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Fenchurch Law - Annual Coverage Review

A panoply of coverage disputes reached the English courts in 2024 across diverse industry sectors, highlighting the London market’s sophisticated role in managing risk and boosting commercial resilience through geopolitically turbulent times.

Several judgments from the Court of Appeal reflect the trend for literal policy interpretation and a reluctance to interfere with unambiguous wording, including in marine cargo, offshore construction and W&I claims. The first reported decision on section 11 of the Insurance Act 2015 (‘IA 2015’) provides insight on the requisite causal connection. And guidance was provided on the scope of recovery for loss sustained over extended periods of time, in relation to construction projects and Covid BI losses.

The Invasion of Ukraine in February 2022 has led to a deluge of claims in the Commercial Court for losses arising from aircraft stranded in Russia, and damage to or expropriation of strategic assets including energy, mining and manufacturing interests. Several aircraft leasing companies are pursuing claims under contingent & possessed policies, case managed alongside parallel proceedings against various reinsurers, with related trials taking place in Ireland and the US.

Collectively these cases demonstrate the importance of precise language throughout insurance policies, with particular attention on key provisions around the description of insured parties, triggers for non-damage perils, aggregation, dispute resolution and any opt-out from statutory protections. Recent claims experience helps to inform best practice on pitfalls to avoid for policyholders and brokers, to secure coverage as broad as market conditions might realistically allow and minimise the prospect of disputes.

BUSINESS INTERRUPTION

Various Eateries v Allianz [2024] EWCA Civ 10

The latest decision on coverage under the Marsh Resilience wording considered various issues concerning the scope of prevention of access clauses, and aggregation of loss. Following settlement of related cases in Stonegate and Greggs, important questions on the treatment of furlough payments and additional increased costs of working were not included in continuing points of appeal and these matters are due to be revisited by the Court of Appeal in January 2025.

The remaining grounds of appeal from the first instance decision in Various Eateries were dismissed. The position remains that policyholders are entitled to claim for multiple sub-limits by reference to particular government actions, such as the nationwide lockdowns and regulations imposing restrictions on operation of different industry sectors; and those with ‘composite’ policies i.e. a number of separate contracts recorded in a single document, can recover individual sub-limits per company or per premises, depending on the insuring clauses and aggregation wording.

Gatwick Investment v Liberty [2024] EWHC 124 (Comm)

This case considered a number of preliminary issues in relation to coverage under prevention of access (‘POA’) or non-damage denial of access (‘NDDA’) clauses for policyholders operating in leisure, hospitality and retail industries.

The Commercial Court  held that: (i) the Supreme Cout ruling on concurrent causation applies to POA / NDDA clauses in the same way as disease clauses, (ii) government action was that of a ‘statutory authority’, (iii) there was cover in respect of regulations imposed in response to a nationwide pandemic, (iv) furlough payments fell to be deducted from any sums otherwise due to policyholders, and (v) policy limits apply separately to multiple insured entities under a composite policy.

Bellini v Brit UW [2024] EWCA Civ 435

The claimant sought indemnity for Covid losses under a policy extension providing cover for: “interruption of or interference with the business caused by damage … arising from … any human infectious or human contagious disease … manifested by any person whilst in the premises or within a 25 mile radius …”

The Court of Appeal upheld the first instance decision, that there was no cover under this extension in the absence of physical damage. The claimant’s argument that something had gone wrong with the language, so that it was necessary to correct the error through contractual construction (applying Chartbrook v Persimmon Homes [2009]) was rejected. ‘Clumsy drafting’ resulting in limited cover did not mean that the provision was absurd, nor justify rewriting the contract. Where the parties have used unambiguous language, the courts must apply it, following the Supreme Court decision in Rainy Sky [2011].

London International Exhibition Centre v Allianz [2024] EWCA Civ 1026

The Court of Appeal considered coverage under insuring clauses triggered by disease ‘at the premises’ and held that the Supreme Court’s approach to causation applied to radius clauses in the FCA Test Case [2021] was equally applicable. The nature of the insured peril informs the causation test agreed between the parties and it must have been contemplated that an outbreak of disease could spread rapidly and widely. The appropriate causation test did not involve a ‘but for’ analysis and each individual case of illness resulting from Covid may constitute a separate and equally effective cause. Unfortunately, the judgment did not discuss in any detail the evidential requirements for policyholders to prove the presence of Covid at their premises and this remains contentious, given the limited availability of testing services in the early stages of the pandemic.

UnipolSai Assicurazioni v Covea Insurance [2024] EWCA Civ 1110

Covea provided cover for many children’s nurseries forced to close between March and July 2020. The Court of Appeal upheld the first instance decision that Covea, having paid out substantial sums in respect of BI losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The pandemic did constitute a ‘catastrophe’ giving rise to the insured losses, and there was no requirement in the policy for ‘suddenness’ or occurrence of a time-limited ‘event’.

On the issue of aggregation, pursuant to the Hours Clause in the reinsurance policy, the Court affirmed that, when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences (consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries). An apportionment of financial loss would be impractical and was deemed to be incorrect.

International Entertainment Holdings v Allianz [2024] EWCA Civ 1281

The Court of Appeal decided that restrictions brought in by the UK government, preventing or hindering access to the claimants’ theatres around the country, were not actions of a ‘policing authority’ and there was no indemnity available under policies imposing this requirement within the insuring clauses. Further, it was held that Covid can qualify as an ‘incident’ and coverage may be available on a per premises basis, in the absence of clear wording to the contrary.

CONSTRUCTION ALL RISKS

Technip Saudi Arabia v MedGulf Insurance [2024] EWCA Civ 481 

Technip was the principal contractor for an energy project in the Persian Gulf. A vessel chartered by Technip collided with a platform within the project site, leading to a damages settlement of $25 million agreed with the platform owner, KJO.

Technip claimed under the liability section of its offshore construction policy, written on the WELCAR wording, which named both Technip and KJO as ‘Principal Insureds’ (the words Insured and Assured were used interchangeably in the policy). The insurer refused indemnity on grounds that the Existing Property Endorsement excluded cover for damage to existing property owned by any of the ‘Principal Assureds’, including the platform owner KJO, and this was upheld by the High Court.

Technip appealed, arguing that the policy was composite, and the exclusion only applied to property owned by the particular insured claiming the indemnity. The Court of Appeal refused, based on the natural meaning of the wording and how this would be understood by a reasonable person. Each insured under the policy was deemed to have separate insurance cover, but the term ‘Principal Assureds’ had the same meaning in each case.

Sky UK & Mace v Riverstone [2024] EWCA Civ 1567

The timber roof of Sky’s headquarters in West London suffered extensive water ingress, due to a design defect in failing to incorporate temporary waterproofing during installation. The building was constructed by Mace as main contractor and insured under a CAR policy. The damage occurred prior to practical completion in April 2016, but continued to develop thereafter, including subsequent to expiry of the period of insurance in July 2017.

The Court of Appeal affirmed that ‘damage’ means an adverse change which impairs the relevant property’s use or value. The roof was damaged as soon as it suffered water ingress. Insurers were held liable to indemnify both Sky and Mace for all damage that occurred during the period of insurance but deteriorated or developed thereafter, overturning the trial judge’s decision that the claimants were only entitled to recover for the cost of repairing damage in existence at the end of the insured period. Investigation costs reasonably incurred to determine how to remediate damage were also covered, whether or not damage was revealed.

The roof was made up of 472 modular ‘cassettes’ covering an area of 16,000 square metres. The policy deductible of £150,000 applied per any one event and the Court of Appeal held that the relevant event was the decision to build to a design that did not include temporary waterproofing, so that only one deductible applied.

Mace had pleaded and proved damage at practical completion and was entitled to a monetary judgment in addition to and distinct from Sky. Matters have been remitted to the trial judge, for determination of the sums due to each claimant under the policy.

INSURANCE ACT 2015

Scotbeef v D&S Storage [2024] EWHC 341 (TCC)

Scotbeef pursued a claim against D&S Storage in relation to the supply of defective meat. After D&S Storage became insolvent, its liability insurer was added to the proceedings pursuant to the Third Parties (Rights against Insurers) Act 2010 (‘TPRIA 2010’).

The insurance policy contained a ‘Duty of Assured’ clause, described as a condition precedent to liability, requiring Scotbeef to take reasonable steps to ensure that the Food Storage & Distribution Federation’s standard terms were incorporated into commercial contracts. The terms were not incorporated to the agreement with D&S Storage, and the insurer applied to strike out the insurance claim, based on Scotbeef’s non-compliance with the policy term. The High Court considered: (a) whether the construction of a condition precedent affects its enforceability; and (b) when terms which depart from the IA 2015 are enforceable.

On the first issue, it was held that construction of the entire clause must be evaluated in the context of the whole policy, to determine whether the provision would operate as a condition precedent, regardless of any label applied. In this case, the disputed term included a write-back for cover, where the policyholder acted reasonably in seeking to incorporate the standard terms, and the consequences of breach were detailed in a later section of the policy. This meant the provisions were difficult to reconcile and ambiguous in effect, so that the purported condition precedent was unenforceable.

On the second issue the Court held that, while it is possible to depart from the IA 2015, any such terms must be clearly brought to the policyholder’s attention prior to inception of the policy. The insurer had not done so and therefore could not rely on the purported opt-out term to deny indemnity.

Delos Shipholding v Allianz (“the WIN WIN”) [2024] EWHC 719 (Comm)

The claim arose from the ‘illegal parking’ of a bulk carrier just inside Indonesian territorial waters off Singapore. This minor infraction led to the vessel being detained by the Indonesian authorities for over a year, while the Master was prosecuted under local shipping laws. The claimants claimed under a war risks policy, which provided that the vessel became a constructive total loss after 6 months’ detainment.

The Insurers denied liability on grounds that (i) the loss was not fortuitous, as resulting from voluntary conduct to anchor in that location, (ii) an exclusion applied, for arrest restraint or detainment ‘under customs or quarantine regulations’, and/or (iii) the claimants had breached the duty of fair presentation, by failing to disclose that the sole director of the registered owner of the vessel was the subject of criminal charges in Greece.

The Commercial Court held that the exclusion did not apply, and the loss was fortuitous, since the crew did not realise the vessel had strayed into Indonesian territory or consciously chosen to do so. On alleged material non-disclosure, the Court held that the claimants did not have actual or constructive knowledge of the criminal charges, because the director was not ‘senior management’ for the purposes of section 4(3) of the IA 2015, instead being merely a nominee director with no decision-making powers. In any event, the defendants were held not to have been induced by the alleged non-disclosure.

The claimants’ separate claim for damages for late payment, pursuant to section 13A IA 2015 was dismissed. Based on the expert evidence, the Court was not satisfied that another similar vessel would have been available for the claimants to purchase, as alleged, and the claim for loss of trading profit, as a result of late payment of the insurance claim, was not made out.

MOK Petro Energy v Argo [2024] EWHC 1935 (Comm)

A cargo of gasoline loaded onto a tanker in Oman was insured under an all risks marine open cover on the ICC (A) wording. The gasoline was blended with methanol and the sale contract between MOK (the buyer) and PetroChina (the seller) required the cargo to have a phase separation temperature (‘PST’) below a stated level. On arrival at the discharge port, the cargo was found to significantly exceed the agreed limit. This meant that the octane rating was negatively affected, although the blend did not actually undergo phase separation, and the cargo was rejected by the end purchaser.

Insurers declined indemnity, on grounds that (a) no damage had occurred, and (b) a warranty in the policy, requiring inspection and certification of the cargo at the load port, had not been complied with. The cargo had been inspected, but there was no contemporaneous evidence of certification. MOK sought to rely on section 11, IA 2015, which provides that insurers cannot rely on breach of terms (such as warranties or conditions precedent) intended to reduce the risk of loss, if the insured can show that the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. MOK argued that its failure to comply with the certification element was irrelevant and would not have reduced the risk, since inspection of the cargo had taken place.

The Commercial Court held that no damage, i.e. adverse physical change, had occurred simply by mixing the blend in proportions which resulted in a defective product with propensity for a higher PST than contractually stipulated, applying Bacardi v Thomas Hardy [2002]. The comments on breach of warranty were therefore ‘obiter’, i.e. unnecessary to the decision and not binding in subsequent cases. The Judge agreed with the insurer that section 11 “is directed at the effect of compliance with the entire term and not with the consequences of the specific breach”. It was not disputed that compliance with the warranty as a whole was capable of minimising the risk of water contamination, so that the breach of warranty was made out.

This is the first judicial guidance on the operation of section 11, since the enactment of the IA 2015. There has been much debate as to whether this provision introduced a strict causation test, allowing policyholders to argue that the specific breach would have made no difference in the particular circumstances, even if compliance with the term would generally decrease the risk of that type of loss occurring. The decision in this case suggests a more onerous test for policyholders, and it will be interesting to see how the arguments are developed in subsequent cases.

JURISDICTION

Zephyrus Capital Aviation v Fidelis Underwriting [2024] EWHC 734 (Comm)

The defendant reinsurers applied to stay claims against them based on exclusive jurisdiction clauses (‘EJC’s) in favour of the Russian courts. The Commercial Court held that it was unlikely the claimants would receive a fair trial in Russia, in circumstances where the Russian state had a direct interest in the outcome of the litigation, and several claimants are from the UK and EU, which Russia had designated as ‘Unfriendly Foreign States’. The Court had regard to the multiplicity of proceedings and the risk of inconsistent judgments, as additional factors supporting its decision. This is a rare example of the English courts deciding that there are strong reasons not to apply an EJC.

AerCap Ireland v PJSC Insurance [2024] EWHC 1365 (Comm)

By contrast, the defendant reinsurers in this case were successful in obtaining a stay of English court proceedings on grounds that the policies, containing all risks and war risk coverage, included an EJC in favour of the Ukrainian courts. The Commercial Court held that the jurisdiction clauses were binding and enforceable, and the ongoing conflict was unlikely to result in substantial delays or other issues in litigating these claims in Ukraine.

‘PAY FIRST’ CLAUSES

MS Amlin v King Trader (“the Solomon Trader”) [2024] EWHC 1813 (Comm)

The policyholder chartered a ship, which became grounded in the Solomon Islands. The owner of the vessel, King Trader, obtained an arbitration award against the charterer in excess of $47 million. The charterer entered insolvent liquidation and King Trader sought to recover the loss from the charterer’s insurers, under the TPRIA 2010. The charterer’s liability insurance contained a clause stating: “it is a condition precedent to the Assured’s right of recovery … that the Assured shall first have discharged any loss, expense or liability.”

The insurers were successful in obtaining a declaration that they were not liable to indemnify the claim, because the insolvent charterer had not discharged the underlying liability. The High Court held that the ‘pay first’ clause was not repugnant to the purpose of the insurance or inconsistent with the other policy terms (including the right to terminate on insolvency, while preserving the insured’s right to indemnity for prior incidents). The clause was clearly worded and prominently stated, not a “fox in the henhouse … hidden away in the thickets of the Policy”.

The decision is a salutary reminder for policyholders to be wary of similar provisions. The Judge acknowledged that: “The state of English law on this issue in the light of the 2010 Act is not particularly satisfactory… Prudent operators seek to insure against those liabilities, and a range of third parties who suffer loss and damage as a result of accidents at sea will look to insurances of this kind to be made whole. ‘Pay first’ clauses reduce the efficacy of that protection when it is most needed”.

POLITICAL VIOLENCE

Hamilton Corporate Member v Afghan Global [2024] EWHC 1426 (Comm)

Following seizure of a US military warehouse by the Taliban, the owners sought to claim under a political violence reinsurance policy. The insurers declined cover in reliance on an exclusion for loss: “directly or indirectly caused by seizure, confiscation, nationalisation … expropriation, detention … nor loss or damage to the Buildings and/or Contents by law, order, decree or regulation of any governing authority, nor for loss or damage arising from acts of contraband or illegal transportation or illegal trade.”

The Commercial Court held that ‘seizure’ in this context was not restricted to seizure by law, order, decree or regulation of any governing authority, and the cover was limited to physical damage or destruction – not loss by way of deprivation. It was noted that ‘seizure’ has a settled legal meaning, namely “the act of taking forcible possession either by a lawful authority or by overpowering force”, following Kuwait Airways [1999]. The Judge rejected the claimant’s submission that the clause should be construed in light of factual matrix evidence addressing the market’s understanding of the differences between political risks and political violence insurance, and the history of similar clauses.

PROFESSIONAL INDEMNITY

Axis Specialty Europe v Discovery Land [2024] EWCA Civ 7

Discovery Land became interested in acquiring and developing Taymouth Castle in the Scottish Highlands. The solicitor instructed by Discovery Land on the purchase fraudulently misappropriated surplus client funds and then, nine months later, secretly mortgaged the castle to a third party.

The fraudulent solicitor was senior partner in a two-partner firm, which became insolvent, and Discovery Land pursued a claim against the firm’s PI insurers pursuant to the TPRIA 2010. A dispute arose as to whether the second partner in the firm had ‘condoned’ the dishonest acts of the fraudster, which would have engaged the following exclusion under the SRA Minimum Terms: “The insurer shall have no liability for … any claims … involving dishonest or fraudulent acts … committed or condoned by the insured, provided that: (a) the policy shall nonetheless cover the civil liability of any innocent insured; and (b) no dishonest or fraudulent act … shall be imputed to a body corporate unless it was committed or condoned by all directors of the company … or [LLP] members”.

The trial judge held that, while the second partner’s standards fell well below those required in the profession, he was not aware of and had not approved the fraud, or other acts in the same pattern of dishonest behaviour leading to the claim and nor was there any ‘blind-eye knowledge’ on his part. Further, the Court rejected insurers’ argument that the claims relating to (i) surplus funds and (ii) the secret mortgage should be aggregated, for purposes of the limit of indemnity.

The Court of Appeal upheld the first Instance decision as entirely rational. The aggregation clause in the policy provided that: “similar acts or omissions in a series of related matters or transactions will be regarded as one claim”. Applying the Supreme Court decision in AIG v Woodman [2017], it was necessary to consider whether the degree of similarity was real or substantial, and whether the claims fitted together, based on a thorough analysis of the underlying facts. Here, the trial judge had reviewed the evidence ‘painstakingly’, and while the two claims involved the same property and affiliated company victims, this was insufficient to provide the necessary link between the two transactions.

SUBROGATION

Dassault Aviation v Mitsui Sumitomo [2024] EWCA Civ 5

Dassault supplied aircraft to Mitsui Bussan Aerospace (‘MBA’) pursuant to a contract governed by English law including a non-assignment provision, as follows: “… this Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party”.

Following a delay in supply of aircraft on to the Japanese coastguard, Mitsui Sumitomo Insurance (‘MSI’) indemnified MBA for a liquidated damages claim from the coastguard and then sought to recover the loss by subrogated proceedings against Dassault. It was common ground that MBA’s claims against Dassault would be transferred to MSI by Article 25 of the Japanese Insurance Act, reproduced by the insurance policy, subject to operation of the non-assignment clause.

The Court of Appeal unanimously allowed the insurer’s appeal against the High Court decision, concluding that the language of the sales contract, in prohibiting an assignment ‘by any party’, did not prevent an assignment that took place by operation of law.

RSA Insurance v Textainer Group [2024] EWCA Civ 547

Textainer, a global supplier of shipping containers, incurred a loss of around $95 million following the collapse of Hanjin Shipping, in respect of thousands of missing and damaged containers and lost rental income. Textainer secured $70 million from primary and excess layer insurers and later recovered $15 million in Hanjin’s liquidation.

The Court of Appeal reaffirmed the well-established principle that recoveries are allocated on a ‘top-down’ basis, not proportionately (applying the House of Lords decision in Lord Napier and Ettrick [1993]). Sums obtained from third parties were therefore to be applied towards uninsured losses first, then paid down from the highest to the lowest layer of cover, before reimbursing the policy deductible. This approach applies to aggregate or excess layer placements and unitary losses alike. It confirmed that the concepts of under-insurance and average have no relevance to insurance written in layers.

WARRANTY & INDEMNITY

Project Angel Bidco v Axis Managing Agency [2024] EWCA Civ 446

The claimant sought indemnity under its buyer-side W&I policy for loss in value of the shares in a target company, on the basis that warranties given by the seller were alleged to be untrue. The relevant warranties stated that the company was not involved in legal proceedings or under investigation and had not committed any breach of contract or acts of bribery or corruption (‘ABC warranties’).

After the transaction completed, the target company became the subject of police investigations relating to compliance with anti-corruption and bribery legislation, and lost its key client, Liverpool City Council, resulting in insolvency of the target company and the policyholder. The insurers declined cover in reliance on a policy exclusion for “any liability or actual or alleged non-compliance with … [anti-bribery or anti-corruption laws]”. The policyholder argued that there was an obvious mistake in drafting of the exclusion, as it contradicted coverage provided in a cover spreadsheet listing the ABC warranties as insured obligations.       

By a 2:1 majority, the Court of Appeal upheld the Commercial Court decision, that the policyholder’s proposed correction to the exclusion clause should not be permitted. While accepting that there was an obvious contradiction, the Court held it was not clear any mistake had been made in the drafting and nor did any clear remedy exist to correct the alleged mistake. There was a plain commercial rationale for the broad effect of the exclusion, from the insurer’s perspective, and the ordinary meaning of the words applied. In a dissenting judgment, Phillips LJ preferred the policyholder’s argument and would have allowed the appeal, based on the commercial purpose and intended effect of the insurance in the overall context of the Sale & Purchase Agreement.

This case illustrates the high bar for establishing a mistake in the drafting of commercial contracts, particularly a bespoke W&I policy, to justify rectification of a disputed provision.

Authors:

Amy Lacey, Partner

Catrin Wyn Williams, Associate

Pawinder Manak, Trainee Solicitor

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by Fenchurch Law