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Accessing The Insurance Policy Of An Insolvent Company: Making Life Easier

Accessing The Insurance Policy Of An Insolvent Company: Making Life Easier

The Third Parties (Rights against Insurers) Act 2010 comes into force on 1 August 2016.   It will make life easier for third party claimants who wish to benefit from the insurance policy of an insolvent company.   

The new law will help manage the risk of company insolvency by making it easier for a  third party to recover its full claim against the insolvent company from insurers, as opposed to sharing the company’s available assets (if any) with other creditors.

What is the problem?

The existing rules have been in place since 1930, and provide for an insolvent company’s rights under a pre-existing insurance policy to automatically transfer to a third party claimant.  This is important, as it means that the insurance proceeds go direct to that third party instead of the insolvent company for distribution among all of its creditors.  The new rules will bring the current regime up to date, as well as targeting difficulties that have arisen in their application.   

How easy will it be to claim against an insurer of an insolvent company? 

Under the current rules, claims against the insurer can be a lengthy and expensive process.   It is necessary to establish the insolvent company’s liability first before any claim can be raised against the insurer.   This usually means raising separate proceedings, first against the insolvent company and then against the insurer.   Also, if a company has already been dissolved, there is the additional hurdle of restoring it to the Companies Register (again, by application to the court).   All of this adds cost and delay to the process of attempting any recovery.

The new rules remove these difficulties (and associated expense) by allowing the third party to sue the insurer direct.  Whilst the insolvent company’s liability still needs to be established before the policy can be accessed, that company does not need to be included in the proceedings.  

Insurers may also welcome this rule.  At present, an insurer who is presented with a decree for payment against the insolvent company is left with policy-based defences (eg.  reliance on an exclusion).   Under the new rules, the insurer will be able to challenge the underlying claim as if it were the insolvent company and, if successful, avoid any reference to the policy.  

OK, but how do I know if it is worthwhile pursuing a claim? 

The new rules will help assess this at an earlier stage.  The third party will be able to request information about a potential insurance policy from anyone that he ‘reasonably believes’ might hold it.  There will be a 28 day time limit for responding to such a request, failing which compliance may be compelled through the court.  This should help result in an early determination of whether a claim would be likely to succeed, or whether a policy exclusion could be successfully relied upon.  

Knowing your rights under this new legislation will make the scope for recovery under an insurance policy of an insolvent company much easier and more cost effective.

Nicholas McAndrew

Burness admin