The Third Parties (Rights Against Insurers) Bill (the “Bill”) will, if it becomes law, replace the existing Third Parties (Rights Against Insurers) Act 1930 (the “1930 Act”). The 1930 Act applies if a party with liability insurance (the “Insured”) has a liability to a third party and then becomes insolvent. The 1930 Act transfers the Insured’s rights under the insurance policy to the third party so that it can proceed directly against the insurers. Without the 1930 Act, the third party would, under the common law, simply have to join the other unsecured creditors and any funds obtained from insurers would be added to that pot.
On 31 July 2001, the Law Commission and Scottish Law Commission (the “Commissions”) published a report outlining the problems that people saw with the 1930 Act (which we summarise in further detail below) and their recommendations on how these could be resolved. The purpose of the Bill is to implement those recommendations.
The Commissions’ report identified a number of problems with the 1930 Act, the most significant being: the third party is required to establish the existence and amount of the Insured’s liability before it can issue proceedings against the insurer; the third party is required to proceed against both the Insured and the insurer, which could involve restoring the Insured to the register of companies; the 1930 Act has failed to keep pace with developments in company/insolvency law (in terms of the types of insolvent entities it covers); the 1930 Act does not cover certain types of voluntarilyincurred liabilities, such as legal expenses; the rules regarding disclosure of information to the third party are inadequate (since at present the obligation to provide disclosure does not arise until the liability of the Insured is established); and rights transferred to the third party are subject to any defences which the insurer could have used against the Insured, such as strict conditions within the policy requiring the insolvent person to perform some act in person.
The key innovations introduced by the Bill relate first to the procedure by which the third party’s rights can be established and, secondly to the process by which the third party can obtain information about the insurance policy. The Bill has the following key differences to the 1930 Act:
- The third party will no l onger have to establish the existence and amount of the Insured’s liability to it before it can issue proceedings against insurers. Where a third party is owed a liability by an Insured who is, or becomes, insolvent, the rights of the Insured against the insurers are automatically transferred to the third party. The third party can then issue proceedings against the insurers to establish both the Insured’s liability and the potential liability of insurers.
- Insurers may no longer rely on the strict interpretation of conditions in the insurance policy which require the insolvent Insured to perform some act in person. Further, insurers are unable to avoid a policy as a result of the Insured becoming insolvent or alter the rights of the third party (whatever its terms might say).
- Third parties may write to anyone, including insurers and brokers, to ask for information relating to any policies in place, and their terms, before the liability of the Insured is established.
- Voluntarily incurred liabilities, such as liabilities covered by legal expenses insurance, health insurance and car repair insurance will be covered by the Bill.
- The definition of an insolvent person is widened so that it now includes individuals; incorporated and unincorporated bodies; and certain trusts.
The Bill was introduced straight to the House of Lords (only the second time this has been done) on 23 November 2009 and had its second reading on 7 December 2009. This is part of a trial procedure designed to simplify the passage through Parliament as a result of recommendations from the Commissions. The House of Commons will review the Bill only once it has passed through the House of Lords. The timing for passing the Bill will depend on when the General Election is called. A late election may mean that the Bill is passed in 2010, whereas an early election may delay its passage until the following year.
The Bill, if it becomes law, may result in a speedier resolution of third-party claims against insurers, but it appears less certain that this will lead to costs savings. Third parties may proceed with claims against insurers where it may later turn out that the Insured had no liability to the third party, potentially increasing costs for insurers. Likewise, enhanced disclosure obligations to third parties may result in increased costs, but, conversely, may result in fewer frivolous third-party claims.