Draft Third Parties (Rights Against Insurers) Regulations 2016

Geoffrey Clifton-Brown Excerpts

Tuesday 12th April 2016 General Committees

[The Parliamentary Under-Secretary of State for Justice (Mr Dominic Raab)]

I beg to move,

That the Committee has considered the draft Third Parties (Rights against Insurers) Regulations 2016.

It is a great pleasure, Mr Davies, to serve under your chairmanship for what I think is the first time.

The draft regulations are to be made by the Secretary of State under the power in section 19 of the Third Parties (Rights against Insurers) Act 2010, as amended by the Insurance Act 2015. They can be made only if they have first been approved by both Houses of Parliament. They were considered and approved by the other place on 22 March. The purpose of the power in section 19 is to make provision adding or removing circumstances in which a person is potentially within the scope of the 2010 Act.

The draft regulations will add to the list of circumstances in which the 2010 Act may apply to corporate and other bodies that are subject to certain sectoral insolvency regimes or, with limited exceptions, have been dissolved. When the changes have been made, the 2010 Act will be able to be brought into force without adversely affecting people who are within the scope of the 1930 third parties legislation that is to be replaced by the 2010 Act, but are not within the scope of the 2010 Act. The reforms to be introduced by the 2010 Act are supported by insurers and claimants alike. The benefits of the legislation apply to insurance of all kinds and will be particularly beneficial in cases of long-tail industrial diseases, such as mesothelioma. To set the draft regulations in context, let me explain briefly the principles underlying the third parties legislation.

Third parties legislation has existed since the 1930s. It is so called because the claimant is a third party in relation to the contract between the insurer and the insured. The current legislation is the Third Parties (Rights against Insurers) Act 1930, which applies to England, Wales and Scotland, and the Third Parties (Rights against Insurers) Act (Northern Ireland) 1930, which applies to Northern Ireland. The purpose of the 1930 Acts and indeed the 2010 Act is to protect the interests of claimants against insured persons who have a liability to the claimant, but who no longer have effective control of their assets. Typically, this occurs if the insured person is insolvent.

The basic effect of the third parties legislation is to transfer to a third party to whom an insured has incurred a liability the contractual rights of the insured against the insurer as regards that liability. This has the effect that the proceeds of the insurance policy are paid to the claimant not the general creditors of the insolvent insured, which is particularly important when insurance is compulsory otherwise the purpose of having compulsory insurance would be negated. To put it crudely, the aim of the legislation is to prevent creditors from trumping victims. That is the basic point: a dry technical detail that is difficult to get one’s head around.

To trigger the application of the 2010 Act, an insured must both incur a liability to a third party against which it is insured and undergo an insolvency or analogous event specified in the 2010 Act. Unfortunately, following enactment of the 2010 Act, it was found, at least in some respects, to have a narrower scope than the 1930 legislation. This was partly a result of the terms used in the drafting of the 2010 Act and partly because of developments in insolvency law following the financial crisis of 2008.

The operative provisions of the 2010 Act have therefore not yet been brought into force and will not be until these defects have been remedied. It is this remedial process that is so essential to realising the benefits of the 2010 Act, which is intended to extend and improve the protection conferred by the 1930 legislation. That is the point of the regulations. Part of the remedial process was effected by amendments to the 2010 Act made by the Insurance Act 2015 and the draft regulations will complete the process.

Let me now describe the working of the amendments to be effected by the draft regulations. First, they extend the list of circumstances where the 2010 Act may apply by adding the sectoral insolvency or administration procedures listed or referred to in the provisions to be inserted in the 2010 Act by regulation 3 of the draft regulations.

Those additions cover the possibility of insolvency or administration under special legislative regimes that generally follow, but are distinct from, procedures under the Insolvency Act 1986 in a wide range of important business sectors where company failure has the potential to damage the public interest or cause market contagion, for example, the kind of things that might follow the collapse of a financial services, postal or energy utility company.

Secondly, regulation 4 extends the scope of the 2010 Act in relation to dissolved bodies, which do not have effective control over their rights and assets. The 2010 Act currently applies to dissolutions under sections 1001, 1002 or 1003 of the Companies Act 2006, but not to other types of dissolution. Regulation 4 broadens the scope of the application of the 2010 Act to include those other kinds of dissolutions, to ensure they are all covered.

The proposed coverage of dissolutions generally will, however, not extend to the dissolution of unincorporated partnerships. Our view is that that exception is sensible, as technically at least a partnership dissolves each time a new partner leaves or is added.

[Geoffrey Clifton-Brown (The Cotswolds) (Con)]

I am sure that in relation to regulation 4 my hon. Friend was coming on to explain the point made in paragraph 7.9 of the explanatory memorandum.

“Unincorporated partnerships are excluded from the dissolution provisions in regulation 4 and the provisions of regulations 5 and 6 because they dissolve whenever there is a change in membership (for example the retirement of one partner).”

The provisions are supposed to cover dissolutions in the sense of bankruptcy. The question I put to my hon. Friend is: what happens if an unincorporated partnership goes bankrupt? He will probably tell me that partnerships are jointly and severally liable, which they are, but what happens in the event that the partners themselves go bankrupt?

The explanatory note says:

“Regulation 4 inserts new section 6A in the 2010 Act, extending its coverage to all dissolved corporate and unincorporated bodies except when the body in question is an unincorporated partnership or is treated as not having been dissolved as a result of subsequent events (the latter may still be “relevant persons” by virtue of another provision).”

That last part is what makes the situation unclear. What is the position with unincorporated partnerships?

[The Chair]

I call the Minister, after that very long intervention.

[Mr Raab]

That was almost worthy of a separate speech, and perhaps my hon. Friend might wish to give one.

[Geoffrey Clifton-Brown]

Do not encourage me.

[The Chair]

No. That was quite enough.