Insolvent Professional? Claim Against Their Insurer

You believe a solicitor, accountant, surveyor or other adviser got something wrong and it has cost you money. Then you learn the professional has gone insolvent. It is natural to fear that your claim is now worthless.

Often it is not since most professionals carry insurance, and the Third Parties (Rights against Insurers) Act 2010 can pass their rights under that insurance to you, so you can pursue the insurer directly. Below is a comprehensive framework of the act and how it can be relevant to your case.

Can I Claim If My Professional Is Insolvent?

If the professional is “insolvent” in the way the Act defines and their insurance covers your claim, their insurance rights can pass to you. You must still prove fault and loss, and the insurer can still rely on the terms of the policy.

Professional indemnity insurance exists to pay out when a client’s negligence claim succeeds. Normally the professional tells the insurer, the insurer handles the claim and compensation is paid.

If the professional becomes insolvent first, there is a risk. The Act’s Explanatory Notes explain that the insurance money generally becomes part of the insolvent estate and can go towards other creditors instead of you. You may then receive only part of what you are owed.

How the Third Parties Act 2010 Works

The Act has been in force since 1 August 2016. If the professional is a “relevant person” under it, their rights under the insurance policy for your claim pass to you (section 1). That puts you in a position to pursue the insurer, but not to collect without proof. In practice:

• You can sue the insurer directly. You do not have to win a separate case against the professional first. In one set of proceedings the court can declare both the professional’s liability to you and the insurer’s potential liability (section 2).
• You still have to prove fault and loss. You cannot enforce the rights until the professional’s liability, including the amount, is established. That can be by a court declaration, a judgment, an arbitration award or an enforceable agreement (section 1(3) and (4)).
• The insurer keeps its defences. You are entitled to the declarations subject to any defence the insurer could have raised against the professional (section 2(3)).
• You cannot recover more than you are owed. The rights that pass to you do not cover any amount above the professional’s own liability to you (section 8).
• Some policy conditions cannot block you. The rights are not subject to a “pay first” condition, which would require the professional to pay you before the insurer must pay. Anything you do that would satisfy a policy condition is treated as done by the professional (section 9).
• You can ask for information about the insurance. Under section 11 and Schedule 1, you can send a written request asking whether a policy covers the claim, who the insurer is and what the policy terms are. The recipient must answer, or explain why not, within 28 days. Information protected by legal professional privilege does not have to be given.

Which Insolvencies Count?

The Act only helps if the professional is a “relevant person”. The main categories are:

• Individuals, such as sole practitioners: a bankruptcy order, an individual voluntary arrangement, a county court administration order or, with limits, a debt relief order (section 4).
• Companies and similar bodies: administration, a winding-up order or voluntary winding up, a receiver or manager appointed, or a voluntary arrangement or creditor arrangement in force (section 6).
• Dissolved companies: a body that has been dissolved can also count, unless it has since been treated as never dissolved (section 6A). One aim of the Act was to remove the need to restore a defunct company to the register before suing it.

A firm that has only stopped trading is not automatically covered. You can check an individual’s status on the GOV.UK bankruptcy and insolvency register and a company’s through GOV.UK’s company information service.

Closed Firm? Check Run-Off Cover

A closed firm is not always an insolvent one. Solicitors’ firms regulated by the Solicitors Regulation Authority (SRA) must buy run-off cover when they close, which lasts a mandatory six years. Since 1 October 2023 the SRA has run the Solicitors Indemnity Fund (SIF), which can respond to some claims made after those six years.

For other professions, such as accountants and surveyors, cover depends on the policy and the profession’s rules. Many professional indemnity policies work on a “claims made” basis. In simple terms, they respond to claims made while the policy is in force, not necessarily to when the mistake happened. That is one reason to act quickly.

How Do I Find the Insurer?

• Ask the professional, or whoever is handling the insolvency.
• Check your engagement letter or terms of business.
• Send a written information request under Schedule 1 of the Act.
• Send a letter of claim. The Pre-Action Protocol for Professional Negligence encourages a preliminary notice and a detailed letter of claim. Both ask the professional to tell their insurers.

Our guides explain how to start a professional negligence claim and what a letter before claim should contain.

What Happens After a Letter of Claim?

The protocol sets a timetable that both sides are expected to follow. These are targets, not guarantees:

• 21 days: the professional should acknowledge your letter of claim in writing
• 3 months: the professional then has three months from the acknowledgment to investigate and send a reasoned response, unless an extension is agreed
• 6 months: if the claim is disputed, negotiations should aim to resolve it within six months of the acknowledgment

If the claim is not resolved, court proceedings may be needed. Where the professional has become insolvent, this is also the stage at which your claim against the insurer comes into play.

What Defences Can the Insurer Raise?

Taking over the professional’s rights is not a guaranteed payout. Because you receive the professional’s rights under the policy, the insurer may argue, for example:

• The professional was not negligent, or your loss was not caused by the mistake;
• The policy does not cover this type of claim, or an exclusion applies;
• Your claim is above the policy limit; or
• Other policy terms were not met.

The Act limits some technical defences. For example, if the insured is a dissolved company, the insurer cannot enforce a condition requiring that company to provide information or help.

Do Time Limits Still Apply?

Yes. Insolvency does not stop the clock. Under the Limitation Act 1980, negligence and contract claims generally must be started within six years. For negligence where you did not know about the damage, section 14A gives the later of six years from when the claim arose or three years from when you first had the required knowledge. Section 14B sets a 15-year overall limit running from the negligent act or omission.

The 2010 Act also has special rules on time limits in section 12, so take advice quickly. See our limitation period guide.

How We Can Help

Our professional negligence team can review your claim against the professional, look at the legal merits and risks, check your deadlines and advise you on your options, including whether the 2010 Act can help in your situation.

How to reach us: Completing the case assessment form. Your enquiry goes straight to our professional negligence litigation team and is confidential. Please include a phone number so we can call you back, and tell us who advised you, what went wrong and when, how it caused your loss and your best estimate of the claim. We cannot advise non-clients, so advice follows once you instruct us.

Already have a solicitor? You can ask for a second opinion on your prospects, or ask about transferring your case.

You can also visit our professional negligence claims page.

This article is general information for England and Wales and not a legal advice.