August 2016 will see the biggest shake up to UK insurance law in living memory. In addition to the implementation of a new general Insurance Act, making substantial changes to the rights of policyholders and insurers, it has recently been announced that the “new” Third Parties (Rights Against Insurers) Act 2010 will finally come into effect on 1 August 2016.
The new Third Parties Act is significant. It applies both to companies and individuals and will be of interest to anyone with a claim against an insolvent party. In addition to bringing the law up to date with current insolvency legislation, it allows the party with a claim to:
- find out whether the insolvent party has any insurance policies which would have provided cover against the liabilities the claim relates to, and
- bring a claim directly against the insolvent party’s insurers, avoiding the risk and uncertainty of suing an insolvent entity.
A client hires a firm of consulting engineers to design the plant in a new building. Two years later the heating and cooling systems start malfunctioning. Eventually they break down altogether.
New consultants advise that the plant was badly designed in the first place. Unfortunately the original engineering firm has gone bust by now. The original engineers presumably had professional indemnity insurance in place when the work was carried out, but the client has no details of the policy and no idea who the underwriters were.
Under the new Act, the client can contact former directors of the defunct firm and require them to hand over details of the insurance policy, including the identity of the insurers and the terms of cover. The client can also make a similar approach to the insolvent firm’s former brokers.
Armed with this information, the client can then commence legal proceedings directly against the insurers without taking the risk that, even if the claim turns out to be successful, there will be no one liable to pay.
The ability to access an insolvent party’s insurance cover is not new. The old 1930 Act allowed claims to be brought against an insolvent party’s insurers, but not without significant risk and expense. The new Act purposefully makes it much easier and cheaper to do so, and is expected to be more widely used as a result.
Like the old Act, the new Act does not generally give a third party any greater rights against the insolvent policyholder’s insurers than the policyholder itself would have had. However, it includes significant new provisions to overcome practical issues which prevented the old Act from being used more widely.
Obtaining details of an insolvent party’s insurance cover
Under the new Act, third parties will for the first time be entitled to request details of the insolvent party’s insurance cover before they decide whether or not to bring a claim. This removes the problem of having to commit time and money to legal action before you know whether there is anybody worth suing.
Third parties will have a right to request details from the insolvent party itself, or from anyone else with knowledge of the insolvent party’s insurance arrangements e.g. its former insurance brokers or, in the case of a defunct company, its former officers or employees. Those parties are required to respond within 28 days and either provide the details requested, or any information they have as to where such details might be found.
The details which can be requested include:
- the identity of the insurer,
- the terms of the policy, including the original and/or remaining limit of cover, and
- whether the insurer has denied liability for the potential claim and if so, details of any proceedings with the insurer concerning its liability under the policy.
Bringing claims directly against the insurer
Under the new Act, third parties no longer have to establish the insolvent party’s liability before pursuing its insurer. Instead, they can take things the other way round – by first obtaining a court declaration that the insurer is liable for the insolvent policyholder’s liabilities to them.
If the insurer does not accept that the insolvent party was liable to the third party, then the third party will still have to prove that legal liability before enforcing the policy against the insurer. But the new regime is still welcome, because it gives the third party the option of determining any potential issues over the insurance coverage before embarking on the more costly business of establishing the insolvent party’s liability to them.
For more information on the new Act and how it may affect you, please contact the author, or another member of the Mishcon insurance team.