The High Court has held that insurers can be joined to proceedings under the Third Parties (Rights against Insurers) Act 2010 whether or not there are coverage defences under the policy.
The 2010 Act came into force on 1 August 2016 and replaced the provisions of the Third Parties (Rights against Insurers) Act 1930 except in situations where both the insured became insolvent and the liability was “incurred” before 1 August 2016. The 1930 and 2010 Acts were introduced to make it easier for third parties to claim compensation for losses directly against the insurers of insolvent insureds (see our previous Law- Now). In particular, under the 2010 Act a third party claimant can bring a single set of proceedings against both the insolvent insured and the liability insurer. The court will determine both the insured’s liability to the third party and the insurer’s liability under the policy in the same action.
In this case the High Court had to consider an application to join an insurer as a co-defendant to existing proceedings against an insured that had gone into administration after the claim was served. The insurer defended the application on two key grounds:
- That the claim was not covered under the policy. Section 2(1) of the 2010 Act provides: “This section applies where a person (a) claims to have rights under a contract of insurance by virtue of a transfer under section 1, but (b) has not yet established the insured's liability which is insured under that contract.” The insurer argued that section 2(1) was not engaged because the policy did not provide cover for the third party’s claim against the insured.
- The policies’ arbitration and foreign jurisdiction clauses meant that any coverage dispute would be subject to French law and had to be determined either by arbitration or by the French courts. Therefore, the English court did not have jurisdiction and BAE could not seek a declaration of RSA’s liability under section 2(2)(b). Section 2 states, “A person may bring proceedings against the insurer for either or both of the following— (a) a declaration as to the insured's liability to a person, (b) a declaration as to the insurer's potential liability to a person”.
The court found that section (2)(1) is triggered even when there is a potential dispute as to whether there is cover under the policy. Section 2(1) only requires a person to claim to have rights under a contract of insurance. The insured’s liability to the third party and the insurer’s liability under the policy do not need to be established before section 2 is engaged. Dismissing a number of arguments raised by the insurer, the court said that if a claim was made against an insurer that was “simply unarguable”, the insurer would be able to apply to strike it out. It would also be open to the insurer to apply to have coverage issues determined as preliminary issues to avoid incurring costs in participating in the defence of the claim against the insured.
On the insurer’s second argument, the court found that, under the terms of the policy, the coverage dispute had either to be decided by the French courts or by arbitration. It followed that the English court did not have jurisdiction to make a determination. The judge allowed the insurer to be joined as a co-defendant to the proceedings but stayed that part of the proceedings relating to the insurer’s liability under the policy.
The decision confirms that, under the Third Parties (Rights against Insurers) Act 2010, insurers may be joined as a party to proceedings notwithstanding the existence of strong coverage defences. In such situation, insurers may consider applying to have the case against them struck out or raising the coverage issue as a preliminary issue.
The decision is one of two recent decisions to consider the implications of the 2010 Act, the other being Redman v Zurich (see our Law-Now) in which clarification was given on the transitional provisions of the 2010 Act, confirming that the liability is incurred when damage is caused and not when the claimant establishes the right to compensation, such as through judgement.
Collectively, these two cases show that the 2010 Act will see insurers involved in underlying proceedings at a much earlier stage than under the 1930 Act, with the trigger for direct claims against the insurer being the incurring of a liability to the third party, not the establishment of that liability. Even if insurers are able successfully to deal with any coverage issues through strike out or preliminary issue applications, they will be forced to incur legal costs in respect of claims that may never have succeeded against the insured
Further reading: BAE Systems Pension Funds Trustees Ltd v Royal & Sun Alliance Insurance plc  EWHC 2082 (TCC)