An Improved Law for a New Century - Third Parties (Rights Against Insurers)

The existing law

The Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act") is one of the shortest Acts ever enacted (just six sections) but was designed to overcome a serious injustice.

Prior to the passing of the 1930 Act, an individual might have succeeded in an action against a wrongdoer who had caused him harm/loss and who had third party insurance to meet the claim but would remain uncompensated if, before the victim could claim his money, the wrongdoer went bankrupt and the insurance money was paid to the other creditors. This was a particular problem experienced by the victims of road traffic accidents caused by insolvent, but insured, car drivers. The 1930 Act was introduced in a recession (perhaps the worst ever) and continues to be most relevant in times of recession, such as the early 1990s.

By section 1 of the 1930 Act, where an insured incurs a liability to a third party (before or after the insured becomes insolvent), the insured's rights against the insurer under the contract of insurance are transferred to and vest in the third party. The 1930 Act applies to motor policies, public liability policies and professional indemnity policies.

Section 2 of the 1930 Act gives the third party the right to such information as may reasonably be required to ascertain whether any rights have been transferred to and vested in him and to enable him to enforce those rights.

Problems with the existing law

At face value, the 1930 Act appears to be a very powerful tool for a third party. However, several cases from the 1960s onwards have drawn attention to fundamental flaws in the 1930 Act:

1. The third party must establish his claim against the insured by obtaining judgment before he obtains any rights against the insurer.1 This may involve having to restore to the Companies Register a "struck off" company, which application could be time barred.2

2. The right to information about the insurance policy does not arise until liability against the insured has been established.3 The third party could pursue litigation to obtain judgment against an insolvent insured at great cost only to discover there is no effective insurance.

3. The 1930 Act only applies to insurance for wrong doing. It does not apply to legal expenses insurance so that solicitors were unable to recover unpaid fees due from an insolvent client.4By analogy, the same would seem to apply to medical fees covered by health insurance.

4. If an insured enters into a...