The Third Parties (Rights Against Insurers) Act 2010 ("the Act") has received Royal Assent. The Act makes changes to the Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act"). A commencement date has yet to be fixed. In this article we summarise the 1930 Act and the changes made to it. The changes are designed for the most part to make it easier for a third party to claim directly against the liability insurers of an insolvent insured.
The 1930 Act
The 1930 Act applies where a person or company (the insured) has taken out liability insurance and becomes insolvent. The 1930 Act transfers the insolvent insured’s rights under the insurance policy to a third party claimant and enables the third party to proceed directly against the insurer.
To recover under the insurance (or even to obtain information about the existence and terms of a policy) the third party has to establish the existence and amount of the insured's liability before being allowed to issue proceedings against the insurers. This invariably involves the time and cost of legal proceedings,
In addition, the insurers can rely on any defences to a claim for indemnity under the policy that they would have had against the insured. For example, if the insured had failed to disclose a material fact prior to inception of the policy then the insurers could seek to avoid the policy to escape liability for paying the third party.
The key changes made by the Act
The key changes made by the Act are:
- The third party will have the right to seek declarations
as to the insured’s liability to them and as to the insurer’s
potential liability under the insurance contract in one set of
proceedings. If the court or tribunal makes such declarations, it
will be able to make an appropriate judgment (usually a money
judgment). The third party will retain the option
of bringing proceedings against the insured before commencing
proceedings against the insurer (as at present).
- The third party will no longer be obliged to join the insured in proceedings against the insurer. However, if this is not done any declaration made regarding the insured’s liability to the third party will not bind the insured.
- Case law held that the 1930 Act only applied where the liability incurred by the insured person was due to a breach of contract or in tort, and did not apply to liabilities that had been voluntarily incurred by the insured person such as the payment of contractual debts. Consequently, a third party could not claim under an insolvent insured's legal expenses policy. The same reasoning could have applied to insurance for other voluntarily incurred liabilities such as health or car repair insurance. Under the Act it is irrelevant whether or not the liability of the insured was incurred voluntarily
- The third party’s ability to seek information about the
insurance is clarified and simplified.
- The rights transferred to the third party will be still subject
to the same defences that the insurer could have used against the
insured. However, some technical defences and obstacles available
to the insurers have been removed.
- The position in cases with a foreign element is clarified where one of the stated insolvency event occurs within England, Scotland or Wales.