Out-Law News 4 min. read

Insurance third party rights rules do not apply retrospectively, court confirms


The more burdensome 1930 regime governing the rights of third parties to claim directly against insurers of insolvent defendants will continue to apply where the cause of action accrued and the defendant became insolvent before 1 August 2016, regardless of when the third party's right to compensation was established, a court has confirmed.

Shirley Redman, whose husband Peter died of an asbestos-related illness in November 2013, had attempted to claim against the insurer of Peter's now-insolvent former employer using the simpler third party rights regime set out in the 2010 Third Parties (Rights Against Insurers) Act. The regime, which came into force on 1 August 2016, did away with the need for a struck-off company to be revived before a third party claim could be filed, amongst other things.

Zurich Insurance had already agreed that, as far as possible, the determination of the point in issue should not impact substantively upon Mrs Redman's claim, and had covered the costs of the High Court case to give judges the opportunity to clarify the application of the transitional provisions in the 2010 Act ahead of future cases on the point. Insurance law expert Colin Read of Pinsent Masons, the law firm behind Out-Law.com, welcomed the judgment, which he noted was "relevant to a number of other pending actions".

"The clarity the decision provides will help to avoid wasteful satellite disputes in those and other cases," he said.

"After a wait of six years for the 2010 Act to come into force, we are now starting to see some cases on its application. For example, we have recently seen reports of an oral judgment in another case on the Act, involving the BAE System pension fund trustees, which reportedly confirms that a claimant may sue an insurer of an insolvent insured direct under the new Act, even where there is a coverage dispute. In other words, as was the aim of the legislation, the new regime provides a truly one-stage process for determining both the underlying liability of the insured and the consequent liability of the insurer," he said.

"The Redman decision itself provides helpful clarity about when matters will continue to fall under the old 1930 regime and when the new Act will apply, confirming that if both the insured entity becoming insolvent and the accrual of the cause of action against the insured pre-date 1 August 2016, the 1930 Act is the relevant one, even if the claimant will not establish its right to compensation by way of a judgment or similar until after 1 August 2016. This position appeared to be assumed in a decision last year, although it was not the key issue in that case and it is welcome that the court has now had the opportunity to address the issue head-on," he said.

The third party rights regime is designed to protect the proceeds of an insurance policy from the effects of the insured party's insolvency. Under both the 1930 Act and the 2010 Act, the insured's rights against its insurer are automatically transferred to the third party when any one of a series of specified insolvency events occurs. Where the insured is a limited company or unincorporated organisation, these events include appointment of a receiver, manager or provisional liquidator, winding up or dissolution.

The 2010 Act does, however, introduce some changes which are designed to make it easier for the third party to claim against the insurer. For example, it does away with the need for the third party to establish the insolvent party's liability under the policy through a judgment, settlement or arbitration award before it can start an action against the party's insurer, although the insured's liability must still be established as part of the same set of proceedings. The Act also makes it easier for the third party to request information about the policy at an early stage to that it can make an informed decision about whether to litigate.

Mrs Redman brought a claim against Zurich as the insurer of her husband's former employer, now known as ESJS1, under the 2010 Act. She alleged that her husband's death from lung cancer had been caused by exposure to asbestos during his employment. Mr Redman died on 5 November 2013, and ESJS1 was the subject of a voluntary winding up on 30 January 2014. The company was dissolved on 30 June 2016.

Although Mrs Redman did not begin her claim against Zurich until after the new regime came into force, Mr Justice Turner found that the transitional provisions in the Act were "expressly clear" that the previous regime should continue to apply in her case. The relevant dates were the one on which the damage occurred giving rise to the insurer's liability, and the one on which the company experienced the insolvency event.

"In this case, there is no dispute the ESJ1S1 became a relevant person under [the 2010 Act] when it was being wound up voluntarily," Mr Justice Turner said in his judgment. "This occurred over two and a half years before the 2010 Act came into force."

Mrs Redman's initial argument that the company did not incur 'a liability against which that person is insured under a contract' as per the wording of the Act before the Act came into force did not "stand up even to the most casual scrutiny", the judge said. The liability was "incurred when the cause of action is complete and not when the claimant's rights against the wrongdoer are thereafter crystallised whether by judgment or otherwise", he said.

The judge also described Mrs Redman's alternative argument that the application of the 1930 Act did not preclude the retrospective but parallel operation of the 2010 Act as "brave".   "The purpose of transitional provisions is to identify the respective scope of application of earlier and later legislation," he said. "If [Mrs Redman's] approach were correct, there would be no such transition because the [2010] regime would apply retrospectively and indiscriminately without reference to any point or circumstances of transition."

"If parliament had intended the 2010 regime retrospectively to apply to all third party claims against insurers then it would have taken a relatively straightforward drafting exercise to achieve this," he said.

"This decision has the effect of prolonging the operation of the 1930 Act regime, with its potentially cumbersome two-stage procedure of obtaining judgment against an insolvent insured, such as an insolvent professional, before pursuing their insurer," said litigation expert Michael Fletcher of Pinsent Masons.

"There will no doubt be claimants whose causes of action accrued, and the targets of whose claims became insolvent, before 1 August 2016, who will be disappointed that they will not be able to make use of the more streamlined procedure under the 2010 Act even though it is now in force. Nevertheless, the confirmation this decision provides is welcome in the interests of avoiding costs being wasted in pursuing claims via the wrong route," he said.

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