The court considered appeals from conflicting interpretations of the effect of s1(3) of the 1930 Act on pay to be paid clauses in the event of the insolvency of the insured.
Held: The condition did not purport to avoid the contract or to alter the rights of the parties under the contract in the event of the insured company’s insolvency. The rights of the company and the insurers remained the same after a winding up as they had been before winding up. Lord Justice Stuart-Smith: ‘What is affected or altered by the insolvency or winding up is the ability to enjoy the rights, but not the rights themselves, which remain the same before and after the event, save that upon the winding up the rights are transferred to the third party.’ Lord Justice Bingham set out principles for the interpretation of the 1930 Act: ‘(1) Its primary purpose was to remedy the injustice highlighted in Re Harrington (In re Harrington Motor Co Ltd [1928] Ch 105). Had the 1930 Act governed that case the pedestrian would have been able to enforce his claim directly against the insurer (and he could have done so even if the insurer had already paid the liquidator). But had the Act stopped there it would have been open to the parties to agree that the right to indemnity should cease on bankruptcy or winding up, so that there would be no rights in the insured to be transferred to the injured third party. It was accordingly necessary for the Act to invalidate avoidance clauses of this kind, and that was duly done . . (7) As Mr Justice Slade (as he then was) put it in The Allabrogia [1979] 1 Lloyd’s Rep. 190 . . ‘The manifest purpose of s.1(3) is to make certain that, in any of the events specified in s.1(1), the third party shall be able to take the full benefit of the rights against the insurer, unaltered and undiminished by any provision in the contract which is designed directly or indirectly to cancel, prejudice or reduce such rights in the event of one or more of such events taking place.’
Section 1(3) accordingly provides that the insurance contract shall be of no effect in so far as it purports directly or indirectly to avoid the contract or alter the rights of the parties under it upon the happening to the insured of any of the specified events. This seems to me to be an almost standard provision prohibiting parties from, in effect, contracting out of a statutory requirement. The application of the sub-section requires one to construe the insurance contract between insurer and insured to ascertain whether the rights of the contracting parties are determined or altered under the contract on the happening of one of the specified events. (8) . . . The question posed by Mr Justice Slade in The Allobrogia (sup) (at p.198) was whether the provision under review has the substantial effect of avoiding the contract between the member and the club or altering the rights of the parties upon the happening to the member of any of the events mentioned in s.1(1) of the 1930 Act, and I did not understand any of the parties before us to challenge that approach. In my opinion it is correct.’
Judges:
Lord Justice O’Connor, Lord Justice Bingham and Lord Justice Stuart-Smith
Citations:
[1989] 1 Lloyd’s Rep 239
Statutes:
Third Parties (Rights Against Insurers) Act 1930 1(3)
Jurisdiction:
England and Wales
Citing:
Appeal from – Socony Mobil Oil Co Inc and others v West of England Ship Owners Mutual Insurance Association Ltd (the ‘Padre Island’) (No 2) 1987
. .
Appeal from – Firma CF-Trade SA v Newcastle Protection and Indemnity Association (the ‘Fanti’) QBD 1987
The court considered the effect of section 1(3) on a ‘pay to be paid’ clause in a re-insurance contract.
Held: If, as a matter of construction of the membership rules, the condition survived the making of a winding-up order – which he thought . .
Cited – Re Harrington Motor Co Ltd, Ex parte Chaplin 1928
A person injured in a road accident had obtained judgment for damages against the company, but had been unable to enforce the judgment before the company went into liquidation. The company’s motor insurers paid the amount of the judgment to the . .
Cited by:
Cited – Freakley and Curzon Insurance Ltd v Centre Reinsurance International Company and Another; similar CA 11-Feb-2005
Claims were made for personal injury caused by asbestos. The re-insurers sought declaratory relief against the head insurers, and the administrators of the insolvent company. The administrators sought declarations in turn. Curzon insured the company . .
At first instance – Socony Mobil Oil Co Inc and others v West of England Ship Owners Mutual Insurance Association Ltd (Padri Island) (No 2); Firma CF-Trade SA v Similar (The ‘Fant’) HL 14-Jun-1990
The House was asked as to the effect of section 1(3) of the 1930 Act on policies including ‘pay or be paid’ clauses.
Held: The central question was whether the condition of prior payment was rendered of no effect by section 1(3) of the Act of . .
Lists of cited by and citing cases may be incomplete.
Insurance
Updated: 12 April 2022; Ref: scu.223315