The UK Government Accepts Proposals to Reform the Third Parties (Rights Against Insurers) Act 1930

Profession:Herbert Smith

On 2 July, Baroness Scotland of Asthal announced the UK Government's acceptance of the proposals in the reports of the Law Commission and the Scottish Law Commission (Law Com No. 272) to reform the Third Party (Rights Against Insurers) Act 1930 (the "1930 Act"), which is to all intents and purposes mirrored by the Third Party (Rights Against Insurers) Ordinance (Cap. 273) in Hong Kong ("the Ordinance").

The purpose of the 1930 Act and the Ordinance

The 1930 Act, and the Ordinance, give a third party claimant against an insured the right to pursue directly the insured's insurer and receive payment under the insurance policy in circumstances where the insured is both (a) liable to the third party claimant; and (b) insolvent. This statutory transfer of rights operates as an exception to the general rule of privity of contract (that only a party to a contract can sue and be sued under it) and to the principle of insolvency law that all unsecured creditors of insolvent individual are to be treated equally. The mischief the 1930 Act was designed to cure was the application of the proceeds of an insurance policy covering a third party's claim to all of the insured debtor's creditors generally, when the insured's entitlement to the proceeds of the policy arose solely due to the third party's claim.

Criticisms of the 1930 Act

Although the 1930 Act operates in principle to cure the mischief set out above, in practice the manner in which the English Courts have interpreted its terms has caused delay and expense for third party claimants hoping to avail themselves of the statutory transfer which it creates. Further, the 1930 Act has for some time been considered outdated in the light of recent developments in insolvency law.

Principal reform recommendations

The draft Bill appended to the Law Commission's report would, if enacted, bring in the following principal reforms;

1 give the third party the right to issue proceedings against the insurer before he has established at law the existence and amount of the insolvent insured's liability. At present, the third party cannot sue the insurer without first successfully suing the insured. The proposed reform would allow the third party to establish the existence and amount of the insured's liability and pursue the insurer in the same proceedings;

2 in the case of a dissolved company, the third party would no longer have to apply to restore the company to the register and sue it before proceeding...

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