Third Parties (Rights Against Insurers)
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PART 1 INTRODUCTION AND OVERVIEW 1.1 Our terms of reference1 are to examine, jointly with the Scottish Law Commission, the scope and operation of the 1930 Act in the light of current law and market practices of the insurance industry.2 1.2 The aim of the Third Parties (Rights Against Insurers) Act 1930 was, as its long title indicates, “to confer on third parties rights against insurers of third-party risks in the event of the insured becoming insolvent ...”. Before the Act, the proceeds of any insurance policy covering a liability which the insured had incurred to a third party were payable to the insured’s insolvency practitioner. Once paid over, they formed part of the insured’s assets and were distributed as such to his general creditors. The third party whose loss had triggered the claim against the insurer was likely only to recover a small dividend as one of those creditors. 1.3 When it was first debated in October 1929, the Bill was described as a measure which would “commend itself to all quarters of the House”3 and this proved to be the case. 1.4 The Act gives third parties a right to claim the insurance proceeds from the insurer ahead of the other creditors. It operates by transferring the insured’s rights against the insurer to a third party to whom liability has been “incurred”4 on the happening of one of the insolvency situations set out in the Act. It also gives third parties certain rights to disclosure of policy information5 and prohibits policy terms designed to avoid the operation of the Act6 and settlements between the insurer and the insured reached after the transfer of rights.7 1.5 As we shall see, the court has held that the precondition to the transfer of rights in section 1 of the Act that liability has been “incurred” is only met once the third party has established the liability of the insured by judgment, award or agreement.8 It is not met on the happening of the event giving rise to the liability of the insured. Until the third party has established liability in this way, he has no right of 1 Set out in the Law Commission’s Sixth Programme of Law Reform(1995) Law Com No 234 and the Scottish Law Commission’s Fifth Programme of Law Reform (1997) Scot Law Com No 159. 2 In preparing this paper we have consulted with the Northern Ireland Law Reform Advisory Committee. 3 Hansard (HC) 29 October 1929, vol 231, col 128. 4 Section 1(1). 5 Section 2. 6 Sections 1(3) and 2(1). 7 Section 3. The Act is set out in Appendix A. 8 Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363. See para 1.9 and paras 4.3-4.5 below where we also discuss briefly different views of when the right to an indemnity under a liability insurance policy should arise. 1 action against the insurer under section 19 and no right to the disclosure of policy information under section 2.10 CALLS FOR REFORM 1.6 Calls for reform of the Act have centred on the practical consequences for third parties of this judicial construction of sections 1 and 2.11 Attention has been drawn, for example, to the fact that third parties may go to the expense of establishing the liability of the insured only then to discover, once the duty to disclose has arisen, that the insurer is not liable under the insurance contract.12 Criticism has also been made of the requirement that third parties restore dissolved companies to the register so that they can establish their liability and acquire rights under the Act.13 1.7 The ability of insurers to rely against third party claimants under the Act on all the defences and policy terms on which they could have relied against the insured14 has been questioned. Also, it has been suggested that distribution of a limited insurance fund, inadequate to meet the claims of all third parties, to those who establish their claims first rather than pro rata to all claimants is unfair.15 Questions have also been raised as to whether what limitation period governs claims under the Act16 and the territorial scope of the Act17 should be clarified. 1.8 As well as reviewing the problems which have been caused by the current operation of the Act, we consider in this Paper whether, in view of changes in insurance law and practice since 1930, the scope of the Act should be extended or 9 It is unclear whether English procedural rules allow the third party to join the insurer into proceedings against the insured for a declaration of the insurer’s future liability. In Scotland, the third party may establish the liability of the insured and of the insurer in the same proceedings. See paras 4.27-4.29 below. 10 Nigel Upchurch v Aldridge Investments [1993] 1 Lloyd’s Rep 535 and Woolwich Building Society v Taylor [1995] 1 BCLC 132. See paras 4.13-4.17 below. 11 Although the operation of the Act may also cause problems for insurers and for officeholders. See para 1.15 below. 12 See dicta of Phillips J in Banque Bruxelles Lambert v Eagle Star unreported, 26 February 1993, see para 4.18, n 33 below. See also Cox v Bankside [1995] 2 Lloyd’s Rep 437 discussed at para 7.2 and 13.13 below. It has been questioned whether this was the intention of Parliament in 1930. See Sir Jonathan Mance “Insolvency at Sea” [1995] LMCLQ 34 and J Goodliffe “What is Left of the Third Party (Rights against Insurers) Act 1930?” [1993] JBL 590. See Part 4 below. 13 See paras 4.38-4.50 below. 14 See eg Clauson LJ in Smith v Pearl Assurance (on the enforceability of arbitration clauses) and Lord Goff in The Fanti (on pay first clauses which require the insured to have paid the third party’s claim before being entitled to an indemnity from the insurer). See Part 5 below. 15 See Part 7 below. 16 See Part 9 below. 17 See Part 8 below. 2 restricted.18 As part of our review, we look at schemes of third party rights in other jurisdictions.19 THE NATURE OF LIABILITY INSURANCE 1.9 A liability insurance policy is a contract of indemnity in which the insurer agrees to indemnify his insured for any loss suffered by reason of the insured’s liability to another. In Post Office v Norwich Union Fire Insurance Society Ltd,20 the Court of Appeal held that an insured did not suffer loss until his liability had been determined by judgment, arbitration or agreement. This approach differs from that taken by the court in Chandris v Argo Insurance Co Ltd,21 where it was held that an insured had suffered loss when he had incurred liability to the third party, even though the existence and amount of that liability had not yet been established.22 THE PURPOSE OF LIABILITY INSURANCE 1.10 The view is taken in some jurisdictions that the purpose of liability insurance is not merely to protect the financial interests of the insured, but is also to protect the interests of those to whom the insured may incur liability. The Louisiana Direct Action Statute provides, for example, that “all liability policies ... are executed for the benefit of all injured persons ... to whom the insured is liable”23 and allows third parties a right of direct action against insurers, regardless of the solvency of the insured.24 1.11 Some commentators in this country have also suggested that liability insurance could be seen as being for the benefit of third parties.25 The doctrine of privity of contract26 is still generally upheld by the English court, although it has been 18 See Part 11 below. 19 Brief summaries of third party rights in other jurisdictions are set out in Appendix F. 20 [1967] 2 QB 363. See also Bradley v Eagle Star Insurance Co Ltd [1989] AC 957. These cases are discussed further at paras 4.4-4.7 below. 21 [1963] 2 Lloyd’s Rep 65. 22 See also Castle Insurance Co Ltd v Hong Kong Shipping Co Ltd (The Potoi Chou) [1984] 1 AC 226. The approach taken in the Post Office and Bradley cases has been criticised. See para 4.5, n 7 and 4.7, n 13 below. See also Sir Jonathan Mance, “Insolvency at Sea” [1995] LMCLQ 34, at p 39 who suggests that, following these cases, the alternative approach is confined to general average loss and s 66(5) of the Marine Insurance Act 1906. See also Peter Goldsmith QC, “The Third Parties (Rights against Insurers) Act 1930” (1995) 11 Int ILR 378. 23 See para 1.24 of Appendix F. 24 In France, the progressive strengthening of the victim’s position with regard to the insurer has been described as “decontractualisation”. 25 In 1929, the Attorney-General, Sir William Jowitt, said that the proposed Act would “confer a direct right in favour of the third party so that the third party may deal directly with the insurance company and that the money which comes into being by reason of the fact that the third party has been injured shall be money allocated to that third party and not taken away from him and utilised for the benefit of other persons”. See Hansard (HC) 29 October 1929, vol 231, cols 128-143.