The Third Parties (Rights Against Insurers) Act 2010
The Third Parties (Rights Against Insurers) Act 2010 received Royal Assent on 25 March 2010. It is not yet in force and it is unclear when it will be. However, it is worth insurers considering the Act now as it will bring some significant changes.
At common law, if an insured became insolvent before a third party was paid, under general legal principles the insurance money would become an asset in the insolvent estate. The third party would receive, at best, only part of the payment due. The Third Parties (Rights against Insurers) Act 1930 dealt with this injustice by transferring the insured’s rights against the insurer to the third party.
However, the passage of time revealed problems with the 1930 Act. In particular the third party was required to establish (a) the existence and amount of the insured’s liability before (b) it could issue proceedings against the insurer. In other words, multiple proceedings were necessary. These were time consuming and expensive. Given that the third party was required to proceed against both the insured and insurer, if the insured no longer existed (for example had been wound up), it had to be restored to the Register.
The rules requiring disclosure of information to third parties were inadequate. The right to information did not arise until the liability of the insured had been established. The effect was that a third party had to conduct litigation in ignorance as to whether or not there was a future claim against the insurer. Given that a third party was in no better position as against the insurer than the insured, insurers could rely on technical defences that could have been used against the insured. The 1930 Act failed to keep pace with developments in company and insolvency law. For example, it did not reflect the range of modern insolvency procedures. The extent to which the 1930 Act applied to cases with a foreign element was not clear.
The 2010 Act is intended to streamline the 1930 Act and bring it up to date. A third party will be able to bring proceedings against the insurer without first having established the insured’s liability. In other words, the liability of both the insured and insurer will be established in one set of proceedings and there will no longer be a need for a third party to proceed against the insured first. However, the third party must still establish the insured’s liability before being able to enforce the rights against the insurer.
The rules concerning provision of information will be clarified. The Act lists disclosable insurance information that can be sought. This can be sought from any person that a third party reasonably believes could hold it, for example, insurers, brokers and anyone else authorised to hold policy information. As far as possible, the information must be provided within 28 days, or the third party should be notified why this is not possible. If the document is now in the control of someone else, the third party must be given full details. There is no duty to disclose privileged information.
As before, the rights transferred to the third party will be subject to all of the defences that an insurer could have used against the insured. However, there are three exceptions: -
1) If the insured is required to have done something, for example given notice of the claim within the specified period, it is sufficient for that to be done by the third party. 2) If a condition in the insurance contract requires the insured to provide continuing information and assistance to the insurer once notice has been given, and if that is no longer possible (for example in the case of death or dissolution) the rights transferred to the third party are not subject to that condition. 3) Insurers can no longer rely on “pay first” clauses, ie provisions requiring the insured to pay sums due to the third party before any right to indemnity can arise.
Conclusions
The aim of the 2010 Act is to modernise its predecessor and make it quicker, easier and cheaper to recover compensation directly from insurers. The full implications remain to be seen. However, it is likely that insurers will have to deal with an increase in requests for policy information. They are likely to be a party in more cases, especially as the recession takes it toll and will find technical defences to be more difficult.
Nick Weston is an Associate Solicitor in the Casualty Unit at Langleys