Two recent decisions of the High Court have provided much needed clarification as to the scope and operation of section 62 of the Civil Liability Act 1961 and should reduce liability insurers’ risk of exposure to being joined to proceedings by claimants seeking to recover directly from the insurer on foot of an insolvent insured’s liability policy.
These decisions have confirmed the following important principles in relation to section 62:
- liability should be determined in the underlying claim against the insured before the insurer is joined to proceedings or sued;
- the courts will recognise a valid repudiation by an insurer; and
- a claimant cannot remedy a breach by an insured of a condition in its insurance policy.
Section 62 provides that where an insured who has a policy of liability insurance becomes bankrupt or dies (if an individual) or is wound up (if a company) or dissolved (if a partnership or other incorporated association), monies payable to the insured under the policy shall be applicable only to discharging in full all valid claims against the insured in respect of which those monies are payable, and no part of those monies shall be assets of the insured or applicable to the payment of debts.
The existing authority - Dunne v. PJ White Construction Company
While section 62 does not expressly confer a direct right of action on an injured party against a defendant’s insurers, in the case of Dunne v. PJ White Construction Company (1989), Chief Justice Finlay, as he then was, expressed the view in the Supreme Court that it was an inevitable consequence of section 62 that a right of action in favour of the injured third party is created, with the qualification that a full debate was required on this matter before it could be finally determined. Chief Justice Finlay held that the injured person had the benefit of the presumption that the defendant’s insurance policy was good. To properly implement the protection given by the section, it was necessary that the onus of proving the existence of a right to rescind or repudiate the policy lay on the insurers.
Both of the recent High Court decisions arose in the context of applications by the insurers in question to strike out the claim against them on the basis that no reasonable cause of action was disclosed. Both insurers were successful.
The first decision was given by the President of the High Court, Kearns P, on 3 December 2012 in McCarron v. Modern Timber Homes Limited (in liquidation), Shaun McColgan, Daniel McColgan and Quinn Insurance Limited.
The plaintiff had suffered an injury during the course of his employment and sued his employer and Quinn Insurance, on the basis that Quinn was the insurer of his employer at the time of the accident. Quinn had declined cover of the claim on the basis of breach of a notification condition in the general conditions to the policy. No judgment or order had been obtained against the employer at the time of the application.
Kearns P noted that it has been long established that an insured person’s rights of indemnity under a policy of insurance against liability to third parties does not arise until the existence and amount of his liability to the third party is first established, either by action, arbitration or agreement.
Considering the decision in Dunne, the Court noted that it was important to emphasise that the issue decided in that case was whether the onus of proof to establish that a right asserted by the insurance company in the pleadings to rescind or repudiate the policy of insurance fell on the plaintiff or on the insurer.
The “interesting feature about the case” was that no point was taken by the insurance company that it had been improperly joined to the proceedings in the first place.
The judgment in Dunne confirmed that section 62 created a right of action but did not say when the cause of action may be said to arise or at what point it becomes enforceable. Turning to the precise terms of section 62 for guidance and in particular the reference to discharging “all valid claims against the insured”, Kearns P considered that a claim could not be characterised as a valid claim against the insured until liability has been established against the insured and the quantum of the claim assessed. The Court considered that any claim against the insurer, if brought in the same set of proceedings as those against the insured, would have to be stayed until the liability of the insured is first established. However, noting that the insurer might never be involved at any stage if the employer successfully defends the primary claim, Kearns P preferred the “interpretation which leans against injustice or illogicality”, appearing to accept the insurer’s submission that the causes of action against insured and insurer were quite separate and distinct and there would be no point in having the insurer joined to the proceedings until the validity of the plaintiff’s claim is established by means of a judgment against the insured.
Kearns P consequently made an order striking out the proceedings against the insurer for failure to disclose a reasonable cause of action or alternatively because there was no privity of contract between the plaintiff and insurer.
The same issue was considered more recently by Mr Justice Peart in the High Court, in Yun Bing Hu v. Duleek Formwork Limited (in liquidation) and Aviva Direct Ireland Limited (February 2013).
This case also involved an employers’ liability claim. The insurer was joined to the proceedings as a defendant after the insured went into liquidation and the plaintiff obtained judgment in default of appearance against the insured.
In this case, the claim was declined by the insurer because the insured breached a condition precedent to liability in the policy, namely the payment of the excess. The insurer argued that the purpose of section 62 was not to provide a plaintiff with a remedy against an insurance company in circumstances where there was no privity of contract, but rather to ensure that when an insurance company is liable to pay money to an insured under a policy, and the insured goes bankrupt or, in the case of a company goes into liquidation, the insurance monies are “ring-fenced” to meet the claim made on the policy, and does not disappear into the general fund for the benefit of other creditors.
The Court attached significance to the fact that the plaintiff did not dispute that the insured had failed to pay the excess and that therefore the relevant condition of the policy had been breached. The Court noted that the issue of where the onus lies in relation to the entitlement to repudiate did not therefore arise in this case.
The Court was satisfied that the plaintiff clearly had no privity of contract with the insurer and that he could not seek to enforce the contract of insurance as between the insured and insurer, especially in circumstances where he did not dispute that the excess payment was a condition precedent to liability under the policy, and does not dispute that the excess payment was requested to be paid and was not paid. Monies were therefore not payable to the insured under the policy.
The Court concluded that no reasonable cause of action was disclosed against the insured and that the proceedings should consequently be struck out.
Peart J noted that the Court’s jurisdiction to strike out proceedings on this basis should be exercised sparingly and only in a clear case, expressing the view that the Court should be satisfied not only that the pleadings disclose no reasonable cause of action and / or that the claim is bound to fail, but also that there is no possible amendment to the claim which might save it.
The Court therefore considered whether the plaintiff could claim negligence against the insurer on the basis of the insurer’s failure to inform the plaintiff that a pre-condition to liability under the policy had been breached. The Court concluded that the insurer did not have such a duty of care to the plaintiff. If the insurer owed a duty of care to the plaintiff, the question would arise as to whether it also owed a duty to other potential claimants under the policy of which it was not aware and there was not sufficient proximity between the insurer and potential claimants as to find that the insurer owed them a duty of care.
Finally, it is interesting to note that the claimant offered to pay the outstanding excess in order to remedy the breach of the condition precedent. While the Court expressed sympathy for the plaintiff’s position, the plaintiff was not permitted to remedy the breach.