William Mcllroy Swindon Limited and another v Quinn Insurance Limited
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The insured was a building and roofing contractor. On 5th September 2006, a fire occurred at a warehouse where the insured was working. It was alleged the fire was caused by the insured's use of a blowtorch.
The insured claimed on its public liability insurance but the insurer denied liability saying the insured was in breach of policy terms including a "reasonable precautions" clause. For some reason the insured did not get to hear of the insurer's repudiation until 18th February 2009 or shortly afterwards.
During 2009, three court judgments held the insured liable for causing the fire. Damages were assessed in late 2009/early 2010. No payments were made and the insured went into voluntary liquidation in February 2010. The claimants brought an action against the insurers under the Third Parties (Rights against Insurers) Act 1930.
General condition 16 of the policy provided that any dispute between the insured and the insurer: "on our liability in respect of a claim or the amount to be paid shall, in default of agreement, be referred within nine calendar 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".
The insurer argued that the dispute arose from the moment it made it clear it was refusing to indemnify. The dispute had not been referred to arbitration within the nine-month lime limit and could not now be pursued in court.
The claimants argued that a liability insurer has no liability to indemnify the insured until the insured's liability to the third parties has been established by litigation, arbitration or agreement (Post Office v Norwich Union ). Until then no dispute about the insurer's liability could arise and so the nine-month time bar had no application.
They also argued that it was an especially onerous clause that was buried in 11 pages of printed terms. It had not been incorporated into the contract because the insurer had not taken adequate steps to bring it fairly to the insured's attention.
The High Court
The judge held that the claim was time-barred. The clause clearly intended that arbitration would be the exclusive remedy for disputes between insurer and insured over claims under the policy.
In his view, a "dispute" arose on or shortly after 18th February 2009, when the insured first learned that the insurer was refusing an indemnity. In normal circumstances the insured would be entitled to sue for a declaration. But under the terms of the clause, the matter was to be resolved by arbitration and any arbitration had to be commenced before the end of November 2009.
The judge accepted that the condition was unusual but not that it was unduly onerous. He thought nine months was a reasonably generous time in which to refer a dispute to arbitration.
The claimants appealed.
The Court of Appeal
The Court of Appeal overturned the decision, which Sir Henry Brooke (giving the leading judgment) said "seemed remarkably unfair".
The central issue was whether the insurer's refusal of indemnity in February 2009 amounted to a dispute triggering the time-bar clause.
It has been long established law that liability under an indemnity policy does not accrue unless and until the existence and amount of the liability to the third party has first been established, whether by judgment, arbitration award or agreement (Post Office v Norwich Union ).
Consequently, no dispute about the insurer's "liability in respect of a claim or the amount to be paid” could have arisen until the insured's liability to the claimants had been established by the assessment of damages in December 2009 and January 2010. The present actions were commenced well within the nine-month period required by general condition 16.
The decision upholds the Post Office v Norwich Union analysis of when an insurer's liability arises under a liability insurance, although the Court of Appeal was careful to point out that its conclusion was reached only in the context of a public liability policy.
Part of the problem in this case was that "claim" in general condition 16 was not defined. Did it mean the third party's claim or the claim under the insurance policy?
The Court of Appeal concluded that it was plainly referring to a claim for indemnity under the policy, made on the basis of a third party claim where liability and quantum have been properly ascertained.
Otherwise the clause would effectively force an insured to bring arbitration proceedings against its insurer within 9 months of any dispute, before (possibly years before) any third party claim actually materialised.
Lord Justice Rix commented that such a clause, put forward by an insurer as part of its standard wording, would indeed be a trap for the unwary.
"In such circumstances, if 'claim' can be given a different meaning which would avoid such consequences, it should be," he said. "In sum, I would be reluctant to uphold the judge’s construction of such a clause unless it was plainly necessary. Not only is it not necessary, but it is not the natural construction."