It will be recalled that the 2010 Act is intended to make it easier for third party claimants to bring direct actions against (re)insurers where an insured has become insolvent. The key changes coming in are as follows:
- There will no longer be any need for the third party to “establish” the insured’s liability to it first (by judgment, arbitration award or agreement). The 2010 Act will allow a third party to litigate the substantive cause of action alongside an action for an order that the insurer pay any damages awarded.
- The definition of an insolvent company has been updated.
- The 2010 Act allows a third party who believes he has a right of action under the 2010 Act to obtain information about the rights transferred both before and after the issue of proceedings. If it can be established that there is a contract of insurance that covers, or might reasonably be expected to cover, the supposed liability, information can then be obtained on:
- the identity of the insurer;
- the terms of the insurance;
- whether there are (or have been) proceedings issued; and
- whether there is an aggregate limit of indemnity (if so, how much) and whether there are any fixed charges which would apply to any sums paid out.
A person who receives a notice requesting information is obliged, within 28 days (beginning with the date of receipt of the notice), to provide as much of the information specified as they can “without due difficulty” and if it cannot be provided, state why and provide details of any other person who might be able to supply it. Failure to comply with a notice requesting information permits the third party to apply to the court for an order compelling compliance.
In addition, the third party may request information from any person that he or she reasonably believes could provide the information. This might include brokers, former employees and anyone else authorised to hold policy information.
This should enable the third party to make an informed decision on whether or not to commence or continue litigation (and so may prevent speculative claims, but will equally place a large administrative burden on insurers and may increase the amount of compensation the third party seeks).
4) The 2010 Act retains the general approach of the 1930 Act that the rights transferred to the third party will be subject to the defences which the insurer could use against the insured (eg breach of a warranty or condition precedent). However, it introduces three exceptions which are designed to defeat “technical” defences:
The 2010 Act retains the general approach of the 1930 Act that the rights transferred to the third party will be subject to the defences which the insurer could use against the insured (eg breach of a warranty or condition precedent). However, it introduces three exceptions which are designed to defeat “technical” defences:
- Anything done by the third party, which, if done by the insured, would have amounted to, or contributed to, fulfilment of the condition is to be treated as if done by the insured. So, for example, the third party will be able to give notification where a policy provides that the notification must be made by the insured itself.
- Insurers can no longer rely on a defence of breach of duty to provide information, where the insured is:
- an individual who has died, or
- a body corporate that has been dissolved.
- Insurers can no longer rely on “pay first” clauses. This does not extend to marine insurance, except where the insured’s liability is in respect of personal injury or death.
Possible Impact of the 2010 Act on insurers
The 2010 Act is generally expected to be procedurally better for third parties and insurers alike. As it will generally be the insurer that defends the claim against the insured in any event, the 2010 Act is considered to reflect and recognise the reality of the situation. Further potential consequences are:
- an increase in the number of claims that are brought by third parties against insurers as the process for obtaining payment from insurers has been made simpler, quicker and cheaper;
- an opportunity for insurers to scrutinise the initial claim against the insured rather than simply being presented with a judgment which must be paid. Insurers will now be made a party to the proceedings so will have greater control and can ensure a proper defence is invoked. Even if the policy defence fails, insurers will be able to contest liability and quantum of the original claim under the policy;
- an increase in requests for information from third parties who reasonably believe that an insured has incurred a liability to them, and the associated costs and administrative burden of dealing with such requests, particularly since the 28 day time limit for compliance is relatively short. Records will have to be carefully maintained;
- a decrease in speculative claims on the basis that the disclosure provisions under the 2010 Act attempt to provide third parties with access to information in respect of cover at an early stage;
- a reduction in unnecessary court proceedings as the 2010 Act envisages a single set of proceedings to resolve all issues including the insured’s liability to a third party and the insurer’s liability in relation to the third party’s claim; and
- a reduction in legal costs for third parties and insolvent companies as the procedure has been streamlined. It is unclear whether insurers will enjoy the same benefit.