Motor Vehicles Act Section 151 — Rights of third party against insurers on insolvency of insured
CHAPTER IX MOTOR VEHICLES TEMPORARILY LEAVING OR VISITING INDIA
Civil
Summary
Sub-section (1) explains that when a person has a valid insurance contract under this Chapter covering liabilities they may owe to a third party, and that person becomes insolvent, makes a composition or arrangement with creditors, or — if the insured is a company — faces a winding-up order, passes a voluntary winding-up resolution, has a receiver or manager appointed, or has possession taken by debenture holders under a floating charge, then any liability incurred by the insured person (whether before or after that event) results in the insured person's rights against the insurer being transferred to and vested in the third party to whom the liability is owed. This transfer happens despite anything to the contrary in any other law.
Sub-section (2) covers the situation where a deceased debtor's estate is being administered under insolvency law. If the deceased owed a debt to a third party for a liability that was insured under a contract of insurance in accordance with this Chapter, and that debt is provable in insolvency, then the deceased debtor's rights against the insurer for that liability are transferred to and vested in the person to whom the debt is owing, again notwithstanding any contrary provision of law.
Sub-section (3) states that any condition in an insurance policy issued for the purposes of this Chapter which tries, directly or indirectly, to avoid the policy or change the rights of the parties when any of the events in clause (a) or clause (b) of sub-section (1) happen, or when an order for administration of a deceased debtor's estate is made under insolvency law, will have no effect.
Sub-section (4) provides that when a transfer happens under sub-section (1) or sub-section (2), the insurer becomes liable to the third party in the same way as the insurer would have been liable to the insured person. However, under clause (a), if the insurer's liability to the insured person is more than the insured person's liability to the third party, the insured person's rights against the insurer for the excess amount are not affected. Under clause (b), if the insurer's liability to the insured person is less than the insured person's liability to the third party, the third party's rights against the insured person for the balance amount are not affected.
Official Text
(1) Where under any contract of insurance affected in accordance with the provisions of this Chapter, a person is insured against liabilities which he may incur to third party, then—
(a) in the event of the person becoming insolvent or making a composition or arrangement with his creditors; or
(b) where the insured person is a company, in the event of a winding-up order being made or a resolution for a voluntary winding-up being passed with respect to the company or of a receiver or manager of the company’s business or undertaking being duly appointed, or of possession being taken by or on behalf of the holders of any debentures secured by a floating charge of any property comprised in or subject to the charge, if, either before or after that event, any such liability is incurred by the insured person his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything to the contrary in any provision of law, be transferred to and vest in the third party to whom the liability was so incurred.
(2) Where an order for the administration of the estate of a deceased debtor is made according to the law of insolvency, then, if any debt provable in insolvency is owing by the deceased in respect of a liability to a third party against which he was insured under a contract of insurance in accordance with the provisions of this Chapter, the deceased debtor’s rights against the insurer in respect of that liability shall, notwithstanding anything to the contrary in any provision of law, be transferred to and vest in the person to whom the debt is owing.
(3) Any condition in a policy issued for the purposes of this Chapter purporting, either directly or indirectly, to avoid the policy or to alter the rights of the parties thereunder upon the happening to the insured person of any of the events specified in clause (a) or clause (b) of sub-section (1) or upon the making of an order for the administration of the estate of a deceased debtor according to the law of insolvency, shall be of no effect.
(4) Upon a transfer under sub-section (1) or sub-section (2), the insurer shall be under the same liability to the third party as he would have been to the insured person, but—
(a) if the liability of the insurer to the insured person exceeds the liability of the insured person to the third party, nothing in this Chapter shall affect the rights of the insured person against the insurer in respect of the excess amount; and
(b) if the liability of the insurer to the insured person is less than the liability of the insured person to the third party, nothing in this Chapter shall affect the rights of the third party against the insured person in respect of the balance amount.