2016 saw two significant pieces of legislation come into force which will have a meaningful impact on the insurance landscape and which should be of considerable interest to both construction design professionals and also those who appoint any such professionals to carry out design work.
The Insurance Act 2015 ("2015 Act") is the more substantial piece of legislation and, in summary, makes it more difficult for an insurer to refuse claims brought under an insurance policy and may mitigate the consequences of failing to disclose relevant information to the insurer. The 2015 Act was considered in detail in our article entitled "The construction industry and the Insurance Act 2015" dated 14 November 2016.
The second piece of legislation, the Third Parties (Rights Against Insurers) Act 2010 ("2010 Act") came in to force on 1 August 2016 and is intended to address some of the shortcomings identified within the Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act"), bring the 1930 Act up to date with current insolvency law and to make it easier and cheaper to bring a claim against an insolvent company, partnership or individual's (for the purposes of this article an "Insolvent Entity") insurer.
So what changes are introduced by the 2010 Act?
Under the 2010 Act a third party with a claim against an Insolvent Entity is now entitled to:
- pursue a claim directly against the Insolvent Entity's insurer; and
- obtain information in respect of any insurance cover that the Insolvent Entity has, or had, in respect of the claim.
Direct pursuit of claim
Under the 1930 Act a third party with a claim against an Insolvent Entity was entitled to access the Insolvent Entity's insurance cover. However, under the 1930 Act, before any such insurance cover could be accessed, the third party was first required to pursue a claim against the Insolvent Entity to establish the Insolvent Entity's liability for any loss.
This could be a risky and potentially expensive process and, if the Insolvent Entity was a company which had already been dissolved from the register at Companies House, the third party claimant would also be required to first apply to the Court to restore a company to the register before any claim could proceed adding further costs to the process.
The 2010 Act has altered this position so that a third party with a claim against an Insolvent Entity can bring a claim directly against the Insolvent Entity's insurer without first establishing the Insolvent Entity's liability for any loss, avoiding the risk and uncertainty of suing an Insolvent Entity (although the Insolvent Entity may still be joined as a defendant in any proceedings). This new right is subject to a number of important conditions:
- Under the 2010 Act the insurer cannot be put in a worse position by the operation of the 2010 Act than it would have been towards the Insolvent Entity. In practical terms this means that:
- the insurer can rely on any defence on which the insured Insolvent Entity could rely (e.g. contributory negligence or limitation);
- any claim will be subject to the terms of the Insolvent Entity's insurance policy (e.g. any excess or indemnity limit etc.); and
- the insurer can rely on any right of set off that the insurer may have had against the Insolvent Entity in defence of the claim (e.g. any unpaid premium).
- Under the 2010 Act the insurer will, in most circumstances, be entitled to rely on any limitation defence that the Insolvent Entity would have had against the claimant third party or that the insurer would have had against the Insolvent Entity. However, in circumstances where a third party claim was initiated against the Insolvent Entity within limitation and, before such proceedings were concluded but after limitation had expired, the third party commenced proceedings against the Insolvent Entity's insurer then the insurer cannot claim that the claim is time barred.
Further to the above, it is worth noting that the 2010 Act states that a third party's entitlement to pursue a claim directly against an Insolvent Entity's insurer is established by way of a declaration of the court (or a tribunal in arbitral proceedings). Accordingly, while a third party might be entitled under a 'construction contract' to pursue its claim against the Insolvent Entity via adjudication, it is highly unlikely that adjudication proceedings can be used to secure a declaration against an insurer under the 2010 Act.
Historically one of the biggest problems faced by third party claimants considering pursuing a claim against an Insolvent Entity has been obtaining information as to whether or not insurance cover is available and, if so, details of the insurance cover. The 2010 Act seeks to reduce these problems by widening the category of people who can be asked to provide information and by setting a time limit for their response.
Under the 2010 Act, where a third party reasonably believes that an Insolvent Entity has incurred a liability towards that third party and that the Insolvent Entity has insurance cover in respect of the liability, then the third party may request information, by way of a written notice, from any person who is able to provide information in respect of that insurance cover (i.e. the Insolvent Entity, insurers, brokers etc.). The information that may be requested includes:
- whether insurance cover exists;
- the identity of the insurer;
- the terms of the insurance policy; and
- where the insurance cover sets out a limit on the fund available to meet claims (e.g. aggregate insurance cover) the remaining cover available to meet any claims.
Any person receiving a notice must respond within 28 days and either, provide the requested information or explain why he is unable to provide the requested information. If a person receiving a notice is unable to provide the information because it is contained in a document no longer in his control he must provide particulars as to the nature of the information held and the identity of the person holding it.
In addition, where a claim has been commenced against an insurer under the 2010 Act in respect of a liability incurred by an insolvent company, and that company has been dissolved, a third party may, by written notice, request disclosure of any documents which are relevant to that liability from any former officers or employees of the company or from the appointed insolvency practitioner or official receiver.
Under the 2010 Act where a third party has a claim against an Insolvent Entity the third party can now bring its claim directly against the Insolvent Entity's insurer thereby avoiding the risk and uncertainty of suing an Insolvent Entity. In addition, it is now easier for a third party to:
- obtain information regarding any insurance cover that might be in place which will permit a potential claimant to make an informed decision before commencing proceedings; and
- once proceedings have been commenced, obtain disclosure of information relating to the claim which should enhance the claimant's prospects of success.
Given the traditional volatility of the construction industry the provisions of the 2010 Act should provide significant comfort to any party who engages a construction contractor and/or design professional that they may still have substantive recourse should a liability arise after the responsible contractor and/or professional becomes insolvent.
If you would like to discuss this topic in more detail, please contact Thomas Weld.