Claims against insolvent insureds — considerations for insurers and insurance practitioners

In addition to the very tragic loss of life caused by the COVID-19 outbreak, the sad reality is that many businesses will also succumb to the impact of coronavirus and this will have far-reaching implications for business owners, employees and other stakeholders. 

Insurers, claims handlers and brokers should consider the implications in the event that a commercial insured does not survive the pandemic and what steps can be taken to mitigate problems that may arise as a result.  

The Third Parties (Rights Against Insurers) Act 2010

While the Third Parties (Rights Against Insurers) Act 2010 (“the 2010 Act”) came into force in August 2016 amidst a great deal of hype, there have been relatively few noteworthy cases brought under that legislation. This could be set to change as the pandemic causes unusually high numbers of businesses to fail and claimants look to bring claims directly against insurers. It is therefore worth pausing to remind ourselves of the regime as it stands under the 2010 Act.

• Once an insured becomes insolvent, a potential claimant is entitled to request details of the insured’s insurance cover. This includes:
  • The identity of the insurer
  • The policy terms
  • Whether the insurer has claimed not to be liable under the policy in respect of the supposed liability
  • Whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and, if so, relevant details of those proceedings
  • The limit of indemnity under the policy and, if the limit is in the aggregate, how much has been paid out in respect of other liabilities
  • Any deductible.
• Details of the insured’s insurance cover must be provided within 28 days of the request; if not the claimant can apply to the court for an order in this regard
• A claimant does not have to establish liability against an insured prior to bringing proceedings against insurers
• It is no longer necessary for a claimant to bring multiple sets of proceedings. Instead, they can issue proceedings directly against the insurer and resolve all issues (including the insured's liability) within those proceedings
• The court can decide the issue of coverage under the policy as a preliminary issue. If there is no coverage, an expensive trial on the insured’s liability can be avoided
• Effectively, the claimant will ‘step into the shoes of the insured’
• A claimant can fulfil conditions in the policy on behalf of the insured e.g. if the insured had failed to notify the claim, the claimant may do so, preventing the insurer from relying on the insured's failure in this regard to decline indemnity.

However:

• Insurers can rely on any other defences that they may have had against the insured.
• Insurers have a right of set-off, meaning that they can deduct any unpaid premiums on the part of the insured from sums paid to the claimant.

Claims handling

Insurers may face difficulties in dealing with claims against insolvent insureds. In particular, insurers may find it hard to obtain documentary and witness evidence which could hinder the defence of the claim, force them to settle on unfavourable terms and make it difficult or impossible to pursue subrogated claims.

Once a business is wound up, its records are passed to the appointed insolvency practitioner which is concerned with liquidating the business, selling assets and making distributors to creditors. Perhaps understandably, in our experience, insolvency practitioners have not been willing to spend a lot of time searching for documents that may be needed to defend a claim against the insolvent business. 

Experience has also taught us that the owners and directors who have lost their investment and jobs may be more concerned about potential ramifications for themselves arising out of the failure of the business and are rarely inclined to assist in the defence of a claim where the potential breach of policy claims conditions is of limited relevance to them. Similarly, former employees may be difficult to trace. Even if they can be found, they may harbour ill feelings towards the business (which they may consider let them down and left them unemployed) or be busy in a new role and therefore not inclined to provide assistance.

Methods for obtaining evidence

It can be especially tricky for insurers to safeguard against the potential difficulties in securing evidence if a claim is not intimated until after the business has failed. Potential methods for obtaining evidence include:

• Making an application for pre-action disclosure under CPR 31.16. However, this will only be relevant if the documentation in question is held by someone who is likely to be a party in proposed litigation (e.g. if the liquidated company is to be joined in proceedings).
• Making an application for non-party disclosure under CPR 31.17. However, such an application cannot be made until proceedings have been issued against the insurer and, usually, not until the defence has been served.
• Issuing a witness summons under CPR 34.2(1). The witness summons can require the witness to attend the court to produce documents or attend court to give evidence. If the witness fails to comply with the summons, they will be at risk of being held in contempt of court and subject to a fine.
• Obtaining a Norwich Pharmacal Order (NPO). NPOs are an equitable remedy that require a party to disclose certain documents and/or information. NPOs can be used to identify the proper defendant to an action or to obtain information to plead a claim. However, NPOs are only available in limited circumstances.

If a claim is intimated against an insured whose solvency is at risk, insurers may consider securing documents and obtaining witness statements earlier than they would do ordinarily. If an insured is in an industry that is known to be particularly volatile (e.g. construction and retail) insurers should consider requesting a copy of the insured’s records as soon as the notification is made. Whilst insurers may have reservations about making these requests at an early stage, it need not be a difficult conversation to have with insureds, not least because policies will tend to require cooperation with insurers as a condition of cover. It is good practice to get into the habit of securing evidence as soon as practicable. This is particularly so in light of the Disclosure Pilot Scheme (CPR Practice Direction 51U) which provides that a person who knows that they are or may become a party to proceedings is under a duty to the court to take reasonable steps to preserve documents in their control that may be relevant to any issue in the proceedings. Failure to do so can lead to an adverse costs order. Although the Disclosure Pilot Scheme is only operating in the Business and Property Courts at present, it will potentially be rolled out to all courts when the pilot ends in January 2021.