Rights of third parties against insurers on insolvency of the insured

Sec 150 of Motor Vehicle Act, 1988 provides for the rights of Third parties in the event of the insolvency of the insured or in the event of winding up when the insured is a Company. 

The Act provides that if, either before or after that event, any third party liability is incurred by the insured, his rights against the insurer under the policy are transferred to the third party to whom the liability was incurred.

When such transfer takes place, the insurer will be under the same liability to the same liability to the third party as he would have been to the insured person, but

1. If the liability of the insurer to the insured person EXCEEDS the liability of the insured person to the third party, the insured persons; rights against the insurer in respect of the excess are not affected. Examples: The Act provides for TPPD to the extent of Rs. 6000/- only whereas the insurers liability under Private car policy is Rs. 7,50,000. Thus the TP claimant will be entitled to claim up to Rs. 7,50,000.
2. If the liability of the insurer to the insured person is less than the liability of the insured person to the third party. The rights of the third party against the insured person in respect of the balance are not affected.

In the event of an insured becoming insolvent of making arrangements with his creditors (insured is a company, being would up) the rights of the Insured under the Policy will be transferred to and vest in the injured third party.

In other words the injured third party is able to recover compensation direct from the insurers.  In the absence of this provision, any sum revered by the insolvent insured from his insurance company would have formed part of his assets to which his creditors would lay a claim in proportion to their debts.

Extracts from “Guide for Motor Insurance (IC-72)” by Dr. Rakesh Agarwal. Copyright of Sashi Publications, kolkata www.sashipublications.com and www.bimabazaar.com