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High Court decision ends uncertainty over limitation period

13 October 2010

The long-standing uncertainty about when the limitation period under a liability policy starts to run against the insured has been resolved following a decision handed down by the High Court yesterday.

Time certainly starts running once the insured has incurred (following a judgment or a settlement) a quantified liability to the claimant. What has been unclear, however, is whether time also starts to run if, before the insured has incurred any legal liability, the insurer has declined indemnity.

In WM Swindon Limited v Quinn Insurance Limited [2010] EWHC 2448, a building company named Lenihan Limited was insured by Quinn for public liability and other risks. In 2006, Lenihan negligently started a fire at premises it was repairing. It sought indemnity for the claims which it expected to face, but in February 2009 Lenihan was informed that Quinn was declining indemnity. (Quinn had in fact originally declined indemnity in January 2008, but their letter was apparently not received at the time.)

Various companies affected by the fire (the claimants) sued Lenihan, and they obtained quantified judgments against it in January 2010. Lenihan went into liquidation the following month, and its rights under the Quinn policy were transferred to the claimants under the Third Parties (Rights against Insurers) Act 1930.

Unfortunately for the claimants, Lenihans policy contained an (admittedly unusual) provision whereby any dispute as to Quinns liability in respect of a claim had to be referred to arbitration within nine months of the dispute arising and, if not referred to arbitration within that period, the claim, i.e. the claim by Lenihan under the policy, was deemed to have been abandoned.

The claimants argued that there could be no "dispute" as to Quinns liability in respect of a claim unless and until Quinn was indeed liable to indemnify Lenihan in respect of that claim, and that had not occurred until January 2010, when Lenihan become liable to the claimants in a quantified sum.

The court rejected that argument. Instead, it upheld Quinns submission that, where an insurer informs an insured that it will not be granting indemnity in respect of a potential claim and where that refusal to indemnify is unjustified, then the insurer is immediately in breach of contract (because it is effectively saying that it will not perform its primary obligations under the policy) and limitation accordingly starts to run.

The question of limitation was particularly acute in this case, where the policy contained a very short limitation period. However, the issue may arise generally. It is not unusual for insurers, who have declined indemnity and closed their files, to be faced many years later with claimants who have taken an inordinate time to obtain judgment against the insured but who are now seeking to challenge the declinature. This recent case shows that, for some very tardy claimants, any such challenge - if more than six years after the original declinature - would be statute-barred.

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