Reflections on the Third Parties (Rights against Insurers) Act 2010, 8 years later

The Third Parties (Rights against Insurers) Act 2010 (the “2010 Act”) came into force on 1 August 2016 and replaced the Third Parties (Rights against Insurers) Act 1930 (the “1930 Act”).  Details of the 2010 Act itself can be found in our Insurance Legislation Zone – here. In summary, the 2010 Act enables a third party that has suffered loss caused by an insured who has gone insolvent to bring proceedings directly against the insured’s liability insurers. This avoids the need for the third party to litigate against the insolvent insured before it is able to ‘step into the shoes’ of the insured for the purposes of the liability insurance, which was the position under the 1930 Act.

With over eight years of caselaw under its belt, and as the applicability of the 1930 Act becomes less and less likely, we consider some of the key cases relating to the 2010 Act and why they may be of interest to insurers.

Redman v Zurich Insurance PLC [2017] EWHC 1919 (QB)

Key take away – The 2010 Act is not retrospective, and the 1930 Act may still apply to some claims.

This was one of the first key decisions made shortly after the 2010 Act came into force and confirmed that the 2010 Act was not retrospective, and the 1930 Act continued to apply to cases which fulfilled the following criteria:

1. The insured incurred a liability to a third party before 1 August 2016; and
2. The insolvency of the insured occurred before that date.

In Redman, the Claimant, acting as administrator of her late husband’s estate, issued proceedings against the Defendant insurer under the 2010 Act. She asserted that her husband’s death was caused by exposure to asbestos whilst employed by an insolvent company which had taken out Employer’s Liability insurance with the Defendant insurers.

In this case, the Claimant’s husband passed away on 5 November 2013, the Employer was subject to a voluntary winding up on 30 January 2014 and was ultimately dissolved on 30 June 2016. The Court found that the Employer had become insolvent when it was being wound up on 30 January 2014 and the liability had been incurred when the death occurred in 2013. The 1930 Act would, therefore, apply to any claim and, as such, the Claimant’s claim under the 2010 Act was struck out. 

For further detail see our Law-Now.

BAE Systems Pension Funds Trustees Ltd v Royal & Sun Alliance Insurance Plc [2017] EWHC 2082 (TCC)

Key take away – Insurers can be joined to existing proceedings to determine the insured’s liability under the 2010 Act even if insurers dispute that the policy should respond to the liability of the insured.

Shortly after Redman was decided, a dispute arose as to whether a Claimant could use the 2010 Act to join insurers to existing proceedings against a number of Defendants, one of whom was the insolvent insured, even though insurers were disputing that the relevant policy would respond to the liability of the insolvent insured.

The Claimant, BAE Systems (“BAE”), had already issued proceedings against a number of Defendants relating to the design and construction of a concrete floor when one of the Defendants was placed into administration. BAE applied to join the insolvent Defendant’s professional indemnity insurers, Royal & Sun Alliance Insurance Plc (“RSA”), to the proceedings on the basis that, pursuant to the 2010 Act, the rights of the Defendant under the insurance policy had transferred to the Claimant and Section 2(2) of the 2010 Act allowed it to bring proceedings against the insurers without having first established the liability of the Defendant. Section 2(2) of the Act provides: “[A Claimant] may bring proceedings against the insurer for either or both of the following: (a) a declaration as to the insured's liability to [the Claimant]; (b) a declaration as to the insurer's potential liability to [the Claimant]”.

BAE sought declarations regarding both (a) the insolvent insured’s liability to BAE and (b) RSA’s liability under the insurance policy.

The insurance policy included clauses that any disputes over the policy's interpretation or performance should be referred to the French Courts or to arbitration (depending on which clause of the insurance policy applied).

RSA contended that (1) there was no cover under the policy for BAE’s potential liability to the Claimant and so the Claimant had not triggered any rights under the 2010 Act; and (2) the English Court lacked jurisdiction as any coverage disputes under the policy had to be resolved by either a French Court or through arbitration.

The Judge confirmed that Section 2 of the 2010 Act provides the mechanism by which the liability of the insolvent insured as well as the liability of an insurer under the policy is established.  The Judge was satisfied that Section 2 of the 2010 Act is engaged wherever a Claimant claims that (a) an insolvent insured has a liability to the Claimant and (b) there is insurance in respect of that liability - the Claimant does not have to establish those rights before it is able to bring its claim against the relevant insurers.

On this basis, the Judge granted the application to join RSA as a Defendant to the existing proceedings in respect of the insolvent insured’s liability to BAE. However, the claim for declarations regarding RSA's potential liability to the Claimant under the policy was stayed because the Judge found that the policy confirmed the coverage dispute should be either resolved by the French Court or by arbitration (the Court did not have to decide which for the purposes of this application).

See our Law-Now for further details.

Peel Port Shareholder Finance Co Ltd v Dornoch Ltd [2017] EWHC 876 (TCC)

Key take away – Although this was not an application made pursuant to the 2010 Act it is interesting for insurers to know that a pre-action disclosure application (under CPR 31.16) for disclosure of an insurance policy where the insured is not yet insolvent is unlikely to succeed.

The Claimant owned a warehouse which suffered damage in a fire and the Claimant asserted that the fire was caused due to the Defendant’s negligence. The Claimant’s claim against the Defendant was for in excess of £1 million which, if successful, would likely have caused the Defendant to become insolvent. The Claimant therefore issued an application pursuant to CPR 31.16 against the Defendant’s insurers for pre-action disclosure of the insurance policy on the basis that it was likely insurers would be a Defendant to a 2010 Act claim issued by the Claimant in the future.

The insurers objected to the disclosure on the basis that, if disclosure of insurance policies were available under CPR Rule 31.16, there would be no point to the provisions of the 2010 Act which allow disclosure of the policy terms i.e. section 11 and Schedule 1 of the 2010 Act.

The Claimant’s application was refused. The Court took into account that the 2010 Act clearly did not envisage that pre-action disclosure applications would be commonly used to obtain the insurance details for insolvent insureds from insurers, and in fact, liability insurances are usually not disclosable when the insured is solvent because they do not meet the test for standard disclosure (the Judge pointed to examples of cases where other attempts to obtain an insurance policy had failed).  The Judge considered it would, against this background, be quite unusual for a prospective Claimant to argue that the mere possibility of the insured's future insolvency, coupled with a potential subsequent claim against the insurer, justifies the release of the insurance policy details under CPR 31.16.

Further reading can be found here.

Irwell Insurance Co Ltd v Watson [2021] EWCA Civ 67

Key take away – An employment tribunal is a "Court" within the meaning of section 2(6) of the 2010 Act with the effect that employment tribunals can resolve policy coverage disputes, notwithstanding any arbitration clause in the insurance policy.

Mr Watson resigned from his employment claiming constructive dismissal and disability discrimination against his employer and issued a claim in the Employment Tribunal (“ET”). The employer became insolvent but had insurance covering compensation payable to successful employees in ET proceedings. Insurers disputed cover under the policy.  Mr Watson applied to join the insurer to his ET proceedings, but insurers argued that the ET did not have jurisdiction to decide the construction of an insurance policy. The ET judge agreed with insurers, with the effect that Mr Watson would be required to resolve the policy coverage dispute in the civil Courts before returning to the ET to decide the employment issues.

On appeal, the Employment Appeal Tribunal disagreed with the ET judge and insurers and stated that it was “clear from the differences between the regime of the 1930 Act and that of the 2010 Act, that the latter was intended to promote a "single forum" solution to recovery against an insurer where the insured has become insolvent.” With this in mind, they found that the ET was a "Court" within the meaning of section 2(6) of the 2010 Act and that the 2010 Act claim against the insurers could proceed in the ET.  Insurers appealed to the Court of Appeal.

The Court of Appeal agreed with the Claimant and held that an ET is a "Court" within the meaning of section 2(6) of the 2010 Act.  When discussing the issues, the Court of Appeal took into account the overall aim of the 2010 Act which was to allow Claimants to bring only one set of proceedings to resolve their dispute, which would be defeated if Claimants were obliged to bring the insurance claim in a separate forum to the ET.

Furthermore, the Court of Appeal considered that this is the position notwithstanding there was an arbitration clause in the insurance policy and found that the arbitration clause was void in the context of the employee's claims for unfair dismissal and discrimination, as these claims fall under the exclusive jurisdiction of the ET.

Rashid v Direct Savings Ltd [2022] 8 WLUK 108

Key take away – Insurers can rely on the same limitation defences as the insured would have (had the insolvency event not taken place).

The question of limitation under the 2010 Act arises because of the unique insolvency law rules which suspends the limitation period for claims against an insolvent company.  Under the 1930 Act, the Court held in Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd (In Liquidation) [2005] EWCA Civ 1408 that time stopped running for 1930 Act claims against an insurer as well. The effect of this ruling was that arguably, claims against insurers could be brought indefinitely once the insured was insolvent.

This was challenged in Rashid when a number of Claimants brought claims against Direct Savings Ltd (“DSE”) for the negligent installation of cavity wall insulation in around 2014/15. DSE argued that another associated company, Direct Savings (Scotland) Ltd (“DSS”), had carried out the installations, and DSS was wound up on 1 September 2020. Both DSE and DSS were insured by the same insurer. The Claimants made applications to join DSS and the insurer (pursuant to the 2010 Act) as Defendants to the proceedings. The insurer opposed the applications, asserting that the limitation period for any claim against it under the 2010 Act had expired (the installations taking place in 2014/15 and the applications being made more than 6 years later). The Claimants argued that, pursuant to the case of Larnell, time stopped running for its claim against DSS and insurers at the date of the winding up of DSS (1 September 2020).

The Judge considered the key question was whether the claim against an insurer under the 2010 Act was made within or outside the liquidation of DSS.  He decided that the claim against the insurer fell outside the liquidation of DSS on the basis that the 2010 Act permits a direct claim against an insurer without the insolvent insured having to be added as a party (unlike the 1930 Act) and so concluded that the benefit of an insurance policy was not an asset of the insolvency or of the insured. Reiterating a comment from a prior unreported county Court judgment dealing with the same issue, the Judge said that “A claim made against [an insurer], a separate legal entity not subject to [the insured’s] liquidation, for the purpose of enforcing rights against an asset not available to the general creditors, must necessarily be outside the insolvency”.

It was an important factor in Larnell that, with a 1930 Act claim, the third party had to first establish liability against the insolvent insured. This does not apply to claims under the 2010 Act. Larnell was therefore distinguishable, and limitation continued to run in respect of the claim against the insurer under the 2010 Act even after DSS was wound up. The Claimant was therefore out of time to bring its claim against insurers for the liability of DSS.

It is worth noting that this was a County Court decision and so not binding on future High Court claims, although the decision has gained positive commentary in light of the purposes of the 2010 Act and is positive for insurers.

For more detail see our Law-Now.

Keegan v Independent Insurance Company Limited [2022] EWHC 1992 (QB) and Brooks v Zurich Insurance plc [2022] EWHC 1170 (QB)

Key take away – Insurers may face 2010 Act claims for mesothelioma claims under employer liability policies, even though the negligent exposure was prior to the 2010 Act coming into force.

In two recent cases involving similar facts, Claimants who developed mesothelioma since August 2016 issued claims directly against their former employers’ insurers, as the employers had been dissolved long before the commencement of the 2010 Act (this was not in dispute). The insurers in Keegan were not represented at the hearing for various reasons, but the insurers in Brooks argued their position by way of a strike out application. Insurers sought to argue that the 2010 Act should not apply since the liability of the employer was incurred prior to 1 August 2016.  If insurers were correct, it would require the Claimants to proceed under the 1930 Act i.e. to apply to restore their former employer companies to the register of companies and obtain a judgment against them before bringing their claim against insurers.

In both claims the Court dismissed insurers’ arguments and found in favour of the Claimants which meant they could proceed against insurers under the 2010 Act. For various reasons regarding when the symptoms of mesothelioma would become apparent, the Court was satisfied that the Claimants’ cause of action against the insolvent insureds accrued after 2016, and so the Claimants could rely on the 2010 Act. The Court was sympathetic to the fact that Claimants would have been unable to bring their claims against their former employer before realising they had mesothelioma which could only be after symptoms were apparent (after 1 August 2016).

For more detail see our Law-Now’s on Actionable damage in isolation (on Keegan v Independent Insurance Company Limited) and Actionable damage? A mixed question of law and fact (on Brooks v Zurich Insurance plc).

Scotland Gas Networks Plc v QBE UK Ltd (formerly QBE Insurance (Europe) Ltd)) [2024] CSIH 36

Key take away – A ‘decree in default’ (Scottish equivalent to a judgment in default) is sufficient to establish ‘liability’ for the purposes of the 2010 Act.

Claim was brought against an insured, which then went insolvent.  The Claimant did not bring insurers into the proceedings, but continued against the insolvent insured and five months later the insolvent insured failed to appear at a procedural hearing. The Scottish Court granted a ‘decree in default’ against the insured for the full £3 million sought. The Claimant then sought to enforce that decree against the insured’s public liability insurers under the 2010 Act. Insurers sought to argue that a settlement or judgment alone is not enough to determine liability of the insured and that the Claimant was required to prove liability of the insured in any 2010 Act proceedings against the insurer. 

The Court of Appeal upheld the decision of the Scottish Court of Session that a ‘decree in default’ was sufficient to establish ‘liability’ under the 2010 Act. The Judge at first instance commented that it was open to the insurers to defend the liability of the insured at the procedural hearing, which the insolvent insured had not attended. The decision clarified that once the existence and amount of the policyholder's liability have been established by a decree, it is not open to the insurer to dispute the liability of the policyholder to the third party in subsequent proceedings.  The decision is significant as it is generally accepted that, prior to this decision, insurers would usually have the right to ‘look behind’ a judgment which found that an insured was liable to a Claimant or settlement between an insured and a Claimant, to form a view on whether the insured did, in fact, have any liability (and, therefore, a right to an indemnity under the policy). This decision confirms that the 2010 Act can operate as an exception to this general rule and highlights the risks for insurers whose insureds may be insolvent and who do not defend the liability claim against their insureds. This distinction underscores the importance of insurers actively participating in the defence of claims against their insureds, especially when insolvency is involved, even when cover may be in dispute.

Riedweg v HCC International Insurance Plc & Anor [2024] EWHC 2805 (Ch)

Key take away – Insurers cannot bring contribution claims in 2010 Act proceedings as their liability to the third party is not the “same damage” for the purposes of the Civil Liability (Contribution) Act 1978 (1978 Act)

The most recent decision on the effect of the 2010 Act concerned a claim against the insurers of an allegedly negligent property valuer which was insolvent.

The insurer sought permission to issue a Part 20 claim against the solicitors who had acted for the Claimant in the property purchase.  The solicitors opposed the application and argued they should not be joined as the insurer's liability to indemnify under the policy was not the “same damage” as caused by the negligence of the solicitors. The Court agreed with the solicitors and dismissed the insurer’s application for permission to pursue the Part 20 claim.

The Court held that the damage for which an insurer might be liable is not the same as the damage caused by the solicitors to the Claimant and noted that the 2010 Act provides a procedural mechanism for Claimants to pursue insurers directly but does not alter the nature of the insurer's liability to the Claimant.

Importantly, the Court noted that insurers retain the right to step into the shoes of the insured and pursue recovery actions against third parties responsible for the insured's loss through subrogation, but this first required payment to be made under the insured’s policy. This subrogation solution does not, however, take into account the fact that the 2010 Act allows Claimants to seek declarations (and insurers to dispute) both as to liability (of the insolvent insured) and coverage under the policy at the same time.  

Further reading can be found in our Law-Now.

Comment

While there are some helpful legal clarifications for insurers, for example in respect of limitation, these cases also demonstrate that a Court is unlikely to be persuaded by technical arguments from insurers to circumvent the ultimate aim of the 2010 Act i.e. to make it procedurally simpler for Claimants to litigate their claims and not be hindered by the insolvency of the insured. The cases also highlights some practical difficulties for Insurers when 2010 Act claims are issued. 

Insurers should remember that they can always raise liability and coverage defences that they would have had against the Claimant and insured respectively, and this should arguably be their focus in any 2010 Act claims. Doing nothing could cause problems down the line.