A recent judgment has reduced the limitation period for third parties to make direct claims against insurers under the Third Parties (Rights Against Insurers) Act 2010 when compared to claims under the predecessor 1930 Act. The decision will make it easier for insurers to defend such claims on limitation grounds.

Background

The Third Parties (Rights Against Insurers) legislation remedies a practical problem with liability insurance and insolvency law. A liability insurance policy provides an indemnity to an insured entity in respect of liability the insured incurs to third parties. When working as intended, an insurer can indemnify the insured and the insured can pass on any funds received to the third-party claimant to satisfy its liability. However, when an insured becomes insolvent any indemnity paid by insurers to the insured will disappear in the black hole of the insured's estate in insolvency. The third-party claimant is then left to claim, like any other creditor, for a share of residual assets, likely only receiving a small proportion of any policy proceeds.

To resolve this problem the Third Parties (Rights Against Insurers) Act 1930 introduced a statutory transfer of an insured's rights under a liability insurance policy directly to a third-party claimant. The transfer took effect once:

  • an insured's liability to the third party is incurred (which in professional negligence claims is often around the time the allegedly negligence advice is given); and
  • the insured enters certain statutory insolvency arrangements, such as liquidation.

Following this statutory transfer, the benefits of the insurance policy were taken outside of the insured's assets and liabilities to be shared amongst all creditors. Instead, the policy's proceeds were directly available to the third-party claimant.

A problem with the operation of the 1930 Act was that in order for a third party to successfully recover proceeds of a liability policy, it had to establish:

  • that the insured had a liability to it; and
  • that the liability in question was one that insurers were obliged to indemnify the insured for under the relevant policy.

Unfortunately, the 1930 Act provided no separate mechanism by which the third party could establish the insured's liability. As a result, the third party generally had no option but to pursue two sets of litigation – first against the insured in liquidation to establish the insured's liability and second against insurers to establish their liability under the policy.

This then created a further problem. Long-established insolvency law has determined that the limitation period for a claim within a liquidation is suspended once the company enters liquidation. So provided the claim would have been in time at the date the company entered liquidation the subsequent passage of time during the liquidation does not then cause the claim to become time-barred.

This principle only applies in respect of claims against a company within the insolvency. However, when a third party made a claim against an insured company in liquidation in order to establish the insured's liability, before then claiming against insurers under the 1930 Act, it was not clear whether that claim was:

  • within the liquidation – in which case it would benefit from the suspension of limitation from the date of the insured's liquidation; or
  • outside of the liquidation – in which case the usual limitation rules in respect of the claim against the insured would apply.

The answer to this question was important. For example, if an insured company gave negligent advice to a third party in 2000 in breach of contract and tortious duty, the primary 6-year limitation period would usually expire in 2006. As such, if the third party made a claim against the insured in 2010, that claim would likely be time barred and could be defended on that basis. However, if the insured company had entered liquidation in 2005 (before primary limitation expired) and if the third party's claim could be considered to be a claim within the insolvency of the insured, that limitation defence would fall away.

The Court of Appeal decision in Financial Services Compensation Scheme v Larnell (Insurances) Limited (in liquidation) [2006] answered the above question. It was held that a claim made by a third party against an insured company in liquidation made in order to establish the insured's liability and thus allow the third party to claim an indemnity from insurers under the 1930 Act was a claim within the liquidation. As a result, a third party could pursue a claim against insurers under the 1930 Act long after the usual limitation periods for bringing a claim against the insured had expired, provided that any claim against the insured would have been in time at the date of the insured's liquidation.

As a result, when faced with 1930 Act claims insurers are left exposed to potentially very long-tail exposures.

In 2016 the old 1930 Act was effectively replaced by a newer act, the Third Parties (Rights Against Insurers) Act 2010. Whilst operating in much the same way, the 2010 Act sought to overcome some of the practical problems of the old act. In particular, the 2010 Act no longer requires the third party to first make a claim against the insured to establish the insured's liability before it can then claim an indemnity under the insured's policy. Instead, the 2010 Act allows a third party to bring a single set of proceedings against insurers in which it can ask the court to determine both the insured's liability to it and the insurers' obligation to provide an indemnity for that liability.

Until recently, we did not know for sure whether claims under the 2010 Act would be subject to the same suspension of limitation on the insured's liquidation as was determined by Larnell in respect of 1930 Act claims.

The Decision

In a County Court judgment in August 2022 (Rashid and others v Direct Savings Limited and others) the court concluded that the principle established in Larnell does not apply to claims under the 2010 Act. 2010 Act claims can, said the court, be distinguished from Larnell, because unlike the 1930 Act, the 2010 Act allows the third party to make a direct claim against insurers and does not need the insured's liability to be established first by way of separate proceedings.

The decision in Rashid is only a County Court decision and so is not binding authority. Nevertheless, the decision also refers to 5 other (unreported) decisions in which the same conclusions have been reached. So, it seems the Courts are taking a consistent view on this issue.

As a result, insurers would be well within their rights to reject third-party claims to which the 2010 Act applies if those claims as against the insured are out of time. The third-party claimant cannot benefit from a suspension of limitation from the date of the insured's liquidation as they would in respect of a similar 1930 Act claim.

Take away

This decision is potentially very good news for defendant insurers. Claims under the Third Parties (Rights Against Insurers) Act 1930 could expose insurers to very long-tail liabilities due to the application of the decision in Larnell and the suspension of limitation on an insured entering liquidation.

It now appears that, under the Third Parties (Rights Against Insurers) Act 2010, Claimants will no longer be able to benefit from an extended limitation period simply because the insured has entered liquidation.

Defendant insurers should therefore review any existing third-party rights claims they are facing in case this revised view of limitation for claims under the 2010 act now provides them with a defence that previously was not apparent.

Conversely, claimant insurers pursuing subrogated recovery claims will need to ensure such claims are identified, and solicitors instructed, as early as possible to ensure limitation can be protected in the usual way.