After years of delay, on 1 August 2016, the Third Parties (Rights against Insurers) Act 2010 will be brought into force in the United Kingdom, making it easier for a party with a claim against an insolvent business to bring the claim directly against the insurer of that business.
Most businesses have liability insurance of one type or another, whether because such insurance is mandatory by law, a requirement of an industry regulator, or simply good business practice to provide protection in the event of a large claim. Employers’ liability, professional liability, and public liability are the main categories, and each provides insurance coverage to businesses in respect of certain types of claims made against them by third parties.
The reality of liability claims is that, if they are covered by an insurance policy, it is the insurer that will ultimately pay for any damage (subject to policy limits and excesses), and that often directly controls the defence of a claim.
Many decades ago, a problem was identified with claims brought against businesses that had insurance but that were (or were about to be) insolvent. Although payment by insurers was in respect of liability to a third party, the sum would first (technically) pass to the insured. If the insured was insolvent, under usual insolvency principles, the insurance proceeds would become a general asset of the business to be divided amongst creditors, meaning that the injured third party would recover only a portion of its claim.
The Third Parties (Rights against Insurers) Act 1930 was a well-intentioned piece of legislation that sought to address this problem. It clarified that insurance proceeds in the situation outlined above would become the property of the third party that had suffered the loss. It also allowed the third party to proceed directly against the insurer.
THE 2010 ACT
Over time, difficulties were identified with the precise regime introduced by the 1930 Act. The third party was required to prove its liability in separate proceedings before it could bring a claim against the insurer. If the insured was a company that had been dissolved, that required the third party to take the additional step of restoring the company to the register before those proceedings could be commenced.
It was also difficult to find information regarding any insurance. The concern here was that, in some circumstances, third parties that had valid claims against insurers were not in a position to pursue those claims, simply because they did not have any information about the insurance. On the other hand, there was a clear risk to anyone commencing an action against an insolvent business without a proper understanding of the insurance coverage.
The 2010 Act was the product of a Law Commission review into this subject. The passing of the 2010 Act did not, though, bring immediate relief to third parties. Problems were identified in the drafting of the legislation, and the government was unable to find time to rectify those issues until the passing of the Insurance Act 2015. With the deficiencies remedied, the 2010 Act will now come into force on 1 August 2016.
THE NEW REGIME
The 2010 Act makes it easier for a third party to bring a direct claim against an insurer. Although the liability of the insured still needs to be proven, it is no longer necessary to do so in separate proceedings. A single claim can deal with both the liability of the insured to the third party, and the liability of the insurer to the insured.
It is important to remember that a third party will not be put in a better position than it would have been in had the insured been solvent. The insurer can rely on any defence the insured would have had in the claim by the third party. The claim will also be subject to any policy limits or excesses. Further, the insurer retains policy defences, such as for breach of pre-contract duties to provide information or breach of terms (although note how these defences will change when the Insurance Act 2015 is implemented on 12 August 2016—see our November 2015 LawFlash, “Insurance Act 2015 Reforms—What Does It Mean for Policyholders?”).
That said, there are some limited exceptions designed to assist third parties. Conditions requiring the insured to provide information or assistance will not affect the third party’s claim if the reason for the failure to fulfil the condition is that the insured is an individual who has died or a body corporate that has been dissolved. Any other condition that requires an insured to do something (for example, to notify the claim) will be treated as fulfilled if the third party does that thing.
From 1 August, a third party will also be in a more favourable position in terms of obtaining information about any relevant insurance. If the third party reasonably believes that another party has information regarding the insurance, it can make a written request for certain types of information. Most notably, requests can be made to insurers or insurance brokers.
A response to a request must be provided within 28 days (even if it is to say that the party has no information). If a response is not received within that timeframe, the requesting party can apply to court for an order requiring compliance with the request.
Finally, it should be noted that the 2010 Act does not apply to reinsurance.
A valid claim is only as good as the assets standing behind the defendant. Succeeding in a litigation or arbitration—only to find that it is impossible to enforce that claim due to the insolvency of the defendant—is the very essence of a pyrrhic victory.
The Third Parties (Rights against Insurers) Act 2010 provides some assistance to a party that has a claim against a business with solvency issues. Plainly there are still many additional hurdles faced by a third party claiming against an insurer, as compared with a claim against a solvent entity. As well as spending time and money seeking to find information on the insurance in the first place, it will be necessary to show that the claim falls within the scope of the policy and that there are no policy defences available.
On the whole, however, we suggest that the changes are to be welcomed. In the correct circumstances, the insolvency of a defendant does not necessarily mean the end to the value in pursuing a claim.