What is Third Party Insurance?

 There are two quite different kinds of insurance involved in the damages system. One is Third Party liability insurance, which is just called liability insurance by insurance companies and the other one is first 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.

Section 145(g) "third party" includes the Government. National Insurance Co. Ltd. v. Fakir Chand[1], “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.

Salient Features of Third Party Insurance 

Ø Third party insurance is compulsory for all motor vehicles. In G. Govindan v. New India Assurance Co. Ltd.[2],Third party risks insurance is mandatory under the statute .This provision cannot be overridden by any clause in the insurance policy. 



Ø Third party insurance does not cover injuries to the insured himself but to the rest of the world who is injured by the insured. 



Ø 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. 



Ø 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. 



Ø Third party insurance is almost entirely fault-based.(means 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) 



Ø Third party insurance involves lawyers aid 



Ø 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

Chapter VIII of the 1939 Act and Chapter XI of the 1988 Act have been enacted on the pattern of several English statutes which is evident from the report of ‘Motor Vehicles Insurance Committee,1936-1937’In order to find out the real intention for enacting Ss.96 of the 1939 Act which corresponds to Ss.149 of the 1988 Act, it is relevant to trace the historical development of the law for compulsory third –party insurance in England. 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 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 1939 Act 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 1939 Act and S.146 of the 1988 Act. 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 .The 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 1988 Act, 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.”

Prohibition on use of motor vehicles without statutory insurance policy, object of 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.