Despite recognising that their conclusion might be said to be one that “runs counter to a common sense view of the proceedings”, the Court of Appeal held that liability insurance proceeds received by an insolvent company are not held on trust for third party claimants.
It was common ground in this case that the Third Party (Rights against Insurers Act) 2010 did not apply to cause an assignment of the Company’s rights under their insurance policy in favour of the Appellants.
The Appellants, therefore, submitted that it was an implied term of their contract with the Company that any insurance monies received by the Company in respect of a claim by the Appellants were to be held on trust for them.
Dismissing the appeal, Lord Justice Zacaroli (with whom Lord Justice Moylan and Lord Justice Arnold agreed) found that there were “insurmountable difficulties both as regards the requirements for necessity and certainty” of an implied term.
His Lordship held that, even if a term were to be implied, it would not give rise to a trust, as the contract failed to indicate that the Company was required to “ring-fence” the Insurance Proceeds. As a result, the requirements of certainty of intention, subject matter and objects were not met.
The Appellants’ constructive trust argument also failed as the Court of Appeal could not find the Company’s retention of the Insurance Proceeds unconscionable, given that the Appellants had accepted that it could use them to fund their defence.
Ultimately, this judgment will incentivise parties to seek to provide, by express terms, protection against an insured’s insolvency, whether by grant of a proprietary right or security interest.
Read the full judgment here.
