2016 is turning out to be a year of significant reform of insurance law. The Insurance Act comes into force on 16 August 2016 and now we know that the Third Parties (Rights against Insurers) Act 2010 will finally come into force on 1 August 2016, having been updated by the Third Parties (Rights against Insurers) Regulations 2016.
The 2010 Act is intended to address some of the shortcomings of the Third Party (Rights against Insurers) Act 1930 in order to make it easier for third party claimants to bring direct actions against insurers where an insured has become insolvent. The principal changes are as follows:
- As with the 1930 Act, the 2010 Act will allow third parties to bring proceedings directly against insurers when the insured is liable to the third party but has become insolvent. However, the third party will no longer need to "establish" the insured's liability to it first. This was perceived to be a key shortcoming in the 1930 Act because a third party claimant first had to establish liability, usually by obtaining judgment, before being able to pursue the insurer. The 2010 Act will allow the third party to litigate the substantive claim against the insured in tandem with an action for an order that the insurer pay any damages awarded.
- The 2010 Act allows a third party who believes he has a right of action under the Act to obtain information about the rights transferred both before and after the issue of proceedings. 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 on the identity of the insurer, the terms of any insurance including whether there is an aggregate limit of indemnity and whether there are any fixed charges which would apply to any sums paid out.
A person who receives a notice requesting information is obliged, within 28 days, to provide as much of the information specified as they can "without due difficulty" and if it cannot be provided, state why and provide details of any other person who might be able to supply it. Failure to comply with a notice requesting information permits the third party to apply to the court for an order compelling compliance.
In addition, the third party may request information from any person that he or she reasonably believes could provide the information (eg, brokers).
- Further, the Regulations bring the 2010 Act up to date by widening its list of qualifying insolvency events and covering all types of insureds (and not just individuals and companies as was previously the case). The Act also confirms that, provided the insured is subject to an insolvency procedure in the UK, the 2010 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).
- Like the 1930 Act, the 2010 Act does not apply to liabilities under reinsurance contracts.
The driving principle behind the Act is that it will allow third party claimants to make informed decisions on whether or not to commence or continue litigation, helping them understand whether a defendant has insurance which will respond to their claim. The 2010 Act retains the general approach of the 1930 Act that the rights transferred to the third party will be subject to the defences which the insurer could use against the insured (eg breach of a warranty or condition precedent). However, third party claimants will be apprised of any such defences at a much earlier stage, without having had to incur the costs of establishing the liability of the insured.
Implications of the 2010 Act
Potential consequences of the Act are as follows:
- An increase in the number of claims that are brought by third parties against insurers as the process for obtaining payment from insurers has been made simpler, quicker and less expensive.
- A theoretical reduction in the number of issued claims because the 2010 Act allows for a single set of proceedings to resolve both the insured's liability to the third party and the insurer's liability in relation to the third party's claim. This, in turn, should lead to a reduction in legal costs for third parties and insurers and a saving of Court time.
- From the insurers’ point of view, they will now be made a party to the proceedings at an earlier stage and will have the ability to conduct the defence of the claim, rather than being presented with a judgment which must be paid, which was sometimes the position under the 1930 Act (subject to the availability of coverage defences). The process of analysing and defending/paying claims involving insolvent companies should be streamlined from the insurers’ point of view, which should lead to savings.
- However, there may be an increased administrative burden placed on insurers who are likely to have to deal with more requests for information from third parties. The time limit for compliance is relatively short so insurers’ procedures for responding to such requests will need to be reviewed and properly implemented to avoid having to deal with Court orders obliging compliance with requests.