UK: An Improved Law for a New Century - Third Parties (Rights Against Insurers)

Last Updated: 30 November 2001
Article by Jonathan Wyles

The existing law

The Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act") is one of the shortest Acts ever enacted (just six sections) but was designed to overcome a serious injustice.

Prior to the passing of the 1930 Act, an individual might have succeeded in an action against a wrongdoer who had caused him harm/loss and who had third party insurance to meet the claim but would remain uncompensated if, before the victim could claim his money, the wrongdoer went bankrupt and the insurance money was paid to the other creditors. This was a particular problem experienced by the victims of road traffic accidents caused by insolvent, but insured, car drivers. The 1930 Act was introduced in a recession (perhaps the worst ever) and continues to be most relevant in times of recession, such as the early 1990s.

By section 1 of the 1930 Act, where an insured incurs a liability to a third party (before or after the insured becomes insolvent), the insured's rights against the insurer under the contract of insurance are transferred to and vest in the third party. The 1930 Act applies to motor policies, public liability policies and professional indemnity policies.

Section 2 of the 1930 Act gives the third party the right to such information as may reasonably be required to ascertain whether any rights have been transferred to and vested in him and to enable him to enforce those rights.

Problems with the existing law

At face value, the 1930 Act appears to be a very powerful tool for a third party. However, several cases from the 1960s onwards have drawn attention to fundamental flaws in the 1930 Act:

1. The third party must establish his claim against the insured by obtaining judgment before he obtains any rights against the insurer.1 This may involve having to restore to the Companies Register a "struck off" company, which application could be time barred.2

2. The right to information about the insurance policy does not arise until liability against the insured has been established.3 The third party could pursue litigation to obtain judgment against an insolvent insured at great cost only to discover there is no effective insurance.

3. The 1930 Act only applies to insurance for wrong doing. It does not apply to legal expenses insurance so that solicitors were unable to recover unpaid fees due from an insolvent client.4By analogy, the same would seem to apply to medical fees covered by health insurance.

4. If an insured enters into a voluntary arrangement with his creditors, this will bind the third party and reduce the value of the third party's claim against the insurer.5

As we stand on the brink of what may be another recession, it is heartening for third parties (and depressing for insurers) to discover that on 31st July 2001 the Law Commission published a report calling for the repeal of the 1930 Act and its replacement by a new Third Parties (Rights Against Insurers) Act which seeks to overcome all the problems listed above. This report and draft Bill were published following a consultation paper published on 13th January 1998 and given the Government's poor record in enacting Law Commission recommendations it is unknown when this draft bill is likely to become law.

The proposed new law

The Law Commission's draft bill has the following main features:

1. A third party can sue the insurer to obtain a declaration as to the insured's liability to him or the insurer's potential liability to him, without the third party first establishing liability against the insured. Hopefully this will avoid wasteful litigation by resolving all issues in one set of proceedings. The proposed Act does not apply to reinsurance contracts.

2. A third party is entitled to information concerning the insurance policy from the outset, including details of the insurer, terms of the insurance, and relevant communications between the insurer and the insured. The information can be sought from anyone whom the third party reasonably believes has such information. A claim to legal professional privilege cannot be used to avoid disclosure.

3. A third party may claim directly against an insurer even if the insurance covers liabilities voluntarily incurred by the insured such as health insurance and legal expenses insurance.

4. A third party with rights against an insurer is not bound by voluntary procedure such as an individual voluntary arrangement.

The stated aim of the proposed Act is to "bring the 1930 Act up to date, improve the rights of victims and reduce litigation, expense and delay". Whilst this is good news for victims, it is bad news for insurers who will face more third party claims, increased costs and litigation.

1 Post Office v Norwich Union Fire and Insurance (1967) 2 QB 363

2 Bradley v Eagle Star Insurance Co Limited (1987) AC 957

3 Woolwich Building Society v Taylor (1985) 1 BCLC 132

4 Tarbuck v Avon Insurance (2001) 2 All ER 503

5 Sea Voyager v Bielecki (1999) 1 All ER 628

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