REUTERS | Mike Blake

Insurers back on the hook for third party claim

In November 2010, I reported on the TCC’s decision in McIlroy v Quinn. That judgment had flagged up yet another problem for a claimant seeking to take advantage of the Third Parties (Rights Against Insurers) Act 1930 (1930 Act). On 18 July 2011, the Court of Appeal described the TCC judgment as “remarkably unfair” and, crucially, wrong in law.

The insurance policy

The case revolved around a potentially very onerous clause in a public liability insurance policy providing that:

“any dispute between the insured and the company on our liability in respect of a claim…shall…be referred within nine months of the dispute arising to an Arbitrator”.

If this was not done then:

“the claim shall be deemed to have been abandoned and not recoverable thereafter”.

The adjoining owners’ claim against the contractor

The owners of an adjoining building sued a contractor, claiming damages caused by a fire that started on site. By January 2010, the adjoining owners had secured judgment against the contractor and damages had been assessed.

The contractor then promptly went into voluntary liquidation and the judgment was not satisfied, so the adjoining  owners sought to make use of the 1930 Act.

The adjoining owners’ claim against the insurer

Despite initial success against the contractor, the clause in the contractor’s policy seemed fatal to the adjoining owners’ prospects, at least in the TCC.

The contractor had sought indemnity under the policy before the trial of the adjoining owners’ action and the insurer had refused that claim. The TCC held that it was on this date that a dispute arose between the insured and the insurer and, as no arbitration had been commenced within the relevant period (nine months), the claim by the adjoining owners (now standing in the shoes of the contractor) failed.

The Court of Appeal comes through for the adjoining owners

The Court of Appeal has brushed the TCC’s approach aside. Relying on the Post Office case from 1967 (Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363) they said that it was “trite law” that an insurer’s liability under an indemnity policy does not accrue unless and until the existence and the amount of the insured’s liability to relevant third parties has first been established.

The Court concluded that the word “claim” referred to the insured’s claim against his insurers and not the third parties’ claim. In this case, the contractor’s claim did not arise until liability was established in January 2010. In the context of a public liability policy, the essence of a claim is the request for an indemnity on the basis of an established cause of action for a third party claim, where liability and quantum have been ascertained.

The Court of Appeal recognised the dangers of the TCC’s approach, which could lead to an insured becoming time-barred in a claim under a policy well before it has any cause of action to bring that claim. Before the trial of the adjoining owner’s action, the contractor could, at most, have sought a declaration as to liability (but not a finding as to the amount of its claim).

Third party may not know of short time limits in a policy

The practical difficulty for a third party in a case such as this, is that it may not know of short time limits in underlying insurance policies before it needs to rely on the 1930 Act.

Although possible changes are on the statute book (but not yet in force), it is unlikely that the revised provisions would have had any effect on the outcome of this case and third parties should take the necessary steps, as soon as possible once insolvency occurs, to obtain details of insurance cover.

Under the new Act (Third Parties (Rights Against Insurers) Act 2010), if and when it is brought into force, a third party can make the relevant enquiries of brokers as well as the insurer and the insured.

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