Desai & Anor v Wood & Anor ([2025] EWCA Civ 906)
“No Implied or Constructive Trust over Liability Insurance Proceeds Absent Express Agreement or Segregation”

1. Introduction

This Court of Appeal decision arose out of a professional-negligence claim by Mr Dilip Desai and Mr Paresh Shah (“the Appellants”) against Boscolo Ltd (“the Company”), an interior-design practice now in creditors’ voluntary liquidation. Shortly before the liquidation, Royal & Sun Alliance Ltd (“RSA”) exercised a policy clause enabling it to discharge its liability by paying the policy limit (£250,000) to the insured and relinquishing control of the defence. £246,000 of those insurance proceeds remained in the liquidators’ hands. The critical question was whether that sum is held beneficially for the Company (and therefore available to all creditors) or on trust for the Appellants alone.

HHJ Paul Matthews (High Court, Bristol Business & Property Courts) held that the proceeds belonged to the Company. The Appellants appealed, contending that a trust (express, implied or constructive) arose in their favour. Lord Justice Zacaroli, with whom Arnold LJ and Moylan LJ agreed, dismissed the appeal and confirmed that, absent an express contractual arrangement or a statutory assignment under the Third Party (Rights against Insurers) Act 2010, liability-insurance money paid to an insured—even an insolvent one—remains its property.

2. Summary of the Judgment

• The Court of Appeal affirmed the first-instance declaration that the £246,000 balance of RSA’s payment belongs beneficially to the Company.
• No term can be implied (in the design contract or the policy) requiring the Company to hold or apply those monies solely for the Appellants’ benefit once the Company has “reasonable grounds” to doubt its solvency.
• The suggested implied terms failed the traditional business-efficacy/officious bystander tests: they were neither necessary nor capable of certain formulation.
• Even if such terms could be implied, they would not create a trust: there was no intention to segregate the funds, and the Appellants conceded the Company could spend them on defending the very claim.
• Nor did any constructive trust arise on the ground of unconscionability or unjust enrichment; the attempt to invoke the Neste Oy line of authority was incompatible with the Supreme Court’s later decision in Angove’s.
• The long-standing rule in Re Harrington Motor Co (1928) still governs: until statutory assignment occurs (here, on liquidation), third-party claimants have no proprietary interest in liability-insurance proceeds in the insured’s hands.

3. Detailed Analysis

3.1 Precedents and Authorities Cited

1. Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105 – Established that pre-1930 an injured third party had no legal or equitable interest in liability-insurance proceeds paid to an insolvent insured. Lord Hanworth MR and Lord Atkin highlighted the hardship but held that legislative intervention, not judicial innovation, was required.
   Influence: Provided the bedrock principle against which the Appellants' trust argument was tested.
2. Third Party (Rights against Insurers) Acts 1930 & 2010 – Create a statutory assignment of the insured’s rights once an insolvency trigger event occurs.
   Influence: Demonstrated Parliament’s chosen mechanism and timing (post-insolvency), undermining arguments for an earlier, judge-made proprietary shift.
3. Impact Funding Solutions Ltd v Barrington Services Ltd [2017] AC 73 – Addressed the purpose of solicitors’ compulsory indemnity insurance; coined the phrase “paramount purpose” of protecting clients.
   Influence: Cited by Appellants to argue that insurance is procured “for clients’ benefit”. Court accepted the indirect benefit but rejected that as a basis for an implied proprietary entitlement.
4. Cox v Bankside Members Agency [1995] 2 Lloyd’s Rep 437 – CA refused to find a trust over agents’ E&O insurance when proceeds were insufficient for all principals; lack of segregation fatal.
   Influence: Analogous facts; used by Zacaroli LJ to negate creation of any trust where policy permits mingling with general assets.
5. Twinsectra Ltd v Yardley [2002] 2 AC 164 – “Quistclose” purpose trust principles.
   Influence: Appellants’ alternative constructive-trust theory treated as attempt to establish a purpose-limited trust; court found no factual basis for any limitation imposed by RSA.
6. Neste Oy v Lloyds Bank [1983] 2 Lloyd’s Rep 658 & Angove’s Pty Ltd v Bailey [2016] UKSC 47 – Neste’s “last-minute payment” trust disapproved in Angove’s as a remedial (not institutional) trust inconsistent with English law.
   Influence: Foreclosed the Appellants’ “unconscionability” constructive-trust argument.
7. Classic tests for implied terms: BP Refinery; M&S v BNP Paribas; summarised in Ali v Petroleum Co of Trinidad [2017] UKPC 10 – Necessity, obviousness, clarity, consistency with express terms.
   Influence: Framework applied to dismantle the proposed implied terms.

3.2 The Court’s Legal Reasoning

1. Nature of liability insurance and the general law Liability insurance is a personal contract for indemnity: the assured alone owns both policy rights and proceeds (MacGillivray §28-013). Neither policy nor proceeds shift to a third party until statutory or contractual assignment.
2. Implied term analysis a) Necessity and obviousness: Parties did not stipulate any proprietary protection despite drafting a detailed design contract. b) Certainty: Multiple possible trigger points (balance-sheet insolvency, cash-flow insolvency, reasonable apprehension) and states of mind (knowledge, suspicion) defeated the “officious bystander” test. c) Inconsistency: Appellants conceded funds could be used to defend the claim, contradicting the notion of a segregated trust fund.
3. Trust prerequisites unmet Intention to create a trust requires clear segregation and limitation of use; here, none existed. The Company could deploy the money for its own purposes, including adverse litigation spending.
4. Constructive trust rejected Mere insolvency-related hardship is insufficient; Angove’s insists on recognised institutional grounds, not remedial fairness. RSA’s payment letter expressly discharged it and imposed no usage restriction.
5. Statutory context decisive Parliament consciously set the transfer point at the opening of formal insolvency in the 2010 Act; judicial creation of an earlier proprietary right would conflict with that scheme.

3.3 Likely Impact of the Decision

• Transactional practice: Clients engaging professionals may insist on express clauses creating a trust or charge over insurance proceeds, or requiring payment direct from insurers.
• Liquidations: Insolvency practitioners can treat pre-liquidation insurance receipts as company assets unless a pre-existing express trust is demonstrable.
• Insurance drafting: Insurers may see more requests for “non-avoidance” endorsements or third-party loss-payable clauses to bridge the pre-liquidation gap.
• Judicial guidance: Confirms narrow scope for institutional constructive trusts based solely on “unconscionability” post-Angove’s.
• Legislative debate: The acknowledged “hardship” gap (payment days before insolvency) may invigorate calls for amending the 2010 Act trigger or introducing compulsory “direct-pay” mechanisms for certain professions.

4. Complex Concepts Simplified

• Professional Indemnity Insurance: A contract under which an insurer promises to reimburse (indemnify) a professional if the professional becomes liable to a third party (a client) for negligence, up to a set limit.
• Limit of Indemnity: The maximum amount the insurer will pay for any one claim (here, £250,000).
• Credits Voluntary Liquidation (CVL): A statutory process whereby directors choose to wind up an insolvent company and a liquidator realises assets to pay creditors.
• Implied Term: A contractual term read into an agreement by courts to give it “business efficacy” or because it is so obvious both parties must have intended it, even though unwritten.
• Constructive Trust: An equitable remedy that treats a person who has obtained property in circumstances where it would be unconscionable to keep it as holding it for another. English law recognises only certain well-defined categories (institutional, not remedial).
• Segregation: Keeping trust property separate from a trustee’s own money; a strong indicator that parties intended a trust.
• Officious Bystander Test: Imagines a bystander asking the contracting parties, at the time of agreement, whether the suggested term is part of their bargain; they would answer “of course” only if the term is truly implicit.

5. Conclusion

The Court of Appeal’s ruling in Desai v Wood cements a conservative but clear principle: until statutory assignment on formal insolvency or an express contractual arrangement dictates otherwise, liability-insurance proceeds belong to the insured, not to third-party claimants, even where insolvency is looming and the policy was procured for clients’ protection. The decision underscores the high hurdles facing litigants who rely on implied or constructive trusts: necessity, certainty, segregation and recognised equitable doctrines are indispensable. Parties seeking greater security must negotiate it expressly; the courts will not retrofit proprietary rights merely because fairness appears to demand them.