The Good, the Bad & the Ugly: #19 (The Ugly). Rashid v Direct Savings
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#19 (The Ugly): Rashid v Direct Savings Limited [2022] 8 WLUK 108
Rashid v Direct Savings Limited considered the novel issue of how limitation applies to claims made under the Third Parties (Rights Against Insurers) Act 2010 ("the 2010 Act"), as compared with claims under the “old” Act (“the 1930 Act”).
The 1930 and 2010 Acts in summary
Both Acts, generally speaking, provide a mechanism for persons with claims in against an insolvent but insured defendant to seek indemnity from that defendant insurer. The 1930 Act was given a significant and welcome overhaul in the shape of the 2010 Act.
Under the 1930 Act, following Post Office v Norwich Union [1967] 2 QB 363, claimants with a claim against an insolvent, insured defendant first had to establish a liability against that defendant before being able to bring an ascertained claim against its insurer. This created a two-stage process: (i) establish a liability against the insured, and (ii) bring a claim under the 1930 Act for payment by its insurer. Step (i) was required despite the possibility that step (ii) might fail.
By contrast, section 1(3) of the 2010 Act includes the express provision that:
"The third party may bring proceedings to enforce the rights against the insurer without having established the relevant person's liability; but the third party may not enforce those rights without having established that liability."
The 2010 Act thus removes the first stage required under the 1930 Act and instead allows claimants to bring a claim directly against insurers of insolvent defendants where they have policies which might respond to the claim but where the insurer has denied indemnity.
Limitation, and FSCS v Larnell
There is a long-established principle for claims against insolvent defendants that, where the claim was not time-barred at the onset of the insolvency process, time ceases to run for limitation purposes (Re General Rolling Stock Co Ltd (1872) LR Ch App 646).
In Financial Services Compensations Scheme Limited v Larnell (Insurances) Limited [2005] EWCA Civ 1408, the Court of Appeal was required to determine the question of limitation for claims brought under the 1930 Act.
The claimant in Larnell had commenced proceedings more than six years after the cause of action had accrued and more than three years after he had the knowledge relevant for the alternative limitation period under section 14A of the Limitation Act 1980. However, the insured had entered liquidation just within that three-year limitation period. The claimant argued that under statutory regime of the Insolvency Ac 1986 the provisions of the Limitation Act were suspended, and the claim was in the time.
The Court of Appeal held that the two-stage process for bringing a claim under the 1930 Act meant that the first stage (the claim against the insolvent defendant to establish a liability) fell within the insolvency regime. This stage was a claim in the insolvency. Therefore, in line with Re Rolling Stock Co, limitation ceased at the onset of the insolvency.
It followed that limitation for the second stage (the claim against the insurers) also ceased at onset of the insolvency, and the insurers were unable to rely on the limitation defence.
Rashid v Direct Savings Limited
The cessation of limitation under the 1930 Act established in Larnell was considered in Rashid but this time with reference to the 2010 Act. The Judge concluded that the benefit of the insurance policy issued by the insurers was not an asset in the insolvency and that the right to bring a claim against them was not dependent on first establishing liability against the insolvent defendant and instead arose at the onset of the defendant’s insolvency event occurs. Accordingly, held the Judge, claims under the 2010 Act do not fall within the insolvency regime, and so the usual limitation requirements applied.
The Claimant in Rashid argued that someone in his position should not be worse off under the 2010 Act as compared with the 1930 Act. However, as the Judge commented:
"In most respects a claimant was better off under the 2010 Act with the ability to sue the insurer direct without first having to establish liability against the insolvent insurers … It may be that an unintended effect of these changes is that the pause on limitation first recognised in Larnell would no longer be available to a claimant but it would be unwise to assume that this was seriously considered by the drafting team."
We therefore consider Rashid “ugly” for policyholders – or, more accurately, for claimants bringing claims against insolvent policyholders. It represents an important but correctly decided change to the law regarding limitation in insolvency and claims made directly against insurers. Policyholders and their brokers should be conscious of this change and consider bringing direct claims against insurers under the 2010 Act well before limitation becomes a potential problem.
Toby Nabarro is an Associate at Fenchurch Law.
