Month: March 2024

Establishing Liability under the TPRIA 2010

A recent decision of the Scottish Court of Session (Outer House), Scotland Gas Networks plc v QBE UK Limited & QBE Corporate Limited [2024] CSOH 15, gives helpful guidance on the operation of the Third Parties (Rights against Insurers) Act 2010 (“the 2010 Act”).

Background

Scotland Gas Networks plc (“SGN”) operated a pipeline running adjacent to a quarry, operated by D Skene Plant Hire Limited (“Skene”). A landslip occurred at the quarry, causing damage to part of the pipeline. SGN claimed the damage was a result of quarrying operations carried out by Skene. It had to divert the pipeline away from the quarry and incurred costs in doing so.

SGN brought a claim against Skene for £3 million for damage to the pipeline. A decree by default was granted against Skene, as a result of failing to appear at a procedural hearing.

Skene was insured under a public liability policy (“the Policy”). SGN claimed against the defendants (“Insurers”) under Section 1(4) of the 2010 Act (which gives third parties rights against insolvent persons) as Skene was in liquidation.

The TPRIA

Under Section 1(2) of the 2010 Act, the rights of a “relevant person” (i.e. the insolvent insured party) are transferred to the third party who has suffered loss for which the relevant person is liable.

Section 1(3) of the 2010 Act states that an injured party can bring proceedings against an insurer without first establishing the insured’s liability.

For the purposes of Section 1(4) of the 2010 Act, liability is proven only if the existence and amount of liability are established by way of a judgment or decree, arbitral award, or binding settlement).

The main issues explored in this case were:

1. Whether the decree by default “established” Skene’s liability?
2. Whether SGN’s claim against Skene was excluded by terms of the Policy?

Did the decree by default “establish” Skene’s liability?

Insurers’ Argument

Insurers argued that the granting of a decree by default did not establish liability under the Act. This was on the basis that the decree granted to SGN established the loss suffered, but did not establish the actual liability of Skene. Insurers relied on case law applicable to the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”) suggesting that it is necessary to show how Skene was liable to SGN. In addition, Insurers argued that establishing liability must take into consideration the merits of the dispute.

SGN’s Argument

SGN argued that Insurers’ position did not take into account the innovations of the 2010 Act and the effect of Section 1(3), which meant that proceedings could be brought without liability being established. Under the 1930 Act, the insured’s liability to a third party had to be established by judgment, arbitration or agreement before proceedings could be brought. By contrast, Section 1(4) of the 2010 Act already addresses how that liability is established. Sub-section 1(4)(b) confirms that this can be established by a decree and therefore the old case law referred to by Insurers was irrelevant.

The Decision

The Court noted that there are two elements to Section 1(4) when considering the establishment of liability:

1. Firstly, the existence of liability and the amount; and
2. Secondly, how the existence and amount of liability is established.

Both these elements were satisfied based on the existence of Skene’s liability in the amount of £3 million, established by decree.

Therefore, it rejected Insurers’ arguments that “establish” requires a consideration of the merits and instead concluded that “establish” does not require any additional elements apart from those contained in Section 1(4).

Was SGN’s claim against Skene excluded?

Clause 3.1.1 of the Policy provided that Insurers would indemnify the policyholder for loss resulting from damage or denial of access.

Insurers’ Argument

Insurers argued that liability founded upon a decree by default was not covered; and that the decree effected a “judicial novation” which meant that the rights SGN were enforcing against Skene through litigation were replaced with the right to enforce the decree, which did not fall within Clause 3.1.1. Further, Insurers argued that the pipeline had not suffered “damage” as defined under the Policy, and that instead SGN was claiming for pure financial loss. Clause 7.11 of the Policy contained an exclusion for financial loss not consequent upon bodily injury or property damage.

SGN’s Argument

SGN argued that the terms of the decree were “in full satisfaction of the summons” and this meant that the liability which the decree created fell under Clause 3.1.1 of the Policy. The requirements for Section 1(4) had been satisfied and this superseded the judicial novation. Insurers were wrong to say that financial loss consequent upon damage to property of a third party fell within the scope of the exclusion, taking into account the express provision for indemnity with respect to denial of access liabilities.

The Decision

The Court concluded that the decree by default “established” Skene’s liability to SGN for purposes of Section 1(4), and that Skene’s liability arguably fell within the scope of the Policy. A decree by default cannot be viewed in isolation, and in this case it was granted in an action brought by SGN against Skene. A judicial novation could not extinguish the underlying liability for the purposes of Section 1(4) of the 2010 Act. The Insurers’ motions for dismissal were rejected and SGN’s overall claim under the Policy was held over to trial.

Impact on Policyholders

The decision is helpful for policyholders in demonstrating that a judgment (or decree, in the Scottish parlance) in default will suffice to establish liability for purposes of a claim under the 2010 Act. The statutory provisions operate as an exception to the general rule that insurers are entitled to ‘look behind’ underlying claims to evaluate policy indemnity based on a merits assessment of legal liability, highlighting the risks faced by insurers where insolvent insureds fail to defend incoming claims in full, or at all.

Ayo Babatunde is an Associate at Fenchurch Law.

by Ayo Babatunde

Seven things a good Insurer will never do

1. Give You Up: Are you looking to your existing insurance provider to renew your cover and continue supporting your business through the good times and bad? A good insurer will always do that.

2. Let you down: Under ICOBS rule 8.1.1, a good insurer will handle claims promptly and fairly, provide reasonable guidance to help a policyholder make a claim, provide appropriate information on its progress, and not unreasonably reject a claim (including by terminating or avoiding a policy).

3. Run around: When investigating a claim, an insurer will never run around trying to find reasons not to pay. It will always treat its customer fairly.

4. Desert you: In the case of liability insurance, a good insurer will always step up and pay defence costs, even where coverage might be under the microscope, and will not leave its policyholder in the lurch.

5. Make you cry: Following a heavy loss, a good insurer will always take an even-handed approach to its claims process, rather than taking the opportunity to carry out a ‘post-loss underwriting process’.

6. Tell a lie: A good insurer will never tell its policyholder that a claim is not covered by a policy when it clearly knows otherwise.

7. Hurt you: Quick, lastly – A good insurer will always investigate and pay a claim quickly, lest it be on the wrong side of S13A damages for late payment claim, and will never add to the pain often felt by policyholders at such difficult times.

Alex Rosenfield is an Associate Partner at Fenchurch Law

by Alex Rosenfield