How does the Third Parties (Rights against Insurers) Act work in practice?

We review the practical effect for claimants and insurers of the Third Parties (Rights Against Insurers) Act 2010 in the light of two recent decisions.

The Third Parties (Rights Against Insurers) Act 1930 allowed third-party claimants to bring claims against insurers when the insured was dissolved, but it involved several hurdles. The 2010 Act has modernised and streamlined this process, enabling third parties to recover compensation from insurers more efficiently when a policyholder becomes insolvent.

Third parties can now bring proceedings directly against insurers without having to first establish liability of the insured and restore a dissolved company which has been struck off the register.

Effectively, both the insured’s position “as was” and that of insurers “as is” is dealt with within the same set of proceedings. The 2010 Act aims to simplify third-party recovery by transferring a policyholder's rights under an insurance contract directly to the third party.

The Scotland Gas case

The recent Scottish case of Scotland Gas Networks Plc v QBE UK Ltd provides an insight into how courts are interpreting the 2010 Act.

The dispute revolved around damage caused to a gas pipeline by a company, Skene, which later became insolvent. Scotland Gas sought to recover damages from Skene’s insurers QBE under the 2010 Act. Scotland Gas initially sued Skene for damages, obtaining a default judgment of £3 million after Skene failed to defend the case. However, QBE denied that the decree by default established liability for the purpose of the 2010 Act. Decree by default was excluded in the scope of their policies.

Key issues

• Establishment of liability by decree: The insurers argued that liability must involve a substantive examination of the case's merits. The court rejected this argument, holding that section 1(4) of the 2010 Act allows liability to be established through judgments, including those made by default.
• Insurance coverage: While it is not possible to contract out of the 2010 Act, there are a number of defences available to insurers. The insurers in this case argued that the damages claimed by Scotland Gas were excluded under Skene's public liability policies. This issue was left unresolved and will proceed to trial.

Key takeaways

• Binding effect of default judgments: Insurers cannot contest the liability established by a default judgment unless they take steps to set it aside. This decision reduces uncertainty for claimants but places greater onus on insurers to intervene early in disputes involving their policyholders.
• Limitations on insurers’ defences: Insurers retain the ability to argue that the claimed losses fall outside the scope of the insurance policy. However, they must demonstrate this within the framework of the established liability.

Broader impact

The ruling, while from Scotland, is expected to influence courts across the UK due to the Act's consistent application nationwide. It reinforces the binding nature of default judgments in establishing liability, while also demonstrating the complexities of policy coverage disputes. Both insurers and claimants must approach claims under the Act with clear strategies and legal precision. It underscores the need for insurers to proactively manage claims involving insolvent policyholders to mitigate risks.

Riedweg v HCC International Insurance PLC

The Riedweg case clarified that insurers sued directly under the Third Parties (Rights Against Insurers) Act 2010 cannot claim contributions from third parties under the Civil Liability (Contribution Act) 1978. The court held that an insurer’s liability to indemnify an insolvent insured is not the “same damage” as liability for negligence caused by another party, limiting insurers’ ability to shift liability in such cases.

Facts

The claimant alleged that a company, Goldplaza Berkeley Square Ltd (Goldplaza), overvalued a property for £8 million, causing her financial loss. It was the claimant’s case that, but for the negligent valuation, she would not have brought the property. Ultimately, she sold the property for £5.5 million and sought £2.2 million in damages.

After Goldplaza went into liquidation, the claimant pursued Goldplaza’s professional indemnity insurer, HCC International Insurance PLC (HCC), under the 2010 Act. HCC then sought a contribution from the claimant’s solicitors, alleging that their negligence also caused the claimant’s loss. HCC asserted that the solicitors served not only as the claimant's legal representative but also as her business advisor and agent, playing a pivotal role in the property purchase. HCC argued that the solicitors had breached their fiduciary duty, violated the contract, and acted negligently, resulting in the same damage to the claimant as that allegedly caused by Goldplaza for the valuation.

Key issues

The question arose as to whether HCC, as the insurer of an insolvent company, operating under the 2010 Act, could claim a contribution from the solicitors under the Civil Liability (Contribution) Act 1978 (the 1978 Act).

HCC argued that both Goldplaza’s negligence (via the valuation) and the solicitors’ alleged negligence (advising the claimant on the transaction) caused the claimant’s financial losses. They sought to argue that HCC and the solicitors were liable for the “same damage” as required by the 1978 Act.

The solicitors argued that an insurer’s obligation under the 2010 Act to indemnify for a loss is fundamentally at odds with a contribution claim. The claimant’s loss in both cases was caused by entering into a deal she would not have agreed with if the valuation and solicitor advice was correct. While the harm caused by Goldplaza and the solicitors was not the same, HCC argued that there could be an overlap for a contribution claim. 

The solicitors disagreed with this and argued that the negligent property valuation and the  solicitors’ poor advice whilst both contributed to the overall finance loss of £2.2 million were different. This means that if HCC had compensated the claimant by paying out on Goldplaza’s behalf, HCC would not have the right to claim for a contribution. On the other hand, if Goldplaza had compensated the claimant and been the one defending the claim, it could have sought a contribution from the solicitors.

Key takeaways

This case provides clarity on the scope of both Acts, particularly how they interact in cases involving insolvent insured parties.

The court clarified that an insurer’s liability is distinct from its insured’s liability. An insurer indemnifies its insured for losses, but it does not directly cause or share liability for the claimant’s damage.

Under the 1978 Act, an insurer cannot claim a contribution unless it is liable for the same damage as the third party. The court found that HCC’s liability to indemnify Goldplaza was not the “same damage” as the solicitors’ alleged liability for negligence.

• For insurers: This decision limits their ability to claim contributions from third parties when they are sued directly under the 2010 Act. Insurers cannot claim to be liable for the same damage as the insured or other parties unless their liability is identical in nature.
• For third parties (eg solicitors): They are not at risk of contribution claims from insurers where the insurer’s liability arises solely from their contract with the insured and/or a different cause of action. 

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