Bader and Others v Centriq Insurance Company Limited (4572/2015) [2017] ZAGPJHC 12 (16 February 2017)

80 Reportability

Insurance Law

Brief Summary

Insurance — Indemnity — Section 156 of the Insolvency Act — Plaintiffs sought to recover from the insurer after the insured, Delru, was found liable for professional misconduct — Insurer denied liability, asserting that plaintiffs must prove that the claim falls within the indemnity provisions of the policy — Court held that plaintiffs are required to establish that Delru's liability is covered by the terms of the indemnity, and that the findings of liability in the original action do not bind the insurer, as it was not a party to those proceedings.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter was heard in the Gauteng Local Division, Johannesburg as a stated case before Wepener J. The proceedings were framed as an action by third-party claimants against an insurer, brought pursuant to section 156 of the Insolvency Act 24 of 1936, following the insured’s final winding-up.

The plaintiffs were Valerie Ann Bader, Charles Michael Bader N.O., Angela Lee Bader N.O., Johannes Petrus Barnard N.O., and DBF Executors Services (Pty) Ltd N.O. The defendant was Centriq Insurance Company Limited, alleged to have issued a professional indemnity policy to Delru Makelaars BK (Delru), a financial adviser.

The procedural history included earlier litigation in the Pretoria High Court in which the plaintiffs sued Delru for breach of professional duties. Delru joined Centriq as a third party in that action, but the third-party proceedings were dismissed at the commencement of trial (with the effect of absolution from the instance between Delru and Centriq). The plaintiffs then proceeded unopposed against Delru and obtained judgment. After Delru’s final winding-up, the plaintiffs sued Centriq directly under section 156. The stated case required the court to decide whether the prior judgment against Delru established, as between the plaintiffs and Centriq, the insured’s liability for purposes of the section 156 claim.

The general subject-matter concerned the relationship between an underlying judgment against an insured and an insurer’s liability to indemnify under a professional indemnity policy, in the specific context of a statutory right of action under section 156 upon the insured’s insolvency.

2. Material Facts

It was undisputed (by agreement in the stated case) that at all material times Centriq was Delru’s insurer and had agreed to indemnify Delru under a professional indemnity policy attached to the pleadings. The policy period was 1 June 2009 to 31 May 2010, the premiums were paid, and the policy was in force during February and March 2010.

On 26 February 2010 the plaintiffs made a claim against Delru for alleged breach of professional duties. That claim was notified to Centriq during February or March 2010. Centriq later rejected/repudiated the claim by letter dated 25 November 2011, relying (at least initially) on an exclusion in clause 3(ii) of the exclusions section of the policy; in the present proceedings Centriq relied, as pleaded and as it considered itself entitled to do, on additional grounds of exclusion.

The plaintiffs thereafter sued Delru in the Pretoria High Court (case number 57810/2011) and Delru joined Centriq as a third party. Shortly before trial, Delru’s attorneys withdrew and Delru was unrepresented at trial. At the commencement of that trial Centriq (as third party) sought dismissal of the third-party proceedings against it. The third-party proceedings between Delru and Centriq were dismissed, with the stated effect of absolution from the instance as between them.

The plaintiffs then led evidence in the trial against Delru, there was no opposition, and witnesses were not cross-examined. Tuchten J granted judgment in favour of the plaintiffs against Delru, and no appeal was noted against that judgment.

On 15 January 2015 Delru was placed under final winding-up (case number 19113/2014). The plaintiffs subsequently instituted the present action against Centriq under section 156, alleging that the claims for which Delru was found liable were claims covered by the indemnity under the policy. Centriq admitted that Delru had been found legally liable to the plaintiffs, but denied that the liability established in the judgment was shown to fall within the policy’s indemnity.

Where the court identified a dispute relevant to the stated question, it concerned not whether the Pretoria High Court judgment existed or what it decided as between the plaintiffs and Delru, but whether that judgment, without more, established coverage and indemnity liability as between the plaintiffs and Centriq under section 156.

3. Legal Issues

The central legal question was whether the judgment granted by Tuchten J against Delru established, as between the plaintiffs and Centriq, Delru’s liability to the plaintiffs for purposes of a claim against Centriq under section 156 of the Insolvency Act 24 of 1936.

This question required determination of the legal effect of the prior judgment on a non-party insurer and, in particular, whether section 156 dispensed with (or reduced) the claimant’s burden to prove that the insured’s liability falls within the indemnity provisions of the policy. The dispute therefore turned primarily on law and the application of legal principles to the agreed procedural and contractual context, rather than a factual credibility dispute. The court was asked to decide the legal consequence of an underlying judgment obtained in proceedings to which the insurer was not a party (in the sense that no lis between the plaintiffs and the insurer was adjudicated).

4. Court’s Reasoning

The court approached the stated question by emphasising that the plaintiffs’ cause of action was founded on section 156, which confers an entitlement on a third party, upon sequestration (and in context, insolvency), to recover from the insurer the amount of the insured’s liability toward the third party, but only where the insurer is obliged to indemnify the insured “as provided for” in the policy terms. On the court’s analysis, section 156 did not operate as an evidential shortcut that automatically converts an underlying judgment against the insured into proof of the insurer’s indemnity obligation.

A pivotal aspect of the reasoning was that, after dismissal of the third-party proceedings in the Pretoria action, Centriq was not a party to the adjudication between the plaintiffs and Delru. The court characterised this as the absence of a lis between the plaintiffs and Centriq in those proceedings. As a result, the findings made in the judgment against Delru were not binding on Centriq. The court considered that there was accordingly no basis to treat the Pretoria judgment as determinative of whether Delru’s proven liability fell within the policy’s indemnity clause, particularly where the indemnity obligation depended on the policy wording and the potential operation of exclusions.

The plaintiffs’ argument, as reflected in the stated case and submissions, was that once Delru’s legal liability to the plaintiffs had been judicially established, the requirements of section 156 were satisfied, or at least that the plaintiffs needed to prove only a limited set of elements (including that Delru’s liability was covered by the policy). The court accepted that proving those elements was necessary, but held that the existing Pretoria judgment did not itself establish the critical connection between Delru’s liability and coverage under the indemnity. The court treated the policy definition of “legal liability” (clause 1) as requiring proof that the liability is of the type contemplated by the indemnity wording, and not merely any liability in the abstract.

In developing this, the court relied on the principle articulated by Scott JA in Le Roux v Standard General Versekeringsmaatskappy Bpk 2000 (4) SA 1035 (SCA), namely that to succeed under section 156 a plaintiff must prove the insurer’s liability to indemnify the insured, and that section 156 does not confer upon the third party a better right against the insurer than that enjoyed by the insured. The court reasoned that the plaintiffs, even though proceeding under a statutory right, effectively “stepped into” the insured’s position for the purpose of claiming what is owed under the indemnity and thus still bore the burden of proving that the claim falls within the policy’s terms (and is not excluded).

The court also addressed reliance placed by the plaintiffs on Van Reenen v Santam Limited 2013 (5) SA 595 (SCA). It construed Van Reenen as recognising that section 156 creates a distinct right, but not as dispensing with the obligation to prove the insurer’s indemnity liability on the policy terms. The court further stated that section 156 does not transfer or vest the insolvent’s existing rights in the third party; it creates a new, distinct cause of action enabling the third party to recover precisely what the insurer owes under the indemnity, which necessarily entails establishing that the insured’s liability is one the policy covers.

To support the proposition that an underlying judgment is not necessarily determinative of coverage or indemnity, the court referred to English authority, including AstraZeneca Insurance Co. v XL Insurance (Bermuda) Ltd [2013] EWHC 349 (Comm) and AstraZeneca Insurance Co. v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660, noting the approach that, absent agreement to be bound, an insurer may challenge whether the insured was in fact under a liability within the relevant policy, even if a judgment exists against the insured. While acknowledging that the judgment may be compelling evidence depending on how it was obtained, the court’s focus remained on the absence of binding effect on Centriq and the need for proof of policy coverage.

On that basis, the court concluded that the Pretoria judgment established Delru’s liability to the plaintiffs as between those parties, but did not establish, as between the plaintiffs and Centriq, that Delru’s liability was “as provided for in the policy” or within the indemnity wording. The necessary link between the underlying liability and the policy indemnity remained to be proven in the section 156 proceedings.

5. Outcome and Relief

The court decided the stated question in favour of the defendant, holding that the judgment of Tuchten J did not, as between the plaintiffs and Centriq, establish Delru’s liability for purposes of a section 156 action in the absence of proof that the claim falls within the policy indemnity.

The plaintiffs were ordered to pay the defendant’s costs in relation to this part of the proceedings.

Cases Cited

Beck v Du Toit 1975 (1) SA 366 (O).

Putco Ltd v TV and Radio Guarantee Co (Pty) Ltd 1985 (4) SA 809 (A).

Le Roux v Standard General Versekeringsmaatskappy Bpk 2000 (4) SA 1035 (SCA).

Unitrans Freight (Pty) Ltd v Santam Ltd 2004 (6) SA 21 (SCA).

Van Reenen v Santam Limited 2013 (5) SA 595 (SCA).

AstraZeneca Insurance Co. v XL Insurance (Bermuda) Ltd [2013] EWHC 349 (Comm).

AstraZeneca Insurance Co. v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660.

Legislation Cited

Insolvency Act 24 of 1936, section 156.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court found that section 156 of the Insolvency Act 24 of 1936 creates a distinct statutory right for a third party to claim from an insurer upon the insured’s insolvency, but it does not absolve the third party from proving that the insured’s liability falls within the indemnity provisions of the insurance policy.

The court further found that a judgment obtained against the insured in proceedings to which the insurer was not a party, particularly where the insurer was not bound by the adjudication and there was no lis between the claimant and insurer, does not by itself establish the insurer’s liability to indemnify under the policy for purposes of section 156.

LEGAL PRINCIPLES

Section 156 of the Insolvency Act 24 of 1936 was applied as conferring a statutory entitlement on a third party, upon the insured’s insolvency, to recover from the insurer only what the insurer is obliged to pay the insured under the policy indemnity. The statutory right was treated as distinct, but confined to the scope of the insurer’s contractual indemnity obligation.

A claimant proceeding under section 156 must prove the insurer’s liability to indemnify the insured on the policy terms. The statutory mechanism does not confer greater rights on the third party than the insured possessed and does not prevent the insurer from relying on policy terms and exclusions available against the insured.

An underlying judgment against an insured, obtained in proceedings where the insurer was not a party and not bound, does not necessarily establish that the insured’s liability is a liability covered by the policy. The existence of such a judgment does not, without proof linking the liability to the indemnity wording, determine coverage or the insurer’s indemnity obligation in subsequent proceedings against the insurer.