On 1 August 2016 the long awaited Third Parties (Rights Against Insurers) Act 2010 (the ‘2010 Act’) came into force. The Third Parties (Rights Against Insurers) Act 1930 (the ‘1930 Act’) continues to apply where:
- the defendant became insolvent and incurred liability to the claimant before 1 August 2015; or
- the defendant died before 1 August 2015.
Amendments to the original wording of the 2010 Act were made by the Insurance Act 2015 and the Third Parties (Rights Against Insurers) Regulations 2016.
Imagine the scenario. A claimant has a claim against a defendant. The defendant carries insurance to cover that claim. The defendant goes into formal insolvency before the insurer pays out. Should the claimant be entitled to the insurance proceeds or should it be left to submit an unsecured claim in the estate of the insolvent defendant?
Prior to 1930, the proceeds of any insurance policy would have been paid into the insolvent estate and then distributed to creditors in the usual way. Following the introduction of the 1930 Act, a claimant could pursue its claim directly against the insurer. By effectively circumventing insolvency legislation, this allowed the intended beneficiaries of an insurance policy to potentially recover 100% of their claim rather than a pro rata dividend from the insolvent estate.
Problems with the 1930 Act
Since its enactment, various deficiencies have been identified with the 1930 Act. Some of the main shortcomings are summarised below:
|Full range of insolvency procedures not covered||The 1930 Act had not kept pace with developments to the insolvency regime and therefore did not cover all insolvency proceedings, for example, orders made under the Insolvent Partnerships Order 1994 and individual voluntary arrangements|
|Liability and quantum||A claimant had to establish the defendant’s liability and quantum by either judgment, arbitration award or settlement before taking action against the insurer. This increased both the time and cost of bringing a claim.|
|Dissolved companies||A claim could not be brought against a company which was no longer on the register of companies. Claimants had to incur the additional costs of restoring the defendant company to the register.|
|Insufficient information||The claimant had limited rights to obtain information from the insurer and might therefore be bringing proceedings to establish liability/quantum without knowing whether there was a policy that would pay out.|
The claimant only had the same rights against the insurer as the defendant. If the insurer had a defence against a claim by the defendant under the policy, for example for failure to comply with the notification requirements, this could be asserted against the claimant.
A particular issue was ‘pay to be paid’ provisions. Where a policy stated that the insurer did not have to pay out until the defendant had paid the claimant and the defendant had not paid out due to insolvency, the claimant could not recover from the insurer.
Reforms of the 2010 Act
The purpose of the 2010 Act is to address some of these shortcomings and to improve the protection afforded to claimants. So what has changed?
The definition of ‘relevant persons’ i.e. the defendants to whom the 2010 Act applies has been updated and extended to include a full list of insolvency proceedings, including the specialist insolvency regimes which apply to certain sectors.
The Secretary of State has the power to add further categories of relevant person as and when the need arises.
Liability and quantum
A claimant can now bring proceedings against an insurer without first having to establish liability and quantum against the defendant, although liability and quantum will have to be established before those rights against the insurer are actually enforced.
The claimant can apply to court for declarations as to:
- the defendant’s liability to the claimant; and/or
- the insurer’s potential liability to the claimant.
On making such a declaration, the court may also give the appropriate judgments against the insurer. Liability can still also be determined by judgment, arbitration award or settlement (as before). When seeking a declaration, the claimant may join the defendant to the proceedings. This may be helpful if the claimant is anticipating any shortfall that he may wish to enforce against the defendant.
An arbitration provision in the contract of insurance remains enforceable. A claimant may therefore need to proceed by way of arbitration.
A defendant company no longer needs to be restored to the register of companies.
Disclosure of information
Another significant change is the improved ability of claimants to obtain information about the rights transferred to them. This allows claimants to make informed decisions as to whether or not it is worthwhile pursuing a claim against the insurer.
What information can be requested?
- Whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it.
- If there is such a contract of insurance:
- details of who the insurer is;
- the terms of the contract;
- whether the defendant 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 defendant 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.
Who must provide the information?
Subject to satisfying the relevant criteria, information can be requested from:
- the defendant; and/or
- any third party, for example, the insurer or insurance broker.
Where the defendant has been dissolved and proceedings have been started against an insurer, there are additional provisions allowing the claimant to request relevant documents from any officer or employee of the defendant, any insolvency practitioner or, if relevant, the Official Receiver.
When must the information be provided?
On receipt of a notice requesting information, the recipient has 28 days within which to either:
- provide the information (as long as this can be done ‘without undue difficulty’); or
- if they are not able to provide the information, explain why not.
If they are not able to provide the information because it is contained in a document that is no longer in their control and the recipient knows or believes that it is now in another person’s control, they must provide whatever details they can of the nature of the information and the identity of the person holding the document.
The general position remains. The rights that transfer to a claimant under the 2010 Act are subject to the terms of the insurance contract and any defences that the insurer may have. Any rights of set off in favour of the insurer will remain.
However, certain protections have been introduced to prevent insurers from avoiding claims for largely technical reasons. These include:
Fulfilment of policy conditions by the claimant – A claimant can effectively step into the shoes of the defendant to fulfil policy requirements and this will be treated as though it were done by the defendant.
Failure to provide information or ongoing assistance – If the defendant has either died or been dissolved, the insurer cannot rely on a failure by the defendant to provide information or assistance to the insurer (unless it is a requirement to notify the insurer of the existence of a claim) to avoid a claim.
‘Pay to be paid’ provisions – An insurer can no longer rely on a ‘pay to be paid’ defence, save in limited circumstances.
What does this mean in practice?
The 2010 Act undoubtedly purports to streamline the procedure, however, it also seeks to equalise the balance of power as between potential claimants and insurers.
|Claimants should now be able to determine relatively quickly and cheaply whether they have a potential claim against an insurer||Insurers are likely to face an increased number of information requests.|
|Claimants will therefore no longer have to incur legal fees on speculative claims.||The number of requests and the relatively short time in which they must be dealt with may place a significant administrative burden on insurers.|
A claimant’s ability to bring a single set of proceedings dealing with both the defendant’s and the insurer’s liability should have both time and cost benefits.
|Insurers may see an increase in claims as claimants will no longer have to risk the costs of establishing the defendant’s liability and quantum before finding out whether there is insurance in place to cover the claim.|
This article first appeared in Corporate Rescue & Insolvency journal (2016) 4 CRI 153.