Commercial Court grounds War Risks insurers in landmark Russian aircraft judgment
Please find a link to the judgment here - Russian Aircraft Lessor Policy Claims [2025] EWHC 1430 (Comm)
Introduction
On 11 June 2025, judgment was handed down following the long-awaited Russian aviation “mega trial” heard in the Commercial Court between October 2024 and January 2025.
The judgment is substantial for a number of reasons, not least because it runs to 230 pages, but also because the £809 million awarded is the largest amount ever awarded by the UK courts.
Of particular significance to policyholders however, is Mr Justice Butcher’s detailed application of causation principles, and his commentary on “the grip of the peril” which he first considered in Stonegate Pub Company Ltd v MS Amlin Corporate Member Ltd & Ors [2022] EWHC 2548 (Comm) and which was recently affirmed in Sky UK Ltd & Anor v Riverstone Managing Agency Ltd & Ors [2023] EWHC 1207 (Comm).
Background
On 10 March 2022, shortly after Russia’s invasion of Ukraine, the Russian Government issued an order which banned the export of aircraft and aircraft engines, initially for a period up until 31 December 2022 (“Order 311”). As a result, an estimated £7-10 billion of aircraft were retained by Russian lessees, and coverage proceedings were brought by affected lessors across a range of jurisdictions. Last winter, six sets of those proceedings were heard together by the Commercial Court, with AerCap acting as lead claimant on behalf of DAE, Falcon, KDAC, Merx and Genesis (together, “the Lessors”).
Each of the Lessors insured aircraft under policies which included two relevant sections, namely All Risks and War Risks cover. Whilst the All Risks cover insured against loss arising from property damage subject to certain exclusions, the War Risks cover protected against loss caused by war, which is typically excluded from standard All Risks cover.
Within those sections, there were two principal types of cover: Contingent Cover and Possessed Cover. The Contingent Cover was designed to respond when the aircraft were not in the physical possession of the Lessors, but were instead being operated by the Russian lessees, and was triggered in circumstances where the Lessors could not recover under the operator’s own insurance policies. In contrast, the Possessed Cover was designed to respond when the aircraft were in the actual possession of the Lessors, including during the course of any repossession.
Given that its War Risks cover was subject to an aggregate limit of $1.2 billion (around £892 million), AerCap’s primary claim was for All Risks cover for the full value of the aircraft at $3.5 billion (around £2.57 billion).
We set out the various points considered by the Court, and the key takeaways for policyholders, below.
Insurers’ position
Both All Risks and War Risks insurers denied liability for the Lessors’ claims on the basis that (inter alia):
a) the Lessors had not been permanently deprived of the aircraft;
b) in any event, both Political and Government Perils were excluded under the All Risks cover;
c) the loss was not covered under the War Risks cover; and
d) the effect of US and EU sanctions was that insurers were prohibited from paying the Lessors’ claims.
Contingent Cover or Possessed Cover?
AerCap advanced that it was the Contingent Cover which responded to the claim, given that the assets were stranded in Russia and were not therefore in the care, custody or control of the Lessors.
It was a requirement of the Contingent Cover that the Lessors were “not indemnified” under the lessee’s own insurance policy. The relevant leases obliged the lessees to take out their own insurance for the aircraft during the period of the lease, with the Lessors added as an additional insured. Those policies were referred to by the Court as the Operator Policies. It was an important factor that Lessors had also sought an indemnity under the Operator Policies, which is listed for trial in the Commercial Court in October 2026.
Despite each of the other Lessors seeking cover under the Possessed Cover, Mr Justice Butcher agreed with AerCap and held that each of the Lessors were entitled to claim under the Contingent Cover, given that the various requirements of the Contingent Cover were, prima facie, met.
Whilst the insurers argued that the Contingent Cover only responded in circumstances where the Lessors were “not indemnified” under the Operator Policies, and there was in fact a chance, pending the trial listed for October 2026, that they would be, the Court held that “not indemnified” actually meant “had not been paid”. On that basis, the Lessors’ outstanding claims under the Operator Policies were no bar to cover, as they had not been paid in respect of them.
In reaching that view, Mr Justice Butcher adopted guidance from the Australian case of LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17, which held that:
“The ease with which an insured may establish matters relevant to its claim for indemnity may influence questions of construction … a construction which advances the purpose of the cover is to be preferred to one that hinders it as a factor in construing the policies.”
In that vein, the Possessed Cover was not engaged because it was triggered where the aircraft were in the possession of, or alternatively were “in the course of repossession” by, the Lessors. The Court held that the latter required an overt act to physically repossess the aircraft, rather than simply an intention or a plan to do so. Therefore, as the Lessors had not taken steps to repossess the aircraft, the Possessed Cover could not be engaged.
Could the Lessors demonstrate permanent deprivation of the aircraft and, if so, when?
The relevant insuring clauses were triggered by “physical loss or damage” sustained to the aircraft during the period of insurance.
Each of the Lessors advanced a similar argument, which was that it was sufficient for them to show, on the balance of probabilities, that recovery of the aircraft was a “mere chance”.
In contrast, War Risks insurers argued that the appropriate test was whether there was no realistic prospect of recovery at any time within the commercial lifetime of the aircraft, a bar which they said had not been met. All Risks insurers accepted that there had been a loss of the aircraft, but argued that the loss was the result of a War Risks peril.
In holding that each of the Lessors had suffered permanent loss of possession of the aircraft upon the implementation of Order 331 on 10 March 2022, the Court held that the Lessors only needed to establish that deprivation of possession was, on the balance of probabilities, permanent which, in line with the judgment of the Supreme Court of New South Wales in Mobis Parts Australia Pty Ltd v XL Insurance Co SE [2019] Lloyd’s Law Rep IR 162, could be interpreted as being “more probable than not”. That case, whilst not binding in the UK, considered the notion of permanence and held that it should be assessed against the standard of “more probably than not”.
What was the proximate cause of the loss?
Having established a loss, the central issue was whether that loss was covered under the All Risks or the War Risks cover.
In relation to the All Risks cover, the Court had to consider whether the claims fell within either of two excluded perils, being:
a) Political Peril, defined as “any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional”; or
b) a Government Peril, defined as “confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government”.
If the claims did fall within either of those perils, the War Risks cover would be engaged.
Despite War Risks insurers’ attempts to argue a restrictive interpretation of the exclusions, Mr Justice Butcher found that the action taken by the Russian government on 10 March 2022 (Order 311) amounted to a “restraint” or “detention” that fell squarely within the definition of a Government Peril.
As a result, the claims were excluded by the All Risks cover and fell to the War Risks insurers.
Causation – Wayne Tank & Pump Cp. Ltd v Employers Liability Incorporation Ltd
Central to the arguments on causation was whether the Wayne Tank principle applied to independent concurrent causes (i.e. two causes each of which is sufficient to cause the loss on its own), or if Wayne Tank applied only to interdependent concurrent causes (i.e. where two causes, neither of which is sufficient on its own, act together to cause the loss).
In broad terms, the Wayne Tank principle dictates that, where there are two proximate causes of a loss, and one is covered and the other excluded, the exclusion will prevail, and the insurer will not be liable.
In seeking to limit the potential application of the Government Peril and Political Peril exclusions if it was found that the loss was also caused by a peril within the All Risks cover, War Risks insurers argued that the Wayne Tank principle did not apply to independent concurrent causes. In essence, the War Risks insurers were seeking to argue that, in addition to Order 311, the lessees of the planes had independently decided that it was in their interest to retain the aircraft and engines, which was a proximate cause which would be covered under the All Risks cover, and was completely independent from Order 311 such that the Wayne Tank principle did not apply.
Ultimately, Mr Justice Butcher found that Order 311 was the sole proximate cause. However, obiter, he commented that, even if there was an independent concurrent cause that fell within the scope of the All Risks cover (such as the lessees deciding themselves to retain the aircraft), the Wayne Tank principle would apply and the fact that Order 311 triggered the Government Peril exclusion would exclude cover in any event.
This part of the judgment is notable for policyholders as, while it is settled law that the Wayne Tank principle applies to interdependent concurrent causes (causes which act together to cause the loss), Mr Justice Butcher has now indicated, albeit obiter, that the same principle applies to independent concurrent causes (causes which would have been sufficient to cause the loss on their own).
As a result, each of the Lessors’ claims were found to be excluded under the All Risks cover and it was held that the claims fell to the War Risks insurers. Unfortunately, in Aercap’s case, this meant that it was entitled only to the lower limit of indemnity of $1.2 billion.
Do sanctions prevent payment to lessors?
Each of the policies contained an endorsement providing that insurers would not be liable where “providing coverage to the Insured is or would be unlawful because it breaches an embargo or sanction".
On that basis, insurers argued that they were prohibited from making payment under the War Risks section on account of sanctions introduced by the EU and US.
The Court considered the relevant sanctions and rejected insurers’ arguments on the basis of the specific wordings.
The grip of the peril – Stonegate v MS Amlin and Sky v Riverstone applied
Finally, in light of Mr Justice Butcher’s finding that the loss occurred on 10 March 2022, a separate issue arose in relation to the claims advanced by the Lessors whose War Risks policies contained provisions to review the geographical limits of the policies, pursuant to which insurers had terminated cover in Russia prior to 10 March 2022.
DAE, Falcon, Merx and Genesis advanced the “death blow” or “grip of the peril” concepts considered by Mr Justice Butcher in Stonegate v MS Amlin and again by the Court of Appeal in Sky v Riverstone. The lessors argued that the loss flowed from a peril that was operative within the policy period, and so, notwithstanding that the total loss occurred outside of it, they were entitled to cover.
In considering the authorities, Mr Justice Butcher clarified that:
“if an insured is, within the policy period, deprived of possession of the relevant property by the operation of a peril insured against and, in circumstances which the insured cannot reasonably prevent, that deprivation of possession develops after the end of the policy period into a permanent deprivation by way of a sequence of events following in the ordinary course from the peril insured against which has operated during the policy period, then the insured is entitled to an indemnity under the policy.”
Concluding that there were indeed restraints and detentions that took place prior to the implementation of Order 311, and that the loss of the aircraft on 10 March 2022 arose in a sequence of events that followed in the ordinary course of those restraints and detentions, it was held that the aircraft were in the grip of the peril by the time the relevant policies were terminated, and the relevant Lessors were therefore entitled to cover. In other words, whilst the aircraft were lost on 10 March 2022, they were in “the grip of the peril” from 5 March 2022 onwards.
In making this decision, the Court made several important findings, including:
a) relying on the explanation of the doctrine by the Court of Appeal in Sky v Riverstone, that a policy covering “loss occurring during” does not overcome the application of the “grip of the peril” principle;
b) there is no difference between (i) a loss where physical damage during the period of insurance later develops into a total loss after expiry and (ii) a loss where a deprivation during the period later becomes permanent after expiry, as a matter of construction; and
c) the “grip of the peril” principle naturally applies to deprivation of possession scenarios.
Lessons for policyholders
During a time of increased geopolitical tension, this decision is an important one given its key findings of fact and analysis of legal principles, which are likely to be applicable to all manner of coverage disputes arising out of Russia’s invasion of the Ukraine.
In particular, Mr Justice Butcher’s consideration of loss by way of deprivation in non-marine insurance policies is likely to be relevant to a range of insurance policies and policyholders that have been affected by the fallout from the Ukraine conflict and other ongoing geopolitical events.
Mr Justice Butcher’s consideration of the Wayne Tank principle is also of particular importance to policyholders given the apparent expansion of its previously accepted application to interdependent concurrent causes. It now seems that the principle will also apply to causes either of which is sufficient to cause the loss on its own, but which act in parallel.
Authors:
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
AI is mainstream. Reimagining conventional risk management and insurance practice
As generative AI continues to revolutionise how businesses operate, the insurance industry is navigating a fast-changing landscape. AI’s potential to increase efficiency is undeniable, but it’s also raising serious questions about risk, responsibility, and the very nature of professional value.
In a recent panel discussion, at the Airmic Annual Conference in Liverpool, David Pryce, Senior Partner at Fenchurch Law, Jonathan Nichols, Head of RMIS Operations at Archer, and Vincent Plantard, Head Strategy & Analytics Claims, Director at Swiss Re Corporate Solutions, shared how their businesses are adapting to AI, the challenges they’re facing, and what responsible use looks like in high-stakes, regulated sectors.
From “let’s wait” to full-scale adoption
“A year ago, if you’d asked me about AI, I would’ve said, ‘We’re a small firm, we’ll wait and see what the bigger players do.’ But within about eight months, that completely changed.”- David Pryce
What drove the shift?
The realisation that clients are unlikely to continue paying for tasks that AI can perform quickly, cheaply, or even for free.
David and his team began a firm-wide review of every task they perform, categorising each into five types of data interaction:
- Capturing
- Retrieving
- Processing
- Analysing
- Creating
The focus is on using AI to free up more time for meaningful, high-value client engagement. The view is that if a task isn’t central to what clients truly value, it should be automated wherever possible. For the work that is core, AI should be used to enhance the way you operate, not to replace it. The ultimate aim is to spend more time applying the judgment, creativity, and specialist knowledge that only humans can offer.
Process to process improvement
Jonathan opened with a stark reality. At a recent industry event, a student asked him, “Where should my career be in five years?” The honest answer: many current jobs will no longer exist as AI rapidly replaces routine processes.
AI is not just advancing, it’s accelerating. Current systems already exceed average human IQ, and in a few years, they are projected to surpass Einstein-level intelligence. AI will solve complex problems at a scale and speed humans can’t match. However, AI cannot decide what problems to solve. That remains the essential human role.
The real value in future careers won’t come from doing the process but from improving it. To stay relevant, professionals must actively learn AI, work closely with IT teams and vendors, and develop strong data strategies, as AI can only deliver results with the right information. Companies that don’t embrace this shift will quickly be left behind.
Becoming data-led professionals
The shift isn’t just about technology, it’s about mindset. Swiss Re’s Vincent shared that one of the biggest challenges is helping professionals evolve from intuition-based decision-making to data-informed thinking.
“We’re asking people who’ve built their careers on experience to now use data and AI insights as a critical part of their decision-making. It’s a cultural change.”
The focus is on automating low-value, repetitive work, like routine marketing tasks and claims processing, so that teams can focus on what matters most: serving clients, making strategic decisions, and adding value.
“AI isn’t about cutting heads. It’s about giving people the space to focus on higher-order work.”
David echoed this theme, emphasising that the profession has already moved beyond the question of whether AI will have an impact; it is. The real focus now is on how to integrate AI into processes in ways that strengthen service and build even deeper trust with clients.
Risk and responsibility
David highlighted that while AI is a powerful tool, it does not remove professional responsibility.
“When you delegate a task to a junior colleague, you don’t sign it off without reviewing it. It’s the same with AI. You must check the output; you’re still accountable.”
In most cases, existing insurance policies will respond to AI-related errors if the professional has taken reasonable care. But there’s a fine line.
“Sending AI-generated work to a client without checking it would likely be seen as negligent, or even reckless. And if you act recklessly, you could find yourself uninsured.”
David also raised an important emerging issue: whether insurance policies are fully equipped to address the rapidly evolving AI landscape. He noted that some cyber exclusions may unintentionally restrict legitimate AI use, while insurers are beginning to consider AI-specific risks, such as hallucination errors. However, the fundamental principle remains that insurance is there to protect those who act responsibly.
Crucially, that responsibility doesn’t rest solely with individuals; it is an organisational duty. Firms must ensure their teams are properly trained to use AI safely and effectively. Simply blaming the tool for mistakes will not suffice; courts, regulators, and insurers will still hold businesses accountable.
David shared a cautionary story: a lawyer who submitted AI-generated court documents containing fake legal citations. The lawyer now faces professional sanctions and possible prosecution.
Responsible AI use is not just about risk management; it’s about maintaining trust with clients, regulators, and insurers. By using AI to enhance, rather than shortcut, professional work, firms can better serve their clients while staying firmly within regulatory and ethical boundaries.
Integrating AI seamlessly
Many professionals still think of AI as something they actively prompt, typing questions into tools like ChatGPT. But as Vincent pointed out, AI is increasingly embedded into everyday systems.
“When you get personalised dashboards, search suggestions, or email summaries, AI is working behind the scenes. You’re probably using it already.”
Jonathan emphasised the importance of taking a proactive, hands-on approach to learning AI. He recommended a three-pronged strategy: first, get familiar with AI personally by using tools like ChatGPT, Copilot, or any accessible AI platform. By experimenting with these tools, professionals can better understand their capabilities and limitations. He noted that the number of people using AI regularly has grown significantly over the past six months, signalling how quickly adoption is accelerating.
Second, Jonathan encouraged working closely with internal IT teams, who often already have access to advanced AI tools. Understanding what is available within the organisation is key to unlocking potential solutions.
Third, he advised engaging directly with technology vendors. By learning what providers can offer and asking how AI might help solve specific problems, professionals can better integrate AI into their workflows. His core message was clear: don’t shy away from AI. Much like past technological shifts, such as the move from fax machines to email, embracing AI will be essential to staying effective and competitive in the evolving workplace.
Getting started
For professionals wondering where to begin, David offers this:
“Don’t try to build your own AI. Start with an off-the-shelf solution from a reputable, secure provider.”
He also recommends integrating AI into workflows in a deliberate and balanced way. Use AI to automate routine, repetitive tasks to free up time, but caution against letting automation distract from the core value clients seek.
Evolving, not replacing
The takeaway from all three speakers is clear: AI isn’t about replacing professionals. It’s about elevating them.
“We’re not preparing for some distant AI future. The tools we have now are already changing how we work. It’s not about whether we use AI, it’s about using it well.”
The key risks? Not using AI at all, or using it irresponsibly.
AI is here to stay. The professionals who thrive will be those who embrace it, understand its limits, and use it to strengthen, not erode, the trust their clients place in them.
David Pryce is a Senior Partner at Fenchurch Law.
Insufficiency of packing exclusion (Institute Cargo Clauses)
The Institute Cargo Clauses (“ICC”) are a set of standard marine cargo clauses maintained by the Joint Cargo Committee. The latest iteration of these clauses, the ICC 1/1/2009, offers three levels of cover in descending scope of protection: ICC ‘A’ (all-risks), ICC ‘B’ (named perils, broader), and ICC ‘C’ (named perils, narrower).
All three levels of cover are subject to a common set of excluded perils. One commonly encountered exclusion is clause 4.3 of the ICC 1/1/2009 (“the Packing Exclusion”), which excludes:
“… loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the Assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses "packing" shall be deemed to include stowage in a container and "employees" shall not include independent contractors)”.
Where an insurer purports to decline cover in reliance on this exclusion, it is important for a policyholder to closely examine the insurer’s reasons for doing so. In every case, the burden falls on the insurer to prove that the loss was proximately caused by the excluded peril (i.e., the insufficiency of packing). This requires the insurer to show that:
- The packing or preparation of the subject matter insured was insufficient or unsuitable to withstand the ordinary incidents of the insured transit;
- The insufficiency or unsuitability of the packing or preparation was the proximate cause of the loss or damage;
- The packing or preparation was carried out by the assured or their employees; and
- The packing of preparation was carried out prior to the attachment of the insurance.
Each of these elements is considered below.
- The packing or preparation of the subject matter insured was insufficient or unsuitable to withstand the ordinary incidents of the insured transit
‘Packing’ and ‘preparation’ refer to those steps necessary to prepare the cargo for the loading process. ‘Packing’ generally encompasses the placing of an outer covering over the cargo or the placing of the cargo in a container, but may at times include the insertion of material into the cargo to protect internal components. ‘Preparation’ generally involves other acts that may be necessary to prepare the cargo for loading, for instance the removal or adjustment of mechanical parts.
In no case would ‘packing’ or ‘preparation’ refer to the very acts resulting in the cargo being loaded on board. Thus in The Icebird [1991] LMLN 312, the Supreme Court of Victoria held that the failure to properly secure helicopters in the hold of the vessel could not be considered an act of ‘packing’ or ‘preparation’.
The phrase ‘the ordinary incidents of the insured transit’ has not been considered in any reported judgment relating to the ICC. A leading textbook suggests that this phrase should be read broadly to impose a ‘a rigorous requirement for packing’. On this reasoning, ‘ordinary incidents’ would refer to all reasonably foreseeable circumstances of the insured transit. Thus, if the packing of cargo was insufficient to withstand foreseeably rough sea conditions such as sudden high winds, the exclusion would apply.
That said, the formula ‘the ordinary incidents of the insured transit’ closely mirrors the classic definition of inherent vice set out in Soya v White [1983] 1 Lloyd’s Rep 122, namely:
“the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty”.
The phrase ‘the ordinary course of the contemplated voyage’ has been ascribed a narrow meaning in the context of inherent vice. The UK Supreme Court has held that the phrase does not encompass all reasonably foreseeable weather conditions on a voyage, but instead stands as a counterpoint to voyages on which a fortuitous external accident or casualty did occur. In other words, loss or damage involving the intervention of a fortuitous external accident or casualty would not be regarded as taking place in the ‘ordinary course of the contemplated voyage’: see The Cendor MOPU [2011] UKSC 5. There is scope, therefore, for arguing that the ‘ordinary incidents of the insured transit’ should be understood in a similarly narrow fashion and that, where insufficiency of packaging is being relied upon by insurers to decline cover, a careful examination of the circumstances leading up to the loss should be carried out.
- The proximate cause of the loss or damage was the insufficiency of the packing or preparation to withstand the ordinary incidents of the insured transit
The onus falls on the insurer to prove that the insufficiency of packing was the proximate, i.e. the dominant, cause of the loss. This need not necessarily be the cause that was closest in time to the loss.
As a practical matter, a policyholder should consider whether some other cause was dominant. This might include, for example, extraordinary weather conditions (including temperature) or sea states, or unforeseeable delays. Ultimately the cause of a loss is a question of fact and policyholders with complex losses with multiple factors at play should seek the assistance of experts.
- The packing or preparation was carried out by the Assured or their employees
The Packing Exclusion only applies where the packing or preparation was carried out by the policyholder’s employees, rather than an independent contractor, and a policyholder should always consider this distinction.
It has been suggested that the rationale for the distinction is that insurers potentially have a right of subrogation against an independent contractor who carried out the packing or preparation, and may therefore be more willing to accept the risk of insufficient packing in that situation.
- The packing or preparation was carried out prior to the attachment of the insurance.
The Packing Exclusion only applies where the allegedly insufficient or unsuitable packaging was carried out “prior to the attachment of this insurance”. The time of attachment is governed by clause 8.1 of the ICC 1/1/2009, the first paragraph of which provides:
“[the] insurance attaches from the time the subject-matter insured is first moved in the warehouse or at the place of storage (at the place named in the contract of insurance) for the purpose of the immediate loading into or onto the carrying vehicle or other conveyance for the commencement of transit …”
Cover under a policy subject to the ICC clauses attaches when the cargo is moved for ‘immediate loading’ onto the carrying vehicle. ‘Immediate’ in this context means as quickly as possible, without any unreasonable delay. As such, where goods are moved, albeit not for the purposes of the immediate loading (e.g. when cargo is moved into a holding area but loading onto the carrying vehicle only takes place several days later), it would be difficult to establish that the policy had attached at the time the cargo was moved into the holding area.
If the process of loading the cargo onto the carrying vehicle consists of several discrete steps taken in close succession, at which step would the insurance attach? Usefully for policyholders, case law suggests that the policy would attach when the first (rather than the last) of these steps is taken.
Thus in Swashplate v Liberty Mutual [2020] FCA 15, (i) a helicopter was moved out of a hangar and loaded into a container where it was secured, and (ii) the container was then loaded onto the carrying truck two hours later. The helicopter was damaged during transit as it had not been secured properly in the container. Insurers attempted to argue that the policy attached only when the container was loaded onto the truck. However, the Federal Court of Australia commented in obiter that the requirement for immediacy was satisfied once the helicopter was moved out of the hangar, and that the policy attached at that point. Since the error in securing the helicopter took place after the policy attached, the insurers could not rely on the Packing Exclusion.
Conclusion
Although we commonly see insurers seeking to decline cover on the basis of the Packing Exclusion, whether they are entitled to do so is often far from straightforward.
For example, we were recently consulted on behalf of a policyholder with a claim arising from molasses that had been packed into flexibags, which were then loaded on to shipping containers. The flexibags did not have automatic air vents and ended up bulging after being exposed to unusually high temperatures while in transit. It was questionable whether the Packing Exclusion was truly applicable, since the damage arguably was not caused by the ‘insufficiency or unsuitability of packing … to withstand the ordinary incidents of the insured transit’.
In short, for the Packing Exclusion to apply, the facts of the case must always fall within the four requirements identified above. A policyholder should thus closely scrutinise a declinature which relies on the Packing Exclusion and consider if the insurer has genuinely satisfied these requirements.
Authors
Toby Nabarro, Director, Singapore
Win for policyholder in triple insurance case
Watford Community Housing Trust v Arthur J Gallagher Insurance Brokers Limited [2025] EWHC 743 (Comm)
In a judgment favourable to policyholders delivered on 8 April 2025, the Commercial Court upheld a policyholder’s right to choose on which policy to claim where cover was provided under multiple policies. The Court also confirmed that, where insufficient cover is provided by an individual policy, the policyholder may claim sequentially under two or more policies.
Background
The Claimant was responsible for a serious data breach, the financial consequences of which were covered under three separate insurance policies arranged by the Defendant broker (a Cyber Policy, a Combined Policy, and a PI Policy, which contained indemnity limits of £1m, £5m and £5m respectively).
Each Policy contained an ‘Other Insurance’ clause, which provided that, where multiple policies covered the same loss, the Policy would only cover losses in excess of those covered by the other policy.
Following the breach, and on the Broker’s advice, the Claimant notified the Cyber Insurer but not the Combined or PI Insurers, resulting in late notification. The Combined Insurer eventually affirmed cover despite this; but the PI Insurer maintained a declinature, and it was common ground that it had been entitled to do so. As a result, the Claimant had £6m of available cover under the Cyber and Combined Policies.
The Broker subsequently accepted that its advice had been negligent.
As its losses arising from the data breach exceeded the £6m of available cover, the Claimant sued the Broker, alleging that but for its negligence, the Claimant would have been entitled to a total indemnity of £11m (being the sum of the indemnity limits of all three policies).
The Broker’s position
The Broker argued that the maximum total indemnity to which the Claimant would have been entitled, even absent its Broker’s negligence, was the maximum liability under any one Policy, i.e. £5m. The Broker further argued that, since the Policyholder had already received £6m from the Cyber and Combined Policies, it had suffered no loss in not being covered under the PI Policy, as it had already recovered more than the maximum indemnity to which it would have been entitled.
In support of its case that the maximum recoverable indemnity was only £5m, the Broker submitted, and the Court accepted, that the ‘Other Insurance’ clauses in each of the Policies all cancelled out one another. Accordingly, argued the Broker, this was a case of triple insurance where the Policies provided primary cover for £1m, £5m and £5m respectively.
The Broker then argued that. in such a case of triple insurance, a general principle of ratable contribution applied, such that the maximum indemnity to which the Claimant was entitled was the maximum liability under any one policy. As a result, each Insurer’s liability would be limited to an equitable proportion of that capped liability. For example in the current situation, the Cyber, Combined and PI insurers would each be liable for one-third of the first £1m of the Claimant’s loss, and (ii) the Combined and PI insurers would each be liable for one-half of the next £4m of the Claimant’s loss, such that the Claimant would be entitled to £333,333, £2,333,333 and £2,333,333 from the Cyber, Combined and PI Insurers respectively - ie, a total of £5m.
In addition, the Broker had an alternative argument that, since the Policies were worded such that none of the insurers had agreed to provide primary coverage when another primary policy existed, effect should be given to that intention, by limiting the total indemnity available to the maximum indemnity under any one policy, thus reducing each individual insurer’s liability.
Decision
In finding for the Claimant, the court held that, contrary to the Broker’s principal submission (which the court said had been mistakenly based on cases involving claims between insurers) ,there was no general principle of rateable contribution in cases involving double (or triple) insurance whereby a policyholder’s indemnity was capped at the highest limit of any one policy. Further, the policyholder could choose the order in which to claim under the available policies, and, if it failed to recover the whole loss from one, it could recover the balance from the other(s). It would then be a matter for the insurers to establish contribution between themselves.
In addressing the Broker’s alternative argument that the wording of the policies operated to restrict the total indemnity to the highest single limit, the Court accepted that the general proposition that the wording of the policies could have displaced the usual rule outlined above, but held that, as a matter of construction, that was not the effect here.
As the Judge explained:
“It seems to me that if an insured has paid more than one premium for more than one primary policy against liability incurred above a specified attachment point and up to a specified limit, absent an express contractual provision that provides otherwise, as a matter of general principle the insured should be able to recover the whole of its loss under one or more of the policies up to a maximum of the combined limits. Contribution, if it arises, is a matter for the insurers inter se and absent a rateable proportion clause in the policy is of no concern to the insured”.
The Broker was therefore liable for the Claimant’s losses which subsisted after payment by the Cyber and Combined Policies, subject to the limit of indemnity under the PI Policy.
The full judgment can be read here:
https://www.bailii.org/ew/cases/EWHC/Comm/2025/743.pdf
Authors
Matthew King, Associate (Foreign Qualified Lawyer)
Neurodiversity Celebration Week – Q&A with Daniel Robin
Neurodiversity Celebration Week (NCW) is a global initiative aimed at challenging stereotypes and misconceptions about neurological differences. As part of NCW, Deputy Managing Partner Dan Robin takes part in an open and insightful Q&A with Associate Dru Corfield, sharing his personal experiences and perspectives.
Dru: Hi Dan, thank you for agreeing to speak about your neurodiversity as part of neurodiversity week. It is an important conversation and something that the firm is big on supporting. I suppose the obvious first question is in what way are you neurodiverse?
Dan: I have dyspraxia.
Dru: And what does that mean to a layman? How does your dyspraxia manifest?
Dan: It affects my co-ordination, particularly hand-eye as my wife found out when we went (or tried to go) motorbike riding when we first met in Australia. Workwise it makes organisation challenging and has in the past affected my ability to write. It has also occasionally had an adverse effect on my time management.
Dru: How old were you when you were diagnosed, and what gave the game away?
Dan: 12. I think my parents sought a diagnosis based on issues with coordination and how disorganised I was with schoolwork.
Dru: What was the most difficult part of being dyspraxic as a teenager?
Dan: Back when I was in teenager in the late 90’s/early 00’s (don’t let the hairline fool you, I’m only 38) there was a real lack of awareness about dyspraxia, and at school the perception was that I was lazy and sloppy rather than ascertaining whether there was another reason behind it. It was also a challenge when first learning to drive, I started to learn on a manual car but quickly learnt that was not going to happen.
Dru: And how has public awareness of neurodiversity improved since you were diagnosed / a teenager?
Dan: It’s come on loads in the last 20 years. I think the biggest change is that neurodiversity has gone from being seeing as detrimental, to being accepted, to being seen in some circumstances as an asset.
Dru: How can being neurodiverse be an asset?
Dan: Where you have to work on certain things that don’t come naturally, it can make you better at then than those to whom it came naturally. As a Spurs fan (unfortunately), I will use Harry Kane as an analogy, had he not had setbacks and had to work on parts of his performance, he would not be the best striker in the world that he is today. There are also some neurological differences that lend themselves to the skills needed for professional services, running business etc.
Dru: How has it affected you rise at Fenchurch Law from an Associate in 2018 to the Deputy Managing Partner in 2024?
Dan: I think having to work on organisation skills and other elements of the roles I have had puts me in a unique position to help others / young members of staff – because simply put there were areas of my role which I wasn’t good at it but had to improve in order to develop. I would like to think that I am a good example of the fact that there are no barriers to progression if you are neurodiverse.
Dru: How have Fenchurch been with your neurodiversity?
Dan: The support has always been incredible; I was open from start and they immediately tried to put measures in to help me. I felt comfortable being able to tell the firm and they didn’t take it as a negative, because even 7 years ago the way neurodiversity was viewed in wider society was different to how it is seen today.
Dru: And finally, what advice would you give to neurotypical people when dealing with people with dyspraxia?
Dan: Take the time to understand. Particularly because it can manifest in a way that can be misinterpreted as someone having a lack of care, attention to detail or even laziness. There are measures in place to help with nearly all aspects needed for a professional services role, and it’s about working with the individual to work out what support they require. For example, with a junior lawyer, it may be accepting that they struggle with note taking in meetings, and finding a way to work with that, or they require instructions to them in a certain way.
Dru: Thanks very much for sharing, Dan.
Daniel Robin is the Deputy Managing Partner at Fenchurch Law.
Clarendon v Zurich: Proposal Insolvency Questions Narrowly Construed
In a judgment handed down on 13 February 2025, the High Court upheld an application to strike out parts of an insurer’s Defence, in a coverage dispute arising from £8 million fire losses at a dental practice in Leeds. The decision is welcome news for policyholders and brokers, supporting a narrow approach to interpretation of insurer questions on insolvency of corporate entities related to the proposer, in statements of fact prior to inception of the policy.
Fenchurch Law act for the claimants, Clarendon Dental Spa LLP (the ‘LLP’) and Clarendon Dental Spa (Leeds) Limited (‘Clarendon’), in their action against Zurich and Aviva, following insurers’ refusal to indemnify property damage and business interruption losses arising from a catastrophic fire in June 2021. Following commencement of proceedings, settlement with Aviva was agreed on commercial terms, and trial of the claim against Zurich is listed for hearing in May 2025.
Duty of Fair Presentation
Zurich alleged that Clarendon had breached its duty of fair presentation in failing to disclose the insolvency of two companies (‘PDS’ and ‘JHP’) that shared a common director with Clarendon and the LLP. These entities were former partners of the LLP and resigned in 2014, before entering into creditors’ voluntary liquidation, following a business restructuring which led to the formation of Clarendon. The LLP continued to own the freehold of the premises. Prior to 2006, the freehold was owned by Back-to-back Investments Ltd (‘BTB’), a company in which the dentist owner of Clarendon was a director. BTB entered insolvent liquidation in December 2009.
As part of the insurance renewal process, a statement of facts was provided to Zurich, including an ‘Insolvency Question’: “Have you or any partners, directors or family members involved in the business … Been declared bankrupt or insolvent, or been disqualified from being a company director?”. Clarendon answered ‘No’. A proposal form was given to Aviva, including a declaration that “Neither You or Your directors or partners involved with The Business or any other company or business have … in the last ten years been declared bankrupt or insolvent or been the subject of bankruptcy or insolvency proceedings or been disqualified as a company director”.
Under section 3 of the Insurance Act 2015, an insured is required to make a fair presentation of the risk, including disclosure of every material circumstance that the insured knows or ought to know, ensuring that every material representation as to a matter of fact is substantially correct. Disclosure is not required of a circumstance as to which the insurer waives information (section 3(3)(c)).
Zurich’s Defence stated that Clarendon breached this duty by incorrectly answering the Insolvency Question and failing to disclose the liquidations. Clarendon argued that on its true construction, the subjects of the Insolvency Question were limited to Clarendon and its current directors only (and not other corporate entities that a partner/director of Clarendon had previously been involved with), so the answer provided was correct. The insurers advanced a broader interpretation covering any partner in any partnership, and any director of any company, that is or was involved in Clarendon’s business as a dental practice, including the LLP as owner of the freehold and the former operator of the dental practice prior to restructuring.
Contract Interpretation and Waiver
Applying the Supreme Court decision in Wood v Capita Insurance [2017], the Court held that a reasonable person would objectively understand the Insolvency Question as relating only to insolvencies of current partners or directors of the policyholder, and not former partners or members of the LLP.
A special rule applies where a question asked by an insurer is ambiguous. As explained by Snowden J in Ristorante v Zurich [2021]: when the court is interpreting questions posed by insurers, rather than a negotiated contract term, any genuine ambiguity is resolved in favour of the applicant. If there are two rival constructions, both of which are objectively reasonable, the insurer cannot impugn as misrepresentation an answer which a reasonable person would not consider to be false.
The questions were contained in standard form documents issued to policyholders, hence the reference to “partners, directors or family members”, used disjunctively to cover the various possibilities that a policyholder is a partnership, a company, or a sole trader. The wording should naturally be read as referring to current partners and directors, at the date of the question, not to former ones.
The Court also noted the practical difficulties that would be faced in answering the Insolvency Question, if it meant any entity ‘involved’ with the business, as alleged by Zurich. There would need to be an inquiry into the circumstances not only of the policyholder’s own former partners or directors, but also those of predecessor owners or operators of the business, and evaluation of whether any potentially relevant person was sufficiently involved to require investigation - placing an unrealistic and unnecessary burden on policyholders to determine those ‘materially involved’.
It was therefore held that Clarendon answered the questions correctly but even if they had not, they were at best ambiguous and that ambiguity would be interpreted in favour of the policyholders. Further, Zurich and Aviva waived any right to disclosure of the fact of the liquidations, by asking the insolvency questions in the terms presented. The Court therefore agreed to strike out parts of Zurich’s Defence, in relation to alleged material non-disclosures on insolvency.
Implications
The case serves as a timely reminder on the need for clarity in proposal form questions and answers, to avoid disputes. Insurers should ask carefully worded enquiries to sufficiently investigate at the outset, and any attempt to re-write or extend the scope of such questions at the claims stage should be refused.
Read the full judgment here.
Authors:
Daniel Robin, Deputy Managing Partner
Pawinder Manak, Trainee Solicitor
Fenchurch Law - Annual Coverage Review
A panoply of coverage disputes reached the English courts in 2024 across diverse industry sectors, highlighting the London market’s sophisticated role in managing risk and boosting commercial resilience through geopolitically turbulent times.
Several judgments from the Court of Appeal reflect the trend for literal policy interpretation and a reluctance to interfere with unambiguous wording, including in marine cargo, offshore construction and W&I claims. The first reported decision on section 11 of the Insurance Act 2015 (‘IA 2015’) provides insight on the requisite causal connection. And guidance was provided on the scope of recovery for loss sustained over extended periods of time, in relation to construction projects and Covid BI losses.
The Invasion of Ukraine in February 2022 has led to a deluge of claims in the Commercial Court for losses arising from aircraft stranded in Russia, and damage to or expropriation of strategic assets including energy, mining and manufacturing interests. Several aircraft leasing companies are pursuing claims under contingent & possessed policies, case managed alongside parallel proceedings against various reinsurers, with related trials taking place in Ireland and the US.
Collectively these cases demonstrate the importance of precise language throughout insurance policies, with particular attention on key provisions around the description of insured parties, triggers for non-damage perils, aggregation, dispute resolution and any opt-out from statutory protections. Recent claims experience helps to inform best practice on pitfalls to avoid for policyholders and brokers, to secure coverage as broad as market conditions might realistically allow and minimise the prospect of disputes.
BUSINESS INTERRUPTION
Various Eateries v Allianz [2024] EWCA Civ 10
The latest decision on coverage under the Marsh Resilience wording considered various issues concerning the scope of prevention of access clauses, and aggregation of loss. Following settlement of related cases in Stonegate and Greggs, important questions on the treatment of furlough payments and additional increased costs of working were not included in continuing points of appeal and these matters are due to be revisited by the Court of Appeal in January 2025.
The remaining grounds of appeal from the first instance decision in Various Eateries were dismissed. The position remains that policyholders are entitled to claim for multiple sub-limits by reference to particular government actions, such as the nationwide lockdowns and regulations imposing restrictions on operation of different industry sectors; and those with ‘composite’ policies i.e. a number of separate contracts recorded in a single document, can recover individual sub-limits per company or per premises, depending on the insuring clauses and aggregation wording.
Gatwick Investment v Liberty [2024] EWHC 124 (Comm)
This case considered a number of preliminary issues in relation to coverage under prevention of access (‘POA’) or non-damage denial of access (‘NDDA’) clauses for policyholders operating in leisure, hospitality and retail industries.
The Commercial Court held that: (i) the Supreme Cout ruling on concurrent causation applies to POA / NDDA clauses in the same way as disease clauses, (ii) government action was that of a ‘statutory authority’, (iii) there was cover in respect of regulations imposed in response to a nationwide pandemic, (iv) furlough payments fell to be deducted from any sums otherwise due to policyholders, and (v) policy limits apply separately to multiple insured entities under a composite policy.
Bellini v Brit UW [2024] EWCA Civ 435
The claimant sought indemnity for Covid losses under a policy extension providing cover for: “interruption of or interference with the business caused by damage … arising from … any human infectious or human contagious disease … manifested by any person whilst in the premises or within a 25 mile radius …”
The Court of Appeal upheld the first instance decision, that there was no cover under this extension in the absence of physical damage. The claimant’s argument that something had gone wrong with the language, so that it was necessary to correct the error through contractual construction (applying Chartbrook v Persimmon Homes [2009]) was rejected. ‘Clumsy drafting’ resulting in limited cover did not mean that the provision was absurd, nor justify rewriting the contract. Where the parties have used unambiguous language, the courts must apply it, following the Supreme Court decision in Rainy Sky [2011].
London International Exhibition Centre v Allianz [2024] EWCA Civ 1026
The Court of Appeal considered coverage under insuring clauses triggered by disease ‘at the premises’ and held that the Supreme Court’s approach to causation applied to radius clauses in the FCA Test Case [2021] was equally applicable. The nature of the insured peril informs the causation test agreed between the parties and it must have been contemplated that an outbreak of disease could spread rapidly and widely. The appropriate causation test did not involve a ‘but for’ analysis and each individual case of illness resulting from Covid may constitute a separate and equally effective cause. Unfortunately, the judgment did not discuss in any detail the evidential requirements for policyholders to prove the presence of Covid at their premises and this remains contentious, given the limited availability of testing services in the early stages of the pandemic.
UnipolSai Assicurazioni v Covea Insurance [2024] EWCA Civ 1110
Covea provided cover for many children’s nurseries forced to close between March and July 2020. The Court of Appeal upheld the first instance decision that Covea, having paid out substantial sums in respect of BI losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The pandemic did constitute a ‘catastrophe’ giving rise to the insured losses, and there was no requirement in the policy for ‘suddenness’ or occurrence of a time-limited ‘event’.
On the issue of aggregation, pursuant to the Hours Clause in the reinsurance policy, the Court affirmed that, when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences (consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries). An apportionment of financial loss would be impractical and was deemed to be incorrect.
International Entertainment Holdings v Allianz [2024] EWCA Civ 1281
The Court of Appeal decided that restrictions brought in by the UK government, preventing or hindering access to the claimants’ theatres around the country, were not actions of a ‘policing authority’ and there was no indemnity available under policies imposing this requirement within the insuring clauses. Further, it was held that Covid can qualify as an ‘incident’ and coverage may be available on a per premises basis, in the absence of clear wording to the contrary.
CONSTRUCTION ALL RISKS
Technip Saudi Arabia v MedGulf Insurance [2024] EWCA Civ 481
Technip was the principal contractor for an energy project in the Persian Gulf. A vessel chartered by Technip collided with a platform within the project site, leading to a damages settlement of $25 million agreed with the platform owner, KJO.
Technip claimed under the liability section of its offshore construction policy, written on the WELCAR wording, which named both Technip and KJO as ‘Principal Insureds’ (the words Insured and Assured were used interchangeably in the policy). The insurer refused indemnity on grounds that the Existing Property Endorsement excluded cover for damage to existing property owned by any of the ‘Principal Assureds’, including the platform owner KJO, and this was upheld by the High Court.
Technip appealed, arguing that the policy was composite, and the exclusion only applied to property owned by the particular insured claiming the indemnity. The Court of Appeal refused, based on the natural meaning of the wording and how this would be understood by a reasonable person. Each insured under the policy was deemed to have separate insurance cover, but the term ‘Principal Assureds’ had the same meaning in each case.
Sky UK & Mace v Riverstone [2024] EWCA Civ 1567
The timber roof of Sky’s headquarters in West London suffered extensive water ingress, due to a design defect in failing to incorporate temporary waterproofing during installation. The building was constructed by Mace as main contractor and insured under a CAR policy. The damage occurred prior to practical completion in April 2016, but continued to develop thereafter, including subsequent to expiry of the period of insurance in July 2017.
The Court of Appeal affirmed that ‘damage’ means an adverse change which impairs the relevant property’s use or value. The roof was damaged as soon as it suffered water ingress. Insurers were held liable to indemnify both Sky and Mace for all damage that occurred during the period of insurance but deteriorated or developed thereafter, overturning the trial judge’s decision that the claimants were only entitled to recover for the cost of repairing damage in existence at the end of the insured period. Investigation costs reasonably incurred to determine how to remediate damage were also covered, whether or not damage was revealed.
The roof was made up of 472 modular ‘cassettes’ covering an area of 16,000 square metres. The policy deductible of £150,000 applied per any one event and the Court of Appeal held that the relevant event was the decision to build to a design that did not include temporary waterproofing, so that only one deductible applied.
Mace had pleaded and proved damage at practical completion and was entitled to a monetary judgment in addition to and distinct from Sky. Matters have been remitted to the trial judge, for determination of the sums due to each claimant under the policy.
INSURANCE ACT 2015
Scotbeef v D&S Storage [2024] EWHC 341 (TCC)
Scotbeef pursued a claim against D&S Storage in relation to the supply of defective meat. After D&S Storage became insolvent, its liability insurer was added to the proceedings pursuant to the Third Parties (Rights against Insurers) Act 2010 (‘TPRIA 2010’).
The insurance policy contained a ‘Duty of Assured’ clause, described as a condition precedent to liability, requiring Scotbeef to take reasonable steps to ensure that the Food Storage & Distribution Federation’s standard terms were incorporated into commercial contracts. The terms were not incorporated to the agreement with D&S Storage, and the insurer applied to strike out the insurance claim, based on Scotbeef’s non-compliance with the policy term. The High Court considered: (a) whether the construction of a condition precedent affects its enforceability; and (b) when terms which depart from the IA 2015 are enforceable.
On the first issue, it was held that construction of the entire clause must be evaluated in the context of the whole policy, to determine whether the provision would operate as a condition precedent, regardless of any label applied. In this case, the disputed term included a write-back for cover, where the policyholder acted reasonably in seeking to incorporate the standard terms, and the consequences of breach were detailed in a later section of the policy. This meant the provisions were difficult to reconcile and ambiguous in effect, so that the purported condition precedent was unenforceable.
On the second issue the Court held that, while it is possible to depart from the IA 2015, any such terms must be clearly brought to the policyholder’s attention prior to inception of the policy. The insurer had not done so and therefore could not rely on the purported opt-out term to deny indemnity.
Delos Shipholding v Allianz (“the WIN WIN”) [2024] EWHC 719 (Comm)
The claim arose from the ‘illegal parking’ of a bulk carrier just inside Indonesian territorial waters off Singapore. This minor infraction led to the vessel being detained by the Indonesian authorities for over a year, while the Master was prosecuted under local shipping laws. The claimants claimed under a war risks policy, which provided that the vessel became a constructive total loss after 6 months’ detainment.
The Insurers denied liability on grounds that (i) the loss was not fortuitous, as resulting from voluntary conduct to anchor in that location, (ii) an exclusion applied, for arrest restraint or detainment ‘under customs or quarantine regulations’, and/or (iii) the claimants had breached the duty of fair presentation, by failing to disclose that the sole director of the registered owner of the vessel was the subject of criminal charges in Greece.
The Commercial Court held that the exclusion did not apply, and the loss was fortuitous, since the crew did not realise the vessel had strayed into Indonesian territory or consciously chosen to do so. On alleged material non-disclosure, the Court held that the claimants did not have actual or constructive knowledge of the criminal charges, because the director was not ‘senior management’ for the purposes of section 4(3) of the IA 2015, instead being merely a nominee director with no decision-making powers. In any event, the defendants were held not to have been induced by the alleged non-disclosure.
The claimants’ separate claim for damages for late payment, pursuant to section 13A IA 2015 was dismissed. Based on the expert evidence, the Court was not satisfied that another similar vessel would have been available for the claimants to purchase, as alleged, and the claim for loss of trading profit, as a result of late payment of the insurance claim, was not made out.
MOK Petro Energy v Argo [2024] EWHC 1935 (Comm)
A cargo of gasoline loaded onto a tanker in Oman was insured under an all risks marine open cover on the ICC (A) wording. The gasoline was blended with methanol and the sale contract between MOK (the buyer) and PetroChina (the seller) required the cargo to have a phase separation temperature (‘PST’) below a stated level. On arrival at the discharge port, the cargo was found to significantly exceed the agreed limit. This meant that the octane rating was negatively affected, although the blend did not actually undergo phase separation, and the cargo was rejected by the end purchaser.
Insurers declined indemnity, on grounds that (a) no damage had occurred, and (b) a warranty in the policy, requiring inspection and certification of the cargo at the load port, had not been complied with. The cargo had been inspected, but there was no contemporaneous evidence of certification. MOK sought to rely on section 11, IA 2015, which provides that insurers cannot rely on breach of terms (such as warranties or conditions precedent) intended to reduce the risk of loss, if the insured can show that the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. MOK argued that its failure to comply with the certification element was irrelevant and would not have reduced the risk, since inspection of the cargo had taken place.
The Commercial Court held that no damage, i.e. adverse physical change, had occurred simply by mixing the blend in proportions which resulted in a defective product with propensity for a higher PST than contractually stipulated, applying Bacardi v Thomas Hardy [2002]. The comments on breach of warranty were therefore ‘obiter’, i.e. unnecessary to the decision and not binding in subsequent cases. The Judge agreed with the insurer that section 11 “is directed at the effect of compliance with the entire term and not with the consequences of the specific breach”. It was not disputed that compliance with the warranty as a whole was capable of minimising the risk of water contamination, so that the breach of warranty was made out.
This is the first judicial guidance on the operation of section 11, since the enactment of the IA 2015. There has been much debate as to whether this provision introduced a strict causation test, allowing policyholders to argue that the specific breach would have made no difference in the particular circumstances, even if compliance with the term would generally decrease the risk of that type of loss occurring. The decision in this case suggests a more onerous test for policyholders, and it will be interesting to see how the arguments are developed in subsequent cases.
JURISDICTION
Zephyrus Capital Aviation v Fidelis Underwriting [2024] EWHC 734 (Comm)
The defendant reinsurers applied to stay claims against them based on exclusive jurisdiction clauses (‘EJC’s) in favour of the Russian courts. The Commercial Court held that it was unlikely the claimants would receive a fair trial in Russia, in circumstances where the Russian state had a direct interest in the outcome of the litigation, and several claimants are from the UK and EU, which Russia had designated as ‘Unfriendly Foreign States’. The Court had regard to the multiplicity of proceedings and the risk of inconsistent judgments, as additional factors supporting its decision. This is a rare example of the English courts deciding that there are strong reasons not to apply an EJC.
AerCap Ireland v PJSC Insurance [2024] EWHC 1365 (Comm)
By contrast, the defendant reinsurers in this case were successful in obtaining a stay of English court proceedings on grounds that the policies, containing all risks and war risk coverage, included an EJC in favour of the Ukrainian courts. The Commercial Court held that the jurisdiction clauses were binding and enforceable, and the ongoing conflict was unlikely to result in substantial delays or other issues in litigating these claims in Ukraine.
‘PAY FIRST’ CLAUSES
MS Amlin v King Trader (“the Solomon Trader”) [2024] EWHC 1813 (Comm)
The policyholder chartered a ship, which became grounded in the Solomon Islands. The owner of the vessel, King Trader, obtained an arbitration award against the charterer in excess of $47 million. The charterer entered insolvent liquidation and King Trader sought to recover the loss from the charterer’s insurers, under the TPRIA 2010. The charterer’s liability insurance contained a clause stating: “it is a condition precedent to the Assured’s right of recovery … that the Assured shall first have discharged any loss, expense or liability.”
The insurers were successful in obtaining a declaration that they were not liable to indemnify the claim, because the insolvent charterer had not discharged the underlying liability. The High Court held that the ‘pay first’ clause was not repugnant to the purpose of the insurance or inconsistent with the other policy terms (including the right to terminate on insolvency, while preserving the insured’s right to indemnity for prior incidents). The clause was clearly worded and prominently stated, not a “fox in the henhouse … hidden away in the thickets of the Policy”.
The decision is a salutary reminder for policyholders to be wary of similar provisions. The Judge acknowledged that: “The state of English law on this issue in the light of the 2010 Act is not particularly satisfactory… Prudent operators seek to insure against those liabilities, and a range of third parties who suffer loss and damage as a result of accidents at sea will look to insurances of this kind to be made whole. ‘Pay first’ clauses reduce the efficacy of that protection when it is most needed”.
POLITICAL VIOLENCE
Hamilton Corporate Member v Afghan Global [2024] EWHC 1426 (Comm)
Following seizure of a US military warehouse by the Taliban, the owners sought to claim under a political violence reinsurance policy. The insurers declined cover in reliance on an exclusion for loss: “directly or indirectly caused by seizure, confiscation, nationalisation … expropriation, detention … nor loss or damage to the Buildings and/or Contents by law, order, decree or regulation of any governing authority, nor for loss or damage arising from acts of contraband or illegal transportation or illegal trade.”
The Commercial Court held that ‘seizure’ in this context was not restricted to seizure by law, order, decree or regulation of any governing authority, and the cover was limited to physical damage or destruction – not loss by way of deprivation. It was noted that ‘seizure’ has a settled legal meaning, namely “the act of taking forcible possession either by a lawful authority or by overpowering force”, following Kuwait Airways [1999]. The Judge rejected the claimant’s submission that the clause should be construed in light of factual matrix evidence addressing the market’s understanding of the differences between political risks and political violence insurance, and the history of similar clauses.
PROFESSIONAL INDEMNITY
Axis Specialty Europe v Discovery Land [2024] EWCA Civ 7
Discovery Land became interested in acquiring and developing Taymouth Castle in the Scottish Highlands. The solicitor instructed by Discovery Land on the purchase fraudulently misappropriated surplus client funds and then, nine months later, secretly mortgaged the castle to a third party.
The fraudulent solicitor was senior partner in a two-partner firm, which became insolvent, and Discovery Land pursued a claim against the firm’s PI insurers pursuant to the TPRIA 2010. A dispute arose as to whether the second partner in the firm had ‘condoned’ the dishonest acts of the fraudster, which would have engaged the following exclusion under the SRA Minimum Terms: “The insurer shall have no liability for … any claims … involving dishonest or fraudulent acts … committed or condoned by the insured, provided that: (a) the policy shall nonetheless cover the civil liability of any innocent insured; and (b) no dishonest or fraudulent act … shall be imputed to a body corporate unless it was committed or condoned by all directors of the company … or [LLP] members”.
The trial judge held that, while the second partner’s standards fell well below those required in the profession, he was not aware of and had not approved the fraud, or other acts in the same pattern of dishonest behaviour leading to the claim and nor was there any ‘blind-eye knowledge’ on his part. Further, the Court rejected insurers’ argument that the claims relating to (i) surplus funds and (ii) the secret mortgage should be aggregated, for purposes of the limit of indemnity.
The Court of Appeal upheld the first Instance decision as entirely rational. The aggregation clause in the policy provided that: “similar acts or omissions in a series of related matters or transactions will be regarded as one claim”. Applying the Supreme Court decision in AIG v Woodman [2017], it was necessary to consider whether the degree of similarity was real or substantial, and whether the claims fitted together, based on a thorough analysis of the underlying facts. Here, the trial judge had reviewed the evidence ‘painstakingly’, and while the two claims involved the same property and affiliated company victims, this was insufficient to provide the necessary link between the two transactions.
SUBROGATION
Dassault Aviation v Mitsui Sumitomo [2024] EWCA Civ 5
Dassault supplied aircraft to Mitsui Bussan Aerospace (‘MBA’) pursuant to a contract governed by English law including a non-assignment provision, as follows: “… this Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party”.
Following a delay in supply of aircraft on to the Japanese coastguard, Mitsui Sumitomo Insurance (‘MSI’) indemnified MBA for a liquidated damages claim from the coastguard and then sought to recover the loss by subrogated proceedings against Dassault. It was common ground that MBA’s claims against Dassault would be transferred to MSI by Article 25 of the Japanese Insurance Act, reproduced by the insurance policy, subject to operation of the non-assignment clause.
The Court of Appeal unanimously allowed the insurer’s appeal against the High Court decision, concluding that the language of the sales contract, in prohibiting an assignment ‘by any party’, did not prevent an assignment that took place by operation of law.
RSA Insurance v Textainer Group [2024] EWCA Civ 547
Textainer, a global supplier of shipping containers, incurred a loss of around $95 million following the collapse of Hanjin Shipping, in respect of thousands of missing and damaged containers and lost rental income. Textainer secured $70 million from primary and excess layer insurers and later recovered $15 million in Hanjin’s liquidation.
The Court of Appeal reaffirmed the well-established principle that recoveries are allocated on a ‘top-down’ basis, not proportionately (applying the House of Lords decision in Lord Napier and Ettrick [1993]). Sums obtained from third parties were therefore to be applied towards uninsured losses first, then paid down from the highest to the lowest layer of cover, before reimbursing the policy deductible. This approach applies to aggregate or excess layer placements and unitary losses alike. It confirmed that the concepts of under-insurance and average have no relevance to insurance written in layers.
WARRANTY & INDEMNITY
Project Angel Bidco v Axis Managing Agency [2024] EWCA Civ 446
The claimant sought indemnity under its buyer-side W&I policy for loss in value of the shares in a target company, on the basis that warranties given by the seller were alleged to be untrue. The relevant warranties stated that the company was not involved in legal proceedings or under investigation and had not committed any breach of contract or acts of bribery or corruption (‘ABC warranties’).
After the transaction completed, the target company became the subject of police investigations relating to compliance with anti-corruption and bribery legislation, and lost its key client, Liverpool City Council, resulting in insolvency of the target company and the policyholder. The insurers declined cover in reliance on a policy exclusion for “any liability or actual or alleged non-compliance with … [anti-bribery or anti-corruption laws]”. The policyholder argued that there was an obvious mistake in drafting of the exclusion, as it contradicted coverage provided in a cover spreadsheet listing the ABC warranties as insured obligations.
By a 2:1 majority, the Court of Appeal upheld the Commercial Court decision, that the policyholder’s proposed correction to the exclusion clause should not be permitted. While accepting that there was an obvious contradiction, the Court held it was not clear any mistake had been made in the drafting and nor did any clear remedy exist to correct the alleged mistake. There was a plain commercial rationale for the broad effect of the exclusion, from the insurer’s perspective, and the ordinary meaning of the words applied. In a dissenting judgment, Phillips LJ preferred the policyholder’s argument and would have allowed the appeal, based on the commercial purpose and intended effect of the insurance in the overall context of the Sale & Purchase Agreement.
This case illustrates the high bar for establishing a mistake in the drafting of commercial contracts, particularly a bespoke W&I policy, to justify rectification of a disputed provision.
Authors:
Catrin Wyn Williams, Associate
Pawinder Manak, Trainee Solicitor
The F1: A closer look at the Bacardi principle and section 11 of the Insurance Act
The Facts
MOK Petro Energy FZC v Argo (No. 604) Limited, The F1 [2024] EWHC 1935 (Comm) concerned a cargo of 11,800 MT of 92 RON unleaded gasoline (“the Cargo”) that had been loaded onto the tanker F1 (“the Vessel”) in Sohar, Oman. The Cargo was insured under an all-risks marine open cover on the ICC(A) wording (“the Policy”).
The Cargo consisted of a blend of gasoline and methanol. The gasoline and methanol used for the Cargo were drawn from four shore tanks (two gasoline, two methanol). They were loaded onto the Vessel via connecting pipelines and then blended in a tank on board the Vessel.
All gasoline-methanol blends have a phase separation temperature (PST), i.e., a temperature at or under which the blend will separate into a gasoline-rich upper layer and a methanol-rich lower layer. Phase separation is undesirable as phase-separated blends have a lower octane value and may damage the engine in which they are used. Put another way: the lower the PST, the better for the blend.
Also relevant is the fact that water increases the propensity of a gasoline-methanol blend to under phase separation. Unwanted water contamination therefore increases the PST of a blend.
The Cargo specifications, per the sale and purchase contract between MOK (the buyer) and PetroChina (the seller), required the Cargo to have a PST of 1°C or below. However, when the Vessel arrived at the discharge port, the Cargo was found to have a PST of 29°C. The Cargo was rejected by MOK’s end purchaser and ultimately sold by MOK to a salvage buyer. MOK claimed an indemnity under the Policy for the difference between (i) the value of the Cargo had it complied with specifications and (ii) the value at which it was actually sold.
Insurers declined the claim. In the ensuing trial, the Commercial Court upheld insurers’ declinature. While much of the judgment turned on the specific facts of the case, the Court’s findings on the following two issues carry wider implications for policyholders:
- Whether the mere fact that the Cargo had been defectively blended could constitute damage.
- How should a Court assess whether compliance with a warranty would reduce the risk of loss, as required under section 11 of the Insurance Act 2015.
Whether the mere fact of defective blending could constitute damage
Clause 1 of the ICC(A) wording provides that the insurance “covers all risks of loss of or damage to the subject-matter except as provided in Clauses 4, 5, 6 and 7 below”.
A policyholder seeking to obtain cover under the ICC(A) wording must generally establish (i) a fortuitous event which (ii) caused loss or damage to the insured cargo. Insured cargo is damaged only where it undergoes an adverse change in physical state.
In this case, one of MOK’s arguments was that (i) PetroChina’s decision to blend the gasoline and methanol in the proportions actually used was fortuitous, and (ii) this blending caused damage by resulting in a product that had a propensity to phase separate at 17°C, which was higher than the contractually stipulated PST of 1°C (although the blend did not actually undergo phase separation).
The question that arose was – could the blend be regarded as damaged merely because it was defective from the moment of its creation? Dias J held that it could not as there had never been a change to the physical state of the blend. The facts were on all fours with the well-known Bacardi Breezers case: Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd [2002] EWCA Civ 549 (“Bacardi”).
- In Bacardi, a drinks manufacturer mixed cardon dioxide which it did not appreciate had been contaminated with benzene with water and concentrate to form light alcoholic drinks. Unsurprisingly, the contaminated drinks were unmarketable. The issue was whether there had been “physical damage” to the drinks for the purpose of a limitation of liability clause. The English Court of Appeal held that there had been no damage – the drinks had not been subject to damage, but were merely defective from the moment of their creation.
- Similarly, in the present case, the blend was formed through the mixing of gasoline and methanol, and had a propensity to phase separate from the moment of its creation. It had never existed without this propensity. Since there was no change in the physical state of the blend to speak of, it could not, held the Court, be said to have suffered damage.
How should a Court assess whether compliance with a warranty would reduce the risk of loss?
Section 11 of IA 2015 applies to (among others) warranties which, if complied with, would tend to reduce the risk of loss of a particular kind. The general effect of section 11 is that, where an insured has breached a warranty to which section 11 applies:
- if the insured can show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”, per section 11(3); then
- the insurer would not be able to rely on the insured’s breach to exclude/limit/discharge its liability.
Put another way, section 11 obviates an insured’s breach of warranty where the warranty is not relevant to the insured’s actual loss.
In the present case, the Policy contained an express warranty requiring a surveyor to inspect and certify the connecting pipelines between the Vessel and the shore tanks. On the facts, MOK’s surveyor had done the former but not the latter. Accordingly, the Court found that MOK had not complied with the express warranty.
The issue then became whether section 11 negated MOK’s breach of warranty. This would be the case if MOK could show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”.
MOK’s primary case had been that the blend had been fortuitously contaminated with water either when the gasoline and methanol were loaded onto the Vessel via connecting pipelines, or when they were blended on board the Vessel. This water contamination in turn increased the PST of the blend (see above). The Court therefore assumed, for the purposes of its section 11 analysis, that the “loss which actually occurred” was the contamination of the blend with water as alleged by MOK.
On the facts, MOK’s surveyor had inspected the pipelines and found no water contamination, but had not issued a certificate in respect of the inspection. Arguably, the requirement to issue a certificate (when an inspection had already been carried out and no trace of water contamination had been found) was a mere formality and the failure to issue a certificate could not have increased the risk of loss (water contamination). The question then arose – in considering whether “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”:
- Should the Court consider only the effect of the particular breach of warranty committed by MOK (i.e., only the effect of its surveyor’s failure to issue a certificate)? If so, MOK’s breach arguably would not have increased the risk of water contamination, and MOK would be able to rely on section 11 to negate its breach of warranty.
- Alternatively, should the Court consider the effect of non-compliance with the warranty as a whole (i.e., the effect of both not inspecting and not certifying the pipelines)? If so, non-compliance with the warranty as a whole would probably have increased the risk of contamination, and MOK would not be able to rely on section 11.
Dias J preferred the second view, holding that section 11 was directed at the effect of compliance with the entire warranty and not with the consequences of the specific breach by the insured, and that paragraph 96 of the Explanatory Notes to IA 2015 supported this reading. Accordingly, MOK’s breach of warranty would have been fatal to its claim.
Implications for policyholders – English law
Neither of the findings discussed are policyholder-friendly.
That said, Dias J’s finding that the mere fact of defective blending cannot constitute damage intuitively accords with the reason why mere defects are not covered under all-risks insurance – namely, that all-risks insurance is not meant to guarantee the proper manufacture or construction of the property insured. A parallel can be drawn with construction all-risks policies, which typically do not cover the costs of rectifying defects in design or workmanship. Apart from this, the F1 is also significant for being the first case to explicitly endorse the applicability of Bacardi in an insurance context (Bacardi having been concerned with a dispute under a supply of goods contract).
As for section 11 of IA 2015, this case (as noted in an earlier article) is significant for being the decision to consider that section. That said, Dias J’s observations (i.e. that it is the effect of non-compliance with the entire warranty, rather than the insured’s particular breach, that should be taken into account) were obiter and it remains to be seen whether another Court would agree with her. In our view, notwithstanding Dias J’s observations, the use of the definitive article in section 11(3) (“the non-compliance”) might suggest on the contrary that it is the insured’s particular breach that should be looked at.
Implications for policyholders – Singapore Law
The authors – both of whom are APAC-based – will briefly consider the implications of this decision for Singapore law, a commonwealth jurisdiction whose law of insurance substantially reflects the English position prior to IA 2015.
There do not appear to be strong reasons why a Singapore Court would not consider Dias J’s findings on the issue of defective blending persuasive.
However, Dias J’s observations on section 11 of IA 2015 have less relevance. Under Singapore law, a breach of warranty has a draconian effect – the insurer is discharged from liability from the date of an insured’s breach of warranty: see section 33(3) of the Singapore Marine Insurance Act 1906. There is no equivalent of section 11 of IA 2015 that a policyholder can look to negate the breach of warranty. The Singapore law position accords with what had been the English law position prior to 2015, and its harshness was the reason behind the English reforms to insurance warranties as set out in the IA 2015.
Authors:
Toby Nabarro, Director Singapore
Reinsurance Cover for Covid BI Losses Upheld on Appeal
In UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWCA Civ 110, the Court of Appeal has upheld the first instance finding that the reinsured (Covea), having paid out substantial sums in respect of Covid business interruption (BI) losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The decision provides clarification on the operation of aggregation clauses and the proper interpretation of a “catastrophe” in treaty reinsurance arrangements.
Covea provided cover for a large number of children’s nurseries which were forced to close between 20 March 2020 and July 2020, as a result of the pandemic. The factual background and outcome at first instance are explained in detail in our earlier article. The decision was appealed by reinsurers and the following questions arose for re-evaluation:
1. Whether Covid-19 losses arose out of, and were directly occasioned by, a “catastrophe”; and
2. Whether the “Hours Clause” - by which the duration of any “Loss Occurrence” was prescribed depending on the nature of the underlying peril - meant that:
(i) an “individual loss” occurs on the date the covered peril strikes, including where the insured peril is the loss of ability to use premises; and
(ii) where the (re)insured first sustains indemnifiable BI loss within a nominated 168-hour period, subsequent losses after that period fall to be aggregated as part of a single “Loss Occurrence”.
Meaning of Catastrophe
At first instance, Mr Justice Foxton held that Covid-19 did amount to a “catastrophe,” as required under the reinsurance wording. On appeal, the reinsurers argued that a catastrophe must be a sudden or violent event, capable of causing physical damage, whereas the pandemic was an ongoing state of affairs.
The Court of Appeal rejected these submissions, highlighting the absence of any reference to an “event” within the policy wording, and noting that the unities test in Axa v Field [1996] is merely an aid to be used with broad application. Their Lordships also rejected the argument that “suddenness” was a pre-requisite for all catastrophes, and, in any event, the “exponential increase in Covid 19 infections in the UK […] did amount to a disaster of sudden onset.” The attempt by reinsurers to rely on an ejusdem generis argument, in relation to the alleged need for physical damage, was flawed, as the types of catastrophes mentioned in the policy were not intended to be a prescribed class. The expert evidence that BI cover may include cover for non-damage BI was unchallenged.
Operation of the Hours Clause
The central question for consideration under the Hours Clause was when the relevant loss occurred. If it fell outside the period stipulated, then it would not be recoverable. It was also noted that the term “Loss Occurrence” was defined in the policy to mean “individual losses”. Discussing this further, the Court of Appeal emphasised that the term “occur” means when a loss first happens during a period of time. In relation to BI specifically, it was held that when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues - consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences. An apportionment of financial loss would give rise to considerable practical difficulties and was deemed to be incorrect.
Implications for Policyholders
The decision is welcomed by cedants with the benefit of similarly worded reinsurance policies. The implications are far-reaching, with total payouts for Covid BI claims estimated in the region of £2 billion, according to the Association of British Insurers. This policyholder-friendly precedent is particularly helpful, since most reinsurance disputes are resolved in confidential arbitrations.
Authors:
Pawinder Manak, Trainee Solicitor
Climate Risks Series, Part 3: Aloha v AIG - Liability Cover for Reckless Environmental Harm
Aloha v AIG - Liability Cover for Reckless Environmental Harm
Increasing numbers of claims are proceeding around the world alleging that the public were misled about the risks associated with climate change, resulting from fossil fuels and greenhouse gas (“GHG”) emissions.
A recent decision in the Supreme Court of Hawaii, Aloha Petroleum Ltd v National Union Fire Insurance Co. of Pittsburgh and American Home Insurance Co. [2024], held that an “occurrence” in this context included the consequences of reckless conduct, and GHG emissions were a “pollutant” for purposes of a pollution exclusion under a commercial general liability policy.
Background
The Appellant, Aloha Petroleum Ltd (“Aloha”), was insured with two subsidiaries of AIG under a series of liability policies, in respect of its business as one of the largest petrol suppliers and convenience store operators in Hawaii.
The counties of Honolulu and Maui sued several fossil fuel companies, including Aloha, claiming that the defendants knew of the effects of climate change and had a duty to warn the public about the dangers of their products. It was alleged that the defendants acted recklessly by promoting climate denial, increasing the use of fossil fuels and emitting GHGs, causing erosion, damage to water infrastructure and increased risks of flooding, extreme heat and storms.
Aloha sought indemnity under the policies and AIG refused to defend the underlying claims, alleging that the harm caused by GHGs was foreseeable and therefore not “accidental”; and alternatively, seeking to rely upon an exclusion to cover for losses arising from pollution.
Aloha issued proceedings seeking a declaration that the policies would respond, and the District Court of Hawaii referred the following questions to the Supreme Court, to assist with determining the parties’ motions for summary judgment:
- Does an “accident” include recklessness, for purposes of the policy definition of “occurrence”?
- Are greenhouse gases “pollutants” within the meaning of the pollution exclusion?
Policy Wording
The policies provided occurrence-based coverage, with two different definitions of “occurrence” for the relevant periods:
- “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”, or
- “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured”
The pollution exclusion clauses varied across the policies, but the differences were immaterial for purposes of the issues before the Supreme Court.
The 2004-2010 policy excluded cover for:
“Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.
. . . .
“Pollutants” [mean] “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Is Reckless Conduct Accidental?
Aloha argued that it was entitled to indemnity, as the allegations of recklessness were sufficient to establish an “accident” and therefore an “occurrence” under the policies. Aloha relied on Tri-S Corp v Western World Ins. Co. (2006), which held - in the context of unintentional personal injury resulting from proximity to high voltage power lines - that reckless conduct is accidental, unless intended to cause harm, or expected to with practical certainty.
AIG claimed that Aloha understood the climate science, and the environmental damage was intentional, not fortuitous. It relied on AIG Hawaii Ins. Co. v Caraang (1993), which held - in the context of torts involving obvious physical violence - that an “occurrence” requires an injury which is not the expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.
The Supreme Court agreed with Aloha, ruling that:
“when an insured perceives a risk of harm, its conduct is an ‘accident’ unless it intended to cause harm or expected harm with practical certainty … interpreting an ‘accident’ to include reckless conduct honors the principle of fortuity. The reckless insured, by definition, takes risk.”
Are GHGs “Pollutants”?
Aloha argued that GHGs are not pollutants, because they are not “irritants” (applicable in the context of personal injury, not property damage) or “contaminants”. The drafting history was said to indicate that the exclusion should be limited to clean-up costs for traditional pollution caused by hazardous waste from the insured’s operations, not liability resulting from its finished products.
The Supreme Court held that a “contaminant”, and therefore “pollutant” for purposes of the exclusion, is determined by whether damage is caused by its presence in the environment. Although a single molecule of carbon dioxide would not be viewed as pollution, a fact-specific analysis is required, and the Supreme Court was satisfied that Aloha’s gasoline production is causing harmful climate change. This approach was supported by the regulation of GHG emissions in Hawaii and the federal Clean Air Act.
Not all of the policies contained a pollution exclusion clause, however, and the question of whether AIG is required to indemnify Aloha for that policy period (covering 1986 to 1987) will now be considered by the District Court.
Impact On Policyholders
The finding that reckless conduct is covered by liability policies in the context of climate harms is highly significant and will be welcomed by energy companies.
While the issues are yet to be fully explored in European jurisdictions, it is interesting to compare the UK Supreme Court decision in Burnett v Hanover [2021], where merely reckless conduct was insufficient to engage a ‘deliberate acts’ exclusion in a public liability policy; and the recent decision in Delos Shipping v Allianz [2024], confirming that a defence based on lack of fortuity requires the insurer to establish that consequences of the insured’s actions were inevitable, i.e. “bound to eventuate in the ordinary course”.
The precise wording of any pollution or climate change exclusion should be carefully considered prior to inception of the policy period. The causative language used can significantly alter the scope of coverage and prospects of indemnity (see, for example, Brian Leighton v Allianz [2023]).
Authors:
Climate Risk Series:
Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
Part 2: Flood and Storm Risk – Keeping Policyholders Afloat