Third party rights of direct action against insurers due to come into force

The 2010 Third Parties (Rights Against Insurers) Act does away with the need for a third party to establish the insolvent party's liability under the policy through a judgment, settlement or arbitration award before it can start an action against the party's insurer. The insured's liability must still be established before those rights can actually be enforced, but this can be done as part of the same set of proceedings.

"The need for the third party to first establish the insured's liability before it could pursue its claim directly against the insurer is a time-consuming and expensive process as it involves multiple sets of proceedings," said insurance law expert Rebecca Carrera of Pinsent Masons, the law firm behind Out-Law.com.

"Under the 2010 Act, the insured's rights against the insurer will still be automatically transferred to the third party on the happening of one of a series of specified insolvency events; but the third party will be able to issue proceedings directly against the insurer and resolve all issues – including the insured's liability – within those proceedings," she said.

Once in force, the 2010 Act will replace the previous regime set out in the 1930 Third Parties (Rights Against Insurers) Act. The aim of both pieces of legislation is to protect the proceeds of an insurance policy from the effects of the insured party's insolvency. Without the effect of the legislation, any money paid out by a policy held by a party that has since gone bankrupt or into liquidation will go to the trustee in bankruptcy or liquidator, and will form part of the insured's assets for distribution to all creditors.

Under both pieces of legislation, the insured's rights against its insurer are automatically transferred to the third party when any one of a series of specified insolvency events occurs. These include a debt relief order, an administration order, an individual voluntary arrangement or a bankruptcy order where the insured party is an individual; or a voluntary arrangement or administration order, appointment of a receiver, manager or provisional liquidator, winding up or dissolution in the case of a limited company or unincorporated organisation.

As with the 1930 Act, a transfer of rights under the 2010 Act will not put the third party into any better position than the insured would have been. The insurer can therefore continue to rely on any defence it would have had against its insured. The 2010 Act does, however, introduce some exceptions to this rule. In cases where the transferred rights are subject to a condition that the insured was required to fulfil, the third party will now be able to fulfil that condition; transferred rights will no longer be subject to any condition requiring the insured to provide assistance or information where the insured no longer exists; and 'pay first' clauses, requiring the insured to pay sums due to a third party before it can claim under the policy, will not apply.

The 2010 Act will also make it easier for the third party to request information about insurance at an early stage so that it can make an informed decision about whether to litigate; for example, information about the nature of the cover or the identity of the insurer.

Information can be requested from anyone that the third party reasonably believes holds information about the policy; for example, the insured, a broker or a former officer, an ex-employee or an appointed insolvency practitioner. A party who receives a request for information under the Act must provide it within 28 days, as long as they are able to do so "without due difficulty".