Prior to 1930 if an insured person/company (insured) incurred a liability to a third party (TP) but then became bankrupt/passed into liquidation any monies paid out under the insurance policy was paid to the Trustee/Liquidator for the benefit of ALL creditors.
The Third Parties (Rights Against Insurers) Act 1930 (1930 Act) transferred the insured’s rights against the insurer under certain circumstances to the TP who could pursue the insurer against the policy proceeds once the insured’s liability was established. So the policy proceeds may benefit the TP and not all creditors.
The Third Parties (Rights Against Insurers) Act 2010 (2010 Act) comes into force on 1 August 2016 and makes some welcome changes.
Extension of “Insolvency”
Under the 2010 Act the rights of the insured under the policy is transferred to the TP if the insured is already “relevant person” when the liability is incurred. The relevant person now includes for individuals: County Court Administration Orders; Debt Relief Orders as well as bankruptcy; and for company/unincorporated bodies this now includes Voluntary Arrangements; Administration Orders; the appointment of a receiver/manager; Voluntary Winding Up; and the appointment of a provisional liquidator under the Insolvency Act 1986, as well as liquidation.
There is no longer a requirement to establish liability against the insured before commencing proceedings against the insurer directly. Also, TP may ask the Court for declarations as to both the insured’s and the insurer’s liabilities. The declarations will bind the insurer but not the insured unless made a party to the proceedings. There are provisions for this. Importantly, there is no longer a need to restore a company struck off the register of companies and there are similar rules for claims brought in arbitration.
Under the 1930 Act the main difficulty was obtaining information about the identity of the insurer and the extent of the cover. Under the 2010 Act this widens the category of people who can be asked to provide information to the insured or any person who is able to provide it, which is likely to include insurers, brokers and other people holding the policy information; and requires the insurers to provide detailed information about the policy coverage prior to the issue of proceedings; both within 28 days of any request. There is a sanction of a Costs Order in later Court proceedings if the requests are not complied with.
The TP will be in no better position than the insured under the general law on the terms of the insurance policy. The insurer can rely upon its rights if the insured made any material non-disclosure or misrepresentation when taking out the cover or if it has breached a warranty or condition precedent in the policy; it can also rely upon other policy terms; the indemnity limit; and the excess applied. The insured retains defences of limitation and contributory negligence but the insurer can no longer rely upon defences such as “pay first” clauses (except for death or personal injury in a marine policy); and the failure of the insured to provide assistance.
The 2010 Act will not apply to re-insurance.
All in all, the 2010 Act makes some welcome changes to enable claims of this nature to be more easily pursued, reducing the costs of litigation.