First decision on s11 Insurance Act (causation test for breach of warranty)
Ever since the introduction of the Insurance Act 2015, there has been debate about how causation works in the context of section 11 and in particular the provision in sub-section 11(3) whereby the policyholder is excused from the usual consequences of a breach of warranty if it can show that its “non-compliance with the [warranty] could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”
Policyholders had thus argued, despite the Law Commission having said this was not what it had intended, that this introduced a strict causation test. For example, where the policyholder had warranted that it had a burglar alarm but it failed to set it, it would (it argued) be open to it to show that this particular burglary was undertaken by thieves so sophisticated that setting the alarm would have made no difference - even if setting the alarm would decrease the risk of burglary in general.
Likewise, a policyholder would wish to argue that, on the actual facts of its loss, a warranty had been breached in only a minor respect, which made no difference, even if a more serious non-compliance would unquestionably have affected the likelihood of that particular loss.
This argument has now been considered, and rejected, by Mrs Justice Dias in her decision on 26 July in Mok Petro v Argo. This was a highly complex case concerning contaminated commodities, and the breach of warranty issue features only briefly at the end of the judgment. On that issue, the Judge said as follows:
“There is nothing in the wording of the section to suggest that where a term can be breached in more than one way, it is only the particular breach which must be looked at. On the contrary, it seems to me that section 11 is directed at the effect of compliance with the entire term and not with the consequences of the specific breach. … I therefore conclude that [Counsel for the Insurers] is right about this. There was no serious dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination … and that therefore non-compliance could have increased the risk of the loss which actually occurred.”
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Comm/2024/1555.pdf
Jonathan Corman is a Partner at Fenchurch Law.
"Top Down" still top law: RSA & Ors v Textainer
In the recent decision of Royal & Sun Alliance & Ors v Textainer Group Holdings Limited & Ors [2024] EWCA Civ 542, the Court of Appeal rejected an attempt by Insurers to avoid the application of the (seemingly) well-established “top down” principle to the allocation of recoveries.
Background
The (much simplified) background was as follows.
Textainer is one of the largest owners/suppliers of shipping containers.
In 2016, approximately 113,000 of its containers were on lease to a Korean company, Hanjin Shipping Co Limited (“Hanjin”). Hanjin became insolvent, and Textainer incurred a significant loss, partly in relation to containers which were never recovered and partly in relation to the cost of retrieving/repairing the others, as well as lost rental income.
Textainer had a “container lessee default” insurance programme, written in layers up to (for present purposes) $75 million, with a $5m retention. Textainer’s overall loss, as a result of Hanjin’s default, was approximately $100m. It absorbed the first $5m through its retention, and its primary and excess layer insurers (“Insurers”) paid out policy limits amounting to $75m, leaving an uninsured loss of $20m.
Textainer subsequently recovered approximately $15m in Hanjin’s liquidation.
Under ordinary “top down” principles, all of that recovery would have inured to Textainer. Insurers nevertheless claimed that they were entitled to a proportionate element of it (amounting, on the above figures, to approximately 75%).
The top down principle, and Insurers’ attempt to circumvent it
The top down approach to the allocation of recoveries was established by the House of Lords’ decision in Lord Napier and Ettrick v Hunter[1993] AC 713. It equates to assuming that the recoveries are made simultaneously with the loss and then considering how the net loss would be borne (ie, first by the retention/deductible, then by the primary layer, then carrying up the excess layers, and finally to the uninsured element).
Insurers argued that the policies in the present case were distinguishable from the stop loss policies considered in Napier. The stop loss policies, they argued, applied to a single (or "unitary") financial loss for a specified period of underwriting by the name. In contrast, the container lessee default policies did not (they argued) insure a unitary loss, but “covered the physical loss of or damage to individual containers and related costs/loss of earnings as and when those losses were incurred, eroding first the retention, then the layers of cover, one by one”.
Insurers argued that there was a fundamental distinction between the case of a single or unitary loss (as considered in Napier) and that of multiple losses, such as the present case. They argued that, although in the former case subsequent recoveries would reduce that single loss top down, where there were “multiple losses of different items of property at different times, recoveries in respect of those specific items not only could but must be allocated to the insurer who had indemnified against their loss”.
However, those arguments were at odds with the decision by Langley J in Kuwait Airways Corporation v Kuwait Insurance Co S.A.K [2000] 1 Lloyd’s Rep 252 (“Kuwait Airways”).
Kuwait Airways
In that case, the policyholder, Kuwait Airways (“KAC”), had lost 15 aircraft when they were seized Iraqi forces during the 1990 invasion of Kuwait. The relevant aviation insurers paid KAC the policy limits of $300m, leaving it with $392m of uninsured losses.
Subsequently, 8 of the aircraft, valued at c $395m, were recovered. Under conventional top down principles, that recovery would have inured to KAC, leaving its residual loss covered by the insurance payout.
The aviation insurers nevertheless attempted to have the value of the recovered aircrafts apportioned pro rata between them and KAC, on the supposed basis that “each aircraft loss was a separate loss, exemplified by the fact that each had its own agreed value in the policy, the premium was based on that value and…the payment made of $300m was in effect a payment of 300/692 of the agreed value of each aircraft”.
Langley J rejected that argument. He held that there could not be:
“… any justification for “disaggregating” recoveries where there is an aggregate limit to the indemnity. Moreover the aggregate limit (in the case of one occurrence) applied regardless of the number of aircraft lost…whether or not there were a number of losses or only one loss (there was certainly only occurrence) is my judgment nothing to the point…”.
He also held that:
“… that conclusion accords with commercial good sense. Had KAC lost only the 7 aircraft which were in fact destroyed, its insurers would unarguably have had to pay up to the limit of the indemnity without any recovery. It would be remarkable if the policy was to be so construed that, because KAC lost those 7 aircraft but also 8 others which were later recovered intact, insurers became entitled to a credit for proportion of the value of the aircraft recovered”.
Faced with those comments, which seemed to apply so closely to the present case, Insurers were compelled to submit that Kuwaiti Airwayscould be distinguished or, failing that, was wrongly decided.
The Court of Appeal’s decision
Insurers had lost in the Commercial Court in front of David Railton KC, sitting as a Deputy Judge, and were no more successful when they appealed to the Court of Appeal.
The Court of Appeal’s judgment was given by Phillips LJ, with Arnold & Falk LJJ concurring.
The Court of Appeal agreed with the Deputy Judge that the true nature of Textainer’s insurance was cover “against particular layers of loss” and that, if recoveries were not applied top down but proportionately to the insured layers as well as to the uninsured losses, Textainer would not receive the extent of the indemnity for which it had contracted. Moreover, Textainer would, if Insurers were correct, have been in a worse position than if the recoveries had been achieved before Insurers had paid out. By contrast, Dillon LJ, in the Court of Appeal in Napier, was clear that the outcome should be the same “whether the underwriters have or have not already paid the amount for which they are liable for the time the recovery is achieved”.
In short, the Court of Appeal agreed with Textainer that the reality was that the insurance was not provided in relation to individual containers, most of which, if lost, would eventually be recovered, but that “the real subject of the insurance is the multiple strands of lost rental, costs and expenses which will be ongoing and intertwined…”
Accordingly Insurers’ challenge to the top down principle failed.
Other issues
The Court of Appeal’s judgment covered two other issues.
(a) Which losses were paid by whom?
This was a factual issue. Some of Textainer’s containers had been leased to Hanjin on operating leases and some on finance leases. However, the settlement by the liquidator only applied to the containers supplied on operating leases.
This required Insurers to show (assuming their challenge to the top down principle had succeeded) precisely which containers they had indemnified and which formed part of Textainer’s uninsured loss. Only then could one allocate the recovery.
Insurers argued that there should be a “pragmatic assumption” that the losses in respect of finance leases would have occurred at the same time as, or at least in proportion to, losses in respect of operating leases, so that there was nothing to stop a pro rataapportionment of the recovery between insured and uninsured losses.
The Court of Appeal rejected that approach. It said it had been open to Insurers to adduce evidence on this issue and that, having failed to do so, they could not resort to an assumption.
(b) Under-insurance
Finally, Insurers sought belatedly to argue that, because there had been an element of uninsured loss, this indicated that Textainer had been under-insured and that its loss should be reduced by the application of average.
That argument failed. Phillips LJ held the concept of under-valuation or under-insurance has no relevance to insurance written in layers. Unlike a single policy insuring (say) a ship, where under-insurance exposes the insurer to the same risk (up to the limit of cover) but the premium has been unfairly supressed, where cover is written in layers, the cover by definition matches precisely the value of the risk which the insurer has accepted.
Conclusion
It is gratifying that Insurers’ attempt to circumvent the top down principle was so robustly rejected by the Court of Appeal. Likewise, its clarification that under-insurance and average have no relevance to insurance written in layers will also be welcomed by policyholders.
Insurance for fees claims: RSA & Ors v Tughans
Introduction
This Court of Appeal decision, in which our firm represented the successful respondents, considered the scope of a professional indemnity policy written on a full “civil liability” basis. Will such a policy respond to a claim against a firm (in this case, a firm of Solicitors) for damages referable to its fee, for which the firm had performed the contractually agreed work, but where the fee was only paid by the client following a misrepresentation by the firm?
That was the issue in Royal and Sun Alliance Insurance Limited & Ors v Tughans (a firm) [2023] EWCA Civ 999 (31 August 2023), although it is important to stress that the Court of Appeal hearing, like the Commercial Court before it, proceeded on the assumption that there had in fact been a misrepresentation. Whether that was or was not the case remains to be determined in the underlying proceedings against the Solicitors.
The underling facts of the case were complex, but the appellant Insurers’ argument was summarised by the Court of Appeal as follows:
“Because the fee was procured by misrepresentation, Tughans had no right to retain it; and if it was obliged to return it, as part of a damages claim, it had not lost something to which as a matter of substance it was entitled, just as much as if the contract were avoided and it was obliged to return it or its value in a restitutionary claim… Tughans had not suffered a loss in the amount of the fee, and cover for that element of a damages claim would violate the indemnity principle.”
That argument failed at first instance before Foxton J, and failed again in the Court of Appeal.
The indemnity principle
At the heart of Insurers’ argument was reliance on the indemnity principle, the principle that a policy of indemnity insurance (as distinct from contingency insurance) will only indemnify an insured’s actual loss, and no more than that. The Court of Appeal held that Insurers’ reliance on the indemnity principle here was misplaced, for a number of reasons.
First, a professional who has done the contractually agreed work, and has earned the contractually agreed fee, does suffer a loss if he is ordered to return the fee because the retainer had been procured by a misrepresentation.
Secondly, the Insurers’ argument was inconsistent with the public interest in there being compulsory PI cover for certain professionals, so that, if a firm and its partners were not good for the money, a client would be unprotected where its damages claim included the fee which it had paid.
Thirdly, the implication of the Insurers’ argument would leave uninsured those partners, and potentially also those employees, who had no involvement with the misrepresentation and/or who had not benefited in any way from the fee.
Restitutionary claims
In RSA v Tughans, the underlying claim was one for damages, albeit damages calculated by reference to the fee which the client had paid. The Insurers argued that, since a claim framed in restitution would certainly not (they said) be covered, the same must be true of an analogous damages claim.
The Court of Appeal was unpersuaded. First, a damages claim is different from a restitutionary one. In any case, the Court of Appeal held that not only would a professional indemnity policy cover a restitutionary claim in respect of a fee which had been earned, it might in some circumstances also cover a fee which had not been earned. Thus, said Popplewell LJ, if a professional “… receives money on account of fees, and an employee steals them from the client account, or negligently transfers them to a third party, before the work is done to earn the fee, a claim by the client for the money, advanced as a restitutionary claim, would seem to me to give rise to a liability which constitutes a loss; and would, moreover, appear to fall squarely within the intended scope of PII cover, and be a necessary part of cover if the PII policy is to fulfil the public protection function of a compulsory insurance scheme”.
Conclusion
This is a very welcome decision for professional firms facing claims which extend to the fees which they have received and where previously PI insurers would have inevitably asserted that their policy would not cover such a claim.
Jonathan Corman is a partner at Fenchurch Law
“Condoning dishonesty”: Discovery Land Co LLC & Ors v Axis Specialty Europe SE
Those dealing with Solicitors’ professional indemnity claims will know that the SRA Minimum Terms are intended to provide very wide cover, and will indemnify claims involving dishonesty unless the dishonest act/omission in question was committed or condoned by all the partners in the firm or by all the members of an LLP.
What is meant in this context by “condoning” was considered in the recent case of Discovery Land Co LLC & Ors v Axis Specialty Europe SE [2023] EWHC 779 (Comm), a decision by Robin Knowles J.
The Claimants were the victims of two multi-million pound frauds carried out by Mr J, a solicitor, who was a Member of Jirehouse Partners LLP and a director of two related legal practices, Jirehouse and Jirehouse Trustees Ltd (collectively, “Jirehouse”). A second person, Mr P, was likewise a member/director of the relevant entities.
Mr P hadn’t been involved with the two frauds - indeed, he resigned shortly after discovering them - but Jirehouse’s professional indemnity insurer (Axis) sought to decline indemnity by arguing that he had nevertheless condoned them.
Axis’s policy provided that
"EXCLUSIONS
The insurer shall have no liability under the policy for:
…
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly arising 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 that company or, in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
The court accepted that in this context to “condone” was an ordinary word meaning to convey acceptance or approval, and in some situations it does not require an overt act.
Axis’s case was that the frauds formed part of a longstanding pattern of dishonest behaviour on the part of Mr J, involving the temporary - but still unquestionably prohibited - practice of using client monies to address temporary cashflow problems, and various other dishonest acts, and that Mr P had been aware of or had turned a blind eye to that pattern.
Seemingly supportive of that argument were cases such as Zurich Professional Ltd v Karim [2006] EWHC 3355 (QB) and Goldsmith Williams v Travelers Insurance Co Ltd [2010] EWHC 26 (QB), where it had been held it was sufficient for two partners to have condoned the dishonesty of a third partner (the actual fraudster) when they were aware a persistent course of dishonesty by that partner, even if they weren’t aware of the actual act of fraud which had given rise to the claim.
However, that type of argument failed in this case. Robin Knowles J held that Mr P needed to have condoned the acts through which the two frauds by Mr J had been committed, and that simply condoning the occasions on which Mr J had illicitly “borrowed” client monies or his various other dishonest improprieties wasn’t sufficient.
Robin Knowles J’s assessment of Mr P was as follows:
“In my judgment the true story of this case is that [Mr P’s] standards fell well below those required in his profession. Indeed there are episodes that show he was untrustworthy and prepared to behave dishonestly. But these episodes were not such as to justify a conclusion that he in any way appreciated that [Mr J] could be embarked on multi-million pound fraud, extracting client monies in connection with the commercial entities with which he was involved. [Mr P] did not condone, either generally or specifically in relation to the two claims, what AXIS described in closing as a Ponzi scheme by [Mr J] …”
Robin Knowles J felt able to distinguish the two previous authorities mentioned above on this basis:
“…in Karim the Court accepted that the two condoning partners knew that flows of money out of the firm to themselves could not come legitimately from the income of the firm. In Goldsmith Williams, the Court found that, before the relevant transactions, the condoning partner engaged in mortgage fraud in her own right and knew that her partner did. There are not true parallels between those facts and the facts of the present case.”
Perhaps a more valid point of distinction was that, as the Judge noted in passing, the wording of the policy in this case was subtly different to the Minimum Terms considered in the two earlier cases. Those cases had required an assessment of whether the “dishonesty [of] or [the] fraudulent act or omission [by]” the fraudulent partner had been condoned by the other partner(s). In the present case, the wording of Axis’s policy had been replaced with a reference to the “dishonest or fraudulent acts, errors or omissions” committed by the fraudulent partner. Accordingly, condoning a general pattern of dishonesty was plainly not enough: the other partner must have condoned some specific dishonest acts or omission with which the claim in question was directly or indirectly involved.
The full judgment can be found here:
https://www.bailii.org/ew/cases/EWHC/Comm/2023/779.html
Jonathan Corman is a Partner at Fenchurch Law
Latest aggregation decision
In what will be a relief both to the victims of dishonest solicitor Linda Box (pictured, and christened by the press the "Gangsta Granny") and to her innocent partners in the former firm of Dixon Coles & Gill, the Court of Appeal handed down judgment today (06.08.21) in this important decision for those involved with solicitors' professional indemnity disputes. The Court of Appeal dismissed the insurer's appeal and instead confirmed the decision below that the various claims, emanating from Mrs Box's numerous thefts from numerous clients, did not arise from "one series of related acts and omissions" and thus did not aggregate. In short, the Court of Appeal held that each client's claim arose from the specific thefts which it had suffered, rather than all of the different clients' claims having arisen from the totality of the thefts. Put another way, a theft from client A did not cause client B's loss and vice-versa.
Adding salt to the insurer's wounds, the Court of Appeal did identify (at para. 82 of its judgment) an ingenious argument which might have worked in the insurer's favour, or at the very least have enabled it to survive what was an application for summary judgment and instead have the argument tested at a trial. However, the argument had formed no part of the insurer's submissions and the Court of Appeal held it was too late for it to be pursued.
The full judgment is here: https://www.bailii.org/ew/cases/EWCA/Civ/2021/1211.html
Jonathan Corman is a partner at Fenchurch Law
Webinar - Waiver, RORs, and “Prudent Uninsureds”: what do they mean?
Agenda
Jonathan Corman, a partner at Fenchurch Law, presented a webinar on 25 February on the above topic.
By reference to an actual case study, the webinar covered:
• when and why insurers reserve their rights;
• the difference between “waiver” and “estoppel”, and why it matters;
• what the policyholder and broker can do when faced with an ROR;
• the effect of an ROR on claim conditions; and
• the implications of a policyholder being told to act as a “prudent uninsured”.
Aggregation decisions - a bit like buses...
Hot on the heels of the High Court's decision last month that numerous defalcations by a dishonest solicitor could not be aggregated (see my post on that at https://lnkd.in/dkN2UY2) comes a further High Court judgment on 10 December 2020, again ruling against aggregation, in Spire Healthcare Ltd v RSA
The dispute arose out of the activities of the rogue surgeon, Ian Paterson, who was ultimately jailed for 15 years (increased to 20 years on appeal) for carrying out unnecessary mastectomies. As well as being a Consultant Breast Surgeon in the NHS, he also maintained a lucrative private practice, working at two Spire hospitals, and it was there that he performed numerous mastectomies on patients whom he had falsely told had breast cancer.
In fact, there were two strands to Mr Paterson's wrongdoing:
First, he had, as described, carried out unnecessary surgery on healthy patients ("over-treating"). It is almost certain that his motive here was financial.
Secondly, he had - in both his NHS practice and his private work - performed partial rather than full mastectomies ("under-treating") on patients who did have breast cancer, thereby exposing them without their consent to the risk of the cancer returning, having adopted this forbidden procedure either to save time or because the result was considered aesthetically preferable.
About 750 of Mr Paterson's victims sued Spire, either for "over-treating" or "under-treating" (and, in a few cases, for both). The claims cost Spire a total of £37m in damages, claimants' costs and defence costs.
Spire was insured for those claims under a policy written by RSA, with a limit of £10m for all claims "...consequent on or attributable to one source or original cause...".
RSA argued that all the claims were "caused" by Mr Paterson and/or to his propensity to negligence or dishonesty. That argument failed, the court (HH Judge Pelling QC, sitting as a Judge of the High Court) instead agreeing with Spire that the cause of the over-treating claims was entirely distinct from the cause of the under-treating claims. In paragraphs 24 & 25 of the judgment, Judge Pelling QC spelt this out:
"If the result was not as I have summarised it, then there would be no effective causative link between what is contended to be the originating cause and the loss in each case that it was sought to aggregate nor would what is alleged to be the originating cause explain adequately or at all why the negligent act or omission leading to the claims had occurred. A hypothetical example may help to explain the point. An orthopaedic surgeon performs both knee replacement and hip replacement procedures. He operates under a mis-appreciation as to the manner in which hip replacements are to be carried out which constitutes negligence applying established principles resulting in multiple claims by patients on whom he performed hip replacement surgery. At the same time in relation to his knee replacement practice he operates under another and different mis-appreciation relevant exclusively to knee replacement surgery which constitutes negligence applying established principles resulting in multiple claims by patients on whom he performed knee replacement surgery. In my judgment each mis-appreciation would constitute a separate originating cause unless for example it could be said that the existence of the mis-appreciations was for example the result of the Insured's failure properly to train the individual concerned.
Characterising the originating or original cause as "… negligent and inappropriate clinical care …" or, alternatively, as deliberate misconduct does not assist because in the hypothetical example set out above, the cause of the negligent hip replacement surgery whilst causative of all the hip claims was not in any sense causative of the knee claims and vice versa. Submitting as [RSA] does that in this case it is a statement of the obvious that all the claims were the result of Mr Paterson and his conduct ignores the need to search for an effective original cause of all the losses it is sought to aggregate..."
The result, in financial terms, was that Spire was entitled to £20m, and not just £10m, from RSA.
It is far too soon to know whether RSA will try to appeal. But my own view (famous last words...) was that this decision - like its predecessor last month - was entirely correct.
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Comm/2020/3299.html
Jonathan Corman is a partner at Fenchurch Law.
Court declines to re-write existing EL insurance law
Komives v Hick Lane Bedding Ltd & Anor [2020] EWHC 3288 (QB)
This recent High Court decision was on any view a sad case, although the Court appears to have been mindful of the adage that “hard cases make bad law”.
The Claimants were two Hungarian nationals, who had been trafficked to the UK and who then worked for the First Defendant, Hick Lane Bedding Limited (“the Company”), in conditions of modern slavery. Both Claimants suffered psychiatric injuries, and one of them had also suffered a severe accident at work.
The Company went into administration in 2015; and its managing director was sentenced to prison for conspiracy to traffic individuals into the UK with intent to exploit them.
The Company’s employers’ liability insurer at the relevant time was the Second Defendant, AmTrust Europe Limited (“AmTrust”). AmTrust had written the Company's EL policy based, it appears, on relatively limited information, but it had been provided with a glowing survey as to the Company’s working practices.
The Claimants issued proceedings for their injuries against both the Company and AmTrust. AmTrust responded by avoiding the policy - a fairly predictable stance, one might have thought, in light of the Company’s clear non-disclosure of its criminal conduct.
The Claimants’ Counsel, instructed by the Anti-Trafficking and Exploitation Unit, nevertheless sought to challenge AmTrust’s avoidance, on various grounds:
- The Claimants argued that, by writing the policy based on relatively scant information, AmTrust had turned a blind eye to the possibility of the Company’s criminal conduct, or alternatively was not allowed to take this point against the victims of that conduct.
- The legislative scheme, represented by the Employers’ Liability (Compulsory Insurance) Act 1969 and the similarly entitled 1998 Regulations, which restrict which conditions/warranties can be contained in an EL policy, were intended to protect employees like the Claimants and to ensure that insurance was available. Coupled with Rule 8.1.1 of ICOBS, which states that an insurer must “not unreasonably reject a claim (including by terminating or avoiding a policy)”, it followed, submitted the Claimants, that AmTrust’s avoidance was unreasonable.
- The Claimants’ underwriting expert, Mr Flaxman, accepted that, had its involvement with modern slavery been known, the Company would have been “uninsurable” and that, in the scale of non-disclosures or misrepresentations, the Company’s non-disclosure “couldn’t get much worse”. He nevertheless gave evidence that, as a matter of “market practice”, AmTrust should have paid the claims.
The Court rejected these submissions. While understandably sympathetic to the Claimants’ position, the Court predictably recognised that the scheme to mandate insurance for employees was nothing like that afforded to the victims of road accidents, where the Road Traffic Act 1988 severely restricts an insurer’s ability to avoid a motor policy for breach of the duty of fair presentation. The Court concluded that the present framework of EL insurance may well produce very unsatisfactory results, but that it was for Parliament, and not the courts, to put that right.
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/QB/2020/3288.html
Jonathan Corman is a partner at Fenchurch Law
Reinstatement re-stated
In its recent judgment in Endurance Corporate Capital v Sartex (05/03/20), the Court of Appeal confirmed that, absent any contractual provision to the contrary, the appropriate basis of indemnity in a property policy is the reinstatement basis - ie, the cost of repairing/replacing the damaged/destroyed building. The only exception is is where, at the time of the loss, the policyholder had been planning to sell the building, rather than continuing to use it.
The Court of Appeal rejected the Insurer’s case that, in order to be entitled to the cost of reinstatement (rather than merely the decrease in market value, where that was lower), the policyholder needed either to have already carried out the reinstatement itself or at least - as per Great Lakes v Western Trading (CoA, 11/10/16) - to have held a “fixed and settled intention” to do so. In a blow to property insurers, the Court of Appeal ruled that this requirement only applied in the very rare situation where the flood, fire, etc had increased the value of the building - as had occurred in the Great Lakes case (see https://www.fenchurchlaw.co.uk/ordinary-measure-indemnity-great-lakes-reinsurance-uk-se-v-western-trading-limited/).
In a further blow to property insurers, the Court of Appeal held that they cannot apply a blanket percentage discount (in practice, often as much as 30-35%) to the cost of reinstatement, to represent the alleged betterment where an old building was replaced using modern materials. A deduction for betterment will be permitted only where insurers can prove and quantify the lower running costs of the new building or, in the case of new plant & machinery, its greater efficiency.
https://www.bailii.org/ew/cases/EWCA/Civ/2020/308.html
Jonathan Corman is a partner at Fenchurch Law
Court of Appeal plunges into notification issues
In a Judgment handed down yesterday, the Court of Appeal considered for the first time in over ten years issues regarding the effect of a notification of a “circumstance” to a professional indemnity policy: Euro Pools plc v RSA [2019] EWCA Civ 808 [1].
Introduction
The commercial background to the dispute was unusual. Typically, a policyholder will argue that its notification was wide in scope, so that in due course its notification will “catch” any ensuing claims. By contrast, the insurer to whom the notification was made will typically argue that the scope of the notification was narrow (or, sometimes, wholly ineffective), so that it is in a position to resist indemnifying the policyholder for the later claim(s).
Here the position was reversed. The insurer (RSA) argued that the notification in question was sufficiently wide to catch the later claims; and the policyholder argued that its original notification was very narrow, so that accordingly the claims in question could be said to arise from the (unquestionably wider) notification which it had made to its successive policy.
The reason for this apparent role reversal was the simple fact that the indemnity limit under the original policy (which was on an aggregate basis, not “per claim”) was exhausted, so that the policyholder needed to establish that the later policy (also written, as it happens, by RSA) would respond.
The facts
Euro Pools plc (“Euro Pools”) designed and installed swimming pools. One particular feature which it offered was the inclusion of vertical “booms”, which could be raised and lowered in order to compartmentalise the pool.
Initially, the booms were powered by an air drive system, whereby air would be pumped into and out of stainless steel tanks housed within the booms.
In February 2007, Euro Pools notified its 2006/07 policy (“the First Policy”) that the booms weren’t working. This was, it said, because of a perceived problem with the stainless-steel tanks. Euro Pools proposed an inexpensive solution whereby inflatable bags would be used instead of the steel tanks.
In June 2007, just before expiry of the First Policy, Euro Pools supplemented its original notification by informing RSA that, while it was continuing to replace the tanks with inflatable bags, the cost of which it expected would fall within its excess, it nevertheless wished “to ensure the matter [was] logged on a precautionary basis should there be any future problems”. [2]
Thereafter, during the course of its 2007/08 policy (“the Second Policy”, also written, as I have said, by RSA), it became apparent to Euro Pools that the inflatable bags were no more successful than the stainless steels tanks had been, and that the air drive system would need to be replaced with a hydraulic system - which would be far more expensive. Indeed, it appears that, with a view to preventing its customers from making claims against it, ultimately Euro Pools spent about £2m replacing the air drive system with a hydraulic system.
By this time, the limit under the First Policy was exhausted. The issue was therefore whether the £2m of mitigation costs had been spent in avoiding putative claims which, had they been made, would have arisen out of the circumstance(s) notified to the First Policy.
The Court of Appeal’s Judgment
Euro Pools argued that its notifications in February and June 2007 to the First Policy had been confined to a problem with the stainless-steel tanks. Relying on the principle that one cannot notify a circumstance of which one is not aware, Euro Pools submitted that when notifying the First Policy it had not been aware of a possible problem with the inflatable bags, let alone with any inherent defect in the air drive system generally, and thus could not have been notifying either of those as a “circumstance”.
That argument was accepted at first instance by Moulder J, who thus held, to RSA’s disappointment, that the Second Policy did respond. However, some commentators had criticised this decision on the basis that the Judge had confused the ability to notify a problem (here, that that the booms were not working) with the cause of that problem. As earlier cases such as Kidsons [3] and Kajima had had held, it is open to a policyholder to make a “hornets’ nest” notification - ie, a general notification of a problem, even where the cause of the problem and/or its potential consequences are not yet known.
The Court of Appeal (Hamblen LJ, Males LJ, and Dame Elizabeth Gloster) largely echoed those criticisms, and held that the notification to the First Policy had not been confined to the failure of the steel tanks and the consequential need to replace them with inflatable bags. Instead, the Court of Appeal agreed with RSA that the circumstances notified in February 2007 were that “multiple failures had taken place in relation to the [booms] and….[Euro Pools] was not sure what was causing the failures” and that the circumstances notified in June 2007 were that “in the face of continuing boom failures, Euro Pools had developed a potential solution involving the use of inflatable bags, but that it nevertheless wished to make a notification in case of ‘any future problems’ giving rise to possible third party Claims”.
“In other words,” said the Court of Appeal, “Euro Pools appreciated that it might not have got to the bottom of the problem in the sense of understanding what the root cause of the booms’ failure was. Thus, although Euro Pools hoped that it could make the boom design work by using bags in place of tanks, and that solution would fall within the deductible, it nonetheless wanted to make a general precautionary notification.”
Conclusion
In allowing the appeal, the Court of Appeal has re-stated the orthodox approach, as set out in previous cases such as Kidsons, Kajima and McManus [5]. Although the Court of Appeal’s decision was undoubtedly disappointing to this particular policyholder, in the long run its approach is likely to be beneficial to policyholders since it will assist them when, as is often the case, they wish to make a precautionary notification of a problem when the cause of that problem and/or its potential consequences are as yet unknown.
Notes:
[1] The full Judgement is here: https://www.bailii.org/ew/cases/EWCA/Civ/2019/808.html
[2] This request seems to have been prompted by a realisation on the part of Euro Pools’ broker that, owing to an administrative error, RSA had not opened a claims file following the original notification in February 2007.
[3] HLB Kidsons (a firm) v Lloyd’s Underwriters [2008] Lloyd’s Rep IR 237.
[4] Kajima UK Engineering Limited v The Underwriter Insurance Company Limited[2008] EWHC 83.
[5] McManus v European Risk Insurance Co [2013] Lloyd’s Rep IR 533.
Jonathan Corman is a partner at Fenchurch Law.