Insurance as a third-party beneficiary contract (seven)

Justice Peprah AGYEI.

A third-party beneficiary, in the law of contracts, is a person who may have the right to sue on a contract, despite not having originally been an active party to the contract. This right arises when the third party is the intended beneficiary of the contract, as opposed to a mere incidental beneficiary. Third-party relies on assents to the relationship and take legal action against either the promisor or the promisee of the contract, depending on the circumstances under which the relationship was created.

A contract made in favour of a third party is known as a “third-party beneficiary contract.” Under traditional common law, the third-party right to sue principle was not recognized, instead, relying on the doctrine of privity of contract, which restricts rights, obligations, and liabilities arising from a contract to the contracting parties. However, the Contracts (Rights of Third Parties) Act 1999 introduced several allowances and exceptions for this in English law. Other common-law countries also made and are making reforms in this area.

Insurance contracts demonstrate many of the ways third parties can benefit from agreements. In a life insurance policy, for example, the contract between the insured and the insurer in most cases is for the benefit of a third person, the beneficiary. Property insurance also can provide benefits to third parties in some circumstances, particularly when property interests are being transferred or when interests in real estate are limited or shared. An insurance contract can benefit as a third party in two primary ways:

  • Insurance contracts can protect third parties in cases of injury or damage.
  • Insurance contracts can protect third parties in real estate sales and mortgages, such as lease interests and life estates.

Third-Party Interests in Liability Insurance

Liability insurance protects against loss resulting from injury or damage to a third person as a result of the insured activity(ies), usually by negligence. Although a named insured obtains the policy, the protection can be extended to others, such as additional drivers of an insured’s car.

The victims of an insured’s negligence also benefit from liability coverage. In recent years, some states have adopted direct-action statutes. In most jurisdictions, however, the purpose of liability insurance is to indemnify only insureds for their losses in paying damages to the victims. In these situations, the third-party victims cannot sue under the liability policies until courts have ordered judgments against the insureds. If an insurer denies claim payments after a judgment, some states allow a third party to sue the insurer directly in a statutory action known as garnishment.

A typical example in Ghana is when a fare-paying passenger gets injured in a motor accident. He stands to benefit from the motor insurance policy of the driver who caused the accident thereby causing the injury/death or property damage. This is why pedestrians need to check the validity of vehicles before they use their services. For instance, the motor third party insurance cover will pay on behalf of the insured or the driver, in respect of a legal liability to third parties resulting from an accident caused by his/her vehicle. The insurer will indemnify:

  • The owner or any other person driving, using or in charge of the vehicle with the consent of the owner, or any authorised passenger getting in, on or out of the vehicle for:
  • death of or bodily injury to any person, and/or
  • damage to property belonging to someone other than the insured
  • death of or bodily injury to a member of the insured household or any other occupants
  • the policy also pays compensation for the driver for bodily injury or death.

Without the motor third-party insurance in place, all the costs concerning the above would have been borne by the insured or the driver.

Again, if we enter a shopping mall or mart and get hurt as a result of fire or other events, whose responsibility is it to take care of us? Whose responsibility is it when we send our children to school especially the private institutions and they get injured or even die because of fire from the premises or any other event like collapse of building? Do we care and think about what we would do if we go to restaurants or hotels to eat or sleep and we get injured or our properties get damage as a result of fire from the premises or other events like a collapse of a building? Who is responsible to compensate us when we get injured or a relative loses their lives through any event in these places? We may not have done any insurance but we can benefit as third parties. The people whose activities invited us to the premises have a responsibility to take care of us and our properties. This is why we can bring legal action against them when we do not get this protection. They can transfer this to insurance companies and we (third parties) can receive compensation from their insurers.


A contract has been defined as a legally enforceable agreement. We have explained in our earlier write-ups the elements that make a contract be legally enforceable agreement. These include agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law.

Insurance contracts should have all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. Nonetheless, insurance contracts have distinctive features in their own body of law. In addition to having the necessary elements of all contracts, valid insurance contracts have certain special characteristics. We have discussed adhesion, utmost good faith, conditional contract, indemnity and insurable interest. Today we discussed insurance as a third-party beneficiary contract..

The writer is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK,.

+233 (0) 549705031 [email protected]


Navigating the Legal Landscape of Insurance, American Institute for Chartered Property and Casualty Underwriters. Edited by Martin J. Frappolli,is%20the%20intended%20beneficiary%20of%20the%20contract%2C%20

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