The Law Commission and the Scottish Law Commission proposals to replace the Third Parties (Rights Against Insurers) Act 1930 ('The 1930 Act') with a simpler and updated scheme that will be more effective.
They are necessary because:
the 1930 Act is intended to give a person who is owed money a direct claim against an insurer of the debt. However, it does not work as well as it should;
third parties are often not assisted by it at all or are unnecessarily required to expend substantial time and money enforcing their rights;
its operation in the context of insolvency has provoked criticism over a number of years from lawyers, the judiciary, litigants and academics;
the Act is seriously out of date in a number of ways and fails to reflect modern developments in company and insolvency law.
The proposals will affect:
third party claimants who are owed money (for example injured former employees of defunct companies; victims of accidents for which the person to blame is unable to pay compensation (eg because of insolvency); claimants in claims involving public liability and professional indemnity insurance);
insurance companies;
other creditors of the insured party;
the legal profession, insolvency practitioners and the Official Receiver; and
the courts.
The number of successful claims by third parties is likely to rise as a result of the Law Commissions' recommendations. There will be savings from the reduction in litigation on worthless claims and the new streamlined procedures. Overall, indications are that the proposals will be broadly cost-neutral.
We intend that the proposed changes to legislation will be implemented by a Regulatory Reform Order made under the Regulatory Reform Act 2001. Subject to the outcome of this consultation, we propose that the changes are implemented during 2003/4. The Order would apply to Scotland as well as to England and Wales as the subject matter is reserved. It would not remove or modify any of the functions of the National Assembly for Wales. The 1930 Act does not apply to Northern Ireland.
This consultation is being made in accordance with the requirements of the Regulatory Reform Act 2001 (summary at Annex A) and the terms of the Government's Code of Practice on Written Consultations (Annex E).
All responses should be received by 29 November 2002.
This Consultation Paper sets out proposals for reforming the legislation governing the ability of people who are owed money by someone who is insured against a debt, but insolvent, to take direct action against the insurer.
Changes are required to simplify the Third Parties (Rights Against Insurers) Act 1930 so that it operates more effectively. The proposals would streamline the procedures for using the Act and update it to reflect subsequent developments in insolvency and insurance law and practice.
The proposals would implement the recommendations of the joint Report of the Law Commission (no. 272) and the Scottish Law Commission (no. 184), Third Parties - Rights Against Insurers, which was published in July 2001. The Law Commissions' Consultation Paper is available on the Law Commission's website at www.lawcom.gov.uk/library/lccp152/cp152.pdf, and the full Report is at www.lawcom.gov.uk/library/lc272/lc272.pdf. The Government's acceptance of the recommendations in that Report was announced in answer to a Parliamentary Question on 2 July 2002.
The reforms will affect all those affected by the 1930 Act. Third parties and their legal advisers will benefit from less complicated procedures. There will also be savings for the courts, the Official Receiver and insolvency practitioners. For insurers the proposed reforms would mean that claims would be less likely to be complicated by delayed notification or other procedural difficulties. Other creditors of an insolvent party would not receive a share of the insurance payment where the Act applied.
We propose to introduce the reform by means of a Regulatory Reform Order under the Regulatory Reform Act 2001. This consultation is being conducted in accordance with the provisions of section 5 of the Act. Views are invited on all aspects of the consultation paper, and a number of specific questions are set out at the end of the document.
Copies of the consultation paper are being sent to the following professional organisations and representative bodies, among others:
REPRESENTATIVE BODIES
Association of British Insurers
Association of District Judges
British Bankers' Association
British Chamber of Commerce
Citizen's Advice Scotland
Civil Justice Council
Committee of Scottish Clearing Bankers
Confederation of British Industry
Consumers' Association
Faculty of Advocates
Federation of Small Businesses
Forum for Private Business
General Council of the Bar
HM Council of Circuit Judges
Institute of Chartered Accountants
Institute of Chartered Accountants of Scotland
Institute of Directors
International Underwriting Association
Law Society
Law Society of Scotland
Lloyd's Insurance Market
Medical Protection Society
National Association of Citizens' Advice Bureaux
National Consumer Council
Society of Practitioners of Insolvency
Trades Union Congress
GOVERNMENT BODIES
HM Treasury
Department of Trade and Industry
Financial Services Authority
Financial Services Compensation Scheme
Insolvency Service
Office of Fair Trading
Official Receiver
Small Business Service
Scottish Executive
National Assembly for Wales
Northern Ireland Assembly
A full list of consultees, which numbers about 180, can be obtained from:
or from the contact address given below.
Responses are also welcome from others, who have not received a copy of the consultation paper directly from the Lord Chancellor's Department.
A questionnaire relating to this consultation paper is at Annex D. Please send your response by 29 November 2002 to:
Ms Fovazia Khan
Lord Chancellor's Department
Civil Law Development Division
Room 3.S.4
Southside
105 Victoria Street
London SW1E 6QT
Tel: 020-7210 1219
Fax: 020-7210 1216
email: Fovazia Khan
Representative groups are asked to provide a summary of the people and organisations they represent when they respond.
The Department may wish to publish responses to this consultation document in due course. Please ensure your response is marked clearly if you wish your response or name to be kept confidential. Confidential responses will be included in any statistical summary of numbers of comments received and views expressed.
Respondents should also note the disclosure provisions under the Regulatory Reform Act summarised in paragraphs 8-10 of Annex A and paragraphs 17-20 of Annex B.
Further copies of this consultation paper can be obtained from Fovazia Khan at the above address.
The proposals set out in this Consultation Paper reflect the recommendations of the joint Report by the Law Commission and the Scottish Law Commission, Third Parties - Rights Against Insurers. The Regulatory Reform Order which it is proposed to introduce will substantially reflect the draft Bill prepared by the Law Commission and Scottish Law Commission and published in its Report.
Before the Report was published, the Law Commissions consulted a wide range of legal, academic and business interests. This overwhelmingly confirmed that the deficiencies of the 1930 Act caused real hardship. The Law Commissions' recommendations seek to remedy the areas where the 1930 Act is perceived not to be working well; to remove the need for multiple sets of proceedings; to reduce costs for both litigants and the courts; and to accommodate recent developments in insolvency and insurance law.
Following publication of the Law Commissions' Report, the Lord Chancellor's Department sought information on the impact of the recommendations to inform the partial Regulatory Impact Assessment at Annex C. Those consulted unanimously said that the Law Commissions' proposals were sensible and long overdue. They considered that overall, the reforms would improve the ability of third parties to enforce their rights and would reduce litigation, expense and delay.
In view of the extensive consultation and consideration already carried out by the Law Commissions, this Consultation Paper does not include a detailed analysis of the existing law or the arguments for and against the options for reform. Instead, it concentrates on taking forward the Government's preferred option of implementing the Law Commission's recommendations by way of a Regulatory Reform Order and the extent to which that proposal meets the statutory tests set out in the 2001 Act. You should nevertheless feel free to comment on any particular aspect of the proposals.
The proposed Order would apply to Scotland as well as to England and Wales as the subject matter is reserved. It would not remove or modify any of the functions of the National Assembly for Wales. Their views are being sought as statutory consultees given that the proposals extend to Wales. The 1930 Act does not apply to Northern Ireland.
This consultation paper uses the following terms, as defined:
debtor - a person who owes money; whose debt is insured; and who has become insolvent (or otherwise prevented from paying the debt)
insurer - the person who insured the debtor's debt
third party - the person to whom the debtor owes money
1930 Act - the Third Parties (Rights against Insurers) Act 1930
The 1930 Act gives a third party a direct claim against an insurer of the debt, where the debtor is insolvent and in certain other circumstances. The Act does this by providing for the transfer to the third party of the debtor's right to proceed against the insurer. The aim is to enable the third party to have access to the insurance proceeds in full and without the delay and expense involved in dealing with the debtor. These proposals would re-enact the substance of the 1930 Act with certain procedural improvements.
The Law Commissions' recommendations are intended to enable the 1930 Act to be used more effectively. The 1930 Act has the effect of imposing certain burdens on third parties in carrying on the activity of enforcing their legal rights where the debtor has become insolvent. The proposals would remove or reduce those burdens and would also remove inconsistencies and anomalies in the current law which has become out-of-date.
In the absence of the 1930 Act, and in the event of insolvency, the third party would not receive all the insurance proceeds. Instead, these would be treated as an asset of the debtor and would be distributed pro rata under insolvency legislation to the general creditors, of whom the third party would be one. As a result, the third party would be likely to recover at most only a small proportion of the insurance proceeds. The third party might also be disadvantaged if the debtor's freedom of action was lost for some reason other than insolvency, for example a corporate debtor might be wound up while solvent or might become subject to a receivership.
Third parties who use the 1930 Act are often vulnerable members of society, such as injured former employees of defunct companies. The Act also plays an important commercial role by disentangling insured debts from insolvency procedures. This benefits all involved by simplifying insolvency proceedings which only have to focus on uninsured debts.
One effect of the 1930 Act is that general creditors cannot benefit from the proceeds of insurance in respect of an insured debt. This could be seen as imposing a burden on other creditors who lose a share of the insurance money. The Act also makes it more likely that third parties will pursue debts leading to claims under valid insurance policies, which would otherwise not be worth making because the proceeds would mainly benefit other creditors. An effect of the Act, therefore, is that more claims may be pursued against insurers. However, these are valid claims for incidents covered by the policy.
In re-enacting the provisions of the 1930 Act with procedural improvements, these proposals would re-impose existing burdens on insurers and other creditors which are created by the Act. However, it is our view that these would be proportionate to the benefits which are expected to result from the re-enactment, as the provisions give important rights to third parties which need to be retained. In our view, the proposals as a whole would strike a fair balance between the rights of those individuals and the public interest. It is desirable, and consistent with the policy of the 1930 Act, that third parties should be able to recover insurance proceeds in full, rather than general creditors benefiting from the results of specific insurance; and that third parties should be able to pursue valid claims rather than insurers escaping them simply because the debtor has become insolvent.
The Law Commissions' principal recommendations are as follows.
Reducing procedural burdens
These three proposals are aimed at reducing the procedural steps that the third party needs to take to use the 1930 Act.
Third party entitled to a remedy in one set of proceedings - Under the procedure which results from the 1930 Act, the third party cannot issue proceedings against the insurer without first establishing the existence and amount of the debtor's liability. This may have the effect of requiring the third party to issue a number of separate sets of proceedings. The proposed Order would enable the third party to issue proceedings against the insurer before the liability of the debtor has been established. The third party would then be able to establish the existence and amount of the debtor's liability in those proceedings. This could be done by asking the court for declarations (or "declarator" in Scotland) on the debtor's liability to him and the insurer's potential liability to him under the insurance contract.
Third party not required to restore dissolved companies to the register - Under the procedure which results from the 1930 Act, if the debtor is a dissolved company that has been struck off the register of companies, the third party may first have to take proceedings to restore it to the register in order to be able to sue it. Under the proposed new scheme it would not be necessary for the third party to proceed against the debtor at all, so this problem would not arise.
Third party to have improved access to insurance information - The 1930 Act gives the third party a right to obtain information about the insurance policy. However, in practice that right is often worthless. The right to information is restricted because it does not arise until the liability of the debtor is established and this may not be until some time after the debtor has become insolvent. Until then, the third party may have to conduct litigation in ignorance of whether they have any rights under the 1930 Act or, if they have, whether they are of any value. As a result time and money may be wasted pursuing a worthless claim or a worthwhile claim may be abandoned in the belief that there are no funds to pay a judgment. The proposed Order would allow third parties to obtain information about any rights transferred to them in order to enable a decision to be taken on whether to continue litigation or not.
The scheme of the 1930 Act has the effect of requiring third parties to establish the existence of the debtor's liability to them before proceeding against the insurer. This can involve them having to pursue several sets of proceedings in order to enforce their rights. Proposal A will remove this burden by enabling the third party to proceed against the insurer before the debtor's liability had been established; and instead to establish that liability in a simple set of proceedings against the insurer. In removing a procedural hurdle in the way of third parties, we do not believe that the proposal would remove any necessary protection or existing right or freedom. It is already possible for liability to be established under the present law. However, doing so involves more cumbersome and time consuming procedures. The proposal will mean savings in costs and time to third parties, insurers, the courts and insolvency practitioners.
Similarly, Proposal B would remove the burden on a third party of having to restore a defunct company to the register of companies and have it wound up before pursuing the claim. We do not believe that this would remove any necessary protection or existing right or freedom. It could be argued that in addition to removing a procedural hurdle in the way of third parties, the proposal would relieve companies of the burden of being required to have a continuing legal existence for these purposes alone. The proposal would offer a further saving in costs and time for all involved, including the Official Receiver. Proposal C, to improve and clarify the third party's access to insurance information, would also remove the burden of pointless proceedings that might otherwise be taken, with consequent cost and time savings.
Proposal C would also create a new burden on insurers, to provide information at an earlier stage. However, this would only be significant where the insurance company then proved not to be liable, as otherwise the information would have had to be provided anyway at a later stage. Our view is that the imposition of this burden is proportionate to the benefit of enabling third parties to obtain relevant information without cumbersome procedural impediments; strikes a fair balance between the interests of those affected and the public interest, in that it will help significantly in enabling claims to proceed on a more timely basis and without unnecessary and costly proceedings; and that, in relation to the burden imposed, the Order as a whole is desirable given the extent to which it also removes burdens and has other beneficial effects. The proposal could also be seen as removing a burden from third parties who have previously had no statutory ability to obtain the relevant information at an early stage. We do not believe that this would remove any necessary protection or existing right or freedom, as it is already possible for the information to be obtained, but only in a more cumbersome and time-consuming way.
Removing burdens imposed on third parties by technical defences
The next three proposals are concerned with removing certain technical defences that constitute a burden on the third party, because they can make a third party's attempt to enforce a right using the 1930 Act ineffective (or in the case of voluntary arrangements, less effective).
Insurers' ability to rely on some technical defences removed - Under the procedure which results from the 1930 Act, a third party's claim may fail because the insurer successfully relies on the defence that the debtor did not give notice of the claim, even where the third party had personally told the insurer of the claim within the prescribed period. Under the proposed Order it would not be possible for the insurer to rely on this defence. If the insurance policy specified that a particular thing should be done by the debtor, and if, after a statutory transfer under the proposed Order, the third party did that thing, the insurer would not be able to rely on the non-performance of the policy condition.
Third party generally protected from pay-first clauses - The House of Lords held in the case of The Fanti and The Padre Island that rights transferred to a third party by the 1930 Act are useless if the insurance contract contains a clause requiring the debtor to pay the claim before the right to indemnity arises (a 'pay-first' clause). Under the proposed Order, the third party's claim would generally not be adversely affected by such a clause.
Voluntary procedures properly catered for - There have recently been concerns over the interaction between the 1930 Act and voluntary arrangements between debtors and creditors under the Insolvency Act 1986. Under such an arrangement, a debtor who abides by the terms of the agreement is not required to pay the debts in full, but only a proportion of them, often in instalments. A creditor is not entitled to enforce the original debt against the debtor. The value of the third party's claim against the insurer may be reduced by such an arrangement. Third parties may only be able to avoid this result by making, and involving other creditors in, expensive and time-consuming applications to court. Under the proposed Order, a third party with rights against the insurer would not be bound by a voluntary arrangement to the extent of those rights.
The requirement on the insured to give notice of the claim to the insurer can prevent the third party from pursuing the claim, even where he has personally informed the insurer within the required period. Similarly, 'pay-first' clauses in insurance contracts frustrate the third party's ability to pursue the claim. Proposals D and E would relieve the third party of these burdens. We do not believe that they would remove any necessary protection or any existing right or freedom. The ability to rely on these technical defences to frustrate claims is not a right which insurers could reasonably expect to continue to exercise.
A consequence of the removal of the right to rely on these technical defences is that insurers would be required to pay out in cases where they would not have to at present. However, this would only occur in circumstances where, but for the insolvency, the insurer would be properly liable. Our view is that the imposition of this burden is proportionate, strikes a fair balance between the interests of those involved, and is desirable. It is fair and beneficial in terms of the civil law generally that claims should not be able to be frustrated on the basis of technicalities.
Proposal F would remove the burden from the third party of not being able to recover the insurance proceeds in full. This would have the consequence that these sums would not be available to other creditors. We do not believe that this proposal would remove any necessary protection or any existing right or freedom. The right to benefit from the results of specific insurance is not one which general creditors could reasonably expect to continue to exercise. In addition, creditors would have the benefit of saving the costs and time involved in any proceedings that might currently be brought by the third party.
Removing burdens caused by inconsistencies in the law
The last three proposals are focused on updating and clarifying the interaction of the 1930 Act with subsequent provisions of insolvency and company law and with jurisdictional arrangements in cases with a foreign element. The proposed changes would remove inconsistencies and anomalies in the current law.
Developments in company and insolvency law reflected - There are a number of omissions from the list of circumstances in which the 1930 Act effects a statutory transfer. For example, no transfer is effected if the insured is struck off the register of companies under section 652 or 652A of the Companies Act 1985, and no mention is made of the orders which may be made against an insolvent partnership under the Insolvent Partnerships Order 1994. The proposed Order takes account of the wide variety of procedures to which individuals, companies and other bodies may now be subject and which might adversely affect a third party.
Operation in cases with a foreign element clarified - In cases with a foreign element it can be unclear whether the 1930 Act applies, or whether a court in Great Britain has jurisdiction to hear the third party's claim. This difficulty may increase as cross-border insurance activity grows. The proposed Order therefore sets out that, when deciding whether the Order applies, the only relevant issue is whether the conditions relating to the transfer of third party rights set out in the Order apply. If they do, then the Order applies. Whether or not other aspects of the third party's claim are foreign is irrelevant. This provision does not extend the geographical extent of the 1930 Act.
Legal expenses and health insurance covered - In Tarbuck v Avon Insurance Plc it was held that the 1930 Act does not enable a solicitor with unpaid fees to claim directly on the legal expenses insurance of an insolvent client, and the Law Commissions indicated that the same reasoning would appear to apply to health insurance or car repairs insurance. To remedy this, under the proposed Order a third party would be able to make a direct claim against an insurer even if the insurance covered liabilities to the third party voluntarily incurred by the debtor.
Proposal G is essentially an updating measure which was not addressed when the relevant insolvency and company legislation was passed, and which will promote clearer and more coherent law in that wider context which fairly reflects the interests of the parties concerned. The omissions from the list of circumstances in which the 1930 Act effects a statutory transfer to a third party, such as those involving struck-off companies and insolvent partnerships, constitute restrictions on the third party which it would be fair to remove; this is the effect of Proposal G. Proposal H reduces legal uncertainty, and therefore relieves both a psychological burden against taking appropriate legal action, and a financial burden created by the need for additional legal advice.
Proposal I would enable a third party to claim, on the legal expenses or health insurance of an insolvent client. This would extend the scope of the 1930 Act, but would be consistent with its policy of enabling third party rights to be effectively enforced. It would remove the burden on a third party of being unable to recover the full debt, and would not create any wholly new right to receive, or obligation to pay, money.
We do not believe that these provisions remove any necessary protection or any existing right or freedom. Clarification of the law and the removal of inconsistencies and anomalies would benefit all those involved by streamlining and simplifying proceedings. Although these proposals would increase to a limited extent the circumstances in which third parties can take proceedings, they would not impose any additional burden on insurers, who would have to resolve these issues with the receiver in insolvency proceedings in any event. It is anomalous that a claim cannot be made against the insurer in respect of liabilities to the third party voluntarily incurred by the insured and otherwise covered by the insurance, and this can result in unfairness.
The Law Commissions proposed that there should be a power to make amendments to accommodate future legal developments in insolvency law without having to introduce fresh primary legislation. We envisage that the relevant provisions of the proposed Order will be designated subordinate provisions so that they can be amended by a subsequent Subordinate Provisions Order.
We believe that the Law Commissions' proposals improve the current legislation and bring the law more in line with current commercial practices. They afford the third party a greater, more equitable degree of protection in establishing their claim against the insurer. The proposals introduce streamlined procedures and sensible clarifications to the law which will give access to effective remedies to third parties who are currently prevented from bringing a claim due to the cost, procedural effort and uncertainties involved in proceeding under the 1930 Act.
Each proposal for a Regulatory Reform Order must satisfy a number of legal tests. The questions in this document are designed to elicit the information that the Minister will need in order to satisfy the Committees that, among other things, the proposal satisfies these tests. In particular, the Regulatory Reform Act requires information on:
whether any of the proposals could remove any necessary protection;
whether any of the proposals could prevent any person from continuing to exercise any right or freedom which he might reasonably expect to continue to exercise and, if so, how he is to be enabled to continue to exercise that right or freedom;
whether any burdens are being imposed on any person in the carrying out of an activity;
whether any savings or increases in cost are estimated to result from the proposals and, if so,
the reasons why savings or increases in cost should be expected, and
if it is practicable to make an estimate of the amount, that amount and how it is calculated,
any benefits (other than savings in cost) which are expected to flow from the implementation of the proposals.
For this reason, we would particularly welcome your views on how each aspect of the proposed changes in this consultation document meets the following tests:
Necessary protection - the Minister making a Regulatory Reform Order must be of the opinion that it does not remove any necessary protection. This means that no order can be made unless the Minister is of the opinion that it would maintain any protections that the Minster considers to be necessary. Such protection relates to the checks and balances associated with a particular regulatory regime. The protection does not have to be statutory in nature and does not have to be for the purposes originally intended by Parliament. If the Minister considers a particular protection to be no longer necessary, he or she must provide the Parliamentary scrutiny committees with compelling evidence to support this view.
Rights and freedoms - an RRO cannot be made unless the Minister is satisfied that it does not prevent any person from continuing to exercise any right or freedom which they might reasonably expect to enjoy. This test recognises that there are certain rights that it would not be fair to take away from people under these procedures.
In order to provide for the effective reform of regulatory regimes, RRO's can re-state existing burdens and create new burdens. But where that is the case stringent additional safeguards apply:
proportionality - If a new legal burden is being imposed, or an existing burden retained or increased, then the Minister must ensure that it is proportionate to the benefit it brings. This means, for example, that imposing a burden of several thousand pounds on charities for some negligible benefit would not pass the test.
fair balance - before proposing any RRO that has the effect of imposing legal burdens, the Minister must be of the opinion that a fair balance is being struck between the interests of the person affected by the Order and the interests of the wider public. In this context, fairness does not mean that everyone must benefit. What it does mean is that the benefit to society as a whole must be such as to justify the additional burden on a small group or the individual.
desirability - the Minister making the Regulatory Reform Order must be of the opinion that the extent to which it removes burdens or brings other benefits makes the Order as a whole desirable.
The Act requires Departments to consult widely on regulatory reform proposals. It requires us to collect evidence on a number of issues from a wide range of consultees. A selection of the list of consultees, including the devolved administrations, to whom the document has been sent can be found in the Introduction to this document. A full listing is available on the Internet at:
Comments are invited from all interested parties, and not just from those to whom the document has been sent. A response form (with questionnaire) can be found at Annex D.
The Parliamentary Committees who will deal with orders under the Regulatory Reform Act have requested that a note explaining the Parliamentary process for orders to be made under the Act be annexed to all consultation papers so that consultees understand when and to whom they are able to put their views, should they wish to do so. This is set out in Annex B.
This consultation document follows the format recommended by the Cabinet Office for such proposals. The criteria applicable to all UK public consultations under the Cabinet Office Code of Practice on Consultation are set out in Annex E.
Normal practice will be for details of representations received in response to this consultation document to be disclosed, or for respondents to be identified.
Please identify any information which you or any other person involved do not wish to be disclosed. Paragraphs 17-20 of Annex B explains the provisions of the Regulatory Reform Act in this case.
You should note that the Scrutiny Committees will be able to request sight of your representation as originally submitted. We envisage that, in the normal course of events, this provision will only be used rarely and on an exceptional basis.
These reform proposals will require changes to primary legislation in order to give effect to them. The Minister could achieve these changes by introducing a Regulatory Reform Order under the Regulatory Reform Act 2001. Regulatory Reform Orders are subject to preliminary consultation and to extended Parliamentary scrutiny (by Committees in each House of Parliament) of any subsequently proposed Order. On that basis, the Minister invites comments on these reform proposals as measures that might be carried forward by a Regulatory Reform Order.
This consultation document has been produced because the starting point for regulatory reform proposals is thorough and effective consultation with interested parties. In undertaking this preliminary consultation, the Minister is expected to seek out actively the views of those concerned, including those who may be adversely affected, and then to demonstrate to the Scrutiny Committees that he or she has addressed those concerns.
Following the consultation exercise, when the Minister lays proposals before Parliament under the Regulatory Reform Act, he or she must also lay a report for consideration by the Scrutiny Committees setting out a summary of:
the burden imposed by the existing law;
whether any of those burdens are proposed to be removed or reduced;
how the proposals otherwise further the other objects of the Regulatory Reform Act (re-enacting proportionate burdens, introducing new but proportionate burdens, removing inconsistencies and anomalies);
whether there is 'necessary protection' and how it is to be continued;
how any reasonable expectation of the exercise of rights or freedoms is affected (if at all) and how the exercise can be continued;
how new burdens (if any) are both proportionate and, taking the proposals as a whole, strike a fair balance between the public interest and the interests of the persons affected by the new burdens;
whether an Order that imposes burdens is desirable in terms either of the burdens it removes or the other benefits it brings;
whether any parts of the proposed Order are being designated as 'subordinate provisions', allowing them to be changed by less elaborate Parliamentary procedures in the future;
what cost savings or increases are expected, and why;
what other benefits there will be from the proposals;
details of the consultation process;
any representations received as a result of that consultation; and
the changes made as a result.
On the day the Minister lays the proposals and report, the period for Parliamentary consideration begins. It lasts for 60 days, excluding Parliamentary recesses of more than four days. If you want a copy of the proposals and the Minister's report, you will be able to get them either from the Government department concerned or by visiting the Cabinet Office's website at www.cabinet-office.gov.uk/regulation/act/index.htm.
Both Houses of Parliament scrutinise regulatory reform proposals and draft orders. This is done by the Scrutiny Committees.
Standing Orders in the Commons stipulate that the Committee there considers whether proposals:
appear to make an inappropriate use of delegated legislation;
remove or reduce a burden or the authorisation or requirement of a burden;
continue any necessary protection;
have been the subject of, and take appropriate account of, adequate consultation;
impose a charge on the public revenues or contain provisions requiring payments to be made to the Exchequer or any government department or to any local or public authority in consideration of any licence or consent or of any services to be rendered, or prescribe the amount of any such charge or payment;
purport to have retrospective effect;
give rise to doubts whether they are intra vires;
require elucidation, are not written in plain English, or appear to be defectively drafted; or
appear to be incompatible with any obligation resulting from membership of the European Union;
prevent any person from continuing to exercise any right or freedom which he might reasonably expect to continue to exercise;
satisfy the conditions of proportionality between burdens and benefits set out in sections 1 and 3 of the Act;
satisfy the test of desirability set out in section 3(2)(b) of the Act;
have been the subject of, and take appropriate account of, estimates of increases or reductions in costs or other benefits which may result from their implementation; or
include provisions to be designated in the draft order as subordinate provisions; and in the case of the latter consideration the committee shall report its opinion whether such a designation should be made, and to what parliamentary proceedings any subordinate provisions orders should be subject.
The Committee in the House of Lords will consider each proposal in terms of similar criteria, although these are not laid down in Standing Orders.
Each Committee might take oral or written evidence to help it decide these matters, and each Committee could then be expected to report:
whether the Minister should proceed to lay a draft order in the same terms as the original proposal, or
whether amendment is necessary, or
whether the order-making power should not be used (for example, because of the significance or sensitivity of the proposal).
Copies of Committee Reports, as Parliamentary papers, can be obtained through HMSO. They are also available on the Parliament website at:
http://www.parliament.uk/commons/selcom/drghome.htm for the Deregulation and Regulatory Reform Committee in the Commons; and
http://www.parliament.the-stationery-office.co.uk/pa/ld/lddereg.htm for the Delegated Powers and Regulatory Reform Committee in the Lords.
After the 60 days for Parliamentary consideration, the Minister can lay a draft order before both Houses, this time for the approval of Parliament.
Each of the Scrutiny Committees examines the draft order to see how far its views have been taken into account. They report, within 15 sitting days, whether the draft order should be approved or not, and it would then be for the relevant House itself to take its final decision.
The final draft order then has to be approved by both Houses of Parliament before becoming law.
Responding to this consultation document is your first and main opportunity to make your views known to the relevant department as part of the consultation process. You should send your views to the person named in the consultation document (as described above). When the Minister lays proposals before Parliament you are welcome to put your views before either or both of the Scrutiny Committees.
In the first instance, this should be in writing. The Committees will normally decide on the basis of written submissions whether to take oral evidence.
Your submission should be as concise as possible, and should focus on one or more of the criteria listed in paragraph 6 above.
The Scrutiny Committees appointed to scrutinise Regulatory Reform Orders can be contacted at:
| Delegated Powers and Regulatory Reform Committee Tel: 020-7219 3103 |
Deregulation and Regulatory Reform Committee Tel: 020-7219 2830/2833/2837 |
Section 7 of the Act provides what should happen when someone responding to the consultation exercise on a proposed order requests that their response should not be disclosed.
The name of the person who has made representations will always be disclosed to Parliament. If you ask for your representation not to be disclosed, the Minister should not disclose the content of that representation without your express consent and, if the representation relates to a third party, their consent too. Alternatively, the Minister may disclose the content of the representation in such a way as to preserve your anonymity and that of any third party involved.
If you give information about a third party which the Minister believes may be damaging to the interests of that third party, the Minister does not have to pass on such information to Parliament if he does not believe it is true or he is unable to obtain the consent of the third party to disclosure. This applies whether or not you ask for your representation not to be disclosed.
The Scrutiny Committees may, however, be given access on request to all representations as originally submitted, as a safeguard against improper influence being brought to bear on Ministers in their formulation of regulatory reform orders.
The Law Commission and the Scottish Law Commission Report, Third Parties - Rights Against Insurers, recommended the repeal and replacement of the Third Parties (Rights Against Insurers) Act 1930. This impact assessment considers the overall impact of the proposals contained in the Report. Terms are used as defined in paragraph 1 on page 8.
The 1930 Act confers a right on a third party to deal directly with the debtor's insurer and receive any payment under the policy in circumstances where the debtor is insolvent, but insured. The Law Commissions' recommendations seek to remedy areas where the 1930 Act is not working well; to remove the need for multiple sets of proceedings; to reduce costs for both litigants and the courts; and to accommodate recent developments in insolvency and insurance.
To achieve these aims, the Law Commissions propose a number of procedural changes, which do not create any new substantive rights. These include enabling the third party to issue proceedings against the insurer before the liability of the debtor has been established; improving access to insurance information so that the third party can take an informed decision on whether to pursue or continue litigation; ensuring that the third party's rights are not adversely affected by voluntary arrangements under the Insolvency Act 1986 or by 'pay-first' clauses requiring the debtor to pay the claim before a right to indemnity arises; and updating the law to take account of developments in company and insolvency law generally.
In order to assess the impact of the recommendations made in the Law Commissions' Report, we consulted a number of Government departments whose policy was affected by the recommendations, the Association of British Insurers (ABI), the Insurance Law Sub-Committee of the Consumer and Commercial Law Committee of the Law Society, the Medical Protection Society and the International Underwriting Association.
Those affected by the Law Commissions' recommendations are as follows:
third party claimants who are owed money (for example injured former employees of defunct companies; victims of accidents for which the person to blame is unable to pay compensation (eg because of insolvency); claimants in claims involving public liability and professional indemnity insurance);
insurance companies;
other creditors of the insured party;
the legal profession, insolvency practitioners and the Official Receiver; and
the courts.
We were able to obtain no accurate data as to the number of claims that are made on an annual basis under the 1930 Act. Estimates provided by the ABI suggest that proceedings under the Act are rarely brought because of the difficulties of the existing procedure. The ABI estimates that there have been no more than 100 cases under the Act where liability or the status of the policy cover is in dispute, and probably nearer to 60 or 70, since inception of the Act in 1930. We were not able to obtain estimates of the number of cases where these issues were in dispute and proceedings were not brought because of the procedural difficulties of using the 1930 Act. The existence of the Act means, however, that in many more cases where there is no need for proceedings, the third parties receive the money they are entitled to under an insolvent debtor's policy.
We consider that the options available are:
option 1 - adopt the Law Commissions' recommendations; or
option 2 - make no change to the law.
The bodies we consulted were not able to provide any quantification of the possible benefits arising from the proposals. However, all supported the changes proposed. The following benefits to third parties and their legal advisers from the proposed reforms were identified:
the third party would be entitled to have a detailed picture of the insurance cover as soon as he has reasonable grounds to believe that the debtor is liable to him and is insolvent, and this should help to save time and expense;
the third party would be able, albeit to a limited extent, to ensure that the insurance cover is not invalidated either by circumstances leading up to or arising out of the debtor's insolvency or otherwise;
if a third party were able to take a single legal action against the debtor or the insurer or both, whichever is more convenient, this should save time and expense and would be a more efficient use of court and legal resources both generally and particularly where the debtor is a company which has been dissolved;
the third party should never be caught unaware of any settlement between the insurer and the debtor;
greater access to information would mean that third parties would have clearer knowledge of whether there are insurance funds available to pay if the debtor is held liable, and thus whether it is worthwhile to make a claim;
it was suggested that there could be savings in legal costs for the claimant of around one-third. The precise figure would depend on the size of the claim (for example in a case where the legal fees are currently in the region of £150,000, under the new regime there could be savings of around £50,000 for the third party).
For the insurer, the proposed reforms would have the following benefits:
claims would be less likely to be complicated by delayed notification or other procedural difficulties, and it is in the insurer's interest to settle all valid claims promptly;
the insurer would remain free to make a settlement agreement with the insured at any time before the debtor's rights are statutorily transferred;
whilst an insurer would not be able to rely on the defence that the debtor did not give notice of the claim and on certain other technical defences, there would be no other restrictions on the ability of insurers to rely against third parties on defences under the policy.
For others, the proposed reforms would have the following benefits:
by removing the need for multiple sets of proceedings, and because claims would be less complicated by delayed notification or other procedural difficulties, the costs and time of the action against the debtor would be saved. This would also be of great benefit to insolvency practitioners in insolvency proceedings, who would no longer have to expend time and money on dealing with such matters;
a further saving would arise from the fact that the third party would no longer have to restore a dissolved company to the register and have it wound up to access their rights. Such windings up cause delay and expense to third parties and also consume resources of both the Official Receiver and the courts.
As with benefits, the bodies we consulted were unable to provide any quantification of the possible costs arising from the proposals, but all support the changes proposed. We were informed by our consultees that the number of claims is likely to rise as a result of the Law Commissions' recommendations, but the extra claims would be valid claims that would be made now were the present regime not unduly complex and costly.
It was suggested that to a large extent the financial implications of the increase in claims will be offset by the reduction in litigation on worthless claims. It should also be offset by the saving in time on those cases that do proceed, under the new streamlined procedures. It should also be borne in mind that insurers generally deal directly with a third party without reference to the 1930 Act.
The insurance sector would be affected because it is likely to have to pay more claims than hitherto. As indicated above, it is estimated that there have been around 60 to 70 cases since the introduction of the 1930 Act, where liability or the status of the policy cover is in dispute. Although the number of such cases may rise significantly as a result of the proposed procedural improvements, it is still unlikely to amount to a substantial number. The procedural improvements are also likely to increase the number of claims where settlement can be reached without the need for proceedings. However, it is expected that the costs of any additional claims would be offset for insurers by the reduction in time and resources necessary to process the claims and the reduction in litigation. The overall indication from insurers is that the proposals would be broadly cost-neutral.
The provisions on disclosure of information to the third party proposed by the Law Commissions may involve some extra work on the part of insolvency practitioners in meeting the disclosure requirements. Any extra costs relating to this would be borne by the insolvent person's estate, which would affect the overall sum available to creditors. The Insolvency Service was unable to quantify the likely cost, but it is expected that this would be small.
If the Law Commissions' recommendations are not taken forward by legislation then the 1930 Act will remain in force and the problems which have prevented the Act from working well (for example, the duplicated procedures, limited access to information, lack of clarity in proceedings and the time and expense involved in enforcing the third parties' rights), will continue to occur.
There are no compliance or implementation costs.
Small businesses may be claimants in a claim and therefore they would benefit from implementation of the Report's recommendations. They may also benefit indirectly from the fact that less money would be spent by debtors in dealing with proceedings brought by third parties simply as a preliminary to establishing rights against an insurer, and therefore more money would be available for the creditors at large. It is unlikely that they would be affected by any other costs.
We carried out an initial assessment of the potential impact for competition in the affected markets, and we consider that the proposals will have no (or no appreciable) competition impacts. Although there may be an increase in successful insurance claims as a result of implementation, any increases are not considered likely to have a disproportionate effect on particular firms within the market. Furthermore, the costs to insurers appear likely to be mitigated by cost-savings resulting from the streamlining of procedures and a reduction in worthless claims. Any overall increase is likely to be recouped by insurers through increased premiums. It is not therefore anticipated that implementation would give rise to any competition concerns within the insurance market.
Any increase in insurance premiums resulting from implementation of the proposal would impact on all undertakings whose operations create a potential liability to employees or third parties against which it is their practice to insure. This could affect many markets, but we were unable to identify any in which this could be anticipated to have any appreciable consequences for competition.
It is believed by those consulted by the Department that the Law Commissions' proposals succeed in improving the current legislation and bring the law more in line with current commercial practices. They afford the third party a greater, more equitable degree of protection in establishing their claim against the insurer. The Commissions' proposals would introduce streamlined procedures and sensible clarifications avoiding the need to issue a number of separate proceedings with the consequent costs. They would give new effective remedies to claimants who are practically prevented from bringing a claim due to the cost, procedural effort and uncertainties involved in litigation under the 1930 Act. Overall, the benefits of the proposals outweigh any potential costs and relieve all the parties of the delay and expense involved in such claims.
Please respond as set out above.
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Ms Fovazia Khan
Lord Chancellor's Department
Civil Law Development Division
Room 3.S.4
Southside
105 Victoria Street
London SW1E 6QT
Tel: 020-7210 1219
Fax: 020-7210 1216
email: Fovazia Khan
The Department may wish to publish responses to this consultation document in due course. Please ensure your response is marked clearly if you wish your response or name to be kept confidential.
Consultees are invited to give reasons for their answers where possible.
Do you agree that the 1930 Act should be amended as the Law Commissions propose?
Do you agree that these proposals are suitable for implementation by Regulatory Reform Order?
a) Where the proposals reimpose existing burdens through re-enactment of the 1930 Act, do you agree that the burdens are proportionate, fairly balanced and desirable?
b) For each of proposals A, B, C, D and E which create new burdens, do you agree that the burdens are proportionate, fairly balanced and desirable?
c) All the proposals are intended to remove existing burdens. Do you agree that in doing so they do not remove any necessary protection or prevent any person from continuing to exercise any right or freedom which he might reasonably expect to continue to exercise?
a) Do you agree that the consultation paper and the partial Regulatory Impact Assessment correctly identify potential costs, savings and other benefits arising from the proposals?
b) Can you identify any other costs, savings or other benefits arising from the proposals?
c) Can you provide any views or information that might assist in quantifying each of the individual areas where there are costs, savings or other benefits?
Do you have any other comments or observations?
If you have any complaints or comments about the consultation process, you should contact the Lord Chancellor's Department's consultation co-ordinator, Laurence Fiddler, on 020 7210 2622 or email him at Laurence Fiddler. Alternatively, you may wish to write to the address below:
Laurence Fiddler
Consultation Co-ordinator
5th Floor
Lord Chancellor's Department
Selborne House
54-60 Victoria Street
London SW1E 6QW
The criteria in the Code of Practice on Written Consultation issued by the Cabinet Office is as follows:
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