The claimants brought legal proceedings against a company for negligence and breach of contract. The defendant company had professional indemnity insurance with Royal & Sun Alliance. The insured company had been insolvent for some time but shortly before it went into voluntary liquidation it had settled its claim for indemnity with the insurer by receipt of a sum of money equating to the limit of indemnity, being £250,000. The payment was made under a condition in the policy by which the insurer was released from any obligation to defend the legal proceedings brought against the insured company. The claimants claimed in the subject proceedings a declaration that the liquidator held those monies on trust for the claimants. When the company went into liquidation the total liabilities far exceeded the insurance monies, which were held as cash at bank on behalf of the company.

The claim was rejected at first instance and the claimants appealed. The claim was made on the basis of an express and/or implied term and in the alternative on the basis of a constructive trust.

Decision: Appeal dismissed.

Held: At common law, absent any special term, third parties do not have rights against the insurer or to the proceeds of the insured’s policy.2 The Third Parties (Rights against Insurers) Act 2010 did not apply to this claim: by the time the company went into liquidation its claim for indemnity had already been compromised by the payment of the insurance monies. The question of an implied term could not be divorced from the question of a trust: an implied term would be of no benefit unless it also gave rise to a trust. A contractual right would give rise only to a right to prove for a dividend in the liquidation.

The parties would not have intended to impose a trust on the insurance proceeds in the hands of a solvent insured. To do so in the case of an insolvent insured required meeting the test for implication of a term, summarised recently in Ali v Petroleum Co of Trinidad and Tobago.3 Any such term must be identified with certainty and clarity. This presents