Cleaning up the act

The Third Party (Rights Against Insurers) Act 1930 was originally introduced to deal with the interface between motor insurance and insolvency law. Its aim was to prevent the injustice ­(established in a 1928 case) of insurance proceeds being paid into the estate of an insolvent insured party as a windfall for that person’s creditors as opposed to being paid to the victim as compensation.

Under insolvency law, any payments made into the estate of an insolvent insured (whether an individual or a company) would be distributed to classes of creditor in accordance with the statutory scheme and not as compensation for individual creditors.

However, since 1930 the insurance and the insolvency landscapes have changed beyond contemplation. The 1930 act has universal application for all insurance claims apart from reinsurance. Its ­application in a commercial context is ­riddled with difficulties, which can result in victims not being able to take advantage of its principles.

In recognition of this, the Third Parties (Rights against Insurers) Bill has been ­introduced to Parliament. The bill received its second reading in the House of Lords on 9 December 2009 and has now been referred back to the House of Commons.

The aim of the bill is to modernise the 1930 act and to make it quicker, easier and cheaper for a victim to recover compensation directly from an insurance company.

The proposed changes

The bill seeks to address the major issues with the application of the 1930 act. In ­particular:

  • The bill provides a statutory transfer of the rights under a policy to a victim in ­circumstances where the insured becomes the subject of an insolvency event. This is a fundamental change that could sweep away the requirement for the victim to commence multiple proceedings (ie as opposed to ­having, as now, to proceed against the insured in order to establish liability before proceeding against the insurance company for payment).
  • The bill removes the current requirement to restore a dissolved insured entity to the register of companies at Companies House in order to be able to take the benefit of the 1930 act.
  • The bill contains a detailed procedure that enables the victim to obtain ­information about the policy at an early stage. This will be a departure from the ­current position, where the victim’s right to information only arises upon the ­liability of the insured being established.
  • Any transfer to a victim under the 1930 act (as amended by the bill) of the policy rights remains subject to all the defences that the insurer could have raised against the insured. However, the bill introduces three exceptions to this principle (the insurer would previously have been able to rely on breach of such a technicality to avoid ­liability). The three exceptions are:
  • where the policy contains a condition that requires the insured to do something (for example the provision of initial ­information or assistance), the victim’s compliance with that condition is sufficient;
  • where the policy contains a condition that requires the insured to provide continuing information and assistance once the ­insurer has notice of the claim, and the insured cannot comply with that condition (for example where the insured has been ­dissolved), the statutory transfer will not be subject to that condition and the victim does not need to comply; and
  • a ‘pay-first’ clause (ie where the insured is required to pay sums due to the victim before the liability of the insurer arises) will not apply on a statutory transfer.
  • The bill additionally updates the ­applicable insolvency processes by including processes such as company and individual voluntary arrangements.

The impact of the bill

While the 1930 act is a useful tool for victims in circumstances of the insolvency of the insured, the circumstances of its application have changed dramatically over the ­intervening 79 years. The 1930 act is overdue for modernisation and has been the subject of debate for a number of years.

If the bill receives Royal Assent, it may result in:

  • an increase in third-party claims, as the process will have been clarified and ­simplified so as to allow the 1930 act to operate as intended; and
  • an increase in requests for information from insurers, which may become a ­significant administrative burden.

The bill has been referred back to the House of Commons, but it still needs to ­complete five stages before it can receive Royal Assent. In light of the general ­election due in 2010, it is not clear whether ­Parliament will have sufficient time to ­complete the process. Therefore, it may be that reform of the 1930 act will have to wait until after the next general election and would be dependent on the new government maintaining an interest in such reform.

Richard Williams is a restructuring ­partner and Alison Cull is a restructuring senior associate at Pinsent Masons