Covid recession could lead to direct claims against insurers under Third Parties Act

Insurers may be forced to fend off more direct claims against their business as the pandemic-induced economic recession brings the Third Parties (Rights against Insurers) Act 2010 into play.

According to Sarah Irwin, a solicitor at law firm Weightmans, this act – which came into force in 2016 – enables a “third party with a claim against an insurer the option to bring proceedings directly against an insurer in the event of the insured’s insolvency”.

Ultimately, the act has been designed to streamline the process by which a claimant can bring a claim directly against an insurer instead of an insolvent defendant. It allows a statutory transfer of the insured’s rights arising under a policy of insurance to a third party.

Anyone with a claim against an insolvent person or an offending dissolved company can make use of the act’s provisions.

Speaking at her firm’s webinar on 13 January, titled ‘Horizon Scanning: what’s in store for insurers in 2021 and beyond?’, Irwin said that she anticipates an increase in company insolvencies, which could – in turn – lead to more individuals making use of the Third Parties (Rights against Insurers) Act.

She explained: “This could well be the calm before the storm and perhaps we will see businesses start to struggle once the [government coronavirus] support payments end. I would expect one implication of this to be a rise in insolvency insurance.

“Any time we face economic uncertainty, especially at the scale we’re seeing at present due to both the effects of the Covid-19 pandemic and the associated lockdowns or tiered restrictions, then more and more businesses will unfortunately face some tough decisions about whether to trigger insolvency proceedings. As a result, I would expect to see an increase in claims using the avenue offered by the Third Parties (Rights against Insurers) Act 2010.

“It follows that as we see more businesses facing insolvency, we’ll see more claimants choosing to pursue insurers directly via this avenue.”

Claimant friendly

Although “there was quite a bit of buzz around this act when it first came in”, Irwin added that she doesn’t “really think we’ve seen many headline cases surrounding it”. However, “this could be about to change in the next few months and years”.

“The process is attractive to claimants,” she explained. “It’s very claimant friendly. It’s not possible to contract out of the act and when it operates, it means that all of the rights of the insured against their insurer under the contract of insurance are transferred to the claimant third party and this provides some clear and key benefits.

“It means there is no need to bring multiple sets of proceedings. The third party claimant is simply entitled to request the details of the insurance cover and they can issue proceedings directly against the insurer to resolve all issues at once, and that includes issues of policy coverage.

“Effectively, we say the claimant steps into the shoes of the insured and this means that the claimant can also fulfil conditions in the policy on behalf of the insured. This includes the requirement to notify a claim and it means, therefore, that insurers can’t rely on an insured’s failure to notify a claim to decline indemnity under the policy.”

Practical advice

The main way insurers can get ahead of these potential claims is to be proactive, Irwin advised.

“All those involved in the claims process, whether it’s insurers, claims handlers, brokers, it might be worth considering what would happen to any ongoing claim if an insured did face insolvency and then thinking ahead as to how you can best mitigate those problems which may arise,” she said.

“It’s worth considering securing documents and perhaps going as far as obtaining witness statements earlier than you usually would.

“I would go as far as saying it would be worth requesting a copy of the insured’s records as soon as the notification was made, especially if the insured is in an industry which is known to be more volatile. We have retail, we have aviation, but also construction professionals involved in the property sector, property valuation. There are definitely some sectors which are potentially more at risk over the coming month.”

Not being a step ahead could prove detrimental to the claims process, Irwin added.

She explained: “Once a business has wound up, it’s records are passed to the appointed insolvency practitioner and they’ll be really concerned with liquidating the business, selling the assets and distributing those funds to creditors, so an ongoing claim may not be a priority for them.

“This could mean that it might be more difficult than it otherwise would be to get assistance for locating documents and obtaining evidence, getting witness statements together. It will also, of course, be much more difficult when you don’t have that usual access to key witnesses or those involved in the underlying circumstances to the claim, who would otherwise be able to respond much more efficiently, with first-hand knowledge and in much more detail.

“It might mean you end up having to negotiate on worse terms.”

The downside of this approach “is that it does mean quite a lot of work might be front-loaded and the costs associated with that work will also be front-loaded”. However, she believes this strategy could reap benefits as “there is potential for increased claims under this act”.