The Third Party (Rights Against Insurers) Act 2010 is shortly to come into force. Here are 5 key points. Here we look at the implementation date, legislative history and basic definitions of the Act. Later posts will look at the Act in more detail.
A BRIEF OVERVIEW
The Act allows a claimant to bring an action against an insurer in circumstances where the original (insured) defendant has become insolvent. The claimant can bring an action against the insurer directly and stands, in effect, in the shoes of the insured. An important development is that the claimant need not bring an action against the insured beforehand but can bring an action directly against the insurer. One action can be brought to (i) establish the original defendant’s liability to the claimant; (ii) establish the insurer’s liability to pay under the policy.
1. THE ACT (FINALLY) COMES INTO FORCE
On the 1st August 2016.
2. THE LONG LEGISLATIVE HISTORY
The detailed answer is that the Act arises directly out of a Report from the Law Commission and Scottish Law Commission published in July 2001. That Report examined in detail the defects in The Third Party (Rights) Against Insurers Act 1930.
Defects in the 1930 Act
The 1930 Act operated by allowing a “statutory transfer” of some of the insured’s rights under an insurance policy to a third party. That Act allowed a statutory transfer if the insured became insolvent. In essence it allowed a claimant, claiming against the insured, to bypass insolvency procedures and proceed against the insurance company direct. As the Report noted:
“It is also worth noting that third parties who use the 1930 Act are often vulnerable members of society – for example, injured former employees of defunct companies.”
The Report pointed out that the Act had significant defects, it did not keep up to date with insolvency legislation. There were a number of real and significant problems:-
- A third party could not issue proceedings against the insurer without first establishing the existence and amount of the insured’s liability. This required the issue of a number of separate sets of proceedings.
- If the insured was a dissolved company the third party was required to take proceedings to restore it to the register in order to be able to bring proceedings.
- There was no effective right for a third party to obtain information about the insurance policy. The courts held that a right to information did not exist until after liability is established. Often this would not be until some time after the insured’s insolvency. Until then the third party would have to conduct the litigation whilst not knowing whether any rights had been transferred under the 1930 Act and whether they were of any value. Consequently time and money were often wasted pursuing a worthless claim or a worthwhile claim that had to be abandoned because of the belief that there were no funds to pay a judgment.
- The third party was only able to exercise the right to obtain information against a limited number of people. These may not include the person who, in fact, has the information, eg. an insurance broker.
- It was not clear what information the third party was entitled to receive and the information provided under the 1930 Act could omit critical details.
The Law Commission’s aims
The Law Commission set out a number of aims for its draft Bill.
- A person who believed on reasonable grounds that he had received a transfer of rights would be entitled to obtain information about those rights so as to enable a sensible decision to be taken on whether to pursue or continue litigation.
- The third party would be entitled to require the information from anyone in control of it.
- The Act would specify the information which would have to be provided to a third party exercising rights.
Keeping up to date with insolvency law
The aim of the Bill was to take into account the wide variety of procedures to which individuals, companies and other bodies could be subjected. The Bill contained a power of amendment which enables the Secretary of State to ensure that a new Act could be updated without the need for fresh primary legislation. The Third Parties (Rights against Insurers) Regulations 2016 make changes to the Act to deal with additional insolvency situations.
Catering for voluntary procedures
There were concerns about the operation of the 1930 Act and voluntary arrangements. The Bill ensure that a third party with rights against an insurer would not be bound by a voluntary procedure to the extent of those rights.
Covering “voluntary liabilities”
It had been held that the 1930 Act did not enable a solicitor with unpaid fees to claim directly on the legal expenses of an insolvent client. The same reasoning applied to health insurance or car insurance. Under the Bill this restriction would no longer apply. “A third party would be able to make a claim against an insurer even if the insurance covered liabilities voluntarily incurred by the insured to the third party.” (Report 1.21)
Removing the insurers’ rights to rely on some technical defence
Under the 1930 Act a third party’s claim could fail because an insurer could rely on the defence that the insured did not give notice of the claim, even when the third party had personally told the insurer of the claim within the prescribed period.
Protecting the third party from “pay first” clauses
In the Fanti and the Padre Island  2 AC 1 the House of Lords decided that rights transferred to a third party under the 1930 Act were useless if the insurance contract contained a clause requiring the insured to pay the claim before the right to an indemnity arose (a “first pay” clause). Under the Bill the third party’s claim would not be adversely affected by such a clause.
Cases with a foreign element
It was unclear how the 1930 Act operated in cases with a foreign element. The Law Commission stated that its Bill would set out clearly the occasions on which it would apply. In many cases jurisdictional issue would be settled by the Brussels Convention. Where a third party was domiciled in one part of Great Britain or in Northern Ireland the third party would be given the choice of suing in their own domicile or that of the insurer. In cases where the insurer was based outside Great Britain and where the Brussels Convention did not allocation jurisdiction, the Law Commission recommended a minor amendment to the rules of court in England and Wales to enable the courts to exercise jurisdiction over claims against insurers based abroad.
THE HISTORY OF THE ACT
Although the Law Commission Report was published in 1991 it languished for many years. However, responding to criticism that Law Commission Reports were not acted upon, Parliament introduced a trial procedure in the House of Lords. This enabled Law Commission reports to spend less time on the floor of the House and certain stages to be carried out in Committee. The Bill was introduced into the House of Lords on the 23rd November 2009 and was passed on the 25th March 2010. It then took six years for it to be brought into force.
3. THE STRUCTURE OF THE ACT?
In outline the basic structure of the Act is to transfer the rights of an insurance policy directly to the person who would be making a claim against a defendant which would be covered by that policy. (Section 1).
- There is a procedure for establishing liability under the Act (s.2 and 3).
- The situations in which a claim can be made against an individual or company are set out (sections 4 – 7).
- It is ensured that the liability of the insurance company is limited to the rights of the insured under the policy (s.8).
- There is a section dealing with conditions affecting transferred rights (s.9).
- The insurer’s right of set off is transferred (s.10).
- There are detailed provisions dealing with information and disclosure for third parties (s.11 and Schedule 1).
- The right of the insurer to rely on a limitation defence that the insured may have had (s.12)
- There are sections dealing with jurisdiction (r.13).
- The effect of transfer on the insured’s liability is confined to the amount not recovered from the insurer (s.14).
- Reinsurance is excluded (s.15).
- It is made clear that the Act that it covers insurance that was voluntarily incurred (s.16)
- There are anti-avoidance provisions (s.17)
- It is made clear that the Act applies to cases with a foreign element (s.18)
- The Secretary of State has power to amend the Act so as to extend or change the definition of “relevant person” (s.19).
4. THE IMPORTANT DEFINITIONS IN THE ACT
There are definitions that are central to the Act, these definite who can bring an action under the Act and the circumstances in which an action can be brought.
References to an insured are references to a person who incurs or who is subject to a liability to a third party against which that person is insured under a contract of insurance.
A relevant person relates to the person who is insured. This is the person against who the third party wants to bring an action but cannot do so because there is an insolvency, or similar, process in place which prevents an action, in practical or legal terms.
Individuals who are a relevant person, include where there is in force against that individual
- A deed of arrangement registered under the Deeds of Arrangement Act 1914.
- An administration under Part 6 of the County Courts Act 1984.
- An enforcement under made under Part 6A of the County Courts Act 1984.
- A debt relief order made under Part 7A of the Insolvency Act 1986.
- A voluntary arrangement approved in accordance with Part 8 of the Insolvency Act 1986
- A bankruptcy order made under Part 9 of the Insolvency Act 1986. (Section 2.(1) and (2).
- An amendment to the Act also means that insolvencies under Part 2 of the Banking Act 2009 are included as a sector specific administration provisions.
There are other provisions which govern the situation in Scotland and Northern Ireland.
Individuals who die insolvent
A person who dies insolvent is a relevant person for the purposes of section 1(1)(b)of the Act. An individual is regarded as having died insolvent if, following their death:
- Their estate falls to be administered with an order under section 421 of the Insolvency Act 1986.
- Again there are specific provisions which govern similar provisions in Scotland or Northern Ireland. (Section 5)
A body corporate or an unincorporated body is a relevant person if:
- A compromise or arrangement between the body and its creditors (or a class of creditors) has been sanctioned in accordance with the section 899 of the Companies Act 2006.
- The body has been dissolved under section 1000, 1001 or 1003 of that Act and has not been restored to the register under section 1025 or ordered to be restored under section 1031.
- It has had a voluntary arrangement approved under Part 1 of the Insolvency Act 1986approved and in force.
- An administration order has been made under Part 2 of the Insolvency Act 1986.
- A receiver or manager has been appointed under Part 3 of the Insolvency Act 1986 (even if there is no actual receiver or manager because there is a temporary vacancy).
- It is being wound up voluntarily in accordance with Chapter 2 or Part 4 of the Insolvency Act 1986.
- A provisional liquidator has been appointed under S. 134 of the Insolvency Act 1986. (even if there is no provisional liquidator because there is a temporary vacancy).
- The body is being wound up by the court following a winding up order made under Chapter 6 or Part 4 of that Act or Part 5 of that Act.
Again there are specific provisions relating to the position in Scottish law and the law in Northern Ireland.
These definitions set out the recommendation in the Report. The Law Commission rejected the notion of a general transfer of rights if the insured encountered “financial difficulties” It was recommended that where a company was struck of the register the third party should receive a statutory transfer of rights. There was no purpose in requiring the third party to apply to court in order to restore the defunct company. The Act extends the rights to a case where a provisional liquidator is appointed.
This is defined in section 1 (2) as the person to whom the rights of the relevant person are transferred to or vest in as a result of an insured become a relevant person. In other words the person who would have an action against the insured for the liability against which that person is insured if the insured were not insolvent or ceased to exist.
These are rights under a contract of insurance which are transferred under s.1 of the Act.
- A relevant person is widely defined. It covers insolvency situations and situations where a company has ceased to exist because it has been struck off the register.
- A third party is the party who is the person who has an action against the relevant person covered by the liability against which the relevant person is insured.
5. ADDITIONAL READING THAT WILL HELP
- The Act
- The Regulations
- Clyde & Co’s Insight on the Act
- CMS Cameron McKenna on the Act in Lexology
- Clyde & Co (again) writing in Mondaq