Suzanne Chalmers succeeds in the Court of Appeal in the case of Desai v Wood, concerning third party claimants’ rights in the proceeds of an indemnity insurance policy
16th Jul 2025
The Court of Appeal has handed down judgment in the case of Desai v Wood [2025] EWCA Civ 906. The Court held that the fact that the claimants in a professional negligence action had entered into a contract with the insured defendant which required it to maintain insurance against future claims did not mean that the claimants had a beneficial interest in an insurance payment made to the insured in respect of the claim before the insured entered liquidation.
It is well established that, in the absence of a special condition in the insurance policy, third party claimants against an insured generally have no rights, either against the insurer, or in the proceeds of such a policy. The Third Party (Rights Against Insurers) Act 1930 and its successor, the Third Party (Rights against Insurers) Act 2010 (‘TPRIA 2010’) altered the law to give rights to claimants who have a claim against an insolvent insured. The TPRIA 2010 provides for the statutory assignment of the rights of the insured under a liability insurance policy to a third party claimant to whom the insured is liable, when the insured suffers an insolvency event, such as the commencement of a voluntary or compulsory winding up. The third party may commence proceedings against the insurer before it has established the insured’s liability, but only where the insolvency event has already taken place.
In Desai, the insurer made the payment and discharged its liability under the policy before the Company entered creditors’ voluntary liquidation (‘CVL’), and so the Appellants could not rely upon the provisions of the TPRIA 2010. The Court of Appeal held that, in those circumstances, the Appellants were in no better position than the Company’s other creditors. It rejected the Appellants’ argument that the outcome should be different where the Company had contractually agreed to maintain insurance for the benefit of its clients. The effect of the Court’s decision is that, unless the parties have expressly provided otherwise, a claimant has no prior claim on an insurance payment made to an insured who is in financial difficulty, but is not the subject of a bankruptcy or liquidation at the time of payment.
The Facts
The Appellants entered into a Contract for the provision of services with the Company, a firm of interior designers. The Contract was made on a standard form, incorporating the conditions of the British Institute of Interior Design (‘BIID’). The Contract provided that the Company would maintain public liability and professional indemnity insurance against future claims.
The Appellants subsequently intimated a claim for professional negligence against the Company. The Company made a claim under the terms of its professional indemnity insurance policy with Royal & Sun Alliance (‘RSA’) in respect of the Appellants’ claim. Before the claim was determined or compromised, RSA made a payment to the Company in relation to the Appellants’ claim and relinquished control of the defence of the claim. RSA took advantage of a condition in the insurance contract (‘the Claims Condition’) which permitted it to pay out the limit of indemnity to the insured, thereby relieving itself of any further liability in respect of the Appellants’ claim, including any liability to fund the defence of the claim.
At the time that the payment was made, the Company’s accounts showed that it was already in financial difficulty. The Appellants commenced proceedings against the Company. The Company then entered CVL. The Appellants maintained that the insurance payment which had been made by RSA was subject to a trust for their benefit. Accordingly, the Liquidators of the Company (the Respondents) issued an application under section 112 of the Insolvency Act 1986 seeking directions as to the status of the payment.
Judgment in the Court below
At first instance, the Appellants contended that it was either an express term or an implied term of their Contract with the Company that any insurance monies received by the Company in respect of a claim by the Appellants were to be held on trust for them. In the alternative, they contended that the insurance payment was the subject of a constructive trust in their favour. The trial Judge, HHJ Matthews, dismissed these claims and declared that the proceeds of the insurance policy belonged beneficially to the Company alone (Wood v Desai [2024] EWHC 1893 (Ch)).
The decision of the Court of Appeal
On appeal, the Appellants advanced their case in a different way. In essence, they maintained that there were implied terms of the contract and/or the insurance policy that, if the insurance payment was made at a time when the Company had reasonable grounds to believe that it might be unable to meet the claim from its other resources, the payment should be ringfenced to meet their claims, and that a trust arose in their favour. Their case was that the insurance was required for the ‘paramount purpose’ of securing that the Company was financially able to compensate its clients, and therefore a term was to be implied that the Company would not use these funds in a way which was inconsistent with such a purpose. At the hearing, the Appellants accepted for the first time that, because their claim had not yet been established, the Company could use the payment to fund its defence, but maintained that the Company could not use the fund for any other purpose.
The leading Judgment was given by Lord Justice Zacaroli. He found that the implied terms contended for by the Appellants did not meet the essential requirements for necessity (see Ali v Petroleum Company of Trinity and Tobago [2017] UKPC 10) and certainty of terms. He noted that the parties could have, but did not, make specific provision in the Contract to confer a proprietary right or security interest on the Appellants. At most, it could be said that it might have been reasonable for the parties to have addressed the possibility that insurance proceeds might be received by the Company when it was likely to be insolvent. That fell short of the requirement that the provision was necessary to make the contract work. Furthermore, there were insurmountable difficulties in identifying with sufficient precision what the notional bystander would assume the parties had intended.
It was even more unclear how the implied terms contended for could be modified to take account of the fact that the payment was made pursuant to the Claims Condition, at a time when the Appellants’ claim had not yet been established and (as the Appellants accepted) the Company could use the payment to defend the claim.
Even if a term was to be implied as contended for, it would not give rise to any trust, because the requirements of certainty of intention, subject matter and objects were not satisfied.
The Court of Appeal also rejected the Appellants’ alternative argument that a constructive trust arose in their favour. Zacaroli LJ commented that the Appellants appeared to be inviting the Court to recognise a type of remedial constructive trust which was rejected by the Supreme Court in the case of Angove’s Pty Ltd v Bailey [2016] 1 WLR 3179 as not recognised in English law.
Why this case is significant
It has long been position at common law that a claimant does not have a beneficial interest in a payment made by an insurance company to an insured in respect of their claim, even where that claim has already been proved (Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105). To address this unfairness, Parliament enacted the Third Party (Rights Against Insurers) Act 1930, subsequently replaced by the TPRIA 2010, to transfer the rights of the insured to the claimant upon the insolvency of the insured. However, the benefits provided to a claimant under the TPRAI 2010 do not arise unless and until formal insolvency proceedings have been commenced. Accordingly, if an insurance payment is made to a Company before liquidation, in the absence of an express agreement to the contrary between the claimant and the insured, the payment becomes part of the general assets of the company. The claimant is no better off than the other creditors of the company.
The Court of Appeal has now confirmed that the position remains the same, even where (as is very frequently the case) a claimant has entered into a contract with the insured which requires the insured to maintain insurance against future claims. Its conclusion against the implication of a term applies not only in the particular circumstances of this case (where the Claims Condition entitled the insurer to compromise the insurance claim, leaving the insured to defend the claim) but generally, including where insurance proceeds are paid in respect of an established liability.
Accordingly, if an insured wishes to seek additional protection against the risk that the insured will become insolvent, it will need to make express provision for this in the contract of retainer, whether by grant of a proprietary right or security interest.
This case also highlights the possible consequences where an insurer elects to rely upon a claims condition enabling it to discharge its obligations under the insurance contract by making a payment of the limit of indemnity to the insured. Such conditions are commonly included in policies which are not subject to compulsory insurance requirements. They enable an insurer to compromise its liability when it considers that it would not be in its interests to continue to defend a claim against the insured, but, for whatever reason, settlement with the claimant or claimants cannot be achieved. If insurers make a payment to the insured pursuant to such a condition, in general, the insured is not under any obligation to use those funds to meet the claimant’s claim.
A link to the Judgment can be found here.
Suzanne Chalmers, instructed by Mark Cullingford of Thrings LLP, represented the Liquidators of the Company who were the Respondents to the appeal.
