In Redman v Zurich Insurance, Mrs Justice O’Farrell DBE considered the interplay…
The Third Parties (Rights Against Insurers) Act 2010 (the “2010 Act”) came into force on 1 August 2016. After a lengthy period in limbo, it was amended and brought into force by the Insurance Act 2016. Its purpose was to reform and clarify the law in respect of third party claimant’s rights against the insurers of insolvent defendants, which had previously been governed by the Third Parties (Rights Against Insurers) Act 1930 (the “1930 Act”). The important features of the 2010 Act are considered by Ben Smiley of 4 New Square.
THE DETAIL OF THE 2010 ACT
The transfer of rights and bringing proceedings
The first major change from the 1930 Act is found in sections 1 and 2 of the 2010 Act. Section 1(3) provides that a third party claimant may bring proceedings to enforce its rights against the insurer of an insolvent insured “without having established the relevant person’s liability; but the third party may not enforce those rights without having established that liability.”
Pursuant to section 2(2), the third party can bring such proceedings against the insurer for a declaration as to the insured’s liability to that third party and/or the insurer’s potential liability to that third party. In such proceedings, the insurer can rely on any defence that would have been open to the insured (subject to particular provisions regarding limitation at section 12). In order for the insured’s liability to be established (and so for the claimant to enforce its rights against the insurer), section 1(4) requires a declaration, judgment, arbitral award or enforceable agreement.
Sections 4 to 7 set out what constitutes a “relevant person” for the purposes of the Act: i.e. to which insolvent insureds the 2010 Act applies. It was these provisions that were required to be amended before the 2010 Act could come into force.
In respect of individuals, section 4(1) provides that they will be “relevant persons” if they are subject to: an administration order or enforcement restriction order under the County Courts Act 1984, or debt relief order, voluntary arrangement or bankruptcy order under the Insolvency Act 1986. Section 5 deals specifically with individuals who die insolvent.
As regards corporate or unincorporated bodies, the 2010 Act provides at section 6(2) that the entity will be a “relevant person” if it is subject to a voluntary arrangement, administration, receivership, voluntary winding up, provisional liquidation, or a winding up order, pursuant to the Insolvency Act 1986. Section 4A of the 2010 Act provides that an entity will be a “relevant person” if it is “in insolvency” under Part 2 of the Banking Act 2009. Section 4B of the 2010 Act provides that an entity will be a “relevant person” if it is in administration under relevant legislation which is defined in Schedule A1 to the 2010 Act. This includes diverse legislation relating to aviation, energy, financial services, postal services, railways and water and sewerage. Section 6A deals with corporate or unincorporated bodies which have been dissolved.
Although the above sections may appear relatively long-winded, they essentially identify the different types of insolvency at law, such that there is clarity as to when an insured will fall within the scope of the 2010 Act.
Limits and Conditions
Section 8 of the 2010 Act prevents the transferral of rights to a third party claimant which exceeds the liability of the insurer to the insured. Section 10 of the 2010 Act entitles the insurer to set off against its liability to the third party claimant any liability that the insured was under to the insurer. These provisions are necessary to prevent the insurer from being prejudiced by the fact that the claim is being brought by the third party rather than its insured.
Section 9 of the 2010 Act avoids a prejudice that might be suffered by a third party due to the fact that it is standing in the shoes of the insured. As noted above, the insurer is (subject to limitation points at section 12) able to raise any defence to a claim by the third party as it would have been entitled to raise against the insured. However, pursuant to section 9(2) of the 2010 Act, the third party is able to comply with conditions of the insurance on behalf of the insured. Further, the transferral of rights is not subject to conditions which it would be impossible for a third party to fulfil on behalf of the insured: i.e.
- Conditions which cannot be fulfilled because the insured is dead or dissolved (section 9(3));
- Conditions which require the insured to notify the insurer of a claim under the contract of insurance (section 9(4)); and
- Conditions which require the prior discharge by the insured of its liability to the third party claimant (section 9(5)).
Provision of information
The second major change from the 1930 Act is achieved by section 11 of and Schedule 1 to the 2010 Act, relating to the provision of information to a potential third party claimant. Under the 1930 Act, a third party claimant’s entitlement was set out in the relatively vague terms of section 2. In brief, the insured, its insolvency office-holder and its insurer were obliged to provide such information “as may reasonably be required” for two purposes:
- “for the purpose of ascertaining whether any rights have been transferred to and vested in” the potential claimant, and
- “for the purposes of enforcing such rights”.
Relative to the 1930 Act, the 2010 Act firstly widens the net of who is obliged to provide the relevant information. The insolvent insured is identified specifically as being so obliged. But a notice requiring provision of information can also be sent to any person who is able to provide the information, so long as an insolvent insured has incurred a liability to a third party claimant. So there is no limit on the potential recipient, albeit the most likely additional category would be the insolvent defendant’s insurance brokers.
Secondly, the 2010 Act clarifies the information required to be provided, which is set out at Schedule 1, paragraph 1(3). It includes details of: “whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it” and, if so, the identity of the insurer, the terms of the insurance, and other matters specified which would be of use to a third party claimant when considering whether it was worthwhile to bring proceedings against the insurer. An example of this is the remaining limit of liability under the insurance contract.
Finally, the 2010 prescribes a mechanism for the third party to obtain that information, which can be summarised as follows:
- A notice must be served giving particulars of the facts relied on as entitling the person to give notice;
- The information required (or an explanation as to why it cannot be provided) must be provided within 28 days of receipt of the notice;
- Failure to provide the information by the recipient of the notice will entitle the party seeking the information to apply to Court to enforce the obligations under the 2010 Act.
APPLICATION OF THE 2010 ACT
If both (a) the insured’s liability to the claimant was incurred and (b) the insured entered insolvency before 1 August 2016, then the 1930 Act will apply. In all other circumstances, the 2010 Act applies. Therefore, even if the liability is historic, the 2010 Act will apply if the insolvency is more recent (and vice versa). The aim would appear to be to ensure that as many claims as possible are captured by the 2010 Act, without making it retrospective in effect.
Taken as a whole, the 2010 Act can be seen as pro-consumer. It eases the burden on claimants who want to seek relief from the insurers of insolvent defendants, by:
- Making it more difficult for insurers to avoid liability to such third party claimants by making the most of the cost and time involved in bringing two sets of proceedings (by removing the need for the claimant to bring a claim against the insured first).
- Allowing claimants to make an informed decision as to whether a claim against the insurer is worthwhile (by widening the sources of information, specifying the information to be provided, and setting out a clear mechanism and timeframe, prior to the claimant determining whether to embark on proceedings).
 This appears to have caught out some already: see Batra v SFM Legal Services Ltd  EWHC 2238 (Ch) at  in which Chief Master Marsh noted that an order had been made on 18 December 2015 purporting to give permission for insurers to be joined to proceedings pursuant to the 2010 Act before it had even come into force.