London Market - August 2010

Third Parties (Rights Against Insurers) Act 1930, Breach of Condition By Insured A Bar To Third Party Claims

Clare Horwood & Others v Land of Leather Limited (in Administration), Zurich Insurance PLC & Others [2010] EWHC 546 (Comm)

In September 2007, Land of Leather Limited (“LOLL”) received a number of complaints from customers who had suffered skin allergies from sofas which had been supplied to LOLL by Linkwise. LOLL sought compensation from Linkwise and in November 2007 the two companies reached an oral agreement (the “November Agreement”). The terms of the agreement stated that Linkwise would give LOLL USD900,000 in credit against future orders.

LOLL sent its product liability insurer, Zurich Insurance PLC (“Zurich”), a copy of an invoice prepared for Linkwise outlining the terms of their agreement. LOLL stated that it would be made clear to Linkwise that any payment did not include compensation in respect of the impending personal injury claims. Zurich confirmed that the wording in the invoice was fine.

LOLL sent the invoice via email to Linkwise outlining the terms of their agreement and stating that the invoice was for “Immediate settlement”. Linkwise replied summarising the key points of the agreement as follows:

“The payment of $900,000 was in full and final settlement of all matters relating to alleged allergic furniture problems.

Linkwise to issue a credit note for $900,000, payment to be made over 6 months at the rate of $150,000 per month starting December.

Land of Leather to guarantee $20,000,000 of purchases over the 12 months from 1 Dec 2007.”

LOLL replied to this stating that the terms of the settlement were on the invoice and that LOLL did not want to guarantee the purchases from Linkwise.

On 16 November 2007, Linkwise issued a credit note to LOLL. However, credit was refused when LOLL made its next payment for sofas supplied by Linkwise. This refusal of credit occurred at a difficult time for LOLL which had suffered damage to its reputation and a 50% drop in its share price. The need for the USD900,000 became more pressing.

In February 2008, LOLL made demands on Linkwise to honour the November Agreement but Linkwise wanted to renegotiate. A second agreement was reached (the “February Agreement”) which included the following provision:

“Land of Leather also confirm they will make no further claim on Linkwise in respect of alleged allergic reactions to their products…”

LOLL went into administration which led its customers to bring their personal injury action directly against Zurich under the Third Parties (Rights Against Insurers) Act 1930.

Zurich argued that it was not liable to indemnify LOLL, and was therefore not liable to the claimants, as the general words of release in the February Agreement were in breach of General Condition 3 of the policy.

General Condition 3 stated that:

“The Insured shall not, except at his own cost, take any steps to compromise or settle any claim…”

Zurich further argued that the February agreement was in breach of an implied term of the policy to act reasonably and in good faith with due regard to Zurich’s interests.

The customers counter-argued that:

The words “no further claim” in the February Agreement had to be read in their context as “no further claim of the type identified in the invoice” and as Zurich had agreed to the wording of the invoice there had been no breach of General Condition 3 or breach of an implied term of the policy.
The prohibition on settling claims under General Condition 3 of the policy only applied to claims against the insured and not claims by the insured.
There was no consideration given for the February Agreement which meant that it was not a valid contract.

Mr. Justice Teare held that:

The February Agreement was a complete statement of the parties’ respective rights and should not be read with reference to the invoice. Likewise a reasonable person would not think that the February Agreement should be interpreted as referring to the invoice.
The prohibition under General Condition 3 of the policy relates to both claims against and by the insured.
The February Agreement did provide a commercial benefit to LOLL in that prior to this agreement it did not know when it would receive payment. This was satisfactory consideration and therefore the February Agreement was a valid contract.

The personal injury claim by the customers was dismissed.