On 2 July, Baroness Scotland of Asthal announced the UK Government’s acceptance of the proposals in the reports of the Law Commission and the Scottish Law Commission (Law Com No. 272) to reform the Third Party (Rights Against Insurers) Act 1930 (the "1930 Act"), which is to all intents and purposes mirrored by the Third Party (Rights Against Insurers) Ordinance (Cap. 273) in Hong Kong ("the Ordinance").
The purpose of the 1930 Act and the Ordinance
The 1930 Act, and the Ordinance, give a third party claimant against an insured the right to pursue directly the insured’s insurer and receive payment under the insurance policy in circumstances where the insured is both (a) liable to the third party claimant; and (b) insolvent. This statutory transfer of rights operates as an exception to the general rule of privity of contract (that only a party to a contract can sue and be sued under it) and to the principle of insolvency law that all unsecured creditors of insolvent individual are to be treated equally. The mischief the 1930 Act was designed to cure was the application of the proceeds of an insurance policy covering a third party’s claim to all of the insured debtor’s creditors generally, when the insured’s entitlement to the proceeds of the policy arose solely due to the third party’s claim.
Criticisms of the 1930 Act
Although the 1930 Act operates in principle to cure the mischief set out above, in practice the manner in which the English Courts have interpreted its terms has caused delay and expense for third party claimants hoping to avail themselves of the statutory transfer which it creates. Further, the 1930 Act has for some time been considered outdated in the light of recent developments in insolvency law.
Principal reform recommendations
The draft Bill appended to the Law Commission’s report would, if enacted, bring in the following principal reforms;
1 give the third party the right to issue proceedings against the insurer before he has established at law the existence and amount of the insolvent insured’s liability. At present, the third party cannot sue the insurer without first successfully suing the insured. The proposed reform would allow the third party to establish the existence and amount of the insured’s liability and pursue the insurer in the same proceedings;
2 in the case of a dissolved company, the third party would no longer have to apply to restore the company to the register and sue it before proceeding against the insurer. In such circumstances, the third party would not have to sue the insured at all;
3 to change the circumstances in which a third party has a right to information about the insured’s insurance cover. Under the 1930 Act and the Ordinance, the right to information about the policy does not arise until the liability of the insolvent insured has been established and quantified (see Woolwich B. S. v. Taylor  1 BCLC 132). Until such time, the third party must litigate against an insolvent defendant in ignorance of whether there is insurance to cover the claim and, if so, the limit of indemnity thereunder. The 1930 Act also does not allow the third party to claim information from the individuals (e.g. the broker) who actually have it in some circumstances. The proposed reforms would allow a third party who reasonably believed that a transfer of rights had occurred to obtain information sufficient to allow him to make a sensible decision on whether to prosecute his claim against the insured. They will also allow the third party to seek specific information from anyone who is in control of it;
4 to take account of the wide variety of procedures to which individuals, companies and other corporate bodies may now be subject and which might adversely affect a third party claimant. The draft Bill also contains a power of further amendment so that future developments in company and insolvency law may be reflected in the new Act without the for further primary legislation;
5 to provide that a third party with rights against an insurer would not be bound (to the extent of those rights) by voluntary arrangements entered into by the insolvent insured. Recent cases (e.g. Re Greenfield  BPIR 699) have suggested that a third party claimant’s rights under the 1930 Act may be reduced by such voluntary arrangements;
6 to reverse the decision in Tarbuck v. Avon Insurance plc  2 All ER 503, which held that a third party cannot make a claim under the 1930 Act in respect of insurance which covers liabilities voluntarily incurred by the insured to the third party (e.g. legal expenses insurance);
7 to remove from the insurer the ability to rely on a number of technical defences, such as the breach of a policy requirement for the insured (and no one else) to give the insurer notice of a claim against him (the draft Bill allows the third party to notify the insurer once the insured is insolvent), and the breach by the insured of a "pay first" or "pay to be paid" clause, which would defeat the purpose of the legislation altogether if upheld (see ‘ The Fanti’  2 AC 1 (HL));
8 to clarify the operation of the Act in cases with a foreign element. In most cases, jurisdictional questions would be settled by the Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil Commercial Matters 1968 (applied by the Civil Jurisdiction and Judgment Act 1982).
The full text of the Law Commissions’ report can be found at www.lawcom.gov.uk.
The draft Bill, if and when enacted, will make life easier for claimants against insolvent defendants. Correspondingly, it will make life more difficult for insurers of such defendants. The fact that a claimant no longer has to take an insolvent defendant as he finds him, taking the risk that insurance cover may not be in place to cover the claim, may have been eroded or the policy validly avoided, may reduce claims against insolvent insureds, but where the claimant identifies a pot of insurance monies available to pay his claim against an insured who may, through its insolvency, not have access to the documents or individuals necessary to defend itself properly, the insurer’s ability to settle will no doubt be adversely affected by the fact that the claimant knows the amount of insurance available.
Subject to the minor amendments outlined above, the fundamental provision of the 1930 Act, that the claimant can be in no better position than the insured under the terms of the policy, will remain unchanged.
At this stage it is not known whether there are any plans in Hong Kong to implement similar reforms of the Ordinance.
© Herbert Smith 2002
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