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What is Third-Party liability in Vehicle Insurance?

10 min read

By Sakshi Chhabra

Meaning of Insurance

According to the provisions of the Motor Vehicles Act, 1988, it is necessary that every vehicle in India should have a valid insurance to drive their vehicle on the road. Any vehicle which is used for social, domestic or any other purposes should be insured.

Insurance is basically a contract whereby one party that is the insurer undertakes in return for consideration, the premium to be paid to the other party, the insured or the assured is actually a sum of money in the event of the happening of one or various specified uncertain events.

A liability insurance is when the sum is payable when legal liability is incurred as for personal injuries or professional negligence.

What is Third-party Liability Insurance?

Motor third-party insurance is also known as third-party liability insurance.

It is also the ‘act only cover’ because it is regarded as a statutory requirement under the motor vehicles act.

It is referred to as a ‘third-party’ cover because the beneficiary of the policy is someone other than the two parties involved in a particular contract which is the insured and the insurance company.

This ‘third-party liability insurance’ does not provide any benefit to the insured specifically but it basically covers the legal liability of the insured in case of death/disability of any third-party loss or to any third-party property.

The third-party insurance cover is necessary and all types of non-life insurance companies have a duty to provide this cover.

In India, with the registration of the vehicle the automobiles dealers also arrange for a comprehensive insurance and this comprehensive cover is simply an addition with the mandatory third-party cover and it protects the vehicle owner from any financial loss caused by theft or damage to the vehicle.

The premium for motor third-party insurance was calculated by a schedule of rates provided by the Tariff Advisory Committee which is an arm of IRDA. IRDA which is the insurance regulator has done away with the motor tariff and now the compensation given to the victim is decided in ratio to the earning capacity of the victim.

In S. Iyyapan Vs. United India Insurance Co. Ltd[1], it was observed that the main intention behind ensuring compulsory third-party liability insurance for the vehicle owners is to provide for any damage inflicted to the third party caused by the first party. The third-party in case of accidents must get all the sufficient damages.

The reason to put forth the third-party liability insurance was to protect the pedestrians of the road and other users who are faced with the risk of the vehicles on the road, thus unless a vehicle has a third-party insurance it cannot be put to use.

Third-party liability

The third-party insurance is basically a form of liability insurance which is purchased by an insured (first party) from an insurer (second party) against the claims of another (third party). The first party is held responsible for the damages or losses regardless of the cause of those damages.

People often get confused while choosing a vehicle insurance policy in regards whether to opt a comprehensive vehicle insurance policy or a third-party vehicle insurance policy.

The comprehensive vehicle insurance policy provides for overall protection against damages to a vehicle as a result of incidents related to accident or collision, whereas a third-party liability insurance covers any legal liability arising because of damages or injury caused by the first party (insured) to a third-party.

Third party liability insurance is purchased for protection against the claims of third party. One of the most common type is third-party insurance in automobile insurance.

In India the third-party insurance is much more than just being a precautionary safeguard. It is compulsory and covers the financial liability which the policyholder may incur from a third-party damage liability and covers the cost resulting from damages or loss of property.

The third-party liability insurance offers for coverage against the claim of damages and losses which is incurred by a driver who is not the insured and is therefore not covered under the insurance policy. The driver who has caused damages is thus the third party.

In Oriental Insurance Co. Vs. Inderjit Kaur[2], it was held that if the insurer has issued a third-party liability policy to cover the bus without receiving the premium, he has to indemnify the third parties in regard to the liability covered by the policy. The third-party liability only covers the third-party risk and the insurer is not liable for any harm suffered to a passenger on the bus traveling in it similar is the position off a pillion rider.

In the case of K. Gopal Krishnan Vs. Sankara Narayanan[3], the Court observed that the owner of the scooter is not bound to take out a third-party liability insurance in order to cover the claim of the pillion rider. If the first party is injured the insurance company would not be liable unless the said policy is covering such risk which is obtained by the scooter owner.

In National insurance Co. Ltd. Vs. Swaran Singh[4], the Supreme Court held that the liability of the insurer is statutory. It is to satisfy the decree passed in favor of the third party. The insurance company cannot shake off its liability to pay the compensation by saying that are the relevant point of time the vehicle insured was driven by a person having no license.

The motor vehicle insurance can be broadly classified into two parts-

  • Comprehensive insurance and;
  • Third-party insurance.

As per Section 146 of Motor Vehicles Act 1988, third party liability insurance is mandatory and one cannot drive a vehicle on Indian roads without this insurance.

Coverage of third-party insurance

What does third-party insurance cover?

  • The third-party liability insurance covers the death off or any bodily injury do any person including the occupants in the vehicle.
  • It also covers damage to the property other than the property belonging to the insured or held in trust/ custody or control of the insured.

What does third-party insurance not cover?

  • Cost of damage to the car of insured.
  • Cost incurred by the insured during the breakdown of vehicle.
  • Cost of accidental hospitalization expenses.

Cost of third-party insurance

The cost of third-party liability insurance is very cheap and comes at an affordable and nominal price.

For examples, if a comprehensive vehicle insurance is to be purchased which covers own damage as well as third party liability it is approximately at a range of Rs. 10,000 to Rs. 12,000. Whereas if only a third-party liability insurance is bought it will come in less than Rs.1000 which is just a small amount for the overall coverage.

Also, the third-party liability insurance is mandatory by law and there won’t be much difference in the pricing between different insurers and the premium it will more or less be the same, irrespective of the insurer chosen.

Oriental Insurance Vs. Sudhakaran K. V[5], in this matter the difference between an owner of the vehicle and the third party regarding an insurance was established. According to section 147 of the motor vehicles are it was explained that only the owner of the vehicle can take a third-party liability insurance and it is to be used in order to reimburse the claims of third party.

The third-party liability insurance in no way is created for the benefit of the insured itself.

Beneficiaries and Premium

Third-party liability insurance or the act only cover is a basic requirement under the Motor vehicles act. It is referred to as a third-party cover because the beneficiary of the policy is someone else other than the two parties involved in the contract that is, the insured and the insurer (insurance company).

This policy covers the legal liability of the insured in case of death or disability of any third-party loss or damage. The victim in this case can claim for compensation under the ‘no fault liability’ or ‘fault liability’ of the motor vehicles act 1988. But unlimited compensation is available only in case of loss of life.

In third-party liability insurance, the premiums in this policy do not differ with the value of what is being insured as what is insured is the legal liability and it is absolutely not possible to know in advance that what liability will be caused in an accident.

However, the premium on the third-party liability cover is decided by the Insurance Regulatory and Development Authority of India (IRDAI).

This insurance protects against the legal liability of accident and it also covers damage caused to any surrounding property. The mandatory nature of the third- party liability insurance is justifiable because it makes the process easier father injured person to recover the compensation from the insured/insurer.

In case if the insured is involved in an accident with a third party, then the policyholder is liable to pay for the damages or injuries caused. When an accident takes place, the insured must inform the insurance company as soon as possible and make them aware of the situation.

It is also essential to gather the information relating to the accident and provide it to the insurance company.

Certain details must be noted such as:

  • Description of the accident along with the time and date.
  • Details of the insurance and the policyholders present during the accident.
  • Details of the witness is present.
  • Photographs of evidence at the site of accident.
  • Details of the injuries sustained by the driver, passenger or vehicle or to the third-party.
  • Details of the FIR number in case there is a police inquiry.

Salient features of third-party liability insurance

  • Third-party liability insurance is mandatory for all motor vehicles.
  • Third-party insurance does not cover injuries cost to the insured itself.
  • It covers to the third party to whom the injury is caused.
  • The beneficiary of the third-party insurance is another party who is injured because of the first party. Practically the money is always paid directly by the insurance company to the third party and does not even pass through the hands of the first party (insured).
  • Third-party insurance is fully fault based that means one has to prove the fault of the insured and also the injury caused because of the fault in order to claim damages.
  • It involves lawyer’s aid.
  • Third-party insurance is not much popular with the insurance companies as compared to the first party insurance, as the insurance companies never know the maximum amount to be paid under third party liability.

Misconception about third-party liability

  • Third-party liability insurance only covers the cost for the damages to the third party and not covers the damages of the insured as he is not the third party, hence no compensation is paid by the insurance company.
  • Third-party insurance is available at very cheap rates but there are wrong impressions, third-party insurance costs more and the cost mostly depends on the engine capacity of the vehicle.
  • Some companies assure no claim bonus to the insured. However, in case of third-party insurance, no such facility called NCB (No Claim Bonus) is available.
  • Insurance company settles the claim in any type of insurance. But in case of third-party insurance, it is the motor accident claim tribunal which is held as the final authority to reject or accept the claim.

Rikhi Ram Case[6], this case was decided under the ambit of the Motor Vehicle Act 1939. It was held that the liability of an insurer does not completely CS in so far as the third-party victims are concerned even if the transfer of the vehicle is done without a notice made to the insurer.

Claim procedure in third-party liability

  • The first step in claiming third-party insurance is by filing an FIR in the nearest police station and getting a copy of the same. Motor accident claims tribunal is a special quote where such crimes are dealt and thus the crime needs to be registered here.
  • The case regarding the third-party liability for the damage can be filed in the police station of the area where the insured first party resides. If it is a case of property damage of the third party then a report from the inspection officer or the surveyor and the original bill that estimates the loss is necessary.
  • Details of the registration numbers of the vehicles involved in accident are also necessary.
  • The name and contact details of the witnesses are needed.
  • Informing the insurance company about the incident.
  • Submitting the claim form duly signed is most important.

Documents required at the time of claim

  • Duly signed claim form.
  • Driving license copy.
  • Copy of police FIR.
  • RC copy of the vehicle.
  • Copy of original policy document.
  • Company stamp and original documents in case the vehicle is a company’s vehicle.

Conclusion

Thus, the concept of third-party liability insurance is clear. It is a policy according to which the insurance company is liable to pay compensation to the third-party in an incident where the damage is caused by the first party (insured).

The third-party insurance protects the interest of a third party who is a victim in the incident caused by the fault of the insured. So, any liability arising on the insured is mitigated by the insurer (insurance company).

Third-party liability insurance is necessary and mandated by the Motor Vehicle Act, 1988 and it cannot be overridden by any type of clause in the insurance policy.

The insurance company is regarded as a State as per the Article 12 and thus it cannot deny or refuse third-party insurance cover because it will violate the rights guided by Article 14 of the Indian Constitution.

As a result, it is important to have a third-party liability cover in order to safeguard oneself and also to provide the necessary compensation to the third-party who has been injured or damaged because of the fault of the insured.

Recently, A petition was brought against the amendment in the motor vehicle act which was dismissed by the Supreme Court of India.

References

  1. S. Iyyapan Vs. United India Insurance Co. Ltd, civil appeal no. 4834 of 2013
  2. Oriental Insurance Vs. Inderjit Kaur, (1998) 1 SCC 371
  3. K. Gopal Krishnan Vs. Sankara Narayanan, AIR 1968 Mad 436
  4. National Insurance Co. Ltd. Vs. Swaran Singh, 1997 ACC 377
  5. Oriental Insurance Vs. Sudhakaran K. V, civil appeal no. 3634 of 2008
  6. Rikhi Ram Case, civil appeal no. 1578 of 1994