Indemnity – The maker, or breaker of motor insurance claims

The world of indemnity can be complex and, at times, tedious to have to deal with no matter who you act for in a motor insurance claim. It can extinguish the recovery of genuine losses incurred by a claimant through no fault of their own. It can bring power to an insurer to secure cost recovery of a claim from a driver. It can be instrumental in how litigation is carried out and demands accommodation for robust requirements from the opposing party. Here we will explore the pitfalls and challenges that indemnity can present.

Indemnity Status – Fully Contractual Insurer

A motor insurer would ordinarily decide on their indemnity position from the outset of a claim. Generally, an insurer would be acting as ‘fully contractual’, in the circumstances that their policyholder has adhered to the terms of their policy and ensured that an accident has been reported within 48 hours of the date of collision. This means that they will be acting in a capacity as per the contractual terms set out in the policy of insurance. They will bear the cost of the third-party claim without contributions from the policyholder.

Indemnity Status – RTA Insurer

In the event that a policyholder has not complied with the terms of their motor insurance policy, then the insurer can take a reduced indemnity stance, known as RTA insurer. The obligations of an insurer holding RTA indemnity status are governed by section 151 of the Road Traffic Act 1988. The aforementioned Act is clear in compelling an RTA insurer to hold one obligation only: to satisfy any judgment obtained against the tortfeasor, if they were the relevant insurer of the vehicle. This reduced indemnity status may arise should the policyholder have not complied with the terms of the policy, or an unauthorised driver had control of the vehicle, (late reporting of an accident, unauthorised driver, vehicle stolen and thief identified).

The Act also gives provision for an insurer to recover the cost of any claim that they have paid arising from the tortfeasor’s negligent act or omission:

“Section 151 (1) This section applied where … a judgment to which this subsection applied is obtained.

S151(8) Where an insurer becomes liable under this section to pay an amount in respect of a liability of a person who is not insured by a policy or whose liability is not covered by a security, he is entitled to recover the amount from that person or from any person who –

(a)    Is insured by the policy, or whose liability is covered by the security, by the terms of which the liability would be covered if the policy insured all persons, or as the case may be, the security covered the liability of all persons, and

(b)    Caused or permitted the use of the vehicle which gave rise to the liability

Indemnity Status – Article 75 Insurer

Historically, Article 75 status arose where the policy of insurance was obtained by fraud, misrepresentation, non-disclosure of material fact or mistake or if cover was backdated. Should an insurer of held this status, it means they denied contractual or RTA obligations and as such, the driver is considered to have been uninsured. Any claim arising would then fall to the Motor Insurers’ Bureau (MIB), under the Uninsured Drivers’ Agreement 1999/2015. The insurer would then step into the shoes of the MIB, and pay any non-subrogated losses, depending on the circumstances.

Given the amendment to Section 152 in 2019, an insurer cannot obtain a declaration of Article 75 Insurer status to avoid a policy for misrepresentation or non-disclosure, unless:

1. The policy has been cancelled by mutual consent, or by virtue of a provision contained in it before the accident occurring, (Section 151(1)) or;
2. The use of the vehicle at the time of the accident fell outside the use permitted by the policy.

Should an insurer successfully downgrade its status to Article 75 insurer, then it no longer has any direct liability to meet a judgment obtained by a claimant, owing to no insurance covering the driver at the time of the accident, and the liability to meet the aforementioned judgment devolves to the MIB under the Uninsured Drivers Agreement.

Successes for the claimant

Loopholes can benefit both parties in a claim arising from a road traffic accident. An example of where a claimant may benefit from a loophole would be when they have issued proceedings against an insurer under the European Communities Rights Against Insurer Regulations 2002, and/or The Motor Vehicles (Compulsory Insurance) (Miscellaneous Amendments) Regulations 2019, and have identified the tortfeasor as an employee, servant or agent of a business.

The landmark case of Cameron v Hussain (and others), gave provision that a tortfeasor must be identified in order to be given notice of the claim and any proceedings, and so that the defendant can confirm their indemnity stance. The claimant can satisfy the requirements by citing a defendant business policyholder, within their Particulars of Claim, without naming a driver/tortfeasor, and is able to plead that the defendant’s insured employee, servant or agent was negligent. In practice, this is very difficult to defend on the basis of an indemnity issue from the outset unless compelling evidence is available to rebut the claimant’s allegations.

Successes for the defendant

An example of where indemnity can prevent an insurer from having any obligations may be where the vehicle has been stolen and the thief has not been apprehended/identified. The claimant has commenced proceedings against the insurer only, under the European Communities Rights Against Insurer Regulations 2002, and/or The Motor Vehicles (Compulsory Insurance) (Miscellaneous Amendments) Regulations 2019. These provisions are only applicable in the case that there are no indemnity issues, i.e. the insurer is acting as a ‘fully contractual insurer’. We learnt earlier that the insurer would hold an obligation as an RTA insurer in the event that a judgment has been obtained against the tortfeasor (thief in this case) if they were the relevant insurer of the vehicle. Applying this to our case, the thief has not been identified, and as such, a judgment has not been obtained against them and it cannot be because neither the claimant nor the defendant have knowledge of who was in control of the vehicle at the time of the collision. The insurer has no obligation to make any payment for any losses arising from the road traffic accident, despite having a policy of insurance in place for the vehicle. Any expectancy for the insurer to pay could be considered prejudicial to the insurer, as there is no way to recover the cost of the claim. The claim ought to be redirected to the MIB.

Another example of an indemnity loophole could be the action of insurers of learner drivers. Learner drivers can take out a policy  which covers them for learning how to drive in a particular vehicle. However, one of the common requirements for a learner driver’s policy is that there must be a pre-existing policy of insurance in place on the vehicle for a standard driver – likely to be the person who is teaching the learner. Not many learner drivers realise that as soon as they pass their test, their policy of insurance is withdrawn immediately. The insurer only provides cover until the driving test is passed. As such, any claim arising as a result of the now-newly qualified driver having continued use of the vehicle, (even on their way back from the test centre), will fall to the RTA obligation of the pre-existing policy of insurance held by the ‘teacher’. 

Summary

In essence, the world of indemnity can make or break a claim in motor insurance litigation. It is crucial that both defence lawyers and claimant lawyers have a sound understanding of how indemnity works, so as to maximise results for their clients and ensure recoverable interests are protected.

For more information, please contact Alex Parker - File Handler. Email: AParker@keoghs.co.uk