Decision in Land of Leather allergy case favourable to insurers

Horwood and others v Land of Leather (in administration), Zurich Insurance and others

(Queen's Bench Division — 18 March 2010)

The claimants sued Land of Leather in respect of skin allergies allegedly sustained through the use of sofas sold by the firm. LOL became insolvent and the action continued against its product liability insurer, Zurich, under the Third Parties (Rights Against Insurers) Act 1930.

The policy contained claims control terms (which were expressed to be conditions precedent to Zurich's liability under the policy) whereby (1) the insured was prohibited from compromising or settling "any claim" (without Zurich's consent); and (2) Zurich was entitled to use the insured's name "to make or defend any claim for indemnity or damages against any third party" — for example, to bring subrogated recovery actions.

Without Zurich's consent LOL entered into a compromise agreement with the company that had supplied the sofas to LOL, the effect of which — so the court held — was to preclude LOL from thereafter claiming an indemnity against the claims from that company.

The claimants endeavoured to counter Zurich's case that this constituted a breach of the prohibition in (1) above by arguing that the prohibition on settling claims only applied to claims against the insured and not to claims by the insured for recovery against third parties.

The court rejected this argument, holding that "it would be absurd if the insurer had control of proceedings commenced in the name of the insured against others [i.e. under (2) above] but yet the insured was under no prohibition not to settle such claims".

The prohibition in (1) should thus be construed as applying to both types of claim — even though it did not say so in term. LOL had, therefore, acted in breach of the claims conditions and, in consequence, Zurich was relieved of its potential liability towards the claimants under the 1930 Act.

Comment

In reaching this favourable decision to insurers the court reiterated, quite apart from the obligation to comply with any relevant claims conditions, an insured is under an implied obligation to act reasonably and in good faith with due regard to insurers' interests and rights of subrogation. It is also worth noting that the outcome would have been the same had the case been brought under the Third Parties (Rights Against Insurers) Act 2010. Philip Vallance QC, BLM London

The following law report contributed by specialist insurance practice Berrymans Lace Mawer (www.blm-law.com) first appeared in Post Magazine on 27 May 2010.

Disclaimer: The law report contains information of general interest about current legal issues, it does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. Specialist legal advice should always be sought in any particular case.