The Third Parties (Rights against Insurers) Act 2010 – ‘not all is lost on construction insolvency’

The Third Parties (Rights against Insurers) Act 2010 came into force in 2016, aiming to make it easier for third party claimants to make claims when an insured party has become insolvent.

It can be useful legislation for those who have entered into construction contracts and professional team appointments and suffer an insolvency event, and in this blog we set out what options for recovery the Act opens up.

Often on a construction project when the contractor becomes insolvent, the immediate actions of the employer are confined to: ceasing payments; holding the retention; and liaising with receiver /liquidator. However, it’s worth remembering that if the contractor incurred a liability that is covered, for example by professional indemnity insurance, where the employer will not be named as a joint or co-insured (unlike the contactor’s ‘all risk’ policy for the works), the rights of the insured (the contractor) against the insurer can be transferred to the employer as a third party claimant under the 2010 Act. In the context of professional indemnity insurance, this might relate to the contractor’s liability for design errors where the contractor has a design responsibility under the building contract.

Even if the employer has not yet established the insured's (contractor’s) liability, the 2010 Act allows the employer as the third party claimant to bring a single set of proceedings directly against the insurer to: obtain declarator they are liable under the terms of the policy; and a declarator that they are liable to pay the employer as third party claimant, and once that declarator is secured, the court can then decree against the insurer for the payout.

As you would expect, the insurer can deploy any defences, limitations or exclusions available under the policy which it could have argued against the insured (the contractor), and the insurer can set-off any money that the contractor may have owed it (such as outstanding premiums) against the awarded payout.

The 2010 Act contains some useful tools for the employer as third party claimant, such as the right to ‘step-in’ and fulfil any conditions to a policy claim that may not have been made, such as a timeous claim notice. In addition, an employer as a potential claimant has rights under the Act to request policy details from the insured (which on insolvency will mean the contractor’s receiver/liquidator) or from the insurer or the insurance broker who placed the policy.

So remember to check the insurance position on insolvency as it’s worth investigating what routes of recovery are open to you through the 2010 Act – not all is lost on construction insolvency.