Rt Hon Lord Mance

2 FEBRUARY 2010

  Q140  Chairman: Any suggestions in respect of that clause? No, so 4(ii)?

  Lord Mance: That is a similar point, but a different way round. If the insurance claim, the insured claim against the insurer, in other words, is subject to arbitration, can the insured be joined in arbitration proceedings? That is perhaps a more radical possibility. People are not infrequently joined in court proceedings, or have been in the past, notwithstanding an arbitration clause, but to join someone to an arbitration when they are not party to the arbitration agreement is of course going to surprise arbitrators. Again, the point is simply that the draft is unclear. It occurred to me that both these points could actually be made clear if one takes the view that actually an arbitration clause does compel parallel and separate proceedings. If one took that view, one could make that clear in clause 2(9) by simply saying that it should read, "When bringing proceedings in court under subsection (2)(a), P may also make the insured a defendant to those proceedings" and then adding the words, "subject to any arbitration clause applicable between P and the insurer".

Chairman: I think I follow that. Are there any questions on that?

  Q141  Lord Sheikh: What would be the benefit?

  Lord Mance: Well, the benefit would be simply to make the position clear because, otherwise, people are going to argue under this, "Here is a statutory provision which entitles me to join him in the arbitration" or, "Here is a statutory provision which entitles me to join the insured in court proceedings, notwithstanding the arbitration clause". That will be sorted out in court proceedings one way or the other and it may well be that the answer is the one that Lord Borrie gave on the last occasion, that parallel proceedings are inevitable. I think the legislator should perhaps make up his mind as to what he wants. If he wants to override arbitration clauses, he should say and avoid any argument. If he wants to respect them, he should say so and accept that there are parallel proceedings.

  Q142  Chairman: Then, in paragraph 4(iii) you come to the question of whether an arbitrator appointed in a contract in relation to the insurer and the insured is likely to be able to deal effectively with any issue of liability between the insured and the third party. That was a point which was canvassed at the last hearing. What is your view about that?

  Lord Mance: Well, as I have indicated, I am not too worried about this. I saw there was quite a lot of discussion. In reality, in insurance arbitrations, and I have to accept my rather dated experience, it is the fact that the position between the third party and the insured is, in one way or another, something which often has to be considered. For example, the insurer may be saying, "You, the insured, accepted a liability to the third party which was non-existent". Very often of course the insurance will have some provision which binds the insurer by reasonable settlements, at least, if the insurer has had the opportunity of disagreeing with them, sometimes a QC clause exists to determine whether an incoming claim should be settled. Disputes can arise as to whether the insured was liable to the third party, and there is an issue of law which I have mentioned in the footnote as to whether even a judgment against the insured is actually binding on liability insurers, but, leaving aside that issue, very often these claims are handled by the insured in a particular way which, the insurer may say, prejudices the insurer. The idea of insurance policy arbitrators considering the position as between the insured and the third party seems to me not too strange or unfamiliar an idea and, in practice, especially if they are chaired by a lawyer, these tribunals get their minds round the most esoteric problems and usually insurance covers almost all the world's activities and they find themselves dealing with things which they are not very familiar with other than insurance.

  Q143  Chairman: Thank you. If we can move to your paragraph 5, here we are concerned with what happens where there has been non-disclosure or breach of some condition in relation to the premium so as to invalidate the insurance. How should that affect the third party?

  Lord Mance: This falls within the general principle that what the third party gets is what, in general, the insured has and, if the insured has conducted himself in a way which prejudices the insurance position, then the third party suffers. Commutation is one example, non-disclosure is another, and failure to pay the premium as a condition precedent is of course yet another which does strike one sometimes as very harsh, but it is a fact of life that, if you do not pay the premium, it sometimes counts as good or as bad as if you did not take out any insurance at all in the first place. Sometimes, there are ways round that and sometimes you might argue that the premium can be paid later in that situation under clause 9(2), that is that the third party itself could pay the premium doing what the insured could. Sometimes, you can say it is not really a condition to cover and sometimes you could say that the premium is deemed to be paid because the broker, under the custom of Lloyd's, accepts liability to the insurer and is deemed to have paid the insurer straightaway; that custom extends to the marine insurance field and may extend, I think it has been argued in the past, to some other fields. I am afraid conduct as between the insured and the insurer which prejudices the insurance before a statutory transfer is a fact of life and, without radically extending the scope of this Bill, it could not really be covered. I think many of the points made in this connection really are points in support of more general insurance law reform, and that is of course certainly something on the Law Commission's books at this moment and may indeed be on the European Commission's books.

<jf114>Chairman: Are there any questions on paragraph 5(i)?

  Q144  Lord Sheikh: The third party should not be put in any better position really because, if there are defences available to the insurer, the insurer could utilise those defences. The point I am making is that the third party, under the circumstances of what you are talking about, cannot have anything more than what the insured would get in the courts. With regard, for example, to the premium, I have seen policies which say that the insured has paid the premium, but the point I am making is that the third party should not be entitled to any more than the insured would be.

  Lord Mance: I think I have been saying that, in general, that is the philosophy of the Act with some modifications, which are contained in clause 9. To go further would, I accept, be probably to enter an area where the better course, which may well happen, is more general law reform relating to the law of insurance, which, I am afraid, frequently has been said to be particularly harsh in this country in the fields of non-disclosure and in the fields of breach of warranty and condition precedent; others, besides me, have made that point.

  Q145  Lord Sheikh: In the submission from the ABI, you see that they agreed basically with what is being proposed, so why rock the boat?

  Lord Mance: Well, I see that they have said that, and I think again I said that nothing that I have suggested should prejudice the Bill because it has been a long time in its genesis, it is a good measure and I think it restores the original spirit of the 1930 Act which, I am afraid, court decisions have considerably weakened, although one must welcome more recent cases, like the OT Computers case which have gone back to first principle.

  Q146  Chairman: In sub-paragraph (ii), you come to the question of set-off in that connection and here we are going to be hearing evidence from the next witness on the subject of set-off. I do not know if you would like to express any additional views on that?

  Lord Mance: No, I will not. I see the force of the suggestion that there might in some fields be a modest further entrenching upon the rights of insurers. The present clause itself represents something of a compromise in that the set-off relates to the policy itself and not to anything else, which is fair enough, and one could go somewhat further perhaps in the personal injuries field, as, I think, is being suggested.

  Q147  Chairman: Well, thank you, Lord Mance. Now, do we need to touch on your paragraph (iii) there, or could we go on to your views about reinsurance?

  Lord Mance: I think we can move on.

  Q148  Chairman: Finally, you have put a point about brokers generally, an interesting one.

  Lord Mance: This, as you see, is a point where I have to declare a particular interest since I was the losing counsel in Macmillan v Knott Becker Scott; perhaps I did not mention that in here. It is perhaps unfortunate that, particularly in circumstances where insurance is compulsory, if a broker fails to place valid liability insurance for a company which then becomes insolvent, and brokers are professionally required to be insured, there is no statutory transfer of the insured or the rights of the person who should have been insured against the broker in respect of the failure to place a valid insurance to the third party to the extent—and actually I am looking at the sentence I have written here and I am not sure it is particularly correctly phrased—that he should be.

  Q149  Chairman: I was looking to see whether that point of yours is covered at all in the Law Commission report. Do you happen to know the answer to that?

  Lord Mance: No.

<jf114>Chairman: I could not find it when I was looking through it again quickly this morning.

<jf114>Lord Bach: My Lord Chairman, we do not think it is, my officials are telling me.

  Q150  Chairman: I certainly could not find it. Does that create a difficulty in doing anything about insolvent brokers at this stage, Lord Mance?

  Lord Mance: Actually, I think the error is in the word "insolvent" in my note. I do not think the word "insolvent" should appear here, so perhaps you could just delete it. What I was suggesting in my lecture and intending to suggest here, dealing with the situation of an insolvent defendant who should have had a valid third party liability insurance and brokers who negligently fail to place the insurance, particularly where the insurance is compulsory, in Macmillan v Knott Becker Scott it was held that the insured's right against the brokers for failure to place the insurance went into the insurance liquidation pot, in other words, it formed part of the insured's general assets. What I am suggesting here is that that is illogical, that the insured's right against his brokers—and please delete the word "insolvent" where it appears in the second line and also in the fifth line from the end in my note—that the insured's right against the solvent brokers, not insolvent, in respect of the failure to place insurance should be transferred to the third party as a substitute for the transfer of the insured's right against the insurer which the broker has failed to create. That is the point, and the truth is that, if the third party should have had the benefit of a compulsory liability insurance, let us suppose, and the broker has failed to give the third party that benefit, the insured has a perfectly good right against the broker and that right should be transferred to the third party as a substitute for the third party liability insurance which should have existed.

  Q151  Lord Archer of Sandwell: Presumably, there would be no point in making the provision if the broker is insolvent?

  Lord Mance: Absolutely, and I am sorry about the word "insolvent" having crept in there. It of course remains the insured who is insolvent. In Macmillan v Knott Becker Scott, the argument was that the broker owed a duty of care in tort to the third party because the broker knew that the compulsory liability insurance was being placed for the benefit of third parties, and I argued in favour of that proposition. The court held that that was wrong, that there was a contractual scheme and there was no reason to create a duty of care, but it seems to me, especially in cases of compulsory liability insurance, there is every reason why the right of action against the broker, which is effectively a substitute for the valid insurance, should benefit the third party rather than the general pot of creditors.

  Q152  Chairman: I think I follow it. It is almost more clearly set out, I think, in your lecture than it is in your note.

  Lord Mance: I am afraid that I was faced with a deadline of Friday morning and at this stage I was near the end of the note and in a hurry!

  Q153  Lord Goodhart: I was just having a look at the long title of the Bill, which is "to make provision against the rights of third parties against insurers' liabilities to third parties in cases where the insured is insolvent and in certain other cases". What, I think, is not being proposed is that the Bill should be extended to cover brokers as well as insurers.

  Lord Mance: Insofar as the claim against the brokers is a substitute for the insured's claim against the liability insurers, yes, indeed you are right.

<jf114>Lord Goodhart: So one would have to at least find some way of altering the long title of the Bill before we could make that amendment.

  Q154  Chairman: There is also the difficulty, if Lord Bach is right, that, if this was not discussed at all by the Commission, it might be difficult for us to go out on a limb at this stage.

  Lord Mance: Well, the most I can hope is that at some stage someone gives this some attention.

<jf114>Chairman: Perhaps you will in due course in your judicial capacity!

  Q155  Lord Sheikh: Perhaps we ought to be thinking about what right the third party has under the professional indemnity policy of the broker who failed to act. It is a scenario which could arise.

  Lord Mance: Unfortunately, that is the whole point.

  Q156  Lord Sheikh: But not against the insurer of the insured, but against the PI insurer of the broker.

  Lord Mance: Well, that of course would be the point of pursuing the broker, but, unless the broker is under some liability to the third party, there is no way in which you can get to the broker's professional indemnity insurance, and what I am suggesting is that the broker who has failed to create the third party liability policy should stand in for it.

<jf114>Lord Sheikh: I think it would be unwise to import it at this stage into the Bill.

  Q157  Chairman: Lastly, in paragraph 8 you deal with what you call the "intractable subject of `first past the post'", and you suggest that there is not much that can be done now other than to leave the Bill as it stands.

  Lord Mance: Yes.

  Q158  Chairman: It is as good an answer as any.

  Lord Mance: It is far too intractable a subject. I pointed out that it does lead to some remarkable results. In the Lloyd's litigation, the Gooda Walker Names scooped the first bite of the pool as a result of a decision that their case should come on first in court.

<jf114>Chairman: Are there any further questions any member of the Committee would like to ask?

  Q159  Lord Hunt of Wirral: Well, we are very grateful to you for the amount of time and the trouble you have taken with this Bill. I am just rather relieved, my Lord Chairman, that I do not have to declare any interest as either a successful or unsuccessful solicitor in cases because that could run into thousands! I do take your point that you have seen a number of situations where you feel that the law could be improved, and I share your concern that after the 1930 Act there was a considerable amount of litigation arising out of that Act, and I just am seeking some assurance to set against our task. Looking at the Bill as a whole and the history of the consultation that has taken place, I am not asking you if we are making a better job of the situation than happened in 1930 because time has moved on, but can you see any glaring omissions which, you feel, might fuel a series of litigation, bearing in mind the long title to the Bill and the area that we are scrutinising, or are you reasonably happy that we will not see a substantial number of cases arising out of certainty or uncertainty of some of the provisions?

  Lord Mance: I think, because the Bill does build on the 1930 Act, but aims to restore the underlying principles and ensure that they are in future observed, it can be hoped, with some degree of assurance, that it is going to have a reasonably case-free future, but any lawyer who predicted the future course of litigation would be most unwise! What can be said is that the Third Parties (Rights against Insurers) Bill did give rise to problems over a remarkably long time-span, and that may suggest that it was only over a considerable time-span that actually the courts really, in the light of other developments and thinking, began to depart from its original conception, so I hope that, if things go wrong, it will be a time-span in which I do not have to answer!

  Q160  Chairman: Well, it is 80 years since the original Act was passed and perhaps we had better come back in 80 years' time, which will be 2090, and see whether your prognostication is correct or not. But then that might disappoint Lord Hunt! Thank you, Lord Mance, very much indeed for an extremely impressive, if I may say so, account of the problems in this area.

  Lord Mance: Thank you very much for your interest and may I wish the Committee well in its deliberations.