Lloyd's Maritime and Commercial Law Quarterly
THIRD PARTY PAYMENTS TO INSUREDS—WHAT CONSTITUTES A GIFT?
The Wind Star
It is a well-established principle of indemnity insurance that an insured who suffers a loss covered by the terms of his policy is not permitted to accumulate recoveries in respect of the loss from his insurer and from third parties, to the extent that he is thereby more than fully indemnified for his loss.1 However, where an insured is paid money by a third party that is not intended to diminish his insured loss, but is rather made as a gift intended to benefit him over and above any money he is able to recover from his insurer, that principle will not apply: in these circumstances, the insured is entitled to retain both the insurer’s payment and the third party’s. To bring himself within this exception to the general rule against accumulation, the insured must be able to demonstrate two things in particular: first, that the third party’s payment was made voluntarily— i.e., that it was not made pursuant to a pre-existing legal liability owed to the insured in respect of his loss; secondly, that it was not intended to diminish the insured portion of his loss. These rules emerge from Burnand v. Rodocanachi
2 and, more recently, from Merrett v. Capitol Indemnity Corp.3 They have now been applied to doubtful effect in The Wind Star.4
The facts were as follows. The plaintiff insurance company insured a cargo of naphtha shipped from the defendant Amoco’s refinery in Texas to ICI in the United Kingdom. On arrival it was discovered that the cargo was contaminated. It was not disputed that ICI was entitled to claim in respect of the resultant loss against the plaintiff insurers. Nor was it disputed that the contamination was due to Amoco’s negligence and/or breach of industrial standards. However, for reasons which do not fully emerge from Potter, J.’s judgment, it was never established that ICI was entitled to assert a direct claim against Amoco in respect of its loss. This may have been due in part to the fact that the cargo was not sold directly by Amoco to ICI, but passed through the hands of two intermediaries, breaking the contractual chain. Why it was not established that ICI were entitled to sue in tort, however, is not clear. That it should have been able to do so in principle is strongly suggested by the fact that ICI and Amoco swiftly came to an agreement under which Amoco settled ICI’s claim; but Amoco expressly denied liability under the terms of this agreement, and the case was argued on the basis that ICI in fact had no claim against Amoco. Under the settlement agreement Amoco paid ICI’s losses in full, in consideration for an unconditional release from any claims ICI might have had against it, as well as an assignment of ICI’s rights against the insurers in respect of the loss. In its capacity as assignee, Amoco then made a claim on the policy, and the insurers brought an action seeking a declaration that they were not liable to meet this claim. Amoco counterclaimed a declaration to the contrary.
1. This principle, commonly termed the principle of indemnity, underlies the award of three different remedies to an insurer against its insured, according to the chronological order of the payments that the insured received: subrogation; an action for restitution (money had and received); a declaration that the insured holds monies received from a third party on trust for the insurer. For discussion, see C. Mitchell, The Law of Subrogation (Oxford, 1994), 67–69, 74–86.
2. (1882) 7 App. Cas. 333.
4. Colonia Versicherung A.G. v. Amoco Oil Co. (The Wind Star) [1995] 1 Lloyd’s Rep. 570.
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