Insurance claims: know your rights against insurers of insolvent parties

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act), as amended by the Insurance Act 2015 and the Third Parties (Rights Against Insurers) Regulations 2016, came into force on 1 August 2016. This has brought some welcome and long-awaited reforms to the Third Parties (Rights Against Insurers) Act 1930 (the 1930 Act) and will make it easier and less risky for third parties to bring direct actions against insurers of insolvent parties.

1930 Act

The 1930 Act introduced some important changes to the law when it came into force. Notably, it overrode privity of contract by allowing third-party claimants to make claims against insurers directly, ensuring proper compensation could be secured by third parties who had incurred damage at the hands of an insolvent party. However, the 1930 Act had several shortcomings and changes to insolvency law over the last 85 years have caused many parts of it to become outdated. As discussed in more detail below, the 2010 Act addresses these shortcomings and provides important updates.

What improvements have been made?

No need to establish liability against the insured

Under the 1930 Act, before a third party could make a claim against an insurer, it was first required to establish liability against the insured. This was problematic, first, because if the insured did not admit liability, the third party would have to issue separate court proceedings in order to establish liability. Clearly, this was costly and time-consuming. Moreover, there was a further step if the insured was a dissolved company – in order to establish liability, the third party would first have to make an application to have the dissolved company restored to the Register of Companies, adding in a third set of legal proceedings.

The 2010 Act remedies this shortcoming by getting rid of the need to establish liability against the insured before a claim can be brought directly against the insurer. This eliminates the expense of having to issue separate proceedings to establish liability and means that there will be no need to restore dissolved companies to the Register.

Right to obtain information

Under the 1930 Act, a third-party claimant also needed to establish liability against the insured before having the right to access information relating to the insurance policy. This was another major shortfall of the 1930 Act since it meant that a third party had no certainty that the claim would be covered by the insurance before embarking on a claim against the insured. This issue was addressed in First National Tricity Finance Ltd v OT Computers Ltd [2004] EWCA Civ 653 (OT Computers) and the judgment went some way towards remedying the problem. In this case, the insurer denied the third party claimant access to the insurance policy, arguing that the rights of the insured transferred to the claimant only once the insured’s liability had been established. However, the judge found against the insurer and held that the rights transferred upon entry into insolvency. The judge ordered that the insurance policy be disclosed. The decision in OT Computers was an important one. However, it remained unclear how much information a third-party claimant had a right to obtain (in OT Computers the claimant had only sought disclosure of the insurance policy).

The 2010 Act codified the decision in OT Computers and clarified exactly what information the third-party claimant had a right to access. Third-party claimants now have a right to be provided with the identity of the insurer, the policy terms, information about whether the insured has previously been denied cover, any previous proceedings, and whether any of the insurance fund has already been exhausted. Moreover, the 2010 Act gives third-party claimants the right to obtain information from parties other than insurers, such as brokers, insolvency practitioners and former officers of the insolvent company. Finally, parties from which information is sought are given a 28-day time limit to provide it. If they fail to comply with this, the claimant may apply to the court for an order compelling them to do so.

Stepping into the shoes of the insured

One final point to note from the 2010 Act is that it allows third-party claimants to fulfil policy obligations themselves so as to avoid breach of any obligations under the policy. Therefore, for example, the insurers cannot avoid paying out under the policy by arguing that the insured has failed to provide information required under the policy since the third party can provide the information themselves.

Conclusion

Impact on third-party claimants

The 2010 Act will bring some welcome reforms for third-party claimants. It will now be quicker, cheaper, procedurally simpler and less risky for third parties to bring such claims. We are likely to see an increase in the number of claims brought by third-party claimants as a result.

Impact on insurers

The changes are likely to be more of a mixed bag for insurers. On the one hand, the administrative burden will be much greater as insurers (and other parties that hold information) will be obliged to provide information within reasonably strict time limits. As mentioned above, there is also likely to be an increase in the number of claims brought since claimants will know from the outset whether or not their claims are likely to be met by the insurance if successful.

One positive outcome for insurers is that they will now have control over the proceedings. Instead of being presented with a judgment and having to pay out accordingly, insurers will be able to scrutinise the claim and conduct their own defence.