Third Parties (Rights Against Insurers) Act 2010

The Third Parties (Rights Against Insurers) Act 2010 (“the 2010 Act”) has significant implications for those whose practices involve dealing with insolvent and dissolved insured clients. Coming into force on 1 August this year, the Act aims to simplify the mechanism by which a claimant (the third party) may bring a claim directly against an insurer, where a defendant (the insured) is insolvent.

There may be many situations in which an insurer may decide that its insolvent insured was legally liable, and that its policy covered that liability without the need for proceedings or the operation of the 2010 Act. However this note sets out the position where a claimant seeks to enforce rights by way of proceedings and applies equally to defended liability claims as well as subrogated recovery actions.

Why do third parties have rights against insurers?

The 2010 Act is the second Act, following that in 1930, the intention behind the Acts is to put claimants in a preferential position to other creditors of an insolvent defendant.

The background to the 1930 Act was that in Re Harrington Motor Company, Ex parte Chaplin [1928] Ch. 105, the claimant, a pedestrian, was knocked over and injured by a taxi belonging to the defendant company. The claimant recovered damages for personal injury caused by the taxi driver’s negligence. The defendant was insured against claims such as this. However, the defendant became insolvent. The insurer paid a sum of money under the policy as an indemnity against the judgment to the liquidator. The Court of Appeal held that this sum should not be paid over to the claimant but rather became part of the defendant’s general assets, available to be distributed amongst the defendant’s creditors. Atkin LJ considered this correct in law – the third party had no claim against the money paid by the insurer – but described it as “an unsatisfactory result.” In order to remedy this unfairness Parliament passed the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”) to deal with this kind of scenario.

The 1930 Act

Following the 1930 Act, on insolvency, the proceeds of a policy for a valid claim go to the purpose for which they were intended rather than being swallowed up in the funds available to creditors. The 1930 Act transfers the insured’s rights under the policy to the third party (i.e. the claimant), enabling the third party to proceed directly against the insurer: the third party steps into the shoes of the insolvent insured and has the same rights as the insured. However, certain problems with the 1930 Act have been identified over the years. For example, the third party has to establish the existence and amount of the insured’s liability before it can issue proceedings against the insurer (Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363, meaning there might be two sets of proceedings: one against the insured and one against the insurer.

Also, if an assured is dissolved and has been struck off the register of companies, no proceedings can take place until the company has been restored, which has the effect of adding costs to a matter before proceedings ever get issued.

Another key issue to consider under the 1930 Act is that a third party is in the same position in relation to the insurer as the assured. The Act transfers such rights as the assured is entitled to under the contract of insurance. As such any defence which the insurer may have to a claim under the policy applies equally to the claim made by the third party. Therefore, a breach of warranty or a material non-disclosure by the assured can be successful defences to a claim. So too can a valid point on construction of policy coverage, or a failure to comply with a clause making prompt notification of the claim a condition precedent to the liability of the insurer. Another issue with the 1930 Act was set out in the decision of Fanti and the Padre Island [1991] 2 AC 1 which was heard before the then House of Lords, in which it was decided that rights could not  transfer under the 1930 Act if the insurance contract contained a clause requiring the insured to pay the claim before the right to an indemnity arose (a “first pay” clause) and the insured had not done so.

The 2010 Act received royal assent in March 2010 but, rather unusually, was not given effect until The Third Parties (Rights against Insurers) Act 2010 (Commencement) Order 2016 was passed in April 2016, which set out that the 2010 Act will come into force on 1 August 2016. The 2010 Act is aimed at remedying some of the issues which arose under the 1930 Act.

Effect of the 2010 Act

In short, the 2010 Act removes the need for separate proceedings (and the need to restore companies to the register) by allowing a third party to bring a single action against the insurer to establish, 1) the insured’s liability, and 2) the potential liability of the insurer. This removes the need for proceedings against the insured to establish liability, and subsequent proceedings against an insurer which disputes that the liability is covered by its policy.

Importantly, the Act applies to matters where the insured party has, after 1 August 2016, either entered into insolvency/bankruptcy or incurred a liability.

Commencement Table

 
Incurring a liability

Insolvency/default

Before 1 August 2016

After 1 August 2016

Before 1 August 2016

1930 Act

2010 Act

After 1 August 2016

2010 Act

2010 Act

 

Under the 2010 Act, a statutory assignment of rights in favour of the third party, takes place under the contract of insurance when an assured becomes subject to insolvency proceedings of the type set out in the 2010 Act, though the transfer only arises when the liability is established.

A claimant can proceed without joining an already insolvent or defunct company to the proceedings at all. The claimant only has to pursue the relevant insurer. It should be noted that there is nothing to preclude a party from suing the insured itself. That may be the safest course of action where, on the facts, there is room for argument as to whether the 1930 Act or the 2010 Act applies. Also an insurer’s contractual defences against the insured will continue to operate so as to potentially defeat a claim. There is, however, some easing of the position to prevent the most technical defences. For example, an insurer can no longer decline liability on the ground that the insured failed to notify them of a claim, provided the third party has notified the insurer under section 9 of the 2010 Act.

Other changes

One of the key parts of the act relates to the right to information. Under the 1930 Act, the courts have held that the third party’s right to information about the insurance policy does not arise until the insured’s liability has been established.

The 2010 Act allows the third party to obtain information about the rights transferred to him or her. The claimant can request information from the party it believes is liable to him where he believes they are a relevant person. And it follows from that, the right to information does not arise if that person then denies they are a relevant person – the right is triggered by “reasonable belief” but that must give way to reality.

A claimant can also request information from an insurer on any person it believes may have the information – the 2010 Act sets out detailed provisions for when and from whom the information should be given, and what the information is and by when the response should be given. This is very likely to be the subject of much dispute. The 2010 Act provides a framework for the provision of information though this will no doubt be developed as requests are made and insurers decide whether the request is proper and whether requests become too onerous.

Possible impacts

Claims made against insurers under the 2010 mechanism may increase. Claims for disclosure of policy information will almost certainly increase, given the new statutory basis for these requests. Insurers will need to understand the sorts of requests which are likely to be made and will need to be prepared when it comes to responding to the requests.