A core principle of Irish contract law is that a person who is not a party to a contract does not have enforceable legal rights, even where the contract is intended to benefit that person. This principle applied equally to most insurance contracts. This core principle is now qualified in respect of certain insurance contracts with the coming into force of sections 21 and 22 of the Consumer Insurance Contracts Act 2019 (CICA) in September 2020.
Right of third party to claim against insurer
Under Section 21 of the CICA where a person (Insured) is insured against a liability that may be, and is incurred by the Insured to a third party consumer, the Insured’s rights against the insurer will transfer to the third party consumer where a) the Insured is dead, cannot be found, is insolvent or b) it is just and equitable to do so.
Section 21(3) bestows a right to information on a third party to seek information from the insurer (or any other person) regarding;
- the existence of a contract of insurance;
- the identity of the insurer;
- the terms of the contract; and
- whether the insurer had informed the insured of their intention to refuse liability.
Section 22 supplements section 21 and applies where the requirements under section 21 have been fulfilled. It allows the third party to bring proceedings directly against the insurer for a declaration of actual or potential liability to them. The insurer may rely on any defence which the Insured would have had available to them.
Therefore, insurers may be forced to disclose the existence of an insurance contract with an Insured in certain circumstances and may have to defend proceedings issued against them by a third party unrelated to the original insurance contract.
Origins of the New Sections
Sections 21 and 22 will have wide-ranging implications for insurers. The Report on Consumer Insurance Contracts by the Law Reform Commission (Commission) remarked that the rule on privity made it difficult for third parties to obtain benefits to which they were entitled, especially in instances where the third party was unable to recover directly against the insurer, even though the Insured had a valid insurance policy.
The Commission made specific reference to section 62 of the Civil Liability Act 1961, which provides for the ringfencing of monies payable under an insurance policy. It prevents these monies from being included as assets in bankruptcy proceedings, in the administration of the Insured’s estate, or in the winding-up or dissolution of a company. However, the Commission criticised the operational limits of section 62 whereby liability and quantum had to be determined in the underlying claim before the insurer was joined (see McCarron v Modern Timber Homes Ltd IEHC 530 and Hu v Duleek Formwork Ltd and Aviva Direct Ltd IEHC 50). Section 21(4) addresses this point. It allows the third party to issue proceedings against the insurer without having first established the Insured’s liability, albeit liability must be established to enforce the terms of the insurance contract.
In terms of difficulties for third parties in obtaining information from an insurer, the Commission referred to McKenna v Best Travel Ltd 2 ILRM 471. Under section 21 a third party, within a consumer insurance contract context, can now request fundamental information upon which to base their proceedings.
Insurers should be live to the possibility of a third party consumer, intended to benefit under an insurance contract that falls within the scope of the CICA, making a direct claim against them. Under the CICA, insurers have the same general policy defences to actions brought by third parties, as it would have had in actions brought by the Insured. In addition, insurers are entitled to set off any liabilities owed to them by the Insured, against any liability owed by the insurer to the third party.
If you would like to know more about the expansion of third party rights and how it may affect your business, then please contact one of the key contacts listed or your usual William Fry contact.
Contributed by Conor Forde