Time bar issues – direct action

| Insight

The legal position with respect to time bar of direct action claims is somewhat complex and uncertain under Norwegian law. This complexity and uncertainty relates to when the direct action claim could be considered time-barred, including which set of limitation rules apply to the relevant direct action claim. Some of the issues were discussed in a recent judgement from Borgarting Court of Appeal (LB-2017-178696-2).

Under Norwegian insurance law third parties are entitled to bring claims for compensation directly against the insurer (direct action). The rule enabling direct action is mandatory if the assured is insolvent, to avoid detriment of the injured party. A practical consequence is that the so-called «pay to be paid» clauses will be of no effect to the insurer in case of insolvency of the assured.

However, the legal position with respect to time bar of direct action claims is somewhat complex and uncertain under Norwegian law. This complexity and uncertainty relates to when the direct action claim could be considered time-barred, including which set of limitation rules apply to the relevant direct action claim. Some of the issues were discussed in a recent judgement from Borgarting Court of Appeal (LB-2017-178696-2).

The claim arose out of a collision by a vessel in a port of China. The vessel was subject to a chain of charterparties, where the subject charterers had P&I insurance with Skuld, and the subject carrier had insurance with Gard. In 2010, arbitration proceedings were initiated between the charterer and the carrier. The subject charterer got insolvent in 2010. In July 2016, the arbitration award found the charterer responsible for the carrier’s loss. In February 2017, the carrier brought a direct action claim against Skuld. Skuld rejected the claim with reference to the claim being time-barred.

Is the Norwegian Insurance Contracts Act’s special limitation rule mandatory for direct action claims?

The first question was whether the time bar of the direct action claim against the insurance company should be assessed on the basis of the special limitation rule in the Norwegian Insurance Contracts Act («ICA») or on other principle of law.

The ICA contains a special limitation rule (section 8-6) departing from the standard time bars found in the Limitation Act. Namely, ICA provides that the limitation period does not start running before the end of the calendar year within which the assured became aware of the circumstances substantiating its claim. Skuld argued that this ICA section was excluded in the insurance agreement, and that the time bars applicable in this instance were either governed by the insurance agreement or by the Limitation Act. The respondents countered that section 8-6 of the ICA was mandatory to the subject matter.

The rule enabling that direct action is mandatory if the assured is insolvent does not have any specific or expressed reference to the special limitation rule in ICA section 8-6. Based on the wording itself, the preparatory works and legal theory, the Court of Appeal concluded that it is only the relevant direct-actionrule itself and the provisions to which this refers to, which are mandatory for such commercial insurance. As ICA section 8-6 was not among the provisions that was meant to be mandatory by the assured’s insolvency, the court held that ICA’s special limitations rule may be lawfully waived.

However, the Court of Appeal held that the insurance agreement did not contain any limitations rules which applied directly to a third party’s direct action claim, but only to the member’s claims itself against the insurance company. Accordingly, the Court of Appeal concluded that the time bar of the direct action claim should be based on the Norwegian Limitation Act.

Still, the Court of Appeal did not consider whether the parties, in any event, had any right to depart from the Limitation Act or to which extent the special limitation rule in the ICA or the Maritime Code might prevail as lex specialis.

The Limitation Act – necessary knowledge of the damage or the claim

Pursuant to the Norwegian Limitation Act section 9 and section 10, the limitation period starts to run from the date when the debtor obtained or should have obtained necessary knowledge of the damage (section 9) or the claim (section 10)

In the subject matter, the Court of Appeal considered the knowledge required pursuant to the relevant Limitation Act’s sections, as the time bars would be deemed timely interrupted if the respondents succeeded with their argumentation;  The respondents argued that the knowledge required pursuant to the Limitation Act was first acquired when the arbitration award was delivered as it was the arbitration process which clarified whether the carrier had any direct action claim against Skuld at all. The appellants alleged that the knowledge required was already acquired when the carrier became aware of the charterer’s insolvency.

The Court of Appeal stressed that the knowledge required are more or less concurrent pursuant to the Limitation Act section 10.1 and section 9.1. The main issue was when the carrier had acquired such necessary knowledge.

The Court of Appeal acknowledged that the creditor could not await to bring their claim until it was legally clarified whether they had a right to bring the claim. The Court of Appeal further elaborated that if the creditor/claimant had knowledge of all aspects substantiating the claim, he could not await an assessment or judgement of the circumstances in a corresponding matter before the time-bar starts to run. There was no proof that the respondent had lack of knowledge of matters of significance for the assessment on whether the charterer was responsible. Thus, the Court of Appeal concluded that the carrier had the necessary knowledge prior to the arbitration award, and accordingly, the claim was considered time-barred pursuant to the Limitation Act section 3, cf. section 2, cf. section 10 and section 9.

The Limitation Act section 8 – recourse claims

Before the hearing in the Court of Appeal, Gard, as the carrier’s insurer, paid their insurance claim to the subject carrier, and subrogated a part of the carrier’s direct action claim against Skuld and became a party to the proceedings. The carrier’s remaining part of the direct action claim represented their individual share. For the hearing in the Court of Appeal, Gard brought a new statement that the Limitation Act section 8 should govern Gard’s recourse claim.

Pursuant to the Limitation Act section 8, the period of limitation will be extended to one year after the discharge of the debt for the recourse claim against the co-debtor that has been made.   

With reference to case law and the preparatory works, the Court of Appeal recognised that section 8 applies to all types of recourse claims and thus held that Gard’s recourse claim against Skuld should be subject to the Limitation Act section 8. Accordingly, the Court of Appeal concluded that Gard’s recourse claim against Skuld was not time-barred.

In the subject matter, the Court of Appeal had already assumed that the carrier’s direct claim against Skuld was time-barred. This means that to the extent section 8 of the Limitation Act is being applied, this will mean that Skuld will nevertheless be held liable, as a result of Gard’s discharge of their debt by paying the insurance claim to its member (the carrier). Section 8 of the Limitation Act will thus have the consequence that the claim against the insurance company is resumed long after the direct action claim was time-barred – as a result of the subject matter between Gard and their member (the carrier). This emphasises the complexity and uncertainty of the legal position with respect to time bar of direct action claims and creates less predictability for the insurance company in relation to direct action claims.

However, the judgement has been appealed, and the Supreme Court has decided to try the case. It will be interesting to see how the Supreme Court deals with this complexity.