“Two Acts go to war. Can Insurers of an insolvent insured join culpable third parties into proceedings?”

“Two Acts go to war. Can Insurers of an insolvent insured join culpable third parties into proceedings?” 19 Nov

In an important decision for insurers, the Court has for the first time, in its judgment in Riedweg v HCC International Insurance PLC and others [2023] EWHC 2805 (Ch), considered the way in which the Civil Liability (Contribution) Act 1978 (“the 1978 Act”) and the Third Party Rights against Insurers’ Act 2010 (“the 2010 Act”) interact.

The issue to be decided

The Court was concerned with the question as to whether the professional indemnity insurer of an insolvent insured is to be treated in law as being liable in respect of the same damage as that for which its insured is liable, for the purpose of enabling the insurer to pursue a claim to recover a contribution pursuant to the 1978 Act.

Background facts

The issue arose in a professional negligence claim in which the Claimant agreed to buy a property for £8 million relying on allegedly negligent valuation advice from valuers, Goldplaza Berkeley Square Ltd ("Goldplaza").

The Claimant claims that she would not have agreed to buy the property but for the overvaluation, and as a result of it she had been unable to complete or assign the contract for the sale of the property.

The seller subsequently sold the property to a third party for £5,500,000 and made a claim against the Claimant for the difference in the respective sale prices. The Claimant settled those proceedings on terms that she pay the seller £2,200,000. She claims that sum as damages, together with interest and other associated losses from Goldplaza.

As Goldplaza had by then entered into liquidation, the Claimant brought the claim against its professional indemnity insurers, HCC International Insurance plc ("the Insurers") pursuant to the 2010 Act.

The Insurers alleged that the solicitors (“the Solicitors”) who acted for the Claimant on the underlying transaction had acted in breach of fiduciary duty and contract and had caused the same damage as that alleged to have been caused by Goldplaza.

The Insurers made an application to join the Solicitors into the action pursuant to the 1978 Act.  The Solicitors resisted that application arguing that the damage suffered by the Claimant was not the same damage as the Insurers were potentially liable to the Claimant.

The position as between Goldplaza and the Solicitors

It was agreed (for the purposes of the application) that had the Claimant sued Goldplaza, it would have been entitled to join the Solicitors into the claim as they were potentially liable for the same loss, namely those losses suffered by the Claimant in agreeing to buy the property.

The 2010 Act

Section 1(1) and (2) of the 2010 Act provides:

'(1) This section applies if— (a) a relevant person incurs a liability against which that person is insured under a contract of insurance, or (b) a person who is subject to such a liability becomes a relevant person. (2) The rights of the relevant person under the contract against the insurer in respect of the liability are transferred to and vest in the person to whom the liability is or was incurred (the "third party"). (3) The third party may bring proceedings to enforce the rights against the insurer without having established the relevant person's liability; but the third party may not enforce those rights without having established that liability.'

The Solicitors’ arguments

The Solicitors argued that, as a matter of general proposition, the liability of an insurer to indemnify for a loss is not in respect of the same damage as that suffered by the injured victim who makes a claim in reliance on the relevant policy of insurance.

The Solicitors relied on the decision in Bovis Construction Ltd v Commercial Union Assurance Co Ltd [2001] 1 Lloyd's Rep 416. Bovis were employed to manage a construction project, and took out a policy with Commercial Union in the joint names of themselves and the employer to cover potential third party claims in connection with the project. There was property damage to the  property following a flood and the employer sued Bovis for damages, which claim was settled. Bovis, and their public liability insurers (who had met the claim), then sued Commercial Union for an indemnity or contribution under s.1 of the 1978 Act.

The Court held that:

“Bovis was liable for the flood damage to the property: CU was liable under a policy of insurance. It is a misconception to describe those as liabilities "in respect of the same damage". The damage inflicted by the builder was a defective building susceptible to flooding damage and consequential loss of rent. CU has not inflicted that damage: the only damage it could inflict would have been a refusal to pay on the policy (which in any event excluded consequential loss), thereby imposing financial loss. This is not the same damage.”

As to the 2010 Act, the Solicitors submitted that whilst it allows:

• A claimant to sue insurers directly and, for that purpose, a claimant effectively stands in the place of the defendant for the purpose of enabling a claim to proceed, and

• Insurers to defend both the underlying liability of their policyholder, and the question whether the liability is covered by the policy of insurance,

it does not provide that the insurers are sued as if they were the insured and in its place; rather the statutory scheme respects the role of the insurer, who does not stand in the shoes of the insured.

As such the implementation of the procedural scheme provided by the 2010 Act has not changed the substantive law that the loss is not the same damage.

The Insurers’ argument

The Insurers argued that the loss was the same damage relying on the fact that:

• Previous authorities have held that the 1978 Act was designed to provide a broad formulation of the entitlement to contribution.

• The Insurers could join Goldplaza to the claim in any event.

• If the Insurers pay or are ordered to pay a sum to the Claimant, then it will be subrogated to Goldplaza's rights.

The Court’s decision

The Court preferred the submissions made on behalf of the Solicitors and held that Insurers had not sufficiently engaged with the analysis in Bovis Construction that the only damage Insurers are capable of inflicting is in refusing to meet its obligations under the insurance policy.

If Insurers did refuse to meet their obligation under the policy that would be damage to Goldplaza, which is potentially liable to the Claimant regardless of whether or not the Insurers have grounds to repudiate the insurance policy.

Further it does not follow that simply because Goldplaza would have the right to seek a contribution from third parties that Insurers, likewise, have that right.

The purpose of the 2010 Act is to provide a mechanism for a claimant to pursue an insurer directly in respect of the liability of its insured, and for the claimant to stand in the insured's place for that purpose.

The insurer's liability is still that which flows from its obligations to the insured, which can only be to indemnify the insured against its liability to a third party.

The fact that Insurers may in the future acquire rights through subrogation affects the analysis of whether they are liable for the same damage as a third party.

EDESIA LAW COMMENT:-

This decision may, at first sight, appear harsh on Insurers in depriving them of a right to join potentially culpable third parties into proceedings.  However the judgment is consistent with purpose of the 2010 Act, the fundamental nature of third party insurance policies and, moreover, the authority of Bovis.

All is not lost for Insurers; the Court has granted permission to appeal on the grounds “that the point arising is of some practical importance and not the subject of previous authority”.  Further, as prefaced, Insurers retain the rights of subrogation albeit after making payment.

  Mark Aizlewood is a Partner at Edesia Law.