On Thursday the Ministry of Justice published a written ministerial statement concerning the commencement of the Third Parties (Rights against Insurers) Act 2010. The Act received royal assent over three years ago, in March 2010, but its implementation has been repeatedly pushed back and the Act is not yet in force.
In this latest statement the government has said that the Act will not be implemented until legislation has been passed to introduce amendments, principally to extend the scope of the Act to insured companies entering into administration without a court order. It now seems unlikely that the Act will come into force before 2014 at the earliest.
The 1930 Act
When implemented, the 2010 Act will replace the Third Parties (Rights against Insurers) Act 1930. For the present, however, the 1930 Act remains in force.
The 1930 Act allows a third party with a claim against an insured person to claim against that person’s insurer as well, usually because the insured has become insolvent. Under the common law, the third party would only be able to claim against the insolvent insured and join the group of general creditors in the hope of recouping some of the claim.
The 1930 Act provides for the transfer to the third party of the insured’s right to proceed against the insurer, in other words the third party steps into the shoes of the insured. It follows that all the terms of the insurance policy apply and that the insurer is able to rely on any defences that would have been available against the insured.
The 2010 Act
The key changes introduced by the Third Parties (Rights against Insurers) Act 2010 are:
- Most significantly, the third party will be able to issue a claim against the insurer without first obtaining a judgment against the insolvent insured. It should be noted, however, that the liability of the insured to the third party will still need to be established before the rights under the insurance can be enforced against the insurer.
- The Act clarifies that third parties will be able, where the third party reasonably believes that a person is liable to it and that that person has insurance where the right to claim has transferred to the third party, to serve a notice on the insurer requesting certain information relating to the insurance. This will include whether the insured has been informed that the insurer does not consider that there is a liability to pay the claim under the policy. Requests for information will have to be answered within 28 days.
- Three restrictions to the defences currently available to insurers will be introduced: (1) the third party will be able to fulfil the conditions of the insurance policy in place of the insolvent insured so that the insurer will not be able to rely on non-performance of the insured as a defence; (2) the insurer will not be able to rely on breach of a condition to provide continuing information if the insured has been dissolved or, if an individual, has died; and (3) if there is a pay-first clause this will not generally affect the third party’s rights.
- The 2010 Act reflects the changes in insolvency law by widening the definition of insolvent company to include companies subject to company voluntary arrangements and schemes of arrangement with creditors. The amendments that the government now intends to introduce will widen the ambit of the Act still further.
- The third party will be able to pursue the insurer without first restoring a dissolved insured to the register of companies.
The changes that will be implemented by the 2010 Act will be beneficial to third parties seeking to claim directly from liability insurers in insolvency situations. Significantly, it will be possible for third parties to bring one set of proceedings to establish both the liability of the insured to the third party and the liability of the insurer under the policy. Insurers and brokers should be prepared for an increase in requests for information under the Act.
It is unlikely that the 2010 Act will be implemented until at least 2014. The Ministry of Justice statement issued last week states that legislation to amend the 2010 Act will be introduced “when parliamentary time permits” and that the Act will then be brought into force “as soon as reasonably possible” after the amendments have been passed. No indication of when this will be has, however, been given and the position remains that claims by third parties continue to be subject to the provisions of the 1930 Act.