Insolvent insurance claim changes

david-menzies By David Menzies, ICAS Director of Insolvency

6 June 2016

Third Parties (Rights Against Insurers) Act 2010 comes into effect on 1 August 2016 and will affect how insured claims against an insolvent person or entity may be pursued. Find out how the changes will affect insolvency practitioners.

Third Parties (Rights Against Insurers) Act 2010, (the Act) which applies in England & Wales, Scotland and Northern Ireland, comes into effect on 1 August 2016 and will allow claimants (‘a third party’) to raise proceedings direct against an insurer where the insured is, or was, insolvent.

A third party will also be entitled to request certain information in order to enable them to make informed decisions on whether or not to commence or continue litigation.

A third party does not receive a right to recover from the insurer any amounts in excess of the insured’s liability. The rights of the insured against the insurer are preserved in respect of any amount that is due under the insurance policy but not payable to the third party. An example is where the insurer is obliged by the policy not only to indemnify the insured in full but also to reimburse the insured for costs incurred in mounting a defence to a third party’s claim or in seeking advice on whether a third party’s claim is likely to be successful. These costs would be payable under the policy but not recoverable by the third party (the insured would retain the right to claim them).

The Act also provides the insurer with an absolute right to set-off allowing the insurer to deduct amounts due to it from the insured when paying the third party’s claim, to the extent to which it would have been entitled to do so had the claim been brought by the insured.

The Act allows third parties to obtain information about the rights transferred to them in order to enable an informed decision to be taken on whether or not to commence or continue litigation. The third party may serve on the insolvent, or another person who is able to provide the relevant information, a notice to provide information. This includes:

  • (a) whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it;
  • (b) if there is such a contract -
    • (i) who the insurer is;
    • (ii) what the terms of the contract are;
    • (iii) whether the insured has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability;
    • (iv) whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and, if so, relevant details of those proceedings (the name of the court or arbitrator; the case number; the contents of all documents served in the proceedings in accordance with rules of court or orders made in the proceedings, and the contents of any such orders;
    • (v) in a case where the contract sets a limit on the fund available to meet claims in respect of the supposed liability and other liabilities, how much of it (if any) has been paid out in respect of other liabilities;
    • (vi) whether there is a fixed charge (or in Scotland, a fixed security within the meaning given by section 47(1) of the Bankruptcy and Diligence etc (Scotland) Act 2007) to which any sums paid out under the contract in respect of the supposed liability would be subject.

Where an insolvent company has been dissolved following a winding up (and not restored), the insolvency practitioner appointed immediately prior to its dissolution may be served a notice requiring them to disclose any documents that are relevant to the liability being claimed. The provisions do not appear to extend to a company that has moved from administration to dissolution. The duties of disclosure to or rights to inspection by the third party are the same as the corresponding duties and rights under Civil Procedure Rules of parties to court proceedings in which an order for standard disclosure has been made.

Information need only be provided if it can be provided without undue difficulty from a document that is in the possession (or to which they have a right of possession, inspection or to take copies), of the person being requested to provide the information or where they are an individual, the information is within that person's knowledge.

Information which is subject to legal professional privilege or, in Scotland, to confidentiality as between client and professional legal adviser, need not be provided.

A person who receives a notice must, within the period of 28 days beginning with the day of receipt of the notice either provide any information specified in it that they are able to provide or in relation to any such information that they are not able to provide, explain why they are not able to provide it.

Implications for IPs

The Act should be welcomed by IPs as it is likely that where a claim is raised during the course of an insolvency process and which is covered by an insurance policy it is likely that the claim will be raised direct with the insurer. While in practical terms an insurer would normally take over the running of defending a claim in any case, the Act is likely to result in a formalization of that.

It is also likely that there will be a reduction in the number of applications for consent for court action to be commenced as the third party will no longer have to raise an action against the insolvent but can raise the action direct against the insurer.

IP’s will not require to amend their policies on retention of the insolvent’s books and records as the Act only requires information to be provided which is in their possession. As previously, where there is knowledge of a claim being pursued or likely to be pursued, consideration should be given to retaining the relevant documents until the action is settled.

Where notice is received, the period to respond and provide the requested information is quite short at 28 days. Legal advice may wish to be sought to confirm that there is a requirement to provide information and the extent of the information to be provided as well as whether certain documents are covered by legal professional privilege, or confidentiality in Scotland. Any notice received should therefore be progressed for action as soon as possible after it’s receipt.

Third Parties (Rights Against Insurers) Act 2010


  • Insolvency
  • Business issues

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