Applied Law Briefing No.30
Law:
Readers will be familiar with the 1930 Act. Subject to certain requirements, the 1930 Act provides a potential claimant, for example a subrogated cargo insurer, with a direct right of claim against the insurers of an insolvent insured, such as a carrier.
The 1930 Act is problematic, because there was doubt as to when the rights of the insolvent insured, under the insurance contract, were transferred to the claimant. In 2004 the case of OT Computers provided welcome clarification. In this case the insurers declined the claimant's request to provide a copy of the relevant insurance policy (in order to establish that cover was available for the loss) on the basis that the transfer of rights occurred not when the insured became insolvent (as defined by the 1930 Act) but only when the claimant had established that the insolvent insured was actually liable for the loss. The court found that the rights transferred on the happening of the insolvency event, which meant that the insurers were obliged to provide a copy of the policy at this stage and could not withhold disclosure until after the insolvent insured's liability had been established. The proposed amendment to the 1930 Act aims to codify this decision and place it on a statutory footing. Please note, that the amendments are not yet law and there is still some way to go before the Bill makes its way through the legislative process.
Commercial impact:
If the insurers in OT Computers had succeeded it would have had serious costs consequences for potential claimants and in many cases would have deterred claimants from pursuing claims at all. In the most extreme scenario, where the insured was insolvent and had been struck off the Companies Register (a "defunct insured"), the claimant would first have to bring proceedings to restore the insolvent insured to the Register, then against the insolvent insured to obtain a judgement and then against the insurers, at which point the insurers could point to a valid defence under the policy and the claim would fail after significant costs had been wasted.
OT Computers removed this mischief and finally it appears that primary legislation will catch up to put the matter beyond any doubt. If the proposed amendments becomes law, on the happening of the insolvency event the claimant is entitled to request information from a number of parties, such as the personal representative of a defunct insured, the liquidator of an insolvent insured, the insurers if their identity is known, or any other party who is able to provide information regarding the contract of insurance, including brokers, adjusters and surveyors. Any party receiving a request for information must provide it within 28 days of receipt.
The need for multiple proceedings will also be removed as the claimant will only bring one set of proceedings against both the insurers, to obtain a declaration that the insurers have incurred a liability under the contract of insurance, and against the insolvent insured to determine its liability to the claimant (and accordingly the insurers' liability to indemnify the insolvent insured by way of a direct payment to the claimant). Remember, the claimant is in no better position than the insolvent insured and the insurers are entitled to raise the same policy limits and exclusions (subject to certain exceptions). If the proposed amendments to the 1930 Act come into force any residual uncertainty will be removed and the various rights and obligations will be clarified.
HFW Tip:
Of course, neither the 1930 Act, the case law nor the proposed amendments will have any impact upon insurance contracts written in jurisdictions outside the UK and local advice should be sought before claimants embark upon proceedings against insolvent third parties who are insured abroad.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
