Third Parties (Rights Against Insurers) Act 2010 developments

There have been two recent judgments in relation to the Third Parties (Rights Against Insurers) Act 2010 of interest to the insurance market. As the intention of the 2010 Act is essentially that claimants are placed in the same position as regards their claim as if the insured had not been placed into an insolvency procedure, the outcome of these cases may give some pause for thought.

Reminder

The 2010 Act allows a third party claimant to step into the shoes of the insured, where the claimant has a claim against the insured and that insured has entered an insolvency procedure.  The claimant can bring a claim against insurers, both to establish the insured’s liability to the claimant, and the insurer’s liability to indemnify that claim under the policy. Both aspects of the claim can be brought in the same action without the need to join the insured¹. The claimant has no greater rights under the policy than the insured, and the insurer is entitled to raise any policy defences against the claimant that it could have raised against the insured.

Scotland Gas Networks v QBE²

In this matter it was held that where the 2010 Act applies, insurers cannot go behind a judgment on the underlying claim against the insured, argue that there was no liability and hence the policy does not respond.

Judgment

This is a Scottish law decision of the First Division, Inner House, Court of Session (the equivalent of the Court of Appeal in England and Wales). It is very likely to be persuasive in the Courts of England and Wales.

The pursuer (claimant) was the owner and operator of gas pipelines. It claimed against a company, Skene, and its sub-contractor, alleging a lack of care and nuisance when blasting, undertaken as part of quarrying works, caused a landslip. As a result, rock supporting gas pipelines was fractured and was likely to collapse risking a major escape of gas, and the pipeline had to be diverted away from the quarry. The pursuer sought £3 million in damages from Skene, which went into liquidation, did not defend the claim, and so decree by default (equivalent to judgment by default in England) was granted in the sum of about £3 million to the pursuer.

In this claim, the pursuer sought to recover these damages from Skene’s public liability insurers under the 2010 Act.  Insurers resisted the claim. The Act requires that an insured has incurred a liability that is insured and section 1(4) indicates the various ways that a liability against the insured may be established including “by a judgment or a decree” (s1(4)(c)). Insurers argued that no liability had been established as the decree had been given in pursuance of the rules of court, and the liability did not arise out of an insured peril. This was rejected at first instance and there was an appeal.

The Court of Session rejected this appeal. It found that the effect of s1 was that once the insured’s liability to the third party had been established by one of the methods set out in subsection (4) the liability may be enforced against the insurer (subject to establishing policy coverage) without the need to establish liability again.

Insurers had argued that the term “damage” in the policy was defined and depended on tangible property loss or damage, and there was an exclusion for pure financial loss. Insurers said that the decree by default was not damages but an obligation to pay a penalty, and so not insured. This was rejected on the basis that prior case law made clear that a decree in these circumstances arises from the cause of action itself. 

Insurers also sought to rely on the Court of Appeal judgment in AstraZeneca v XL³. In this judgment Clarke LJ stated that the existence of a liability has to be established to the satisfaction of the insurer, or by a judgment in relation to that dispute. It is not enough that the claimant has a judgment against the insured, or the insured has agreed to settle the liability claim. However, the Court of Session noted that this case concerned a different set of circumstances (i.e. whether a reinsurer was obliged to indemnify an insurer that had settled the claim without establishment of liability) and that in the situation addressed by the 2010 Act, that inconvenience had been removed and  s1(4) was clear.  The wording of s1(4) Act did not restrict the word “decree” to one pronounced after a consideration of the merits. 

Further, the judge said that there was no injustice to the insurer which could have, for example, assumed responsibility for the defence of the underlying action against Skene. 

Comment

Subject to any appeal, the case makes clear that where there is a risk of insured insolvency, liability insurers need to be even more aware of any litigation or potential litigation against the insured as they will be bound by a judgment establishing liability, even if it does not follow a consideration of the merits. 

Of course, if there is a default in the defence of the underlying claim, it is possible that this may be in breach of the policy terms and conditions.

Riedwig v HCC

In this matter it was held that liability insurers defending the underlying liability claim in place of the insured under the 2010 Act cannot bring a contribution claim against a third party that may be liable for the same damage as the insured.

Judgment

The claimant alleged that a company of surveyors negligently overvalued a property and was liable for damages to her. The surveyors went into liquidation and so the claimant pursued her claim for negligence against the surveyors’ professional indemnity insurer under the 2010 Act.

The insurer argued⁴ that the claimant’s solicitors had also provided negligent advice in respect of the transaction and that the surveyors would have been entitled to bring a claim for a contribution against the law firm as both were liable for the “same damage” under the Civil Liability (Contribution) Act 1978⁵. It was accepted by both parties for the purposes of the application that this was correct in principle, i.e. that the surveyors and the law firm were potentially liable for the same damage.

The insurer put forward that it should be able to bring the contribution claim, as the 2010 Act meant that the insurer effectively stood in the shoes of the insured to allow the claim to proceed. The insurer should therefore be permitted to rely, in its defence of the liability aspect of the claim, on any points the insured could rely on. The insurer said that case law had established a broad formulation of entitlement to contribution under the 1978 Act.

The judge, Master Brightwell, rejected these arguments, holding that following the analysis in Bovis Construction⁶ as approved in Royal Brompton Hospital, the insurer does not inflict damage on anyone, except in failing to meet its obligations under the insurance, and that would comprise damage to the surveyors not the claimant. Although the 2010 Act allows a mechanism for a claimant to pursue the insurer in place of the insured, the insurer’s liability still flows from its obligation to the insured.  Therefore, insurers were not allegedly liable for the same damage as the law firm.

It was suggested that, if the application was rejected, the insurer might join the surveyors, which might then pursue the Part 20 contribution claim, or that if insurers were ordered to pay a sum it would be subrogated to the surveyors’ rights, but this was not considered by the judge further.

Comment

Again subject to any appeal, the result of the judgment is that insurers are in a potentially worse position under the 2010 Act then if they were indemnifying a claim being pursued against a solvent insured. The insurer in such a situation might wish to consider whether a separate subrogation claim was possible to recover any contribution further down the line.

Footnotes

1. Thus replacing the previous regime under the Third Parties (Rights Against Insurers) Act 1930, where a two stage process of establishing liability against the insured and then pursuing the rights under the policy existed.
2. [2024] CSIH 36.
3. [2013] 1 CLC 478.
4. In an application to add a Part 20 claim.
5. Insurers also sought to add an individual third party to the claim, a business adviser and lawyer who advised the claimant – the same considerations apply.
6. [2001] 1 Lloyd’s Rep 416.