The Third Parties (Rights Against Insurers) Act 1930 is intended to protect those who suffer loss at the hands of an insured party that becomes insolvent before any claim is successfully made against them for their wrongdoing. Our engineering and construction experts consider the difficulties with the current legislation and the principal changes in the new Third Parties (Rights Against Insurers) Act 2010, which will replace it.
For some 80 years individuals and companies have enjoyed the right to pursue the insurers of insolvent or even dissolved companies for insured losses. Perhaps "enjoyed" is not the right way of describing it, given the experiences claimants have had in seeking to enforce this right under the current legislation.
Nevertheless, the Third Parties (Rights Against Insurers) Act 1930 (1930 Act) has as its purpose the protection of those who suffer loss at the hands of an insured party that becomes insolvent before any claim is successfully made against them for their wrongdoing.
The 1930 Act essentially does two things: first, it enables the person who has suffered loss to acquire certain of the insolvent insured's rights under the insurance policy; and second, it protects the proceeds of any claim on the policy from disappearing into the pot of assets to be distributed among creditors.
While the original purpose of the 1930 Act was to ensure that victims of road accidents caused by insolvent drivers received proper compensation, its application is far reaching and plays an important role in the commercial world, not least in relation to construction projects where designers and contractors with design responsibilities are required to carry professional indemnity insurance.
Deficiencies in the 1930 Act
However, there are a number of problems with the way the 1930 Act operates. The intended beneficiaries of the right have often not been assisted by it at all or have been put to unnecessary time and expense in order to enforce their rights. The main criticisms of the 1930 Act are that:
- A potential third party claimant is not able to issue proceedings against an insurer without first establishing liability against the insured. This means that in the absence of an admission of liability, the third party would have little choice but to issue proceedings against the insured (an adjudicator's decision would not be sufficient for this purpose as was illustrated in Galliford (UK) Ltd v Markel Capital Ltd , where the contractor failed in its claim under the 1930 Act as it had not obtained an order of the court enforcing the adjudicator's decision). The result is that the third party may be required to issue at least two separate sets of proceedings - first, against the insured and then the insurers.
- Further, if the insured has been dissolved, in order to establish liability against the insured, an application must be made to the court to restore the insured to the Register of Companies.
Clearly, the above actions require a considerable amount of investment both in terms of time and money for the injured third party. Therefore, before embarking on such a long road to recovery, the third party would want to be satisfied (as far as it can be) that the prospects of recovering against the insurer are good. At the very least, it would want to know:
- that insurance was in place for the relevant period
- that the policy would respond to the claim
- what, if any, limitation there was on the amount of cover available
- what, if any, conditions were attached to the cover and whether they had been complied with
- if the insurer had previously declined cover and, if so, on what grounds
While the 1930 Act does provide a right to obtain information about the insurance policy, that right has in the past been interpreted as not arising until liability has been established, leaving the third party with no choice (in the absence of cooperation by the insurers) but to incur the potentially wasted costs of proceedings against the insured before it can find out whether any insurance policy will respond.
In recent years, the courts have gone some way to addressing this dilemma. In particular, in First National Tricity Finance Ltd v OT Computers Ltd (in administration) , the Court of Appeal recognised the need to obtain information about the existence of insurance cover in these circumstances. It was held that there had been a transfer of 'inchoate' (contingent) rights on OT's insolvency, which would crystallise when liability was established by way of a court judgment or arbitral award.
The practical effect of this is that third parties are entitled to know whether the insured has an insurance policy that would meet the claim before incurring the cost of establishing liability against the insured.
However, while the OT Computers case has provided some relief to would-be third party claimants, the 1930 Act still has its limitations, and trying to obtain sufficient information from an unwilling insurer can be a very frustrating and costly process.
Even if the third party is satisfied that insurance is in place, it may still fall at the final hurdle if, for example, the insurer has a defence it has not previously provided information about or if the amount of the cover has previously been exhausted. Such information may be obtainable under the 1930 Act by applying to the court although the extent to which insurers would be compelled to provide such information has not been tested.
The deficiencies in the 1930 Act were highlighted in a report published in May 2001 by the Law Commission and the Scottish Law Commission. The report recommended a number of reforms and was accompanied by a draft Bill giving effect to those recommendations. The government accepted those recommendations in 2002.
So what happened to the draft Bill?
Was it forgotten? Not exactly. After several years a further draft Bill, the Third Parties (Rights Against Insurers) Bill, was introduced in Parliament in November 2009, and received Royal Assent just four months later on 25 March 2010.
What changes have been made?
The principal changes made by the 2010 Act are:
- Third parties will be able to bring claims directly against insurers without first being required to bring proceedings against the insured to establish liability. By permitting direct claims against insurers, the need for dissolved insureds to be restored will also be dispensed with.
- The right to obtain information regarding the insurance position has been clarified. The information to be provided will include the identity of the insurer, the terms of the policy, whether the insurer has previously declined to cover the liability, whether there have been any previous proceedings and how much of any fund available to meet claims has already been used up. The categories of people who can be requested to provide such information has also been widened. It includes not only insurers, but also brokers and, where the insured has been dissolved, information can, provided that certain circumstances are satisfied, be sought from former officers and employees and the insolvency practitioners who had been appointed in respect of the insured. Time limits for responses are also imposed.
- Insurers will not be entitled to rely upon the failure of a dissolved company to provide information and assistance where that is a condition of the policy. Nor will conditions requiring the insured to pay out first and then recover under the policy have any effect.
- Third parties will be able to step into the shoes of the insured and fulfil conditions of the policy itself, such as notifying a claim.
Unfortunately, it had gone unnoticed that the Bill failed to take account of changes in insolvency laws, and did not include within its scope company voluntary arrangements or schemes of arrangements with creditors. Further amendments were therefore required to widen the scope of the 2010 Act before it became law.
Perhaps due in part to the change of government and the economic challenges it has faced, bringing the 2010 Act into force has not been a priority and, as a result, it has sat on the statute books for four and a half years without coming into force.
There is, however, some light at the end of the tunnel. It is hoped that the new Insurance Bill which includes the long awaited amendments to the 2010 Act will pass through Parliament before the current session ends on 30 March 2015, and so clear the way for the 2010 Act to become law by early 2016.
It seems clear that the 2010 Act will have a number of benefits for third party claimants. Crucially, it will enable an informed decision to be made at an early stage in the process as to whether it is worthwhile investing time and money in pursuing recovery from an insolvent company's insurer. Then, having taken the decision to do so, it should significantly reduce the procedural steps and therefore the often prohibitive costs involved in securing recovery from insurers.
From the third party claimant's perspective therefore, when it does eventually become law, the 2010 Act should certainly have been worth waiting for. In the meantime, however, third party claimants will have to continue their battles under the old system, which is particularly frustrating given that the much needed reforms were agreed by the government 12 years ago.