Third Parties Rights against Insurers: A review and cautionary tales for claimants

June 15, 2020

By James Kinsey

A Covid-19 induced recession in the UK is on the horizon. Conceivably personal injury claimants may face an increased number of claims against insolvent tortfeasors. This article provides an overview of a third party’s rights against insurers from a claimant perspective, a few recent cautionary tales, and an update of the law since the implementation in August 2016 of the Third Parties (Rights against Insurers) Act 2010.

The 2010 Act

Through the lens of personal injury litigation, the 1930 and the 2010 Third Parties (Rights against Insurers) Acts enable a third party, for present purposes a PI claimant, to receive compensation for injuries and losses caused by a legal person subject to statutory insolvency with liability insurance covering the risk of liability to third parties/claimants. The key feature of the Acts is the transfer of an insured’s rights under the insurance contract to a claimant.

Here are the key provisions of the 2010 Act:

• A ‘relevant person’ (the tortfeasor) must incur liability against which there is insurance; or an insured person having incurred liability becomes a relevant person (s.1(1)). The statutory meaning of a relevant person is defined fairly widely for individuals and corporate bodies and the principle is extended to situations in which the insured, though not insolvent, has invoked a number of specified alternatives to insolvency for example company administration.
• The rights of the insured relevant person against an insurer are then transferred and vested in the claimant to whom the liability is or was incurred s.1(2).
• The claimant can bring direct proceedings in respect of transferred rights against an insurer without having established and quantified the insolvent insured’s liability (s.1(3)). Crucially the claimant cannot enforce those rights without having established and quantified that liability. Unlike under the 1930 Act, a direct action can be brought against the insurers in a single set of proceedings obviating the need first to apply to have a company restored to the Register of Companies before it is sued.
• The ways to establish and quantify the insured’s liability for the purposes of enforcement under s.1(4) are judgment, arbitration award, settlement or by simply asking the court for a declaration under s.2. A declaration would be to the effect of the insured’s liability to the claimant and the insurer’s potential liability to the claimant.

Cautionary Tales

Recent cases I have considered provide a warning of how an insurer may thwart a claimant’s pursuit of compensation.

The first case involved the 1930 Act as the defendant company’s tort predated the 2010 Act’s implementation. The company was subsequently dissolved. There was no direct right against the insurer under the 1930 Act without first establishing the liability of the insured and the extent of that liability. The claimant considered applying to court for the company to be restored to the Register. It would have been both fruitless and costly. The insurer disclosed its intention not to indemnify the insured following a failure to comply with notification requirements under the policy.

Interestingly, when a defendant motorist’s insurance policy is inoperative in the context of injury to claimants caused by or arising out of the use of vehicles on a road or other public place, the claimant is protected by the benefits of the provisions within The Road Traffic Act 1988 or failing that the MIB Uninsured Drivers Agreement 2015 which provide statutory and regulatory mechanisms allowing claimants to receive compensation. No corresponding scheme exists to assist claimants injured in accidents outside the use of motor vehicles. Once a policy is avoided claimants are left to pursue costly litigation without the possibility of receiving damages for injuries sustained.

Furthermore, in this case the insurer wrongly refused to disclose insurance documentation on the basis that there was no right to an indemnity. In fact, there was a duty on the insurer upon request by the claimant to provide necessary information reasonably required for the purpose of establishing whether any rights had been transferred and of enforcing those rights under s.2. Section 2 may be used by claimants to assess whether to bring proceedings against an insolvent insured before making a claim against an insured, where a risk exists that the defendant may not have the benefit of an indemnity.

The second case involved the 2010 Act. The claimant intended to sue a company in the business of travelling shows. The company operated an inflatable ride involving customers jumping over a metal bar wrapped in protective foam. Unfortunately, the foam around the bar had come loose. When the claimant hit the metal bar, she broke her ankle.

The directors of the company failed to cooperate with the claimant solicitors in relation to their insurance position. The claimant then contacted the local authority. She was directed to the travelling show’s liability insurers who were subsequently notified of the potential claim against the insured. The travelling show had taken out a policy covering risks of liability to third parties.

Unlike the first case there was no issue with notification requirements under the policy. The claimant herself had notified the insurer of the potential claim. Section 9(2) of the 2010 Act permits claimants to fulfil certain policy conditions on behalf of the insured. For instance, they may notify the insurer of a potential claim within a contractual time limit. If done an insurer is prevented from alleging non-performance of the insured.

The issue was that subsequently the insurer contacted the insured who was at that time not yet dissolved. The insured failed to cooperate with the insurer. It wilfully obstructed the insurer’s investigation. Consequently, the insurer avoided its obligations under the policy.

The problem was this: if proceedings were started against the insured there was no protection for the claimant under s.9(3) of the 2010 Act. Under s.9(3) any condition in the insurance contract that requires the insured to provide continuing information and assistance to the insurer once the claim has been notified will not apply against a third party where the insurer is incapable of fulfilling such requirements because it had been dissolved.  Critically, the failure to cooperate with the insurer was prior to the company being dissolved. At that stage, the travelling show could and should have cooperated with the insurer. Claimants in similar cases must be attuned to what stage the insured breached its policy obligations.

These cases reveal the power of insurers’ statutory defences under the Acts. The transfer of rights will not put a claimant into a better position than the insured in respect of an insurer’s legal liability or policy cover. Ultimately, claimants must establish the insurer’s liability and its extent as against the insured. If an insured fails to comply with notification requirements or obstructs / refuses to engage with an insurer’s investigation, then the insurer will likely avoid the policy. Claimant’s will then be left with a claim unlikely to result in compensation.

Legal Update

Since the 2010 Act’s implementation in August 2016 there has been a handful of decisions and a legislative update that claimant personal injury practitioners should be aware of.

The first case above revealed the importance of applying the correct Act. Turner J in Redman v Zurich Insurance PLC and another [2017] EWHC 1919 (QB), found that the 2010 Act expressly makes clear that the 1930 Act continues to apply where before 1 August 2016 a relevant person had become insolvent for the purpose of the 2010 Act and had incurred a liability against which they were insured. The transitional provisions did not provide for the 2010 Act to be applied retrospectively so as to run parallel with the regime under the 1930 Act.

The next key decision is that of BAE Systems Pension Funds Trustees Ltd v Royal & Sun Alliance Insurance Plc and others [2017] EWHC 2082 (TCC). O’Farrell J found that a third party may join an insurer as a co-defendant to proceedings where there is a dispute as to whether the relevant loss is covered under the policy. For the 2010 Act to apply, the claimant need only plead that it has such rights. In the first instance it need not establish those rights. However, before it receives an indemnity the third party must of course prove the insured’s and insurer’s liability. Claimants should be aware of bringing proceedings against insurers where there is a potential coverage issue and should first be confident of an arguable case in relation to coverage under the policy. If not, defendant insurers will be quick to apply to apply for the claim to be struck out.

Palliser Ltd v Fate Ltd [2019] EWHC 43 (CB) reminds claimants that in addition to being wary of  potential ways in which an insurer may avoid a contract due to failures by the insured, the claimant must also consider the more fundamental issue of whether an insurer will be liable to the claimant under the policy itself. In Palliser, Recorder Burrows QC considered the liability under the 2010 Act of an insurer of a landlord to compensate a leaseholder following a fire in a restaurant and flats in floors above the restaurant caused by the negligence of a landlord who went into liquidation. The insurers claimed that the policy did not cover the claimant’s loss in relation to the upper floors because it only covered ‘Accidental damage to Property not belonging to you or in your charge or under your control…’. As a matter of construction, as the building ‘belonged to’ the landlord it was found that the section did not cover the landlord’s liability in respect of property for which it was the freeholder. The claim failed as the Act requires the insurer to be liable to the insured under the policy.

Another important case illustrates different issues claimants may face when contemplating proceedings against solvent or insolvent companies. In Peel Port Shareholder Finance Company Ltd v Dornoch Ltd [2017] EWHC 876 (TCC) Jefford J decided that CPR r.31.6 may not be used to obtain pre-action disclosure of a solvent defendant’s liability insurance arrangements. Following Peel, claimants intending to sue a solvent company suspected to become insolvent upon enforcement of a favourable judgment might find themselves in a worse position than claimants intending to sue an insolvent insured. The former does not have recourse to either the CPR or the 2010 Act’s disclosure provisions within Schedule 1 for assistance as to whether the insurer will indemnify the solvent insured upon judgment in favour of the claimant. By comparison, claimants bringing proceedings against an insolvent insured may utilise the disclosure obligations within the 2010 Act to identify the insurance coverage position of the insured in order to make an informed decision about the benefit of bringing proceedings against an insurer.

Personal injury lawyers also practicing in employment law may be interested in the decision of the EAT in Watson v Hemingway Design [2019] 12 WLUK 244. It was found that an employment tribunal was a ‘court’ within the meaning of the 2010 Act and as such it had power to make declarations under the Act as to the liability of the insurer as well as of the insured. It is clear now that a claimant asserting rights under employment law against an insolvent employer may bring a claim directly against an insurer within the ET.

There has been one important legislative change affecting the 2010 Act since its implementation. It may be of more interest to defendant personal injury practitioners. The Third Parties (Rights Against Insurers) Act 2010 (Consequential Amendment of Companies Act 2006) Regulations 2018, applying from 23^rd November 2018, permits an insurer of a company dissolved for more than six years the right to restore the company to the Register in order to take legal proceedings to recover contributions from other persons liable for a personal injury in respect of which the insurer had paid out damages. Prior to the amendment, an insurer of a dissolved company sued directly was unable to bring a subrogated claim, for example in an asbestos case, by restoring a dissolved company to the Register after six years. The insurer faced paying out the whole of the claim. The amendment places the insurer in the same position if a claimant had applied to restore the insured company rather than bringing a direct claim against the insurer.

Conclusion

It is likely the UK will enter a deep recession and many personal injury claimants may find themselves turning to direct claims against insurers. The Acts are welcome as they provide statutory schemes to enable claimants to receive compensation despite a defendant’s insolvency, if they are covered by insurance against third party risks. The lesson learnt from my recent experiences and the recent decisions is to be aware if the potential pitfalls when seeking to pursue a defendant either suspected of being insolvent or indeed insolvent for the purposes of the Acts.