It has been some time coming, but on August 1, 2016, the operative provisions of the Third Parties (Rights against Insurers) Act 2010 (the Act) will come into force. The Act will significantly improve the subrogation prospects of insurance companies whose contracts are subject to the laws of England, Wales, Scotland or Northern Ireland.

The purpose of this article is to provide a brief overview of the problems that insurance companies face when seeking a recovery from the insurer of an insolvent individual or company, and how the Act should address these.

Background

The current legislation is the Third Parties (Rights against Insurers) Act 1930 and the Third Parties (Rights against Insurers) Act (Northern Ireland) 1930 (the 1930 Acts). This legislation allows a person who has a claim against an insolvent person or company to bring the claim directly against the insurer of the debt.

There are significant issues with the current regime. In 2001, the Law Commission and Scottish Commission produced a joint report, Third Parties – Rights against Insurers, that examined these problems and recommended reform. These recommendations led, albeit belatedly, to the new Act.

The Broader Scope of the Act

It is more than 80 years since the 1930 Acts first came into force and, unsurprisingly, a lot has changed in the world of insolvency law. The third-parties regime has not kept up to date with developments, particularly the range of procedures to which individuals, companies and bodies can be subject. The 1930 Acts do not, for example, cover voluntary procedures between the insured and the insured’s creditors. Under the 2010 Act, a claimant can bring a claim against the insured’s insurer if the insured has, in advance of or after incurring the alleged liability, gone through one of the insolvency procedures specified in the Act. The list of insolvency procedures brings the law up-to-date. The Act also grants the Secretary of State the power to introduce regulations that update the list. The incoming regime should therefore be well equipped to handle future developments in insolvency law.

The drafting of the Act was not, however, smooth-sailing. Following its enactment in 2010, the commencement of the Act was delayed because its scope was found, in some respects, narrower than its predecessors and it had not kept pace with the development of insolvency situations, particularly following the 2008 financial crisis. The Third Parties (Rights against Insurers) Regulations 2016 rectifies these issues.

The Procedure

The procedure to recover a debt under the 1930 Acts is costly, lengthy and complex. It entails two problems in particular.

First, should one wish to bring a claim against a company struck off the Companies Register, one must first issue proceedings to restore the company to the register. The process is complex and time consuming, consisting of 14 stages. The Treasury Solicitor is involved and witness statements must be prepared. In their latest impact assessment on the 2010 Act, the Ministry of Justice relayed the Association of British Insurer’s estimate that the average cost of restoring a company is between £1250 and £2000. This estimate appears reasonable, as does the Ministry of Justice’s view that “it is likely that a significant proportion of the costs are ultimately borne by the insurance industry.”

Second, a claimant must establish the liability of the insured before it can pursue a claim against the insurer. The Ministry of Justice felt unable to quantify the cost of this requirement but clearly, this step also adds to the cost and length of proceedings.

The 2010 Act will remove these hurdles. Claimants will be able to bring a claim directly against the insured’s insurer in one set of proceedings.

Access to Information

Under the current regime, claimants cannot obtain information about an insurance policy until liability is established. Understandably, claimants often give up on proceedings. They cannot be sure that if they go through the complex and costly process and actually obtain a judgment, there will be sufficient insurance coverage (if indeed, any coverage at all) to pay the sum due.

The Act seeks to address this problem by giving claimants the right to request certain information from anyone who may hold that information, including the insured, insurers and brokers. The claimant must reasonably believe that the insured has incurred a liability and undergone one of the relevant insolvency procedures. They can then, in advance of or after the issuing of proceedings, make a request for useful information such as the policy terms and whether the indemnity limit has already been exceeded in paying other claims.

A person who receives a request for information must respond within 28 days. If the recipient is unable to provide any of the information, they must explain why and should they not have the information, say who they believe has it. A claimant may obtain a court order against the recipient of the request, should they fail to respond in accordance with the Act’s requirements.

Removal of Defenses

The 1930 Acts do not allow a claimant to be in any better position than the insured. The insured’s insurer can use the same defenses as the insured would.

The Act retains this general approach. The insurer will be able to invoke arguments of, for example, limitation, contributory negligence and mitigation. In general, the insurer will also be able to rely on policy defenses. The Act nevertheless allows a claimant to enforce his or her rights against the insurer, should the insured have failed to satisfy a condition of the policy, in three ways.

First, should the claimant take the step that the insured was required to take (e.g., notifying the insurer of the claim within a time limit), the condition will be taken as satisfied.

Second, an insurer can still be held liable in cases where the insured no longer exists (e.g., the insured individual has died or the insured company has dissolved) and cannot therefore satisfy the policy’s requirement to provide information or assistance.

Third, except to a limited extent in marine insurance, “pay first” clauses will not apply.

Conclusion

The Act will allow insurers to pursue a subrogation action against the insurer of an insolvent party in a broader range of insolvency situations. Moreover, the procedure for making such a recovery should be easier, quicker and less costly than it is currently. There will no longer be the need for multiple proceedings and there will be less policy defenses on which the third-party insurer can rely. Insurers will also be able to obtain information about the insolvent party’s insurance coverage, which will assist in determining the worth of pursuing a claim, before they issue proceedings. With the implementation of the Act, we should therefore see a decrease in speculative claims, an increase in the early resolution of other claims, and a significant saving in time and costs for all involved.

It may be 15 years since the Law Commission and Scottish Commission recommended reform but, when the Act comes into force on August 1, 2016, insurance companies can have greater confidence when handling subrogated claims against an insolvent party’s insurer.