On 1st August 2016, the Third Parties (Rights Against Insurers) Act 2010 will come into force.
Whilst the Act received Royal Assent in 2010, implementation had been delayed as it did not fully address a number of insolvency situations. Amendments were made in the Insurance Act 2015 to address these matters. A subsequent Statutory Instrument brings the provisions into force.
The 2010 Act replaces the Third Party (Rights Against Insurers) Act 1930.
Under normal circumstances, if an insured becomes liable to a third party, they are able to sue the insured and that liability would be covered by the insurer.
However, in common law, if the insured became insolvent, the third party would become a general creditor and had to recover their losses from the insured’s estate – they often ended up receiving nothing.
The 1930 Act sought to protect the benefit of insurance cover for third parties by transferring the insolvent insured’s rights under the insurance policy directly to the third party.
Any payment under the policy is made to the third party rather than to the insured, thus providing a windfall to the general creditors. The Act also gives third parties rights to disclosure of certain information relating to the policy of insurance.
Whilst the intention of the 1930 Act were laudable, in practice there were a number of cumbersome requirements imposed on third parties and defences open to insurers.
The 2010 Act is designed to make it easier and less costly for third parties to bring liability claims directly against the insurers of insolvent insureds.
The new Act removes the need for a third party to obtain judgment against the insolvent insured before issuing a claim against the insurers. This involved the need to restore dissolved companies to the register of companies.
It will now be possible for a third party to bring a single set of proceedings to establish both the liability of the insured to the third party and the liability of the insurer under the policy.
Insurers retain the usual defences in a claim which would have been available to the insured.
However, the 2010 Act introduces three exceptions to defences, which were available under the 1930 Act.
The third Party will be able to fulfil the conditions of the insurance policy in place of the insured – the insurer will not be able to rely on the non-performance of a policy condition by the insured.
Insurers cannot rely on breach of a policy condition requiring the insured to provide the insurer with information and assistance if the insured has died (individual) or been dissolved (corporate body) and therefore unable to fulfil the condition
Any ‘Pay-first’ clause (where the insured is required to pay sums due to the third party before claiming under the policy) do not affect the third party’s rights. This aspect does not apply to contracts of marine insurance other than a liability in respect of death or personal injury.
The intention of these is to ensure third parties are not penalised for any detrimental conduct of the insured.
A third party who reasonably believes that an insured has incurred a liability to it can request information about any insurance cover available. A request for information must be made in writing.
The third party may request information from any person that they reasonably believe could provide the information. This will, of course, include the insured and their insurers but could include brokers, former employees and anyone else who may have been authorised to hold policy information.
The third party can request the following information:
Whether there is insurance that covers the supposed liability (or might reasonably be regarded as covering it
The identity of the insurer
The policy terms
Whether the insured has been informed that the insurer denies liability under the policy
Whether there are – or have been – proceedings between the insured and insurer (and relevant details)
Whether the limit of indemnity has been eroded by other claims.
Whether there is a fixed charge to which sums paid by the insurer would be liable.
Privileged information does not have to be provided in response to a request.
If the information cannot be provided, reasons why must be given and details provided of any other person who might be able to supply it, if applicable.
Requests for information will have to be answered within 28 days – beginning with the date of receipt of the notice.
This should enable the third party to make an informed decision on whether or not to commence or continue proceedings.
Insurers can set-off monies owed to it by the insured (unpaid premium, for example) from any amount due to the third party.
The Act does not apply to reinsurance contracts
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