Freakley & Ors v Centre Reinsurance International Company & Anor

This appeal and cross-appeal are from an order made on 23 April 2004 by Mr Justice Blackburne in proceedings in and arising out of the administration of T&N Limited (formerly Turner & Newall Limited and latterly T&N plc). The parties to those proceedings were the administrators of T&N, Curzon Insurance Limited, the insurer under an asbestos liability policy effected by T&N on 30 December 1996, and reinsurers under a reinsurance agreement dated 27 December 1996 of Curzon’s liability under that policy. The object of those proceedings was to resolve issues which had arisen between the administrators and the reinsurers in relation to the handling of personal injury claims arising from exposure to asbestos made or to be made against T&N.

In substance, there were three principal questions to be addressed: (i) whether, in the events which had happened, the administrators or the reinsurers were entitled to handle asbestos claims, (ii) whether the costs of handling claims handled by the reinsurers should be borne by the reinsurers or by T&N and (iii), to the extent that the reinsurers were entitled to reimbursement from T&N in respect of the cost of handling claims, what priority was to be given to that right to reimbursement in the administration of T&N.

The judge determined the first of those questions in favour of the reinsurers; that is to say, he held that, by reason of the administration order, the terms of the asbestos liability policy and the reinsurance agreement, the reinsurers had become entitled to handle asbestos claims. He determined the second question, also, in favour of the reinsurers; holding, in effect, that the reinsurers were entitled to reimbursement from T&N in respect of the cost of handling claims. But he determined the third question against the reinsurers. He rejected the contention that the administrators were required to treat the obligation to reimburse costs incurred by the reinsurers as an expense of the administration.

The administrators appeal from those parts of the order of 23 April 2004 which reflect the judge’s determination of the first and second of those questions in favour of the reinsurers. The reinsurers cross-appeal from that part of the order which reflects the judge’s determination, against them, of the third question. Both appeal and cross-appeal are brought with permission granted by the judge.

In March 1998 T&N and its subsidiaries were acquired by the Federal-Mogul Group, a world-wide group of companies owned by Federal-Mogul Corporation. Federal-Mogul was incorporated in Delaware, in the United States of America. On 1 October 2001 it, and certain of its United States and United Kingdom subsidiaries (including T&N), filed for protection in the Federal Bankruptcy Court under Chapter 11 of the United States Bankruptcy Code. Immediately thereafter – and on the same day – Mr Justice Hart made administration orders under Part II of the Insolvency Act 1986 in respect of 133 United Kingdom subsidiaries within the Federal-Mogul Group, including T&N and a large number of its subsidiaries. The circumstances in which those steps were taken was described by Mr Justice Blackburne at paragraph 4 of his judgment ([2004] EWHC 200 Ch):

“The bankruptcy and administration proceedings were prompted by the fact that the F M Group in general and T&N in particular have faced a huge quantity of personal injury claims arising from exposure to asbestos, both in the UK and in the US, in products manufactured or distributed by the Group. The Chapter 11 filings and the administrations have been sought to obtain the benefit of statutory stays while a plan of re-organisation under Chapter 11 and, possibly, a section 425 scheme of arrangement in the UK are formulated. A Cross-Border Insolvency Protocol, dated as of 1 October 2001, has been entered into with a view to co-ordinating the US and UK insolvency proceedings and assisting towards the development of an integrated re-organisation plan for all of the companies involved. The overall objective is to ring-fence the liabilities for the claims and the assets available to meet them so that solvency can be established and the Group can continue to trade. In the course of argument, I was told that, prior to any statutory stays coming into effect, payments totalling between £350 and £370 million had been made in satisfaction of claims.”

As the judge observed, at paragraph 5 of his judgment, a very substantial asset potentially available to meet the claims against T&N and its subsidiaries was the asbestos liability policy (reference CZ7/96, ASB/096), dated 30 December 1996, underwritten by Curzon. Curzon is a captive insurance company within the Federal-Mogul Group, registered in Guernsey and not subject to any insolvency proceedings. Under that policy Curzon had agreed to indemnify T&N, up to a limit of £500 million but subject to a retained excess of £690 million, in respect of personal injury claims arising from exposure to asbestos.

Curzon’s liability under the policy was wholly reinsured by three reinsurers, Centre Reinsurance International Company (“Centre Re”), Münchener Rückversicherungs-Gesellschaft (“Munich Re”) and European International Reinsurance Company Ltd (“EIRC”). Under the reinsurance agreement dated 27 December 1996 the three reinsurers agreed severally to reinsure 33% of the loss payable from time to time by Curzon to T&N pursuant to the terms and conditions of the policy. As the judge explained, EIRC had purported to avoid its participation and proceedings were pending in the Commercial Court in which EIRC sought a declaration that it was entitled to do so. But nothing, I think, turns on that.

It is common ground that the issues raised by the administrators’ appeal turn on the meaning and effect of the provisions in the asbestos liability policy read with the reinsurance agreement. It is necessary, therefore, to consider those provisions in some detail.

The policy comprises four sections: Section I – Coverage of Asbestos Claims; Section II – Limit of Insurance; Section III – Conditions; and Section IV – Definitions. The obligation to indemnify is set out in Section I, at clause 1:

“Subject to the terms and conditions of this Policy, the Insurer will indemnify the Policyholder during the Period of Insurance for any and all Ultimate Net Loss in excess of the Retained Limit in connection with Asbestos Claims. The total amount the Insurer will pay for Ultimate Net Loss is limited as described in SECTION II, LIMIT OF INSURANCE.”

Section II provides that the Limit of Insurance is the maximum in aggregate the Insurer will pay for Ultimate Net Loss; regardless of the number of subsidiaries, the number of asbestos claims made or brought, the number of persons making or bringing such claims, or any other circumstances whatsoever. “Limit of Insurance” is defined at Section IV, clause 8 to mean £500 million. The “Period of Insurance” means the period commencing on the “Inception Date” (1 July 1996) and continuing “without time limitation until the exhaustion of the Limit of Insurance or the commutation or other termination of this Policy” – Section IV, clause 9 (read with clause 4).

“Asbestos Claim”, “Retained Limit” and “Ultimate Net Loss” are also defined terms. “Retained Limit” means £690 million – Section IV, clause 15. “Asbestos Claim” has the meaning given by Section IV, clause 1:

“‘Asbestos Claim’ means any written demand or civil proceeding with respect to which the Policyholder or any Subsidiary is alleged to be or may be responsible (whether or not the demand or civil proceeding in question is made or brought, or could be made or brought, directly against the Policyholder or any Subsidiary) by whomever made or brought anywhere in the world and in whatever procedural posture such demand or civil proceeding may arise (including any judicial or administrative proceeding or arbitral or other alternative dispute resolution proceeding) seeking monetary relief (whether or not such relief is the only relief sought) for Personal Injury alleged to have been caused in whole or in part by the Asbestos Hazard.”

In that context “Asbestos Hazard” means “the mining, manufacture, sale, distribution, use, installation or removal of, or handling or exposure to, asbestos, asbestos products, asbestos fibres or asbestos dust.” – Section IV, clause 2.

“Ultimate Net Loss” has the meaning given by Section IV, clause 17:

“‘Ultimate Net Loss’ means:

a.

All sums paid in fact by the Policyholder or any Subsidiary as cash or the purchase cost or (if lower) the fair market value of in kind disbursements (whether legal liability exists or not) in settlement of any Asbestos Claims, including but not limited to actual and consequential damages, costs and expenses allowed or awarded, and punitive, exemplary and multiple damages;

b.

Plus all sums paid in fact by the Policyholder or any Subsidiary as cash or the purchase cost or (if lower) the fair market value of in kind disbursements in satisfaction of a judgement on any Asbestos Claims, including but not limited to actual and consequential damages, costs and expenses allowed or awarded, and punitive, exemplary and multiple damages to the extent covered herein;

c.

Plus all reasonable and proper amounts paid in fact by the Policyholder or any Subsidiary as cash or the purchase cost or (if lower) the fair market value of in kind disbursements (whether legal liability exists or not) for costs, fees and expenses that are attributable to the defence or disposition of one or more Asbestos Claims, or the pursuit of subrogation rights, including but not limited to costs, fees and expenses of the Claims Handling Designee (other than salaries and other overhead costs of the Policyholder or its Subsidiaries) plaintiffs costs, lawyers, paralegals, investigators, witnesses, experts and other persons for the litigation, adjustment and investigation of such claims;

d.

Less amounts received in fact by or on behalf of the Policyholder or any Subsidiary as cash or the fair market value of in kind disbursements from third parties as subrogation and other recoveries, salvages and claims upon other insurance . . . ;

e.

Amounts recovered under any one paragraph of this Definition cannot also be recovered under any other paragraph of this Definition;

f.

The Policyholder shall be conclusively presumed to have suffered an Ultimate Net Loss in respect of any Ultimate Net Loss actually suffered by any Subsidiary. . . .”

Put broadly, therefore, the obligation of the insurer is to indemnify T&N – as the “Policyholder” defined in Section IV, clause 11 – in respect of all sums or other amounts “paid in fact” by T&N or any scheduled subsidiary which fall within one or more of the categories listed in Section IV, clause 17 (Ultimate Net Loss) save that (i) the insurer does not become liable to pay under the indemnity until the aggregate of the sums or other amounts included within Ultimate Net Loss exceeds £690 million and (ii) the maximum amount which the insurer can be required to pay, “in any circumstances whatsoever”, is limited to £500 million.

Section III, clause 4, makes provision for the handling of claims made against T&N or its subsidiaries. The clause is in these terms, so far as material:

“a.

Subject to the terms and conditions of this Policy and except if either an Insolvency Event affects the Policyholder or Ultimate Net Loss reaches the Retained Limit, the Policyholder shall have full, exclusive and absolute authority, discretion and control, which shall be exercised in a businesslike manner in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to this Policy and of the reinsurers thereof, with respect to the administration, defence and disposition (including but not limited to settlement) of all Asbestos Claims, including but not limited to the appointment of one or more Claims Handling Designees.

b.

The Policyholder shall not, and shall ensure that each Subsidiary shall not, without prior written approval of the Insurer, such approval not to be unreasonably withheld of delayed,

i Terminate, appoint, or replace any Clams Handling Designee provided that once Ultimate Net Loss has reached the amount of [£550 million], the Insurer shall be entitled to terminate, appoint or replace any Claims Handling Designee;

ii Agree to any settlement of Asbestos Claims likely to result in the Policyholder and the subsidiaries in the aggregate pursuant thereto paying or incurring an amount (including costs associated with investigation and defence directly allocated to such Asbestos Claims) in excess of [£1 million] any one claimant, [£150,000] on average per claimant, any one group settlement, or [£20 million] in the aggregate any one group settlement.

c.

The Policyholder shall specify to each Claims Handling Designee that claims handling by such Claims Handling Designee be conducted in a businesslike manner in the spirit of good faith and fair dealing having regard to the legitimate interests of the parties to this Policy and of the reinsurers thereof.

. . . .

f.

In the event of either an Insolvency Event in relation to the Policyholder or Ultimate Net Loss reaching the Retained Limit, the Insurer shall have (and shall retain until the first to occur of exhaustion of the Limit of Insurance, commutation or the Insurer so determining) the full, exclusive and absolute authority, discretion and control, which shall be exercised in a businesslike manner in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to the Policy and of the reinsurers thereof, of the administration, defence and disposition (including but not limited to settlement) of all Asbestos Claims, including but not limited to the appointment of one or more Claims Handling Designees.

g.

In the event of either an Insolvency Event in relation to the Policyholder or Ultimate Net Loss reaching the Retained Limit, the Policyholder and the Subsidiaries shall give the Insurer reasonable co-operation in the defence and settlement of any Asbestos Claim.

. . . ”

Leaving aside, for the moment, the effect of an Insolvency Event affecting the policyholder, the provisions relating to the handling of asbestos claims against T&N or its subsidiaries are clear enough. Until Ultimate Net Loss reaches the Retained Limit – that is to say, until the aggregate of the sums and other amounts within the categories described under Section IV, clause 17 exceed £690 million - claims are handled by T&N. Once Ultimate Net Loss has reached the Retained Limit the right to handle asbestos claims passes to the insurer; and (unless the policy is commuted, or the insurer decides to relinquish the right) that right remains in the insurer until the Limit of Insurance (£500 million) is exhausted. The commercial logic of those provisions is also clear. The right to handle asbestos claims lies with the party who – prima facie, at least – will have to meet such of those claims as are accepted or established. So, the right to handle claims lies with T&N until the Retained Limit is reached; then passes to the insurer while claims are paid under the policy – that is to say, until the Limit of Insurance is reached; and then reverts to T&N.

It is important to keep in mind, however, that the party in whom, from time to time, the right to handle asbestos claims lies under those provisions is required to exercise that right with due regard to the interests of the other party. In each of paragraphs (a) and (f) of Section III, clause 4 there is the requirement that the “full, exclusive and absolute authority, discretion and control . . . with respect to the administration, defence and disposition . . . of all Asbestos Claims”, conferred (as the case may be) on T&N or the insurer, is to be “exercised in a businesslike manner in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to this Policy and of the reinsurers thereof”. That requirement is emphasised by the obligation, imposed on the Policyholder by paragraph (c) of clause 4, to impose a similar requirement on any Claims Handling Designee that it may appoint.

Section III, clause 4, paragraphs (a) and (f) provide for the transfer of the right to control claims handling from T&N to the insurer both in the event that Ultimate Net Loss reaches the Retained Limit and in the event that “an Insolvency Event affects the Policyholder”. Insolvency Event is defined in Section IV, clause 5:

“An ‘Insolvency Event’ shall occur in relation to the Policyholder or any Subsidiary if:

a.

it is unable to pay its debts as they fall due;

b.

(applying generally accepted accounting principles applicable in its country of incorporation) the value of its assets is less than the amount of its liabilities, taking account of contingent and prospective liabilities;

c.

a resolution is proposed or action commenced for its liquidation or winding up otherwise than purely for the purposes of a solvent reconstruction or amalgamation;

d.

any creditor becomes immediately entitled to appoint a receiver (including an administrative receiver or receiver and manager) over the whole or any material part of its assets or undertaking;

e.

it enters into discussions with its creditors generally or with a class of them with a view to agreeing a composition or rescheduling of its debts or commences upon a voluntary arrangement in relation to its debts;

f.

a petition is presented for it to be placed in administration pursuant to Part II of the Insolvency Act 1986 (as from time to time amended, re-enacted or replaced); or

g.

any matter similar or analogous to any of those described in paragraphs (c), (d) or (f) occurs in relation to it under the laws of any relevant jurisdiction.”

It is not in dispute that an Insolvency Event occurred in relation to T&N – and in relation to many of its subsidiaries – on 1 October 2001 when petitions for administration orders under Part II of the Insolvency Act 1986 were presented to the High Court. At first sight, therefore, the right to handle asbestos claims passed from T&N to the insurer on 1 October 2001 under the provisions of paragraphs (a) and (f) of Section III, clause 4. But, it is said, section 1(3) of the Third Parties (Rights against Insurers) Act 1930 (as amended) prevents effect being given to those provisions. It is that contention which has given rise to the first of the three principal questions which the parties sought to have resolved in these proceedings: whether, following the making of the administration orders on 1 October 2001, the administrators or the reinsurers were entitled to handle asbestos claims?

Section IV, clause 17, paragraph (c) provides in terms that there are to be included in Ultimate Net Loss “all reasonable and proper amounts paid in fact by the Policyholder . . . for costs, fees and expenses that are attributable to the defence or disposition of one or more Asbestos Claims”; and that such costs, fees and expenses (“claims handling expenses”) are to include, but are not to be limited to, “costs, fees and expenses of the Claims Handling Designee (other than salaries and other overhead costs of the Policyholder or its Subsidiaries), plaintiffs costs, lawyers, paralegals, investigators, witnesses, experts and other persons for the litigation, adjustment and investigation of such claims.” It is clear, therefore, that in so far as claims handling expenses are paid by T&N or its subsidiaries those expenses are to taken into account as part of Ultimate Net Loss. So claims handling expenses paid by T&N are to be aggregated with the sums paid in settlement of asbestos claims (or in satisfaction of judgments obtained by those advancing asbestos claims) for the purpose of determining whether Ultimate Net Loss has reached the Retained Limit (£690 million).

It is clear, also, that that will be the position notwithstanding the requirement, under Section III, clause 4, sub-paragraph (b)(i), that T&N shall not appoint or replace any Claims Handling Designee without the prior written approval of the insurer; and notwithstanding that, in the exercise of the power conferred by the proviso to that sub-paragraph, the insurer has chosen to replace the Claims Handling Designee by its own appointee once Ultimate Net Loss has reached £550 million – that is to say, at a time when Ultimate Net Loss is approaching, but has not reached, the Retained Limit (£690 million). It is accepted that, if the claims handling expenses are paid by T&N, it is immaterial that they are paid to “lawyers, paralegals, investigators, witnesses, experts and other persons” appointed by the insurer.

Nor is it said that the position will be different (in a case where no Insolvency Event has occurred) if, after Ultimate Net Loss has reached the Retained Limit the insurer decides - as it may do under Section III, clause 4, paragraph (f) - to leave the control of claims handling with T&N; save that, in that case, the context in which it will be relevant to determine whether claims handling expenses are to be taken into account as part of Ultimate Net Loss will have changed. Once Ultimate Net Loss exceeds the Retained Limit, the question whether claims handling expenses are to be taken into account as part of Ultimate Net Loss will need to be addressed in connection with the Limit of Insurance – the maximum in the aggregate which the insurer can be required to pay in respect of Ultimate Net Loss.

But Section IV, clause 17, paragraph (c) refers to amounts “paid in fact by the Policyholder” for costs, fees and expenses. The paragraph does not, in terms, include amounts paid by the insurer in respect of claims handling expenses. And, once the right to handle claims has been transferred to - and remains with, and is exercised by - the insurer under Section III, clause 4, paragraph (f), claims handling expenses are likely (in practice) to be paid by the insurer. So, it is said, once Ultimate Net Loss has reached the Retained Limit (there having been no Insolvency Event), claims handling expenses are not to be aggregated with the sums paid in settlement of asbestos claims (or in satisfaction of judgments obtained by those advancing asbestos claims) for the purpose of determining the amount of Ultimate Net Loss; and, in particular and in this context, for the purpose of determining whether the amount to be paid by the insurer in respect of Ultimate Net Loss has reached the Limit of Insurance (£500 million).

I have referred, in the preceding paragraph to the contention that claims handling expenses paid by the insurer, following a transfer of the right to control claims handling upon Ultimate Net Loss reaching the Retained Limit, are not to be aggregated with the other amounts described in Section IV, paragraph 17 for the purpose of determining whether the amount to be paid by the insurer in respect of Ultimate Net Loss has reached the Limit of Insurance. But, of course, the contention (if correct) is relevant, also, to the position which would arise if (notwithstanding section 1(3) of the 1930 Act) the right to control claims handling were transferred upon the occurrence of an Insolvency Event before Ultimate Net Loss has reached the Retained Limit. In that case, also, it is said that, once Ultimate Net Loss has reached the Retained Limit, claims handling expenses paid by the insurer are not taken into account for the purpose of determining whether the amount which the insurer is to pay in respect of Ultimate Net Loss has reached the Limit of Insurance. But, in that case, it is said that claims handling expenses paid by the insurer following transfer of the right to control are not taken into account for the purpose of determining whether Ultimate Net Loss has reached the Retained Limit – so that the time at which Ultimate Net Loss reaches the Retained Limit is later than it otherwise would be.

These contentions have given rise to the second of the three principal questions which the parties sought to have resolved in these proceedings: who should bear the costs of handling claims handled by the reinsurers? Or, to put the point another way, can the insurer (and the reinsurers) treat the claims handling expenses paid following transfer of control as part of Ultimate Net Loss – so that payment of the claims handling expenses discharges pro tanto the liability of the insurer (and the reinsurers) to pay in respect of Ultimate Net Loss.

In that context it is pertinent to have in mind that Section II of the policy requires that the Limit of Insurance is “the maximum in the aggregate the Insurer will pay for Ultimate Net Loss” regardless of “any . . . circumstances whatsoever”. It is pertinent to have in mind, also, Section III, clause 1 of the policy, which is in these terms, so far as material:

“a.

No Insolvency Event affecting the Policyholder or any Subsidiary . . . shall cause any liability of the Insurer hereunder to become due earlier or for a higher amount than would have been the case if such Insolvency Event had not occurred . . .

b.

Payment in fact by the Policyholder or any Subsidiary as a cash disbursement or the delivery of an in kind benefit in discharge of an Asbestos Claim shall be a condition precedent to the liability of the Insurer hereunder, except that after an Insolvency Event occurs in relation to the Policyholder or any Subsidiary –

i.

the Insurer shall be liable to pay the Policyholder even though the Policyholder (if the Insolvency Event occurs in relation to it) or the Subsidiary (if the Insolvency Event occurs in relation to it) is unable to discharge its liability in respect of such Asbestos Claim; but

ii . . .; and

iii nothing in this condition shall operate to relieve the Policyholder or any Subsidiary which has not suffered an Insolvency Event from the obligation to make disbursement as a condition precedent to the liability of the Insurer hereunder.

. . .

d.

The Insurer shall be entitled (but not obliged) to set-off, against any sum which it may be liable to pay the Policyholder, any sum which the Policyholder is liable to pay the Insurer.”

As I have said, Curzon’s liability under the policy was wholly reinsured under a reinsurance agreement dated 27 December 1996. Curzon (therein described as the “Cedant”) and the three reinsurers agreed, by article 1.1, that:

“Subject as provided herein, the Cedant shall cede and each Reinsurer shall severally (but not jointly) reinsure… (33 1/3%) of Ultimate Net Loss in excess of the Retained Limit, each as defined in the Asbestos Liability Policy numbered CZ 7/96 ASB/096 (hereinafter referred to as the ‘Policy’) between the original insured T&N Plc (hereinafter called the ‘Policyholder’), payable from time to time by the Cedant to the Policyholder pursuant to the terms and conditions of the Policy”.

A copy of the policy was annexed to the agreement for the purposes of identification. By a side letter dated 30 December 1996 T&N recorded that the reinsurers had agreed to enter into the reinsurance agreement at its request. It is clear that the agreement and the policy must be construed together.

Article 2.1 of the reinsurance agreement defines the Limit of Cover of each reinsurer in terms which reflect Section II of the policy:

“The Limit of Cover of each Reinsurer hereunder is £166,666,666.66 . . . which is the maximum in the aggregate each Reinsurer may be liable to pay hereunder in any circumstances whatsoever”.

Article 3.1 provides for a period of reinsurance which reflects the corresponding provision in Section IV, clause 9 of the Policy.

Article 4.1 is in these terms:

“Subject as expressly provided herein and as a condition of this agreement, the Cedant hereby . . . irrevocably transfers to the Reinsurers all of its rights and powers pursuant to the Policy including (without limitation) those in SECTION III CONDITIONS, CLAUSE 4, POLICYHOLDER’S CLAIMS HANDLING – PARAGRAPH f, of the Policy.”

That transfer of rights and powers is given further effect by paragraphs (b) and (f) of article 8.1:

“ Notwithstanding anything contained to the contrary, it is a condition of this Agreement that:

. . .

(b)

the Cedant, having transferred its rights and powers under the Policy to the Reinsurers, shall not approve or effect the termination, appointment or replacement of a Claims Handling Designee (as defined in the Policy) . . .

. . .

(f)

if the Cedant shall become entitled to the full, exclusive, and absolute authority, discretion and control of the administration and defence and disposition (including but not limited to settlement) of all Asbestos Claims, including the appointment of one or more Claims Handling Designees pursuant to SECTION III –CONDITIONS, Clause 4 f. of the Policy, that authority, discretion and control shall be exercised by a majority of the Reinsurers pursuant to the transfer in Article 4 hereof, and the Cedant shall provide all such assistance as the Reinsurers or a majority of them may reasonably require . . . in respect thereof.”

Article 10.2 incorporates, in the reinsurance agreement, the anti-acceleration and anti-enlargement provisions on insolvency of the Policyholder (amongst others) contained in Section III, clause 1, paragraph (a) of the policy.

The effect of the reinsurance agreement, when read with the policy, is that the reinsurers stand in the shoes of Curzon (as the insurer under the policy) for the purposes of these appeals.

The mischief to which the Third Parties (Rights against Insurers) Act 1930 was addressed was explained by Lord Brandon of Oakbrook in Bradley v Eagle Star Insurance Co Ltd [1989] AC 957, 967f-968e :

“The historical reason for the passing of the Act of 1930 was to remedy a particular form of injustice which had become apparent from two then recent decisions of the Court of Appeal. The first of these two decisions was In re Harrington Motor Co Ltd, Ex parte Chaplin [1928] 1 Ch 105. In that case a person injured in a road accident had obtained judgment for damages against a 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 liquidator, who then treated the injured person as an unsecured creditor with no special interest in the insurance monies. It was held by the Court of Appeal that the liquidator had been right to deal with the matter in that way.

The second decision was Hood’s Trustees v Southern Union General Insurance Co of Australasia Ltd [1928] 1 Ch 793. In that case H, being insured by the defendant company against liability to third parties, negligently injured C in a road accident. C subsequently brought an action against H for damages, but before he could obtain judgment, H was made bankrupt and the official receiver was appointed trustee in the bankruptcy. The trustee informed the defendant company in reply to a question that he did not intend to take any part in C’s action against H. H later purported, for an agreed sum much below the value of the claim to release the defendant company from its obligation under the policy to indemnify him in respect of any judgment obtained against him by C. Shortly afterwards C obtained judgment against H for damages for the personal injuries sustained by him. Subsequently H was made bankrupt a second time and another trustee in bankruptcy was appointed. It was held by Tomlin J that the benefit of the indemnity under H’s policy of insurance vested in the trustee in the first bankruptcy, notwithstanding that C’s claim, being one in respect of tort for which judgment was not obtained until after the commencement of the first bankruptcy, was not itself provable in bankruptcy. That decision was subsequently affirmed by the Court of Appeal.

These two decisions showed that, even where an injured person obtained a judgment for damages against a wrongdoer, if the wrongdoer being a company went into liquidation, or being an individual became bankrupt, and the judgment had not by then been enforced by execution the monies payable by way of indemnity under any policy of insurance by which the wrongdoer was insured against liability to third parties, did not go solely to benefit the injured person but were payable to the liquidator or trustee in bankruptcy of the wrongdoer for distribution pari passu among all the unsecured creditors. This was recognised to be plainly unjust, and the Act of 1930 was passed to remedy that injustice. . . .”

Section 1 of the 1930 Act – as it stood in December 1996 (following amendment by the Insolvency Acts of 1985 and 1986) and in October 2001 – was in these terms, so far as material:

“(1)

Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then -

(a)

in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or

(b)

in the case of the insured being a company, in the event of a winding-up order or an administration order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of a receiver or manager of the company’s business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, of any property comprised in or subject to the charge or of a voluntary arrangement proposed for the purposes of Part I of the Insolvency Act 1986 being approved under that Part;

if, either before or after the event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.

(2)

Where the estate of any person falls to be administered in accordance with an order under section 421 of the Insolvency Act 1986, then, if any debt provable in bankruptcy . . . is owing by the deceased in respect of a liability against which he was insured under a contract of insurance as being a liability to a third party, the deceased debtor’s rights against the insurer under the contract in respect of that liability shall, notwithstanding anything in any such order], be transferred to and vest in the person to whom the debt is owing.

(3)

In so far as any contract of insurance made after the commencement of this Act in respect of any liability of the insured to third parties purports, whether directly or indirectly, to avoid the contract or to alter the rights of the parties thereunder upon the happening to the insured of any of the events specified in paragraph (a) or paragraph (b) of subsection (1) of this section . . . the contract shall be of no effect.

(4)

Upon a transfer under subsection (1) or subsection (2) of this section, the insurer shall, subject to the provisions of section three of this Act, be under the same liability to the third party as he would have been under to the insured, but -

(a)

if the liability of the insurer to the insured exceeds the liability of the insured to the third party, nothing in this Act shall affect the rights of the insured against the insurer in respect of the excess; and

(b)

if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Act shall affect the rights of the third party against the insured in respect of the balance.

(5)

For the purposes of this Act, the expression “liabilities to third parties”, in relation to a person insured under any contact of insurance, shall not include any liability of that person in the capacity of insurer under some other contract of insurance.

. . .”

The purpose and effect of section 1(1) of the 1930 Act is to transfer to a third party the rights of the insolvent insured under the contract of insurance. The rights transferred are the rights of the insured against the insurer in respect of the insured’s liability to the third party. The insured’s liability to the third party arises, if at all, outside the contract of insurance. Section 1(2) is to similar effect. It provides for the transfer to a third party, to whom a debt provable against the insolvent estate of a deceased is owing in respect of a liability against which the deceased was insured, of the rights of the deceased debtor under the contract of insurance. Again, the rights transferred are the rights of the deceased against the insurer in respect of the deceased’s liability to the third party. And, again, the deceased’s liability to the third party arises, if at all, outside the contract of insurance. Section 1(4) provides that, upon a transfer under sub-section (1) or (2), the insurer will be under the same liability to the third party as he would have been to the insured. The third party steps into the shoes of the insured (or the deceased, as the case may be); but only to the extent of the insured’s rights under the contract of insurance in respect of the insured’s liability to the third party. That is underlined by paragraphs (a) and (b) of section 1(4) of the Act.

The statutory transfer takes place at the time when the relevant event within paragraph (a) or (b) of section 1(1) of the Act occurs. It may well be that, at that time, the liability of the insured to the third party has not been established; so that the insurer is under no present liability to pay the insured in respect of that third party claim. The position was explained by Lord Justice Saville, in this Court, in Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep. 437, 467:

“. . . Under the Act the rights of the insured against the insurer are transferred to the third party on (in the case of an insured company) the making of a winding up order etc.: see s.1(b) of the Act. It follows from this that a statutory transfer can take place before the obligation of the insurer to pay arises i.e. before the liability of the insured has been established. In such an event, since it is clear from the authorities that the third party is to be put in no better position than the insured, the third party does not obtain the right to immediate payment until the liability of the insured is established.

. . .

. . . That right [the right of the third party to immediate payment by the insurers] only arises when, in each case, the claim is established, just as that right, while owned by the insured, would also arise only when the particular claim in question was established. It is only when that right arises that the insurers come under the correlative obligation to make payment. To my mind it follows that as each claim is established (whether before or after the statutory assignment), the right to payment arises and thus the amount of available insurance is in effect diminished, so that when it is exhausted later established claims have no right to an indemnity. . . .”

That passage was adopted by this Court in In re OT Computers Ltd (in administration), Nagra v OT Computers Ltd [2004] EWCA Civ 653 paragraph [45], [2004] Ch 317, 334B-H. Lord Justice Longmore, with whom the other members of the Court (Lord Justice Jonathan Parker and Lord Justice Maurice Kay) agreed, observed (ibid, paragraph [46]) that whether or not this Court was bound by that analysis, “the question of the date of transfer to the third party of the rights of the insured against the insurer should now . . . be regarded as conclusively determined . . . in favour of the view that the transfer takes place on the event of insolvency”.

A further possibility, of course, is that (whether or not a particular claim has been established at the time when the statutory transfer takes place) the policy is, at that time, subject to an excess which has not been reached; so that, again, the insurer is under no present liability to pay the insured. It must follow from the analysis in Cox v Bankside (supra) that, following the statutory transfer, the third party can have no better right than the insured; so the third party has no right to be paid by the insurer until claims in an amount sufficient to absorb the excess have been established. This, too, was recognised by Lord Justice Longmore in In re OT Computers Ltd (supra, paragraph[46]).

In principle, therefore, four classes of asbestos claimants can be identified in a case (as the present) where (i) the insurer’s liability under the policy is subject to an excess (the Retained Limit) and to a cap (the Limit of Insurance) and (ii) an event within section 1(1)(b) of the Act occurs before the level of established claims has reached the amount of the excess. First, there are asbestos claimants whose claims against the insured have been established before the statutory event has occurred. They can have no claim against the insurer because (on the hypothesis adopted) their claims are established at a time when the Retained Limit has not been reached and the insured would have no right to be indemnified by the insurer in respect of them. Second, there are asbestos claimants whose claims against the insured are established after the statutory event has occurred but before the Retained Limit has been reached. They, too, can have no claim against the insurer either before their claims have been established or after their claims have been established. In the former case, their claims against the insurer have not been established; in the latter case, the claims are established at a time when the Retained Limit has not been reached; so that, in neither case is the insured entitled to be indemnified by the insurer in respect of them. Third, there are asbestos claimants whose claims are established after the statutory event has occurred and after the Retained Limit has been reached, but before the cover under the policy has been exhausted by the Limit of Insurance. The insured is entitled to be indemnified by the insurer in respect of those claims; and the insured’s rights to indemnity are transferred to the asbestos claimants. Fourth, there are asbestos claimants whose claims are not established until after cover under the policy has been exhausted by the Limit of Insurance. They can have no claim against the insurer, because (cover having been exhausted) the insured would not be entitled to be indemnified by the insurer against their claims.

The position may be summarised as follows: (i) asbestos claimants in the first class can enforce claims against the insured, but not against the insurer; (ii) asbestos claimants in the second class can enforce claims against the insured (once those claims are established) but not against the insurer; (iii) asbestos claimants in the third class can enforce claims against the insurer (once those claims are established) but cannot enforce claims against the insured (save to the extent that their claims are not met by the insurer - see section 1(4)(b) of the Act); (iv) asbestos claimants in the fourth class can enforce claims against the insured (once those claims are established) but not against the insurer.

I have referred, in the previous paragraph to section 1(4)(b) of the 1930 Act. It seems to me implicit in that provision that, in a case where the rights of the insured against the insurer under the policy in respect of the insured’s liability to the third party have been transferred to the third party under section 1(1), the third party must look first to the insurer for payment (to the extent of the rights transferred) rather than to the insured. I would accept that there is nothing in the 1930 Act which can have the effect of extinguishing the underlying cause of action against the insured. As section 1(4)(b) makes clear, the insured remains liable to the third party, at least to the extent that the third party’s rights against the insured exceed the rights which are the subject of the statutory transfer. But, as it seems to me, Parliament plainly intended that, following the statutory transfer to the third party of the insured’s rights against the insurer in respect of the third party’s claim, the responsibility for meeting that claim should (as between insurer and insured) lie with the insurer. If that were not so, (i) there would be a risk of double recovery if the third party were to sue both insurer and insured and (ii) there would be a risk that the insured would be liable to the third party in respect of a claim in which he no longer had any right of indemnity under the policy – because his right had been transferred to the third party by the statute. It would, of course, be a strange case in which the third party chose to pursue the insolvent insured rather than the solvent insurer. But the question whether (and for what) the third party could prove in the insolvency of the insured would have to be addressed if the insurer were also insolvent.

The effect of section 1(4)(a) of the 1930 Act can be illustrated by reference to the provisions of the asbestos liability policy in the present case. Assume that no event within section 1(1)(b) of the Act occurs until after Ultimate Net Loss has reached the Retained Limit; and that, upon Ultimate Net Loss reaching the Retained Limit, the insurer determines (as it is entitled to do under Section III, clause 4, paragraph (f) of the policy) that claims handling rights shall remain with the insured. On that basis it is common ground that the liability of the insurer to T&N, as the insured, in respect of an asbestos claim advanced and established by a third party after Ultimate Net Loss has reached the Retained Limit includes (i) a liability to indemnify T&N in respect of the asbestos claim and (ii) a liability to indemnify T&N in respect of the expenses of handling the asbestos claim. Assume, then, that (before any payment is made) there is a transfer of rights under section 1(1) of the 1930 Act on T&N’s insolvency. The effect of section 1(4)(a) of the Act will be that, thereafter, the insurer will be under the same liability to the third party in respect of the asbestos claim as it would have been to T&N. But the liability of the insurer to indemnify T&N in respect of the expenses of handling the asbestos claim will be unaffected by the statutory transfer. That is because T&N, as insured, is under no liability to the third party in respect of its own expenses. The liability of the insurer to T&N under the policy exceeds the liability of T&N to the third party in that respect.

The events, the occurrence of which will give rise to a statutory transfer of rights from the insured to the asbestos claimant, are described in section 1(1) of the 1930 Act. The events which, under the policy, give rise to a transfer of claims handling rights from the insured to the insurer are defined Section IV, clause 5. The events defined in the policy (“contractual events”) are not the same as the events described in the Act (“statutory events”). In the present case, the relevant statutory event is one of those specified in section 1(1)(b) of the Act: an administration order being made in respect of the insured company. The comparable event in the policy is the presentation of a petition for the insured company to be placed in administration. In the present case both events occurred. Whether the timing difference (if any) was of any significance in the present case is a question which was before the judge and to which I shall return later in this judgment. But, more generally, the contractual events are defined in the policy in terms which are likely to have the result that that event will occur before the comparable statutory event. And it is clearly possible that a contractual event will not be followed by a comparable (or any) statutory event. For example, the insured company might well become insolvent – within paragraph (a) or (b) of Section IV, clause 5 – in circumstances in which that insolvency did not lead to the occurrence of any of the events described in section 1(1)(b) of the 1930 Act.

It is necessary to have in mind, therefore, in construing the policy – and, in particular, the provisions in Section III, clause 4, paragraph (a) and (f) which provide for the transfer of claims handling rights on the occurrence of an Insolvency Event – that an Insolvency Event may occur independently of the occurrence of any event described in section 1(1)(b) of the 1930 Act; and, indeed, that the fact that an Insolvency Event has occurred does not lead, necessarily, to the conclusion that a statutory event will also occur. So the provisions must be construed on the basis that there may be a transfer of claims handling rights as between insured and insurer, but no transfer, as between insured and asbestos claimants, of the insured’s right to be indemnified by the insurer. In other words, the parties when agreeing those provisions must be taken to have had in contemplation that they might need to apply in circumstances where, notwithstanding the occurrence of an Insolvency Event, the right to indemnity remained with the insured as well after as before the level of claims reached the Retained Limit.

As I have said, the three principal questions for determination in the proceedings before the judge were (i) whether the administrators or the reinsurers were entitled to handle asbestos claims made or to be made against T&N and its relevant subsidiaries, (ii) who should bear the costs of handling claims handled by the reinsurers – or (to put the point another way) can the reinsurers treat the claims handling expenses paid following transfer of control as part of Ultimate Net Loss – and (iii), to the extent that the reinsurers were entitled to reimbursement from T&N in respect of the cost of handling claims, what priority should be given to that right to reimbursement in the administration of T&N.

The general nature of the issues raised by these questions can be illustrated by an example:

It can be seen from that illustrative example that, if the administrators are correct in their approach to the first principal question but are not correct in their approach to the second principal question, the total amount which the reinsurers can be called upon to pay will be limited to £500 million; but they will not be entitled to control claims handling until Ultimate Net Loss reaches the Retained Limit. Following the occurrence of the Insolvency Event – and until Ultimate Net Loss reaches the Retained Limit – control of claims handling will remain with T&N. Claims handling charges will be incurred and borne by T&N. Claims handling charges (if any) incurred by the reinsurers will be borne by the reinsurers; they will not give rise to a right to reimbursement and they will not be recoverable by set-off.

But, if the administrators are correct in their approach to the second principal question, the total amount which the reinsurers will be required to pay may well be substantially in excess of £500 million. They will have to pay £500 million in respect of asbestos claims; and will have to bear (without recourse) the claims handling charges during such period as the control of claims handling lies with them. If the administrators are also correct in their approach to the first principal question, that period will not begin until Ultimate Net Loss reaches the Retained Limit. On the basis of the illustrative example, the claims handling charges during that period will include the £50 million paid while asbestos claims amounting to £410 million are paid; and will also include any further sum in respect of claims handling charges paid while claims amounting to the remaining £90 million are paid. If the administrators are wrong in their approach to the first question, the period will begin upon the occurrence of the Insolvency Event; and, on the basis of the illustrative example, the claims handling charges will include a further £40 million paid by the reinsurers before Ultimate Net Loss reached the Retained Limit.

The judge described arrangements under which the question whether or not claims handling expenses were to be taken into account in determining Ultimate Net Loss turned on whether T&N or the insurer – as the party having control of claims handling - had paid those expenses (the second principal question) as “whimsical”. He said this, at paragraph 98 of his judgment:

“In my judgment, the treatment by the Policy of claims handling expenses is not intended to change depending on who, as between T&N and the insurer, happens at any given moment to be in charge of claims handling or on whom, as between T&N (or any Subsidiary) and the insurer, the actual claims handler (for example a solicitor) happens to look to for payment of his charges. The clear intent of the Policy is that these expenses, insofar as they are reasonable and proper in amount (see paragraph (c) of the definition of the Ultimate Net Loss), are to form part of the Ultimate Net Loss.”

There were three sets of proceedings before the judge. In the first (HC02C03744, commenced by a claim form issued on 13 December 2002), Centre Re and Munich Re sought declaratory relief against Curzon. In the second (4246 of 2002, also commenced on 13 December 2002), Centre Re and Munich Re sought, by way of ordinary application in the administration, orders and directions binding the administrators of T&N. In the third (5798 of 2001, commenced on 8 August 2003) the administrators sought, again by ordinary application in the administration, directions binding Centre Re, Munich Re, EIRC and Curzon.

On 2 October 2003, by an order made in all three sets proceedings, Mr Justice Blackburne directed that there should be a hearing of the six issues listed in the schedule to that order. By the time those issues came before the judge for determination, they had been expanded, in order – as it was put by counsel for the administrators – “to tease out nicer points from the existing issues”. At a hearing over four days in December 2003, the judge addressed the fifteen issues which the parties then wished to have resolved. Those fifteen issues are set out in his judgment, delivered on 12 February 2004, and in the order which he made on 23 April 2004.

The judge divided the fifteen issues into four groups, as he explained at paragraph 9 of his judgment:

“. . . The intention has been to raise a series of discrete questions, the outcome of which turns on the true construction of the Policy and, to a lesser extent, the Reinsurance Agreement and on issues of law rather than on the investigation and determination of disputed issues of fact. Their determination, I am told, is material to the carrying forward of the proposed re-organisation plan for the F M Group. The issues can be grouped under four main headings: (1) those concerned with the impact of the Third Parties (Rights Against Insurers) Act 1930 (as amended) (“the 1930 Act”) on the provisions of the Policy relating to the transfer of claims handling rights (issues 1 to 9); (2) those concerned with the party on whom the cost of claims handling falls after any transfer of claims handling rights (issues 10 to 13); (3) the priority in its administration of any liability of T&N for the cost of claims handling after any transfer of claims handling rights (issue 14); and (4) whether a contribution claim falls within the Policy (issue 15).”

It can be seen that the first, second and third groups of issues correspond to what I have described, earlier in this judgment, as the three principal questions.

There is no appeal from the judge’s determination in respect of the issues numbered 1, 6 to 9, or 15 in the order of 23 April 2004. The administrators appeal on issues 3 to 5 and on issues 10 to 13. Two of the reinsurers (Centre Re and Munich Re) appeal from the judge’s determination in respect of issue 14. They cross-appeal, also, from the judge’s determination in respect of issue 10. It is convenient to address the issues under appeal in the groups in which they were placed by the judge.

THE FIRST GROUP OF ISSUES

Were claims handling rights transferred to the reinsurers at the time of the administration order?:

The first group of issues – so far as relevant to these appeals – and the judge’s determination in respect of each are these:

Although presented as four distinct issues, it is common ground that, if the judge was correct in the answer which he gave to issue 2, the answer to issue 3 follows as a matter of course. By an amendment to their appellants’ notice (filed by way of cross-appeal), made during the hearing of this appeal without objection, the reinsurers seek to limit the scope of the answer which the judge gave to issue 4. It is said that that answer should be varied so as to read:

The real question between the parties, underlying the issues in this first group, is whether the transfer of claims handling rights upon the occurrence of an Insolvency Event – for which Section III, clause 4, paragraph (f) of the policy provides – is of no effect by reason of the provisions in section 1(3) of the 1930 Act.

It is not now in dispute that the policy is a “contract of insurance made after the commencement of this Act in respect of the liability of the insured to third parties”, notwithstanding that Ultimate Net Loss has not (or had not, at the relevant time) reached the Retained Limit. There is no appeal from the judge’s determination (in answer to Issue 1) that it is. And, in its decision in In re OT Computers Ltd (supra), this Court referred to the judge’s conclusion on that point with approval (ibid, paragraph [47]). The question is whether – upon a true construction of section 1(3) of the 1930 Act - Section III, clause 4, paragraph (f) of the policy “purports, whether directly or indirectly, . . . to alter the rights of the parties thereunder” upon the administration order being made in respect of T&N, as the insured under that contract. As the judge put it, at paragraph 35 of his judgment:

“The essential point in contention here is whether, as the reinsurers contend, section 1(3) applies only to alterations to the rights against the insurer transferred to the third party by section 1(1) in respect of the insured’s liability to that third party or whether, as the administrators contend, it is of wider application and, if it is, whether clause 4f gives rise to an alteration of rights within the purview of that subsection.”

It is convenient, at this point, to refer to the question of timing which underlies issue 4. I have already explained that “Insolvency Event” is defined in Section IV, clause 5 of the policy in terms which are not a precise match for the events described in section 1(1)(b) of the 1930 Act. In particular, in the context of the present case, the event which gives rise to a statutory transfer of rights under section 1(1) of the Act is “the event of an administration order being made”. But the relevant “Insolvency Event” for the purposes of the policy is that defined in Section IV, clause 5, paragraph (f): “a petition is presented for [the Policyholder or any Subsidiary] to be placed in administration pursuant to Part II of the Insolvency Act 1986 . . . ”. The reinsurers submitted to the judge that this timing difference had the effect that the provisions in Section III, clause 4, paragraphs (a) and (f) – which provide for a shift in the right to control claims handling on the occurrence of an Insolvency Event – did not purport to alter the rights of the parties under the contract of insurance at the time at which effect has to be given to section 1(3) of the Act; that is to say “upon the happening to the insured of any of the events specified in . . . paragraph (b) of [section 1(1)]”. By the time that the statutory event occurred, the rights of the parties under the contract of insurance were the rights which existed following the shift in the right to control claims handling which had already taken place on the earlier occurrence of the contractual event.

In the present case – in so far, at least, as the relevant contractual event was said to be the presentation of a petition for administration - that submission failed on the facts. The administration order was made, as is not unusual in cases of this nature, on the basis of an undertaking to present a petition. It cannot be said that the contractual event – the presentation of the petition – occurred earlier that the statutory event – the making of the administration order.

It might have been said that there was some other Insolvency Event within Section IV, clause 5 which did occur before the making of the administration order on 1 October 2001. It is pertinent to have in mind that, at the relevant time, section 8(1)(a) of the Insolvency Act 1986 gave to the court jurisdiction to make an administration order in respect of a company if, but only if, the court was satisfied that the company was, or was likely to become unable to pay its debts within the extended meaning given to that expression by section 123 of the Act. It would have been arguable, therefore, that an Insolvency Event within Section IV, clause 5, paragraph (b) had occurred before 1 October 2001. But this argument was not advanced; and there was no material in the evidence before this Court upon which it could have been supported.

The judge accepted (at paragraph 62 of his judgment) that to confine the operation of section 1(3) of the Act to cases where the contractual provision purporting to alter the parties rights under the contract had effect only on the occurrence of a statutory event within section 1(1) would be to “open the door to the introduction of clauses which provide for the avoidance of the contract of insurance or a relevant alteration of the parties’ rights thereunder which are expressed to be triggered by events falling short of any of the statutory insolvency events but which are closely connected with them and which, unless rendered ineffectual, will defeat the object of the 1930 Act”. He indicated that he would have been content to adopt the approach suggested on behalf of the administrators – that is to say “a purposive approach to the construction of sections 1(1) and (3) whereby the operation of section 1(3) is triggered if (a) one of the statutory insolvency events has occurred and (b) that statutory insolvency event is sufficiently connected with the triggering event, if it has occurred, in the contract of insurance which seeks to avoid the contract or effect a relevant alteration of rights”. He accepted that that approach – which required the court to find a “sufficient connection” between the statutory event and the contractual event – introduced an element of uncertainty; but he did not hold that it should be rejected on that ground.

As the judge observed, at paragraph 51 of his judgment, issue 4 is not happily worded if, as he was told in argument, the underlying question which it was intended to raise was whether, by reason of the supposed timing difference, a transfer of claims handling rights under Section III, clause 5, paragraphs (a) and (f) could be rendered ineffective by reason of the (later) occurrence of an event within section 1(1)(b) of the 1930 Act. The reinsurers do not quarrel with the judge’s decision to give the answer “Yes” to the issue, as framed. It may be said, however, that that answer, of itself, does not sufficiently reflect what the judge decided; and that the answer would be more complete – and would more fully reflect the judge’s reasoning – if it were expanded in the manner sought by the reinsurers. I can see force in that submission; but I am not persuaded that this Court should vary the judge’s order in this respect. It seems to me that, if the order is less informative than it might be in relation to this point, the problem lies with the question rather than with the answer. The judge’s conclusion on the underlying question appears clearly from his judgment. In the circumstances that, whichever view is taken as to the effect of the timing difference in principle, the result (on the facts of the present case) is the same, it is unnecessary for this Court to express its own view on that question.

As I have said the real question which underlies the issues in this first group, is whether the provisions for the transfer of claims handling rights upon the making of the administration order on 1 October 2001 – treating the contractual and the statutory events as contemporaneous on the facts of this case - are of no effect by reason of section 1(3) of the 1930 Act. That question turns on whether the phrase “the rights of the parties thereunder”, where it appears in the statutory requirement that “In so far as any contract of insurance . . . in respect of any liability of the insured to third parties purports . . . to alter the rights of the parties thereunder . . . , the contract shall be of no effect”, refers to all the rights of the parties under the contract oronly to the rights of the parties in respect of the liability incurred by the insured to the third party; and, if the latter, whether claims handling rights are properly to be treated as rights in respect of the liability incurred to the third party. The judge was plainly correct to approach that question on the basis, indicated in the paragraph of his judgement which I have just set out, that section 1(3) of the 1930 Act must be construed in context.

The judge held that the phrase “the rights of the parties thereunder” was to be given the more limited of the possible meanings just identified. After setting out the rival contentions of the parties, he said this, at paragraphs 42 to 44 of his judgment:

“42.

In my judgment, subsection 1(3) [of the 1930 Act] recognises that there may be terms in the contract of insurance, whether or not they are to be found in the rights under the contract which are transferred to the third party by section 1(1), which are intended to have effect upon the happening of one of the statutory insolvency events and which, if allowed to have effect, will impair the full enjoyment by the third party of the rights transferred to him by section 1(1) ; or, to echo the approach of Slade J in The Allobrogia [ReAllobrogiaSteamshipCorporation [1979] 1 Lloyd’s Rep 190, 198], which will have the effect, directly or indirectly, of prejudicing or reducing those rights. The question is whether clause 4f, which undoubtedly provides for an alteration of rights under the Policy, is such a term.

43.

Leaving aside whether, in any event, one or more of the statutory insolvency events has occurred (with which later issues are concerned), does a transfer of claims handling rights from T&N to the reinsurers before the Retained Limit has been reached and at a time, therefore, when the burden of any disposal of third party claims resulting in a payment will be carried by T&N (or its creditors) and not by the insurers (whether Curzon or the reinsurers) constitute an alteration in the enjoyment by the third party of his rights against the insurers by prejudicing or reducing those rights in some material way? (I say “material” to make clear that any de minimis diminution in rights may be ignored.)

44.

I cannot think that it does. Although, as between T&N (acting by its administrators) and the reinsurers, the question who has the claims handling rights before the Retained Limit is reached when, on any view, there is a transfer of those rights to the reinsurers, may be a matter of importance, I am unable to see why it should prejudice or reduce in any material way the rights transferred to the third party.”

His reasoning led the judge to give the answer ‘No’ to the second issue. And, as he held, the answer to the third issue was ‘No’ also.

It is clear that, in reaching his conclusion, the judge rejected the submission, advanced of behalf of the reinsurers, that the only rights to which section 1(3) of the Act was intended to have any application were the rights of the insured which were transferred to the third party by sections 1(1) and (2) of the Act. The submission was pursued by the reinsurers in this Court. I, too, would reject it The submission fails, as it seems to me, to give weight to the obvious difference between the phrase “the [insured’s/debtor’s] rights against the insurer under the contract” which appears in sections 1(1) and (2) of the Act and the phrase “the rights of the parties [under the contract]” in section 1(3). Parliament has recognised that a contract of insurance between an insured, say A, and an insurer, say B, will not only confer rights on A (exercisable against B) but will include rights conferred on B (exercisable against A). An example of the latter would be B’s right to be paid premiums under the contract. The difference in the two phrases used makes it clear that Parliament intended to distinguish between A’s rights against B (which, in so far as they were rights in respect of the insured’s liability to the third party, were to be transferred to the third party under the Act) and B’s rights against A (in respect of which the third party was not to become under any liability). The same distinction can be seen in the comparison between the anti-avoidance provisions in section 3 of the Act – “no agreement . . . or payment made to the insured after the commencement [of bankruptcy or winding-up] shall be effective to defeat or affect the rights transferred to the third party” – and those in section 1(3) – “in so far as any contract of insurance . . . purports . . . to alter the rights of the parties thereunder . . . the contract shall be of no effect”.

Further, as it seems to me, it would not be sufficient for the reinsurers to persuade the court that the only rights to which section 1(3) of the Act was intended to have any application were the rights of the insured which were transferred to the third party by sections 1(1) and (2) of the Act. It must be kept in mind that Section III, clause 4 of the policy confers complementary rights. Paragraph (a) gives the insured the right to control claims handling until one of the relevant events occurs; paragraph (f) gives that right to the insurer after the relevant event has occurred. There could not be any real doubt, as it seems to me – having regard to the reasoning of the House of Lords in TheFanti and The Padre Island [1991] 2 AC 1 (to which I shall need to refer) – that if (on a proper analysis) claims handling rights are rights in respect of the liability incurred by the insured to the third party then, but for the fact that the relevant events include insolvency (and subject, of course, to section 1(3) of the Act), the rights conferred on the insured by Section III, clause 4, paragraph (a) would be the subject of a statutory transfer under section 1(1) of the 1930 Act. It is only because the relevant events which define the point at which there is a shift from the insured’s rights under paragraph (a) to the insurer’s rights under paragraph (f) include the occurrence of a contractual Insolvency Event that it can be said that, at the point at which the statutory transfer would take effect, there are no rights under paragraph (a) to which section 1(1) of the Act can apply. Even if the reinsurers were correct in their submission that the only rights to which section 1(3) of the Act was intended to have any application were the rights of the insured which were transferred to the third party by sections 1(1) and (2) of the Act, the critical question would remain: is the provision, in both paragraphs (a) and (f), which requires a shift in the right to control claims handling on the occurrence of an Insolvency Event rendered ineffective by section 1(3) of the Act. And that question turns on whether the judge was right to hold that the meaning to be given to the phrase “the rights of the parties thereunder”, in section 1(3) - whether rights of the insured against the insurer or rights of the insurer against the insured - must be limited in the manner already indicated; that is to say, must be limited to the rights properly to be treated as rights in respect of the liability incurred by the insured to the third party.

It is said, on behalf of the administrators, that, once it is accepted that section 1(3) of the Act was intended to have application to rights under the contract of insurance other than rights transferred to the third party under sections 1(1) and (2) – that is to say, once it is accepted that section 1(3) can apply to at least some of the insurer’s rights against the insured – there is no reason why “the rights of the parties thereunder” should not include all the rights of parties inter se under the contract. The judge rejected that submission. As I have said, he took the view, as paragraphs 42 and 43 of his judgment make clear, that section 1(3) was intended to apply only to terms in the contract of insurance (whether or not they are found in the rights transferred to the third party) “which are intended to have effect on the happening of one of the statutory insolvency events and which, if allowed to have effect, will impair the full enjoyment by the third party of the rights transferred to him”.

In reaching that conclusion, as appears from paragraph 42 of his judgment, the judge found assistance in observations of Mr Justice Slade in ReAllobrogia Steamship Corporation [1979] 1 Lloyd’s Rep 190. That case – and the subsequent cases of The Fanti and The Padre Island – required consideration of the effect, on the insolvency of the insured, of “pay to be paid” conditions in contracts of insurance. It is pertinent, therefore, to have in mind both that the policy in the present case contains such a condition – at Section III, clause 1, paragraph (b) – and that those “pay to be paid” conditions are, themselves, subject to waiver after an Insolvency Event has occurred, as the proviso to Section III, clause 1, paragraph (b) makes clear. It has not been suggested by either the reinsurers or the administrators that that proviso is rendered ineffective by section 1(3) of the Act; but, for my part, I find it difficult to see why the arguments advanced by the administrators (if correct) do not lead, necessarily, to that conclusion. That, as it seems to me, may well suggest that the arguments are not correct.

The issue in the Allobrogia case was whether the English court should order the winding–up of a foreign registered company. That turned on whether the company owned assets within the jurisdiction of the English court which could be realised in a winding-up for the benefit of creditors; and that, in turn, was said to depend on whether the company had any realistic prospect of success in a claim against its insurers (a P&I Club). The rules of that Club included a “pay to be paid” condition – as a proviso to rule 28.

The petitioners had obtained judgments against the company in respect of loss of cargo. Liability under those judgments was a risk covered by the company’s membership of the Club. It was said that, on the making of a winding-up order, the company’s rights against the Club in respect of its indebtedness to the petitioners would be transferred to the petitioners under the provisions of section 1(1) of the 1930 Act. The Club (which claimed to be a creditor of the company in respect of unpaid calls) opposed the petition. It contended that the making of a winding-up order would, of itself, prevent compliance with the “pay to be paid” condition – so rendering the claim against it valueless; and so destroying the basis upon which the court was invited to exercise its jurisdiction to wind-up a foreign company. In answer to that contention the petitioners argued that, by reason of section 1(3) of the 1930 Act, the “pay to be paid” condition, contained in the proviso to rule 28, could not have effect following winding up. In the course of addressing that submission, Mr Justice Slade said this, (ibid, 198):

“The effect of s.1(3) thus, according to its express terms, is to invalidate any provision which is contained in a relevant contract of insurance and purports, directly or indirectly, to avoid such contract or to alter the rights of the parties thereto upon the happening to the insured of any of the events specified in s.1(1), which gives rise to the statutory transfer to the third party under the contract. 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. . . .”

Mr Justice Slade had pointed out (ibid, 197) that the Club was faced with an inescapable dilemma. Either the insolvency of the company did, ex hypothesi, render impossible compliance with the “pay to be paid” condition; or it did not. If the latter, then it could not be said that the claim was valueless; if the former, then there was much force in the argument that the “pay to be paid” condition would have the substantial effect of altering the rights of the parties under the contract upon the insolvency of the company, and so had to be struck down by section 1(3) of the Act. He explained (ibid, 198) that:

“The use of the phrase ‘directly or indirectly’ in s.1(3) shows that provision in a relevant contract can fall foul of s.1(3), even though it does not expressly and in terms purport to avoid the contract or alter the rights of the parties upon the happening to the insured of any of the relevant events. The effect of the word ‘indirectly’ is in my judgment that any provision in such a contract which has the substantial effect of avoiding a contract or altering the rights of the parties upon the happening to the insured of any such events is invalidated, even though the contract does not in terms so provide.”

Although, as Mr Justice Slade made clear in a later passage of his judgment in the Allobrogia case, he did not think it necessary or appropriate to reach a final decision on the point, he indicated that he thought that there were substantial grounds for the view that, by reason of section 1(3) of the 1930 Act, the proviso to rule 28 could not have effect if the company’s insolvency would make it impossible for it to satisfy the “pay to be paid” condition imposed by that proviso.

In Firma CF-Trade S.A v Newcastle Protection and Indemnity Association (the ‘Fanti’) [1987] 2 Lloyd’s Rep 299, Mr Justice Staughton adopted the viewprovisionally expressed by Mr Justice Slade in the Allobrogia case(supra) as to the effect of section 1(3) of the 1930 Act on the “pay to be paid” condition. He held that (if, as a matter of construction of the membership rules, the condition survived the making of a winding-up order - which he thought it did not) the condition sought directly to alter the rights of the parties in a winding up, and so could not be given effect. But, in Socony Mobil Oil Co Inc and others v West of England Ship Owners Mutual Insurance Association Ltd (the “Padre Island”) (No 2) [1987] 2 Lloyd’s Rep 529, Mr Justice Saville took the opposite view. The two cases came to this Court on conjoined appeals, [1989] 1 Lloyd’s Rep 239. This Court (Lord Justice O’Connor, Lord Justice Bingham and Lord Justice Stuart-Smith) preferred the view of Mr Justice Saville on the section 1(3) point. The Court held that 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. As Lord Justice Stuart-Smith observed, (ibid, 260):

“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, while agreeing that the “pay to be paid” condition was not struck down by section 1(3) of the 1930 Act, took the opportunity (ibid, 247-8) to set out eight general points on the construction of the 1930 Act. The following are material in the present context:

“(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 at p.198:

‘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.”

Lord Brandon answered the first of those questions by holding (ibid, 28E)that, immediately before the members were ordered to be wound up, they had only contingent rights against the clubs in respect of liabilities to third parties incurred by them. As he put it: “The rights were contingent in that it was a condition precedent to the members being identified by the clubs in respect of those liabilities that they should first have been discharged by the members themselves. On the second of those questions – the section 1(3) point – he agreed with the views of Mr Justice Saville and the Court of Appeal: the “pay to be paid” provisions, being terms of the contracts of insurance between the members and the clubs, did not purport, directly or indirectly, to avoid those contracts, or to alter the rights of the parties under them, upon the members being wound up, so as to render those provisions to that extent of no effect under section 1(3) of the Act of 1930. He agreed with Mr Justice Saville, also, as to the answer to the third question. Differing from Mr Justice Staughton and the Court of Appeal on that point, he held that the statutory transfer of rights to the third party could not put the third party in any better position vis à vis the insurer than that which the insured had enjoyed before the transfer. So that if “the insurer would have had a good defence to a claim made by the insured before the statutory transfer of his rights to the third party, the insurer will have precisely the same good defence to a claim made by the third party after such transfer” – (ibid, 29H). The clubs would have had a good defence to any claim for indemnity made by the members before they were wound up – on the ground that the condition precedent introduced by the “pay to be paid” provision had not been satisfied – and they could rely upon the same defence against claims for an indemnity made by third parties to whom the rights of the members had been transferred by section 1(1) of the 1930 Act. Each of the other members of the House (Lord Keith of Kinkel, Lord Ackner, Lord Goff of Chieveley, and Lord Jauncey of Tulichettle) expressly agreed with Lord Brandon.

Lord Goff explained his reasons for adopting the approach of Mr Justice Saville and the Court of Appeal on what he described as “the central question in these cases”: whether the condition of prior payment was rendered of no effect by section 1(3) of the Act of 1930. He then went on to say this (ibid, 38d-h):

“It is evident that certain of the judges in the courts below (I refer in particular to Staughton J in the Fanti [1987] 2 Lloyd’s Rep 299, 310, and to Stuart Smith LJ in the Court of Appeal [1989] 1 Lloyd’s Rep 239, 258-259) were much affected by what they perceived to be the unfortunate consequences which would follow if the cargo owners were denied a direct action against the clubs. Indeed Stuart-Smith LJ went so far as to say that, if the argument of the clubs were to prevail, any liability insurer could drive a coach and horses through the Act by the simple device of incorporating a pay to be paid clause in the policy. To my mind, this statement both exaggerates the danger and ignores the policy underlying the Act of 1930.

In his judgment, Bingham LJ, at pp 247-248, summarised in eight points his general approach to the construction of the Act. With that admirable summary I respectfully agree. In it, he stressed that the primary purpose of the Act was to remedy the injustice highlighted in particular in In re Harrington Motor Co Ltd, Ex parte Chaplin [1928] 1 Ch 105, in which it was held that payment by an insurance company to an insolvent insured of a sum due under a liability policy, fell to be distributed among the creditors of the insured, of whom the injured party was only one: see Bradley v Eagle Star Insurance Co Ltd [1989] AC 957, per Lord Brandon of Oakbrook. He also stressed that under the Act there were to be transferred to the third party only such rights as the insured had under the contract of insurance, subject always to section 1(3) of the Act which in effect prevented contracting out of the statutory transfer. This being the statutory scheme, it is very difficult to see how it could be said that a condition of prior payment would drive a coach and horses through the Act; for the Act was not directed to giving the third party greater rights than the insured had under the contract of insurance. . . .”

Lord Goff recognised (ibid, 39C) that, although claims in relation to cargo losses were generally fought between two groups of insurers (the cargo underwriters and the P&I Clubs), the effect of the decision which the House of Lords had reached on the section 1(3) point was that:

“There may conceivably be cases where there is loss of life or personal injury, arising from default on the part of the shipowners or their employees, in which insolvency of the shipowners could have the effect that a P&I Club in which the relevant ship was entered could, in theory, decline to make payment direct to the injured party or his next of kin.”

But he observed that, in such a case, the practice was to waive the condition of prior payment; and that not a single example had been given of an individual claimant being defeated by reliance on the “pay to be paid” condition. He pointed out that a “pay and be paid” condition had been a regular feature of P&I club rules long before 1930 – so that it could not be said to have been introduced for the purpose of defeating the transfer provisions in the Act – and suggested that it was highly unlikely that liability insurers (other than P&I clubs) would seek to incorporate similar conditions in their policies: “because to do so would be likely to render their policies less marketable in a competitive world”.

It is plain that, at the time when the parties entered into the asbestos liability policy and the reinsurance agreement which are under consideration in the present case, it must have been appreciated that there was a real risk that the volume and amount of potential asbestos claims could lead to the insolvency of T&N or some of its subsidiaries. It must have been appreciated, also, that – in the event of insolvency – problems could arise as to the effect of the statutory transfer of the insured’s rights under section 1(1) of the 1930 Act. The policy provides, in terms, for that possibility and for the problems which could arise. In the light of the decision of the House of Lords in The Fanti and The Padre Island (No 2) it can be seen that two particular problems needed to be addressed.

First, if there were to be a “pay to be paid” condition precedent to the insured’s right to be indemnified prior to insolvency, then what was to be done to ensure that that condition did not defeat the claims of third party asbestos claimants after insolvency. In other words, how was the possibility recognised by Lord Goff in the passage which I have just set out to be met? It must have been thought that the answer lay in the proviso to Section III, clause 1, paragraph (b); that is a to say, in waiving the condition precedent following the occurrence of an Insolvency Event.

Second, some provision had to be made for determining what claims should be the subject of indemnity; and, in that context, provision had to be made for claims handling which would be fair to both insured and insurer. As I have said, there was a commercial logic in leaving the right to handle claims in the hands of the insured until Ultimate Net Loss reached the Retained Limit for so long as the insured was able to meet claims made against it. But, following the insolvency of the insured, there was an obvious possibility that claims made by third parties against the insured would not be met (or, at the least, would not be met in full).

The effect of the statutory transfer under section 1(1) of the Act, read with section 1(4), was that the insurer became directly liable to the asbestos claimants; that is to say, the insurer came under the same liability to the asbestos claimants in respect of claims not met as it would have been under to the insured. And, the effect of the proviso to Section III, clause 1, paragraph (b) was (or was intended to be) that the insurer could not rely on the “pay to be paid” condition precedent. The insurer could, of course rely on the Retained Limit; but, once the Retained Limit had been reached, the insurer would be liable to pay asbestos claimants in respect of claims established thereafter, subject (of course) to the Limit of Insurance. So there was a commercial logic in providing that the right to handle claims passed to the insurer on the insolvency ofthe insured.

The question is whether those sensible commercial objectives can be achieved; or whether the provisions introduced to meet the two problems which I have mentioned are rendered ineffective by section 1(3) of the 1930 Act.

In my view, the judge was correct to find the answer to that question in the guidance which Mr Justice Slade had given in the Allobrogia case, [1979] 1 Lloyd’s Rep. 190 at p.198, in the passage adopted by Lord Justice Bingham in The Fanti and The Padre Island, [1989] 1 Lloyd’s Rep 239, 247-8, and expressly approved by Lord Goff, [1991] 2 AC 1, 38F-G:

“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.”

If section 1(3) of the Act is construed with that guidance in mind, it can be seen, first, that the phrase “the rights of the parties thereunder” - where it appears in the statutory requirement that “In so far as any contract of insurance . . . in respect of any liability of the insured to third parties purports . . . to alter the rights of the parties thereunder . . . , the contract shall be of no effect” - must have been intended to referonlytothe rights of the parties in respect of the liability of the insured to the third party; and, further, must have been intended to refer only to those rights of the parties in respect of the liability of the insured to the third party – whether rights of the insured against the insurer or rights of the insurer against the insured - which, if altered in the manner for which the contract provides (upon the occurrence of an event giving rise to a statutory transfer under section 1(1) and (2) of the 1930 Act), would “cancel, prejudice or reduce” the rights which, under the statute, were to be transferred to the third party “unaltered and undiminished”.

In particular, as it seems to me, Parliament should not be taken to have intended – when enacting what Lord Justice Bingham described in The Fanti and The Padre Island (No 2) (ibid,247) as a provision “to invalidate avoidance clauses” – to strike down provisions in the contract between insurer and insured which are designed to put the third party in a better position vis à vis the insurer (upon a statutory transfer of the insured’s rights) than the insured would have been immediately before the transfer; or which are designed to ensure that the substance of the right transferred is unaltered.

The proviso to Section III, clause 1, paragraph (b) - that is a to say, the waiver of the “pay to be paid” condition precedent following the occurrence of an Insolvency Event - can be seen as an example of a provision in the first of those categories. It is a provision in the contract between insurer and insured which is designed to put the third party in a better position vis à vis the insurer (upon a statutory transfer of the insured’s rights) than the insured would have been immediately before the transfer. It is for that reason, as it seems to me, that the reinsurers are right to accept that they cannot rely on the “pay to be paid” (or “payment in fact”) condition in Section III, clause 1, paragraph (b) as an answer to the claims of the asbestos claimants. Effect must be given to the proviso notwithstanding section 1(3) of the 1930 Act. And, as I have said, the administrators do not suggest otherwise.

It could not be said that the shift in claims handling rights effected by Section III, clause 4, paragraphs (a) and (f) is designed to put the third party in a better position vis à vis the insurer than the insured would have been immediately before the transfer. Rather, as it seems to me, the shift for which those paragraphs provide is designed to ensure that the substance of the right to indemnity, which is the subject of the statutory transfer, is unaltered.

The judge assumed that (had there been no provision for a shift in claims handling rights under paragraphs (a) and (f) upon the occurrence of an Insolvency Event) the claims handling rights would have remained in the insured, T&N, notwithstanding the occurrence of an event which gave rise to a statutory transfer under section 1(1) of the 1930 Act. Neither party has suggested that the judge was wrong to make that assumption. It is, I think, important to appreciate the significance of the premise upon which that assumption must be based. It seems to me that the reasoning of the House of Lords in The Fanti and The Padre Island (No 2), read with the speech of Lord Brandon in Bradley v Eagle Star Insurance compels the conclusion that (had there been no provision for a shift in claims handling rights under paragraphs (a) and (f) upon the occurrence of an Insolvency Event) the claims handling rights would have transferred (together with the other rights of the insured against the insurer) under the statutory transfer unless it could properly be said that the claims handling rights were not rights of the insured against the insurer in respect of the insured’s liability to the third party claimants. But, to treat the claims handling rights as rights of the insured against the insurer in respect of the insured’s liability to the third party claimants would give rise to the bizarre result that (had there been no provision for a shift in claims handling rights under paragraphs (a) and (f) upon the occurrence of an Insolvency Event) the effect of the statutory transfer would be that “the full, exclusive and absolute authority, discretion and control . . . with respect to the administration, defence and disposition” of his own claim would have been transferred to the asbestos claimant. It is, perhaps, unsurprising that neither the administrators nor the reinsurers contend for a construction of section 1(3) of the 1930 Act which has that result. The only way to avoid that result, as it seems to me, is to accept that the claims handling rights were not rights of the insured against the insurer in respect of the insured’s liability to the third party claimants. And, if that premise is accepted, then the claims handling rights (whether regarded as rights of the insured against the insurer or as rights of the insurer against the insured) are not rights to which section 1(3) of the 1930 Act has any application.

On the basis of the assumption which he made, the judge asked himself whether the shift in claims handling rights would constitute an alteration in the enjoyment by the third party of his rights against the insurers by prejudicing or reducing those rights in some material way? His answer to that question is found at paragraph 44 of his judgment, which (for convenience) I set out again:

“I cannot think that it does. Although, as between T&N (acting by its administrators) and the reinsurers, the question who has the claims handling rights before the Retained Limit is reached when, on any view, there is a transfer of those rights to the reinsurers, may be a matter of importance, I am unable to see why it should prejudice or reduce in any material way the rights transferred to the third party.”

If the judge was correct to make the assumption which he did – and neither party has suggested otherwise – then, as it seems to me, his conclusion was plainly correct. As I have said, it is important to keep in mind that the party in whom, from time to time, the right to handle asbestos claims lies under Section III, clause 4, paragraphs (a) and (f) is required to exercise that right with due regard to the interests of the other party. There is no reason to think that it will make any material difference to the third party – to whom the right to be indemnified is transferred under section 1(1) of the 1930 Act – whether claims are handled by T&N or by the insurer (or by the reinsurers).

I would dismiss the appeal and the cross-appeal from the judge’s order in relation to the first group of issues.

The second group of issues, and the judge’s determination in respect of each are these:

The central question is whether costs and expenses incurred and paid by the reinsurers in the exercise of claims handling rights – that is to say, following the transfer of such rights – are to be taken into account as part of Ultimate Net Loss. That question is raised directly by sub-paragraph (ii) of issue 12; but it is common ground that, if the judge was correct in the answer which he gave under issue 12(ii), he was correct, also, in his answer to issues 10 and 13.

The administrators appeal from the judge’s order in relation to issue 12(ii); from the second part of the order in relation to issue 10 (it being common ground that the judge was right to hold that Curzon and the reinsurers may be obliged, in the proper exercise of claims handling, to incur expenses); and from the order in relation to issue 13.

The reinsurers, by an amendment to their appellants’ notice (filed by way of cross–appeal), made during the hearing of the appeal without objection, seek to vary the judge’s order in relation to issue 10. It is said that the answer which the judge should have given to the question raised by that issue is:

If the judge were correct to hold (as he did) that costs and expenses incurred and paid by the reinsurers in the exercise of claims handling rights are to be taken into account as part of Ultimate Net Loss, then the further question arises: is T&N liable to reimburse those costs and expenses. That is the question raised both by paragraph (ii) of issue 11 and by paragraph (i) of issue 12. It is accepted by the administrators that, if the judge was correct in the answers which he gave in relation to those paragraphs, he was correct, also, in the answer which he gave to paragraph (iii) of issue 12.

The administrators appeal from the judge’s order in relation to issues 11(ii), 12(i) and 12(iii). There is no appeal from the order in relation to issue 11(i).

As I have explained earlier in this judgment, this question arises because, although Section IV, clause 17, paragraph (c) of the policy provides that there are to be included in Ultimate Net Loss “all reasonable and proper amounts paid in fact by the Policyholder . . . for costs, fees and expenses that are attributable to the defence or disposition of one or more Asbestos Claims”, that paragraph does not, in terms, include amounts paid by the insurer (or the reinsurers) in respect of claims handling expenses. So, it is said, the parties did not intend that claims handling expenses paid by the insurer (or the reinsurers) should be taken into account for the purpose of determining the amount of Ultimate Net Loss. And it makes no difference – in relation to the parties’ intentions as to what should be included under Section IV, clause 17, paragraph (c) – that the claims handling expenses were paid by the insurer (or the reinsurers) following a transfer of claims handling rights under the provisions of Section III, clause 4, paragraphs (a) and (f). Nor does it make any difference, in that respect, whether that transfer took place upon the occurrence of an Insolvency Event or upon Ultimate Net Loss reaching the Retained Limit.

I have also explained earlier in this judgment that the contention, advanced on behalf of the administrators, that the parties did not intend that claims handling expenses paid by the insurer should be taken into account for the purpose of determining the amount of Ultimate Net Loss (if correct) has two important consequences. First, it leads to the conclusion that if, following the occurrence of an Insolvency Event before Ultimate Net Loss has reached the Retained Limit (£690 million), claims handling expenses are paid by the insurer in the exercise of the claims handling rights which (upon the occurrence of that event) have been transferred to it, those expenses are not taken into account for the purpose of determining when, thereafter, Ultimate Net Loss does reach the Retained Limit. So that, in such a case, the point at which the insurer becomes liable to indemnify T&N against the claims of asbestos claimants – and the point at which the insurer may become liable to pay the asbestos claimants under the provisions of section 1(1) of the 1930 Act – depends on, and is liable to be postponed by, the decision of the insurer to exercise claims handling rights. Second, it leads to the conclusion that (whether or not an Insolvency Event occurs, and whether or not such an event occurs before or after Ultimate Net Loss has reached the Retained Limit) if, after Ultimate Net Loss has reached the Retained Limit, the insurer pays claims handling expenses, those expenses are not taken into account against the Limit of Insurance (£500 million). So that, in such a case, the amount which the insurer may have to pay in order to discharge its obligations to provide cover under the policy depends on, and is liable to be increased by, the decision to exercise claims handling rights.

It may be thought that commercial parties, agreeing the terms of a claims liability policy, would have been unlikely to have intended that their bargain should have the effect that both the point at which Ultimate Net Loss reached the Retained Limit (if an Insolvency Event had occurred) and the overall burden on the insured (by reference to the Limit of Insurance) should depend on the insured’s decision to exercise claims handling rights. But, as is said on behalf of the administrators, it is not for the court to speculate. It is not for the court to refuse to give effect to the bargain which the parties did make on the ground that (as the court might think) it would have been more sensible for them to have made a different bargain; nor should the court impose on the parties a bargain which (as the court might think) they could have been expected to make if they had considered the matter more carefully. The bargain, in the terms for which the administrators contend, is not unworkable; or even (as the administrators would say) unusual in this field. Effect can and should be given to it.

The judge did not accept that the omission from Section IV, clause 17, paragraph (c) of any reference, in terms, to amounts paid by the insurer in respect of claims handling expenses led to the conclusion that the parties did not intend that claims handling expenses paid by the insurer (or the reinsurers) should be taken into account for the purpose of determining the amount of Ultimate Net Loss. At paragraphs 80 to 85 and 87 to 94 of his judgment he set out, in detail, the contentions of the parties. His conclusions are found at paragraphs 96 to 101. I have already referred, earlier in this judgment, to his view, expressed at paragraph 98, that:

“. . . the treatment by the Policy of claims handling expenses is not intended to change depending on who, as between T&N and the insurer, happens at any given moment to be in charge of claims handling . . . The clear intent of the Policy is that these expenses . . . are to form part of the Ultimate Net Loss.”

The judge reached that view after describing, at paragraph 97 of his judgment, the pattern of treatment to which, as he thought, the administrators’ contentions would lead:

“It is a striking feature of the administrators’ position that, for so long as claims handling remains with T&N, claims handling expenses form part of the Ultimate Net Loss and count towards the Retained Limit, following which they are covered by the indemnity up to the £500 million Limit of Insurance. The expenses will continue to be so treated, notwithstanding the occurrence of any event causing a transfer of claims handling rights to the insurer, if the insurer surrenders back to T&N its rights under the clause, which it is free at its absolute discretion to do, or, even if claims handling rights remain with the insurer, if T&N (or a Subsidiary) makes payment of them. . . . Since a contractual insolvency event which is intended to trigger a transfer of rights under clause 4f can occur at any time and is a matter over which the insurer has no control, the possibility exists that, long before the Retained Limit is reached, the insurer may find, unless he hands back the exercise of such rights, that the claims handling expenses are to be ignored in calculating the Ultimate Net Loss and that it has to pick up full liability for them. In short, depending on whether a transfer of claims handling rights under 4f is triggered and how claims handling is thereafter carried out, the insurer may find himself having to pick up a potentially unlimited liability over and above the £500 million cover provided by the Policy.”

As I have said, the judge described that pattern of treatment as “whimsical”.

In the course of his analysis of the contentions advanced on behalf of the reinsurers the judge referred, at paragraph 89 of his judgment, to the submission that it was unreal to suppose that Curzon would have agreed to undertake a potentially unlimited liability for claims handling expenses when the incidence of those expenses “might be a mere matter of chance depending on whether, for example, the solicitors undertaking the claims handling should submit their bill to T&N or to the insurers for payment”. And he referred to this point again, at paragraph 97 of his judgment (in a sentence omitted in the passage which I have already set out):

“Thus, should the solicitors instructed to defend the claim choose to look to T&N for payment of their charges (and it is common ground that, without more, they would be entitled to do so) notwithstanding that, in the exercise of the claims handling rights transferred to them, the insurer has instructed the solicitors in question to act, the administrators accept that the charges so paid would form part of the Ultimate Net Loss . . .”

The point is reflected, also, in paragraph 98, where the judge refers to the treatment of claims handling expenses being “not intended to change depending . . . on whom, as between T&N (or any Subsidiary) and the insurer, the actual claims handler (for example a solicitor) happens to look to for payment of his charges”.

The importance of the point does not, perhaps, emerge fully from the judgment. The judge clearly accepted that solicitors instructed by the insurer, in the exercise of its claims handling rights under the policy, to defend claims made by asbestos claimants could look to T&N for payment of their charges. Indeed, he thought that was common ground. And he set out the underlying reason why that was said to be so. But, as it seems to me, he may have given less emphasis to the reason which led to the conclusion that solicitors instructed by the insurer could look to the insured for payment than it deserved. The reason appears at paragraph 89 of the judgment, where the judge records the submissions made on behalf of the reinsurers:

“Even though instructed by the insurers, the solicitors are solicitors of the insured. See Groom v Crocker [1939] 1KB 194 at 202-203. The insured remains legally responsible for the solicitors’ charges, notwithstanding that the solicitors may also be entitled to look to the insurer for payment; see Adams v London Improved Motor Coach Builders Ltd [1921] 1KB 495 at 501. Indeed the insured is regarded as having incurred the solicitors’ fees even though they have in fact been paid by the insurer: see Lewis v Avery (No 2) [1973] 1WLR 510 at 513. This shows that the exercise of claims handling carries, by itself, no implication that the cost of doing so falls outside the limit of cover under the Policy.”

It is important to keep in mind that the policy provides for the insurer to indemnify the insured (T&N) in respect of liability for claims made by asbestos claimants against T&N. The costs, fees and expenses which are included in the definition of Ultimate Net Loss under Section IV, clause 17, paragraph (c) are costs, fees and expenses attributable to the defence or disposition of Asbestos Claims – that is to say, claims for which the Policy holder or any Subsidiary is alleged to be responsible (Section IV, clause 1). The right to “the full, exclusive and absolute authority, discretion and control . . . of the administration, defence and disposition . . . of all Asbestos Claims” conferred by Section III, clause 5, paragraph (f) is a right to handle claims made by asbestos claimants against T&N. When handling claims in the exercise of that right, vis á vis the claimant, the insurer is acting on behalf of the insured, not on its own behalf.

The position of a solicitor acting in pursuit or defence of a claim brought by or against one person on instructions given by another person was considered by this Court in Adams v London Improved Motor Coach Builders Limited [1921] 1 KB 495. The plaintiff was a member of a trade union and, as such, entitled under its rules to legal aid out of the union’s funds in connection with a dispute against his employer. The union instructed solicitors to act on the plaintiff’s behalf. The plaintiff gave no formal retainer to the solicitors and there was no agreement that he would or would not be liable for their costs. It was assumed by the solicitors that their costs would be paid by the union. The plaintiff’s claim was successful and the solicitors sought, in his name, to recover costs from the defendant. The defendant took the point that costs could not be awarded to the plaintiff, because the plaintiff was under no liability to pay the solicitors. Lord Justice Bankes (with whom Lord Justice Atkin agreed) said this (ibid, 501):

“When once it is established that the solicitors were acting for the plaintiff with his knowledge and assent, it seems to me that he became liable to the solicitors for costs, and that liability would not be excluded merely because the Union also undertook to pay the costs. It is necessary to go further and prove that there was a bargain, either between the Union and the solicitors, or between the plaintiff and the solicitors, that under no circumstances was the plaintiff to be liable for costs.”

That passage was cited with approval by Viscount Dilhorne in Davies v Taylor (No 2) [1974} AC 225, 230C-G.

In Groom v Crocker [1939] 1 KB 194 the plaintiff had been defendant to an action brought by his brother alleging negligence in relation to a motor accident. The plaintiff’s insurer instructed solicitors, Messrs Crocker, to act for him in that action, as it was entitled to do under the terms of the policy. The policy contained a clause which gave to the insurer, if it so desired, “absolute conduct and control of all or any proceedings against the insured”. It was common ground between the plaintiff’s insurer and the insurer of his co-defendant in that action that responsibility lay with the co-defendant. Nevertheless, by agreement between the insurers the solicitors admitted negligence on the part of the plaintiff and judgment was given against him; which his insurer paid. On discovering what had been done in his name, the plaintiff brought proceedings against the solicitors alleging breach of duty and libel. Sir Wilfred Greene, Master of the Rolls, explained the position of the solicitors in these terms (ibid, 202-203):

“[The provisions of the policy] do not in terms refer to the position of solicitors, but they clearly entitle the insurers to nominate a solicitor to act in the conduct of the proceedings to which they relate. The duty of the solicitor to the assured for whom he is to act cannot of course be the same as that which arises in the ordinary case of solicitor and client, where the client is entitled to require the solicitor to act according to his own instructions. The whole object and usefulness of these provisions would be defeated if the assured were entitled to interfere with the conduct of the proceedings in that way. The assured in my opinion is not entitled to complain of anything done by the solicitor upon the instructions, express or implied, of the insurers, provided it falls within the class of things which insurers are, as between themselves and the assured, entitled to do under the terms of the policy when properly construed. . . .

. . . The right given to the insurers [under the policy] is to have control of proceedings in which they and the assured have a common interest – the assured because he is the defendant and the insurers because they are contractually bound to indemnify him. Each is interested in seeing that any judgment to be recovered against the assured shall be for as small a sum as possible. . . . The effect of the provisions in question is, I think, to give to the insurers the right to decide upon the proper tactics to pursue in the conduct of the action, provided that they do so in what they bona fide consider to be the common interest of themselves and their assured. . . .”

In Lewis v Averay (No 2) [1973] 1 WLR 510, the appellant was funded for an appeal to this Court by the Automobile Association. The respondent had the benefit of legal aid with a nil contribution. The appeal was successful and the appellant sought an order that his costs be paid out of the legal aid fund. The application was resisted on behalf of the legal aid fund on the basis that the appellant’s costs had not been incurred by him; the costs had been incurred by the Automobile Association. It was said that the Association “undertook the appeal and instructed their solicitors and paid them”. Lord Denning, Master of the Rolls, with whom the other members of the Court agreed, rejected that submission. He said this (ibid, 513G):

“[The appellant] is the person who is legally responsible vis à vis the other party; but he is indemnified by those standing behind him. That is sufficient to satisfy the requirement that those costs were ‘incurred by him’.”

The conclusions to be derived from the cases to which I have just referred were summarised by Mr Justice Phillips in Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437, 451:

“. . .

3.

Where underwriters instruct a solicitor to conduct the defence, they thereby create the relationship of solicitor and client between the solicitor and the assured – Groom v Crocker at pp 202-202.

4.

The normal consequence of this is that the assured becomes liable to pay the solicitor’s costs, even if the underwriters were also liable for those costs: Adams v London Improved Motor Coach Builders Ltd, [1921] 1 KB 495 at pp 501 and 504.

5.

Those costs are properly deemed to be incurred by the assured, even if they are funded by underwriters: Davies v Taylor (No 2) [1974] AC 225, at p 230; Lewis v Avery (No 2), [1973] 1 WLR 510 at p 513.

. . .”

I return, therefore, to the question whether claims handling expenses paid by the insurer in the exercise of its right, under Section III, clause 4, paragraph (f), to handle claims made by asbestos claimants against T&N (or a subsidiary), are within the definition of Ultimate Net Loss by virtue of Section IV, clause 17, paragraph (c). It is clear that the expenses of handling claims against the insured which are incurred on the instructions of the insurer (acting in pursuance of its right to give instructions on behalf of the insured) are properly to be regarded as incurred by T&N (or the relevant subsidiary), notwithstanding that, as between the insurer and the persons instructed, those expenses may also be said to have been incurred by the insurer. The short question of construction, as it seems to me, is whether the phrase “amounts paid in fact by the Policyholder or any Subsidiary” can properly be read as including “amounts incurred by the Policyholder or any Subsidiary and paid in fact by the Insurer”. I think that the answer to that question is “Yes”.

It is pertinent to keep in mind that “payment in fact” of claims handling expenses by the insured is not made a condition precedent to the insurer’s liability under the policy by Section III, clause 1, paragraph (b). That is in contrast to “payment in fact” of Asbestos Claims, which is made a condition precedent under that paragraph. Asbestos Claims – as defined in Section IV, clause 1 – do not include the expenses of handling such claims, which are the subject of Section IV, clause 17, paragraph (c). Further, “payment in fact” of an Asbestos Claim is not a condition precedent to the insurer’s liability following the occurrence of an Insolvency Event – see the proviso (i) to Section III, clause 1, paragraph (b). But the obligation to indemnify, in Section I of the policy, is “for any and all Ultimate Net Loss in excess of the Retained Limit”. It must have been intended, therefore, that there would be cases in which there was an obligation to indemnify notwithstanding that there had been no “payment in fact” by the Policyholder or any Subsidiary in respect of the loss. Ultimate Net Loss, as defined in Section IV, clause 17, must be construed with that in mind.

In a case where, following the occurrence of an Insolvency Event, the policyholder or a subsidiary (as the case may be) is unable to discharge its liability in respect of an Asbestos Claim – that is to say, a case within Section III, clause 1, paragraph (b), proviso (i) – the insurer is plainly intended to be liable to indemnify the insured in respect of the claim, notwithstanding that the claim has not been “paid in fact” by the policyholder or the subsidiary. And it is equally plain that, in such a case, “sums paid in fact by the Policyholder or any Subsidiary” – where that phrase appears in Section IV, clause 17, paragraphs (a) and (b) – must be read as including “sums incurred by the Policyholder or any Subsidiary and paid in fact by the Insurer”. The phrase “amounts paid in fact by the Policyholder or any Subsidiary” – in paragraph (c) - must be read in the same way. It includes “amounts incurred by the Policyholder or any Subsidiary and paid in fact by the Insurer”.

It follows that I would hold that costs and expenses incurred and paid by the reinsurers in the exercise of claims handling rights, are to be taken into account as part of Ultimate Net Loss. I would dismiss the administrators’ appeal in relation to issues 10, 12(ii) and 13 of the judge’s order.

It remains necessary to consider the reinsurers’ cross-appeal in relation to issue 10. It is said that, in his answer to that issue, the judge ought to have given greater recognition than he did to the difference between the position before and the position after Ultimate Net Loss had reached the Retained Limit. In particular, it is said that the answer should have made it clear that, before the Retained Limit is reached, the insurer may be obliged to incur expenses (in the sense of instructing but not assuming responsibility to pay claims handlers), but not to discharge them; and that it is only after the Retained Limit is reached that the insurer may be obliged both to incur and discharge (by way of indemnity to T&N) claims handling expenses. In my view there is nothing in the point. If the insurer assumes responsibility for claims handling – which, if Ultimate Net Loss has not reached the Retained Limit, it will be entitled to do only if an Insolvency Event has occurred – it will, necessarily, instruct claims handling agents. Although, as a matter of legal analysis, those claims handlers will be instructed on behalf of the insured, they will be instructed by the insurer and will look to the insurer for payment. It is unreal to think that, vis à vis the claims handler, the insurer will not assume a responsibility for payment and will not, in fact, discharge that responsibility by payment. The relevant question is on whom, as between insurer and insured, the primary responsibility lies. That is the question raised by issues 11(ii) and 12(i); and it is to that question that I now turn.

As I have said, if the judge were correct to hold that costs and expenses incurred and paid by the reinsurers in the exercise of claims handling rights are to be taken into account as part of Ultimate Net Loss, then the further question arises: is T&N liable to reimburse those costs and expenses? It is in relation to that question that there is a distinction, in practice, between the position before and the position after Ultimate Net Loss has reached the Retained Limit.

Once Ultimate Net Loss has reached the Retained Limit – and until the insurer’s liability is capped by the Limit of Insurance - the insurer is liable to indemnify the insured in respect of claims handling expenses. It follows that, during that period, the insurer is obliged to discharge the claims handling expenses which are incurred on its instructions, without there being any right to reimbursement. The insurer’s right is to aggregate those expenses with the claims as part of Ultimate Net Loss. So those expenses are taken into account in determining the point at which the insurer is discharged from further liability by the Limit of Insurance.

During the period before Ultimate Net Loss has reached the Retained Limit, the insurer is not liable to indemnify the insured in respect of claims handling expenses. And that remains the position notwithstanding that claims handling rights have been transferred to the insurer upon the occurrence of an Insolvency Event. Section III, clause 1, paragraph (a) requires that no Insolvency Event affecting the policyholder or any subsidiary shall cause any liability of the insurer under the policy to become due earlier than would otherwise have been the case if the Insolvency Event had not occurred. It is to give effect to that requirement, as it seems to me, that the parties must be taken to have intended that the insurer would be reimbursed by the insured in respect of claims handling expenses paid by the insurer – pursuant to its right to handle claims under Section III, clause 4, paragraph (f) – during the period between the occurrence of an Insolvency Event and the date at which Ultimate Net Loss has reached the Retained Limit.

Support for that view can be found, as it seems to me, in the judgment of Mr Justice Phillips in Cox v Bankside (supra), to which I have already referred. In the section of that judgment which follows the heading “Costs” (ibid, 450-451) Mr Justice Phillips addressed the question whether E&O underwriters were entitled to reimbursement of defence costs which they had discharged. The relevant provisions of the policy in that case – the insuring clause and general condition 1 – were in these terms:

“ [Insurers] agree to the extent and in the manner hereinafter provided to indemnify the Assured against all sums which the Assured shall become legally liable to pay as damages and/or costs and/or legal expenses but not exceeding the sum stated in item 3 of the Schedule (such sum to include costs and expenses incurred with the written consent of the Insurers in defence or settlement of any claim) in respect of claims which are first made against the Assured during the period specified in the Schedule arising from . . .”

“In respect of all losses notified by the Assured or claims first made against the Assured during the period of Insurance, the aggregate amount specified in Item 4 of the Schedule [the excess] which amount shall be inclusive of damages and claimants costs and expenses, and costs and expenses incurred with the written consent of the Insurers in the defence or settlement of any claim, shall be borne by the Assured at their own risk and the Insurers shall only be liable to indemnify the Assured in excess of such amount.”

Mr Justice Phillips set out the submissions made by Mr Sumption QC on behalf of the underwriters:

“1.

All defence costs are ‘incurred by’ the assured, whether defence solicitors are instructed and/or paid by underwriters or by the assured. 2. If underwriters fund defence costs which should properly be borne by the assured under general condition 1, the assured is liable to reimburse underwriters in respect of this expenditure. Underwriters can set off this liability against their indemnity obligations under the policy. 3. Subject to 2, underwriters are liable to indemnify the assured for defence costs incurred with their written consent, up to the limit of cover. 4. The requirement for written consent can be waived by underwriters. 5. Subject to 2, when underwriters fund defence costs they thereby discharge their liability to indemnify the assured against those costs, so that the payments made encroach upon the limit of cover.”

As will have appeared from the summary of his conclusions which I have already set out, Mr Justice Phillips accepted the first of those submissions. He adopted the second submission in his sixth conclusion (ibid, 451):

“6.

If underwriters fund defence costs of an assured which fall within the excess, the assured will be under an obligation to reimburse underwriters. This obligation arises under the terms of general condition 1, or alternatively under principles of restitution”.

As he pointed out, that conclusion was based on the premise that the assured was legally liable to pay the solicitors who were instructed to conduct the defence. I have already explained why that condition is satisfied in the present case.

Cox v Bankside (supra) came before this Court on appeal from Mr Justice Phillips on other points; but not – or, at least, not directly - on the question of reimbursement of defence costs. There is nothing in the judgments in this Court which throws doubt on the conclusion which Mr Justice Phillips reached on that question. There is support for the proposition that where, under a contractual right to do so, insurers take over the conduct of the insured’s defence to a claim the lawyers instructed by the insurers act for and represent the insured – (ibid, 462, per Sir Thomas Bingham, Master of the Rolls).

Mr Justice Blackburne, in addressing this point in his judgment in the present case, did not choose to rely on the decision of Mr Justice Phillips in Cox v Bankside (supra). He said this, at paragraph 100:

“The decision in that case, so far as relevant to these issues, turned on different contractual terms and, insofar as it rested on a general principle, is open to question having regard to what was said about the availability of a remedy in restitution where it is sought, by recourse to restitutionary principles, to redistribute risks for which provision has been made, either explicitly or implicitly, under the applicable contract. See Pan ocean Shipping Co Ltd v Credit Creditcorp Ltd [1994] 1WLR 161 at 164 and 165 (Lord Goff of Chieveley).”

For my part, I do not share the judge’s reservations. This is not, as it seems to me, a case where it is sought, by recourse to restitutionary principles, to redistribute risks for which provision has been made, either explicitly or implicitly, under the applicable contract. The risk, in relation to claims handling costs incurred before Ultimate Net Loss has reached the Retained Limit, is placed on the insured under the terms of the contract; and that remains the position notwithstanding the shift in claims handling rights following the occurrence of an Insolvency Event – see Section III, clause 1, paragraph (a). Further, as it seems to me, the contractual provisions upon the basis of which Mr Justice Phillips reached his conclusions (the insuring event and general condition 1) are not materially different from those in Section I, clause 1 and Section III, clause 1, paragraph (a) in the policy now under consideration.

For those reasons I would hold that T&N is liable to reimburse claims handling expenses incurred on the instructions of the insurer during the period between the occurrence of an Insolvency Event and the date at which Ultimate Net Loss has reached the Retained Limit. I would dismiss the administrators’ appeal in relation to issues 11(ii), 12(i) and 12(iii).

The only issue in this third group is:

Issue 14. Whether any reimbursement of claims handling expenses that T&N is obliged to make should be paid as if it were an expense of the administration of T&N under section 19(4) of the Insolvency Act 1986?

Answer: No.

During the course of argument, the reinsurers broadened the issue by referring to section 19(5); alternatively to the court’s discretion to authorise and, if need be, direct an administrator to make a payment on the footing that the payment is to be treated as an expense of the administration.

Section 19 of the Insolvency Act 1986 – as it stood before Part II of that Act (Administration Orders) was replaced by the provisions enacted as Schedule B1 to the Enterprise Act 2002 – provided for the vacation of office by an administrator appointed under section 13 of that Act. Sections 19(3) to (5) were in these terms:

“(3)

Where at any time a person ceases to be an administrator, the following subsections apply.

(4)

His remuneration and any expenses properly incurred by him shall be charged on and paid out of any property of the company which is in his custody or under his control at that time in priority to any security to which section 15(1) then applies.

(5)

Any sums payable in respect of debts or liabilities incurred, while he was administrator, under contracts entered into . . . by him or a predecessor of his in the carrying out of his or the predecessor’s functions shall be charged on and paid out of any such property as is mentioned in subsection (4) in priority to any charge arising under that subsection.”

The judge observed that it was common ground that claims handing expenses incurred and paid by the administrators were expenses under section 19(4) of the 1986 Act; and that, accordingly, expenses incurred and paid by the administrators were charged on property of T&N, being property under the administrators’ control, in priority to the claims of the holders of floating charges. Issue 14 arises in respect of claims handling expenses paid by the reinsurers in the exercise of claims handling rights which have been transferred to them under the Policy (read with the reinsurance agreement); and, in practice, it arises only in relation to expenses incurred between the occurrence of an Insolvency event and the date on which Ultimate Net Loss has reached the Retained Limit. As the judge put it:

“The effective question is whether, as the reinsurers contend but the administrators dispute, such claims handling expenses are, or are to be treated as, expenses of the administration and, assuming that sufficient assets [are] available, are recoverable as such or whether, as the administrators contend but the reinsurers dispute, they merely rank for payment as ordinary unsecured liabilities of T&N with the prospect that they may not be fully recovered.”

The judge decided that question against the reinsurers. At paragraph 106 of his judgment he identified two of the three arguments advanced by the reinsurers:

“[1] The reinsurers submit that section 19(5) of the 1986 Act applies to such payments because, although on the assumptions applicable to this issue the contract with the particular claims handler has been entered into by the reinsurers (and not by the administrators), the contract has been entered into on T&N’s behalf and, being a contract made during the administration, should be treated as duly authorised by the administrators acting on T&N’s behalf. The fact that under the Policy (which is a pre-administration contract) the reinsurers have a right of reimbursement by T&N does not prevent the application of section 19(5) (which is confined to payments in respect of debts and liabilities under post-administration contracts entered into by an administrator on the company’s behalf) to the post-administration contract with the claims handler.

[2] Alternatively, they submit that reimbursement of the expenses by the administrators is in the interests of T&N’s creditors since it is in their interests that T&N’s liabilities should be determined in a proper and not excessive amount both before and after the Retained Limit has been reached. It is in their interests that the available cover under the Policy should be preserved for genuine claims. It is in their interests that payment of what is due to the reinsurers is made, since a failure to effect reimbursement may jeopardise the very existence of the Policy which is T&N’s largest asset. The reality, they submit, is that the liability to reimburse is a liability that falls on the administrators acting as agents of T&N. The expenses in question are, therefore, to be regarded as having been incurred by the administrators under section 19(4).”

The judge rejected those submissions, for the reasons which he set out at paragraph 107 of his judgment:

“I cannot agree with either submission. It is important to appreciate the nature of the claims handling expenses with which the issue is concerned. They are payments made by the reinsurers in discharge of amounts owed to claims handlers (primarily solicitors I imagine) in defending asbestos claims under contracts with claims handlers entered into post-administration bythe reinsurers on T&N’s behalf. The fact that, additionally to T&N, the reinsurers may be subject to a separate personal liability to the particular claims handler for his expenses is immaterial. The payments so made are not in discharge of any contracts entered into by the administrators. Nor are they expenses which have been incurred by the administrators. Indeed, the issue arises precisely because they are neither. The fact that the expenditure in question may be in the interests of T&N’s creditors and that the administrators could or might well have incurred the self-same expenses if they, rather than the reinsurers, had been instructing the claims handlers in question does not justify treating the expenses as if they were made under contracts entered into by the administrators or as if they were incurred by the administrators. The plain fact is that, in law, they are neither. It follows, in my view, that neither section 19(5) nor section 19(4) is in point.”

In my view the judge was wrong to hold that neither of sections 19(4) or 19(5) were in point. Section 19(4) of the 1986 Act, as it then was, provided that “expenses incurred [by the administrator]” shall be charged on and paid out of property of the company which is under his control in priority (inter alia) to the claims of those secured by a floating charge. It is implicit that the expenses should have been incurred in carrying out the functions for which the administrator was appointed. Section 19(5) made this explicit. It provided that “sums payable in respect of liabilities incurred . . . by [the administrator] in the carrying out of his . . functions” were to be paid out of property under his control, in priority to the statutory charge arising under section 19(4). The relevant question, as it seems to me, is whether liabilities for claims handling expenses incurred on the instructions of the insurer – acting under the rights conferred by the policy following the occurrence of an Insolvency Event – are properly to be treated as liabilities incurred by the administrator in carrying out his functions for the purposes of section 19(5) of the Act. And that question falls to be addressed on the basis (i) that liabilities for claims handling expenses incurred on the instructions of the insurer, acting in defence of claims against the insured, are liabilities of the insured and (ii) that, had those liabilities been incurred on the instructions of the administrators, they would have been properly treated as liabilities incurred on behalf of the insured company in carrying out their statutory functions - for it is only on that basis that, if paid by the administrators, claims handling expenses would have fallen (as is common ground) within section 19(4) of the Act.

It is necessary, therefore, to have in mind the purposes for which the administration order was made by Mr Justice Hart on 1 October 2001. Those purposes included (i) the approval of a voluntary arrangement with the company’s creditors under Part 1 of the Act of 1986 and (ii) the sanctioning of a compromise or arrangement between the company and “such persons as are mentioned in section 425 of the Companies Act 1985”. The persons mentioned in section 425 of the 1985 Act include the company’s creditors. In my view it is not open to doubt that the purposes for which the administration order was made could not be achieved unless steps were taken to identify the creditors of T&N and the relevant subsidiaries. Further, unless otherwise directed by the court, the functions of the administrators included the taking of such steps as were necessary to identify the creditors, including creditors in respect of asbestos claims. As I have said, the administrators accepted before the judge that claims handling expenses which they had incurred and paid would fall within section 19(4) of the Act. The basis for that must be that such expenses would be incurred in discharging the function to which I have just referred.

The purposes described in the order of 1 October 2001 were subsequently extended, by an order made by Mr Justice Lindsay on 16 July 2004 (after Mr Justice Blackburne had given judgment on the applications before him), to include an additional purpose, namely a more advantageous realisation of the company’s assets than would be effected in a winding up. That, too, requires the identification of the asbestos claimants. It is only when asbestos claims are established that recourse can be had to the substantial asset represented by the policy.

Section 14(1) of the 1986 Act, as it then was, empowered the administrator of a company to do all such things as might be necessary for the management of its affairs; and, in particular, to exercise the powers specified in schedule 1 to that Act. Paragraph 13 of that schedule gave power to make any payment which is necessary or incidental to the performance of the administrator’s functions. Section 14(5) of the Act provided that, in exercising his powers the administrator was deemed to act as the company’s agent.

It follows that, unless otherwise directed by the court, claims handling expenses, properly incurred, are necessary to the carrying out of the purposes for which the administration order was made on 1 October 2001; and, if not incurred on the instructions of the reinsurers – acting under the powers conferred by the policy and the reinsurance agreement – would have to be incurred on the instructions of the administrators. It is important to keep in mind – in this context as well as in others – that the power to handle claims must be exercised “in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to the Policy and of the reinsurers”. It is important to keep in mind, also, that (whether incurred on the instructions of the reinsurers or on the instructions of the administrators) the claims handling expenses are liabilities of T&N and the relevant subsidiaries.

For those reasons I would hold that, in principle, liabilities for claims handling expenses incurred on the instructions of the reinsurers – acting under the rights conferred by the policy and the reinsurance agreement following the occurrence of an Insolvency Event – are properly to be treated as liabilities incurred by the administrators in carrying out their functions for the purposes of section 19(5) of the Act. It is not, I think, necessary to consider the further submission, advanced on behalf of the reinsurers, that – in the light of the decision of this Court in In re Atlantic Computer Systems Plc [1992] Ch 505 – the court would have power, in any event, to authorise (and, if necessary, direct) the administrators to make payments by way of reimbursement to the reinsurers of their claims handling expenses as an expense in the administration. But I should add that I would regard it as open to both the administrators and to the reinsurers to apply to the court for directions in the administration as to what claims handling expenses do, in fact, need to be incurred. As I have said, the basis on which I would hold that claims handling expenses incurred on the instructions of the reinsurers are properly to be treated as liabilities incurred by the administrators in carrying out their functions for the purposes of section 19(5) of the 1986 Act is that, unless otherwise directed by the court, those are expenses which are necessary to the carrying out of the purposes for which the administration order was made on 1 October 2001. What claims handling expenses do, in fact, need to be incurred in the administration must remain a matter under the control of the court.

I would allow the reinsurers’ appeal in relation to issue 14; and direct that that the order in relation to that issue be varied as follows:

I would dismiss the administrators appeal on all issues. I would dismiss the reinsurers’ cross appeal on issues 4 and 10. I would allow the cross-appeal on issue 14 to the extent indicated.

I agree. I have, however, read Lady Justice Arden’s judgment. I would wish to reserve my position in relation to the issue which she has dealt with. It was not the subject of express argument before us.

I agree with the judgment of Chadwick LJ for the reasons that he gives, save on one point. It concerns section 1(4)(b) of the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”). Section 1 (4) provides::

“(4)

Upon a transfer under subsection (1) or subsection (2) of this section, the insurer shall, subject to the provisions of section three of this Act, be under the same liability to the third party as he would have been under to the insured, but -

(a)

if the liability of the insurer to the insured exceeds the liability of the insured to the third party, nothing in this Act shall affect the rights of the insured against the insurer in respect of the excess; and

(b)

if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Act shall affect the rights of the third party against the insured in respect of the balance.”

The point to relation to which I wish to express my reservations relates to the effect of the 1930 Act, as explained in [36](iii) and [37] of the judgment of Chadwick LJ. It is the question as to the effect of section 1 of the 1930 Act when the statutory transfer of the insured’s rights to the third party occurs. The relevant issue is: what happens in that situation to the right of the third party as against the insured? Chadwick LJ holds, and I agree, that that right is not extinguished. However Chadwick LJ also comes to the conclusion that the implication of section 1(4)(b) of the 1930 Act is that the third party is in that case unable to enforce his or her claim against the insured/tortfeasor. Chadwick LJ gives two reasons for his conclusion:

“As section 1(4)(b) makes clear, the insured remains liable to the third party, at least to the extent that the third party’s rights against the insured exceed the rights which are the subject of the statutory transfer. But, as it seems to me, Parliament plainly intended that, following the statutory transfer to the third party of the insured’s rights against the insurer in respect of the third party’s claim, the responsibility for meeting that claim should (as between insurer and insured) lie with the insurer. If that were not so, (i) there would be a risk of double recovery if the third party were to sue both insurer and insured and (ii) there would be a risk that the insured would be liable to the third party in respect of a claim in which he no longer had any right of indemnity under the policy – because his right had been transferred to the third party by the statute. It would, of course, be a strange case in which the third party chose to pursue the insolvent insured rather than the solvent insurer. But the question whether (and for what) the third party could prove in the insolvency of the insured would have to be addressed if the insurer were also insolvent.”

This may be yet another instance with which the 1930 Act has not dealt: as to the shortcomings of the 1930 Act generally, see Third Parties – Rights AgainstInsurers, a joint report by the Law Commission and the Scottish Law Commission (2001) (Law Com No 272) (Scot Law Com No 184).It may not be necessary to the decision in this case, and (as it was not argued on this appeal) I wish merely to ensure that the point is left open for full argument and decision on another occasion if it becomes material. It could, as Chadwick LJ accepts, become important if the insurer were to become insolvent or (being a corporation) was dissolved and could not be revived or its assets were located in a jurisdiction where the third party’s claim could not be enforced.

I agree that the apparent assumption in section 1(4)(b) is, as Chadwick LJ concludes, is that the third party would only be able to enforce any claim against the insured to the extent that the amount of the claim exceeded the amount for which the insured was held covered. However, the third party must first bring proceedings against the insured, and obtain judgment against him, in order to establish the existence and amount of the liability owed to him by the insured (Bradley v Eagle Star Insurance Co Ltd [1989] AC 957). Moreover, the object of the 1930 Act was to give new and additional rights to the third party ( see the judgment of Chadwick LJ at [30]), not to reduce them, as would happen if, for example, the insurer was in fact less solvent than the insured or, being a corporation, had ceased to exist (in circumstances where it was no longer possible to revive it). If, on the other hand, the insured was held liable and, in consequence, paid a claim that was covered by the insurance in question, my provisional view is that, one way or another, he would be entitled to obtain recovery from the insurer. In addition, in my judgment (which is provisional as the matter has not been argued), neither the insured not the insurer could be made liable to pay the third party a second time to the extent that this would result in the third party receiving more than is needed to compensate him for his loss. On this basis, paragraphs (a) and (b) of section 1 (4) of the 1930 Act merely amplify the opening words of that section, and accordingly are to be read simply as explicatory of the effect of the statutory transfer on the insurer.