Compulsory Third-Party Insurance

Explanation. A person driving merely as a paid employee does not contravene the sub-section unless he knows or has reason to believe that there is no such policy in force.

Sub-section (2): what is outside it. Vehicles owned by the Central Government or a State Government and used for purposes not connected with any commercial enterprise.

Sub-section (3): what may be exempted. By order of the appropriate Government: government vehicles used for a commercial enterprise, vehicles of a local authority, and vehicles of a State Transport Undertaking, but only if that authority has established and maintains a fund in the prescribed manner.

The proviso to sub-section (3) is the point of principle. The State may go without insurance only if it has set aside its own money to pay claims. Nobody is allowed to be simply uninsured.

Section 147: what the policy must cover

Sub-section (1). A complying policy must be issued by an authorised insurer and must insure the person or classes of persons specified in it

• (b)(i) against any liability incurred in respect of the death of or bodily injury to any person, including the owner of goods or his authorised representative carried in the vehicle, or damage to any property of a third party, caused by or arising out of the use of the vehicle in a public place; and
• (b)(ii) against the death of or bodily injury to any passenger of a transport vehicle, except gratuitous passengers of a goods vehicle, so caused.

The Explanation. Death, bodily injury or property damage is deemed to have been caused by or to have arisen out of the use of a vehicle in a public place even though the person or property was not in a public place at the time, if the act or omission which led to the accident occurred in a public place.

A lorry driven carelessly on the road that crashes through a wall into a house injures somebody who was never in a public place at all; the Explanation puts that case squarely inside the policy.

Sub-section (2): the premium. Notwithstanding any other law, for third-party insurance relating to death or grievous hurt the Central Government shall prescribe a base premium and the liability of the insurer in relation to that premium, in consultation with the Insurance Regulatory and Development Authority.

Sub-section (3): the certificate. A policy is of no effect for the purposes of the Chapter unless and until the insurer issues, in favour of the person by whom it is effected, a certificate of insurance in the prescribed form containing the prescribed particulars of any condition subject to which it is issued.

Sub-section (4): policies issued before the amendment continue on their existing terms, and the Act applies to them as if it had not been amended.

Sub-section (5): cover notes. Where a cover note is not followed by a policy within the specified time, the insurer must notify the registering authority, or such other authority as the State Government prescribes, within seven days of the expiry of the cover note's validity.

Sub-section (6): the indemnity. Notwithstanding any other law, an insurer issuing a policy under this section shall be liable to indemnify the person or classes of persons specified in the policy in respect of any liability which the policy purports to cover.

Section 148: vehicles from reciprocating countries

Where, under an arrangement between India and a reciprocating country, a vehicle registered in that country operates on a route or in an area common to the two, and a policy complying with that country's law of insurance is in force, the policy is effective throughout that route or area as if it complied with this Chapter, notwithstanding section 147 but subject to rules made under section 164B.

Section 156: the certificate governs

Where an insurer has issued a certificate of insurance,

• (a) so long as the policy described in the certificate has not been issued, the insurer is, as between himself and any person except the insured, deemed to have issued a policy conforming in all respects with the description and particulars in the certificate; and
• (b) where the policy has been issued but its actual terms are less favourable to persons claiming under it than the particulars stated in the certificate, the policy is, as between the insurer and any person except the insured, deemed to conform to the certificate.

This is the provision that makes the certificate, the small paper in the vehicle, the operative document for a third party. The insurer cannot tell an injured stranger that the real policy was narrower than the certificate said.

Notice the words "except the insured" in both clauses. As between insurer and insured the true policy governs; the deeming operates only in favour of third parties.

Section 157: transfer with the vehicle

Sub-section (1). Where the person in whose favour the certificate was issued transfers the ownership of the vehicle together with the policy, the certificate and the policy are deemed to have been transferred to the transferee with effect from the date of transfer. The Explanation clarifies that the deemed transfer includes the rights and liabilities under the certificate and the policy.

Sub-section (2). The transferee must apply to the insurer in the prescribed form within fourteen days of the transfer for the necessary changes, and the insurer shall make them.

Compulsory insurance follows the vehicle, not the paperwork. A buyer who has not yet done the formalities is nevertheless covered for third-party risks from the date of transfer.

A worked example

Firdaus buys a second-hand goods vehicle on 1 June and forgets to tell the insurer. On 10 June his paid driver, who had no reason to think the vehicle uninsured, knocks down a pedestrian on a highway; a fragment of the load flies off and damages a boundary wall of a house set back from the road.

Is there cover? Yes. By section 157(1) the certificate and policy are deemed transferred to Firdaus from 1 June, with the rights and liabilities; the fourteen-day application under section 157(2) is a duty, not a condition of cover.

Is the pedestrian covered? Yes, section 147(1)(b)(i): death of or bodily injury to any person caused by or arising out of the use of the vehicle in a public place.

Is the wall covered? Yes. It is damage to the property of a third party, and by the Explanation to section 147(1) it does not matter that the wall was not in a public place, because the act or omission that led to the accident occurred in one.

Is the driver liable to prosecution for using an uninsured vehicle? On these facts no: the Explanation to section 146(1) protects a person driving merely as a paid employee unless he knows or has reason to believe there is no policy in force.

The insurer says the actual policy excluded goods vehicles of this weight, though the certificate did not. As against the pedestrian and the householder, section 156(b) deems the policy to conform to the certificate.

Suppose the vehicle carried hazardous chemicals. The proviso to section 146(1) requires a policy under the Public Liability Insurance Act 1991 as well.

What it does NOT mean

It is not comprehensive insurance. The Chapter compels cover of third-party risks; damage to the insured's own vehicle is a matter of contract.

The driver is not outside the cover as a stranger. Section 145(i) includes the driver and co-workers on a transport vehicle in "third party".

Government vehicles are not automatically exempt. Only non-commercial use is outside section 146(1), and an exemption for commercial use requires a fund.

A gratuitous passenger in a goods vehicle is not within the compulsory cover. Section 147(1)(b)(ii) expressly excepts them.

The certificate does not bind as against the insured. Section 156 operates "as between himself and any other person except the insured".

Quick revision

1. Section 146(1): no use of a motor vehicle in a public place without a policy complying with the Chapter; a paid employee is excused unless he knows or has reason to believe there is none; hazardous goods also need a Public Liability Insurance Act policy.
2. Section 146(2) and (3): non-commercial government vehicles are outside; local authorities, State Transport Undertakings and commercially used government vehicles may be exempted only against an established fund.
3. Section 147(1): death or bodily injury to any person and damage to third-party property; passengers of a transport vehicle except gratuitous passengers of a goods vehicle; the Explanation covers a victim who was not in a public place if the act or omission was.
4. Section 147(2), (3), (5) and (6): base premium prescribed by the Central Government with the Insurance Regulatory and Development Authority; a certificate of insurance is essential; cover-note lapse to be notified in seven days; the insurer is liable to indemnify what the policy purports to cover.
5. Section 148: a policy from a reciprocating country is effective on the common route or area.
6. Section 156: as against everyone except the insured, the certificate governs, both where no policy has issued and where the policy is less favourable.
7. Section 157: certificate and policy pass with the vehicle on transfer, with rights and liabilities; the transferee applies within fourteen days.
8. National Insurance Co. Ltd v. Swaran Singh, (2004) 3 SCC 297: the Chapter is social welfare legislation and is to be interpreted to effectuate its object.

Test yourself

1. State the requirement of compulsory insurance and what a complying policy must cover. Section 146(1) forbids any person to use, except as a passenger, or to cause or allow another to use, a motor vehicle in a public place unless there is in force in relation to that use a policy of insurance complying with Chapter XI; a vehicle carrying or meant to carry dangerous or hazardous goods must also be insured under the Public Liability Insurance Act 1991. A person driving merely as a paid employee does not contravene the sub-section unless he knows or has reason to believe that no policy is in force. Vehicles of the Central or a State Government used for purposes unconnected with any commercial enterprise are outside the sub-section, and the appropriate Government may exempt government vehicles used commercially, vehicles of a local authority and those of a State Transport Undertaking, but only where that authority has established and maintains a fund in the prescribed manner.

By section 147(1) a complying policy must be issued by an authorised insurer and must insure against liability for the death of or bodily injury to any person, including the owner of goods or his representative carried in the vehicle, and against damage to any property of a third party, caused by or arising out of the use of the vehicle in a public place, and against the death of or bodily injury to any passenger of a transport vehicle other than a gratuitous passenger of a goods vehicle. The Explanation deems the injury or damage to have arisen out of such use even though the victim or property was not in a public place, provided the act or omission which led to the accident occurred in one.

2. What is the effect of a certificate of insurance? By section 147(3) a policy has no effect for the purposes of the Chapter unless and until the insurer issues a certificate of insurance in the prescribed form in favour of the person effecting the policy. Section 156 then gives the certificate an operative force of its own as against third parties. Where the policy described in the certificate has not yet been issued, the insurer is, as between himself and any person except the insured, deemed to have issued a policy conforming in all respects with the description and particulars stated in the certificate. Where the policy has been issued but its actual terms are less favourable to persons claiming under or by virtue of it, against the insurer directly or through the insured, than the particulars stated in the certificate, the policy is likewise deemed, as against everyone except the insured, to conform to the certificate. The result is that the injured stranger may rely on the certificate as it stands; the insurer's remedy for any discrepancy lies only against its own insured.

3. What happens to the insurance when the vehicle is sold? Section 157(1) provides that where the person in whose favour the certificate of insurance was issued transfers the ownership of the motor vehicle together with the policy relating to it, the certificate and the policy described in it are deemed to have been transferred in favour of the transferee with effect from the date of transfer, and the Explanation clarifies that the deemed transfer includes the transfer of the rights and liabilities under the certificate and the policy. Section 157(2) requires the transferee to apply to the insurer within fourteen days of the transfer, in the prescribed form, for the necessary changes in regard to the fact of the transfer, and obliges the insurer to make them. The deeming provision protects the victim of an accident that occurs in the interval before the paperwork catches up, which is consistent with the description of the Chapter in National Insurance Co. Ltd v. Swaran Singh, (2004) 3 SCC 297, as social welfare legislation to be interpreted so as to effectuate the object of extending relief by compensation to the victims of accidents.