Limitation in claims against insurers under the Third Parties (Rights against Insurers) Act 2010

United Kingdom

In one of the first decisions on limitation under the Third Parties (Rights against Insurers) Act 2010, the Leeds County Court decided that, for claims against insurers, time continues to run for limitation purposes even after the insolvency of the insured.  This is in contrast to the position under the Third Parties (Rights against Insurers) Act 1930, where the courts had held that limitation periods were paused as at the date of the insolvency of the insured.

In Rashid v Direct Savings Ltd, His Honour Judge Gosnell considered the different provisions under the 1930 Act and the 2010 Act, and how to apply the limitation periods under the Limitation Act 1980 in cases where the insured is insolvent. The judge concluded that the principles set out in the case of Larnell (which was a decision relating to the 1930 Act) are not applicable to claims brought under the 2010 Act so that limitation does not stop running at the date of the insolvency event.

Background

14 claimants brought claims against Direct Savings Limited (DSE) for the negligent installation of Cavity Wall Insulation in around 2014/15. DSE argued that another associated company, Direct Savings (Scotland) Limited (DSS), actually carried out the installations and DSS was wound up on 1 September 2020. Both DSE and DSS were insured by the same Insurer. The claimants made applications to join the Insurer and DSS as defendants to the proceedings and the Insurer opposed the applications on the basis that the limitation period for any claim against it under the 2010 Act had expired (the installations taking place in 2014/15 and the applications being made more than 6 years later).  The claimants argued that, pursuant to the case of Larnell, time stopped running for limitation purposes at the date of the winding up of DSS, even though the claim was against the Insurer under the 2010 Act. The judge considered various issues, the main question being whether the claim against the Insurer under the 2010 Act is made within or outside of the liquidation of DSS, and consequently whether the limitation period for such a claim is paused at the date of the insolvency of DSS.

Decision

The judge noted that there are no specific provisions in the 2010 Act or the 1930 Act which answer the question about whether the limitation period continues to run after the insured becomes insolvent.  The usual position for claims against an insolvent company is that the limitation period for such claims is paused from the date of the insolvency event.  The case of Financial Services Compensation Scheme v Larnell (Insurances) Limited (in liquidation) [2006] QB 808 considered whether this pause in the limitation period would also apply to claims by claimants against insurers under the 1930 Act.  Lord Justice Lloyd concluded that, under the 1930 Act, the first stage for a third party is to establish the liability of the insolvent insured and such claim falls ‘within’ the liquidation. Until that liability has been established neither the insured nor the third-party claimant has a right to recover under the policy and therefore, if the claim is not time-barred at the commencement of the insolvency, it does not become time-barred by the passage of further time (as per the normal General Rolling Stock principles). Larnell pre-dated the 2010 Act and so did not consider the application of these principles in respect of the 2010 Act.

In the present case, the Insurer sought to distinguish Larnell and argued that a claim under the insurance policy did not fall ‘within’ the liquidation of DSS. This was because, unlike the 1930 Act, the 2010 Act does not require a claimant third party to first establish liability against the insolvent insured and the third party accrues a direct right against the insurer at the moment of insolvency. The Insurer relied on  five (non-binding) prior unreported judgments, which reached the same conclusion – that Larnell can be distinguished, and that limitation continues to run in a claim against an insurer under the 2010 Act.

The claimants sought to argue that if the Law Commission had intended for limitation to continue to run despite the winding up of a company, they would have recommended this when considering the amendments to the 1930 Act, but they did not do so. Therefore, the claimants argued, the 2010 Act was not intended to amend the previous position on limitation under the 1930 Act as confirmed by Larnell. The claimants also argued that the 2010 Act should be interpreted purposively and not put the claimants in a worse position than they would have been under the 1930 Act, which arguably they were if limitation continued to run despite the insolvency event.

The judge preferred the Insurer’s arguments, agreeing with the five previous (unreported) judgments. The judge noted that the key question was whether the claim against an insurer under the 2010 Act was made within or outside of the liquidation. He considered the answer clear on the basis that the 2010 Act permits a direct claim against an insurer without the insolvent insured having to be added as a party and so concluded that the benefit of an insurance policy was not an asset of the insolvency or of the insured. Reiterating a comment from one of the prior unreported judgments, the judge said that “A claim made against [an insurer], a separate legal entity not subject to [the insured’s] liquidation, for the purpose of enforcing rights against an asset not available to the general creditors, must necessarily be outside the insolvency”. It was an important factor in Larnell that, with a 1930 Act claim, the third party had to first establish liability against the insolvent insured. This does not apply to claims under the 2010 Act. The judge said that “The normal reasoning for suspending the limitation period on insolvency, to enable to liquidator to collect in the company’s assets and distribute them fairly without having to deal with litigation from the company’s creditors does not apply where a Claimant makes a direct claim against [the Insurer] under the 2010 Act”.

The judge was unconvinced by the claimant’s submissions, commenting that one possible reason the Law Commission did not specifically recommend the law on limitation should be changed for the 2010 Act was because it was not aware of the issue. Larnell was only decided in 2005, which was after the Law Commission’s recommendations in respect of the changes to the 1930 Act, drafted in 2001. Therefore, the argument that the drafters of the 2010 Act would not have wanted to put the claimant in a worse position than under the 1930 Act was also rejected – the judge considered it unlikely that the drafters of the 2010 Act seriously considered this point at all.

Larnell was therefore distinguishable and limitation continued to run in respect of the claim against the Insurer under the 2010 Act even after DSS was wound up.

Comment

This case is important for any claimant which is considering when it should bring a claim against insurers of insolvent insureds pursuant to the 2010 Act. Claimants may previously have thought they had unlimited time to bring such claims, relying on the Larnell decision that time is paused at the date of the insured’s insolvency. However, this judgement has confirmed that time continues to run for 2010 Act claims and so this may now cause third party claimants to issue their claim earlier in order to avoid potential limitation issues. Some claimants may already find that they are out of time. On the other hand, the judgment will assist insurers in raising limitation defences to 2010 Act claims. Most importantly, it provides clarity to the application of the Limitation Act to claims under the 2010 Act and to all parties in respect of their applicable rights and defences.

Further reading:

Rashid v Direct Savings Limited [2022] 8 WLUK 108

Financial Services Compensation Scheme v. Larnell (Insurances) Limited (in liquidation) [2005] EWCA Civ 1408