Parliament is currently considering a new Bill that would make it easier for third parties to claim directly against liability insurers in situations where the insured is insolvent.

The Bill is intended to replace the Third Party (Rights Against Insurers) Act 1930 which already allows a third party to claim directly against liability insurers in certain circumstances where the third party has become insolvent.

The key proposed changes to the 1930 Act are as follows.

  • A third party would be able to resolve all issues relating to its claim against the insurer in a single set of proceedings. It would not be necessary for the insolvent insured to be a party to any proceedings for the liability of the insurer to be established (although the third party could make the insured a defendant to the proceedings if it wanted to).
  • Amongst other things, the third party would, under the 2010 Bill, be able to seek against the insurer either or both of:

(a) a declaration as to the insured's liability to the third party, which in contrast to the position under the 1930 Act is sufficient to establish the insured's liability for the purposes of a claim against the insurer; or

(b) a declaration of the insurer's potential liability. This can be obtained without the third party having established the insured's liability first (although it must do so before it is able to enforce the rights).

  • The proposed legislation would clarify that the third party would be able, where it reasonably believed that a person was liable to it and had insurance where the rights to claim had transferred to the third party, to serve a notice on the insurer (as well as the insured, or indeed the broker) requesting certain information relating to the insurance. This would include information on any defences available to the insurer.
  • As under the 1930 Act the rights transferred to the third party would be subject to the same defences as the insurer would have against its insured. Under the proposed legislation, however, the third party would be entitled to fulfil any of the insured's contractual obligations as if such obligations had been performed by the insured. This would mean that insurers would not be able to rely on technical coverage defences based purely on the fact that it was the third party, not the insured, who had complied with the term.

The proposed changes to the legal framework in this area would make it easier and cheaper for third party claimants to bring claims against liability insurers in insolvency situations. In particular, it would be possible to bring one set of proceedings only and to resolve all issues between the third party and the insurer in one go. Crucially, it would no longer be necessary to establish the liability of the insured before any coverage issues under the insurance were determined. Thus, amongst other things, the third party would no longer have to bear the costs risk associated with establishing the insolvent insured's liability only to find that there was actually no cover for the claim. The new legislation may therefore result in insurers being faced with more claims from third parties.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 03/12/2009.