Discontinued Business Group Update - July 2011

Whether claim by insured under liability policy was time-barred and when did the "claim" arise?

William McIllroy (Swindon) Limited and others v Quinn Insurance Limited [2011] EWCA Civ 825

A third party alleged that the insured had negligently caused a fire which damaged its property. The insured denied liability but notified its public liability insurer. After the third party had written a letter of claim to the insured, the insurer denied liability (on the ground that the insured had breached a policy condition). In due course, a default judgment was entered against the insured and damages were later assessed by the court. After the insured went into voluntary liquidation, the third party claimed under the Third Parties (Rights against Insurers) Act 1930.

General Condition 16 of the public liability policy provided as follows: "Any dispute between the Insured and the [Insurer] on our liability in respect of a claim...shall be referred within nine months of the dispute arising to an arbitrator...If the dispute has not been referred to arbitration within the aforesaid nine month period, then the claim shall be deemed to have been abandoned and not recoverable thereafter".

It was common ground at first instance that "claim" in General Condition 16 meant the claim by the insured against the insurer (and not a claim by a third party against the insured). Post Office v Norwich Union [1967] establishes that until the liability of the insured has been established, and the amount of liability has been ascertained, an insured cannot sue its insurer. However, the trial judge held that, as an insured can seek a declaration that the insurer is in breach of a policy obligation, in this case a dispute had arisen as soon as the insured had denied liability. Since that dispute was not referred to arbitration within 9 months, the judge held a claim against the insurer was now timebarred. An appeal was brought and the Court of Appeal has now allowed that appeal.

The Court of Appeal regarded the judge's decision as unfair, since it required the insured to have started arbitration within 9 months of the insurer repudiating liability, even though the insured was denying liability for the fire and its liability to the third party would probably not have been established during the 9-month period. Sir Henry Brooke said that no dispute could have arisen between the insured and the insurer on the insurer's liability unless and until the insured's liability was established. Rix LJ, on the other hand, accepted that it is possible for an insured to sue for a declaration rather than an indemnity but posed the question "have the parties agreed for a 9 month time bar even in a situation where the only dispute which has arisen between the insurer...