Background Review of Current Position
4.A party (“an insured party”) that incurs a liability to another party (the “third party”) may have purchased an insurance policy to protect itself against the cost of that liability. If so, usually the insured party will make a claim under such a policy. Provided the insurer is satisfied that the claim is valid, the insurer will pay out the insurance proceeds. However, if the insured becomes insolvent before the third party is paid, then under general legal principles the insurance money will become an asset in the insolvent estate of the insured party. The third party would at best receive only part of the payment he or she would otherwise have been due, and the insurance money would be used to increase the amount paid to other creditors.
5.The Third Parties (Rights against Insurers) Act 1930 and the Third Parties (Rights against Insurers) Act (Northern Ireland) 1930 deal with this problem by transferring the insured party’s rights against the insurer to the third party.
6.However, the 1930 Acts do not work as well as they should, and insolvency law has changed considerably since 1930. The 1930 Acts can be expensive and time-consuming to use. Details of the deficiencies in the operation of the 1930 Acts are set out in the Law Commissions’ Report.