Better late than never, the Third Party (Rights Against Insurers) Act of 2010 finally came into force in an amended form on 1 August 2016. It applies across the UK, with minor variances between Scotland and England and Wales. The Act updates third party creditors’ rights against insurers under the 1930 Act of the same name, permitting a streamlined and more cost-efficient procedure for creditors’ claims against insurers in circumstances where the insured company/ individual which took out the liability insurance has suffered an insolvency event.
Historic Position
The 1930 Act was introduced to address the inequitable position that, where an injured third party made a claim against liability insurance and the insured became insolvent, the insurance proceeds became an asset of the insolvent estate and were paid out to creditors in order of ranking, rather than to the third party. As an unsecured creditor, the injured third party would be unlikely to recover very much of the insurance money that it would have been due but for the insolvency.
The 1930 Act addressed this by transferring the rights of the insured against the insurer to a third party creditor. Although beneficial, a significant issue with the 1930 Act was the requirement of third parties to establish the insured’s liability prior to making a claim against the insurer. Proving such liability could be time consuming and costly and it was often difficult to obtain information from a party undergoing an insolvency event.
Post 1 August 2016 Position
- Single Proceedings – under the 2010 Act, third parties can raise proceedings directly against the insurer encapsulating the entire matter (including the insured’s liability) rather than having to first establish the existence and amount of the insured’s liability by way of costly proceedings.
- No Re-registration Necessary – The 1930 Act provided that insured companies could not be sued if they were defunct, so it was necessary for third parties to restore the insolvent company to the register in order to raise proceedings. As the 2010 Act removes the requirement to sue the insured, it also removes the step of restoration to the register.
- Improved Access to Information – Third parties are entitled to obtain information at an early stage regarding the rights being transferred under the policy, including whether the policy would respond, and can therefore make an informed decision as to whether to proceed with the claim before incurring significant costs.
- Insurer’s Defences – Under the 1930 Act, the defences available to the insurer against the third party mirrored those which could be deployed against the insured. The 2010 Act restricts the defences available to insurers by introducing three exceptions:
- The “failure to take actions required under the policy” defence cannot be relied upon where the third party has taken equivalent action to that required by the insured;
- The “failure to provide continuing information and/or assistance as prescribed in the policy” defence cannot be relied upon where it is not possible to provide where the insured entity no longer exists or such information is provided by the third party;
- “Pay first” clauses (ie those requiring an insured to pay sums to a third party before any right to indemnity arising) do not apply to rights transferred under the 2010 Act.
Practical Points to Note
- The 2010 Act widens the insolvency events upon which insured’s rights can be transferred to third parties to include alternatives to insolvency such as voluntary procedures between the insured and their creditors.
- Liabilities voluntarily-incurred by third parties, such as legal expenses insurance, are captured under the 2010 Act.
- The third party steps into the shoes of the insured and does not obtain any greater rights than the insured.
- In the event of numerous third party creditors making a claim against the insurers under the same policy, the monies are distributed on a first come, first served basis.
- The 2010 Act does not require any amendments to construction documentation but it is something to be aware of.
- We continue to recommend that Employers and Funders on construction projects seek to be made co-insured or joint insured, failing which, a named interested party in respect of insurance policies relating to works and any existing structures. As a co-insured or joint insured, Employers/ Funders have a direct right of claim against the relevant insurer, thus negating the need to raise proceedings under the 2010 Act.
- Employers and Funders on construction projects should also demand copy insurance certificates as evidence that the insurance obligations have been complied with.
Conclusions
This legislation provides improved protection for third party creditors by simplifying the process for direct claims against the insurer in the event of the insured’s insolvency. This is welcome in the current uncertain economic climate but the better position for Employers and Funders on construction projects remains to take steps at the outset to avoid having to fall back on the statutory protection.