Irish High Court Clarifies Third Party Rights Against Insurers
Two recent decisions of the Irish High Court have provided useful clarification as to the nature and extent of a third party's rights against an insurer pursuant to section 62 of the Civil Liability Act 1961. Section 62 provides a means by which a third party with a claim against an insolvent insured can bring a direct claim against the insured's liability insurer and, as such, operates as an exception to the established principle of privity of contract.
Section 62 provides that:
Where a person (hereinafter referred to as the insured) who has effected a policy of insurance in respect of liability for a wrong, if an individual, becomes a bankrupt or dies or, if a corporate body, is wound up or, if a partnership or other unincorporated association, is dissolved, moneys payable to the insured under the policy shall be applicable only to discharging in full all valid claims against the insured in respect of which those moneys are payable, and no part of those moneys shall be assets of the insured or applicable to the payment of the debts (other than those claims) of the insured in the bankruptcy or in the administration of the estate of the insured or in the winding-up or dissolution, and no such claim shall be provable in the bankruptcy, administration, winding-up or dissolution.
Both recent decisions arose in the context of applications by liability insurers to strike out claims brought directly against them under section 62 by employees injured at work on the basis that they were the employer's insurer at the time of the accident and the employer was insolvent.
In McCarron v Modern Timber Homes Limited (In Liquidation)1, the plaintiff employee sued his employer and its insurer, Quinn Insurance ("Quinn"). Quinn had declined cover of the claim on the basis of a breach of a notification condition of the policy.
Importantly, the plaintiff had not obtained any judgment or order against the insured employer at the time he joined Quinn as a co-defendant.
Referring to the judgment of the Supreme Court in Dunne v P.J. White Construction Company Limited (In Liquidation)2, which stated that it had "long been established that an insured person's rights of indemnity under a policy of insurance for a liability to third parties does not arise until the existence of the amount of that liability to the third party has been established, either by action, arbitration or agreement", the court held that a claim against an insurer under section 62 is not valid until liability has been established against the insured (and the quantum of the claim has been assessed). In the court's view, any cause of action against an insurer under section 62 is separate and distinct from the claim against the insured, and insurers should not therefore be joined to proceedings until a judgment or order establishing the insured's liability has been obtained by the plaintiff against the insured.
The court consequently struck out the proceedings against the insurer on the basis that the case failed to disclose a reasonable cause of action or, alternatively, because there was no privity of contract between the plaintiff employee and the defendant employer's insurer.
In the second case, Yun Bing Hu v Duleek Formwork Limited (In Liquidation)3, the court considered section 62 in similar circumstances, where an employee attempted to enforce a judgment against his employer's liability insurer, who had been joined to the proceedings when the insured went into liquidation.
The insurer had declined to cover the claim because the insured had breached a condition precedent of the policy in failing to pay a policy excess of €1,000. The insurer also argued that there was no privity of contract between it and the plaintiff and that the only party entitled to challenge the decision to decline cover for the accident was the insured and no such challenge had been brought. The insurer submitted that the purpose of section 62 was to ring-fence insurance monies to meet claims made on the policy and to ensure that monies specifically to deal with those claims under the policy did not disappear into the general fund for the benefit of other creditors, i.e. it was not to provide a plaintiff with a remedy against an insurer where there was no privity of contract.
The plaintiff actually accepted that there was a valid repudiation by the insurer as a result of the breach and sought to remedy the breach himself by offering to pay the outstanding excess.
The court was satisfied that the plaintiff had no privity of contract with the insurer and that he could not seek to enforce the insurance contract, particularly given that he did not dispute that the insured's breach of a condition precedent of the policy had repudiated the contract. On that basis, the court held that the plaintiff's claim disclosed no reasonable cause of action against the insurer and ordered that it be struck out. The court expressed sympathy for the plaintiff's position but held that he could not remedy the insurer's breach of the policy by paying the excess.
In summary, the court's decisions in McCarron and Yung Bin Hu confirm the following key principles in relation to claims brought against insurers under Section 62:
(a) Liability must be determined in the underlying claim against the insured before the insurer is joined to the proceedings or separate proceedings are brought against the insurer.
(b) The court will recognise a valid repudiation by an insurer.
(c) A plaintiff cannot remedy a breach by an insured of a condition in its insurance policy.
The principles provide helpful clarification on the application of section 62 and serve to limit (or at least more clearly define) its scope, which may reduce liability insurers' exposure to section 62 claims going forward.
1High Court December 3 2012, (2012 IEHC530)
21989 1 IRLM 803
3High Court February 5 2013, (2013 IEHC15.)