Since 1930 we’ve had laws aimed at ring-fencing certain insurance proceeds from an insured company or individual’s insolvency for the benefit of third parties with insured claims against the insolvent party.
Without this legislation, any insurance proceeds would go into the general pot and shared among the insolvent party’s creditors as a whole rather than benefiting the third party with the insured claim.
In 2010, the Third Party Rights Act 2010 was passed. Its purpose was to update the legislation to reflect new insolvency procedures and to iron out some of the practical difficulties that had arisen as the old law was tested through the Courts. The Act was finally brought into force in August this year.
What you need to know about how claims are treated:
- The rights of the insured under the policy transfer to a third party claimant when the insured becomes a ‘relevant person’.
- The insured becomes a ‘relevant person’ if a specified insolvency procedure is in force in respect of it. For companies, these include administration, liquidation, provisional liquidation, voluntary arrangements, the appointment of a receiver and manager or dissolution. The obvious exclusion is fixed charge receivership (often called ‘LPA receivership’)
- This transfer of rights means the insured can no longer bring a claim in the courts in its own name under the policy against the insurance company.
- The third party claimant can now directly claim against the insurance company and does not need to include the insured party in the proceedings (although it can – in the same set of proceedings). This helps where the insured company is dissolved.
- Crucially, the third party claimant cannot also claim against the insured company once the rights have transferred – unless there is a shortfall in what can be recovered from the insurer.
- The third party claimant is not in any better position against the insurance company than the insured party – all the same policy terms, exclusions, limits and excess apply.
- The insurer has largely the same policy defences against the third party as it would have been able to use against the insured – the third party is not in a better position. There are specific exceptions which aimed at removing practical obstacles to the third party – such as where the insured cannot provide information or notify the insurer because it does not exist.
Rights to get information:
- A third party claimant can ask for information by notice in writing from the insured or from any person who can provide it. The information includes:
- Whether there was a relevant policy in place;
- The policy terms;
- Whether the insurer has paid out on similar claims; and
- Whether there are fixed charges which would apply to any sums paid out.
- Insolvency practitioners – as current or former office holders – are likely targets. If you can provide the information ‘without due difficulty’ from a document within your control, or from your knowledge – you must do. You must respond anyway within 28 days of receiving the notice – either providing the information or explaining why not and suggesting who you believe have any missing information.
- If you do not comply with this, the third party can obtain a court order against you (and costs)!