Introduction

The introduction to the Act says this:

“An Act to make provision about the rights of third parties against insurers of liabilities to third parties in the case where the insured is insolvent, and in certain other cases”.

The Act 2010 (the Act) modernises and simplifies the Third Parties (Rights against Insurers) Act 1930. It is important legislation for personal injury practitioners as inflation is rising, fuel prices are skyrocketing, Brexit has increased business costs and the UK is heading into recession. We can expect to see an increase in business insolvency.

The Gazette published the May 2022 UK insolvency statistics recently.

In May, there was a total of 1,817 company insolvencies in England and Wales

• 1584 creditors’ voluntary liquidations (CVL’s)
• 135 compulsory liquidations
• 84 administrations
• 14 company voluntary arrangements
• 0 receiverships

This is 34% higher when compared to May 2019 (pre-pandemic).

As for individuals, there were: –

• 566 bankruptcies
• 2,030 Debt Relief Orders (DRO’s)
• 7,812 individual voluntary arrangements

As personal injury lawyers, we can expect to see more and more insolvent Defendants.

The Acts: Similar but quite different

The starting point under the 1930 Act and the 2010 Act is that, where a person is owed a liability by another and that other person is or becomes insolvent, the rights of the insolvent person against his or her insurers are automatically transferred to the person owed the liability who is referred to as the third party. The Acts seek to achieve the same aim but via different mechanisms. The 2010 Act has a key difference. Under the 1930 Act, a third party cannot issue proceedings against an insurer without first establishing the existence and amount of the insured’s liability to a third party. This may require the third party to bring proceedings against the insured. If the insured is a dissolved company that has been removed from the register of companies, the third party was required under the 1930 Act to bring proceedings to restore it to the register in order to be able to sue it. The 2010 Act removed the need for these separate proceedings against the insolved person and thereby removes the need to restore companies to the register. It does this by allowing the third party to issue proceedings against the insurer to establish, first, the insured’s liability and, secondly, the potential liability of the insurer. This removes the need for preliminary proceedings against the insured. The transfer of right under section 1 does not put the third party in a better, or worse, position than the insured or to affect anything other than the entitlement to the proceeds of the insurance policy in relation to the liability in issue.

Start date

The 2010 Act has a start date of 1^st August 2016. It only applies where the relevant person became insolvent on or after this date. If it was before 01.08.16, the 1930 Act applies. The date when they incurred a liability i.e. the accident date is not relevant for these purposes. In other words, if the accident occurred on 1^st January 2015 and the relevant person became insolvent on 1^st December 2017, the 2010 Act applies. The Act does not have retrospective effect. Liability is incurred when the cause of action is complete and not when the claimant’s rights against the wrongdoer are thereafter crystallised whether by judgment or otherwise: Redman v Zurich Insurance plc [2017] EWHC 1919 (QB), para 23 (Turner J).

The Act: Section 1 Transfer

Transfer of rights to third parties

Section 1 – Rights against insurer of insolvent person etc

(1)       This section applies if—

(a)       a relevant person incurs a liability against which that person is insured under a contract of insurance, or

(b)       a person who is subject to such a liability becomes a relevant person.

(2)       The rights of the relevant person under the contract against the insurer in respect of the liability are transferred to and vest in the person to whom the liability is or was incurred (the “third party”).

Definitions under the act

It is essential to understand the definitions used in the Act generally and also in a personal injury context.

(1)       “third party”

e.g. a Claimant in an EL/PL personal injury case

NB RTA Claimants can bring claims directly against the insurer under the RTA 1988

(2)       “relevant person”

i.e. an individual or company

e.g. the employer or occupier in a PI claim

This is the tortfeasor.

It is only a “relevant person” if they are insolvent

Insolvency means that they pay their debts, or it has more liabilities than assets and is in danger of stopping trading or closing down.

“Relevant persons” are defined in sections 4 and 6 of the Act.

4(1)     An individual is a relevant person if any of the following is in force in respect of that individual in England and Wales —

(b)       an administration order made under Part 6 of the County Courts Act 1984,

(c)        an enforcement restriction order made under Part 6A of that Act,

(d)       subject to subsection (4), a debt relief order made under Part 7A of the Insolvency Act 1986,

(e)        a voluntary arrangement approved in accordance with Part 8 of that Act, or

(f)        a bankruptcy order made under Part 9 of that Act.

If the Defendant in a personal injury claim is in an insolvency situation, the Claimant’s legal representatives should check that the individual is subject to one of the above. If there is any uncertainty, one can look at the relevant parts of the primary legislation e.g. the Insolvency Act 1986.

Corporate bodies i.e. Companies, clubs

6          Corporate bodies etc.

(1)       A body corporate or unincorporated body is a relevant person if a compromise or arrangement between the body and its creditors (or a class of them) is in force, having been sanctioned in accordance with section 899 [or 901F] of the Companies Act 2006. ]

(2)       A body corporate or an unincorporated body is a relevant person if, in England and Wales or Scotland—

(a)       a voluntary arrangement approved in accordance with Part 1 of the Insolvency Act 1986 is in force in respect of it,

(b)       the body is in administration under Schedule B1 to that Act,]

(c)        there is a person appointed in accordance with Part 3 of that Act who is acting as receiver or manager of the body’s property (or there would be such a person so acting but for a temporary vacancy),

(d)       the body is, or is being, wound up voluntarily in accordance with Chapter 2 of Part 4 of that Act,

(e)        there is a person appointed under section 135 of that Act who is acting as provisional liquidator in respect of the body (or there would be such a person so acting but for a temporary vacancy), or

(f)        the body is, or is being, wound up by the court following the making of a winding-up order under Chapter 6 of Part 4 of that Act or Part 5 of that Act.

The relevant person must have or had a policy of insurance.

If the relevant person was uninsured, there is of course no right to claim

Establishing liability

Section 1

(3)       The third party may bring proceedings to enforce the rights against the insurer without having established the relevant person’s liability; but the third party may not enforce those rights without having established that liability.

(4)       For the purposes of this Act, a liability is established only if its existence and amount are established; and, for that purpose, “establish” means establish —

(a)       by virtue of a declaration under section 2 or a declarator under section 3,

(b)       by a judgment or decree,

(c)        by an award in arbitral proceedings or by an arbitration, or

(d)       by an enforceable agreement.

A Claimant can “establish the relevant person’s liability” by simply obtaining a declaration and judgment. A Claimant can issue a claim in the County Court against the insurance company like any other PI claim without having first established their liability.

Section 2(2)

(2)       P may bring proceedings against the insurer for either or both of the following—

(a)       a declaration as to the insured’s liability to P;

(b)       a declaration as to the insurer’s potential liability to P.

This is the statutory power to bring those proceedings.

C may bring a claim under section 2 even where the insurer disputes cover.

See BAE Systems Pension Funds Trustees Ltd v Bowmer and Kirkland Ltd [2017] EWHC 2082 (TCC) [ (O’Farrell J).

For the operation of the Act see, in particular, [16] and [17]: ‘I am satisfied that section 2 is engaged wherever the claimant claims that the insured is a relevant person, that the insured has liability to the claimant, that the insured has insurance in respect of that liability and that therefore there is a transfer under section 1 of the 2010 Act. The claimant does not have to establish those rights before section 2 operates. Section 2 provides the machinery for establishing the existence of those rights.’

Where the court makes a declaration that the insurer is liable to the third party, it may also give ‘the appropriate judgment’ against the insurer. The Claimant may join the relevant person as a party but there is no requirement to do so. If the Defendant relevant person is joined, it will be bound by any declaration.

However, that liability does have to be established in order to take enforcement action.

That means proving liability in the same way as any claim as against a Defendant employer or occupier or private individual.

So, you prepare the case in exactly the same way.

The insurer can defend the claim as if it were the relevant person. For example, it can raise arguments as to breach of duty, causation and contributory negligence etc.

There are likely to be practical difficulties for the insurer in defending the claim as the relevant person is insolvent. Paperwork may have been lost and former employees may not be easy to identify or unwilling to cooperate.

Defences

Section 4(4)

(4)       Where proceedings are brought under subsection (2)(a) the insurer may rely on any defence on which the insured could rely if those proceedings were proceedings brought against the insured in respect of the insured’s liability to P.

 There are two hurdles for the Claimant: –

(1)       establish its liability claim against the relevant person

(2)       establish the insurer’s liability to indemnify under the policy.

These hurdles are now in the single set of proceedings but a Claimant does have to leap over both to achieve its compensation.

The point to remember is that the insurer’s indemnity to the Claimant is only as good as that to which is owed the insured.

The usual policy coverage defences apply e.g.: –

• did the insured give fair presentation of the risk?
• did it breach any conditions of its policy?

Problems typically arise for third party Claimants if the accident occurred and/or they intimate a claim prior to the Defendant becoming insolvent i.e. a relevant person under the Act. As the Defendant heads into an insolvency situation, it may well fall foul of the conditions of its insurance policy. For example, a serious problem would arise for a Claimant seeking to claim against an insurer under the Act if the relevant person, whilst still solvent, failed to cooperate and provide information to the insurer in respect of the claim prior to becoming insolvent. In that scenario, one would request disclosure of the policy conditions relied upon by the insurer so as to ascertain whether the insured was, in fact, in breach.

The Three Exceptions

Section 9

9          Conditions affecting transferred rights

(1)       This section applies where transferred rights are subject to a condition (whether under the contract of insurance from which the transferred rights are derived or otherwise) that the insured has to fulfil.

(2)       Anything done by the third party which, if done by the insured, would have amounted to or contributed to fulfilment of the condition is to be treated as if done by the insured.

(3)       The transferred rights are not subject to a condition requiring the insured to provide information or assistance to the insurer if that condition cannot be fulfilled because the insured is-

(a)       an individual who has died, F1…

(b)       a body corporate that has been dissolved[F2, or

(c)        an unincorporated body, other than a partnership, that has been dissolved.]

(4)       A condition requiring the insured to provide information or assistance to the insurer does not include a condition requiring the insured to notify the insurer of the existence of a claim under the contract of insurance.

(5)       The transferred rights are not subject to a condition requiring the prior discharge by the insured of the insured’s liability to the third party.

As discussed above, the insurer can still rely upon defences which it could have used against the insured. However, there three exceptions set out above to prevent an insurer from defeating a third party’s claim relying on certain technical defences based on conditions in the insurance contract. Where insurers are relying on defences in relation to their liability under the policy, it may be appropriate for those defences to be tried as preliminary issues in order to avoid unnecessarily incurring the costs of a trial in relation to the insured’s liability to the third party should the insurer’s defences succeed.

Subsection 2 relates to conditions in the insurance contract that require the insured to do something. Where such a condition exists and the third party, rather than the insured, has done the thing required by the condition, subsection (2) deems that the thing required has been done for the purposes of the condition.

For example, where the insured has not given notice of the claim but the third party has personally informed the insurer of the claim within the period prescribed in the insurance contract, the requirement to give notice is deemed to have been fulfilled and the insurer will not be able to rely on non-fulfilment of the condition as a defence.

Subsection 3 relates to any condition in the insurance contract that requires the insured to provide continuing information and assistance to the insurer once notice has been given of the claim.

Where the insured is incapable of fulfilling such a condition because it is no longer in existence (because it is an individual who had died or a company that has been dissolved), subsection 3 provides that the transferred rights are not subject to that condition.

For example, if the insurance company refute the third party claim in correspondence because they have not been provided with an Accident Report or a Witness statement from a Health and Safety Manager as they were required to do so by their terms and conditions, and the insured company has now been dissolved, you can draw their attention to section 9(3) and remind them that this is not a defence to your client’s claim.

Subsection (5) concerns ‘pay-first’ clauses, namely provision in an insurance contract requiring the insured to pay sums due to the third party before any right to indemnity can raised. These clauses will not apply to rights transferred under the Act.

Information under The Act

The other major difference between the 2010 Act and 1930 Act is that there is now an ability under the new Act to obtain information about an insolvent’s party’s insurance arrangements. Previously, a party was unable to establish if there was relevant insurance behind an insolvent Defendant and whether it was likely to pay out on the claim.

This corrects a major problem with the 1930 Act whereby the right to information did not arise until the insured’s liability has been established. Until then, the third party would have to conduct litigation in ignorance of whether any rights had been transferred. As a result, time and money may have been wasted pursuing a worthless claim. Alternatively, a worthwhile claim might have been abandoned in the belief that there would be no funds to pay a judgment.

The new Act allows a Claimant to gain more control over the situation when looking to bring proceedings against an insolvent Defendant.

SCHEDULE 1 (Section 11)

 Information and disclosure for third parties

Notices requesting information

(1)       If a person (A) reasonably believes that—

(a)       another person (B) has incurred a liability to A, and

(b)       B is a relevant person,

A may, by notice in writing, request from B such information falling within sub-paragraph (3) as the notice specifies.

(2)       If a person (A) reasonably believes that—

(a)       a liability has been incurred to A,

(b)       the person who incurred the liability is insured against it under a contract of insurance,

(c)        rights of that person under the contract have been transferred to A under section 1, and

(d)       there is a person (C) who is able to provide information falling within sub-paragraph (3),

A may, by notice in writing, request from C such information falling within that sub-paragraph as the notice specifies.

Paragraph 2 is a very wide power to request information from “C” i.e. any person.

This could be: –

• the insurer itself
• the insured
• an insurance broker
• former directors or employees
• the Official Receiver

There are of course who means by which to establish if there is insurance in place primarily through the usual databases and various organisations e.g. the Employers’ Liability Tracing Office (ELTO) and Financial Services Authority database

(3)       The following is the information that falls within this sub-paragraph—

(a)       whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it;

(b)       if there is such a contract—

(i)        who the insurer is;

(ii)       what the terms of the contract are;

(iii)      whether the insured has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability;

(iv)      whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and, if so, relevant details of those proceedings;

(v)        in a case where the contract sets a limit on the fund available to meet claims in respect of the supposed liability and other liabilities, how much of it (if any) has been paid out in respect of other liabilities;

(vi)      whether there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.

The information listed above is very prescriptive. It is a requirement to provide information rather than documents per se. It prevents a fishing expedition or extensive disclosure but does provide for the very sorts of things that a Claimant and its advisors would want to know.

Section 11 and Schedule 1 set out a clear disclosure regime, enabling a third party to write to someone whom they reasonably believe can provide the information the Act specifies. The duty of a person who receives a request for information is also clearly set out – he or she must respond within 28 days. This ensures that a third party is able to obtain the information he or she needs to commence of continue proceedings without creating a system that is not unduly onerous or costly for those who are providing the information. It allows a third party to identify if there is insurance and, if there is, the identity of the insurer.

If there is non-compliance with the request, an application can be made to the court for an order, requiring the named party to provide the information sought under Schedule 11.

Pre-action disclosure

In Peel Port Shareholder Finance Co Ltd v Dornoch Ltd, [2017] EWHC 876 (TCC) the insured was solvent and trading and had the benefit of a relevant policy of insurance, but insurers had denied liability under the policy. The claimant contended that the insured would not be able to satisfy any judgment for the amount claimed and would be wound up, and that the Claimant would then be entitled to sue the insured directly under the 2010 Act.

In exercising the Court’s discretion under CPR 31.16 and declining to order disclosure, Jefford J took into account the statutory and legal landscape as follows: the provisions of Schedule 1 to the 2010 Act demonstrated that Parliament could not have envisaged that CPR 31.16 could or would commonly be used to obtain insurance policies from the insurers of solvent insureds; there had never been an express statutory provision entitling a litigant to obtain the insurance policy of a solvent insured, because a litigant takes his defendant as he finds him; in proceedings against the insured CPR 31.16 did not provide a route for a prospective litigant to obtain the insurance policy of a solvent insured because the policy did not meet the test for standard disclosure; and attempts to deploy other provisions of the CPR to obtain the insurance policy of a solvent insured had failed.

Following Peel, Claimants intending to sue a solvent company suspected of becoming insolvent upon enforcement of a favourable judgment might find themselves in a worse position than Claimant intending to sue an insolvent insured.

Limitation

12        Limitation and prescription

(1)       Subsection (2) applies where a person brings proceedings for a declaration under section 2(2)(a), or for a declarator under section 3(2)(a), and the proceedings are started or, in Scotland, commenced—

(a)       after the expiry of a period of limitation applicable to an action against the insured to enforce the insured’s liability, or of a period of prescription applicable to that liability, but

(b)       while such an action is in progress.

(2)       The insurer may not rely on the expiry of that period as a defence unless the insured is able to rely on it in the action against the insured.

(3)       For the purposes of subsection (1), an action is to be treated as no longer in progress if it has been concluded by a judgment or decree, or by an award, even if there is an appeal or a right of appeal.

Section 12(1) applies where (a) the Claimant has brought proceedings for a declaration after the expiry of a period of limitation applicable to an action against the Defendant to enforce the Claimant’s liability and (b) while such an action is in progress.

Section 12(2) provides that in those circumstances the insurer may not rely on the expiry of that limitation period unless the Defendant could have done so.

For example, if the Claimant brings a claim against a Defendant firm which goes into liquidation during the proceedings and the Claimant then brings proceedings for a declaration under section 2, insurers will not be able to rely on a limitation period which has expired in the meantime. The action must be ‘in progress’ however.

This means that the Claimant must not withdraw or discontinue the action before commencing proceedings under section 2.

Section 12(4)(a) also provides that where the Claimant has established Defendant’s liability nothing in the 2010 Act is to be read as meaning that, for the purposes of limitation, the Claimant’s cause of action against the insurer arose otherwise than at the time when the Claimant established the liability of the insured. The effect of this provision is to prevent insurers going behind any judgment, award or settlement under which the Claimant has established liability and arguing that the Defendant had a limitation defence (even if the point was never taken).