Section 151 Motor Vehicles Act: Rights of third party against insurers on insolvency of insured

Section 151 of Motor Vehicles Act: Motor Vehicle Regulation & Claims Procedure

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(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.

Legal Commentary & Landmark Judgments: Section 151

Section 151 of the Motor Vehicles Act, 1988 mandates that upon the insolvency, bankruptcy, or corporate winding-up of an insured tortfeasor, all contractual insurance rights and indemnities transfer directly to and vest in the third-party victim, invalidating 'pay to be paid' clauses.

Automatic Statutory Transfer & Vesting of Rights: Section 151(1) commands that upon the insured individual becoming insolvent or making a composition with creditors, or upon a company entering winding-up/liquidation, all rights against the insurer transfer directly to and vest in the third-party victim.
Invalidation of Insolvency Termination Clauses: Section 151(3) strictly invalidates any policy condition purporting to avoid the policy, terminate cover, or alter the parties' rights upon the insured's bankruptcy, insolvency, or winding-up, rendering all such avoidance clauses of no legal effect.
Direct Insurer Liability & Excess Right Retention: The insurer becomes directly liable to the third party as it would have been to the insured; if insurance proceeds are less than total liability, the third party retains the right to prove for the balance in the insolvency proceedings under Section 151(4).

Key Landmark Precedents:

Bimlesh v. New India Assurance Co. Ltd. (2010) 8 SCC 591: The Supreme Court held that Section 151 is a crucial protective measure enacted to insulate third-party victims from the insolvency or dissolution of the tortfeasor, creating a direct statutory charge on insurance proceeds that bypasses general unsecured creditors.
National Insurance Co. Ltd. v. Swaran Singh (2004) 3 SCC 297: A 3-Judge Bench of the Supreme Court observed that the statutory architecture of Chapter XI is designed to ensure third-party indemnification; provisions like Section 151 extinguish private contractual defenses that would otherwise leave innocent accident victims remedy-less.

Courtroom Practice & Strategic Litigation Guidance:

If the owner of an offending commercial vehicle enters corporate insolvency resolution (CIRP under the Insolvency and Bankruptcy Code, 2016) or liquidation, immediately invoke Section 151. Pleading Section 151 establishes that the insurance indemnity does not form part of the corporate debtor's liquidation estate; the MACT claim proceeds directly against the insurer without being stayed by Section 14 IBC moratoria.

Section 151: Rights of third party against insurers on insolvency of insured

Section 151 of Motor Vehicles Act: Motor Vehicle Regulation & Claims Procedure

Legal Commentary & Landmark Judgments: Section 151