Insurance policies are typically looked on by potential claimants as a route to recovery where a party has become insolvent. The Third Parties (Rights against Insurers) Act 2010 (the 2010 Act) aimed to give parties further protection in this position, by enhancing the right to pursue insurers directly where the insured party has become insolvent.
The statutory background
In summary, the 2010 Act (and preceding legislation which it replaced) allows the insolvent insured’s rights under the insurance policy to be transferred to the third party, allowing them to pursue the insurer directly. This prevents the sums paid to the insolvent insured under the liability policy becoming part of the wider assets used to satisfy creditors, which would otherwise be the case.
Under the law, prior to the 2010 Act, a claimant would have to obtain a judgment against the insured in order to establish liability. Then, once established, the claimant could commence separate proceedings against the insurer (but sometimes without knowledge of the defendant’s insurance cover). The need to establish the insured’s liability before issuing proceedings against the insurer could involve restoring companies to the register as well as other applications to the court, creating additional procedural hurdles and costs. These problems led to the 2010 Act which aimed to remove some of these complexities. The modifications in the 2010 Act, which came into force in 2016, removed some of the costly and time consuming complexities and obstacles within the earlier Act, including:
- a claimant can now bring proceedings against an insurer without having to establish liability against the defendant first
- a dissolved company no longer needs to be restored to the register of companies
- a claimant is entitled to request details of the defendant’s insurance cover, allowing claimants to make informed decisions as to whether or not it is worthwhile pursuing a claim against the insurer; and
- although the insurer can rely on any liability defence the insured would have had against the insured, protections have been introduced to prevent insurers from avoiding claims for overly technical reasons.
The 2010 Act and adjudication
Of course, in construction disputes parties often adjudicate rather than litigate. So how does the Act help parties in adjudication?
In the case of Galliford (UK) Limited t/a Galliford Northern v. Markel Capital Limited (2003), a dispute arose between Galliford, the main contractor in the refurbishment of a hotel, and Michael Heal Associates (MHA), the structural engineers who had gone into voluntary liquidation but who had an insurance policy from Markel Capital. Galliford referred the dispute to adjudication and received a decision in their favour. Galliford argued that as MHA had been insured against its liability to Galliford, and the former had gone into liquidation, all of the insurance rights were transferred to Galliford.
However, prior to the 2010 Act, the third party had to establish the insured’s liability first through a declaration of the court, a settlement, or an arbitration award. The Court had to consider whether an Adjudicator’s award was enough. The Court said it was not and as such “proceedings were issued prematurely” as “liability under the policy is not established until the adjudication award is enforced by a judgment of the court or agreement” and therefore the case was dismissed.
Under the 2010 Act, the third party still has to establish the liability of the insured for the transferred rights to be enforced, but crucially, the claimant can begin proceedings against the insurer without liability being established first. Had Galliford been decided under the 2010 Act, therefore, it seems that proceedings would not have been premature and the case would not have been dismissed.
So, while pursuant to Galliford an Adjudicator’s award alone will not be enough to establish the legal liability of the insured party, if that party applied for summary judgment to enforce an Adjudicator’s decision, this should be enough to establish legal liability and put the third party into the position of the insured. Under the 2010 Act, this liability does not have to be established before proceedings are commenced against the insurer and so it seems that the insurer could be joined into the enforcement proceedings. While the insurer can rely on any defence the insured would have had, given the limited grounds to resist enforcement of an adjudication award, the potential defences are likely to be limited.
There are no currently reported cases adopting this approach. However, the position following Galliford and in light of the 2010 Act appears to support it. If endorsed by the court, it would be consistent with the 2010 Act’s approach to improving the rights of parties who have entered into contract with an insolvent insured party. Given the continued unfortunate frequency of construction insolvencies and the court’s adjudication workload, it will surely not be long before the court is asked to consider this question for real.
This article is from the March 2020 issue of Cornerstone, our monthly newsletter for those working in the construction industry.