In McIlroy & Rannoch v Quinn on 12 October the Technology and Construction Court (TCC) held that a clause in an insurance policy which required arbitration to be launched within nine months was effective to bar a third party's claim.
The claim arose under the Third Parties (Rights against Insurers) Act 1930 and related to a fire in premises in Lewes, East Sussex. The contractor was sued by the building owners and by January 2010 they had secured judgment against him and damages had been assessed. He then promptly went into voluntary liquidation and the judgment was not satisfied.
The building owners became aware that the contractor had the benefit of liability insurance and sued the insurer under the Third Parties (Rights against Insurers) Act 1930. Upon insolvency of an insured this provides for the insured's rights under any insurance policy he holds to be transferred to a third party for the purpose of enabling the third party to claim against the insurer. However, the courts have held that in order to take advantage of this Act, the third party must first establish the liability of the insured by litigation or arbitration as appropriate and that the third party steps into the shoes of the insured and so has no better rights than the insured in respect of the claim against the insurer.
The difficulty for the third party was that the insurance policy contained a clause whereby any dispute in respect of the insurer's liability was to be referred to arbitration within nine months of the dispute between the insurer and the insured arising or the claim was deemed to be abandoned. This period had now passed. The question was, when did the dispute arise between the insured and the insurer?
The court held that this event occurred when the insurer made it clear that it was refusing to indemnify. It was irrelevant that the potential claims by the third party against the insured had not yet been resolved. The court's analysis was that at the point when the insurer denies liability (and on the assumption that it is wrong to do so) it is then in breach of contract because it is effectively saying that it will not perform its primary obligations under the policy in respect of the claim. At that point, the insured can, at the very least, issue proceedings for a declaration in respect of the insurer's potential liability to him and does not have to wait until the third party's claims have been resolved.
The court held that the relevant condition of the insurance policy was validly incorporated within it. Although in some cases unusually onerous clauses have to be "flagged up" to insured parties, in this case the insurer had sent the wording to the insured some four years previously with a warning to read the policy carefully. Since then the policy had been renewed each year with the clause contained in it. Further, the policy had been placed through brokers, who would be expected to provide relevant advice.
The court considered two other lines of argument advanced on behalf of the third party. Could it obtain an extension of time under the Arbitration Act 1996 to serve notice of arbitration? The court determined that it did not have jurisdiction to decide this, such jurisdiction resting with the Irish courts, but that if it did have such jurisdiction then it would only be exercised where the insurer's conduct had caused or contributed to the insured's failure to comply with the relevant time limits. It said that "a claimant has to take the risk the insured will have failed to comply with a provision in the policy and thereby fatally undermined the position of the claimant".
Secondly, the claimant relied on the provisions of the FSA's Insurance Conduct of Business Sourcebook 2005 to the effect that an insurer must not seek to exclude its liability unless it is reasonable for it to do so. The court held that the insurer was not seeking to restrict or exclude liability when the policy was issued (but only when it notified the insured that it was excluding the claim). In any event the time bar incorporated was not contrary to the provisions of the Sourcebook.
The effect of this case is to make clear that while the third party has no right to bring a claim until liability between it and the insured is established, time can start running between the insured and the insurer well before then. The message would seem to be to get as much information as possible as soon as possible and watch out for policy provisions which affect the validity of a claim directly against the insurer.
We reported in our June e-bulletin about the replacement of the 1930 Act by the 2010 Act. However, it is doubtful that the new Act will make any difference to claimants in the position of the third party in this case. The Act clarifies and extends the right to ask for information before the insolvency event, and allows the third party to claim directly against the insurer. It is still possible, however, that the insured will fail to issue proceedings or protect its limitation position before it becomes insolvent, and before the third party claimant realises that the 1930 Act may come into play. In that situation the third party claimant (who will still have no better claim than the insured) may still find his claim against the insured barred.