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London & Bermuda Newsletter
The UK House of Lords has introduced a bill that, if passed, will give an injured third party the right to directly sue the insurer of the party responsible for its injury if the party liable is bankrupt or insolvent.
At the moment, the Third Parties (Rights Against Insurers) Act 1930 prescribes the mechanism whereby a party can access the insurance coverage of another that has caused it injury and succumbed to bankruptcy or insolvency. The Act is, however, problematic in a number of respects. Most notably, it exposes an injured party to the prospect of multiple legal proceedings as it requires that liability against the wrongdoer be established, often necessitating the issuance of a suit, before proceedings can then be commenced against the insurer. From the perspective of an injured party, the position is far from satisfactory given the time and cost that must be expended to access coverage.
The bill attempts to simplify the current state of affairs. It eliminates the necessity for multiple proceedings by allowing the third party to issue a single action against both the wrongdoer and its insurer. In addition, and in contrast to the position at present, the bill allows an injured party to sue a company that has been struck off the register of companies without first taking procedural steps to have the company restored to the register.
The bill will also provide an injured party with an increased ability to obtain information about a wrongdoer’s insurance policy, thereby allowing the injured party to form a view at an early stage on the benefits of litigating against the insurer.
Notwithstanding the changes that are to be introduced by the bill, it will preserve the current position whereby the coverage rights transferred to an injured party are subject to the defences that the insurer could have asserted against the original insured. However, the insurer will be precluded from relying on a number of technical defences. Notably,
- Where the original insured was required to do something as a precondition to coverage, if the injured party fulfils that condition, the bill will deem it satisfied;
- Where the policy contains a condition that the original insured is to provide continuing assistance to the insurer, and the insured is incapable of doing so because it is a company that is insolvent, or a person who has died, the rights transferred to the injured party are deemed not to be subject to that condition;
- Subject to a marine insurance exception, where an insurance policy requires that the original insured pay damages to the injured party before seeking indemnification from the insurer, the clause will, by virtue of the bill, be deemed not to apply; if it did, the rights transferred to the injured party by virtue of the statute would be worthless.
There is a good chance the bill will complete its journey through Parliament before the impending 2010 election. If it does, insurers will become involved in coverage litigation with third parties injured by their insureds sooner than would have been the case under the 1930 regime. That all said, the bill is unlikely to increase insurer exposure. The bill will do nothing to broaden the scope of cover offered under a policy. In addition, injured third parties will still be required to establish the insured’s liability before pursuing coverage, albeit during consolidated proceedings. Given that third parties will have better access policy information, there should be a decrease in the number of weak, or frivolous, claims filed against insurers, as third parties will be able to form a view on the merits of launching a coverage dispute sooner rather than later.
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