At a time when, globally, insured businesses are under severe financial strain, the availability and extent of their insurance assets take on a new significance. It is significant not just for troubled businesses and their insurers, but also for third parties with potential or actual claims against those businesses.
An insured may, for example, notify under a professional indemnity or other liability insurance in response to a third party claim. But if the insured goes into some form of insolvency process, will any insurance proceeds (or the right to those proceeds) form part of the insolvent estate?
In many jurisdictions, that is the case and it would leave the third party claiming on the insolvent estate in competition with other creditors. In other jurisdictions, however, the law instead affords the third party more direct access to the insurance proceeds.
The UK falls under the latter category, based on the Third Parties (Rights against Insurers) Act 1930 (the “1930 Act”) and the Third Parties (Rights against Insurers) Act 2010 (the “2010 Act”).
The 1930 Act
The 1930 Act allowed, broadly, for third party claimants to step into the shoes of the insolvent insured, by way of a “statutory assignment”, and seek direct recourse against any relevant liability insurer.
One obvious practical weakness inherent in this scheme, however, was that the claimant still needed first to “establish” the liability of the insolvent business (whether by way of court judgment, arbitration award or commercial settlement) before any right to recover from insurance arose, requiring thereafter, additional proceedings against the insurer(s). The process could in practice be daunting. In the case of a previously dissolved company, the claimant might have to take steps to restore the insured to the register of companies and to obtain the leave of the court to start proceedings against it. Further, unless and until establishing the insured’s liability, the claimant could not even obtain information relating to potentially relevant liability insurance cover.
The 2010 Act
The 2010 Act (which came into force on 1 August 2016) addressed the more obvious deficiencies.
First, it allows third party claimants to obtain advance information on any liability insurance cover and therefore to assess the commercial benefit, or otherwise, of pursuing a claim. The right to request information from any party, including brokers, is based on the reasonable belief of the claimant that the insured has incurred a liability to it (and is insolvent) and that there is insurance that may respond to the claim. Absent any challenge to such “reasonable belief”, under the 2010 Act the recipient of the request should respond within 28 days, failing which the third party can apply to court for an order for the information to be provided.
Second, the 2010 Act allows the third party to bring a claim directly against the insurer without even joining the insolvent insured as a party (although it must be the subject of formal insolvency proceedings). In effect, a single action can be brought to establish both the insured’s liability to the claimant and, then, the insurer’s liability to pay. Once the third party proves that the insurer is liable, or potentially liable, it can ask the relevant court or arbitral tribunal for a declaration to that effect. Such a procedure in principle benefits both the third party and the insurer (and, indeed, the representatives of the insolvent estate) in terms of procedural, including costs, efficiencies.
The limitation “trap” in the 2010 Act
Insurers and their representatives have recently focused, however, on certain matters flowing from those same reforms that are potentially more troubling to third parties claiming against certain insolvent insureds.
Under English law, time stops running for limitation purposes at the commencement of a liquidation, but the same does not apply in the case of an administration, for instance.
In Financial Services Compensation Scheme v. Larnell (Insurances) Limited (in liquidation), the English Court of Appeal had decided that a claim made by a third party against an insured company in liquidation was, for the purposes of any subsequent 1930 Act claim against a liability insurer, a claim “within” the liquidation.
Under the former regime, the third party therefore benefitted from the suspension of the limitation period from the date of the liquidation and could pursue the insurance claim long after the “usual” limitation period would have expired as against the insured. The only caveat was that the claim against the insured would have had to have been “in time” (that is, not already time-barred) at the date of the insured’s liquidation.
The potential for “long-tail” exposures continued to trouble insurers, but the 2010 Act offered an alternative argument.
Whereas, under the 1930 Act, the underlying cause of action was against the insolvent insured, the 2010 Act operates differently; when the insolvency event occurs, the third party claimant accrues a direct right against the insurer to seek a declaration of liability, i.e., the statutory assignment occurs at an earlier stage (under Section 1(2) of the 2010 Act). Therefore, the third party’s 2010 Act claim does not fall “within” the liquidation.
As a consequence, in Rashid v. Direct Savings Ltd.  8 WLUK 108, District Judge Gosnell (sitting in the Leeds County Court) recently ruled that any limitation period impacting on the third party’s claim against the insured also continues to run in relation to claims against the liability insurers under the 2010 Act scheme. There is therefore no “pause” when a company goes into liquidation.
While the district judge acknowledged that “It may be that an unintended effect of these changes is that the pause on limitation first recognised in Larnell would no longer be available to a claimant”, he added that “it would be unwise to assume that this was seriously considered by the [2010 Act] drafting team”. He therefore refused an application for permission to appeal, but it is understood that a number of other applications for permission dealing with this important limitation point have been lodged with the Court of Appeal.
In the meantime, the clear practical lesson for claimants that are considering claims against insolvent insureds is to identify the limitation period as a matter of priority and to seek information regarding the scope of any available liability insurance cover.