Factual and Procedural Background
The appellants, Plaintiff 1 and Plaintiff 2, asserted claims for breach of contract and/or negligence against Company A, which held a professional indemnity insurance policy (the "Policy") with Company B. Shortly before Company A entered voluntary liquidation, Company B paid Company A the full indemnity limit of £250,000 (the "Insurance Proceeds"), thereby discharging its liability and relinquishing control of the claim. The appellants claimed that the Insurance Proceeds, £246,000 of which remained with Company A's liquidators, were held on trust for them.
Following a reserved judgment, Judge Matthews declared that the Insurance Proceeds belonged beneficially to Company A alone. The appellants appealed this decision.
Company A conducted interior design and project management services, led by its sole controlling director, Director A. The appellants engaged Company A under a written contract dated 13 April 2013 (the "Design Contract") to design a refurbishment for a property. Director A advised the appellants that Listed Buildings Consent was unnecessary, advice which the appellants alleged was negligent, causing loss.
The Design Contract incorporated standard conditions from a professional institute, requiring Company A to maintain professional indemnity insurance with specified minimum cover and duration. The Policy provided a £250,000 indemnity limit per claim and was renewed annually. The appellants notified their claim in 2015, with a formal complaint in 2018.
Company B, under Claims Condition 7 of the Policy, exercised its right to pay Company A the full indemnity limit, thereby relinquishing control of the claim. The appellants issued proceedings against both Company A and Company B, claiming the Insurance Proceeds were held on trust for them. Company A entered voluntary liquidation in October 2021, with the Insurance Proceeds as its principal asset.
The appellants' claim was stayed pending directions from the liquidators regarding the Insurance Proceeds. The judge below determined the liquidators' application, concluding the Insurance Proceeds belonged beneficially to Company A.
Legal Issues Presented
- Whether the Insurance Proceeds paid by the insurer to the insured Company A were held on trust for the appellants.
- Whether an express or implied term of the Design Contract or the Policy imposed a trust or ringfencing obligation over the Insurance Proceeds in favour of the appellants.
- Whether a constructive trust arose over the Insurance Proceeds due to unconscionability or unjust enrichment.
- The applicability of statutory provisions governing third-party rights against insurers in the context of Company A’s insolvency and the payment of Insurance Proceeds prior to liquidation.
Arguments of the Parties
Appellants' Arguments
- The appellants contended there was either an express or implied term in the Design Contract that the Insurance Proceeds were to be held on trust for them.
- They argued for two alternative implied terms: (a) if Company A had reasonable grounds to believe it might be unable to meet the appellants’ claim from its own resources, it would not dissipate or misuse the Insurance Proceeds; (b) if certain conditions were met (including Company A having the relevant state of mind), Company A would transfer or use the Insurance Proceeds solely for the "Paramount Purpose" of compensating the appellants, as derived from relevant case law.
- The appellants further contended that, given Company A had the relevant state of mind upon receipt of the Insurance Proceeds, a trust arose by implication restricting use of those funds.
- They relied on the principle from Impact Funding Solutions Ltd v Barrington Services Ltd concerning the "Paramount Purpose" of professional indemnity insurance policies to support their implied term arguments.
- The appellants also argued that the circumstances surrounding the payment of the Insurance Proceeds gave rise to a constructive trust, analogizing to cases where it would be unconscionable for the insured to retain insurance monies.
Company A and Insurer's Arguments
- The judge below rejected the appellants’ claim of an express or implied trust or ringfencing obligation, a position not challenged on appeal.
- It was submitted that the Policy’s payment to Company A discharged the insurer’s liability and relinquished control, with no contractual or policy restriction on Company A’s use of the Insurance Proceeds.
- There was no basis for implying terms restricting Company A’s use of the Insurance Proceeds, particularly given Company A’s ability to use those funds to defend the appellants’ claim.
- It was argued that statutory law and precedent establish that third-party claimants do not have proprietary rights over insurance proceeds held by the insured prior to insolvency or liquidation.
- It was contended that the policy’s dual purpose was to benefit both Company A and indirectly its clients, but this did not create a trust or ringfencing obligation.
- The insurer’s correspondence confirmed no restriction on Company A’s use of the Insurance Proceeds.
- Constructive trust arguments were rejected on the basis that no unconscionability arose given Company A’s rights to use the funds.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105 |
Third-party claimants have no proprietary rights in insurance proceeds paid to an insolvent insured; insurance proceeds form part of the insured’s general assets. |
Confirmed that appellants had no equitable or legal right to the Insurance Proceeds held by Company A’s liquidators; established the principle that insolvency triggers assignment of rights under statutory provisions, but only after payment. |
| Impact Funding Solutions Ltd v Barrington Services Ltd [2017] AC 73 |
Interpretation of professional indemnity insurance policies consistent with their "Paramount Purpose" to ensure the insured can compensate clients. |
Used to define the "Paramount Purpose" in the implied term arguments; court found this did not suffice to imply a trust or ringfencing obligation. |
| Cox v Bankside Members Agency Ltd [1995] 2 Lloyds Rep 437 |
Rejection of trust over insurance proceeds in agency relationships absent express terms requiring segregation or trust. |
Supported the court’s finding that no trust arose over the Insurance Proceeds here, as no segregation or fiduciary obligation to hold proceeds on trust existed. |
| Twinsectra Ltd v Yardley [2002] 2 AC 164 |
Circumstances in which a payment for a specific purpose creates a resulting trust. |
Distinguished as inapplicable because no limitation on Company A’s use of Insurance Proceeds was established. |
| Neste Oy v Lloyds Bank plc [1983] 2 Lloyds Rep 658 |
Recognition of constructive trust arising from unconscionability in payments received by insolvent agent for specific purposes. |
Referenced but disapproved by later authority; court rejected constructive trust argument based on unconscionability here. |
| Angove's Pty Ltd v Bailey [2016] UKSC 47 |
Rejection of remedial constructive trusts not recognised in English law; clarified limits of constructive trust doctrine. |
Applied to reject constructive trust claim; held no institutional constructive trust arose over Insurance Proceeds. |
| Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 10 |
Test for implication of terms: necessity and obviousness, not mere reasonableness or fairness. |
Guided the court’s analysis on whether to imply terms restricting use of Insurance Proceeds; terms not implied due to lack of necessity and certainty. |
| Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 |
Requirement that implied terms be capable of sufficient clarity and precision. |
Supported the court’s finding that the appellants’ proposed terms were too vague and uncertain to be implied. |
| Swain v The Law Society [1983] 1 AC 598 |
Statutory scheme requiring solicitors to maintain professional indemnity insurance for client protection. |
Referenced to illustrate the dual purpose of professional indemnity insurance; court found limited relevance to the present case. |
Court's Reasoning and Analysis
The court began by considering the terms of the Design Contract and the Policy, noting that the contract required Company A to maintain professional indemnity insurance but did not specify any proprietary or ringfencing rights in favour of the appellants. The Policy, under Claims Condition 7, allowed the insurer to pay the indemnity limit to Company A and thereby relinquish control of the claim, which it did.
The court examined the general legal principle that third-party claimants do not have proprietary rights in insurance proceeds received by the insured prior to insolvency, citing the longstanding authority of Re Harrington Motor Co Ltd. It was noted that statutory provisions assign rights to third parties only upon insolvency events, but in this case the insurer’s payment preceded liquidation, thus no assignment occurred.
The appellants’ arguments for an implied term imposing a trust or ringfencing obligation were analyzed against the established tests for implication of terms, including necessity and obviousness. The court found that the proposed implied terms lacked the necessary certainty and were not necessary to give business efficacy to the contract. The court highlighted the range of possible formulations for the relevant financial state and mental state of Company A’s directors, which rendered the terms too vague.
Further, the court found that even if such terms were implied, they would not give rise to a trust because the terms did not require segregation or restrict Company A’s use of the Insurance Proceeds exclusively to pay the appellants. The acceptance that Company A could use the funds to defend the appellants’ claim was inconsistent with the existence of a trust.
The court rejected the constructive trust argument on the basis that it was not unconscionable for Company A to retain the Insurance Proceeds, especially given the insurer’s relinquishment of control and Company A’s right to use the funds. The court distinguished this case from those where constructive trusts arise due to mistake or fraud.
In conclusion, the court affirmed that the Insurance Proceeds belonged beneficially to Company A and were not held on trust for the appellants.
Holding and Implications
The court DISMISSED the appellants’ appeal.
The holding confirms that the Insurance Proceeds paid by the insurer to the insured company prior to liquidation are beneficially owned by the insured, absent express contractual or policy provisions to the contrary. The appellants, as third-party claimants, do not have proprietary rights in those proceeds merely because they relate to their claim.
This decision upholds the established principle that third-party claims against an insured do not confer beneficial ownership of insurance monies paid to that insured before insolvency. No new precedent was created; rather, the court applied existing legal principles and statutory frameworks to the facts.
The ruling underscores the importance for parties seeking protection against an insured’s insolvency to negotiate express contractual provisions conferring proprietary rights or security interests over insurance proceeds, as such protections will not arise by implication or constructive trust.