Under the Third Party (Rights Against Insurers) Act 2010 (and the Third Party (Rights against Insurers) Act 1930 for liabilities and insolvency events occurring before 1 August 2016) a third party can claim directly against the insurer when the insured has incurred a liability to the third party and the insured has become insolvent.
The third party cannot, however, have any enhanced rights. It cannot be in a better position than the insured and any claim the third party makes will be subject to the same policy terms and conditions as a claim by the insured would have been.
In the case of Crowden and Crowden v QBE Insurance (Europe) Ltd [2017] the court provided some clear guidance on how exclusion clauses should be interpreted in an insurance contract - confirming again that any exclusion clause that would operate to extinguish a claim by the Insured would consequently operate to extinguish a claim by the third party.
Background
The claimants (the third parties (TP) in the claim against insurers) engaged the services of a financial adviser to provide investment advice. That investment advice was negligent. TP commenced legal proceedings and obtained judgment against the Insured in respect of the negligent investment advice received. The insured subsequently entered into liquidation and TP issued proceedings against QBE, claiming an indemnity under the insured's professional indemnity insurance (the policy).
QBE applied for summary judgment dismissing the claim, or an order striking out the claim. In the first instance they asserted they had no liability to the insured, as a result of an 'Insolvency Exclusion' contained in the policy. On that basis they had no liability to TP either.
QBE also asserted that the claimants had no right to bring the claim in any event - their rights having been assigned to the Financial Services Compensation Scheme (FSCS), from whom TP had received some compensation towards the losses they had suffered as a result of the negligent advice from the Insured.
The Insolvency Exclusion
The Insolvency Exclusion provided that QBE had no liability in relation to and claims or loss "arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured... or any other business... with whom the Insured has arranged directly or indirectly any insurances, investments or deposits...".
QBE argued that the Insolvency Exclusion would apply to a claim made by the insured, and it therefore applied to the claimants' claim. They asserted:
- For the Insolvency Exclusion to apply the relevant insolvency must be a cause of the relevant claim, liability or loss. The claim, liability or loss in question was caused by the insolvency of the companies responsible for the financial instruments in whom investment was made.
- Furthermore the Insolvency Exclusion made commercial common sense and a change made to the policy wording when the policy was renewed was significant in demonstrating the parties' contractual intention (i.e. that claims caused by or relating to an insolvency event were excluded).
The claimants submitted that the Insolvency Exclusion did not apply, in the main because:
- It did not apply to negligent advice given by the Insured. The principles of construction applicable to exclusion clauses required the Insolvency Exclusion to refer expressly to negligence, if it was to work to exclude negligence;
- It only applied in respect of investments made by the insured for itself, not those made by the insured on behalf of its customers; and
- The 'relevant insolvency' required a formal insolvency process, not just an inability to pay debts as they fell due.
Decision
The Court did not accept the arguments advanced by TP. The judge held that there was no need for the Insolvency Exclusion to expressly refer to excluding negligence; "The position in respect of insurance contracts is wholly distinguishable in that an exclusion clause in an insurance policy is not designed to exclude, restrict or limit a primary liability on the part of the insurer; instead, it is intended to define the risk which the insurer is prepared to accept by way of the insurance contract. Further, the exclusion clause in an insurance policy does not ordinarily operate to deprive the insured of rights which existed prior to or but for the cover afforded by the Policy."
The principles of construction applicable to exemption clauses generally were not to be adopted when interpreting insurance exclusions. That was because exclusion clauses in insurance contracts were designed to define the scope of cover which the policy was intended to provide; the court should not apply an approach which automatically favoured the party whose claim the exclusion clause would extinguish (the contra proferentum approach).
If there was a genuine ambiguity in the meaning of the provision and the effect of one construction would exclude all or most of the insurance cover, the court could in those circumstances opt for a narrower construction, either by applying the contra proferentem approach or by opting for a more commercially sensible construction.
The Insolvency Exclusion was not limited to non-negligent acts or omissions as there was no suggestion in the language of the provision that it was to be limited in that way. The use of the words "directly or indirectly" also supported the application of the Insolvency Exclusion - even if the causative link between the insolvency and the claim was not a proximate cause. The insolvency had to be specifically accountable as a cause and stand out as a contributing factor - but it could be more remote than a proximate cause.
There was no indication in the exclusion that it applied only to insurances, investments and deposits arranged by the insured on its own behalf and not to those arranged on behalf of its clients. Furthermore there was no good reason why the exclusion should be limited to formal insolvency of the Insured. It also applied where the 'insolvency' of the investment providers / companies was the cause.
QBE's construction was therefore correct. The claim, liability or loss suffered by TP was caused by the insolvency of the investment companies, which fell within the meaning of the Insolvency Exclusion. The exclusion therefore applied and QBD had no obligation to indemnify the insured (and consequently TP).
The court found that the issues surrounding the effect of the assignment were complex and required further investigation. Summary judgment on this ground was therefore inappropriate.
QBE were, however, entitled to summary judgment against TP. The Insolvency Exclusion would have worked to exclude a claim by the Insured and it therefore worked to exclude a claim by TP.
Comment
This decision confirms that a third party relying on third party insurance rights cannot be in a better position than the original insured party. Perhaps more importantly however, the decision makes it clear that normal rules of construction do not necessarily apply to exclusion clauses in an insurance contract. Insurance policy exclusions usually define the risk covered by the policy and do not operate to deprive the insured of any existing rights it might have had. If any doubt exists as to their effect, there is no need to automatically construe exclusion clauses in an insurance contract in favour of those trying to avoid them.