In a recent case, the court held that a party to a settlement agreement (in this case a broker) cannot restrict the indemnity it is providing so that the indemnity is not payable if the insured goes into administration, or liquidation, or undergoes some other insolvency event. The decision is important on its own facts. But it does also raise questions about the legitimacy of other clauses in insurance contracts which depend on whether or not the insured or reinsured has entered into any kind of insolvency event.

The underlying policy of the Insolvency Act 1986 is that all assets of an insolvent organisation must be made available for distribution amongst its creditors. However, the courts also have the power to prevent parties from contracting out of the statutory regime. This long established common law principle known as the anti-deprivation principle has been used by the courts over the years to strike down contractual provisions which attempt to do just that. The principle has received an airing in two recent High Court decisions.

In a decision handed down just before the end of term, auditors have won an important House of Lords ruling limiting their liability in cases where a “one man” company is used as a vehicle for fraud. The Law Lords dismissed by a majority of three to two a negligence claim brought against an audit firm for failing to detect a massive fraud at Stone & Rolls, a trading company that fell in the late 1990s – holding that the liquidators could not bring a claim for damages when the company itself was responsible for the fraud.

Background

In Griffi n v UHY Hacker Young & Partners1 the court dismissed an application for summary judgment on the basis of the ex turpi causa (or illegality) defence, and made a number of observations as to uncertainties in the law as it stands.

Where the Courts Service failed to notify the Land Registry of a bankruptcy petition with the effect that property was disposed of without a pending action having been registered, the trustee in bankruptcy had a right to claim damages.

Philip Bell v Philip Long, Andrew Thomson, PKF and Weatherall Green & Smith (North) Limited [2008] EWHC 1273 (Ch)

Background

The receiver's duty to exercise care in disposing of the company's assets and to ensure he obtains the best price reasonably obtainable at the time of sale was considered recently in the English case of Bell v Long & Others.

On April 28, 2017, the California Legislature passed Senate Bill No. 496, which limits the defense and indemnity obligations of design professionals who enter into contracts to perform design professional services on or after January 1, 2018. Existing law limits design professional defense and indemnity obligations for contracts entered into with public agencies to claims that arise out of, pertain to, or relate to the negligence, recklessness or willful misconduct of the design professional.

A version of this article was first published in The Law Society Gazette and Prime Resi.

Lenders contemplating potential claims against insurers of insolvent professionals will welcome the fact that the Third Parties (Rights Against Insurers) Act 2010 (2010 Act) is to finally come into force from 1 August 2016, having been updated by the Third Parties (Rights Against Insurers) Regulations 2016.

Key Points

Mitigation of loss by a claimant does not always mean that liability under negligence claims is avoided

The Facts