THE INSURER PAID THE COMPANY BECAUSE YOU WERE CLAIMING AGAINST IT BUT DOES THE COMPANY HAVE TO PAY YOU? COURT OF APPEAL DECISION CONSIDERED

One of the fundamental rules of litigation is to take care that the person you are suing actually has the money to pay damages (and costs).  Often damages are covered by an insurer, however there can be problems if there is no insurer or the insurer refuses to indemnify.  Here we look at a slightly different situation, the insurer had paid the money it was liable to pay under the claim but it was paid directly to the insured company. That company subsequently went into liquidation.  Did the claimants have any right to that money?

(Remember – before you issue proceedings you have to make sure its worth the candle…)

“Harrington stands in the way of an argument that the proceeds of an insurance policy in the hands of the insured are subject to a trust in favour of a third party merely because the insurance proceeds are specifically referable to that third party’s claim.”

KEY PRACTICE POINTS

Most litigators will be more interested in the result in the case than the method by which the court reached its conclusion.  This has profound practical implications.  An insurer can hand over sums to the defendant and the claimant will have no claim over that money. It is an important factor to be borne in mind if there is risk that the defendant may go into liquidation.

THE CASE

Desai & Anor v Wood & Anor [2025] EWCA Civ 906

THE FACTS

The claimants asserted (but had not established) a claim in professional negligence against the defendant Boscolo Ltd.  The defendant company had the benefit of professional indemnity insurance.  Shortly before the company went into voluntary liquidation the insurer paid to it the limit of indemnity under the policy (£250,000). This relieved the insurer from any further liability in respect of the claimants’ claim.

THE CLAIMANTS’ CLAIM

The claimants sought an order that the insurance proceeds that remained (£246,000) were held on trust for them.

THE JUDGMENT AT FIRST INSTANCE

At first instance it was held that the insurance proceedings belonged beneficially to the company alone.

THE CLAIMANTS’ UNSUCCESSFUL APPEAL TO THE COURT OF APPEAL

Put shortly the Court of Appeal rejected the claimants’ appeal. It held that there was no implied term that the proceeds would be held for the claimants. It further rejected the argument that there was an “implied trust” or a constructive trust.

RIGHTS UNDER THE THIRD PARTY (RIGHTS AGAINST INSURERS) ACTS

The Third Party (Rights against Insurers) Act 2010 did not assist the claimants. The insurer had compromised its obligations in full by making the payment to the defendant before the company had gone into liquidation.

“40. The 1930 Act sought to cure that problem by providing for a statutory assignment of the rights of the insured under a liability insurance policy to the third party claimants to whom the insured is liable, in the event that the insured suffers one or other of a series of insolvency events, such as the commencement of a voluntary or compulsory winding-up. The 1930 Act was replaced by the Third Party (Rights against Insurers) Act 2010 (the “2010 Act“) which provides for a similar assignment of rights.

41. It is common ground that the 2010 Act did not apply in this case to cause an assignment of the Company’s rights under the Policy in favour of the appellants, because by the time the Company went into voluntary liquidation its rights under the Policy – so far as any claim relating to its liability to the appellants was concerned – had been compromised by payment of the Insurance Proceeds by RSA to the Company under Claims Condition 7.

42. Harrington stands in the way of an argument that the proceeds of an insurance policy in the hands of the insured are subject to a trust in favour of a third party merely because the insurance proceeds are specifically referable to that third party’s claim.”

THE CONCLUSION: THIS MAY RUN COUNTER TO COMMON SENSE – BUT IT IS THE LAW

The claimants action on this issue failed. There is no principle of law that money handed over by an insurer is held on trust for the party bringing an action against the defendant.

“90. The hardship that this conclusion creates for the appellants stems in large part from the facts that (1) RSA is entitled under the Policy to compromise the insurance claim by paying a sum equal to the limit of insurance to the Company and (2) the Company is free to use that sum to fund the defence of the appellants claim.

91. In a case where insurance proceeds are paid in respect of an established liability, the conclusion I have reached against the implication of a term might be said (as the Court of Appeal in Harrington said of the conclusion in that case) to be one that “runs counter to a common sense view of the proceedings”. That is particularly so where insurance proceeds are received by the insured shortly before its liquidation, given that, had the payment been delayed, the right to receive it would, upon liquidation, have been transferred to the third party claimant. That consequence follows, however, from the long-established position in law, as confirmed in Harrington, and the fact that the 2010 Act identifies – so far as the facts of this case are concerned – going into liquidation, and no earlier point, as the trigger-point for an assignment of rights to third parties.

92. The conclusion does not, moreover, preclude parties seeking to provide, by express terms, protection against an insured’s insolvency, whether by grant of a proprietary right or security interest.”

RELEVANT WEBINARS

Will an insurer pay for this? The Third Party (Rights Against Insurers) Act 2010 Act, the Road Traffic Act, the MIB and other routes considered, webinar 16th September 2025, booking details available here. 

For most claimants it is not feasible to issue proceedings unless an insurer is liable to pay. This webinar looks at the routes by which a claimant can attempt to ensure that an insurer provides a remedy.

This webinar will cover:

• The Third Party (Rights Against Insurers) Act 2010 considered
• Case law and the TPRAG 2010 – how effective has it been?
• The Third Party (Rights Against Insurers) Act 1930
• Section 151 of the Road Traffic Act
• When is the MIB liable to pay?
• The pitfalls of the Road Traffic Act and dealing with the MIB.
• Looking at the claimant’s own home insurance – when this may provide a remedy