The Third Parties (Rights Against Insurers) Act 2010 (the New Act) will come into force on 1 August, creating an exception to a fundamental principle of English law; the rule of privity of contract whereby only those who are party to a contract can enforce rights under it.
The New Act, which replaces its namesake of the year 1930 (1930 Act), makes it simpler when pursuing a claim against an insolvent defendant, by creating rights in respect of the insolvent’s insurance policy/insurer which did not exist previously (as between the third party and the insurer).
The provisions under the New Act apply to all types of liability insurance. The resounding advantage to the third party creditor is that, instead of being restricted to claiming in the insolvency of the insured, thereby ranking as an unsecured creditor, and being likely to recover only a fraction of its original claim, the creditor may now pursue the insurer who will, in the majority of cases have deep pockets and the possibility of a full or substantial recovery is now a real possibility. The New Act effectively therefore allows the intended beneficiaries of an insurance policy to benefit from the insurance directly.
Although the New Act received Royal Assent in 2010, its implementation was delayed to make further amendments to the draft legislation, including adding a number of specific insolvency situations, and the power for the Secretary of State to add further insolvency situations to the New Act by order should the need arise.
These shortcomings in the initial drafting were addressed by the Insurance Act 2015. It is important to note that the New Act does not have retrospective effect and therefore the 1930 Act remains applicable where the cause of action occurred and the insured became insolvent before 1 August this year.
The previous position
Previously it was not possible for a third party to claim directly against another party’s insurer. Due to the fact an insurance contract is personal between the policyholder and the insurer, the creditor would have to prove its claim against the insured and then the insured would be indemnified by its policy (subject to the relevant policy conditions), and sums paid to the creditor by the insurer.
This created various difficulties/problems for claimants:-
- The third party creditor had first to establish the insured’s liability and quantum by way of separate proceedings before a claim could be brought against the insurer;
- If the policyholder previously breached any policy conditions, this could therefore affect the third party’s ability to recover from the insurer. Common examples could be breach of notice provisions;
- If the insured’s policy had an excess, it would also apply to the creditor. In the event the excess was high, this could result in disproportionality for the creditor on a cost/benefit analysis;
- Uncertainty regarding the obligation to provide information meant that requesting and obtaining details about the policy and the insured could be difficult;
- A claim could not be brought against a dissolved company without the third party creditor first restoring the company to the register.
Under the New Act, an insurer can be made party to proceedings from the very beginning of a claim, as well as clarifying the position on disclosure of information to third parties to allow them to assess the chances of recovery before incurring unnecessary costs.
The most important changes are as follows:
- There will no longer be any need to prove the insured’s liability in order to pursue its insurer. Third parties will be able to proceed with a cause of action at the same time as seeking an order that the insurer will be responsible for payment of any damages awarded.
- Third parties will no longer need to apply to the court to restore an insolvent insured company to the register of companies before commencing an action against its insurers. Instead, third parties may bring proceedings against insurers directly.
- The third party can request information when it reasonably believes the insured has incurred liability (liability does not have to be established by way of proceedings at this stage). Insurers will be required (within 28 days of the request being made) to provide detailed information about policy coverage to a claimant at the pre-proceedings stage. Failure to comply permits the claimant to apply to court seeking compliance and a costs order against the insurer.
- Any notice provisions (or other policy conditions) in the policy may be fulfilled by the third party on behalf of the insured (i.e. acts of the third party will be treated as if they are acts of the insured). If the third party intends to make a claim against an insured party which it suspects is in financial difficulty, it must therefore act quickly to avoid missing any deadlines within the policy for serving notices on the insurer.
- Insurers’ defences are now more limited; whereby they can no longer rely on a defence of breach of duty to withhold information, where the insured is:
- an individual who has died;
- a body corporate that has been dissolved; or
- deemed to have failed in providing assistance in defending the claim.
- Insurers can no longer rely on “pay first” clauses (except for marine insurance claims) in the absence of injury or death.
- Claimants can now be subrogated into the position of the insured in order to fulfil any conditions under a given policy.
What does this all mean?
When the New Act applies, the rights of the insured are automatically transferred to the third party on the insolvency of the insured, through a statutory transfer. It does not create new substantive rights but transfers the pre-existing contractual rights.
It is difficult to predict exactly what the impact of these changes will be on a practical level, particularly from the insurers’ perspectives. It is anticipated that there will be:
- a reduction in the amount of speculative claims by third parties, which should come about as a result of information regarding policy coverage being required very early on to avoid fruitless claims.
- an opportunity for insurers to be a party to the proceedings. This will give insurers greater control over the routes which claims take and allow them to have an input into the defences and quantum which form as a result of claims which arise via third parties.
- an increase in the number of claims that are brought by third parties against insurers as the procedure is expected to be more streamlined than it was under the 1930 Act. This should in theory also reduce the amount of unnecessary court proceedings.
- an increased administrative requirement on insurers to make sure that all records and documentation are stringently kept in order to avoid falling foul of the 28 day compliance period for providing information.
- a decrease in legal costs for the parties as a result of spending less time having to work through what was previously a convoluted procedure.