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Tue October 19 2021

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Another Option When Pursuing an Insolvent Company?

29 Oct 10 In the current financial climate, the construction industry frequently has to deal with supply chain insolvencies, leading to losses that are often irrecoverable from the insolvent company.

The Third Parties (Rights Against Insurers) Act 2010 (the "2010 Act") will make it easier for insured losses to be recovered direct from the insolvent company's insurer.   Stacey Collins (Senior Associate) & Steven Langton (Solicitor) of Pinsent Masons LLP explain.     

Say you've employed a sub-contractor that designs and installs some electrical equipment.  However, due to a design defect, the equipment does not work correctly.  You pursue the sub-contractor for damages, who has a professional indemnity insurance policy in place that would respond to your claim.  However, before you manage to recover your losses, the sub-contractor goes into liquidation.

Under the common law, the insurance proceeds would become part of the pot of assets available to all the creditors of that sub-contractor. Therefore, the chances of your claim being fully satisfied would be slim.

The Third Parties (Rights Against Insurers) Act 1930 (the "1930 Act") was intended to deal with the above scenario and to allow the claimant to pursue the insurer direct.  This was achieved by transferring to the claimant the insured's (the sub-contractor in the example above) rights under its insurance policy.

However, using the 1930 Act can be a lengthy and costly route to pursue. One of the main issues with the 1930 Act is that it requires a judgment to be obtained against the insured before being able to pursue the insurer.  A claimant therefore needs to bring two separate actions, with potentially double the time, cost and hassle.

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The 2010 Act is intended to address the perceived weaknesses in the 1930 Act. Although not yet in force, some of the highlights of the 2010 Act include:

  1. The process for claiming against the insurer is simplified. For example, the claimant will not have to obtain judgment against the insolvent company before pursing its insurer. 
  2. The list of insolvency events is broader, so the Act will apply to a wider range of insolvency scenarios and businesses (eg LLPs, which were not covered by the 1930 Act).
  3. There will be wider rights for a potential claimant to obtain information about the insurance policy.  This will greatly assist parties who are assessing the merits of bringing a claim under the Act.
  4. Some of the common defences raised by insurers have been removed. For example, an insurer can currently defend a claim under the 1930 Act on the basis that the insolvent company did not provide the notifications required by the insurance policy: the 2010 Act allows the potential claimant to provide that notification instead. 

However, there are some criticisms of the 1930 Act which the 2010 Act does not address.  For example, insurers can still raise the same defences against the claimant as it would be able to use against the insured. The insurer can also set off any money owed to the insurer by the insured against amounts due to the claimant.

Overall, the 2010 Act will provide potential claimants with greater rights to pursue an insurer in the event an insured claim is interrupted by the defaulting party becoming insolvent.  This is welcome news for those of us that are regularly providing advice on strategies to recover losses from insolvent businesses.

For a more detailed review of the 2010 Act please visit:  

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