A fundamental consideration when embarking on any litigation is whether the defendant will be able to pay. In most cases, this is really a question of whether the defendant is insured (although in some cases a defendant may be uninsured and yet still have the means to pay).

What happens if the defendant is insolvent? 

Just because a potential defendant is insolvent does not close off the possibility of your client's claim being met by the defendant's insurer. If the defendant benefited from an insurance policy which covered them for the risk in question, then under the Third Parties' (Rights against Insurers) Act 2010 (the Act) it is possible for a claimant to bring a claim against the insurer direct.

How do I find this out?

In the first instance you should contact the liquidator. You can obtain their details from the Companies House website. The liquidator will have details of the defendant's brokers, who will be able to give you details of the defendant's insurance arrangements at the material time.

If the liquidator or the broker are unable to assist in providing the insurance details requested, you can also request information relating to the identity of the insurer and the terms of the insurance from any person that you reasonably believe could provide the information. This would include former employees. 

The liquidator will also give your client the opportunity to prove its claim in the bankruptcy. You should register your client's claim in any event as a fall-back position in the event that the defendant is declined an indemnity. 

What if the defendant's insurer declines to indemnify them?

Identifying a relevant insurer is only the first step. Under the Act the insurer is entitled to raise the same defences it could use against its insured, so an insurer can legitimately decline cover on the grounds that the defendant has breached a condition of the policy (such as the notification provisions or a "hot works" endorsement). 

If that happens, the Act permits you to request a copy of the policy terms so that you can test whether the insurer's declinature is valid, and to challenge it if it is not. If the insurer refuses to provide a copy, you do not have to establish that the claim is covered under the policy before commencing proceedings against them under the Act (BAE Systems Pension Funds Trustees Ltd v RSA [2017] EWHC 2082 (TCC)).  

If the claim is covered then the Act effectively transfers the defendant's rights under the policy to the claimant, who can then sue for an indemnity.

Can I request a copy of the defendant's insurance policy if the defendant is still solvent?

No. In Peel Port Shareholder Finance Company Ltd v Dornoch Ltd [2017] EWHC 876 (TCC) the claimant was concerned that whilst it had a strong claim on liability, the defendant might not have the means to pay (the claimant having advised at the pre-action stage that its insurers had declined an indemnity for breach of a "hot works" endorsement).

The claimant wished to challenge the insurer's declinature and sought pre-action disclosure of the defendant's insurance arrangements in order to do so. The court refused on the basis that there is no express statutory provision entitling a litigant to obtain a copy of the insurance policy of a solvent insured.

What do I do if my insured client has been dissolved?

Solicitors handling subrogated claims for insurers are often instructed to pursue a recovery claim quite some time after the underlying incident giving rise to the insured's claim took place. If the insured is a company it is important to check the company's status at the time you are first instructed, and to keep it under review.

Since legal proceedings in subrogation claims can only be issued in the name of the insured, if it transpires that by the time you come to issue the claim the insured has been dissolved you will need to take steps to restore the insured to the Company Register.

This can be done by making an application to the court under section 1029 of the Companies Act 2006. You should note, however, that the costs of this process will not normally be recoverable from the defendant. 

Further information

If you require information or advice on any of these issues, please contact Christian Charlesworth, Legal Director in our property risks team.

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.