Legal Update - The Third Parties (Rights Against Insurers) Act 2010

Legal Update - The Third Parties (Rights Against Insurers) Act 2010

By Ian Peacock and Nicholas Saunders, Professional Indemnity Insurance Specialists at Bond Dickinson LLP.

 

Bringing claims against insured defendants – the new regime

 

The Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act) came into force on 1 August 2016 and is intended to simplify how claims are brought against defendants who have (or may have) insurance cover. In this article Ian Peacock and Nicholas Saunders of Bond Dickinson LLP explain the implications of the 2010 Act, and why practitioners need to be alive to this legislative development.

 

The Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act) modernises and simplifies the Third Parties (Rights Against Insurers Act) 1930 (the 1930 Act).

 

The old regime - the 1930 Act

 

The 1930 Act was introduced to provide claimants who were seeking to establish a liability against an insolvent person or corporate entity with a direct route of recovery against any relevant insurance cover (such as professional indemnity or employer's liability), thereby addressing the problems previously created for claimants by the English law principal of privity of contract.

 

Previously, this principal meant that any insurance claim and responsive indemnity fell within the insolvency (there being no contractual relationship between the claimant and the insurer and the insolvent entity providing the requisite nexus). The practical effect was that competing claims to the funds could arise, serving to reduce or extinguish a claimant's recovery.

 

The 1930 Act was largely successful in terms of meeting its objectives. However, it also gave rise to a number of practical problems from a claimant's perspective including that:

  • ŸBefore a claimant could bring a claim against an insurer, it was first necessary to establish liability against the insolvent defendant. In the case of a dissolved corporate entity, this required restoration of the entity in order to bring a claim.  
  • ŸThe information which a claimant was entitled to receive concerning the defendant's insurance arrangements was limited, hence it was problematic for a claimant to evaluate at the outset whether it was worth pursuing the claim.
  • Ÿ If, after establishing liability, it transpired that the defendant did not have any or any sufficient, insurance, the claimant was left with no way of recovering its damages or costs.

The 2010 Act – what's new?

 

Under the 2010 Act, a claimant still has the option of adopting the 1930 Act route of establishing liability and then bringing a claim against the insurer. However, a claimant may also now claim directly from a defendant's insurer if the defendant becomes insolvent. . This streamlines the process and removes the need for multiple sets of proceedings by allowing the claimant to issue proceedings directly against the insurer and to resolve all issues (including the insolvent defendant's liability) within those proceedings.

Other key changes are that the 2010 Act:

  • Ÿ Improves a claimant's rights to information about any insurance policies, thus enabling an informed decision about whether to commence or continue litigation.
  • Ÿ Removes the need to restore defendants who have been struck off the companies register.
  • Ÿ Allows a claimant to fulfil conditions in the policy on behalf of the insured (such as notifying the claim) to reduce the risk of insurers refusing cover for breach of  policy terms.

The 2010 Act is not retrospective. In most circumstances, it will only apply if liability has been incurred after 1 August 2016 (the date it came into force) or if the defendant becomes insolvent in one of the ways specified by the 2010 Act after 1 August 2016. If both events happened before 1 August 2016, the 1930 Act will still apply.

 

The effect of these changes

 

The 2010 Act is expected to avoid, or at least limit, the costs of bringing and defending proceedings where no insurance cover is available, and to streamline the legal process for claiming insurance monies where they are potentially available, making it quicker and more cost-effective.

 

What action should lawyers now take?

 

Lawyers acting for claimants should now consider whether to make an information request from an insolvent defendant, or its insurers or brokers, before commencing proceedings. If the new Act applies then the party receiving such a request is required to respond within 28 days and information which can be requested includes the terms of the contract, details of any coverage dispute, and whether there has been any erosion of the limit of indemnity.

 

This information will put claimants in a much stronger position when considering whether to adopt the 1930 Act procedure or the new 2010 Act procedure, or whether it is worth pursuing proceedings at all. It will also enable claimants to reduce the risk of insurers avoiding cover by allowing a claimant to fulfil policy conditions in default of the defendant insured having done so.  

 

Claimant lawyers who ignore the new opportunity under the 2010 Act to investigate what insurance cover is potentially available could be incurring unnecessary and irrecoverable costs for their client if a liability is not actually covered by insurance. This sort of oversight could leave solicitors open to a professional negligence claim.

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