CHAPTER ONE – THE INDEMNITY PRINCIPLE
When applied in the most basic terms, the principle of indemnity ensures that another entity (often the insurer, but sometimes the MIB) will step into the shoes of the fault party/tortfeasor (often the driver, but sometimes the policyholder) to meet the claim of the wronged innocent party (that could be a driver of the other vehicle involved, innocent passenger, or pedestrian)[1].
That concept is widely accepted in common parlance as ones right to be placed back into the position that they would have been in – restitutio in integrum – but for the negligent breach of duty served upon them. The contract of motor insurance is just one way of ensuring a fault party can fulfil their tortious liability to “right the wrong” they served upon the third party unfortunate enough to have sustained a loss as a result of that actionable negligence.
In that sense, the contract of motor insurance is really a contract of indemnity, or a promise given by the motor insurer to its policyholder that it will meet the liability (provided of course that such a liability is covered – or insured – by the contract).
Since the introduction of the Road Traffic Act 1930 it has been a statutory requirement for all drivers of motor vehicles in England and Wales to have insurance covering them against “third party risks”. That requirement is now entrenched within the Road Traffic Act 1988, which makes it implicit that any person who “uses” a motor vehicle “on a road (or other public place)”[2] must have in force a policy of motor insurance. Any person driving without such a policy is “guilty of an offence“[3].
Section 145 of the Act sets out a number of prescribed terms, which all policies coming into force must have. On the basis that those minimum requirements are met, the insurer will be contractually liable to indemnify the driver of the insured vehicle against any damage to the person or property of a third party. This is known as the “Insurer’s duty to indemnify” the driver as against the claims brought by the party sustaining damage and/or losses.
Matters are not however as straight forward as they may seem, mainly due to the practice of issuing policies of motor insurance to individuals to drive specific motor vehicles (as opposed to being assigned to a vehicle insuring it for any, and all, who may drive it, for example), which is an idiosyncrasy of this jurisdiction. The result is that a person involved in an accident may have a host of potential insurers at their disposal for the purposes of suing for the recovery of their losses when involved in an accident in England and Wales.
By way of illustration, the following example encapsulates the mischief of the practice adopted in the UK:
Mr R is involved in a road traffic accident with Mrs W, causing Mr R to suffer personal injury and financial losses. The accident is the fault of Mrs W. However Mrs W is not specifically insured to drive the vehicle. She was driving the vehicle under the “driving other cars extension” on a separate policy she obtained in respect of her own vehicle. The vehicle she was driving belonged to Mr W and he had incepted a policy of motor insurance of his own for the vehicle involved in the accident.
In this scenario, Mr R has the option of recovering his losses from either Mr or Mrs W’s insurance company. In most EU countries the answer would be more straightforward insofar as the vehicle involved would have a policy insuring the vehicle and that would be the party indemnifying Mrs W for the claim.
Quite who Mr R should pursue will be explored in more detail later in this chapter but such is the system of motor insurance in the UK, Mr R clearly has a choice. He might sue Mrs W’s insurer who has provided her with a policy of insurance for another vehicle but which afforded her coverage to drive other cars; or alternatively he might sue Mr W’s insurer which had issued a policy to Mr W in respect of the vehicle involved in the index accident. The situation becomes more complicated in the event that one, or both, of these insurers take the decision to withdraw indemnity from Mrs W. That may occur if the use of the vehicle at the material time of accident was not insured or, for example, the policy has been cancelled. Other reasons for withdrawal of indemnity may comprise non-disclosure of convictions (such as speeding penalties) or misrepresentation when the insurance contract was formed. For present purposes however, this chapter is primarily concerned only with the insurer’s duty to indemnify, the exclusions and order of hierarchy of potential insurers will be explored in more detail later.
The task facing our hypothetical claimant – Mr R – and indeed many practitioners in the sector when it comes to deciding precisely which entity to pursue, is perhaps most eloquently articulated by Master Davison in his Judgment in the High Court case of Advantage Insurance Company Ltd -v- Stoodley & Trinity Lane[4], when he said
“When a road traffic accident occurs – even one involving only one vehicle – it is not unusual for more than one insurer to have a potential liability. This is partly a product of the fact that motor insurers in the UK insure the driver not the vehicle. (This stands in contrast to the position in the rest of the EU where it is usually the vehicle that is insured.) The potential liability of multiple insurers leads to disputes regarding their status. There exists what has come to be called the liability “tree” with the contractual insurer sitting at the top of the tree and the MIB Central Fund sitting at the bottom. As a general proposition (and looked at from the perspective of an insurer) if an insurer higher up the tree falls out, then liability to indemnify or satisfy a judgment will rest with the insurer immediately below.”[5]
The Stoodley case is in fact a very similar scenario to that involving our own hypothetical example above. Mr Stoodley was behind the wheel of a BMW vehicle, which unfortunately left the carriageway and collided with a tree. Inside of that BMW were three passengers; Mr Hampton – the owner of the BMW, with whom he had incepted a policy of insurance for the BMW with Trinity Insurance (the second defendant); Mr Rogers who was fatally injured as a result of the accident; and finally, Mr Reed, who was catastrophically injured and brought a claim valued in the multi-millions. Mr Stoodley was not named on the policy issued to Mr Hampton by Trinity Insurance but he did have his own policy of motor insurance, issued by Advantage, in respect of a Vauxhall vehicle he owned. The case explored the battleground between Advantage (as contractual insurer to Mr Stoodley) and Trinity Insurance (as Road Traffic Act Insurer having issued a policy to Mr Hampton for the BMW).
In so doing, the very notion of the indemnity tree was born, Master Davison having planted the seeds for that particular sapling in his Judgment.
Types of motor insurer
Before considering the hierarchy of insurers it will be helpful to understand the different types of insurer, most likely to fall into one of the following defined categories
- Contractual insurer – the insurer issuing a contract of insurance to the fault driver or in respect of the fault vehicle. In the vast majority of cases, this insurer will be the entity most likely to meet the liability of the driver to whom they issued the policy of motor insurance.
- S.148 Road Traffic Insurer or “the hybrid contractual insurer” – this type of insurer is reserved to those insurers in contract, usually an insurer that has issued a driver with a policy with “driving other cars” extension, but has withdrawn indemnity from the driver in contract but owes a contingent liability as modified pursuant to s.148 RTA 1988.
- 151 Road Traffic Act Insurer – this term is often used to describe the insurer who have issued a policy of insurance covering the usage of the fault vehicle but have withdrawn indemnity (usually due to a breach of policy conditions, for example) but still retain a contingent liability to satisfy a claim pursuant to statute.
- The Article 75 insurer – this would be any insurer who have withdrawn indemnity from the driver of the fault vehicle and so cannot be contractual insurer but have also downgraded their status as Road Traffic Act Insurer, meaning they are only liable to the extent of the MIB Uninsured Drivers’ Agreement.
- The Motor Insurers’ Bureau – often the entity of “last resort” the MIB will step into the breach of the driver of the fault vehicle is uninsured or untraced (the result being that the Claimant has recourse pursuant via either the Uninsured Driver’s Agreement or the Untraced Driver’s Agreement). Such is the nature of insurance premiums a small portion of each is donated to the MIB to underpin that risk to all road users that the fault driver may be uninsured or untraced and thereby providing a safety net for all innocent victims that their loss will be met even in one of those two unfortunate scenarios.
RTA Insurer vs Contractual Insurer
Before we scrutinise the order of insurers or liable parties on the indemnity tree of hierarchy it is well worth considering the difference between a “Road Traffic Act Insurer” and a “contractual insurer” and who, if either of those entities, is the insurer with the liability to meet a claim.
The Road Traffic Act Insurer is the insurer which has issued the policy of motor insurance in respect of the fault vehicle (so to take the Stoodley case, that would be Trinity Insurance). The contingent liability to satisfy any Judgment so obtained against the fault party is laid down by statute within section 151 of the Road Traffic Act 1988.
The contractual insurer is the insurer which has issued a policy of motor insurance to the driver of the fault vehicle involved in the accident, but which does not expressly provide a coverage for that specific vehicle within the policy of insurance ie. the policy was issued to the fault driver for another vehicle, not involved, which means the fault driver was driving the vehicle under the “driving other cars” extension on the policy (as Mr Stoodley did per his policy with Advantage Insurance).
Without delving into the correct mechanism of how to sue either of these parties, that is to say, what the cause of action is, for present purposes one should understand which of these insurers trumps the other when it comes to the liability to indemnify the claim.
The conflict was explored further in the case of Legal & General v. Drake Insurance [1992] QB 887, which shall be scrutinised in further detail in the following chapters.
As Master Davison explained, and as is now commonly accepted in civil claims by the judiciary, the contractual insurer is the entity at the top of the tree for indemnity purposes.
Whilst further clarification is to be expected to come in higher court jurisprudence on this point, and the order of indemnity is to be reconsidered on a case-by-case basis, for now at least one should work on the basis that the contractual insurer will be first in line to meet any claim where there are would be multiple insurers in play.
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[1] British Cash and Parcel Conveyors Ltd v Lamson Store Service Co Ltd [1908] 1 KB 1006 at 1014
[2] s. 143(1)(a) of the Road Traffic Act 1988
[3] s. 143(2) ibid.
[4] [2018] EWHC 2135 (QB)
[5] Para 1 ibid.