Bill clears the way for third party claims against liability insurers

The Third Parties (Rights Against Insurers) Bill was introduced into the House of Lords on 23rd November under a new Parliamentary procedure that is intended to quicken the process by which uncontroversial Law Commission proposals reach the statute book.

If passed, the Bill will update a 1930 Act that protects monies payable under liability insurance from the insured's creditors if the insured becomes insolvent. The proposals more or less replicate recommendations made by the Law Commissions of England and Scotland in 2001.

Before the 1930 Act came into force, a third party with a valid claim against an insured person or company would lose out if the insured went bankrupt or into liquidation. Any money payable under the policy would go into the general pot of assets and be distributed among all the insured's creditors.

The Third Parties (Rights Against Insurers) Act 1930, however, enabled the claimant to pursue a claim directly against the insurer and recover under the liability policy, as long as the liability of the insured had been established.

Under the Act, the insured's rights against its own insurer are automatically transferred to the third party when one of a list of insolvency "events" occurs, such as bankruptcy, winding up or the appointment of a receiver or manager. The third party can then enforce those rights against the insurer, subject to the terms and conditions of the policy and to any defence the insurer may have had against the insured.

But there are some drawbacks. For example, if the insured's liability to the third party has not been properly established before the insolvency event, the third party will usually have to issue proceedings against the insured and get a judgment before taking out separate proceedings against the insurer.

And if an insured company no longer exists because it has been dissolved, the third party will have to apply to get the company restored to the register before it can begin a legal action against it.

The new Bill aims to remedy these problems by removing the need for multiple sets of proceedings. The third party would be able to bring a single action against the insurer as soon as one of the triggering insolvency events occurs.

The court would then decide on both the insured's liability to the third party and on the insurer's liability under the policy during the same proceedings. The Bill makes provision for the insured to be joined (or to apply to be joined) as a party to the action, but the court could reach a decision on liability in the insured's absence.

The new law would also make it easier and quicker for the third party to find out from an early stage if there is an insurance policy in place and if so, obtain details about the cover in order to decide whether or not it is worthwhile pursuing an action. In addition, the Bill updates and expands the list of insolvency events to reflect changes in insolvency law since the 1930s.

Announcing the draft bill, Justice Minister Bridget Prentice said:

"It is essential, particularly in the current climate, that victims are able to settle rightful compensation claims in as inexpensive and unstressful a way as possible – even if the wrongdoer has gone bust.

The insolvency of an individual or company should not make it more difficult for claimants to recover full compensation for their loss."

The Bill is due to have its second reading in the House of Lords on 2nd December.