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Third Parties (Rights against Insurers) Act 2010

8 April 2010
The issues

Insurance – insolvent insured – Third Parties (Rights against Insurers) Act 1930.


Please note that since this was prepared, the new Government has instituted a review of inherited Regulation and no commencement date will be set for the Act until that review is completed.

In July 2001 the Law Commission and the Scottish Law Commission published a report recommending reform to the Third Parties (Rights against Insurers) Act 1930. The recommendations were accepted in 2002. The Bill however was not introduced, allegedly due to lack of Parliamentary time, until November 2009. It received Royal Ascent on the 25th March 2010.

The 1930 Act was introduced essentially to remove the “loop hole” of privety of contract whereby a third party, bringing an action in respect of a matter covered by an insurance policy, was effectively barred from recovery if the insured became insolvent. The 1930 Act transferred the insured’s rights under the insurance policy to the third party. The Law Commission identified a number of problems with the 1930 Act. In particular the Commission was concerned that:-

i) A third party had to establish the existence and the amount of the insured’s liability before it could issue proceedings against the insurer.

ii) The third party had to proceed against both the insured and the insurer. In some cases this required the restoration of the insolvent insured to the Register of Companies.

iii) The Act had failed to keep pace with contemporary commercial developments. It catered only for individuals or companies, omitting, for example, Partnerships.

iv) It did not consider certain types of voluntarily incurred liabilities such as legal expenses.

v) The Rules relating to disclosure of information to a third party were inadequate. The right to information arose only when the liability of the insured was established and it was unclear what information had to be provided under the Act.

vi) Rights transferred to the third party were subject to any defences which the insurer could have used against the insured. So an insurer could rely on a technical defence to defeat a claim, eg: that the insured had failed to notify the insurer of the claim, even if the third party had given this notification instead.

The Third Parties (Rights against Insurers) Act 2010 has been passed with cross party support and has been described (by Henry Benningham MP) as “small but important”, building on the 1930 Act. The main points dealt with by the 2010 Act are:

i) The new Act creates a statutory transfer to third parties of the right to the benefit of an insurance policy in the event that an insured which is insolvent incurs a liability to that third party. A new Court procedure is available therefore. The third party has a right to seek declarations as to the insured’s liability to them and as to the insurer’s potential liability under the insurance contract in one set of proceedings, thus avoiding duplication of litigation and increased costs. (This is an optional mechanism – it is still possible to bring proceedings against the insured before starting proceedings against the insurer.)

ii) The third party is no longer obliged to join the insured in proceedings against the insurers.

iii) Voluntarily incurred liabilities such as legal and health insurance are expressly provided for.

iv) The regime clarifies the issue of information. It provides a list of disclosable information in the Act. The third party can seek information from certain persons on the basis of a reasonable belief that they have received a transfer of rights under the legislation. The duty to disclose arises only on the third party’s request and there is no continuing duty on the disclosing party to monitor information relevant to the third party’s claim.

v) The rights transferred to the third party will be subject to the same defences that the insurer could have used against the insured (the third party has still not greater right than the insured) but the third party is now able to provide notification in fulfilance of the insured’s contractual duty. If the third party notifies, that notification will be treated as if done by the insured. Secondly, any condition which required the insured to provide ongoing information or assistance to the insurer will have no effect if the insured was a body corporate that has been dissolved.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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