The age-old law of declarations has enabled insurers to avoid the risk of a subrogated recovery action in the US courts, and paying a $60m (£40.6m) damages claim in the case of Ecclesiastical Insurance Office v trustees of the Carmelite Charitable Trust and the estate of Father Paul O'Brien).

In the early hours of November 5, 1999, a monk from the British Province of the Order of Carmelites dropped his cigarette as he fell asleep. The result was a catastrophic fire, in which the monk died and the building was extensively damaged.

At the time of the fire, Father Paul O'Brien was on a sabbatical from his parish in Aberystwyth to further his religious education and personal development. He arrived at the Shrine of LaSalette in Attleboro, Massachusetts, in October 1999 to attend various seminars.

After the fire at the shrine, the property insurer notified the Carmelite Order that it would be looking to them for reimbursement of all monies paid out for the reinstatement of the property, estimated at $30m (£20.3m).

The trustees of the order sought to rely on insurance policies that it held with its liability insurer, Ecclesiastical Insurance Office, in the event that it should be found liable to pay US damages. On reviewing the policy wording, the liability insurer believed that the circumstances of the fire fell outside the policy. It repudiated liability to indemnify either the order or the estate of Father O'Brien for any claims that might arise.

Bad faith proceedings

In the US, insurers are vulnerable to allegations of unfair insurance practices, or “bad faith proceedings”, which carry punitive damages of up to three times the value of the claim if the allegation is found to be justified. The liability insurer of the Carmelite Order was vulnerable, therefore, to a claim for punitive damages of $60m (£40.6m).

In order to determine that it was taking justifiable action, and to avoid the uncertainty of bad faith proceedings being brought at any time in the next few years, the liability insurer applied to the Commercial Court in London for a declaration that it was not liable, under English law, to indemnify either the trustees or Father O'Brien's estate. With such a declaration, it could persuade the US courts, in any future proceedings, that neither the Carmelite Order nor Father O'Brien's estate had insurance cover in these circumstances.

In the Commercial Court, determination of liability centred on the wording of a particular clause concerning the legal liabilities of individual members of the order. However, before the court considered the interpretation of the policy wording, it had to decide whether a declaration could properly be made in these circumstances.

Premature and speculative

The trustees of the order argued that no declaration should be made, because to do so would be premature and speculative. Their counsel argued that it was not right for the court to have its time taken up with over-anxious clients wishing to have a pre-emptive strike to avoid future litigation.

The trustees relied on the case of Re Clay, which states that a person, against whom no claim has been made, cannot obtain a declaration that no such claim exists. In Re Clay, beneficiaries under a will sought a declaration against the executor that he had no right to obtain repayment of his costs. The Court of Appeal decided that the beneficiaries could not obtain such a declaration because the executor had not made any such claim for repayment, but had merely reserved his rights to do so. The court agreed that there does not need to be a course of action already in existence for a declaration to be made. It decided, however, that, from this established principle, no inference should be drawn that proceedings can be invoked where there is no claim at all in existence by anyone.

The courts are not opposed to making declarations as to future rights, but they will do so with very considerable reserve. The reason for this is that declarations will not be granted in cases that raise purely hypothetical questions that may never actually arise and, naturally, future rights involve a degree of uncertainty. The trustees of the Carmelite Order argued that the declaration sought by the liability insurer concerned just such a hypothetical question, as no US proceedings had been commenced and therefore the declaration should not be granted.

Economic use of resources

However, Mr Justice Morison agreed with the liability insurer that the proceedings were not a misuse of declaratory relief. While the courts will not enter into speculation as to how a claim will be formulated, or to declare parties' rights before they are substantially at risk, he said that the ability of the courts to grant a declaration may be of great assistance in order to resolve outstanding litigation.

The judge thought it was an economic use of the courts' resources to make declarations where they can properly be made to advance the interests of the parties in prospective litigation. The fact that no such litigation had been commenced was not an obstacle, provided that the general principle concerning hypothetical questions was not infringed.

Mr Justice Morison agreed that the correct interpretation of the policy was that the liability insurer was not liable to the Carmelite Order or Father O'Brien's estate for the property damage to the shrine. Accordingly, he granted the declaration.

A considerable influence to his decision was the threat of US proceedings. He thought that the US property insurer would be disinclined to begin a recovery action against the Carmelite Order without the backing of insurance cover.

This case shows that the courts will not shy away from granting declaratory relief if it means that future litigation can be avoided. For insurers, declarations can prove a very useful tool for repudiating claims with certainty as to the legal position on policy interpretation.