THIRD PARTIES (RIGHTS AGAINST INSURERS) BILL

  In the course of my oral evidence to the Special Public Bill Committee on Tuesday 12 January, Committee members asked about a number of matters relating to the Bill. There were three issues that I promised the Committee I would look into:

—  the status of third party rights against insurers in other jurisdictions;

—  the support of the Financial Ombudsman Service in considering claims under the Bill; and

—  the multiple parties scenario described by Lord Hunt.

  I have set out my comments on those three issues below.

OVERSEAS COMPARISONS

  Lord Lloyd of Berwick asked whether the Law Commissions had carried out international comparisons to determine the approach adopted by other countries in relation to third party rights. Lord Hunt of Wirral asked in particular about developments in the European Union.

  In addition to the research conducted in relation to Australia (which I referred to in my evidence), the Commissions also found that a number of countries had adopted a "direct right of action" approach in respect of the third party's right to sue an insurer. Several of these are explained at Appendix F to the Commissions' 1998 consultation paper.

  In the past week I have researched the position in a number of other countries. Although in some cases it has been difficult to find current English-language versions of the different statutes, I have set out briefly below what I understand to be the approach taken in different countries, with a particular focus on the European Union.

Belgium

  It appears that under Belgian law, a third party will be able to claim directly from an insurer where there is compulsory insurance for the liability event.[1]

Canada

  Insurance law is dealt with at provincial (rather than federal) level in Canada. However, several provinces have legislation dealing with third party claims against an insurer. For example, section 132 of the Ontario Insurance Act 1924 provides that a third party may proceed against an insurer where the third party can prove:

—  a valid insurance policy exists;

—  the third party has obtained a judgment in respect of the insured's liability; and

—  the insured has not satisfied that judgment.

Finland

  In Finland, section 67 of the Insurance Contracts Act provides:

"A person who has sustained bodily injury, property damage or financial loss under general liability insurance is entitled to claim compensation in accordance with the insurance contract direct from the insurer, if:

  (i)  the insurance policy has been taken out pursuant to laws or regulations issued by the authorities;

  (ii)   the insured has been declared bankrupt or is otherwise insolvent; or

  (iii)  the general liability insurance has been mentioned in marketing efforts launched to promote the insured's business."[2]

  That section goes on to set out the requirements in respect of the insurer notifying the insured, and giving the insured an opportunity to provide information. It also provides that if an insurer accepts a third party's claim, the acceptance is not binding on the insured. Section 68 makes further provision about direct claims by an injured third party.

France

  In French law there is a general concept of "action directe" which allows an injured person to sue the insurer of the person or entity which has caused the injury. Originally developed through the case law, action directe was subsequently codified, and can now be found in the Code des Assurances, particularly article L124, which relates to liability insurance (but see also article L112-6).

  To proceed against the insurer, the third party must still establish the liability of the insured by way of a claim in court, or an out of court claim;[3] however the court claim may either be a joint action against both insured and insurer, or separate actions.[4]

Germany

  The existing insurance Contract Act (Versicherungsvertragsgesetz) was substantially revised in 2007 (taking effect in 2008).[5] Included amongst the key changes were new provisions in respect of contracts for compulsory insurance, providing an injured party (ie the third party) with a direct right of action against an insurer.

  The third party will be able to proceed against the insurer in any of the following circumstances:

—  where the insured has taken out third-party motor insurance (under the Act on Compulsory Insurance for Keepers of Motor Vehicles);

—  where insolvency proceedings have begun, or where insolvency proceedings have been dismissed because of a lack of assets, or where a provisional insolvency administrator has been appointed; or

—  where the whereabouts of the insured are unknown.[6]

Israel

  The Insurance Contract Law, enacted in 1981, takes account of a direct action between a third party and an insurer.[7] Section 69 applies where the insured has undergone certain bankruptcy or liquidation events, and the insured has also incurred a liability to a third party (either before or after the bankruptcy etc event). In those circumstances, section 69 provides that: the rights of the Insured against the Insurer in respect of that liability shall not become part of his assets but will pass to the third party, who may sue the Insurer on the strength of these rights, but a plea available to the Insurer against the Insured may also be set up by him against the third party".[8]

Italy

  It appears that, subject to a small number of exceptions (motor vehicle, boating and hunting accidents) Italian law does not allow an injured third party to proceed directly against an insurer.[9] instead, proceedings must be brought by the insured against the insurer.[10]

Poland

  In Poland, property insurance contracts are regulated by articles 821-828 of the Civil Code. "Property insurance" includes third-party liability insurance.[11] Article 822 provides that any person entitled to indemnity in relation to a contract of civil liability insurance may bring a claim directly against an insurer.

South Africa

  In South Africa, insolvency legislation provides that a third party may proceed against an insurer where the insured's estate has been sequestrated.[12]

Motor insurance in the European Community

  Committee members may also be aware that, separate from the third party regimes in different countries, throughout the European Community there are specific arrangements for third party rights in the context of motor insurance. The European Community introduced the Fourth motor insurance Directive (2000/26/EC) which allowed a person visiting another Member State to bring a direct action against the insurers in the Member State of their domicile. This was extended further in the Fifth motor insurance Directive (2005/14/EC), which granted direct action against insurers on all victims.

The Financial Ombudsman Service

  Lord Hunt of Wirral asked whether the Financial Ombudsman Service was content with the Third Parties (Rights against Insurers) Bill, given that the Service will be able to investigate claims made in the context of the Third Parties Bill in particular, Lord Hunt asked whether the Service felt that its resources were sufficient to manage claims made under the Third Parties Bill. I indicated that the Financial Ombudsman Service had expressed its support for the Bill—the Service was consulted as part of the 2008 Ministry of justice consultation process.

  I have since contacted Mr Peter Hinchliffe, the lead ombudsman for general insurance, to discuss the particular issue of resourcing. I was advised by Mr Hinchliffe that a slight increase in workload is expected if the Third Parties Bill comes into force. However, Mr Hinchliffe indicated that only a small number of cases are brought under the current legislation (the Third Parties (Rights against Insurers) Act 1930). He expects that the number of cases under the new legislation would be similarly low.

Multiple tortfeasors scenario

  Lord Hunt asked about the situation where an insured (referred to hereafter as "A") who is liable to an injured third party, seeks a contribution from another insured ("B"). That is:

  Lord Hunt suggested that B's contract of insurance with its insurer alight contain a "pay first" or "pay to be paid" clause, which would ordinarily require B to pay out its contribution to A (if liable) before being able to recover from its own (ie B's) insurer. (I have assumed that the scenario described by Lord Hunt involved marine insurance contracts, which are the subject of clause 9(6) of the Bill. I have also assumed that the third party's claim was for death or personal injury.)

  I examine in turn the position of the three main parties. First, if we consider the position of the third party, he or she will be able to recover their losses in full (provided that there are no liability or coverage issues). If A (from whom the third party seeks compensation) is solvent, the third party should be able to recover its losses from A. If A's contract of insurance with its insurer contains a pay first clause, A may be required to pay out the third party's claim before recovering from its insurer.[13] Alternatively, if A is an insolvent company, then (under the Bill) the third party will be able to proceed against A's insurer directly. If the contract of insurance contains a pay first clause, it will be of no effect, because the third party's claim is for death or personal injury (see clause 9(6)). So it appears that the third party's claim, provided it is a valid claim, will be met in full.

  We then consider the position of A, who is liable to the third party. A seeks a contribution from B, on the basis that B's actions contributed to the loss suffered by the third party. Although Lord Hunt did not say so explicitly, I assume that B is an insolvent company (or another "relevant person" for the purposes of the Bill—see clauses 4 to 7). It is important to remember that it is only if there has been a liability event (eg B's actions causing As loss) and an insolvency-type event (making B a "relevant person") that the provisions of the Bill are invoked—in the absence of either event, the provisions of the Bill will not apply to A's claim against B.

  A seeks a contribution from B. B is insolvent, so A's claim, under the Bill, is brought directly against B's insurer. The contract of insurance between B and its insurer contains a "pay first" clause, which means that B must pay A's claim before recovering the amount from its insurer. B clearly cannot pay. As it is a marine insurance contract, but A's claim is not for death or personal injury, B's insurer will be able to rely on the "pay first" defence—that is, it will be entitled to insist on payment of the claim by B first, before it will indemnify A (this, of course, is a result of the House of Lords decision in The Fanti & The Padre Island [1991] 2 AC 1).

  This outcome is the result of the general policy position that the third party (whoever he, she or it may be) steps into the shoes of the insured. For this reason, insurers' ability to rely on defences against third parties is largely undisturbed by the Bill; this approach was supported on consultation (see the Law Commissions' 2001 Report, paragraphs 5.10 to 5.12). In the context of marine insurance (where pay first clauses are most frequently used), the International Group of P and I Clubs strongly supported the retention of pay first clauses. Their concern was that a general change to the law beyond the restriction for death or personal injury would lead to a migration of the clubs to other jurisdictions. Given the relatively limited use of pay first clauses the Commissions agreed that with the exception of death or personal injury, insurers should be entitled to rely on such clauses in the context of marine insurance.

25 January 2010

2   Insurance Contracts Act, No 543, 28 June 1994. Back

3   Article L124-1. Back

4   Tournois, M Direct actions by victims against insurers of wrongdoers in France [1996] IJIL 194 at 199. Back

5   Insurance Contract Act, Federal Law Gazette I page 2631. English translation viewed at httpa/www.gesetze-im-internet.de/enalisch vvg/engiisch vve.html on 19 January 2010, administered by the German Ministry of Justice. Back

6   Section 115, Insurance Contract Act. Back

7   Insurance Contract Law 5741-1981. Back

8   Section 68 makes provision for the payment of insurance proceeds directly to a third party-this does not appear to be confined to the situation set out in section 69, but in relation to third party liabilities generally. Back

9   See Italian Insurance Code (Legislative Decree 7 September 2005, No 209) for vehicle and boating exceptions. See article 8(7) of Law 27 December 1977, No 968 for the hunting exception. Back

10   Cassazione Court, sez III, decision of 20 April 2007, No 9516. Back

11   Campbell, International Insurance Law and Regulation (2009) POL-11. Back

12   Section 156 Insolvency Act 1936. Case law indicates that a third party may also bring such proceedings where the insured is a close corporation which is subject to a winding up order-see Unitrans Freight (Ply) Ltd v Santam Ltd [2004] ZASCA 20 (20 March 2004), at para 7. Back

13   Although I understand that industry practice in marine insurance is that P & I Clubs do not rely on pay first clauses in cases of death or personal injury. Back