The third party rights against insurers legislation allows a claimant to make a claim against a defendant’s insurers without having to issue court proceedings (and the term ‘defendant’ is used here to describe the party pursued by a claimant, whether or not proceedings have been issued). Furthermore, the rules apply as much where a defendant is an individual as with a defendant company.
At present the defendant must be insolvent, but new legislation will remove with this requirement.
A regular frustration for claimants is not knowing whether a prospective defendant is worth pursuing. The claimant may have a winnable claim against the defendant, but if the defendant has no money or is about to go insolvent, then the game is not worth the candle. The claimant may establish its claim and even get a judgment in its favour, but may then be left with no way of recovering its damages. It will also have to bear all its own costs, which could be considerable.
The Third Parties (Rights Against Insurers) Act 1930 (the 1930 Act) provides a remedy. It allows the claimant to stand in the defendant’s position in relation to its liability insurer. The right of a defendant to an indemnity from its insurer is transferred to a claimant when the defendant becomes insolvent. But the claimant is required to establish the claim against the insolvent defendant prior to obtaining any rights against the insurer. It does this by obtaining a judgment, arbitration award or settlement of the claim in its favour.
However, the procedure a claimant must follow under the 1930 Act is cumbersome and expensive. The new legislation – Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act) – introduces some important changes, as discussed in this article. The 2010 Act passed into law in March 2010, just before Parliament rose for the general election, and will come into force by ministerial order on a date yet to be announced.
How the current system works
Let’s say that Fine & Dandy plc has a shop in the High Street selling its world-renowned tableware. One day Farmer Jones walks past with his prize Aberdeen Angus. Farmer Jones is careless and the animal breaks free. It heads towards Fine & Dandy’s crockery emporium. The bull runs into the china shop, with predictable results.
Fine & Dandy spends several thousand pounds repairing the damage and it writes a letter to Farmer Jones asking for reimbursement. It has a strong claim, and Farmer Jones holds his hands up and admits liability. But his farm is not doing well. He has no money to meet the claim and is about to be made bankrupt. There will be no dividend to go towards Fine & Dandy’s losses.
However, Farmer Jones does have public liability insurance and when his bankruptcy order is made, his right to an indemnity passes to Fine & Dandy. The mechanism of the 1930 Act passes that right automatically on the bankruptcy, because liability has been agreed. It would happen in the same way if a judgment (or arbitration award) had been obtained against Farmer Jones.
Fine & Dandy can therefore stand in Farmer Jones’s shoes and make a claim on his policy. Subject to any indemnity issues, it will be reimbursed for its losses.
FINDING OUT IF A DEFENDANT IS INSURED
What should Fine & Dandy do to find out about Farmer Jones’s liability insurance? The 1930 Act provides some help: it states that if an insured defendant becomes insolvent, then it must provide a claimant with its insurance details.1 Therefore, when Farmer Jones becomes insolvent, Fine & Dandy should ask him for his insurance details.
If a claimant knows the identity of the insurer, it can also ask the insurer for more information about the policy. The 1930 Act imposes such a duty on the defendant’s insurer if there are reasonable grounds for supposing that the mechanism of the 1930 Act has transferred the defendant’s rights against it to the claimant. The obvious question any claimant would want to ask is whether the policy will respond to the claim and, if not, why not.
What about the common situation where a defendant goes bankrupt without admitting liability? The unfortunate truth is that a defendant company might be put into administration precisely because a claim has been made against it.
Say that Fine & Dandy’s letter of claim receives a less helpful response from Farmer Jones. His reply is short but not particularly sweet and it suggests that he does not admit liability for the damage caused by the runaway animal. Then, while considering its options, Fine & Dandy discovers that Farmer Jones has already gone bankrupt. The 1930 Act does not apply to transfer any rights against Farmer Jones’ insurers (if any), because there is no settlement, judgment or arbitration award.
Until the Court of Appeal decision in the First National Tricity Finance Ltd v OT Computers Ltd , Fine & Dandy would have had a real dilemma. There was first instance case law holding that Fine & Dandy would have to obtain a judgment before being entitled to disclosure of the information it needed.2 Claimants had to proceed with a claim, and possibly issue court proceedings and pursue them to judgment, when all that time and expense might prove wasted if there was no insurance policy.
OT Computers concerned computers sold by OT Computers under the brand name ‘Tiny’. A finance company provided credit to purchasers, and under the consumer credit legislation it became jointly and severally liable with OT Computers to the purchasers. OT Computers went bust and so the finance company had to fulfil OT Computers’ obligations under extended warranty schemes on the computers. OT Computers did have liability insurance, but its administrators and the insurers themselves refused to give the finance company any information about the insurance.
The finance company asked the court to order disclosure of the information. OT Computers argued that its liability had not been established and therefore the mechanism in the 1930 Act did not apply. But the Court of Appeal held that there had been a transfer of ‘inchoate’ (contingent) rights on OT Computers’ insolvency, which would crystallise when liability was ascertained. Accordingly, it ordered disclosure of information about OT Computers’ insurance arrangements. The finance company was entitled to know whether OT Computers was insured for a claim against it.
Therefore, when Farmer Jones goes bankrupt, Fine & Dandy can immediately ask for information about his insurance policy, ie whether he has liability insurance. Before it starts to pursue him, it will be able to find out if it is worth doing so.
limits of the current system
Things do not always work out to the advantage of claimants under the 1930 Act. A real-life example of the expense and frustration involved in pursuing a claim came in the recent Goldsmith Williams (a firm) v Travelers Insurance Company Ltd . The claimant firm of solicitors was appointed by mortgage lenders in two separate transactions. Unknown to the claimant, these transactions were part of a mortgage fraud perpetrated by another solicitor. The claimant repaid the mortgages to the lenders and took assignments of the lenders’ causes of action against the fraudulent solicitor.
The claimant jumped through all the hoops provided by the 1930 Act. First, it restored the solicitor’s firm to the register. Next, it issued proceedings against the firm. Then it entered judgment. Only then could it bring a claim against the solicitor’s professional indemnity insurers, the defendant. It was at this point that the insurers revealed that they were relying on a fraud exclusion clause in the policy. The claimant challenged this, but lost at trial. The court held that the defendant insurer was entitled to reject the claim on these grounds. All the claimant’s time and expense in pursuing the claim went to waste.
Goldsmith Williamsillustrates another important aspect of the system. The claimant’s rights against the insurer can only be as good as the defendant insured’s claim to an indemnity. The claimant cannot have any better right against the insurer than the insured. If the insured’s actions in causing the claimant’s loss fall outside of the terms of the policy, or it acts contrary to policy conditions in some other way, then the claimant will walk away from the insurer empty-handed.
A further concern for claimants is the situation where a defendant company has been dissolved and the policy terms required the insurer to be given certain information by the defendant. The insured no longer exists and is therefore unable to give the information, so this condition can never be satisfied. The policy condition has not been met and, as a result, it does not respond to the claim. The claimant might then be left without a remedy.
2010 Act: A new hope
The simple but important change implemented by the 2010 Act solves the claimant’s problem in Goldsmith Williams. The 2010 Act gives a claimant the right to bring a claim against the defendant’s insurer without first bringing a claim against the defendant. The right arises when the defendant is subject to an insolvency procedure. So if the defendant is a limited company that has been removed from the register, there is no need for a claimant to restore the company before proceeding.
The 2010 Act gives the claimant the right to obtain information about the defendant’s insurance.3The right arises if it can be shown that there is a contract of insurance that covers (or might be reasonably expected to cover) the defendant’s supposed liability to the claimant. The information available is the identity of the insurer, the terms of insurance, and whether there are (or have been) proceedings between the insurer and the defendant in respect of the supposed liability.
However, the claimant can still receive no better right than the defendant insured. So inGoldsmith Williamsthe claimant would still not have been able to recover its outlay, but it would have discovered that fact without needing to go on an expensive and ultimately fruitless journey through the procedure provided by the 1930 Act.
To see how the 2010 Act works in practice, we’ll go back to Fine & Dandy and the errant bull. Farmer Jones tells the company that although he does have liability insurance, he will not provide any details. Fine & Dandy, as the claimant, gives notice to Farmer Jones that it wants to know the identity of his insurer and the nature of the insurance. Farmer Jones then has 28 days to present as much of the information specified in the notice as he can. If he cannot provide it, he should state why and say who might be able to supply the information. Farmer Jones may therefore give Fine & Dandy the details of his broker. If he does not comply, Fine & Dandy can seek a court order obliging him to do so.
Restriction on insurer’s defences
Another change brought in by the 2010 Act is a restriction to the defences available to the defendant’s insurer under the 1930 Act. The first is the aforementioned ‘loophole’, whereby the insurer of a defendant company can say that the policy does not respond because a policy term requiring a defendant to give certain information to the insurer has not been satisfied. This occurs because the company has been dissolved. This restriction has now been abolished.
Another exception occurs if the claimant itself satisfies a requirement under the policy to meet a particular policy condition imposed on the defendant. If the defendant’s rights against the insurer have been transferred to the claimant, then the insurer cannot rely on the non-performance of the policy condition by the defendant. The condition was satisfied, just not by the insured.
The 2010 Act updates the existing legislation (which will be repealed when the 2010 Act comes into force), and introduces new elements to reflect the changes in both the insurance market and insolvency law since 1930. The procedure that claimants must follow under the 1930 Act is cumbersome and time-consuming, and the new system is intended to be quicker and cheaper, and will reduce litigation.
The new system is welcome for claimants seeking to pursue a claim against an insured defendant. They will be able to find out quickly and easily whether the insurance will meet the claim. It is good news too for insurers pursuing subrogated recovery claims.
For liability insurers, the 2010 Act is a mixed blessing. It is certain to mean that they face more claims and the claims will be brought directly against them, rather than against their insureds. Additionally, the 28-day deadline for responding to a notice requesting information means that insurers will need to have a procedure in place for processing the request as soon as they receive it. Otherwise the next thing they receive could be a court order and a costs award against them.
More positively, if the policy does not respond to the claim, then that issue is likely to be brought to the fore at an earlier stage. So, ultimately, the claim will be dealt with much more quickly. Furthermore, if there is no policy defence, it will be possible to discuss and contest the merits of the claim (and quantum), rather than facing a judgment against the insured.
The 2010 Act (when it comes into force) should mean a quicker, easier and cheaper system, which will benefit both claimants and liability insurers.