In Redman v Zurich Insurance, Mrs Justice O’Farrell DBE considered the interplay…
In BAE Systems v RSA, Mrs Justice O’Farrell DBE considered operation of Third Parties (Rights against Insurers) Act 2010 (“the 2010 Act”) in circumstances where (i) insurers dispute cover, and (ii) it is alleged that the jurisdiction of the English courts to determine coverage disputes is ousted by the terms of the insurance policy.
The Judge held that (i) the fact that cover was in dispute was no bar to insurers being joined to the action, and (ii) the coverage dispute should be stayed.
The decision is considered by Katie Powell of 4 New Square.
THE BACKGROUND FACTS
On 24 August 2016, BAE Systems brought a claim against various defendants in respect of the design and construction of a high bay warehouse and associated works. On 25 February 2017, one of those defendants, Twintec, was placed into administration. On 15 March 2017, Twintec’s solicitors informed the Claimant’s solicitors that Twintec was insured by RSA under a policy of insurance. RSA then applied to amend its claim form to include RSA as a defendant, relying on the provisions of the 2010 Act.
RSA opposed the application. It argued that the Court did not have jurisdiction to join RSA as a defendant on two separate bases:
(i) RSA did not provide cover in respect of any liability that Twintec might have to the Claimant; and
(ii) any dispute as to coverage under the policy at issue should be determined by arbitration or in the French courts, not in the English courts.
THE ISSUES AND THEIR RESOLUTION
Issue 1: Can a claim be brought against an insurer under the 2010 Act in circumstances where there is an extant dispute over whether the insurer provides cover for relevant liability?
Section 2 of the 2010 Act provides a mechanism by which a claimant can bring proceedings against an insurer before the claimant has established liability against the alleged wrongdoer (thereby overcoming one of the main problems encountered by claimants with the Third Parties (Rights against Insurers) Act 1930, which required the claimant to establish that liability first). It provides:
Establishing liability in England and Wales and Northern Ireland
(1) This section applies where a person (P)—
(a) claims to have rights under a contract of insurance by virtue of a transfer under section 1, but
(b) has not yet established the insured’s liability which is insured under that contract.
(2) P may bring proceedings against the insurer for either or both of the following—
(a) a declaration as to the insured’s liability to P;
(b) a declaration as to the insurer’s potential liability to P.
(3) In such proceedings P is entitled, subject to any defence on which the insurer may rely, to a declaration under subsection (2)(a) or (b) on proof of the insured’s liability to P or (as the case may be) the insurer’s potential liability to P…
(11) In this section, references to the insurer’s potential liability to P are references to the insurer’s liability in respect of the insured’s liability to P, if established.”“
RSA argued that section 2 was not engaged because it was entitled to decline cover on the basis of an exclusion clause in the policy.
The Judge rejected the argument that cover needed to be established before RSA could be joined, holding that section 2(1) was engaged even where there was a potential dispute as to whether or not there was appropriate cover under the policy, reasoning:
(i) section 2(1) makes clear that the claim to have rights under a contract of insurance by virtue of a transfer does not require a claimant to establish those rights; it simply requires the claimant to make a claim to have such rights; and
(ii) section 2 provides the machinery for establishing not only the (alleged) insured’s liability to the claimant, but also the (alleged) insurer’s liability to provide cover in respect of the underlying liability.
The Judge dismissed the submission that, were this interpretation correct, it would cause substantial difficulties to insurers in that a claimant could join any insurer to the action and be forced to incur substantial expense, irrespective of the merits of the claim. She reasoned:
(i) Where it was simply unarguable that any relevant cover was in place, the Court could strike out such proceedings as having no real prospect of success.
(ii) The (alleged) insurer was not obliged to conduct any substantive defence to the underlying claim, and could simply take no part in that part of the proceedings on the basis that it was satisfied that it had a good defence on coverage.
(iii) It was always open to the (alleged) insurers to seek declarations and/or have preliminary issues determined in respect of coverage.
Issue 2: Did the jurisdictional clauses in the contract preclude RSA from being joined to the proceedings?
RSA’s second basis for resisting the application was that the insurance policy in question contained clauses that allegedly had the effect of requiring covering disputes to be decided under French law, in arbitration or in French courts. The relevant provisions were:
“In the event of disagreement between the insurer and the policyholder regarding the interpretation or performance of this policy, the disputes shall be referred to the French courts and shall be subject exclusively to French legislation.”
“In the event of a dispute in relation to the activation of the cover or to the determination of business practices, the parties agree, prior to any legal action, to refer their disputes to two arbitrators chosen by each party, which arbitrators should, in the absence of any agreement within a period of three months, elicit the assistance of a third arbitrator designated by them or by the presiding judge of the high court within whose territorial jurisdiction the insured’s registered office is located.” provides for the mechanism by which liability to both the insured and the insurer is or is not established. “
The parties took extreme positions, with RSA arguing that the coverage dispute was caught by both clauses and BAE arguing that it was cause by neither. The Judge rejected both positions, holding (i) in light of the Lord Hoffman’s judgment in Fiona Trust & Holding Corp v Privalov  UKHL 40, it was unlikely that the dispute was covered by both clauses, but that (ii) she was satisfied, for the purpose of the application at issue, that the coverage dispute would be covered by either clause 5.9 or clause 5.10. On either basis, it was not a matter that the English court should determine.
The Judge granted the Claimant’s application to join RSA, allowing the claims under both section 2(2)(a) and section 2(2)(b) but staying the claim under section 2(2)(b). Her rationale for allowing, albeit staying, the claim under section 2(2)(b) was that there were potential limitation issues in the case. This meant that, were it later to be found that the appropriate forum for determining the coverage dispute was, in fact, the English courts, the Claimant might find itself time barred from pursuing the claim.
The Judge’s conclusion that BAE were entitled to bring a claim against BAE notwithstanding that there remained an extant coverage dispute is unlikely prove controversial. Even ignoring the terms of the 2010 Act, the procedural advantages afforded to a claimant under the 2010 Act would be considerably reduced if, before bringing a claim against an insurer under that Act, it first needed to bring proceedings to establish that the insurer was obliged to provide cover for the underlying liability alleged.
What is less clear is the extent to which Courts will be willing to try coverage issues under section 2(2)(b) as preliminary issues before determining the issues of underlying liability under section 2(2)(a). Traditionally, courts have been reluctant to try issues that may turn out to be entirely hypothetical. However, given a claim under the 2010 Act can only be brought if the (alleged) insured is in some form of insolvency situation, Courts may be more prepared to entertain preliminary issues on coverage disputes under the 2010 Act than they would in other contexts; a failure by a claimant to establish cover is likely to be dispositive of the whole action.
Finally, the issues that arose in relation to clauses 5.9 and 5.10 show that, notwithstanding the laudable efforts of the 2010 Act to streamline the process of recovery under an insolvent defendant’s insurance policy, the 2010 Act cannot trump clauses in the insurance policy that oust the jurisdiction of the English courts to resolve disputes under it. Hence it is not a panacea for all the obstacles facing a claimant that wishes to recover under an insolvent defendant’s insurance policy.