OBSERVATIONS AND RESERVATIONS ON THE THIRD PARTIES (RIGHTS AGAINST INSURERS) BILL [HL]

  This note seeks to deal with two broad types of reservations: (1) those relating to specific potential problems in the practical application of the provisions, and (2) a general reservation that insufficient attention has been given to the broad issue of third parties' rights in relation to liability insurance.

SPECIFIC PROBLEMS

  1.  (a)   Transfer of the insured's rights to the third party claimant arises on the double trigger of insured insolvency made manifest and the occurrence of insured liability as a matter of fact and law (clauses 1, and 4-7 of the Bill). The sequence of these two events is not significant for this purpose. However, clause 1(1)(a) is likely to be far more limited in practical scope than clause 1(1)(b): the insolvency regimes are necessarily temporary and, for example, bankruptcy and administration are both likely to end at the 12 month point. So for clause 1(1)(a) it is a matter of chance whether the event of liability takes place during this period as appears to be required (see clauses 4 and 6 which are expressed in the present tense when speaking of the insolvency regimes). It is likely that a court would seek out the accrual of the cause of action as the critical date, as it does for the purposes of limitation so there are likely to be arguments and proceedings on this point alone.

By contrast, where the sequence of events is as required in cl 1(1)(b) the field of claimants will be potentially greater (liability pre- insolvency is more likely as a matter of fact simply because the transfer of insured rights will take place automatically on the making, eg, of the Bankruptcy Order, and will at that date take in all prior acts or omissions of the insured as may give rise to claims; in addition, the insured is more likely to be commercially active prior rather than post insolvency and it is his commercial activity that commonly gives rise to liability ). However, where liability has taken place pre- transfer the claimant is in a difficult position with regard to the applicable limitation period. He may be able to delay commencing his claim for some time and might be minded to do so where there is a realistic prospect of the insured entering into one of the insolvency regimes in the short term but, for example, personal injury claimants are subject to a relatively short time period, currently 3 years as a primary period (Limitation Act 1980, s.11). Contract based claims and other kinds of tort based claims have a more generous 6 year period. The ethos of civil procedure is to commence proceedings in a timely fashion albeit that any such proceedings are viewed as the last resort. Furthermore, claims up to £25,000, being the current Fast Track limit (CPR Part 28), tend to be managed such that trial takes place within a target of 8 months. Unless the insolvency of the insured has already taken place the claim will likely be considered by a court prior to any statutory transfer of rights as envisaged by the Bill. Thus, many claimants will need to proceed without any benefit from many of the provisions of the Bill.

(b) The transfer of insured rights takes place in an automatic fashion (cl 1(2)). Yet there may be multiple claimants (either one event giving rise to multiple claims or multiple events in any given insured period).The Bill does not appear to address this. It thus appears that claimants may find themselves in some kind of race with person(s) unknown in order to claim on insurance monies before any applicable insurance limit is reached. It is not clear how this would be managed.

(c) The Bill appears to be silent on the position where there is an annulment of say the Bankruptcy Order (Insolvency Act 1986, section 282).

(d) There appears to be no express provision for administration other than by Order (clause 6) (Insolvency Act 1986, Part II and Schedule B1).

(e) The third party claimant is only in a position to fulfil certain insurance conditions once the insured's insolvency has become manifest in accordance with the basic provisions of the Bill (clause 9). This is likely to be limited in practical application because the management of many insureds will be less efficient and less observant of insurance terms and conditions during the `twilight period' in the run up to manifestation of insolvency (see, for example, George Hunt Cranes Ltd v Scottish Boiler and General Insurance Co Ltd [2002] Lloyd's Rep. IR 178, CA). Moreover, the occasions on which the claimant can fulfil obligations on the insured by cl 9(3) is somewhat limited.

(f) The anti-avoidance provisions of clause 16 will not be sufficient to prevent compromises as between insured and insurer prior to manifestation of the insured's insolvency; perhaps this is intentionally so. The anti- avoidance mechanisms of the Insolvency Act 1986, most notably sections 238, 339 and 424, may not be adequate. There is some potential for a claim, albeit at considerable cost, to seek and obtain a freezing order (CPR Part 25, and see on this Normid Housing Assoc Ltd v Ralphs (No 2) [1989] 1 Lloyd's Rep. 274).

(g) The information a claimant would need in practice would extend to the potential for competing claimants under the policy; this is not listed in the current Bill, schedule 1. Claimants need to be able to estimate the amount available under the policy. It is not clear whether the obligation to give information is a once only obligation or whether it continues as it would under CPR Part 31. The penalty is not clear; is it intended that contempt proceedings are possible for knowingly false statements?

GENERAL RESERVATION

  2.  These specific practical problems indirectly raise a more general or broad reservation about the current proposals for reform.

  The provisions create a perverse incentive in forcing an insured defendant into one of the insolvency regimes. A personal injury claimant, for example, would have difficulty doing so prior to Judgment or an Order for interim payment (CPR Part 25) but could do so at that stage. Courts may be faced with difficult decisions on petitions to wind- up or make bankrupt. Such claimants would also have incentive to vote in favour or a CVA/IVA simply to bring about the trigger of transfer of rights. There is some time pressure on a claimant in this regard given that he would be subject to a limitation period (presumably six years as contract) from the date of his own judgment (cl 12 of the Bill).

  Moreover, it is a basic premise of insolvency law that existing rights and obligations as between insolvent and third parties are not altered merely by the fact of insolvency. The 1930 Act is one exception to this and there are others of course, primarily preferential creditors under Sch 6 of the Insolvency Act 1986. These exceptions are usually the product of social and or political desires. They need however, to be carefully considered. It is also a basic principle of insolvency law that the entirety of the insolvent's assets should be made available for the creditors as a group and in accordance with the statutory scheme of distribution. Little objection is likely where insurance monies on property fall into the assets of the insolvent on the loss or destruction of the insured property: one asset is merely replaced by another. Liability insurance differs in that although the policy is an asset it serves to indemnify for a loss/liability rather than to replace a lost asset. The Law Commission's standpoint and thus the stand point taken in the Bill is to respect the philosophy of the 1930 Act. Thus, there has been no debate on the position of liability insurance more generally. There has been no consideration of whether it might be right to remove the requirement of any manifestation of insured insolvency as a precondition for transfer of certain rights to third parties.

  As is well known the 1930 Act came into being in order to remedy a perceived anomaly displayed in Re Harrington Motor Co ex., p. Chaplin [1928] Ch 105 and in Hoods' Trustees v Southern Union Ins Co of Australasia Ltd [1928] Ch 793. The position of motor accident claimants is now radically different, being the product of discrete reform from 1930 and more recently the product of EU Directives. The motor claimant is now the exception rather than the classic example of the norm; he has a direct right of action against a liability insurer regardless of the insured's financial position. This kind of claimant does not need to rely on the provision of law first developed for his benefit.

  The current reform has not dealt with the larger issue of whether review more generally should take place; specifically whether it is right that motor claimants should be treated as a distinct group, and whether it is right that all other types of claimants are unable to make direct claim on a liability insurer unless the insured is insolvent. It is hard, for example, to justify the position of, say, a postman injured whilst on his rounds by a speeding motorist who is able to make direct claim on the liability insurer regardless of the solvency of the motorist, but who if injured when attempting to deliver post as he falls into unlit excavations around a householder's property is unable to make a similar claim unless and until the householder is insolvent.

18 January 2010