The High Court was recently asked to consider whether a professional negligence claimant had proprietary rights over an insurance indemnity payment that had been made to the defendant in relation to the liability caused by the claim. The answer? A resounding 'no'.
Background: Allegedly negligent designers go into liquidation
Boscolo Ltd had contracted with Messrs Desai and Shah (in this case the "Respondents") to provide architectural and interior design services for their new residential apartment in Hampstead. They subsequently notified Boscolo that they intended to bring a claim for breach of contract and Boscolo duly notified its PI insurer.
On 19 August 2021, prior to legal proceedings being issued, the insurer exercised its right under the policy to pay over to Boscolo the £250,000 limit of indemnity and relinquish control of the defence.
Legal proceedings were then issued by the Respondents against Boscolo and, just three weeks later, the company entered a creditors' voluntary liquidation. Boscolo's bank balance of £246,000, which consisted of the money paid by the insurer, was its only realisable asset. Meanwhile it also owed its former director and owner £250,000 and just over £34,000 was owed to trade creditors.
The Respondents claimed that the £250,000 insurance payment was held by Boscolo Ltd (now in liquidation) on trust for their benefit and so could not be included in the general distribution of assets to creditors but should be paid directly to them.
Boscolo's liquidators disagreed and applied for directions from the court under s. 112 of the Insolvency Act 1986 to resolve the dispute.
No implied term
The contract between the Respondents and Boscolo included, as most such contracts do, an obligation on the part of Boscolo to maintain professional indemnity insurance. The Respondents argued that it was an implied term of that contract that any insurance monies received in respect of a claim by the Respondents would be held on their behalf by Boscolo either as their agent or trustee.
HHJ Paul Matthews disagreed with the Respondents' interpretation of the contract. There was no basis on which to construe the contract as requiring Boscolo to obtain insurance in which the Respondents would have a proprietary interest. A term to that effect could only be implied if it was so obvious as to 'go without saying' or if it was necessary in order to give business efficacy to the contract. However, in this case the contract worked and made business sense without such a clause being implied.
No constructive trust
The Respondents also argued that the money should be held on trust on their behalf either because it would be 'unconscionable' for Boscolo to benefit from the payment, or to prevent the unjust enrichment of Boscolo.
Again, HHJ Matthews disagreed. There was nothing 'unconscionable' about the payment being made by insurers to Boscolo in reliance on the terms of the insurance policy. The insurance policy had not been put in place for the joint benefit of Boscolo and the Respondents, it existed before they entered into their contract. The money had not been paid to Boscolo by mistake, fraud, theft or breach of trust and it could not be said that the money had 'reached the wrong hands' as it had been correctly paid to the insured under the policy.
Further, there was no basis for claiming Boscolo had been unjustly enriched. That argument failed at the first hurdle because it could not even be said that the payment received by Boscolo was worth more than its rights under the insurance policy, i.e. there had been no enrichment, unjust or otherwise. Even if there had been, that enrichment would not have been at the expense of the Respondents, since they had no personal rights over the insurance policy, and it could not be said to be unjust.
Conclusion: a gap in the protection provided by the Third Party (Rights Against Insurers) Act 2010
The inevitable conclusion of this was that the indemnity payment would not pass directly to the Respondents. Should their claim against Boscolo succeed the Respondents would instead have to await a payment in the insolvency like any other creditor.
This judgment effectively confirms that claimants generally have no more interest in the assets of an insolvent company than any other creditor.
However, perhaps the most important lesson stems from the unfortunate timing of the Respondent's claim. Had the Respondent's issued their claim before Boscolo went into liquidation, Boscolo's rights under the policy would have transferred to the Respondents under s. 1 of the Third Party (Rights Against Insurers) Act 2010. However, because the insurers paid the limit of indemnity out before the insolvency event, Boscolo no longer had any rights to transfer under that Act and the Respondents were left out of pocket.
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