After considerable delay the long-awaited Third Parties (Rights Against Insurers) Act 2010, having been amended by the Third Parties (Rights Against Insurers) Regulations 2016, is finally due to come into force on 1 August 2016. The delay was caused by the need to update the 2010 Act to reflect developments in insolvency law since the 2010 Act bill was first passed.
What does the 2010 Act do?
The 2010 Act has effectively provided an update to the Third Parties (Rights Against Insurers) Act 1930, which has protected the rights of claimants against insurers of the liabilities of defendants who were either insolvent or dissolved. Like the 1930 Act, the 2010 Act entitles a third party claimant to claim compensation from insurers of insolvent entities directly rather than having to claim through the insured and risk such sums paid out pursuant to a policy forming part of the insolvent estate. Without the 1930 Act such payments would potentially have to be shared amongst creditors of the insolvent estate.
Unfortunately for claimants, under the 1930 Act, a claimant had to usually commence proceedings against the insured and establish liability before bringing action against the insurer. Where a company was dissolved, this could even lead to either a claimant having to seek leave to proceed against an insured company in liquidation or the company having to be re-instated to the companies register in order for proceedings to be commenced.
The 2010 Act will, however, permit a third party to bring such proceedings directly against the insurer usually alongside an action against the insured - the third party still needs to establish the insured is liable before being able to enforce recovery from the insurer.
Key highlights of the 2010 Act include:
- The insured party’s primary liability to the third party can now be determined alongside an action for an order that the insurer pay any damages awarded, removing the cumbersome two-step process with a view to cutting down the time taken to recover funds.
- The definition of qualifying insolvency events has been expanded and all types of insured parties are covered.
- Provided that the insured is subject to an insolvency procedure in the UK, the Act will apply (regardless of the governing law of the dispute between the insured and the third party, the residence of any of the parties involved, the governing law of the insurance policy and the place where payments have to be made under the insurance).
- If it can be established that there is a contract of insurance that covers, or might reasonably be expected to cover, the supposed liability, information can then be obtained from both the insured and the insurer including:
- The identity of the insurer
- The terms of any insurance policy including whether there is an aggregate limit of indemnity
- Whether there have been any proceedings between the insured and the insurer and if so, what the outcome was
- Whether there are any fixed charges which would apply to any sums paid out under the policy to which the liability related to
- A party receiving such a request for information is obliged to provide the same within 28 days of receipt or details of any other person who may be able to do so. Noncompliance may result in a court order compelling compliance. This should enable a third party to make an informed decision on whether or not to commence or continue action limiting speculative claims.
- The rights transferred to the third party will continue to be subject to the defences which the insurer could have used against the insured with three exceptions:
- Anything done by the third party, which, if done by the insured, would have amounted to, or contributed to, fulfillment of the condition is to be treated as if done by the insured.
- Insurers can no longer rely on a defence of breach of duty to provide information, where the insured is:
- An individual who has died, or
- A body corporate that has been dissolved.
- (With the exception of marine insurance) insurers can no longer rely on “pay first” clauses.
How will it work in practice?
In reality, it has long been practice for insurers to defend any claim brought by third parties against the insured alongside the main proceedings. The 2010 Act is intended to reflect this and to simplify the process by adding a degree of efficiency.
It remains to be seen whether the 2010 Act will affect the day-to-day practice of insurers and potential claimants although we are probably likely to see the following trends:
- An increase in the number of claims brought by third parties against insurers as the process for obtaining payment from insurers has become streamlined, quicker and cheaper and therefore more accessible. Consequently, there may well be a decrease in unnecessary court proceedings due to the removal of the two step process.
- There will be less applications to restore dissolved companies to the companies register given that it is no longer required to commence proceedings.
- Insurers performing in depth reviews and being more vocal in defending the initial claims brought against the insured by the third party as the insurer will no longer be presented with a fait accompli for liability.
- An increase in requests for information from insurers which, although come with associated costs and administrative burden of dealing with such requests in the short timeframe allowed, will in turn perhaps decrease the speculative claims issued.
Ultimately this is a welcome but overdue amendment to what was an inefficiency in the way claims against insurers were brought where the insured was in a form of insolvency process or had been dissolved.