Rights of Third Parties

Rights Of Third Parties 

1. Third Parties

An insurance contract is a contract between the insurer and the assured. The indemnity payable to the assured is of course of benefit to the assured. However, it may also be of benefit to third parties, for example those persons for whose benefit the insurance was taken out (even though they are not a party to the insurance contract) and those persons who have a claim against the assured.

There are a number of third parties who may claim against the insurer in respect of rights under the insurance contract. They are: 

a)Co-assureds and assignees.

b)Claimants under the Third Parties (Rights Against Insurers) Act 1930.

c)Claimants under the Third Parties (Rights Against Insurers) Act 2010.

d)Claimants under the Contracts (Rights of Third Parties) Act 1999.

2. Co-Assureds And Assignees

Co-assureds are persons who are insured in respect of the same subject-matter of insurance under the same policy. However, merely because they are insured under the same policy, they are not necessarily insured under the same contract.

Composite policies insure a number of assureds in respect of the same subject-matter of insurance where their interests are differentiated. 

Most co-assureds are insured under composite policies. In such cases, each co-assured is insured under a separate contract of insurance. The following authorities are crucial to understanding the mechanism of composite policies:-

a) Lumbermens Mutual Casualty Company v Bovis Lend Lease Limited

b) Enterprise Oil Limited v Strand Insurance Company Limited

c) IG Europe (Ireland) Ltd v Faraday Capital Limited

d) Law Society of England and Wales v Shah

e) William McIlroy (Swindon) Ltd v Quinn Insurance Ltd

f) Peel Port Shareholder Finance Co Ltd v Dornoch Ltd

g) BAE Pension Funds Trustees Ltd v Royal Sun Alliance Insurance plc

h) Cultural Foundation v Beazley Furlonge Ltd

Institute Clauses:

a)International Hull Clauses 2003, clause 36

Accordingly, in the event that a ship is insured by an insurer for two co-assureds, the shipowner and the mortgagee, the co-assureds are insured under a composite policy and under separate contracts of insurance. 

As such, any loss of or damage to the ship will mean that each co-assured may claim an indemnity under their respective contracts and each co-assured’s claim will not necessarily be prejudiced in the event that the other co-assured failed to discharge the duty of utmost good faith or was guilty of wilful misconduct.

However, the conduct of one composite co-assured may prejudice another co-assured’s insurance if, for example, one co-assured should have arranged to comply with a policy warranty applicable to both contracts; in that event, the breach of warranty may discharge the insurer from liability under both contracts.

The position is different in the case of joint assureds (e.g. the joint tenants of property, whose interests are inextricably intertwined and cannot be differentiated). They are insured under one contract of insurance and the conduct of one co-assured will affect the insurance of the other.

It may be that the assured assigns his or her rights in respect of an insurance claim to a third party. In that event, the third party will be entitled to claim the assured’s indemnity under the insurance contract, because the assignee will acquire title to the assured’s cause of action (the assignment might be effected equity, pursuant to section 136 of the Law of Property Act 1925 or to section 50 MIA). 

In the case of assignees, the assignee’s title to the assured’s claim against the insurer is only derivative and the assignee will have no better title to the claim than the title of the original assured, whereas the title of the co-assured exists independently of the title of the other assured. Therefore, if A has been guilty of a material non-disclosure, the insurer is entitled to avoid A’s insurance contract. If B is an assignee, the insurer can still avoid the insurance contract and deprive B of a claim.

However, if B is a co-assured, the insurer will not necessarily be able to avoid B’s insurance contract because of any breach of duty on the part of A, unless B is also in breach. 

3. Third Parties (Rights Against Insurers) Acts 1930 and 2010

Under a liability policy, the assured is entitled to be indemnified in respect of his or her liability to a third party. The measure of the indemnity is the amount paid or payable by the assured (section 74 MIA).

The assured will not be treated as sustaining a loss which falls for an indemnity unless and until there is a judgment or award determining the assured’s legal liability or there is a settlement of the claim against the assured (Post Office v Norwich Union Fire Insurance Society Ltd; Bradley v Eagle Star Insurance Co Ltd, compare Chandris v Argo Insurance Co Ltd. In that event, the liability of the assured is said to be ‘established’ or ‘ascertained’. For a strict application of this principle, requiring a liability established or ascertained by a settlement agreement to have the specific cost of discharging that liability identified in the settlement agreement, see Lumbermens Mutual Casualty Company v Bovis Lend Lease Limited, , this decision has recently been disapproved by two Commercial judges in Enterprise Oil Ltd v Strand Insurance Co Ltd and AIG Europe (Ireland) Ltd v Faraday Capital Limited.

Under the Third Parties (Rights Against Insurers) Act 1930, the third party is entitled to enforce any rights of the assured, who is liable to the third party, under the assured’s contract of insurance against the insurer, provided that the assured is bankrupt or makes a composition with his or her creditors, or (in respect of a corporate assured) a winding-up order is made or a resolution for voluntary winding-up is passed or a receiver or manager is appointed or possession taken by or on behalf of the holders of debentures secured by a floating charge of property subject to a charge or dealt with in a voluntary arrangement (see section 1). As with assignees, the third party’s rights against the insurer under the 1930 Act are only as good as the assured’s rights against the insurer.

This Act applies only to insurance contracts; it does not apply to reinsurance contracts (section 1(5)). Nor does it apply to compulsory insurance against oil pollution (Merchant Shipping Act 1995, sections 163–165, which make special provision for the rights of third parties).

The 1930 Act has been the subject of a Law Commission Report: Law Commission Report No. 272, ‘Third Parties – Rights Against Insurers’.

Following that Report, Parliament enacted the Third Parties (Rights Against Insurers) Act 2010. The Act entered into force on 1 August 2016 and will apply if either the assured’s insolvency occurred or the assured’s liability to a third party was incurred after that date. The 2010 Act is similar in effect to the 1930 Act, but among other things, it will streamline proceedings against insurers, provide for the third party’s right to information, and neutralise certain provisions in the policy (including the ‘pay to be paid’ provision, although even this is restricted in the case of marine insurance: see section 9). The requirement of an ascertained liability before proceeding against an insurer has been removed by the 2010 Act, although third party rights cannot be enforced against the insurer until liability has been established (see sections 1 and 9).

4. Contracts (Rights of Third Parties) Act 1999

Under section1 of the Contracts (Rights of Third Parties) Act 1999, if an insurance contract confers a benefit on a third party and if that third party is identified by name, class or description, the third party can enforce the terms of the contract which confer the benefit on him or her directly, even though not a party to the contract.

The effect of this Act can be excluded by the parties to the insurance contract when the contract is agreed (section 1). For example, the International Hull Clauses 2003, clause 36, effectively excludes the operation of the 1999 Act.

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