When adjectives matter: How ‘Accidental’, ‘Sudden’ and ‘Unforeseen’ affect all-risks insurance cover
Construction and engineering projects, being subject to a wide variety of risks, are invariably insured on an all-risks basis via Construction All-Risks (“CAR”) or, in the case of projects involving the installation of plant or machinery, Erection All-Risks (“EAR”) policies. Following practical completion, the relevant works are typically insured via property damage and/or machinery breakdown insurance; such cover is similarly procured on an all-risks basis.
All-risks policies often comprise (at least) two sections:
- Section 1, which covers damage to insured property (i.e., material damage cover); and
- Section 2, which covers liability of insureds to third parties (i.e., third party liability cover).
This article is concerned with the material damage cover section of all-risks policies and considers how the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ modify the scope of cover under that section.
MATERIAL DAMAGE COVER: THE PRINCIPLE OF FORTUITY
Material damage cover does not indemnify against all forms of loss to insured property. Instead, it covers only fortuitous loss or damage. The principle of fortuity has been equated with ‘accidental damage’; an event would be ‘accidental’ if it occurred by chance and was non-deliberate: see Leeds Beckett University v Travelers Insurance Company Limited [2017] EWHC 558 (TCC) (“Leeds Beckett”) at [199].
The principle of fortuity applies regardless of whether the words ‘all-risks’ appear in the insuring clause. The insuring clause of the material damage section of a CAR policy might therefore simply state that:
“… insurers will indemnify the Insured in respect of physical loss or damage to the Insured Property arising from any cause except as hereafter provided.”
It is, however, not uncommon for an insuring clause to include the adjectives ‘accidental’, ‘sudden’ or ‘unforeseen’ (or some combination of the three). For CAR policies, the requirement for ‘sudden’ and/or ‘unforeseen’ loss is less commonly seen in the UK, but is still often encountered in the APAC region. For instance, the insuring clause of the material damage section of the Munich Re standard form CAR wording, which is commonly used in Singapore and Malaysia, provides that:
“… if at any time during the period of cover the items or any part thereof entered in the Schedule shall suffer any unforeseen and sudden physical loss or damage from any cause, other than those specifically excluded, in a manner necessitating repair or replacement, the [insurer] will indemnify the Insured in respect or such loss or damage …” (emphasis added)
We consider below whether the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ introduce any further requirements (in addition to the basic requirement of fortuity) for there to be cover for material damage.
‘ACCIDENTAL’
It is less common for the insuring clause for material damage cover to impose a requirement for ‘accidental’ damage. This stands in contrast to the insuring clause for third party liability cover, which frequently responds to damage or injury ‘accidentally’ caused by the insured.
That said, a requirement for ‘accidental’ damage may in some cases find its way into the material damage cover section of a policy. For instance, in Leeds Beckett, the word ‘damage’ was defined for the purposes of the relevant CAR policy as “accidental loss or destruction of or damage”; this meant that the material damage cover of that policy would respond only in the event of ‘accidental’ damage.
The requirement for ‘accidental’ damage would not usually change the default scope of cover. In other words, it remains the case that the loss need only be fortuitous in order for the material damage section of a policy to respond. As noted in Leeds Beckett, the principle of fortuity already encompasses the concept of accidental loss, and common law jurisdictions have generally been content to treat the two as being synonymous.
‘SUDDEN’
‘Sudden’ imports a different meaning than ‘fortuitous’. Accordingly, the use of the word ‘sudden’ in the material damage section of a policy narrows the scope of cover; the loss or damage must at minimum be ‘sudden’ (in addition to being ‘fortuitous’) in order for the policy to respond. Case law sheds the following light on the meaning of ‘sudden’.
First, it is the loss or damage itself, rather than the cause of said loss or damage, which must be ‘sudden’.
An example of the distinction between a cause and the resulting loss and damage can be seen in the Singapore High Court case of Pacific Chemicals Pte Ltd v MSIG Insurance [2012] SGHC 198 (“Pacific Chemicals”), where the sudden malfunction of a measuring gauge (the cause) led to the gradual solidification of phthalic acid stored in a tank (the loss or damage). The Court found that the loss or damage suffered, having taken place “over a period of time”, was not ‘sudden’ in nature.
Secondly, ‘sudden’ is frequently used in conjunction with ‘unforeseen’ (see again the Munich Re wording above). In such cases, it is clear that ‘sudden’ must connote something other than ‘unforeseen’ or ‘unexpected’ (as to construe it otherwise would render ‘sudden’ superfluous). The tenor of relevant case law, as noted by Paul Reed KC in the textbook Construction All-Risks Insurance, suggests that ‘sudden’ should be construed in this context as importing a need for “dramatic change to have occurred during a relatively short period of time”.
‘Sudden’ may, however, have a different meaning when used alone. The New Zealand and Australian Courts have understood the word ‘sudden’ (when used alone) to mean ‘unforeseen’ or ‘unexpected’: see New Zealand Municipalities Co-Operative Insurance Co Ltd v City of Tauranga (unreported) and Sun Alliance & London Insurance Group v North West Iron Co Ltd [1974] 2 N.S.W.L.R. 625.
Thirdly, ‘sudden’ (when used in the context of ‘sudden and unforeseen’) should not be equated with ‘instantaneous’.
In Pacific Chemicals, the Court found that the caving-in of a storage tank that had occurred rapidly (but not necessarily instantaneously) should be regarded as ‘sudden’ loss or damage.
That said, in appropriate cases, much longer periods of time could still be considered ‘sudden’. As noted in Construction All-Risks Insurance, the interpretation of the word ‘sudden’ is a context-sensitive exercise. For instance, in assessing whether there has been ‘sudden’ damage under a mining project policy in the form of a change in ground conditions, it may be appropriate to apply a geological timescale; on this interpretation, a change in ground conditions taking place over several days (or possibly even months) might well still be considered ‘sudden’.
‘UNFORESEEN’
‘Unforseen’ also imports a different meaning from ‘fortuitous’. Accordingly, the express inclusion of ‘unforeseen’ narrows the scope of cover; the loss or damage must at minimum be ‘unforeseen’ (in addition to being ‘fortuitous’) in order for the policy to respond.
Nevertheless, it is not generally difficult to establish that an occurrence was unforeseen; all that needs to be shown is that the loss or damage was ‘unanticipated’ or ‘unexpected’ from the perspective of the insured. Thus in Pacific Chemicals, one head of damage, namely the solidification of phthalic acid (see above), was caused by the lowering of the temperature in the relevant tank. The Court found that the solidification was not an expected consequence of that process and the damage thus fell within the ambit of ‘unforeseen’.
It should be noted that fortuity and foreseeability are separate concepts. The question of whether damage is fortuitous hinges on whether the damage was caused by chance (rather than being inevitable) and was non-deliberate. Foreseeability is an entirely separate requirement that has no part to play in determining whether damage was fortuitous.
CONCLUSION
While there is not a large body of case law concerning the ambit of the words ‘sudden’ and ‘unforeseen’ (which is perhaps unsurprising given the prevalence of arbitration clauses in non-consumer insurance policies), the authorities would suggest that neither word should be read restrictively, and that considerable latitude should be afforded to insureds in establishing that an occurrence was ‘sudden’ and ‘unforeseen’.
Eugene Lee is an Associate at Fenchurch Law
The elephant in the room: and it’s not the Secretary of State
In this, the latest in a series of recent Covid-19 BI appeals, the Court of Appeal has handed down judgment in International Entertainment Holdings Limited & Ors v Allianz Insurance Plc [2024] EWCA Civ 1281. A copy of the judgment can be found here.
The central issue here turned on whether the restrictions brought in by the government, preventing or hindering access to the claimants’ theatres around the country, were those of a “‘policing authority”.
In concluding that they were not, the Court of Appeal held that, “It is sufficient to say that the term does not extend to the Secretary of State. To adapt Lord Justice Scrutton’s famous remark about the elephant (Merchants Marine Insurance Co Ltd v North of England Protection & Indemnity Association (1926) 26 Ll LR 201, 203), the reasonable policyholder might not be able to define a “policing authority”, but he would know that the Secretary of State was not one.”
That finding notwithstanding, the judgment brings some welcome news for the wider policyholder market with the finding that Covid-19 can be an “incident” and that, in the absence of clear wording to the contrary, cover can be available on a “per premises” basis.
The Underlying Proceedings
The issues on appeal in this matter were first heard by Mr Justice Jacobs as part of a group of cases (see Gatwick Investment Ltd v Liberty Mutual Insurance Europe SE [2024] EWHC 124 (Comm)).
The claim concerned the interpretation of a non-damage denial of access (“NDDA”) clause for losses arising out of the closure of venues, following the 21 March Regulations made by the Secretary for Health and Social Care.
The relevant wording read as follows:
“Denial of Access Endanger Life or Property
Any claim resulting from interruption of or interference with the Business as a direct result of an incident likely to endanger human life or property within 1 mile radius of the premises in consequence of which access to or use of the premises is prevented or hindered by any policing authority, but excluding any occurrence where the duration of such prevention or hindrance of us [sic.] is less than 4 hours, shall be understood to be loss resulting from damage to property used by the Insured at the premises provided that
i) The Maximum Indemnity Period is limited to 3 months, and
ii) The liability of the Insurer for any one claim in the aggregate during any one Period of Insurance shall not exceed £500,000”
At first instance, the Judge concluded that the Secretary of State was not a “policing authority”, which was sufficient for the policyholders’ claims to be dismissed.
The Appeal
While accepting that the term “policing authority” was not limited to the police, and that it could encompass restrictions imposed by a similar body performing policing functions in circumstances likely to endanger human life or property, the Court of Appeal felt it unnecessary to decide how widely the clause may extent on the basis that it was sufficient to say it did not include the Secretary for State.
That decision was ultimately determinative of whether or not the policyholders in this case were able to claim for losses arising out of the Covid-19 pandemic, however, there were three further issues on appeal which will be of interest to the wider policyholder market: (i) whether or not Covid-19 was capable of being an incident; (ii) whether the extension applied on a “per premises” basis; and (iii) whether policy wording referring to “any one claim in the aggregate” contained a mistake capable of correction.
Can Covid-19 be an “incident”?
The Court of Appeal was asked to consider whether, in the context of the relevant clause, Covid-19 could be an “incident likely to endanger human life.”
The Court of Appeal accepted that the word “incident” can be used synonymously with “event” or “occurrence” but, in ordinary usage, it would generally connote something more dependent on the context in which the word is used. In the context of this wording, “incident” was qualified by something that “endangers human life or property,” so as to require a response from a “policing authority”
It was common ground that “Covid-19 endangered human life because of the infectious nature of the disease; and taken together with all the other cases of Covid-19 in the country, it called for a response by the Secretary of State”.
Further, in this clause, it was clear that the terms “incident” and “occurrence” were being used interchangeably. Therefore, a case of Covid-19 could properly be regarded as an “incident,” and could amount to an “event” or “occurrence”.
Although this analysis differs from that of the Divisional Court in the FCA Test Case, where it was held (in the context of the Hiscox NDDA clause) that “it is a misnomer to describe the presence of someone in the radius with the disease as “an incident” for the purposes of the clause”, the Court of Appeal did not find that the point was wrongly decided by the Divisional Court. Rather, its decision was based on the wording of the clause before it.
The finding that Covid-19 can be an “incident,” in certain contexts, is a potentially significant outcome for other policyholders with “incident” wordings. There are likely to be a number of claims out there that have been in cold storage due to an “incident” wording, which should now be revisited given this apparent thawing on the issue.
Per premises
The Court of Appeal agreed with the lower court’s finding that this wording provided cover on a per premises basis.
When considering whether the wording provided for cover on a per premises basis, the Court of Appeal focused on the specific wording of the clause, and in particular the fact that the insured peril was specific to each of the premises insured. A prevention or restriction of access to each premises would, therefore, give rise to a separate claim to which a separate limit would apply. The insurer’s focus on the defined term “Business” (i.e. that it would not “make sense to speak of the business of the premises as distinct from the business of the policyholder”) was found to place more weight on the definition that it would bear.
Further, the Court of Appeal noted that the policy drew no distinction between policyholders in the claimant group who owned or operated only one venue, and those who owned or operated multiple venues. In those circumstances, interpreting the policy limit as applying separately to each policyholder rather than to each premises would be “somewhat capricious”.
This is an important finding for policyholders with more than one premises in circumstances where insurers are frequently seeking to limit losses to a single limit across multiple premises. Close attention should be paid to the specifics of the wording, as the nuance of the drafted wording and the policy as a whole will dictate whether a per premises argument can be sustained.
Correction
The insurer’s attempt to introduce an aggregate limit were unsuccessful in the absence of a clear mistake (or at least a mistake with a clear answer).
The insurer’s had attempted to rework the wording of the extension referring to “any one claim in the aggregate” to provide an annual aggregate limit by inserting the word “any one claim and in the aggregate”. The Court of Appeal found that while it was reasonably clear that something had gone wrong in the language, it was nonetheless far from obvious what solution the parties had intended. It was as likely that the insurer had intended for the limit to apply in the aggregate as it was that the limit was intended to apply to any one claim. The correction proposed by the insurer would result in the words “any one claim” being deprived of any meaning. Accordingly, the judge was correct to have rejected the insurer’s case of construction by correction at first instance.
This decision again confirms the principles in East v Pantiles (Plant Hire) Ltd and Chartbrook Ltd v Persimmon Homes Ltd, which were considered recently in another appellate Covid-19 decision, Bellini N/E Ltd v Brit UW Ltd. It serves as a stark reminder that the courts will usually be reluctant to correct mistakes, and the circumstances in which they might do so are limited to those where there is an obvious definitive answer.
Parting Comments
Despite a disappointing result on the meaning of “policing authority”, this decision has produced renewed hope for policyholders with similar issues in dispute, and it is far from the last word on the various NDDA wordings still out there. Further appeals arising from the Gatwick Investment Ltd v Liberty Mutual Insurance Europe SE group of cases are listed for hearing early next year, in addition to other matters proceeding to trial in the commercial court.
Watch this space.
Authors
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
A “WIN WIN” for Policyholders
Background
Delos Shipholding S.A. v Allianz Global Corporate and Specialty S.E. [2024] EWHC 719 (Comm) is one of several recent judgments to consider the scope of an insured’s duty of fair presentation under the English Insurance Act 2015 (the “Act”) and helpfully applies that duty in a manner likely to favour policyholders; also noteworthy are the Commercial Court’s observations on the concept of fortuity and on the duty to sue and labour. The Court additionally considered and rejected the insureds’ claim under section 13A of the Act for damages arising from late payment, which is not covered in this article.
Facts
The bulk carrier ‘WIN WIN’ (the “Vessel”) was insured under a policy (the “Policy”) incorporating an amended form of the American Institute Hull War Risks and Strikes clause.
In February 2019, the Master unknowingly anchored the Vessel in Indonesian territorial waters without permission. Some days later, the Indonesian Navy detained the Vessel for having done so illegally. The Master was prosecuted for contravening Indonesian shipping law, with the Vessel only being redelivered to the insureds in January 2020. The insureds alleged that the Vessel had become a constructive total loss and served several Notices of Abandonment on insurers, all of which were rejected. The insureds then commenced suit to claim for total loss of the Vessel under the Policy, as well as damages for late payment of their claim under section 13A of the Act.
At trial, insurers accepted that the conditions for a total loss had had been met, but alleged that (i) they were entitled to avoid the Policy for material non-disclosure, (ii) the detainment was not fortuitous, and (iii) the delay in release was materially caused by the insureds’ unreasonable conduct in breach of their duty to sue and labour. None of the defences succeeded and the Court allowed the insureds’ claim. The insureds’ claim for damages under section 13A of the Act was, however, dismissed.
Material non-disclosure
At the time the Policy was renewed on 29 June 2018, one Mr Bairactaris, who was the sole director of the first claimant (the shipowner), was being prosecuted by the Greek authorities on charges relating to a shipment of heroin (the “Charges”). Mr Bairactaris was also at all material times a nominee director of the first claimant. In other words, he exercised no independent judgment as director and instead acted on the instructions of other persons, who in this case where the second claimant (the Vessel’s commercial managers) and its owner.
Insurers sought to avoid the Policy on the basis that the insureds had breached their duty of fair presentation. Accordingly, Insurershad to establish that:
- the insureds had actual or constructive knowledge of the Charges;
- the Charges were a material circumstance that should have been (but was not) disclosed at the time of renewal; and
- the relevant underwriter had been induced by the non-disclosure of the Charges to write the risk.
(i) Knowledge
So far as actual knowledge was concerned, since Mr Bairactaris was the only individual within the claimants who knew of the Charges, the key issue was whether the first claimant had been fixed with knowledge of the Charges via section 4(3)(a) of the Act, which attributes to an insured “what is known to ... the insured’s senior management”. Section 4(8)(c) of the Act defines senior management as “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.
Notwithstanding his position as nominee director, the Court found that Mr Bairactaris was not part of senior management. It was the substance of the role played by him which was determinative, and since his responsibilities as sole nominee director were confined to executing administrative formalities (rather than the organisation of the first claimant’s activities), he could not be regarded as senior management.
This case thus demonstrates the key principles regarding the “knowledge” of a corporate policyholder and re-states the balance under English insurance law between the rights of the insurer to be provided with the material facts prior to inception of a policy against the practical challenges faced by those responsible for the insurance of corporate policyholders in ensuring they are in possession of the material facts in the first place.
As the Court also found that the insureds also did not have any constructive knowledge of the Charges, the defence of material non-disclosure failed at the first hurdle. The Court nevertheless continued to consider the remaining issues
(ii) Materiality
The parties agreed that the test for materiality was substantively unchanged by the Act, i.e. it was whether a prudent underwriter would have wanted to take the undisclosed circumstances (here, the Charges) into account.
The more controversial issue was whether the hypothetical prudent underwriter could also take into account exculpatory circumstances under the test for materiality. These consisted of information that the insureds would also have made known to insurers had the Charges been disclosed, including in this case:
- Mr Bairactaris’ firm belief that the charges were without foundation; and
- the fact that Mr Bairactaris was a nominee director fulfilling only an administrative function and had no role in the operation of the Vessel.
The Court observed that, had it been necessary to decide, it would have held that that exculpatory circumstances could be taken into account; were it otherwise, an insurer “could … be as selective as it liked in how it defined the circumstances which it alleged could be disclosed”. On the facts, the Court observed that the Charges (considered with the said exculpatory circumstances) would have been material and would have led a prudent underwriter to consider imposing a condition, e.g. that Mr Bairactaris should be replaced as a nominee director.
(iii) Inducement & Remedy
The Court found that, had the Charges been disclosed, the actual underwriter would have imposed a condition requiring replacement of Mr Bairactaris as nominee director. The test for inducement under section 8(1)(b) of the Act would thus have been satisfied – the situation was one where, but for the non-disclosure of the Charges, insurers would only have entered into the Policy on different terms.
Insurers would thus have been entitled to treat the Policy as though it included the above condition (per paragraph 5 of Schedule 1 of the Act). The more interesting issue was whether, in this case, it was equally open to the insured to then prove that it could and would have complied with the condition. The Court, accepting that “sauce for the goose [was] … equally sauce for the gander”, opined that insureds could, and that on the facts the insureds would, have complied with a condition requiring replacement of Mr Bairactaris in any event; as such, insurers would have been without a remedy even if they had successfully proved knowledge of the Charges.
Other issues
This wide-ranging judgment covered several other issues, two of which are dealt with below.
(i) Fortuity
Insurers relied on the proposition set out in The Wondrous [1991] 1 Lloyd’s Rep 400, that the ordinary consequences of an assured’s deliberate and voluntary conduct are not fortuitous and do not fall within the cover provided by all risks policies. Insurers argued that, by anchoring in Indonesian waters, the Vessel had voluntarily exposed herself to the operation of local law. The consequent detention was simply an ordinary consequence of that voluntary conduct.
These arguments failed. The Court declined to read the proposition in The Wondrous so widely and instead clarified that the proposition had two aspects:
- First, there must be some choice by the insured. This implies awareness that a decision is being made between two or more options which are different in some relevant sense.
- Second, the consequences must be such as to flow in the ordinary course of events. This requires the consequence to be “inevitable in the sense that it is bound to eventuate in the ordinary course”.
Neither aspect was satisfied on the facts. Since the Master did not realise that the Vessel was in Indonesian waters to begin with, there was no conscious choice by the Master to anchor there. Further, since at the time of detention the Indonesian navy had only just begun to arrest vessels that had been anchored in Indonesian waters without permission (whereas previously there no reported cases of such detention), the detention was neither inevitable nor an ordinary consequence of the Vessel’s conduct.
(ii) Sue and Labour
Both the terms of the Policy and section 78(4) of the Marine Insurance Act 1906 imposed on the insureds a duty to sue and labour. In simple terms, this duty is analogous to a contract party’s duty to mitigate its losses caused by a breach of contract and in the same way, the duty to Sue and Labour requires the insured to make every attempt to reduce the possible exposure to loss.
Insurers argued that, by being side-tracked into discussions with the Navy which involved considerations of a bribe or something similar (which the insureds were ultimately not prepared to do), the insureds had unreasonably protracted Indonesian Court proceedings against the Master and delayed the release of the Vessel.
The Court reiterated the well-established principle that an alleged breach of the duty to sue and labour would only afford insurers a defence where the breach breaks the chain of causation between the insured peril and the loss. This required the insured to act in a way in which no prudent uninsured would have acted; a mere error of judgment or negligence would not suffice. On the facts, there was no breach of the duty – given the uncertain circumstances faced by the insureds, there was no way of their knowing that engaging in discussions with the Navy would “slow things down”, so it could not be said that the insureds had acted in a way that no prudent uninsured would have acted.
Comment
The Court’s policyholder-friendly reading of both the elements of the duty of fair presentation, as well as of the meaning of the “ordinary consequences of an assured’s deliberate and voluntary conduct”, are welcome developments for policyholders. That said, many of the Court’s observations – particularly in relation to the issues of materiality and insurers’ remedies – were obiter, and it remains to be seen if future judgments will follow the lead established here.
Authors
Climate Risks Series - Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
The global rise in climate litigation looks set to continue, with oil and gas companies increasingly accused of causing environmental damage, failing to prevent losses occurring, and improperly managing or disclosing climate risks. Implementation of decarbonisation and climate strategies is subject to scrutiny across all industry sectors, with claims proceeding in many jurisdictions seeking compensation for environmental harm as well as strategic influence over future regulatory, corporate or investment decisions.
Evolving risks associated with rising temperatures have significant implications for the (re)insurance market as commercial policyholders seek to mitigate exposure to physical damage caused by severe weather events; financial loss arising from business interruption; liability claims for environmental pollution, harmful products or ‘greenwashing’; reputational risks; and challenges associated with the transition towards clean energy sources and net zero emissions.
Litigation Trends
Cases in which climate change or its impacts are disputed have been brought by a wide range of claimants, across a broad spectrum of legal actions including nuisance, product liability, negligence, fiduciary duty, human rights and statutory planning regimes. Approximately 75% of cases so far have been commenced in the US, alongside a large number in Australia, the EU and UK.
Science plays a central role and can be critical to determining whether litigants have standing to sue. The emerging field of climate physics allows for quantification of greenhouse gas (“GHG”) emitters’ responsibility, with around 90 private and state-owned entities found to be responsible for approximately two-thirds of global carbon dioxide and methane emissions. Recent advances in scientific attribution may provide evidence for legal causation in claims relating to loss from climate change or severe storms, flooding or drought.
Directors of high-profile companies may be personally targeted in such claims as liable for breach of fiduciary duties to the company or its members, in failing to take action to respond to climate change, or approving policies that contribute to harmful emissions.
Recent Cases
An explosion of ‘climate lawfare’ has kicked off in recent years, with the cases highlighted below indicative of key themes.
Smith v Fonterra [2024]
The New Zealand Supreme Court reinstated claims, struck out by lower courts, allowing the claimant Māori leader with an interest in customary land to proceed with tort claims against seven of the country’s largest GHG emitting corporations, including a novel cause of action involving a duty to cease materially contributing to damage to the climate system. This was an interlocutory application and the refusal to strike out does not mean that the pleaded claims will ultimately succeed on the merits. However, the judgment is significant in demonstrating appellate courts’ willingness to respond to the existential threat of climate change by allowing innovative claims to be advanced and tested through evidence at trials.
R v Surrey County Council [2024]
In a case brought by Sarah Finch fighting the construction of a new oil well in Surrey, the UK Supreme Court (by a 3:2 majority) ruled that authorities must consider downstream GHG emissions created by use of a company’s products, when evaluating planning approvals. The Council’s decision to grant permission to a developer was held to be unlawful because the environmental impact assessment for the project did not include consideration of these “Scope 3” emissions, when it was clear that oil from the wells would be burned.
Verein KlimaSeniorinnen [2024]
An association of over 2,000 older Swiss women complained that authorities had not acted appropriately to develop and implement legislation and measures to mitigate the effects of climate change. The Grand Chamber of the European Court of Human Rights held that Article 8 of the European Convention encompasses a right for individuals to effective protection by state authorities from serious adverse effects of climate change on their life, health and wellbeing. Grand Chamber rulings are final and cannot be appealed: Switzerland is now required to take suitable measures to comply. While not binding on national courts elsewhere, the decision will be influential.
ClientEarth v Shell [2023]
The English High Court dismissed ClientEarth’s attempt to launch a derivative action against the directors of Shell plc in respect of their alleged failure to properly address the risks of climate change, indicating that claims of this nature brought by minority shareholders will face significant challenges. The Court noted that directors (especially those of large multinationals) need to balance a myriad of competing considerations in seeking to promote the success of the company, and courts will be reluctant to interfere with that discretion, making it harder to establish that directors have breached their statutory duties.
US Big Oil lawsuits
Following lengthy disputes over forum, proceedings against oil and gas companies in the US are gaining momentum, paving the way for the claims to be substantively examined in state courts. Many actions against the fossil fuel industry seek to establish that defendants knew the dangers posed by their products and deliberately concealed and misrepresented the facts, akin to deceptive promotion and failure to warn arguments relied upon in other mass tort claims in the US, arising from the supply of tobacco, firearms or opioids.
Implications for Policyholders
With increasing volatility and accumulation risk, insurers will look to mitigate exposures through wordings, exclusions, sub-limits and endorsements. The duty to defend is the first issue for liability insurers, given the number of policyholders affected and the potential sums at stake in indemnity and defence costs.
In 2021, the Lloyd’s Market Association published a model Climate Change Exclusion clause (LMA5570). Property policies exclude gradual deterioration, with express wording or impliedly by the requirement of fortuity, and liability insurance typically excludes claims arising from pollution.
Lawsuits have been filed in the US over insurance coverage for climate harm, including Aloha Petroleum v NUF Insurance Co of Pittsburgh (2022), arising from claims by Honolulu and Maui, and Everest v Gulf Oil (2022), involving energy operations in Connecticut. Policy coverage may depend on whether an “occurrence” or accident has taken place, as opposed to intentional acts or their reasonably anticipated consequences (Steadfast v AES Corp (2011).
Policyholders should review their insurance programmes with the benefit of professional advice to ensure adequate cover for potential property damage, liability exposures and legal defence costs.
In the following instalments of our Climate Risks Series, we will examine the impact of reinsurance schemes and parametric solutions, and coverage for storm and flood-related perils in light of recent claims experience.
Authors
Amy Lacey, Partner
Ayo Babatunde, Associate
Queenie Wong, Associate
Non-damage property cover in political violence insurance: Hamilton Corporate Member Ltd v Afghan Global Insurance Ltd
On 12 June, the Commercial Court handed down judgment in an important case for the political violence insurance market regarding the meaning of “direct physical loss” and also of the seizure exclusion.
Hamilton Corporate Member Ltd v Afghan Global Insurance Ltd [2024] EWHC 1426 (Comm) arose out of the Western withdrawal from Afghanistan and the subsequent assumption of control by the Taliban. In August 2021, Anham, the original insured, lost its warehouse at the Bagram airbase in Afghanistan when it was seized by the Taliban. Anham sought to recover the US$41m loss under its political violence policy which had been issued by an Afghani insurer, which in turn was reinsured by the Claimant reinsurers.
The Exclusion
The reinsurers denied the claim (and sought summary judgment for a declaration of non-liability), relying on the following exclusion:
“Loss or damage directly or indirectly caused by seizure, confiscation, nationalisation, requisition, expropriation, detention, legal or illegal occupation of any property insured hereunder, embargo, condemnation, 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.”
Anham sought to argue that the exclusion was inapplicable, on the grounds that in the context of the exclusion the “seizure” had to be carried out by a governing authority, which could not be said of the Taliban at the material time. However, the court (Calver J) had little difficulty in holding that the exclusion did apply, on the basis that in both settled case law and ordinary language “seizure” means “all acts of taking forcible possession, either by a lawful authority or by overpowering force”. Clearly, the Taliban fell into the latter category. The court also rejected Anham’s submission that it should not reach a decision without first hearing expert evidence as to how the political violence insurance market understood this exclusion.
Direct physical loss
The Judgment also shed light on how the Courts in this context will construe the “physical loss” of property.
The policy contained the following Interest provision:
“In respect of Property Damage only as a result of Direct physical loss of or damage to the interest insured”.
Likewise, Insuring Clause 2 indemnified Anham against “Physical loss or physical damage to the Buildings and Contents”.
Anham submitted that the warehouse had been lost, on the grounds that it had been irretrievably deprived of possession of it because of the Taliban. In making this argument, Anham sought to rely on the definition in the Marine Insurance Act 1906 of constructive total loss (namely, that, where an insured is deprived of his property and there is little chance of recovery, the courts will consider that a constructive total loss). However, Calver J unhesitatingly held that, in the context of a political violence insurance policy, “direct physical loss” meant physical destruction, not mere deprivation of use.
Interestingly, the Judgment did not cite cases such as Moore v Evans [1917] 1 KB 458 (CA) [1918] AC 185 (HL) or Holmes v Payne [1930] 2 KB 301, which held that the word “loss” was not qualified by the word “physical”.
Summary
The Judgment in Hamilton is plainly unhelpful to policyholders insured under the AFB Political Violence wording, which is widely used in the London market. Unless successfully appealed, (re)insurers are likely now to reject any claim based on this wording for loss of property where the hostile forces have not caused any actual damage to the insured interest, notwithstanding that their actions deprived the insured of the use of or access to it.
Authors
Jonathan Corman, Partner and Dru Corfield, Associate
Bellini v Brit: The Court of Appeal serves up a slightly sour COVID-19 decision
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2024] EWCA Civ 435
The Court of Appeal has handed down judgment in a case that will have significant repercussions for business interruption cover and should be on every policyholder and broker’s radar.
Non-damage endorsements commonly supplement the predominantly damage-based cover afforded by business interruption insurance policies. However, as this case demonstrates, care must be taken to ensure that the policy wording reflects the intention for the endorsement to be triggered without the need for actual damage – or the policyholder might find itself without the cover the endorsement appears to provide.
The Background
The case related to the proper interpretation of a ‘Murder, suicide or disease’ extension (the “disease clause”), as set out below:
We shall indemnify you in respect of interruption of or interference with the business caused by damage, as defined in clause 8.1, arising from:
- a) any human infectious or human contagious disease (excluding [AIDS] an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a [25] mile radius of it;
- b) murder or suicide in the premises; […]
Many similar disease clause wordings, giving cover for cases of Covid-19 at the premises or within a certain vicinity, have been the subject of litigation arising out of the pandemic.
The core issue here was, whether on a true construction of the disease clause there could be cover in the absence of damage, as defined in the policy.
At first instance, the court had held that, on the wording of the disease clause, there was no cover without damage. Our article on that decision can be found here.
The Common Ground
It was common ground between the parties that standard business interruption insurance is contingent on physical loss or damage to the insured premises or other property, but that non-damage-based cover is typically available as an extension. Such extensions may take various forms and the FCA Test Case considered a number of examples which did not require physical damage to be triggered.
It was also common ground that there had been no physical loss of or damage to the premises or property used at the premises.
It is also worth noting that it was assumed for the purposes of the preliminary issues trial that the insured was able to establish that Covid-19 was manifested either at the premises or within the 25-mile radius. It was further assumed that the premises were closed by reason of government intervention, and this intervention amounted to "interruption or interference" within the meaning of the disease clause, resulting in financial loss.
The Principles
The principles of contractual interpretation are by now a well-trodden path in recent insurance coverage disputes. The concept of “correction of mistakes by construction” was considered in East v Pantiles (Plant Hire), where the Court found that two conditions must be satisfied: “…first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”
The principles of contractual interpretation in the context of insurance policies were neatly summarised by the Supreme Court in the FCA Test Case: “The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court's task.”
The Arguments
The policyholder argued that the disease clause should be understood as if the words "caused by damage, as defined by clause 8.1" were deleted. The words "in consequence of the damage", according to the policyholder, should instead read as "in consequence of the insured perils set out above at paragraphs (a)-(e) above". It was argued that this was the only way to make sense of the policy, and reflected how the court had interpreted the trends clause in FCA Test Case.
In addition, it argued that the words "damage, as defined in clause 8.1" made no sense on the basis that Damage was not defined in clause 8.1, which simply provided for business interruption coverage subject to certain defined provisos.
The court was invited to rewrite the policy in the most sensible way that accorded with the obvious intention of the parties (i.e. that the disease clause provided non-damage rather than damage cover).
The insurer asserted that such an approach was impermissible. They argued that it did not matter that the disease clause provided only very limited extensions of cover for disease, nor did it matter that it was hard to imagine how liability could ever arise under the disease clause on their interpretation: the parties should be held to their bargain.
The Decision
The Court of Appeal considered the well-established principles and held that it would only be permissible to rewrite the clause if something had gone wrong with the language used.
In circumstances where it was not clear that something had gone wrong, and where the clause was not ambiguous on its face, the court identified the correct approach as one that gave the clause its natural meaning - even where the end result was the provision of only limited, if any, additional cover.
In applying the principles to the facts of the case, the court considered that when objectively viewed, and taking into account the policy in its entirety, it did not provide non-damage business interruption cover as asserted by the policyholder.
The court’s reasoning can be summarised as follows:
- The standard business interruption cover clearly required damage to property. The extensions to the standard cover effectively provided cover for various things caused by physical damage;
- The same phraseology (which stated “Damage, defined in clause 8.1”) was used in most of the other extensions to the standard cover, and the reference was not a mistake, but instead made clear that the damage-based business interruption coverage in clause 8.1 was being extended to the indemnity clauses in clause 8.2;
- The policy must be interpreted as at 20 October 2019 when it incepted, and therefore cannot be interpreted through the telescope of Covid-19; and
- The fact that the disease clause provided limited additional cover does not in and of itself make it absurd. The court acknowledged that insurance policies are often somewhat repetitive and also sometimes clumsily drafted.
Comments
This judgment, while undeniably sound in its reiteration of well-established legal principles, still manages to feel particularly ugly for policyholders.
The disease clause in question, in all other respects, is a typical non-damage endorsement, and in our view should have been read as affording non-damage cover. We do not agree, as the court found, that a “reasonably informed small-business-owning policyholder” would conclude that they had only damage-based cover. Au contraire. Rather, we suggest, they would share the view of court in the FCA Test Case in finding the reference to “damage” inapposite and requiring of a wider interpretation in a non-damage context. Not least where the outcome is that the extent of cover the “extension” actually provides is so limited as to verge on being illusory.
Undoubtedly policyholders are swayed when making purchasing decisions by the idea that some policies are more extensive than others. This appeal serves as an apt reminder to policyholders and brokers that there is a real need to be alive to standard form wordings and extensions, which as this case shows, may not provide the policyholder with anything tangible.
As a parting comment, there is a theme emerging in the reporting of Covid-19 insurance disputes, including this judgment, which we find unpalatable as a concept: namely that where clauses are included automatically and no “additional” premium is paid, the policyholder is getting something it has not paid for. That cannot be right. The insurance market is not in the business in handing out “free” cover, and policyholders are not being provided with extensions free of charge. There has been and always will be a calculation of risk by insurers, for which a policyholder pays a premium and the insurer provides the end product. Free, it is not.
Authors
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
What is unfairly prejudicial conduct entitling a shareholder to relief from the Court – and are such claims indemnified under the company’s D&O Policy?
Successive versions of the Companies Act (most recently Section 994 of the 2006 Act (“CA 2006”)) have provided protection and relief for minority shareholders against unfairly prejudicial conduct of the company’s affairs by majority/controlling shareholders and the board of directors.
However, the petitioning shareholder has the burden of establishing such conduct.
The recent case of Re Cardiff City Football Club (Holdings) Ltd [2022] EWHC 2023 (Ch) (summarised below) emphasises that (i) even if a majority shareholder’s conduct is vindictive, unpleasant or morally unfair, it does not always follow that it will be classed as unfairly prejudicial and (ii) the conduct of a majority shareholder, even if unfairly prejudicial, must be within the affairs of the company itself, and not merely carried out in his or her personal capacity.
Background
Mr Issac was a minority shareholder in Cardiff City Football Club (Holdings Limited) (“the Company”) which is the holding company of Cardiff City Football Club (“the Football Club”). He brought a petition against Vincent Tan and the Football Club on the grounds that Company’s affairs had been conducted in a prejudicial manner. The claim related to an open offer of shares made by the Company following a board resolution in May 2018. Mr Tan was the majority shareholder of the Company who before the offer of shares owned 94.22% of the issued shares. No other shareholders took up the offer of shares. This increased Mr Tan’s shareholding to 98.3% and Mr Issac’s was reduced from 3.97% to 1.18%.
Mr Issac argued that this dilution was prejudicial because the value of his shares was diminished. He argued that the whole offer was arranged by Mr Tan due to his animosity to Mr Issac rather than for any proper commercial purpose. Whilst the Board of Directors approved the offer, Mr Issac contended that it had merely “rubber stamped” Mr Tan’s decision, in breach of Section 173 of the CA 2006, which requires directors to exercise their own independent judgment, and of Section 171 of the CA 2006, which requires an allotment of new shares to be for a proper purpose.
Mr Tan denied these allegations. He argued that he provided consideration for the new shares issued to him by agreeing to write off £67 million which was owed to him by the Company. Therefore, Mr Tan argued there was a good commercial purpose behind the offer - which improved the Company’s balance sheet - and it was not because of any animosity towards Mr Issac. and that the directors had exercised their allotment power for a proper purpose.
Mr Issac sought an order that Mr Tan should buy his shareholding for a fair value. He sought an order for sale on the basis of a 3.97% shareholding as opposed to a 1.18% shareholding.
Decision
In deciding whether there was any unfair prejudice, the Court asked the following three questions:
- Was Mr Tan's conduct the conduct of the Company’s affairs?
- Did the directors act independently?
- Did the directors act for a proper purpose?
Was Mr Tan's conduct the conduct of the Company’s affairs?
The Court answered that question in the negative.
Mr Issac argued that Mr Tan used his position as a majority shareholder to put pressure on the Board to give in to his demands. However, the Court held that this could not be seen as conduct of the Company because these acts were a personal or a private act. The Court cited Re Unisoft Group Ltd (No. 3) [1994] 1 BCLC to distinguish between the acts or conduct of a company and the acts of a shareholder in his private capacity. The Court held Mr Tan was entitled “qua” shareholder and creditor to exert commercial pressure and act in his own interests.
The Court acknowledged that Mr Tan did have personal animosity to Mr Issac, which was part of the reason he made the open offer of shares, and that his conduct was vindictive and unpleasant.
However, the Court held that there was nothing unlawful or unconscionable in Mr Tan's actions, and that what he did was unfair in a moral but not in a legal sense. There was no Shareholders' Agreement, and no provisions in the Articles of Association had been infringed. Accordingly, there was no breach of anything referable to the affairs of the Company.
The mere fact that respondents have caused prejudice to the petitioner does not always mean there has been unfairness. So, where two companies were always run as a single unit in disregard of the constitutional formalities of both of them, but with the acquiescence and knowledge of the petitioners, there was prejudice, but no unfairness (Jesner v Jarrad Properties [1992] BCC 807)
Conversely, conduct by those in control of the company may be unfair and reprehensible but not prejudicial. So, where directors entered into transactions pursuant to which (despite obvious conflicts of interest) they purchased company assets, this was unfair but no section 994 remedy was granted, as the price paid by the directors was not less than the company would have obtained from an arm’s length purchaser (Rock Nominees Limited v RCO (Holdings) Plc (In Liquidation) [2004] 1 BCLC 439 CA).
Did the directors act independently?
The Court held that the directors did act independently. There was a justifiable commercial rationale for what the Board was being asked to do. Board minutes were prepared in advance of the meeting, but there was nothing inherently wrong with that, so long as the Board had the opportunity to take its own view as the meeting developed.
Did the directors act for a proper purpose?
The Court decided that the directors did act for a proper purpose.
The Court cited Howard Smith v Ampol Petroleum [1974] AC 821, which held it would be "too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company".
The allotment of the shares was deemed as being for a proper purpose, namely clearing debt owed to Mr Tan. This would improve the Company's balance sheet and provide greater financial stability.
Therefore, the Court concluded that there was no unfair prejudice.
Impact on D&O Policyholders
Directors’ and Officers’ (D&O) policies will usually respond if there has been a claim made for a wrongful act by a director, provided the director has been acting in that capacity (rather than as a shareholder). The policy will likely provide indemnity or defence costs of any director against such allegations, which is important protection as such costs cannot lawfully be met by the company.
However, in this case, because Mr Tan was held to have been acting in a personal capacity (rather than as a director in the conduct of the Company’s affairs), his costs are unlikely to have been indemnified under the Company’s D&O policy.
Ironically, the very grounds relied upon by Mr Tan and the nature of the Company’s defence would themselves have excluded the right to indemnity for defence costs under the policy, and the directors would have to seek reimbursement of costs from the unsuccessful petitioner.
This case serves as a reminder that personal acts of directors, outside the scope of their directorial duties, cannot be relied upon in claims for minority shareholder relief, and nor will they be indemnified under the company’s D&O policy, if the subject of third-party claims.
Authors
Michael Robin, Partner
Ayo Babatunde, Associate
The End of Days, or Just the Beginning? Current AI use
It’s seemingly the only thing anyone can talk about. It is hard to go to any conference, panel discussion or networking event without someone paying it lip service. And most cyber articles, opinion pieces or business plans contain some nebulous reference to it. Artificial Intelligence (“AI”) is certainly the flavour of the month. But what it is, how is it used and what does it mean for us all? This article will look at the development of AI and hopefully alleviate concerns by demonstrating how it has been part of our everyday lives for some time.
Part of the problem is that most definitions of AI are either too complicated or too broad. One with which most people work is something along the lines of “AI is a computer’s ability to perform the cognitive functions or abilities that we usually associate with the human mind”. This tends to make people think of HAL from 2001: A Space Odyssey or the more recent example of ChatGPT. But AI elements are far more ingrained in our lives than science fiction or Large Language Models. Regardless of how we view AI, it is very much present in our everyday world; whether in the personal space of helping to enable safer online payments, or travelling to work through our smartphones, to offering greater efficiency for businesses and their clients through automation and autonomy.
Although the history of AI can be traced back to 1950 – for example, Alan Turing’s paper entitled ‘Computing Machinery and Intelligence’ [1] – for present purposes it makes sense to start in the late 1970s. The 1950s to mid-1970s were a time of great advancement for AI but (like ordinary computers) they had less impact on everyday lives. The emergence of arcade games in the late 1970s can be viewed as perhaps the earliest widespread societal engagement with AI. Games like Pong, Space Invaders and Pacman may not be what spring to mind when we think of AI, but the way in which the computer responded in real time to the player’s actions can certainly be considered as artificially intelligent gameplay. Similarly, the 1997 defeat of Gary Kasparov, chess world champion, by IBM’s ‘Deep Blue’ AI system has been viewed as a milestone in the history of AI. At the time, there was widespread unease that a computer had defeated one of humanity’s great intellectual champions.
In the grand scheme of things, however, AI in the 20th century was far more widespread in popular culture than in everyday life. After 2001: A Space Odyssey, films like Star Wars, Alien, Blade Runner, The Terminator, RoboCop and The Matrix had great impact in shaping society’s (mis)understanding about AI. The dystopian sci-fi genre of cinema has perhaps been the single biggest contributor to the concern and fear around the technology. Most of the stories in these films centre around the concept of computers ‘taking over’ and subduing humanity. This unhelpfully incepted ideas about the scope and purpose of AI in the popular conscience, despite the fact that the grand narratives were entirely fictitious.
In reality, AI deployment is more nuanced, precise and limited. While the potential of the technology is astounding, the current everyday uses of AI are surprisingly narrow (meaning task-specific) albeit certainly widespread. If you unlock your smartphone with facial recognition, you use AI several times a day. If you have predictive text enabled on texts or emails, you use AI whenever you are drafting. When you use maps on your phone to navigate a car or public transport journey, the real time traffic and transport updates are analysed and evaluated by AI to assess the swiftest route. If you call a service provider and speak to an automated voice – that’s AI. If you engage with a customer chatbot – that’s AI too. If you have social media and engage with suggested posts/videos, the AI algorithms that show the content have prioritised posts based on previous ‘likes’, your location, wider online activity and user demographic. Similarly, if you use Spotify or Apple Music, AI assesses your music taste and playlists and creates a track list in a similar vein.
In business, if your company does not use AI, it is almost certain that one of your service providers does. For example, while London-based law firms are unlikely to develop their own AI software, it is highly likely that their disclosure providers use AI in document review and processing. And in healthcare, it is highly likely your local hospital is using AI, given that NHS Trusts use AI to analyse X-ray images to support radiologists make assessments. AI is also used to assist clinicians with interpreting brain scans. Whenever you fly on a plane, air traffic control systems log your flight data and use it to feed AI systems that aid efficiency in air traffic management. And in the military, AI has been used in autonomous ground vehicles and unmanned drones and it assists in the prevention of cyber warfare. Even the food you eat may have been produced with the assistance of AI, given that sophisticated farms use AI and drones to analyse soil health, crop health and yield potential, thereby applying fertilisers and water more precisely – which optimises resource use and minimises environmental impact. In short, AI has permeated consumer life, healthcare, travel, defence and agriculture in ways that may not have been realised by the man on the Clapham omnibus but are highly unlikely to be reversed.
So AI is here to stay. But it is not omnipotent, and it is not yet omnipresent. It’s been around for far longer than ChatGPT although has had more targeted deployment than people tend to think. And you’re likely using it every day. While we can’t say for sure how the technology will develop, it’s not a future discussion: it’s already happening. AI has almost certainly improved efficiency and ease in your life and hasn’t locked the pod bay doors just yet.
This is the first in a series of articles about AI by Dru Corfield and Dr Joanne Cracknell.
Dru Corfield is an Associate at Fenchurch Law and inaugural committee member of the City of London Law Society’s AI Committee. Fenchurch Law was the first law firm in the UK to focus exclusively on representing policyholders in coverage disputes with their insurers and is top-ranked by both Legal 500 and Chambers.
Dr Joanne Cracknell is a Director in the Legal Services PI Team, Global FINEX, WTW. E: joanne.cracknell@wtwco.com W: https://www.wtwco.com/en-gb/solutions/services/legal-services-practice
WTW (Willis Towers Watson) is a global insurance broker, multidisciplinary consultancy, and risk advisor with a mission to empower companies amidst rapid change
[1] Source: Turing, Alan M. (1950). Computing machinery and intelligence. Mind 59 (October): 433-60.
Slowly but surely: policyholders make progress in their fight to recover Covid-19 BI losses from insurers
Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE [2024] EWHC 83 (Comm)
Introduction
Judgment has now been handed down following an eight-day preliminary issues hearing in October/November 2023 at which a number of different businesses, from a variety of industries, including bowling alleys, theatres, hotels, pubs, retail stores and a race course, sought to advance claims against their insurers for recovery of their COVID-19 losses.
It is the latest judicial consideration of prevention of access/non-damage denial of access wordings following: (i) the Divisional Court judgment in the FCA test case, which found that prevention of access/non-damage denial of access type wordings did not respond (a point that was not on appeal to the Supreme Court, and therefore did not benefit from a fresh look at the correct causation analysis); and (ii) Corbin & King, where further consideration of these types of wording found that there was cover based on the Supreme Court causation analysis and other factors.
The majority of the policyholders were insured by Liberty Mutual Insurance Europe (“LMIE”), as either the lead or sole insurer. There were a number of LMIE wordings and policy arrangements for the court to consider, albeit with very similar issues. Another case against Allianz Insurance Plc (“Allianz”) was heard alongside the LMIE group of claims, on a different wording, but again with similar coverage issues for determination.
In broad terms, the key preliminary issues that the court was asked to consider fell into the following categories:
- Trigger & Causation
- Limits
- Furlough
Not all issues were live in each of the claims. A full list of the answers to all preliminary issues can be seen in section H of the judgment.
Fenchurch Law acted for Hollywood Bowl and International Entertainment Holdings.
Trigger & Causation
LMIE’s starting position on causation was that Corbin & King was wrongly decided, and instead the correct analysis was that of the Divisional Court in the FCA Test Case. However, insurers ultimately accepted prior to the hearing that they would not be successful on this point at first instance, and instead were granted permission to appeal at a later date.
Despite declarations made both by the Divisional Court and the Supreme Court in the FCA test case, and then debated again in Corbin & King, insurers ran a number of arguments including that “statutory authority” assumed a peril which concerned restrictions imposed by bodies such as the police, or other bodies with authority from or created by statute, i.e. bodies with a local remit.
The court disagreed on all counts, and held that the actions taken by government were the “paradigm example” of action by a “Statutory Authority”. The judge agreed with policyholders that there was cover for interferences that resulted from the action of any person, body or entity which has lawful authority derived from statute or statutory instrument. It was also sufficient that person or body responsible for the relevant interference was exercising authority which was derived from statute.
In respect of the Allianz wording, the court found that a case or cases of Covid-19 did not amount to an “incident” within the meaning of an “incident likely to endanger human life” (notwithstanding the court also accepting that a case or cases of Covid-19 was likely to endanger human life). Furthermore, the term “policing authority” did not encompass the central government or Secretary of State for Health and Social Care, the court found that it instead refers to the police or other bodies whose function it was to ensure that the law is obeyed and enforced.
Limits
On the LMIE wordings the policyholders argued that the sub-limits applied on a per restriction and per premises basis, or alternatively, that it applied to any one occurrence. Insurers argued that sub-limit was an aggregate limit applicable to all claims under the relevant clause, irrespective of the number of separate restrictions, and regardless of the policies being composite or not.
The court’s findings were broadly as follows:
- The policies provided cover on a per occurrence basis (i.e. each occurrence was subject to the relevant sub-limit), with no annual aggregate limit for claims under the relevant clause;
- Relying on Corbin & King, the policyholders with composite polices (a policy which records the interest of a number of different companies or insureds in a single document, but with the effect that there was separate contract of insurance between the insurer and each policyholder) were not subject to an aggregate limit that applied across all insureds. Moreover, there was a sub-limit per policyholder company, per occurrence; and
- Despite the use of “limit” instead of the defined term “limit of indemnity”, which appeared elsewhere within the policy wording, the court considered there was no material distinction between the two. As a result, the single policyholders with multiple premises could not recover on a per premises basis, but instead per occurrence aggregation with no annual aggregate limit.
The Allianz wording, despite not extending to the central government’s response to the Covid-19 pandemic, was found to apply to each company (it was already agreed that there was a composite policy on these particular facts). Furthermore, in circumstances when multiple premises were owned by one insured, there was no basis to treat individual premises as one unit based on the terminology “interference with the Business”, or elsewhere in the relevant wording. Accordingly, the sub-limit applied to “any one claim”, and therefore potentially multiple premises, subject to proving an “incident” within the relevant radius of each of the premises.
Furlough
The issue of furlough was previously considered by the court in Stonegate v MS Amlin & Ors, where it was held that furlough payments were to be taken into account under a savings clause that provided for the reduction of costs normally payable out of turnover that ceased or were reduced as a result of the covered event.
Despite detailed submissions, the court reached the same view on the basis that the issue before it was the same as that considered in Stonegate, a number of the points made had already been rejected, and it was therefore appropriate to follow the decision. In respect of arguments made on causation, the court agreed with insurers that furlough could not be regarded as wholly separate and divorced from the restrictions which were introduced in consequence of the widespread prevalence of COVID-19, which happened prior to the introduction of the CJRS scheme. Furthermore, it was not appropriate to take a different (and stricter) approach on causation in the context of the savings clause than in the context of the insured peril - there was a sufficient proximate causal connection between the insured peril and furlough payments that reduced the wage costs of a business.
What does it mean and what happens next?
This most recent Covid-19 judgment is welcome news for policyholders, again reaffirming the decision in Corbin & King v Axa. However, as noted above, insurers have been granted permission to appeal on causation and we expect that those with wordings affected by this issue will be forced to await the outcome of that appeal, despite now having a number of significant authorities supporting their claims.
In the addition to insurers being granted permission to appeal on causation, policyholders were granted permission to appeal the decision on furlough, which remains of particular importance to the wider insurance market. Hopefully a decision at appellate level will provide the market with closure on a point that sometimes feels almost political – did the government really intend for shareholders of large insurers to benefit from taxpayers’ money?
All other grounds of appeal were refused by the first instance judge, meaning that the parties will have to seek permission directly from the court of appeal. More to come on that as matters progress.
The judgment confirmed a “per occurrence” based recovery for those on the LMIE wordings, with the issue of identifying the relevant occurrences to be determined at a later date. However, as a starter for ten, we anticipate that restrictions such as the nationwide lockdowns and local lockdowns will be the obvious first candidates.
Importantly, the recent judgment will come as particularly welcome news to those with composite polices, who in the absence of specific wording to the contrary should continue to pursue claims for each insured entity, and also multiple premises in certain circumstances.
Authors
Anthony McGeough, Senior Associate
Condonation and Aggregation - Decision by the Court of Appeal in Axis Specialty Europe S.E v Discovery Land [2024] EWCA Civ 7
This is the first Court of Appeal decision as to the meaning of “condoning” dishonest acts under the SRA Minimum Terms. As a reminder, solicitors’ professional indemnity policies must comply with the Minimum Terms. Under those terms insurers can decline to cover a claim which arises from dishonesty only if it had been committed or condoned by all partners in the firm.
The dispute concerned two fraudulent acts perpetrated against the claimants by their solicitor, Mr Stephen Jones, who was the senior partner in a two-partner firm. The other partner was a Mr Prentice. The firm became insolvent, and the claimants pursued two claims against the firm’s insurers, Axis, pursuant to the Third Parties (Rights against Insurers) Act 2010.
AXIS denied cover on the basis that the second partner, Mr Prentice, had condoned Mr Jones’ dishonesty (through “blind eye” knowledge), therefore engaging the exclusion considered below. While the Trial Judge found that Mr Prentice’s standards fell well below those required in his profession, he nevertheless concluded that Mr Prentice had not condoned the relevant fraudulent acts. Consequently, the claimants were entitled to be indemnified.
The appeal concerned Axis’ challenge to (1) the Judge’s finding of fact that Mr Prentice had not condoned Mr Jones’ dishonest behaviour and (2) the Judge’s decision that Axis was not entitled to rely on the aggregation clause.
Condonation
The exclusion in Axis’ policy was in the following terms:
"EXCLUSIONS
The insurer shall have no liability for: …
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly out of or in any way involving dishonest or fraudulent acts, errors or omissions 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, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of the company or in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
There was an argument as to what clause 2.8 requires to be “condoned”. The Court of Appeal agreed with the Trial Judge that the clause is wide enough to include condonation of a pattern of dishonest behaviour of the same type as that which gives rise to the claim. As a result, the question would be “whether or not knowledge and acceptance or approval of other acts in the same pattern amount to condonation of the act or acts which gave rise to the claim.”
For example, where partner B condoned the regular use of client funds by partner A for his/her own purpose, the Court of Appeal considered it would be more difficult for partner B to argue that he was unaware of “the specific instances of such behaviour which gave rise to the claim.”
In this case, the Court of Appeal acknowledged that, while the Trial Judge found that Mr Prentice’s evidence contained both truth and untruth, his evaluation of the evidence and ultimate decision was entirely “rational” and one he was entitled to reach.
Aggregation
The Court of Appeal had to consider whether the two claims arose from “similar acts or omissions in a series of related matters or transactions.” To do so, it applied the test for aggregation considered by the Supreme Court in AIG v Woodman.
Teare J (at first instance) found that the degree of similarity must be “real or substantial.” As to whether the claims were “related”, Lord Toulson found that this required that they “fitted together.” In considering this, the Court of Appeal in Discovery Land commented that assessing “a real or substantial” similarity requires a careful consideration of the “substance of each claim.”
Here, whilst the same property was involved and the victims were affiliated companies, the Court of Appeal considered these factors to be “insufficient to provide the necessary link between the two transactions.” The Judge’s decision not to aggregate the claims was upheld.
In determining both issues, the Court of Appeal commented that a thorough factual analysis of the evidence was required, which is what it accepted the Trial Judge had indeed carried out in “painstaking” detail. While each case turns on its own facts, this decision provides a helpful guide at Appellate level as to how a court should approach issues of condonation and aggregation.
Authors
Jessica Chappell, Senior Associate