A guide to a legal labyrinth: Claiming from the insurer

There is now no doubt that insolvencies are going to rise at all levels of the industry. Therefore, the provisions of an act passed nearly 80 years ago to ensure that people knocked down by insolvent drivers received proper compensation may be used much more this year than before. The Third Parties (Rights Against Insurers) Act 1930 gives claimants direct access to a defendant's insurance cover if the defendant is or becomes insolvent.

The act applies to a variety of claims. For example, it applies to claims against professionals who are covered by professional indemnity insurance.

Claimants will not receive a payout in every case. The insurer can rely on the same defences that the defendant itself can. If there are notification requirements in the insurance policy and the defendant has not complied with them, the claim against the insurers may fail. If there is an excess in the policy and the amount of the claim is less than this amount, the insurer will not be liable. Also, the defendant may have exhausted its insurance cover for a particular time period if several claims are made against it. The reasoning here is that it would be unfair to require insurers to pay third-party claimants in circumstances in which they would not have had to pay if the insured had remained solvent.

The act is far from perfect and presents a number of obstacles for claimants. The procedure to make a claim is complicated and expensive. It requires at least two sets of proceedings: one to establish the defendant's liability, followed by another to establish the insurer's liability under the terms of the policy.

If the defendant is a company that has been liquidated, an additional application must be made to restore the company to the register to pursue the claim. Some methods of dissolving companies (such as section 652 of the Companies Act 1985) are not covered by the act and will not transfer rights to third parties.

Claimants will, of course, want to know what insurance cover is available before starting proceedings against a defendant. The act requires insolvent defendants, insolvency practitioners and insurers to disclose details of the insurance cover available, although the extent of the disclosure obligation is unclear and may not include all the information the claimant needs to decide whether a claim is worthwhile – for example, details of any prior claims that may exhaust the cover available.

Claimants will want to know what insurance cover is available before going to law. The act allows this

Until recently, claimants had to decide whether to bring a claim against an insolvent defendant without any idea as to whether the claim would be covered by insurance, and this was a considerable deterrent. In a case from 2004 involving a firm called Re OT Computers, which went insolvent, the Court of Appeal decided that the act obliged defendants and their insurers to disclose this information from the date of insolvency so as to allow claimants to take an informed decision about whether to pursue the claim.

Insurers had previously argued successfully that the right to this information did not arise until the claimant had established that the defendant was liable. The decision in OT Computers makes claims under the act a much less risky prospect for claimants and may lead to more widespread and effective use of the option.

The Law Commission reported on the act in 2001 and proposed reforms, such as allowing claims to be resolved in one set of proceedings,thereby clarifying the position on access to information about insurance cover and preventing insurers relying on defences based solely on the fact that the insured is insolvent or not complying with policy terms. It also removed loopholes and inconsistencies.

The government agreed that the proposed reforms were necessary and decided to implement them, but unfortunately the process stalled in 2004 because of issues about the quickest way to do it.

In 2008 the government confirmed that these reforms were still planned and would be implemented when parliamentary time allowed. It seems unlikely at this stage that the reforms will be made in time to deal with the current round of widespread insolvency so parties, their advisers and the courts will need to grapple with the current unsatisfactory regime for some time to come.