Recovery from an insolvent target: impact on liability insurers
The Third Parties (Rights Against Insurers) Act 1930 (the 1930 Act) received a makeover in the form of the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act).
The 2010 Act is set to come into force on the 1 August 2016, making this a good time to revisit who will benefit from the update.
The 2010 Act will make it much easier for claimants, faced with an insolvent potential defendant, to recover damages from that party’s insurer.
The 1930 Act already assists any party that has suffered a loss caused by another individual or corporate entity who benefits from liability insurance. If the potential defendant is bankrupt or insolvent, the current legislation permits the claimant to cut through to the insurance policy once certain criteria have been met.
The 2010 Act covers a wider range of insolvency events than the 1930 Act, and presents a more efficient process for claimants (and insurers who are seeking a recovery).
But what will this mean in practice? To illustrate the changes, consider a simple scenario:
|A fire destroys a warehouse owned by Black Ltd. Blame falls squarely on the work of an electrical company, White Ltd, which is not only insolvent but has been dissolved. Black does not know if White had any relevant insurance. What are the available remedies and what difference will the 2010 Act make?|
The 1930 Act
Before Black can consider recovering its losses it needs to ensure White has a policy of insurance that will cover the claim. The terms of that policy will affect Black’s ability to recover if White has failed to comply with, say, a condition precedent requiring White to notify the claim within a certain period.
The scope of information available to Black pursuant to the 1930 Act from White’s liquidator may be difficult if the liquidator has closed their file. They may not have the relevant documents any more, and others who were once connected to the business would be under no obligation to assist.
If Black finds out that there is a policy that might respond, White’s insurer still does not have to cooperate. Black will need to establish White’s liability and the first step will be to restore White to the register (which takes time and money). Black will then have to sue White to establish liability and quantum - only then can Black rely on the 1930 Act to commence proceedings against White’s insurer.
It could be at this point that White’s insurer finally tells Black that it is relying on a breach of a condition precedent regarding notification. The insurer could also point to a ‘pay to be paid’ clause in the policy, meaning an indemnity is only due after White has paid, which the company is clearly in no position to do.
So far, therefore, Black’s time, efforts and costs may have been wasted. If White failed to comply with a term of the condition precedent then, pursuant to the 1930 Act, regardless of any steps Black took to notify White’s insurer of the claim, the insurer may be entitled to take the point against Black and successfully defend the claim.
The 2010 Act
The position for claimants is far easier under the new legislation.
First, acquiring information under the 2010 Act will be straightforward. Provided certain conditions are met, Black could gain a wider scope of information from a much broader range of sources – they would not be limited to White’s liquidator. Black could approach White’s former directors and broker to obtain details of the policy. The 2010 Act provides a right to request that information, relying on the court to enforce the provision, if necessary. Once Black has the policy information, Black can then notify White’s insurer about the claim and try to engage with them.
Black does not need to reinstate White to the company register. Pursuant to the 2010 Act, Black can bring proceedings directly against the insurer for a declaration of the liability of both the insured and insurer without having to establish liability first against the (insolvent) insured.
Once liability has been established and quantified, Black can enforce White’s policy rights for its own benefit. White’s insurer will not be able to rely on the fact that White could not notify it of a claim, Black’s notification will be sufficient (and White’s insurer will engage with the claim much earlier). The 2010 Act renders the policy’s ‘pay to be paid’ clauses unenforceable.
The insurer can still rely on any defences that would have been available to the insured.
The 2010 Act makes it easier for a third party to bring claims against insurers when a target has become insolvent. Addressing the 1930 Act’s shortcomings means liability insurers should expect more requests for information and a likely increase in successful third party claims.