Happy 4th Birthday – The Third Parties (Rights Against Insurers) Act 2010

On the 1 August 2020 it will be 4 years since the Third Parties (Rights Against Insurers) Act 2010 (“the Act”) came into force. At the time commentators hailed the event as something of a new dawn for successful claimants seeking to enforce judgments against the insurers of insolvent defendants; as we shall see, however, nearly 4 years later it has dropped into the legal pool with barely a ripple if the number of reported cases involving the Act is anything to go by.

This could be a testimony to its drafting and effectiveness or simply because such claims are not as frequent as might be thought or, when made, are relatively straightforward. A good number of the cases where the Act might be relevant to a claimant’s rights will involve claims against insolvent employers by former employees, in which case the insurers of the insolvent employer would have only very limited rights to decline indemnity for breach of policy provisions.

That said, there have been decisions reported, and it is noticeable that claimant solicitors often appear to misunderstand how the Act works, as indeed they did with its predecessor of 1930. Issues we have come across are:

  • Not appreciating that the Act does not apply if the wrongdoer incurred a liability to the third party prior to the Act coming into force, and so seeking to take advantage of rights granted by the Act in cases governed by the 1930 Act.[1]
  • Trying to make a direct claim against an insurer before the insured party has become a ‘relevant person’; probably as a result of confusing the rights under the Act with those given under the Road Traffic Act.
  • Interpreting the right to request ‘information’ (section 11/Schedule 1) with a right to obtain documents/pre-action disclosure.
  • Seemingly not appreciating that the Act grants a third party the right to proceed against the insurer for a declaration of potential liability before the insured’s liability to the third party has been established.

1930 Act or the Act?

This issue came before the court in Redman v Zurich Insurance Plc.[2]

The claimant’s husband had died of lung cancer, and it was her case that he had contracted this as a result of exposure to asbestos when employed by the second defendant that had, at the relevant time been insured by Zurich. She brought a claim under the Act, her husband having died on 5 November 2013. The employer was the subject of a voluntary winding up on 30 January 2014 and was dissolved on 30 June 2016, so it was a relevant person but had become so before the Act came into force.

Zurich’s application was successful, with the court finding that the 1930 Act applied to Mrs Redman’s claim. This was on the basis that the transitional provisions of the Act made it clear that if before 1 August 2016, when the Act came into force:

  1. The relevant person has incurred a liability against which that person is insured; and
  2. The person subject to such a liability has become a “relevant person”

then the 1930 Act applied to the third party’s claim. There was, the court held, nothing in the Act to say the 2010 regime could be applied retrospectively.

Information

One of the issues with the way the 1930 Act worked was that a third party who had acquired rights under that act had no right to information about the wrongdoer’s insurance position until after they had established the latter’s liability. This meant that they could successfully sue the wrongdoer but still end up with a worthless judgment, because there was no valid insurance. So, it is unsurprising that there were attempts by claimants to obtain disclosure of or information about insurance policies and documents before they had acquired rights under the 1930 Act.

There were two decisions in 2007/08 in which claimants had sought further information under Part 18 of the CPR; in one, Harcourt v F E F Griffin[3], they were successful, in the other, West London Pipeline & Storage Ltd v Total UK Ltd[4], the application failed. The claimants had chosen this route because the defendants’ insurance documents were not disclosable in the proceedings as they did not relate to the issues in the proceedings, and in the latter case David Steele, J held that by the same token a claimant could not seek the information by another route. I have always considered his reasoning the better of the two judgments but whether it was because this was generally accepted or not, such applications were in fact rare.

The coming into force of the Act, however, prompted the claimant in Peel Port Shareholder Finance Co Ltd v Dornoch Ltd to test the information water, and seek to circumvent or improve on the disclosure provisions of the Act.[5]

The facts were reasonably straightforward and not unusual. There had been a fire at the claimant’s warehouse caused, it was alleged, by the negligence of the defendant, Dornoch, when undertaking hot works. Dornoch was insured against this liability but the insurer had repudiated liability for breach of a condition precedent. At the time of the claimant’s application Dornoch was solvent but, the claimant argued, it would be unable to satisfy any judgment and so would be forced into insolvency, whereupon the claimant would be entitled to sue the insurer. Accordingly, it applied for pre-action disclosure of the policy.

This was refused. The court held that the statutory and procedural landscape, including the provisions of Schedule 1 of the Act, militated strongly against the court exercising its discretion under the CPR to order disclosure of the solvent insured’s insurance policy to the claimant. The circumstances of the case were not so exceptional as to justify disclosure contrary to established practice. The judge was heavily influenced by the fact that had such disclosure been available there would have been no need for the Act to have its own regime, and it was the latter that applied.

When to sue the insurer

One of the issues with the 1930 Act was that the third party had no right to sue the insurer until after they had established the insured’s liability. This was decided as long ago as 1967.[6] The unassailable rationale behind this being that until an actual quantified liability has arisen, an insured under a liability insurance has no right to indemnity.

This was dealt with in the Act. Section 2 makes it clear that as long as the insured wrongdoer is a relevant person, the third party may seek a declaration of the insurer’s liability to indemnify the insured before establishing that the wrongdoer is actually liable to them. It does so in reasonably clear language, and also provides that if it so wishes an insurer that is sued under this section may also take any defence open to its insured on primary liability, as well as contesting coverage.

The issue came before the court in BAE Pension Funds Trustees Ltd v RSA Insurance Plc[7]. BAE brought proceedings against various parties arising out of the construction of a warehouse. One of the defendants, insured by RSA, went into administration and BAE sought to add RSA as a defendant. RSA opposed the application. Firstly, on a jurisdictional issue but also on the basis that section 2 of the Act was not engaged because it was entitled to decline cover under the policy and so did not actually insure the relevant defendant, which did seem rather to beg the question the court would be asked to decide; i.e. was there valid cover or not.

The judge (unsurprisingly in view of the language of section 2) dismissed this part of the application by RSA, and was unconvinced by RSA’s argument that if BAE was correct it would cause substantial difficulties to insurers, in that a claimant could join any insurer to the action and be forced to incur substantial expense, irrespective of the merits of the claim. She made the point that if it was unarguable that cover was in place, the claim could be struck out, and the insurer was not obliged to conduct a defence of the underlying claim. Finally, it was always open to an insurer to seek a declaration of non-liability. (As it happened, however, RSA succeeded on the jurisdictional argument, and so BAE’s claim against it was stayed.)

Despite this decision, however, claimants rarely seem to join an insurer as a defendant in the underlying claim. The reasons are not clear but it may possibly be that claimant’s lawyers feel their client will be in a better position if they first establish liability in what will in all probability be an undefended claim against an insolvent defendant. Also, and as suggested above, in EL cases the insurer is effectively bound to cover a claim, initially at least, in most cases.

Foreign insureds

In Catalyst Managerial Service v Libya Africa Investment Portfolio[8], the question of extra territorial effect of the Act was discussed. The claimant was a UAE company that had been ordered to provide security for costs, which it sought to do by means of an ATE policy. The defendant argued this was unsatisfactory, primarily because the beneficiary under the policy was the claimant itself and so any funds payable would not be available to the defendant.

It was agreed and the judge accepted that the Act would only avail the defendant, if at all, if the claimant was wound up in the UK, which given the claimant was a UK company was unlikely.

Conclusion

As I said at the outset, there is not a great deal of law on this Act as yet but the outcome of such decisions as there have been are not surprising. That and the fact there are few decisions so far suggests that the Act is bedding in well and will not prove too controversial. In that sense, consequently, it may be the predicted new dawn.

For more information contact David Hadfield

[1] It is fundamental to its operation that, under the Act, a third party only acquires rights against an insurer once the person or entity that has incurred a liability to the third party has become what the Act terms a ‘relevant person’, which in simple terms happens when the person/entity undergoes an insolvency event.

[2] Mrs Shirley Anne Redman (suing as widow and administratix of the estate of Peter Redman, deceased) v Zurich Insurance Plc, ESJS1 Limited (formerly known as the Humber Electrical Engineering Co. Limited)

[2017] EWHC 1919 (QB)

[3]  [2007] EWHC 1500 (QB)

[4] [2008] EWHC 1296 (Comm)

[5] [2017] EWHC 876 (TCC)

[6] Post Office v Norwich Union Fire Insurance Society [1967] 2 QB 363

[7] [2017] EWHC 2082

[8] [2017] EWHC 1236

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