William McIlroy (Swindon) Ltd & others v Quinn Insurance Ltd [18.07.11]

Court of Appeal rules insurers able to pursue Quinn under Third Party (Rights against Insurers) Act 1930, despite arbitration clause with time-bar in policy. Kennedys successfully acted for the appellants who appealed against a first instance decision that their claims were time-barred under the policy. The underlying claim arose from a fire in September 2006, which occurred during works carried out by Quinn’s insured, Lenihan. Lenihan notified Quinn, who declined indemnity under the policy in February 2009. Judgments were entered and damages assessed against Lenihan in December 2009 and January 2010. Lenihan was subsequently wound up. Lenihan’s rights were then vested in the Claimants, pursuant to the Third Party (Rights against Insurers) Act 1930.

Proceedings were issued against Quinn in April 2010. Quinn then raised a new ground for declinature, namely that Lenihan should have instituted arbitration proceedings within nine months of February 2009, when Quinn’s refusal of indemnity was first communicated to Lenihan. Quinn argued that the actions were now time-barred.

Decision

The Court of Appeal considered general condition 16 of Quinn’s policy, which required any dispute between the insured and the insurer regarding the insured’s “liability in respect of a claim” to be referred within nine months of the dispute arising to an arbitrator or be deemed abandoned.

At first instance, the Judge constructed the clause to require Lenihan to initiate proceedings within nine months of Quinn purporting to repudiate liability, which is when it held that the dispute arose.

On appeal, the Court of Appeal found it was “trite law” that liability under an indemnity policy only accrued after the existence and amount of a liability to a third party is established. The court referred to Post Office v Norwich Union [1967] and considered that no dispute in respect of a claim could have arisen between Lenihan and Quinn unless Lenihan’s liability to McIlroy or others had been established by judgment. “Claim” in this context meant cause of action. Normally, a time-bar operates in respect of a cause of action and not before the cause of action has actually accrued.

Comment

In the Court of Appeal’s judgment, it stated that:

“… the judge’s conclusion seemed remarkably unfair, since his construction of the clause would require Lenihan to have initiated proceedings within nine months of Quinn purporting to repudiate liability under the policy, even though Lenihan were contending that the fire was not their fault, and even though … their liability to the present claimants might not have been established...”

This must be right. If the first instance decision had stood, in many instances an insured would have lost its right to claim under its policy before its cause of action had arisen. Where such a clause was present, it would have eroded the ability of others to pursue insurers who had declined indemnity on unmeritorious grounds, under the Third Party (Rights against Insurers) Act 1930.