QUEEN'S BENCH DIVISION
COMMERCIAL COURT
B e f o r e :
B E T W E E N :
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TARBUCK |
Claimant |
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- and - |
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AVON INSURANCE |
Defendant |
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MR. CHRISTIE (instructed by Messrs. Berrymans Lacemower) appeared on behalf of the Defendant.
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Crown Copyright ©
MR. JUSTICE TOULSON: Is the Third Parties (Rights against Insurers) Act 1930 capable of applying to the right of a litigant, under a policy of legal expenses insurance ("LEI"), to payment by the insurer of costs owed by the insured litigant to her solicitor, so as to cause the insured's right to be transferred to the solicitor in the event of the insured's bankruptcy? That is the subject of this preliminary issue. It is a question of some general importance on which there is no direct authority.
The insured is a Miss Valerie Nicholson. She ran a Natural Health Clinic in Clerkenwell. In 1989 she entered into a policy of insurance with the defendant called an Office or Surgery Policy. Section 1 provided cover in respect of damage to office contents and other risks. Section 7 was headed "Legal Expenses". It provided that the insurers would pay the insured's "legal costs" up to £50,000 in connection with various types of claim. The types of legal proceedings for which there was cover under the policy included disputes arising from contracts for the supply of goods or services, disputes in connection with employment contracts, and of direct relevance in this case:
"Any dispute involving:
1. Any negligent act or omission or nuisance by a third party which results in pecuniary or physical damage to material property owned by or the responsibility of the insured.
2. The possession of freehold or leasehold real property owned, occupied, and used by the insured for business purposes, provided pecuniary loss is or could be sustained if a claim or legal proceedings are not pursued or defended."
Legal costs were defined as including:
1. Solicitors costs, that is fees, costs and disbursements reasonably incurred by the "appointed representative".2. Third party costs, that is other parties' costs and expenses incurred in civil proceedings in respect of which the insured should become liable in court, tribunal or arbitration proceedings or under a settlement with another party.
3. Expert witness costs.
4. Awards in the form of any basic or compensation award made against the insured under various pieces of legislation concerned with employment.
The policy contained conditions which, among others, provided that the insured might nominate an appointed representative but the insurers were entitled to reject any particular choice of appointed representative without explanation, and that the insurers would accept a claim only when it had a reasonable chance of success.
In July 1990 Miss Nicholson began proceedings against her landlord for damages for breach of a repairing covenant in her lease. The landlord counterclaimed for possession. The insurers agreed to pay Miss Nicholson's costs in connection with the action up to the limit of indemnity of £50,000 in accordance with the terms of the policy. The claimant was appointed her appointed representative under the policy and acted for her throughout the action.
At the trial of the action in 1993 Miss Nicholson was granted relief from forfeiture on condition that she paid arrears of rent and costs to the landlord. This she failed to do, and on 28th October 1993 she was adjudged bankrupt on a petition presented by the landlord.
On 10th August 1993 the claimant delivered a final bill to Miss Nicholson in the sum of approximately £69,000. She wrote to the insurers protesting about the bill and informing them of her bankruptcy. On 15th November 1993 the insurers sought her written authority to pay to the claimant the balance of the indemnity available under the policy, which then came to just over £21,000. Miss Nicholson declined to authorise any payment to the claimant except for a small amount in respect of the outstanding fees of an expert.
On 17th November 1993 the claimant issued a writ against Miss Nicholson claiming the outstanding amount of the final bill. Judgment in default of notice of intention to default was entered on 10th December 1993. Thereupon the claimant wrote to Avon claiming direct payment of the balance
of the insurance monies available under the Act.
Avon's position was an entirely honourable one. They were perfectly happy to pay the balance of the sum insured and would have done so, with knowledge of Miss Nicholson's bankruptcy, if she had consented. But they took the view that, as matter of strict law, the Act was not available to the claimant and in this they were supported by advice given to them by the Insolvency Service. So they declined to make the payment requested by the claimant. The claimant therefore brought this action against Avon for the remaining balance available under Miss Nicholson's policy.
In their defence, the insurers pleaded that the legal expenses insurance was not an insurance of liability such that the 1930 Act conferred rights on the claimant in this case. In those circumstances an order was made by consent that there should be a trial of a preliminary issue whether Miss Nicholson's policy was an insurance of liability such that the Act conferred rights on the claimant in this case.
It is well known that the Act was prompted by concerns expressed in road accident cases where an injured person obtained judgment against a careless motorist's employer which went into liquidation before satisfying the judgment. The result under the law as it stood before the Act was that the injured person had to prove in the company's liquidation and the monies paid by the insurance company to the company, in order to satisfy the judgment, went to the general body of creditors. This was widely regarded as unsatisfactory and led to the passing of the Act. The wording of the Act, however, was not confined to road traffic cases or to liabilities in negligence.
Section 1(1) of the Act provides:
"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...;
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."
The insurance market has developed widely since 1930 and one of its more recent developments has been LEI. The concept is not entirely new. Mance Goldrein and Merkin point out in their book Insurance Disputes 1999, at para 21.10, that defence costs of shipowners and charterers have been underwritten by P&I clubs for a very long time. It has also been common for very many years for professional indemnity policies to provide cover, not only against damages and costs awarded to claimants up to a specified limit of indemnity, but also to provide cover, often unlimited, in respect of defence costs incurred with the insurers' consent. But the marketing of LEI has grown apace in recent years and now plays an important part in the funding of litigation.
The Law Commission is presently considering the need for amendment of the Act in the light of changes in law and practice which have occurred since it was passed. In 1998 it issued a consultative report in which legal expenses insurance received the following mention in a footnote:
"It has been suggested that the Act does not apply in any event to legal expenses insurance as such insurance is classed under the Insurance Companies' Act 1982 as a contract of first party pecuniary loss insurance rather than as liability insurance and as the failure of the insured to pay his legal advisor is distinguishable from other breaches of contract and from other events leading to the incurring of liability. (see N. Stanbury, Legal Expenses Insurance Beware of Insolvent Insurers [1996] 92 BILA Journal 26.)"
Mr. Stanbury's article is interesting. He argues that the Act was intended to deal with "a conventional contract of liability insurance", whereas LEI "is essentially a contract of first party pecuniary loss insurance intended to reimburse the insured for an expense which he has necessarily incurred." Mr. Stanbury developed the distinction in the following passage:
"Under LEI, the insured's obligation is to pay his appointed representative's proper fees in consideration for having the benefit of agreed professional advice and/or representation. This is a direct and fundamental liability of the insured as a term of the contract itself and can be distinguished from the more remote and less quantifiable liability (to the solicitor or some other party) arising from some breach of the contract, or arising in tort based on the contractual relationship, or arising in tort independently of the contract. In other words, is the foreseeable and controllable obligation to make a payment voluntarily accepted under contract to be equated with the unlooked for and potentially unavoidable liability and tort for which insured indemnity is, as a matter of public policy, to be recoverable by the plaintiff notwithstanding the defendant's insolvency? Why should the Act protect the unpaid appointed representative when it is unlikely that, mutatis mutandis, the unpaid repairer of a damaged motor vehicle, or the unpaid supplier of a replacement for stolen property, would be able to invoke the Act, even though the person with whom they had contracted was insured against such a loss."
Counsel's argument on each side was attractively simple and concise. Mr. Davies, for the claimant, submits that the claim falls within the natural construction of the words of the Act. Both parties, he submits, foresaw when entering into the contract of insurance that in the running of Miss Nicholson's business she might become involved in litigation, with attendant legal liabilities either to her own solicitor or to the opposing party in the proceedings, and the object of the LEI section of the policy was to provide indemnity against such liabilities up to the limit and within the terms of the policy. She was, therefore, insured against liabilities to third parties which she might incur. The fact that such a policy might itself in 1930 have been void for maintenance is not relevant, he submits, to the transferability of the insured's right in the policy under the principle created by Section 1 of the Act.
Mr. Christie, for the insurers, adopted Mr. Stanbury's argument. He submitted that the Act applies only to liability insurance as conventionally understood, i.e. insurance covering liability for damage caused to another person by some fault of the insured and not the insured person's own pecuniary loss; so there is not a "liability" within the meaning of the Act. He also submitted that, insofar as this LEI provides for cover in respect of the costs of the insured's own solicitor, it does not provide cover for liability to a third party; it provides cover for the insured's own loss in her voluntarily incurring a contract debt; so there is not a "third party" within the meaning of the Act.
Although these were advanced as separate points they are, in my view, different ways of advancing what is essentially one point. If Mr. Christie is wrong in his approach on the question whether there is a liability within the meaning of the policy, then the claimant is a third party, i.e. someone other than the insured. Mr. Christie accepted that insofar as the LEI provides cover against an opposing party's costs or cover against an award, it falls within the ambit of the Act. But he distinguishes between those parts of the LEI and that part which provides indemnity against the costs of the insured's own appointed representative.
Mr. Christie placed reliance on the categorisation of insurance business under the Insurance Companies Acts and Insurance Companies (Classes of General Business) Regulations 1977, under which LEI is not grouped as liability insurance. I do not find that particularly helpful because those provisions have a self-contained regulatory purpose and, as I have already commented, it is common ground that other parts of this LEI do fall within the scope of the Act, albeit that for regulatory purposes they would not be classed as indemnity insurance.
However, I have found the fundamental problem posed in this case very difficult. I am troubled by the unfairness of the result and the wider implications if the insurers' argument is correct. I also have trouble with the claimant's approach as a matter of construction, and I do not see a way of construing the Act so as to produce a fair and desirable result in all cases.
If the claimant acted for Miss Nicholson in the knowledge of her LEI, it would seem only fair that the balance of the insurance monies available to her should go towards the claimant's costs rather than to her general creditors (or, since apparently the trustee in bankruptcy did not make a claim under the policy within the period specified in the policy, that it should be retained by the insurers).
This case may, on its facts, seem out of the ordinary in that the insurers were happy to have paid the claimant with Miss Nicholson's consent, knowing of her bankruptcy, and they only refrained from doing so because of her objection. But if their argument is right, Mr. Christie accepts and indeed submits that they would have had no business to pay the claimant, even with her consent, after she became bankrupt, because the proceeds of the policy ought to have gone to her trustee for the benefit of her general creditors. Once that is recognised, the potential seriousness of the matter for solicitors acting for clients with LEI is obvious. If they are to guard against the insolvency risk, they need to ensure that they have adequate money on account or are otherwise secured for their fees, possibly by assignment in advance of the benefits of the policy. They cannot regard the client's LEI as available to cover their fees in the event of insolvency, however honourable the intentions of the client may be and however good their relationship with the client.
So the construction contended for by the insurers produces a result with which I am frankly not happy on the facts of this case, and has implications for all concerned in this class of work which they are likely to find disturbing. But there are difficulties to my mind, both historic and substantive, in construing "liabilities to third parties which he may incur" as including a simple contract debt voluntarily incurred. As a matter of legislative history, it is improbable that the draftsman of the Act intended such a broad meaning.
There are other forms of insurance, apart from LEI, which would be affected by such a broad construction. Take the example of medical insurance. If a patient gives details of his medical insurance cover to a hospital on admission and the hospital treats him on the basis that the costs will be covered by the insurance, there is obvious injustice if, on his intervening insolvency, the proceeds of the insurance policy cannot go to the hospital, even though the patient may wish it, but must go rather to the general creditors. If, however, nothing was said about insurance at the time when treatment was provided, it is difficult to see on what principle the hospital should have any claim over money which might happen to be available to the patient under some insurance policy which covered his costs of treatment.
I do not think that it is possible by mere construction of Section 1 of the Act to achieve what might be considered a desirable result in these different situations. I have looked at the Contracts (Rights of Third Parties) Act 1999 to see whether that now affords a solution to the problem but I do not consider that it does or, at any rate, not a complete solution.
I have to choose between construing the words "where a person is insured against liabilities to third parties which he may incur" as limited to insurance against liabilities which may be imposed on that person by operation of law, whether for breach of contract or in tort, or as including the underwriting of liabilities voluntarily undertaken by that person, i.e. the payment of contract debts. I do not believe that the words were intended to include the latter. So with regret on the facts of the present case, I would hold that the claimant has no right of claim against the insurers under the Act.
I do not regard the result as satisfactory but, in my view, the solution lies in amendment of the Act. I hope that this matter will therefore receive the attention of the Law Commission in its final report.
LEI is now a significant feature of litigation, and affording appropriate rights to the various affected parties presents some quite difficult problems. They include potential problems of priorities where LEI covers both the insured's own costs and liability for the costs of another party. These matters need consideration on a wider basis than I have been able to give in deciding the present case.
MR. DAVIES: My Lord, may I just take some instructions?
MR. JUSTICE TOULSON: Yes.
MR. DAVIES: My Lord, there are two matters which flow from your Lordship's judgment for consideration. The first is the matter of costs and the second is whether the matter can be taken further. I will deal with the second first, if I may. What your Lordship says about this matter requiring allowances elsewhere of course is noted, but the present position is that the claimant is left with a claimant which effectively lost on the preliminary issue and, given the importance which your Lordship attaches to the point, we would I think like to take it further.
MR. JUSTICE TOULSON: Mr. Macropolis, do you want to say anything about that. It seems to me that it is a case where I should give permission to appeal. I have found it a difficult point and it is clearly a point of some general importance.
MR. MACROPOLIS (for Mr. Christie): I do not believe I can object to that.
MR. JUSTICE TOULSON: No. I shall be very happy if I am wrong. Yes, well you may have permission to appeal.
MR. DAVIES: Much obliged, my Lord. And the second matter is in the matter of costs.
MR. JUSTICE TOULSON: Well I suspect Mr. Macropolis will have an application.
MR. MACROPOLIS: My friend and I have mutually agreed costs in this matter and I have a schedule of costs. My estimate of total costs came to £9,096 plus VAT and my friend agreed a figure of £8,500.
MR. JUSTICE TOULSON: Yes. Plus or including VAT? MR. MACROPOLIS: Plus VAT.
MR. DAVIES: I am not sure that we need to be bogged down with the VAT element because I think we are VAT registered but I think under the rules VAT is not normally added but perhaps that can be sorted out.
MR. MACROPOLIS: I can confirm this with my client's accountants, but as I understand the position insurance companies will recover very little VAT as a matter of practice. They are more than happy to knock off whatever they can recover.
MR. JUSTICE TOULSON: Oh, I see, there is an agreed costs figure of £8,500.
MR. DAVIES: My Lord, the amount is agreed. All I would say is that, whilst we have lost the preliminary issue, the overall circumstances the far bigger implication which your Lordship has identified, the fact that this is a preliminary issue, I would invite your Lordship to say there should be in effect costs in the cause.
MR. JUSTICE TOULSON: Well, it is the end of the action is it not? There is not a cause.
MR. DAVIES: It would in effect be the end of the action.
MR. JUSTICE TOULSON: I think that, if my judgment stands, the right course now is to dismiss the action is it not?
MR. DAVIES: My Lord, I think that probably must follow, subject to an appeal of course.
MR. JUSTICE TOULSON: Absolutely. Dismiss the action but with permission to appeal. So, having resolved the preliminary issue in the way that I have, the only possible consequence is dismissal of the action. It was a perfectly bona fide claim to bring and I am sorry you have lost, but that is no reason for not bearing the costs.
MR. DAVIES: My Lord, yes.
MR. JUSTICE TOULSON: So you have to pay the costs and, as I understand it, £8,500 is all they are wanting for the entire action.
MR. DAVIES: My Lord, yes. I cannot take it any further.
MR. JUSTICE TOULSON: So the answer is there will be judgment for the defendants. Action dismissed. Claimant to pay defendant's costs in the sum of £8,500. Permission to appeal.
MR. DAVIES: I am much obliged.
MR. JUSTICE TOULSON: Thank you very much.