05 June 2013

Side stepping the middle man: third party rights against insolvent insureds

A decision in the Supreme Court of Bermuda has considered the rights of third parties to pursue claims directly against insured persons who have become insolvent. This is of particular interest to Guernsey and Jersey as both have similar third party legislation.

Side stepping the middle man: third party rights against insolvent insureds

The decision in Re Kingate Management Limited (in Provisional Liquidation) dealt with a number of issues including an application by a third party to continue proceedings against a Madoff casualty, Kingate Management Limited (the Company) which was in provisional liquidation.  The Company had no significant liquid assets but did have insurance policies. 

In considering the application, the Bermudan Court looked at Bermuda's Third Parties (Rights Against Insurers) Act 1963 which provides that an insolvent insured's rights against a liability insurer are transferred to and vested in a third party to whom the insured is liable.   This can be very useful to a third party who otherwise would have to prove in the liquidation of the insured together with all the other creditors.

The Bermudan Court confirmed the operation of the legislation and held that the third party should be able to continue their action.  The court also dismissed the suggestion that the third party should simply file a claim (prove) in the Company's liquidation in respect of the debt on the basis that this was "highly artificial" and, given that there would be no assets to distribute, a "barren exercise".  In any event, the third party's claims would not impact on the pool of assets available to the Company's creditors in the liquidation, because the third party claims attached to the insurance proceeds which (by operation of the legislation) belonged to the third party.

The Bermudan Court also considered the duty under the legislation on the insolvent insured and the appointed insolvency practitioner to disclose "such information as may reasonably be required by him for the purpose of ascertaining whether any rights have been transferred to and vested in him by this Act and for the purpose of enforcing such rights".  The Court described the third party's rights here as being both broad and flexible.

Guernsey and Jersey have the Third Parties (Rights against Insurers) (Guernsey) Law, 1936 and the Third Parties (Rights against Insurers) (Jersey) Law, 1948, respectively. Those statutes are in substantially the same terms as the Bermudan legislation, as all three were modelled on the UK's Third Parties (Rights against Insurers) Act 1930.  The decision in Re Kingate Management Limited (in Provisional Liquidation) should therefore be of comfort to creditors of an insolvent insured in Guernsey or Jersey whose claim is covered by an insurance policy held by the insolvent insured.

Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.

© Carey Olsen 2013

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