A recent High Court decision in Riedweg v HCC International Insurance Plc & Anor [2024] EWHC 2805 has ignited a flurry of discussion among legal commentators. They have variously described it as “critical”, “important”, and, for one displeased commentator, a “nasty little trap”. We suggest a different view: while the outcome may not have satisfied insurers, it was predictable and arose from a straightforward construction of statute. It affirms rather than shifts the legal tectonic plates.

The central question in the Riedweg case is an interesting one: when a claimant sues an insurer directly for a liability of its insured, can the insurer recover a contribution from a third party? The court answered simply: no.

Policyholder Disputes associate Arjun Dhar explains why in this article.

Background

The claimant was a property buyer who engaged Goldplaza, a property valuer. Goldplaza valued a property at £8m. The claimant, in reliance on that valuation, entered into a contract to purchase it. Subsequently, it emerged that the property had been vastly overvalued, leaving the claimant with losses of £2.2m.

The claimant sought to bring a claim in negligence against Goldplaza for its losses, but Goldplaza had gone into liquidation. Nevertheless, Goldplaza had professional liability insurance, which meant if the claimant was successful, the insurer would have to pay for its losses.

The Third Parties (Rights Against) Insurers Act 2010 (TPRAI)

The TPRAI was designed for situations like this. It enables a claimant to pursue an insolvent defendant for an insured liability through its insurer directly. The claimant is said to “step into the shoes” of the insured for the purposes of bringing the claim. In technical terms, the rights of the insured in respect of the liability “are transferred to and vest in the person to whom the liability is or was incurred”.

Relying on this provision, the claimant sued the defendant’s professional indemnity insurer, HCC International. The insurer then argued that the buyer’s solicitors were at least partially responsible for the claimant having overpaid for the property and applied for permission to join them to the claim as co-defendants.

Civil Liability (Contribution) Act 1978 (“CLCA”)

The CLCA enables a person legally responsible for damage to recover a contribution from any other person legally responsible for the same damage. The insurer argued that the CLCA gave it the right to claim a contribution from the claimant’s solicitors, who it said had committed various wrongs and breaches and were partially responsible for the claimant having overpaid for the property.

Issue

The claimant’s solicitors objected to being named co-defendants. They deployed a technical argument to say that the insurer had no right to bring the claim because the CLCA only allowed a party to claim against another in respect of the “same damage”. The damage they had allegedly done to the claimant, they said, was not the “same damage” in respect of which the insurer was potentially liable. Importantly, both parties agreed there would be no issue if Goldplaza were the defendant and had tried to name the solicitors as co-defendants.

The court’s decision

The court sided with the solicitors. The key elements of its reasoning were as follows:

• The CLCA only permits a contribution for the “same damage”. Case law says that (i) the “same damage” means common liability to the same claimant, and (ii) the only “damage” an insurer is capable of inflicting is in refusing to pay out under an insurance policy. This is not the same as the damage its insured was accused of having caused the claimant, ie causing her to incur a loss because of a negligent overvaluation.
• The TPRAI expressly creates a statutory mechanism for a “claimant” to pursue an “insurer” It does not create a mechanism for the insurer to acquire the insured’s rights or to step into the insured’s shoes in any other way.

For these reasons, the court held that an insurer being pursued directly for its insured’s liability pursuant to the TPRAI cannot assume the rights of its insured (including the right to seek contribution from a third party).

Reflections

Why did the case stir so much interest? On one view, it would have been a balanced and fair outcome for a court to find that the insurer could seek a contribution from a third party for its insured’s damage, as the insured would have been able to do if it was defending the claim itself and as the insurer would be entitled to on a subrogated basis after having indemnified the insured or paid the claimant directly. If an insurer is responsible for defending a claim against its insured itself, then, the argument goes, an insurer should be able to defend with the same tools that its insured would have had. This includes the ability to seek a contribution from a third party responsible for the same damage.

The problem with that view is that the TPRAI does not make any provision for an insurer to acquire the rights of its insured, and it is not a natural state of affairs for any party to step into an insured’s shoes. The TPRAI disrupts the natural contractual state by expressly creating a pathway for a claimant to sue an insurer directly.

Interest

Some interesting elements emerge from the case.

First, the court described the effect of the two pieces of legislation on the claimant-defendant-insurer relationship. When a claimant steps into an insured’s shoes, it gains nothing more or less than the insured’s right to sue the insurer under the insurance policy. The corollary of this is that the insurer’s liability is no more than an obligation to pay out under the insurance contract. The insurer does not become responsible to a third party for the damage its insured caused. This maintains a distance from the original damage that insurers would do well to preserve.

Second, the decision is low stakes from insurers’ perspective. It remains open (and is usual) for an insurer to pursue a contribution through a subrogated claim. In a situation such as this, an insurer would typically pay out a claim once liability has been established. At that point, it becomes subrogated to its insured’s rights of suit, including its right to seek a contribution from a third party. From a public policy perspective, it is not a bad outcome for an insurer to have to pay out to a claimant once an insured liability is established before pursuing other responsible parties. It avoids dragging out the litigation with the injured party.

Ultimately, the decision’s immediate impact is minimal because it takes a combination of unlikely events for an insurer to need to make a contribution claim specifically (ie where the ability to make a subrogated claim would be inadequate). It would require (1) a claimant pursuing an insolvent insured through their insurer, (2) a third party with significant liability for the same damage, and (3) some reason why a claim would need to be brought against the third party urgently (for example, because they are likely to become insolvent in the near future). These circumstances are not inconceivable, and insurers would feel the impact of the decision if such circumstances manifested in the context of a significant loss. In the long term, therefore, this could prove to be a more significant decision than it appears to be

Future

Several commentators have opined that the case is destined for appeal. While the court’s core reasoning is robust, there is certainly one question an appellate court could helpfully clarify: the TPRAI pathway for insolvent defendants. If the insured defendant is liquidated before the insurer pays out the claim, the insurer cannot acquire rights through subrogation because a dissolved entity, being a legal non-person, has no rights capable of subrogation. In that scenario, the only way an insurer could claim a contribution is to restore the liquidated entity purely to acquire the subrogated right to claim against third parties. This is a complex and cumbersome process, and it is unclear whether it is a purpose for which a court would order a company’s restoration. An appellate court could usefully clarify this.

Conclusion

The decision is robust. It may not produce neatness or parity between injured claimants and defendants’ insurers, but it affirms the objectives of TPRAI with minimal practical detriment to insurers. While there are reasonable moral and practical grounds to suggest insurers should be able to bring contribution claims when sued on behalf of an insured, the solution is to seek an update to the law. The decision is a reminder that an outcome does not have to be neat to be legally right.