Not Too Slender a Thread - Supreme Court decision in MT Højgaard v E.ON
The Supreme Court has upheld an appeal concerning liability to comply with fitness for purpose obligations in a design and build contract, in a case with significant ramifications for policyholders involved in construction projects. The judgment highlights the difficulties which arise when accepted industry practices are exposed as inadequate and reinforces the importance of precise drafting of contract terms, and associated policy wordings, given the literal interpretation likely to be applied notwithstanding potentially harsh consequences for unwary contractors.
The dispute arose from a significant error in an international standard for the design of offshore wind turbines known as J101. The contractor, MT Højgaard (“MTH”), relied on J101 whilst engaged by E.ON to design, fabricate and install foundations for the Robin Rigg wind farm in the Solway Firth, Scotland. Following completion of the works, it was discovered that J101 contained an inaccuracy such that the load-bearing capacity of grouted connections had been substantially over-estimated, resulting in remedial works at a cost of €26 million.
In April 2014, the trial judge held that MTH was liable to E.ON because the foundations were not fit for purpose, in breach of a provision in the Technical Requirements section of the Employer’s Requirements in the contract which imposed an obligation that the design “shall ensure a lifetime of 20 years in every aspect without planned replacement”. This provision applied in addition to less onerous contract terms requiring MTH to exercise reasonable skill and care, and to comply with J101.
The Court of Appeal overturned that decision, concluding that the 20 year service life provision in the Technical Requirements was qualified by compliance with J101 and good industry practice, in light of the inconsistency between that provision and other contractual terms. The relevant wording tucked away in the Technical Requirements was described as “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations, viewed in context of the contractual provisions as a whole and commercial implications.
In a unanimous decision, the Supreme Court ruled that MTH was liable for breach of the fitness for purpose obligations, construed either as a warranty that the foundations (1) would have a minimum service life of 20 years, or alternatively (2) be designed to last for 20 years. The court referred to UK and Canadian authorities where contractor warranties to complete works without defects were held to override any prescribed specification, noting: “it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”. J101 was expressed to be a minimum standard and the court was not prepared to disregard or give a different meaning to provisions of the Technical Requirements incorporated to the contract.
Construction contracts routinely incorporate schedules and technical documents with less than complete harmonisation as to intended legal standards of design and workmanship. The contract in this case was acknowledged to be of a “complex, diffuse and multi-authored” nature with many “ambiguities, infelicities and inconsistencies”. Nevertheless the court saw no reason to depart from the natural meaning of the fitness for purpose provisions, alongside MTH’s other obligations, in accordance with the prevailing approach of judicial non-interventionism that parties will be taken to mean what they say in their contracts (Arnold v Britton [2015] UKSC 36).
To avoid ambiguity, contracting parties should consider the inclusion of express provisions clarifying whether and how technical schedules are to affect overall obligations as to design and workmanship, clearly distinguishing requirements to exercise skill and care from performance warranties or guarantees of fitness for purpose. This in turn will allow policyholders to properly evaluate the risks assumed under the contract, and liaise with their insurance brokers to ensure adequate professional indemnity and all risks cover for potential liabilities.
MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59
https://www.supremecourt.uk/cases/docs/uksc-2015-0115-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
Fenchurch Law continues expansion of insurance claims disputes capability with Hunter appointment
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has further expanded its team of specialist claims dispute lawyers with the appointment of Tom Hunter as an associate.
Tom joins the Fenchurch Law team with experience in financial lines claims defence work and coverage issues including advising on professional indemnity, D&O, E&O and banker’s blanket bond claims. In addition to supporting clients of the firm’s financial & commercial risks practice, he will also work on coverage disputes for clients of their professional risks and construction risks practices.
Managing Partner of Fenchurch Law, David Pryce said: “Tom’s appointment continues the expansion of our coverage dispute capabilities. His experience and knowledge of the financial lines space further strengthens our ability to deliver exceptional service to policyholders and their brokers.”
Tom joins from Reynolds Porter Chamberlain (RPC) where he was an associate in their professional and financial risks group. During his time with RPC he was seconded to Arch Insurance Europe, where he worked within their third-party claims team.
Fenchurch Law receives “Gold” Award for client care experience
We’re delighted to announce that Fenchurch Law has received Investor in Customers’ Gold assessment award, recognising our commitment to client service.
Investor In Customers is an independent client experience agency which conducts client experience assessments, helps develop insights into client satisfaction, and awards annual accreditations. This was our first assessment with them.
By measuring how well we understand and meet our clients’ needs, offer innovative and efficient service and create loyalty, Investor in Customers awarded us their highest ever first assessment score, and the sixth highest score ever awarded by IIC. We also achieved IIC’s highest ever Net Promoter Score®.
Net Promoter Score® is a universal standard that measures the willingness of clients to recommend a company's products or services to others, and our high score highlights how much we care about our clients’ satisfaction.
Managing Partner David Pryce commented that: “the recognition reflects how we prioritise client satisfaction at Fenchurch Law. Improving outcomes for policyholders is our number one priority, and we are confident that the IIC assessment process will help us to improve every aspect of our service in the future”.
To learn more about the award and Investor in Customers, please visit: www.investorincustomers.com.
®Net Promoter, NPS, and Net Promoter Score are trademarks of Satmetrix Systems, Inc., Bain & Company, and Fred Reichheld
Dalecroft Properties Limited – v – Underwriters
Dalecroft Properties Limited – v – Underwriters subscribing to Certificate Number 755/BA004/2008/OIS/00000282/2008/005
[2017] EWHC 1263 (Comm)
This recent decision by the Commercial Court provides a neat recap of the applicable law pre the Insurance Act 2015, which still applies to many claims brought by policyholders today.
The Claimant, Dalecroft Properties Limited (‘Dalecroft’), owned a property in Margate (‘the property’). The property was a mixture of commercial and residential parts, and was insured with the Defendants (‘the Underwriters’).
The property was a five-storey building, and included a restaurant, a charity shop and an amusement arcade, the upper floor of which had previously been used as a discotheque (‘the disco building’).
The brief insurance history is as follows:
- On 1 August 2007, Tristar (the Underwriters’ Agents) issued Dalecroft with a schedule for the period 1 August 2007 – 31 July 2008 (‘certificate 001’).
- Shortly after, Dalecroft requested an increase to the sums insured. Accordingly, on 16 August 2007, Tristar issued Dalecroft with a new schedule marked CANCEL & REPLACE (‘certificate 002’).
- At the August 2008 renewal, Tristar issued Dalecroft with a schedule for the period 1 August 2008 – 31 July 2009 (‘certificate 003’).
- On 19 November 2008, Dalecroft’s brokers requested that “the property should be registered in the name of Dalecroft Properties Ltd’. On 20 November 2008, Tristar issued Dalecroft with a new schedule marked CANCEL & REPLACE (‘certificate 004’). The period of insurance ran from 19 November 2008 to 31 July 2009, and the premium was stated to be £0.00.
- On the same day, Dalecroft’s broker noted that Tristar had failed to correct Dalecroft’s name on the policy and so, on 21 November 2008, Tristar issued a further schedule marked CANCEL & REPLACE (‘certificate 005’). Again, the insured period ran from 19 November 2008 – 31 July 2009, and the premium was stated to be “£0.00.”
A fire occurred on 16 May 2009, which required the property to be demolished and rebuilt. Dalecroft then made a claim on the policy, which the Underwriters sought to avoid.
In the subsequent proceedings, Dalecroft claimed an indemnity from the Underwriters for its losses arising from the fire. The Underwriters counterclaimed for a declaration that they were entitled to avoid the policy on the grounds of misrepresentation/non-disclosure, and a breach of warranty.
In all but one of allegations of misrepresentation, Dalecroft denied that what it said was untrue. It also said the matters complained of by the Underwriters did not induce the making of the contract, as the relevant contract was not made until 2008, by which point the Underwriters had issued a revised certificate headed “Cancel and Replace.”
The issues to be decided were:
a) Which was the relevant policy?
b) Did Dalecroft misrepresent any matters to the Underwriters?
c) Were there any breaches of warranty?
d) Was the risk divisible into commercial and residential parts?
Which was the relevant policy?
Dalecroft submitted that the relevant policy was contained in certificate 005, this being the policy in force at the date of the fire.
The Underwriters, by contrast, submitted that correct policy was certificate 003 i.e. the policy issued at renewal in August 2008.
The Judge, Mr Richard Salter QC, agreed with the Underwriters. He accepted that certificates 004 and 005 were marked CANCEL & REPLACE; however, neither certificate was a new policy.
Misrepresentation/Non-Disclosure
The Underwriters relied on the following misrepresentations/non-disclosures in the August 2008 Proposal/Statement of Fact:
a) That the residential units were vacant for refurbishment;
b) That the property was in a good state of repair;
c) That the property had no flat roof;
d) That the property had not been subject to malicious acts or vandalism;
e) The non-disclosure of the fact that the property had been the subject of an Emergency Prohibition Order (‘EPO’) dated 6 June 2008.
Apart from point (a), the Underwriters made out their case in respect of each alleged misrepresentation/non-disclosure.
There was compelling evidence that the property had suffered from broken windows, leaking and drainage issues (amongst other issues). Accordingly, Dalecroft had misrepresented that the property was in a good state of repair.
As regards the status of the roof, the Judge noted the experts’ views that the flat proportion of the roof comprised 50.43% of the entire roof area. As such, the representation that there was no flat roof was also incorrect.
As to the alleged malicious acts of vandalism, the Judge found that there was a history of “continual disturbances of vandalism and drug taking”, together with at least one further specific incident where a police officer was assaulted. Therefore, this too had been misrepresented.
Finally, the Judge accepted that the EPO had been misrepresented. There was a long list of defects to the property (which significantly increased the risk of fire), and nothing to suggest that the issues had been remedied. In the circumstances, the Judge found that this was a matter about which a prudent insurer would have wished to know.
The Judge found that each of points (b) – (e) were material, and that the Underwriters had made out their case on inducement. Accordingly, Dalecroft’s claim had to fail.
Although not strictly necessary, the Judge went on to consider the remaining issues.
Were there any breaches of warranty?
The Underwriters alleged that Dalecroft breached a Commercial Unoccupancy Condition in the policy (‘the Condition’) in that it had failed to ensure that:
a) The Basement and disco building were free of combustible materials;
b) The charity’s letterbox was sealed;
c) The Charity Shop and the Basement were properly secured;
On the evidence, the Judge was satisfied that Dalecroft was in breach of the Condition. In particular, it was clear from the available photographs that there were loose combustible materials in the disco building, and that neither the charity shop nor its letterbox were secured against unauthorised entry.
Was the risk divisible into commercial and residential parts?
Dalecroft argued that the risk was divisible, and that, because the alleged misrepresentations/non-disclosures related only to the residential parts, it was entitled to an indemnity for their losses in relation to the commercial part.
The Judge disagreed. The condition broken by Dalecroft was directed at risks which jeopardised the entire property. It followed that the Underwriters were discharged from all liability.
Summary
The Underwriters, on the facts of this case, were entitled to reject all claims made against them. The Judge was keen to emphasise, however, that even if the new law had applied, Dalecroft’s claim would still have failed. In this respect, he was satisfied that Dalecroft made “no real effort” to make a fair presentation, and that Underwriters would still have declined to take on the risk.
Alexander Rosenfield is an associate at Fenchurch Law
Peel Port Shareholding Finance Company Ltd – v – Dornoch Ltd
Can a Claimant obtain an order for pre-action disclosure against a solvent insured?
The Claimant, Peel Port Shareholder Finance Company Ltd (‘Peel Port’), suffered a fire at its premises at Sheerness Docks, Kent, on 14 January 2013. Its case was that the damage was caused by the activities of ‘European Active Projects Ltd’ (‘EAPL’).
Peel Port claimed that EAPL had no defence to the claim, and that judgment would be awarded in its favour for sums exceeding £1m. Further, it claimed that EAPL would be unable to meet any judgment, and would be wound up as a result.
EAPL’s insurers, Dornoch Ltd (‘Dornoch’) denied that the claim was covered, on the basis that EAPL did not comply with the “hot working” endorsement to their public liability policy (“the policy”). Dornoch did not, however, disclose a copy of the policy to Peel Port.
Peel Port took issue with Dornoch’s non-disclosure, and argued that sight of the policy was essential to their understanding of (a) whether the endorsement had been properly incorporated into the policy; and (b) the effect of the endorsement when construed in the context of the policy as a whole.
The application
Under the framework provided for in CPR 31.16, Peel Port issued an application for pre-action disclosure against Dornoch for a full copy of the EAPL policy. CPR 31.16 states as follows:
1) This rule applies where an application is made to the court under any Act for disclosure before proceedings have started.
2) The application must be supported by evidence.
3) The court may make an order under this rule only where–
a. the respondent is likely to be a party to subsequent proceedings;
b. the applicant is also likely to be a party to those proceedings;
c. if proceedings had started, the respondent’s duty by way of standard disclosure, set out in rule 31.6, would extend to the documents or classes of documents of which the applicant seeks disclosure; and
d. disclosure before proceedings have started is desirable in order to –
i. dispose fairly of the anticipated proceedings;
ii. assist the dispute to be resolved without proceedings; or
iii. save costs
The parties’ submissions
Peel Port argued that disclosure of the policy should be ordered, as this might obviate the need for any further litigation against EAPL, thereby preventing wasted costs.
Dornoch accepted that the procedural grounds for issuing the application were made out, and that the policy itself was disclosable. However, they resisted the application on the basis that a statutory mechanism for obtaining information about the policy already existed in Third Parties (Rights against Insurers) Act 2010 (‘the Act’).
In light of the above, Dornoch argued that any order for disclosure under CPR 31.16 would undermine and be inconsistent with the Act.
The decision
The Judge, Mrs Justice Jefford, refused Peel Port’s application. In arriving at her decision, the Judge gave weight to the following factors:
1) The advent of the Act meant it was unlikely that Parliament envisaged a situation where litigants could use CPR 31.16 to obtain insurance policies from the insurers of insolvent insureds;
2) There had never been an express statutory mechanism which entitled a litigant to obtain the policy of a solvent insured;
3) CPR 31.16 would not come to a prospective litigant’s avail in proceedings against the insured, as the policy could not fall within the parameters of standard disclosure i.e. it was not relevant to the case.
It was central to the Judge’s decision that EAPL was not insolvent. Peel Port tried to deflect this point by saying that EAPL would not be able to meet a judgment awarded against it. However, the Judge found that the circumstances were not sufficiently exceptional. Accordingly, there was no basis to depart from the established practice against disclosure of a solvent insured’s policy.
Alexander Rosenfield is an associate at Fenchurch Law
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.