After much delay, the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act) came into force on 1 August 2016. The 2010 Act aims to assist parties wishing to claim against insolvent companies and individuals who supply professional services by allowing them to claim directly against their insurers.
Many regulatory bodies require professional service providers to have Professional Indemnity insurance in place to protect their business in the event that a claim is made against them by a third party. In addition, maintaining such insurance is often a contractual requirement under a professional's appointment. In ordinary circumstances third parties have always been able to bring a claim against professionals in an attempt to recover losses sustained in the course of dealings and professionals, in turn, can seek to rely upon the cover provided by their Professional Indemnity policy. However, when it comes to pursuing insolvent individuals or companies, third parties have notoriously had to engage with a potentially difficult and time consuming process.
Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act")
Under the 1930 Act, parties with a claim against an insolvent insured party were first required to establish the insured's liability before being able to obtain relevant information to establish whether an insurer would even respond to a claim. To do so, the third party had to first apply to restore the company to the register of companies (in the event the insolvent company had been struck-off the register of companies), apply for the court's permission to issue a claim and then bring the claim against the insolvent entity. Only when the insured's liability had been established could the insured's rights under the insurance policy be transferred to the Claimant so that the Claimant could pursue an insurer directly under the terms of the insurance policy.
Parties taking these steps would therefore often be doing so without knowing whether an insurer would pay out in accordance with the terms of the insurance policy and as such would be exposed to the risk that the litigation could ultimately prove fruitless. The problem was, therefore, that a claimant would often have to spend considerable time and money establishing liability without knowing whether there was an insurance policy in place to cover such liability.
The 2010 Act
The 2010 Act brings the 1930 Act up to date with current insolvency law and procedure and significantly improves the process for bringing claims against an insolvent party's insurer. It also addresses the obstacles of the 1930 Act by providing that (once the rights have been transferred to the Claimant) the Claimant may bring an action against the insurer "without first establishing the fact and amount of the insured's liability". The insured's liability must still be established before any rights can be enforced against the insurer (as opposed to before the claim is brought) but this can now be achieved by obtaining a declaration in the same proceedings as are issued against the insurer (as well as by judgment, arbitration award or by enforceable agreement).
The effect is that the Claimant need only issue one set of proceedings against the insurer (optionally joining the insured if it chooses), removing any need for separate proceedings against the insured, or for applications to restore the insured to the register of companies. There are obvious cost benefits to this.
More importantly, for those with claims against insolvent parties, the 2010 Act also confers on Claimants improved rights to request and obtain information in respect of:-
- The identity of the insurer
- The terms of the insurance
- Whether there are (or have been) proceedings issued
- Whether there is an aggregate limit of indemnity (if so, how much) and whether there are any fixed charges that would apply to any sums paid out
The Claimant can also request such details from the insolvent party itself, or from others with knowledge of the insolvent party's insurance such as insurance brokers. In addition, where the insured is a body which has been dissolved, and the Claimant has started proceedings against the insurer, the Claimant can also request relevant documents from former officers, employees or insolvency practitioners. The party receiving the request must provide the information, or explain why it cannot do so, within 28 days of the request from the Claimant.
Under the 2010 Act the insurer may rely on any defence which would have been open to the insolvent insured, had the claim been brought against it. Furthermore, the insurer is entitled to set off any liability which the insured had to the insurer under the insurance contract. However, the 2010 Act introduces several provisions that are designed to defeat 'technical' defences that insurers have in the past attempted to rely on as follows:
- In cases where the transferred rights are subject to a condition the insured has to fulfil, anything done by the Claimant which, if done by the insured, would have fulfilled the condition, will be treated as if done by the insured. So, for example, the Claimant will be able to give notification where a policy provides that the notification must be made by the insured itself.
- Insurers can no longer rely on failure to comply with a condition requiring provision of information, where such condition cannot be fulfilled because the insured is:
- an individual who has died, or
- a body that has been dissolved
- Insurers can no longer rely on "pay first" clauses (which require the insured to pay sums due to the Claimant before claiming under the policy). It is worth noting that this does not extend to marine insurance, except where the insured's liability is in respect of personal injury or death.
Although the ability for a Claimant to benefit from an insolvent party’s insurance policy has existed for some time, until recently this often involved an additional element of risk and expense on the part of the Claimant. The 2010 Act addresses the shortcomings of the 1930 Act by avoiding the risk and uncertainty inherent in suing an insolvent entity.