Insurers had no priority rights to collect premiums over the proceeds of a successful action they had insured, as a result of a drafting error.
The High Court affirmed the general rule that, where a party has contracted for an unsecured right only, the court will not elevate it to a secured status.
The insolvency trustee of Harlequin Property SVG Limited (the “Trustee“) asked the court whether insurers, who had insured against adverse costs orders when pursuing a claim against accountants, could claim against the £8m recovered in priority to other creditors of Harlequin. A priorities agreement regulated the insurers’ recovery rights but, in error, excluded proceeds received from a court judgment. The insurers argued that they were entitled to priority over unsecured creditors over the proceeds or a court order preventing the Trustee from taking full advantage of his legal rights over the proceeds.
The court refused to accept the insurers’ arguments. The insurers were unsecured creditors and the court would not create an exception to the order of priority between creditors under the Insolvency Act 1986. The court also noted that to do so would be inconsistent with the terms of the priorities agreement regardless of the insurers’ position that it contained an error. The court further held that the nature and circumstances of the insurers’ drafting error did not justify an order to restrict the Trustee.