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Third Parties (Rights Against Insurers) Act 2010: New regime in force 1 August 2016

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23/06/2016

The long-awaited Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act), which simplifies the procedure for bringing claims directly against the insurers of insolvent defendants, will come into force on 1 August 2016. Walker Morris’ Banking Litigation specialist highlights key aspects of the 2010 Act, which applies to all types of liability insurance and will therefore be of interest to potential claimants in all sectors.

The story so far

An insurance policy is a personal contract between an insured policyholder and the insurer. Common law does not allow any person who is not a party to that contract but who may have suffered loss at the hands of the insured, to make a direct claim against the insurer. Furthermore, case law previously held that where an insured party became insolvent, any proceeds of the insurance policy should be made available for distribution to all creditors, and not just to any third party claimant.

To address the unfairness created for a third party claimant by the common law position, statute stepped in, initially in the form of the Third Parties (Rights Against Insurers) Act 1930 (the 1930 Act), to enable claims to be brought against insurers directly. That represented a significant success for third party claimants, who could, as a result, recover directly against the deep pockets of insurance companies, rather than having to prove in the insolvencies of impecunious defendants.

However, even the 1930 Act had various legal and procedural shortcomings. It left third party claimants having to issue separate court proceedings against defendants and insurers from the less than ideal position of having little knowledge of, and no control over, the relevant insurance policy terms, requirements and legitimacy.

Third Parties (Rights Against Insurers) Act 2010

Following a long-running passage through Parliament, the 2010 Act [1] will address these shortcomings in respect of insured defendants who are subject to all the major forms of individual and corporate insolvency as from 1 August 2016.

In particular, the following key aspects should mean that it will be quicker, easier and cheaper than ever before for third parties to pursue claims against insurers:

  • third party claimants will now only have to bring one set of court proceedings against both the defendant and the insurer, asking for declarations as to both the defendant’s liability and the insurer’s policy liability. When the court makes its declarations, it may also award judgment to the third party directly against the insurer
  • improved disclosure of information provisions, including time limits for responses to be given, will mean that third party claimants will be better informed from the outset, and will therefore be better placed to assess whether a claim is worth pursuing
  • where a defendant company has been dissolved, third party claimants no longer need to go to the time and expense of restoring it to the register of companies; the claimant can simply pursue the insurer
  • if there are policy requirements that must be fulfilled (such as the giving of notice of a potential claim, for example) the third party claimant will be able to fulfil them itself. This avoids the previous problem that non-compliance by an insured could vitiate the insurance and thereby preclude a third party’s claim
  • where an insured defendant company has been dissolved or an insured individual has died, non-compliance with any requirements to provide information or assistance to the insurer will no longer preclude a third party’s claim
  • voluntarily incurred liabilities (one of the most common of which being legal expenses) will now potentially be recoverable from the insurer
  • the 2010 Act also has wide cross-border effect and so may apply to foreign insurers
  • insurers cannot contract-out of the 2010 Act and it overrides any domestic choice of law provisions within the UK.

WM Comment

This area of law has been long overdue for reform and the 2010 Act will at last address many of the concerns and problems which many claimants have had in bringing claims against impecunious or insolvent defendants who are insured. It is also likely that the changes will make claims against insurers easier and less expensive to pursue and hopefully encourage insurers of defendants to settle more claims out of court.

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[1] as amended by the Insurance Act 2015.

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