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NEW THIRD PARTY RIGHTS AGAINST INSURERS LEGISLATION:
A review of The Third Parties (Rights Against Insurers) Bill
Legislation that will permit Claimants to sue an insolvent defendant's liability insurer directly - without having to join the assured to the proceedings and establish liability against him - will shortly make life more interesting for insurers.
The Third Parties (Rights Against Insurers) Bill (the "Bill") was introduced in the House of Lords on 23 November 2009 and received a second reading on 9 December 2009. The proposals more or less replicate the recommendations set out in the Law Commission and the Scottish Law Commission's 2001 joint report "Third Parties' Rights against Insurers" (Law Com No. 272), which was accepted by the Government in 2002. The Bill proposes a number of changes to the rights which are currently provided to third parties by the Third Parties (Rights Against Insurers) Act 1930 ("1930 Act").
The purpose of the Bill is to make it easier, quicker and less expensive for a third party claimant to recover compensation from the insurer of a defendant who is insolvent or subject to an insolvency procedure.
REVIEW OF THE CURRENT POSITION
The 1930 Act gives a third party claimant against an insured the right to pursue the insured's insurer and receive payment under the insurance policy in circumstances where the insured is both (a) liable to the third party claimant; and (b) insolvent. This statutory transfer of rights operates as an exception to the general rule of privity of contract (that third parties cannot sue upon contracts to which they are not party; Scruttons Limited v. Midland Silicones Limited [1962] A.C. 446) and to the principle of insolvency law that all unsecured creditors of insolvent individual are to be treated equally.
CRITICISMS OF THE 1930 ACT
A recurring and central problem is that the third party is required to establish the claim in proceedings against the defendant before obtaining any rights against the insurer. This may involve having to restore to the Companies Register a company that has been struck off, which inevitably leads to delay and increase in legal costs.
In addition, the right to information about the insurance policy does not arise until liability against the insured has been established. The third party could pursue litigation to obtain judgment against an insolvent insured at great costs only to discover there is no effective insurance. A considerable amount of time and costs can be wasted pursuing actions which are fruitless.
Finally, the 1930 Act has for some time been considered outdated in the light of recent developments of insolvency law.
REGIME PROPOSED BY THE BILL
The stated aim of the Bill is to "bring the 1930 Act up to date, improve the rights of victims and reduce litigation, expense and delay". The Bill introduces a number of provisions which have been designed to operate alongside and complement certain provisions of the 1930 Act. The key proposed changes to the 1930 Act are as follows:-
1 Right of Action
(a) Single set of proceedings against the insurer
As set out above, under the 1930 Act, the third party cannot issue proceedings against the insurer without first establishing the existence and amount of the insured's liability.
The Bill creates a statutory transfer of the right to the benefit of a liability policy to a third party in the event that an insured, who is subject to an insolvency procedure, incurs a liability to that third party. This means that the third party will be able to issue a claim against the insurer without first having to establish the liability of the insured. Accordingly, the statutory transfer of rights removes the need for multiple set of proceedings by allowing the third party to resolve all issues relating to its claim against the insurer within those proceedings.
The new right to bring a direct action against insurers is optional. The third party has the choice of using either the new method of single proceedings established by the Bill or the existing method of first establishing the liability of the insured and, once such liability is established, sue the insurer under the insurance contract.
(b) Dissolved companies
Under the 1930 Act, if the insured is a company that has been struck off the register of companies, the third party may first have to take proceedings to restore it to the register before being able to sue it. In removing the need for the third party to sue the insured before issuing proceedings against the insurer, the Bill also removes the need for restoration of the defunct defendant company to the register.
(c) New rights to information
Under the 1930 Act, the right to information about the policy is restricted as it does not arise until the liability of the insolvent insured has been established and quantified (Bradley v. Eagle Star Insurance Co Ltd [1989] A.C. 957).
The Bill gives the third party new rights to obtain certain information on the insured's insurance position both before and after the issue of proceedings. The third party is entitled, on giving 14 days' written notice, to receive from the insured, the insurers or others in possession of relevant information, details of the insurance cover. However, in order to do so, the third party has to believe, on reasonable grounds:-
- that a liability has been incurred to him;
- that the party who incurred the liability is insured against it under a contract of insurance;
- that rights of that party under the contract have been transferred to him under sections 1 or 2; and
- that there is a person who is able to provide any information falling within sub-paragraph (2).
If it can be established that there is a contract of insurance that covers the supposed liability (or might reasonably regarded as covering it), the following information can be obtained:-
the identity of the insurer;
- the terms of the insurance;
- whether the insurer has told the insured that it does not consider itself liable under the insurance contract in respect of the alleged liability;
- whether there are or have been proceedings between the insurer and the insured in respect of the supposed liability;
- where a 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.
- where there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.
A person who receives such a notice is obliged, within 28 days (beginning with the date of receipt of the notice):-
- to give any information specified in it that he is able to provide;
- in relation to any such information that he is not able to provide, notify that person why he is not able to provide it.
2 Insurer's Defences
The Bill retains the general approach of the 1930 Act so that the rights transferred to the third party as a result of the statutory transfer are subject to all of the defences which the insurer could raise against the insured. However, the Bill introduces three exceptions to the defences which an insurer can use against an insured, which are designed to ensure that a third party is not prevented from enforcing his rights:-
- If the insurance policy contains a condition requiring that the insured must do something, and if, after a transfer a rights under the Bill, the third party had done the action required by that condition, the insurer will not be able to rely on the non-performance of the policy condition.
- An insurer will not be able to rely on breach of a condition in the policy requiring the insured to provide the insurer with information and assistance if the reason for that condition not being fulfilled is that the insured has been dissolved.
- If there is a "pay-first" clause requiring the insured to pay sums due to the third party before any right to indemnity from the insurer can arise, the Bill ensures that the third party's rights are not subject to such a condition. However, the Bill provides an exception in the case of a contract of marine insurance where the nullity of the effect of pay-first clauses will only apply if the claim is for death or personal injury.
3 The scope of the new regime
(a) Voluntary arrangements
The Bill updates the law contained in the 1930 Act to take into account of the wide variety of procedures to which individuals, companies and other bodies may now be subject and which might adversely affect a third party.
(b) Voluntarily incurred liabilities
Under the Bill, a third party may claim directly against an insurer even if the insurance covers liabilities voluntarily incurred by the insured to the third party.
(c) Cross-border cases
In cases with a foreign element, it can be unclear whether the 1930 Act applies, thereby creating complication and uncertainty for third parties. The Bill clarifies the position and provides that as long as a transfer of rights takes place under the conditions specified in the Bill, then the Bill is applicable irrespective of whether the case has any foreign element.
CONCLUSION
The proposed changes are designed to facilitate claims against liability insurers in insolvency situations. In particular, it will be possible to bring one set of proceedings only and to resolve all issues between the third party and the insurer altogether. Crucially, it will no longer be necessary to establish the liability of the insured before any coverage issues under the insurance were determined.
The new legislation will therefore inevitably result in insurers being faced with more claims from third parties. In addition, the improved rights to information are likely to impose an increased administrative burden on liability insurers as most information requests will ultimately be required to be dealt with by the insurers themselves. However, one can anticipate that the access to information at an early stage should also reduce the number of unsuccessful claims which liability insurers are required to process.
This is only the second Bill to be introduced straight to the House of Lords, as part of a trial procedure designed to simplify the passage through Parliament of Bills arising out of Law Commission proposals. The Third Parties (Rights Against Insurers) Bill was put before Parliament (First Reading) on 23 November 2009. It received its Second Reading at Grand Committee Stage in the House of Lords on 7 December 2009. Accordingly, the House of Commons has not yet considered the Bill and will only do so once the Bill passes through the stages of the House of Lords. The Bill has been committed to a special public bill committee, empowered to take written and oral evidence on bills before considering them clause by clause in the usual way. The meeting of the committee is scheduled to take place on 26 January 2010.
If you have any queries arising out of the above, please do not hesitate to contact Christopher Dunn or Sophie Cordonnier at this office.
January 2010
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