On 24 October 2024 the Inner House of the Court of Session (Scotland’s Civil Appeal Court) provided its opinion in Scotland Gas Networks (SGN) PLC against QBE Limited and others. This ought to be of interest to insurers across the UK because the opinion of the court provides guidance on the mechanism for challenge to a judgment or decree against their insured, which is subsequently presented for payment under S.1 of the Third Party (Rights Against Insurers) Act 2010.
The purpose of S.1 is, in appropriate circumstances, to provide a claimant with direct access to the indemnity due from an insurer when its insured has incurred liability and is a relevant person for the purposes of S.4. A relevant person includes a legal person subject to insolvency, bankruptcy, sequestration, administration, and similar proceedings.
The key change introduced by the 2010 Act from the preceding Act was to streamline the previous two-stage process under the 1930 Act (by which a claimant would have to first establish the liability of the insured person and only then be permitted to bring a claim direct against the insurer). Further to the 2010 Act, this can now be rolled up into a single action so that the liability of the insured and the right to indemnity from the insurer could be established in a single action.
Whether or not a single action or two actions are required will turn on the facts and circumstances of each case and in particular when the insured becomes a relevant person. Often where there is uncertainty around indemnity, it will be the very finding of the insured’s liability for a claim which results in their bankruptcy, administration, etc. and causes them to become a relevant person.
Initially SGN had brought a claim directly against QBE’s policyholder. Insurers initially entered a defence for the policyholder but subsequently withdrew from the conduct of that defence due to uncertainty around indemnity. Following this decision the action proceeded for a period. Ultimately the policyholder failed to maintain a defence through to trial and a decree in absence (default judgment) was entered against it due to this failure. At this point it became a relevant person. It was that decree/judgment which formed the basis for the proceedings in SGN v QBE and others relying on the 2010 Act.
There were two significant points raised by insurers in defence. The first, and of significance here, was that insurers were entitled to challenge the validity of the underlying decree against its insured because it was a decree in absence rather than a decision based on the merits of the case after evidence.
Insurers argued that they were entitled to challenge the underlying judgment because this was possible under the 1930 Act. This argument was based upon the proposition that to trigger indemnity the policyholder/person transferred rights under the 1930 Act was under an onus to demonstrate that it had, in all the facts and circumstances, incurred an actual liability in respect of the claim to the satisfaction of the insurer – see for example AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd & Anor [2013]1 CLC 479.
The Scottish Appeal Court rejected this proposition. It did so by distinguishing all of the 1930 Act decisions as inapplicable to the 2010 Act regime. The court highlighted that the previous regime was “inconvenient” and that the purpose of the 2010 Act had been to remove inconvenience. On a plain reading of the Act, the court’s job was to establish whether the insured’s liability had been constituted in a way which was consistent with the requirements of S.1(4) of the Act; and then to determine if and to what extent the policy required the insurer to indemnify its insured for that liability.
The appeal court went on to consider if there was any distinction to be drawn between an undefended decree/default judgment and a decree in foro (based on the merits after hearing the case) when considering S.1(4). QBE’s argument was that decrees in absence were of a different character to decrees in foro. It argued that a decree in absence was a punishment for procedural default and that this was different. It argued that this had been the approach under the 1930 Act and that the intention of the Joint Law Commission/Parliament could not have been to change this when introducing the 2010 Act.
The Scottish Appeal Court rejected this argument. It did so on the basis that such orders are not mere procedural punishment for default in Scotland. Such orders have the same effect as decrees in foro. They are enforceable and they are res judicata (sufficient to bar future proceedings arising out of the same matter between the parties) and so they are more than a procedural remedy. It was acknowledged that while such default orders may be easier to unwind than decrees in foro, that did not make them any less a decree or judgment for the purposes of S.1(4). The appeal court found support for this proposition in the wording of S.1(4) which simply refers to decree or judgment. There is no qualification that “decree” must be a decree in foro nor is there express exclusion of decrees by default. The same applies for “judgment”.
The result was that the only defence left open to insurers at this stage was the second leg of its defence which was whether or not the policy would have operated to indemnify their insured in respect of the liability constituted in the decree.
Where the single stage process created by the 2010 Act is followed then insurers will have the opportunity to defend on liability, quantum and indemnity. There will always be a risk that a two-stage process may develop and that remains a route under the 2010 Act. Sometimes that will be in insurers’ hands because they may elect to withdraw indemnity before or during the life of a claim against the insured or it may not be because the insurer may be unaware of the initial proceedings or have delayed notice.
Where there is a risk of a two-stage process in Scotland, the insurer may wish to insert itself into those proceedings as a Party Minuter. That is a party which, though not the defender (respondent), has an interest in the outcome of the proceedings and such may make representations on liability and quantum whether or not the defender chooses to do so. This option was available to QBE at the point of withdrawing from the original proceedings and may well have been considered.
Where the insurer is unaware of the first proceedings until there is a decree/judgment the decision in SGN v QBE and others dictates that the appropriate route by which to launch a challenge over the fact or amount of the insured’s liability in the first proceedings is to unwind that decree in those original proceedings in order to become a party and make representations about liability and quantum. Where the insurer was not a party to the original action and is uncertain of its position on indemnity, it may find that the only way to do this is an action for reduction. The recent opinion from October 2024 in Duncan Andrew Alexander Orr; Aileen Orr and Dao Farms Limited v UK Agricultural Lending Limited - CA18/24 supports the proposition that a person who was not party to the original proceedings may seek to reduce a decree (although this attempt failed to establish a suitable challenge to the original decision).
Any perceived unfairness about a decree in absence/default judgment is mitigated to some extent in Scotland where the bar to having such a decree recalled is lower than where the decree is in foro. “In absence” there is no need to show exceptional circumstances. However, an insurer would be expected to: (1) set out why in the whole circumstances of the case on the true facts and relevant law the decree ought not to have been granted; and (2) set out how a decree in absence came to be granted without any opposition being stated to it as consideration of this aspect will be an important factor.
The foregoing indicates that where the decree in absence is in foro and the insured subsequently becomes a relevant person, it will be a long way back for insurers and they really ought to enter the original proceedings as a Party Minuter if at all possible.
Clearly there are a number of factors to weigh when considering the best approach to liability claims where there are questions around policy indemnity. Unfortunately, certain key factors may be unknown, such as: are there proceedings; is there a defence; or will the insured later become a relevant person?
The decision in SGN v QBE and others demonstrates that insurers will only be permitted one opportunity to defend on liability and quantum and it will be expected that such opportunity is taken at the earliest stage (in that case it was in the original proceedings). In some ways the situation here is on a par with the decision a motor insurer must take when presented with a claim/decree under the Road Traffic Act. Decisions will need to be taken quickly, decisively and with a keen eye to what is most economical.
While decisions from Scotland are not technically binding in England and Wales this Court of Session decision on the interpretation of S.1(4) of the 2010 Act is authoritative.
If you would like to discuss this topic further, then please get in touch.
Mark McCluskie, Partner & Regional SIG Co-Lead
Email: mmccluskie@keoghs.co.uk
Ghazala Khalid, Partner & Coverage SIG Member
Email: gkhalid@keoghs.co.uk
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