End of Insolvency Shield for UK Insurers?
The Third Parties (Rights Against Insurers) Act 2010 (“TPR”) will finally come into force on 1 August 2016, making it easier for third parties to bring claims against insurers of insolvent companies. It has taken more than six years, spread over three separate governments and was amended even before it came into force, but TPR will finally replace the Third Parties (Rights Against Insurers) Act 1930 (the “1930 Act”).
There is a gap in common law where a company is insured but insolvent. The principle of privity of contract means that only the parties to the insurance contract can enforce its rights. Therefore, under common law, only the liquidators or the insolvent company could bring a claim under an insurance policy and the proceeds would then be absorbed into the assets of the company and distributed to its creditors. This means that a third party, who the policy may have been specifically intended to protect, is left to claim alongside all other unsecured creditors rather than being compensated directly. For example, if a property developer takes out insurance to cover post-completion defects and then goes into liquidation, the new owner of the property could no longer benefit from the policy as the policyholder is insolvent.
This unfairness was rectified by the 1930 Act which allowed a third party to recover from a company’s liability insurer if the company became insolvent. However the 1930 Act only went so far and neglected to deal with a number of unsatisfactory situations. TPR aims to deal with these shortcomings.
TPR introduces a number of key changes:
Establishing liability of the insolvent company- A key tenet of the 1930 Act was that the third party had to first establish the liability of the insolvent insured company and if dissolved after liquidation, restore the company to the Companies’ Register. Not only was this time consuming, but the third party would often have to bring a claim without knowing the details and, crucially any limitations, of the insurance policy. TPR allows third parties to bring claims directly against the insurer and can join the insolvent company as a party if they wish to. Third parties will also no longer be required to reinstate a dissolved company before liability can be established.
Provision of information- Third parties now have the right to request information regarding the policy from the insured, the broker and/or any other relevant party. This information may include the terms of the policy, whether the insurer has disputed liability, any proceedings between the insured and insurer relating to the supposed liability and whether there is any limit on funds available.
Enhanced third party contractual rights- TPR largely echoes the 1930 Act in transferring the contractual rights of an insured insolvent company to a third party. However TPR removes some of the defences which insurers have used to prevent paying out on the policy. For example, where a policy requires that the policyholder perform an obligation and that action is taken by the third party, it will be now be treated as satisfied.
TPR is a very practical piece of legislation and therefore there are number of practical implications we may expect to see:
Fewer speculative claims- The increased information sharing means that third parties will have a far clearer picture of the merits of a claim before bringing one as they will be able to analyse the exact wording of the policy and background to the relationship between the insurer and insured in advance. This should result in fewer speculative claims being issued and disputes being settled earlier.
Increased administrative burdens for insurers- The other side of the coin is that insurers will have to be more cooperative in providing information. While this may increase the administrative burdens for insurers, increasing the information available at an early stage can only help to resolve disputes more quickly.
Reduction in legal costs- Unnecessary costs can increase rapidly as third parties first establish the liability of the insured and then reinstate the insolvent company if it has been dissolved, just to bring a claim against the insurer. The greatest benefit of the new Act is the reduction in legal cost for third parties as these steps may no longer be necessary.
The grander hope is that third parties can contract with companies with greater confidence knowing that it is now easier to access the company’s insurance policy should the company become insolvent. Let’s hope it was worth the wait.