With the Insurance Act 2015 receiving Royal Assent on 12 February 2015, we take a look at the consequential amendments to the Third Parties (Rights Against Insurers) Act 2010 (the “2010 Act”). These amendments were aimed at rectifying the failure to include certain insolvency circumstances in the original 2010 Act (which due to these defects was not brought into force after Royal Assent) and it is hoped that the act may finally come into effect by autumn 2015.
The aim of the third parties legislation was to assist a third party who has a claim against an insolvent person or company where that claim is insured. The Third Parties (Rights Against Insurers) Act 1930 and the Third Parties (Rights Against Insurers) Act (Northern Ireland) 1930 (the “1930 Acts”) represent the third parties legislation currently in force. However, the 1930 Acts are often considered to be prohibitively complex in the procedures that need to be followed; requiring, for example, an application to be made to the court to restore a dissolved insured company to the Register of Companies in order to establish liability and bring a claim against it. This can add to both the cost and time taken for the third party to obtain relief under the 1930 Acts.
Changes brought about by the 2010 Act
The new 2010 Act (which is yet to come into force) simplifies the process by permitting a third party to bring a claim directly against the insurer, without having to restore the insolvent company to the registry. In doing so, this prevents circumstances in which insurance monies are paid to the insolvent insured (and subsequently divided amongst the general creditors as part of insolvency proceedings) rather than to the intended beneficiaries of an insurance policy. An example of which would be where, without the 2010 Act, an employer has taken out liability insurance to protect its employees injured at work and then becomes insolvent. An insurer would pay any claims money to the insolvent insured and not the injured employee (thus undermining the government policy for compulsory employee liability insurance).
In addition, the 2010 Act gives claimants more rights to establish whether a company has insurance before issuing a claim. Both changes help save time and costs.
Problems with the 2010 Act and how they have been rectified
Whilst the 2010 Act has received Royal Assent, further scrutiny of the provisions which took place after Royal Assent identified that it would no longer achieve the desired outcomes because new forms of insolvency had been introduced in the interim, but not included in the drafting.
In order for the 2010 Act to apply, an insured must: (1) incur a liability to a third party for which they have insurance; and (2) be or become a relevant person within the definition of the 2010 Act.
A relevant person was defined as the insured being subject to a number of specified insolvency events contained in Sections 4 to 7 of the 2010 Act. No general insolvency procedures are included in this list and therefore this prescriptive provision did not include several new insolvency procedures. In short, the 2010 Act was out of date before coming into force.
Amendments were required to correct this defect and represent the intention of third parties legislation i.e. that the legislation should apply to an insured where it has lost the effective power and control over its assets, whether this is due to insolvency, dissolution or any other analogous event.
The Insurance Act 2015 included the necessary amendments to the 2010 Act. The amendments specifically insert two new insolvency procedures to include Debt Relief Orders in Northern Ireland (which only came into force after 2010) and capture all forms of administration (as previous drafting only included an administration order obtained through a court order, where in reality companies can also be put into administration by the holder of a floating charge or by the directors of the company itself).
The 2010 Act also permits the Secretary of State to add or remove insolvency circumstances (if approved by both Houses of Parliament). This ensures that in such a fast paced area of law as insolvency law, the 2010 Act should be able to keep up. In addition, the amendments aim to deal with long-tail liabilities, such as mesothelioma which may have a latency period of up to 50 years. Here, the changes mean that any insured which became insolvent in the past under previous legislation is included within the scope of the 2010 Act (albeit that this is only the case where the insured incurs a liability after commencement, otherwise the 1930 Acts will still apply).
The Law Commissions of England and Scotland (whose recommendations are implemented by the 2010 Act) have expressed hope that the regulation making power afforded under the 2010 Act will be used to add further insolvency events in due course. Whether this will be achieved this year remains to be seen. In the meantime, it is hoped the 2010 Act will be brought into force in autumn 2015.