LECTURES IN INSURANCE LAW
THIRD PARTY RIGHTS
References
1. Cap 405- Insurance (Motor Vehicle Third Party Risks) Act
2. Court Interpretation of 1930 UK Act-
3. Gatonye LLB Dissertation
4. EALR Vol 4 (1971)
5. Compulsory Motor Insurance In Kenya -By Kulundu Bitonye (LLM
Thesis)
6. John Karimi Thesis-1984 (LLB)
Questions to consider
i. What is the origin of Cap 405(UK 1930 Act)?
ii. What was the rationale of passing the Act?
iii. What is the link between Cap 405 and the 1930 Act of UK?
iv. What amendments have been made to the Act to date?
v. Are the amendments satisfactory?
vi. What are the major defects?
An insurer may insure against the insured’s liability to a third party,
whether in tort or contract. At times it may be effected as a result of
mandatory statutory requirements especially in motor vehicle and
employer’s liability. In discussing the common aspects of this
insurance it is necessary to look at:-
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I. Statutory protection given to third parties in the event of insured’s
bankruptcy or liquidation
II. Questions arising from standard conditions to be found in insurance
polices
III. Questions concerning the sum insured and costs of insurance
IV. Insurer’s duty to victim of their insured.
Under common-law, if an insured went, bankrupt or was placed under
liquidation after a claim arose against him, any money paid by his
insurers to indemnify the insured against claim after the beginning of
bankruptcy went towards the general assets of the bankrupt or
insolvent company and were not entitled to be claimed by any third
parties. Re Harrington Motor Co (1928) Ch. 105
Basis /History of Cap 405
The basis of Kenya’s Cap 405 is the 1930 Third Party Rights Act of
UK. This Act was designed to correct the injustices suffered by those
with a valid claim against an insurer who had become bankrupt. The
proceeds of contractual indemnity would but for the provision of this
Act form part of the general assets to be distributed amongst all
creditors. Under this Act a claim could be brought directly against the
insurer. Although the Act was designed to protect 3 rd parties,
provisions of this Act can be illusionary. Sec 1(1) of the Act gives
leeway for enforcement against the insurer directly. However,
enforcement can only happen if:-
i. You establish liability on the part of the insured
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ii. No defences are raised by the insurer against is insured e.g. non-
disclosure or breach of policy conditions.
iii. Obtain judgement against the insured. Only then can you receive
compensation.
Section 1&2 gives the bankrupt insured the duty to inform third
parties
In a sense, the Act is not meant or designed to protect third parties,
because of the above limitation rather it seeks to protect the insured
and insurer.
Section 1, 2, 3 are some of the provisions requiring amendments
The rights of the inured are transferred to third party only when
liability is incurred by insured. Liability is therefore not incurred until
judgement or the insured admits liability
Post Office Vs Norwich Union Fire (1967)2 QB363
Bradley Vs Eagle Star(1998)1 AC 957
Third party rights are no better than the insured’s rights
Post Office Bank Vs. Norwich Union established that the plaintiff
derived his rights from the 1930 Act subject to conditions of policy.
The conditions forbade an insured from admitting liability without the
consent of the insurer.
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Exclusion of the Act
Sec 1(3) of the Act
When looking at decided cases, the provision is of limited interest,
infact the application of the 1930 Act is theory and can easily be
avoided.
Fanti Vs Pandre Island Cases (1991) AC 1
This concerned the standard provisions of ship owners mutual
insurance clause. This introduced the ‘paid to be paid’ clauses.
In this case, the insured was wound up after liability to a third party
was established but before the third party claims had been paid. It was
held that the thied party did not have direct rights against insurers
under the 1930 Act.
Sec 1-3 is therefore is of no assistance to third parties as ‘paid to be
paid’ clauses imposed condition precedent before liability attaches to
an insurer.
What the 1930 Act transferred therefore was contingent right to
indemnify conditional on the insured having paid the 3 rd party. If the
condition was not satisfied the insured had no present right on
indemnity and therefore the statutory transfer could not put 3 rd party in
any better position than the insured.
Principle of equity could over ride ‘paid to be paid’ clauses. At
common law only an action of assumpsit’s by person entitled to
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indemnity. Equity intervened where reliance of contract will defeat
indemnity by requiring indemnifier to pay 3 rd party directly thus
equity remedy prevailed over common law. This argument was
rejected at common-law because whether there was express agreement
equity could not come in as it varies position agreed upon.
Where there are contract provisions certain issues arise:
Admission of liability
No admission of liability or payment shall be done without isnured’s written
consent at his own discretion.
Conduct of proceedings
It is the insurers discretion to take over and conduct proceedings and
therefore insurer acquires this right as long as it is in common interest of
insurer and insured.
Taking control of proceedings does not deny insurer the right to deny
liability to indemnify insured (he has not admitted because the
contract is between the insured and the insurer). There could be
conditions breached thus repudiation.
Where an insurer has taken over proceedings can he purport to deny
liability that the event is not covered?
Sole V Royal Insurance (1971) 2 LLR 332, the insured effected a
policy to indemnify himself against the possible successful
enforcement by his neighbour of a descriptive covenant on his
property. His defence against the action by neighbours which was
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successful was conducted by insurers but subsequently denied that
they were liable to insure him. The court held that they were liable
and that if they had not been liable there conduct in defending the
insured would have estopped them for denying liability
Admission of liability
This is designed to protect the interests of the insurer. There validity
cannot be questioned whether there is prejudice suffered or not or
whether loss has been suffered or not is irrelevant.
Terry vs Trafalgar Insurance (1970) 1LLR 524
Insurer’s refusal to defend
Where an insurer refuses to defend an action. The question is what
happens when the insured losses and settles the matter. This was
decided in Australia Distillers Ltd vs Ajax Insurance (1974) ALTR
136
Obligation to take reasonable precaution
Such clauses will literally negative a large cover intended to be
effected since one major purpose of a liability policy is to insure
against liability of negligence. Failure to take reasonable care when
duty is owed amounts to negligence. Courts have adopted the
common law construction of the condition.
Woodfall & Rymer Vs Moyer 1 KB 66 ,an employer who was insured
was vicariously liable for act of his employee. His employee failed to
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take reasonable care to ensure safety and as a result a fire broke out.
The court rejected the argument that the insured had failed to take
reasonable precaution because he had complied as he selected a
qualified fireman. As a result the insured was not personally
negligent.
Sums insured
There could be a limit in ones contract. For example one can be
covered for one year and in this period the insured can have as many
claims as possible.
THE REGIME OF KENYA’S CAP 405
Ques: Cap 405 is well intentioned but has several flaws in many
important aspects. What reforms would you suggest for cap 405?
In liability insurance, indemnity becomes due once liability is incurred
and liability will be said to be incurred once judgment against insured
is obtained or there is admission by insurer.
One must distinguish occurrence policy and claims made policy
where the former is limited by occurrence while the latter by a claim.
The distinction is important especially where insurer has changed
from one cover to another or one insurer to another
In limit per occurrence indemnity is provided where the peril is
insured against happens during period of cover.
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In claims made policy indemnity is available for all claims made
during the policy period: irrespective of whether or not peril causing
loss happened during the policy period.
Kelly Vs Norwich Union Fire Insurance Society(1989) 2 LLR 333
Tilley & Knoad Vs Dominion Insurance (!987) 2 EGLR 34
Conditions common to liability insurance policy
The insured is precluded from admitting liability to 3 rd parties prior to
obtaining consent from insurer
Insurer enjoys discretion whether or not to conduct the insured
defence. Failure to give consent or conduct defence doesn’t estope
insurer from repudiating the policy if indeed facts exist on which such
repudiation is allowed( see Groom Vs Crooker (1939) 1 KB 194
where the insured was found negligent). Held that there was a clear
breach of duty to the insured entitling the insured to damages.
Contrast this position with Beacon Insurance Limited Vs Langdaly
(1939) 4 AllER 209 the insurer did not admit liability but settled the
3rd party’s claim without the knowledge of the insured. Held that the
insurer had acted properly in securing an advantageous settlement
In law insurer can settle with a 3 rd party as long as they do not
unjustifiably admit liability and possibly so long as they do not settle
beyond policy limits or refuse a settlement offer within the limits of
the policy.
The insured to take reasonable care in dealing with 3rd parties
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Reasonable care has been interpreted t o cover only those
circumstances where insured is blatantly negligent. In dealing with
these cases, courts have adopted a common sense approach and have
excluded cover in situations where insured has been overly reckless.
Woodfall & Rymer Vs Moyer 1 KB 66 compare with Fraser Vs
Ffurman (1967) 1 WLR 898
The purpose of this condition is to ensure that the insured will not
because of policy cover refrain from taking precautions which he
knows ought not to be taken