When a defendant becomes insolvent during a professional negligence claim, a claimant may understandably worry whether the door to recovering damages is now closed. Provided the defendant is insured, however, a claimant may be able to recover damages by claiming against the defendant’s insurer. Here, we explore how this can be done, and why claimants need to act quickly.
A defendant’s insolvency during a claim can often significantly reduce a claimant’s chances of recovering adequate damages. Whilst the claimant (now an unsecured creditor) may receive a small portion of any assets that are distributed to creditors during the insolvency process, this will likely be significantly less than what they would have received in damages for a successful claim.
There may, however, be a further option if the insolvent defendant has taken out professional indemnity insurance.
What is a professional negligence claim?
Professional negligence claims hold professional advisers accountable for a breach of their duty of care that results in a recognisable loss for the client. This could be, for example, when an adviser makes an error or omission, or provides negligent advice that causes the client to lose money or business.
To offset the often sizeable sums of such claims (which can reach up to £50m in certain cases), most professional advisers will be required to have professional indemnity insurance. This usually covers the legal costs, expenses, and potential compensation associated with such claims.
Indeed, professional indemnity insurance is increasingly important for professional advisers, particularly those working in the legal, accountancy, and construction sectors, due to an increase in litigation and risks arising from the use of technology and heightened regulations, with the UK professional indemnity insurance market worth more than £3bn in policy premiums.
How can a claimant make a claim against an insurer?
Prior to 2016, claimants could recover damages from the insurer of an insured, insolvent defendant (‘the insured’) via the Third Parties (Rights Against Insurers) Act 1930 (‘the 1930 Act’).
This essentially transferred the insured’s rights against their insurer to the claimant.
Whilst the 1930 Act provided a route to securing damages in the event of a defendant’s insolvency, it did come with several significant hurdles that introduced additional costs. These included requiring the claimant to:
- restore the dissolved company to the register of companies;
- obtain leave of the court to allow proceedings to commence;
- secure a judgment against the insured prior to commencing proceedings against the insurer; and
- commence separate proceedings against the insurer for claiming damages.
The Third Parties (Rights Against Insurers) Act 2010 (‘the 2010 Act’), which came into force on 1 August 2016, solved many of these problems.
Much like its predecessor, the 2010 Act allows claimants to claim directly against an insurer to recover losses if the defendant is, or has become, insolvent.
It also provides for an easier and less expensive process for claimants by:
- no longer requiring a claimant to restore a company to the register of companies;
- allowing a claim to be made directly against the insurer rather than having to make a claim in the insolvency proceedings of the defendant;
- using the same set of proceedings to deal with the insured’s liability in the professional negligence claim and any policy coverage issues with the insurer; and
- making it easier for a claimant to obtain information on the insured’s coverage earlier in the process.
How can I progress a claim against the insurer?
First, claimants must verify that the insured’s policy covers the loss being claimed. Under the 2010 Act, a claimant has the right to request the following information from any party that it believes can reasonably provide it, such as the insured, the insurer, or the insurance broker:
- whether there is an insurance contract covering (or potentially covering) the relevant liability;
- who the insurer is and what the policy’s terms are;
- whether the insured has notified the insurer of the claim;
- if the insurer has denied liability, whether there are, or have been, any proceedings between the insured and the insurer in respect of the liability, as well as details of those proceedings; and
- whether the insurer has already paid out from any funds available and, if so, how much.
The recipient must reply to this request within 28 days.
Once the claimant is satisfied that the insurer has liability, they can proceed. Claimants should be aware, however, that there are several defences available to an insurer, including the insured’s non-payment of premium or their failure to comply with a policy condition, such as timely notification.