After more than 80 years, the law governing the rights of third parties against insurers has finally been given an overhaul, with the passing of the Third Parties (Rights Against Insurers) Act 2010. The aim is to make it easier, quicker and cheaper for third parties to recover compensation from the insurer of a defendant who is insolvent or subject to an insolvency procedure.
Background
The original right of third parties to recover compensation from insurers in such circumstances was granted by the Third Parties (Rights Against Insurers) Act 1930. The mischief that the Act was designed to cure was the application of the proceeds of an insurance policy for the benefit of creditors generally, when in fact the insured's entitlement to the proceeds only arose as a result of the third party's claim.
The Act, however, has long been criticised as ineffective and in need of reform. It is simply too difficult for third parties to succeed with claims against insurers under the current regime. Amongst the problems are:
(a) The technical hurdles: under the 1930 Act, there were numerous technical hurdles for the third party claimant to overcome. These included the requirement to establish liability against the insured before bringing a claim against the insurer, which was felt to be a waste of costs and time. Connected to this was the need to restore an insolvent company to the Register of Companies before bringing a claim, a requirement which was also felt to lack justification;
(b) Information: the manner in which the Courts interpreted the 1930 Act caused delay and expense for third party claimants. For example, the third party did not have the right to information about the policy until the liability of the insured had been established and quantified (Woolwich B. S. v Taylor [1995] 1 BCLC 132). It has therefore proved difficult for prospective claimants to know whether it is worth bringing a claim, because of the lack of information as to the existence of the policy and its terms and level of cover; and
(c) Policy defences: the effectiveness of the 1930 Act was diluted by the Courts upholding the validity of a number of policy defences available to insurers. The amended Act seeks to limit their application, whilst being careful to ensure that the third party claimant is not given greater rights under the policy than the insolvent insured would themselves have had.
The changes
The Act was passed on 25 March 2010 and brings about a substantial number of changes to the existing legislation. The most important of these can be summarised as follows:
(a) The technical hurdles: in an effort to save time and costs, the need to prove the liability of the insured before bringing a claim against the insurer has been abolished. In the event of the insolvency of the insured party, the third party claimant is given a statutory transfer of the benefit of the policy. The claimant can thus bring a claim directly against the insurer although recovery will, of course, still require them to show that the insured was liable for their loss. There is also no longer a need to restore a defunct company to the Register before proceeding with any claim.
(b) Information: the Act allows a party who reasonably believes that a transfer of rights has occurred to obtain information from parties such as brokers; and
(c) Policy defences: the Act removes the ability of insurers to rely on a number of defences that would be available against the insured, such as the requirement that the insured give the insurer notice of a claim. One of the more interesting, and widely discussed, changes is the curtailment of the pay to be paid rule.
The pay to be paid rule is most often seen in P&I insurance. Its effect is that P&I Clubs are only obliged to indemnify a member once the member has discharged a liability. Whilst in reality this requirement is often waived, it operates as an important part of P&I cover, helping to keep costs down and is part of the system of mutuality upon which the Clubs are based. The validity of such a pay to be paid rule was established in the case of The Fanti/Padre Island (No.2) [1990] 2 All ER 705.
During the consultation stage, much of the commentary surrounding the proposed Act suggested that its enactment would radically curtail the pay to be paid rule and that the Clubs would be adversely affected. The concern is unfounded. The Act exempts contracts of marine insurance (under which P&I cover falls) from the restrictions on the pay to be paid rule, except in cases of personal injury and death.
Even so, one might criticise this limited change as being contrary to the principle of mutuality since it puts insolvent members in a better position than their solvent colleagues. However, this change is far from radical and we doubt it will come as a big shock to the managers of P&I Clubs, who have long-accepted that, in practice, they are unlikely to rely on the pay to be paid rule in respect of personal injury and death, whether in respect of their members or third parties. Indeed, the Clubs have been on notice ever since the The Fanti/Padre Island when comments from Lord Goff gave them a firm indication that, should they attempt to rely on the rule in cases of personal injury or death, Parliament might be obliged to step in to remedy the situation through legislation.
Likely effects
Although pay to be paid rules remain largely intact in marine insurance wordings, the Act may still have an impact on insurers. One can anticipate an increased number of third party claimants will be successful in recovering against insurers when the party liable is insolvent. There is also likely to be an increase in requests for information by potential third party claimants, leading to increased costs and expenditure of time for the insurance industry.
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