The extent to which a claimant is entitled to enforce rights against the insurer of an insolvent entity is likely to become a key battleground for insurers over the coming months and years, particularly as the economic impacts of Brexit, COVID and the costs of living/business crises truly begin to bite.
It is more important than ever, therefore, that insurers are able to effectively navigate the key pieces of legislation governing the area: the Third Party Rights Against Insurers Act 1930 (1930 Act) and its successor, the Third Party Rights Against Insurers Act 2010 (2010 Act).
A brief history
The aim of the 1930 Act was to provide a gateway through which a claimant, to whom an insolvent insured entity had incurred a liability, could effectively stand in the shoes of that insured, thereby allowing it to claim compensation for its losses from the insolvent insured's liability insurers. However, there were challenges for claimants under the 1930 Act as not only could it be difficult to obtain information on the scope of insurance cover before making a claim against insurers, claimants first had to establish the liability of an insured (which could involve the restoration of the insured entity to the Register of Companies and expensive and time-consuming legal proceedings against the insured).
In resolving a number of these idiosyncrasies, the 2010 Act created a more straightforward process for obtaining information from, and enforcing rights directly against, a liability insurer, thereby enabling claimants to alleviate the risks traditionally associated with proceeding against an insolvent entity first and then its insurers. The 2010 Act achieved this by implementing a number of practical changes including, but not limited to, the following:
- It allowed a claimant to proceed directly against an insurer without first needing to establish the liability of the insured (which often required the restoration of the insured entity to the Register of Companies)
- It made it easier for claimants to obtain particular categories of information (for example the policy terms and confirmation of whether there had been any proceedings between the insured and insurers) from insurers and certain other parties provided certain criteria were met
- It also restricted some of the remedies available to insurers for a breach by an insured entity of any policy terms and conditions. For example, section 9 2010 Act deprived the insurer of any remedy for breach of a condition requiring the insured to provide information and assistance in circumstances where either a) the insured had been unable to discharge its obligations under that condition as a result of it having been dissolved, or b) the claimant had already taken steps to comply with the condition in question.
Notwithstanding the above, a number of nuisances - both in the legislation and in the law – remain, and insurers may wish to take the following factors into account when faced with a claim under the 1930 or 2010 Act.
Limitation is not suspended under the 2010 Act
In claims against insurers under the 1930 Act, limitation is suspended on the insured's insolvency. This follows the 2005 case of Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd. This means that a claimant can potentially pursue 1930 Act claims against insurers long after the usual limitation periods in contract and tort have expired.
However, a recent decision in the Leeds County Court – Rashid v Direct Savings Limited  - held that the principle established in Larnell does not apply to 2010 Act claims against insurers. This is because the claimant has a direct claim against the insurer under the 2010 Act. This means that limitation is not suspended where a claimant brings a direct claim against insurers under the 2010 Act. Although this is only a County Court decision, HHJ Gosnell said that the Court had been provided with five unreported judgments all reaching the same conclusion and for similar reasons. This decision provides insurers with potentially good grounds for rejecting claims under the 2010 Act where primary limitation has expired.
The 2010 Act may not always apply
Insurers should be aware that, provided certain criteria are met, the 2010 Act will not necessarily always apply.
Guidance was offered in Redman v Zurich Insurance Plc & Anor (Rev 1) , wherein Turner J confirmed that the 2010 Act would apply unless both the insured's insolvency and the act through which the liability had been incurred had taken place before 1 August 2016. If they both had, then the 1930 Act would continue to apply and the claimant would be faced with a harder task in order to recover compensation (although with a potential advantage of an extended limitation period).
Establishing insurer's liability
In BAE Systems Pension Funds Trustees Ltd v Royal & Sun Alliance Insurance Plc , O’Farrell J found that a claimant does not need to establish that a loss is covered before bringing a claim under the 2010 Act, it may join an insurer as a co-defendant to proceedings even where there is a dispute as to whether cover is available.
Nevertheless, claimants will still – in order to recover their losses - be required to seek declarations under section 2(2) 2010 Act, both as to the insured's liability to the claimant and the liability of the insurer to provide an indemnity in respect of that liability, before the Court will award any compensation.
Accordingly, insurers will (subject to the restrictions set out at section 9 2010 Act) still be free to raise any coverage points as a defence (or even grounds for a strike out) in any application for a coverage declaration under the 2010 Act.
Insurer's defences/rights to bring a contribution claim
Although section 9 2010 Act restricts the remedies available to insurers, it is worth noting that the third party will still not be placed into a better position than the insolvent insured and the insurer will – for the most part - still have the same policy defences (as well as rights under the Limitation Act 1980 and Civil Liability (Contribution) Act 1978)) as it would have done had the claim been brought against it by the insured directly.
In addition, insurers will still be able to take action in respect of the breach of a condition requiring the insured to provide cooperation and assistance where the insured was capable of fulfilling that condition prior to it being dissolved. Insurers should, therefore, pay careful attention to when exactly the breach which gave rise to the remedy, was committed.
Although changes brought about by the implementation of new legislation have made it easier for claimants to obtain compensation from the insurers of insolvent insureds, technical issues can and do often arise when claims are advanced under the 1930 or 2010 Acts. In an economic climate where more and more insureds are likely to be pushed towards insolvency, insurers will do well to seek advice on how those technical issues might impact upon their exposure to third party claims.