The recently enacted Third Parties (Rights against Insurers) Act 2010 (the "Act") will give greater powers to those seeking to make a recovery against an insolvent party's insurance policy.
In the still-gloomy economic conditions, the rate of insolvencies in the construction industry remains high. Against this backdrop the new Third Parties Act will make it easier for claimants to pursue an insolvent party's insurer.
No date has yet been set for the Act to come into force. Most expect a date around mid-2011 once the new Coalition Government has completed its review of Labour-led legislation. This is an Act that is expected to survive that process, and once it is in force, it will allow third parties to "leap-frog" the insolvent company and bring their claim directly against the insolvent's insurer. Third parties will no longer have to establish liability against the insolvent insured before issuing proceedings against the insurer. The Law Commissions of England and Scotland (who originally recommended the changes) considered this requirement to be overly time consuming and costly.
The key changes:
- A third party with a claim against an insolvent insured may issue proceedings against the insurer without first having to establish the liability of the insured. The third party's claim against the insolvent insured will take place in the same proceedings, and at the same time, as the claim that the insurer pay any damages awarded.
- A third party who believes it has rights under the Act will be entitled quickly to obtain information about the insurance from the insurer or from individuals who had information about the policy, to enable the third party to determine the prospects of success and the utility of proceeding. Previously, the right to information did not arise until the liability of the insured was established. This resulted in third parties bringing proceedings against insolvent entities without knowing whether or not they were insured.
- Insurers may not rely on certain so-called "technical" defences under the policy. An insurer could not, for example, rely on an insured's failure to give notice of a claim where the third party had effectively "stepped into the insured's shoes" and informed the insurer of the claim within the prescribed period. "Pay-first" clauses, requiring the insured to pay sums due to the third party before a right to an indemnity can arise, would not apply (except in marine insurance cases).
Although the new Act gives insurers more control over claims, insurers defending claims will need to respond and deal with a greater number of requests for information from third parties. They will need to consider the impact of third party communications on policy provisions relating to claims and circumstance notifications. They will also need to take prompt steps to ensure that evidence is identified and obtained at the earliest possible stage from the insured.
The Act is more advantageous to third party creditors: the definition of who is "insolvent" has been widened; the procedure for bringing claims directly against insurers is less time consuming and expensive; the ability to request information from insurers enables third parties to weigh up whether a claim is worth bringing; and more claims are likely to be successful given the provisions restricting reliance upon technical defences.
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