When is an individual a consumer for insurance purposes?
The law distinguishes between businesses and consumers in many areas, with the consumer benefiting from a more favourable regime as a result of their need for greater protection in the commercial market place.
In the insurance arena, consumers can look to a number of statutory and regulatory provisions designed to protect their rights, including those contained in the Consumer Insurance (Disclosure and Representations) Act 2012, the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), and the Insurance Conduct of Business Sourcebook (ICOBS) rules.
Often the distinction between a consumer and a business will be readily apparent. Occasionally the line is more blurred, and it is recognised that private individuals can act in a number of capacities. A recent Court of Appeal case, Mohammed Ashfaq v International Insurance Company of Hannover plc, has provided guidance on how to ascertain whether an individual is acting as a consumer when taking out an insurance policy.
In that case, the insured was seeking to have set aside a judgment of the Technology and Construction Court dismissing his claim for indemnity following a fire at a property he owned in Huddersfield. He argued that the court should have taken into account his consumer status, and that if it had, it would have reached a different conclusion.
The insured had incorrectly given a negative answer in his online proposal form for residential let property insurance to the question as to whether he had ever been convicted or had any prosecutions pending. The policy contained a ‘basis of contract’ clause as a result of which any incorrect information provided in the proposal form could amount to a breach of warranty. The insured had in fact a pending prosecution for common assault. When this was discovered insurers sought to avoid liability under the policy on a number of grounds including breach of warranty. The insured argued that had the consumer protections contained in UTCCR and ICOBS been taken into account the insurers would not have been so entitled.
The UTCCR defines a consumer as “any natural person who, in contracts governed by these Regulations, is acting for purposes which are outside his trade, business or profession.” ICOBS similarly defines a consumer as “any natural person who is acting for purposes which are outside his trade or profession. Further, where the individual is acting in more than one capacity, ICOBS provides that, if in relation to particular contract of insurance, the customer entered into it mainly for purposes unrelated to his trade or profession, the customer is a consumer.
The insured submitted that his trade or profession was that of a company director of three companies whose business was IT not property ownership or letting. He further submitted that the main purpose of taking out the insurance was to protect his property asset against fire and other risks and the insurance against loss of rent was subsidiary. The main purpose of entering into the contract of insurance was therefore unrelated to his trade or profession and he fell within the definition of a consumer.
The Court of Appeal disagreed.
It was clear from the face of the policy documentation that the purpose for which the insurance was taken out was to protect the property which the insured was using for the business of letting to students for rent, against fire and other risks. The purpose of the insurance was therefore related to the insured’s trade, business or profession of property letting. Further, part of the cover sought was loss of rent for up to 12 months: this was not an application for ordinary domestic house insurance.
The fact that insured was a company director and carried on the trade or profession of company director did not mean that he was not also carrying on the trade business or profession of a building owner letting out property for profit.
This finding is consistent with guidance given by the FCA as to how individuals acting in certain capacities should be categorised. One of the examples it gives of a commercial customer is a person taking out a policy covering property bought under a buy-to-let mortgage.
The judge did not consider whether the appellant would have been considered a consumer under the Consumer Insurance (Disclosure and Representations) Act 2012 which was not in force at the relevant time for the purposes of this case. On the basis that that Act takes a similar approach, defining a consumer insurance contract as one between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade business or profession, it would seem unlikely that a different conclusion would have been reached.
This case serves as a reminder that a person’s status as a consumer is not synonymous with that of being an individual. Any business activity undertaken, including as an adjunct to that individual’s usual trade or profession, may make them a commercial consumer for insurance purposes.
See Mohammed Ashfaq v International Insurance Company of Hannover plc [2017] EWCA Civ 357.
Joanna Grant is a partner at Fenchurch Law.
Leeds Beckett University – v – Travelers Insurance Co Ltd
A recent decision by the Technology and Construction Court has considered causation issues in the context of a property insurance claim. Was the damage accidental or inevitable?
The insured, Leeds Beckett University (‘the University’), acquired the site of a former brewery on which to build a number of accommodation blocks in 1993. The blocks were completed by 1996.
In December 2011, large cracks appeared in the largest of the buildings (“the building”). Subsequent investigations revealed that the concrete walls below ground-level had turned to mush. The building was then demolished in 2012.
The University insured the building with Travelers, who declined the claim in May 2012. In support of their declinature, Travelers said that the building had been subjected to sulphate attack by ground water beneath, and that the exclusions for gradual deterioration, faulty or defective design, or contamination applied.
The University disagreed, and argued that the relevant damage was “accidental” such that it was caught by the policy’s definition of “damage.” Further, it sought to characterise the damage as “flood” damage, so as to bring it within the meaning of “defined peril.”
The issues to be decided at trial were as follows:
a. Could the damage be characterised as “accidental damage” within the meaning of the policy?
b. If so, was it caught by any of the exclusions which the insurers sought to rely upon?
Was the damage accidental?
The Judge, Mr Justice Coulson, began his analysis by setting out the detailed history of the building and the land upon which it was sited. He referred specifically to the fact that the building was built over an existing watercourse, and to the historic geotechnical reports which raised concerns with the sulphate content of the soil and the damage it might cause. The Judge also made reference to the defective design of the groundwater drainage system, remarking that “this was going to be a difficult site to develop because of the numerous water issues.”
The University tried to deflect these issues, and asserted that the watercourse did not show up on every O/S map, and could not be identified when construction commenced. Further, it said that the occurrence of the damage over the watercourse was just a coincidence. The Judge gave short shrift to these points, and rejected any notion that the damage could be described as “flood damage.”
As to whether the damage was accidental; again, the Judge found against the University. His view was that “accidental simply means an event occurs by chance, which is non-deliberate.” In framing his view, he drew a distinction between the risk of something happening, which would usually be covered by a policy, and the inevitability of something happening (such as wear and tear), which would not.
On the facts, the Judge was left with little doubt that the damage was not accidental or fortuitous, a fact on which both parties’ experts agreed. There was not simply a risk that the concrete walls would fail – it was an inevitability. Accordingly, the University could not succeed on causation, and its claim failed.
Did any of the exclusions apply?
1. Gradual deterioration?
The University argued that, if the damage was accidental, the exclusion could not apply. The Judge disagreed, and concluded that there was nothing in the policy which supported such an analysis. Further, he considered the University’s argument to be ‘contrary to commercial common sense.’
As to the meaning of the words “gradual deterioration”, the Judge concluded that “gradual deterioration can be caused by the interaction between the property insured and the circumstances in which the property exists.” In other words, one had to take a holistic view when looking at gradual deterioration – it was wrong to look at the building itself without considering any external influences i.e. the ground and flowing water.
In the present case, the damage was caused by an inherent defect or weakness of the building, and occurred over a period of at least 10 years. Accordingly, the Judge found that the exclusion applied.
2. Faulty design?
The Judge was satisfied that this exclusion also applied. He made reference to the lack of a suitable drainage system (or rather, the lack of one at all), and the fact that the risks were brought to the University’s attention at an early stage. It followed that the design was unfit for purpose, and the exclusion applied.
3. Contamination?
As above, the Judge found in favour of the insurers. The evidence made it clear that there were ‘probably’ old mineshafts underneath the site (albeit they were never found), which was agreed as being the most likely source of the contaminated water which was discovered in December 2011.
The ‘proviso’ clause
The final issue to be decided was whether the University’s claim was capable of being salvaged by the ‘proviso’ to the exclusion clause. This provided that the exclusion could not exclude subsequent damage from a cause not otherwise excluded.
The nub of the University’s argument was that, whilst the original damage was to the blockwork, the subsequent damage was the cracking and the other damage to the superstructure.
The Judge rejected this argument. The damage to the sub-structure and the visible damage to the superstructure above were all part of the same damage, the cause of which was excluded.
Comments
The judgment is a useful yardstick of how the Courts will resolve claims for property damage which was inevitable rather than fortuitous.
It also provides some helpful commentary as to how exclusion for wear and tear or gradual deterioration will be assessed – namely, by considering the interaction between the insured property and its environment.
Alexander Rosenfield is an associate at Fenchurch Law
Fenchurch Law strengthens professions insurance disputes capabilities with Rosenfield hire
Fenchurch Law, the UK’s leading firm working exclusively for policyholders and brokers on complex insurance disputes, has announced the appointment of Alex Rosenfield as an associate.
Alex joins Fenchurch Law’s profession team utilising his experience of property damage, business interruption and professional indemnity claims to represent a broad range of professionals including accountants, insolvency practitioners, solicitors, IFA’s and surveyors in claims disputes.
David Pryce, managing partner of Fenchurch Law, said: "Alex brings the team a solid grounding in coverage disputes. His experience both within the Lloyd’s and London market and in acting for policyholders, adds further strength to the capabilities of our professions team.”
Alex joins Fenchurch Law from Elborne Mitchell LLP where he was an assistant solicitor. He trained at Manchester-based BPS Law LLP which provides policyholder coverage representation.
Fenchurch Law receives third consecutive nomination for insurance law firm of the year
Following our success at last year’s Post Magazine Claims Awards, we are proud to have been nominated again in 2017 for the Insurance Law Firm of the Year Award.
In 2016, we were honoured to have received the award that recognises, that specifically recognises a firm that demonstrates technical ability and the application of innovative ideas and customer service within legal services. The team are delighted to have received this second nomination for such a prestigious award.
This nomination highlights the increasing recognition that whole industry is driving for improved policyholder outcomes.
The Post Magazine Claims Awards celebrate excellence and innovation in the general insurance claims sector. The 2017 award winners will be announced on 1st June at a ceremony in the Sheraton Hotel on London’s Park Lane.
To find out more about the Awards and a list of all the finalists check out http://www.postevents.co.uk/claimsawards/static/shortlist
Insurance Act 2015: Some Insurers Crying Foul
When the Insurance Act 2015 came into force in August 2016, it was hailed as the biggest reform of this area of law in over a century. The old law had been criticised by the Law Commission as “out of date” and “no longer reflecting the realities of today’s commercial practices”.
The Act addressed those criticisms head-on. It repealed the archaic “duty of utmost good faith” and created a new, fairer, “duty of fair presentation” designed to clarify precisely what is required from policyholders during the disclosure process, and to increase the burden on Insurers to ask the right questions about the risk they wish to write.
Likewise, the Act softened many of the harsh remedies available to Insurers under the pre-Act regime. Where policyholders innocently omitted to disclose a material piece of information (for a wide variety of unfortunate, but quite understandable, reasons), the old law afforded Insurers the draconian remedy of avoiding the policy in its entirety, even if they would have still written the risk in one way or another.
The Act, on the other hand, asks the very sensible question brokers and coverage lawyers have been asking for decades, which is: “What would you have done had you known?”. If the Insurer would have written the risk in any event, the Act’s new system of proportionate remedies provides a more measured redress mechanism to alter policy terms or the premium retrospectively to reflect what ought to have happened in the absence of the Insured’s oversight.
Uncertainty for Brokers and Policyholders
On the face of it, therefore, the Act generally works in favour of policyholders. However, as with all change (even one for the better), the move from a complex, but established, body of law to a more rational, but nonetheless new and untested, set of rules has created much uncertainty for brokers and their clients over the past six months.
In particular, many brokers now ask themselves and their advisors: “Does the Act really put my clients into a better position than they were in under the old law, and, if not, can I use the prevailing market conditions to improve their position in some way?”
The answer, of course, is that it in many cases the Act puts Insureds in a worse position than under the old law, leaving brokers with the challenge of finding an appropriate solution to protect their clients’ interests.
The best (and most controversial) example of this is the use of “Innocent Non-Disclosure” clauses on certain lines of business. Pre-Act, clauses such as the following were largely uncontroversial and commonplace protections against the risk of avoidance:
“Insurers shall not avoid this Policy as a result of any non-disclosure or misrepresentation by the Insured save in respect of a fraudulent non-disclosure or misrepresentation”.
In other words, under the old law Insurers were prepared (for a variety of reasons, not least their eagerness to write business) to agree that nothing short of a fraudulent non-disclosure or fraudulent misrepresentation would give them opportunity to remove that client’s cover in its entirety.
Under the Act’s new proportionate remedies regime, even an innocent breach of the duty of fair presentation might, for example, entitle Insurers to retrospectively increase an Insured’s premium significantly, or to exclude the type of loss that has unearthed the innocent non-disclosure. In the absence of an Innocent Non-Disclosure clause (tweaked to reflect the new order of things), an Insured therefore has far less protection on certain lines than they might have secured in previous years.
Tension between Brokers and Insurers
It is unsurprising, therefore, that many brokers have continued to insist on the inclusion of Innocent Non-Disclosure clauses (as well as a variety of other protections) to ensure that their clients remain protected against non-disclosure remedies under the Insurance Act, much as they were protected under the old law. The reality is that Insurers today continue to compete fiercely, and many are therefore prepared to maintain these same protections afforded to Insureds that were available when the old law applied.
Many Insurers, however, have cried foul-play, arguing that these clauses should no longer be necessary in the post-Act world. Some go further and argue that taking advantage of soft market conditions to include them is in some way “unfair” to Insurers, given the Insurance Act was designed to “level the playing field”.
Such arguments are unlikely to hold water with brokers. One of the principal reasons the Law Commission recommended changing the law was to ensure that the rights generally afforded to Insurers on all lines of business reflected the realities of today’s market practice. Changing the inherent dynamics of the market was never on the agenda. If soft market conditions mean that Insurers, in competing for business, remain prepared to offer greater certainty and protection to Insureds, then brokers are duty bound to try and secure those things for their clients.
Conclusion
Under the pre-Act regime, the balance of power lay firmly with Insurers. At worst, policyholders might have found themselves without cover for either perfectly innocent non-disclosures or for breaches of terms wholly irrelevant to a particular loss. Market conditions pre-Act gave brokers the ability to protect their clients from those harsh remedies.
While those remedies no longer exist, brokers will continue to use those same market conditions to find ways to eliminate some of the uncertainty the Act has created. Some Insurers will see that as the insurance market working as it should. Others will say that gaining such protections flies in the face of the spirit of the Act.
To those latter Insurers, I can only assure them their own brokers are very probably striving to achieve precisely the same protections for those Insurers’ own exposures. Every cloud?
James Morris is a senior associate at Fenchurch Law.
Fenchurch Law appoints Morris to strengthen financial lines insurance disputes team
Fenchurch Law, the UK’s leading firm working exclusively for policyholders and brokers on complex insurance disputes, announces the appointment of James Morris as senior associate.
In his role, he is specialising in representing policyholders with coverage disputes arising from financial lines insurances including professional indemnity, D&O, crime, cyber and warranty & indemnity.
David Pryce, managing partner of Fenchurch Law, said: "James brings to the team important experience from across the insurance industry including legal advisory work to insurers, adjusting major losses for an insurer and performing in-house advocacy for a leading insurance broker. His background and understanding adds further strength to our financial lines capabilities.”
James joins Fenchurch Law from JLT Specialty where he was legal and technical advocate, financial lines group. He spent a number of years at City law firm RPC where he was an associate in their financial risks practice. While in his role at RPC James was seconded to AIG’s financial lines claims team, where he adjusted both major and complex claims and losses.
James also sits on the British Insurance Law Association’s Under 35s Committee.
Exclusion clauses clarified
In the recent decision of Impact Funding v. AIG the Supreme Court gave important guidance on the construction of exclusion clauses in the context of Insurance policies. Whilst of particular interest to Solicitors and their insurers the decision is of wider importance.
Barrington Support Services Limited (Barrington) was a firm of Solicitors who acted for claimants wanted to pursue claims for industrial deafness. Public funding was no longer available for such claims and hence the clients needed to fund their actions by way of CFA and ATE insurance. Impact Funding Solutions Limited “Impact” provided cover for disbursements which would be incurred in pursuit of those claims. The intention was that if the litigation was successful, the loans would be repaid by the defendants to the action and, if unsuccessful, by ATE insurers. Crucially in this case, Impact also had a direct cause of action against Barrington under the terms of a Disbursement Funding Master Agreement (DFMA). It provided amongst other things;
(a) at clause 6.1, that each party would “comply with all applicable laws, regulations and codes of practice from time to time in force… and each party indemnifies the other against all loss, damages, claims, costs and expenses… which the other party may suffer or incur as a result of any breach by it of this undertaking”; and
(b) at clause 13.1, Barrington represented and warranted to Impact that “the services provided or to be provided by [Barrington] to the Customer shall be provided to the Customer in accordance with their agreement with the Customer as set out in the relevant Conditional Fee Agreement”.
Loans amounting to £581,353 were made by Impact. Barrington failed to investigate the claims properly which either failed or were never pursued. ATE insurers refused to pay out as a result of Barrington’s negligence, leaving Impact substantially out of pocket. Barrington became insolvent and Impact brought a claim against Professional Indemnity Insurers, AIG, under the Third Party Rights against Insurers Act.
The professional indemnity policy written by AIG (“the Policy”) was written on materially the same terms as the Minimum Terms and Conditions.
The insuring clause provided: “The insurance must indemnify each Insured against civil liability to the extent that it arises from Private Legal Practice in connection with the Insured Firm’s Practice…”.
At clause 6.6 the Policy contained an exclusion for:
(a) trading or personal debt of any Insured; or
(b) breach by any Insured of the terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of the Insured Firm’s Practice; or
(c) guarantee, indemnity or undertaking by any particular Insured in connection with the provision of finance, property, assistance or other benefit or advantage directly or indirectly to that insured…”
The judge at first instance decided that the exclusion applied. The Court of Appeal overturned that decision, holding that it was inapplicable and that AIG were liable under the policy. AIG appealed to the Supreme Court. By a majority of 4 to 1 the Appeal was allowed. The Supreme Court had to decide:
(a) Whether the contract between Impact and Barrington was a contract or arrangement for the supply of services to Barrington by Impact and hence excluded (notwithstanding that Impact’s loss arose from Barrington’s negligence in handling its clients claims)
(b) Whether it was necessary to construe the exclusion clause narrowly limiting its effect so as to make it consistent with the purpose of the Policy as a whole, given that this was a Professional Indemnity policy.
In relation to (a) the Supreme Court found that the contract was indeed a contract for Impact to supply services to Barrington: (i) Barrington contracted with Impact as a principal and not as an agent for the clients (ii) Barrington clearly obtained a benefit from the funding of disbursements since it enabled the claims to be fully funded. Barrington’s clients were able to pursue their claims which they could not otherwise afford and hence it was able to earn fees (iii) Barrington itself had paid an administration fee and had agreed to pay the loan itself should the client(s) breach the credit agreement.
In relation to (b) the Supreme Court found that there was no reason to imply additional words to limit it’s scope, it was not necessary to give the contract business efficacy or was so obvious that it went without saying. The Policy should be construed as having a broad insuring clause but subject to a number of exclusions which were “an attempt to identify the types of liability against which solicitors are not required by law to be covered by way of professional liability insurance”. There was no reason to construe those exclusions narrowly.
Good news for Insurers and bad for insureds? Not necessarily. Although obviously bad news for Impact. The decision as a whole should be welcomed as it provides clarification in relation to the construction of the policy. Many firms are considering their options not only in relation to Alternative Business Structures, but also in relation to litigation funding as a whole. We would also suggest it is good news for the Solicitors Profession as a whole. As had the decision gone the other way, potential sky high premiums for next renewal should insurers be obliged to cover claims such as this?
Pauline Rozario is a Consultant at Fenchurch Law
“One event or two?” What is the proper construction of the phrase “arising from one event” within the aggregation clause in a reinsurance contract?
Re MIC Simmonds v. AJ Gammell
The commercial court upheld an arbitration award and concluded that the arbitrators had correctly applied the test for the interpretation of an aggregation clause. The arbitrators had to decide what was the proper construction of the phrase “arising from one event” within the aggregation clause in a reinsurance contract.
The facts
The dispute centred around on whether or not claims made against the Port of New York (PONY) following the attacks on the World Trade Centre (WTC) were to be aggregated as liabilities arising from that event. The allegation was that PONY had failed to provide adequate protective equipment to around 10,000 rescue workers in the course of the clean-up operation causing respiratory conditions. The claims were settled and a claim was made on the excess of loss reinsurance programme.
The dispute
The arbitrators found that reinsurers were liable to indemnify the loss as the policy provided for cover for “loss, damage, liability or expense or a series thereof arising from one event”. As all claims could be aggregated together as losses or liabilities arising from one event, namely the attacks on the WTC which caused the destruction of the twin towers. The appellants argued that it did not. The argument was this: where the insured’s liability arises as a result of a continuing state of affairs, was this to be treated as a single event of negligence or does the relevant event only arise when the harm giving rise to the insured’s liability occurs? The appellants argued:
- The failure to provide adequate protective equipment did not constitute one event, in other words, the attack on the WTC which was disassociated form the negligence which gave rise to the underlying claims could not be a single event for the purposes of the aggregation clause.
- The respiratory claims arose from a continuing failure and there were therefore many events.
- The attacks on the WTC were too remote to constitute an event.
Judgment
The court reviewed the relevant authorities and affirmed:
There are three requirements for a “relevant event” when considering a “series of losses and / or occurrences arising out of one event” for the purposes of aggregation, namely that:
- there is a common factor which could properly be described as an event;
- the event satisfies the test of causation;
- it is not too remote.
The court agreed with the arbitrators that:
- The event in question here was identified as the attack on the WTC so the issue was whether the losses or liabilities arose from it.
- There was a sufficiently causal connection between the attack on the WTC and the losses that justified aggregation.
- The test is much less strict than that for a proximate cause. Here, although the attack on the WTC may not have been a proximate cause of the respiratory attacks, the causal link between them was clear and obvious, namely the link between the attacks and the inhalation of harmful and toxic dust.
Good news for policy holders? Yes, the court has taken a common sense approach in finding that the attacks on the WTC and the subsequent clean-up operation, was part and parcel of the same event for insurance purposes.
Pauline Rozario is a Consultant at Fenchurch Law.
The ordinary measure of indemnity: Great Lakes Reinsurance (UK) SE v Western Trading Limited
In the latest in a series of pro-policyholder decisions by the courts, the Court of Appeal yesterday handed down a judgment upholding the trial judge’s ruling that a policyholder was entitled to be reimbursed by its insurers as and when it reinstated its premises (the historic Boak Building in Walsall) which had been destroyed by fire.
The Insuring Clause in the policy merely stated that insurers agreed “to the extent and in the manner provided herein to indemnify the Assured against loss of or damage to the property specified in the Schedule.” However, there was a separate reinstatement clause (“the Memorandum”) which stated that, in the event of damage or destruction, the indemnity was to be calculated by reference to the reinstatement of the property destroyed or damaged but only if the reinstatement was carried out “with reasonable despatch”, failing which only the amount which would have been payable under the policy, absent the Memorandum, would be due.
No reinstatement had occurred by the time of the trial, for the simple reason that the insurers had denied all liability under the policy, relying on various defences in relation to misrepresentation, breach of warranty and insurable interest. These were all rejected by the Judge, and there was no appeal on that score, the Insurers’ appeal being confined to the correct measure of indemnity.
There was disagreement between the parties as to whether the Memorandum could be relied on, and thus the Court of Appeal considered what would be the correct measure of indemnity assuming it were indeed inapplicable.
Insurers argued that, on the facts of this case, the relevant measure of indemnity was the reduction in the building’s value. Its market value just before the fire had been a mere £75,000. That reflected the fact that it was virtually derelict but, since it was Grade II Listed, it was not capable of being economically converted into (say) a block of flats. Ironically, its value had increased after the fire, since it lost its listed status and thus could now be redeveloped. Insurers thus argued that there was no loss, and nothing for them to indemnify.
The Court of Appeal disagreed. It held that, where the policyholder was the owner of the property or, if not, where it was obliged to replace the property (here the policyholder was the lessee of the building and owed the owner an obligation to repair it), the indemnity under the policy was ordinarily to be assessed as the cost of reinstatement. The Court of Appeal recognised that the position would be different if, at the time of the loss, the policyholder was trying to sell the property or intended to demolish it anyway.
The Court of Appeal also recognised, as had the trial judge, that an insurer who paid out the cost of reinstatement would have no redress if the policyholder then decided simply to keep the insurance proceeds. It held that the insurers could be protected if, rather than their being ordered to pay an immediate sum of money, the court instead made a declaration requiring insurers to reimburse the policyholder for the actual reinstatement costs as and when incurred.
Finally, it should be noted that the Court of Appeal held that, where a reinstatement clause required the policyholder to undertake the works of reinstatement “with all reasonable despatch”, it would not be in breach of that requirement unless and until insurers had confirmed indemnity under the policy. That is an obvious victory for common sense, even if it might be thought depressing that the Insurers would really have wished to argue that a policyholder could legitimately be prejudiced by a combination of its own impecuniosity and insurers’ unlawful refusal to affirm cover.
See: Great Lakes Reinsurance (UK) SE v Western Trading Limited [2016] EWCA Civ 1003.
http://www.bailii.org/ew/cases/EWCA/Civ/2016/1003.html
Jonathan Corman is a Partner at Fenchurch Law.
“When the lie is dishonest but the claim is not” – collateral lies and dishonest exaggerations
Two recent Supreme Court judgments have considered the impact of dishonesty – on an insurance claim and on a settlement agreement.
In one, where ship owners sought to embellish their insurance claim through the inclusion of a false, but irrelevant, statement, the court held that the owners were nevertheless able to recover under their insurance policy.
In the other, evidence that an employee had dishonestly exaggerated the extent of injuries sustained in the work place entitled his employer’s insurers to set aside a settlement entered into with him before that evidence was available.
Through their differing outcomes, these cases serve to illustrate that, while the courts remain as ready as ever to take a strong stance whenever there is evidence of fraud, nevertheless and in line with the current trend towards a more level playing field for policyholders, where “the lie is dishonest but the claim is not”, for an insurer to avoid all liability for the claim will not be an appropriate sanction.
Versloot Dredging BV v HDI Gerling Industrie Versicherung AG
In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG, the owners of a ship damaged by a flood in the engine room made a false statement that the bilge alarm had sounded. The Supreme Court found that this did not prevent the ship owners from being able to recover under their insurance policy. This was because, although the lie was dishonest, the claim was genuine. On the facts, the policy would have responded in the same way and for the same amount whether or not the statement was true. The dishonest statement did not therefore go to the recoverability of the claim, and was not material. The insurer was required to meet the liability, which was a liability that it had always had.
This type of dishonest statement was previously known as a “fraudulent device” and is now termed a “collateral lie”. The question for the court was whether collateral lies, statements that dishonestly strengthen what would otherwise be entirely genuine claims, constitute “fraudulent claims”. Fraudulent claims entitle the insurer to avoid liability. They encompass both claims that have been fabricated in their entirety and claims that have been dishonestly exaggerated as to their amount. Following the judgment in Versloot Dredging it is now clear that collateral lies no longer fall to be considered as a further category of fraudulent claim and will not entitle an insurer to reject the claim.
The scope of ‘fraudulent claims’, and in particular whether it extends to collateral lies, was an issue that had been left open by the wording of the Insurance Act 2015 (the Act). The Act, which applies to policies entered into after 12 August 2016, sets out an insurer’s remedies for fraudulent claims. These include the right not to pay the claim and the right to recover from the insured any sums paid by the insurer. The decision in Versloot Dredging has resolved the uncertainty as to whether a collateral lie would be caught by the Act. It is now clear it is not. Where a policyholder seeks to strengthen a genuine claim with a collateral lie, if that collateral lie is immaterial to the insured’s right of recovery, the insurer is not entitled to avoid the claim.
Hayward v Zurich Insurance Company plc
By contrast, Hayward v Zurich Insurance Company plc demonstrates that, in line with the usual maxim, fraud will still unravel all. In this case, by dishonestly exaggerating his injuries, an employee had obtained a settlement from his employer’s insurer that was significantly higher in value than what he would otherwise have recovered. When conclusive evidence proving the dishonesty later emerged, the insurer sought to set aside the settlement. To do so, it was necessary for the insurer to show that it had been induced by the misrepresentation as to the extent of the injuries to enter into the settlement. The issue for the Supreme Court was whether the insurer could still be said to have been induced by the misrepresentation in circumstances where, at the time of entering into the settlement, the insurer suspected that the employee was dishonestly exaggerating his injuries. The court found that it was sufficient that the misrepresentations were a material cause of the insurer entering into the settlement. There was no requirement for the insurer to have believed the misrepresentations to be true and the settlement could consequently be set aside.
Significantly, in Hayward, where the Supreme Court was considering the impact of the fraud on a settlement agreement not an insurance policy, the employee remained entitled to damages for his actual, albeit modest, injury. Were the same type of dishonest exaggeration to occur in the context of a claim made under an insurance policy, it would constitute a fraudulent claim for which a policyholder could not recover anything at all, whether at common law or under the new statutory regime.
See Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45; Hayward v Zurich Insurance Company plc [2016] UKSC 48.
Joanna Grant is a Partner at Fenchurch Law.