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You are here: BAILII >> Databases >> The Law Commission >> Third Parties –Rights Against Insurers [2001] EWLC 272(3) (July 2001) URL: http://www.bailii.org/ew/other/EWLC/2001/272(3).html Cite as: [2001] EWLC 272(3) |
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PART 3
A THIRD PARTY'S RIGHT OF ACTION UNDER THE DRAFT BILL
1 Introduction
2 The Nature of the Third party's rights
3 The need for reform
3.4 A third party faced with a financially sound insured is not able to recover any money from the insured until he has established the insured's liability to him, either by agreeing it with the insured or by obtaining a judgment or arbitration award. The third party only "establishes liability" for these purposes once the amount (as well as the existence) of the liability has been ascertained. Only then is the third party entitled to enforce his rights, and only then is the insured entitled to make a claim on the insurance policy.[1]
His [the insured's] liability to the injured person [the third party] must be ascertained and determined to exist, either by judgment of the court or by an award in arbitration or by agreement. Until that is done the right to an indemnity does not arise.[2]
3.6 The requirement that the third party establish the insured's liability before issuing proceedings against the insurer can involve the third party in a number of otherwise unnecessary applications. For example, before he can proceed against the insured, he may have to apply for an order restoring the insured to the register of companies[3] or for an order allowing proceedings to begin or continue,[4] or for both of these. The third party may have to commit substantial funds and may fail to recover his costs, even if successful.[5] The requirement may cause the third party to lose his claim against the insurer altogether[6] or force him to discontinue.[7]
3.7 In the consultation paper, we suggested that this requirement is unnecessary. The insured is unlikely to have any interest in the proceedings brought by the third party.[8] Nor does a third party have a direct interest in establishing the insured's liability in this way. Doing so does not confer on him a right to recover any of the insured debt, either from the insured[9] or the insurer.[10] Indeed, recent Scottish authority suggests that such a third party may be obliged to prove the insured's liability for a second time in the subsequent action against the insurer.[11] The third party's proceedings against the insured in such a case serve no purpose at all.
3.8 For a time it was thought that a third party who has yet to establish the insured's liability might be able to obtain a declaration (or, in Scotland, a declarator) of the insurer's obligations under the insurance contract.[12] This has now been shown to be possible in Scotland[13] but not possible in England and Wales.[14]
3.9 Judicial opinion has varied on the nature of the insured's rights before liability has been established. As we pointed out in the consultation paper,[15] some judges have suggested that the insured may at that stage have a contingent right to an indemnity;[16] others have rejected this.[17] So far as the position of the third party is concerned, the courts have denied that the third party has any rights of any description at this stage. Indeed, the latest authorities suggest that the 1930 Act does not effect a transfer until liability is established.[18]
3.10 The requirement that the third party establish liability before becoming entitled to sue the insurer under the 1930 Act does not appear to have been the intention of Parliament.[19] On consultation there was very great support for removing it. We have done so in the draft Bill.[20]
4 Consultation
5 Mechanism of transfer
3.12 In Appendix F of the consultation paper we set out some schemes of third party rights which have been introduced in other jurisdictions. In Australia, third parties are not given direct rights against insurers but are given secured rights against the insured to any money recovered by the insured from the insurer. Some critics of the 1930 Act have advocated that a similar approach be adopted here.[21] We do not support such a radical departure from the existing law. The basic approach of the 1930 Act seems to us to be preferable. It is unsatisfactory to require the office-holder[22] to become involved in a claim in which he has no direct interest. In particular:
(1) The third party, as the only person who stands to gain from a successful insurance claim, should, in our view, be the person who decides whether, and how vigorously, to pursue the insurer. The office-holder has other considerations and might decide to drop, or settle, a claim that could be won.
(2) On the Australian model, if the insurance claim is unsuccessful, the costs would be borne by the office-holder and consequently by all the insured's creditors. We think that it is preferable that the third party, who alone will gain if the claim is successful, should bear the risk of failure.
(3) The 1930 Act approach simplifies the role of the office-holder. The Australian model fails to do this.
6 Single set of proceedings
3.13 A large majority of consultees agreed that a new Act should remove the requirement that a third party establish the insured's liability before bringing an action against the insurer. Most consultees agreed that this would simplify and speed up litigation and reduce costs. It would also remove the possibility that third parties would lose their remedy against the insurer by failing to comply with procedural requirements.[23]
3.15 A small dissenting group of consultees thought that it would be inappropriate in some cases to allow the third party to establish the insured's liability in an action against the insurer. It was pointed out that such a reform might occasionally require the insurer to disclose more documentation earlier.[24] In our view it is not objectionable to require the insurer to reveal information relevant to the third party's claim, however that information came into being. Whilst this may occasionally improve the third party's state of knowledge, we do not see that as an objection to our recommendations.
3.16 Concerns were also raised over conflicts of interest. For example, in a case where only negligence is alleged by the third party, the insured might wish to defend on liability by denying that the relevant conduct was negligent. The insurer, on the other hand, might wish to deny cover by alleging that the insured's conduct amounted to fraud. It was pointed out that in the United States such conflicts have led the courts to hold that, where the insurer has reserved its position on coverage, an insured has an absolute entitlement to control his own defence.[25] Such an entitlement appears to be fundamentally inconsistent with the insurer's subrogated right to conduct the defence of the insured. In addition, some courts in the United States have held that an insurer is not bound by findings of fact in litigation against the insured. This raises serious difficulties when enforcing judgments in favour of third parties against insurers.
3.18 In a case in which the insured is a party to the action, the position of the third party may be improved in the exceptional cases in which such conflicts arise. For example, the third party may, as a result of the single set of proceedings, discover before trial the terms of the insurance policy[26] and consequently whether the categorisation of the insured's liability under different heads of loss will affect insurance recoveries.[27] Under the 1930 Act, generally only the insurer and insured are privy to this information until judgment on liability has been obtained. Whilst one consultee objected that this would lead to "artificiality" in the presentation of the third party's case, in our view it simply puts the parties on a more equal and fairer footing. This reform will enable third parties to avoid wasting time and money alleging and proving losses which are uninsured.[28]
7 Joinder of insured
3.20 It was our provisional view in the consultation paper that a third party should usually proceed against both the insured and the insurer, unless the insured was a company which no longer existed, in which case he might proceed against the insurer alone.[29]
3.21 A number of consultees suggested that the third party should be given the right to proceed against the insurer alone in all cases. It was argued that in the vast majority of cases the insurer conducts the defence of the insured in any event, and the presence of the insured as a nominal defendant is simply an additional cost. It was pointed out that in many cases the insured, even if joined, would take no active part in the proceedings as he would not be able to afford to do so. In those circumstances, it was suggested, it would be better if he were not a party as he would then not be bound by the judgment. We agree. A third party will not be required to join the insured as a defendant to an action under the proposed new Act.[30]
8 Reform recommendations
9 Mechanism of transfer
3.22 Like the 1930 Act, the draft Bill confers rights on the third party by effecting a transfer to the third party of the insured's rights under the insurance contract in respect of the insured's liability to him.[31] The draft Bill does not create new substantive rights; instead, it transfers pre-existing contractual rights agreed between the insured and insurer.[32] It does, however, give the third party a new procedural right to declarations as set out below.[33]
10 Timing of transfer
3.23 In Part 2 we explained that the draft Bill, like the 1930 Act, confers rights on the third party, not only if the insured becomes insolvent, but also in a number of other specified circumstances. As we noted above, the courts have held that the statutory transfer does not take place until such time as the liability of the insured to the third party is established.[34]
3.24 By contrast, under the draft Bill, the moment at which the insured's liability to the third party is established is irrelevant to the timing of the statutory transfer. In cases in which the third party is already owed money by the insured, the moment of transfer will be the onset of the insured's insolvency etc. So, for example, a transfer will occur, in the case of a compulsory winding-up, on the making of the winding-up order.[35] In terms of the draft Bill a statutory transfer will occur when the insured becomes a "person to whom this section [section 1] applies".[36] In cases in which the insured is already such a person, the statutory transfer will occur at the moment that the insured incurs liability to the third party.[37]
11 Third party's rights before liability is established[38]
3.25 The draft Bill differs from the 1930 Act by providing that a third party may issue proceedings against the insurer without first having established the liability of the insured.[39] The draft Bill does this by giving the third party a procedural right, which arises at the same time as the transfer of rights, to ask the court (or tribunal) for declarations as to the insured's liability to him and as to the insurer's potential liability to him under the insurance contract.[40]
3.26 If the third party proves his case under each head then the court (or tribunal) will be obliged to grant the declarations requested.[41] A declaration, in England and Wales, is usually a discretionary remedy. However, we decided that in this context it should be a matter of entitlement. The declarations are simply steps in the process of enforcing a legal right, and we can think of no good reason why the court should be given a discretion to refuse to make the declarations if the third party makes out his case.[42]
3.27 If it makes the declarations, or declarators, the court will then be entitled to give an "appropriate judgment".[43] If it has already dealt with quantum, this is likely to be a money judgment. It may be, however, that the court leaves quantum to be determined on a later occasion, or in arbitration proceedings. In such a case the "appropriate judgment" is likely to be an award of damages to be assessed.
3.28 This mechanism in the draft Bill is optional. A third party who receives a transfer of rights before the insured's liability is established is not obliged to use it.[44] It remains open to such a third party to sue the insured and, once liability is established, sue the insurer on the insurance contract. A third party may elect to do this if he is already involved in proceedings against the insured when he receives a transfer of rights. Rather than begin again, the third party may wish to continue his existing action against the insured[45] with the aim of bringing proceedings against the insurer afterwards.[46]
3.29 A third party using the mechanism in the draft Bill is not obliged to ask the court for both declarations or declarators. He may ask for only one. However, unless the third party asks for and obtains both declarations, the court will only be entitled to grant a money judgment after the third party has established liability in the traditional way. [47]
12 Third party's rights after liability is established
3.30 The third party may receive a transfer of rights after the insured's liability has been established.[48] In such a case, the new machinery described above will not be relevant.[49] Such a third party will simply exercise the contractual insurance rights against the insurer which the draft Bill has transferred to him.
13 Third party's rights in arbitration proceedings
3.31 The insurance contract may require, or allow, disputes to be resolved in arbitration proceedings. We explain, in Part 5 below, our decision not to alter the effect of such clauses after a statutory transfer.[50] If such a clause exists, then a third party who has already established liability may bring arbitration proceedings.[51] A third party who has yet to establish the insured's liability will be able to take advantage of the new mechanism described above in an arbitration.[52]
3.32 The third party may be contractually entitled, or obliged, to resolve his dispute with the insured in arbitration proceedings. We did not think it appropriate to prevent such a third party from benefiting from the new mechanism in the draft Bill; such a third party will be entitled to use it. As we explain in Part 5 below,[53] the arbitration clause in the contract between the third party and the insured will not affect the appropriate forum for such proceedings.
14 Joinder of the insured as defendant
3.33 We agree with the consultees who suggested that in most cases the joinder of the insured is simply a wasted cost. Accordingly, the third party is not obliged to join the insured to proceedings against the insurer.[54] It would, however, be inappropriate for a court to make declarations or declarators as to the insured's rights which are binding on the insured in the insured's absence. Accordingly, if the third party fails to join the insured, the insured will not be bound by any declarations made.[55]
3.34 A third party who brings an action against the insurer under the draft Bill before establishing the liability of the insured will be entitled to join the insured as a co-defendant. If he does so, the insured will be bound by the court's findings.[56] The third party may wish to do this if, for example, the insured has only partially insured his debt, or the insurer has a plausible defence to a claim under the insurance contract. If the third party follows this course then, to the extent that he is unable to recover from the insurer, he will be able to enforce the judgment against the insured without the need to take further proceedings. [57]
15 Terminology of "incurring liability" retained
3.35 Recent decisions have thrown doubt on when liability is treated as "incurred" for the purposes of the 1930 Act.[58] In the consultation paper we used the concept of "the event giving rise to the liability of the insured" instead.
3.36 We have concluded that any uncertainty in the context of the 1930 Act stems from the failure of that Act to spell out the consequences of a statutory transfer.[59] By contrast, under the draft Bill, the third party's rights on receipt of a statutory transfer are clear. In addition, a number of objections to the alternative phrase used in the consultation paper were raised on consultation or have since occurred to us.[60] Accordingly, the draft Bill retains the term "incurs" when referring to the creation of a liability.[61]
16 Transitional provisions
3.37 We were concerned to ensure that as many third parties benefit from a new Act as possible. The transitional provisions have been drafted accordingly.[62] Their effect is that, if the insured has both incurred liability to the third party and has been wound up[63] at the moment the draft Bill comes into force, then the 1930 Act will continue to apply. Similarly, if the insured has already died whilst insolvent, the 1930 Act will continue to apply. In all other cases, the new Act will effect the statutory transfer and will govern the third party's claim.
17 Procedural considerations
3.38 In the consultation paper we identified a number of issues relating to joinder and substitution which would be likely to arise in claims under a new Act, and asked consultees whether we should recommend amendments to rules of court to cater for them.[64] As we explain below, we have concluded that the current rules of court in both jurisdictions already provide sufficient procedural flexibility.[65]
3.39 However, we do recommend below[66] an additional rule in both jurisdictions to require the third party to notify the insured of any action he brings under the draft Bill against the insurer in which he intends to prove the insured's liability to him.
18 Third party may join insurer to proceedings against insured
3.41 In England and Wales, provided the limitation period governing those proceedings has not expired, this will be possible.[67] If, on the other hand, that limitation period has expired,[68] it appears that the third party could not obtain an addition order from the court. The court would have no discretion to grant such an application.[69] Under current Scottish procedural rules, the court has a wide discretion in all situations to permit the addition of the insurer as a defender in existing proceedings against the insured.[70]
3.42 As we explain below,[71] the inability of a third party to join the insurer to ongoing proceedings against the insured after the limitation or prescription period relating to that action has expired will not present the third party with difficulties. The draft Bill specifically provides that, in such a case, the third party will be entitled to issue fresh proceedings against the insurer.[72]
19 Third party may take over insured's proceedings against insurer
3.43 The third party may receive a transfer of rights after he has established the insured's liability. He may not have been paid due to a dispute between the insured and insurer about the insurance contract. Such a dispute may be the subject of litigation. If it is, the third party might wish to apply to be added or substituted as claimant into the proceedings. Under the CPR, the court would have the power to grant such an application, whether or not it was made before the end of the limitation period governing the cover proceedings.[73]
3.44 In Scotland, a pursuer can be added or substituted to an action by amendment.[74] In particular, when the rights of the pursuer have been assigned to another person, the assignee is entitled to take the pursuer's place in the action.[75]
20 Insurer may apply to add insured as defendant
3.45 The insurer may wish the insured to be a defendant to the third party's action. For example, the insurer may wish to ensure that the insured is bound by the court's ruling on the validity of the insurance contract. Under the CPR, the insurer will be able to apply to add the insured provided that the application is made within the limitation period governing the liability proceedings.[76]
3.46 As stated above[77] it is also possible under Scottish procedural rules to add defenders to an action where parties with an interest have not been called or the action has been directed against the wrong person.[78]
21 Insured may apply to be made defendant
3.47 In the consultation paper we suggested that in some circumstances the insured might wish to be added as a defendant to the third party's action.[79] In our view such cases will be very rare. The insurer is likely to defend a claim as vigorously as the insured and will have greater resources.
3.48 It is important to note that the insurer defending the third party's claim may do so without regard to the insured's interests and may have different priorities.[80] There may therefore be occasions on which the insured will wish to join the proceedings as defendant. For example, if the third party's allegation is that the insured failed to provide a safe working environment, it may be that the insured will be concerned about its reputation or about possible criminal proceedings under health and safety legislation. It may be the case that the insured has an economic interest in a successful defence by the insurer (for example, a successful claim by the third party might cause future premium rises under the policy).
3.49 Under the CPR, if an insured did wish to apply to be added as defendant the court would be able to grant an addition order on the application of the insured provided it is made within the limitation period.[81] In Scotland, a person with sufficient title and interest is entitled to apply to be sisted as a party to an action.[82]
22 Insured may apply to be made claimant
3.50 In exceptional cases the insured may wish to intervene as claimant in the third party's action. This may be the case if the insured is concerned to protect his position under the equivalent of section 1(4)(a) of the 1930 Act, which preserves the insured's right to claim from the insurer any sums in excess of those payable to the third party.[83] Under the CPR, the court would be entitled to grant such an application, provided that it was made within the limitation period.[84]
23 Leave requirement
3.51 A large majority of respondents agreed with our provisional conclusion that a third party should not be required to obtain leave before proceeding under a new Act[85] and we recommend that no such requirement be imposed in either jurisdiction.
24 Notification of insured
3.52 In most cases in which the third party sues the insurer alone under rights transferred by the draft Bill, the insured will be content to do nothing.[86] As we have seen, as a non-party he will not be bound by any findings of fact or declarations made by the court.[87] It is likely to be of benefit to him to be relieved of the need to participate in proceedings where the real contest is between the third party and the insurer.
3.53 However, there are circumstances in which the insured may wish to apply to be added as a party.[88] While he will usually know about the proceedings in any event[89] this may not be the case if, exceptionally, the third party and the insurer fail to alert him.
25 Nature of the notice requirement
26 Non-existence of the insured
3.56 Where the insured is a company which has been wound up or struck off the register of companies it will be impossible for the third party to notify the insured or for the insured to intervene in the proceedings. In Part 4 below, we explain why the draft Bill imposes on certain of the former officers (and employees) of a defunct insured, obligations to provide disclosure if it is requested by a third party.[90] There may be reasons why people notified in this way of the third party's proceedings may wish to become involved; it seems to us to be highly unlikely that other ex-officers or employees would wish to do so. We were also concerned to limit the burden of the notice requirement on the third party. We therefore recommend that the new rule of court, imposing on the third party a duty to notify the insured of his proceedings, should not apply if the insured no longer exists when proceedings are issued.
Note 1 West Wake Price & Co. v Ching [1957] 1 WLR 45 in which Devlin J held at p 49: “The essence of the main indemnity clause is that the assured must prove a loss. The assured cannot recover anything under the main indemnity clause or make any claim against the underwriters until they have been found liable and so sustained a loss.” In Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at p 374, Denning MR approved this dictum, and made clear that “The insured could only have sued for an indemnity when his liability to the third party was established andthe amount of the loss ascertained.” (emphasis added). For a recent application and confirmation of this principle, see Thornton Springer v NEM Insurance Co. Ltd and others [2000] 2 All ER 489. [Back] Note 2 Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at p 374 per Denning MR. The House of Lords confirmed this in Bradley v Eagle Star Insurance Co. Ltd [1989] 1 AC 957. These cases have been approved in Scots law. See McDyer v Celtic Football and Athletic Co Ltd 1999 SLT 2 and Cheltenham and Gloucester plc v Royal and Sun Alliance Insurance Co. (OH), 2001 SLT 347. For a full discussion see the consultation paper, Part 4. [Back] Note 3 Under s 651 or s 653 of CA 1985. [Back] Note 4 For example under s 130 (company winding-up) or s 285 (bankruptcy) or s 11(3)(d) (administration) of IA 1986. [Back] Note 5 The insured is likely to be unable to pay the costs of a successful action by the third party. A costs order will only be made against an insurer conducting the defence of the insured in exceptional circumstances (Symphony Group plc v Hodgsons [1994] QB 179). This may not matter to the third party who may be able to claim his costs from the insurer under the insurance contract. However, this will depend on the wording of the insurance contract (and on the insurer finally proving to be liable under it). See paras 7.29-7.33 below. [Back] Note 6 Illustrated by Bradley v Eagle Star Insurance Co. Ltd [1989] 1 AC 957 in which Mrs Bradley was out of time on her application to restore her defunct employer to the register of companies. This case led to an amendment to the law (CA 1985, s 651 was amended by Companies Act 1989, s 141), though only in the context of personal injuries and Fatal Accident Act 1976 claims. [Back] Note 7 The third party’s predicament is made worse by the fact that, during this preliminary litigation, the courts have refused to grant the third party access to insurance information, either under the specific rules contained in the 1930 Act (Nigel Upchurch Associates v Aldridge Estates Investments Co Ltd [1993] 1 Lloyd’s Rep 535) or under procedural rules (Burns v Shuttlehurst Ltd [1999] 1 WLR 1449). We recommend in Part 4 below that third parties have an earlier and wider right to such information. [Back] Note 8 In practice the insurer will usually conduct the defence of the insured without being a party (cf the insurer’s approach in Wood v Perfection Travel [1996] LRLR 233, in which the insurer succeeded on an application to be joined as a party in his own right.) [Back] Note 9 Although this is not spelled out in the Act, the better view is that a third party is not entitled to enforce against the insured to the extent of the insurer’s duty to indemnify under the insurance contract. See paras 7.5-7.8 below. Even a third party who felt able to argue that this was not the case would not be likely to attempt to enforce as, in most cases, the insured’s resources are too meagre. [Back] Note 10 The third party must also establish, in subsequent proceedings or by agreement, the insurer’s obligations under the insurance contract. [Back] Note 11 Cheltenham and Gloucester plc v Royal and Sun Alliance Insurance Co, IH, 30 May 2001. The court held that an insurer may be entitled to dispute the insured’s liability to the third party as part of a defence to a claim under the insurance policy brought by the insured, even if that liability had already been established by a court judgment. It held that a statutory transfer under the 1930 Act did not alter the insurer’s right to do this. In Cheltenham and Gloucester the insurer had investigated the third party’s claim against the insured and had, for a time, conducted the insured’s defence, before withdrawing in the belief that it could avoid liability under the insurance policy. The court held that, in those circumstances, the insurer was entitled to dispute the insured’s liability to the third party in the action brought by the third party under rights transferred by the 1930 Act. [Back] Note 12 On the basis that the insured would have been entitled to such a declaration. See the comments of Lord Denning in Brice v Wackerbarth (Australia) Pty Ltd [1974] 2 Lloyd's Rep 274 at p 276. [Back] Note 13 Bell v Lothiansure Ltd 19 January 1990 (OH); reclaiming motion refused 1993 SLT 421. See also Landcatch Ltd v Gilkes 1990 SLT 688; McDyer v Celtic Football and Athletic Co Ltd 1999 SLT 2; Cheltenham and Gloucester plc v Royal and Sun Alliance Insurance Co (OH), 2001 SLT 347. The point, however, was not explored by the Inner House in the McDyer case: 2000 SC 379. [Back] Note 14 In Burns v Shuttlehurst [1999] 1 WLR 1449 Stuart-Smith LJ held at p 1459C: “...the plaintiff could not sue for a declaration, quite apart from the fact that he has not done so. Although there is as a rule a contractual right for the insured to sue for a declaration, not all rights under the contract are assigned to the third party, but only those in respect of the liability to him.” . This view is in line with the earlier decision of Dohmann QC in Nigel Upchurch Associates v Aldridge Estates Investment Co Ltd [1993] 1 Lloyd’s Rep 535 who held at p 538 col 1: “...what the Act transfers to the third party is the insured’s right “in respect of the liability”, that is the right to be indemnified for his monetary loss in having to meet his liability to the third party. I do not find that s1 transfers to the third party some contractual right to seek declaratory relief before a specific liability has been established.” [Back] Note 15 Consultation paper, Part 4. [Back] Note 16 Lord Goff in The Fanti and The Padre Island [1991] 2 AC 1 described the right transferred to the third party as “at best, a contingent right to indemnity”. [Back] Note 17 In Nigel Upchurch Associates v Aldridge Estates Investment Co Ltd [1993] 1 Lloyd’s Rep 535, it was held that, until the liability of the insured had been established, the insured had no contractual right to be indemnified contingent upon liability being established. [Back] Note 18 “In my judgment the effect of [the Post Office and Eagle Star cases] is that ...no ...rights ...will be transferred to or vest in IAF [the third party] until such time as the liability of the firm is ascertained and determined”, Jackson v Greenfield [1998] BPIR 699 at p 709E per Lawrence Collins QC. Similar views were expressed in Sea Voyager v Bielecki [1999] 1 All ER 628 at p 645. [Back] Note 19 Three factors suggest this: (1) the absence of any reference to the moment when liability is established in the 1930 Act itself; (2) the absence of any reference to the requirement in the history of the Bill’s reading inHansard; (3) the fact that the 1930 Act was modelled on the Workmen’s Compensation Act 1906 which expressly provides for the insured’s liability to the third party to be litigated between the insurer and third party. That the 1930 Act was modelled on this earlier legislation is clear from the wording of the two Acts. It was also stated in Parliament (Parliamentary Debates (HC) 29 April 1929, vol 231, col 130). [Back] Note 20 See paras 3.25-3.29 below. [Back] Note 21 See, for example, Digby Jess, “Reform of direct rights of action by third parties against non-motor liability insurers” [2000] LMCLM 192. [Back] Note 22 We use this general term in the text to refer to the person in charge of the insolvency procedure which has caused a statutory transfer (for example a liquidator, an administrator, an administrative receiver, a receiver, or a supervisor of a voluntary arrangement). [Back] Note 23 As occurred in Bradley v Eagle Star Insurance Co. Ltd [1989] 1 AC 957. See para 3.6, n 6 above. [Back] Note 24 As a result of disclosure ordered in the proceedings. It was suggested, for example, that the insurer might have defences to an insurance claim, based on investigations carried out by the insurer with the insured’s assistance under the terms of the policy, which involved matters that were also the subject of the third party’s claim against the insured. In such circumstances it was suggested that it might be unfair to force the insurer “to make available to the third party all such material on which the insurer’s defences were based, when such material had only come into existence because of the existence of the policy, and because of the insured’s duty of assistance and/or good faith under the policy.” [Back] Note 25 Spears v State Farm Fire and Casualty Insurance (1987) 725 SW 2d 835, 291 Ark 465. [Back] Note 26 By the usual process of disclosure. In practice they may know independently as a result of exercising their right to obtain information provided by Sched 1 of the draft Bill. See Part 4 below. [Back] Note 27 Issues of allocation - as between insured events and causes and as between insured and uninsured events or causes - may be crucial to the amount of cover available. [Back] Note 28 We doubt whether this reform will lead third parties to present their claims in an artificial way as third parties will be aware that doing so would make their claims more difficult to prove. [Back] Note 29 Consultation paper, para 12.23. [Back] Note 30 However, an insured who is not joined as a defendant will not be bound by the terms of any eventual judgment. See paras 3.33-3.34 below. As an additional protection, we recommend below that a third party who chooses not to join the insured must nevertheless inform him of the proceedings. See paras 3.52-3.56 below. [Back] Note 31 Clause 1(1). We shall refer to the transfer effected by the draft Bill, as we do that effected by the 1930 Act, as a “statutory transfer”. [Back] Note 32 And modifies them in limited respects as explained in Part 5 below. [Back] Note 33 Paragraphs 3.25-3.29. [Back] Note 34 See para 3.9 above. [Back] Note 35 Clause 1(3)(f). It is worth noting that in the case of a voluntary winding-up the transfer will occur on the passing by the members of the resolution in favour of the winding-up (clause 1(3)(d)). The difference, which we have retained from the 1930 Act, is explained by the fact that a petition for a compulsory winding-up may be opposed by the company, and indeed may turn out to be wholly unjustified. The position is not known until the court adjudicates. In the case of a voluntary winding-up, on the other hand, there is typically no-one to contest the making of the order. [Back] Note 36 Clause 1(1)(b). [Back] Note 37 Clause 1(1)(a). If the insured is no longer a person to whom s 1 applies then the draft Bill does not effect a transfer. So, for example, if a winding-up order has been “stayed or sisted” under IA 1986, s 147, and the insured then incurs a liability to a third party, no transfer will take place. [Back] Note 38 Liability is “established” only once both the existence and the amount of the liability are ascertained (clause 10(2)). See para 3.4 above. [Back] Note 39 The mechanism for England and Wales is contained in clause 8; that for Scotland is in clause 9. [Back] Note 40 Clause 8(1). Or “declarators” in Scotland. See clause 9(1). [Back] Note 41 Clause 8(2). No equivalent provision is necessary in Scotland where a declarator is a matter of right. [Back] Note 42 Non-discretionary declarations are used elsewhere in legislation. See, for example: Trade Marks Act 1994, s 21; Leasehold Reform, Housing and Development Act 1993 s 61(1); and Family Law Act 1986, s 58(1). [Back] Note 43 Clause 8(5) (in Scotland, clause 9(4)). [Back] Note 44 Clause 8 (in Scotland, clause 9) is permissive, not obligatory. [Back] Note 45 He may have to apply for permission to continue proceedings. See para 3.6, n 4 above. [Back] Note 46 Alternatively, the third party may wish to join the insurer to his existing proceedings. See paras 3.40-3.42 below. [Back] Note 47 The draft Bill entitles the third party to apply for one declaration only in order to allow the new mechanism to operate flexibly. A third party may decide, for example, not to ask for a declaration as to the insured’s liability to him if, when he receives a statutory transfer, he is engaged in proceedings against the insured which are nearing completion. The third party may nevertheless wish to clarify the insurance position by asking for a declaration as to the insurer’s duty to indemnify, pending the outcome of the action against the insured. [Back] Note 48 It may be that the third party’s attempt to enforce judgment precipitates the insured’s insolvency. [Back] Note 49 Clause 8 (in Scotland, clause 9) only applies to proceedings brought by the third party before the insured’s liability has been established. [Back] Note 50 See paras 5.39-5.44 below. [Back] Note 51 As he may under the 1930 Act. This is a consequence of the mechanism of statutory transfer. See para 5.39 below. [Back] Note 52 Clause 8(6) (in Scotland 9(5)) A third party in this situation will also be entitled to information on the insured’s insurance - see Part 4 below. [Back] Note 53 See para 5.44 below. [Back] Note 54 Clause 8(8) (in Scotland, clause 9(7)). [Back] Note 55 Ibid. In addition, in cases in which the insured’s liability to the third party, or its amount, is in issue, we recommend that the rules of court be altered to require the third party to inform the insured of his allegations. See paras 3.52-3.56 below. [Back] Note 57 Clause 14. For a full analysis of this aspect of this clause see paras 7.4-7.8 below. [Back] Note 58 In Jackson v Greenfield [1998] BPIR 699 at p 708E, the judge expressed the view that “incurred liability” may, on the existing authorities, have a different meaning in s 1 from that in s 3 of the 1930 Act. [Back] Note 59 See paras 3.4-3.10 above. [Back] Note 60 The insured’s breach of duty may predate the third party’s resulting loss. It would not be appropriate to effect a statutory transfer of rights before a loss is suffered. The wording of the 1930 Act clearly does not do so. Further, there may not always be an “event” giving rise to liability: it may arise from an omission rather than an act, or from a series of occurrences. [Back] Note 61 See, for example, clause 1(1)(a). [Back] Note 63 Or one of the other events in s 1(1) of the 1930 Act has occurred. [Back] Note 64 Consultation paper, para 12.23. Since the publication of the consultation paper, the Civil Procedure Rules (“CPR”) have come into force in England and Wales (on 26 April 1999). They replace the old Rules of the Supreme Court and County Court Rules. [Back] Note 65 In Scotland, third party procedure allows a defender to sist a third party where he claims that he has a right of indemnity against that party and in other circumstances. The insured could use this procedure to make the insurer a party to an action brought against him by the third party. Rule 20, Ordinary Cause Rules; Rule 26, Rules of the Court of Session. [Back] Note 66 See paras 3.52-3.56 below. [Back] Note 67 Under CPR 19.2(2)(b) which gives the court the power to order addition if (1) there is an issue involving the new party and an existing party which is connected to the matters in dispute in the proceedings, and (2) it is desirable to add the new party so that the court can resolve that issue. The court would be able to order addition of the insurer in order to resolve the issue of the insurer’s duty to indemnify under the insurance contract. [Back] Note 68 This may occur quite often. For example, the following sequence of events can be anticipated: (1) Third party issues liability proceedings against solvent insured; (2) limitation period applicable to that action expires; (3) before the third party receives a quantified judgment in the proceedings against the insured, the insured becomes insolvent and is wound up, triggering a transfer of rights under the draft Bill. [Back] Note 69 Under CPR 19.5. The addition of the insurer as defendant would not be “necessary” in the sense required by CPR 19.5(3). [Back] Note 70 Rule 18.2(2)(d), Ordinary Cause Rules; Rule 24.1(2)(d), Rules of the Court of Session. [Back] Note 71 See paras 5.57-5.58 below. [Back] Note 72 Clause 11(1) and (2). [Back] Note 73 If made before the expiry of the limitation period, the court would have discretion under both heads of CPR 19.2(2) to make an addition order, and under CPR 19.2(4) to make a substitution order. If made after the end of the limitation period the court will have a discretion under CPR 19.5. The requirement in CPR 19.5 that the order be “necessary” will be satisfied by virtue of CPR 19.5(3)(b): the insured’s claim against the insurer can no longer “properly be carried on” by the insured as required by that sub-rule as the third party now possesses the insured’s rights under the insurance contract. We discuss limitation and prescription issues in relation to claims under the draft Bill in Part 5 below. [Back] Note 74 Rule 18.2(2)(b)(iv)-(v), Ordinary Cause Rules; Rule 24.1(2)(b)(iv)-(v), Rules of the Court of Session. [Back] Note 75 Fearn v Cowper (1899) 7 SLT 68. The same rule seems to apply in arbitration, although the insured would remain bound by the submission to arbitration. See F Davidson, Arbitration (1st ed 2000) p 331; Henry v Hepburn (1835) 13 S 361. [Back] Note 76 Under CPR 19.2(2)(b). [Back] Note 77 See para 3.41 above. [Back] Note 78 Rule 18.2(2)(d), Ordinary Cause Rules; Rule 24.1(2)(d), Rules of the Court of Session. [Back] Note 79 Consultation paper, para 12.23. [Back] Note 80 See para 7.38-7.39 below. [Back] Note 81 Under CPR 19.2(2)(b). The insured will know about the proceedings as a result of our recommendation that the third party be required by the rules of court to inform him of it. See paras 3.52-3.56 below. [Back] Note 82 Muir v Glasgow Corporation (1917) 2 SLT 106 (OH); Rule 13.1(1), Ordinary Cause Rules. [Back] Note 83 Clause 3 (on which, see para 7.37 below). For example, suppose, before any statutory transfer, that the insured incurred costs defending the third party’s claim and that the insured wished to claim these costs from the insurer under the terms of the insurance policy. Suppose also that the insurer refused to meet the insured’s claim, alleging a misrepresentation by the insured at the time the insurance policy was entered into which would allow it to avoid liability under the policy entirely. If, after a statutory transfer, the third party brought a claim against the insurer, and the insurer defended the claim by relying on the same misrepresentation, the insured might wish to join the action as a claimant in order to test the insurer’s common defence to each claim. [Back] Note 84 CPR 19.2(2)(b). For Scots law see para 3.44 above. [Back] Note 85 Consultation paper, para 12.40. [Back] Note 86 In most cases the insured will be represented by an office-holder. [Back] Note 87 Clause 8(8) (in Scotland, clause 9(7). See para 3.33 above. [Back] Note 88 See paras 3.47-3.50 above. [Back] Note 89 When notified of the claim, the insurer’s first step is likely be to ask the insured for the facts. [Back] Note 90 Schedule 1, paras 3 and 4. See paras 4.42-4.45 below. [Back]
