Lenders contemplating potential claims against insurers of insolvent professionals will welcome the fact that the Third Parties (Rights Against Insurers) Act 2010 (2010 Act) is to finally come into force from 1 August 2016, having been updated by the Third Parties (Rights Against Insurers) Regulations 2016.
This legislation will assist lenders who are looking to make an informed decision about whether to pursue claims against the insurers of insolvent professionals, such as valuers or solicitors. The 2010 Act improves upon the rights afforded by the 1930 Act of the same name, by allowing third parties to claim directly against the insolvent party’s insurer. The 2010 Act will also give potential claimants rights to access information from the outset which will help determine whether an insurance policy is likely to respond to a claim.
Difficulties faced by lenders under the 1930 Act
The 1930 Act provides a mechanism by which claimants can obtain the following from an insurer of an insolvent party:
- an indemnity under the policy, but only having first obtained judgment against the insured; and
- information about an insolvent party’s insurance.
It is however unclear whether the claimant first has to establish the liability of the insured in order to obtain the information referred to at (b) and this has been subject to judicial debate. In the Matter of OT Computers Ltd (In Administration), First National Tricity Finance Ltd v OT Computers Ltd (In Administration) [2004] EWCA Civ 653 Longmore LJ overruled previous authorities and held that establishing liability is not a pre-requisite. He noted that the Law Commission had decided that the position should be reversed in legislation. Ultimately this is what led to the 2010 Act.
It is also unclear precisely what information the claimant is entitled to under the 1930 Act. In the Re OT Computers case the claimant only sought disclosure of the policy document.
Consequently, under the present legislation, lenders frequently find themselves in the invidious position whereby they have a negligence claim against an insolvent professional but do not have clear rights to obtain information to establish whether there is insurance in place to meet the claim. They run the risk that if they embark on litigation it could prove fruitless. Often an insurer will decline cover for the professional without providing any reasons, leaving the lender in ignorance as to whether the decision to decline cover could be challenged.
The process the lender has to embark upon to obtain the required information and pursue the insurer direct is lengthy and costly. First, the lender has to incur the time and expense of obtaining a judgment establishing the insured’s liability. In the case of an insolvent company, the lender may first have to obtain the court’s permission to issue a claim and, if the firm is a company which has been struck off the register of companies, may have to apply to restore the company to the register. Once a judgment against the insured has been obtained a claim against the insurer can then be pursued. It may not be until this point that it transpires that cover has been exhausted or properly declined and the lender will have endured a pointless, costly battle.
The difficulties faced by lenders were highlighted in the case of Goldsmith Williams (a firm) v Travelers Insurance Company Limited [2010] EWHC 26 (QB). GW acted for a lender in two residential purchases and the borrower, Mr A, whose firm, J, acted in the purchase, stole the mortgage funds. J was a two partner firm and its insurer, Travelers, declined cover on the basis that the second partner, U, had condoned A’s dishonesty but it did not provide detailed reasons for the declinature. GW did not accept that U had been involved in the fraud and wished to challenge the insurer’s decision to decline cover.
The lender brought a claim against GW for the stolen mortgage funds, and assigned its claim to GW, who in turn obtained a judgment against J. J had entered insolvency proceedings and therefore, having obtained a judgment, under the 1930 Act GW obtained the right to pursue Travelers directly. The court found that the insurer’s decision to decline was justified as U had been engaged in separate mortgage fraud and was undoubtedly aware of the transaction in question and helped to facilitate it. GW’s claim therefore failed. GW had not been aware of this information prior to bringing proceedings against Travelers. The case demonstrates that a lack of information provided by insurers can result in lenders bringing fruitless claims.
Improvements under the 2010 Act
The 2010 Act makes some key changes which will assist lenders in future actions.
1. Removal of the requirement to first establish liability
A claimant suing an insolvent defendant will be able to pursue a claim against an insurer directly, without first having established the insolvent insured’s liability in separate proceedings. A lender will therefore be able to ask the court for a declaration regarding both the insured’s liability and the insurer’s potential liability under the insurance policy in the same action. This means the lender need only bring a single set of proceedings against the insurer and will be able to establish if there is insurance cover in place before having to proceed with the underlying claim. Beneficially, this also means the lender no longer has to restore an insolvent party to the register.
If the insurer does not accept the professional’s liability, the lender will still have to prove liability before enforcing against the insurers but the rights afforded by the 2010 Act give the lender the opportunity to consider coverage issues and any defences raised by the insurer at an earlier stage and before the considerable costs of establishing liability are incurred.
2. Access to information
The 2010 Act provides a new regime for the provision of information. A third party is entitled to request details about the insolvent party’s insurance cover before it decides whether to bring a claim, removing uncertainty and cost. A request can be made for details of:
- the identity of the insurer;
- the terms of the policy;
- the limit of cover;
- whether cover has been declined previously (and if so, details of any proceedings); and
- whether any aggregate indemnity limit has been eroded.
A response should be provided within 28 days, otherwise the third party can apply to the court for an order compelling compliance. The request for information can be made not only to the insurer but also to brokers, insolvency practitioners and former officers of the insolvent company.
This represents a welcome shift in the dynamic between third parties and insurers. Helpfully, it means a lender is now able to obtain information about coverage issues before going to the expense of establishing liability and pursuing a claim against the insurer.
3. Insurer not able to avoid cover for insured’s failure to provide information
Another improvement worth noting is that once liability has been established and a third party is seeking to enforce his rights under a policy, an insurer can no longer seek to avoid liability based on a failure of the insolvent insured to provide information and assistance to the insurer. The third party can fulfil any obligations under the policy itself to prevent the policy from being breached and declared void. This prevents insurers relying on purely technical defences to defeat a third party’s claim.
Is the 2010 Act the complete answer for lenders?
The 2010 Act only applies where there has been an event of insolvency in relation to the insured. Consequently, if insurance cover has been declined in relation to a professional who is not yet insolvent, in order to obtain information under the Act the lender will still have to obtain a judgment against the insured then enforce that judgment and put the insured into insolvency for nonpayment of the judgment debt.
Furthermore, there is no requirement under the 2010 Act for the insurer to disclose specific reasons for a refusal to indemnify, or the arguments advanced by the insured in response. A lender will still face difficulties reaching an informed view regarding the justification for the declinature. The information may become available during disclosure, or could be requested by way of a Request for Further Information after service of the defence, but to reach that stage of proceedings against the insurer, the lender will have had to incur significant costs – and therefore lack of information at an early stage remains a problem. This could be overcome if prior to proceedings the lender seeks pre-action disclosure but this could be costly if an application and hearing is required.
It should be noted that the 2010 Act will not apply to any current claims; the 1930 Act will continue to apply where the insured was subject to an insolvency procedure, or liability to a third party was incurred, prior to 1 August 2016.
The 2010 Act provides an easier route by which third parties, including lenders, can consider and bring claims against insurers following the insolvency of the insured defendant. Any legislation that prevents good money being thrown after bad and allows claimants to make better-informed decisions before embarking upon litigation should most definitely be welcomed.
Claimants have been waiting six years for this legislation to come into force. Lenders may be disappointed that it has taken so long, especially as the peak of lender claims against professionals during this cycle has largely passed.
However, lenders must consider its introduction to be better late than never, even if the information to be provided is not as wide as might have been desired.
