Win-Win, and Win again: Delos Shipholding v Allianz in the Court of Appeal
Introduction
In October 2024, our colleagues Toby Nabarro and Eugene Lee wrote here about the policyholders’ first instance success in the case of Delos Shipholding SA & Ors v Allianz Global Corporate and Specialty SE & Ors [2024]. The Court of Appeal has recently upheld those findings in a judgment which will be essential reading for those involved in coverage disputes, especially concerning the duty of fair presentation under the Insurance Act 2015 (the Act).
Background
The case originated from an incident in February 2019 when the "WIN WIN", a bulk carrier vessel, was detained by Indonesian authorities for anchoring inside Indonesian territorial waters without permission. The vessel was detained for over a year, leading to its classification as a constructive total loss under the terms of the war risks insurance policy issued by the appellant insurers.
Key Issues on Appeal
The insurers were granted permission to appeal on two primary issues:
1. Exclusion Clause Interpretation:
The first issue concerned the interpretation of Exclusion (e) of the American Institute Hull War Risks and Strikes Clauses (1977), which excludes loss caused by, resulting from, or incurred as a consequence of "Arrest, restraint or detainment under customs or quarantine regulations and similar arrests, restraints or detainments not arising from actual or impending hostilities". The insurers argued that the detention of the vessel fell under this exclusion.
2. Duty of Fair Presentation:
The second issue was whether the policyholders had breached the duty of fair presentation under the Act by failing to disclose that the sole director of the registered owner of the vessel was the subject of criminal charges in Greece.
Court of Appeal's Decision
The Court of Appeal unanimously dismissed the insurers' appeal and upheld the policyholders’ claim for an indemnity.
1. The Exclusion:
The Court of Appeal interpreted the exclusion as applying to detentions under two different kinds of regulation, i.e. customs or quarantine regulations, and extending to other regulations with a similar purpose. The reason for the detainment here was because the vessel did not have the correct licence and it was common ground that it had not been detained under any customs or quarantine regulations.
The insurers’ case was that there had been a detention which was “similar” to a detention under customs or quarantine regulations, in part because customs and quarantine regulations are concerned with the exercise of state sovereignty and security, or clearances, and that the regulations under which the arrest was made were “similar”.
The Court found that the exclusion was concerned with:
“Arrest, restraint or detainment under customs or quarantine regulations and similar arrests, restraints or detainments …’ As a matter of strict language it might be said that it is the arrest, restraint or detainment which has to be similar to an arrest, restraint or detainment under customs or quarantine regulations, but as all arrests are similar in that they place a vessel under the control of the arresting state, it is clear that the similarity with which the clause is concerned is whether the regulation under which the arrest is effected is similar to, or has a similar purpose to, a customs or quarantine regulation”
As the detention of the vessel was completely unconnected – on the facts - to customs or quarantine regulations, the Court found that it therefore did not fall under the exclusion.
2. Duty of Fair Presentation:
On the issue of fair presentation, the issue was whether the insureds ought to have disclosed criminal charges which had been brought against its sole nominee director prior to inception of the policy.
The principal insured was Delos Shipholding S.A. (Delos), which was the registered owner of the vessel. Its sole nominee director was a Mr Bairactaris, a Greek maritime lawyer. Delos was part of the NGM Group, a well-known Greek shipping group run by the Moundreas family. Mr Bairactaris was the only person who was aware of the charges which had been brought against him. Mr Bairactaris was limited in his role as nominee director to taking instructions from the Moundreas family, he exercised no independent judgment and made no decisions.
Actual knowledge
As a corporate insured, pursuant to s.4 of the Act, Delos was obliged to disclose material information within the actual knowledge of its “senior management” (or information which Delos “ought to know”, as discussed further below). The first issue was whether Mr Bairactaris fell within the definition of “senior management”, being “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.
Both Courts found that Delos’ activities consisted of owning and operating the vessel for profit, which included acquiring contractual rights and obligations. Mr Bairactaris played no part in these activities and had no decision-making role; he simply did what he was told by the Moundreas family.
Therefore, the Court of Appeal upheld the first instance finding that Delos was not aware of the criminal allegations that had been brought against Mr Bairactatris. Whilst the sole director of a corporate insured will normally be part of the insured’s senior management, this will not always be the case. Further, it did not follow from this finding that Delos had no senior management for the purposes of the Act; rather, the senior management comprised those members of the Moundreas family who took the decisions on behalf of Delos.
Ought to know
The Court of Appeal also upheld the first instance finding that the criminal allegations did not amount to information which Delos ought to have known pursuant to s3(4)(a). In short, the obligation to make reasonable enquires pursuant to s4(6) did not extend to asking Mr Bairactaris about whether he knew of any material information, essentially because he knew nothing about the vessel to be insured and thus Delos would reasonably have considered it futile to make enquiries of him .
Inducement and remedy
Pursuant to s5, Schedule 1 of the Act, if the insurer would have entered into the contract, but on different terms, the contract is to be treated as if it had been entered into on those terms. The trial judge had found that, upon full presentation of the criminal charges, insurers would have imposed a condition that Mr Bairactaris should resign as a director and that the insured would have complied with that condition because Mr Bairactaris would have resigned (i.e. that the non-disclosure had not, therefore, induced insurers to enter into the policy).
Insurers argued that it was impermissible to consider what the insured would have done in response to any hypothetical additional terms imposed by insurers as this was not provided for in the Act itself; an argument which was supported by the Law Commission Report on the draft Act (para 11.82), which had stated:
”… it should not be open to an insured to say that it would have complied with any term which the insurer would have imposed (for example, an exclusion or warranty) and so the loss should be covered…”
Given the finding that the insureds had not breached the duty of fair presentation, the Court of Appeal stated that it was unnecessary to determine whether the trial judge was wrong in her findings on inducement, although the Court of Appeal said they found insurers’ submissions persuasive. The Court also noted that it had not received any submissions on whether it was legitimate to use the Law Commission Report or Explanatory Notes to the Act as aids to interpretation and made no findings in this regard.
This important issue of inducement will therefore be left to be decided in another case.
Implications of the Decision
The Act is one of, if not the, most important pieces of legislation for policyholders and coverage lawyers. Therefore, any judgment from an appellate Court discussing the Act is essential reading, especially when the policyholders prevailed. The Court of Appeal's decision should be kept in mind, especially in relation to the duty of fair presentation, when considering:
- The circumstances when an individual may or may not form part of the insured’s senior management. Senior management may include individuals who are not on the board, not employees and who have no contract with the insured;
- The extent to which reasonable enquires have to be made of someone within the organisation seeking insurance; and
- Inducement, and the extent to which it may be legitimate to consider steps which the insured would have taken in response to an additional term which the insurer hypothetically would have imposed following fuller disclosure. The Court of Appeal strongly indicated that such an approach was wrong, whilst not making any findings on this point meaning that, technically, this is still an open issue for another day.
Author:
The Sky is the limit: Developments in relation to damage under CAR policies
On 16 December 2024 the Court of Appeal delivered judgment in the case of (1) Sky UK Ltd and (2) Mace Limited vs Riverstone Managing Agency Ltd and Others, a decision which will provide welcome clarity to the construction community, as well as being of interest to the insurance market more widely in terms of its analysis of the nature of an indemnity policy. The judgment discusses a number of important points, notably the rights of insured parties under a Construction All Risks (“CAR”) policy to recover in respect of “deterioration and development damage” which occurred after the policy period as a result of damage which had occurred during the policy period.
The factual background
The claims were in respect of extensive water damage to the roof of Sky's global headquarters building in West London, which was constructed for Sky in 2014 to 2016 by Mace as main contractor under a JCT 2011 Design and Build Contract dated 17 March 2014. Sky and Mace were named insureds under the Policy.
The roof was comprised of 472 wooden cassettes, into a substantial number of which water had entered before final waterproofing had taken place and had remained for periods of construction, leading to wetting and, so Sky and Mace alleged, irreversible swelling and structural decay by the end of the period of insurance (or “POI”, which ran from commencement of the project to one year after practical completion).
In the period between expiry of the POI and the drying out works (which arrested any further damage) the condition of the timber already damaged had worsened, and moisture had spread to other parts of the roof construction. The Court of Appeal termed these types of damage as “deterioration damage”; i.e. damage, such as further swelling, in parts of the timber already damaged, and “development damage”; i.e. damage to additional, previously undamaged timber by way of spread.
It is important to note, as the Court of Appeal stated, that the vast majority of water ingress had occurred during the POI and there was little, if any, ingress after the POI. Secondly, there was no allegation by the defendant insurers that Sky or Mace had failed to mitigate their loss prior to the hearing, given the complexity of designing, agreeing and implementing a remedial scheme.
The underlying decision
In the underlying decision, HHJ Pelling held that Sky was only entitled to damage which had occurred during the POI, and not development or deterioration damage which occurred thereafter. In reaching this decision, the Judge relied on the House of Lords decision in Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] and statements in that decision that in a policy covering losses occurring during a policy period, the cover does not extend to damage occurring before or after the policy period.
The Judge had found that the entry of moisture into the cassettes during the POI was a tangible physical change to the cassettes as long as the presence of water, if left unremedied, would affect the structural strength, stability or functionality of the cassettes during the POI.
The arguments on appeal
All of the parties were granted permission to appeal on numerous grounds, but in this article we discuss the primary point of contention, which was whether Sky could claim for deterioration and development damage.
On this point, the cover identified in the insuring clause of the policy was in respect of “damage to Property Insured occurring during the Period of Insurance” and insurers argued that damage occurring after the POI was not covered. Insurers relied on the decision in Wasa as authority for the proposition that, under “time policies”, the cover is in respect of damage occurring during the period of cover, and not occurring before or after.
In summary, Sky and Mace’s arguments in reply were that:
- An insurance claim is a claim for unliquidated damages and, as such, the measure of recovery is for all the loss suffered by reason of the insured peril occurring during the POI, including loss caused after the POI.
- The Policy contained a Basis of Settlement clause, as below, and the measure of recovery contended for was supported by the underlined words in the clause:
“Basis of Settlement
In settlement of claims under this Section of the Contract of Insurance the Insurers shall, subject to the terms and conditions of the Contract of Insurance, indemnify the Insured on the basis of the full cost of repairing, reinstating or replacing property lost or damaged (including the costs of any additional operational testing, commissioning as a result of the physical loss or damage which is indemnifiable hereunder) even though such costs may vary from the original construction costs …."
The Court of Appeal decision
Development and deterioration damage
Lord Justice Popplewell delivered the leading judgment, which was rooted in the principle, long established in the authorities, that a contract of insurance is a contract of indemnity, often described as a contract to hold someone harmless. Such a contract was not, however, a promise by the insurer to pay money upon the happening of the insured event, but rather a promise to hold harmless, i.e. a promise that the insured will not suffer the damage in the first place. This promise to hold harmless was the insurer’s primary obligation and, when breached, it was under a secondary obligation to pay damages for breach of the primary obligation.
In light of this, damages payable under an insurance policy fell to be assessed on the basis of established common law principles as to foreseeability, remoteness and mitigation that applied to any other contract; namely damages to put the innocent party in the position it would have been but for the breach, subject to express terms in the policy modifying the general position (e.g. limits or deductibles, exclusions such as for consequential loss or if caused by certain perils), but only if such modification was excluded by clear wording.
Lord Justice Popplewell found that the temporal limit in the insuring clause was insufficiently clear to modify the ordinary rule that insurers were liable to pay the reasonably foreseeable costs of remedying development and deterioration damage.
This conclusion was supported by the wording of the Basis of Settlement clause.
Further, Lord Justice Popplewell found that the authorities, including the House of Lords’ decision in Wasa was distinguishable on the facts, predominantly because it did not relate to development or deterioration damage of the type suffered in this case.
Investigation Costs
Mace also claimed the costs of “lifting the lid”, namely the upper surface of the cassettes in the roof upslope above the gutters, as reasonable investigation costs. The trial Judge, at first instance, denied these costs as being recoverable under the Policy and characterised them as “speculative opening up works”. Additionally, the Judge found that any investigation costs not revealing physical damage would not be recoverable under the CAR Policy.
Nevertheless, based on the normal common law principles that apply to contractual damages claim, aimed at putting the innocent party back in the position it was before the breach (to hold harmless), the Court of Appeal found that reasonable costs of investigation were recoverable if they were reasonably incurred in determining how to remediate the insured damage which has occurred. This was the case, even if the result of the investigation may be to identify the absence of damage in certain areas.
Meaning of physical damage
On a separate point, the Court of Appeal also rejected insurers’ appeal in relation to the meaning of “damage”, and upheld the trial Judge’s findings that damage meant any change to the physical nature of tangible property which impaired its value or usefulness to its owner or operator. There was no need for the physical change to compromise the performance of an individual cassette, as insurers argued.
Retained Liability
The Policy contained a deductible (or “Retained Liability”) of £150,000 “any one event but this will only apply to those claims which are recoverable under DE5…”. It was common ground that the claim was recoverable under DE5 by reason of defective design being a proximate cause, and the trial Judge had found therefore that a single deductible of £150,000 applied to the whole of the claim, as opposed to applying separately in respect of damage to each cassette.
The Court of Appeal also upheld the trial Judge’s findings on this point that, based on the long established authorities, an event refers to the cause of the damage, and not the damage itself, supported by the fact that the deductible was specifically linked to the cause of the loss being defective design.
Comment
As the Court of Appeal stated, on the principal point of contention, the fact that development and deterioration damage was recoverable, would accord with business common sense. In the context of a major construction claim, an insured party would reasonably expect to be compensated for the consequences of insured damage which occurred during the policy period, to a part of the works already damaged (deterioration) or to some other part of the building not yet damaged (development), after this period had expired, in the absence of any policy terms limiting recovery. This is especially so in relation to complex claims where a remediation scheme may not be finalised until sometime after expiry of the policy period, and where the state of the building may deteriorate in the meantime.
Of course, development or deterioration damage would be unlikely to be covered under a buildings policy, since this would exclude damage which first occurred prior to the building policy period, meaning the Court of Appeal judgment is crucial in helping insureds to transfer this risk to the insurance market.
The outcome is consistent with the approach taken in recent cases on non-damage business interruption claims, that provided the policy “trigger” occurs within the indemnity period, the totality of loss is covered including that which continued to be suffered after the policy period (UnipolSai Assicurazioni SPA v Covea Insurance plc [2024]).
The Court of Appeal decision will therefore be welcomed by employers and contractors alike. It remains to be seen whether permission to appeal to the Supreme Court is granted.
Authors
Will someone think of the Lenders? Co-insurance issues for funders
Recent Court decisions such as Sky UK Ltd & Mace Ltd v Riverstone Managing Agency Ltd (which we wrote about previously in more detail here) have discussed “Project Insurance” policies taken out by employers in relation to construction projects, confirming the principles by which contractors, sub-contractors and other consultants may become insured under these policies. However, such policies normally also name lenders as insured parties (either specifically by name, or by general description) and in this article we discuss how these principles apply to lenders and what lenders need to do to ensure they are entitled to claim under the policies.
By way of recap, a Project Policy or OCIP normally covers insured parties in respect of physical damage to the “works”, as well as providing third party liability cover (both in respect of negligence and “non-negligence” under JCT 6.5.1). The employer, and/or any lenders, will frequently also want the policy to provide Delay in Start Up cover, which covers financial loss in the event that practical completion is delayed by damage[1] to the works.
A policy will normally define the “Principal Insured” as the employer, being the party who contracts with insurers when the policy is taken out. As I say, contractors, sub-contractors and lenders may also be named under the policy although, as was stated by Eyre J in RFU v Clark Smith Partnership [2022]:
“Being named as an insured does not without more make a person a party to the insurance contract. A person who is named as an insured but who is not otherwise a party to the insurance contract does not become a party to the contract simply by reason of having been named in it. That person remains a third party unless and until it becomes a party in a way recognised as constituting it in law a party to the insurance contract or obtains the benefit of the policy in question in some other way. … Similarly, the editors of Colinvaux rightly say at 15-018 “the mere fact that a policy states that it covers the interests of named or identifiable third parties does not of itself give those third parties the right to enforce the contract or to rely upon its terms (e.g. the benefit of a waiver of subrogation clause)”.
Where a third party insured, such as a contractor or lender, becomes an insured by agreement between an insurer and a Principal or contractual insured, the existence and scope of the cover the third party insured enjoys under the policy depends on the intention of the parties to be gathered from the terms of the Policy and the terms of any contract between the contractual assured and the relevant third party insured.
In a construction context, the Courts have stated that a third party insured contractor can become a party to the policy:
- If the employer taking out the policy is authorised to insure on the third party’s behalf (the “agency” route); or
- On the basis there is a standing offer from the project insurers to insure persons described in the policy such as “Main Contractor” or “Sub-Contractor”, which offer is capable of being accepted by those persons upon execution of a building contract, provided it is not inconsistent with the standing offer (this was the approach which the Court said was relevant in Haberdashers’ Aske Federation Trust Ltd v Lakehouse Contracts Ltd).
Whether a (sub) contractor becomes insured because of agency principles or accepting a standing offer, as well as looking at the policy, it will therefore be necessary to look at the (sub) contract to determine the extent to which the (sub) contractor is entitled to claim, and also to determine the extent to which the (sub) contractor will benefit from a waiver of subrogation.
For similar reasons, a lender will not be insured under a project policy where that policy has been arranged by a principal insured, unless the lender has provided authority to the principal insured to arrange insurance on its behalf and, even then, the lender will only be insured to the extent of the authority provided (even if the cover provided under the policy is wider than the authority provided).
In many cases, this will not cause any issues for a lender to a development finance project since the loan agreement with the borrower will authorise the borrower to arrange insurance in respect of the works, naming the lender as co-insured and first loss payee. Where the borrower is the principal or contracting insured in these circumstances, it will have the requisite authority to insure and the lender will be insured to the extent that the policy reflects the authority.
However, if for some reason the borrower is not the contracting insured, the lender may need to grant authority to the contracting insured via means other than the loan agreement. Further, if the lender wants to benefit from certain bespoke coverage not normally catered for in standard LMA facility agreement drafting (such as DSU cover), it will need to ensure that the principal insured is specifically authorised to obtain such cover on its behalf, and to the extent required.
A final point to note is that these principles will also apply where lenders are looking to be insured under other types of insurance policy in addition to project policies, which the lender has not taken out directly with insurers, such as latent defects or rights of light policies.
Christopher Ives is a Partner at Fenchurch Law
[1] Policies normally contain certain non-damage triggers as well, such as murder, suicide and disease.