Third Parties (Rights Against Insurers) Act 2010

The recent decision of the Outer House of the Court of Session in Scotland Gas Networks plc v QBE UK Ltd ([2024] CSOH 15) addresses certain significant issues relating to the Third Parties (Rights Against Insurers) Act 2010.

Scotland Gas Networks owned and operated gas transportation infrastructure and gas mains in Scotland. One of its gas pipelines ran adjacent to a quarry operated by Skene. Scotland Gas Networks became aware of a landslip at the quarry and contended that rock surrounding the pipeline had become fractured as a result of Skene’s quarrying operations. Scotland Gas Networks also claimed that the quarrying operations had gone beyond what was permitted by the certification issued to Skene by Falkirk Council.

Scotland Gas Networks position was that the pipeline lacked adequate support and could not be operated safely, with the relevant section of the pipeline having to be diverted away from the quarry at a substantial cost.

A claim for damages of £ 3,000,000 was made by Scotland Gas Networks against Skene in the Court of Session. Skene went into liquidation and a decree by default was obtained following Skene’s failure to appear. There was no appeal against the decree and Skene was later dissolved. 

Skene had Liability insurance and the insuring clause stated that insurers would:

“indemnify the insured… against legal liability to pay damages, including claimant

costs recoverable from the insured, as a result of bodily injury, personal injury,

advertising injury, damage or denial of access that occurs during the period of

insurance and arises out of and in connection with the business.”

The word “Damage” was defined as meaning “loss of, destruction of or damage to tangible property”. “Denial of access” was defined as “nuisance, trespass or interference with any easement, right of air, light, water or way.” 

Scotland Gas Networks sought to bring a direct action against Skene’s Liability underwriters under the Third Parties (Rights Against Insurers) Act 2010. In particular, the below detailed sections of the Act received consideration.

• Section 1(1) of the Act applies where a “relevant person”, insured under a contract of insurance, incurs a liability to a third party. It was not disputed that Skene fell within the Act’s provisions of a “relevant” person as it was being wound up and had been dissolved. 

• In accordance with Section 1(2) of the Act, the rights of the relevant person against insurers are transferred to the third party.

  
  

• In accordance with Section 1(3) of the Act, the third party can bring proceedings against underwriters without having established the relevant person’s liability. However, the rights cannot be enforced against underwriters unless such liability is established. Therefore, insurers, as against the third party, are entitled to rely upon both the absence of any liability on the part of the Insured and the lack of any coverage in accordance with the policy terms and conditions.

• Section 1(4) of the Act provides that the relevant person’s liability is established only if its existence and amount are established. “Established” meaning (a) by virtue of a declaration; (b) by a judgment or decree; (c) by an arbitral award; or (d) by an enforceable agreement.

Underwriters contended that the aforementioned decree by default, obtained by Scotland Gas Networks following Skene’s failure to appear, had not established Skene’s liability. Underwriters position being that in order for liability of the Insured to be established, there had to be some consideration of the merits of the case. Whereas a default judgment did not require any examination of such merits. Underwriters further contending that it remained open to Liability insurers to challenge the basis upon which a third party had established liability on the part of the Insured.

The Court found that establishing liability in accordance with the express terminology of Section 1(4) of Third Parties (Rights Against Insurers) Act 2010 was sufficient for a claim to proceed against underwriters under the Act and that underwriters were not afforded the opportunity to revisit the merits of the Insured’s liability to the third party. The Court finding that the decree by default was sufficient to have established Skene’s liability in accordance with the express provisions of the Third Parties (Rights Against Insurers) Act 2010.