This briefing is the first in a series of 3 briefings about the Third Parties (Rights Against Insurers) Act 2010 which we will be publishing over the next fortnight.
The pros and cons every claims professional needs to know – part 1
The Third Parties (Rights against Insurers) Act 2010 (2010 Act) is finally due in force on 1 August 2016. The 2010 Act is intended to address some of the shortcomings of the Third Parties (Rights against Insurers) Act 1930 (1930 Act) and will make it easier for third party claimants to bring claims against an insurer when an insured has become insolvent.
One of the key aspects of the 2010 Act is that it removes the need for multiple sets of proceedings by allowing the third party claimant to issue proceedings directly against the insurer and resolve all issues (including the insured's liability) within those proceedings. The third party will have the choice of using either the new method of single proceedings established by the 2010 Act, or the existing method of first establishing the liability of the insured before initiating proceedings against the insurer.
The Act also removes the need for restoring defunct bodies to the companies register who have been struck off it.
Finally the 2010 Act improves the third parties' rights to information about any insurance policies, allowing the third party to obtain information at an early stage about the rights transferred to it in order to enable an informed decision to be taken about whether or not to commence or continue litigation.
In summary: The pros and cons for insurers
Click here to view the table.
The 2010 Act explained in detail
You can access a copy of the 2010 Act itself by clicking here.
The defendant insured (or possible insured) is defined in the Act as a "relevant person". (Section 1(5)(b)). This means a person or entity in one of the categories set out in the 2010 Act who incurs the liability against which it is insured, and who is insolvent in one of the ways specified by the 2010 Act. We use the definition of relevant person throughout this series of articles.
Click here to view the table.
Information and disclosure for third parties (Section 11 and Schedule 1)
The current position under the 1930 Act regarding disclosure of documents and information to third parties (section 2 of the 1930 Act) is that the insured (or its liquidator etc) and the insurer have to give the third party at its request "such information as may reasonably be required by him for the purpose of ascertaining whether any rights have been transferred to and vested in him" by the 1930 Act. That duty includes "a duty to allow all contracts of insurance, receipts for premiums, and other relevant documents…to be inspected and copies to be taken thereof". No guidance is given in the 1930 Act on what "other relevant documents" might include.
The 2010 Act improves the position for third parties by not only letting them request information by notice in writing from the relevant person (Section 11, Schedule 1, paragraph 1(1)), but also from any other person who is able to provide the information (paragraph 1(2)(d)). This will include brokers as well as insurers and other persons authorised to hold policy information.
A third party will be able to request information from those who were employees or officers of an insured or from insolvency practitioners/official receivers who were acting before the insured became defunct (Schedule 1, paragraph 3).
The third party can only make a request under Schedule 1, para. 1 if it "reasonably believes" that the insured is a relevant person who has incurred a liability to it, or if the third party believes it has a right under the insurance contract (which would only exist if the insured was a relevant person). There is currently no guidance on what constitutes a reasonable belief and what rights the insured and the insurer might have if they consider that the belief is unreasonable. If this could not be resolved between the parties the third party would likely have to apply for a court order requiring the insurer (or any other person authorised to hold the information) to comply with the information request, (under Schedule 1, para. 2(3)) stating the reasons for its belief.
What information has to be disclosed?
The 2010 Act sets out what information has to be provided. This is in paragraph 1 (3)(a) and (b) of Schedule 1 of the 2010 Act and includes information on:
- whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it, and
- if there is such a contract:
- who the insurer is
- what the terms of the contract are
- whether the insured has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability
- whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and (if so) relevant details of those proceedings
- in a case where the contract sets a limit on the fund available to meet claims in respect of the supposed liability and other liabilities, how much of it (if any) has been paid out in respect of other liabilities
- whether there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.
The definition of "relevant details of proceedings" which we have underlined above is in paragraph 1 (4) of the Schedule. In the case of court proceedings it is:
- The name of the court.
- The case number.
- The contents of all documents served in the proceedings in accordance with rules of court or orders made in the proceedings, and the contents of any such orders.
In the in the case of arbitral proceedings it is:
- The name of the arbitrator.
- The contents of all documents served in the proceedings in accordance with the rules of the arbitration or orders made in the arbitral proceedings, and the contents of any such orders.
Although the 2010 Act makes it clearer to insurers what they need to disclose, it also increases the burden on insurers by compelling them to provide the information within 28 days of receipt of the notice requesting it (or to say why they are not able to provide it). (Paragraph 2(1)).
Insurers will need to make sure they have procedures in place so as not to miss the 28 day deadline otherwise the third party can apply for a court order requiring the insurer to comply. The insurer would almost certainly have to pay the costs of the application for any order made against it.
Documents not in someone's control
The insurer will also have to give whatever particulars it can about documents which are not in its control but were at one time and which the insurer knows or believes are now in another person's control (paragraph 2 (2)). The kind of particulars the insurer would have to give in that situation would include the nature of the information and the identity of that other person who now has control of the information.
The interpretation of whether a person is able to provide information and when a document is in its control is set out in paragraph 7 of the Schedule as follows:
A person is able to provide information only if:
- That person can obtain it without undue difficulty from a document that is in that persons control.
- Where that person is an individual, the information is within that person's knowledge.
- A document is in a person's control if it is in that person's possession or if that person has a right to possession of it or to inspect or take copies of it.
Disclosure and privilege
Paragraph 4 (1) of Schedule 1 confirms that the duties of disclosure and the rights of inspection are "the same as the corresponding duties and rights under Civil Procedure Rules of parties to court proceedings in which an order for standard disclosure has been made". This mechanism gives a third party claimant the opportunity to access the evidence which may help or hinder the insured’s defence, without having to restore the insured to the Register or to bring it into proceedings.
These requirements to disclose information are more or less the same as giving pre-action disclosure, although no ongoing duty of disclosure is required (paragraph 4(4)). However, it is not clear from the 2010 Act whether multiple requests for information could be made, which would be akin to an ongoing duty of disclosure, albeit not voluntarily instigated.
This duty of disclosure means that the insurer/broker will have to be alive to the identification of privileged documents and be careful not to allow inspection of them. Paragraph 2 (4) specifically says that "no duty [to disclose] arises…in respect of information as to which a claim to legal professional privilege …could be maintained in legal proceedings". This would include both legal advice privilege (confidential communications which pass between a client and his lawyer which have come into existence for the purpose of giving or receiving legal advice about what should prudently and sensibly be done in the relevant legal context) and litigation privilege (documents produced with the dominant purpose of use in actual or contemplated proceedings).
It is not always easy to tell whether a document is privileged so it would be preferable if a qualified lawyer (whether in-house or external) reviewed the documents which are disclosed to avoid inadvertent disclosure of privileged documents. Clearly there is a judgment to be made there between the level of risk and business resourcing needs. Where a party has inadvertently allowed inspection of a privileged document, the party who inspected it may only use it with permission of the Court; but the Court may give permission for its use if it decides that the mistake would not have been obvious to the person inspecting the documents.