William McIlroy (Swindon) Ltd and others v Quinn Insurance Ltd – limitation defence (2011) EWCA Civ 825
The claimants leased premises damaged by fire in 2006. Sub-contractors, A Lenihan Ltd (Lenihan) had been carrying out refurbishment works and the fire was allegedly caused by a Lenihan employee negligently using a blow torch to remove paint.
Lenihan had public liability insurance for the relevant period with the defendant, Quinn. Proceedings were brought against various contractors by the present claimants, and third party proceedings were brought against Lenihan. Quinn refused to provide an indemnity because of alleged breaches of policy terms and Lenihan was made aware of this in February 2009 (a letter to this effect written in July 2008 never reached Lenihan). Quinn was informed about the litigation but took no part in it and default judgments were entered against Lenihan.
The claims in the main actions were settled in November 2009. In December 2009 and January 2010 Ramsay J held the settlements to be reasonable and assessed damages against Lenihan. A voluntary winding up resolution was passed in February 2010 and Lenihan did not satisfy any of the judgments.
Quinn’s time-bar defence
The claimants brought these proceedings against Quinn under the Third Parties (Rights against Insurers) Act 1930. Quinn raised a new defence to the claims. It claimed that Lenihan should have instituted arbitration proceedings in accordance with clause 16 of the policy within nine months of February 2009 when first told that Quinn was refusing to provide them with an indemnity.
Clause 16 read:
“Any dispute between the insured and the company on our liability in respect of a claim or the amount to be paid shall, in default of agreement, be referred within nine months of the dispute arising to an arbitrator ... and the decision of the arbitrator shall be final and binding on both parties. If the dispute has not been referred to arbitration within the aforesaid nine month period, then the claim shall be deemed to have been abandoned and not recoverable thereafter.”
Edwards-Stuart J rejected the claimants’ argument that clause 16 was an onerous and unusual clause which had not been properly brought to Lenihan’s attention and held that the claims were time-barred.
Court of Appeal
The claimants’ appeal was allowed. The decision below was unfair since to avoid being time-barred Lenihan would have had to have initiated proceedings within nine months of Quinn repudiating liability even though Lenihan contended that the fire was not its fault and that its liability to the claimants might not have been established during the nine month period. The court therefore examined clause 16 closely to see whether that was the correct interpretation.
Liability under an indemnity policy does not accrue unless and until the existence and amount of the liability to relevant third parties has first been established, whether by judgment, arbitration award or agreement (Post Office v Norwich Union). It followed that no dispute within clause 16 could have arisen until Lenihan’s liability to the claimants had been established. Given that the clause referred to “liability in respect of a claim or the amount to be paid”, this occurred at the earliest in December 2009 when Ramsay J assessed the first claim against Lenihan. The present proceedings were brought within nine months of that date.
The court added that, had Lenihan wanted to challenge Quinn’s purported repudiation of the policy in February 2009, it would have had until February 2015 to do so because such a dispute would not have triggered clause 16. The nine month time bar did not apply where the only dispute between insurer and insured concerned cover under the policy and the insured did not as yet have a claim under the policy.
This decision is a useful reminder that rights transferred to a third party under the 1930 Act remain subject to the terms and conditions of the insurance contract between the insured and the insurer. The third party can be in no better position against the insurer than the insured. A common problem here concerns notification. Inaction or failure on the part of an insured to comply with his obligations under the policy is quite likely where the insured is in liquidation and has no great concern with whether the claim is met or not and this delay may irretrievably damage the third party’s prospects of claiming successfully against the insurer.
This litigation raises several other points of interest in addition to the correct interpretation of clause 16. For example, before the Court of Appeal Quinn chose not to take the point that the proceedings were court proceedings and not arbitration as required by clause 16. Whilst there were no doubt good reasons for this concession, not least because Quinn did not make an application for a stay, it could be misleading since, in genera,l beginning court proceedings in breach of an arbitration clause will not prevent a limitation period from continuing to run.
Other points were dealt with by Edwards-Stuart J below which did not see the light of day in the Court of Appeal. One concerned whether the court had jurisdiction to extend the contractual limitation period under s12 of the Arbitration Act 1996. The judge held, perhaps surprisingly, that the English courts did not have jurisdiction under the Arbitration Act 1996, on the basis that the insurance policy was governed by Irish law. He considered that any application should be made to the Irish courts.
Another of the third parties’ arguments concerned the validity of clause16. The third parties could not challenge clause 16 under the Unfair Contract Terms Act 1977 (UCTA) since UCTA does not apply to insurance policies nor was this consumer insurance within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). They therefore contended that it was an unusual and onerous clause which was not incorporated as a term of the policy because Quinn had failed to bring it to Lenihan’s attention.
Clause 16 was fairly unusual. The nine month time limit was considerably less than the statutory six year limitation period and that there was no certainty as to when the period would start to run. The clause was buried in an off the shelf policy comprising 11 pages of small print, there was no reference to it in the proposal form and there was no reference to it in the covering letter enclosing the policy documents or in the introduction to the policy and the section entitled "Important points to note".
The third parties argued that it was in breach of the Insurance Conduct of Business Sourcebook (ICOB), paragraph 2.5.3 of which states:
"A firm must not, in any written or oral communication to a customer, seek to exclude or restrict, or rely on any exclusion or restriction of, any duty or liability unless it is reasonable for it to do so."
The judge held that Quinn was not under any obligation to advise Lenihan of the existence of the nine month time limit in a policy which Lenihan had, by then, had in its possession for some four years. This was not a case where Quinn’s standard terms were simply incorporated by reference. The insurance was arranged through brokers who could be expected to be familiar with Quinn’s standard form of policy and to have given any relevant advice to Lenihan.
The ongoing programme of insurance contract law reform could affect the position of a small business like Lenihan in similar circumstances in future. Lenihan had about six employees and a turnover of less than £2 million. In April 2009 the Law Commission published Issues Paper 5 entitled Should micro-businesses be treated like consumers for the purposes of pre-contractual information and unfair terms?. Lenihan might have qualified as a micro-business, depending upon which test is adopted (one is having fewer than ten employees). One of the core proposals for micro-businesses is that they should have the protection of the UTCCR (see above). This would allow a court to assess a term for fairness as long as it was not individually negotiated, does not reflect mandatory regulatory conditions and is not a core term. Responses to the paper were published in November 2009 and the Law Commission have said that they are going to turn their attention to business issues in the course of the next year.
As a postscript, yes, we are still in the world of the 1930 Act despite the fact that the Third Parties (Rights against Insurers) Act 2010 received Royal Assent on 25 March 2010. The recession creates an even more pressing need for a fairer and more efficient way for third parties (or their insurers) to be able to bring claims against liability insurers where the insured is insolvent. It is frustrating and rather shocking that parliamentary time cannot be found to pass secondary legislation giving the new Act a commencement date, particularly since we have already waited for so many years for the Act to be passed. The Law Commission reviewed the 1930 Act and published a final report and draft Bill in 2001 and the Bill was approved by the Government in 2002. The 1930 Act will continue to be relevant for a while because even once the new Act comes into effect (assuming that it does not get forgotten entirely) it will apply to cases where both the insured’s insolvency and the liability to the third party occurred before the Act’s commencement date.