Establishing liability under the Third Parties (Rights against Insurers) Act 2010 - Scotland Gas Networks Plc v QBE UK Ltd [2024] CSOH 15

The Scottish Court of Session has, for the first time, considered what is required to establish a ‘liability’ for the purposes of the Third Parties (Rights against Insurers) Act 2010 (the “2010 Act”). In this matter, the Court found that a ‘decree in default’, issued due to the insolvent Insured’s failed to appear at a procedural hearing, was sufficient to establish ‘liability’.

The decision is significant as, while insurers would usually have the right to ‘look behind’ a decision or settlement to form a view on whether the insured did, in fact, have an underlying liability (and, therefore, a right to an indemnity), the 2010 Act operates as an exception to this general rule in these circumstances. The case highlights the risks for insurers whose insureds face insolvency and fail to defend a claim in full, or at all.

Background

This case related to alleged damage to a gas pipeline running adjacent to a quarry operated by a company within the Skene Group (the “Insured”). The Claimant, Scotland Gas Networks, is the statutory body responsible for the maintenance of gas pipelines in Scotland. The Claimant alleged that the Insured acted outside the scope of their quarry operations permit, resulting in the fracturing of rock between the face of the quarry and the pipeline, and damage to the pipeline itself. The result was that the pipeline could not operate within an appropriate margin of risk, and the pipeline had to be diverted away from the quarry to prevent further damage occurring.

The Claimant raised proceedings against the Insured seeking recovery of £3 million for the costs of repairing damage to the pipeline and this diversion. The Insured subsequently entered into liquidation on 14 June 2017, and was eventually dissolved on 8 January 2020.

On 15 November 2017, five months after its insolvency, the Insured failed to appear at a procedural hearing. The Scottish Court granted a ‘decree in default’ against the Insured for the full £3 million sought. The Claimant then sought to enforce that decree under the 2010 Act, as against the Insured’s public liability insurers under a policy which included cover for claims arising from damage to third party property.

The 2010 Act

The aim of the 2010 Act was to provide a mechanism for potential claimants to, in certain circumstances, recover losses due from an insolvent party directly from that party’s insurers. In particular, it removed the need for a claimant to successfully establish a liability on the part of the insolvent insured before being able to pursue insurers.

This decision, however, considered how the 2010 Act would affect a  claimant where they proceed against an insolvent party and receive a decision that they seek to enforce against insurers. 

Under the 2010 Act, assuming various conditions are met, a third party has a right to pursue insurers directly where an insolvent insured incurs a ‘liability’ to them. This decision considered two issues:

1. Whether a decree by default was sufficient to establish a ‘liability’ pursuant to s1(4) of the 2010 Act; and
2. If there was a liability, whether this liability was covered under the terms of the insurance policy.

Establishing a Liability

The construction of s1(4) of the 2010 Act is not one the Courts have considered previously. The Claimant’s position was that the Act should be read simply – it states a ‘decree’ is sufficient to establish that a liability exists, and there is no distinction made between the types of decree which the Courts can issue.

Insurers’ principal position was that to ‘establish’ a liability there needed to be some consideration of the merits of the claim. A decree in default was discretionary and resulted from a liability arising from a failure to engage with the court process, rather than being a decision which affirmed a pre-existing liability.

Insurers’ alternative position was that the Claimant can gain no better rights against insurers than the insured had. That position was well accepted under the previous legislation (the 1930 Act). It is a general principle of insurance law that, to obtain indemnity, an insured must show that: (i) it had an actual legal liability; and (ii) a settlement or judgment alone is not determinative of liability. That is, an insured cannot manufacture a liability which did not already exist by either entering into a settlement or allowing judgment to pass against it. It remains open to an insurer to dispute that the insured was actually liable, either at all or on the basis specified in the judgment (see, AstraZeneca v XL Catlin [2013] EWCA Civ 1660). The interpretation put forward by the Claimant would cut across that right.

The Court’s Decision

The Scottish Court agreed with the Claimant. In reaching his decision, Lord Richardson noted that the 2010 Act was drafted recognising that this area of law needed reform. Its aim was to avoid additional time and cost by removing the need for claimants to proceed against the insured and their insurer separately and combining proceedings where that was possible.

In that context, Parliament prescribed the routes under which liability for the purposes of the 2010 Act could be established, one of which was a decree. The Court agreed with the Claimant that no distinction was made between the types of decree, they were all equally capable of giving rise to a relevant liability for the 2010 Act. The Court considered that that was in line with the desire to achieve certainty in judicial decision making and that there was no basis to imply that Parliament required consideration of the merits as part of that process.

Therefore, while insurers would usually have the right to ‘look behind’ a decision or settlement to form a view on whether the insured did, in fact, have an underlying liability (and, therefore, a right to an indemnity), the 2010 Act operates as an exception to this general rule in these circumstances. Requiring the potential claimant to, again, prove their claim would defeat the purpose of the 2010 Act.

Cover under the Policy

The overall issue of cover under the policy was held over until after a full trial. The Court did, however, comment on specific issues raised by the parties.

The first of these was whether liability established by a decree in default falls within the scope of the policy. The Court held that it did – while the issue of the decree does trigger a separate liability, that decree is inextricably linked to the action in which it is pronounced. The ‘judicial novation’ of the requirement to fulfil the terms of the decree from the insured to its insurers does not unlink those issues.

In this case, the decree in default arose from a claim seeking payment for losses resulting from damage to property, and so that is the liability which is to be considered under the policy.

Comment

This is the first decision focussing on this significant difference in the wording and approach of the 2010 Act from its predecessor. The Court has reinforced the policy aim of the 2010 Act of preventing duplicate litigation; the Court put forward a limited exception to the general rule that insurers can ‘look behind’ the terms of a decision between a claimant and its insured to ascertain whether there is truly a legal liability.

Whilst, that approach may be justified within the limited scope of this Act. It does, however, highlight the risks for insurers should an insured facing insolvency fail to defend a claim in full, or at all. In that scenario, insurers’ only recourse is likely to be the policy’s terms and conditions, and a breach of any obligation on the insured to fully defend its position and keep insurers updated on the claim. Those risks are higher for loss occurring policies, where insurers do not necessarily have the benefit of a notification clause to ensure the risk of a claim has been highlighted to them. 

The decision also suggests that the scope of the 2010 Act would extend to decrees passed in absence i.e. where there has been a failure to enter appearance/defences in an action at all. This is the principal route where a decision without any consideration of the merits could occur under the Civil Procedure Rules in England & Wales, as an application for summary judgment or ‘strike out’ does require an assessment of whether a party has any ‘real prospect of success’. As seen here, there is no equivalent assessment of the merits of the claim by the Scottish Court, who have discretion to grant decree of default at any point should a party fail to comply with procedural steps of the court.