The pros and cons every claims professional needs to know
In this article, the third in our series of briefings on the Third Parties (Rights against Insurers) Act 2010 (2010 Act) which comes into force on 1 August 2016, we take a hypothetical look at whether two cases which were decided under the Third Parties (Rights against Insurers) Act 1930 (1930 Act) would have had different outcomes under the 2010 Act, to illustrate how the new 2010 Act regime might apply.
In summary: The pros and cons for insurers
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Legg v Sterte Garage Ltd  EWCA Civ 97
This was a case where claimant homeowners were claiming against a garage for pollution of their land by diesel. Initial expert reports suggested that a spillage from an above-ground tank had caused the pollution. This would have been covered under the garage's public liability policy as a "sudden identifiable unintended and unexpected incident". However, later expert reports concluded that the most likely source of the contamination was in fact long-term leaks from two underground diesel storage tanks. This kind of gradual pollution would fall outside the policy. The particulars of claim against the garage were amended so they now included both causation arguments. The public liability insurer then ceased to conduct the defence; judgment in default was entered against the garage which was by now insolvent and unable to meet either any liability under the judgment or an order that it pay the claimants costs.
The claimants then applied to join in the insurer as a defendant and order that it pay their costs. This was on the basis that the insurer was liable under the policy to indemnify the garage against its liability for costs to the claimants, that as a result of the garage's liquidation the claimants succeeded to the garage's rights under the 1930 Act and (crucially) that on the facts the insurer had acted exclusively or predominantly in its own interest in defending the claims brought against the insured. The court agreed the application and made a non-party costs order against the insurer and the Court of Appeal dismissed an appeal by the insurer.
NB - defendant costs are not payable to the claimant even if they were payable to an insured under the liability policy. This is expressly set out in Section 8 of the 2010 Act but reflects the current position in law under the 1930 Act. This is why the non-party costs application had to be made, the success of which depends on the insurer's conduct.
If the garage had already become insolvent before the claimants issued proceedings, and if they had had the expert evidence which pointed to a gradual leak, then under the 2010 Act they could have had the benefit of checking the policy terms and would hopefully have seen that there was no point suing the insurer once the expert evidence suggested a gradual leak since it was not covered by the policy. By not bringing a claim this would have saved the claimants the stress and expense of losing their claim and the uncertainty and further costs of applying to bring in the insurer and make a non-party costs order. The benefit to the insurer would be no claim to defend at all.
If the garage were insolvent and the claimants had started proceedings against the insurer directly under the 2010 Act, on the basis of a sudden spill which was covered under the policy, then when new expert evidence of a gradual leak arose which put cover in question, some sort of settlement could likely have been made with the insurer before trial. This would have benefitted the claimants hugely as they would actually have received some compensation; as for the insurer, whether or not the outcome was favourable depends on whether the settlement would have been less than what it ended up paying under the non-party costs order in the real case.
Given the actual facts of the case, not a lot changes for the claimants or the insurer under the 2010 Act as it seems that establishing liability against the insured is the only thing that caused its insolvency so they would still have had to run those proceedings to finality and only then, when the garage became insolvent by reason of the judgment, would have discovered that the insurance policy did not cover the loss. The non-party costs order would presumably still have been granted in that scenario.
The insurer could voluntarily have told the claimants about the coverage issue as soon as the gradual leak evidence became available, and attempted to settle on the garage's behalf at that point, which would have made a non-party costs order less likely to succeed.
Goldsmith Williams v Travelers  EWHC 26 (QB)
The facts that are relevant for these purposes are that a judgment was obtained against Joshua and Usman Solicitors for liability to a mortgage provider, who assigned that liability to the Claimant, Goldsmith Williams, who brought a claim against Travelers under the 1930 Act. Travelers successfully defended a claim on Joshua and Usman’s solicitor’s professional indemnity policy by relying on the exclusion clause whereby fraud was committed or condoned by all the directors of the company.
For the Claimant things could have been different under the 2010 Act. Firstly it would not have had to restore Joshua and Usman Solicitors to the companies register in order to be able to sue it and establish its liability, so it would have saved time and money by only suing the insurers directly to establish liability. Secondly, in advance of bringing proceedings, it could have obtained disclosure from Travelers about the policy exclusion and may have decided not to sue once it saw the terms of the policy in the context of the known facts regarding fraud by the solicitor directors. (Although this is perhaps unlikely, because it was a standard exclusion in a solicitor’s PI policy, so the Claimant should have guessed the exclusion existed.) Thirdly, if knowledge of the contents of the policy would have made a difference to it, the Claimant could have required the mortgage provider to obtain that disclosure from Travelers before it agreed to take an assignment from the mortgage provider, thereby avoiding taking on the risk.
For Travelers, it would continue to rely on the exclusion clause, but it is possible that early disclosure under the 2010 Act in response to a request from the third party might have put the Claimant off bringing proceedings against Travelers and/or might have given Travelers more leverage for an early settlement.