Contribution and Insolvent Insureds

In the case of Riedweg v HCC International Insurance plc and ors [2024] EWHC 2805 (Ch), Master Brightwell considered (for what appears to be the first time) the interaction between section 1 of the Civil Liability (Contribution) Act 1978 (“the 1978 Act”) and The Third Parties (Rights Against Insurers) Act 2010 (“the 2010 Act”).

The legislative background

The 2010 Act allows a Claimant to bring proceedings directly against the insurer of an insolvent company or individual. It does this by transferring the rights under the insurance contract from the insolvent party to the Claimant.

The 1978 Act allows a person (A) who is liable for damage suffered by another person (B) to bring a claim for contribution against a third party (C) where C is also liable to B in respect of the “same damage”.

The question for the court to consider was, if a Claimant brings a claim against the insurer of a dissolved company under the 2010 Act, can that insurer bring a contribution claim against another company under the 1978 Act. I.e. are the insurer and the third party liable in respect of the “same damage”?

The factual background

The Claimant alleged that Goldplaza Berkeley Square Ltd (“Goldplaza”) had negligently overvalued a property, causing the Claimant alleged losses of £2.2 million. Goldplaza entered members’ voluntary liquidation in November 2021, meaning the Claimant brought proceedings against Goldplaza’s insurers (“HCC”) under the 2010 Act.

HCC sought to bring a contribution claim against the Claimant’s solicitors (“Forsters”) for the property transaction, alleging breach of fiduciary duty/breach of contract/negligence which caused the same damage as that for which HCC was supposedly liable. It was not disputed that if the Claimant had sued Goldplaza, Goldplaza could straightforwardly have brought contribution proceedings against Forsters (subject of course to proving the claim itself). However, Forsters argued that HCC’s liability remained under its insurance contract, albeit now enforced by the Claimant. Forsters argued that HCC’s liability was therefore not for the “same damage”, meaning a contribution claim could not be brought.

The Decision

Master Brightwell dismissed HCC’s application to bring a contribution claim against Forsters, in doing so holding that any liability of HCC was not for the “same damage” as any liability of Forsters. HCC was liable under its contract of insurance with Goldplaza; the 2010 Act did not make HCC liable for the cause of action against Goldplaza. Indeed, this was implicit in HCC’s Defence, which pleaded several reasons why it was not liable as between Goldplaza and HCC to indemnify Goldplaza (and therefore the Claimant). In contrast, any claim against Forsters would be for damage caused to the Claimant. The liability was therefore not the same meaning the 1978 Act did not apply.

Comment

This decision has already been much debated since its release, with many raising concerns that the decision places too great a burden on the insurers of insolvent Defendants.

The decision does, however, appear to correctly reflect the scheme of the 2010 Act. The 2010 Act was not designed as a quasi-subrogation mechanism, but rather as a mechanism to allow Claimants to claim on the insolvent Defendant’s insurance policy. This is why insurers can rely on arguments that normally lie as between the insurer and insured (such as questions of coverage) as a defence to claims under the 2010 Act.

There is, of course, a separate policy question about whether this result is desirable. It remains possible for an insurer to separately bring subrogation claims once it has paid out on the policy. However, insurers face having to pay the claim in full (assuming liability is established) before bearing the burden of bringing any subrogated claims separately, affecting their bargaining position in any subsequent negotiations. This may also result in multiple sets of proceedings, rather than the single joint trial possible where there is a contribution claim. Further, in lower-value claims brought under the 2010 Act, the costs of having to pursue such claims separately may substantially negate the value of pursuing other Defendants, leaving insurers with little choice but to pay any successful claim themselves. Finally, the delay caused by such a process may present further difficulties if the defendants to any contribution claim are themselves a potential insolvency risk.

It therefore remains to be seen whether the matter will be revisited, either in the courts or through calls for statutory intervention, whether affecting the 2010 Act or as part of wider reform of the 1978 Act.

Article by Philip Marriott