INTRODUCTION

  1. This memorandum briefly describes the consultations carried out in connection with the reforms in the Third Parties (Rights against Insurers) Bill and the principal resulting changes to the text. These consultations fall into two stages; first, consultation undertaken by the Law Commission and the Scottish Law Commission in connection with their original provisional recommendations, and second, consultations undertaken by the Government.

A.   Consultation on the Law Commissions' Original Provisional Proposals (1998)

  2. In 1998, the Law Commission and the Scottish Law Commission published their joint consultation paper on the Third Parties (Rights against Insurers) Act 1930. There were 65 responses to this consultation paper from insurers, reinsurers, brokers, lawyers, consumers and businesses. Twenty-two of the responses came from representative bodies (for example, the ABI and the Association of Personal Injury Lawyers ("APIL")). Respondents to that paper confirmed that the burdens imposed by the 1930 Act on third parties caused real hardship and urged reform. The Law Commissions then considered the replies and published their final report and draft Bill in 2001. The Law Commissions' consultation paper and report are available at www.lawcom.gov.uk.

B.   Consultation by the Lord Chancellor's Department on the impact of the proposals (2001)

  3. In November 2001, the then Lord Chancellor's Department sought information on the impact of the Law Commissions' proposals from a number of Government departments and agencies whose policy is affected by the recommendations. Those consulted were: HM Treasury, Department for Trade and Industry, Financial Services Authority, Financial Services Compensation Scheme, Insolvency Service, Office of Fair Trading, the Official Receiver, Small Business Service, Scottish Executive, the National Assembly for Wales and the Northern Ireland Assembly. The responses supported the proposed reforms.

C.   Consultation by the Lord Chancellor's Department for implementation of the Law Commissions' recommendations by a Regulatory Reform Order (2002)

  4. In September 2002, a public consultation exercise was carried out by the then Lord Chancellor's Department about implementing the Law Commissions' proposals through a Regulatory Reform Order (RRO). Those consulted included members of the judiciary, the legal profession, representative organisations, insurers, trade unions and academics. The Department for Constitutional Affairs (as the Lord Chancellor's Department had become) published its response to the consultation in February 2004. There were 21 replies. The majority of consultees who replied (95%) were of the view that reform of the current legislation was necessary, and most (79%) were in favour of all of the Law Commissions' recommendations. Four consultees (21%) did not agree with all of the proposed changes and believed that some of the proposals should not be adopted in their current form due to the adverse impact that they might have on the insurance market and on the third parties themselves. There was also concern that the proposals should not give a third party greater rights than the debtor. The one consultee who opposed the proposals was of the view that they arguably go further than the purpose of the 1930 Act, and would distort the rights and benefits of interested parties where an insured defendant is found to be insolvent. In the event it was decided that the reforms were not suitable for implementation by RRO. The consultation paper and the response document are available at:

(i) http://www.dca.gov.uk/consult/rro/tparties.htm, and

(ii) http://www.dca.gov.uk/consult/rro/tprairesp.htm.

D.   Consultation by the Northern Ireland Department of Enterprise, Trade and Investment (2005).

  5. In December 2005 the Department of Enterprise, Trade and Investment issued the text of a draft Bill for consultation. Nine responses were received. Eight (88%) supported the draft Bill. One (12%) raised a concern that the Bill should apply equally to UK and foreign insurers. A copy of the summary of the responses is available at http://www.detini.gov.uk/consultation9.pdf.

E.   Consultation by Ministry of Justice on Draft Law Commission Bill (2008)

  6. In December 2008, the Ministry of Justice consulted 35 major stakeholders to assess whether they remained supportive of the proposals and whether they agreed with their implementation by means of the new House of Lords procedure for Law Commission Bills. Those consulted included insurers, reinsurers, the judiciary, the Insolvency Service, lawyers, consumer protection organisations and businesses and Government departments. 23 of those consulted were organisations representing large numbers of insurers, lawyers, consumers and businesses. All responses were positive and none of the consultees disagreed with the proposed implementation of the proposals by the new procedure. As a result of comments made and of further consideration of the draft Law Commission Bill, several changes were made. These are described in the accompanying paper comparing the Bill with the 2001 draft Bill prepared by the Law Commissions (Appendix 1). There were some significant suggestions made that have not been taken forward. One consultee suggested that the scope of the proposals should be widened to include circumstances beyond insolvency and insolvency-type events and that there should be some special provision in some instances for personal injury and death cases. Another suggested that the Bill should apply whenever insurance proceeds were payable in the United Kingdom. One consultee argued that the Bill should establish an Employers Liability Insurance Bureau. These changes would substantially change the nature of the Bill.

CONCLUSION

  7. On the basis of these consultations the Ministry of Justice considers that the Bill is supported by a large consensus of opinion across the insurance industry. This has only been achieved by limiting the scope of the Bill and striking a fair balance between the interests of all those affected where the Bill applies.

  The Third Parties (Rights against Insurers) Bill was introduced on 23 November 2009. It is the second Bill to be introduced under the trial of the new House of Lords procedure for Law Commission Bills.

  On 7 December 2009 the Second Reading Committee debated the bill. At the debate Lord Bach stated that he would make a document available outlining the changes between the Bill as introduced and the draft Bill published by the Law Commission and the Scottish Law Commission as part of their 2001 report Third Parties—Rights against Insurers (Cm 5217) ("the 2001 Bill").

  This letter describes the principal differences between the Bill as introduced ("the Bill") and the 2001 Bill. This comparison does not mention every change. Changes, such as changes of language and changes resulting from changes in the order of the clauses in the Bill, are omitted.

EXTENSION OF THE BILL TO NORTHERN IRELAND

  The Bill now extends to Northern Ireland. In 2005 the Office of Law Reform in Northern Ireland informed the Department for Constitutional Affairs that it would be desirable to introduce the proposals simultaneously in Northern Ireland. In late 2005—early 2006 the Northern Ireland Department for Enterprise, Trade and Investment carried out a public consultation on the extension of the Bill to Northern Ireland, the responses to which were very positive.

ORDER OF THE CLAUSES

  The order of clauses in the Bill does not follow the order in the 2001 Bill. The changes are intended to make the Bill easier to understand. The Bill now has the following structure:

—  transfer of rights and when they can be enforced (clause 1); 2 - new procedure for seeking to establish liability (clauses 2 and 3);

—  circumstances which lead to a transfer of rights (clauses 4 to 7);

—  limits and conditions etc which affect the transferred rights (clauses 8 to 10);

—  new disclosure regime (clause 11 and Schedule 1),

—  enforcement (clauses 12 to 14);

—  application of the Act (clauses 15 to 18); and

—  supplemental matters (clauses 19 to 21 and Schedules 2 to 4).

  Circumstances Triggering a Transfer of Rights

  The circumstances which trigger a transfer of rights were set out in clauses 1 and 2 of the 2001 Bill. They are now contained in clauses 4 to 7 of the Bill. Additional circumstances have been added, and changes made, to reflect developments in insolvency and company law.

  Also, given that the Bill will extend to Northern Ireland references to insolvency events and other circumstances under the law of Northern Ireland have been added. These are equivalent events to those listed for England and Wales and Scotland.

DISAPPLVING CONDITIONS IN THE CONTRACT OF INSURANCE

  An insurance contract may contain a condition that an insured must provide information or assistance to the insurer. Such a condition may be impossible to fulfil if the insured is a body corporate that has been dissolved. Clause 4(2) of the 2001 Bill addresses this problem by stating that the condition does not apply to rights under the contract which have been transferred. The reason for the provision is to prevent an insurer relying on non-fulfilment of a condition to avoid having to make payment, where that condition is impossible to fulfil (see paragraphs 5.17 to 5.19 of the Law Commission report).

  However two problems were identified with clause 4(2) during the Ministry of Justice consultation in 2008-09. First, it was recognised that the same problem arises where the insured is an individual who has died. Clause 9 of the Bill therefore expands the provision to include this circumstance.

  Secondly, it was pointed out that clause 4(2) of the 2001 Bill could be interpreted as including a condition to provide notice of the claim, since providing notice could be interpreted as providing information. Clause 9(3) of the Bill makes clear that this is not the case. As such, a condition to notify the insurer of a claim is not disapplied where due to the death or dissolution of the insured it becomes impossible to fulfil. The condition remains but by virtue of clause 9(2) of the Bill can be fulfilled by the third party.

ANTI-AVOIDANCE

  Clause 6 of the 2001 Bill contained an anti-avoidance provision. A provision of

  an insurance contract was to be of no effect if it sought to avoid the contract or alter the rights of the parties to it when the circumstances which gave rise to a transfer of rights occurred. Clause 17 of the Bill contains the equivalent provision but also refers to a provision which seeks to terminate the contract.

  This change is to ensure that a contract cannot avoid the provisions of the Bill

  by the inclusion of a provision stating that the contract is to be terminated if the insured becomes a relevant person for the purposes of the Bill: This ensures that the Bill gives full effect to the policy that it should not be possible to draft a contract of insurance in such a way as to nullify the effect of the Bill. A similar change is contained in paragraph 5 of Schedule 1 to the Bill.

PROCEEDINGS TO ENFORCE TRANSFERRED RIGHTS

  Clauses 8 and 9 of the 2001 Bill create a new procedure to enforce rights which

  have been transferred to a third party. Instead of having to establish the liability of the insured before being able to bring proceedings against the insurer the third party can, in the same proceedings, seek declarations about both the insured's liability and the insurer's potential liability. Clauses 2 and 3 of the Bill replicate this. However, the Bill makes it clear that a third party does not need to seek both declarations in order to obtain judgment against the insurer. A third party will, however, have to establish the liability of both the insured and the insurer to obtain that judgment.

  Clause 10 of the 2001 Bill which sought to provide an interpretation to clauses 8 and 9 has been removed. This section is now unnecessary because the subject-matter of clause 10(2) and (3) in the 2001 Bill is now covered by clause 1(4) of the Bill. Clause 10(1) of the 2001 draft Bill is now covered by clause 2(11) and 3(10).

DISCHARGE OF INSURED

  The Bill does not contain an equivalent of clause 12 of the 2001 Bill. This is because case law since the Report means the provision is no longer necessary (see The Law Society of England and Wales v Shah [2007] EWHC 2841 (Ch)).

DETERMINATION OF DOMICILE

  Clause 13(2) of the 2001 Bill applied provisions of the Civil Jurisdiction and Judgments Act 1982 to determine the domicile of various entities. The list omitted the provision relating to the domicile of trusts and this omission is corrected in clause 13(2) of the Bill.

EXTENSION OF JURISDICTION AS A RESULT OF EQUIVALENT PROVISION IN NORTHERN IRELAND

  The Bill does not contain an equivalent to clause 13(4) of the 2001 Bill because the Bill extends to Northern Ireland.

POWER TO AMEND ACT

  Clause 18 of the 2001 Bill gave the Secretary of State power to amend the Acts This was included to ensure that if new insolvency events were created by statute, or if the insolvency events listed in the Act were changed, the Act could be amended to keep pace with such changes. However, it is now recognised that such broad power is not needed—the legislation creating the new insolvency event or amending an existing event will be able to make consequential amendments to the Act. Clause 18 is therefore not replicated in the Bill.

  However, clause 19 of the Bill contains a more limited power of amendment relating just to Northern Ireland legislation. This has been included as it will be easier to exercise an order making power under the Act than to exercise the power to make an Order in Council under section 84(2) of the Northern Ireland Act 1998.

INFORMATION AND DISCLOSURE

  Schedule 1 to the Bill contains provisions relating to disclosure of information along the lines of those in Schedule 1 to the 2001 Bill. Consultation following the Report indicated that the requirement for a third party to have reasonable grounds to believe various matters before he or she could request information would be extremely hard to fulfil. Changes have therefore been made to the Schedule to enable a third party to be able to obtain the information he will need in order to bring a claim.

Ministry of Justice

January 2010