Lord Bach and Mr David Hertzell

12 JANUARY 2010

  Q1Chairman: Mr Hertzell, may I apologise for keeping you waiting outside and indeed apologise to the others, but we did have one or two matters which we needed to discuss about future meetings and future witnesses and so on. Welcome to this meeting of the Special Public Bill Committee. I think the suggestion is that Lord Bach should start the ball rolling rather than Mr Hertzell; is that right?

  Lord Bach: If I may briefly and then perhaps the Committee will hear from Mr Hertzell following my few remarks.

  Q2  Chairman: Indeed, that would be fine.

  Lord Bach: Thank you very much, my Lord Chairman. Before giving my evidence can I say how delighted I am that you are chairing this second Special Public Bill Committee in the trial of the new procedure for Law Commission bills. I have no doubt that you will guide our deliberations to a successful conclusion as you did in relation to what is now of course the Perpetuities and Accumulations Act 2009. I should also remind the Committee and congratulate you on the coming into force today, 12 January, of the Law Commission Act 2009 which you sponsored. My Lord Chairman, may I also say, as I know you will have noticed, that Lord Justice Munby who is the present Chairman of the Law Commission, along with some of his colleagues, is at the back.

  Q3  Chairman: I should have given him a special welcome too. May I say we all hope to attend the exhibition which I think is currently to be seen not far from here, so we should be there.

  Lord Bach: My Lord Chairman, I am grateful for the opportunity to give evidence today and would like to thank all those who spoke in support of the new procedure and the Bill at second reading committee. There is clearly a consensus of support for the Bill and I hope that will enable us to scrutinise this technical Bill in a constructive way. I do not propose in this statement to repeat at length the material included in my speech at second reading committee or in the memorandum of evidence submitted by the Ministry of Justice to the Committee. May I address points raised by noble Lords at second reading committee briefly. I am of course happy to try and answer any questions that the Committee may have but I am more than delighted that David Hertzell, the Law Commissioner responsible for commercial and common law work at the Law Commission, is here alongside to help me to do so. My own view, for what it is worth, is that the Committee will get much more information and indeed wisdom by asking Mr Hertzell questions than they will by asking me. Of course the Government is very grateful to Mr Hertzell and the Commission for their support for this Bill and the new procedure. If I may address the points briefly raised at second reading committee. My noble Lord, Lord Hunt of Wirral asked a number of questions relating to the Government's progress in implementing the Law Commission Act 2009. I can confirm to the Committee that the protocol referred to in section 2 of the Act is at an advanced stage of preparation. Extensive discussions about the protocol between the Ministry of Justice and the Law Commission have already taken place. Consequently we hope that we will be in a position to be able to lay it before Parliament during this session. The noble Lord also asked at second reading committee whether the list of Law Commission reports on which the Government's decision remains outstanding, which was promised to the hon Member for Christchurch during the debate on the Act in the other place on 16 October 2009, had been delivered. I can record that it was sent on 14 December to the hon Member by my right hon friend, the Ministry for State, who is the Minister responsible for the Law Commission. I have of course sent you, my Lord Chairman, a copy of the letter and placed it in the House Library. The table enclosed with the letter is a complete statement of the then current position. It shows that there were 18 reports outstanding and gives details of their present status. Of these reports, nine were in the process of being implemented and nine remained to be decided upon. The only update that is necessary is that the draft Civil Law Reform Bill, which forms part of the implementation process in relation to four of the reports listed in the table, was published for pre-legislative scrutiny on 15 December last. I hope this demonstrates further our commitment to the Law Commission and its work. The noble Lord, Lord Hunt of Wirral also asked whether we had any plans to consolidate or codify the law in this area once the Bill is passed and what steps we would take to make it more intelligible. In reply I indicated that I would seek the views of the Law Commission. I apologise for the delay. I have now written to the Chairman himself for his views and will respond to the noble Lord in due course. Three noble Lords, Lord Hunt, Lord Goodhart and Lord Borrie all criticised the length of time it has taken the Government to bring this useful and practical measure before Parliament. Lord Hunt asked whether the lack of a new procedure was the reason or whether there were more compelling ones. Lord Goodhart stated he thought it should have been possible to introduce the Bill within a couple of years of the Law Commission's report and welcomed the new procedure as a means of avoiding this kind of delay. I think Lord Borrie echoed those comments. Of course, my Lord Chairman, eight and a half years is a long time for a useful, uncontroversial piece of law reform to lie dormant and I regret the delay. Noble Lords and the Committee will appreciate that delays of this kind are not new nor confined to the period in office of this Government and it is a sign, I hope, of our determination to escape from delays of this kind that we have supported strongly the development of the new procedure. My noble friend, Lord Borrie asked two questions at Committee: whether I was satisfied with the operation of the Motor Insurers' Bureau and secondly whether there was a need for a similar arrangement in the field of employers' liability insurance. I can only tell him that my officials are consulting colleagues at the Department of Transport on the one hand and the Department for Work and Pensions on the other. I apologise for the delay and will reply to the noble Lord as soon as possible. My Lord Chairman, that is all I want to say at this stage. Obviously I would be happy to answer any questions. I think, as I have said already, it is likely that a more satisfactory answer to any technical question on this Bill will come from my co-witness.

  Chairman: Are there any more general questions therefore for Lord Bach before we ask Mr Hertzell to address the Committee? Yes, Lord Hunt.

  Lord Hunt of Wirral: My Lord Chairman, may I first of all join the noble Lord, the Minister in saying how pleased and delighted we all are that you have kindly agreed to chair this Committee.

  Chairman: That is enough of that!

  Q4  Lord Hunt of Wirral: Because you presided with such distinction over the Perpetuities and Accumulations Act and pioneered this new procedure and because of course you are now responsible for the Law Commission Act which according to the noble Lord, the Minister comes into effect today. As I understand it, the protocol in the Law Commission Act is now the subject of some discussions between the various parties within government and within the Law Commission. I wonder whether or not the noble Lord, the Minister might consider publishing a draft protocol to enable members of this Committee just to see how it is going to move forward before it is actually laid because that is a good opportunity to put forward any suggestions that we might have as to the wording of the protocol? I would particularly like to thank the noble Lord, the Minister for setting out the changes between the two Bills, the draft Bill which was with the report and then the Bill as it is now published. I found that to be an enormously helpful document and his comments on consolidation are also very welcome indeed. On the general point I think we are now much better placed to proceed in committee for a detailed examination of the Bill thanks to the documentation and information which he and his fellow witness have produced for which I am very grateful. Whether or not this protocol could be shared particularly with members on a draft basis is a matter now on which I await the Minister's reply.

  Lord Bach: I would like to take that request away, if I may. We are keen to get on with actually producing the protocol. We want to do it during this session of Parliament which I think everyone knows is likely to be curtailed from a normal session of Parliament. I hope the noble Lord, through you, my Lord Chairman, will forgive me if I do not immediately say yes to that, but I will take it away and discuss it with my officials who will no doubt discuss it with the Law Commission.

  Chairman: Any other general comments from members before we ask Mr Hertzell to comment?

  Q5  Lord Sheikh: Do we have a time-line in view of the fact that this goes back to 1998 and 2001? What is the target we have in mind to get this on the books?

  Lord Bach: This Bill?

  Q6  Lord Sheikh: This piece of legislation?

  Lord Bach: I think in the discussions that took place prior to using this procedure it was agreed by the usual channels, if I may use that phrase, that every effort would be made to get this Bill on the statute book by the time Parliament is prorogued for any forthcoming general election. That is very much our aim and I hope it is the aim of all associated with the Bill.

  Q7  Lord Sheikh: So it will be laid before the general election really?

  Lord Bach: Absolutely, that is what I am trying to say.

  Q8  Lord Sheikh: First class, I am pleased to hear that.

  Lord Bach: That is the idea because it has been delayed too long, I have conceded that. It seems to have broad consensus and so the sooner we get it on the statute book the better.

  Q9  Chairman: Good. Mr Hertzell, would you like to take over?

  Mr Hertzell: Thank you very much. I hope I may just say a couple of words by way of introduction before we get into the questions. First, my Lord Chairman, I am very grateful for the opportunity to give evidence to this Committee and for the opportunity to participate in the second of two Bills being used as pilots for a possible new Law Commission procedure. At the Law Commission we very much hope that such a new procedure, if adopted, will allow us to put forward uncontroversial Bills into a swifter passage to legislation than may hitherto have been the case. So far as this Bill is concerned, it has been very widely consulted on. I would like to stress that point. It has been consulted on twice since the original consultation in 1998. There has also been a subsequent cross-departmental cross-government consultation and a specific consultation in respect of Northern Ireland. Everybody with an interest in this area of law has had a very ample opportunity to give us feedback on it. I am very pleased to say that it continues to enjoy very wide support from all interested parties, including insurers and claimants' representatives too. It remains uncontroversial in all senses. It is important I think to stress that this Bill does preserve the key mechanisms of the 1930 Third Parties Act by which the rights of the insured against the insurer are transferred to the third party when that insured becomes insolvent, so that mechanism which was there in 1930 we have preserved. It means effectively that the third party steps into the shoes of the insured and the insured's debts are disentangled from insolvency procedures. That is an important point to make because when we have had to come and look at various pseudo insolvency processes we have kept that disentanglement in place. The Bill does not alter the substantive rights of the parties. What it has tried to do is to improve the processes by which those parties enforce their rights. The second point to make is that the Bill is of general application. Wherever there is a third party interest in the proceeds of an insurance policy this Bill would apply. I can give you a couple of examples. If you look at employers' liability, you would have the employer as the insured, you would have the employers' liability insurer as the insurer and the injured employee would be the third party. That is a very common scenario. Another one would be for example a professional indemnity situation in which the professional practice would be the insured, the professional indemnity insurer would be the insurer and the client would be the third party in that scenario. So it has general applications not limited to any specific class although the roots of the 1930 Act lie in motor insurance. The latest figures available from the Association of British Insurers, to give you some guidance on how the Bill is used, shows that 30 per cent of actions involving the Third Parties Rights Act are employment liability, 42 per cent are public liability insurers, 12 per cent are professional indemnity insurers and the balance is made up of various other bits and pieces of different types of insurance.

  Q10  Chairman: Could you give us those figures again.

  Mr Hertzell: 30 per cent is employment liability, 42 per cent is public liability and 12 per cent professional indemnity, the balance being a mix. The final general point I would like to make by way of opening is although this is an uncontroversial Bill, recent financial conditions will have made it more relevant, I think. In 2008 there were 23,000 corporate insolvencies and 114,500 personal insolvencies in round numbers. The final figures for 2009 are not yet available but taking trend estimates forward that would give us around 27,000 corporate insolvencies and 157,000 personal insolvencies, so there is an increased potential there for this piece of legislation to apply. Finally, I would just say that we perhaps need to remember that many of these third party claimants that may be affected by this Bill are vulnerable people such as injured former employees for whom the cost and complexity of the current legislation is a significant additional hurdle to overcome. I am very happy to take any questions that you may have on the Bill.

  Chairman: Who would like to start the questions?

  Q11  Lord Hunt of Wirral: My Lord Chairman, I would just like to ask Mr Hertzell if he can share with us if there are any areas of the Bill that could give rise to further problems just as the 1930 Act, although it was never intended at the time, gave rise to a number of loopholes? The specific example I was just going to put, if I may, my Lord Chairman, to Mr Hertzell is the position of what are called P&I clubs—protection and indemnity clubs—where I have carefully looked through for instance clause 9 and I am not sure we do address the position of P&I clubs. This is just one specific example to demonstrate a much wider problem which I would like Mr Hertzell to address. In sub-paragraph (6) of clause 9 it says: "In the case of a contract of a marine insurance, subsection (5) applies only to the extent that the liability of the insured is a liability in respect of death or personal injury." Those who understand P&I clubs know that clubs do raise something called the "pay first" principle to deflect claims by injured claimants on to other paying defendants. I can see there is a need for an addition here to ensure that the liability includes a liability to indemnify or contribute to the liability of another tortfeasor in respect of death or personal injury otherwise the avoidance will continue because it is not a liability in respect of death or personal injury; it is a liability to indemnify or contribute to the liability of another tortfeasor. I just wonder whether that might be an example of something which we have to carefully go through with considerable care because just as the 1930 Act demonstrated a whole plethora of case law which followed the 1930 Act we must do everything we can to make sure that there is not a further burst of such litigation following this Act.

  Mr Hertzell: Could I just answer that in a series of points really. First of all, just to make a general point really, Lord Hunt, that the P&I clubs are supportive of the particular changes being put forward here, as I think you know. P&I clubs put forward in their consultation a specific response to this in relation to themselves as a very specific type of insurer focusing on marine insurance, and as mutual insurers where the participants in insurance may well also be participants in the claim—so it is a circle in many ways—and they wish to preserve the concept of pay first by which the insured is under an obligation to pay the claim before it can collect off the insurer, as part of that preservation of the mutual rights that they have amongst themselves. There were questions raised in the consultation as to whether or not P&I clubs, strictly speaking, continue to operate in quite that way now or whether they have a more general and commercial application. Nevertheless at the time we felt it was a relatively contained area of insurance and not one that was likely to have an impact on the wider public, and so we preserved the condition of pay first, as you say, for P&I clubs with the exception of death and personal injury and, as I understand it, that is their current practice. As to whether or not it is possible to have a contribution from another, the general point in this Bill is that the rights are transferred whether or not there is a right to collect off somebody else, so in effect whether there is a possibility of collecting from another does not prevent the transfer of rights taking place, so you would be able to collect through from the P&I club in respect of death and personal injury but not otherwise. Does that answer your question?

  Q12  Lord Hunt of Wirral: It does not meet my point but no doubt you may have an opportunity to give it some further thought because I was saying that they have been raising the pay first principle to deflect claims by injured claimants for personal injury on to other paying defendants including of course the government.

  Mr Hertzell: Yes.

  Q13  Lord Hunt of Wirral: And if there is not some addition to this sub-clause I can see that the P&I clubs may continue to avoid their liabilities in this way. I was looking for assurance that they could not.

  Mr Hertzell: I do not think they can avoid their liabilities to the third party because I think the rights go straight through so you are able to claim direct against them because a transfer has occurred. I will confirm that to you to make sure you can see the relevant clause.

  Q14  Lord Hunt of Wirral: My point is can we be assured that similar situations have been thought through in respect of other parts of this Bill, bearing in mind the plethora of case law which has occurred on the 1930 Act we do not want to be meeting in ten years' time to try and amend this Bill to cover the situations which have arisen because we are dealing with a highly intricate and technical area of law.

  Mr Hertzell: We have stress-tested it as far as we possibly can through a huge amount of consultation but of course we can never entirely predict what may happen in the future.

  Chairman: Are there any other comments or questions on the points raised by Lord Hunt or do you have a new point?

  Q15  Baroness Whitaker: It is slightly similar, Lord Chairman, to the point raised by Lord Hunt but I think it is not identical and I hope you will forgive my lack of legal experience. I should say I was once responsible for policy on employers' liability compulsory insurance so I hope that serves as a tiny bit of background. My question is: if the wrong doer's insurer is insolvent is it just the same procedure or does something else need to be written in?

  Mr Hertzell: It is outside this really in a sense. If the insurer is insolvent then the remedy would be with the Financial Services Compensation Scheme as a kind of insurer of last resort in effect so the procedure would be different.

  Q16  Baroness Whitaker: So there is always going to be money there?

  Mr Hertzell: One would hope so, yes.

  Baroness Whitaker: Thank you.

  Q17  Lord Sheikh: Except for clarification, my Lord Chairman, it is only a percentage of money that is available just so that the noble Baroness is not misled to think that all the money would be available. The scheme only pays a percentage.

  Mr Hertzell: Yes, although I think the compulsory insurance is 100 per cent for employers' liability and motor and 90 per cent for general, and it is for consumers in general not for corporate claimants.

  Q18  Chairman: Any other questions? Could I just ask one thing. It is some time since I have actually read the report although I have. To what extent did you carry out any international comparisons? Do other countries have equivalent legislation to Third Parties (Rights against Insurers) Bill?

  Mr Hertzell: We did do some. We did look at Australia. This was a consultation that took place some time in the past. We looked at what happens in Australia and they have a different system there. They have a form of security regarding the insured debt and so the insolvency practitioner, be it the administrator or the liquidator, is obliged to be involved to effectively take forward the claim on a secured basis against the insurer. We felt that was a less satisfactory approach than the 1930 Act transfer of rights because it still did not disentangle insurance debt from insolvency procedures and it required the insolvency team to undertake various actions which they may have very little interest in doing. Our view was it was better that the third party who is likely to have the greatest interest in this particular claim should be the party that pursues it. We have looked at a certain amount of Commonwealth alternatives.

  Q19  Chairman: It should not just be confined to the Commonwealth. It seems in a sense such a beneficial idea that one imagines other countries—France, Germany and so on—will have something rather equivalent to Third Parties (Right against Insurers)

  Mr Hertzell: I am afraid I do not know.

  Lord Hunt of Wirral: It is a good point.

  Chairman: Do you know the answer to that question? Does anybody know the answer?