The Rights of Third Parties

Reform of the Third Parties (Rights Against Insurers) Act 1930

In July 2001 the Law Commission and the Scottish Law Commission published their long-awaited joint report and draft Bill on the reform of the Third Parties (Rights Against Insurers) Act 1930. The purpose of the Act is to give the victim of an insolvent assured a right to make a direct claim against the assured’s liability insurers, thereby obtaining to that extent a priority over other unsecured creditors in the bankruptcy or winding up of the assured. In the last decade a series of judicial decisions has operated to undermine much of the effectiveness of the Act. In 1998 the Law Commission produced a consultation paper with provisional recommendations for change (Law Comm 152), and following consultation the final version has now appeared. It is very likely that legislation will follow within two or three years. The Law Commission has sought to set its new measure in the context of insolvency law: this is clearly the correct approach, as the real question which underlies the legislation is the extent to which a victim of the assured should take priority over trade creditors. The general policy – that if an action by a victim has generated an insurance claim by the assured, the proceeds of the insurance should go to the victim and not to other creditors – has been strongly affirmed. The reform of the 1930 Act stemmed from the Law Commission’s consultation on the reform of the doctrine of privity generally, which resulted in the Contracts (Rights of Third Parties) Act 1999. That Act is unlikely to apply to liability policies, as such policies are intended to benefit the assured and not the third party and in any event in the ordinary case the requirement that the beneficiary third party can be identified from the outset will rarely be met. In any event, as the Law Commission points out in its 2001 Report, the 1999 Act does not address one of the fundamental issues which arise in third party claims against insurers, namely, the ability of the third party to obtain information.