Rights to Damages and Insurance Proceeds Flashcards
Ashdown v Ingamells (1880) 50 LJ QB 109
Case: Two partners sold their business to I as good consideration for I paying certain creditors a total of £1750; I failed to pay the creditors while the partners were made bankruptcy; creditors proved for debts against the partners
Decision: The trustee in bankruptcy could claim the full £1750 from I, despite only paying nominal amounts to the creditors. This was reasoned as if the insolvent was solvent, they would have been able to claim the full amount.
N.B. in PQ, suggest settling out of court
Consider situation where retailer sells defective product to consumer, due to manufacturer’s wrongdoing. Assuming that there is no collateral warranty, under Donoghue v Stevenson would only have a claim against manufacturer for consequential loss not repair/replacement of faulty product. Trustee in bankruptcy may claim full amount from manufacturer and consumer will only be able to claim pari pass. Therefore, should aim to settle with manufacturer out of court.
Re Harrington Motor Co [1928] Ch 105
Case: Creditor obtained judgment against company in respect of liability for which company insured
Rule: At common law, a victim must prove
Third Parties (Rights Against Insurers) Act 1930 s.1(1)
“(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then -
(a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or
(b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of the company entering administration, or of a receiver or manager of the company’s business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, of any property comprised in or subject to the charge, or of a voluntary arrangement proposed for that purposes of Part I of the Insolvency Act 1986 being approved under that part;
if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.”
N.B. If insured has settled the claim with the insurer, the rights cannot be transferred to the third party as they have been exhausted
Re Compania Merabello San Nicholas SA [1973] Ch 75
Winding-up petition presented purely to obtain benefited of 1930 Act
Normid Housing Association Ltd v Ralphs [1989] 1 Lloyd’s Rep 265 (CA)
Case: Normid sued its architects for £5.7m in damages; architects and insurer planned to settle for £250,000 as full and final settlement of the debt (before insolvency); Normid tried to obtain ex parte injunction to stop settlement
Decision: Although arguably the consideration in the policies is given up for something substantially below their value, Normid has no legal or equitable right to prevent the proposed settlement. This claim has nothing to do with the 1930 Act, it is plainly on contract, and the architects are free to deal with their rights as they like. They owed no professional duty of skill and care to the plaintiffs to deal or not deal with them in a particular way.
Rule: No such thing as Mereva injunction
Third Parties (Rights Against Insurers) Act 2010
Will soon come into force, although does not make significant changes
(a) it extends the definition of insolvent circumstances which trigger the operation of the Act to cover new insolvency procedures e.g. debt relief orders: ss. 4-7
(b) only one set of proceedings need to be brought to establish liability of debtor and insurer: ss. 1(3)(4), 2(1)(2)
Road Traffic Act 1988 ss. 151, 152
Rule: Since 1934 the Victim, once judgment is obtained against the driver, may bring proceedings against the insurer (irrespective of driver’s financial position)
European Communities (Rights Against Insurers) Regulations SI 2002
Rule: Since 2003 the victim may bring proceedings against the driver’s insurers without first obtaining judgment against the driver
Financial Services and Markets Act 200, s. 213
Rule: Since 1975 insured claimants may be reimbursed by the Financial Services Compensation Scheme’s policyholder protection scheme (now established under Financial Services and Markets Act 2000 s. 213; for rules see Prudential Regulation Authority Rulebook); the FSCS will then be surrogated to claimants’ rights against insolvent insurer
The Insurers (Reorganisation and Winding Up) Regulations 2004 SI 2004/353 Part IV
Rule: Governs insolvency of insurers
(a) IA 1986 s.175 does not apply; instead regs 21-26 apply: reg 20
(b) In winding up of a long term or general insurer debts are paid in the following order: reg 21(1)(2) -
(i) expenses of liquidation (N.B. IA s.176ZA applies to give them priority over floating charge)
(ii) preferential debts (defined in reg 17(1) as debts falling within categories 4 or 5 of IA Sch 6 i.e. contributions to occupational pension schemes etc. and remuneration etc. of employees)
(iii) insurance debts i.e. liabilities under a contract of insurance to a policy holding who has a direct right of action against insurer, including return of premiums
(iv) all other debts
N.B.
- preferential debts rank pari passu: reg 21(3)
- insurance debts rank pari passu: reg 21(4)
- preferential debts have priority over floating change: reg 21(5)
- in distributing prescribed parts under IA s. 176A insurance debts have priority over other unsecured debts: reg 21(6)
- where FSCS has paid a claimant and taken an assignment of claimant’s rights and FSCS then proves in winding up, the FSCS debt must be paid with the same priority as other insurance debts: reg 32
Third Parties (Rights Against Insurers) Act 1930 s. 1(5)
Rule: Excludes reinsurance (alongside 2010 Act s. 15)
Re Law Guarantee Trust and Accident Society Ltd [1914] 2 Ch 617 (CA)
Case: When society (insurer) was wound up it was liable to pay insured claim of £4,988 but in reality it could only pay a dividend of 26.25%; the Society had reinsured 2/11ths of this liability; reinsurer conceded it was liable to pay 2/11ths of £4,988 but question arose whether that payment went to insured claimant or was distributed pari passu among all the Society’s creditors
Decision: Liable for 2/11ths of full debt, to form part of the estate
Rule: Reinsurance claims form part of the estate to be distributed rateably amongst the creditors
National Employers Mutual General Insurance Association Ltd v AGF Holdings (UK) Ltd [1997] 2 BCLC 191
Case: When NEMGIA faced financial trouble it sold its brokered insurance business to AFG; mechanism was for business to be hived down to NEMGIA subsidiary, NEMIC, and shares in NEMIC sold to AFG; NEMIC agreed by reinsurance to indemnify NEMGIA all its liabilities under brokered business and 50% of its liabilities under direct sale policies; AGF fear NEMFIA would be wound up so arrangement made whereby NEMIC would pay directly the policyholders of NEMGIA in return for taking assignment of policyholders’ claims against NEMGIA; when NEMGIA wound up liquidator sued AGF and NEMIC alleging the direct payment arrangement was a breach of the reinsurance contract and the tort of unlawful interference with business and conspiracy
Decision: Accepted that liquidator had not suffered a loss
Are “cut through” clauses in reinsurance contracts valid
Privity of contract issues solved in 1999 Act, but there are still void due to British Eagle
