Amendments to the Third Party (Rights against Insurers) Act 1930 are long overdue, so the reforming Bill currently being fast-tracked through Parliament, the Third Party (Rights against Insurers) Bill, should be welcomed by the insurance industry. In the words of the Ministry of Justice, it is intended to make it “… easier and less expensive to claim compensation from insolvent defendants”.
The 1930 Act was originally introduced to deal with insurance issues relating to motor claims in the 1920s. It introduced a cumbersome procedure to circumvent the common law requirement that any liability insurance payment made following a judgment against an insolvent insured had to be paid into the general pot of assets - for distribution to all creditors, not directly to the successful claimant. It required the third party to obtain judgment against the insolvent insured and then pursue the insurer, transferring the insolvent insured’s rights to the third party, to the exclusion of other creditors.
The new Bill streamlines this process, enabling third parties to sue insolvent defendants’ insurers directly, rather than first having to obtain judgment.
Under the present legislation, assuming there is no issue on coverage, insurers will deal with third party claims whether or not the insured is insolvent. Difficulties arise, however, where there are questions about coverage, a claim is repudiated or a policy avoided. An insolvent insured is unlikely to challenge the repudiation/avoidance, leaving the third party to make the running. The end result can be a full liability judgment against the insolvent insured and, subsequently, a claim from the third party for indemnity under the liability policy. Where the repudiation/avoidance is not upheld, insurers have little prospect of setting aside/varying the underlying judgment.
Assuming the Bill becomes law, insurers (and claimants) will benefit from the streamlined procedure. They will be able to involve themselves in the underlying liability directly with third parties, who will be able to issue proceedings in the normal way but also name insurers as defendants. Where there are policy issues to be resolved, these can be dealt with in the same proceedings, before liability judgment.
Prudent insurers already exploit existing procedural rules to be joined as an additional defendant and seek a declaration on coverage, as well as protecting their position in the underlying liability action. Under the reforms, an insurer will be routinely named as a defendant where its insured is insolvent.
The Bill also gives third parties rights to information about the insurance policy. Under the 1930 Act, this is not required until the insured is insolvent and judgment obtained. Early disclosure will promote the resolution of any contentious coverage issues direct between third party and insurer. Similarly, if the insolvent insured has been struck off the company register, it will no longer be necessary to restore the company, as third parties will have a direct right against insurers, without having to sue the insured.