The Insurance Act 2015 includes consequential amendments to the Third Parties (Rights Against Insurers) Act 2010 that will enable the 2010 Act to finally come into force by autumn 2015. In this blog, I take a look at some of the more significant changes introduced by the 2010 Act, which aim to simplify the cumbersome and expensive procedure for direct claims against insurers set out in its predecessor, the Third Parties (Rights Against Insurers) Act 1930. When the 2010 Act comes into force, the 1930 Act will be repealed, except for cases where both the insured incurs liability to a third party and its insolvency occurred before the date when the Act comes into force.
The 2010 Act introduces a less complex and potentially cheaper procedure for claiming directly against the liability insurer of an insolvent defendant. The changes reflect the reality of litigation where liability insurance is in place, which is that claims against defendants are often handled by their liability insurers.
The aim of the 1930 and 2010 Acts is to assist a third party in receiving compensation for losses caused by an insolvent person or company who has liability insurance. Before the 1930 Act was enacted, privity of contract meant that a person who obtained judgment against an insolvent insured defendant had no direct claim to the insurance monies. The policy was simply one of the assets in the insolvency which was available for the benefit of the general body of creditors. The innocent person would often find itself restricted to proving in the bankruptcy or liquidation, even though an insurance policy had been taken out precisely to cover its claim.
The 1930 Act sought to remedy this injustice by providing for a statutory assignment to the third party of the defendant’s rights against the insurer on the occurrence of insolvency. In this way, money payable under the insurance policy does not form part of the creditor’s pot. The third party effectively steps into the shoes of the defendant insured and may bring a claim against the insurer. All the terms of the insurance policy apply and the insurer is able to rely on any defences to the insurance claim that would have been available against the insured.
But the 1930 Act suffers from one major weakness: it sets out a two-stage process by which a third party claims against an insurer. Only after it has established liability and quantum against the insolvent insured, can a third party pursue the insurer. This usually means two separate actions and, if the insolvent corporate defendant has been dissolved and struck off the Register of Companies, the third party has to incur the additional expense of restoring it to the register so that it may pursue the claim against it.
It is not surprising that this complex piece of legislation is seldom used in practice.
The 2010 Act
The 2010 Act aims to improve the position of third parties through various changes to the regime, including by:
- Allowing the third party to proceed against the insurer without the need to also add the insured to the proceedings.
- Eroding certain defences available to insurers under the 1930 Act.
- Widening the category of persons from whom the third party can obtain information about the defendant’s insurance arrangements and clarifying the type of information which may be obtained.
Although the 2010 Act was passed over five years ago, it could not come into force until it was amended to include various new insolvency procedures. The amendments are included in the Insurance Act 2015. The 2015 Act also permits the Secretary of State to add further insolvency situations to the 2010 Act, to keep up with developments in insolvency law.
Proceeding against the insurer without the need to sue the insured defendant
The single most significant change in the 2010 Act is that, where the insured defendant falls within one of the events recognised by the Act (namely insolvency, dissolution, etc), a third party will be able to proceed directly against its insurer in one set of proceedings, without having to establish liability and quantum against the insured defendant. In fact, without having to pursue the insured at all. The third party only has to issue proceedings against the insurer seeking a declaration as to the liabilities of both the defendant and its insurer. The court may then enter judgment against the insurer (and the insured as the case may be). This means that there will no longer be a need to restore the insolvent defendant to the registry (unless, of course, the third party wishes the defendant insured to be bound by the declaration).
But, there is one caveat. Although a third party may proceed against the insurer without actually having established the insured’s liability, it will need to ascertain such liability before it can enforce any judgment against an insurer. In other words, the third party will still need to establish in the claim against the insurer that the insured is liable.
Limiting the defences available to insurers
The 2010 Act restricts certain defences that are available to insurers under the 1930 Act. For example, the third party will be able to fulfill conditions of the policy, such as any notification requirements. This will be treated as if it was done by the insured, so that the insurer will not be able to rely on a breach of condition by the insured defendant to resist the insurance claim. This is quite significant in cases where a corporate insured may have been dissolved prior to notifying the third party’s claim (or potential claim) against it to insurers.
Improved rights to insurance information
The 2010 Act also improves the rights of third parties to obtain information about the defendant’s insurance position before issuing proceedings. This is significant as claimants need to know whether an insolvent defendant is insured, and on what terms, in order to avoid wasting time and money in pursuing insurers only to find out late in the proceedings that they are entitled to reject the claim under the terms of the policy.
Under the 2010 Act, provided certain criteria are satisfied, a third party may serve a notice requesting information about the defendant’s insurance arrangements on any person entitled to provide it. This would include the defendant insured, insurers, brokers and former office holders of a defunct insured. By contrast, under the 1930 Act, the third party could request insurance information mainly from the insured and the relevant insolvency practitioner.
The 2010 Act lists the information to which a third party is entitled. This includes:
- Whether there is an insurance policy in place potentially covering the supposed liability.
- The name and address of the insurer.
- The terms of the insurance policy (including any exclusion clauses and conditions).
- Whether cover has been previously exhausted.
- Whether the insurer has notified the insured that it is not liable under the policy to meet the insured’s supposed liability to the third party.
- Whether there have been any proceedings between the insurer and the insured in respect of the supposed liability and details of those proceedings.
The party receiving the notice has a duty to act quickly and answer the request within 28 days. Although the 2010 Act does not impose any penalty for failure to comply with the duty, a third party may apply for a court order requiring compliance. It is possible that insurers, brokers or any other relevant person may be inclined to provide the information requested, or at least explain why it cannot provide it, in order to avoid the prospect of an adverse costs order.
Contrast this with the 1930 Act. Following the decision of the Court of Appeal in OT Computers, it is clear that under the 1930 Act, a third party is entitled to obtain such information as may reasonably be required about the defendant’s insurance for the purpose of deciding whether any rights against the insurer have been transferred to the third party. The third party has a right to information as soon as the insured becomes insolvent. However, it is not entirely clear which information the relevant persons have a duty to disclose. It is possible for a third party to fail at the last hurdle if the insurer is relying on a defence in relation to which it failed to provide information. The third party can jump through the hoops in the 1930 Act only to find out that insurers can escape liability, for example, because of an applicable exclusion clause in the policy, or because the insurance cover had previously been exhausted.
The 2010 Act addresses the deficiencies of the 1930 Act that cause real hardship to third parties, as they are required to expend substantial time and money enforcing their rights. The streamlined procedure for claiming directly against the insurer of an insolvent defendant that the 2010 Act introduces will benefit both third parties and insurers. As there are fewer hurdles that the third party needs to overcome to assert its rights, and as all matters can be resolved in one set of proceedings, costs should be reduced and so should any ultimate costs liability of insurers. Moreover, where insurers have a valid defence to the claim, it will be in their interest that the proceedings are resolved swiftly. I think it is likely that the 2010 Act will lead to more direct claims against insurers. Insurers and brokers should prepare themselves for an increase in requests by third parties for policy information before litigation is commenced, and should consider putting procedures in place for dealing with any requests as quickly as possible.