I can’t see you, Clem Fandango

Video justice

In mid-March 2020, I was interviewed by Richard Crump of Law360 for an article about the potential impact of Covid-19 on court hearings. The courts were poised to move a significant proportion of hearings online, and I said: ‘It is very interesting, but also worrying, that we are suddenly going into a live experiment where there are concerns about the capacity of the courts and about fairness and open justice.

Since then, there has been an explosion in video hearings, and what has at times seemed a blizzard of practice notes and guidance – from the senior judiciary, from professional bodies[1]Including the Commercial Bar Association (COMBAR)’s excellent Guidance Note on Remote Hearings., and from others.[2]Such as the Inns of Court College of Advocacy’s Principles for Remote Advocacy.

Despite this abundance of advice, new issues continue to emerge.

In Navigator Equities Ltd v Deripaska [2020] EWHC 1798 (Comm), Andrew Baker J was hearing a contempt application remotely. The hearing took place over four days in June 2020, with live witness evidence. The judge said:[3]At paragraph 7.

I was slightly surprised to find when Mr Mill QC moved to call Ms Berard for her oral evidence that this was to be from the conference room at Blackstone Chambers from which Mr Mill was addressing me, his juniors also in attendance (or it may be they were elsewhere in Chambers). I had no reason to think that those in the room were not adopting proper social distancing precautions under current circumstances. My surprise lay not in that direction, but in the fact that the court had not been notified or asked to approve that arrangement, no attempt had been made to ensure there was a Bible available so that Ms Berard could be sworn as she would have preferred (but thankfully she was content to affirm instead), the words for her oath or affirmation were not to hand (although I did notice when drafting this judgment that they were tucked away at the end of the authorities volume of the electronic hearing bundle), the conference room setup meant that I could not have both Ms Berard and Mr Mill QC on screen, and no representative of Mr Deripaska was present.

After saying that he did not regard this as entirely satisfactory, the judge added:[4]At paragraph 9.

If a witness is to give evidence remotely, where he or she will be and who (if anyone) will be with them, and why, should be discussed between the parties in advance. That is always so, in my view, but especially it is so if the arrangement may be such that there could be interaction with the witness during their evidence that will not be visible to the court. Any arrangement other than that the witness will be on their own during their evidence should be approved by the court, in advance if possible, and parties should not assume that an arrangement will be approved just because (if it is) it is agreed between them. Sensible arrangements discussed and agreed in advance are likely to meet with approval if the court does not identify any difficulty of possible substance that the parties may have overlooked. But it must be for the court, not the parties, to control how it receives the evidence of witnesses called before it. I acknowledge that the parties were not asked by the court in advance to specify the witness arrangements here. They should have been, and that they were not is my responsibility, but equally parties should not wait to be asked.

Quasi-prosecutorial duties: contempt applications are not adversarial commercial litigation

The judgment also contains remarks of general importance about the quasi-prosecutorial duties of parties bringing contempt applications.[5]See paragraphs 141-145. This requires a different approach from the ‘modern style’ of dispute resolution which the judge said had developed ‘[i]n the working generation of 30 years or so’ during which he had been engaged in commercial dispute resolution in London and which he deprecated as overly hostile and aggressive. The judge said:[6]At paragraph 161.

In the working generation of 30 years or so during which I have been engaged in commercial dispute resolution in this jurisdiction, principally in this court and in London arbitrations, there has been a significant general increase in hostility and aggressiveness in the conduct of disputes. The taking of any and every point, good or bad, and other failures to display proper independence from the litigating client, is treated too often as if it were a normal or appropriate adjunct of well funded, hard fought, business disputes, particularly if there are issues of dishonesty involved. Where ultimately the court is asked only to decide the outcome of the business dispute, usually to be expressed in terms of a party or parties being told to pay money to another party or other parties, there may be nothing too unfair about that modern style, regrettable though I regard it nonetheless. But when the court is being asked by a private litigant to consider a charge of contempt of court against the other side, especially against an individual whose liberty the applicant therefore seeks to put at risk, a better standard of conduct is not merely desirable, it is essential to the fairness and the appearance of fairness of the process. Though I do not suppose that this is how the claimants’ legal team saw what they were doing, the appearance in this case was of claimants not seeking to put Mr Deripaska fairly on trial for contempt, but of claimants seeking to load the dice against him.

Alison Padfield QC

Notes   [ + ]

1. Including the Commercial Bar Association (COMBAR)’s excellent Guidance Note on Remote Hearings.
2. Such as the Inns of Court College of Advocacy’s Principles for Remote Advocacy.
3. At paragraph 7.
4. At paragraph 9.
5. See paragraphs 141-145.
6. At paragraph 161.

Commercial Court update – impact of COVID-19 on volume of business, remote & hybrid hearings, & more

The latest Commercial Court User Group meeting was held remotely via Microsoft Teams on 15 June 2020. The minutes of the User Group meeting have just been published. These show how the Commercial Court has adapted during the COVID-19 pandemic.

Here are the main points:

Impact of COVID-19 on volume of Commercial Court business

  • The transition from physical (in-person) to remote (video) hearings has been smooth, with almost all of the Court’s work being conducted notwithstanding COVID-19. There is as a result almost no backlog of work
  • There appears to have been no reduction in court business: there has been a slight upturn in actions commenced (269 in January to March 2019 and 288 this year); the statistics for hearings overall (this appears to exclude trials) are comparable to last year and the year before
  • There have been fewer trials in this period:
    • This appears to be due to settlement rather than adjournment
    • The normal settlement rate is 60 to 65%; in the year to mid-June 2020 it is closer to 75%
    • There have been three times the number of Tomlin orders between January and the end of May 2020 than over the comparable period last year
  • The increase in the rate of settlements began in January 2020 and does not therefore appear to have been triggered by ‘lockdown’ in the United Kingdom; it may be linked to COVID-19-related uncertainty globally, reflecting the international nature of the Court’s business

Remote hearings – present and future

  • Parties may request a socially-distanced physical hearing but there is no guarantee that they will get one. Some judges are unable to return to court due to COVID-19. Conversely, parties will not be expected to attend court if they do not want to
  • Hybrid (part physical, part remote) hearings have taken place with the support of external providers, and a protocol for hybrid hearings is being developed – covering issues such as staggered access times, access routes, witness bundles, managing oaths and affirmations, and the need for test runs
  • It would not generally be fair for one party to be in person and the other to appear remotely
  • The court is hearing witness actions remotely. The judges are alive to potential difficulties with longer trials, particularly where there is critical witness evidence or where there is complex expert evidence (eg where large complex documents have to be explained by experts)
  • Longer trials and hearings with key witness evidence are likely to be the first to return to physical hearings
  • Interim hearings are more likely to be carried out remotely for some time
  • Consideration is being given to whether to keep remote or even hybrid hearings as a default position or at least an often-used option for some types of hearing

Practical points arising from the conduct of remote hearings to date

  • There have been concerns that remote hearings are too informal
  • There seems to have been a loss of some of the non-verbal communication and information that is picked up in a court room
  • The style of advocacy is different as the judge and advocate seem to be in a ‘bubble’
  • Court etiquette should be observed:
    • It is permissible to use mobiles phones on silent in both physical and remote hearings
    • Most counsel are taking instructions via WhatsApp which on occasion can be distracting for those taking part in the hearing
    • Parties who do not have ‘speaking parts’ seem to be interacting more freely amongst themselves, which can be distracting for others
    • Advocates should not be conducting conversations with their teams while on mute
  • There have been one or two incidents where despite warnings participants have photographed proceedings
  • It appears that directions for bundles are being discussed and agreed between parties, causing costs to be raised. This should not be necessary in light of the available guidance. Court users should refer to:

Platforms for remote hearings – Skype for Business/CVP but no ban on Zoom

  • The only platform currently approved by the Ministry of Justice for use on judicial computers is Skype for Business
  • Cloud Video Platform (CVP) is being rolled out. Court users should presume that the default proceeding is that hearings will be conducted using Skype for Business until CVP is available
  • Parties can agree another platform if suitable arrangements can be made (eg for the judge to have access to a separate device running that platform)
  • If parties wish to use another platform, in depth preparations are required, and they should make the Listings office aware as soon as possible: there are always two judges on paper application duty who are able to deal with platform issues

Other aspects of Commercial Court business

Alison Padfield QC

The Commercial Court Report 2018-2019

As I wrote in a previous blog, the Commercial Court report for 2017-2018 was the first for some years. The 2018-2019 report has just been published and is described on the judiciary website as an ‘annual’ report, so it seems we can expect the trend of yearly reports to continue.

The report for 2018-2019 covers the period from October 2018 through to the end of September 2019.[1]The court year begins on 1 October or the first working day thereafter.

Judges[2]Pages 6 and 22 to 23.

There are currently 12 Queen’s Bench Division judges nominated to sit in the Commercial Court.

At the start of October 2019 the judges of the Commercial Court were Teare J (Judge in Charge of the Commercial Court), and Andrew Baker, Bryan, Butcher, Carr, Cockerill, Jacobs, Robin Knowles, Moulder, Phillips, Picken, Popplewell and Waksman JJ.

Since the last report, Males and Phillips LJJ have been promoted to the Court of Appeal and Popplewell and Carr JJ will soon follow, and Walker J has retired.[3]As an aside: the retirements of Lords Clarke, Mance and Sumption left the Supreme Court without any Commercial Court expertise (Lord Sumption sat as a deputy), but Lord Hamblen, a former Commercial Court judge, has since been promoted from the Court of Appeal, and Lord Burrows, who sat as a deputy, has also been appointed.

The Court aims to have about eight judges sitting at any one time but this has not always been possible in recent years because all Divisions of the High Court are currently operating below strength.[4]This is due to a recruitment crisis: https://www.lawgazette.co.uk/practice/hiring-crisis-high-court-judges-in-line-for-47k/5070502.article; https://www.theguardian.com/uk-news/2019/jun/05/uk-high-court-judges-to-be-given-25-pay-rise-to-tackle-hiring-crisis.

The report says that the Commercial Court will gain some new recruits during the course of the year 2019 to 2020. Two new judges have in fact already been nominated to sit in the Commercial Court: Henshaw and Foxton JJ.

Deputy judges are used for applications and trials to ensure that targets for lead times can be maintained. Deputies will only be used either when the parties agree that the matter may be dealt with by a deputy, or when the Judge in Charge of the Commercial Court considers it suitable for the matter to be dealt with by a deputy.

Arbitration[5]Page 7.

There were four hearings of jurisdictional challenges under s 67 of the Arbitration Act 1996. A significant drop in s 69 applications[6]Appeal on a point of law under s 69 of the Arbitration Act 1996. from 87 to 39 was overshadowed by a dramatic fall in s 68 applications[7]Challenges on grounds of serious irregularity under s 68 of the Arbitration Act 1996. from 71 to 19. The Court hopes that this statistic reflects the fact that parties are appreciating the point made repeatedly by the Court in its judgments that the hurdle for s 68 applications is very high.

Disclosure pilot[8]Pages 16 to 17.

The two-year disclosure pilot was launched on 1 January 2019. It is anticipated that it will continue formally thereafter if it is deemed a success. The Court anticipates that 2020 will be key for getting feedback and encourages users to keep submitting this.

In the first six months of the pilot across the Business and Property Courts, in cases where a single model order was made, 53% were for Model C. Where multiple orders were made, 42% were for Model C and the rest either Model B or Model D. In the Commercial Court, 80% of cases opted for Model C.

The report says that in larger cases the disclosure pilot has led to a greater focus on narrowing the scope of disclosure, but that there is a concern that in lower value claims the process is increasing costs. This issue is being actively considered. Overall, there appears to be a need to be vigilant about not over-complicating the process, respecting the express duty of co-operation, and making sure that judges and lawyers alike keep hearing lengths under control.

The report says that there have been concerns about ‘game-playing’ with parties taking tactical positions on the completion of the Disclosure Review Document, and that encouragement to adopt a co-operative approach remains important. [9]Practitioners should take the hint, as Vos LJ, the Chancellor of the High Court, made clear at para 54 of his recent judgment on the disclosure pilot in McParland & Partners Ltd v Whitehead [2020] EWHC 298 (Ch): ‘It is clear that some parties to litigation in all areas of the Business and Property Courts have sought to use the Disclosure Pilot as a stick with which to beat their opponents. Such conduct is entirely unacceptable, and parties can expect to be met with immediately payable adverse costs orders if that is what has happened. No advantage can be gained by being difficult about the agreement of Issues for Disclosure or of a DRD, and I would expect judges at all levels to be astute to call out any parties that fail properly to cooperate as the Disclosure Pilot requires. Very few parties have taken the opportunity for disclosure guidance hearings, and parties are encouraged to think about this option.

Witness statements[10]Pages 18 to 19.

The remit of the Working Group established by the Commercial Court Users’ Committee to consider witness statements, chaired by Popplewell LJ, evolved to cover all of the jurisdictions in the Rolls Building. The final report completed in July 2019 was considered by the Business and Property Courts Board at the end of November 2019. The Board welcomed the report and endorsed in principle its main recommendations, as follows:

  • An authoritative statement of best practice should be formulated for the preparation of witness statements, with a harmonisation of the Guidesfor the Commercial Court, Chancery Division and Technology and Construction Court.
  • There should be a more developed factual witness statement of truth confirming that the objective of a witness statement and proper drafting practices have been explained to and understood by the witness, and a solicitor’s certificate of compliance to be signed if there are solicitors on record for the party serving the statement.[11]Witness statements are also receiving attention in other quarters: From 6 April 2020, a witness statement must state ‘the process by which it has been prepared, for example, face-to-face, over the telephone, and/or through an interpreter’: PD32, para 18(5), as amended by the 113th update to the CPR. See Gordon Exall’s Civil Litigation Brief blog for information on other forthcoming changes to statements of truth.
  • Oral examination in chief on particular issues or topics should be given active consideration at Case Management Conferences.
  • In the Commercial Court, page limit extensions should generally only be considered retrospectively at Pre-Trial Reviews, at the costs risk of the party serving if a required extension is not granted so that a statement has to be re-drafted and re-served.
  • Judges should be more ready, at PTRs or after trials, to apply costs sanctions or express judicial criticism where there has been non-compliance or bad practice.
  • Consideration should be given within each Business and Property Courts jurisdiction to the possibility of introducing a pre-trial statement of facts prepared by the legal team and served at the same time as witness statements, to serve as the main vehicle for setting out parties’ detailed factual narrative case, derived primarily from the contemporaneous documents, removing the temptation to use witness statements as a vehicle for doing that[12]For the current arrangements for introducing documents into evidence at trial, see the Commercial Court Guide, paras J8.6 and J8.7. and enabling them to be properly limited to any particular points on which factual witness testimony at trial may really add something.

The report says that the Working Group will oversee the work that will now commence towards implementing those recommendations. Andrew Baker J is taking over as chair of the Working Group following Popplewell LJ’s elevation to the Court of Appeal and the detailed initial work may be undertaken by one or more smaller groups reporting to the full Working Group.

Alison Padfield QC

Notes   [ + ]

1. The court year begins on 1 October or the first working day thereafter.
2. Pages 6 and 22 to 23.
3. As an aside: the retirements of Lords Clarke, Mance and Sumption left the Supreme Court without any Commercial Court expertise (Lord Sumption sat as a deputy), but Lord Hamblen, a former Commercial Court judge, has since been promoted from the Court of Appeal, and Lord Burrows, who sat as a deputy, has also been appointed.
4. This is due to a recruitment crisis: https://www.lawgazette.co.uk/practice/hiring-crisis-high-court-judges-in-line-for-47k/5070502.article; https://www.theguardian.com/uk-news/2019/jun/05/uk-high-court-judges-to-be-given-25-pay-rise-to-tackle-hiring-crisis.
5. Page 7.
6. Appeal on a point of law under s 69 of the Arbitration Act 1996.
7. Challenges on grounds of serious irregularity under s 68 of the Arbitration Act 1996.
8. Pages 16 to 17.
9. Practitioners should take the hint, as Vos LJ, the Chancellor of the High Court, made clear at para 54 of his recent judgment on the disclosure pilot in McParland & Partners Ltd v Whitehead [2020] EWHC 298 (Ch): ‘It is clear that some parties to litigation in all areas of the Business and Property Courts have sought to use the Disclosure Pilot as a stick with which to beat their opponents. Such conduct is entirely unacceptable, and parties can expect to be met with immediately payable adverse costs orders if that is what has happened. No advantage can be gained by being difficult about the agreement of Issues for Disclosure or of a DRD, and I would expect judges at all levels to be astute to call out any parties that fail properly to cooperate as the Disclosure Pilot requires.
10. Pages 18 to 19.
11. Witness statements are also receiving attention in other quarters: From 6 April 2020, a witness statement must state ‘the process by which it has been prepared, for example, face-to-face, over the telephone, and/or through an interpreter’: PD32, para 18(5), as amended by the 113th update to the CPR. See Gordon Exall’s Civil Litigation Brief blog for information on other forthcoming changes to statements of truth.
12. For the current arrangements for introducing documents into evidence at trial, see the Commercial Court Guide, paras J8.6 and J8.7.

Employment tribunal claims and the Third Parties (Rights Against Insurers) Act 2010

The latest decision on the Third Parties (Rights Against Insurers) Act 2010 (‘the 2010 Act’) has come from an unexpected source.

In Watson v Hemingway Design Limited (in liquidation)[1]Employment Appeal Tribunal, 16 December 2019., Kerr J decided that an employment tribunal had jurisdiction to make a declaration under the 2010 Act as to the liability of the insurer as well as the liability of the insured. He also concluded that an arbitration clause in the contract of insurance was rendered void by employment and discrimination legislation.

Neither aspect of the decision is likely to be welcomed by insurers.

Employment tribunal jurisdiction

The judge said that the first issue – whether an employment tribunal had jurisdiction to make a declaration under the 2010 Act as to the liability of the insurer as well as the insured – was a question of statutory construction: specifically, whether ‘court’ in the 2010 Act included the employment tribunal. This followed from the fact that the jurisdiction of the employment tribunal was entirely statutory, and s 2 of the Employment Tribunals Act 1996 provided that ‘Employment tribunals shall exercise the jurisdiction conferred on them by or by virtue of this Act or any other Act, whether passed before or after this Act.’ The judge said that, if an employment tribunal fell within the words ‘the court’ in s 2(6) of the 2010 Act, the Act had conferred jurisdiction on the employment tribunal to make a declaration as to the insurer’s liability under s 2(2)(a) of the 2010 Act; and, if that was so, the 2010 Act fell within the words ‘any other Act, whether passed before or after this Act’.

The judge considered various authorities[2]Including Attorney-General v BBC [1981] AC 303, HL, Peach Grey & Co v Sommers [1995] ICR 549, CA, Vidler v UNISON [1999] ICR 746, EAT and Brennan v Sunderland City Council [2012] ICR 1183, EAT. and noted that the employment tribunal had been held to be a ‘court’ for some purposes but not for others. He concluded that the scope of ‘court’ depended on the statutory context, and that the context called for a purposive construction of ‘court’ in the 2010 Act because otherwise the statutory purpose of the 2010 Act in allowing the claimant to bring one claim rather than two would have failed in its application to employment tribunal claims.

Validity of the arbitration clause

The second issue was whether an arbitration clause in the contract of insurance was rendered void by the applicable employment legislation. Although the judge did in fact go on to consider this issue, he said that in his view it was not necessary for him to decide it because, although the insurer had relied on the existence of the arbitration clause in its grounds of resistance (defence), it had only done so ‘further or in the alternative’ to its challenge to the tribunal’s jurisdiction.

This seems questionable: the judge said that it was possible that the arbitration clause might become relevant at the next stage of the proceedings because either party might take steps to have an arbitrator appointed; but in fact the insurer had (as the judge himself found) already invoked the arbitration clause in its pleaded defence. Therefore, as soon as the judge concluded that the employment tribunal had jurisdiction under the 2010 Act, the question of the validity of the arbitration clause arose for decision.

On the second issue, the claimant argued that s 203 of the Employment Rights Act 1996[3]Section 203(1) of the Employment Rights Act 1996 provides: ‘Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports—(a) to exclude or limit the operation of any provision of this Act, or (b) to preclude a person from bringing any proceedings under this Act before an employment tribunal. and s 244 of the Equality Act 2010[4]Section 244(1) of the Equality Act 2010 provides: ‘A term of a contract is unenforceable by a person in whose favour it would operate in so far as it purports to exclude or limit a provision of or made under this Act. rendered the arbitration clause void because it excluded or limited the operation of those provisions and precluded the claimant from bringing proceedings before the tribunal under those sections ‘as against [the insurer] which has inherited [the insured’s] liability[5]At para 25(7)..

In setting out relevant provisions of the arbitration clause, the judge said that the clause applied where there was a ‘difference or dispute’ between the insured and the insurer ‘or any other person insured under this Policy’. The fact that the judge quoted this second phrase suggests that the judge considered that, on a statutory transfer under the 2010 Act, the claimant became a ‘person insured under this Policy’. This fits with his characterisation of the clause[6]At para 59. as ‘requiring the claimant (as statutory transferee of the rights of… the insured) to submit his dispute with [the insurer] to arbitration’.

In fact, the clause does no such thing. The claimant remained free to submit his dispute to the employment tribunal – as, indeed, he had done. Nothing in the arbitration clause affected the progress of the claimant’s claim in the employment tribunal; nor did the claimant suggest that it did.

In finding that the arbitration clause did not bind the claimant, the judge seems in effect to have accepted the claimant’s submission that the insurer had ‘inherited [the insured’s] liability’, and extrapolated from this to treat the claim by the claimant against the insurer as if it were a claim under the employment legislation.

It is of course correct that, once the judge had concluded that, as a matter of construction of the 2010 Act, ‘court’ included the employment tribunal, the binding nature of the arbitration clause deprived the claimant of the procedural advantage of bringing one set of proceedings. This arguably undermines his conclusion on the question of the jurisdiction of the employment tribunal. But in any event his reasoning conflates two things:

  • the claimant’s rights against his former employer – which he was, and remained, entitled to bring in the employment tribunal under s 203 of the Employment Rights Act 1996 and s 244 of the Equality Act 2010; and
  • the employer’s rights against the insurer which were transferred to him under the 2010 Act, which were – and should have remained – subject to the arbitration clause.

Notes   [ + ]

1. Employment Appeal Tribunal, 16 December 2019.
2. Including Attorney-General v BBC [1981] AC 303, HL, Peach Grey & Co v Sommers [1995] ICR 549, CA, Vidler v UNISON [1999] ICR 746, EAT and Brennan v Sunderland City Council [2012] ICR 1183, EAT.
3. Section 203(1) of the Employment Rights Act 1996 provides: ‘Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports—(a) to exclude or limit the operation of any provision of this Act, or (b) to preclude a person from bringing any proceedings under this Act before an employment tribunal.
4. Section 244(1) of the Equality Act 2010 provides: ‘A term of a contract is unenforceable by a person in whose favour it would operate in so far as it purports to exclude or limit a provision of or made under this Act.
5. At para 25(7).
6. At para 59.

Non-party costs orders against liability insurers – Travelers Insurance Co Ltd v XYZ in the Supreme Court

Yesterday, the Supreme Court handed down judgment in Travelers Insurance Co Ltd v XYZ.[1][2019] UKSC 48.] This was an application for non-party costs against liability insurers made under s 51(3) of the Senior Courts Act 1981 by claimants in the PIP breast implant group litigation.

I have previously written about non-party costs order against insurers, including commentary on the Court of Appeal decision in Travelers v XYZ, and I will be updating that post in the light of the Supreme Court decision.

In the meantime, here are my initial thoughts on the decision.

Travelers v XYZ involved a Group Litigation Order (‘GLO’), and the facts were unusual. They are summarised briefly in my earlier blog:  for present purposes, the key point is that some of the claims against the insured which were within the GLO were covered by insurance, but others were not.

Although the facts were unusual, the Supreme Court took the opportunity to review the principles applicable to non-party costs orders against liability insurers.

Much of what is in the Supreme Court decision amounts to confirmation of well-established principles from earlier authorities in relation to applications for non-party costs orders against liability insurers:

  • The proper participation of the insurer in the funding, conduct and control of the insured’s case is regulated by long-settled principles, which are in addition to the contractual terms of the policy itself. As Sir Wilfrid Greene MR said in Groom v Crocker[2][1939] 1 KB 194 at 203., insurers must act in what they consider in good faith to be the common interest of themselves and their insured.
  • There are two bases on which a non-party costs order against liability insurers might be made: intermeddling; and becoming the ‘real defendant’ to proceedings.[3]TGA Chapman Ltd v Christopher [1998] 1 WLR 12, CA; Travelers v XYZ, para 36 (Lord Briggs, with whom Lady Black and Lord Kitchin agreed.
  • Exceptionality’ is not a useful test for determining whether a non-party costs orders should be made against liability insurers.[4]TGA Chapman Ltd v Christopher [1998] 1 WLR 12, 20, CA; Citibank NA v Excess Insurance Co Ltd [1999] Lloyd’s Rep IR 122, 131 (Thomas J); Travelers v XYZ, paras 33 and 34 (Lord Briggs).
  • In order to identify whether a liability insurer has become the ‘real defendant’ to proceedings, the principles laid down by the Court of Appeal in TGA Chapman Ltd v Christopher[5][1998] 1 WLR 12 should be applied.[6]Travelers v XYZ, paras 52 and 77 (Lord Briggs).
  • As there is no obligation on insurers to disclose policy information including limits of cover, a failure to do so is unlikely to justify a non-party costs order.[7]Cormack v Excess Insurance Co Ltd [2002] Lloyd’s Rep IR 398, CA, 406, col 2 (Auld LJ); Travelers v XYZ, paras 67 and 81 (Lord Briggs).
  • If the other ingredients for a non-party costs order are present, causation remains an important element, and it is the costs attributable to the intermeddling that the meddler is likely to be ordered to pay: if the costs would have been incurred in any event, an order is unlikely.[8]Travelers v XYZ, paras 66 and 80 (Lord Briggs).

Liability insurers will be reassured in particular by the clear statement that non-disclosure by insurers of policy limits is unlikely to justify a non-party costs order.

Key points of interest in the decision are:

  • The analysis and application of the principles relevant to intermeddlers, rather than the ‘real defendant’ principles, because the insurer had become involved in uninsured claims.[9]At paras 52 to 56 (Lord Briggs). On this basis, the ‘real defendant’ principles established in TGA Chapman Ltd v Christopher are confined to claims in which the limit of indemnity is insufficient to cover the costs of the successful party.[10]At para 78 (Lord Briggs).
  • The significance accorded by the Supreme Court to the fact that in liability insurance, the insurer’s involvement arises from a framework of contractual obligation as between the insurer and the insured: Lord Briggs said that if the insurer has not gone beyond the confines of those contractual obligations and attendant rights as explained in Groom v Crocker, ‘liability as an intermeddler may be very hard to establish’.[11]At para 55.

One element of this framework of rights is the established principle that, in relation to issues common to insured and uninsured claims, insurers may not[12]Unless the policy expressly permits this. apportion their contractual liability to pay defence costs.[13]Travelers v XYZ, para 13 (Lord Briggs), referring to New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237, PC, approved: International Energy Group Ltd v Zurich Assurance plc [2016] AC 509, paras 36 to 38.

This meant that insurers were funding the common costs of the defence of both insured and uninsured claims.  Lord Briggs noted[14]At para 63 that solicitors who were jointly instructed by the insured and the insurer played an advisory role in the insured’s decision not to disclose the limits of its insurance cover earlier, when uninsured claimants might have abandoned their claims, and successfully to resist an order for disclosure. That advice was, Lord Briggs said, ‘given in good faith without a perception by the solicitors that there might be (as the judge held that there was in fact) a conflict between the interests of the insured and the insurer’ in whether to make the disclosure.

This is an interesting remark: the good faith of the solicitors, and their failure to identify the conflict, while explaining why an insurer has strayed beyond the proper ambit of its role as outlined in Groom v Crocker, does not mean that that has not happened. Lord Briggs expressly left open[15]At para 64 the question of whether it would be right, in those circumstances, for the insurer to take responsibility for the advice.

The basis of Lord Briggs’s conclusion on this point was, in fact, simply that the advice fairly reflected the insurer’s rights, and was not therefore conduct which amounted to unjustified intermeddling in the uninsured claims for the purposes of the proceedings.[16]At para 64

How far this might be pushed in practice is unclear: Lord Briggs said that it might even have extended to the insurer’s involvement in settlement and admissions in relation to uninsured claims, although he did not reach a firm conclusion on this, and that the court should be slow to second-guess jointly instructed solicitors where they allow the insurer a role in decision-making about claims raising common issues, notwithstanding that some of the claims are uninsured.[17]At paras 73 and 83 He also recognised that, where there was a connection between uninsured and insured claim, what he described as ‘the legitimate interests of the insurer’ might justify some involvement by a liability insurer in decision-making and even funding of the defence of the uninsured claims without exposing the insurer to liability to pay the successful claimant’s costs.[18]At para 79.

Ultimately, though, Lord Briggs preferred to rest his decision on the absence of any relevant causative link in relation to the incurring of costs.[19]At para 74.

Lord Sumption, who said that he agreed broadly with Lord Briggs’s analysis of the relevant principles and their application in this case, made a series of potentially significant observations in a concurring judgment.

Lord Sumption too emphasised the importance of the insurer’s contractual right to direct the conduct of the litigation, but he developed the analysis differently. He said that this was a form of compulsory agency and was a right to direct the litigation ‘in his assured’s interest, and not his own, even though their interests will usually coincide’.[20]At para 114.

This is in contrast to the assumption implicit in Lord Briggs’s judgment that, where the interests of the insured and the insurer conflict, the insurer’s contractual right to control the litigation entitles the insurer to act in accordance with its interests rather than those of the insured. Lord Sumption said that the solicitor who the insurer appoints is the insured’s solicitor, who owes all the usual professional duties to the insured and is entitled to look to the insured for his fees, notwithstanding that his instructions come from the insurer.

Lord Sumption said that this feature in particular meant that the insurer could not be regarded as the real defendant, that this left unjustified intermeddling as the only basis on which a liability insurer might be at risk of having a costs order made against him, and that cases in which a costs order might be made against a liability insurer on this basis were ‘likely to be rare’.[21]At para 116. He added that:

  • A liability insurer has an obvious legal interest in the performance of his contractual duties under the policy and the exercise of his contractual rights.
  • That interest is limited to the defence of insured claims and different considerations may arise if he steps outside that role.
  • As Travelers v XYZ illustrated, the proper defence of claims may involve steps which directly or indirectly affect uninsured claims.
  • This is an area in which a person conducting or directing the conduct of litigation is entitled to a large margin of judgment and hindsight is not usually an adequate tool for assessing how he exercises it.
  • If he acts in good faith in the interest of the assured qua the defendant to insured claims, he should not incur liability in costs.
  • He would expect this to be equally true of the case where the potential liability of the assured is subject to a limit of cover which is exceeded, but that was not an issue which needed to be examined because it did not arise on the facts of the appeal.

Although Lords Briggs and Sumption both considered that insurers should be afforded a significant degree of latitude in decision-making in litigation against insureds which they were contractually entitled to control, Lord Sumption placed at the heart of his analysis the insurers’ obligation to act in the interests of the insured. If liability insurers do this, they should not be exposed to liability for non-party costs orders. If they prefer their own interests, they should be prepared for a less benign outcome. Which side of the line their conduct will fall if they act on flawed advice from a jointly instructed solicitor is unclear. Lord Briggs’s judgment could be interpreted as hinting that an order should not be made; and the opposite could be said for Lord Sumption’s.

Alison Padfield QC

Notes   [ + ]

1. [2019] UKSC 48.]
2. [1939] 1 KB 194 at 203.
3. TGA Chapman Ltd v Christopher [1998] 1 WLR 12, CA; Travelers v XYZ, para 36 (Lord Briggs, with whom Lady Black and Lord Kitchin agreed.
4. TGA Chapman Ltd v Christopher [1998] 1 WLR 12, 20, CA; Citibank NA v Excess Insurance Co Ltd [1999] Lloyd’s Rep IR 122, 131 (Thomas J); Travelers v XYZ, paras 33 and 34 (Lord Briggs).
5. [1998] 1 WLR 12
6. Travelers v XYZ, paras 52 and 77 (Lord Briggs).
7. Cormack v Excess Insurance Co Ltd [2002] Lloyd’s Rep IR 398, CA, 406, col 2 (Auld LJ); Travelers v XYZ, paras 67 and 81 (Lord Briggs).
8. Travelers v XYZ, paras 66 and 80 (Lord Briggs).
9. At paras 52 to 56 (Lord Briggs).
10. At para 78 (Lord Briggs).
11. At para 55.
12. Unless the policy expressly permits this.
13. Travelers v XYZ, para 13 (Lord Briggs), referring to New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237, PC, approved: International Energy Group Ltd v Zurich Assurance plc [2016] AC 509, paras 36 to 38.
14. At para 63
15. At para 64
16. At para 64
17. At paras 73 and 83
18. At para 79.
19. At para 74.
20. At para 114.
21. At para 116.

Reservations of rights by insurers

Knowing when and how an insurer’s rights should be reserved is a key skill for anyone involved in handling insurance claims – claims handlers, loss adjusters and of course lawyers.

So here are a few thoughts about reservations of rights.

Tension

Reservation of rights by insurers is a subject which evokes strong reactions. The circumstances surrounding an insurance claim can be extremely difficult for policyholder or other insured party, and an immediate reservation of rights can alienate the insured and damage the relationship of trust which should exist between the insured and its insurer. But on the other hand, insurers and their agents, including lawyers, will always have in mind the possibility that, if an insurer subsequently rejects a claim without having reserved its rights, the insured may argue that because of the way the claim has been handled, the insurer is not entitled to do this. I’m going to talk about this tension. In order to do that, I need first to briefly sketch the legal principles underpinning reservations of rights.

Legal principles underpinning a reservation of rights

The principles in play are familiar ones: affirmation or waiver, and estoppel. At the same time, this area is bedevilled by linguistic confusion – the label ‘waiver’ is sometimes used to apply to both concepts, partly because it is convenient shorthand – it’s much easier to say – and I do this myself – that an insurer has waived its rights than to say that is or has become estopped from exercising its rights. Some of the older cases are less precise in their use of language, too, so it can be dangerous to rely on the labels they use. 

It’s useful to remember, here, that the law of insurance contracts is a branch of contract law, and that although it has specific features such as the duty of utmost good faith – and now the duty of fair presentation – the answer to many questions can be found in the general law of contract. And this means that we can look to the general law of contract for the legal principles underpinning this area, and for the labels or terminology.

So, one the one hand, there is ‘waiver by election’, which in insurance cases is often referred to as waiver, or as affirmation.

And on the other hand, there is ‘waiver by estoppel’, more commonly referred to in insurance cases as estoppel.

Waiver and estoppel were considered in detail by the Court of Appeal in an insurance case in Kosmar Villa Holidays plc v Trustees of Syndicate 1243[1][2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489. in 2008. This is the key case on reservation of rights by insurers, and the following outline draws heavily on the judgment of Rix LJ.

Both doctrines – waiver or affirmation on the one hand, and estoppel on the other – require that the party with the relevant contractual right who is alleged to have lost it – typically the insurer – made an unequivocal representation[2]Estoppel by convention, which does not involve any representation, is not relevant in the present context., by words or conduct, that they did not, in future, intend to enforce that legal right against the other party to the contract – here, the policyholder or other insured making a claim under the policy.

It’s always a good idea to be sure that you know the ordinary meaning of a term before you start to think about its legal meaning, and according to my Oxford English Reference Dictionary, unequivocal means ‘not ambiguous, plain, unmistakeable’.

The need for an unequivocal representation means that silence and inaction are not enough to give rise to a waiver or estoppel – they are by their nature equivocal (at least in the absence of a ‘duty to speak’ – which I’m going to come to in a moment).

So the two concepts are similar – but there is a key difference: in the case of estoppel, the insured also has to demonstrate that it relied on the unequivocal representation in such a way that it would be inequitable for the insurer to go back on the representation. This is sometimes referred to as ‘detriment’ or ‘detrimental reliance’. This is not a requirement for affirmation or waiver – only for estoppel.

That’s a brief sketch of the basic legal principles underpinning reservations of rights. I think good way into this subject is to remember what Rix LJ said in the Kosmar Villa Holidays case:[3]At para 80 (Rix LJ).

What a reservation of rights does is expressly to preserve a situation where otherwise it might be held that something unequivocal had occurred’.

I also like the phrase which Leggatt J used in Involnert Management Inc v Aprilgrange Ltd[4][2015] EWHC 2225 (Comm), [2015] 2 Lloyd’s Rep 289. – that a reservation of rights is ‘an obstacle to finding an unequivocal communication of a decision[5]At para 179. – in that case, a decision by insurers to affirm a policy when they might have avoided it for non-disclosure.

If I’d been writing this piece before the decision of the Court of Appeal in Ted Baker v AXA[6]Ted Baker plc v Axa Insurance UK plc [2017] EWCA Civ 4097, [2017] Lloyd’s Rep IR 682. in 2017, I would have stopped here and moved on to discuss the practical aspects of reservations of rights. I’ll do that in a moment – but first I need to say something about Ted Baker v AXA.

In that case, the Court of Appeal recognised that there may be an estoppel based on a ‘duty to speak’. Christopher Clarke LJ said that:[7]At para 82.

‘… whether an estoppel arises is not wholly dependent on whether the person sought to be estopped has made some representation express or implied. It may arise if, in the light of the circumstances known to the parties, a reasonable person in the position of the person seeking to set up the estoppel (here, TB) would expect the other party (here the insurers) acting honestly and responsibly to take steps to make his position plain.

As I’ve said, the traditional analysis is that an unequivocal representation is required for an estoppel. And it follows from this that silence and inaction are insufficient.

It’s clear that this must be qualified in the light of the Ted Baker decision. But questions remain.

There was a reservation of rights in Ted Baker. This was referred to by Christopher Clarke LJ only in passing when he set out the facts of the case. He didn’t refer to it at all when analysing the duty to speak. As a former Commercial Court judge with significant experience in insurance law, it seems extremely unlikely that Christopher Clarke LJ would have overlooked the significance of a reservation of rights. The inference is that he didn’t think that the reservation of rights was relevant – and actually this is logical if – as he said in the quotation above – a representation is not required in order for there to be an estoppel based on a duty to speak.

But the fact remains that the Court of Appeal did not deal expressly with the impact of the reservation of rights on the duty to speak, and that the Ted Baker decision leaves open the question of whether – at least in some circumstances – a reservation of rights might be relevant; whether it might somehow neutralise a duty to speak, perhaps by preventing it from arising in the first place.

When should an insurer’s rights be reserved?

I’d like now to come back to the tension I mentioned earlier: when – at what stage in the life of a claim, or in what circumstances – should an insurer’s rights be reserved?

There are two – sharply opposing – views on this:

In the first camp are those who think that an insurer should not reserve its rights until it has notice of a potential defence to the claim – for example the right to avoid or proportionately reduce a claim for breach of the duty of fair presentation, or as in the Kosmar Villa Holidays case, a late notification and potential breach of a condition precedent by the policyholder.

If nothing has happened – yet – which means that the insurer might be entitled to exercise certain rights, the purist approach is that there is no need for a reservation of rights. This has support from policyholder organisations. The regulatory requirement that insurers treat their customers fairly may also be relevant in some circumstances.

In the second, opposing, camp are people who think that an insurer should reserve its rights as soon as a claim is made and the insurer starts to investigate it.

Both camps can draw support from Kosmar Villa Holidays.[8]Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489. Rix LJ said[9]At para 80. that even where an insurer knows that an occurrence has potentially been notified late, but it is getting to grips with a new claim arising out of the occurrence, has asked questions and is waiting for answers, the situation is ‘equivocal’ – and that in such a situation there is no need for a reservation of rights, even if such a reservation ‘may be practical and wise’. He then went on to say:[10]At para 82.

‘‘It would not be good practice for insurers to rush to repudiate a claim for late notification, or even to destabilise their relationship with their insured by immediately reserving their position – at a time when they were in any event asking pertinent questions about a claim arising out of an occurrence about which they had long been ignorant in the absence of prompt notification.

Rix LJ also said that:[11]At para 82.:

Legal doctrine should not push insurers into over-hasty reliance on their procedural rights.

This looks like firm support for the purist, don’t-be-too-quick-to-reserve, camp. But Rix LJ then qualified what he had said in a way which in my view brings the matter down on the side of the prudent-to-reserve-at-the-outset-of-any-investigation camp, saying:[12]At para 83.

That said, I would certainly not like to give the impression that insurers can equivocate for long while giving the plain impression that they are treating a claim as covered by their policy, especially at a time when a decision might be required, without running at least the risk that they will be treated as having waived some requirement of their contract or their right to avoid it. Moreover, there may well be express options given to insurers under their policy the unguarded exercise of which is simply inconsistent with the right to decline cover.

There are two obvious problems for insurers in waiting to see if something emerges from an investigation. One is that the insurer or its agents have to ensure that they reserve insurers’ rights as soon as something does emerge – or risk being held to have lost those rights.

And the other problem is that no-one wants to end up in court – let alone the Court of Appeal, as happened in Kosmar Villa Holidays – arguing about waiver or estoppel.

The upshot of this is that, more often than not, in a claim of any complexity, insurers’ rights will be reserved, and this will be done at the outset of the investigation of the claim.

Practical issues in reserving rights

I’d like to look now at some of the practical issues which can arise in relation to reservations of rights.

I’ve already covered the question of when insurers’ rights should be reserved, so the next question is, if insurers rights are to be reserved, how should that be done?

On one view, nothing could be easier. After all, as Lloyd LJ said in the Court of Appeal in Barber v Imperio [13]Barber v Imperio Reinsurance (UK) Ltd (unreported, 15 July 1993).in 1993:

Every businessman knows how to reserve his rights’.

But is it really that simple?

The first point is that a reservation of rights can be effective without using the phrase ‘reservation of rights’ if the effect of the words used is clear.

For example, in a case in 1979,[14]Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd [1980] 1 Lloyd’s Rep 523. Woolf J held that a loss adjuster’s use of the phrase ‘without prejudice’ was in fact a reservation of rights. [15]At 525.

And in a case in 2015,[16]Brit UW Ltd v F & B Trenchless Solutions Ltd [2015] EWHC 2237 (Comm), [[2016] Lloyd’s Rep IR 69 Carr J found as a fact that the words ‘reservation of rights’ were not used, but that the insured’s representatives were told clearly at the relevant meeting that insurers might not be providing cover because of a material non-disclosure.[17]At paras 175-177.

This is similar to the approach to construing insurance policy terms such as conditions precedent – there is no magic in the phrase, and what matters is the substance.

But why take the risk of not using the well-understood, conventional words?

So if the starting point is that it is prudent to use the phrase ‘reservation of rights’, or a variation of it, what else is required?

Here, less may be more – the simplest wording may be the most effective – for example:

‘Insurers’ rights are fully reserved.’

Why is this so? Well, let’s look at some examples. A simple reservation of rights is often embellished or expanded.

And so a letter from insurers or their lawyers might say something like this:

‘Insurers’ rights are fully reserved under the policy, including the right to refuse to pay a claim altogether.’

The additional words don’t add anything. But they raise an implicit question: what about the right to avoid the policy? The reservation refers to the policy – could this be an unequivocal representation that the insurers do not intend to rely on their right to avoid the policy?

So what then if the letter-writer adds more words to deal with this, and the reservation becomes:

‘Insurers’ rights are fully reserved, including the right to refuse to pay a claim altogether or to avoid the policy.’

This new wording has arguably cured one problem, but has it created another? What about the right not to avoid the policy but to reduce the payment proportionately due to a breach of the duty of fair presentation?

And on it goes.

In each case, the question of whether the reservation of rights is effective depends on the facts, and although it would be difficult to spell out an unequivocal representation from these wordings, no-one wants to have their wording tested in court.

The point here is that, in general terms, attempts to embellish a simple reservation of rights do not make it stronger, and carry an element of risk.

Let’s look at another practical issue. Does a reservation of rights need to be repeated in order to remain effective? As the relevant principles are waiver and estoppel, there are no relevant time limits. And there is no requirement that, to be effective, the reservation of rights must be repeated in every communication from the insurer.

But whether a reservation of rights remains effective if not repeated very much depends on the facts.

If the situation in relation to the claim has changed, or the insurer and insured are in frequent contact, and the insurer has not repeated the reservation of rights, its effectiveness as an ‘obstacle’ to a finding of an unequivocal representation may be reduced, particularly over time.

Challenging a reservation of rights

Let’s change gear now and think about whether a reservation of rights can be challenged.

The first point is that there is no direct means of challenging a reservation of rights. So we are looking at indirect ways in which an insured might bring pressure to bear on insurers in order to persuade them to conclude their investigations and lift a reservation of rights more quickly.

One way this might be done is commercial pressure. This might be applied to the insurer’s claims department by a large broker – or perhaps, internally within the insurer, by the underwriter if the client is a longstanding and valuable source of premium. This is more likely to be a factor in a soft market. And it is unlikely to be effective if there are serious concerns about the validity of a large claim.

In some situations pressure might be brought to bear by a complaint to the insurer’s complaints department, and if that is unsuccessful, to the Financial Ombudsman Service – the FOS – that the insurer is not treating its customer insured fairly and is breaching ICOBS[18]ICOBS 8.1.1R includes: ‘An insurer must: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’. This applies to all insureds, not only consumers. in failing to complete its investigations and make a decision about cover within a reasonable period.

But many commercial policyholders are outside the FOS’s jurisdiction;[19]The FOS can deal with complaints not only from consumers, but also from micro enterprises, and small businesses, charities and trusts: FCA Handbook, DISP 2.7.1R-2.7.3R. From 1 April 2019, the following are eligible complainants, a micro enterprise (an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m); a small business (a business with an annual turnover of less than £6.5m and either fewer than 50 employees or a balance sheet total of less than £5m); a charity with an annual income of less than £6.5m; and a trust with a net asset value of less than £5m: see DISP 2.7.3R and FCA Handbook Glossary. The FOS award limits are £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R. and the time it takes the FOS to deal with a complaint may also make this ineffective.

I’ve written previously about the possibility of a claim for damages for late payment of insurance claims due to breach of the new implied term.[20]See Damages for late payment of insurance claims. The risk of a claim for damages for consequential loss is likely to put insurers, and their agents, under pressure to conclude investigations and lift reservations of rights more quickly. And this means that the risk of a claim for damages for late payment of a claim is probably now the most powerful of these indirect means of challenging a reservation of rights.

Alison Padfield QC

Notes   [ + ]

1. [2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489.
2. Estoppel by convention, which does not involve any representation, is not relevant in the present context.
3. At para 80 (Rix LJ).
4. [2015] EWHC 2225 (Comm), [2015] 2 Lloyd’s Rep 289.
5. At para 179.
6. Ted Baker plc v Axa Insurance UK plc [2017] EWCA Civ 4097, [2017] Lloyd’s Rep IR 682.
7. At para 82.
8. Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489.
9. At para 80.
10. At para 82.
11. At para 82.
12. At para 83.
13. Barber v Imperio Reinsurance (UK) Ltd (unreported, 15 July 1993).
14. Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd [1980] 1 Lloyd’s Rep 523.
15. At 525.
16. Brit UW Ltd v F & B Trenchless Solutions Ltd [2015] EWHC 2237 (Comm), [[2016] Lloyd’s Rep IR 69
17. At paras 175-177.
18. ICOBS 8.1.1R includes: ‘An insurer must: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’. This applies to all insureds, not only consumers.
19. The FOS can deal with complaints not only from consumers, but also from micro enterprises, and small businesses, charities and trusts: FCA Handbook, DISP 2.7.1R-2.7.3R. From 1 April 2019, the following are eligible complainants, a micro enterprise (an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m); a small business (a business with an annual turnover of less than £6.5m and either fewer than 50 employees or a balance sheet total of less than £5m); a charity with an annual income of less than £6.5m; and a trust with a net asset value of less than £5m: see DISP 2.7.3R and FCA Handbook Glossary. The FOS award limits are £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R.
20. See Damages for late payment of insurance claims.

Damages for late payment of insurance claims

This is an updated version of an earlier post.

Summary

All new contracts of insurance entered into from 4 May 2017 contain a term, implied by statute[1]Insurance Act 2015, s 13A., that if the insured makes a claim under the policy, the insurer must pay any sums due within a reasonable time.

This means that, for the first time in English law, there will be a generally available right to claim damages for late payment of insurance claims. This is in addition to the right to an indemnity under the policy and any interest.

The need for reform

It was always a surprising and unsatisfactory feature of English insurance law that there was no general right to claim damages for late payment of an insurance claim. But this was affirmed by the Supreme Court as recently as 2015 in The Alexandros T:[2]This summary of the law by Longmore LJ in the Court of Appeal ([2012] EWCA Civ 1714, [2013] 1 Lloyd’s Rep 217, para 1) was approved by Lord Clarke in the Supreme Court in the same case ([2013] UKSC 70, [2014] 1 Lloyd’s Rep 223, para 6).

As a matter of English law, an insurer commits no breach of contract or duty sounding in damages for failure promptly to pay an insurance claim. The law deems interest on sums due under a policy to be adequate compensation for late payment; this is so, even if an insurer deliberately withholds sums which he knows to be due under a policy, see Sprung v Royal Insurance[3][1999] Lloyd’s Rep IR 111. approving the decision in The Italia Express (No 2).[4][1992] 2 Lloyd’s Rep 281. … English law, moreover, gives no separate contractual remedy to an insured who complains that an insurer has misconducted himself before settling a claim. In either case the remedy of the insured is to sue the insurer and, if no settlement is forthcoming, proceed to judgment.

But the principle – that there was no right to claim damages at common law for late payment of an insurance claim – had long been under attack:

  • The principle was applied with ‘undisguised reluctance’ by the Court of Appeal in Sprung v Royal Insurance (UK) Ltd[5][1999] Lloyd’s Rep IR 111, CA, 118 (Evans LJ. in 1996.[6]Decided in 1996 but not reported until 1999.
  • The Court of Appeal granted permission to appeal in 1997 in a case which raised the issue but the appeal was not heard[7]Pride Valley Foods Ltd v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR 120..
  • Rix LJ described it as ‘controversial’ in 2005, and said that if the issue reached the House of Lords the law might be clarified or changed (he nonetheless declined to grant permission to appeal, saying that was a matter for the House of Lords);[8]In Mandrake v Countrywide Assured Group plc [2005] EWCA Civ 840, at para 25. he also questioned it in extra-judicial remarks in 2009.[9]In ‘Should Sprung lose its spring?’, the Twelfth Annual Peter Taylor Memorial Address given to the Professional Negligence Bar Association on 21 April 2009. My colleague Rick Liddell of 4 New Square assisted Rix LJ in the preparation of this lecture.
  • The principle was challenged in the Supreme Court in Teal v Berkley[10]Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd [2013] UKSC 57, [2013] Lloyd’s Rep IR 56 in 2013, but the Court accepted reinsurers’ submission that the issue did not need to be determined in order to decide the appeal[11]See para 4 (Lord Mance). Colin Edelman and I acted for the reinsurers, instructed by James Roberts and Chris Dunlop of Clyde & Co..

In Sempra Metals Ltd v Inland Revenue Commissioners,[12][2007] UKHL 34, [2008] 1 AC 561. the House of Lords held that the loss suffered as a result of the late payment of money was recoverable at common law, subject to the ordinary rules of remoteness which apply to claims for damages; but the question of whether Sempra might permit a claim for late payment under a contract of insurance remained undecided.

Other possible routes to an award damages for late payment of insurance claims were also blocked: breach of the duty of utmost good faith by insurers does not sound in damages;[13]See Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249, HL; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd, The ‘Star Sea’ [2001] UKHL 1, [2003] AC 469. The Law Commission considered introducing a right to damages for breach of the duty of good faith as an alternative to the new implied term, but was persuaded by insurers that this might lead to the development of US-style bad faith claims, and that this would be undesirable: see the Report, paras 26.60-26.63. and an implied term that insurers handle claims with reasonable speed and efficiency was rejected by Mance J in Insurance Corpn of the Channel Islands Ltd v McHugh[14][1997] LRLR 94. as neither obvious nor necessary for business efficacy, and inconsistent with the scheme and express terms of the relevant policies.[15]At 136-137.

There is a statutory cause of action for late payment under a policy of insurance, but this is only of limited application. It arises under ICOBS 8.1.1[16]ICOBS 8.1.1 imposes obligations on insurers in relation to claims handling, including an obligation to handle claims promptly and fairly. and s 138D of the Financial Services and Markets Act 2000.[17]This provides that contravention by an authorised person of a rule made by the Financial Conduct Authority (‘FCA’) is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. This ‘can perhaps be described as an express cause of action for breach of statutory duty’: Green v Royal Bank of Scotland plc [2013] EWCA Civ 1197, para 28 (Tomlinson LJ). The rules made by the FCA include ICOBS. It is available where the insured is a ‘private person’. This means an individual – not only a consumer – and any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind.[18]See s 138D(6) of FSMA and Regulation 3(1)(a) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, reg 3(1). This exception has been construed widely: see Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92, paras 48 and 70 (David Steel J). The statutory cause of action is separate from the jurisdiction of the Financial Ombudsman Service (‘FOS’), and unlike the FOS, is not subject to a financial limit.[19]The FOS award limit is £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R. In practice, this statutory cause of action was little-used in insurance cases. It has not been abolished, but is really now a dead letter in insurance claims.

Which contracts of insurance will be subject to the new implied term?

The Insurance Act 2015 was passed on 12 February 2015 and entered into force on 12 August 2016. This date is familiar to anyone involved in insurance claims, but it is not the relevant date for the new right to damages. The new right to damages for late payment of insurance claims applies only in relation to contracts of insurance entered into on or after 4 May 2017.[20]See s 28(2) of the Enterprise Act 2016, which inserts a new s 22(3A) into the Insurance Act 2015. The Enterprise Act 2016 was passed on 4 May 2016, and provides that the provisions in relation to damages for late payment enter into force one year later, on 4 May 2017: see s 44(3) of the Enterprise Act 2016. For policies entered into before that date, the old law continues to apply.

The new implied term

The implied term is introduced by s 13A(1) of the Insurance Act 2015. This provides:

It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time.

What is ‘a reasonable time’?

It follows from the way that the implied term is expressed in s 13A(1) that the right to payment within a reasonable time arises only if the insured makes a claim. As one might expect, ‘[a] reasonable time includes a reasonable time to investigate and assess the claim[21]Section 13A(2) of the Insurance Act 2015., and what is reasonable will depend on ‘all the relevant circumstances’. The statute lists some ‘examples of things which may need to be taken into account’. These are:[22]See s 13A(3) of the Insurance Act 2015.

  • the type of insurance’ – for example, travel insurance, or business interruption insurance;
  • the size and complexity of the claim’ – for example, a straightforward claim for storm damage to roof of house, or a major fire involving an insured in financial difficulties and suspected of arson. The Law Commission suggest in their July 2014 Report[23]At para 28.32. The wording of s 13A is identical to the wording of clause 14 in the Law Commission’s draft Bill and therefore the subject of its July 2014 Report. that a claim may be complicated by its location, and that if, for example, an insured peril occurs abroad, its investigation may be more difficult;
  • compliance with any relevant statutory or regulatory rules or guidance’. This might lead to allegations of breach of ICOBS even where the statutory cause of action under s 138D FSMA does not arise – for example, there is an obligation under ICOBS 8.1.1(2) to ‘provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’;
  • factors outside the insurer’s control’. An obvious example would be delay caused by the insured itself, perhaps in failing to provide information sought by the insurer. The Law Commission suggest[24]See the July 2014 Report at para 28.38. that this might extend to a situation where there were unusually high numbers of claims, for example due to widespread flooding, and insufficient numbers of loss adjusters or surveyors available in or around the affected area.

Delay in paying a disputed claim

The insurer does not breach the implied term ‘merely by failing to pay the claim (or the affected part of it) while the dispute is continuing’, but:

  • the burden is on the insurer[25]If the insurer shows that there were reasonable grounds…’: s 13A(4). to show that there were ‘reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable)’;
  • if it can do so, then ‘the conduct of the insurer in handling the claim may be a relevant factor in deciding whether the term was breached and, if so, when.[26]Section 13A(4), Insurance Act 2015.

The Law Commission’s intention was to protect the ability of insurers to take a robust approach to decision-making where they suspect fraud or non-compliance with policy terms or where the precise circumstances of the loss were not clear, and to catch bad claims-handling practices, not prevent legitimate investigations by insurers.[27]Report, para 27.6. They therefore suggest that ‘something more’ must be shown before an insurer which makes a reasonable but ultimately wrong refusal to pay a claim may be found to have breached the implied term, and give the examples of:

  • an insurer which conducts its investigation unreasonably slowly, or is slow to change its position when further information confirming the validity of the claim comes to light;[28]See the July 2014 Report, paras 28.50-28.52. or
  • as examples of a deliberate or reckless breach, where claims handlers delay or reject a claim they know to be valid in order to secure a bonus payment or with a view to any internal budgets or quotas, or an insurer’s approach to a claim is blameworthy to the point of recklessness.[29]See the July 2014 Report, para 28.98.

Attempts to introduce into the House of Lords a right to allow insurers to rely on legal advice about a dispute in this context without waiving privilege in that advice were unsuccessful. This plainly has implications for the way in which insurers and their lawyers record legal advice and decisions made in the context of handling claims for policies issued/variations made from 4 May 2017 onwards. It would be prudent for the facts on which claims handling decisions are based, and the rationale for those decisions, to be recorded separately from the substance of legal advice, so that the former can be disclosed and relied on if a claim is made for late payment without having to choose between waiving privilege in legal advice, or being unable properly to defend a claim for late payment.

Delay in rejecting invalid claim does not give rise to right to damages

The implied term applies only in respect of ‘sums due’ in respect of a claim. This means that a delay in rejecting a claim which is later held to be invalid does not give rise to a right to damages for breach of the implied term.

The remedies for breach

As this is a term implied into the contract of insurance by statute, the usual remedies for breach of a contractual term are available, including damages and injunctive relief, and the usual rules as to remoteness, foreseeability and mitigation of loss will apply to a claim for damages. The basic position in relation to foreseeability, in the words of the Law Commission, is that ‘Insurers are aware that policyholders rely on insurance monies in times of crisis’.[30]Report, para 26.39.

Limitation periods

In accordance with its usual approach, the Law Commission was proposing not to make any specific provision in relation to limitation but to allow limitation to follow the general law.[31]Report, para 28.71-28.76. The general law is the six-year limited period for actions founded on simple contract.[32]Section 5, Limitation Act 1980. However, a specific limitation period was added by amendment in the House of Lords. This provides an additional one-year time limit for an action for breach of the implied term starting on the date on which the insurer has paid all the sums due in respect of the claim.[33]Section 5A(1), Limitation Act 1980. As this does not disapply the six-year limitation period, in principle either of these provisions might bar the claim for damages for late payment. Multiple limitation periods will therefore be in play in a claim for an indemnity under a policy of insurance and for damages for late payment.

Contracting out of the implied term

The parties may not contract out of the statutory implied term in consumer insurance.[34]Section 16A(1), Insurance Act 2015. For the purposes of the Insurance Act 2015, ‘consumer insurance contract’ means ‘a contract of insurance between (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession, and (b) a person who carries on the business of insurance and who becomes a party to the contract by way of that business…’: see s 1 of the Consumer Insurance (Disclosure and Representations) Act 2012 and s 1 of the Insurance Act 2015. In non-consumer insurance[35]A contract of non-consumer insurance means ‘a contract of insurance that is not a consumer insurance contract’: see s 1 of the Insurance Act 2015. the parties may contract out of the implied term except where the breach is deliberate or reckless (‘did not care’).[36]Section 16A(2) and (3), Insurance Act 2015. Importantly, these restrictions do not apply to settlement agreements.[37]Section 16A(6), Insurance Act 2015.

This means that where contracting out is permitted (ie in non-consumer insurance unless the breach is deliberate or reckless), a contractual limitation on liability may be imposed, for example capping the amount or type of damages which may be recoverable.

Lawyers acting for insurers will need to consider whether they should advise insurers to enter into contractually binding settlement agreements which include an express term in relation to any entitlement to make a claim for late payment, or if that is not possible or desirable, at least provide for full and final settlement of the insurer’s liability so as to start time running for any claim for late payment.

Where the beneficiary is not an insured

The obligation to pay claims within a reasonable term applies only to ‘the insured’ making ‘a claim under the contract’, and where a contract has been entered into, ‘the insured’ is defined as ‘the party to a contract of insurance who is the insured under the contract’.[38]Section 1, Insurance Act 2015. The right to damages for late payment therefore applies only in respect of claims made by a party to the contract, and unlike in respect of fraudulent claims and contracting out, no special provision is made for late payment of claims under group policies which provide cover for persons who are not parties to the contract.

Impact of the reform

The Law Commission thought that successful late payment claims would be relatively rare, and the impact on insurers correspondingly limited.[39]Report, para 26.33. The reform will have a significant impact for policyholders like Mr Sprung for whom something goes badly wrong: they will no longer be left without a remedy. The Law Commission may be right that successful late payment claims prove to be relatively rare. The wider impact of the reform is however likely to be significant. There is potential for disruption if claims management companies move into this area, and the Association of British Insurers, which supported the reform, did so despite its concern that this might happen.[40]See the transcript of the evidence of Ms Philippa Handyside of the Association of British Insurers to the House of Lords Special Public Bill Committee on 3 December 2014, at page 20. These fears may turn out to be unfounded.

But the right to damages is likely to influence how insurers investigate and make decisions about claims. The need to record the rationale for decisions should prompt consideration at an earlier stage as to whether liability should be admitted, or part of a claim paid, while investigations of quantum or other elements are ongoing. There may also be an increased level of formality in claims handling, with insurers writing to insureds setting out in more detail the facts on which they are basing a decision, and inviting the insured to correct those facts if they think they are wrong. Insurers may also make increased use of Part 36 offers, or at least put their position formally in writing, so as to avoid any dispute as to what they offered to pay the insured at what stage, and on what terms. Where insurers confirm liability at an earlier stage, while continuing to investigate quantum, insureds will be in a stronger bargaining position when it comes to agreeing the quantum of the claim.

Alison Padfield QC

Notes   [ + ]

1. Insurance Act 2015, s 13A.
2. This summary of the law by Longmore LJ in the Court of Appeal ([2012] EWCA Civ 1714, [2013] 1 Lloyd’s Rep 217, para 1) was approved by Lord Clarke in the Supreme Court in the same case ([2013] UKSC 70, [2014] 1 Lloyd’s Rep 223, para 6).
3. [1999] Lloyd’s Rep IR 111.
4. [1992] 2 Lloyd’s Rep 281.
5. [1999] Lloyd’s Rep IR 111, CA, 118 (Evans LJ.
6. Decided in 1996 but not reported until 1999.
7. Pride Valley Foods Ltd v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR 120.
8. In Mandrake v Countrywide Assured Group plc [2005] EWCA Civ 840, at para 25.
9. In ‘Should Sprung lose its spring?’, the Twelfth Annual Peter Taylor Memorial Address given to the Professional Negligence Bar Association on 21 April 2009. My colleague Rick Liddell of 4 New Square assisted Rix LJ in the preparation of this lecture.
10. Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd [2013] UKSC 57, [2013] Lloyd’s Rep IR 56
11. See para 4 (Lord Mance). Colin Edelman and I acted for the reinsurers, instructed by James Roberts and Chris Dunlop of Clyde & Co.
12. [2007] UKHL 34, [2008] 1 AC 561.
13. See Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249, HL; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd, The ‘Star Sea’ [2001] UKHL 1, [2003] AC 469. The Law Commission considered introducing a right to damages for breach of the duty of good faith as an alternative to the new implied term, but was persuaded by insurers that this might lead to the development of US-style bad faith claims, and that this would be undesirable: see the Report, paras 26.60-26.63.
14. [1997] LRLR 94.
15. At 136-137.
16. ICOBS 8.1.1 imposes obligations on insurers in relation to claims handling, including an obligation to handle claims promptly and fairly.
17. This provides that contravention by an authorised person of a rule made by the Financial Conduct Authority (‘FCA’) is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. This ‘can perhaps be described as an express cause of action for breach of statutory duty’: Green v Royal Bank of Scotland plc [2013] EWCA Civ 1197, para 28 (Tomlinson LJ). The rules made by the FCA include ICOBS.
18. See s 138D(6) of FSMA and Regulation 3(1)(a) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, reg 3(1). This exception has been construed widely: see Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92, paras 48 and 70 (David Steel J).
19. The FOS award limit is £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R.
20. See s 28(2) of the Enterprise Act 2016, which inserts a new s 22(3A) into the Insurance Act 2015. The Enterprise Act 2016 was passed on 4 May 2016, and provides that the provisions in relation to damages for late payment enter into force one year later, on 4 May 2017: see s 44(3) of the Enterprise Act 2016.
21. Section 13A(2) of the Insurance Act 2015.
22. See s 13A(3) of the Insurance Act 2015.
23. At para 28.32. The wording of s 13A is identical to the wording of clause 14 in the Law Commission’s draft Bill and therefore the subject of its July 2014 Report.
24. See the July 2014 Report at para 28.38.
25. If the insurer shows that there were reasonable grounds…’: s 13A(4).
26. Section 13A(4), Insurance Act 2015.
27. Report, para 27.6.
28. See the July 2014 Report, paras 28.50-28.52.
29. See the July 2014 Report, para 28.98.
30. Report, para 26.39.
31. Report, para 28.71-28.76.
32. Section 5, Limitation Act 1980.
33. Section 5A(1), Limitation Act 1980.
34. Section 16A(1), Insurance Act 2015. For the purposes of the Insurance Act 2015, ‘consumer insurance contract’ means ‘a contract of insurance between (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession, and (b) a person who carries on the business of insurance and who becomes a party to the contract by way of that business…’: see s 1 of the Consumer Insurance (Disclosure and Representations) Act 2012 and s 1 of the Insurance Act 2015.
35. A contract of non-consumer insurance means ‘a contract of insurance that is not a consumer insurance contract’: see s 1 of the Insurance Act 2015.
36. Section 16A(2) and (3), Insurance Act 2015.
37. Section 16A(6), Insurance Act 2015.
38. Section 1, Insurance Act 2015.
39. Report, para 26.33.
40. See the transcript of the evidence of Ms Philippa Handyside of the Association of British Insurers to the House of Lords Special Public Bill Committee on 3 December 2014, at page 20.

The changing face of the Commercial Court

Update

This post was published on 30 June 2019. On 16 July 2019, the appointment of five new judges to the Court of Appeal was announced. This includes three Commercial Court judges: Carr, Phillips and Popplewell JJ.

The Commercial Court recently published its first annual report for some years. Given the pressure on court staff due to the chronic underfunding of the English and Welsh court system – from which the Commercial Court is not immune[1] – it seems likely that the decision to recommence publication of annual reports now is part of the ongoing drive to attract business to the Commercial Court in an increasingly competitive international market.

The Commercial Court Report 2017-2018 reveals changes in the Court’s constitution and its business. Here are a few interesting snippets:

The constitution of the Commercial Court

At the time of publication,[2] the judges of the Commercial Court were Teare J (Judge in Charge of the Commercial Court), Andrew Baker, Bryan, Butcher, Carr, Cockerill, Jacobs, Robin Knowles, Males,[3] Moulder, Phillips, Picken,[4] Popplewell, Waksman and Walker JJ.[5] This means – although the Report does not comment on this – that there are now, for the first time ever, three female Commercial Court judges, and one Commercial Court judge who is a former solicitor.

Recently retired judges who are still authorised to sit in the Court include Sir William Blair, Sir Ross Cranston, Sir Michael Burton and Sir Andrew Smith. The London Circuit Commercial Court Judge (from 1 July 2019, this will be HHJ Pelling QC[6]) and a number of specialist commercial Queen’s Counsel are also authorised to sit as deputy judges in the Court. Deputies are used only when the parties agree, or when the Judge in Charge of the Commercial Court consider that this is appropriate.

Commercial Court judges, as judges of the Queen’s Bench Division, sit on circuit hearing criminal trials for part of the year.[7] They may also hear cases in the general Queen’s Bench list, the Administrative Court and the Court of Criminal Appeal.

Commercial Court business

The balance of work has changed since the last report was published: international insurance and reinsurance disputes, together with shipping disputes, previously dominated the Court’s time. These remain among the larger categories of business, but now alongside commercial fraud, actions arising out of commercial sale and purchase agreements, and claims relating to banking, financial services and securities transactions. ‘Now the Court sees many more banking and financial services disputes than it used to, and disputes (based either in contract or tort) between high net worth individuals from around the world now provide a considerable share of the Court’s business.[8]

Seventy per cent of cases were international.[9] About a quarter of the claim issued related to arbitration: challenges to awards, applications for injunctions or for enforcement of awards, and other applications including for the appointment of an arbitrator.

Eight hundred and sixty-four claim forms were issued in the Commercial Court[10] in 2017-2018 (slightly down on 2016-2017, when 888 claim forms were issued). There were 57 trials (up from 51 in 2016-2017). The settlement rate was 60%. About half of the trials were under a week in length, 30% were one to two weeks, 16% were three to four weeks, and 5% were over four weeks. The largest claim was for US$3bn and there were over a dozen claims worth over £100m. In addition, many arbitration claims concerned awards for extremely substantial sums, sometimes into the billions of pounds.

The workload of the Financial List, established in 2015, remains at about 15 cases a year – apparently in line with predictions.

Alison Padfield QC

  1. The impact of this on the Court features obliquely in the Report’s introduction. This thanks the Court staff for their ‘very hard work and unfailing help’, which ‘has always been given unstintingly and without complaint, despite the pressure and difficult circumstances under which the Court staff have had to work’ (Report, page 5).
  2. On 27 February 2019.
  3. Males J has since moved to the Court of Appeal.
  4. Since January 2018, Picken J has also been the Presiding Judge of the Wales Circuit.
  5. Report, page 6.
  6. See https://www.judiciary.uk/announcements/specialist-circuit-judge-judge-in-charge-of-the-london-commercial-court-pelling-qc/ (accessed 30 June 2019).
  7. An interesting point of distinction between the Commercial Court, as part of the Queen’s Bench Division (of the High Court) and the Chancery Division (of the High Court), whose 15 judges do not go out on circuit to sit in criminal trials.
  8. Report, page 7.
  9. Report, page 9: ‘A domestic case is one in which the subject matter of the disputes between the parties’ concern property or events situated in the United Kingdom and the parties are UK based relative to the dispute. For these purposes a party is “UK based relative to the dispute” if the part of its business which is relevant to the dispute is carried on in the UK, irrespective of whether it is incorporated, resident or registered overseas. All other cases are “international cases.”
  10. This excludes the Admiralty Court, for which separate figures are kept (see the Report at page 12 for details).

Articles page update

I’ve just updated my articles page to add two articles:

  • Is the grass always greener? – an article on the obligations of SIPP providers following R (Berkeley Burke SIPP Administration Ltd) v Financial Ombudsman Service Ltd – written with Diarmuid Laffan of 4 New Square and published in the New Law Journal in January 2019
  • Cyber games – an article on cyber insurance published in the New Law Journal in June 2018

Thanks as ever to Jan Miller, the editor of the New Law Journal, for permission to use the articles here.

Alison Padfield QC

The Third Parties (Rights Against Insurers) Acts (again)

Regulations have just been passed to plug the latest legislative gap inadvertently opened up by the Third Parties (Rights Against Insurers) Act 2010. I have previously written about the need to plug earlier gaps, and the resulting delay in the 2010 Act coming into effect (here, and here).

The Regulations are the Third Parties (Rights Against Insurers) Act 2010 (Consequential Amendment of Companies Act 2006) Regulations 2018.

One of the problems with the Third Parties (Rights Against Insurers) Act 1930, and one of the reasons for reform, was that where the insured defendant is a company which has been struck off the register, a claimant has to restore it to the register for the purpose of obtaining judgment against it. This is because, without judgment against the insured company on liability and quantum, no claim can be made against the company’s liability insurers under the 1930 Act.[1] For cases to which the 1930 Act still applies[2], which include many long-tail disease cases, the company must still be restored to the register; but for cases to which the 2010 Act applies, it is no longer necessary to do this.

In removing a procedural hurdle for claimants, the 2010 Act created a problem for liability insurers. Now, under the 2010 Act, a liability insurer may have to pay an indemnity on behalf of an insured company without the claimant having restored that company to the register. And if a company has not been restored to the register, its insurers cannot exercise their right of subrogation – by bringing a claim in the name of the defunct company – to recover from a third party damages they have paid to the claimant.

It is open to the insurers themselves to apply to court[3] to restore the company to the register – but unlike an application by a claimant in a personal injury claim, to which no time limit applies[4], insurers may apply to restore a company to the register only if it has been dissolved in the previous six years[5].

The 2018 Regulations address this by amending s 1030(1) of the Companies Act 2006. The effect of the amendment is to allow 2010 Act insurers to apply ‘at any time’ to restore a company to the register in order to bring a subrogated claim in respect of the company’s liability for damages for personal injury.[6]

The regulations were made on 2 November 2018. They come into force later this month.[7]

Alison Padfield QC

  1. See Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363, CA; Bradley v Eagle Star Insurance Co Ltd [1989] AC 957, HL.
  2. See Redman v Zurich Insurance plc [2017] EWHC 1919 (QB), [2018] 1 WLR 280.
  3. See s 1029 of the Companies Act 2006.
  4. There was a time limit, but this was removed in 1989 following the decision in Bradley v Eagle Star Insurance Co Ltd in the House of Lords: see ss 651 and 653 of the Companies Act 1985, as originally enacted and as amended.
  5. See s 1030(4) of the Companies Act 2006.
  6. The 2018 Regulations are made under s 19(8)(a) and (9) of the 2010 Act.
  7. On the 21st day after the day on which they were made: see reg 1.