Case Digest No. 18 · Contentious insolvency
Liability insurance proceeds and third-party claimants in insolvency
Desai v Wood [2025] EWCA Civ 906
The Court of Appeal held that liability insurance proceeds received by an insolvent company are not held on trust for third-party claimants to whom the company owes the insured liability.
Court of Appeal
[2025] EWCA Civ 906
October 2025
Decision at a glance
The question, answer and consequence.
- Legal question
- The central issue was liability insurance proceeds and third-party claimants in insolvency.
- Court's answer
- The Court of Appeal held that liability insurance proceeds received by an insolvent company are not held on trust for third-party claimants to whom the company owes the insured liability.
- Practical consequence
- The decision clarifies how liability-insurance proceeds interact with third-party claims when the insured is insolvent. It informs recovery strategy before claimants assume that a policy creates a ring-fenced or directly available fund.
Factual background
Boscolo Limited (“the Company”) was engaged by the Appellants to design a refurbishment scheme for a property. The Design Contract was made on a standard form “Model of Memorandum of Agreement” incorporating the conditions of the British Institute of Interior Design. The Company had the benefit of a policy of professional indemnity insurance with Royal & Sun Alliance Ltd (“RSA”). The Company informed the Appellants’ agent that they carried professional indemnity insurance for £250,000 for any one claim and public indemnity insurance for £1 million for any single event. Once notified of the claim, RSA appointed solicitors to defend the claim and a standstill agreement was entered into. Before any legal proceedings had been issued, RSA’s solicitors informed the Company that RSA had made the
Issue
The central issue was liability insurance proceeds and third-party claimants in insolvency.
Procedural history and reasoning
to exercise its power under Claims Condition 7 of the Policy (see right). The Appellants issued proceedings against both the Company and RSA, claiming among other things that the Insurance Proceeds were held on trust for them, and claiming damages against the Company in excess of £700,000. The Company entered creditors voluntary liquidation, having been insolvent for many years. ISSUE Whether liability insurance proceeds are held on trust for third-party claimants. GROUNDS OF APPEAL The Appellants advanced two alternative cases of implied term. 1. Implied Term in the Design Contract “if [the Company] had reasonable grounds to believe that [the Company] might be unable to meet the Appellants’ claim in due course from its other resources (the “Relevant State of Mind”) it would not dissipate those insurance monies or use them to pay other creditors or for any purpose conflicting or inconsistent with the “Paramount Purpose”…” 2.
Implied Term in both the Design Contract and the Policy “if (A) the Appellants as clients made a professional negligence claim against [the Company], and (B) the claim was covered by [the Company’s] insurance and (C) Insurers investigated the claim; and (D) Insurers decided to pay, and paid, insurance monies in respect of the claim to [the Company]; and (E) [the Company] had the Relevant State of Mind; then [the Company] would transfer the insurance monies to the client (or alternatively would in any event not use those insurance monies otherwise than for the paramount purpose for which the insurance was (compulsorily) required (and the insurance claim was paid) namely to secure that [the Company] was financially able to compensate its clients: see Impact Finding Solutions Ltd v Barrington Service Ltd [2017] AC 73 per Lord Hodge at [16]-[18] (the “Paramount Purpose”).” Counsel for the Appellants accepted at the hearing of the appeal that the Company could use the Insurance Proceeds for the purpose of funding its defence of the Appellant’s claim.
OUTCOME OF THE APPEAL The Court of Appeal dismissed the appeal. Lord Justice Zacaroli recognised that, in a case where insurance proceeds are paid in respect of an established liability, the conclusion reached against the implication of a term might be said to be one that “runs counter to a common sense view of the proceedings”(Re Harrington Motor Co Ltd, ex p Chaplin [1928] Ch 105). His Lordship attributed this consequence to the long-established position in law and the fact that the Third Party (Rights against Insurers) Act 2010 identifies going into liquidation as the trigger- point for an assignment of rights to third parties. FIRST INSTANCE HHJ Paul Matthews (sitting as a Judge of the High Court) The application determined by the judge was an application for directions issued by the liquidators of the Company, as to what they should do with the remainder of the Insurance Proceeds.
Decision and key points
The Court of Appeal held that liability insurance proceeds received by an insolvent company are not held on trust for third-party claimants to whom the company owes the insured liability.
- Liability insurance proceeds received by an insolvent company are not held on trust for the third party claimants to whom the company owes the relevant liability.
- The Court of Appeal recognised that the conclusion reached might be said to be one that “runs counter to a common sense view of the proceedings” (Re Harrington Motor Co Ltd [1928] Ch 105).
- Parties are not precluded from seeking to provide, by express terms, protection against an insured’s insolvency, whether by grant of a proprietary right or security interest.
Why this decision matters
The decision clarifies how liability-insurance proceeds interact with third-party claims when the insured is insolvent. It informs recovery strategy before claimants assume that a policy creates a ring-fenced or directly available fund.
Particularly relevant to: Claimants, insurers, insolvency practitioners and coverage litigators.