With the prospect of an economic slowdown in 2024 and businesses facing greater financial pressures, we may see an increase in claims against insolvent companies. It is therefore vital to consider all options available in the pursuit of a claim against an insured defendant.  In this blog, I explore the options that might be available to claimants under the Third Parties (Rights against Insurers) Act 2010 (the 2010 Act).

The 2010 Act came into force in August 2016. At the time, the 2010 Act was surrounded by interest, however with the passing of nearly eight years the importance of the 2010 Act may have been overlooked. To litigators, the 2010 Act is an important tool in their armoury when acting for a client against an insolvent company. In essence, the 2010 Act allows a third party to bring a legal action directly against the insurers of an insolvent company without being required to establish liability beforehand.

Naturally, it’s important to note that the company that has become insolvent would need to have held a valid insurance policy in place at the time of the alleged unlawful activity and such activity would need to have been an insured risk.

The Previous Regime

By way of background, the 2010 Act was introduced to replace the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act). The 1930 Act was fraught with practical difficulties for those wishing to bring claims against insurers of insolvent companies. This included, for example, a requirement to restore a dissolved company to the register of companies at Companies House, which is neither a simple task, nor guaranteed.

A claimant then had to successfully bring a claim against the insolvent company, once restored to the register, in order to establish liability of the company, before then bringing a separate claim against the insurer to establish its liability to indemnify the company under the relevant insurance policy. Thus it was far from a straight forward process.

The Current Regime

The effect of the 2010 Act  was to make it easier and simpler to pursue such claims such thata claimant can bring a legal claim against an insolvent company’s insurers without having to take the additional step of restoring the company to the register.

Another benefit of the 2010 Act is that a claimant is not required to establish liability of the company prior to bringing their claim against the insurer; instead a claimant is now able to bring a single claim against the insurer directly.

Relevant Person

Under section 1 of the 2010 Act, an insolvent company or individual which incurs a liability which they are insured against will be considered “a relevant person”. The rights of the relevant person under the insurance contract are then transferred to the third party to whom the liability is incurred.

Liability

Anyone who has ever engaged in litigation will know that it isn’t always easy to establish liability, especially in more complicated cases such as professional negligence claims. Often inter-party correspondence and disclosure between parties is invaluable in helping to establish liability or persuading a party to admit liability.

Under the 2010 Act, a claimant isn’t required to prove liability before bringing a legal claim against an insolvent company’s insurer. This enables the claimant to take legal action against the insurer as the relevant person.

Section 1(3) of the 2010 Act states that a third party can bring proceedings to enforce these rights against the insurer but may not do so without having first established the insurer’s liability. In that sense, once the claim is brought against the insurer, the claim then proceeds like any other and it would be for the court to determine liability if is denied.

Therefore, the procedure for claimants to seek recourse against an otherwise insolvent company has become much more straightforward.

Requests for Information

By virtue of Schedule 1 of the 2010 Act the claimant is also entitled to certain documents within 28 days of formally requesting them from the insolvent company or the insurer, including:

• if a contract of insurance is in place;
• and if there is such a contract in place:
• confirmation of who the insurer is;
• what the terms of the insurance contract are;
• whether the insured (i.e. the policy holder) has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability;
• 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;
• 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;
• whether there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.

If the documents are not provided within this timeframe, then an application may be made for a court order requiring their production.

Financial Limitation

Section 8 of the 2010 Act sets out a limit on the rights transferred to third parties under the legislation, including in a financial sense. In simple terms, if the maximum amount up to which the insurer is liable to the defendant company under the insurance policy exceeds the value of the legal claim, the claimant won’t be able claim the full amount due from the insurer to the company.

Defences

The insurer is entitled to rely on the same defences that the insured would be entitled to rely on if the claim was brought directly against the insured.

Under the 1930 Act, the limitation period for bringing a claim against an insurer was suspended once a company entered liquidation, as such claims were deemed to be claims against the company within the insolvency.

Following the coming into force of the 2010 Act, it has been held in the case of Rashid v Direct Savings Limited [2022] by His Honour Judge Gosnell that limitation continues to run in a claim under the 2010 Act as claims can now be brought directly against an insurer without a need to first establish the liability of the insolvent company. It should be noted that this was a County Court decision and not the decision of a higher court, and so is not a binding authority. However, potential claimants should certainly be aware of the matter of limitation when considering whether to bring a claim under the 2010 Act.