Liability insurance: insurers successfully defend claim under Third Parties (Rights against Insurers) Act 2010

A recent decision of the High Court provides a useful example of how the Third Parties (Rights against Insurers) Act 2010 may operate in cases where third parties bring a claim directly against a defendant’s insurers and the use of both coverage and liability defences by insurers.

In Palliser Ltd v Fate Ltd, the insurer successfully argued that there was, essentially, no cover available under a liability policy and the third party claimant’s claim failed, almost in its entirety. The judge did go on to consider the liability of the insured to the third party claimant, finding that the insured was liable to the claimant (but given his conclusion on coverage the claimant was only awarded £8,500). This case demonstrates how one insurer structured its coverage and liability defences to defeat a third party claim under the 2010 Act.

Summary of 2010 Act

The 2010 Act enables a third party that has suffered loss caused by an insolvent insured to bring proceedings directly against the insured’s liability insurers. This avoids the need for the third party to litigate against the insolvent insured before it is able to ‘step into the shoes’ of the insured for the purposes of the liability insurance, which was the position under the previous Third Parties (Rights against Insurers) Act 1930.

Background

In 2010, a fire destroyed a ground floor restaurant and damaged the flats in the three floors above. The freehold of the property was owned by Fate Ltd (the Insured), with the flats in the upper three floors leased to property development company Palliser Ltd (the Claimant) on a long leasehold title.

The defendant insurer (the Insurer) had already paid out £225,250 to the tenants of the flats under the public liability section of the policy and £610,000 to the Insured under the Buildings section of the Policy (an ‘averaged’ sum due to the underinsurance – the sum insured for the building being £700,000, whereas the value of the building was £900,000).

It was not in dispute that the fire was caused by the Insured’s negligence and the Claimant looked to claim against the Insured for two heads of loss: (1) refurbishment costs (£225,000), having taken over the refurbishment works from the Insured due to delays and poor quality of some of the work and (2) loss of rental income (£275,000) or the gains it could have made by selling the flats and reinvesting in other properties (estimated to be £3.8 million). The Insured went into liquidation in 2017 after the claim was already issued against it, and so the Court allowed the claim to proceed directly against the liability Insurer under the 2010 Act.

There were three issues in dispute, the first was a coverage issue, the second was a liability issue and third a quantum issue.

Issue 1

The Insurer argued that the public and products liability section of the Insured’s Licensed Trade (Master Chef) Insurance Policy did not cover the Claimant’s loss. This section of the policy was designed to cover liability to third parties in the event of “Accidental Damage to Property not belonging to [the Insured] or in [the Insured’s] Charge or under [the Insured’s] Control or that of any employee”. The Insurer argued that there had been no damage to property “not belonging to” the Insured since the Insured owned the freehold of the entire property, including the upper floors.

The Claimant disagreed and said that its long leasehold title effectively ceded ownership of the upper floors from the Insured to the Claimant.

The judge, applying the usual rules of contractual interpretation, found for the Insurer, deciding that the property remained under the ownership of the Insured through its freehold. Thus, the property did not fall within the definition of property “not belonging to [the Insured]”. The judge was influenced by the fact that section 9 of the Claimant’s lease obliged the Insured to take out buildings insurance covering the whole building, including the upper floors, and the Insured did in fact obtain insurance for the value of the whole building, not just the restaurant.

Therefore, the Claimant’s claim failed, save in respect of a small amount of refurbishment costs totalling £8,500 which related to property which definitely did not belong to the Insured, and so the judge went on to consider the second issue – the liability of the Insured.

Second Issue

The second issue related to whether the Insured was actually liable to the Claimant for the refurbishment costs since the policy will only respond to liability of the Insured to a third party. The argument raised by the Insurer was that the Claimant, under the lease, impliedly excluded any negligent liability of the Insured (as landlord) because the lease required the landlord to take out buildings insurance the aim of which is to cover any refurbishment costs. This argument was based on the decision in Mark Rowlands Ltd v Berni Inns Ltd (1986), commonly known as the 'Berni Inns' defence. If the Berni Inns defence was available, the Insured would have no liability to the Claimant and, without such liability, the 2010 Act would not allow the Claimant to recover from the Insurer.

However, the judge noted that the Berni Inns defence was distinguishable in this case in that it is (usually) available to tenants where a landlord is alleging negligence against the tenant, not the other way around because it is the landlord who has the obligation to obtain insurance intended to cover the landlord’s losses. But the judge declined to decide whether the Berni Inns defence would apply. Instead, the judge found that there was a qualification to its application: that any implied exclusion of negligent liability (if it applied at all) did not apply to the extent of any underinsurance.

Consequently the Claimant was awarded the £8,500 (plus interest) for refurbishment costs to property which belonged to the Claimant. Since Issue 1 had already been decided against the Claimant, the Claimant could not recover the remainder of its £225,000 refurbishment claim for property that belonged to the Insured.

Third Issue

The third issue considered quantum. The Claimant advanced a ‘lost gains’ claim in the alternative for loss of rental income (agreed at £275,000) or the so-called development profits the Claimant alleged it could have made by selling the flats on the upper floors and reinvesting the profits in other properties (estimated to be £3.8 million). While the judge did not need to consider these elements of the quantum, the Claimant having already failed on the first issue, the £3.8 million loss of profit claim was expressly addressed in the judgment in case the decision on the first issue was successfully appealed. It is noted in the judgment that if the judge was wrong on the first issue, the Insurer had already conceded that the Claimant was entitled to the loss of rental income.

The judge was ultimately unimpressed by the quantum evidence presented by the Claimant and found that the Claimant fell “a long way short” of proving on the balance of probabilities that, but for the fire, it would have sold the flats or that it would have made the profits alleged.

Comment

In relation to the judgment itself, the judge’s scathing appraisal of the Claimant’s quantum evidence clearly demonstrates the importance of using appropriate witness and expert evidence and presenting losses accurately.

Although there is relatively little commentary on the application the 2010 Act, this case is a good example of how the 2010 Act can work in practice in allowing insurers to run both coverage and liability defences at the same time against third party claimants. While this claim was relatively straightforward, we caution that it may not be so simple, for both claimants and also insurers, in more complex disputes, for example where there are multiple defendants or where there is a Part 20 or recovery action.

Further reading:

Palliser Ltd v Fate Ltd (in liquidation) [2019] EWHC 43 (QB)

Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211