Decree in default determinative of policyholder’s liability under the Third Parties (Rights against Insurers) Act 2010

The recent decision of the Inner House of the Court of Session in Scotland Gas Network PLC v QBE UK Ltd and others [2024] CSIH 36 concerns claims brought against insurers under the Third Parties (Rights against Insurers) Act 2010 (Act) and considers the consequences for insurers where their policyholder has incurred a liability to the claimant through default.

The Court has determined that decree by default may suffice to establish an insured’s liability under the Act, so as to permit the claimant to enforce relevant assigned rights against insurers in respect of that liability without consideration of the merits of the underlying claim.

Background

The claim arises out of the activities of the company D Skene Plant Hire Limited (‘Skene’) at Cowdenhill Quarry near Kilsyth, Scotland. Blasting works at the quarry impacted an adjacent gas pipeline owned and operated by Scotland Gas Network (‘SGN’), causing SGN to divert the pipeline at the cost of some £3 million. SGN pursued proceedings against Skene in 2015, and in June 2017 Skene entered liquidation. Later that year, Skene (and its liquidators) failed to attend a hearing, resulting in the grant of a decree by default for payment to SGN of the £3 million. With the benefit of that decree, SGN pursued a claim against Skene’s insurers under the Act for payment of that sum.

The issues

Insurers disputed the claim on the basis that a decree by default was insufficient to establish Skene’s liability under the Act and appealed the commercial judge’s decision that it was.

The Act provides that where an insolvent defendant incurs a liability for which they are insured, relevant rights in respect of that liability vest in the claimant who may enforce those rights against insurers, but only having established the insured’s liability. Section 1(4) of the Act provides:

“For the purposes of this Act, a liability is established only if its existence and amount are established; and, for that purpose, “establish” means establish –

1. by virtue of a declaration under section 2 or a declarator under section 3,
2. by a judgment or decree,
3. by an award in arbitral proceedings or by an arbitration, or
4. by an enforceable agreement…”

On appeal, insurers made the following contentions:

• as a matter of interpretation, that section 1(4) of the Act required the liability imposed on an insurer to be established by a decree granted after a consideration of the merits of the action rather than merely in consequence of non-compliance with the rules of court;
• alternatively, that the decree relied upon (arising from Skene’s procedural default) was outside the scope of the insurance cover.

On the issue of interpretation, insurers argued that Parliament must have intended that a decree relevant for establishing liability under the Act should be one which followed a consideration of the merits of the case. Reference was made to cases under the preceding Third Parties (Rights against Insurers) Act 1930, which referred to liability and quantum being ascertained in contested proceedings, with insurers asserting that these notions of establishing and ascertaining liability had not been altered by the Act.

On the issue of the scope of cover, insurers argued that liability arising from a decree by default was not an insured peril. It did not require payment of damages by the defender but was rather a penalty imposed at the court’s discretion and which was not insured.

Decision

In reaching its decision, the Court noted that the Act differed significantly from the preceding legislation in providing for how liability for the underlying claim may be established by a claimant for the purpose of enforcing transferred rights. It referred to the case of AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd & Anor [2013] 1 CLC 478, observing that insurers are generally not bound by, and may go behind, any judgment or award determining the insured’s liability to a claimant. The position was significantly different, however, in respect of claims against insolvent policyholders, where the Act had removed that particular inconvenience; once the existence and amount of the policyholder’s liability has been established by any of the methods identified in section 1(4) of the Act, that was binding on insurers.

That being so, the Court went on to enquire whether the position should be otherwise where the particular decree relied upon as establishing the insured’s liability is one granted by default, rather than following a review of the merits. On this issue, the Court found there to be nothing in the wording of the Act to support an interpretation of “decree” in section 1(4) as being restricted to one pronounced only after a merits review. It noted that there remained scope for a defendant to seek relief in the case of inadvertent default and agreed that the requirement for some level of merits assessment would only introduce uncertainty. The Court observed that no obvious injustice resulted from its interpretation, in that insurers will typically have the right to conduct the defence of a claim against their insured, and may well be in a position to seek relief in cases of default.

The Court further rejected the suggestion that a decree by default imposed a liability to pay a penalty as opposed to damages, finding that the authorities in fact pointed the other way; the decree by default arises out of the cause of action itself, and not from the procedural failure which was the immediate reason for its grant. The Court therefore dismissed the proposition that liability arising from procedural default in an action was not an insured peril.

The Court concluded that, whilst decree by default providing for payment of a specific amount is sufficient to establish liability under section 1(4) of the Act, a claimant must nevertheless still establish that the liability so established falls within the scope of the policy (and hence that it is the assignee of relevant rights under the policy), and it remains open to insurers to dispute that and to establish that there is no cover by reason of applicable policy exclusions or the breach of relevant conditions.

Comment 

The Court of Session’s decision, which ought to be authoritative in English courts at Court of Appeal level, makes for an easier route for claimants looking to recover against insurers in cases of default by insolvent policyholders. It accordingly increases insurers’ risk of having to indemnify liabilities which have been established even before even becoming aware of claims having been made, and where they may well have wished to challenge such claims on the merits.

With 2023 witnessing the highest annual number of company insolvencies in England and Wales for thirty years, and with instances of procedural default being more likely amidst the turmoil of insolvency, the impact of this decision for insurers may not be limited to isolated cases. At least where policy coverage is unclear, insurers will want to take steps to set aside default judgments where possible and will be on stronger ground where they can demonstrate that their insured has a real prospect of successfully defending the claim. However, default judgment for an ascertained amount is only determinative of the insured’s liability to the claimant. Insurers’ grounds for resisting third party claims by reference to the policy’s scope are preserved, and an entitlement to reduce liability under the policy or to avoid it altogether is more likely to be established in instances of policyholder default.