Parties contemplating claims in negligence and/ or breach of contract against insolvent companies and individuals providing professional services will welcome the fact that the long awaited Third Parties (Rights Against Insurers) Act 2010 (“the Act”) will come into force on 1 August 2016.
The requirement to carry insurance for companies and individuals carrying out professional services is common place and often imposed by the professional’s regulatory body. Identifying that an insurance policy should be in place is therefore relatively straight forward however, identifying the relevant insurer and whether an insurance policy will respond and ultimately meet and pay any claim has, to date, been problematic, costly and sometimes a worthless exercise for parties pursuing insolvent professionals.
What has changed?
The new Act brings the current act up to date with current insolvency law and procedure but more importantly for those with claims against insolvent professionals and allows parties;
- to obtain information about a relevant insurer and insurance cover prior to commencing a claim; and
- to bring claims directly against an insurer of an insolvent professional.
What was the position before?
Under the old act, parties faced with an insolvent professional were required to establish the insolvent professional’s liability for any claim before being able to obtain relevant and sufficient information to identify whether an insurer would respond to a claim. This step was required before pursuing an insurer directly for an indemnity for the liability of the insolvent professional under the terms of any insurance policy.
Before even commencing a claim, under the old act, parties are faced with incurring costs in taking one or a number of steps, such as applying for the Court’s permission to issue a claim or in the case of an insolvent company, applying to restore the company to the register of companies. Having taken steps to be in a position to commence a claim, further costs in pursuing proceedings to determine and obtain a judgment against the insolvent professional would need to be incurred before being in a position to pursue an insurer. Parties taking these steps would often be doing so without ultimately knowing whether an insurer would pay in accordance with the terms of any insurance policy and with exposure to a risk that significant costs had been expended and the litigation could prove fruitless.
Improvements and benefits under the new act
The benefits conferred under the Act to a party faced with an insolvent professional are in summary two-fold:
Requesting and accessing information
Investigations into an insolvent professional’s insurance cover and requests for information about the identity of an insurer and an insurance policy can now be made by a third party to an insurer, brokers, insolvency practitioners and former officers of an insolvent company prior to commencing court proceedings. A request can be made for details of:
- the identity of the insurer;
- the terms of the policy;
- the limit of the cover;
- whether cover has been declined previously (and if so, details of any proceedings); and
- whether any aggregate of indemnity limit has been eroded.
The provision of information in respect of the potential availability of insurance cover at an early stage will assist a party in assessing risks and making informed decisions as to the cost which might be incurred versus the benefit which might be gained from achieving a payment of damages prior to incurring the costs of commencing a claim to establish liability.
A party can pursue a claim against an insurer without the need or requirement, in the first instance, to establish and obtain judgment that the insolvent professional is liable for the loss or damage.
This means that a single set of proceedings can be issued against the insurer to determine both the defendant’s liability and the potential liability of the insurer under an insurance policy.
The advantage of this is obviously one of cost savings as there is no longer a need for example, to take the step of restoring a company to the register of companies and/or to incur the cost of pursuing a claim against the defendant in the first instance, and then subsequently commencing further proceedings against an insurer.
Is the future rosy or are there limitations?
The new Act which confers the right to pursue an insurer directly is only applicable if there has been an event of insolvency. Where potential defendants are not insolvent, it will still be necessary to pursue the defendant, obtain judgment and force the defendant into insolvency for non-payment of a judgment debt before being able to obtain information under the Act.
Claimants are still likely to face the prospect of incurring costs and pursuing proceedings to obtain sufficient information to conclude whether a refusal to indemnify by an insurer can be justified. Unhelpfully, there is no requirement under the Act for an insurer to provide reasons for a refusal to indemnify. Reasons for a refusal to indemnify under an insurance policy may be obtained through receipt of a defence, requests for further information and/or disclosure but pursuing a claim to these stages is likely to incur significant cost.
The Act will not apply to current claims. The old act will continue to apply where a defendant was made insolvent, or where liability was incurred prior to 1 August 2016.
No claim is worth pursuing where the defendant is insolvent and there is little, if any merit, in obtaining payment of a judgment debt. The new Act goes some way in assisting a potential claimant to identify the l availability of insurance cover at an early stage and to simplify and reduce the cost of pursuing an insolvent professional.