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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Third Parties –Rights Against Insurers [2001] SLC 184(5) (Report) (July 2001) URL: http://www.bailii.org/scot/other/SLC/Report/2001/184(5).html Cite as: [2001] SLC 184(5) (Report) |
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PART 5
INSURERS' DEFENCES
1 Introduction
5.1 Rights transferred to a third party under the 1930 Act remain subject to the terms and conditions in the insurance contract. In the consultation paper we examined the difficulties this may cause the third party and, in particular, the consequence that the insurer may be entitled to rely on a default of the insured as a defence to a claim brought by the third party.[1] We asked consultees whether the third party's lot should be improved under a new Act and, if so, how this might be done.[2]
2 current law
3 Insurers' defences to an insurance claim by insured
5.3 The rights of an insurer who can identify a breach of the insurance contract will depend on the nature of the relevant clause. One possibility is that the breach enables the insurer completely to avoid liability under the policy. This will be the case first, if the clause is a warranty[3] or a condition precedent to the liability of the insurer;[4] and, second, if the breach amounts to a repudiation of the policy as a whole.[5] In Alfred McAlpine plc v BAI (Run-Off) Ltd,[6] the Court of Appeal identified a third way in which the insurer may be able to avoid liability. The court held that a breach of contract might be a repudiation, not of the entire insurance contract, but of the particular claim under it. Whether this is the case or not depends on the seriousness of the breach.[7]
5.5 Prejudice suffered by the insurer as a result of a breach is not relevant to the question of whether the term breached is a warranty or a condition precedent[8] and is probably not relevant to the question of whether the breach amounts to a repudiation.[9] It is clearly relevant to the question whether or not the term breached is an innominate term. It may be taken into account when calculating damages.[10]
5.6 An insurer may also have defences which do not depend on a breach of the insurance contract. In particular, if the insured has made a misrepresentation, an insurer may, depending on the circumstances, be entitled to avoid the contract altogether or to counterclaim for damages. An insurer may also be able to rely on a breach of the insured's duty of utmost good faith if the insured has failed to disclose material facts to the insurer. [11]
5.7 It is important to note that, in practice, insurers often do not rely on their strict rights where there has been non-disclosure, misrepresentation or breach of warranty on the part of the insured. They may voluntarily choose not to rely on certain defences[12] or they may be bound by codes of best practice, such as the Statement of General Insurance Practice.[13]
4 Insurers' defences to a claim by third party under the 1930 Act
5.8 The rights of the insured against the insurer transferred to the third party by section 1 of the 1930 Act are subject to the conditions and defences in the insurance policy. As Harman LJ held in Post Office v Norwich Union Fire Insurance Society Ltd,[14] the third party cannot "pick out the plums and leave the duff behind". As a result, the insurer may, for example, be able to rescind the insurance contract for non-disclosure of material facts or deny liability on the grounds of a breach of a condition in the policy.[15]
5.9 As we pointed out in the consultation paper,[16] a breach of the insurance contract may well occur around the time of a statutory transfer.[17] If this does occur, the third party may not be able to cure the breach, either because the term in question requires the insured to do something personally,[18] or because he is not aware of it in time,[19] or because he lacks the financial resources to do so. [20]
5 Consultation
5.10 In the consultation paper, we suggested that the particular problems faced by third party claimants under the 1930 Act might justify restricting the ability of insurers to rely on defences against them. We consulted on a number of general bases for such restrictions.[21] We also consulted on a number of specific restrictions to policy defences.[22]
5.11 There was little support from consultees for general restrictions on the ability of insurers to rely on policy defences. While many consultees agreed that the right of insurers to rely on a breach of an insurance contract so as to avoid liability altogether was too extensive, most felt that this was not a problem which should be addressed in the narrow context of a reform of the 1930 Act. The view was that, after the statutory transfer, the third party should be subject to the same generally prevailing insurance law, with its imperfections, as was the insured before transfer. We agree, and have taken account of the lack of support for most of our reform options.[23]
5.12 Opinion was also largely opposed to specific restrictions, though a number of consultees supported restrictions on the use of pay-first clauses and on clauses requiring the insured to provide information and assistance. There was no consensus on whether the insurer should be prevented from relying on breaches of notice requirements in "claims made" policies where late notification provides a defence to a claim.[24] A large majority of consultees who addressed the issue agreed that a third party should be able to satisfy procedural requirements such as notice provisions imposed on the insured by the insurance contract.
6 reform recommendations
7 Insurer's defences to a claim under the draft Bill generally
5.13 As we have seen, the case law on the 1930 Act is clear that rights under the insurance contract transferred to the third party are subject to the defences which the insurer could have used against the insured.[25] We have also seen that consultees supported this aspect of the existing regime, and urged caution in respect of our suggestions for departing from it in particular circumstances. [26]
5.14 We have adopted this approach. As a result of the retention of the concept of statutory transfer in the draft Bill,[27] the insurer defending a claim from a third party will, as under the 1930 Act, generally be entitled to rely on any defence it would have been entitled to rely on as against the insured. We recommend a limited number of enhancements to the third party's rights after the statutory transfer. These are designed to prevent particular injustices which the transfer would otherwise create. In the remainder of this Part we set out and explain the way in which specific insurer's defences would operate under the draft Bill.
8 Notice provisions and personal performance by insured
5.15 Most insurance policies contain notice clauses which require the insured to notify the insurer (immediately or within a specified period) of matters such as knowledge of a claim or service of proceedings.[28] Obtaining prompt notice may be vital if the insurer is to investigate the claim so as to conduct the insured's defence. Notice clauses may also require the insured to give notice in a particular form or at a particular place such as the insurer's head office. The court may hold that a notification requirement in an insurance policy must be met by the insured himself, even if rights have transferred to a third party under the 1930 Act.[29]
5.16 In the consultation paper we gave our provisional view that the draft Bill should not permit an insurer to insist on personal performance by the insured of contractual conditions, such as notice provisions, if the third party fulfilled the condition himself.[30] Consultees overwhelmingly agreed with that view. Accordingly, under the draft Bill, a third party will be able to fulfil, or contribute towards fulfilling, a contractual provision such as a notice provision.[31]
9 Duty to provide information and assistance
5.17 The insurance policy may require the insured to provide the insurer with information and assistance. This may be a continuing duty. There is authority that under the 1930 Act a transfer of rights does not affect such clauses, so that a failure by the insured to comply with the obligation may enable the insurer to resist the third party's claim.[32]
5.19 However, the position is different if the insured is a company which has been struck off the register. In such a case, the insured clearly cannot provide any information and assistance. Even if it were resurrected, it would have no interest in doing so. In these circumstances it would, in our view, be anomalous to allow insurers to rely on a clause requiring the insured to provide information and assistance. Accordingly, the draft Bill provides that such clauses are of no effect if the reason that the insured fails to comply is that it does not exist.[33]
10 Excesses and unpaid premiums
5.20 Conditions in insurance contracts relating to the insured's duty to pay premiums are fundamental to the insurer's agreement to provide cover. If an insured makes a claim under an insurance policy without having paid all the premiums due, the insurer will often have a complete defence to the claim, though in some cases an insurer may not rely on non-payment of premiums to avoid liability altogether.[34] Conditions may also provide for an "excess" which reduces the value of the contractual indemnity.
5.21 A third party claiming under the 1930 Act will generally be bound by such terms in the same way as the insured. This is a consequence of the transfer of the rights of the insured in the 1930 Act. [35]
5.22 Consultees were strongly in favour of this feature of the 1930 Act, which we have retained in the draft Bill. Under the draft Bill, the insurer will be entitled to rely on any excess in the insurance contract, which is, in effect, an uninsured amount, and will be entitled to set off any unpaid premiums against the insurance proceeds paid to the third party.[36]
11 "Claw-back" clauses
5.23 The Employers' Liability (Compulsory Insurance) Regulations 1998 (the "1998 Regulations")[37] set out a number of conditions which are prohibited in employers' liability insurance policies. For example, an insurer is not allowed to frame the contract in such a way that cover lapses if the employer is negligent in providing a safe working environment for his employees.[38]
5.24 Regulation 2(2) prohibits any condition which requires an employee or an insured employer to pay the first amount of any claim. This provision is intended to ensure that excesses negotiated between the insurer and the employer do not affect the employee's right to be compensated in full by the insurer, and that payment is not jeopardised by the employer's insolvency.[39]
5.26 As we have seen, a third party will be bound by a clause imposing an excess as a result of a transfer of rights under the 1930 Act. This will also be the case under the draft Bill.[40] It would, however, clearly be contrary to the purpose of the 1998 Regulations, were an insurer similarly entitled to rely on a claw-back clause to reduce, or reclaim, sums payable to the third party after a statutory transfer.
5.27 Recent authority has confirmed that the insurer is not able to rely on a claw-back clause in such a way under the 1930 Act.[41] The result under the draft Bill will be the same. A claw-back clause must comply with section 1 of the 1969 Act which requires an employers' liability insurance policy to oblige the insurer to meet the full amount of an employee's claim. Accordingly, the claw-back clause can only impose an obligation on the insured to reimburse the insurer after the insurer has paid out (usually directly) to the injured employee. Such an obligation is not one of the insured's "rights under the contract against the insurer in respect of the liability".[42] It will consequently remain with the insured. The insurer will be able to pursue the insured for reimbursement under the claw-back clause, but not the third party.
12 Pay-first clauses
5.28 Pay-first (or "pay-to-be-paid") clauses require the insured actually to have paid sums due to third parties in respect of his liability before he is entitled to an indemnity from the insurer.[43] Such clauses are usually only found in the rules of Protection and Indemnity Clubs, although concern has been voiced that they might be used more widely by other mutual insurers.[44] Historically, such clauses were included so that Club members could rely on the financial soundness of other members.[45] In practice, clubs may not require members to have paid out before indemnifying them but may seek to rely on pay-first clauses if claims are brought against them by third parties.[46]
13 Current law
5.29 The question of how such clauses operate in the context of a transfer of rights under the 1930 Act is not easy, and the position was unclear until The Fanti and The Padre Island.[47] In that case, the House of Lords held that, if the insured has not paid sums due to a third party before rights transfer to the third party, no right to be indemnified has accrued, or can be transferred. In particular:
(1) Section 1(3) of the 1930 Act does not render pay-first clauses invalid. Within the meaning of that section, such clauses do not purport either directly or indirectly to alter the rights of the parties upon a transfer of rights.[48]
(2) After the statutory transfer of rights effected by the 1930 Act, the condition precedent represented by the pay-first clause remains in place, with the effect that no right of indemnity arises until the insured has paid the third party. The House of Lords overruled the Court of Appeal on this point.[49] The Court of Appeal had held that, after the transfer of rights, the pay-first clause should be construed to mean that no right of indemnity arose until the third party had paid himself; and that, so construed, it was clear that the pay-first clause was futile and of no effect.[50]
5.30 In reaching its decision, the House of Lords stressed the commercial reasons for the use of such clauses and appeared to take comfort from the Clubs' assurance that they did not rely on them against third parties bringing claims for death or personal injury.[51]
14 Consultation
5.31 We asked consultees how pay-first clauses should be treated on a statutory transfer under the draft Bill.[52] Because of the particular nature of the cover provided by Clubs, we did not form a provisional conclusion on the use of such clauses in the consultation paper.
5.33 Those opposing reform argued that pay-first provisions were vital to the functioning of Protection and Indemnity Clubs. They suggested that preventing clubs from relying on them might encourage them to relocate to other jurisdictions. Others warned that we should avoid reforming areas of law currently under discussion in international negotiations on marine liability insurance. The International Maritime Organisation ("IMO")[53] is considering the possibility of compulsory insurance and direct rights of action for third parties for claims other than for oil and Hazardous Noxious Substances damage.[54]
15 Reform recommendations
This is not, I think, save by denying the clubs a possible defence, to expose them to a liability to the third party greater than they would have been under to the member. The clubs' obligation to the member was to pay, but to pay only, a member who had suffered actual loss (by payment to the third party). Upon transfer, the clubs' obligation would still be to pay, and to pay only, a third party who had suffered actual loss (although not in this instance by payment out). I think this fairly reflects the intention of the 1930 Act.[55]
any liability insurer could drive a coach and horses through the Act by the simple device of incorporating a pay to be paid clause even if, in the case of a solvent insured, he did not always insist upon its performance.[56]
5.36 The draft Bill is designed to protect a third party's claim from the consequences of the insured's insolvency or winding-up. One of these consequences is that an insured is not in a position to pay the third party before claiming on his insurance policy. Thus the general position under the draft Bill is that pay-first clauses are of no effect after a statutory transfer of rights.[57]
5.37 Similar reasoning applies to all forms of insurance. We are, however, reluctant to recommend that a new Act should intervene in the field of marine liability insurance, given current domestic and international negotiations. We wish to avoid proposing provisions which might conflict with international measures.[58] Accordingly, the draft Bill only nullifies the effect of pay-first clauses in the context of marine insurance if the claim is for death or personal injury (in which cases best practice of Protection and Indemnity Clubs is not to rely on pay-first clauses in any event).[59]
16 Anti-avoidance
5.38 Section 1(3) of the 1930 Act makes void any contract of insurance insofar as it "purports, whether directly or indirectly, to avoid the contract or to alter the rights of the parties thereunder" on a statutory transfer. Any term which purported, for example, to end or to restrict cover on a winding-up or bankruptcy order being made against the insured, would be of no effect. The draft Bill contains a similar provision.[60]
17 Arbitration clauses
18 Current Law
5.39 An insured may be required by an arbitration clause in the insurance policy to refer disputes with the insurer to arbitration.[61] Such arbitration clauses bind third party claimants under the 1930 Act as they would have bound the insured.[62]
5.40 It is important to note that, as a general rule, this will not mean that a third party claimant under the 1930 Act is required to enter into an arbitration with the insurer if he does not wish to do so. Under the ABI / Lloyds arbitration agreement most UK insurers have now undertaken not to enforce arbitration clauses in standard-form policies if the insured prefers to have questions of coverage determined by a court. A third party under the 1930 Act will be treated in the same way as the insured.[63]
5.41 A third party may be contractually entitled, or bound, to establish part or all of his claim against the insured in arbitration proceedings. As we have seen,[64] until he establishes liability (which he may do by obtaining an arbitration award), the third party is not entitled to bring proceedings against the insurer under rights transferred by the 1930 Act. When he does so, the appropriate forum for those proceedings will be unaffected by any arbitration clause in a contract with the insured.
19 Consultation
5.42 In the past, third parties bound by an arbitration clause in an insurance contract were not entitled to public funding to pursue arbitration proceedings, even if they would have been entitled to public funding for litigation. This was the subject of judicial criticism.[65] We asked on consultation whether any restrictions should be placed on the ability of insurers to rely on arbitration clauses in the insurance contract.[66] Few consultees responded to this question: the majority of those who did thought that the rights transferred to the third party should remain subject to any arbitration clause in the insurance contract.[67]
20 Reform recommendations
5.43 We recommend that a third party with rights transferred by the draft Bill should be bound by an arbitration clause in the insurance contract to the extent to which the insured would have been bound.[68] As explained above,[69] the new mechanism in the draft Bill allowing the third party to establish the insured's liability in proceedings against the insurer[70] will apply in an arbitration in the same way as it will in court proceedings.
5.44 The position is different if the third party is entitled or obliged by a clause in a contract with the insured to establish the insured's liability in arbitration proceedings. As explained above, the new mechanism in the draft Bill will apply.[71] In such a case, the insurer has not agreed to resolve anything by way of arbitration, and, in our view, it would be contrary to the consensual nature of arbitrations to require him to do so. Accordingly, if a third party in such a position wishes to take advantage of the new mechanism in the draft Bill to establish the insured's liability in proceedings against the insurer, he will have to do so in court proceedings (unless the insurer agrees otherwise).
21 Defences which would have been available to insured
5.45 A third party who receives a statutory transfer under the draft Bill is entitled to proceed, as under the 1930 Act, by attempting to establish the insured's liability in proceedings against the insured before proceeding against the insurer.[72] Usually, a third party proceeding in this way who proves the insured's liability will obtain a judgment against the insured. Occasionally this will not be the case. For example, the insured might succeed with a limitation or prescription defence; or he might successfully rely on an estoppel.
5.46 Under the draft Bill, a third party has the alternative of bringing proceedings against the insurer without involving the insured in litigation.[73] As we have explained, this does not confer any new substantive rights on the third party.[74] Accordingly, a third party who can prove the insured's liability, but who would not have been able to obtain a judgment against the insured, will not in general succeed against the insurer in a claim under the draft Bill.[75] There are two exceptions to this which we explain below.[76]
22 Discharge from bankruptcy
5.47 In England and Wales, a bankrupt insured is likely, in due course, to be "discharged" from bankruptcy.[77] Discharge releases the insured, in specified circumstances, from "bankruptcy debts".[78] In many cases discharge will not affect the insured's debt to the third party, for example, if the third party's claim is for personal injuries[79] or if the events which gave rise to the liability occurred after the commencement of the bankruptcy.[80] But some claims will be affected. For example, a third party's claim in professional negligence against a sole practitioner who subsequently becomes bankrupt is likely to be lost by the insured's discharge. This will be the case even if the third party has obtained a court judgment.[81]
5.48 Similarly, in Scotland, the same mischief applies.[82] The effect of the discharge is that the debtor is discharged of all debts and obligations contracted by him for which he was liable at the date of sequestration.[83] There are some situations in which the discharge will not affect the insured's debt to the third party; however, these are very limited[84] and do not extend to a third party's claim for personal injuries.
5.50 Accordingly, the draft Bill provides that:[85]
(1) a discharge of the insured will be irrelevant to ongoing proceedings between the third party and the insurer; but
(2) the third party who has yet to issue proceedings against the insurer (or join him to existing proceedings against the insured) at the moment of discharge will lose his cause of action.[86]
23 Limitation and prescription
24 England and Wales
5.51 In the consultation paper we suggested that there was some uncertainty surrounding the limitation period governing claims brought under the 1930 Act.[87]
5.52 In our opinion, the better view is that the limitation period governing a third party's claim under the 1930 Act is the period governing the insured's right of action under the insurance contract against the insurer. The reason for this is that the insurer may in general use defences against the third party which he could have used against the insured; these include a limitation defence to the insured's action.[88]
5.53 On consultation we asked whether this interpretation of the 1930 Act should be reproduced in a new Act.[89] The majority of consultees thought that it should. Consultees stressed the importance of the principle that, in general, the transferred rights should be subject to the same restraints in the hands of the third party as they were in the hands of the insured. We agree. Under the draft Bill, the limitation period governing proceedings brought against an insurer by a third party who has established liability without using the new mechanism in the draft Bill[90] will be that which would have applied to that action in the absence of a statutory transfer.[91]
5.55 We do not think that a new Act should enable the third party to establish the insured's liability in proceedings against the insurer if he would not have been able to establish it in proceedings against the insured because that action would have been time-barred. Under the draft Bill, if a third party attempts to establish the insured's liability to him, an insurer will, in general, be able to rely on any limitation defence the insured could have relied on.[92]
5.56 However, it has been necessary to make an exception to this general rule. A third party who is already involved in litigation against the insured when he receives a transfer of rights may wish to bring an action immediately against the insurer. As we have explained,[93] if such a third party makes an application before the expiry of the limitation period governing the ongoing proceedings, it will be possible to join the insurer to the existing proceedings; but if that limitation period has expired, this will not be possible.
5.57 It is one of our principal aims to ensure that a third party who receives a transfer of rights should be relieved of the requirement to obtain a judgment against the insured before obtaining the right to sue the insurer. We considered recommending that the CPR be altered in order to give the court a discretion to order addition in the above circumstances.[94] However, we concluded that it was wrong in principle to extend the circumstances in which a defendant could be joined after the end of the limitation period. In addition it seemed to us an unnecessarily complicated solution.[95]
5.58 The draft Bill takes a different approach. It prohibits the insurer from relying on a limitation defence if the third party has issued proceedings against the insured in time.[96] Thus the third party would be entitled to issue separate proceedings against the insurer. It is likely that the court would order that the two proceedings be consolidated.[97]
25 Scotland
5.59 As stated in the consultation paper,[98] in Scots law the Prescription and Limitation (Scotland) Act 1973 provides for a three year limitation period for claims based on death[99] or personal injury.[100] The limitation period runs from the date of injury or, if later, the date on which it was reasonably practicable for the pursuer to have become aware of the fact that the injuries were sufficiently serious to bring an action, and that the injuries were attributable to an act or omission of the defender (or his employee or agent).
5.60 As far as the law of prescription is concerned, obligations arising out of a contract generally prescribe five years after they become enforceable if no relevant claim has been made or the subsistence of the obligation has not been relevantly acknowledged within that period.[101]
5.61 Although there is no clear Scottish authority, we are of the opinion that, as in English law, the insurer's obligation to indemnify the insured only becomes enforceable when his liability is established.[102] Therefore the prescriptive period in respect of the insurer's obligation to the third party will also begin to run from that date.
5.62 Hence, the provision of the draft Bill[103] which enables an insurer, in proceedings in which the insured's liability to the third party is an issue, to rely on any defence on which the insured could have relied in proceedings against him to establish that liability, includes defences relating to either the period of limitation or prescriptive period as appropriate. But it is expressly provided that an insurer cannot rely on a limitation or prescription defence if the third party had brought a claim against the insured in time.[104]
26 Restoration to the register
5.63 In the consultation paper, we sought consultees' views on whether the two year limitation period in CA 1985, section 651(4) for restoring dissolved companies to the register to pursue claims not involving death or personal injury should be abolished.[105] We also sought consultees' views on whether it should be possible to restore companies dissolved before November 1969.[106] We suggested that the distinction in section 651 was arbitrary and that the November 1969 cut-off could cause a problem in "long tail"[107] personal injury claims.[108] Most of those responding agreed that both section 651 and section 141 should be amended.
27 Imminent Law Commission Report on Limitation of Actions
5.65 The Law Commission published a Consultation Paper[109] on the Limitation of Actions in 1998. The report and draft Bill are to be published shortly. By linking the limitation period governing the third party's claim under the draft Bill to the limitation period in force at the time, the draft Bill will not need amending should the draft Bill in the Limitation of Actions project be enacted before the draft Bill in this project.
Note 1 Consultation paper, Part 5. [Back] Note 2 Consultation paper, Part 14. [Back] Note 3 A warranty in an insurance policy is not to be confused with a warranty in the general law of contract. For a useful discussion of the distinction see MacGillivray on Insurance Law (9th ed 1997) para 10-2 ff. [Back] Note 4 The courts require very clear wording before they find that a condition is a condition precedent allowing the insurer to escape all liability. See Farrell v Federated Employers Insurance Association Ltd [1970] 1 WLR 1400 and Taylor v Builders Accident Insurance [1997] PIQR 247. An important example of a condition precedent sometimes found in insurance policies is a “pay-first” clause which we discuss separately below (see paras 5.28-5.37). [Back] Note 5 A breach of contract is repudiatory if it evinces an intention no longer to be bound by the contract. The courts almost never find a breach to be repudiatory in the absence of clear wording in the contract. [Back] Note 6 [2000] 1 All ER (Comm) 545. [Back] Note 7 The Court of Appeal held that clauses subject to this analysis were “innominate terms” as defined by Diplock LJ in Hongkong Fir Shipping Co. Ltd, v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. On the facts, the court found that the notice provision before it was such a term and held that, had the insured never provided details of the incident in relation to which he was making a claim, and had this meant that the insurer was seriously prejudiced, then the insurer would have been entitled to reject the claim altogether. [Back] Note 8 See Pioneer Concrete (UK) Ltd v National Employers Mutual Insurance Association [1985] 2 All ER 395. [Back] Note 9 See the review of the authorities on this point by Waller LJ in Alfred McAlpine plc v BAI (Run-Off) Ltd [2000] All ER (Comm) 545 at p 551. [Back] Note 10 See the first instance judgment of Colman J in Alfred McAlpine plc v BAI (Run-Off) Ltd [1998] 2 Lloyd’s Rep 694 at p 702. [Back] Note 11 Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd [1990] QB 665. The law in this area was most recently surveyed by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501. [Back] Note 12 Protection and Indemnity clubs say that they usually refrain, for example, from relying on pay-first clauses when the third party’s claim relates to death or personal injury. See para 5.30 below. [Back] Note 13 Which was issued by the Association of British Insurers (“ABI”) in 1986, last revised in 1995. [Back] Note 14 [1967] 2 QB 363 at p 376. [Back] Note 15 See also Lord Brandon in The Fanti and The Padre Island [1991] 2 AC 1 at p 29: “It is abundantly clear from the express terms of the Act of 1930 that the legislature never intended, except as provided in s 1(3) ... to put a third party in any better position as against an insurer than that of the insured himself...in a case where the insurer would have had a good defence to a claim made by the insured before the statutory transfer of his rights to the third party, the insurer will have precisely the same good defence to a claim made by the third party after such transfer.” The Scottish courts have also held that all the pleas open to the insurer against the insured are also available against the third party: see Greenlees v Port of Manchester Insurance Company 1933 SC 383, Cunningham v Anglian Insurance Co. Ltd 1934 SLT 273 andBell v Lothiansure Ltd, 19 January 1990, Lord Cameron of Lochbroom. [Back] Note 16 Consultation paper, para 14.3. [Back] Note 17 For example, an insured heading towards bankruptcy or winding-up may not pay insurance premiums. [Back] Note 18 For example, a term may require the insured to provide the insurer with information and assistance. [Back] Note 19 For example, a term requiring notification of a claim. [Back] Note 20 For example, if the insurance contract requires the claimant to take steps for which legal assistance is not available. [Back] Note 21 Specifically where the insurance was compulsory, where the third party’s claim fell into a particular category, such as death or personal injury, where a policy breach occurred after a certain point or when restrictions were justified by the consequences of the breach. See consultation paper, para 14.7 ff. [Back] Note 22 Specifically non-disclosure and misrepresentation; and breaches of conditions relating to the duty to co-operate and provide assistance, to preserve the assets or business insured, to hold a particular licence or qualification and to make payments to the insurer. [Back] Note 23 The difficulties faced by a third party will be substantially reduced by the greater right to disclosure under the draft Bill (see Part 4 above). As a result of his early knowledge of the details of the insurance contract, for example, the third party may be able to fulfil a condition himself; alternatively, he may become aware of weaknesses in his claim against the insurer before committing substantial funds to it. [Back] Note 24 Under a “claims made” insurance policy the insured is covered for claims made against it during the period covered by the policy, whenever the event giving rise to the claim occurred. See the consultation paper, paras 2.19-2.20. [Back] Note 25 See para 5.8 above. [Back] Note 26 See paras 5.11-5.12 above. [Back] Note 27 See para 3.22 above. [Back] Note 28 See J Rothschild Assurance plc v John Robert Collyear [1998] CLC 1697 where the court discussed when the duty to notify circumstances “which may give rise to a claim” arose. [Back] Note 29 The Vainqueur Jose (CVG Siderurgicia v London SteamshipOwners Mutual) [1979] 1 Lloyd’s Rep 557. Cf Barrett Bros (Taxis) Ltd v Davies [1966] 1 WLR 1334. See consultation paper, paras 5.17-5.31. [Back] Note 30 Consultation paper, paras 14.3-14.6. [Back] Note 32 Edwards v Minster Insurance Co. Ltd (unreported) (CA) 10 March 1994 discussed in the consultation paper at paras 5.52-5.54. [Back] Note 34 For example if there are days of grace, or if the insurer is prevented by election or estoppel from avoiding the claim on the basis of the non-payment. [Back] Note 35 Nevertheless, Murray v Legal and General Assurance Society Ltd [1970] 2 QB 495 is first instance authority that this is not always the case. Cumming-Bruce J held that an insurer could only rely on a policy condition as against the third party if it arose “in respect of the liability of the insured to the third party” and that a condition requiring payment of premiums did not always meet this description. The decision has been criticised by the editor of MacGillivray on Insurance Law (9th ed 1997) para 28-17: “The third party is [under the 1930 Act] assigned rights subject to any defences which the insurers possess against the assured and these include, it is submitted, general equitable rights of set-off”. Phillips J expressly declined to follow Murray at first instance in Cox v Bankside [1995] 2 Lloyd’s Rep 437 at p 451. [Back] Note 36 Clause 5. The possible exception to this general rule highlighted by Murray (see para 5.21, n 35 above) will not apply. Cf the treatment of claw-back clauses which enable an insurer to recover some, or all, of the insurance proceeds from the insured. See paras 5.23-5.27 below. [Back] Note 37 These regulations replaced the Employer’s Liability (Compulsory Insurance) General Regulations 1971 and were made under the Employers’ Liability (Compulsory Insurance) Act 1969 (the “1969 Act”). [Back] Note 38 Regulation 2(1). This applies even if the insured is thereby acting illegally (Regulation 2(1)(c)). [Back] Note 39 A DETR Press Release, issued on 27 October 1998, stated that the 1998 Regulations would “extend the provisions which aim to ensure that excesses negotiated between the insurer and the employerdo not affect the employee’s right to be fully compensated by the insurer.” In its note to editors, the press release said that the purpose of the 1998 Regulations was “to ensure that funds are available to pay any compensation that might be awarded, and that payment is not jeopardised - for instance, because the employer has gone into liquidation or because the insurer has imposed restrictions on the cover.” (emphasis added). [Back] Note 40 See para 5.22 above. [Back] Note 41 Aitken v Independent Insurance Co Ltd 2001 SLT 376. [Back] Note 43 The use of such clauses was described at length in the consultation paper, para 5.58 ff. [Back] Note 44 Hirst J in The Italia Express [1992] 2 Lloyd's Rep 281 at p 298 suggested that a pay-first clause “would be entirely inappropriate in the non-club environment of a commercial insurance contract”. Some consultees suggested, however, that pay-first clauses are now being used more widely by mutual insurance companies. [Back] Note 45 It has been queried whether this argument can be used to justify the use of such clauses, as most modern Clubs operate very similarly to insurance companies: see Sir Jonathan Mance (“Insolvency at Sea” [1995] LMCLQ 34 at p 46) who doubts whether such clauses are essential to the Clubs’ security. [Back] Note 46 In some cases, Club rules may allow an indemnity to be paid before actual payment by the member. For example, the committee of a Protection and Indemnity Club may exercise its discretion to make an out of court settlement possible, or rules may provide that the Club will indemnify the member for sums which the member has been legally ordered to pay, “or could be reasonably expected to pay”. [Back] Note 47 [1991] 2 AC 1 Lord Goff of Chievely, at p 30E, said that it had “troubled maritime lawyers, in the City of London and the Temple, ever since the enactment of the Third Parties (Rights against Insurers Act) 1930.” [Back] Note 48 Lord Brandon at p 29B and Lord Goff of Chievely at p 37. [Back] Note 49 The Court of Appeal decision is reported at [1989] 1 Lloyd’s Rep 239. [Back] Note 50 See the judgments of Lord Brandon at p 29F and Lord Goff of Chievely at pp 31-32. At p 31G Lord Goff described the Court of Appeal’s view as “fundamentally flawed”. [Back] Note 51 See the judgment of Lord Goff at p 39D. [Back] Note 52 Consultation paper, paras 14.40-14.41. [Back] Note 53 The United Nations’ specialised agency responsible for improving maritime safety and preventing pollution from ships. [Back] Note 54 The IMO has already developed liability regimes for oil and other spills (see the 1969 Civil Liability Convention, the 1971 Fund Convention and the 1996 Hazardous Noxious Substances Convention). These are incorporated into UK law in the Merchant Shipping Act 1995 which contains its own regime for direct action by a third party against an insurer (see s 165, which excludes the operation of the 1930 Act). [Back] Note 55 The Fanti and The Padre Island [1989] 1 Lloyd’s Rep 239 at p 250. [Back] Note 56 Ibid, at p 259. Lord Goff of Chievely expressly disapproved this observation (The Fanti and The Padre Island [1991] 2 AC 1 at p 38E). He held that market forces would limit the use of pay-first clauses as an avoidance device, and that the Court of Appeal’s position ignored the policy of the 1930 Act that the third party should not be placed in a better position than the insured. In the light of consultation, we are not so confident as Lord Goff of the effect of market forces. For the reasons given by Bingham LJ, extracted in para 5.34, we do not consider that our view conflicts with the original policy of the 1930 Act. [Back] Note 58 We note that Viscount Goschen, on behalf of the Government, resisted proposed amendments to the Merchant Shipping and Maritime Security Act 1997 which would have allowed third parties a right of direct action against insurers, on the grounds that, in the context of marine insurance, direct action must be achieved through international agreement. (Hansard (HL) 26 November 1996, vol 576, cols 86-88). [Back] Note 61 Most arbitration clauses in insurance contracts only relate to questions of quantum which are unlikely to be relevant in the context of third party liability insurance. However, policies may contain arbitration clauses relating to questions of liability. Such clauses are enforceable as conditions precedent provided that they do not purport to oust the ultimate jurisdiction of the court: Scott v Avery (1856) 5 HLC 811; 10 ER 1121. In England and Wales, under s 9 of the Arbitration Act 1996, the court must grant a stay of court proceedings unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed. In Scotland, the court must give effect to a valid agreement by the parties to refer matters to arbitration and will sist the proceedings before it: Sanderson and Son v Armour and Co. Ltd 1922 SC (HL) 117. [Back] Note 62 Freshwater v Western Australia Assurance Co. Ltd. [1933] 1 KB 515; Dennehy v Bellamy [1938] 2 All ER 262; Cunningham v Anglian Insurance Co. Ltd 1934 SLT 273. One consultee suggested that this might no longer be the case following the enshrinement in statute of the doctrine of separability in s 7 of the Arbitration Act 1996. In our view the effect of s 7 (which confirms the common law position established by Heyman and others v Darwins Ltd [1942] AC 356 and subsequent cases), is that arbitration clauses remain binding even if the rest of the insurance contract is void or otherwise ineffective; s 7 does not imply that, on a statutory transfer of rights under the 1930 Act, rights are transferred to the third party free of the obligations imposed by an arbitration clause. [Back] Note 63 The agreement (made in 1956 and confirmed in 1986) is binding on all members of the ABI and Lloyds, who write the vast majority of third party liability insurance in the UK. It applies to all insurance policies except marine and some aviation policies. The issue of whether a claim by a third party falls under the agreement was specifically considered by the ABI in 1964 in response to a request from LCD and the position of third parties was clarified in a circular to members (Circular No 64/64 of 12 June 1964). [Back] Note 64 See paras 3.4-3.10 above. [Back] Note 65 Smith v Pearl Assurance Co Ltd [1939] 1 All ER 95 per Clauson LJ; Fakes v Taylor Woodrow Construction Ltd [1973] 1 QB 436 at p 441 per Denning MR. See consultation paper, paras 5.41-5.48. Under the new legal funding regime, limited funding may be available for arbitrations. [Back] Note 66 Consultation paper, paras 14.32-14.35. [Back] Note 67 One consultee told us that arbitration clauses are often used by insurers as a means of ensuring that disputes are resolved in a UK forum. Under the Brussels Convention a claimant may be able to insist that court proceedings are conducted abroad, regardless of what is said in the contract. The Brussels Convention does not apply to arbitration agreements. The consultee advised that we should be wary about consigning insurers to a foreign forum for a determination on UK law. [Back] Note 68 This is the effect of the basic transfer mechanism in the draft Bill, Clause 1(1). [Back] Note 69 See para 3.31 above. [Back] Note 70 Clause 8 (clause 9 in Scotland). [Back] Note 71 See para 3.32 above. [Back] Note 72 See para 3.28 above. [Back] Note 73 Clause 8 (clause 9 in Scotland). [Back] Note 74 See paras 3.25-3.26 above. [Back] Note 75 Clause 8(3) (clause 9(2) in Scotland). [Back] Note 76 See paras 5.47-5.50 (discharge from bankruptcy) and paras 5.56-5.58 (limitation). [Back] Note 77 In the case of “first time bankrupts” this occurs automatically two or three years after the commencement of the bankruptcy; in other cases it occurs by order of the court (IA 1986, s 279 and s 280). [Back] Note 79 Ibid, s 281(5)(a). There are various other conditions. [Back] Note 80 Ibid, s 382(1)(b). [Back] Note 81 Ibid, s 382(2) and (3). [Back] Note 82 Bankruptcy (Scotland) Act 1985, s 54 (automatic discharge) and s 56 (discharge on composition). In contrast to its English equivalent, s 54 does not limit the automatic discharge to “first time bankrupts”. [Back] Note 83 Ibid, s 55. The insured may also have received a discharge under a protected trust deed in terms of s 59 of that Act and, although the terms of the discharge will be governed by the trust deed, the effect is likely to be similar. [Back] Note 86 This will only affect the third party if: (1) his claim has not already been settled with the insurer; (2) the debt is one from which discharge releases the insured (so, for example, in England and Wales, it is not a claim for personal injuries - see para para 5.47, n 79 above); and (3) the claim is not time-barred. In such a case the third party would be well advised to issue protective proceedings to preserve the rights conferred on him by the draft Bill against the insurer. If he fails to do so as a result of deficient advice, he may have a claim against his legal adviser. It is worth noting that the third party and his adviser will have at least two years in which to issue these proceedings. This is because discharge will only affect the insured’s debt if the events occurred before the commencement of the bankruptcy, and the earliest time that automatic discharge occurs is two years after that - see para 5.47, n 77 above. [Back] Note 87 At para 9.8 of the consultation paper we drew attention to The Felicie [1990] 2 Lloyd’s Rep 21, in which Phillips J suggested, at p 27, that the third party could bring a fresh arbitration against the insurer, after the expiry of the limitation period governing the insured’s right to start such an arbitration, if the insured had begun arbitration proceedings in time. As we said in the consultation paper the legal basis for this decision is unclear. [Back] Note 88 See Popplewell J in Lefevre v White [1990] 1 Lloyd’s Rep 569 at p 578 who could find “neither logic nor sense” in the contrary argument that a transfer of rights starts a fresh limitation period running. [Back] Note 89 Consultation paper, Part 17. The alternative would be to regard the transfer of rights under the proposed new Act as the accrual of a fresh cause of action with a fresh limitation period. [Back] Note 93 See para 3.41 above. [Back] Note 94 Alterations to the rules must be proposed by the Rules Committee, a body of judges, lawyers and others headed by the Master of the Rolls and the Vice Chancellor. The Rules Committee was set up by s 2 of the Civil Procedure Act 1997. The Lord Chancellor has the power to accept or reject proposed alterations but may not initiate them himself. [Back] Note 95 The definition of “necessary” in CPR 19.5(3) is restricted by s 35 of the Limitation Act 1980. We would accordingly have had to propose to amend this statute. [Back] Note 97 Under the power in CPR 3.1(2)(g). The court will exercise this power in accordance with the overriding objective. [Back] Note 98 Paragraph 9.18. [Back] Note 100 Section 18. Delictual obligations to make reparation for damage to property or pure economic loss, prescribe after five years. While subject to the three year limitation period, delictual claims in respect of death or personal injury do not prescribe. [Back] Note 101 See the consultation paper, para 9.19 and s 6 and Sched 1, para 1(g) to the 1973 Act. [Back] Note 102 See Scott Lithgow v Secretary of State for Defence 1989 SLT 236. [Back] Note 104 Clause 11. See also Scott Lithgow v Secretary of State for Defence 1989 SLT 236. [Back] Note 105 Consultation paper, para 17.17. [Back] Note 106 Prevented by Companies Act 1989, s 141. See the consultation paper, para 17.18. [Back] Note 107 “Long tail” claims are those in which the symptoms and gravity of the injury on which the claim is based do not manifest themselves fully, or at all, until a long time after the cause of the injury. [Back] Note 108 In their discussion paper No 2, Actions Arising out of Insidious Diseases, 1992, at para 6.8.1, the Law Reform Advisory Committee for Northern Ireland suggested that “the period of 20 years may be too short in many cases to assist the victims of insidious diseases... All lawyers engaged in litigation arising out of insidious diseases will be well aware of many cases where such diseases become manifest much later that 20 years after exposure.” [Back] Note 109 Limitation of Actions (1998) Law Com No 151. [Back]
