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You are here: BAILII >> Databases >> The Law Commission >> Third Parties –Rights Against Insurers [2001] EWLC 272(7) (July 2001)
URL: http://www.bailii.org/ew/other/EWLC/2001/272(7).html
Cite as: [2001] EWLC 272(7)

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    PART 7

    THE EFFECT OF THE DRAFT BILL ON OTHER RIGHTS AND OBLIGATIONS

    1 Introduction

    7.1      The draft Bill confers rights on the third party by transferring to him certain of the insured's pre-existing contractual rights against the insurer. In general, this will mean that the insurer will be under the same liability to the third party as he would have been to the insured.[1] This general position is altered to a limited extent by the restrictions on and enhancements to the third party's transferred rights which we are recommending. To the extent that these affect the defences available to an insurer facing litigation under the insurance contract, our recommendations and the reasons for them have been set out in Part 5 above.

    7.2      In the consultation paper we asked consultees whether a new Act should bestow on the third party, the insured and the insurer various other rights and obligations. In this Part we set out and explain our reform proposals. We also examine how the draft Bill would interact with other rights and obligations of the parties, in order to illustrate how a new Act would operate in practice. We look in turn at the position of the third party, the insurer and the insured.

    7.3      We conclude with an analysis of the status of settlements between the insurer and the insured under the 1930 Act and under the draft Bill.

    2 third party's rights and obligations

    3 Third party's right to recover from insured

    4 Amounts not recoverable from insurer

    7.4      Section 1(4)(b) of the 1930 Act expressly preserves the right of the third party to recover from the insured any of his debt which is not covered by the insurance policy.[2] This is also the effect of the draft Bill.[3]

    5 Amounts recoverable from insurer

    7.5      Nothing in the 1930 Act expressly removes the right of the third party to recover from the insured any of his debt which he is entitled to recover from the insurer under transferred rights. Commentators differ on whether the third party may do this.[4] In our view he cannot.

    7.6      After a statutory transfer the insured no longer has any rights against the insurer under the insurance contract in respect of the third party's debt. If the third party could enforce the insured part of his debt against the insured (for instance, by proving in the insolvency) then the position would be as follows:-

    (1) The insured's office-holder would not be able to make an insurance claim. He would have to fund the third party's dividend by reducing the dividend of the insured's other creditors.
    (2) To the extent that the third party was compensated by such a dividend, the third party would, under general principles, be disentitled from enforcing his rights against the insurer.

    7.7      In other words, the insurance policy would not operate in respect of the amount recovered from the insured; instead, funding for this amount would be obtained by reducing the dividend payable to the insured's other creditors. This is inconsistent with the entire thrust of the 1930 Act.[5]

    7.8      The draft Bill eliminates the existing uncertainty under the 1930 Act by expressly prohibiting the third party from enforcing his debt against the insured to the extent that he is able to recover from the insurer.[6]

    6 Insolvency of insurer

    7.9      It is possible that a third party may find that he is unable to recover, in full or in part, what is due under the insurance contract as a result of the insurer's insolvency. Such a third party may qualify for compensation.

    7.10      The current regime of compensation is governed by the Policyholders' Protection Act 1975[7] and is administered by the Policyholder's Protection Board ("PPB"). The PPB will be abolished[8] when the new Financial Services Compensation Scheme (the "Scheme") is brought into existence by the implementation of the Financial Services and Markets Act 2000 ("FSMA 2000").[9]

    7.11      In our view, a third party should possess the same right to compensation as the insured would have had in the absence of a statutory transfer. Under the current draft rules of the Scheme[10] this would be the case.[11]

    7 Insurance proceeds subject to a charge

    8 Floating charge crystallisation causes a transfer of rights

    7.12      When a floating charge crystallises it will typically attach to all the assets of the insured. This would include an existing or future insurance claim. As we have explained, many of the circumstances in which the draft Bill comes into play will coincidentally also cause such a floating charge to crystallise.[12] In such cases, the effect is to remove the insurance claim from the ambit of the floating charge (just as, in the case of a bankruptcy order, the effect is to remove the insurance claim from the ambit of the bankruptcy) so that the third party, and not the chargeholder, receives the benefit of the insurance policy.

    9 Fixed charge already existing at the time of transfer

    7.13      It may be that at the time of the statutory transfer the benefit of all the insured's policies have been charged to a creditor other than the third party.[13] It is possible that a chargeholder might attempt to enforce such a charge over sums recovered under a third party liability policy, though we are not aware of a case in which this has happened.[14]

    7.14      A transfer of rights effected by the draft Bill will not affect the chargeholder's fixed rights over the insurance proceeds.[15] In other words, the third party will receive a transfer under the draft Bill of the insured's rights under the insurance policy, subject to any charge which the insured has granted.

    10 Third party's other statutory rights against insurer

    7.15      The draft Bill provides a right of action for third parties against liability insurers in general. It does not interfere with legislation providing specific rights to third parties to pursue particular types of claim, for example, under the Road Traffic Act 1988.

    11 Voluntary codes of practice

    7.16      There are a number of insurers' voluntary codes of practice to which the vast majority of United Kingdom insurers subscribe.[16] It is clear in some cases that these codes will apply after a statutory transfer;[17] in others the question has yet to be addressed.

    12 Financial Services Ombudsman

    7.17      The current dispute handling scheme for insurance policies, operated by the Insurance Ombudsman Bureau, will be replaced[18] when FSMA 2000 comes into force.[19] The Insurance Ombudsman, along with seven other financial ombudsmen, will be replaced by the Financial Services Ombudsman. In our view, a third party with a claim under the draft Bill will be eligible for assistance under this new scheme.[20]

    13 Insurer's rights and obligations

    14 Insurer's duty to pay on a successful claim by third party

    7.18      We asked consultees whether a new Act should expressly require the insurer to pay the third party directly.[21] Consultees confirmed that this was already standard practice in 1930 Act cases, but that occasionally the insurer paid out to the office-holder. A number felt that the administration, complication and delay this caused was unnecessary and should be avoided by express provision in a new Act. Nevertheless, we concluded that such a provision would have been redundant. A third party who receives a right to insurance proceeds under the 1930 Act or the draft Bill, thereby receives an enforceable right to require the insurer to pay the monies directly to him.

    15 Insurer's right to an indemnity from insured

    7.19      In the consultation paper, we suggested that the insurer should have a right to recover from the insured any sums the insurer has paid to the third party which, but for the Act, he would not have been required to pay.[22] Although the insurer may have this right under the insurance contract, this will not always be the case.

    7.20      Consultees pointed out that such a right would not be exercised often as in most cases the insured is insolvent. However, it was also acknowledged that the insured might be in administration and capable of paying its debts; or, even if insolvent, likely to pay a dividend. A majority of consultees who responded thought that an insurer's right to an indemnity should be included in a new Act.

    7.21      In Part 5 above we explained that, in general, an insurer facing a claim from a third party will be able to rely on the same defences he would have been able to use had the claim been brought by the insured. As a result, in the usual case, the issue does not arise: the insurer will only have to pay the third party in circumstances in which, in the absence of a statutory transfer, he would have had to pay the insured. We proceeded in Part 5 to set out and justify three exceptions to the usual position.[23] In these limited cases, a statutory right to an indemnity might be valuable to the insurer. We examine each of these cases in the following paragraphs. In each case, we have concluded that a right to indemnity would be inappropriate.

    7.22      First, the draft Bill enables a third party to fulfil, or contribute towards fulfilling, a contractual condition such as a provision for notice.[24] The insurer might, as a result, be obliged to pay out under the insurance policy even though he would have been able to avoid paying out altogether in the absence of a statutory transfer (because, for example, of a breach by the insured of the clause in question). In our view, it would not be right in such a case to allow the insurer to prove in the insured's insolvency, thereby reducing the dividend payable to the insured's general creditors. The draft Bill does not in this context remove substantive defences from the insurer; it merely adjusts the way in which the insured's obligations under the contract may be satisfied in the light of the statutory transfer.

    7.23      Secondly, the draft Bill prevents an insurer from relying on a provision in the insurance contract requiring the insured to provide information and assistance in a case in which the insured no longer exists.[25] It is true that this provision might have the effect of requiring the insurer to pay out even though he would have been able to avoid doing so in the absence of a statutory transfer. However, in such a case, a right to an indemnity would be unlikely to help the insurer since ex hypothesi the insured does not exist and so has no property.

    7.24      Finally, the draft Bill prevents an insurer from relying on a pay-first clause, as against the third party, save in specified cases.[26] It is true that, in the absence of a statutory transfer, such a clause might prevent an insured from claiming on the insurance policy. However, an insured in this position is not uninsured. In other words, his failure to pay the third party does not transfer the ultimate burden of paying the insured amount from the insurer to him. In those circumstances, our view is that it is right that, after a statutory transfer, the draft Bill should not compel the insured to bear that cost.

    16 Prejudice to insurer using subrogated rights

    7.25      If an insurer uses a subrogated right under the insurance contract to conduct the defence of the insured, and if the insured loses that action, the insurer may find that he is prevented from denying his liability under the policy in a subsequent claim by the insured.[27]

    7.26      One way in which this can happen is if the insurer continues to conduct the defence of the insured at a time when he is aware of a breach of condition by the insured which would allow him to repudiate the policy. Such conduct is likely to amount to a waiver of the breach so that the insurer would not be able to rely on the breach to resist a claim from the insured under the policy.[28] Another way in which this may happen is if the insurer continues to conduct the defence of the insured at a time when he believes that the insured is not in fact covered by the insurance policy. It has been suggested that this can create an estoppel preventing the insurer from arguing that the insured's claim fell outside the scope of the policy.[29]

    7.27      We asked consultees whether it was fair that a third party should be entitled to rely on this kind of estoppel in a claim against an insurer under a new Act.[30] A number of consultees felt that it was wrong that such estoppels should arise. Others pointed out, however, that insurance contracts will normally contain non-waiver agreements providing protection against this risk, if it exists.[31]

    7.28      We have decided to recommend no change to the law for two reasons:-

    (1) If the third party uses his right to establish the liability of the insured in his action against the insurer,[32] the insurer will never be at risk of being prejudiced. In such a case, the insurer would defend on his own behalf; he would not use subrogated rights at all. If he wished to deny the insured's liability and also to deny his own liability under the policy, he would be able to do so by running concurrent defences. No question of waiver or estoppel, or in Scotland personal bar, would arise.[33]
    (2) If the third party proceeds (as he must under the 1930 Act) by proving his debt against the insured, and the insurer has conducted the insured's defence, then there is a possibility that an estoppel, a waiver or personal bar will arise. In our view, it would be inappropriate to alter such outcomes in a new Act. If, in the absence of a statutory transfer, the insured could have relied on a waiver of a breach of condition or an estoppel, then, in our view, the third party using transferred rights should also be able to do so. To provide otherwise would be to put the insurer who uses his subrogated rights in a better position when facing a claim from a third party than when facing a claim from the insured. We can see no justification for making such a distinction.

    17 Orders for costs against insurer

    7.29      Under the 1930 Act, before a third party may bring a claim against an insurer, he must establish the liability of the insured. The insurer will often conduct the defence of the insured using his subrogated right to do so. If the insured loses, then costs will usually be ordered against the insured. In exceptional cases in England and Wales, the court may make a costs order against the insurer personally.[34] Even in the absence of such an order, the insurer will in most cases end up paying these costs. This is because the insurance contract will usually cover the insured for any costs orders made against him.

    7.30      On occasion, the insurer will not be obliged by the insurance contract to meet the costs incurred by the third party while pursuing his claim:

    (1) If, exceptionally, the insurance contract does not cover the legal costs in question.
    (2) If the legal costs, when added to the other insured liabilities, exceed the cover under the insurance policy.[35]
    (3) If the insurer is able to avoid liability under the insurance contract.[36]

    7.31      It was decided in Cox v Bankside[37] that an insurer using his subrogated right is not under a duty to indemnify the insured in respect of costs otherwise than under the insurance policy. Thus, in any of the circumstances set out in the previous paragraph, the insurer would not be obliged to pay these costs.

    7.32      By contrast, under the draft Bill, if the third party succeeds in establishing the liability of the insured in proceedings against the insurer, he is likely to obtain an order that the insurer pay his costs. The exceptional circumstances in which the insurer may escape having to pay those costs under the 1930 Act will not occur under the draft Bill.

    7.33      We do not think it likely that this will impose a heavy new burden on insurers. In particular, the circumstances in paragraphs 7.30 (1) and (2) will be rare in practice. The circumstances in (3) will be less rare. However, an insurer may be able to mitigate the effect of this by ensuring that any potential defence under the policy is taken as a preliminary point, thus avoiding the need to establish the liability of the insured.

    18 Insurer's other statutory obligations

    7.34      Specific schemes of third party rights against insurers are laid down in various statutes, for example the Road Traffic Act 1988, the Nuclear Installations Act 1965 and the Merchant Shipping Act 1995. The draft Bill does not derogate from the obligations or restrictions which these separate regimes impose on insurers.[38]

    7.35      Insurers sued by employees under the draft Bill may be restricted by employer's liability legislation in the defences which they can raise to third party claims. For example, as we have seen,[39] the Employers' Liability (Compulsory Insurance) Act 1969 and the Employers' Liability (Compulsory Insurance) Regulations 1998 prevent insurers from including certain policy conditions, or relying on them, in employer's liability policies.

    19 Rights and obligations under rules of court

    7.36      The provisions of the draft Bill are intended to supplement, rather than replace, any rights which a third party may have under general procedural rules. So, for example, a third party in England and Wales will have the option of applying for a disclosure order[40] in addition to, or instead of, using his statutory rights to disclosure in the draft Bill.[41]

    20 Insured's rights and obligations

    21 Insured's right to recover from insurer

    7.37      The 1930 Act preserves the rights of the insured against the insurer in respect of any amount due under the policy but not payable to the third party.[42] Such amounts might arise, for example, if the policy covered costs incurred by the insured in mounting an initial defence to the third party's claim or in seeking legal advice on whether the third party's claim was likely to be successful.[43] Such costs would be payable under the policy but not recoverable by the third party. The draft Bill contains a similar provision.[44]

    22 Insured's right that the insurer conducts his defence properly

    7.38      An insurer conducting the insured's defence must act with due regard to the insured's interests.[45] The circumstances in which the insurer will use his subrogated rights under the draft Bill are likely to be limited (see paragraph 7.28(1) above). If he does, the draft Bill does not affect any rights the insured may have against an insurer who fails to fulfil this duty.

    7.39      If the third party proceeds against the insurer and uses his right to establish the liability of the insured in those proceedings, in our view the insurer will not owe any duty to the insured relating to the conduct of its defence.[46] As a consequence, there may be rare cases when the insured might wish to participate in the proceedings himself.[47]

    23 Settlements reached between insurer and insured

    24 Current law

    7.40      Section 3 of the 1930 Act provides that certain agreements between the insurer and the insured are ineffective to defeat or affect the rights transferred to the third party. This section has been interpreted to apply to settlements reached at any time after (1) liability has been incurred and (2) the occurrence of one of the events specified in section 3 (for example, the bankruptcy of the insured). This is the case even if the liability of the insured has, at that time, yet to be established.[48]

    7.41      The list of events in section 3 omits some events which trigger a statutory transfer under section 1.[49] Some third parties may, therefore, receive a transfer of rights under section 1 but not be protected from the settlements specified in section 3.[50]

    25 Reform recommendations

    26 Settlements before a statutory transfer

    7.42      A number of consultees thought that a provision re-enacting section 3 in a new Act should apply also to settlements between the insurer and the insured in cases of impending insolvency. These consultees were concerned to prevent cases in which the third party was deprived of the chance to make a substantial claim on the insurance policy under transferred rights as a result of a settlement at an undervalue reached between the insured and insurer immediately before the insured's insolvency.[51]

    7.43      We are not recommending any such reform. Until a transfer of rights occurs, the insured and the insurer will be free to alter their rights inter se under the insurance contract, as they currently are under the 1930 Act. Reform would introduce undesirable uncertainty into dealings between the insured and insurer. In Normid Housing Association Ltd v Ralphs (No 2)[52] the Court of Appeal suggested that, if the third party can persuade the court that the settlement to which he objects is part of "a plan to cheat the plaintiffs", a freezing order is likely to be available to the third party to prevent it.[53] In addition, as the Court of Appeal also mentioned, without expressing a view, insolvency legislation may provide its own mechanism for challenging settlements at an undervalue.[54]

    27 Settlements after a statutory transfer

    7.44      Once rights have been transferred by the draft Bill the insured retains no rights under the insurance contract in respect of his liability to the third party. Accordingly, he will not be in a position to agree with the insurer that these rights should be changed.

Note 1    As is the case under the 1930 Act. Indeed this is expressly set out in s 1(4).    [Back]

Note 2    Such sums will arise if some of the insured’s debt is not insured under the policy, or if the loss exceeds the policy limit, or if the policy contains an excess; alternatively, the insurer may be entitled to deduct unpaid premiums from the sum payable to the third party (see para 5.20 above).    [Back]

Note 3    As the draft Bill does not alter the pre-existing rights and obligations subsisting between the third party and the insured which do not relate to amounts due from the insurer under the insurance contract, no explicit provision to this effect is necessary.    [Back]

Note 4    The view of the editor of MacGillivray on Insurance Law (9th ed 1997) is that the third party is not entitled to recover such sums from the insured. See para 28-16 n 47: “...he [the third party] can only seek to obtain [from the insured] the amount which he could not have recovered in any event from the insurer.” Compare M Clarke, The Law of Insurance Contracts (3rd ed 1997) whose view (at p 167, para 5-8F1(c)) appears to be that the third party is only barred from recovering from the insured to the extent that he has actually obtained compensation from the insurer.    [Back]

Note 5    The first instance decisions in Re Pethick, Dix [1915] 1 Ch 26 and Re Renishaw [1917] 1 Ch 199, on a similar point which arose in relation to the Workman’s Compensation Act 1906, support the view we have taken.    [Back]

Note 6    Clause 14(1). We explain in the following paragraphs that the third party may be able to obtain compensation if the insurer is insolvent. To the extent that this is possible, the draft Bill also expressly prohibits the third party from recovering that amount from the insured. (clause 14(4)(a) and 14(5)).    [Back]

Note 7    As amended by the Policyholders’ Protection Act 1997. Only some of the 1997 Act has come into force.    [Back]

Note 8    By s 416(3)(b) of the Financial Services and Markets Act 2000 (“FSMA 2000”).    [Back]

Note 9    The implementation date for FSMA 2000 is, at the time of writing, expected to be November 2001. The rules of the Scheme will be made under powers granted to the Financial Services Authority by s 213. The Financial Services Authority has appointed a company named Financial Services Compensation Scheme Ltd as Scheme Manager. The Scheme will replace the existing compensation regimes for investments business and deposits, in addition to insurance.    [Back]

Note 10    Published by the Financial Services Authority in Financial Services Compensation Scheme Draft Rules (2000) Consultation Paper 58.    [Back]

Note 11    By the time the draft Bill is enacted, the existing regime in the Policyholders Protection Act 1975 will no longer be in force. Accordingly, we have not analysed in this report the third party’s right to compensation against the PPB either under the 1930 Act or under the draft Bill.    [Back]

Note 12    See paras 2.18-2.20 above. As we explain there, a floating charge may occasionally crystallise without causing a transfer under the draft Bill.     [Back]

Note 13    Re CCG International Enterprises Ltd [1993] 1 BCLC 1428 confirmed that insurance proceeds could be the subject of an equitable fixed charge. That it is possible to create a fixed charge over future assets was confirmed in Siebe Gorman v Barclays Bank [1979] 2 Lloyd’s Rep 142 in which Slade J held that it was possible to create a fixed charge in equity over prospective assets such as future book debts provided that they could be clearly ascertained. A fixed charge might also arise if a floating charge crystallised over the insurance proceeds without causing a statutory transfer. See para 7.12, n 12 above.    [Back]

Note 14    The insurance policies primarily intended to be covered by such a fixed charge will not be policies covering the insured’s possible future debts, but those covering the insured’s assets, for example a buildings insurance policy. We note that in Re CCG International Enterprises Ltd [1993] 1 BCLC 1428 at p 1430c no point was taken by the plaintiff that the insurance proceeds attributable to the third party should go to the chargeholder.    [Back]

Note 15    An equitable fixed charge over an asset will bind everyone to whom the asset is transferred save for a bona fide purchaser without notice. See Re Charge Card Services [1987] Ch 150 at p 176c, a decision of Millet J (affirmed by the Court of Appeal at [1989] Ch 497).    [Back]

Note 16    For example, the Statement of General Insurance Practice issued by the Association of British Insurers and the ABI/Lloyd’s arbitration agreement. Following the launch of the General Insurance Standards Council (GISC) on 3 July 2000, these codes will in due course cease to be applicable and the industry will be regulated by new GISC codes.     [Back]

Note 17    For example, third parties will be able to use the ABI / Lloyd’s arbitration agreement (see para 5.40, n 63 above).    [Back]

Note 18    See FSMA 2000, Part XVI.    [Back]

Note 19    See para 7.10, n 9 above.    [Back]

Note 20    Under rules 2.4.10 and 2.4.12. The scheme’s rules are published in: Complaints Handling Arrangements (2000) Financial Services Authority and Financial Ombudsman Service.    [Back]

Note 21    Consultation paper, para 12.48.     [Back]

Note 22    Consultation paper, para 14.42.    [Back]

Note 23    Enacted in the draft Bill in clauses 4(1), (2) and (3).    [Back]

Note 24    Clause 4(1). See paras 5.15-5.16 above.    [Back]

Note 25    Clause 4(2). See paras 5.17-5.19 above.    [Back]

Note 26    Clause 4(3) and clause 4(4). See paras 5.28-5.37 above.    [Back]

Note 27    See MacGillivray on Insurance Law (9th ed 1997) para 28-24: “...care is needed in undertaking the defence of the claim on behalf of the assured, or else the insurers may become precluded from denying liability under the policy.” This is perhaps unlikely to happen in Scotland where current procedure enables both the insured and insurer to be pursued in a single process. In such a situation, the insurer can conduct the insured’s defence without prejudice to his own right to deny liability by presenting alternative defences: for example, the insured is not liable, but, if the insured is found liable, the insurer is not liable to indemnify him. See also Cheltenham and Gloucester plc v Sun Alliance and London Insurance plc IH, 30 May 2001 and para 3.7, n 11 above.    [Back]

Note 28    See for example Diplock LJ in Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898 at p 909G.    [Back]

Note 29    It seems that such an estoppel may arise in the United States and Australia (See MacGillivray on Insurance Law (9th ed 1997) para 28-26). In Wood v Perfection Travel [1996] LRLR 233 the Court of Appeal allowed an application by an insurer to be joined to an action brought by a third party against a dissolved company which had been restored to the register. The insurer was concerned that he might, if forced to use his subrogated right to conduct the defence of the insured, be estopped from later denying liability under the policy. Hirst LJ at p 235 accepted, for the purposes of the judgment, that the law was uncertain in this area, but declined to decide the point. Professor Merkin commented that “the legal basis for this risk is unclear, but after Wood it plainly cannot be discounted”. See “When is the Reinsurer Liable?” [1996] Insurance Law Monthly, vol. 8(1) p 4. The view of the editor of MacGillivray is that such an estoppel does not arise in English law (see para 28-29).    [Back]

Note 30    Consultation paper, para 12.13.    [Back]

Note 31    Though non-waiver agreements were not included in occurrence-based liability policies written many years ago under which insurers may still face long tail liability.    [Back]

Note 32    Conferred by clause 8(1) (in Scotland, clause 9(1)).    [Back]

Note 33    Under the 1930 Act, by contrast, an insurer will commonly conduct the defence of the insured (using his subrogated right to do so), before the third party issues proceedings against him. Although, afterWood, insurers alert to the problem of a possible estoppel may be able to avoid using their subrogated rights by applying to be joined as a party in their own right, this is unlikely to become standard practice, particularly as insurers may have a costs incentive not to adopt this course - see paras 7.29-7.33 below.     [Back]

Note 34    Under Supreme Court Act 1981, s 51. For recent guidance from the Court of Appeal on the very limited circumstances in which such an order will be made against a liability insurer see Cormack and Cormack v Excess Insurance Co. [2000] CPLR 358. But cf Monkton Court Ltd(t/a CATS) v Perry Prowse (Insurance Services) Ltd [2000] 1 All ER (Comm) 566 in which the High Court made such an order.    [Back]

Note 35    As was the case in both Cormack and Monkton Court (see para 7.29, n 34 above). Some insurance policies provide a separate indemnity for legal costs, which may or may not be limited.    [Back]

Note 36    In order to do so he may have to show, not just that he has a defence under the policy, but that no estoppel arises, to prevent him relying on it, from his conduct of the insured’s defence. See para 7.26 above.    [Back]

Note 37    [1995] 2 Lloyd’s Rep 437 at p 463 per Lord Bingham MR.    [Back]

Note 38    For example, the Road Traffic Act 1988, s 148 renders void certain policy conditions in compulsory insurance governed by that Act. An insurer defending a claim against a third party a under such a policy will be thereby prohibited from relying on certain policy conditions, notwithstanding the absence of similar prohibitions in the draft Bill.    [Back]

Note 39    See paras 5.23-5.27 above.    [Back]

Note 40    Under CPR 31.    [Back]

Note 41    Draft Bill, Sched 1, para 6.    [Back]

Note 42    Section 1(4)(a).     [Back]

Note 43    The policy might contain a “QC clause”, providing that the insurer will pay a claim without requiring the insured to contest it, unless a Queen’s Counsel advises that the claim could be successfully contested.    [Back]

Note 44    Clause 3.    [Back]

Note 45    See MacGillivray on Insurance Law (9th ed 1997) p 791: “Both the insurers and solicitors appointed by them owe a duty to the assured to conduct the proceedings with due regard to his interests, and an action for damages will lie for breach of that duty.” See Groom v Crocker [1939] 1 KB 194 and Cox v Bankside [1995] 2 Lloyd’s Rep 437.    [Back]

Note 46    See the analysis of the Master of the Rolls in Cox v Bankside [1995] 2 Lloyd’s Rep 437 at p 463, in which the position of an insurer under a common law duty to the insured is contrasted with that of an insurer who is “acting in its own interest only”. The insurer who defends a claim from a third party under the draft Bill is also “acting in its own interest only”.    [Back]

Note 47    See para 3.48 above.    [Back]

Note 48    See Woolwich Building Society v Taylor [1995] 1 BCLC 132.    [Back]

Note 49    Viz (1) the approval of voluntary arrangements, (2) the appointment of a receiver, or manager; (3) possession being taken by or on behalf of the holders of any debentures secured by a floating charge or of any other property comprised in or subject to a charge. It is not clear whether these omissions were deliberate. There is no reference to this point in Hansard’s coverage of the debates of IA 1986 which amended s 1 and s 3 of the 1930 Act. It appears that the distinction is between insolvency proceedings which are terminal (such as winding-up and bankruptcy) and those which may allow the insured to carry on.    [Back]

Note 50    Such an unprotected third party appeared in Jackson v Greenfield [1998] BPIR 699. In that case, after incurring liability to the third party, the insured entered into an Individual Voluntary Arrangement with creditors. Before the third party had established the insured’s liability, the insured attempted to settle the possible insurance claim with the insurer. The third party was concerned to block the settlement. The judge observed (at p 708H) that s 3 would have rendered such a settlement ineffective (for the purposes of the third party’s claim) had the insured been declared bankrupt; but s 3 was of no avail to the third party in the current case as it did not apply in the case of an voluntary arrangements. The judge went on to hold that, as the third party had not yet established the insured’s liability to him, no statutory transfer had taken place, and the insured retained the right to deal with the possible insurance claim as he saw fit.    [Back]

Note 51    In Normid Housing Association Ltd v Ralphs [1989] 1 Lloyd’s Rep 265 the third party wished to pursue the insurer for the full extent of his claim against the insured which amounted to some £5.7m. The insurance contract purported to contain a policy limit, the legal effect of which was debatable, of £250,000. The insurer and the insured wished to settle the insurance position for £250,000. The Court of Appeal held (at p 272) that the third party was not entitled to an injunction to prevent this. The third party had no rights under the 1930 Act, or otherwise, on which the injunction could be based.    [Back]

Note 52    [1989] 1 Lloyd’s Rep 274.    [Back]

Note 53    Ibid, per Slade LJ, at p 278.    [Back]

Note 54    Slade LJ referred to IA 1986, s 423: ibid, at p 277. Other sections of the IA 1986 may also be relevant, for example s 238.    [Back]


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