An Act-only motor insurance policy does not cover occupants; the insurer bears no liability.

On 24 January 2010, N. Nataraj and three others were travelling in a Maruti 800 car bearing Registration No. TN 38 5505.

Near Reliance Petrol Bunk on the Udumalpet–Pollachi Main Road, the car, allegedly driven rashly and negligently by S.T. Nagaraj, collided with a TATA Ace vehicle coming from the opposite direction, causing injuries to the occupants.

The injured claimant filed M.C.O.P. No. 105 of 2014 before the Motor Accidents Claims Tribunal, Pollachi.

The Tribunal found the driver negligent, held that the owner had permitted him to drive without a valid licence, awarded ₹1,20,000 as compensation, and directed the insurer to pay and recover the amount from the driver and owner.

The Oriental Insurance Company appealed under Section 173 of the Motor Vehicles Act, contending that the vehicle was covered only by an Act/“Liability Only” policy, which did not cover the risk of a passenger occupying the insured private car.

Whether an insurer issuing an Act-only/Liability-only policy is liable to indemnify compensation payable to an occupant or passenger travelling in the insured private car?

Whether the Tribunal was justified in directing the insurer to pay the compensation and thereafter recover it from the driver and owner?

Whether the quantum of compensation awarded by the Tribunal required interference?

The Court applied the statutory distinction between compulsory third-party coverage under the Motor Vehicles Act and coverage voluntarily extended under a comprehensive policy.

An Act-only or Liability-only policy covers liability towards statutory third parties but does not ordinarily cover an occupant of a private car who is not otherwise covered by the policy.

Relying on New India Assurance Co. Ltd. v. S. Krishnasamy, 2015 (1) TNMAC 19 (DB), the Court held that an occupant of a private car is not a “third party” for purposes of an Act-only policy and that the doctrine of “pay and recover” cannot be invoked where the insurer bears no contractual or statutory liability.

The Court also referred to National Insurance Co. v. K. Rajasekaran, 2017 (2) TNMAC 253, as relied upon by the appellant regarding the limited scope of liability-only coverage.

The insurer’s appeal lay under Section 173 of the Motor Vehicles Act.

Exhibit R1 showed that the Maruti 800 was insured under an Act-only/Liability-only policy and that the policy restrictions did not extend coverage to occupants travelling in the private car.

Although the claimant was injured due to the rash and negligent driving of the insured vehicle, the claimant’s status as an occupant did not bring the claim within the statutory third-party coverage of the policy.

Applying S. Krishnasamy, the Court held that the insurer could not be made liable merely because the owner had permitted the driver to operate the vehicle without a licence.

Since the insurer was not liable in the first place, the Tribunal’s direction to pay and recover was legally unsustainable.

However, the Court found no reason to interfere with the assessment of ₹1,20,000 as compensation.

The Court held that the Oriental Insurance Company was not liable to pay compensation under the Act-only/Liability-only policy because the claimant was an occupant of the insured private car.

The driver and owner alone were held liable to satisfy the award.

The insurer was entitled to recover any amount already paid to the claimant, but the Tribunal’s direction requiring the insurer to pay and recover was set aside.

The quantum of ₹1,20,000, together with interest and costs as awarded by the Tribunal, was left undisturbed, and the driver and owner were directed to pay it within four weeks of receiving the order.