On 1 August 2016 the Third Parties (Rights Against Insurers) Act 2010 will finally come into force, over six years after receiving Royal Assent.
The aim of the 2010 Act is to make it easier for third parties to stand in the shoes of an insolvent insured and bring a claim directly against a liability insurer.
The 2010 Act repeals and replaces the Third Parties (Rights Against Insurers) Act 1930 (except in cases where the insured both incurred liability to the third party and entered insolvency proceedings before 1 August 2016). The 2010 Act has been delayed in coming in to force because, following its enactment, it was found that it did not adequately cover certain insolvency situations. These deficiencies have now been remedied by amendments introduced by the Insurance Act 2015 and the Third Parties (Rights Against Insurers) Regulations 2016.
The 1930 Act enabled a third party to bring a claim directly against an insurer by operation of a statutory transfer of some of the insured’s rights under the insurance policy, in cases in which the insured became insolvent. However, one of the key shortcomings of the 1930 Act was that a third party could only issue proceedings against the insurer after it had first established the existence and amount of the insured’s liability. This required a number of separate proceedings and, if the insured was a dissolved company, proceedings to restore it to the register.
The 2010 Act maintains the overall scheme of the 1930 Act but aims to remedy some of its problems and simplify the process for third parties to bring claims directly against insurers. It does not apply to reinsurance contracts. The key changes introduced by the 2010 Act are as follows:
• It will no longer be necessary for the third party to establish the insured’s liability before bringing a claim against the insurer.
• Instead, the third party will be able to pursue a single claim against the insurer to establish both the insured’s liability to the third party and the insurer’s obligation to pay under the policy.
• It will also no longer be necessary to restore a dissolved company to the register.
• If a third party reasonably believes that it has acquired rights to a contract of insurance under the 2010 Act, it will be entitled to request (by notice in writing) information relating to the insurance from insureds, insurers and any other party which may be able to provide information (most obviously, brokers).
• The third party will be entitled to request information as to: whether there is an insurance contract that covers the liability; the identity of the insurer; the terms of the insurance; whether there are or have been proceedings between the insurer and the insured in respect of the supposed liability; whether there is an aggregate indemnity limit and, if so, how much of it has been paid out in respect of other liabilities; and whether there are any fixed charges that would apply to any sums paid out.
• Any party who receives a notice requesting information will be required to respond within 28 days providing any information that it can. If it cannot provide the information requested, it will need to explain why not and provide details of anyone it believes may be able to.
• Insurers will continue to be able to rely on any policy defences that that would have been available against the insured. However, the 2010 Act restricts an insurer’s right to rely on policy conditions that the insured has not fulfilled.
• Thus, anything done by the third party, which, if done by the insured, would have amounted to, or contributed to, fulfilment of the condition will be treated as if had been done by the insured.
• Further, an insurer will not be able to rely on a breach of an obligation on the insured to provide information if the insured was an individual who has died or a corporate body that has been dissolved.
• Insurers will also no longer be able to rely on ‘pay first’ clauses which require the insured to pay the claim before the right to an indemnity arises. The exception to this is in respect of contracts of marine insurance as defined in the Marine Insurance Act 1906. Even then, however, the exception does not apply in respect of claims in respect of death or personal injury.
The advantages of the new legislation for third party claimants are clear and significant. They will be able to establish their chances of making a recovery against insurers early on and avoid the cost and burden of separate claims against the insured and insurer. We expect that this is likely to lead to a rise in both information requests and claims made by third parties against insurers.
For liability insurers there will be increased costs and the administrative burden of dealing with more information requests and claims. Brokers will also need to set up procedures to make sure that they comply with the 28-day response time for requests.
However, there may be some advantages for insurers. We would expect the number of speculative claims against insurers to decrease as third parties are able to access information about cover at an early stage. In addition, as insurers will be party to proceedings early on they will be able to have a much greater influence over the conduct of a claim rather than being presented with a judgment against the insured for payment.