Section 14: Effect of transfer on insured’s liability
73.This section sets out the effect of the statutory transfer on the third party’s rights against the insured. The section seeks to remove the uncertainty under the 1930 Acts about whether a third party can recover from the insured any of his or her debt which he or she is entitled to recover from the insurer under transferred rights. The Act provides that the third party is not entitled to do so.
74.Subsection (1) provides that a third party may not seek to enforce his or her rights against the insured to the extent that there is valid insurance in place covering the liability. This is because the insured’s rights against the insurer under the insurance policy have been transferred to the third party. The third party will only be able to seek payment from the insured to the extent that the insurance policy is ineffective – that is, where there is a gap between what is covered by the insurance policy (referred to as the “amount recoverable from the insurer”) and the full amount of the liability.
75.Subsections (2) and (3) cater for the situation where an insured has become a relevant person as a result of a voluntary procedure. These provisions preserve the ability of the third party to recover from the insured the amount by which the liability exceeds the amount recoverable from the insurer. However, the voluntary procedure will apply to the amount of liability which the third party could seek to recover from the insured, so it may affect the amount which is actually recoverable.
76.Subsections (4) and (5) play a similar role to subsections (2) and (3) in respect of a liability subject to a composition approved in accordance with Schedule 4 to the Bankruptcy (Scotland) Act 1985. They remove, either partially or completely, the third party from the scope of this voluntary procedure.
77.Subsection (6) defines the term “amount recoverable from the insurer”, used in subsections (1), (3) and (5). Subsection (6) provides that in calculating the “amount recoverable from the insurer”, that amount does not include any money which cannot be recovered, because:
the insurer itself has also become a “relevant person”, and is therefore unable to pay the debt, or
the contract of insurance provides for a limit on funds available to meet claims which fall in the same category as the third party’s claim.
78.The effect of subsection (6) is therefore to protect a third party where he or she is unable to recover from the insurer, due to either of the circumstances outlined above. Any amount that the third party is unable to recover for these reasons will not be treated as part of the “amount recoverable from the insurer” for the purposes of subsections (1) to (5), and so the third party will be entitled to recover that amount from the insured instead.
79.Subsection (7) relates to the Financial Services Compensation Scheme established by virtue of Part 15 of the Financial Services and Markets Act 2000. A third party may be eligible to make a claim under the scheme in respect of an amount which he or she cannot recover from the insurer because of the insurer’s own financial difficulties. If a third party is eligible but does not make such a claim, this may reduce the amount he or she will be able to claim from the insured.