Article by Hilary Messer published on RealBusiness.co.uk
What happens if you have a financial claim against a person or company who turns out to be insolvent? If it has liability insurance then a new piece of legislation may make it easier to recover your losses.
The old law
The Third Parties (Rights against Insurers) Act 2010 came into force on 1 August 2016, replacing a 1930 Act which aimed to protect insurance proceeds from the effects of the insured’s insolvency.
Before either of these Acts and under common law, if as a third party you had a judgment against an insolvent insured defendant, you still had no direct claim to the insurance monies. Those monies were an asset in the insolvency, available for the benefit of all creditors, even though a policy had been taken out precisely to cover your claim.
The 1930 Act tried to do away with that unfairness and let you claim direct by transferring the insured’s rights to you as the third party. However, you had to sue at least twice: first the insured to get a judgment and then, separately, the insurer to get that judgment paid.
Further, if the debtor company had already been struck off Companies House Register because it was insolvent, you would also have to pay and apply to the Court to restore it to the Register first and before being able to sue any party. This took considerable time, effort and money. The 1930 Act was novel but unfortunately, created such a complex claim process that in practice it was rarely used.
The new law
Some 76 years later the good news for SMEs is that the 2010 Act introduces a less complex and potentially cheaper regime. This should make it easier for you as a third party to claim directly against the liability insurers of an insolvent insured who has caused you to suffer loss. The new and improved process reflects the reality of litigation which is that claims against defendants are often handled by their insurers when legal liability insurance is in place.
How does the law work?
Under both Acts the insured’s policy rights transfer to you as the third party but under the 2010 Act, you pursue your claim in a single set of proceedings, identifying at a very early stage exactly who the insurers are so you know who to sue. This rights’ transfer happens either if the insured is insolvent when it incurs the liability to you or has incurred the liability when it becomes insolvent.
On transfer you simply sue the insurer direct. It no longer matters if the insured has been struck off. You do not need judgment against the insured. You still have to establish that the insurer is liable so you still need judgment but against the insurer only.
In case the insured wants to defend your claim, you must give notice about your intended action, to allow the insured to apply to be joined as defendant if they wish. The transfer of rights does not put you as third party in any better position than the insured. The insurer can rely on any defence the insured would have had. You are subject to the same policy terms, indemnity limit and excess as the insured and the insurer has the same policy defences against you as against the insured.
Those defences are however somewhat eroded by the 2010 Act, making it more favourable to you as third party. For example, if transferred rights are subject to some sort of policy condition that the insured has not met then, if you meet it, that will be treated as if it was done by the insured. The insurer no longer has any defence on this.
Of course you may not even know who the insurer is, let alone the extent of the cover, and have difficulty finding out. Help is at hand as the 2010 Act widens the category of people you can ask for information, setting a time limit for replies. You can now ask the insured, insurers, brokers and anyone else authorised to hold policy information.
There are of course limits on what can be asked: you must reasonably believe the insured has incurred a liability and is a relevant person, and that an insurance policy was in place.
Requesting written proof of the existence of such a policy at the outset of your business dealings will undoubtedly pay dividends in terms of time and effort spent if you do ever need to use the 2010 Act. Do note however that the 2010 Act only applies where either the insured incurs liability to you or its insolvency occurs after 1 August 2016. Any liability or insolvency before this date falls under the 1930 Act.