UNREVISED PROOF COPY Ev 2

House of LORDS

MINUTES OF EVIDENCE

TAKEN BEFORE

THE SPECIAL PUBLIC BILL COMMITTEE

 

THIRD PARTIES (RIGHTS AGAINST INSURERS) BILL [HL]

 

 

Tuesday 26 January 2010

PROFESSOR ROB MERKIN

Evidence heard in Public Questions 34 - 110

 

 

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Tuesday 26 January 2010

________________

Present

Archer of Sandwell, L

Bach, L

Borrie, L

Goodhart, L

Henley, L

Hunt of Wirral, L

Lloyd of Berwick, L (Chairman)

Methuen, L

Paul, L

Sheikh, L

Whitaker, B

________________

Memorandum submitted by Professor Rob Merkin

 

Examination of Witness

Witness: Professor Rob Merkin, Professor of Commercial Law, University of Southampton, examined.

Q34 Chairman: Professor Merkin, first of all, can we welcome you to this Special Public Bill Committee on this Bill, on which, if I may say so, you are evidently a very great expert and we are all extremely grateful for the trouble you have taken both in relation to your first paper, but also your supplementary paper in which you deal with some of the points made by others. Now, one of the great advantages of your first paper is that you deal with things, as it were, clause by clause as I am sure the Committee will want to go through these matters very carefully because they are not altogether easy, even for the lawyers, to understand and certainly many of the members of the Committee are not lawyers, so I hope you will be merciful to them in your explanations! I think the first thing would be to ask you if there are any general points which you would like to make about the Bill as a whole?

Professor Merkin: I think the only general point is that it is actually dealing with two quite different situations and they are intermingled in the Bill, and I think that is possibly why it is not as clear as it might be. One is the situation where somebody is suing an insolvent defendant and you know right at the start that that person is in insolvency and has no money and the insurer is the only source of funding. The second situation is where the defendant is not insolvent and may be insolvent if he cannot meet the judgment or may not be, and the Bill operates in quite a different fashion in that respect because you are then using the Bill as a method of enforcing a judgment against the defendant who was not insolvent at the time, but he may become insolvent as a result of the judgment. I think they need to be kept quite separate, but there is at least one point in the Bill dealing with information where the two issues are not really separated.

Q35 Chairman: I think that, in some respects, that anticipates the first very general question which I was going to ask just in order to get the ball rolling. Obviously, there are points which are going to arise, and I am amazed at the number of decisions which there have already been on the old Act as I had no idea it had been so fiercely litigated over over the years and certainly I am not aware of most of those decisions, but, apart from what you have just mentioned, are there any major defects in the Bill, as you now see it?

Professor Merkin: I think there are three or four areas that may need looking at. One is the one I just mentioned now which is that, if you are suing somebody who, you are pretty sure, is not going to be able to meet the judgment, it would be nice to know upfront whether it is worth bothering, and there is no mechanism under the Bill for obtaining information in advance of that. It is contrary to the 'cards on the table' approach of the CPRs, I think, and certainly on the other side, if the claimant is funded by 'after the event' insurance, he has to disclose that under recent decisions, but the defendant does not under the Bill, so I think the balance needs to be redressed in that regard.

Q36 Chairman: That is the point which you come to, if I am understanding it right, under paragraph 13.4 of your first paper.

Professor Merkin: Yes, that is right.

Q37 Chairman: And you deal with at the top of page 13. Is that right? Am I following you?

Professor Merkin: Yes.

Q38 Chairman: That is where you say, "Perhaps para 1(1)(b) should be amended to read that there is a right to seek information where TP reasonably believes that the insured will not be able to satisfy any judgment".

Professor Merkin: That is right.

Q39 Chairman: Well, that is an important point and we obviously would have to consider whether we should table an amendment to the Bill to deal with that point.

Professor Merkin: Yes.

Q40 Chairman: Are there any other, as it were, defects? We have one or two noted which we are going to come to as we go through them clause by clause.

Professor Merkin: I think that one and there are two others. There is the issue of set-off in clause 10, and I am not sure if I am using the right version of the Bill, but in the version I have it is clause 10, the insurer's right of set-off.

Q41 Chairman: Again, I have that noted as one of the things we are going to have to consider.

Professor Merkin: Because, in practice, many policies, probably most policies, do not simply require a premium to be paid, but they are required to be paid as a condition precedent to cover and, if the premium is not paid, then there is simply no cover and there is nothing the third party can do about it.

Q42 Chairman: That will be another area which we must explore.

Professor Merkin: The difficulty of course is that, if you do modify that, what you are then doing is altering the insurer's rights to be adverse in a third-party claim, which is not what the Bill is trying to do, so I think it is just an issue that I wanted to point out, but whether you can deal with it or not, I do not know. Then there was the rather curious provision in clause 2(7) about the issue of arbitration.

Q43 Chairman: Yes, I agree and again I have noted that as another area where there is a difficulty which may arise.

Professor Merkin: I think, whatever you do, it is not going to be right in this one because, once you have a situation where the policy has an arbitration clause, but there is no arbitration between the claimant and a defendant, either you waive the arbitration clause or you extend the arbitration clause or you have two parallel sets of proceedings. There is nothing else you can do, so something has to give. My own personal preference is that the arbitration clause gives, but that is another story.

Q44 Chairman: So those are the three areas which you have now, as it were, highlighted.

Professor Merkin: Sorry, there are four. The other one is the issue of claims-made policies, professional indemnity policies, and how they work when the insured has failed to notify circumstances and thereby finds himself debarred from notifying claims in a later year because they were notifiable under an earlier year's policy, but claims-made policies are a nightmare anyway.

Q45 Chairman: Well, I think that is very helpful in, as it were, highlighting, as I say, the points which the Committee may wish to consider. Now, I think the best thing would be for us to look through your paper more or less paragraph by paragraph and, first, of course we are going to consider your main submission, not your supplementary submission. I suspect that the simplest thing to do is to ask any member of the Committee whether they have any points before we come to paragraph 6. Are there any questions which anybody would like to ask on paragraphs 4 or 5? No, so is there anything you would like to add on those paragraphs?

Professor Merkin: No, thank you.

Chairman: Is there anything on paragraph 6?

Q46 Lord Borrie: I have one or two on 6, my Lord Chairman. On paragraph 6(6), and I have the Bill at clause 2(9), I can see the advantages of joinder, especially because there is a need for uninsured losses to be claimed and a desirability to do that in the same proceedings. May I suggest that at line 3, the fourth word should be "if" rather than "of"?

Professor Merkin: Yes, quite right.

Q47 Lord Borrie: Then may I go down to the sentence beginning, "It is possible to contemplate the situation in which the third party's claim against the insured arises under a contract containing an arbitration clause" et cetera, et cetera, and then you have made the point, Professor Merkin, just touching on this subject a moment ago, that of course "the arbitration clause is irrelevant because the insurer is not a party to the arbitration clause. However, if the third party has a residual claim against the insured or, for procedural reasons, wishes to join the insured, the arbitration clause presents a potential bar to such joinder". It is impossible to have a joinder in that case, I think.

Professor Merkin: Indeed.

Q48 Lord Borrie: The Bill does not reconcile this conflict. I think you have just alluded to this point in saying to my Lord Chairman that there are different ways of dealing with it.

Professor Merkin: I was actually dealing with the situation where the insurance contract has an arbitration clause. What I am dealing with here is where the dispute between the insured and the third party has an arbitration clause.

Q49 Lord Borrie: Indeed you are. Then on this point that 6.6 is dealing with, the Bill does not reconcile the conflict, but it would simply mean, would it not, that there would have to be parallel proceedings, one an arbitration against the insured who was bound by the arbitration clause and the other in the courts?

Professor Merkin: Quite.

Q50 Lord Borrie: I am not sure whether I know what "parallel" might mean, if one could follow the other or what they do.

Professor Merkin: Well, they may be simultaneous, depending on what the arbitrator decides to do. The arbitrator might decide to stay his proceedings so that other issues can be resolved first.

Q51 Lord Borrie: That seems to me a nuisance rather than a conflict, but I am only saying that to inspire your response! It is a nuisance of course to have two types of proceedings going on on the same subject, but I do not see how you can avoid that. One has signed up to arbitration and the other has not.

Professor Merkin: Yes, as I said before, whatever you do in that situation is wrong. If you force somebody to arbitration when they should not be there, that is wrong and, if you take them out of arbitration when they have got a right to be there, that is wrong too, so I do not think there is any easy solution to this. In fact, there is not a solution to it and I think you have to just live with it.

Q52 Lord Goodhart: Well, I was wondering here whether we, as the parliamentarians, should say, "Well, it's too bad. It's a bit of nuisance, but does it really matter?"

Professor Merkin: I think it might matter, but there is nothing you can do about it, I think, is the answer.

Chairman: Are there any further questions on that particular point? No, but it is observed that that point has been made, so there is a conflict there and it cannot be reconciled or we cannot reconcile it, which brings one to 6.8 which is the case where the arbitration clause is in the insurer's contract rather than in the contract between the third party and the insured. Are there any questions on 6.8?

Q53 Lord Borrie: There seems to be an assumption here, which I would be very grateful if Professor Merkin could explain, that, if there is a liability matter in issue, arbitration is inappropriate.

Professor Merkin: What I am saying is that the sort of arbitration panel you would have in order to resolve an insurance dispute may not be an appropriate arbitration panel to resolve a liability issue. Insurance arbitration panels vary. Sometimes they are sole and sometimes there are three people, a QC and two wing people, and, if the issue is something to do with, I do not know, occupier's liability or something, it may be completely inappropriate for that particular panel to deal with that issue of liability. That is the point I am making.

Q54 Lord Borrie: Well, I am just wondering if it is a question of appointing appropriate members. If appropriate members are appointed, knowing in advance the kind of case they are going to have to determine, including matters of liability, then why cannot the choice of members set the issue?

Professor Merkin: Because very often the arbitration clause in the insurance policy will specify who the arbitrators are to be, not by name, but by qualification. A chief executive of an insurance company is quite often nominated or the Arbitration Service for Insurance, ARIAS, has a panel of arbitrators, all of whom are either insurance people or qualified lawyers and, if it is an ARIAS arbitration clause, then you are stuck with the people on that panel.

Lord Borrie: Thank you, you have explained that very well.

Q55 Lord Sheikh: My Lord Chairman, generally the arbitration clause is only present in material damage policies, which means covering damage to property rather than liability. I have not seen any policy containing an arbitration clause relating to liability. It normally refers to a dispute between the insurer and the insured.

Professor Merkin: I am not sure that is right for the full range of liability policies; they are many and varied.

Q56 Lord Sheikh: I have not seen any policies like that.

Professor Merkin: I think the more sophisticated, for example directors' and officers' policies, may contain arbitration clauses, but you are certainly right that material damage is where you would tend to see arbitration clauses, and they would be confined to quantum rather than liability anyway.

Q57 Lord Sheikh: And the arbitration is binding, unless of course there is a mistake in law, so, therefore, both parties agree on the arbitrators.

Professor Merkin: Yes, indeed.

Q58 Lord Sheikh: And, if they cannot agree the two arbitrators, then of course there will have to be an umpire, so that situation where agreement cannot be reached is normally umpired.

Professor Merkin: Well, it depends upon what the appointment rules say. Umpires are not used these days in practice, but the way that it would normally work is that each party would appoint one and those two would appoint a third who would be a chairman, and each side would tend to appoint an arbitrator who is most likely to be favourable without being biased, favourably inclined to their side of the argument. You may be right in practice, but certainly in employer's liability cases you would not get arbitration clauses. You would get them in more sophisticated forms of professional indemnity, I think, and many of the cases that we have are indeed of that type.

Q59 Lord Goodhart: I am not very familiar with the way that these insurance policies work in this field, but the arbitration clauses may deal only with the question of the amount of damages, or they may deal with both the question of the amount of damages and liability. Is that right?

Professor Merkin: In material damage policies it tends to be just quantum.

Q60 Lord Goodhart: What is a material damage policy?

Professor Merkin: Damage to property and business interruption, policies like that. In liability policies, if you get arbitration clauses, they tend to cover everything because one of the objects is to keep the thing confidential very often.

Q61 Lord Goodhart: If there is an arbitration clause and it does cover both the amount of damages and the liability and this is something which was written into the contract, why should it not continue to be treated as written into the contract here?

Professor Merkin: I think it would be. I think the issue is that what the Bill is proposing is extending the arbitration clause to matters which it was never intended to cover. It was only intended to cover the issue of coverage under the policy, which may mean the construction of words, it may mean the construction of an excess deductible, it may mean the construction of a condition. What it will not deal with is the underlying liability; that is a matter for the insured to be sued to judgment on in some other place.

Q62 Lord Goodhart: But, if the arbitration clause does not provide for the question of liability to be investigated, how does it then happen that under this Bill it would apply? I do not really follow that.

Professor Merkin: I think I owe you an apology because the word "liability" has been used in two senses. I am talking about the liability of the insurers and of the policy, not the liability of the insured to the third party as that is a completely different issue and that would not be a matter of arbitration in the ordinary course of events. The issue would be: does the policy cover the liability of the insured? That would depend upon the wording of the policy. The liability of the insured could come from any one of many sources, some of which may be within the expertise of the arbitrators and some of which may not.

Q63 Lord Goodhart: Given that this Committee is well aware that it is desirable in order to avoid difficulties here to make as few amendments as possible, how important would you regard this particular amendment as being? What do you suggest?

Professor Merkin: As I said at the outset, whatever you do is wrong on this. This is as good a way of being wrong as any, I would have thought! The alternative is to remove the arbitration clause if you want to have the two things settled in the same set of proceedings and, if you take away the arbitration clause, the confidentiality which the parties have insisted upon would disappear. I think that probably is the overriding consideration when it comes to arbitration, the confidentiality, so my guess is that what the Law Commission has come up with is problematic, but it is probably the best solution.

Q64 Chairman: Are there any further questions on that? So, in effect, although an arbitrator appointed under the policy will not necessarily be the best person to determine the liability of the insured to the third party, nevertheless, that is all one can do?

Professor Merkin: Yes.

Q65 Chairman: That is what they have come up with and you cannot think of a better solution? Is that right?

Professor Merkin: If you are going to maintain the concept of a single set of proceedings, that is all you can do.

Q66 Lord Sheikh: There are merits in having an arbitration clause. Even if you look at a dispute on a liability policy, quite often the two parties would let the matter be decided by mediation, so the point is that there is some merit in keeping the arbitration clause. You made the point about confidentiality and we really do not want to go to court, but we want to try to resolve the matter by mediation, even if there is no arbitration clause.

Professor Merkin: Yes, I think we are looking at the three or four per cent of cases that do not settle, but of course, as lawyers, you always do!

Q67 Chairman: Can we then move on to paragraph 7. Am I right in thinking that we ought to have in mind also what you said in paragraph 13 in relation to obtaining information? Are these connected or are they unconnected?

Professor Merkin: Information conditions are policy conditions which the insured has to comply with, but has not because of his insolvency.

Q68 Chairman: I see, so they are separate points.

Professor Merkin: Yes, completely separate points.

Chairman: Does anybody have any problems with paragraph 7? Is there anything which needs further explanation? I have got a query against paragraph 7.6, the last sentence, but are there any other questions before we come to that?

Q69 Lord Sheikh: On clause 9.4, I just want your opinion on this. You see, it talks about a condition requiring the insured to provide information or assistance to the insurer, but in regard to liability policies it is imperative that an investigation be carried out as quickly as possible and loss adjustors need to be appointed, they need to visit the scene of the accident and make a statement, but do you see this working against the insurer in the case where an investigation could not be undertaken as quickly as possible?

Professor Merkin: Yes, it may or it may not; it depends upon the nature of the policy and the nature of the claim, I think. There are some situations where co-operation with the insurer is of no particular assistance to the insurer and there are other situations in which it may be very important very quickly as there may be another third party who is potentially liable by way of subrogation, or it may be that there is no evidence of what happened, so in some cases it may be very important, but I think it is very difficult to generalise and say, "Yes, it is always going to be" or "It is never going to be".

Q70 Chairman: Could you just explain again to me why you say that clause 9 is of limited effect because it only refers to the notification of a claim?

Professor Merkin: Yes, this goes back to the way that claims-made policies operate in practice. Claims-made policies are used almost universally for professional indemnity insurance and they are now even creeping into employer's liability, although I think they are probably unlawful in that context, but the way they work is that the insured can either notify circumstances which may give rise to a claim and then, when a claim arises at a later date, the claim is dragged back into the year of the notification of the circumstances, or he can notify a claim made against him. Now, either of those two are triggers of liability under the policy. The problem arises in that, if circumstances arise in year one which are not notified, the year two policy is likely to exclude any claim arising from circumstances which could have been notified under an earlier year, so, if the insured has not notified circumstances in year one, maybe a different insurer in year two is going to say, "Well, you should have notified that in year one. We're not liable", so it is going to be of limited assistance.

Q71 Chairman: Is there a solution to that particular problem which you can recommend?

Professor Merkin: The only solution is to override the rights of insurers which they would have against the insured himself, but again that is not consistent with the policy of the Bill, so I am just pointing it out as an issue. There is a case in the Court of Appeal at the moment, we are awaiting the outcome on it, on the way that employer's liability policies respond to asbestosis and other meso claims, but, as long as those types of policies are not used for personal injury matters, I do not have a problem. If they are used for professional indemnity, then so be it.

Q72 Lord Sheikh: The point is that in the past claims-made conditions have appeared in employer's liability policies, and I appreciate and understand that generally they would be present in professional indemnity policies where the claim has got to be notified. That also works against a normal policy-holder, for example, never mind the complexity of third parties, so the point I am making is that in the past, particularly four or five years ago when the liability market hardened considerably, it was difficult to get cover for certain types of risks and claims-made policies did appear with regard to employer's liability, so it is likely to happen in the future if the market becomes hard.

Professor Merkin: Well, I hope that the Court of Appeal in the Durham case is going to say that it is not lawful to use that type of policy in employer's liability cases. That is one of the side issues in that case.

Q73 Lord Archer of Sandwell: One can envisage two quite different scenarios. Most of the contracts of insurance that we are concerned with here will be by commercial people who operate normally and fulfil their obligations, but the insured of course in some of these cases might be a little old couple who never deal with their correspondence at all, so they never get round to notifying their insurers. I gather from clause 9(4) that that does not let out the insured, but you could envisage a situation, could you not, where, without anyone knowing that there is an insurance policy, there is litigation between the third party and the initial party and then you have an elaborate series of litigations, judgments and summons, and at the end of all that someone says, "Oh, we didn't know there's a policy of insurance". Is there any way of avoiding that situation, or is it something we can deal with in this Bill?

Professor Merkin: I do not think it is a particular risk because there is actually no point in suing an individual without assets, unless you know that there is an insurance policy somewhere in the background, so I am not sure it would actually happen. It could happen in some cases if you have got maybe a retired couple who own their own home and somebody comes along and trips on the step and thinks, "Well, I can claim against these people and sue them to bankruptcy, if necessary". That may happen, but I do not think it happens very often.

Chairman: Can we then move to paragraph 8, which concerns P&I clubs. Are there any questions? The P&I clubs seem to be satisfied with the Bill as it stands, provided there is no amendment. Could we then move to what is obviously an important question here, set-off, paragraph 9.

Q74 Lord Sheikh: I raised this point last week as it is causing me a little bit of concern and that is in regard to employer's liability policies where, you will appreciate, the premiums can be quite substantial. If you have an injury to an employee and if we were going to invoke this clause, it would mean that the injured person would not be able to get adequate compensation because of that. Do you have any comment?

Professor Merkin: Yes, you can imagine a situation where the premiums are large and the claim is relatively small.

Q75 Lord Sheikh: Which most of the claims are. Normally, they would be 3/4/5,000.

Professor Merkin: Yes, in that case, as you say, the victim would obtain no compensation, but again, if you alter that rule, you put the insurer in a worst position dealing with a third-party claim than dealing with a first-party claim, and I think that the insurance industry would probably not appreciate that and suddenly this Bill would become contentious.

Lord Sheikh: But it could happen.

Q76 Lord Goodhart: We have heard the statement of the view of the Association of Personal Injury Lawyers here who say that they think there should be no set-off. Now, I think that would be difficult for us because it would of course mean that the insurance companies would be very unhappy with this, but is this something that could be dealt with by the point which you raised at the beginning, which we have not reached yet here, which is information so that, if you made it possible for the third party to get the information from which they could appreciate that there was no worthwhile amount available after set-off had been taken into account, then that would, at any rate, prevent the third party from having to waste money on a valueless claim?

Professor Merkin: I think that is probably right, that would help. It does not deal with the problem of how you compensate that employee of course. One of the weaknesses with the 1969 Act is that maybe a dozen or more years ago it was decided that there is no personal liability on directors who cause their company to be uninsured because they do not pay the premiums. That would be a very useful reform, but maybe not for today.

Q77 Chairman: Are there any further questions on set-off? We have had some evidence from, as has already been mentioned, the Association of Personal Injury Lawyers and they suggested that it might be possible to modify the rule of set-off in relation to personal injury claims beneath a certain level, and 5,000 is what they suggest. By analogy, they say one could make an exception in relation to personal injury claims in the same way as we have done in relation to marine insurance. Do you see any merit in that?

Professor Merkin: I see every merit in giving injured employees compensation, yes. The difficulty is how you do that without offending the rights of the insurers, but yes, I do see merit in that.

Q78 Chairman: I think the point is that, if we persuade the insurers to accept the marine insurance position that it will not apply that exception to personal injury claims, they would be saying, "Well, could that not be applied in relation to personal injury claims in set-off?"

Professor Merkin: If insurers could be persuaded of that, that would be great, but whether they could or not, I do not know. You are talking about P&I clubs for personal injury claims?

Q79 Chairman: No, I am not talking about P&I clubs specifically now, I think we have left that one, but we are talking about set-off in general. The argument, as I understand it, is that you are bound to allow set-off in the ordinary way because, otherwise, one is interfering with the rights of the insurer, but the exception could be made in relation to small personal injury claims where the set-off would wipe out the claim altogether. That is the point they are making. I do not know whether others have understood it in the same way. Is there some merit in that?

Professor Merkin: I am just wondering whether there is some method of maybe requiring the insurers to seek their remedy against the employer rather than by way of set-off, which might resolve the problem, but maybe only if the sum is irrecoverable from the employer do they have the right of set-off. Of course, the employer, by definition, is insolvent anyway, so I suppose it does not really get you much further.

Chairman: Are there any follow-ups on that?

Q80 Lord Sheikh: One point I would like to make is that, bearing in mind that we are only giving some enhancement particularly in regard to notification to others, it could be possible, if the insurers agree to this?

Professor Merkin: If the insurers agree to it, I would be the first in line, believe me.

Q81 Lord Sheikh: Because the intention is that the third party does not have any more rights than the insured has, but the point I make is that there is already some enhancement written in the Bill itself.

Professor Merkin: Yes, there is moderate enhancement. Yes, I would be perfectly happy with that, I would be delighted with it. As I say, any employee who does not get compensated, in my view, is unfortunate and should be dealt with, but this Bill may not be the way of doing it, I do not know.

Q82 Chairman: Thank you. Are there any questions on paragraph 10? No, which brings us to limitation, paragraph 11, which is obviously a difficult area. Are there any questions on paragraph 11? The main point is really on paragraph 11.3 and whether, in some way, the Civil Procedure Rules do not apply so as to enable the same limitation period where there is an arbitration clause.

Professor Merkin: That is right.

Q83 Chairman: Perhaps you had better explain that more clearly than I have.

Professor Merkin: The problem arises where the third party has obtained judgment against the insured and the insured then has six years to bring a claim against his insurers under the policy within the Limitation Act. The insured, for whatever reason, waits five years, 11 months to bring his action, brings his action and then, three months later, becomes insolvent, at which point the rights of the insured are transferred to the third party. Now, the third party cannot commence a fresh action at that point because he is time-barred, but what the CPRs allow is for him to take over the proceedings which have been started by the insured. The question is: can that be an arbitration? There is nothing in the CPRs which allows it, so what you need to achieve is maybe an assignment of the arbitration proceedings. There is a Court of Appeal authority for the proposition that you can assign arbitration proceedings, but I think it would not be in the context of this Act. I think maybe a statement somewhere that that is possible would be useful as it would resolve the issue. It may be that the court would actually say, "Well, the authority exists and there's no problem", but there is a potential conflict of authority on this point.

Q84 Chairman: Do you see anything that we could do in this Bill to resolve the particular problem other than hoping that the Civil Procedure Rules might be amended so as to apply to arbitration?

Professor Merkin: I just wonder whether it is possible to amend the Practice Direction, and I think it is Part 62 which deals with arbitration, just to deal with this particular point, to allow arbitration proceedings to be transferred after the expiry of the limitation period.

Q85 Lord Sheikh: The six-year rule, as we know, applies to basically third-party property damage, but, if you look at personal injury, the limitation is three years. Do you have any comment on that?

Professor Merkin: No, we are talking about a claim against the insurer by the insured, not the claim by the insured against a third party. There are separate limitation periods for each of those things. In practice, anyone who is properly advised should not have a problem because they should not allow the insured to wait five years before bringing an action. You should issue a bankruptcy notice immediately against that person as soon as you get your judgment and then of course you get your rights transferred to you.

Q86 Chairman: So, although there is a problem, it is one which is not perhaps going to arise all that often?

Professor Merkin: Yes, and, if it is an arbitration issue, it is almost certainly going to be a commercial matter and, therefore, we need not worry too much about it.

Q87 Chairman: Then paragraph 12. Are there any questions? You have given us help with that already. Then paragraph 13, obtaining information. Again, this is the other aspect of obtaining information.

Professor Merkin: Sorry, but could we go back to paragraph 12? There is a gap which I think Maggie Hemsworth referred to in her note as well, which is the problem of a settlement prior to an insolvency. Now, most insurers and most policy-holders will reach sensible settlements anyway, but you can imagine the situation in which the insured knows he is going to be insolvent and does not care and insurers are looking to buy off the claim for as small an amount as possible and, if they do a deal at that point, the third party loses his rights. There is a suggestion in the very old cases that you can actually claim conspiracy in that situation, but I would not wish to hang my hat on that one! I just wonder whether there is any method of controlling what happens when the insured is potentially insolvent.

Q88 Chairman: Yes, and have you any suggestion to make?

Professor Merkin: I do not. Again, if there is no actual insolvency at that point, the third party has no rights and the insured can bargain away his contract if he so wishes.

Q89 Chairman: So then paragraph 13, obtaining information, which brings us to Schedule 1. This is an area, paragraph 13.4, where you do make a specific suggestion for amendment. Perhaps you might just touch on that and why you think it would be desirable to have an amendment to cover a case where a third party reasonably believes that the insured may not be able to pay.

Professor Merkin: I think the spirit of the Civil Procedure Rules is 'cards on the table', and I think this is a situation in which sometimes it is possible to buy off litigation by refusing to disclose insurance information. If the response of the defendant is, "I'm not going to tell you whether I'm insured. Sue me and you'll find out", I do not think that is particularly conducive to the way that we should be operating that system. These rules work perfectly well in the first of the situations that identified right at the very start whether the insured is insolvent rightaway and you know whether it is worth suing him because you have obtained the information. Where it does not work is where you know, as a claimant, that the insured cannot afford to pay the bill, but you have no way of knowing whether or not there is a policy in force, whether he has paid the premiums, whether there is a deductible which is overriding the claim and so on and so forth.

Q90 Lord Goodhart: This really deals with the problem I raised on the question of clause 10 and the problem of set-off. That problem of the set-off would be dealt with to at least a fairly considerable extent by something in the nature of paragraph 13.4. Is that not correct?

Professor Merkin: Well, insofar as the third party would know that there has been a settlement that he cannot overturn.

Q91 Lord Goodhart: No, sorry, I was thinking of the right to seek information. The problem is that you will only know whether it is worth suing at the moment if there is actually insolvency, but, if you are in a situation where it is likely that insolvency will be coming along soon, the third party is not able to assess whether it is financially worth going ahead with the proceedings.

Professor Merkin: Quite, and of course there may be a situation in which insurance is compulsory, but it does not necessarily mean that the defendant has insurance, so there is no way of knowing under the existing law whether there is a policy in force, and there is nothing in the CPRs after the Buncefield case, assuming that is rightly decided and I think it probably is, which allows you to get the policy upfront.

Q92 Lord Goodhart: In paragraph 13.2, the second line, where it says, "incurred liability to A and also reasonably believes that A is an RP", should that not be "believes that B is an RP"?

Professor Merkin: Yes, quite right, thank you.

Q93 Chairman: Are there any other questions on 13.4? Could I just then have your view on this point. The possible amendment would be in paragraph 1 of Schedule 1 to say, "If a person (A) reasonably believes that another person (B) has incurred a liability to A, and B is a relevant person, or maybe unable to satisfy a judgment against him". Is that what you are aiming towards?

Professor Merkin: Yes, so that you are dealing with both situations, not just the one of the insolvent insured, but the potential insolvent insured.

Q94 Chairman: So that obviously would be an amendment which would be quite a simple and straightforward amendment.

Professor Merkin: Yes.

Q95 Chairman: How often is this likely to arise in practice?

Professor Merkin: Very often, more often than not in fact, I would have said, because, when there is an insolvent insured, there is normally an employment case or something like that, but in many cases of civil litigation you do not know the defendant's status and you do not know whether he is worth suing. If he is an accountant or a solicitor, you can assume that there is a professional indemnity policy there, but he may be in a profession which does not require liability insurance, so I would have said that it was a very common situation.

Q96 Chairman: Who would be likely to object to this amendment, if we were to make it?

Professor Merkin: It would probably be the insurers.

Q97 Chairman: What would be the nature of their objection?

Professor Merkin: In the Buncefield case, they actually hired a QC to argue that there was not any obligation upon them to disclose insurance.

Q98 Chairman: But it is not going to cost them money though, is it, as in the case of set-off?

Professor Merkin: It is going to cost them money in that claims might be brought which would not otherwise be brought.

Q99 Lord Archer of Sandwell: My Lord Chairman, that is quite a financial burden which may arise. If the employer is a small firm, presumably somebody is going to go through all their books, all their invoices, all their contracts, and they have got to get all these things out in order to determine whether they might become a relevant person.

Professor Merkin: I think that all you really want from the insured is the name of the insurer and the policy number and you then want from the insurer whether the policy limit has been exceeded for that year, what is the deductible, what are the policy terms and whether the premiums are paid. The insurer is really the key person here.

Q100 Lord Hunt of Wirral: My Lord Chairman, would you agree that, although 'cards on the table' is very much the policy which is being pursued once litigation has commenced, where litigation has not yet commenced and where people are considering the risk involved, and of course it is not just the insurers we are talking about, it is the defendants, including the Government through local authorities, MoD, et cetera, am I not right in recalling, because I seem to recollect a court case about this, that there is always a wish on the part of the claimant or the claimant's solicitors to know information and a line has to be drawn somewhere? Although the immediate circumstances in which the change is made or the amendment is put forward may appear to justify it, I think the reason why it does cause controversy is that it may open the doors to a whole series of other areas of information which I think the rules in the past have always been designed to protect, and that is why you have to go to court, for instance, in medical negligence cases to make an application for papers to be disclosed or nursing records, et cetera. Am I not right in thinking that this whole area is like opening Pandora's box because you are never quite sure what information is going to be requested and, if so, by whom and, therefore, we must protect the rights of all the parties involved in accordance with the established procedure, or am I misrecalling the history of this? You, as a professor, will know better than me.

Professor Merkin: I think you are certainly right, that there is a risk that people could make requests for information which is of no concern to them and which simply imposes a burden upon the defendant. I accept that. However, I think that, if a person has a genuine claim against a defendant and wants to know whether that claim is worth pursuing, I am not sure that that is the thin end of any wedge, in particular.

Q101 Lord Hunt of Wirral: We had a lengthy debate yesterday on an amendment which was inserting the word "genuine" in the Equality Bill. How do you define what is genuine or not? It is huge and it is another area which we spent an hour yesterday debating, although there are other issues as well.

Professor Merkin: There is another way of dealing with this which may be not to amend the Bill, but to amend the CPRs because 31.14, which I think is the relevant provision, gives the court a discretion to order the disclosure of information which clarifies it, and you could add to that that there may be insurance information which may be part of that and then the court decides what is to be admitted and what is not.

Q102 Lord Bach: If you were to amend the Bill, it is possible that that change itself could open a floodgate, could it not, of uninformed enquiries and costs could increase quite hugely for the insurers. You were asked who would not like it and you replied that it would be the insurers, but they would not like it one little bit, would they?

Professor Merkin: No, but I think that, if you went down the road of amending the CPRs, and there are proceedings in force anyway and, therefore, there are genuine interests, what you need to do is to cut out the vexatious litigant. I am not quite sure, but people actually have a hobby at the moment of claiming on insurance policies for potential defendants, but, if there were not a risk of that, then obviously there would be a problem. Maybe the way to do it is to amend the CPRs so that that particular issue could be dealt with by the Rules Committee. There is, after all, a conflict of precedent authority on this.

Lord Sheikh: Certainly I think Lord Bach was saying last week that we intend to pass this as soon as possible before the General Election.

Lord Goodhart: We very much hope so.

Lord Sheikh: Of course it depends on when the General Election is going to be. The point is that, if we start amending this, we are going to open the floodgates, and I think I would certainly reinforce the point that Lord Hunt made. I think the suggestion would be, if possible, to keep it as it is and amend, as the Professor says in his second recommendation. Otherwise, I think we are going to go on talking, talking and talking, and we have been talking since 1998.

Q103 Baroness Whitaker: But, my Lord Chairman, was it not the suggestion that the CPRs be amended by a clause in this Bill?

Professor Merkin: No. You can deal with this in one of two ways. You can deal with it either in the Bill or by the rules of court which empower the court to extend what information they can insist upon being disclosed.

Q104 Baroness Whitaker: Without primary legislation?

Professor Merkin: Yes.

Q105 Chairman: Could we then perhaps leave paragraph 14 on one side until we come to the supplementary paper, so just finally on this paper look at paragraph 15, which supports 'first past the post'. Are there any questions on that? Well, we will leave that then and turn to your supplementary report. How is it best that we should deal with this issue because this considers first Professor Briggs' evidence, which of course we have read just as we have read your comments on it, and then it deals also with the evidence of Maggie Hemsworth. We are very grateful to you, Professor, for having taken all this trouble with these various other bits of evidence. How would it be best to deal with it, or how would the Committee like to deal with Professor Merkin's comments on Professor Briggs? Do we want to deal with them one by one, as we have been doing up to now, or can we take them very broadly? Professor Briggs was concerned specifically about the international law problem which arose, but what is your main, as it were, point which you want to make in relation to Professor Briggs?

Professor Merkin: I think I have two points. One is that these issues very rarely arise and it would not be sensible to lose the whole Bill over a very small percentage of cases. The other is that I think the Bill actually deals with them. Issues of choice of law and jurisdiction are complex, but are largely irrelevant, I think, to this Bill. The issue is whether there is an English insolvency procedure, and clause 4 deals with the various forms of insolvency and they are all English procedures, so, if there is a significant link with England in that sense, it should not matter what the jurisdiction issues are and what the choice of law issues are in relation to the policy.

Q106 Chairman: In general, is there anything which, in a sense, we could put into the Bill itself which would help resolve Professor Briggs' problems?

Professor Merkin: I do not think that any of Professor Briggs' issues actually cause a problem in practice.

Q107 Chairman: Then there may be problems, which we cannot foresee, which would have to be dealt with by the courts?

Professor Merkin: Yes, I think that is probably right. I do not see why it matters what the law applicable to the insurance contract is. I do not see why it matters where the case is heard. The issue is about getting the victim's hands on the insurance money and, if there is an English insolvency procedure, that is what the Bill allows, so I do not think that these issues are actually significant.

Q108 Chairman: Has anybody any questions to ask Professor Merkin about that? No, so turning to Maggie Hemsworth, what is the main point you would like to make in relation to her evidence?

Professor Merkin: Again, I think the main point I would like to make in relation to Maggie, who is an old friend of mine, is that she raises issues which, for the most part, are dealt with and resolved by the Law Commission in its report. She wishes to reopen the issue of 'first past the post', for example, which has been resolved. I think the object of this Bill is to implement what the Law Commission wish to do and I think it would be wrong at this stage to revisit these issues because there are two views that you can take on these issues and the Law Commission has taken a view on each of them.

Chairman: Are there any questions on what Maggie Hemsworth has said and what you have heard from Professor Merkin?

Lord Borrie: I would like to agree with Professor Merkin, otherwise we go right back to the beginning!

Q109 Chairman: I think that is the general view of the Committee. Well, is there anything more you would like to add in a very general way? I think you have made your views extremely clear about this. As I said at the start, it is clear that you are an absolute expert in this branch of the law and we are very, very grateful for your evidence and for all the trouble that you have taken.

Professor Merkin: All I would say is that I became involved with this project way back in the 1990s when the Law Commission was looking at privity in general and produced a report on privity which said, "There are various exceptions to privity, including the 1930 Act which works very well", and that produced a letter from me, as in those days it was letters rather than emails, saying, "Oh no, it doesn't" and I gave them 20 reasons why it did not work. That, plus other comments, led to the Law Commission looking at the 1930 Act, so I am delighted to see this, although I am sad that it has had to wait for so long. However, the one thing I would say is that between 2002 and today the courts have done a lot of the job of the Law Commission anyway in cases like OT and others, so the issue is not actually as pressing as it was, but I think this Bill is very useful and I do not see any reason why anyone could object to it.

Q110 Chairman: Well, thank you for expressing those views. I hope that, if this Bill does go through, it will not bring to an end your interest in this subject.

Professor Merkin: I will send you a copy of the book! Perhaps I should have declared that as a personal interest!