Discontinued Business Group Update - July 2011

Whether claim by insured under liability policy was time-barred and when did the "claim" arise?

William McIllroy (Swindon) Limited and others v Quinn Insurance Limited [2011] EWCA Civ 825

A third party alleged that the insured had negligently caused a fire which damaged its property. The insured denied liability but notified its public liability insurer. After the third party had written a letter of claim to the insured, the insurer denied liability (on the ground that the insured had breached a policy condition). In due course, a default judgment was entered against the insured and damages were later assessed by the court. After the insured went into voluntary liquidation, the third party claimed under the Third Parties (Rights against Insurers) Act 1930.

General Condition 16 of the public liability policy provided as follows: "Any dispute between the Insured and the [Insurer] on our liability in respect of a claim...shall be referred within nine months of the dispute arising to an arbitrator...If the dispute has not been referred to arbitration within the aforesaid nine month period, then the claim shall be deemed to have been abandoned and not recoverable thereafter".

It was common ground at first instance that "claim" in General Condition 16 meant the claim by the insured against the insurer (and not a claim by a third party against the insured). Post Office v Norwich Union [1967] establishes that until the liability of the insured has been established, and the amount of liability has been ascertained, an insured cannot sue its insurer. However, the trial judge held that, as an insured can seek a declaration that the insurer is in breach of a policy obligation, in this case a dispute had arisen as soon as the insured had denied liability. Since that dispute was not referred to arbitration within 9 months, the judge held a claim against the insurer was now timebarred. An appeal was brought and the Court of Appeal has now allowed that appeal.

The Court of Appeal regarded the judge's decision as unfair, since it required the insured to have started arbitration within 9 months of the insurer repudiating liability, even though the insured was denying liability for the fire and its liability to the third party would probably not have been established during the 9-month period. Sir Henry Brooke said that no dispute could have arisen between the insured and the insurer on the insurer's liability unless and until the insured's liability was established. Rix LJ, on the other hand, accepted that it is possible for an insured to sue for a declaration rather than an indemnity but posed the question "have the parties agreed for a 9 month time bar even in a situation where the only dispute which has arisen between the insurer and the insured is the wider dispute about cover under the policy, but where the insured does not as yet have a claim under the policy". He decided that the parties had not agreed that. The clause did not refer to a "potential claim" and he thought that "its talk of "the claim shall have been deemed to have been abandoned"...emphasises to my mind that what the clause is talking about is a claim for an indemnity which an insured is entitled to make against his insurer...In other words, I would regard "claim" in this context as being synonymous with the assertion of a purported cause of action". The insured in this case could not have made a claim under the policy at the time that the insurer repudiated liability. It could only have notified an incident which might give rise to a third party claim.

Reference was made to the case of Walker v Pennine Insurance [1980]. There, Roskill LJ had said that "it seems to me that you can, within the present clause, have a claim by the assured for an indemnity against a potential liability, long in advance of any claim against the assured by a third party being agreed or determined either as to liability or quantum or both". Sir Henry Brook said that Walker (insofar as it might be taken to impugn the authority of Post Office, should not be followed. Rix LJ sought to confine Walker to motor policies only and said that "I am satisfied that in the context of a public liability policy...the essence of a claim under the policy is a request for indemnity on the basis of an established cause of action in respect of a third party claim where liability and quantum have been ascertained".

COMMENT: The Court of Appeal was clearly concerned in this case that the authority of the Post Office case should not be impugned. However, in the Post Office case the insurers had not sought to repudiate liability (they had only argued that the claim under the policy was premature). Given that it is possible for an insured to seek a declaration from the courts that an insurer has wrongfully repudiated liability (and so, for example, require the insurer to meet defence costs even before the insured's liability has been established), it might be argued that the judge at first instance was correct to find that the claim against the insurer had arisen as soon as liability under the policy was repudiated. However, the Court of Appeal was clearly swayed by the argument that it is unfair to require an insured to commence arbitration/litigation against its insurer before it even knows whether it is liable to the third party. It remains to be seen whether the insurer will appeal this decision to the Supreme Court.

This case will come as a relief to insureds and reinsureds, who have been told by their (re)insurers that they have no liability because of a breach of policy conditions or the duty of utmost good faith, but who have not protected the expiry of the relevant limitation period based on the assumption time runs from such notification rather than the date on which any third party liability may be ascertained.

Rhode Island decision on objections to commutation plan

The Rhode Island Restructuring Act (which became effective in 2004) provides for a scheme whereby a solvent (re)insurance company in run-off may propose a commutation plan, extinguishing its liabilities for past and future claims of its creditors (and thereafter terminating its business).

GTE Re, a Bermudian company, submitted a commutation plan which was approved by insurance division of the Rhode Island Department of Business Regulation. GTE Re then filed a petition for implementation of the plan with the court. A Meeting of Creditors was then held and the plan was approved at the meeting.

However, when GTE Re applied for an order confirming the vote and to implement the plan, objections were raised by certain creditors (with whom GTE Re had entered into reinsurance contracts). These objectors did not challenge the plan but, rather, the constitutionality of Restructuring Act itself. It was argued that the Act breached Article 1, section 10, clause 1 of the US Constitution which provides that "no state shall...pass any...law impairing the obligation of contracts" (the "Contract Clause"). The Superior Court of Rhode Island therefore considered the following issues:

1. Does the state law substantially impair a contractual relationship?
   
   The court held that it did not in this case. The objectors had failed to establish beyond a reasonable doubt that the actuarial-based payout which they are to receive will be less than their recovery if GTE Re remained in run-off. Simply stating that the commutation plan may provide for a different payout than that originally contracted for did not give rise to a "substantial impairment".
   
   It was also argued that the plan nullified the choice of law provisions contained in the agreements between GTE Re and the objectors. However, the court found that the alteration of the choice of law clause was applicable only to disputes arising out of the plan. Nor did the creditor vote in any way substantially impair the objectors' rights under their agreements with GTE Re.
   
   Furthermore, any impairment would have been foreseeable. GTE Re was subject to Bermuda's legal and legislative framework and, as early as 1975, Bermuda has had legislation in place providing for schemes of arrangement between Bermudadomiciled companies and their creditors.
2. If there had have been substantial impairment, was this for a "legitimate public purpose"?
   
   Mere substantial impairment of a party's contract rights is insufficient to amount to a breach of the Contract Clause. A statute will be deemed constitutional if it is justified by a significant and legitimate purpose. In this case, it was clear that the Restructuring Act was directed at Rhode Island's commercial insurance industry as a whole and that one of the State's motives and objectives was the stimulation and support of Rhode Island's economy. This was a legitimate public purpose. Furthermore, the Restructuring Act was a "reasonable and necessary" means by which to address this legitimate public purpose. Nor did the act breach the principle of due process.
   
   Accordingly, the act did not breach the Contract Clause and the court held that the plan did not materially adversely affect the interests of the objecting creditors (or of the policyholders).

Dealing with objections to a Part VII transfer

In the recent case of In the Matter of Sompo Japan Insurance Inc , Briggs J gave his reasons for sanctioning a scheme for the transfer of certain insurance business from the UK branch of Sompo Japan Insurance Inc ("Sompo") to Transfercom. Various objections to the scheme had been raised by certain transferring policyholders. Some of the objections had been as follows:

1. There would be a reduction in the transferring policyholders' security. The judge held that reduction in the confidence level attributable to the transferring policyholders from 99.88% to 99.6% was not material - that was still a satisfactory level of security. Nor was it significant that there was a corresponding increase in the security available to Transfercom's existing policyholders - this had not been achieved at the expense of the transferring policyholders.
2. The independent expert had relied on research carried out by other qualified professionals. The judge accepted that this was "inevitable and acceptable", especially as he had done so only after his own sufficient review of their work.
3. It was said that Sompo had no rational commercial purpose for the transfer. The judge rejected this - a desire to achieve finality was in itself a rational commercial purpose.
4. Objection was made that "since probably a majority in value of the transferring policies were governed by laws other than that of the UK, there was a serious risk that the scheme would be legally ineffective to bring about a substitution of Transfercom for Sompo as reinsurer". Briggs J agreed with Richards J that, provided the evidence showed that a sufficient proportion of transferring policies were governed by English law (and therefore by FSMA), so that the court's sanction of the scheme could not be characterised as acting in vain, then the risk that the validity of the transfer of policies governed by non-English law might be open to question, was not a persuasive reason to refuse sanction. This was subject, though, to the independent expert confirming (as he did) that there was no unacceptable level of uncertainty or unfairness.

Presidency Compromise Text on the proposed Omnibus II Directive

On 24 June 2011 and 21 June 2011, the Council of the European Union published compromise texts on the Omnibus II directive.

The proposals include various changes to the provisions relating to Solvency II, the most significant of which is to delay implementation of the new regime. The text requires member states to transpose the Directive into national law by 31 March 2013, and to apply the provisions from 1 January 2014. Supervisory authorities must however require firms to provide an implementation plan by 1 July 2013 providing evidence of the progress towards implementation of Solvency II.

The text also amends the scope of Solvency II, excluding Insurers or reinsurers who are in run-off by 1January 2014 where:

1. The relevant supervisory authority is satisfied that the undertaking will terminate its activity within 3 years of the 1 January 2014 implementation date; or
2. The undertaking is subject to reorganisation measures and an administrator has been appointed;

provided the undertaking is not part of a group in which other group undertakings are not in run-off.

Undertakings falling within a) will become subject to Solvency II from 3 years after the 1 January 2014 implementation date if they have not terminated their activity by that time. Those falling within b) will become subject to the requirements from 5 years after the implementation date. In either case, the undertaking must provide its supervisory authority with an annual report on progress towards terminating its activity, and if the authority is not satisfied with the progress, the undertaking may become subject to the requirements earlier.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.