Parliament Approves Amendments to Third Party Rights Against Insurers

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...