Motor insurance plays a crucial role in India’s road transport system. Under the Motor Vehicles Act, 1988, it is mandatory for every vehicle plying on public roads to possess a valid motor insurance policy. Whether used for domestic, social, business, or professional purposes, a motor vehicle must be insured against third-party risks to prevent victims of road accidents from being left remediless.

At its core, insurance is a contract whereby the insurer, in exchange for a premium, agrees to indemnify the insured against specified uncertain future events. Initially created in the 14th century to share maritime expedition risks, insurance later expanded to life, fire, accident, marine, liability, and other personal and commercial risks.

In India, third-party liability insurance—often referred to as the “Act Only Policy”—is the minimum insurance cover mandated by law for all motor vehicles, ensuring compensation to individuals affected by the negligence of motor vehicle users.

This article examines the relevance of third-party insurance, statutory provisions, notable case laws, insurer’s liabilities, defences available, and judicial trends that have shaped third-party insurance law in India.

What is Third-Party Insurance?

A third-party insurance policy indemnifies the insured if he is held legally liable for injury, disability, death, or property damage caused to another person. In this contractual relationship:

1. The insured – Owner of the vehicle
2. The insurer – Insurance company
3. The third party – The person who suffers injury, disability, or property loss due to the insured’s vehicle

Who Is a Third Party?

Under Section 145(g) of the Motor Vehicles Act, “third party” includes the Government. In National Insurance Co. Ltd. v. Fakir Chand, the Court observed that third party includes every person other than the insured and insurer—passengers, pedestrians, occupants of another vehicle, and even a passenger in the insured vehicle.

Salient Features of Third-Party Insurance

• Mandatory by Law
  In G. Govindan v. New India Assurance Co. Ltd, the Supreme Court held that third-party insurance is statutory and cannot be nullified by any policy condition.
• Protects Only the Third Party
  It does not cover the insured’s own injuries or vehicle damages.
• Beneficiary is Always the Third Party
  Payments are directly made to the victim or their legal representatives.
• Premiums Not Based on Vehicle Value
  Premium is computed on legal liability, not the asset value.
• Fault-Based Liability Process
  The claimant must prove negligence of the insured.
• Legal Proceedings Required
  Compensation typically requires involvement of lawyers, tribunals, and documentation.
• Unfavourable to Insurers
  Because the quantum of liability is unpredictable.

Evolution of Third-Party Insurance Law

Prior to 1930, England had no statutory requirement for compulsory motor insurance. Victims depended on the financial capability of vehicle owners. To address this challenge, the Third Parties’ Rights Against Insurers Act, 1930 and later the Road Traffic Acts mandated compulsory third-party motor insurance.

These developments inspired Chapter VIII of the Motor Vehicles Act, 1939 and subsequently Chapter XI of the Motor Vehicles Act, 1988, emphasizing compensation to victims regardless of the financial ability of the wrongdoer.

Relevant Provisions Under the Motor Vehicles Act, 1988

Offence

Contravention of Section 146 may lead to imprisonment up to 3 months, fine up to ₹1000, or both.

Defences Available to Insurance Companies

Section 149(2) restricts defences to:

• Use of vehicle for hire without permit
• Involvement in racing
• Use contrary to route permit
• Driver not holding a valid licence
• Policy obtained by fraud/non-disclosure

Driving License – Landmark Interpretations

Earlier, absence of a valid driving license absolved the insurer. However:

• Sohan Lal Passi v. P. Sesh Reddy – Insurers must prove breach with owner’s knowledge.
• National Insurance Co. Ltd. v. Swaran Singh – Supreme Court held that insurer is not absolved merely because the driver lacks a valid license; the breach must be wilful and with the owner's awareness.

This judgment shifted the balance in favour of victims, ensuring that compensation is not denied on technicalities.

Insurer’s Liability and Transfer of Vehicle

Under Section 157, mandatory deemed transfer of insurance occurs when the vehicle is sold, though procedural compliance must follow.

In S. Sudhakaran v. A.K. Francis, the Court held that if the transfer is incomplete and ownership disputed, the insurer is not bound to indemnify.

Property Damage Liability

Under Section 147(2):

• Personal injury/death: Unlimited liability
• Damage to property: Statutory limit of ₹6,000 (unless contractual enhancement)

Conclusion

Third-party motor insurance is not merely a legal obligation—it is a public welfare mechanism. It ensures that accident victims receive timely compensation irrespective of the financial strength of the vehicle owner. Courts have consistently interpreted the law in favour of third-party protection, recognizing the social purpose of insurance under the Motor Vehicles Act.

Insurers, being instrumentalities of the State under Article 12, cannot discriminate or refuse statutory third-party coverage. The mandatory nature of such insurance helps balance the rights of road users and victims, upholding constitutional guarantees of equality and access to justice.

The law continues to evolve to minimize hardships for accident victims, reflecting the philosophy that “road safety and compensation rights are not privileges, but legal protections owed to every citizen.”

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