Scottish Law Commission (Reports)

 


APPENDIX A

Draft

The draft Third Parties (Rights against Insurers) Bill

Explanatory Notes of the The draft Third Parties (Rights against Insurers) Bill begins

Summary and background

This Bill is concerned with a situation in which a person, referred to in the Bill as a "third party", is owed money by someone who is insured against that debt. In the absence of statutory intervention, the third party's rights in respect of the debt are against the insured; it is the insured who has contractual rights against the insurer. The Bill alters the structure of this three-way relationship in certain cases. If the insured is declared bankrupt, or becomes subject to one of a number of other procedures specified in the Bill, the Bill confers on the third party direct rights against the insurer. It does this by transferring to the third party the insured's rights under the insurance contract relating to the debt. The Bill also entitles a third party to obtain information concerning transferred rights from the insurer and others.

One of the aims of the Bill is to ensure that insurance proceeds, paid to cover debts to third parties, go to those third parties, even if the insured is declared insolvent. In the absence of statutory intervention this would not occur. Instead, the proceeds would be treated as an asset of the insured and be distributed pro rata under insolvency legislation to the general creditors, of whom the third party would be one. As a result, the third party might recover only a small proportion of the insurance proceeds; the balance would increase the dividends of the other creditors. The Bill also intervenes to assist third parties owed money by insureds who, whilst not involved in a formal insolvency, have otherwise to some degree lost the effective power to enforce their own rights or deal with their own assets. An example is a case in which the insured has entered into a voluntary arrangement with creditors.

The Bill, if enacted, would replace the Third Parties (Rights against Insurers) Act 1930. The 1930 Act was designed to do the same task as the Bill. However, the 1930 Act does not work as well as it should: it can be unnecessarily expensive and time-consuming to use, both for litigants and the courts; and in many cases it does not assist third parties at all. Details of the deficiencies in the operation of the 1930 Act, and reasons for replacing it with the Bill, are set out in the report.

Overview

Clauses 1 and 2 specify the circumstances in which a statutory transfer will take place, and effect the transfer. After a transfer, a third party will have the benefit of the insured's insurance cover in relation to the amount he or she is owed by the insured, subject to any alterations effected by clauses 3-6. Clause 7 confers on the third party various rights to disclosure as set out in Schedule 1. A third party will be entitled to enforce transferred rights as specified in clauses 8-13. In a major departure from the 1930 Act, clauses 8-10 provide a new mechanism allowing the third party to enforce transferred rights against the insurer without first establishing the fact and amount of the insured's liability in separate proceedings. Clause 14 sets out the consequences of the statutory transfer on the third party's rights against the insured. Clauses 15-17 set out the range of insurance policies covered by the Bill and the way in which the Bill applies to cases with a foreign element. Clauses 18-21 contain various supplemental provisions.

Clause 1

Subsection (1) effects a transfer (by virtue of subsection (1)(b)) if the insured incurs a debt to the third party and then becomes subject to one of the procedures specified in subsection (2), (3) or (4). For example, a third party will receive a statutory transfer if the insured becomes bankrupt (subsection (2)(c)) or if the insured is a company and becomes subject to a Company Voluntary Arrangement (subsection (3)(a)). Subsection (1) also effects a transfer (by virtue of subsection (1)(a)) if the insured incurs the debt whilst already subject to one of these procedures. The reasons for including each of the procedures listed in subsections (2),

(3) and (4), a number of which are not included in the 1930 Act, are set out in detail in Part 2 of the report.

Subsections (5)-(7) limit the circumstances in which a transfer is effected in the case of some of the procedures listed in the previous subsections. These restrictions prevent transfers from occurring in cases in which the third party's position is unaffected by the procedure to which the insured is subject.

Clause 2

Subsection (1) effects a statutory transfer in a case in which the insured dies insolvent. Subsection (2) sets out what must occur before it can be said that someone has died insolvent for the purposes of the clause.

Clause 3

This clause ensures that a third party does not receive a right to recover from the insurer any amounts in excess of the insured debt. So, for example, if the insured incurred costs defending a claim from the third party, and the insurer was obliged by the insurance contract not only to indemnify the insured in full but also to reimburse the insured for costs, the insured would retain the right to claim the costs. See paragraph 7.37 of the report.

Clause 4

This clause prevents an insurer from defeating a third party's claim by relying on certain technical defences which might otherwise be available to it as a result of the statutory transfer. The detailed reasons for altering the transferred rights in this way are set out in Part 5 of the report. This clause has no counterpart in the 1930 Act.

Subsection (1) ensures that an insurer cannot resist a claim from a third party by arguing that the insured has not fulfilled a condition in the insurance contract if the third party has fulfilled that condition instead. So, for example, if the insurance contract required the insured to notify the insurer of a claim within a certain period, and the insured did not do this, but the third party did, the insurer would not, as a result of this subsection, be able to rely on a breach of the condition as against the third party.

Subsection (2) deals with a case in which the insurance contract contains a condition that the insured provide information or assistance to the insurer. In the usual case in which the insured still exists, the insurer will be entitled to rely on a breach by the insured of such a clause as against the third party. However, if the insured is a company that no longer exists, this subsection prevents the insurer from relying on a breach of such a clause as against the third party.

Subsections (3) and (4) deal with "pay-first" clauses. These are clauses which require the insured actually to have paid sums due to the third party before the right to an indemnity arises. Following the judgment of the House of Lords in The Fanti and the Padre Island [1991] 2 AC 1, it is clear that a third party's claim under rights transferred by the 1930 Act is worthless if the insurance contract contains such a clause. Subsection (3) ensures that this is not the case under the Bill, by providing that such a clause does not apply to transferred rights. Subsection (4) limits the effect of subsection (3), in cases of marine insurance, to claims in respect of personal injury or death. See paragraphs 5.34-5.37 of the report.

Clause 5

This clause ensures that, if the insured has not paid all the premiums for the insurance policy, the insurer can deduct those unpaid premiums 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. See paragraphs 5.20-5.22 of the report. This clause has no counterpart in the 1930 Act.

Clause 6

This clause prevents the insured and insurer from drafting the insurance contract so as to nullify the effect of the Bill.

Clause 7

This clause introduces Schedule 1, which confers on the third party rights to obtain information about the insurance policy. See the notes on that Schedule below.

Clause 8

This clause introduces, for England and Wales, a mechanism designed to overcome a major drawback of the 1930 Act. The new mechanism will enable a third party to enforce rights transferred by clause 1 or 2 without first establishing the fact and amount of the insured's liability. Under the 1930 Act this is not possible. The serious problems to which this gives rise, and the way in which the new mechanism will operate, are explained in detail in Part 3 of the report.

Subsection (1) entitles a third party who has received a transfer of rights, but who has not yet established that the insured is liable (or who has established that the insured is liable, but has not proved the amount of that liability), to bring proceedings against the insurer. In those proceedings, the third party must ask the court for one or both of the declarations set out in the subsection. A subsection (1)(a) declaration will contain the court's decision on the third party's allegation that the insured is liable to the third party. A subsection (1)(b) declaration will contain the court's decision on the third party's allegation that the insurance policy covers that liability. It is anticipated that third parties using the new mechanism will usually apply for both declarations, as it is only if both are granted that the court is entitled, under subsection (5), to grant further remedies.

Subsection (2) provides that a third party who proves his or her case will be entitled to the relevant declaration. In the absence of such a provision, a decision on whether to grant the declarations applied for would be within the discretion of the court; such a discretion is not necessary in the context of the new mechanism.

The effect of subsection (3) is that an insurer facing a claim from a third party using the mechanism in this clause and claiming a declaration as to the insured's liability will be entitled to rely on any defence which would have been available to the insured. So, for example, if the insured would have been able to resist a third party's action by relying on an estoppel, the insurer will be able to do the same.

Subsection (4) adjusts the way that subsection (3) operates in two specific circumstances set out in clauses 11(1) and 12.

Subsection (5) empowers a court which has made both subsection (1) declarations to give "the appropriate judgment". In many cases, this will be a judgment for a particular sum of money. However, if argument on the amount of the liability has been postponed, either to a later court hearing, or to an arbitration, the court might grant judgment for damages to be assessed. The need for this subsection arises because, under the 1930 Act, the courts have held that a third party is not entitled to judgment of any kind until the amount of the liability of the insured has been established as between the third party and the insured.

Subsections (6) and (7) extend the benefit of the new mechanism to third parties who are entitled or obliged, by a provision in the insurance contract, to resolve the issue of the insurer's liability in arbitration proceedings.

Subsection (8) provides that a third party who uses the new mechanism and applies for a subsection (1)(a) declaration has the choice of whether or not to join the insured as a defendant to the action. This will make the new mechanism flexible. A consequence of this flexibility, however, is that, if a third party chooses not to join the insured as a defendant, the court may be required to make a subsection (1)(a) declaration, concerning the insured's obligations, in the absence of the insured. It would be inappropriate if a declaration made in such circumstances bound the insured; accordingly the effect of subsection (8) is that an insured is only bound if he or she is a defendant to the third party's claim. As an additional protection, amended rules of court will require a third party to inform the insured of his or her action against the insurer, which will give the insured the option of applying to be joined as a defendant. See paragraphs 3.52-3.56 of the report.

Clause 9

This clause introduces the new mechanism in Scotland. The subsections mirror those of clause 8, except that no counterpart to clause 8(2) is necessary in Scotland, where a declarator is not a discretionary remedy.

Clause 10

This clause defines some of the terms used in the previous two clauses.

Clause 11

This clause sets out rules governing when an action under rights transferred by the Bill will be time-barred. See paragraphs 5.51-5.65 of the report. This clause has no counterpart in the 1930 Act.

Subsections (1) and (2) adjust the way that clause 8(3) (in Scotland, clause 9(2)) operates in a case in which the third party is already involved in proceedings against the insured, and the limitation (or prescriptive) period governing those proceedings has expired. In the absence of these subsections, fresh proceedings against the insurer using the new mechanism in clause 8 or 9 would, in these circumstances, be time-barred. This would not matter if the third party could join the insurer to the existing proceedings against the insured. However, it is likely that this will not be possible under procedural rules which comply with section 35 of the Limitation Act 1980. These subsections are therefore necessary to ensure that the new mechanism provided by the Bill is available to third parties in these circumstances. See paragraphs 5.56-5.58 of the report.

Subsection (3) confirms that, if the third party does not use the new mechanism in clause 8 or 9, the time limits governing the third party's claim will be those which would have governed a claim under the insurance contract by the insured.

Clause 12

This clause ensures that, once a third party has issued proceedings against the insurer under transferred rights (whether or not using the new mechanism in clause 8 or 9), the insured's subsequent discharge from bankruptcy will not affect the claim. In the absence of this clause, clause 8(3) (in Scotland, clause 9(2)) might enable an insurer to rely on such a discharge to defeat the third party's claim. See paragraphs 5.47-5.50 of the report. This clause has no counterpart in the 1930 Act.

Clause 13

This clause concerns cases in which the third party is domiciled in England and Wales or in Scotland, and the insurer is domiciled elsewhere in the United Kingdom. In the absence of this clause, the position would be governed by Schedule 4 to the Civil Jurisdiction and Judgments Act 1982 and by any relevant clause in the insurance contract. The result might be to prevent a third party from suing the insurer in the courts of his or her own place of domicile. This clause alters the position by giving the third party the choice of issuing proceedings in his or her own place of domicile, or in that of the insurer, regardless of any contrary provisions in the insurance contract. See Part 8 of the report. This clause has no counterpart in the 1930 Act.

In general, the Bill does not extend to Northern Ireland: see clause 21. However, in order to ensure that the new jurisdictional rules imposed by clause 13 in England, Wales and Scotland do not conflict with the jurisdictional rules in Northern Ireland, subsection (1) refers to the "United Kingdom" and this subsection is extended to Northern Ireland by clause 21(5). It is likely that in due course legislation in similar terms to that of the Bill will be introduced for Northern Ireland. The purpose of subsection (4) is to ensure that, after this happens, the jurisdictional rules implemented by the Northern Ireland legislation are effective throughout the United Kingdom.

Clause 14

This clause sets out the effect of a transfer of rights on the third party's rights against the insured. In addition to regulating the general position, this clause contains specific provisions necessary to ensure that the Bill operates correctly in the context of the various voluntary alternatives available to insolvent insureds that fall short of a formal bankruptcy or winding up. The general position is covered in the report at paragraphs 7.4-7.8. The issues relating to voluntary procedures are the subject of Part 6. This clause has no counterpart in the 1930 Act.

Subsection (1) provides that a third party may not seek to enforce his or her rights against the insured to the extent that there is valid insurance in place covering the debt. As the benefit of the insurance policy has been transferred by the Bill to the third party, it would not be right to require the insured to make any payments except to the extent that the insurance policy was ineffective.

Subsections (2) and (3) cater for voluntary procedures. Their purpose is to ensure that rights under the insurance contract which have been transferred by the Bill are not devalued by the voluntary procedure which caused the transfer. They do this by limiting the effect the voluntary procedure can have on the insured's debt to the third party. If that effect, disregarding subsections (2) and (3), would have been to reduce the insured's liability to the third party, this will be effective only in relation to that part of the third party's debt, if any, which is not recoverable under transferred rights.

It is important to note that, although the effect of subsections (2) and (3) may be to remove a third party, partially or completely, from the scope of a voluntary procedure, such a third party will still be bound by subsection (1). These subsections will not, therefore, enable a third party to disturb a voluntary procedure.

Subsection (4) ensures that subsections (1), (2) and (3) do not prejudice a third party who is unable to recover from the insurer, either because the insurer is in financial difficulties itself, or because the insurer is only obliged to pay out a certain amount of its funds to claimants in the same category as the third party.

Subsection (5) clarifies that a third party who cannot recover from the insurer because of the insurer's financial difficulties must first claim statutory compensation before enforcing his or her rights against the insured.

Clause 15

The effect of this clause is that the Bill does not cover reinsurance. In other words, the Bill does not cover a case in which the third party is an insurer and is owed money by another insurer under a contract of reinsurance. This is also the case under the 1930 Act. See paragraph 2.45 of the report.

Clause 16

Tarbuck v Avon Insurance plc [2001] 2 All ER 503 has confirmed (subject to any contrary decision on appeal) that the 1930 Act does not cover insurance policies classified by insurers as "first person pecuniary loss insurance" such as legal expenses insurance and health insurance. This clause ensures that the Bill is not similarly restricted. See paragraphs 2.39-2.44 of the report.

Clause 17

This clause clarifies the application of the Bill in cases with foreign elements. Its effect is that, when deciding whether the Bill applies to such cases, the only relevant issue is whether the conditions in clause 1 or 2 (which all arise under English or Scots law) apply. If they do, then the Bill applies. Whether or not other aspects of the third party's claim are foreign is irrelevant. In particular, it does not make any difference where the liability was incurred, where the parties are domiciled, what law governs the insurance contract, or any location specified by the insurance contract for payment. See Part 8 of the report. This clause has no counterpart in the 1930 Act.

Clause 18

This clause confers on the Secretary of State a power to amend clauses 1 and 2 by secondary legislation. This will enable the Secretary of State to accommodate legal developments in insolvency law without having to introduce fresh primary legislation. The power is subject to the affirmative resolution procedure. See paragraphs 2.36-2.37 of the report. No such power is contained in the 1930 Act.

Clause 19 and Schedule 2

This clause replaces references to the 1930 Act in other legislation with references to the Bill. It also, in conjunction with Schedule 2, repeals the 1930 Act and repeals (or, in the case of secondary legislation, revokes) enactments that have amended that Act.

Clause 20

This clause sets out the provisions governing the transition from the 1930 Act to the Bill. If the insured incurs liability to the third party after commencement day, or if the insured becomes bankrupt etc after commencement day, then the Bill will apply to the claim. If both of these occur before commencement day, the 1930 Act will continue to apply. In the case of a transfer caused by the death of an insolvent insured, the 1930 Act will apply to cases in which the insured died before commencement day; the Bill will apply in all other cases. See paragraph 3.37 of the report.

Clause 21

The final clause of the Bill contains the short title, specifies when it will come into force, and sets out its extent.

Subsection (3) restricts paragraphs 3 and 4 of Schedule 1 (as well as clause 8) to England and Wales. This is because existing Scots law on this point is adequate.

Subsection (5) provides that the Bill does not extend to Northern Ireland. It is anticipated that separate legislation in similar terms to the Bill will be enacted there. Exceptionally, some of clause 13 does extend to Northern Ireland. The reasons for this are explained above in the notes relating to that clause.

Schedule 1

This Schedule confers on the third party rights to obtain information about the insurance policy. It entitles the third party to issue two kinds of notice. The first, and more important, of these is dealt with in paragraphs 1 and 2; the second, which applies in England and Wales only, is dealt with in paragraphs 3 and 4. Detailed reasons for providing the disclosure regime in this Schedule are set out in Part 4 of the report. The rights conferred by this Schedule are substantially greater than those in the 1930 Act.

Paragraph 1(1) confers on potential third parties a right to issue a notice requesting information about the insurance policy. The third party may issue a notice to anyone he or she believes on reasonable grounds has the information. The notice must specify the information requested. It must also specify the third party's reasons for thinking that he or she is entitled to make the request (paragraph 1(5)). Paragraph 1(2)-1(4) sets out the information which the third party may request.

Paragraph 2(1) provides that the recipient of a valid notice requesting information must reply within 28 days and sets out what that reply must contain. Paragraph 2(2) sets out how a recipient should reply to a valid notice if he or she once had the details requested but has passed them on. The purpose of this provision is to ensure that a third party's attempt to obtain details is not thwarted by, for example, a change of insurance broker. Paragraph 2(3) ensures that the third party is not entitled to privileged documents (such as those containing legal advice).

Once a recipient has replied to a paragraph 1 notice as required by paragraph 2, that is the end of the recipient's obligations. The recipient is not obliged to keep the third party informed of later developments. A third party who suspects that there have been such developments is, however, entitled to issue a fresh notice under paragraph 1.

Paragraphs 3 and 4 provide a separate right, applying in England and Wales only, designed to assist third parties using the new mechanism contained in clause 8 in a case in which the insured is a company which no longer exists. These paragraphs enable a third party in such circumstances to obtain documentation from the ex-officers of the defunct company without the need to restore the company to the register and obtain court orders.

Paragraph 3(1) specifies the circumstances in which a third party may issue a notice. As it is designed to assist a third party involved in litigation, such a notice may only be sent after the third party has issued proceedings against the insurer. Paragraph 3(2) sets out the people to whom a notice may be sent. Paragraph 3(3) provides that a third party who issues a notice under this paragraph must send with it a copy of the particulars of claim in the proceedings against the insurer (or, if the third party is involved in an arbitration, an equivalent document). This is necessary so that the recipient can learn what is at issue in the case, and can give the appropriate disclosure as required by paragraph 4.

Paragraph 4(1) provides that a recipient of a paragraph 3 notice must respond as if subject to an order for "standard disclosure", the usual disclosure order made by the courts. The obligations imposed by such an order of the court are set out in the Rule 31 of the Civil Procedure Rules. The only differences between the duty imposed by such an order and paragraph 4 are those in the subsequent sub-paragraphs: paragraph 4(2) requires a response within 28 days, and paragraph 4(3) provides that a recipient of such a notice is not placed under any duty to update his or her response if the situation changes. These alterations are in line with the duties imposed by a paragraph 1 notice. It would be inappropriate to impose a continuing obligation on an ex-employee of a defunct company who is playing no part in the litigation. As in the case of a paragraph 1 notice, a third party who believed that further documents might have come into the possession of the recipient of a notice would be entitled to issue a fresh notice.

Paragraph 5 prevents the insured and insurer from contracting out of the disclosure regime in Schedule 1.

Paragraph 6 clarifies that the rights to disclosure are in addition to, and do not replace, any other statutory or procedural rights which the third party may have.