UK: A (Not So) Tiny Leap For Third Parties

The facts of the case are illustrative of how such claims arise. Tiny Computers went into administration in January 2002. Purchasers of Tiny Computers were offered extended warranties, underwritten by Axa and other insurers. Credit for the purchase of Tiny Computers was provided by First National Tricity Finance (FNTF) which, under the Consumer Credit Act 1975, was obliged to satisfy claims by Tiny’s customers for defective goods and under the extended warranties. When FNTF paid a claim, it was subrogated to the customer’s position vis-à-vis any claim against Tiny. FNTF argued that Tiny’s customers (and therefore FNTF once it had paid a claim) were entitled to make a claim against Axa in Axa’s capacity as Tiny’s liability insurer under the Third Parties (Rights Against Insurers) Act 1930 ("the Act").

The Act transfers the rights of an insured to claim against his insurer to a third party claimant upon the event of the insured’s insolvency. To give effect to those rights, the Act provides that the third party is entitled to obtain information about the insurance arrangements of the insolvent insured. (It is worth noting that the Act does not apply to contracts of reinsurance.)

The outcome of the case depended on the Court’s answer to two key questions:

1. Does the Act apply to the insured’s contractual as well as tortious liabilities?
2. Is the third party claimant entitled to obtain information about the insurance arrangements from the date of the insured’s insolvency? (as opposed to only after the third party has a determination of liability (as against the insured) in its favour)

The Court answered yes to both questions. This means that, unless the policy restricts the type of liabilities for which cover is available, the Act applies to any liability of the insured to a third party claimant. Although this seems a commonsense interpretation, it is a significant extension of the law, as earlier cases adopted a restrictive interpretation of "liability". The Court of Appeal recognised that "to confine "liabilities" to tortious liabilities or, even, "tortious liabilities and contractual liabilities akin to tortious liabilities" is to put a considerable gloss upon the statute. Such gloss goes far beyond any normally permissible exercise of construction".

Similarly, the decision that a third party claimant is entitled to obtain information about the insurance arrangements upon the event of the insured’s insolvency is a departure from previous cases. The Court reasoned that the third party should be in a position to assess whether there are in existence any rights that are capable of being transferred to it, and if so what they are, before embarking on a potentially lengthy and expensive claim against the insured.

The case does not extend an insurer’s liability beyond that owed to their insured. The third party does not gain rights the insured does not have. Accordingly, if there is no cover available to the insured, the same applies to the third party. Similarly, as the Court of Appeal noted, if the cover is restricted, e.g. by specifically providing that the insured liability is to be a liability for damages, the third party rights will be similarly restricted and so will not extend to a liability for a contractual debt.

However, as a result of this case, the circumstances in which a third party may be subrogated to the insured’s position are now extended, as is the third party’s right to obtain information about the insurance arrangements in place.