You first! Pay‑to-be-paid clauses upheld in marine liability insurance policies in UK: South African lessons
In November 2025 the UK Court of Appeal confirmed that a “pay-first” clause in a marine liability policy is valid when it accordingly prevents direct recovery by a third party from the insurer when the insured is unable to discharge its underlying liability.
Because the insured was insolvent, the court refused a direct claim by a third party under the UK Third Parties (Rights Against Insurers) Act 2010. The ruling matters for South African charterers, brokers and claimants because many local placements use English‑law wordings in their Hull Policies. The statutory provision in South African can have a similar result.
The facts in brief
The dispute arose from a vessel grounding. The charterer had arranged a policy providing charterers liability cover through a broker. After an arbitration panel ordered the charterer to pay more than USD 47 million to the shipowner and its P&I Club, the charterer became insolvent and was placed in liquidation. Unable to recover from the charterer, the shipowner and its P&I Club sought to claim directly against the charterer’s insurer. The policy certificate incorporated a booklet of terms. Among the terms was a clause stipulating that the insurer’s obligation to indemnify arose only after the assured had paid the claim. The court of appeal confirmed that this “pay‑first” term was part of the contract and did not conflict with the insuring promise. Because the charterer had not paid the award, the insurer’s promise to indemnify the charterer was not triggered.
How did the court interpret the policy?
The policy booklet divided the cover into several parts. One part contained the insurer’s promise to indemnify legal liabilities evidenced by a final, unappealable award or judgment. Another part set out general terms and conditions, including the pay‑first requirement. The booklet contained a hierarchy clause giving priority to the certificate and the insuring terms if there was a genuine conflict. The question was whether the pay‑first requirement contradicted the promise to indemnify. The court said no: the pay‑first term did not negate cover; it qualified enforcement of the insurer’s liability by making prior payment a condition precedent to recovery. The indemnity existed when the award was made, but it could not be enforced until the charterer had paid the claimant. Because the two provisions could operate together, there was no conflict, and the hierarchy clause did not come into play.
Was the clause hidden or unfair?
The appellants argued that the pay‑first wording was buried in the booklet and that it was unusually harsh. They relied on a principle sometimes called the “red hand rule”, which originated in Lord Denning’s statement that particularly onerous clauses need to be printed with a red hand pointing to them to be enforceable. The court of appeal treated that principle as part of a broader “onerous clause doctrine”. Under that doctrine, an unusual or harsh term in one party’s standard terms will not bind the other party unless it is fairly and reasonably brought to their attention. On the facts, the court held the doctrine was not engaged.
Pay-first terms are long-established in marine insurance, particularly in P&I Club rules, and are familiar to market participants. The charterer used a professional broker, whose role includes explaining material terms found in incorporated booklets. In this commercial setting, the clause was neither unusual nor unfairly concealed.
Statutory context and the 2010 Act
The Third Parties (Rights Against Insurers) Act 2010 modernises the regime for direct claims against insurers of insolvent insureds in England. Section 9(5) generally prevents insurers from relying on terms that require the insured to have paid the third party first. Parliament preserved an exception for contracts of marine insurance, except where the liability is for death or personal injury. In this case, the insured’s rights under the policy were transferred to the shipowner and the P&I Club by section 1 of the Act. The arbitration award established liability. Because the liability was not for death or personal injury, the pay‑first requirement continued to apply. The court noted that any departure from this outcome would have to come from parliament, not the courts.
Practical impact for the market
Liability insurance is meant to provide financial protection, yet the pay‑first clause illustrates that cover may be illusory if the assured cannot pay. In earlier proceedings the judge commented that a liability policy which does not respond until after payment “would provide an unsatisfactory cover”. The court of appeal acknowledged that pay‑first clauses reduce the efficacy of cover but emphasised that commercial parties accept this allocation of risk. Brokers and insureds who want insurance to respond in an insolvency scenario must negotiate solutions at placement. Endorsements to the policy can provide for payment from an escrow account or a standby letter of credit to satisfy the clause. Charterparties can require ring‑fenced collateral against foreseeable liabilities, with clear draw‑down triggers tied to awards and judgments. On‑demand guarantees and P&I letters of undertaking can bridge the gap between an award and insurer payment. These structures do not alter the clause, but they make the indemnity accessible in practice.
South African perspective
South African law points in the same direction. Section 156 of the Insolvency Act of 1936 allows a third party to sue an insurer directly when an insured’s estate is sequestrated or wound up. But the third party acquires no greater rights than the insured. The claimant must show the insured’s liability, the insolvency event and that the insurer would have been liable under the policy. A clear pay‑first clause will normally defeat a section 156 claim if the insured has not paid. Where the policy is governed by English law, the English decision will guide the analysis. Even under South African law, the absence of a statutory override and the courts’ general preference to enforce clear commercial terms mean the result will typically be the same. Arguments that a pay‑first clause is oppressive could arise, but the English court’s reasoning suggests that standard market clauses in policy booklets will not be struck down.
Lessons for brokers and claimants
The judgment reinforces the importance of pointing out to clients and explaining the terms of incorporated booklets or onerous policy conditions elsewhere in the policy and the impact of warranties and conditions precedent. Clients should understand that a direct claim against an insurer will fail if the insured has not discharged the liability and that no collateral mechanism is in place. For claimants, the lesson is to assess counterparty solvency early and to seek security upfront where exposures are material. Do not assume a liability policy guarantees insurer payment if a pay‑first clause stands in the way.
Conclusion
The court of appeal’s decision confirms that pay-first clauses remain an effective defence in marine liability policies. They ensure that insurers are not out of pocket until the assured has met its liabilities and they reflect a long-standing market practice. South African practitioners should expect such clauses to be upheld and should advise clients to manage insolvency risk through careful drafting, negotiation, and security arrangements. Pay-first clauses also remind us that not all liability cover guarantees immediate insurer payment — insolvency can leave a gap between the loss and recovery
MS Amlin Marine NV v King Trader Ltd and others (Solomon Trader) [2025] EWCA Civ 1387