1.  My interest in the 1930 Act stems from experience of its difficulties in commercial practice prior to 1993. Although personal injuries was not my field, I also became involved with others in the reversal of the House of Lords decision in Bradley v Eagle Star [1989] AC 957, by the insertion of s 651(5) into the Companies Act 1985.[1] I then gave the 1994 Donald O'May lecture on the subject of which the Committee has the text.[2]

GENERAL2.  It is welcome that the Bill updates the circumstances of insolvency capable of giving rise to a transfer of insurance rights to a third party. It also caters for most of the main concerns expressed in my 1994 lecture:

(i) Clause 1(1) and (2) makes clear that it is the combination of insolvency and the incurring of liability that triggers the statutory transfer, and that the establishment of such liability is not a pre-requisite to such transfer.

(ii) Clause 1(3), 2 and 3 make clear that the third party may sue the insurer without first suing or establishing the liability of the insured.

(iii) Clause 11 and Schedule 1 deal with the question of provision of information. In In re OT Computers Ltd [2004] EWCA Civ 653, the Court of Appeal has in fact overruled some of the problematic decisions which I discussed in this area, but the new Act represents a new and more comprehensive scheme. Schedule 1 it differentiates appropriately between the basis for disclosure from the insured and from others (eg brokers), and introduces useful provisions for disclosure from officers or employees of defunct bodies.

(iv) I take the point, discussed in Prof Merkin's evidence, that the Bill does not provide for disclosure where a third party is concerned that the insured is in a difficult financial state (or will be, if judgment is given against him/it) and wishes to know whether it is worthwhile pursuing the insured. In a number of areas of course, the third party will be aware that the insured is required to have insurance. And the information obtainable under Schedule 1(3)(b)(iii) never enables a third party to be certain regarding the validity of or scope of coverage under the insurance (the third party is entitled simply to know whether the insurer has claimed not to be liable). There is a limit to the extent to which, pre-insolvency, a third party can expect to be able to ascertain what assets a defendant has or is likely to have, although it is well to remember that, in cases where a freezing order is appropriate, full disclosure of assets is a usual concomitant. I suspect that Prof Merkin's alternative approach (that this aspect could be dealt with, if appropriate, by procedural rules) is preferable. On no view should the Bill fail because of this point.

(v) Schedule 1(3)(b)(iii) could be extended to cover any sums which the insurer would claim to set-off. Any extension to require the provision of information from which the third party could judge how likely it was that the insurer would be able to avoid liability would probably be controversial. (Such information might well relate to the particular third party claim, eg where the insurer was reserving its position, because of alleged non-disclosure relating to the circumstances of that claim or because of a possible breach of a policy condition relating to such circumstances.)

(vi) The Bill in clause 17 and Schedule 1 para, 5 reproduces anti-avoidance provisions found in ss 1(3) and 2 of the Act (terms purporting to avoid or terminate the insurance or alter the parties rights in the event of insolvency or of disclosure of information under the Bill are of no effect). But it makes mild improvements to the third party's position by enabling him or it to fulfil any insurance condition in the insured's stead (clause 9(2)) and by providing that the rights transferred are not subject to any condition requiring the insured to provide information (other than notice of a claim) or assistance which the insured cannot fulfil because it has, if a company, been dissolved or, if a person, died (clause 9(3)). I agree that these provisions do not avoid the risk that an insured who is insolvent or approaching insolvency may prejudice the insurance position, without the third party being able really to do anything about it (see Maggie Hemsworth's point 1(e)), but this is inherent in the policy (also reflected in the 1930 Act) to preserve the basic insurance position (see further point 5 below). Any change in this approach would I suspect arouse considerable insurance industry resistance. Again, even if one were to disagree with the approach, the best should not be allowed to be the enemy of the good.

(vii) Clause 9(5) and (6) also solve the problem identified in The Fanti and The Padre Island [1991] 2 AC 1: the transferred rights will not be subject to any "pay first" clause in the insurance, save in the case of marine insurance against perils other than death or personal injury. I note the question regarding multiple tortfeasors and contribution raised by Lord Hunt of Wirral on 12/01/10 at Tr pp 9-10 and addressed by David Hertzell at pp 4-5 of his supplementary letter dated 25/01/10. I would tend to disagree with David Hertzell's answer. If A, after paying the third party, seeks a contribution from B, the basis for this is ssection 1 of the Civil Liability (Contribution) Act 1978, which enables "any person liable in respect of any damage suffered by another person to recover contribution from any other person liable in respect of the same damage ...". Cl.9(6) also covers "liability in respect of death or personal injury" (not liability "for" death or personal injury). I do not (at least presently) see great difficulty about treating "liability in respect of death or personal injury" in clause 9(6) as covering any liability which B may have to A in respect of the third party. So B's insurers should be unable to rely on any "pay first" clause against A, in the same way that they could not have done in relation to any claim by the third party directly against B

(viii) Clause 18 addresses the question of the Bill's scope, making clear that the place of incurring of liability, of parties' residence and of payment of insurance monies are all irrelevant, as is the proper law of the insurance. By inference the Bill will apply in the event of any UK insolvency wherever jurisdiction can be founded over the insurer. Broadly, I agree with Prof Merkin's comments in his supplementary note on the points raised by Prof Briggs.

LIMITATION

  3.  The Bill is less complete and satisfactory in its treatment of limitation:

(i) Clause 12 provides that an insurer against whom the third party brings proceedings for a declaration as to the insured's liability to the third party cannot rely on the expiry of the limitation period for proceedings by the third party against the insured, if an action by the third party against the insured, started within the limitation period, is in progress. It is doubtful whether this adds anything to the law as it would be anyway.

(ii) The problem not addressed concerns the limitation period for proceedings against the insurer: see Prof Merkin's first note, section 11. The insured's right to sue the insurer starts when the insured's liability to the third party has been established. If the limitation period for a claim against the insurer expires without any proceedings being begun against the insurers, then any subsequent claim against the insurer will naturally fail. But what if the insured commences proceedings against the insurer and becomes insolvent near the end of the limitation period, too late for the third party itself to start separate proceedings against the insurer? The Act does not clarify whether the right to pursue the existing proceedings is embraced within the transfer under clause 1(3). However, assuming that it is not, it should be possible under the Rules of Court to substitute the third party as claimant in the proceedings brought by the insured against the insurer.

(iii) The greater problem which I thought in my lecture that the Bill should address (pp 50-51), but it does not, arises where the insurance contains an arbitration clause and the insured has commenced arbitration proceedings. Does the third party have power to step into the insured's shoes as claimant in the existing arbitration? The courts will, one day, have to return to this issue. It is a pity that the Bill does not solve it once and for all.

ARBITRATION

  4.  The Bill is also obscure, and could usefully be clarified, in its treatment of arbitration:

(i) If the third party's claim against the insured is subject to an arbitration agreement, is that overridden by clause 2(9), entitling the third party to join the insured as a defendant in court proceedings under clause 2(2) against the insurer? (See Prof Merkin's first note, section 6.6) Maybe not, and maybe parallel proceedings remain unavoidable in such a case.

(ii) And, if the insured's claim against the insurer is subject to arbitration, does clause 2(9) entitle the third party to join the insured as co-defendant in arbitration proceedings brought under cl.2(2) against the insurer? (Prof Merkin, section 6.8).

(iii) Prof Merkin has discussed the appropriateness of giving insurance contract arbitrators jurisdiction to decide issues between the insured and a third party (cl.2(2) and 2(7). I am not too worried about this. Insurance arbitration tribunals (in my rather dated experience, often chaired by a lawyer) do from time to time have to deal with issues as to whether the insured was liable to a third party.[3]

  5.  Compromises and conduct prejudicing the insurance:

(i) The third party has relatively limited protection regarding compromises or commutation or other pre-insolvency conduct (including non-disclosure rendering an insurance invalid, or failure to pay the premium as a condition precedent to insurance) prejudicing the insurance position: see Maggie Hemsworth point 1(f) and Prof Merkin Tr.Qus 41-42. However, this is always the case. Even where third party liability insurance is compulsory, the insured may in fact fail to take it out. The problems arising in "claims made" insurance probably belong in the same category, and appear difficult to address in the Bill.

(ii) Set-off is also subject to the same general consideration. But clause 10 is welcome in limiting any right of set-off expressly to any liability of the insured arising under the [particular insurance] contract. But the information provisions might be strengthened to require disclosure of any likely set-off.

(iii) The Bill does not appear to have any equivalent of section 3 of the 1930 Act dealing with post-insolvency settlements between the insured and insurer. This is presumably on the basis that, the statutory transfer having occurred, no such provision is necessary.

REINSURANCE

  6.  I am not too troubled or surprised that my lecture suggestion (p 51) that the scheme might be extended to specific facultative reinsurances has not been taken up.

BROKERS

  7.  I do however regret that the Bill does not address the position of insolvent brokers who fail to place a valid third party liability insurance (particularly in circumstances when such insurance is compulsory by law or professional practice): see my lecture p 51-52, discussing Macmillan v A W Knott Becker Scott Ltd. [1990] 1 Lloyd's Rep. 98.[4] I suggested that the "insured's" right against its insolvent brokers in respect of the failure to place a valid insurance should also be transferred to the third party, to the extent that the insurance would, if valid, have been available to meet the third party's claim against the "insured". Again, however, this is not a big point.

  8.  Pari passu distribution of claims under the Bill: Again, I am not surprised or too troubled by the Bill's silence on this intractable subject. The law will remain "first past the post" as in Cox v Bankside [1995] 2 Lloyd's Rep. 437, although this is capable of leading to some remarkable results, depending on the uncertainties of court listing and decision-making.

January 2010

2   Not reporduced here. Preinted as Insolvency at Sea in Lloyd's Maritime and Commercial Law Quarterly, at pp 34-56. Back

3   While not directly relevant in the present context, the extent to which even a judgment between the third party and the insured binds liability insurers may be open. Prof Merkin cites in this regard Commercial Union v NRG Victory [1998] 2 Lloyd's Rep 600 (see his first note under clause 1(4)) but the remarks there were referred to (by me) as obiter and their correctness left open for future consideration in Lexington v Wasa [2009] UKHL 40, para 37. Back

4   As unsuccessful counsel in that case, I again declare an interest. Back