Disclosure of insurance: injunction as a remedy
January 7, 2015
Whether a claimant can enforce an eventual judgment may depend on the defendant having insurance. Finding out about insurance can be relevant to whether to pursue proceedings. However, the case law shows that it can be difficult to obtain disclosure about whether the defendant has effective insurance cover.
Dowling v Bennett Griffin concerned an agreement made in 2001 between a company (APAL) controlled by Alan Phillips (AP), an architect, and the Dowlings, under which APAL agreed to perform architectural and design services on a development project in Hove. The terms of the contract included the following:
“We confirm that we maintain Professional Indemnity Insurance cover of £250,000.00 for any one occurrence … arising out of one event and this will be the maximum of our liability arising out of this agreement.”
The project did not go according to plan, and the Dowlings fell out with AP. County Court proceedings were brought by APAL in 2003 for outstanding fees. The Dowlings counterclaimed for negligence. AP decided not to notify the insurers in order to avoid any increase to insurance premiums and because he was confident that there was no negligence.
The Dowlings succeeded at trial in 2005 both on the fee claim and on their counter-claim. It was not until 2006 that AP notified the professional indemnity insurers of the claim, and by then it was too late. APAL went into insolvent liquidation. The insurers avoided the contract of insurance on the grounds of non-disclosure, misrepresentation and late notification. APAL’s directors and shareholders were AP, who was a chartered architect and a member of the RIBA, and his wife. APAL in liquidation may perhaps have had a claim against its directors for allowing the insurance cover to lapse thereby leaving it with no assets to satisfy the claim. A third party costs order was made against Mr Phillips personally, but the Dowlings only managed to recover £95,000 from him.
The Dowlings then sued their solicitors for negligence in failing to ensure that APAL’s insurance cover was in place. Lewison LJ (with whom the other members of the court agreed) said of the conduct of AP in not notifying the claim that “[s]uch behaviour is, in my view, both irrational and probably dishonest…”. As to what was apparent to the Dowlings’ solicitors in the county court proceedings he said: “I do not think that it would have occurred to a reasonably competent solicitor that an insured professional being sued for negligence would deliberately decide not to notify his insurers of the claim. Still less would it have occurred to him if he had recently been told by his opposite number that a suspicion that APAL was not insured was groundless and that the question itself was malicious.”
Whether APAL had insurance cover was not relevant to the substantive issues in the county court proceedings, and so disclosure would not have been ordered for the purpose of resolving those substantive issues: West London Pipeline and Storage Ltd v Total (UK) Ltd  EWHC 1296 (Comm) declining to follow Harcourt v FEF Griffin  EWHC 1500; XYZ v Various  EWHC 3643 (QB). In XYZ it was decided that CPR part 3.12 (m) enables the court to order disclosure of information about insurance so as to enable the court to manage a case. This did not help the Dowlings because insurance was not relevant to case management of the county court proceedings and the possibility of using CPR part 3.12 (m) was only apparent from the XYZ case.
In the Court of Appeal the principal way in which the Dowlings argued their professional negligence case was that there was an implied term to the effect that APAL would promptly notify its insurers of any claim made against it which could and should have been enforced by injunction. Lewison LJ said that “..[i]n order to persuade the court that a mandatory injunction should be granted there would have to be placed before the court some evidence that the term in question had been breached but there was no such evidence…”. The result was that the Dowlings failed to establish any negligence, and their claim against their solicitors was dismissed.
When judgment has been obtained for a liquidated sum which is covered by insurance the judgment creditor can use section 1 of the Third Parties (Rights against Insurers) Act 1930 (which is still in force and has not replaced by the 2010 Act) to enforce payment from the insurers. Under section 2 there is also a statutory duty to give information to third parties, which arises in the event of bankruptcy or a winding-up order, or following the other events set out in the section. Transfer of the insurance rights occurs on the happening of a section 2 event. This is so regardless of whether judgment has been obtained: Re OT Computers (In Administration)  EWCA Civ 653. None of those events had occurred prior to the insolvent liquidation of APAL.
One has to say that the Dowlings were not served well by the legal system. After 11 years of litigation they had not recovered their losses because of the conduct of the architect described as “..irrational and probably dishonest..”, which was concealed from them.
Was there a remedy? The words “We confirm that we maintain Professional Indemnity Insurance cover of £250,000.00 for any one occurrence…” are a contractual assurance that the maintained insurance cover is effective. The words commencing “we maintain” mean not just that an insurance policy had been taken out, but also that insurance “cover” was being maintained. The contract promised effective continuing insurance cover. That promise included within it a promise to do what was necessary to maintain effective cover. This included (but was not limited to) notification of the claim to the insurers. In principle this contractual promise was capable of specific performance. It was a key to obtaining satisfaction of a judgment, and damages against APAL would not have been an adequate remedy: Beswick v Beswick  AC 58. The risk was of being left with a useless judgment for damages which could not be enforced. The act of notification is a single act capable of being specifically enforced: Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd  UKHL 17.
In these circumstances the Dowlings could have included as part of their counterclaim for damages a claim for specific performance of the promise to maintain insurance cover. Summary judgment could have been sought together with an inquiry as to what steps needed to be taken to maintain effective insurance cover. There would also have been available disclosure under CPR in relation to the claim for specific performance so as to ascertain the form of order to be made on the application.
In paragraph 65 Lewison LJ said: “..In order to persuade the court that a mandatory injunction should be granted there would have to be placed before the court some evidence that the term in question had been breached..”. In the case of quia timet relief it is necessary to show a real threat of a wrong being done. There would have been jurisdiction to entertain an application for an interim injunction on the grounds that a wrong was threatened, but that would have required some evidence of a real threat to break the contract. In contrast the specific performance route does not seek an interim mandatory injunction. Whilst there can be interim mandatory injunctive relief in aid of a claim for specific performance (see Astro Exito Navegacion SA v Southland Enterprise Co Ltd  2 AC 787) this does not affect the analysis that specific performance is itself final relief granted to carry into performance promises made in the contract. There was no clear evidence that the promised effective insurance cover was in place, and there was some indication that it may not be (paragraph 44 CA Judgment: no contact from the insurers, and no expert appointed for APAL to deal with the counter-claim). On a claim for specific performance there can be an issue of whether the contract has been performed and there can be disclosure ordered in relation to that issue.
There was also another route available on the facts once it came to light that AP had not or may not have notified the insurers. The insurance was an asset of APAL. The non-notification made irrationally and probably dishonestly threatened to destroy that asset which was a valuable asset against which a judgment could be enforced. In principle Mareva jurisdiction applied to prevent destruction of the asset. This could have been prevented by appointment of a receiver under section 37 of the Senior Courts Act 1981 to give notice on behalf of the company. Alternatively there could have been an injunction under the Mareva jurisdiction compelling maintenance of the insurance cover by the company.