 Act. While enacting the 1939 Act and the 1988 Act, all the three actions were
engrafted in S.96 of the 1939 Act and Section 149 of the 1988 Act. However neither the 1939
Act, nor the 1988 Act conferred greater rights on the insurer than what had been conferred in
English Law. Thus, in common law, an insurer was not permitted to contest a claim of a
claimant on merits, i.e. offending vehicle was not negligent or there was contributory
negligence. The insurer could contest the claim only on statutory defences specified for in the
statute. Thus while enacting Chapter VIII of the 1939 Act or Chapter XI of the 1988 Act, the
intention of the legislature was to protect third party rights and not the insurers even though
they may be nationalized companies.

11
The Motor Vehicles Act, 1939.
12
The Motor Vehicles Act, 1988.

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Prohibition on use of motor vehicles without statutory insurance policy, the object of this is to
enable the third party suffering injuries from use of the motor vehicle to get damages
irrespective of the financial capacity or solvency of the driver or the owner.

RELEVANT PROVISIONS OF MOTOR VEHICLES ACT, 1988

Chapter XI13 of the Motor Vehicles Act, 1988, like the earlier Act of 1939, makes the
insurance of motor vehicles compulsory. The owner of every motor vehicle is bound to insure
his vehicle against third party risk. The insurance co. i.e. the insurer covers the risk of loss to
the third party by the use of motor vehicle. Thus if there is insurance against third party risk,
the person suffering due to accident(third party) caused by the use of motor vehicle may
recover compensation either from the owner or the driver of the vehicle, or from insurance
company, or from them jointly.

According to Section 14614, no person can use, except as a passenger, or cause or allow any
other person to use a motor vehicle in a public place, unless an insurance policy against
third party risks, in relation to use of the vehicle. Contravention of the provisions of Section-
146 is an offence and is punishable with imprisonment which may extend to three months or
with fine which may extend to one thousand rupees or with both.15 Section 147 provides for
the requirement of policy and limit of liability. Every vehicle owner is required to take a
policy covering against any liability which may be incurred by him in respect of death or
bodily injury including owner of goods or his authorized representative carried in the vehicle
or damage to the property of third party and also death or bodily injury to any passenger of a
public service vehicle. According to this section the policy not require covering the liability
of death or injuries arising to the employees in the course of employment except to the extent
of liability under Workmen Compensation Act, 1923. Under Section 149 the insurer has been
statutorily liable to satisfy the judgment and award against the person insured in respect of
third party risk.

13
Section 145 to Section 164 of Motor Vehicles Act, 1988.
14
The Motor Vehicles Act, 1988.
15
Section 196. Driving uninsured vehicle: Whoever drives a motor vehicle or causes or allows a motor
vehicle to be driven in contravention of the provisions of section 146 shall be punishable with imprisonment
which may extend to three months, or with fine which may extend to one thousand rupees, or with both.

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 INSURER: SCOPE OF DEFENCE

In the settlement of a Motor Accident claim, the relative role of an insurance company is
more than any of the other parties. It has been an approved fact that it is the Motor third party
insurance, which becomes the primary medium for the payment of compensation. As a
beneficial legislation, it is also true that, a road accident victim needs protection as
expeditiously as possible without facing any difficulty. Insurer, being the trustee of a public
fund, an onerous duty is vested with an authorised insurer to administer the fund in the most
judicious manner. When the law was developed, with a view to give speedy justice to the
poor victim, the law makers have purposefully or inadvertently side lined the importance of
an effective defence on the part of the Insurance Company. It may be purposefully in the
sense that they wanted to cut short the delay and sincerely expected that the owner and the
driver of the offending vehicle will definitely contest the claim on its merits.

It is the experience that the owner or the driver generally shows no interest in contesting a
claim and an insurance company is compelled to step in to their shoes as a watchdog to
ensure that their public fund is utilised for only genuine cases. It is therefore felt highly
necessary for an insurer to have sufficient opportunity to defend an accident claim.

Section 149(2) which is Corresponding section 96 (2) of the Old Motor Vehicles Act, 1939)
provides for defences that are available to insurance companies. It reads as-

“No sum shall be payable by an insurer under sub-section (1) in respect of any
judgment or award unless, before the commencement of the proceedings in which
the judgment or award is given the insurer had notice through the Court or, as the
case may be, the Claims Tribunal of the bringing of the proceedings, or in respect
of such judgment or award so long as execution is stayed thereon pending an
appeal; and an insurer to whom notice of the bringing of any such proceedings is
so given shall be entitled to be made a party thereto and to defend the action on any
of the following grounds, namely:--

a. That there has been a breach of a specified condition of the policy, being one of
the following conditions, namely:--
i. a condition excluding the use of the vehicle--
a. For hire or reward, where the vehicle is on the date of the contract of insurance a
vehicle not covered by a permit to ply for hire or reward, or

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 b. For organised racing and speed testing, or
c. For a purpose not allowed by the permit under which the vehicle is used, where
the vehicle is a Transport vehicle, or
d. Without side-car being attached where the vehicle is a motor cycle; or
ii. a condition excluding driving by a named person or persons or by any person who is
not duly licensed, or by any person who has been disqualified for holding or
obtaining a driving licence during the period of disqualification; or
iii. A condition excluding liability for injury caused or contributed to by conditions of
war, civil war, riot or Civil commotion; or
b. that the policy is void on the ground that it was obtained by the non-
disclosure of a material fact or by a representation of fact which was
false in some material particular.

The Insurance Company cannot avoid the liability except on the grounds and not any other
ground, which have been provided in Section 149(2). In recent time, Supreme Court while
dealing with the provisions of Motor Vehicle Act has held that even if the defence has been
pleaded and proved by the Insurance Company, they are not absolve from liability to make
payment to the third party but can receive such amount from the owner insured. The courts
one after one have held that the burden of proving availability of defence is on Insurance
Company and Insurance Company has not only to lead evidence as to breach of condition of
policy or violation of provisions of Section 149(2) but has to prove also that such act happens
with the connivance or knowledge of the owner. If knowledge or connivance has not been
proved, the Insurance Company shall remain liable even if defence is available.

Settlement between insurers and insured persons

No settlement made by an insurer in respect of any claim which might be made by a third
party in respect of any liability of the nature referred to in clause (b) of sub-section (1) of
Section 147 shall be valid unless such third party is a party to the settlement.16

Where a person who is insured under a policy issued, has become insolvent, or where, if such
insured person is a company, a winding up order has been made or a resolution for a
voluntary winding up has been passed with respect to the company, no agreement made
between the insurer and the insured person after the liability has been incurred to a third party

16
Section 152 of The Motor Vehicles Act, 1988.

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and after the commencement of the insolvency or winding up, as the case may be, nor any
waiver, assignment or other disposition made by or payment made to the insured person after
the commencement aforesaid shall be effective to defeat the rights transferred to the third
party, but those rights shall be the same as if no such agreement, waiver, assignment or
disposition or payment has been made.

DRIVING LICENSE AS A DEFENCE

Earlier not holding a valid driving license was a good defence to the Insurance Company to
avoid liability. It was been held by the Supreme Court that the Insurance Company is not
liable for claim if driver is not holding effective & valid driving licence. It has also been held
that the learner's licence absolves the insurance Company from liability, but later Supreme
Court in order to give purposeful meaning to the Act have made this defence very difficult.

It has been held for the first time by the Supreme Court in Sohan Lal Passi's v.P.Sesh Reddy17
that the breach of condition should be with the knowledge of the owner. If owner's
knowledge with reference to fake driving licence held by driver is not proved by the
Insurance Company, such defence, which was otherwise available, can not absolve insurer
from the liability. Recently in a dynamic judgment18, the Supreme Court has almost taken
away the said right by holding;

a) Proving breach of condition19 or not holding driving licence or holding fake licence20
or carrying gratuitous passenger would not absolve the Insurance Company until it is
proved that the said breach was with the knowledge of owner.
b) Learner's licence is a licence and will not absolve Insurance Company from liability.
c) The breach of the conditions of the policy even within the scope of Section 149(2)
should be material one which must have been effect cause of accident and thereby
absolving requirement of driving licence to those accidents with standing vehicle, fire
or murder during the course of use of vehicle.

This judgment has created a landmark history and is a message to the Government to remove
such defense from the legislation as the victim has to be given compensation.

17
AIR 1996 SC 2627.
18
Ibid.
19
Section 149(2) (a) (ii), the Motor Vehicles Act, 1988.
20
Radhica Devi v. Vasantha, 2004 (3) TAC 327 (Ker).

16 | P a g e
However, if there is a breach in the condition of policy, the insurer can recover the money
from the insured. In a recent judgment of the Supreme Court, it was held that the insurer and
the insured are bound by the conditions enumerated in the policy and the insurer is not liable
to the insured if there is violation of any policy condition. But the insurer who is made
statutorily liable to pay compensation to third parties on account of the certificate of
insurance issued shall be entitled to recover from the insured the amount paid to the third
parties, if there was any breach of policy conditions on account of the vehicle being driven
without a valid driving licence. The Court held – “In the present case, if the Insurance
Company succeeds in establishing that there was breach of the policy condition, the Claims
Tribunal shall direct the insured to pay that amount to the insurer. In default the insurer shall
(sic not?) be allowed to recover that amount (which the insurer is directed to pay to the
claimant third parties) from the insured person.”

NATURE AND EXTENT OF INSURER’S LIABILITY

According to the provisions of Section 147, the policy of insurance must be issued by an
authorized insurer. It must be as per requirements as specified in subsection (2).It must insure
against liability in respect of death or bodily injury or damage to property of a third party.
“Third party" includes owner of the goods or his authorized representative carried in the
vehicle and any passenger of a public service vehicle.

The policy of insurance must cover:

1. Liability under the Workmen’s compensation Act, 1923 in respect of death or bodily
injury to any such employee
a) engaged in driving the vehicle, or
b) the conductor or ticket examiner if it is a public service vehicle ,or
2. Any contractual liability.

Section 147 has to be given wider, effective and practical meaning so that it may benefit
various categories of persons entitling them to claim compensation from the insurer or the
insured or both. Insurer's liability commences as soon as the contract of insurance comes into
force. The liability remains in existence during the operation of the policy. If the existing
policy is renewed the risk is covered from the moment the renewal of the policy comes into
force. If the accident occurs before the renewal comes into existence, the insurer cannot be

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made liable.21 It is the primary duty of the vehicle owner to prove that his vehicle was insured
with a particular company. If he fails to comply with it he will have to pay the entire amount
of compensation in the case. In case where there is a dispute in respect of the vehicle having
been insured by an assurance company, the tribunal must give its finding in the matter, it is
its duty to do so. After a certificate of insurance is issued it does not lie in the mouth of the
insurer to deny his liability. If the insurer has been a victim of fraud he can recover the
amount from the insured by a separate action against him.

In Oriental Insurance Co v. Inderjit Kaur22, it was held that if the insurer has issued a policy
to cover the bus without receiving the premium therefore, he has to indemnify third parties in
respect of the liability covered by the policy. He cannot avoid the liability arguing that he was
entitled to avoid or cancel the contract. The policy under the Act covers only third party
risks.23 Insurer is not liable for any harm suffered by a passenger traveling in a private car
neither for hire nor for reward. Similar is the position of a pillion rider on a scooter. In
K.Gopal Krishnan v. Sankara Narayanan24 , Madras High Court observed that a scooter-
owner is not bound to take out a third party risk policy to cover the claim of the pillion rider
that is carried gratuitously. If he is injured, the insurance company would not be liable unless
policy covering such risk is obtained by the scooter-owner. A private carrier registered as
such with R.T.O. and also in insurance policy, cannot be used for carrying any passenger or
goods for hire or reward. However if it is so used and the employees of a party hiring the
private vehicle belonging to the insured are injured in an accident the insurance company will
not be liable.

INSURER’S LIABILITY TO VEHICLE-OWNER

A contract of insurance is a personal contract between the insurer and the insured. It is for the
purpose of indemnifying the insured for damage caused due to accident by the vehicle, to a
third party. To make the insurer liable the policy of insurance must be in the name of the
owner of the vehicle.25 Owner of the vehicle as defined in Section 2(30) is a person in whose
name the motor vehicle stands registered. A person in possession of a vehicle under a hire-

21
http://www.hindustantimes.com/business-news/lok-sabha-passes-motor-vehicle-act-to-bring-reforms-in-
transport-sector/story-v1K4SqPe0kGiyYzics2A5I.html
22
AIR1998 SC 588.
23
Section 147 of The Motor Vehicles Act, 1988
24
AIR 1968 Mad 438.
25
Raj Chopra v. Sangara Singh, 1985 ACJ 209.

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purchase agreement or an agreement of lease or hypothecation is also covered by the
definition, no matter he has exercised his option to purchase the vehicle or not.

Section 157(1) makes it clear that when the owner of a vehicle transfers the ownership of the
vehicle, the policy of insurance and the certificate of insurance shall be deemed to have been
transferred in favour of the purchaser of the vehicle with effect from the date of its transfer.
This deemed transfer shall include transfer of rights and liabilities of the said certificate of
insurance and policy of insurance.

According to subsection (2) the transferee has to apply within 14 days from the date of
transfer to the insurer for effecting necessary changes in the certificate and in the policy of
insurance.

If the certificate of insurance and the policy are not transferred, the insurer could not be made
liable even though the vehicle is transferred. It is to be remembered that “an insurance policy
is a personal contract between the parties for indemnifying the insured in case of an accident
covered under the policy. If the vehicle is transferred by an insured to another person, the
insurance policy lapses upon the transfer. In such a case the benefit of the policy is not
available to the transferee, without an express agreement with the insurance company. When
the insurance policy lapses, it would not be available to cover the liability of the purchaser of
the vehicle.

In S.Sudhakaran v. A.K.Francis,26 there was an agreement for sale of a vehicle. The owner
did not comply with the statutory provisions regarding transfer of a vehicle. He, however,
allowed the vehicle to be used by the transferee .The owner had retained the insurance policy
with him. Held, the insurance company was not liable to indemnify the owner.

Liability in respect of damage to property [S.147 (2)]

For damage to property of a third party under 1939 Act the limit of liability is Rs 6000 in all,
irrespective of the class of the vehicle. Under 1988 Act the position as laid down by section
147 (2) in regard to liability is as under:

i. For death or personal injury to a third party, the liability of the insurer is the amount of
liability incurred, i.e. for the whole amount of liability.

26
AIR 1997 Ker 26.

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 ii. For damage to property of a third party the liability of the insurer is limited to Rs. 6000
as was under the 1939 Act.

Liability of Insurer beyond the limits mentioned in the Act

Section 147 lays down the limits of liability of the insurer. However there is no bar for the
insurer undertaking a higher liability i.e. liability for a greater amount than that mentioned in
the Act. Thus the insured and the insurer can contract and can provide for a higher liability.

THE MOTOR VEHICLES (AMENDMENT) BILL, 2016

The Motor Vehicles (Amendment) Bill — which seeks to make a number of changes to the
existing Motor Vehicles Act, 1988 — was approved by the Union Cabinet and introduced in
the Lok Sabha by the Union Minister of Road Transport and Highways, Sri. Nitin Gadkari,
on 09.08.2016. The Bill has made amendments to 68 of 223 sections and introduced a new
chapter to simplify the processing of third-party insurance claims.

SALIENT FEATURES OF THE BILL-

1. Limits on insurer’s liability- The proposed amendment seeks to put a cap on the liability
to be borne by insurance companies in respect of third party claims. As per the present
Act, the liability of the insurer for indemnifying the owner for compensation claims in
respect of death or bodily injury arising out of use of motor vehicle is unlimited. In other
words, as per present Act, the insurer has to cover the liability incurred in respect of any
accident to the extent of actual amount of liability incurred. 27 However, the proposed Bill
seeks to replace the said provision with an altogether new provision, which puts an upper
limit of liability of insurer to an extent of Rs.10 lakh in respect of death and Rs. 5 lakhs in
respect of bodily injury arising out of motor vehicle accident. As per the new provision,
the Central Government, by rule-making, is empowered to fix the premium and
corresponding liability of the insurer, in consultation with the Insurance Regulatory and
Development Authority. The proviso to the proposed new Section 147(2) states that such
liability fixed by the Central Government shall not exceed Rs. 10 lakhs in respect of death,
and Rs.5 lakhs in respect of bodily injury. This means that the liability fixed on the insurer
can be even lesser than Rs.10 lakhs and Rs.5 lakhs in case of death or bodily injury, as the
case may be.

27
Section 147(2)(a) of The Motor Vehicles Act, 1988

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 The consequence of this section would be that in compensation claims, the victims will not
be able to realize more than Rs.10 lakhs in case of death, and Rs.5 lakhs in case of bodily
injury from the insurer under third party claim, and will have to realize the excess amount
from the owner or driver. This provision will certainly frustrate the social welfare intent of
compulsory third party insurance.

2. Enabling insurer to seek exoneration from liability for non-receipt of premium- The
Bill seeks to make non-receipt of premium one of the specified conditions, which would
enable the insurer to seek exoneration from the liability. As per the present law, non-
receipt of premium would not amount to breach of a statutory condition. Hence, even if
the cheque drawn towards premium was subsequently dishonoured, the insurer was held
liable to satisfy the liability towards third party victims.28 The settled law on the point was
that once an insurance certificate is issued, then the insurer will have to meet third party
claims, notwithstanding the fact that it was entitled to avoid or cancel the policy; although
it can later recover the amount from the insured. However, the proposed amendment
enables the insurer to avoid the policy on the ground of non-receipt of premium, by virtue
of new section as Section 149 2(c).

3. Hit and Run Scheme- The compensation payable for victims in ‘hit and run’ out of the
scheme fund under Section 161 has been enhanced to Rs. 2 lakhs in case of death, and Rs.
50,000/- in case of bodily injury, from Rs.25,000/- and Rs.12,500/- respectively.

4. Motor Vehicle Accident Fund- The Bill seeks to introduce a Motor Vehicle Accident
Fund under Section 164B, which is to be augmented by a special tax or cess. The Fund is
to be utilized for giving immediate relief to victims of motor accidents, and also hit and
run cases. The compensation paid out of the fund shall be deductible from the
compensation which the victim may get in future from the Tribunal.

KEY ISSUES AND ANALYSIS

Although the Bill contains several noteworthy provisions which seek to ensure road safety,
the provision seeking to introduce limited liability of insurer is regressive in nature, and can
cause a lot of hardship to innocent victims of road traffic accidents.

28
New India Assurance Co.Ltd. v. Rula AIR 2000 SC 1082 : (2000) 3 SCC 195)

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1. In the new motor vehicle legislation, which initially proposed to cap insurers’ liability
at 5 lakh for grievous injury and 10 lakh for death, the restrictions were removed in
the final Bill that was passed by the Lok Sabha on April 10. Instead, it has raised the
minimum compensation to 2.5 lakh for grievous injury and 5 lakh for death. This
means the maximum compensation will be open-ended.
2. The Bill caps the maximum liability for third party insurance, but does not cap the
compensation amount that courts can award. In cases where courts award
compensation higher than the maximum liability amount, it is unclear who will pay
the remaining amount.
3. Under the Act, compensation for hit and run victims comes from a Solatium Fund.
The Bill creates a new Motor Vehicle Accident Fund in addition. With a Fund
already existing to provide compensation for hit and run accidents, the purpose of the
new Accident Fund is unclear.
4. State governments will issue licenses to taxi aggregators as per central government
guidelines. Currently, state governments determine guidelines for plying of taxis.
There could be cases where state taxi guidelines are at variance with the central
guidelines on aggregators.
5. While the penalties for contravening provisions of the proposed scheme on interim
relief to accident victims are specified in the Bill, the offences that would warrant
such penalties have not been specified. It may be argued that imposing penalties
without knowing the nature of the offences is unreasonable.
6. The Bill did not address several issues around road safety that have been highlighted
by other committees such as:

a. creating road safety agencies, and

b. improving road design and engineering

7. The Bill caps the maximum liability for third party insurance, but does not cap the

compensation amount that courts can award. In cases where courts award

compensation higher than the maximum liability amount, it is unclear who will pay

the remaining amount.

8. Under the Act, compensation for hit and run victims comes from a Solatium Fund.

The Bill creates a new Motor Vehicle Accident Fund in addition. With a Fund

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 already existing to provide compensation for hit and run accidents, the purpose of the

new Accident Fund is unclear.

9. State governments will issue licenses to taxi aggregators as per central government

guidelines. Currently, state governments determine guidelines for plying of taxis.

There could be cases where state taxi guidelines are at variance with the central

guidelines on aggregators.

10. While the penalties for contravening provisions of the proposed scheme on interim

relief to accident victims are specified in the Bill, the offences that would warrant

such penalties have not been specified. It may be argued that imposing penalties

without knowing the nature of the offences is unreasonable.

11. The Bill did not address several issues around road safety that have been highlighted

by other committees such as:

a. creating road safety agencies, and

b. improving road design and engineering

12. The proposed bill has given the entire power to the police, and the courts will become
redundant. The Act provided that the police in whose jurisdiction accident taken place
should forward papers giving all particulars of owner of vehicle and insurance
particulars to the concern claim tribunal where district judges of around 20 to 25
years’ experience hear and decide the claim. But the new amendment bill has
proposed to give authorisation to police officer to facilitate settlement of the claim
which may lead to Pandara’s Box for corruption at all level.

ANOMALIES ENCOUNTERED IN DEALING WITH THE THIRD PARTY RISKS

1. FRAUDS IN MACT CLAIMS

There has been a disturbing trend of fraudulent claims that have been detected. It was
established by the insurance companies that in many such cases there had been active
connivance between the persons involved i.e. the driver, doctors/hospitals, advocates and
in some cases the concerned police stations.
What is suggested is setting up a centralised database which will assist in extracting
information and identifying cases of repeated involvement of same parties. Some cases

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 are described below, by way of illustration. These cases are already in the knowledge of
the companies concerned.
2. DELAY IN SETTLEMENT OF AWARDS

It is common knowledge that cases take a long number of years for disposal and when
awards get passed, there is scope for appeals and stay of operation of the awards. Although
an insurer is barred from disputing the issue of quantum, grant of permission under
Section 170 to the insurer is a matter of course in proceedings before Tribunals. Filing an
appeal through the insured, even when such permission is not granted under Section 170,
is a familiar practice. Liability to pay subsequent interest at 6 per cent per annum is
seldom an incentive to deposit money in court immediately after the award, all of which
add to the victim’s woes. Since Insurance Company did not obtain order of the Tribunal
under Section 170 therefore, the Insurance Company cannot contest the claim application
on the ground of limitation.29

3. DELAY IN INVESTIGATION OF MACT CLAIMS

A test check of the Own Damage claims revealed that there were also motor third party
(TP) claims pertaining to these accidents. It was noticed that there was no system of
gathering information relating to the Third Party claim, while settling the Own Damages
claims. As the related TP cases were reported subsequently and investigated, these offices
could not link the facts evidenced during the assessment of the Own Damages claim.
Additionally, where Third Party cases were handled by an office other than the policy
issuing office, there was no system to ascertain the position of OD claims, if any.

Under 158(6) of the MV Act 1988, the police officer who receives the intimation/report of
the accident shall forward a copy of the report within 30 days to the Tribunal having
jurisdiction with a copy to the insurer. In all the divisional offices visited, it was seen that
such reports were not received. The companies appoint investigators after the receipt of
summons from the Tribunal for getting copies of First Information Report or license
details or permit details. Had the companies received the intimation report from the police
in time, it would have assisted them in identifying possible TP claims.

29
New India Assurance Co. Ltd. v. Vibha Devi, 2001 ACJ 1009(All).

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 The companies stated that as a result of their efforts, the Supreme Court had recently
directed the State Governments to strictly adhere to the requirements of Section 158 (6) of
the MV Act.

4. SETTLEMENT THROUGH ALTERNATIVE FORUM

The Legal Services Authorities Act, 1987 provides for organising of Lok Adalats by the
Legal Services Committees at various levels, to determine and arrive at a compromise or
settlement between parties to a dispute in respect of any case pending before any court for
which the Lok Adalat is organised. Every Lok Adalat organised for an area shall consist of
serving or retired Judicial Officers and other persons. The Act also treats insurance
services as public utility services.

The insurance industry has also established Claims Conciliation Committees and Jald
Rahat Yojana which are fora that enable negotiated settlements. The awards by these fora
would not carry any interest. Thus, the settlements through the above fora would enable
the companies to save interest and administrative charges.

NEED FOR REFORM

In a claim for compensation, the sole defendant virtually left for setting up a strong defence is
the insurer. The role played by the driver and owner, is to cause accidents negligently or
otherwise. In the dynamics of the law relating to compensation the liability of the owner
towards the victim is practically nil due to the third party insurance. In the circumstance the
law may be restated and Section 149 (2) of the Motor Vehicles Act 1988 be amended to
extend to the insurer all the right open to the insured. There may be rare cases like Bishen
Devi v. Sirbaksh Singh30 in which the insurer had raised untenable pleas by which the case
had dragged on for 18 years as noted by the Supreme Court. It is of common knowledge that
the delay is caused not due to the fault of the insurer alone. However, avoidance of delay by
way of closing the door of defence to the insurer cannot be justified. It is also hoped that own
Supreme Court may authoritatively pronounce the law in the proper perspective.

Although certain defences are available to the insurer, a pertinent question remains whether
the defences available to an insurer are only those mentioned under the section or not. Since
the aspects of negligence and quantum of compensation are not enumerated in the section 149

30
A.I.R. 1979 SC 1862

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(2) whether an insurer is without any remedy to challenge the question of negligence and
quantum. It is submitted that under the changed circumstances of imposing the actual liability
incurred on the insurance company, it would be a historical anachronism to restrict the rights
of the insurer in setting up a full defence on all grounds that are available to the owner or
driver. Under the old Motor Vehicles Act, 1939, the liability of the Insurance Company was
limited in accordance with the type of vehicles, where it was the responsibility of the owner
or driver to make payment to the claimant over and above the limit of the Insurer. It was
natural that the owner and the driver may show some interest to contest the claim to guard of
against an excess award. Under the new Motor Vehicles Act, 1988, a situation has arisen
where neither the owner or driver will come forward to contest the case nor the insurance
company who has to pay the money is allowed to contest. This is an anomaly which is
required to be rectified by necessary legislation.

CONCLUSION

Thus I have studied and analysed the third party liability insurance under the motor Vehicles
Act, 1988.Third party insurance protects the interest of a third party who becomes the victim
of accident or injury caused by the fault of the insured. So any liability arising on the insured
by the third party is mitigated by the insurance company. Third party insurance is compulsory
under the motor vehicles Act, 1988. As the third party insurance is mandatory so it cannot be
overridden be any clause in the insurance policy.
It is the duty of insurers to satisfy the judgments and awards against persons insured in
respect of third party risks. The insurance company is a ‘State’ within the meaning of article
12 of the Constitution. For this reason it cannot deny, discriminate or refuse third party
insurance cover to State run vehicles because their actions are guided by Article 14 of the
Constitution.
The compulsory nature of third party insurance is justifiable as it makes the process easier for
the injured person to recover money from the insured. The defendant or wrongdoer cannot be
exempted on the ground that he has become insolvent. If he owns a vehicle he bound to pay
to the injured directly or through his insurance company. However the present act suffers
from various anomalies and hence there is a need for making certain amendments to the 1988
Act.

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 BIBLIOGRAPHY

BOOKS

 Chandralekha Mukerji, Claiming Compensation under Third-party Motor Insurance,

The Economic Times, Sep 24, 2015
 B.M.Gandhi,‘Law of Torts- with Law of Statutory Compensation', Eastern Book
Company, 2nd edi,311-330
 Janak Raj Jai, Motor Accident Claims- Law and Procedure, (2007) 15
 Sinha T., ‘An Analysis of the Evolution of Insurance in India.’ In: Cummins J.D.,
Venard B. (eds) Handbook of International Insurance. Huebner International Series on
Risk, Insurance and Economic Security, vol 26. Springer, Boston, MA (2007)

WEBSITES

 https://www.pressreader.com/india/business-standard/20170418/281565175633735
 http://shodhganga.inflibnet.ac.in/bitstream/10603/28179/13/13_chapter%205.pdf
 http://indianexpress.com/article/what-is/what-is-motor-vehicles-amendment-bill-all-
you-need-to-know-4608448/
 http://www.thehindu.com/news/cities/mumbai/news/Lawyers-oppose-amendments-to-
Motor-Vehicles-Act/article14599873.ece
 http://lawfarm.in/blogs/motor-vehicles-amendment-bill-2016

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