A Charterers’ Liability insurance contract insured the policyholder against legal liabilities incurred in respect of the operation of a specified vessel. It was a “condition precedent to the policyholder’s rights of recovery under this policy with regard to any claim in respect of any loss, expense or liability that the policyholder shall first have discharged any loss, expense or liability.”

Awards were made against the policyholder exceeding a total amount of USD47 million and the policyholder was wound-up and unable to pay. A claim was made on the insurers.

It was submitted that the “pay first” clause was repugnant or inconsistent with the main purpose of a liability policy which, it was said, covers legal liability and not legal liability followed by discharge of that liability.

After referring to a long line of cases for and against upholding “pay first” clauses, the court said that the fact that the insured is insolvent does not mean that it is unable to discharge any part of its liability. It was said that the “pay as may be paid” clause engaged the requirement in clear language. The “pay first” provision did not negate the obligation for an indemnity. There is no inherent inconsistency between an insurer’s promise to provide liability cover and a clause making enforcement of the obligation to pay conditional on prior discharge of that liability by the insured. That is exactly what “pay first” clauses do. A “pay first” clause can coexist with the main purpose of liability insurance. The clause does not relate to the ability of the insured to pay. The concept of the insured being “able” to pay is inherently unclear and would require a forensic analysis of the insured’s finances to determine if it was entitled to payment.

After making such a finding, the court said in a postscript that the English law on the issue is not particularly satisfactory. A liability policy that exposures the insured to the possibility of being rendered insolvent as a result of being able to unable to claim on the insurance may provide unsatisfactory cover. “Pay first” clauses reduce the efficacy of insurance protection when it is most needed. The court was not prepared to change the law however and implied it was a matter for statute.

In South Africa the courts should give effect to an unambiguous “pay first” clause but aspects of public policy may in some circumstances persuade a court not to apply the provision where payment by the insured is impossible.

[MS Amlin Marine NV v King Trader Limited and Others [2024] EWHC 1813]