What's the beef with the Third Party (Rights against Insurers) Act — Lonham Group Ltd v Scotbeef Ltd

Relevant to this, the Court of Appeal recently handed down its judgment in Lonham Group Limited v Scotbeef Limited, D&S Storage Limited (in liquidation) [2025] EWCA Civ 203.

Facts

A meat producer, Scotbeef Ltd ("Scotbeef"), used warehouse and refrigeration facilities offered by D&S Storage Limited ("D&S"). Scotbeef claimed against D&S in relation to mould growth on meat products stored by D&S.  The mould had caused Scotbeef to incur losses in the sum of £395,588. 

D&S had the benefit of a liability insurance policy with Lonham Group Ltd (the "Insurer") which incorporated a "Duty of Assured Clause" which imposed conditions that D&S would:

i) make a full declaration of all current trading conditions at the point of policy creation;

ii) continuously trade under terms approved by the Insurer; and

ii) make all reasonable and practicable steps to ensure that the aforementioned terms were incorporated into all contracts.

From February 2017 to February 2019, D&S's contracts did incorporate a set of trade association standard terms which included a liability cap (£250 per tonne) and required any claims to be brought within nine months of the event giving rise to the claim. However, from February 2019 onwards, the standard terms were not referenced in invoices sent by D&S to Scotbeef.

Following a trial of preliminary issues, D&S entered liquidation and the Insurer was joined to the proceedings by Scotbeef who sought to exercise rights to a direct indemnity from the Insurer under the Act. The practical effect of the Act, the purpose of which is to protect payments under insurance policies from being part of the assets available to general creditors, is to transfer the rights under the applicable insurance policy of the insolvent insured party (in this case D&S) to the third party (in this case Scotbeef). 

The Insurer denied liability under the Act by relying on D&S's failure to ensure that the standard trade terms were incorporated into the relevant contract with Scotbeef.  This amounted to a breach of the conditions set out at i) to iii) above which were expressed as conditions precedent to an indemnity.

Whilst the Court determined that item i) was properly a representation (breach of which did not necessarily entitle the Insurers to decline the claim) D&S had clearly breached conditions ii) and iii).  These conditions were properly to be categorised as warranties as to "the conduct of the assured during the policy term" and D&S was in breach due to its failure to incorporate the trade association standard terms in its contracts with Scotbeef.  As per sections 10(2) and 10(4) of the Insurance Act 2015, an insurer has no liability in respect of any losses occurring, or attributable to something happening between the breach of such warranty and the date upon which the breach is remediated if that is possible.      

Commentary

A common problem with claims under the Act is that they can be compromised by the failure of insured parties to comply with policy conditions whether notification conditions (ie requirements to notify claims or circumstances that might or are likely to give rise to claims within timescales stipulated by the policy) or, as in this case, with more general conditions as to the conduct of the underlying commercial operations.

The judgment is also a useful reminder of the importance of ensuring clarity prevails as to the contractual terms and conditions regulating the commercial relations between the parties and the implication of those terms.  Here, D&S could very easily have incorporated the standard trade conditions into contracts with Scotbeef as it had done historically.  The limitations on liability therein may well have enabled it to avoid insolvency by capping its liability.  D&S's failure to incorporate the liability limits may initially have been superficially attractive to Scotbeef.  Ultimately, however, the omission did not provide it with any financial benefit in the event of D&S's insolvency because it prejudiced its rights to purse insurers directly under the Act. Had D&S complied with the warranties it is likely that Scotbeef would have recovered £250 per tonne (or such other cap that might have been negotiated between D&S and Scotbeef) of damaged meat whether from D&S (if it would have avoided insolvency) or from the Insurer. Whilst this would have resulted only in a modest contribution to its overall loss such recovery would have improved on the financial result that materialised in the absence of insurance cover.  

If you would like to understand more about any of the topics raised in this article, please reach out to David Thorne and Alex Hyams.

With thanks to Secondee Jonathan Talbot for his contribution to this article.