Scottish Court of Session Decisions

The Assurance Companies Act 1909 (9 Edw. VII, cap. 49) enacts Section 1—“This Act shall apply to all persons or bodies of persons … who carry on within the United Kingdom assurance business of all or any of the following classes:—… ( d) Employers' liability insurance business—that is to say, the issue of, or the undertaking of liability under, policies insuring employers against liability to pay compensation or damages to workmen in their employment.…” Section 2 (1)—“Every assurance company shall deposit and keep deposited with the Paymaster-General for and on behalf of the Supreme Court the sum of twenty thousand pounds.… (4) Where a company carries on or intends to carry on assurance business of more than one class, a separate sum of twenty thousand pounds shall be deposited and kept deposited.… as respects each class of business, and the deposit made in respect of any class of business in respect of which a separate assurance fund is required to be kept shall be deemed to form part of that fund.…” Section 3 (1)—“In the case of an assurance company transacting other business besides that of assurance, or transacting more than one class of assurance business, a separate account shall be kept of all receipts in respect of the assurance business or of each class of assurance business, and the receipts in respect of the assurance business, or, in the case of a company carrying on more than one class of assurance business, of each class of business, shall be carried to form a separate assurance fund with an appropriate name: Provided that nothing in this section shall require the investments of any such fund to be kept separate from the investments of any other fund. (2) A fund of any particular class shall be as absolutely the security of the policy-holders of that class as though it belonged to a company carrying on no other business than assurance business of that class, and shall not be liable for any contracts of the company for which it would not have been liable had the business of the company been only that of assurance of that class, and shall not be applied, directly or indirectly, for any purposes other than those of the class of business to which the fund is applicable.”

The Liquidators of the Glasgow Assurance Corporation, Limited, presented a note “for authority to intimate deliverances on claims in respect of the company's employers' liability business, and the value of the company's liability to persons appearing to be interested in the policies granted in connection therewith.” Answers were lodged by the Welsh Insurance Company, Limited.

The following narrative of facts is taken from the opinion of the Lord Ordinary ( Cullen)—“The Glasgow Assurance Corporation, Limited, now in liquidation, carried on various kinds of insurance business, and, inter alia, that of employers' liability insurance. The respondent company, the Welsh Insurance Corporation, Limited, carries on, inter alia, an employers' liability insurance business. The two companies entered into a re-insurance treaty, dated 30th November 1909, whereby the Welsh company agreed to pay to the Glasgow company 21 1 2 per cent. of its workmen's compensation premiums, and the Glasgow company in consideration thereof agreed to indemnify the Welsh company under its policies in respect of fatal accidents (with certain exceptions), and also to a certain extent against claims in respect of disablement. The re-insurance treaty was terminated on or about 31st August 1911, subject to the risks still current for which the Glasgow company had previously become liable under its provisions. During the period while the treaty was in full force the Welsh company paid over the stipulated proportion of its premiums. The Glasgow company carried the amounts so received by it into the account of its ‘separate assurance fund,’ applicable to employers' liability insurance business, kept in pursuance of the Assurance Companies Act 1909, and similarly entered on the other side of that account the payments of claims made under the treaty. It thus treated the re-insurance transaction as part of its employers' liability insurance business under the Act. The Welsh company has, admittedly, a claim in the liquidation for sums due to it under the treaty, and the main question now raised is as to the mode of ranking the due amount of this claim. A subsidiary question is raised as to the validity of part of the claim.”

The re insurance treaty between the Welsh Insurance Corporation, Limited, and the Glasgow Corporation, Limited, contains, inter alia, the following provisions:—“Whereas the Welsh Insurance Corporation, Limited, of Cardiff (hereinafter called the re-insured) undertakes the business of insuring employers against liability for injuries to their workmen, and is desirous of being relieved of the whole of such liability in respect of fatal accidents as hereinafter provided, and their liability in excess of fifty pounds (£50) for each permanent disablement case of accident as hereinafter provided, the Glasgow Assurance Corporation, Limited, of Glasgow (hereinafter called the Corporation) has agreed to indemnify the re-insured against such liability in accordance with the terms and conditions of this treaty.… Article 1—The corporation hereby under takes to relieve the re-insured of and indemnify the re-insured against all liability under the Workmen's Compensation Act 1906, Employers' Liability Act 1880, Lord Campbell's Act, and at common law, for fatal accidents and accidents causing disablement occurring to the employees of employers insured against such liability by the re-insured.… It is also agreed that in the case of accidents causing disablement the re-insured shall bear the first fifty pounds of compensation payable to each claimant, the liability of the corporation being for all sums payable to each such

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claimant in excess of fifty pounds. Article 2—The re-insured agrees to forward to the corporation at the end of each week a statement on Bordereau Forms of all Workmen's Compensation risks accepted by them excepting mining risks as hereinbefore mentioned. Article 4—On the happening of a fatal accident for which the corporation will be liable, the re-insured undertakes to advise the corporation with full particulars as soon as possible and will use every effort to obtain a favourable settlement, and the corporation undertakes immediately on production of a claim receipt to refund the re-insured the amount paid by them, and permanent cases shall in like manner be dealt with, the reinsured advising the corporation when compensation has been paid to any injured party for a period of six months, but should an accident seem to be of a permanent nature the re-insured will advise the corporation as soon as they conveniently can and settlement shall be effected as herein provided in respect of fatal accidents. Article 5—It is agreed that the corporation will take over and settle within three months after the re-insured shall have paid a total sum of fifty pounds (£50) in weekly compensation all claims in respect of accidents causing disablement.… Article 7—Notwithstanding anything contained in article 6 the corporation agrees that it will submit to the re-insured its revenue account for its Workmen's Compensation Department as lodged with the Board of Trade, and within seven days after it shall have been so lodged and the corporation further agrees that if its ratio of claims to premium income in the said Workmen's Compensation accounts shall in any financial year have exceeded 60 per cent. the re-insured shall have power to cancel this treaty by giving one calendar month's notice of their intention to do so.”

On 18th December 1913 the Lord Ordinary ( Cullen) pronounced this interlocutor:—“… Finds (1) that the respondents are not entitled to any ranking in respect of the costs—legal, medical, and other expenses—incurred in connection with the determination or settlement of claims made under the policies issued by the respondents: And (2) that the respondents are entitled to a ranking on the employers' liability fund of the company (including therein the statutory deposit) in respect of their claim, in so far as the same arises out of claims paid under policies issued by the respondents of which the company was under obligation to relieve the respondents in respect of the agreement or treaty.…”

Opinion.—[ After the foregoing narrative of facts]—The argument on the first of these questions related to certain provisions in the Act of 1909.

By section 1 the Act is made applicable generally to persons or bodies of persons (therein referred to as ‘assurance companies’) which carry on within the United Kingdom all or any of five specified classes of insurance business. One of these classes (section 1 ( d)) is—‘Employers’ liability insurance business, that is to say, the issue of or the undertaking of liability under policies insuring employers against liability to pay compensation or damages to workmen in their employment. The provisions of the Act in question do not apply to assurance companies in so far as they carry on assurance business of kinds not falling within any of the five specified classes.

Section 2 obliges an assurance company within the scope of the Act to make a deposit with the Paymaster-General for or on behalf of the Supreme Court of the sum of £20,000 in respect of each or any of the five specified classes of insurance business which it carries on, and provides that ‘the deposit made in respect of any class of business in respect of which a separate assurance fund is required to be kept shall be deemed to form part of that fund.’

The matter of the ‘separate assurance fund’ is dealt with in section 3, which is in the following terms:—‘… [ quotes, v. sup.]…’

This section is, in terms, applicable to such companies as either (1) carry on other business than that of insurance, or (2) carry on more than one class of insurance business. The receipts and payments in respect of any of the five specified classes of insurance business which such a company carries on are to be carried to and form a separate assurance fund with the appropriate name; and under section 2 (4) where more than one specified class of business is carried on, each of the required deposits is to form part of the separate assurance fund applicable to the particular class of business in respect of which the deposit has been made.

Section 3 does not legislate for the case of a company whose sole business consists in carrying on one of the five specified classes of assurance business, and which has therefore no need to make a separation of its funds.

Sub-section (2) of section 3, in harmony with sub-section (1), is directed to cases where the company is doing more than carrying on one of the five specified classes of assurance business, and its object is to declare that a separate assurance fund required and kept under sub-section (1) shall be a security for the policy-holders of the particular class, ‘as absolutely … as though it belonged to a company carrying on no other business than assurance business of that class,’ and that it ‘shall not be liable for any contracts of the company for which it would not have been liable had the business of the company been only that of assurance of that class, and shall not be applied directly or indirectly for any purposes other than those of the class of business to which the fund is applicable.’

In such a case the policy-holders of any particular class thus have the same claim on a separate assurance fund applicable to that class as they would have had on the unseparated funds of the company if the company had carried on only business of that class. They may therefore come into competition with other lawful creditors of the company whose claims arise out of the same class of the company's business. Section 3 (2) does not secure them against such competition, but only against competition

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with creditors under contracts incident to other classes of business.

Assuming that the Glasgow company had carried on only a business of employers' liability insurance, using that description in a general sense, and had in the course of its business undertaken re-insurances of another company's risks, as they did by the treaty now in question, it could not have been said that it was going beyond the ordinary scope of such a business. Reinsurance for the spreading of risks is an ordinary feature of the various kinds of insurance business both in this country and elsewhere. But while this may be so, the liquidators of the Glasgow company maintain that the undertaking of re-insurance of another company's risks is no part of an employers' liability insurance business as such a business is defined in section 1 of the 1909 Act for the purposes of that Act, and, in particular, for the purpose of the provisions as to keeping separate assurance funds. If this contention be sound, then where an employers' liability insurance company engages, lawfully under its constitution, in transactions for re-insuring other companies' risks, these transactions fall to be regarded as being, from the point of view of the statute, a separate species of insurance business (to which the Act does not apply), and it is necessary that the company, in order to a due observance of the statute, should keep a ‘separate assurance fund’ for its business so far as consisting of the direct insurance of employers under its policies, from the accounts of which fund its receipts and payments in respect of such re-insurances fall to be excluded.

The definition in section 1 runs:—‘Employers’ liability insurance business, that is to say, the issue of, or the undertaking of liability under, policies insuring employers, &c. Re-insuring other companies is not the issuing of such policies. And equally, say the liquidators, it is not ‘the undertaking of liability under’ them. In one sense it is not. The re-insuring company does not become the debtor of the employers holding the policies which are the subject of the re-insurance. There is no privity of contract. But in another sense the re-insuring company does undertake the liabilities under such policies, for it undertakes to bear and discharge these liabilities, its creditor being the company re-insured. The former construction of the statutory words is the more literally exact. But it may be that the wider construction is the preferable one.

Here I may recall the fact that the Glasgow company in keeping their accounts acted on the wider view. In the accounts of their separate assurance fund applicable to their employers' liability insurance business (lodged with the Board of Trade in pursuance of the Act) they regularly entered on the one side the premiums received from the Welsh company, and on the other the payment of claims made by them in pursuance of the treaty. This is said to be the ordinary practice in such cases. I do not know as to that. The statute falls to be construed on its terms. The liquidators say that the Glasgow company was wrong in entering the said receipts and payments as they did. It may be that it was; and the question at issue must be considered irrespective of the method in which the said accounts were de facto kept.

Now re-insurance is an almost universal feature in the conduct of insurance business in its various branches both in this country and in others. This is so well known that it is, I think, justifiable to keep the fact in view in considering the intendment of the Act of 1909; and it seems unlikely that the Legislature should have intended that where a company carries on an employers' liability insurance business, or any other of the five specified classes of insurance business to which it relates, the undertaking of re-insurance should fall to be treated as a thing apart and as a separate species of business. The re-insurance amounts to a spreading of risks among insurance companies, and it cannot well be said in its nature to militate against the interests of policy-holders.

The insurance statutes show that the practice of effecting re-insurances was within the contemplation of the Legislature as a feature of insurance business. The prototype Act of 1870, in its schedule form for the separate assurance fund account of a life assurance company doing other business, has a note appended to it in these terms—‘Items in this … account should be the net amounts after deducting the amounts paid and received in respect of re-assurances.’ The schedule forms in the Act of 1909 have this note—Items in this account to be the net amounts after deduction of the amounts paid and received in respect of re-insurances of the company's risks. It is thus clear that the Legislature had expressly in view the practice of re-insurance as an ordinary feature of an insurance company's business, and in particular (under the Act of 1909) as an ordinary feature of an employers' liability insurance business. The liquidators, however, appeal to the terms of the 1909 note and say that while it recognises re-insurance as a feature in the business of the re-insured company, it does not recognise re-insurance as a feature in the business of the re-insuring company. It is true that the note is only directed to the mode of stating the accounts of a re-insured company. But I confess I find it difficult to believe that the Legislature intended this one-sided recognition of re-insurance—that is to say, that it should be treated in the case of a re-insured company as an ordinary element in its business, but that in the case of a re-insuring company it should be treated as a separate line of business. No reason for such a distinction was advanced in the argument.

The premiums received by an insurance company form, while it is a going concern, the fund from which realised risks are satisfied. Under some policies claims arise and have to be satisfied. Under others no claims arise; and the success of the company's business depends on its premium income being in excess of the claims emerging under its policies. Now while this is so, the liquidators'

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argument concedes that a company doing employers' liability insurance business is entitled, under the statute, to hand over to another company, under a re-insurance agreement, any given part of its received premiums going to make up the natural fund for satisfaction of claims by its policyholders, and thus to deplete that fund. This, taken by itself, is to the prejudice of the reinsured company's policy-holders who look to that fund. Surely it must be intended by way of equivalent that the proportion of the premiums paid by these policy-holders which is transferred to the re-insuring company shall go into the employers' liability insurance fund of that company, and that the re-insured company for behoof of its policy-holders is to have recourse against that fund. In that way the policy-holders of the re-insured company are put in much the same position as if they had insured partly in the one company and partly in the other. The splitting up of the risk is done, not directly by them, but by the company whose policies they have taken; and it is common ground that that company may, in a question with its policy-holders, lawfully take such course under the statute.

I was not favoured with any argument for the liquidators directed to showing on principle why the Legislature should have intended to make the one-sided recognition of re-insurance business which they maintain. The argument consisted in tabling the definition in section 1 of the Act, and also the note to the schedule form dealing, as that note does, only with the mode of giving effect in a re-insured company's accounts to re-insurance of its own risks, and in pointing out that there is no corresponding note saying that a re-insuring company should include in its accounts the premiums received and payments made by it under re-insurance transactions. But I do not find it very difficult to conclude that it was taken for granted that such receipts and payments would enter the accounts of a re-insuring company. All the note deals with is ‘net amounts.’ The re-insured company is thereby directed not to enter separately (1) the gross amounts of its received premiums and payments made therefrom, and (2) the proportion of its received premiums paid over for re-insurance and the amounts received by it by way of indemnity under re-insurances, but to deduct the latter from the former in order to state net sums. This is only a direction as to a particular mode of stating a re-insured company's account. It remains, I think, that re-insurance was contemplated by the Legislature as an ordinary feature in the conduct of an employers' liability insurance business.

The liquidators of the Glasgow company have rejected the claim of the Welsh company for ranking on the ‘separate assurance fund’ of the former company. Following the views which I have expressed, I am of opinion that the deliverance of the liquidators is wrong, and that the Welsh company is entitled to have its claim ranked on that fund.

The second question raised is a subsidiary one, and relates to a part of the claim of the Welsh company which the liquidators say is not a valid matter of claim under the terms of the treaty. It is composed of legal and medical expenses to which the Welsh company were put in connection with claims under their policies falling within the indemnity undertaken by the Glasgow company in the treaty of re-insurance. The question turns on the terms of the treaty.

“A general indemnity by way of re-insurance may very well devolve such incidental expenses on the re-insuring company. But a particular and partial indemnity may or may not do so according to the terms in which the bargain is conceived. In the present case the Welsh company, having issued policies and being in receipt of the whole premiums payable under such policies, agreed to pay over a certain proportion of such premiums to the Glasgow company, and the Glasgow company in consideration thereof undertook to indemnify the Welsh company against a certain part of the policy risks. It was a matter of bargain as to what should be included in the Glasgow company's undertaking. If they were to pay such legal and medical expenses as are ere in question the consideration to be paid to them would naturally be greater than if they were not to do so. One is relegated to the actual terms of the re-insurance treaty. Article 1 thereof is in general terms. Articles 4 and 5 go on to formulate specifically the obligations of indemnity undertaken by the Glasgow company relating respectively to (1) cases of fatal accidents to workmen, and (2) cases of disablement. Article 4 binds the Glasgow company ‘on production of a claim receipt to refund to the re-insured the amount paid by them,’ and goes on to say that ‘permanent cases shall in like manner be dealt with.’ This seems to me to confine the obligation of indemnity to what the Welsh company might have to pay to the insured. Article 5 deals with cases of disablement generally. The Welsh company is to pay the first £50 of compensation due in such cases, and the Glasgow company is to ‘take over and settle within three months after the reinsured shall have paid a total sum of £50 in weekly compensation all claims in respect of accidents causing disablement.’ This article also seems to me to limit the obligation of the Glasgow company to money payable to the insured. I am therefore of opinion that the liquidators are right in their contention that there falls to be excluded from the claim of the Welsh company for ranking so much thereof as is composed of the said legal and medical expenses incurred by the Welsh company.” The liquidators of the Glasgow Assurance Corporation, Limited, reclaimed, and argued—Section 3 of the Assurance Companies Act 1909 (9 Edw. VII, cap. 49) gave the policyholders in any one of the particular classes of insurance business dealt with in the Act a security over the whole funds applicable to the particular class of business, and conferred on such policy-holders a preference over ordinary creditors of the company in that particular class of business. The respondents were not policy-holders; nor were

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they creditors, by virtue of the contract of re-insurance, of the Glasgow company so far as its employers' liability business was concerned. Re-insurance differed from direct insurance in respect (1) that the risks covered were different— Nelson v. Empress Assurance Corporation, Limited, [1905] 2 KB 281, per Matthew, L.J., at p. 285; Lancashire Insurance Company v. Inland Revenue, [1899] 1 QB 353; (2) that re-insurance depended not upon the risks of the original policies but upon the careful management of the re-insured company. The legislation contained in the Assurance Act was directed to the security of policy-holders and did not apply to re-insurance— In re Popular Life Assurance Company, Limited, [1909] 1 Ch 80; In re Life and Health Assurance Association, Limited, [1910] 1 Ch 458. As regards the claim for medical and legal expenses, all that was re-insured under the agreement was the amount paid to the policy-holder as shown by his claim receipt.

Argued for the respondents—The respondents were entitled to rank on the Glasgow company's employers' liability fund. A policy was a contract of indemnity against a defined risk for a valuable consideration, and according to this definition the respondents were policy-holders. The respondents were policy-holders in the particular class of employers' liability business, the risks covered by the re-insurance being risks of claims by workmen against their employers. The only class of insurance which the words of section 1 ( d) of the 1909 Act, “undertaking of liability under policies,” covered was re-insurance. Even if the respondents were not policy-holders, they were certainly creditors and entitled to a ranking as much as the stationer who supplied goods for the reclaimers' office. As regards the claim for medical and legal expenses, the re-insurance being essentially a contract for indemnity, such expenses should be included in the indemnity, and as a matter of insurance practice such expenses were always allowed.

At advising—