A Liability Claim and the Duty to Defend
A small building contractor holds a public liability policy (£2m limit) and a contractors' all risks (CAR) policy. A customer, Mrs Okafor, claims £45,000 for damage to her driveway and for personal injury after a delivery van reversed into her. The insurer receives the claim and a solicitor's letter. There is a dispute: the insurer says the driver was a subcontracted courier, not an employee, and that the policy excludes 'liability arising from the use of mechanically propelled vehicles on the public highway' (which should be covered by motor insurance). The courier's motor insurer disputes liability. Mrs Okafor is threatening to sue the contractor directly. The contractor wants the insurer to appoint lawyers and defend the claim immediately.
1. Explain the insurer's duty to defend and how it should handle the dispute.
Read the worked answer
Duty to defend vs duty to indemnify: under a liability policy the insurer's duty to defend is typically broader than its duty to indemnify - it must defend claims that potentially fall within the cover, even if it ultimately disputes liability. The insurer should:
- Acknowledge the claim promptly and appoint solicitors (or approve the contractor's choice) to protect the contractor's position, reserving its rights.
- Investigate whether the courier was an employee, an agency worker, or an independent subcontractor - this determines vicarious liability and whether the motor exclusion applies.
- Coordinate with the motor insurer - the motor policy is likely primary for the vehicle-related injury; the public liability policy may respond to the driveway damage if it falls outside motor cover.
- Reserve rights in writing - the insurer can defend while reserving the right to decline indemnity if the exclusion is found to apply.
- Consider the claimant's direct rights - under the Third Parties (Rights against Insurers) Act 2010, if the contractor became insolvent, Mrs Okafor could claim directly against the insurer, so the insurer cannot simply ignore the claim.
The insurer should not refuse to defend merely because it suspects an exclusion; that risks a breach of the policy and a complaint.
2. What are the risks to the contractor if the insurer and motor insurer both deny cover?
Read the worked answer
- Uninsured liability: the contractor could face the £45,000 claim plus costs personally, potentially threatening the business.
- Regulatory risk: operating without adequate cover may breach contractual or regulatory requirements.
- Reputation and customer relations: Mrs Okafor may publicise the dispute.
- Costs escalation: delay increases legal costs.
- Insurance history: a dispute may affect future premiums and insurability.
The contractor should keep paying premiums, cooperate fully, and seek broker support to press both insurers. If a gap exists, a standalone liability policy or an increased limit may be needed.