In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at the Third Parties (Rights against Insurers) Act 2010, discussing how it works and providing advice for IPs on their duties to comply with it.
This is the summary of that briefing.
If you'd like to watch the webinar back, you can do so below, if not, read on for our summary. A copy of the presentation can be downloaded here.
Quick Links
- Why the legislation exists
- Statutory rights for creditors
- Insolvency procedures affected by the legislation
- Practitioner’s duties
- My suggestions for you
Why does the legislation exist?
The Third Parties (Rights against Insurers) Act 2010 diverts insurance payouts.
Without it, if an insurance claim is paid after a formal insolvency starts, the unsecured creditors would get a windfall, and the claimant would be an unsecured creditor.
This legislation replaced the similar Third Parties (Rights against Insurers) Act 1930. Before that legislation, the liquidator would receive the compensation when a creditor brought a claim on which an insurance company paid out. Because there were no special arrangements in place, the money would go into the general pot to pay a dividend to all the unsecured creditors.
Now, when the legislation applies, the insurer must pay the compensation directly to the creditor, and not to the liquidator.
(Please note. I refer to liquidators and liquidations in this note as a form of shorthand. The legislation applies in the same way to most insolvency appointments and procedures. Scroll down for a list.)
What statutory rights do creditors have?
When the creditor has a claim covered by insurance, the claim that the company would otherwise have against the insurer is automatically transferred to that creditor. This will happen either:
- On your appointment (if the claim existed then), or
- When the liability arises (if after your appointment).
The effect of the transfer is similar to what it would be if the creditor held security over the insurance claim:
- The creditor (the third party) is still a creditor in the liquidation, but only for the shortfall (the amount it can’t recover from the insurance company directly).
- Because the company’s rights against the insurance company have been transferred to the creditor, you as liquidator cannot also claim against the insurer (even if there are losses to recover).
Does the creditor have better rights that the debtor?
The creditor does not get any better rights that the bust company had. Therefore the creditor faces these risks, for example:
- The creditor’s contributory negligence may reduce its claim
- Pre-transfer set-off may reduce the claim (e.g. the insurer may deduct the value of unpaid insurance premiums)
- The insurer still has its right to void the policy, if it had that right in the first place. But there are anti-avoidance rules, to stop it doing so based on the insolvency alone.
How can a creditor enforce their rights?
The creditor may enforce their rights by:
- Suing the insurer
- Demanding information about the debtor’s insurance policies
- This is necessary to bring a claim
- Doing stuff the debtor is supposed to do
- For example, they may give notices needed under the policy
The timeline of events
- A claim arises, giving the creditor the right to compensation.
- The debtor has insurance to cover at least some of the claim.
- At some point, the debtor goes into liquidation.
- As a result of the liquidation, the debtor’s right to claim on its insurance policy is transferred to the creditor.
- Therefore, the creditor claims directly from the debtor’s insurer.
- Assuming the claim is successful the payment bypasses the liquidation. The insurer pays directly to the creditor.
Insolvency procedures affected by the legislation
The legislation affects most corporate procedures:
It affects:
- all liquidations (compulsory liquidations, MVLs, CVLs, and provisional liquidations);
- all administrations (including under special administration regimes);
- receiverships (but not court-appointed receiverships);
- voluntary arrangements;
- part 26A restructuring plans and part 26 schemes of arrangement.
The main exclusion is the statutory moratorium procedure.
Individual procedures
Individual procedures affected include:
- bankruptcy (including deceased’s insolvent estates);
- voluntary arrangements;
- DROs;
- county court administration orders; and
- county court enforcement restriction orders*.
*when they are brought into force!
Duties of insolvency practitioners
Your main duty is to give the creditor information about the insurance. This is not because you are the office-holder. It is because, as the office-holder, you are someone who is expected to have that information.
You must reply to any information request within 28 days. You must either:
- give the information; or
- say why you cannot.
If you cannot give them the information because someone else now has it, you must say who they are and what they’ve got.
This is the information they can ask for:
- Whether the debtor has insurance (that may cover the claim).
- Who the insurer is.
- A copy of the policy.
- Whether the insurer has declined cover.
- Whether there is any litigation (with the insurer over the policy).
- How much of the cap on the cover is still left.
- Whether there is a fixed charge on any payments from the policy.
The creditor can get a court order if you don’t comply.
Creditors have this right when they think:
- they have a claim against the debtor;
- the company has insurance against the claim; and
- the debtor’s rights have been transferred to them.
Suggestions
Here are my suggestion for insolvency practitioners in various third party rights against insurer situations.
MVLs
You may not want to open an MVL with a known creditor, even if they’re covered by insurance. But, if you do get into that situation, these are the key points to remember:
- The MVL automatically transfers the rights to the insurance.
- So, the policy is no longer an asset in the MVL.
- The creditor will deal directly with the insurer. (This may or may not be a good thing; a quick settlement may be more difficult and the MVL may be prolonged),
- The creditor will have a claim in the MVL, but only to the extent that they are not covered by the insurance. You may be able to negotiate a settlement on that.
Requests for information
Take them seriously. There is a risk of a court order, with costs awarded against you if you don’t reply promptly or correctly.
Remember, you only have 28 days to deal with it. Ask for an extension if you think you need it. Deliver what you can even if it’s not everything!
It’s probably not reasonable for you to ask the creditor to pay your costs in complying with this. It’s all information that should be readily available and easy to provide.
However, there are situations where it might be reasonable for you to ask the creditor to pay your costs. For example, the insurer or creditor might be asking for more information than the statutory minimum. The insurer might have the right to avoid the policy if you don’t co-operate. But it might be reasonable to ask them to cover your costs if they need you to do a significant amount of work to help them deal with the creditor.
Disclosure of documents might also be an issue. You may want to get your costs covered if you’re drawn into disclosure.
Final tip…
Lastly, don’t destroy your file, even if it is due for shredding under your normal policies. It’s never a good look to be destroying potential evidence as litigation starts!
Specialist Insolvency Solicitors
If you have any questions after reading this article, please don’t hesitate to get in touch with our bright and experienced team.
Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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