Over 6 years after receiving Royal Assent, the Third Parties (Rights against Insurers) Act 2010 will finally come into force on 1 August 2016.
The intention of the 2010 Act is to make it easier for third parties to bring claims directly against the liability insurers of insolvent insureds and it will repeal the existing regime under the Third Parties (Rights against Insurers) Act 1930, save in certain circumstances outlined below. Significantly, it will be possible for a third party to bring a single set of proceedings to establish both the liability of the insured to the third party and the liability of the insurer under the policy.
Reason for delay
The commencement of the 2010 Act has been delayed because it did not fully address a number of insolvency situations. Amendments to the Act were made by the Insurance Act 2015 to extend the definition of “relevant person” (ie the insolvency processes caught) and, following approval by Parliament of the Third Parties (Rights against Insurers) Regulations 2016 on 4 May, the 2010 Act will come into force on 1 August 2016.
In spite of its repeal, the 1930 Act will still apply in circumstances where the insured: (1) became a “relevant person” (i.e. subject to a formal insolvency procedure) or (2) liability to a third party was incurred, before 1 August 2016.
Accordingly, the 2010 Act will not apply to current/ongoing claims and will impact only claims where (1) and (2), above, take place after 1 August 2016.
2010 Act: key points
The 2010 Act will make it easier and less costly for a third party claimant, who has suffered a loss and is seeking damages, to pursue the insurers of an insolvent insured directly. It does so in the following ways:
- Liability: the Act removes the need for a third party to first obtain judgment against the insolvent insured before issuing a claim against the insurers, albeit the liability of the insured to the third party will have to be established before any rights against the insurers can be enforced. This can be achieved by way of a declaration of the Court, within the same proceedings. Accordingly, only one set of proceedings will be required.
- Insurer defences: whilst insurers may maintain the usual defences in a claim by a third party which would have been available to the insured, the Act restricts reliance on policy conditions that the insured is required to fulfil such as notification and claims co-operation provisions. The intention is that third parties are not penalised for any detrimental conduct of the insured. The Act will also render “pay first” clauses (where the insured is required to pay sums due to the third party before claiming under the policy) ineffective and will prevent the use of limitation defences where proceedings are commenced against the insured during the limitation period but proceedings for a declaration against insurers fall outside the limitation period.
- Document requests: the Act will provide third parties with an enhanced right to request insurance information from insurers, provided the third party can show a reasonable belief that liability is owed by an insured. Under the Act, a third party will be able, where it reasonably believes that a person is liable to it; that that person has insurance and the right to claim has transferred to the third party, to serve a notice on the insurer requesting certain information relating to the insurance. This will include whether the insured has been informed that the insurer does not consider that there is a liability to pay the claim under the policy. Requests for information will have to be answered within 28 days.
- Dissolved/Struck off company: the 2010 Act will eliminate the requirement to restore a dissolved insured company to the register of companies in order to pursue its insurers.
To read more on the 2010 Act, see our previous Law-Now.
After years of anticipation over the timings of the change in the law regarding third party claims, claimants will welcome the greater degree of certainty the 2010 Act will bring as regards prospective claims against an insolvent insured.
The advantages of the new legislation for third parties seeking to claim for loss against an insolvent company are considerable, as is evident above. It brings with it a considerable cost benefit for claimants, who can now avoid two layers of litigation, as well as the cost of potentially having to restore a company to the register of companies before pursuing its insurers.
It further allows the chances of recovery against insurers to be established early, and prior to proceedings being issued.
For insurers, who have been anticipating the implications of the 2010 Act for the past 6 years, there will no doubt be some anxiety that the 2010 Act will bring a rise in the number of claims and increased quantum of such claims (given the defences available to insurers from a coverage perspective will be more limited in third party claims) and a hike in the number of information requests made, which may put a strain on insurers’ claims handling teams.
Insurers may also find themselves in a position whereby previously communicated declinatures, for example, may come under scrutiny. However, the third party may only cure breaches of conditions requiring the insured to do something and in practice this is likely to be limited to fulfilling cooperation and notification provisions in the policy. Any declinature or remedies applied in reliance on non-administrative policy requirements, for example, misrepresentation, non-disclosure or breach of warranty, will prevail.
The true impact of the 2010 Act will become apparent in due course but one outcome may be that underwriters will seek a greater degree of company account information for more reassurance of the solvency of prospective insureds.
Further reading: Third Parties (Rights against Insurers) Act 2010