Fenchurch Law expands property coverage disputes team
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Nicola Bowen as an associate in its Property Risks practice group.
Nicola has spent a number of years working in insurance litigation with a specific focus on property related matters. She has acted for leading insurers on first party and liability claims disputes and complex defendant matters. She has also acted jointly for insurers and their insureds in a number of large subrogated recovery actions.
Nicola joins Fenchurch Law from BLM, where she was a solicitor in their property damage team and was previously a property damage solicitor with DAC Beachcroft.
Joanna Grant, partner and head of the Property Risks group practice at Fenchurch Law, said: We are delighted to welcome Nicola whose dedicated property damage litigation experience expands the coverage disputes capabilities the team can offer our clients.”
Nicola Bowen is an associate at Fenchurch Law
Fenchurch Law celebrates a hat-trick!
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes has received its third consecutive ‘gold’ award from customer experience experts, Investor in Customers (IIC).
There were many complimentary comments from their happy clients, some of which included:
• “Fenchurch provide myself, my team and my clients with an excellent service and give an honest and balanced response. I rate them as the best in the business.”
• “Service focused, excellent knowledge, great at communicating sometimes difficult points.”
• “I believe the firm offers a unique service in this market and hence is vital to a number of clients.”
• “The service we receive from Fenchurch Law is second to none so we would have no hesitation whatsoever in recommending them to any client - in fact we actively do recommend them.”
• “They offer offer a service that is quick, personable and professional. I would add that they know my industry back to front.”
IIC is an independent assessment organisation that conducts rigorous benchmarking exercises. These exercises determine the quality of client service and relationships across several dimensions, including how well a company understands its clients, how it meets their needs and how it engenders loyalty. IIC also compares the internal views of staff to identify how embedded the client is within the company’s thinking.
Sandy Bryson, Director at Investor in Customers commented: “I am absolutely delighted for the whole Fenchurch Law team. They are rightly thrilled and proud to have achieved a third consecutive IIC Gold award, evidencing that they continue to provide their clients with an exceptional experience. The firm clearly cares deeply about its clients and its employees. The Fenchurch Law management team has embedded a culture of continuous improvement within the firm and they are passionate about making the marginal improvements identified within the IIC report to improve further still. They are a genuine pleasure to work with.”
David Pryce, Managing Partner of Fenchurch Law added: “Providing an exceptional level of client service is something that the whole team at Fenchurch Law cares deeply about. But we know we can always do better, and Investor in Customers give us the insights and the tools to help us keep improving our clients’ experience”.
Fenchurch Law expands coverage dispute team with Le Marquer appointment
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Aaron Le Marquer as partner expanding its capabilities and international expertise.
Aaron specialises in insurance disputes for policyholders with a focus on product liability and recall and complex international losses. His experience extends to all commercial lines of business and he has handled many significant London market losses and represented manufacturers and insurers in high-profile cases in the tobacco, automotive, consumer electronics, pharmaceutical, and medical device sectors.
He joins Fenchurch Law from Tilleke & Gibbins, a leading Southeast Asian regional law firm, where he established a leading insurance practice and subsequently became a partner based in Thailand. Previously, he was assistant general counsel for Asia Pacific with AIG in Singapore. He originally trained and practised as an insurance and product liability lawyer with City and US firms based in London.
Managing Partner of Fenchurch Law, David Pryce said: “The start of 2020 marks a period of growth in our capabilities. Aaron is recognised for his insurance disputes work in Asia and now brings this substantial experience acting for policyholders and brokers on large scale and complex claims disputes together with strong insurance industry expertise and multi-jurisdictional experience. There is no doubt both Fenchurch Law and our clients will benefit significantly from his appointment. We will be making further announcements about the expansion of our team in the coming weeks.”
Fenchurch Law launches "The Associate Series"
Fenchurch Law’s new initiative, The Associate Series, is being launched with a view to sharing our knowledge and experience of coverage disputes with junior-mid level brokers. In doing so, we hope to enhance brokers’ ability to add value to their portfolios.
Fenchurch Law are specialists in coverage disputes. We act exclusively for policyholders and work shoulder-to-shoulder with (and never against) brokers.
The associates, whose specialisms span across a number of classes of insurance, are now sharing their expertise to assist junior-mid level brokers and claims handlers in their own careers. The associates are well-placed to do so as coverage specialists with prior experience as either brokers or insurer-side lawyers.
The Associate Series will enable us to share our knowledge and encourage you to cultivate relationships. Talks are being delivered to brokers across the UK between now and Christmas, with more seminars being planned for 2020.
The (free!) talks will be no more than 30 minutes each and focus on practical issues affecting the junior-mid tier. The fact that the talks are being delivered by your peers will, it is hoped, allow for relaxed interactive sessions.
The menu of talks will be regularly updated to reflect market developments but retain some core topics. The current menu is:
- Notification
- Coverage Disputes 101
- Damages for late payment
- A claims handler, broker and lawyer’s perspective
- Property Risks
- Third Party Rights against Insurers
- D&O
- Combustible cladding
- Contractors and traps for their brokers
Some of these talks will also be the subject of webinars, and there will be regular blogs looking at issues and trends in the market. Keep an eye out for our events and material!
If you have any queries about The Associate Series please contact James Breese on 020 3058 3075 or via james.breese@fenchurchlaw.co.uk.
Fenchurch Law adds Goodship to Construction Risks team
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Rob Goodship as an associate further expanding its coverage dispute team capabilities.
Rob specialises in insurance disputes and has considerable experience in property damage, construction and professional indemnity coverage issues. He joins Fenchurch Law from Kennedys where he was an associate in their property, energy and construction team.
He has acted for several leading insurers in relation to coverage disputes across a broad range of first party and liability claims, as well as defending claims against professionals. He has also acted jointly for insurers and their insureds in a number of large subrogated recovery actions.
Managing Partner of Fenchurch Law, David Pryce said: “Rob is an experienced insurance litigator and his background in advising both insurers and insureds in coverage disputes in some of our core business areas, makes him an important addition to what is the UK’s largest team of policyholder–focused insurance disputes solicitors”.
Rob Goodship is an associate at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #7 (The Good). Woodford and Hillman -v- AIG
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#7 (The Good)
Woodford and Hillman -v- AIG [2018] EWHC 358
There are few cases dealing with coverage issues under D&O policies. This isn’t necessarily because D&O policies are rarely the subject of dispute. It is more likely a reflection of the fact that if directors have to fund hefty legal costs in defending complex civil, criminal or regulatory actions because insurers are being difficult about costs or refusing outright to pay them, their personal finances are depleted to the point where suing the insurer is out of the question (and the Financial Ombudsman’s service is no help because that avenue of remedy is closed off to company directors). The consequence is that insurers’ obligations to fund defence costs are rarely scrutinised in court.
Occasionally, though, directors will take D&O insurers on, notwithstanding the power imbalance and the personal financial risk. Two such directors were Mr Woodford and Mr Hillman. They had been directors of the Olympus Corporation. They left in 2011 when Mr Woodford blew the whistle on a financial scandal.
In 2015 Olympus launched proceedings against them in the High Court in London for £50m, claiming that their involvement in an Executive Pension Scheme while at Olympus breached their duties as directors.
Olympus had D&O cover which covered past directors. Woodford and Hillman notified the claim to the D&O insurers, AIG, seeking an indemnity.
AIG’s resistance to Defence Costs
AIG refused to fund Woodford and Hillman’s defence costs (£4m and counting) claiming they were not reasonable. The policy was governed by German law but disputes fell to be determined in England.
The D&O policy made AIG liable for legal defence costs “provided these are reasonable with regard to the complexity and significance of the case”.
AIG argued that their liability for costs should be determined by a costs assessment. This is an assessment by a costs judge, normally undertaken when litigation ends, to determine how much of the winning party’s costs the loser should pay. The costs judge very critically examines the costs being claimed. The party whose costs are being assessed should expect to take a hair-cut on their recovery. A discount of 30% is not unusual and full recovery is very unlikely. On any view, therefore, a referral to costs assessment, as insisted on by AIG, would have involved Woodford and Hillman being left significantly out of pocket.
The Judge held that a costs assessment was not the right way to determine AIG’s liability for defence costs. Such an assessment was appropriate at the end of litigation as part of the court’s general discretion in relation to costs. An indemnity for defence costs under a D&O policy was “very different”. The Judge said that an insurance policy is intended to indemnify the directors for defence costs. Indemnity was a contractual right which meant that the court had no inherent discretion in relation to such costs. This meant that the (discretionary) costs assessment process had no application.
Instead, the court should assess the right to defence costs in the same way it would assess any issue of quantum. The criteria set out in the policy was that the costs were payable if “reasonable with regard to the complexity and significance of the case”.
The basis for the assessment of the “complexity and significance” of the case faced by the insureds was that it:
- would involve a three-week High Court trial;
- dealt with complex issues in a specialist area of law (pensions);
- was for a significant sum (£50m);
- had reputational significance for insureds because of the seriousness of the allegations.
AIG’s particular objection was to the charge-out rates of the insureds’ city lawyers: £508 for partners and senior lawyers; £389 for mid–level lawyers and £275 for junior lawyers. The Judge held that the complexity and significance of the matter meant it was reasonable to use a City firm at the rates charged. The Judge rejected AIG’s suggestion that the Guideline Hourly rates published by the Court Service for use in a costs assessment (rates significantly lower than City lawyers charge) had no application.
AIG’s determined resistance to paying the fees did not stop there. They complained of duplicated work, excessive billing, failure to delegate appropriately, churning of costs (an allegation that AIG dropped) and engagement of two QC’s. The Judge found that the QC appointments were reasonable in the context, the fees were reasonable and AIG’s other complaints were unsubstantiated.
Woodford and Hillman were awarded all their defence costs: they had been incurred reasonably in view of the complexity and significance of the case against them.
Implications
It is standard for a D&O insurer’s liability for costs to be qualified on grounds of reasonableness. It is now clear that an insurer’s attempts to call in aid the cost assessment process with a view to chipping away ultra-critically at the defence costs claimed by insureds should not work and there are better prospects of the directors’ outlay on defence costs being matched by insurance cover. Insureds now have a case to use when firing back at insurers’ attempts to lowball them, giving them some hope of prising the insurer’s purse open that little bit wider.
Enterprise Act Angle
Woodford and Hillman had to fund their defence costs from their pension funds because the D&O insurer was not responding. They incurred significant tax consequences as a result. Had the policy been governed by English law (and had it been taken out after May 2017) they may also have had a claim against AIG for damages for breach of the obligation to pay claims within a reasonable time (an obligation introduced by the Enterprise Act 2016) equal to the tax charge they suffered as a result of accessing their pension funds. Application of the Enterprise Act might have had an impact on the insurer’s approach to the case.
John Curran is a partner at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #6 (The Bad). Orient-Express Hotels v Generali
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#6 (The Bad)
Orient-Express Hotels v Generali
Business interruption (BI) policies in the UK ordinarily provide for recovery of loss caused by physical damage to property at the insured premises, subject to adjustment to reflect other factors that would have affected the business in any event.
In Orient Express Hotels Ltd v Assicurazioni Generali SPA t/a Generali Global Risk [2010] EWHC 1186 (Comm), the Commercial Court held that the ‘but for’ causation test applies under standard BI policy wordings where there are two concurrent independent causes of loss, and there could be no indemnity for financial loss concurrently caused by: (1) damage to the insured premises - a luxury hotel in New Orleans, and (2) evacuation of the city as a result of Hurricanes Katrina and Rita.
Orient Express Hotels Ltd (OEH) was owner of the Windsor Court Hotel (the Hotel), which suffered significant hurricane damage in August and September 2005 leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks following the declaration of a state of emergency, and the imposition of a curfew and mandatory evacuation order.
A dispute arose concerning the interpretation of OEH’s BI policy (subject to English law and an arbitration provision), which provided cover for BI loss “directly arising from Damage”, defined as “direct physical loss destruction or damage to the Hotel”. The trends clause provided for variations or special circumstances that would have affected the business had the Damage not occurred to be taken into account, “so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during [the indemnity period]”.
The arbitral Tribunal held that OEH could only recover in respect of loss which would not have arisen had the damage to the Hotel not occurred, and this meant that OEH was to be put in the position of an owner of an undamaged hotel in an otherwise damaged city. Since New Orleans itself was effectively closed for several weeks due to widespread flooding, with no-one able to visit the area or stay at the Hotel even if it had (theoretically) been undamaged, OEH could not recover under the primary insuring provisions for BI loss suffered during this period. A limited award of damages was made under separate Loss of Attraction and Prevention of Access extensions to the policy.
OEH appealed to the Commercial Court, arguing that the Tribunal’s approach was inappropriate given the wide area damage to the Hotel and the vicinity caused by the same hurricanes. OEH sought to rely upon principles established in: Miss Jay Jay [1987] and IF P&C Insurance v Silversea Cruises [2004], that, where there are two proximate causes of a loss, the insured can recover if one of the causes is insured, provided the other cause is not excluded; and Kuwait Airways Corpn. v Iraqi Airways Co. [2002], that, where a loss has been caused by two or more tortfeasors and the claimant is unable to prove which caused the loss, the Courts will occasionally relax the ‘but for’ test and conclude that both tortfeasors caused the damage, to avoid an over-exclusionary approach.
Mr Justice Hamblen dismissed the appeal, concluding that no error of law had been established in relation to the Tribunal’s application of a ‘but for’ causation test under the policy on the facts as found at the arbitration hearing, whilst recognising “as a matter of principle there is considerable force in much of OEH’s argument”. The insurance authorities mentioned above were distinguished as involving interdependent concurrent causes, in which case the ‘but for’ test would be satisfied. The Court did appear to accept that there may be insurance cases where principles of fairness and reasonableness meant that the ‘but for’ causation test is not applicable, but OEH was unable to establish an error of law by the Tribunal where this argument had not been raised at the arbitration hearing. Given these evidential constraints on an appeal limited to questions of law, OEH was unsuccessful in the Commercial Court.
Permission to appeal was granted, indicating that the Court considered OEH’s grounds for further challenge had a real prospect of success. Settlement on commercial terms was agreed between the parties prior to the Court of Appeal hearing.
The decision in this case has been criticised by commentators as unfair, giving rise to the surprising result that the more widespread the impact of a natural peril, the less cover is afforded under the policy. Leading textbooks (including Riley on Business Interruption Insurance and Hickmott’s Interruption Insurance: Proximate Loss Issues) express concern at this unsatisfactory outcome, noting that the ‘windfall loss’ applied by Generali under the trends clause during the period when OEH itself was affected by its own damage did not reflect the approach adopted by insurers following, for example, the earlier London bombings, or severe flooding in Cumbria in 2009. We consider that that the true intention of the London market was that, in the event of wide area damage, claims would be met up to the level that would have applied had the damage been restricted solely to the insured’s own property at the premises.
In our view, the approach taken by the Tribunal and upheld by the Commercial Court in this case is wrong in principle. It is hoped that an opportunity will arise for the English Courts to revisit this issue and adopt a fairer approach to indemnity under standard UK wordings, to remedy the potential injustice for policyholders. In the meantime, those taking out BI policies should seek amendment of the trends clause to provide for the policyholder to be put in the position they would have been “but for the event(s) causing the damage” (instead of “but for the damage to insured premises”), and to agree sufficient limits of indemnity under extensions for Loss of Attraction and Prevention of Access.
Zagora Management Limited & Others – v – Zurich Insurance PLC and others
In this recent decision, the Technology and Construction Court allowed claims brought by the leaseholders under “Standard 10 Year New Home Structural Defects Insurance Policies” (“the Policies”), but rejected all the claims against the Approved Inspector.
The case concerned a development of two blocks of flats in Hulme, Manchester (“the Property”). The claimants were the freeholder, Zagora Management Ltd (“Zagora”), and 26 long leaseholders, who between them owned 30 flats. The defendants were (1) Zurich Insurance plc (“ZIP”), which had issued the Policies to the leaseholders; and (2) Zurich Building Control Services Ltd (“ZBC”), which had undertaken the role of building inspector and issued final certificates under the Building Regulations (“the Certificates”).
As against ZIP, the Claimants sought to recover under the Policies the cost of remedying a number of serious defects at the Property, pleaded at £10.9m. Zagora also sued ZIP based under what was referred to as an “agreement to rectify”.
As against ZBC, thirteen of the Claimants, including Zagora, claimed damages representing the diminution in their respective interests as the Property, on the basis that ZBC knew that the statements made in the Certificates were untrue, or was reckless as to their truth.
The claims against ZIP
(i) Zagora’s claim under the Policies
Zagora claimed that it was entitled to sue ZIP under the Policies because it had a freehold interest in the Property as a whole. By contrast, ZIP argued that Zagora was not, and never had been, insured under the Policy.
It was common ground that Zagora had never been issued with a certificate identifying it as the buyer; however, Zagora claimed that did not matter, as it became a co-insured in relation to each flat when it acquired the freehold of the Property in 2013.
Although acknowledging the ingenuity of Zagora’s argument, the Judge (HHJ Stephen Davies) had no difficulty in concluding that it was wrong. Each insurance certificate identified the buyer by name; the only situation provided for in the Policy where the buyer’s identity could change was in the event of an onward sale of the flat in question. That did not apply in this case, as Zagora’s predecessor was never issued with an insurance certificate. Further, the Policies did not allow for there to be more than one insured with separate interests in the same flat. In the circumstances, the Judge held that Zagora was not an insured under the Policy.
(ii) The leaseholders’ claims under the Policies
The Judge found that the Property was seriously defective and that the leaseholders were entitled to recover the reasonable cost of repairs. Before coming to that conclusion, however, the Judge addressed a number of issues of policy construction; in particular, ZIP’s contentions that (a) the claims were subject to a maximum liability provision (“the Cap”), and (b) the Policies did not indemnify the cost of repairs that the claimants never intended to carry out.
Zagora asserted that the Cap imposed a maximum liability of £25m. ZIP’s case, by contrast, was that the Cap limited each leaseholder’s claim to the declared purchase price of its flat, with the result that the total maximum liability was the declared value of 30 flats i.e. £3.634m. The Judge agreed with ZIP, and found that it was not unreasonable for it to have wanted to limit its cover for a 10-year policy. Accordingly, the leaseholders’ claims were capped at the total purchase price of their flats.
As to the correct indemnity, the Claimants contended they were entitled to recover the reasonable cost of repair without first having to undertake those repairs. Whereas ZIP argued that the Policies did not cover repairs which would never be carried out.
The Policy provided that ZIP would pay “the reasonable cost of rectifying or repairing the physical damage [or] the reasonable cost of rectifying a present or imminent danger”. The term “reasonable cost” was, in the Judge’s view, neutral as to whether it was a cost already occurred or a cost to be incurred. Accordingly, there was no obvious reason why it should have the limited meaning for which ZIP contended.
(iii) The “agreement to rectify” claim
Zagora claimed that at a meeting in June 2013, ZIP agreed to resolve certain defects, regardless of the strict position under the Policies.
The Judge commented that, where parties have no pre-existing contractual relationship, it would be necessary to show that they agreed on all matters essential to the formation of a contract. However, the need to do so would be less acute where there was a pre-existing contractual relationship. The difficulty here, however, was that the relationship between Zagora and ZIP did not fit neatly into either category, given that by the time of the crucial meeting, there was a dispute as to the claimants’ contractual rights under the Policy.
In any event, the Judge found that what was actually agreed between the parties was merely a “step along the road” to what the parties would have expected to be a pragmatic resolution of a serious problem, and did not represent a binding and enforceable contract. Accordingly, Zagora’s claim failed on the basis that the agreement lacked contractual certainty.
The claims against ZBC
The Claimants contended that they would not have acquired the individual flats, or (in the case of Zagora) the freehold, had they known the true position regarding the value of their interests. As their claim was brought in deceit, the Claimants were required to show not only that ZBC knew that the representations in the Certificates were untrue or were reckless as to their truth, but that they also relied on those representations.
It was common ground that ZBC knew at the time that it had not taken reasonable steps to satisfy itself that the Building Regulations had been complied with, and had thus been reckless. The issue therefore turned on reliance.
ZBC’s evidence was that it never anticipated that Zagora, as a subsequent purchaser of the freehold, would have relied on the Certificates. The Judge accepted Zagora’s evidence, and found that it was “impossible” to conclude that it intended Zagora to rely on the certificates 2 to 3 years after they were issued. Accordingly, Zagora’s claim failed.
Contrary to the position vis-à-vis Zagora, ZBC accepted that it did anticipate that the leaseholders would rely on the Certificates. However, there was a complete absence of evidence that the leaseholders or their solicitors were provided with the Certificates either before exchange or completion. Therefore, even though the Claimants were able to prove deceit on ZBC’s part, their claims also failed at the reliance hurdle.
Conclusion
The case illustrates the various complexities and challenges facing policyholders, and particularly leaseholders, when bringing claims under new home warranties. The case is also a reminder of the practical difficulties of bringing claims against Approved Inspectors. Indeed, in the recent decision in The Lessees and Management Company of Herons Court v Heronslea and others [2018] EWHC 3309 (TCC), a claim against an Approved Inspector failed, this time because Approved Inspectors were not subject to the Defective Premises Act 1972.
Alex Rosenfield is an associate at Fenchurch Law
PII: What happened in 2018?
A number of interesting cases relating to professional indemnity insurance passed through the courts in 2018, and this article looks at four of them.
Euro Pools plc (in Administration) v RSA [2018] EWHC 46 (Comm)
Kicking the year off was the Euro Pools decision in January 2018.
The insured specialised in the design and installation of swimming pools. The products that were the source of this dispute were the movable swimming pool floors and the vertical booms that enabled division of the pool.
Problems were encountered with each feature, which led to two notifications under separate professional indemnity policy periods.
In summary, the Court found that an insured can only notify a circumstance of which it is aware. Whilst that may seem obvious, it does highlight the issue that policyholders may face with claims-made policies when investigations (and problems) are developing.
Whilst this case was very fact-specific (as most notification cases are), the lesson for policyholders is to give very careful consideration to the wording of notifications. The notification of the circumstance must be appropriately framed and there will ultimately need to be a causal link between the perceived circumstance and the claim.
An appeal was heard by the Court of Appeal last month and its outcome is awaited.
Cultural Foundation v Beazley Furlong [2018] EWHC 1083 (Comm)
Cultural Foundation was another decision involving notifications over multiple policy periods.
In this case the Defendants were the professional indemnity insurers of a firm of architects that had become insolvent before proceedings were issued. The Claimants had arbitration awards against the architects and sought indemnity from the primary insurer and the excess layer insurers.
The notification dispute arose because there had been two notifications within two separate policy years. Taken together the arbitration awards exceeded the primary policy limit but individually they were within it. The Court found that the Claimants could choose the policy year to which the claim could attach because, very unusually, there was no exclusion of claims arising from prior notified circumstances.
Dreamvar (UK) Ltd v Mary Monson Solicitors [2018] EWCA Civ 1082
Dreamvar is a significant case for conveyancing solicitors and their professional indemnity insurers.
The decision by the Court of Appeal involved two joined cases that both concerned the liability of solicitors for identity fraud in property transactions. In both cases the solicitors acting for the seller had carried out inadequate identity checks. Whilst the fraud was discovered before the registration of title, the funds for the purchase had been lost by then.
While not liable in negligence, the buyer’s solicitors were found liable in breach of trust for failing to identify that the seller was not in fact the owner of the property and thus releasing the completion money when their client would not be obtaining good title. The buyer’s solicitors sought relief under section 61 of the Trustee Act 1925 on the basis that they had acted honestly and reasonably. Whilst the Court did not dispute that, it nevertheless declined to grant relief on the basis that the solicitors were better able to absorb the loss, via insurance, than could the client.
This decision clearly extends the circumstances in which solicitors can be found liable in fraudulent transactions, even when the fraud may have principally occurred as a result of the failing of the other side’s solicitors. It remains to be seen whether this principle will extend to transactions other than conveyancing.
This decision may well have an impact on the PI market. Whilst the SRA Minimum Terms will cover claims of this type, some professional indemnity insurers may simply withdraw from this market altogether, forcing up premiums for solicitors doing conveyancing.
Dalamd Ltd v Butterworth Spengler [2018]
The Claimant was the assignee of the causes of action of three companies owned by the same family. One of those, Doumac, had a recycling business which it operated from premises owned by another company, Widnes. Buildings insurance was arranged with Aviva and included an external storage condition in which combustible material had to be kept at least 10m away from buildings. Doumac had been warned about their waste management previously and had a history of minor fire incidents.
Doumac then went into liquidation and its assets and goodwill were transferred to the third company, JLS. XL provided insurance for the plant and machinery that JLS now owned.
A catastrophic fire destroyed the premises. Claims were made against Aviva and XL. Aviva sought to avoid its policy for: (i) the non-disclosure of Doumac’s insolvency and its previous fire history; and (ii) breach of the external storage condition. XL sought to avoid its policy for non-disclosure of previous incidents and warnings as to fire risk.
In circumstances where the Claimant blamed the broker for the non-disclosures, and may have recognised that claims against the insurers presented difficulties, it sued only the broker.
The Court was asked to consider two significant points in relation to causation. Firstly, in the context of a claim only against the broker and with no prior settlement at all with the insurer, whether it was enough for the Claimant just to prove that the claim under the insurance policy had been impaired and that it therefore lost the chance to claim under it. Secondly, in circumstances where Aviva had also declined cover for a reason unrelated to the broker’s negligence (the breach of the storage condition), whether determining if the claim would still have failed on that ground should be decided on a balance of probabilities or loss of a chance basis.
In relation to the first point, the Court held that, where the policyholder had elected to sue only the broker and not recovered anything at all from the insurer beforehand, it must establish on the balance of probabilities that the insurer’s denial of coverage was correct. That contrasts with the position where, before suing the broker, the policyholder had reached a reasonable settlement with the insurer. In that situation, the policyholder can sue for any shortfall in the settlement without having to prove that the insurer’s coverage defence was a good one.
On the second issue, the Court held that the insurer’s alternative ground for declining cover should be considered on a balance of probabilities basis. Consequently, the Claimant only succeeded in the claim in relation to the XL policy as it was held that, on the balance of probabilities, Aviva would have been entitled to decline indemnity pursuant to the breach of the storage condition irrespective of the non-disclosures.
Following this decision, policyholders should only pursue the broker in the clearest of cases, where there is no real doubt that the insurer’s stance is well founded. In any other situation, first challenge the insurer’s stance with a view to reaching a reasonable settlement and only then contemplate a claim against the broker for the shortfall.
Conclusion
The four cases considered here collectively represent mixed news for professionals. Solicitors dealing with property transactions will understandably be dismayed by the Court of Appeal’s decision in Dreamvar. By contrast, insurance brokers will take comfort from Butcher J’s disinclination in Dalamd to help clients to recover their losses from their broker in circumstances where the insurers’ declinature can ultimately be shown to have been unjustified. Finally, the two other cases (Euro Pools and Cultural Foundation) are reminders that the notification of a “circumstance” to a professional indemnity policy continues to represent a fertile source of disputes between professionals and their insurers.
James Breese is an associate at Fenchurch Law
Pallister Limited v (1) Fate Limited (in liquidation) (2) The National Insurance and Guarantee Corporation Limited (3) UK Insurance Limited
In this recent decision in the Queen’s Bench Division, the court examined the meaning of “property belonging to” in the context of a landlord’s insurance policy. The court also examined the scope of the decision in Mark Rowlands v Berni Inns Ltd [1986].
Palliser Limited (‘Palliser’) was the lessee of the three upper floors of 228 York Road, London (‘the Building’), which contained 7 flats. The Building was owned by Fate Limited (‘Fate’), which also operated a restaurant on the ground floor. Under the terms of the lease, Fate agreed to take out insurance that covered damage to the Building.
On 1 January 2010, a fire occurred in the restaurant as a result of Fate’s negligence, causing extensive damage to the three upper floors.
In 2016, Palliser sued Fate. The claim settled in 2017 after Fate became insolvent. Following a case management conference in March 2018, the claim was allowed to continue against Fate’s insurers (‘the Insurers’) under the Third Parties (Rights Against Insurers) Act 2010 (‘the Act’).
Palliser claimed an indemnity from the Insurers under the Public Liability section of Fate’s policy (“Section 6”), for losses suffered as a result of the fire. Two heads of loss were claimed: (1) refurbishment costs; and (2) lost profits, on the basis that Palliser had lost the opportunity to sell the 7 flats and reinvest the proceeds in subsequent developments.
There were three issues for the Court to decide:
1. Did Fate’s policy cover its liability to Palliser (the First Issue)?
2. Under the lease, did Palliser impliedly exclude Fate’s liability for negligence because Fate agreed to take out insurance that covered damage to the Building (‘the Second Issue’)?
3. Did Palliser establish that it had suffered a loss of profits?
Palliser’s claim for lost profits failed on the facts, and this article concentrates on just the First and Second Issues.
The First Issue
Fate’s policy (‘the Policy’) stated that the insured was “Fate”, its business was “restaurant”, and the risk address was “228 York Road, London”.
Section 6 provided cover for “Accidental Damage to Property not belonging to you or in Your charge or under Your control or that of any Employee”. The question to be answered, therefore, was whether the three upper floors fell within this designation.
Palliser argued that “not belonging to” had a different meaning to “not owned by”. In this regard, it said that, because it had control and exclusive possession of the flats, the property did not belong to Fate, in that sense. Further, Palliser said that the Buildings section of the Policy (“Section 9”) did not cover the flats as they were not occupied for the purposes of the business.
The Insurers argued that Section 6 did not cover Palliser’s loss, as the whole building was owned by Fate. They argued that “not belonging to you” was synonymous with “not owned by you”, and that the granting of exclusive possession to Palliser did not mean that Fate, as the landlord, was no longer an owner. They also argued that, because Section 9 provided cover for the Building, the exclusion in Section 6 for property belonging to Fate made perfect sense.
The Judge agreed with the Insurers, and found that the Building did indeed “belong to” Fate as the freehold owner. Further, the Judge said that Section 6 and Section 9 should be viewed as fitting together, with cover for the buildings (which included the upper-floors) being dealt with in Section 9, not Section 6. Accordingly, Palliser’s claims failed, subject to a small portion of the refurbishment costs for fixtures and fittings (£8,500) which unquestionably did not belong to Fate. However, that smaller sum would still be dependent on the Judge’s finding on the Second Issue.
The Second Issue
The Judge referred to this issue as the ‘Berni Inns’ defence (in reference to the case of Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211). There, a lease provided that a landlord would insure a building against fire and lay out the insurance monies to rebuild it, while the tenant was to contribute to the cost of the premium by an “insurance rent”, and was relieved from its repairing obligations in the event of damage by fire.
The building was destroyed by a fire as a result of the tenant’s negligence, following which the landlord’s insurers (using their rights of subrogation) sued the tenant in negligence. The Court of Appeal held that the covenants in the lease meant that the buildings insurance was effected for the benefit of the tenant as well as the landlord, and that the contractual arrangements precluded the landlord from recovering damages in negligence from the tenant.
Palliser submitted that Berni inns was distinguishable, as here it was the landlord which had been negligent, not the tenant. However, even if it was wrong about that, Palliser argued that the Berni Inns defence did not apply because Fate underinsured the building.
The Insurers argued that the Berni Inns defence did apply, making reference to the fact that Palliser had not paid for the insurance, and that the covenants in the lease were very similar to those in Berni Inns.
Although the Judge agreed that Berni Inns was significantly different to the present case, he did not decide whether the defence applied, and instead held that that its application had to be qualified because the building was underinsured. He held that it could not be correct that the tenant had impliedly excluded the landlord’s liability in negligence, since, if it were, there would be an implied exclusion even where the landlord failed to take out buildings insurance at all. As a result, Palliser was at least entitled to recover the £8,500 refurbishment costs.
Conclusion
The case is an interesting example of how the Act will work where insurers run coverage and liability defences at the same time.
So, on the First Issue, because the damage was covered by the property damage section, rather than the third-party liability section of the Policy, the Act did not apply.
As to the Second Issue, although the Judge found in favour of Palliser (albeit only for a small sum), it is unclear whether the outcome would have been different had the Building been adequately insured.
Alex Rosenfield is an associate at Fenchurch Law