A key question in any litigation, especially in the current economic climate, is whether the defendant can satisfy a judgment. Where the defendant is both insolvent and insured a further issue is whether the claimant can ultimately recover payment from the insurer. This may be possible under the Third Parties (Rights against Insurers) Act 1930 but there are a number of significant hurdles for a third party to overcome before it can benefit from the application of the Act. Reform in favour of third parties has long been proposed, and a draft Bill was introduced to the House of Lords on 23 November 2009. A second reading took place on 7 and 9 December 2009 but it is uncertain whether there remains enough time in the current parliamentary term for this Bill to become law.
In the ordinary course where a party that carries liability insurance incurs a liability to a third party the insured party will make a claim on its insurance policy in respect of the liability and use the insurance proceeds to satisfy the third party claim. In circumstances where the insured becomes insolvent before the third party is paid any insurance proceeds, however, those proceeds would simply become part of the insured's general assets for distribution to creditors. As a result the third party claimant for whom the money had in reality been earmarked would be confined to proving as an unsecured creditor in the bankruptcy or liquidation for his loss. The Third Parties (Rights against Insurers) Act 1930 (the "1930 Act") seeks to deal with this problem by effecting a statutory transfer of the insured's rights against its insurer to the third party. The operation of the 1930 Act has, however, come under criticism as it can be an expensive and time consuming process for third parties to pursue a claim under it. The Third Parties (Rights against Insurers) Bill (the "draft Bill") that was recently introduced to the House of Lords seeks to address these criticisms.
Set out below are details of some of the key changes that the draft Bill proposes introducing.
Under the current 1930 Act regime it is necessary for the third party to have established a liability against the defendant insured before the third party can proceed directly against the insurer. Accordingly, two sets of proceedings may well be required – first against the insured to establish liability and secondly against the insurer to establish coverage – necessarily adding to the time and cost that will be incurred. In addition a third party might obtain judgment against the defendant insured only to find subsequently that the insured has no relevant insurance cover available or that the cover has been invalidated such that the judgment is effectively worthless. The current process is also unsatisfactory from an insurer's point of view. There is authority (albeit weak) to suggest that where an insurer defends proceedings brought by a third party against the insured (using their right under the policy to take over the conduct of proceedings) they may be estopped from pleading policy defences in subsequent proceedings brought under the 1930 Act directly against them.
The Bill removes the need for two sets of proceedings by allowing a third party to proceed directly against the insurer as soon as the insured is the subject of an insolvency event (see below) and resolve issues relating to both the insured's liability and policy coverage in those proceedings. The insured is not required to be a party to those proceedings although he must be informed of their existence. In addition the insured can apply to be joined as a claimant (if the insured has a claim under the policy over and above the liability in question, for example in respect of costs) or as a defendant which may be necessary in cases of professional misconduct claims where the insured has a reputation to defend. In addition the third party can join the insured as a defendant if there is an element of uninsured loss that the third party wishes to pursue.
This procedural change has clear benefits in terms of time and cost and recognises the reality of the situation in that it will generally be the insurer that defends the claim against the insured in any event. There are two other clear benefits to a third party to this change in approach. First, in the event that the insurer is unsuccessful in defending the proceedings the third party will be entitled to claim its costs against the insurer. Currently insurers are very rarely a party to the proceedings between the third party and the defendant insured in relation to liability even though insurers generally control those proceedings and the proceedings are being run largely for the insurer's benefit. In the event of the third party succeeding in its claim against the insured it will have to rely on the operation of section 51 Senior Courts Act 1981 (which has been interpreted to allow a successful litigant to claim costs from a non-party in exceptional circumstances) in order to claim costs from an insurer. Secondly, this procedure sidesteps the problem of companies which have been struck off the register. Under the 1930 Act, where a company has been struck off before a liability has been established against it the third party has to apply to Court to restore the company to the register before it can proceed against it to establish the necessary liability, resulting in further wasted time and cost.
- Rights to Information
As well as providing for the transfer of the insured's rights under the policy the 1930 Act allows the third party access to certain information regarding the insured's policy position. The question of when the third party should have the right to this information has been the subject of a number of judicial decisions which have sought to interpret the wording of the 1930 Act. Recently the Court of Appeal in Re OT Computers Limited (in Administration)  EWCA Civ 653 (as to which see our earliere-bulletin) has interpreted the 1930 Act to grant the third party access to certain information on the insolvency of the insured rather than having to wait until a liability is established. The situation, however, remains somewhat unsatisfactory.
The draft Bill clarifies the position and provides that a third party can have access to information in relation to the insured's insurance position as soon as the insured becomes insolvent. The third party's rights to information are more extensive than under the 1930 Act and the procedure for accessing that information more structured under the draft Bill. In particular a third party can request information from parties other than the insured and the insurer which, most significantly, will cover brokers. The third party can obtain access to this information before commencing proceedings against the insurer in order to make an informed decision whether or not to proceed with the claim.
- Defences available to insurers
As the 1930 Act operates as a statutory assignment of the insured's rights under the policy the basic rule is that the third party cannot be in a better position vis-a-vis the insurer than the insured himself would have been. Accordingly any defence which could have been pleaded by the insurer against the insured can be pleaded against the third party. This remains the position under the draft Bill. However, the Bill removes some of the more technical defences on which insurers have previously been entitled to rely. In particular:
- Insurers can no longer rely on breach of a condition of the policy by the insured where the third party has fulfilled that condition.
- Insurers cannot rely on a breach of a duty to provide information or assistance where the reason that the condition has not been complied with is that the insured company has been dissolved.
- Insurers can no longer rely on "pay first" clauses which require the insured to have paid out in respect of a liability before the insurer has a liability. The current use of these clauses effectively excludes the operation of the 1930 Act. There remains an exception as regards "pay first" clauses in respect of marine insurance.
- Insolvency Events
The draft Bill has updated the lengthy list of qualifying "insolvency events" in order to bring it up to date with developments in company and insolvency law. This includes providing for rights to be transferred to a third party where an insured is facing financial difficulties and enters into certain alternatives to insolvency such as voluntary arrangements between the insured and its creditors.
The draft Bill also clarifies a number of uncertainties the existed in relation to the scope of the 1930 Act. In particular:
- The uncertain extra territorial effect of the 1930 Act is resolved. The draft Bill provides broadly that it will apply in circumstances where the "insolvency event" occurs in England irrespective of the (i) governing law of the contract; (ii) the domicile of the parties; or (iii) the governing law of the dispute between the insured and the third party.
- The new Act will apply to voluntarily incurred liabilities such as legal expenses in the context of legal expenses insurance.
- The insurer's right to set off money owed by the insured under the policy (for example by way of premium) from any proceeds due under the policy is affirmed. The law as it currently stands on this issue is unclear as there are conflicting decisions interpreting the 1930 Act.
The proposed reforms will certainly improve the position of third parties and should make the procedure under the new Act more effective and less burdensome for third party claimants. The new Act will remain, however, relatively insurer friendly. Policy cover can still be defeated by a pre-insolvency breach of the policy terms by the insured which the third party may be unable to remedy.
The access that a third party will have to information regarding the defendant insured's insurance position is much improved. Third party litigants will no doubt use these improved rights to make an increased number of requests for information. Whilst these requests may fall primarily on insurers, it would be surprising if brokers do not also receive a substantial number of requests, particularly in the London market where brokers have prepared the policy wordings. The administrative burden associated with this process will be substantial.
On balance, however, it is to be hoped that the improved rights to information will be beneficial to insurers, insureds and third parties alike as it should reduce the number of speculative claims brought against insureds. It is worth noting, however, that in reality the improved rights to information will have their limitations. In circumstances where an insured is not insolvent but is on the verge of solvency or where a judgment against the insured will certainly put the defendant insured into insolvency the third party claimant has no more right to information regarding the insured's insurance position than any other litigant.