Insurers Beware: Decree by default!

As the name suggests, the Third Parties (Rights Against Insurers) Act 2010 provides third parties with the right to make direct claims against the insurers of a policyholder where the policyholder has become insolvent. Scotland Gas Networks Plc v QBE UK Ltd and others [2024] CSIH 36 establishes that where a third party obtains a default judgment against such a policyholder, the 2010 Act does not allow insurers to dispute the policyholder's liability under that judgment. Lord Tyre's opinion serves as a caution for insurers to be wary of liabilities they may face under the 2010 Act from default judgments.

Background

A "decree" is a formal judgment issued by a Scottish court usually giving one party the right to payment of money, interest and expenses. Decree by default is a final order granted when the other party has failed to engage with the court process by, for example, failing: to appear at court, provide court documents on time or to do something required by the court or the court rules. Crucially, it means that a decree can pass without enquiry into the merits of the case.

Scotland Gas Network Plc v QBE UK Ltd and others

In 2011 a gas pipeline owned by Scotland Gas Networks Plc ("Scotland Gas") was damaged, allegedly by quarrying operations by Skene, a company who had leased and operated the site. In 2015, Scotland Gas sued Skene for £3m in damages for the costs of repairing and diverting the pipeline to prevent further damage. Skene entered into liquidation in 2017 and failed to appear in court at a procedural hearing 5 months after entering into liquidation. As a result, decree by default was granted against Skene for the full amount sought and neither Skene nor their insurers attempted to challenge the decree. Scotland Gas then sought to enforce the decree under the 2010 Act against Skene's insurers.

The 2010 Act

The 2010 Act provides third parties with a means to directly recover losses from an insolvent policyholder's insurer for a claim which is covered by the insurance contract. The third party must establish liability against the policyholder within the terms of the 2010 Act and s.1(4) provides that a judgement or decree does just that. Crucially, the Act makes no distinction between types of decree which the courts can issue.

Is decree by default enough?

The insurers' argued that decree by default should be differentiated from decree given after the court had considered the merits of the claim as it resulted from a procedural default. Lord Tyre disagreed, finding that, crucially, all types of decree were equally capable of establishing liability in terms of the 2010 Act. Lord Tyre explained that "decree" in s1(4) of the 2010 Act was not restricted to decrees given only after consideration of the merits and to uphold such an interpretation would give rise to uncertainty.

Scope of the Policy

The insurers also argued that the loss suffered by Scotland Gas was not an insured risk covered under the policy as it was a form of pure economic loss, something expressly excluded in the policy terms. Lord Tyre considered this could only be determined after hearing evidence and that it remained open to the insurers to argue the loss was not an insured risk. That was true even where the policyholder's liability to the third party had been established in the terms of the Act as in this case.

Wider impact

While the liability of a policyholder to a third party is only one link in the chain required to make an insurer liable to the third party under the 2010 Act, a default judgment is enough to do so, and insurers will not be able to challenge the policyholder's liability without taking steps to have the judgment set aside if that is possible.

While they will still have defences available based on, for example, the policy terms, this may require insurers to become involved in the proceedings between the third party and the policyholder at an appropriate (and perhaps earlier) stage to ensure that they are able to challenge the decision if necessary. The decision ultimately underpins the importance for policyholders and insurers that notification of claims and circumstances are made at an early stage to ensure oversight.

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