Over the Insured's Dead Body

13 September 2017. Published by Tom Toulson, Associate

One year on from the entry into force of the Third Parties (Rights Against Insurers) Act 2010 and the fun and games are just getting started.

It turns out cases about the Third Parties (Rights against Insurers) Act 2010 are like buses: you wait a year for one, then two come along at once. And so the High Court has given us not one, but two recent judgments that map out the territory created by the new(ish) Act.

But first, a quick recap

The 2010 Act finally came into force on 1 August 2016. The idea was to make it easier (procedurally speaking) for claimants to sue insurers directly when the Insured has gone belly-up. The prior regime basically required Joe Claimant to get Belly Up Ltd restored to the register of companies, just for the privilege of suing them so that they could then go after the Insurers.

The 2010 Act was supposed to make things simpler. Under the Act, a claimant needn't first establish that the Insured was liable, or that the policy should cover the liability, they could ask the court to settle both questions. This is spelt out in section 2 of the Act, which says:

(1)        This section applies where a person (P):-

(a)        claims to have rights under a contract of insurance by virtue of a transfer under section 1, but

(b)        has not yet established the insured's liability which is insured under that contract.

(2)        P may bring proceedings against the insurer for either or both of the following:-

(a)        a declaration as to the insured's liability to P;

(b)        a declaration as to the insurer's potential liability to P.

Now you would be forgiven for thinking the above is all fairly straightforward and, in this brave new world, everyone would know where they stand. Alas, that would be to underestimate litigators' penchant for "testing boundaries". It also glosses over the Act's transitional provisions, which govern which regime applies, depending on (a) when the Insured kicked the bucket and (b) when the Insured "incurred a liability" (more on that below) to the claimant. If both these events happened before the Act came into force (i.e. before 1 August 2016) the old regime will still apply.

So what do the recent cases tell us?

Lesson number 1: what "incurred a liability" means

In Redman v Zurich Insurance it was not disputed that the insured had been dissolved over two years before the 2010 Act came into force.  The question was, when did the insured "incur a liability"? If it was before 1 August 2016 then the old regime would apply. There was no doubt that the relevant damage had occurred well before that date.

Now you might think it is trite law that a person incurs a liability when all the elements of the cause of action are in place (and not when liability is crystallised by a judgment or settlement etc.) but the Court in this case allowed the arguments to be run again. Indeed, this case was allowed to proceed as a "friendly action" on a question of principle, in part, because the judge was apparently told that hordes of claimants were lining up at the gates of the 2010 Act, trying to squeeze their claims through the transitional provisions via this very point.

It fell therefore to Turner J, to set the record straight by reminding them of the words of Lord Denning: "So far as the liability of the insured is concerned, there is no doubt that his liability to the injured person arises at the time of the accident, when negligence and damage coincide."  

In other words, move along folks. Nothing to see here.

But that was not the only approach tried by the claimant in this case. In what the judge described as a "brave submission" it was argued that the application of the 1930 Act "does not preclude the retrospective but parallel operation of the 2010 Act". Turner J gave this short shrift: "There are many powerful objections to this approach not the weakest of which is that it is wholly inconsistent with the wording of section 1 and schedule 3 of the [2010] Act". 

In a nutshell then, the case tells us you can't sue an insurer under the 2010 Act if the damage (plus duty, breach and causation) occurred before 1 August 2016 (and the Insured went bust before that date).  Now there may be many cases where it is difficult to say when precisely the damage occurred (eg mesothelioma cases), but that was not a reason for bending the interpretation of the transitional provisions.  

Lesson number 2: you don't need to establish coverage to bring proceedings under the Act

If the claimant's approach in the previous case was "brave" then the argument advanced by insurers in BAE Systems Pension Funds Trustees v Royal & Sun Alliance Insurance might perhaps be described as "courageous".

The claimants sought to add the insurers to the proceedings as a co-defendant to the claim after the insured went bust (in February 2017); so it would seem we are in the new Act's territory. However, insurers argued that section 2 of the Act was not engaged because the policy did not provide cover in respect of the claim. The court was not persuaded. It found it was not necessary to establish the coverage position before section 2 is engaged, "On the contrary, Section 2 provides the mechanism by which such liability is or is not established."

As a footnote, perhaps the more interesting part of the judgment dealt with the question of whether the court's jurisdiction was ousted by the particular dispute resolution provisions of the policy. The policy in question (confusingly) contained both a clause referring disputes as to its interpretation to the French courts but also a provision referring coverage disputes to arbitration.  The court found it did not have to decide which clause should pick up the coverage dispute in this case; either way, it was clear that coverage questions should not be determined by the English courts. The result? The claimants were allowed to join the insurers to the proceedings for the purposes of establishing the insured's liability to the claimants - i.e. for a declaration under s.2(a) - but the proceedings under s.2(b) were stayed, pending resolution by the French courts or arbitration.

Final thought

The above cases are useful illustrations of how the new rules work in practice. They show us that the transitional provisions are fairly clear, and the courts will have little difficulty in interpreting them. Doubtless there will be other cases which test the boundaries, some of which may raise more difficult questions of interpretation. However, for the time being, claimants and insurers can take comfort from the fact that the new provisions appear to be working and the courts are offering clarity in this area.