Following the passing of The Third Parties (Rights against Insurers) Regulation 2016 the Third Parties (Rights against Insurers) Act 2010 came into effect from 1st August 2016.
The commencement date of the Act was delayed as the original list of forms of insolvency was not complete and needed to be updated and provision inserted to include corporate bodies that had dissolved.
The 1930 Act will continue to apply where both the insolvent event as defined in Section 1 of the 1930 Act and the incurring of liability both happened before the 1st August 2016.
Under the 1930 act the third party had first to “establish” the insured’s liability, which was done by a judgment, settlement or arbitration award. If the company/insured had been dissolved, to enable proceedings to be issued against the insured the third party would have to apply to the court for the company to be restored to the register.
Under the 2010 Act the rights of the insured under the policy are transferred to the third party if the insured is already a relevant person when it incurs the liability to the third party, or the insured had already incurred the liability when it becomes a relevant person.
Sections 4, 5, 6 (& for Scottish Trusts s7) as amended by the 2016 regulations define “relevant person” which is briefly any company or individual the subject of insolvency proceedings.
Under the new Act once the rights have been transferred then the third party can bring an action against the insurer “without having established the relevant person’s liability.” To enforce those rights the liability of the insured has to be established which can be by a declaration of the court, as well as by judgment, settlement or arbitration award. This is important as it will not be necessary for the insured to be restored to the register if they have been dissolved and only one set of proceedings will be necessary to ask the court to rule on the insured’s liability to the third party and the insurer’s liability under the policy (s2). This will also apply to arbitration.
This will avoid the problem where a judgment is obtained by the third party against the insured only then to lose in subsequent proceedings against the insurers because the insurer argues successfully that the policy does not cover the insured for the claim. A decision is awaited from the Supreme Court on this case at time of writing July 2016.
It is important to remember that the transfer of rights will put the third party in no better position than the insured. The insurer can rely on any defence that the insured would have had including contributory negligence or time limitation.
The third party will be subject to the same policy terms, indemnity limit, and excess as would have applied to the insured and if the insured has made a material non-disclosure or misrepresentation, or in future failed to make a fair presentation, or is in breach of a warranty or condition precedent in the policy the insurer will probably have a defence under the policy.
There are some exceptions to this. Where the transferred rights are subject to a condition whether under the policy or otherwise then anything which if done by the insured would have amounted to or contributed to fulfilling that condition is to be treated as if done by the insured. Transferred rights will also not be subject to any condition that requires the insured to provide information or assistance to the insurer and which cannot be complied with because the insured is an individual who has died or a company or unincorporated body (but not a partnership) that has been dissolved. This last exception does not apply to conditions requiring the insured to notify the insurer of the existence of a claim under the contract of insurance. However, it appears that provided a claim is notified by the third party within the time limits imposed for reporting claims and can provide “information and assistance” to the insurer on the claim which could include how it occurred, who was responsible and the damage sustained this could satisfy the requirement.
For claims made policies the policy would have to still be in force when the claim is notified. Claims made policies are used mainly for professional indemnity including directors & officers policies so caution should be exercised before cancelling these types of policy.
A condition avoiding the policy in the event of insolvency or death will not be a bar to the transfer of rights under the policy.
“Pay first clauses” which require the insured to pay sums to the third party before claiming under the policy such as an excess will not apply to the transferred rights except in a limited extent under marine policies.
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For further information, please contact Ed Brittain, Head of Restructuring and Recovery Risk Practice on +44 (0)12 1626 7821