Techlink Bulletin dated 19th May 1999 considered in detail the provisions of the Contracts (Rights of Third Parties) Bill and its implications for the financial services industry. The Bill received Royal Assent on 11th November 1999. The Act came into force on the day on which it was passed but does not apply in relation to any contracts entered into before the end of the period of six months beginning with that date unless the contract expressly provides for the application of this Act in which case the provisions of the Act may apply immediately. The provisions of the Act are particularly relevant to insurance companies where the benefits of the insurance contract may indeed in some cases be intended for a third party.
There are two key aspects of this legislation which must be considered by companies providing standard wordings of contracts such as policy conditions.
The first aspect of the new legislation is that it will now be possible for a third party to be able to enforce a term of the contract in his own right. This will happen if the contract expressly provides that the third party may do so or the term of the contract purports to confer a benefit on him.
There may be circumstances where it will appropriate (indeed perhaps desirable) for a third party to be able to enforce the contract. For example, where a policy is issued subject to trust from outset, it should now be possible for the contract to state that the trustees, appointed by the settlor in his request to the life insurance company to issue the policy subject to trust, will be able to enforce the contract. This would mean that it would no longer be necessary for a formal assignment of the policy document to take place from the settlor to the trustees in order to vest title in the trustees, instead the title would be granted by virtue of the express contract provision.
In other circumstances, particularly where insurance policies are written for the benefit of employees, such as group permanent health insurance or group critical illness cover, the contract could provide specifically that, in respect of cover on an individual employee, such employee could enforce the contract. This would avoid the additional formalities of the employer having to become involved in any claims process.
It will, of course, be for the insurance company to determine whether they wish to offer such options.
Conversely, it is recommended that all insurance companies review their existing policy wording to ensure that they do not inadvertently include terms that could be construed as purporting to confer a benefit on a third party. If the intention is to exclude third party rights then it would be prudent to expressly state in the document that no other party may benefit from the contract.
If provisions are made for a third party to be able to benefit from the contract, insurance companies must consider their administrative procedures with regard to making and dealing with claims from a third party as well as the necessary system requirements for appropriate record keeping with regard to any third party rights.
If any amendments to the policy conditions are necessary the insurers should take account of the provisions of the Unfair Contract Terms Regulations 1994.
It is clear that with the passing of this Act it is necessary for all insurers to undertake a review of the their policy wordings and trust processes. However, anecdotal evidence so far suggests that this action has not yet been undertaken by all concerned.