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The Law Commission
and
The Scottish Law Commission

(LAW COM No 272)
(SCOT LAW COM No 184)

THIRD PARTIES – RIGHTS AGAINST INSURERS

Presented to the Parliament of the United Kingdom by the Lord High Chancellor
by Command of Her Majesty

Laid before the Scottish Parliament by the Scottish Ministers

July 2001

Cm 5217

SE/2001/134 £xx.xx

The Law Commission and the Scottish Law Commission were set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Honourable Mr Justice Carnwath CVO, Chairman

Professor Hugh Beale

Professor Martin Partington

Judge Alan Wilkie, QC

The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

The Scottish Law Commissioners are:

The Honourable Lord Gill, Chairman

Mr Patrick S Hodge, QC

Professor Gerard Maher

Professor Kenneth G C Reid

Professor Joseph M Thomson

The Secretary of the Scottish Law Commission is Miss Jane L McLeod and its offices are at 140 Causewayside, Edinburgh EH9 1PR.

The terms of this report were agreed on 14 June 2001.

The text of this report is available on the Internet at:

http://www.lawcom.gov.uk

http://www.scotlawcom.gov.uk

CONTENTS

PART 1: INTRODUCTION
The 1930 Act	1.1
The need for reform	1.5
Principal reform recommendations	1.9
Third party entitled to a remedy in one set of proceedings	1.10
Third party not required to sue the insured	1.12
Third party would have improved rights to insurance information	1.14
Developments in company and insolvency law reflected	1.16
Voluntary procedures properly catered for	1.18
Legal expenses and health insurance covered	1.20
Insurers’ rights to rely on some technical defences removed	1.22
Third party generally protected from pay-first clauses	1.24
Operation in cases with a foreign element clarified	1.26
The structure of this report	1.28
Draft Bill	1.30
Amendments to rules of court	1.31
Acknowledgements	1.32
PART 2: THE SCOPE OF THE DRAFT BILL
Introduction	2.1
Circumstances in which rights are conferred on third party	2.5
Definition of insured’s insolvency etc	2.5
Rights conferred in the circumstances set out in the 1930 Act	2.7
Striking off under section 652 or section 652A of CA 1985	2.9
Voluntary winding-up as part of a reconstruction or amalgamation	2.12
Appointment of a provisional liquidator	2.15
Crystallisation of a floating charge	2.18
Recovery of insured: effect on statutory transfer of rights	2.21
Liability to third party incurred after discharge from bankruptcy	2.24
The legal personality of the insured	2.25
Partnerships in English law	2.25
The Insolvent Partnerships Order 1994	2.26
Orders against individual partners	2.30
Partnerships in Scots law	2.32
Limited Liability Partnerships	2.33
Other corporate and unincorporated bodies	2.35
Power to amend new Act by secondary legislation	2.36
Insurance policies covered	2.38
Application to full range of insurance policies	2.38
Application to policies insuring voluntarily incurred liabilities	2.39
No application to reinsurance policies	2.45
Rights against the insurer in Scots Law	2.46
Northern Ireland	2.52
PART 3: A THIRD PARTY’S RIGHT OF ACTION UNDER THE DRAFT BILL
Introduction	3.1
The nature of the third party’s rights	3.4
The need for reform	3.4
Consultation	3.11
Mechanism of transfer	3.11
Single set of proceedings	3.13
Joinder of insured	3.20
Reform recommendations	3.22
Mechanism of transfer	3.22
Timing of transfer	3.23
Third party’s rights before liability is established	3.25
Third party’s rights after liability is established	3.30
Third party’s rights in arbitration proceedings	3.31
Joinder of the insured as defendant	3.33
Terminology of “incurring liability” retained	3.35
Transitional provisions	3.37
Procedural considerations	3.38
Third party may join insurer to proceedings against insured	3.40
Third party may take over insured’s proceedings against insurer	3.43
Insurer may apply to add insured as defendant	3.45
Insured may apply to be made defendant	3.47
Insured may apply to be made claimant	3.50
Leave requirement	3.51
Notification of insured	3.52
Nature of the notice requirement	3.55
Non-existence of the insured	3.56
PART 4: DISCLOSURE OF INFORMATION TO THE THIRD PARTY
Introduction	4.1
Problems with the disclosure regime in the 1930 Act	4.5
No right to disclosure until insured’s liability established	4.5
Two stage disclosure	4.7
No right to require a broker to disclose information	4.8
Unhelpful definition of the information required to be disclosed	4.9
The position of office-holders	4.10
Other means by which a third party may obtain information	4.11
Disclosure regime in England and Wales	4.11
Pre-action disclosure and pre-action protocols	4.11
Disclosure after proceedings have started	4.13
The recovery of evidence in Scotland	4.14
Statutes	4.16
Registers of insurance information	4.18
Consultation: the general approach	4.20
Broad support for a strengthened statutory disclosure regime	4.20
Objections to a statutory disclosure regime	4.21
Duty to disclose will only arise on request	4.25
Disclosable information under the draft Bill specified	4.27
Details of the disclosure regime	4.29
Specified disclosable information	4.29
Grounds for denying liability or repudiating cover	4.31
Details of proceedings between insurer and insured	4.32
Whether insurance fund is subject to a fixed charge	4.33
No disclosure of settlements between insured and insurer	4.34
The request for information	4.35
The timing of the request for information	4.36
Persons entitled to request information	4.37
Persons from whom information may be requested	4.38
Extent of duty of person from whom information requested	4.39
No “continuing duty”	4.40
Duty to disclose information not documents	4.41
Insured is company not on the register (England and Wales only)	4.42
Privileged documents	4.46
Sanction for non-compliance	4.47
Anti-avoidance	4.48
PART 5: INSURERS’ DEFENCES
Introduction	5.1
Current law	5.3
Insurers’ defences to an insurance claim by insured	5.3
Insurers’ defences to a claim by third party under the 1930 Act	5.8
Consultation	5.10
Reform recommendations	5.13
Insurers’ defences to a claim under the draft Bill generally	5.13
Notice provisions and personal performance by the insured	5.15
Duty to provide information and assistance	5.17
Excesses and unpaid premiums	5.20
“Claw back” clauses	5.23
Pay-first clauses	5.28
Current law	5.29
Consultation	5.31
Reform recommendations	5.34
Anti-avoidance	5.38
Arbitration clauses	5.39
Current law	5.39
Consultation	5.42
Reform recommendations	5.43
Defences which would have been available to insured	5.45
Discharge from bankruptcy	5.47
Limitation and prescription	5.51
England and Wales	5.51
Scotland	5.59
Restoration to the register	5.63
Imminent Law Commission report on Limitation of Actions	5.65
PART 6: VOLUNTARY PROCEDURES
Introduction	6.1
Types of voluntary procedure in England and Wales	6.4
Voluntary arrangements	6.4
Compromise or arrangement under section 425 of CA 1985	6.7
Deeds of Arrangement Act 1914	6.9
Treatment under the 1930 Act	6.10
Voluntary arrangements	6.10
Compromise or arrangement under section 425 of CA 1985	6.14
Deeds of Arrangement Act 1914	6.16
The rationale for reform	6.17
Reform recommendations for England and Wales	6.20
Statutory transfer if the insured enters into a voluntary procedure	6.20
Third party’s right to vote on a voluntary arrangement	6.23
Insurer with a right of recourse – effect on voluntary arrangement	6.25
Voluntary procedures in Scotland	6.27
Reform recommendations in Scotland	6.32
PART 7: THE EFFECT OF THE DRAFT BILL ON OTHER RIGHTS AND OBLIGATIONS
Introduction	7.1
Third party’s rights and obligations	7.4
Third party’s right to recover from insured	7.4
Amounts not recoverable from insurer	7.4
Amounts recoverable from insurer	7.5
Insolvency of insurer	7.9
Insurance proceeds subject to a charge	7.12
Floating charge crystallisation causes a transfer of rights	7.12
Fixed charge already existing at the time of transfer	7.13
Third party’s other statutory rights against insurer	7.15
Voluntary codes of practice	7.16
Financial Services Ombudsman	7.17
Insurer’s rights and obligations	7.18
Insurer’s duty to pay on a successful claim by third party	7.18
Insurer’s right to an indemnity from insured	7.19
Prejudice to insurer using subrogated rights	7.25
Orders for costs against insurer	7.29
Insurer’s other statutory obligations	7.34
Rights and obligations under rules of court	7.36
Insured’s rights and obligations	7.37
Insured’s right to recover from insurer	7.37
Insured’s right that insurer conducts his defence properly	7.38
Settlements reached between insurer and insured	7.40
Current law	7.40
Reform recommendations	7.42
Settlements before a statutory transfer	7.42
Settlements after a statutory transfer	7.44
PART 8: CASES WITH A FOREIGN ELEMENT
Introduction	8.1
Applicability	8.5
Consultation	8.5
Reform proposals	8.9
UNCITRAL model law on cross-border insolvency	8.13
Jurisdiction	8.19
Application of the Brussels Convention	8.21
Different parts of the United Kingdom	8.24
Claims not covered by the Brussels Convention	8.32
England and Wales	8.32
Scotland	8.36
Jurisdiction in arbitration	8.38
Jurisdiction clauses	8.39
Summary of recommendations	8.40
PART 9: DISTRIBUTION OF A LIMITED INSURANCE FUND TO MULTIPLE CLAIMANTS
The issue	9.1
Position in Scots law	9.5
Consultation	9.6
“First come, first served” retained in the draft Bill	9.9
Power to order pro rata distribution in some group litigation	9.10
Statutory scheme would be complex and controversial	9.11
Delay caused by a statutory scheme	9.17
Cost of a statutory scheme	9.18
Not a problem central to the 1930 Act	9.19
Bare power to order rateable distribution unsatisfactory	9.20
First come, first served is a satisfactory basis	9.21
APPENDIX A: DRAFT THIRD PARTIES (RIGHTS AGAINST INSURERS) BILL	A
APPENDIX B: THIRD PARTIES (RIGHTS AGAINST INSUERS) ACT 1930	B
APPENDIX C: USEFUL WEB ADDRESSES	C
APPENDIX D: LIST OF PERSONS AND ORGANISATIONS WHO COMMENTED ON CONSULTATION PAPER NO 152	D
APPENDIX E: LIST OF OTHERS WHO HAVE ASSISTED WITH THE PROJECT	E