Freakley & Ors v Centre Reinsurance International Company & Anor

Section 1(3) of the Third Parties (Rights against Insurers) Act 1930 invalidates contractual provisions which, on a statutory insolvency event, cancel, prejudice or reduce rights transferred to a third party in respect of the insured’s liability. It does not invalidate contractual machinery which transfers claims-handling control to the insurer where that machinery preserves the substance of the indemnity.

Claims-handling expenses incurred by the insured but paid by the insurer or reinsurer form part of Ultimate Net Loss. Before the Retained Limit is reached, the insurer is entitled to reimbursement. After that limit, the insurer bears the expenses, which count towards the Limit of Insurance. Reimbursement liabilities may rank under section 19(5) of the Insolvency Act 1986.

The proceedings arose from the administration of T&N Limited and concerned an asbestos liability policy issued by Curzon Insurance Limited and wholly reinsured by the respondents. The administrators challenged the reinsurers’ entitlement to control asbestos claims after T&N entered administration, their liability for claims-handling expenses, and the priority of any reimbursement claim.

Mr Justice Blackburne’s judgment, reported at [2004] EWHC 200 Ch, held that claims-handling rights had transferred to the insurer and reinsurers, that claims-handling expenses formed part of Ultimate Net Loss and were reimbursable by T&N, but that reimbursement did not rank as an expense of the administration. The administrators appealed on the first two groups of issues. The reinsurers cross-appealed on the reimbursement priority issue and on the construction of the claims-handling provisions. The central questions concerned the effect of the 1930 Act and the proper treatment of claims-handling expenses.

1. Disposition. Chadwick LJ gave the leading judgment. Latham LJ agreed, reserving his position on the point addressed by Arden LJ. Arden LJ agreed on the operative issues but expressed reservations concerning the effect of section 1(4)(b) of the Third Parties (Rights against Insurers) Act 1930. The administrators’ appeal was dismissed. The reinsurers’ cross-appeals on issues 4 and 10 were dismissed, but their cross-appeal on issue 14 was allowed to the extent stated below.
2. Statutory transfer and claims handling. Section 1(3) of the 1930 Act is directed to contractual provisions which, on a statutory insolvency event, alter rights relating to the insured’s liability to the third party so as to cancel, prejudice or reduce rights transferred under the Act. It is not directed to every right existing between insurer and insured. The contractual transfer of claims-handling control on an Insolvency Event did not materially prejudice the third party’s transferred indemnity rights. It was designed to preserve the substance of those rights and was therefore effective. The reinsurers acquired the relevant rights under the reinsurance agreement.
3. Claims-handling expenses. Expenses incurred in defending claims against the insured on the insurer’s instructions are properly regarded as incurred by the insured, even if paid by the insurer or reinsurer. The reference to amounts paid in fact by the Policyholder therefore included amounts incurred by the Policyholder and paid by the insurer. Those expenses formed part of Ultimate Net Loss and counted towards the applicable limit.
4. Reimbursement. Before Ultimate Net Loss reached the Retained Limit, the insurer was not liable to indemnify the insured for claims-handling expenses. The contractual allocation of risk therefore required T&N to reimburse expenses paid by the insurer following the transfer of claims-handling control. After the Retained Limit, the insurer was liable to pay such expenses without reimbursement, subject to their counting towards the Limit of Insurance.
5. Administration priority. Claims-handling expenses were necessary to identify asbestos creditors and advance the statutory purposes of the administration. Although paid by the reinsurers, liabilities incurred under their contractual claims-handling rights were properly treated as liabilities incurred by the administrators in carrying out their functions under section 19(5) of the Insolvency Act 1986. The court retained control over what expenses were necessary and could give directions.
6. The respondents received 85 per cent of the costs of the appeals and cross-appeals, and the administrators were ordered to pay 65 per cent of the reinsurers’ costs below, with £120,000 paid on account. Permission to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division). In [2005] EWCA Civ 115, the administrators’ appeal was dismissed. The reinsurers’ cross-appeals on issues 4 and 10 were dismissed, while the cross-appeal on issue 14 was allowed in part and the order was varied.
2. High Court, Chancery Division. Mr Justice Blackburne’s decision, [2004] EWHC 200 Ch, held that claims-handling rights had transferred to the insurer and reinsurers and that claims-handling expenses formed part of Ultimate Net Loss and were reimbursable by T&N. He rejected priority for the reimbursement liability as an expense of the administration.