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You are here: BAILII >> Databases >> The Law Commission >> Third Parties –Rights Against Insurers [2001] EWLC 272(9) (July 2001) URL: http://www.bailii.org/ew/other/EWLC/2001/272(9).html Cite as: [2001] EWLC 272(9)

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PART 9

DISTRIBUTION OF A LIMITED INSURANCE FUND TO MULTIPLE CLAIMANTS

1 The issue

9.1      The insured may incur liabilities to more than one third party. If those liabilities are insured under a single insurance policy and if their aggregate value exceeds a policy limit, the question arises as to the basis on which the insurance fund should be distributed amongst the third parties.

9.2      This issue came before the English courts in Cox v Bankside.^[1] The Court of Appeal held that, ordinarily, the insurance fund can only be distributed on a "first come, first served" basis, under which third parties with enforceable judgments are paid in full until the insurer has paid out all of the fund.^[2] After that point, third parties receive nothing from the insurer. An exception to the ordinary rule applies, in cases in which a group judgment is delivered, or in which more than one judgment is delivered at the same time. In such circumstances, and subject to any agreement to the contrary, the successful litigants will take rateably.^[3]

9.3      In the consultation paper, we set out some reasons why it might be thought desirable to alter the current position in a new Act. In particular, we drew attention to the fact that a third party who received nothing from the insurance fund (because he was too far back in the queue of third parties) would be worse off than if the 1930 Act had never been passed.^[4] We queried whether this was an appropriate effect of an Act designed to assist third parties. We asked consultees whether a new Act should contain a new scheme setting out how a limited fund could be distributed more fairly to multiple claimants.

9.4      We also drew attention to a number of difficulties with which any such scheme would have to deal.^[5] We expressed no preliminary view on whether reform in this area was desirable.

2 Position in Scots law

9.5      There is as yet no multi-party procedure in Scotland, although the courts can conjoin the actions of different pursuers against the same defender. The fund available to these pursuers can then be distributed rateably.^[6]

3 Consultation

9.6      Only one consultee told us that he had experienced this problem outside the Lloyd's litigation.^[7] Several consultees felt that the issue would arise very rarely, but that when it did it could involve very large claims.^[8]

9.7      Consultees were evenly divided on whether a new Act should contain a statutory scheme of rateable distribution. Many of those in favour said that a new Act should benefit all third parties, not just some of them. A number suggested that the first come, first served basis encouraged an unseemly and costly race to judgment.

9.8      Those who opposed reform did so for a number of reasons. Many referred to the inevitable complexity of a fair statutory scheme, the cost for third parties and others of participating in such a scheme, and the delay it would cause for third parties who had acted promptly to advance strong claims.

4 "First come, first served" retained in the draft Bill

9.9      We are not recommending reform in this area for the reasons set out below.

5 Power to order pro rata distribution in some group litigation

9.10      As we have seen,^[9] it is already possible for the court to order rateable distribution in some cases. Moreover, the Court of Appeal has indicated that courts may be prepared to use their case management powers so as to enable them to do so if appropriate.^[10] To the extent that the Court may already order rateable distribution it is clear that no reform is required.

6 Statutory scheme would be complex and controversial

9.11      Nevertheless, in some group litigation, as in Cox v Bankside itself, the court will not have the power to order rateable distribution. The new procedural rules in England and Wales in the CPR do not alter the position. We note, in particular, that the new mechanism for group litigation does not give the court the power to order a rateable distribution of a limited fund. ^[11]

9.12      Any scheme which could hope to deal justly with litigation as complex and diverse as the Lloyd's litigation would have to be immensely detailed. As Sir Thomas Bingham MR pointed out in Cox v Bankside:^[12]

It would have to take account of a multiplicity of plaintiffs, with claims based on different grounds, relating to different periods, against different defendants; it would have to take account of a multiplicity of defendants, some fully insured, some not, some solvent, some insolvent with different E & O cover for different underwriting years; it would have to remain in force for a period of years, during which period the receivers of each policy fund would have to seek the approval of the Court to make interim distributions, and would no doubt have to be paid out of the proceeds of the cover...

9.13      One consultee pointed out that any effective scheme would require something akin to the full machinery of the insolvency legislation with the added complexity that many more claims in this context would be contentious and for unliquidated sums.

9.14      In the consultation paper, we identified a number of the central issues with which any statutory scheme would have to deal.^[13] We were not persuaded by those consultees who favoured a statutory scheme that these difficulties could easily be overcome.

9.15      One difficulty is that of devising a satisfactory mechanism for identifying and co-ordinating disparate claims. A single incident might give rise to an immediate claim by one third party and to a long-tail claim from another. One third party's claim might be unarguable (and so would never ordinarily come to the attention of the court) whilst another might require a lengthy trial. At the time of the statutory transfer, one third party might be awaiting judgment against the insured, while another third party might not yet have advanced his claim. Consultees offered widely different solutions to this problem, none of which we found wholly satisfactory.

9.16      Another difficulty is the need to specify an administrator of the scheme. In the consultation paper,^[14] we mooted various possibilities: the court, a court appointee, the insured's insolvency practitioner, or the insurer. We mentioned the drawbacks of each. Consultees did not persuade us that this issue could be easily resolved.

7 Delay caused by a statutory scheme

9.17      An inevitable effect of any system of rateable distribution would be to delay the distribution of the insurance proceeds while all the claims were processed and, if necessary, adjudicated. Third parties whose claims were straightforward or close to judgment would therefore suffer both from receiving less than the full value of their claim and from delay in receiving it. While it might be possible to provide for interim payments this would mitigate rather than remove the problem; it would also add to the complexity and cost of the scheme.

8 Cost of a statutory scheme

9.18      Any scheme would cost money, most obviously the fees and expenses of its administrator who might, amongst other expenses, require legal advice. The only source for these costs would be the insurance fund. The unwelcome effect would be that the aggregate sums received by third parties would be reduced further by fees paid to insolvency and legal professionals.

9 Not a problem central to the 1930 Act

9.19      Cox v Bankside is the only reported case of this problem arising in the context of the 1930 Act. Only one consultee had other experience of such a problem.^[15] We accept that when the issue does arise it may do so in the context of major litigation. However, we took into account the fact that this was not a common problem for users of the 1930 Act.

10 Bare power to order rateable distribution unsatisfactory

9.20      We considered the possibility of giving the courts the power to order rateable distribution without devising a detailed statutory scheme. However, such a power already exists in group litigation or where the Court is able to engineer simultaneous judgments.^[16] In other cases we concluded that the courts would not welcome a bare power, which would require the presiding judge to resolve many of the above difficulties without statutory guidance.^[17]

11 First come, first served is a satisfactory basis

9.21      Even if we could overcome these difficulties and construct a statutory scheme for rateable distribution, it would not always be preferable to the first come, first served basis. We accept that the first come, first served basis will not always be fair to everyone. It may penalise impoverished third parties unable to prosecute their claims, or third parties seeking to arrive at a settlement without embarking on court proceedings. There is also an element of luck involved, as the speed with which a case can be advanced, heard and judgment delivered is not entirely in a claimant's control.^[18]

9.22      On the other hand, there is much to be said for the first come, first served basis. It favours those with strong claims over those with weak or speculative claims; it rewards those who take the risk of litigation rather than those who sit back and hope to benefit from the efforts of others; it avoids delay and is cheap to operate.

9.23      Moreover, in the absence of insurance, multiple claimants against a defendant with limited funds will largely be compensated on the first come, first served basis. Claimants who advance their claims early are likely to be paid in full; once funds are exhausted, the defendant is likely to be declared insolvent and third parties who advance their claims at this stage are likely to recover only a small proportion of what they are owed. In this way, those at the front of the queue will receive more than those at the back. We found it difficult to justify discriminating between the treatment of multiple claimants faced with such a defendant - ie without insurance but with limited funds - and those advancing claims under the draft Bill against a defendant with limited insurance.

9.24      The first come, first served basis will, in any event, work better under the draft Bill than under the 1930 Act, as the third party will have a right at any stage to require the insurer to inform him of the outstanding value of the insurance fund.^[19] This will save third parties, likely to lose out because of their position in the queue, the expense of pursuing futile litigation.

(Signed) ROBERT CARNWATH, Chairman, Law Commission
HUGH BEALE
MARTIN PARTINGTON
ALAN WILKIE

MICHAEL SAYERS, Secretary

(Signed) BRIAN GILL, Chairman, Scottish Law Commission
PATRICK S HODGE
GERARD MAHER
KENNETH G C REID
JOSEPH M THOMSON

JANE L McLEOD, Secretary
14 June 2001

Note 1    [1995] 2 Lloyd’s Rep 437. We analysed this case in detail in the consultation paper, Part 7.    [Back]

Note 2    The court held that, on the facts before it, there was no legal basis on which it could order any other method of distribution, whether in the 1930 Act, in procedural rules of court, in the maxims of equity, or elsewhere. The “first come, first served” system is sometimes called the “first past the post” system. The terms are interchangeable; we use the former in the text.    [Back]

Note 3    “there being no sensible or fair alternative” (Cox v Bankside [1995] 2 Lloyd’s Rep 437 at p 463 per Peter Gibson LJ). Peter Gibson LJ held that the exception was based on the equitable maxim “equality is equity”. The exception was applied in Cox v Deeny [1996] LRLR 288. See p 290 and p 300.    [Back]

Note 4    In which case he would have received a rateable share of the insolvency fund swollen by the insurance proceeds.    [Back]

Note 5    See consultation paper, paras 15.16-15.17.    [Back]

Note 6    See Bell v Lothiansure Ltd (unreported) 19 January 1990, Lord Cameron of Lochbroom.    [Back]

Note 7    The term “Lloyd’s litigation” refers to the mass of actions brought by members of Lloyd’s syndicates (the so-called Names) in the 1990’s in an attempt to recover damages for the disastrous losses they had suffered. See the consultation paper, para 7.2 ff, for a more complete account.    [Back]

Note 8    Examples suggested by consultees included mass claims against financial advisors over mis-selling of financial products and mass product liability litigation. It may be, however, that in such cases the court would find a way to order rateable distribution in any event. See para 9.10 below.    [Back]

Note 9    See para 9.2 above.    [Back]

Note 10    In Cox v Bankside Peter Gibson LJ said (at p 464) “I see no reason in principle why the Court cannot in the interests of fairness in an appropriate case...engineer a situation wherein judgments are given simultaneously so as to achieve a rateable entitlement”.    [Back]

Note 11    The rules on Group Litigation Orders are at CPR 19.10-19.15. We note, however, that the current situation may change. The Lord Chancellor’s Department is consulting on introducing representative actions in which a representative could bring proceedings on behalf of persons with collective interests (Representative Claims: Proposed New Procedures, CP 1/01, February 2001). Were a group of third parties to take advantage of such a new procedure, the court would under the current proposals be entitled to order rateable distribution to achieve a just settlement.    [Back]

Note 12    At p 459, col 2.    [Back]

Note 13    Consultation paper, Part 15.    [Back]

Note 14    Consultation paper, paras 15.10-15.12.    [Back]

Note 15    One reason for this may be that many insurance policies are not limited by the total value of all claims under a particular risk (or in a particular period or arising from a particular event) but by the value of each individual claim.    [Back]

Note 16    See para 9.10 above.    [Back]

Note 17    When considering a proposal that the court should order rateable distribution in the context of a 1930 Act claim inCox v Bankside, Phillips J stated that “I consider that this would be an impossibility without statutory machinery”.    [Back]

Note 18    One consultee pointed out the possibility that the first come, first served basis might in some circumstances arbitrarily penalise those at the front, as well as those at the back, of the queue. If the insurance policy contains a policy excess the insurer would, under this system, be entitled to deduct it in full from the payout to the first third party to bring a claim (rather than deducting it pro-rata from all the claims or deducting it from the final claim). This consultee suggested that a scheme of rateable distribution could deal with this problem too. It should be noted, however, that this problem will not arise if the excess applies to the individual claim rather than to the total amount which may be claimed under the policy. In addition, an insurer aware that he would be required to pay out the full fund, might in practice deduct the excess from the last claim rather than the first.    [Back]

Note 19    See Part 4 above.    [Back]