Streamlining liability
Date: 11 December 2009
Authors: David Hertzell & James Sharpe
Issue: Vol 159, Issue 7397
Categories: Features, Procedure & practice
The Third Parties (Rights against Insurers) Bill was introduced in the House of Lords last month. The Bill follows the widely supported recommendations of the Law Commission and the Scottish Law Commission, published in 2001.
The Bill replaces the Third Parties (Rights against Insurers) Act 1930 (and its Northern Ireland equivalent). The 1930 Acts sought to deal with the problem highlighted in Re Harrington Motor Company [1928] Ch 105. The claimant was injured by a car belonging to an insured company.
He won damages, but the company was wound up before he could enforce the judgment. The court ruled that the insurance proceeds were part of the assets of the company, to be distributed among the creditors, denying the victim his full payment.
The 1930 Acts are not just confined to road traffic cases, but apply generally. When an insured is liable to a third party, eg an employee, and the insured becomes insolvent, the Acts transfer the insured’s rights under the insurance policy to the third party, enabling them to proceed directly against the insurer. In effect, the third party steps into the shoes of the insolvent insured and has the same rights as the insured did against the insurer.
The fundamental principles of the 1930 Acts have stood the test of time. However, in practice, they do not always work as effectively as they should.
The Bill seeks to solve these mainly procedural problems. It does not alter substantive rights between the parties but streamlines and updates the way in which the parties resolve how, and whether, liability is established.
Under the 1930 Acts, the third party cannot issue proceedings against the insurer without first establishing the existence and amount of the insured’s liability.
The Bill creates a new procedure allowing the third party to establish the liability of both the insured and insurer in one set of proceedings, saving time and money. At present the third party may need to bring further proceedings, eg to restore a defunct company to the register so that it may be sued. Under the Bill the third party proceeds directly against the insurer. The insured’s liability will be resolved in that action, without having to restore the insured to the register.
The current rules regarding disclosure are uncertain and inadequate. The third party’s right to information does not arise until the liability of the insured has been established. Until then, the third party may have to conduct litigation in ignorance of whether there is an insurance policy that covers the liability. As a result, time and money may be wasted pursuing an uninsured defendant.
The Bill clarifies the third party’s right to insurance information.
l It entitles the third party to ask for the information specified in the Bill at an early stage from anyone in control of it.
l Once the third party has made a valid request for information, recipients must respond within a specified timeframe but there is no continuing duty of disclosure. This ensures that a third party can get the information they need to commence or continue proceedings without being unduly onerous for those providing the information.
At present, the insurer may raise the same defences against the third party as he could have done against the insured. This approach is continued, save for three exceptions:
l Insurers can no longer rely on pay-first clauses, requiring the insured to pay money due to the third party in respect of the third party’s claim before the insured can claim the amount from the insurer. There is an exception in the context of marine insurance.
l Insurers cannot claim a breach of policy conditions by the insured, eg duty to give notice of a claim, where the third party has fulfilled the conditions instead.
l Any condition requiring the insured to provide information or assistance to the insurer is of no effect if the insured is dead or was a body corporate that has been dissolved.
There have been conflicting decisions on whether voluntarily incurred liabilities, such as legal expenses and health insurance, are recoverable under the 1930 Acts. These types of insurance are increasingly important.
For example, a hospital might only agree to treat a patient on evidence of health insurance, or a solicitor might only agree to act for a litigant on the basis of his legal expenses insurance.
The Bill expressly provides for them.
The 1930 Acts have failed to keep pace with developments in company and insolvency law. They do not apply, for example, to voluntary arrangements. The Bill reflects the range of modern insolvency procedures.
In cases with a foreign element, eg where the insured is based overseas, it can be unclear whether the 1930 Acts apply. The Bill sets out clearly when its provisions will apply—generally, where the insolvency-type event occurs within the UK. This is important given the increase in cross-border insurance arrangements since 1930.
The Bill was debated in Second Reading Committee this week and is then expected to be considered by a Special Public Bill Committee in the New Year.
David Hertzell, law commissioner & James Sharpe, research assistant, Law Commission
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