Rights of third parties against insurers on insolvency of the insured
AI Assist
Summary
If someone is insured for liabilities to third parties and then becomes insolvent, makes a composition with creditors, is wound up, or their estate is administered after death, the insured’s rights against the insurer for that third-party liability automatically transfer to the third party. Any policy term trying to void or alter those rights on such events is ineffective. The insurer is liable to the third party as it would be to the insured, with usual excess or shortfall rules preserved.
Example
Priya’s insured car hits Rohan’s shop. Before settlement Priya is declared insolvent, so her rights against the insurer for the damage vest in Rohan and he can claim directly from the insurer. If the insurer pays less than Priya owes, Rohan can still pursue Priya for the balance; if insurer’s liability exceeds the debt, Priya keeps the excess claim.
Bare Act
Enacted text(1) Where under any contract of insurance effected in accordance with the provisions of this Chapter, a person is insured against liabilities which he may incur to third parties, then—
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(a) in the event of the person becoming insolvent or making a composition or arrangement with his creditors, or
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(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—
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(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, and
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(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.
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