THIRD PARTIES (RIGHTS AGAINST INSURERS) BILL

  I write in relation to the Third Parties (Rights against Insurers) Bill, shortly to be considered by the Special Public Bill Committee. I have set out below some of the matters which the Committee may wish to consider. I should be very happy to discuss these and any other matters in my oral evidence to the Committee.

BACKGROUND TO THE BILL

  The Report Third Parties—Riqhts Against Insurers' was published jointly in 2001 by the Law Commission and the Scottish Law Commission. A draft Bill accompanied the Report. As is customary, the Commissions carried out an extensive consultation process, involving 65 consultees (including members of the judiciary and legal profession, insurers, reinsurers, brokers, consumer groups, and academics). Since then, Government has carried out a further two consultations, as well as a cross Whitehall consultation. In each case the principles of the Bill have been widely supported. From 2008, Law Commission staff and I have worked closely with officials at the Ministry of Justice in their work to update the Bill.

  The Commissions' recommendations were based on the views of the wide range of parties who took part in the 1998 consultation, several of whom continued to provide valuable advice to the Commissions as they prepared the 2001 Report. The Commissions' aim was to reform the Third Parties (Rights against insurers) Act 1930 in a way which took into account the views of all stakeholders, and provided a simplified and easier-to-use means of conducting litigation. In this regard, it is my view that the Bill genuinely achieves a consensus—perhaps a rare thing in the insurance industry—and its principles are generally supported by all major stakeholders in this area.

  No doubt there will be aspects of the policy affecting third party liabilities which different groups may wish to alter or expand—I expect that such issues may be raised in evidence before the Committee. However, in my view the Bill represents a careful "balancing act" in its reform of the 1930 Acts (that is, the Third Parties (Rights against Insurers) Act 1930, and the Third Parties (Rights against Insurers) Act (Northern Ireland) 1930)—updating and clarifying the law where appropriate, whilst taking account of the different needs of the particular groups affected by the Bill.

THE BILL'S KEY REFORMS

  The Bill's main reforms are as follows:

—  Under the 1930 Acts, the third party cannot issue proceedings against the insurer without first establishing the existence and amount of the insured's liability in proceedings against the insured. Under the Bill, the third party will be able to issue a claim against the insurer without first having to establish the existence and amount of the insured's liability. (I have attached a flow diagram outlining the different ways in which a third party may proceed under the Bill, which I hope will assist the Committee.)

—  If the insured is a dissolved company that has been struck off the register of companies, at present the third party must first bring proceedings to restore it to the register to be able to sue it. Under the Bill, the third party is not required to restore a dissolved company, but may proceed directly against the insurer. The issue of the insured's liability will be resolved in those proceedings.

—  Another barrier to the third party's claim under the 1930 Acts is the veil of ignorance under which they proceed. The courts.have decided that the right to information does not arise until the insured's liability has been established. Until then, the third party may (if the insured is insolvent) have to conduct litigation in ignorance of whether any rights under the 1930 Acts have been transferred. The Bill sets out a clear disclosure regime, enabling a third party to write to someone whom they reasonably believe can provide the information specified in the Bill.

—  In cases with a foreign element (such as where the insurer is domiciled abroad), it can be unclear whether the 1930 Acts apply. The Bill therefore sets out clearly the occasions on which it would apply. Where the insolvency or the "insolvency-type" event which triggers the transfer of the insured's rights happens in the UK, the third party will be able to bring its claim against an insurer in the courts of the UK, even if the insurer is situated abroad.

—  Rights transferred to the third party under the 1930 Acts remain subject to the terms and conditions of the insurance contract. This is because the third party steps into the shoes of the insured, and so is bound by the same limitations as the insured `would have been. However, in three particular circumstances the Bill enhances the third party's rights against the insurer. Consultees in 1998 supported these exceptions.

—  The 1930 Acts have not kept up with developments in company and insolvency law. The Bill applies to all of the insolvency-type situations which now exist, ensuring that the law is up to date.

—  The court has held that when a person fails to pay their solicitor and then becomes insolvent, the solicitor cannot sue the insurer directly for the fees which were covered by legal expense insurance. More recent case law has cast doubt on this decision, but there is still a need to clarify the law on this issue. The Bill therefore allows for the recovery of such voluntarily-incurred liabilities,

ISSUES RAISED

  You have asked whether any interested parties might have concerns over the provisions of the Bill as it now stands. I have been monitoring legal and industry journals, and have kept in touch with colleagues in the insurance industry, but thus far I have heard very little in the way of concerns about the Bill. However, there are two issues which may be raised with the Committee, and which I have outlined below.

EMPLOYERS' LIABILITY INSURANCE BUREAU

  The Committee may be aware of interest in the possible creation of an "employers' liability insurance bureau" ("ELIB"). An ELIB would function in a similar way to the existing Motor Insurance Bureau. It would provide a fund for injured employees whose employer was defunct, where the employer's insurer could not be traced. As you would appreciate, the Commissions did not consider this issue in any detail in their 2001 Report. Although the Bill goes some way to addressing the problem (by creating a more thorough disclosure regime), it will not help a third party who cannot find any information about potential insurance cover held by his or her employer. Ultimately, the possible creation of an ELIB, although undoubtedly an important issue, is not an appropriate addition to this Bill. It was not considered by the Commissions in the 2001 Report, and is a separate issue to be considered by Government and Parliament, rather than a reform of the 1930 Acts.

RECENT CHANGES TO THE BILL

  Committee members will have seen that the Bill has changed from the Commissions' 2001 version. Although I do not believe that these changes are controversial, it may be helpful if I outline the reason for them.

  Since 2008, we have worked closely with the Ministry of Justice to review the Bill, and update it where necessary, particularly in light of responses received to the Ministry's targeted consultation process in 2008. The structure of the Bill has been changed by re-ordering existing clauses into a more logical sequence. The current version of the Bill therefore looks different from the 2001 version although the fundamental policy principles are the same. There have also been a few amendments to update drafting language, reflect developments in the law, and correct anomalies in the 2001 draft.

  In addition, the following minor changes have been made to the Bill:

—  The Bill has been extended to Northern Ireland. This is as a result of support expressed in a consultation carried out in 2005 by the Northern Ireland Department of Enterprise, Trade and Investment for the application of the Bill to that jurisdiction.

—  Previous clause 4(2) of the Bill applied where the insured was a body corporate which had been dissolved, preventing an insurer from relying on a clause which required the provision of information and assistance. In reviewing the 2001 Bill, it became clear that the same problem arises where the insured has died, and so the clause (now 9(3)) was expanded to apply where the insured was an individual who has died. In response to consultation feedback in 2008, clause 9(4) has also been added to make sure the way in which clause 9(3) works is clear.

—  In the 2001 Bill, a third party who obtained a declaration in respect of the insured's liability and a declaration in respect of the insurer's liability was entitled to an "appropriate judgment" (see old clauses 8(5) and 9(4)). Under the current Bill, a third party needs only to obtain a declaration in respect of the insurers liability to be entitled to an "appropriate judgment". However, in order to obtain that judgment both the liability of the insured, and of the insurer, must have been established. This is a small change to take account of the fact that a third party may occasionally be in the position of proceeding against an insured, when the insured becomes a "relevant person". The third party may wish to continue those proceedings, but seek a declaration in respect of the insurer's liability. The Bill therefore allows such a person to be entitled to an "appropriate judgment", provided that both sets of liability have been established.

—  The Secretary of State's power to amend the Bill by statutory instrument (formerly clause 18, now clause 19) has been scaled back. The extended power is not needed, as any legislation creating a new insolvency-type event will make consequential amendments to the Act. However, a limited power of amendment has been included for Northern Ireland.

—  The way in which a third party is able to seek disclosure from an insured party as distinct from any other person has been clarified. This was in response to feedback in the 2008 consultation.

—  The third party's ability to apply for a court order where there is non-compliance with a notice requesting information has been included. This codifies the Law Commissions' existing policy.

—  Old clause 12 (discharge from bankruptcy etc) has been removed, as it was unnecessary in light of developments in case law.

  I should be happy to address any of the changes to the Bill in my oral evidence to the Committee, if that would be of assistance. I look forward to attending the Committee's session on 12 January to assist with its consideration of the Bill. In the meantime, please let me know if there are any particular issues which the Committee may wish to discuss.

David Hertzell

Law Commissioner

6 January 2010