A tale of two Acts – insurers and contribution claims

Summary

Riedweg v HCC International Insurance Plc is the first reported decision on the inter-relationship between the Civil Liability (Contribution) Act 1978 (the 1978 Act) and the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act).  It is a useful reminder of the scheme of the Contribution Act, and the 'same damage' requirement for contribution claims.

The court held that a professional indemnity insurer could not claim a contribution against solicitors in a valuer's negligence case.  The insurer and the solicitors were not liable to the claimant (buyer) for the 'same damage', and the scheme of the 2010 Act made no difference to the outcome; the professional indemnity insurers could not recover contribution from the solicitors. 

Background

There haven't been many reported valuers' negligence decisions in recent years.  However, the background to this case was 'Goldplaza's' allegedly negligent (£8M) over-valuation of a property in 2016, later sold by the claimant buyer for 'only' £5.5M.  Goldplaza's professional indemnity insurers were potentially liable to indemnify Goldplaza under the policy. 

As Goldplaza was insolvent, the claimant buyer had pursued Goldplaza's professional indemnity insurers under the 2010 Act, which (essentially) allows a third party to stand in the shoes of an insolvent insured in respect of liabilities which fall within that insured's cover.   

The question for the court was whether insurers could recover a contribution from the solicitors who had acted for the claimant in the underlying property transaction and who were, therefore, potentially liable to the claimant buyer?

Section 1(1) of the 1978 Act provides that "any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage".  The 'same damage' requirement in the Act provides a broad formulation of the entitlement to contribution. Section 6(1) (broadly) states that "a person [i.e. the contribution defendant, the solicitors in this case] is liable in respect of any damage for the purposes of this Act if the person who suffered it [i.e. the claimant buyer] ... is entitled to recover compensation from him in respect of that damage".

Insurers tried to argue that (i) insurers and the solicitors were both liable to the claimant buyer for the same damage under the 1978 Act - that their liability was coterminous - and that (ii) the 2010 Act allows the claimant buyer to recover compensation from Goldplaza's PI insurer.

The solicitors (obviously) took the opposite position, and argued that the liability of a professional indemnity insurer to indemnify Goldplaza, and the liability of the solicitors to the claimant buyer were not liability in respect of the 'same damage'.  Because the same damage requirement was not satisfied, the PI insurer could not seek a contribution from the solicitors.

The decision

The judge agreed with the solicitors. The purpose of the 2010 Act is to provide a mechanism for a claimant to pursue an insurer directly in respect of the liability of its insured, and for the claimant to stand in the insured's place for that purpose. The insurer's liability is still that which flows from its obligations to the insured, which can only be to indemnify the insured against its liability to a third party. The insurer does not become liable to the third party for the damage caused or allegedly caused by its insured, which it did not inflict. The court followed Bovis v Commercial Union  ([2001] 1 Lloyd's Rep 416).  Bovis involved flood damage to a construction project, and the employer claimed against the contractor (Bovis), who then tried to claim a contribution from insurers.  Bovis' contribution claim was refused; Bovis was liable because it had provided a defective building susceptible to flood damage.  Insurers had not inflicted that damage - the only damage that insurers could inflict was to refuse an indemnity under the policy.  That was not the same damage as Bovis was liable for.

The fact that compensation from the contribution claimant and the contribution defendant might lead to the same or a similar result did not mean that both were liable to the claimant for the "same damage".  Whilst the claimant could seek compensation from both Goldplaza's PI insurers and from the solicitors, that did not help with the 'same damage' requirement. As stated in Royal Brompton Hospital v Hammond, '[t]he facts must be examined more closely in order to determine whether or not the damage is the same'.

The scheme of the 2010 Act (which allows a claimant to stand in the insured's shoes, and to sue an insolvent party's insurer directly, without waiting to establish the existence/amount of the liability) did not help either.  The insurers' liability flowed from their obligations under the policy to the insured (Goldplaza).  The solicitors' liability, on the other hand, flowed from their retainer with the Claimant.  Liability to the claimant for any breach by the solicitors of their retainer was not liability in respect of the 'same damage' as insurers' liability for refusing Goldplaza an indemnity under the PI policy.

Comment

This may not be the end of the saga.  Subject to policy terms, subrogation rights accrue to an insurers once insurers have paid an indemnity or - depending on the terms - at least have an intention to pay. The judgment noted that, if Goldplaza's PI insurers paid out under Goldplaza's policy, they would become subrogated to Goldplaza's rights.  On that basis, insurers would, at that later point, stand in Goldplaza's shoes, and acquire (by subrogation) Goldplaza's right to seek a contribution from the solicitors.

However, and as the judgment noted, no entitlement to subrogation yet arose; nor had it been pleaded.