Vol 7 (2010) - Issue 4

Article preview

Third Parties (Rights against Insurers) Act 2010

The Third Parties (Rights against Insurers) Act 2010 (2010 Act), which received Royal Assent on 25 March 2010, is intended to address a number of problems which have arisen in relation to the operation of the existing Third Parties (Rights against Insurers) Act 1930 (1930 Act), which, over the years, has proven to be both expensive and time-consuming for those seeking to rely upon it.
As at the time of writing, the date upon which the 2010 Act will come into force is not known.

The 1930 Act
In general terms, under the existing 1930 Act, if a party with a liability insurance policy becomes the subject of certain formal insolvency proceedings, its rights against its insurer are transferred to the third party to which the insured has incurred liability. This statutory transfer mechanism is designed to ensure that the third party receives the proceeds of the policy which otherwise would form part of the insolvent insured’s estate and be distributed to the general body of its creditors (leaving the third party to claim as an unsecured creditor). The insured’s rights are transferred to the third party subject to any policy defences which the insurer would have had against the insured. The 1930 Act does not extend to contracts of reinsurance.

The operation of the 1930 Act has given rise to a number of issues, key among these are:

(a) That a third party cannot issue proceedings against an insurer without first establishing the existence and amount of the insured’s liability, which is likely to involve an additional set of proceedings. If the insured is the subject of a bankruptcy order, administration or compulsory winding-up a separate application to the court for an order allowing such proceedings to be commenced or to continue may also be required. Substantial funds may be required in order to pursue these proceedings and ultimately the costs incurred will have been wasted – both for the third party if it does not succeed against the insurer and for the insurer if it is ordered by the court to meet the costs of multiple proceedings.

(b) If the insured has been struck off the register of companies, it has to be restored to the register before the third party can bring proceedings against it.

(c) The 1930 Act does not provide for a statutory transfer in the event that an insured is struck off the register of companies (where this is not accompanied by the insolvency proceedings which are caught by the 1930 Act). Nor does it provide for a statutory transfer in the event that a provisional liquidator is appointed, causing difficulties in the event that the appointment is used in conjunction with a scheme of arrangement under the Companies Acts.

(d) The rights transferred to a third party may not respond if the policy contains a clause requiring the insured to pay the claim before the right to an indemnity arises (a 'pay-first' clause).