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There are many rungs to climb on the insurance money ladder

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legal matters

Claimants are very interested in defendants' insurance. There is little point pursuing a man of straw. But claimants usually have no right to know anything about the other side's insurance, let alone tap into it directly. There is a notable exception provided by the Third Parties (Rights Against Insurers) Act 1930 that arises if the defendant is insolvent.

Section 1 of the Act says that where the insolvent insured has a liability to a third party (the claimant), the insured's rights against its insurer is transferred to the third party. In other words, the claimant gets a direct right against the insurer, and the insurance policy. Section 2 deals with rights of the claimant to information from the person in charge of the insolvency (for example, the liquidator), and from the insurer, that tells the claimant whether any rights against the insurer have been transferred to it.

That all sounds very satisfactory from a claimant's point of view. But judicial interpretation of the Act has created hoops through which a claimant has to jump in order to claim against the insurer.

Most recently, Galliford v Markel Capital (8 May 2003) looked at whether an adjudicator's decision was sufficient to give rise to a right under Section 1 against an insurer. Before looking at the adjudication decision, some background about the hoops created by previous cases may be helpful.

A third party only gets a right to pursue an insurer under Section 1 when a liability has been incurred. In Post Office v Norwich Union in 1963, the Court of Appeal said that meant that before getting a right, a claimant had to prove both liability and the amount it was owed. Broadly, a claimant needs a judgment against a defendant before any right against the insurer crystallises.

But before launching into proceedings to get such a judgment, it seems reasonable that a claimant might want some information about the policy it is looking to get the benefit of. After all, the claimant already knows that the defendant is insolvent. You might think that the provision of such information is the purpose of Section 2, and many commentators would agree. However, according to the High Court you would be wrong. Section 2 has been interpreted in the light of Section 1, and the courts have now twice held (Upchurch v Aldridge in 1993 and Woolwich BS v Taylor in 1995) that the duty to give information about the insurance to the claimant only arises after a right under Section 1 has been transferred.

This interpretation arises from the tense of one verb in Section 2, which says that a right to information arises 'for the purposes of ascertaining whether any rights have been transferred to and vested by the Act' (our italics). As Clarke, a leading textbook on insurance, points out, this interpretation largely defeats the purpose of Section 2. It requires the claimant to test the thickness of the ice by walking on it.

In its recent case, Galliford, having got an adjudicator's decision in its favour, issued proceedings against the insurer, arguing that by reason of the adjudicator's decision the rights against the insurer had been transferred to it by Section 1. The judge disagreed. The adjudicator's decision created a contractual obligation on the insured to pay. But while that obligation might be enforced by an application to the court, it might be successfully defended by the insured, for example on jurisdictional grounds. The adjudicator's decision, until enforced by a judgment, was not sufficient to give Galliford a right against the insurer.

Fortunately for Galliford, it seems to have managed to get information about the insurance policy at an early stage, and thereby avoided the need to use Section 2. If a prospective claimant knows nothing about the insurance arrangements, the combined effect of Upchurch and Galliford is that it would be obliged to pursue the adjudication, and then to enforce the adjudication award against the insured, before getting any right to information about the policy. Thereafter, it might be in a position to decide whether to take action against the insurer. So if your prospective defendant is insolvent, think twice before using adjudication to try to get hold of its insurance money - there are a great many rungs to that particular ladder.

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