A twist in the tale!: - the Court of Appeal throws up some surprises in the “At the Premises” judgment
The long-awaited judgment in the “At the Premises” (“ATP”) judgment has now been handed down, and the expected policyholder-friendly outcome marks another welcome milestone in the journey towards bringing these cases to a conclusion, even if the route by which the Court of Appeal got there took some less expected twists and turns.
While there were a number of other issues on appeal, this article focuses on causation, which continues to be a key battleground for insurers and their policyholders.
Background
By way of a brief recap, policies with clauses providing cover for cases of Covid-19 “at the premises” were not considered by the Divisional and Supreme Court in the FCA Test Case, which instead considered a range of policies including those which provided cover for a disease occurring within a specified radius of an insured premises.
In the FCA Test Case, the Supreme Court considered causation at some length, finding that “[212]…in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.”
However, insurers resisted the application of that analysis to ATP policy wordings, leading to this litigation considering “the critical question” as to whether the Supreme Court’s reasoning in respect of causation could properly be applied to such wordings. At first instance, the answer was a decisive yes (and some further background can be found in our previous article). Insurers appealed, and this judgment is from that appeal which was heard earlier this year.
Insurers’ Causation Arguments
Despite a number of common causation issues to all of the appeals, the primary case advanced differed between the insurers, as follows:
- ExCeL & Kaizen Insurers – their position was that there would be cover only when an occurrence of disease at the premises was a “distinct effective cause” of the closure of the premises (i.e. it must be a known occurrence of the disease at the premises to which the government or local authority was responding);
- Hairlab & Why Not Insurers – they took the position that only a stricter “but for” test applied (requiring the occurrence of a disease at the premises to be a necessary and sufficient cause of the subsequent restrictions - the court recognised this test would seldom be satisfied); and
- Mayfair Insurers – whose position was that the authority had to know about the suffering of disease at the particular premises and had to take it into account in reaching its decision (although it need only contribute to that decision).
The Court of Appeal’s Decision
In setting out their positions, the insurers argued that the correct approach was to begin with the interpretation of the policies in issue, having regard to their language and context, rather than asking whether those clauses differ materially from the radius clauses considered by the Supreme Court in the FCA Test Case. The Court of Appeal agreed there was some force in that.
However, ultimately that change of approach proved to make very little difference to the outcome, with the Court of Appeal finding that:
- The nature of the insured peril informs the causation test agreed between the parties, which is not derived from other perils mentioned in the insuring clause (such as vermin infestation), but instead focuses on the particular peril in question.
- In that regard, notifiable diseases spread rapidly and widely, with the potential to cause interruption over a wide area. The circumstances that would lead to a closure of an insured premises are unlikely to be in response to an isolated incident: instead, it must have been contemplated that a closure or restrictions imposed by a relevant authority would be in response to an outbreak as a whole over a particular area, whether that be local or national. Furthermore, the worse and more widespread the outbreak of the disease, the more likely it would be that such restrictions would be imposed.
- Accordingly, a “but for” test could not have been the intended approach to causation, as the parties must have intended for the causation requirement to be satisfied if the occurrence at the premises was one of a number of causes of the closure.
- It would be unrealistic to suppose that the authority would apply its mind to identifying a particular case of a disease at a particular premises. In the case of a serious outbreak, a relevant authority would know that there had been a number of occurrences of a disease (perhaps over a certain area, or affecting a particular kind of premises within an area) and it would simply react to those occurrences by imposing restrictions accordingly.
- The finding of fact by both the Divisional and Supreme Court in the FCA Test Case (that “each of the individual cases of illness resulting from Covid-19 which had occurred by the date of any Government action was a separate and equally effective cause of that action”), applies equally to the ATP claims, both in respect of the cases which were known about, and those which were “known unknowns”.
Comment
This appeal judgment is a welcome development for policyholders and confirms that despite the differences between radius and ATP clauses, it may not materially affect the nature of the casual link that must be established, which is a matter of policy interpretation and intention.
Policyholders with the benefit of ATP cover can now expect a recovery from their insurers, although notably a lack of clarity remains about the evidence required to demonstrate the presence of a case of Covid-19 at the premises, and it is to be hoped that insurers take a pragmatic approach that avoids this issue becoming the next battleground.
Now that the ATP appeal has concluded, and with the tide very much in favour of the policyholders, the Court of Appeal will be considering similar causation arguments along with furlough in the upcoming appeals arising out of the Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE group of cases.
Watch this space.
Anthony McGeough is a Senior Associate at Fenchurch Law
Grenfell Tower Inquiry: Phase 2 Report
Last week saw the publication of the second and final Grenfell Tower Inquiry report (“Report”) examining the circumstances that led to the tragedy which claimed 72 lives more than seven years ago.
The damning Report concluded that the “culmination of decades of failure by central government” and the “systematic dishonesty” of product manufacturers contributed to a rotten culture at the heart of the industry, setting the path to disaster.
Below is a summary of the key findings in the Report.
Summary of Report Findings
The Report named and shamed a number of parties, including, amongst others:
- The government. From the fires that involved extensive spread through combustible external panels at Knowsley Heights in 1991, Garnock Court in 1999 and Lakanal House in 2009 respectively; to the knowledge of BRE’s large-scale test results showing ACM panels burnt violently in 2001; and awareness of the industry’s worries that combustible insulation and ACM panels were routinely used on high-rise buildings in breach of building regulations – time and time again, the government failed to act in relation to the risks posed by use of these combustible materials in buildings. The government’s deregulatory agenda also contributed to the disregard and delays in strengthening the fire safety regime.
- The Building Research Establishment. The BRE, recognised as a leader in fire safety nationally and internationally, was regularly engaged by the government to carry out research and provide reports. The Inquiry uncovered issues with the BRE such as poor record-keeping, and a lack of scientific rigour, which exposed it to manipulation of test results by product manufacturers. Further, the BRE seemed to have been reluctant to draw the government’s attention to the dangers presented in the cladding products it tested, and the reports presenting these risks to life were drafted in less than overt terms.
- Arconic Architectural Products, Celotex and Kingspan. These companies were manufacturers of the combustible ACM cladding and insulation materials used in the refurbishment of Grenfell Tower. Despite being fully aware the products they sold came with grave concerns for fire safety and were unsuitable for using on high-rise buildings, they all “engaged in deliberate and sustained strategies to manipulate the testing processes, misrepresent test data and mislead the market” so as to further their own commercial interests at the expense of others.
- Rydon, Harley Façade and Studio E. The principal contractor, cladding subcontractor and architect engaged in the refurbishment project were all criticised for failing to understand and discharge their obligations under the contracts. None of them were found to have acted in accordance with the standards of a reasonably competent person in their respective positions. In particular, as the architect of the refurbishment project, Studio E was responsible for the design of the external wall and its choice of materials, and therefore bears a “very significant degree of responsibility”.
The Report also addresses two matters outstanding from the Inquiry Phase 1:
- On the contribution to the fire by ACM panels and the insulation boards, it confirms that the principal factor in the rapid growth of fire was the unmodified polyethylene in the ACM panels, though the insulation (due to its heat retaining ability) was also key.
- As to how the fire escaped into the external wall of the building from the kitchen of the flat where the fire first started, it confirmed the findings in Phase 1, i.e. due to the proximity of combustible cladding to the fire, where the fire likely escaped via the route of a collapsed uPVC window jamb into the column cavity in the external wall.
The Report contains various recommendations targeting the deficiencies identified, with the aim of preventing another cladding fire disaster. To enhance accountability and ensure the government will seriously consider the recommendations affecting fire safety going forward, the Inquiry recommends that the government be legally required to maintain a publicly accessible record of recommendations made by select committees and public inquiries, and document the steps taken in response.
Key Takeaways
The Grenfell Tower fire is a disaster that could have been avoided.
At present, there remain some 2,000 residential buildings in the UK at 11 metres or over identified has having unsafe cladding, in respect of which remedial works have yet to commence. The recent fire that engulfed a block of flats in Dagenham with “non-compliant” cladding highlights the urgency for remediation: there can be no excuses for history repeating itself.
Developers, landlords and construction professionals with cladding exposures should proactively step up to collaborate on completion of investigations and remedial works, to make homes safe. The Report provides some guidance on the apportionment of liability among the various industry stakeholders, which could potentially be helpful for parties pursuing recoveries / seeking contributions, for projects with unresolved cladding and fire safety claims.
Queenie Wong is an Associate at Fenchurch Law
MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale
MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale
MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) [2024] EWHC 1813 (Comm) is the latest in a string of recent cases that confirm the court’s reluctance to interfere with the wording of an insurance contract where the wording is clear. In this case, the wording was no ‘fox in the henhouse’, hidden away in the ‘thickets of the policy’ but front and centre.
Background
King Trader was the owner of a ship, Solomon Trader, which was chartered to Bintan Mining Corporation (“BMC”). MS Amlin issued a charterers’ liability policy to BMC (“the Policy”). In a run of bad luck, the ship became grounded in the Solomon Islands in 2019, BMC became insolvent in 2021, and an arbitration award in excess of US$47m (including interest) was made against BMC in 2023.
As BMC was no longer in the picture, King Trader and its P&I Club sought to recover under the Policy via the Third Parties (Rights Against Insurers) Act 2010.
You would be forgiven for thinking that is the end of the tale - a clear liability had been established, the policyholder had a liability policy, presumably the policy would respond? Sadly not, the wording contained a "pay first" clause, and MS Amlin therefore issued proceedings against King Trader and its P&I Club, seeking a declaration that there could be no indemnity in circumstances where the policyholder had not first discharged their legal liability.
The terms of the Policy
The relevant terms of the Policy for the purposes of this case were set out across various sections of a policy wording that was sub-divided into five parts, and accompanied the insurance certificate, as follows:
Part 1 provided that "The Company shall indemnify the Assured against the Legal Liabilities, costs and expenses under this Class of Insurance which are incurred in respect of the operation of the Vessel, arising from Events occurring during the Period of Insurance as set out in sections 1 to 17 below".
"Legal Liability" was defined as "Liability arising out of a final unappealable judgment or award from a competent Court, arbitral tribunal or other judicial body".
Section 25 of Part 5 stated "It is a condition precedent to the Assured's right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability."
And finally, Section 30 of Part 5 contained the all-important “pay first” clause- “It is a condition precedent to the Assured's right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability.”
Third Parties (Rights against Insurers) Act 2010
It is worth noting that in most circumstances the usual position under section 9(5) of the Act is that transferred rights are not subject to a condition requiring the prior discharge by the policyholder of its liability to the third party (i.e. a “pay first” clause). However, there is a significant caveat to the usual position, which applies in most circumstance except where the policy is a “contract of marine insurance”, as set out in section 9(6) of the Act.
The Issues for the Court
Without the protection of the Act, the third party’s only hope was to persuade the court that the “pay first” clause either (i) did not form part of the Policy; or (ii) as a matter of construction does not apply where a third party seeks to enforce the Policy, or (iii) is inoperative where the insured is unable to discharge the liability or is insolvent.
The court summarised the relevant considerations as being:
- Where there is inconsistency between a clause specifically agreed for the contract vs. a provision in an incorporated set of pre-existing printed terms, the court may find that the second clause is either not incorporated at all, or if it is, the court may read it down.
- Where there is inconsistency between two clauses that appear in the same document, the court may conclude that the clauses co-exist.
- When considering if two clauses can co-exist, attention will be paid to whether giving effect to the “repugnant” clause leaves the more substantive clause with a real and sensible content, and, if the subsidiary clause is to be read down, whether it will be left with a meaningful and sensible content.
- The court may be more willing to read down or read out a subsidiary clause which is inconsistent with a provision that forms part of the main purpose of the contract, or which is inapposite to the main contract.
The Judgment
In respect of arguments on inconsistency / repugnancy, the court held that it was not possible to establish any inconsistency between the “pay first” clause and the terms of the insurance certificate on the basis that the certificate clearly incorporated and attached the entirety of the wording.
Furthermore, there was not an inherent inconsistency between MS Amlin’s promise to provide liability cover and a clause making enforcement of the obligation to pay the indemnity conditional on prior discharge of that liability by the insured.
Nor was there a conflict between sections of the Policy that allowed MS Amlin to terminate the Policy on BMC's insolvency but preserve BMC's rights to indemnity in respect of incidents occurring prior to termination, and the “pay first” clause, which would require an insolvent insured to discharge its liability as a condition precedent to an indemnity.
Finally, the court considered that the “pay first” clause was not “hidden away in the thickets of the Policy”, as it was clear from the insurance certificate and the index of the wording that it included general provisions effecting the scope of rights under the Policy. Furthermore, the “pay first” clause appeared in a section which imposed a number of obligations, which left the judge unpersuaded that the clause “in this context is in the nature of a fox in the henhouse (or a wolf in the flock)”.
As for the arguments on construction and implied terms, the court held that there was no legitimate process of contractual construction that could subject the clear language of the “pay first” clause to restrictions such as only being applicable in circumstances where the insured has the means to pay a claim or in the event that a third party must pursue a claim under the Act, nor could it be argued that necessity or business efficacy required the implication of words limiting the operation of the clause.
Comments
Perhaps not a surprising outcome, especially in the context of a number of recent commercial court and appellate level decisions such as Bellini v Brit and Project Angel Bidco v Axis, that have reinforced that the courts generally will be reluctant to interfere with clear wording in an insurance contract.
In this case, and in circumstances where there is an absence of statutory control for “contracts of marine insurance”, there was little support at common law that would assist these third parties under this particular wording.
That being said, the judge’s parting remarks certainly leave the reader with the impression that this can be seen as a particularly ugly outcome for parties involved, “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”.
Anthony McGeough is a Senior Associate at Fenchurch Law.
Affected by the Riots? Insurance and Other Remedies
Insurance
If your property has been damaged due to the recent nationwide spate of riots, your first port of call for remedy should be your insurers.
Affected individuals should notify their insurers of any damage as a result of the riots, as soon as possible.
Most property policies will include standard cover for physical damage to property. However, some policies may contain an exclusion for losses caused by, or in consequences of riot.
The definition of a riot (unless otherwise defined) in an insurance policy is its technical legal meaning as per The Public Order Act 1986 s.1, which requires a minimum of 12 people for the offence of riot.
The Riot Compensation Act 2016
In the event that a claim is declined, for example, due to a riot exclusion or a vehicle only being insured for third-party losses, the Riot Compensation Act 2016 (“RCA”) may provide an alternative route for compensation.
The RCA was introduced to help communities recover more quickly from the impact of rioting where the affected individuals are either inadequately insured or have had their claim declined by their insurer.
If your property is insured, the RCA requires an affected person first to claim via their insurers. However, If the claim is declined in full or part, the affected person can seek further remedy under the RCA.
What the RCA will cover:
- Owners of a building may claim for damage to the buildings structure;
- Tenants/Occupiers may claim for damaged/stolen contents;
- Damaged or stolen business items stored in a vehicle;
- Damaged or stolen stock-in-trade vehicles; and
- Damaged or stolen underinsured vehicles.
What the RCA will not cover:
- personal items held outside of a building;
- consequential loss e.g. loss of trade or rent; and
- personal injury - this is dealt with by the Criminal Injuries Compensation Authority (CICA).
Deadlines:
- An affected individual will have 42 days from the date of the riot ending to claim under the RCA, unless;
- The affected individual has first made their claim under their insurance, in which case they will have 42 days from the date the insurer declines/partially declines the claim.
How to claim via the RCA:
- Claimants should complete and send the GOV.UK dedicated claim form via post or email to the claims authority for the police force in the area where the riot took place.
- The details of where to send the claim form will be found on the police force’s website.
Helpful Links:
Chloe Franklin is an Associate at Fenchurch Law
First decision on s11 Insurance Act (causation test for breach of warranty)
Ever since the introduction of the Insurance Act 2015, there has been debate about how causation works in the context of section 11 and in particular the provision in sub-section 11(3) whereby the policyholder is excused from the usual consequences of a breach of warranty if it can show that its “non-compliance with the [warranty] could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”
Policyholders had thus argued, despite the Law Commission having said this was not what it had intended, that this introduced a strict causation test. For example, where the policyholder had warranted that it had a burglar alarm but it failed to set it, it would (it argued) be open to it to show that this particular burglary was undertaken by thieves so sophisticated that setting the alarm would have made no difference - even if setting the alarm would decrease the risk of burglary in general.
Likewise, a policyholder would wish to argue that, on the actual facts of its loss, a warranty had been breached in only a minor respect, which made no difference, even if a more serious non-compliance would unquestionably have affected the likelihood of that particular loss.
This argument has now been considered, and rejected, by Mrs Justice Dias in her decision on 26 July in Mok Petro v Argo. This was a highly complex case concerning contaminated commodities, and the breach of warranty issue features only briefly at the end of the judgment. On that issue, the Judge said as follows:
“There is nothing in the wording of the section to suggest that where a term can be breached in more than one way, it is only the particular breach which must be looked at. On the contrary, it seems to me that section 11 is directed at the effect of compliance with the entire term and not with the consequences of the specific breach. … I therefore conclude that [Counsel for the Insurers] is right about this. There was no serious dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination … and that therefore non-compliance could have increased the risk of the loss which actually occurred.”
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Comm/2024/1555.pdf
Jonathan Corman is a Partner at Fenchurch Law.
CrowdStrike Outage - Insurance Recoveries
Many businesses have suffered losses following a catastrophic IT failure when an update released on 19 July by US cybersecurity firm, CrowdStrike, caused crashes on Microsoft Windows systems globally.
We are recommending that policyholders review the scope of coverage available under their cyber and property damage/business interruption insurance.
What to look out for:
- Is there cyber cover for system failure that responds to accidental (i.e. non-malicious) events such as this?
- Are there any relevant business interruption waiting periods to consider?
- What other losses are covered – such as the cost of data restoration, incident response and voluntary shutdown?
- Is there cover for supply chain failure?
- In the context of PD/BI policies, the ‘damage’ trigger will need careful consideration.
What steps do you need to take?:
- Ensure timely compliance with notification provisions and other claims conditions
- Have steps been taken to mitigate losses so far as possible?
- Make sure accurate records are kept of the sequence of events and the losses that have been incurred as a result of the outage.
Please get in touch if we can be of any assistance, or if you have any queries.
Joanna Grant is the Managing Partner of Fenchurch Law
Policy Cover for Cladding “Damage”
A combustible cladding crisis has engulfed the construction sector in recent years, with tragic fires in apartment blocks in London, Melbourne, Dubai and Valencia indicative of systemic global risks. External wall panels, widely used since the 1990’s to reface high-rise buildings, have been exposed in many cases as hazardous and unsuitable, compounded by fire stopping and compartmentation defects, resulting in an avalanche of claims against developers, owners, contractors, consultants and insurers.
Rectification costs are potentially recoverable under latent defects policies, covering structural or safety issues affecting new build developments, or under professional indemnity policies, in response to third party claims against designers arising from negligence in the course of their professional duties. This article focuses on recent authority in common law jurisdictions which suggests that the incorporation of defective cladding panels may constitute physical damage for the purpose of other types of liability or property insurance.
Owners v Fairview
In Owners - Strata Plan No 91806 v Fairview Architectural (No.3) [2023] the defendant (“Fairview”) manufactured and supplied combustible Vitrabond panels, installed on two high-rise residential buildings in Sydney. Following an order by the local council to remove the panels, the owner commenced representative proceedings against Fairview alleging that the panels were not of acceptable quality, in breach of statutory requirements. The owner applied to join Fairview’s liability insurer to the claim, on the basis that Fairview’s potential liability arose from “property damage” caused by an “occurrence” (defined in the policy as an event resulting in property damage that was neither expected nor intended).
Justice Wigney acknowledged that the question of coverage was “not easy … involving matters of degree and characterisation”, with many of the authorities turning on their own unique facts and the more contentious cases involving alleged physical damage based on a loss of functionality. Notably the New South Wales Court of Appeal has rejected an argument that the blockage of a grain silo by grain constituted physical damage (Transfield v GIO (1996)).
The Federal Court held that it was at least arguable the liability policy would respond to the underlying claims, since the affixation of cladding panels “had an instant and damaging effect on the building because the panels posed an immediate and unacceptable danger to the residents of the building”. Physical damage to the facade occurred during the period of insurance, when the panels were attached by insertion of nails and screws into the walls of the building using a top hat structure. It was held that this could be characterised as an “occurrence” because Fairview did not expect or intend the panels to be combustible or defective, nor that the panels would have to be removed.
In reaching this conclusion, Justice Wigney considered Australian Plywoods v FAI (1992), where the Queensland Court of Appeal held that physical damage to the hull of a boat occurred at the time that defective plywood was attached using screws and glue; and R & B Directional Drilling v CGU (2019), where the Federal Court determined there was no physical injury to a tunnel by accidental filling of a conduit pipe with concrete, as the pipe could be removed leaving the tunnel in the same physical state as before the defective work.
Justice Wigney distinguished the decision in Pilkington v CGU [2005], where the English Court of Appeal held that installation of a small number of defective glass panels in the Waterloo Eurostar Terminal had not caused physical damage to the terminal building, to trigger cover under the manufacturer’s products liability policy. In that case, the owner did not remove the affected panels (so there was no physical damage associated with access, to replace defective components) and chose instead to implement safety measures to avoid the risk of shattered glass falling.
Fortuity
In English law, damage is a fortuitous change in physical condition that is adverse. The requirement for an altered physical state is crucial to distinguish between damage and defects. The fact that something is rendered less valuable or useful does not in itself constitute damage; but where the subject matter is added to, defaced or contaminated by some other substance, it is a matter of degree whether this will be regarded as affecting the physical condition of the property. Product liability insurance is triggered by personal injury, or physical loss or damage to third party property, during the period of insurance, as opposed to economic impacts such as loss of goodwill (Rodan v Commercial Union [1999]).
In Pilkington, the first instance decision - that the terminal was not physically damaged by an Occurrence which consisted of no more than the intentional installation of the product designed to be installed - was upheld on appeal. The policy wording made clear that damage or deterioration confined to the product itself was excluded, i.e. the policy would only answer in respect of physical damage suffered by third party property in relation to which the product had been introduced or juxtaposed.
Lord Justice Potter observed:
“Damage requires some altered state, the relevant alteration being harmful in the commercial context. This plainly covers a situation where there is a poisoning or contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied … difficulties of application of such a test may arise in cases where a product supplied is installed by attachment to other objects in a situation in which it remains separately identifiable, but by reason of physical change or other deterioration within it, it requires to be renewed or replaced.”
American Cases
The Court of Appeal in Pilkington considered various American authorities including Eljer Manufacturing v Liberty Mutual (1992), in which Circuit Judge Posner in a majority judgment decided that the installation of a defective product or component into property of the buyer, in circumstances where the defect does not cause any tangible change in the property until years later, can be regarded as physical injury from the time of installation. Judge Posner considered that the presence of a potentially dangerous ‘ticking time bomb’ should be construed as injury to the structure from the time of incorporation, based on the commercial intent of the parties to the insurance contract.
The outcome seems analogous with the limitation period in tort for claims where inherent design defects give rise to economic loss in the absence of physical damage, commencing at the latest on practical completion, as discussed in URS v BDW [2023].
In a dissenting judgment in Eljer, Circuit Judge Cudahy rejected the majority view, and this reasoning was endorsed by the Court of Appeal in Pilkington as better reflecting the approach of an English court. Lord Justice Potter referred to the comments of Stuart-Smith LJ in Yorkshire Water v Sun Alliance [1997] as follows:
“… the American Courts adopt a much more benign attitude towards the insured … based variously on the “folly” argument … or that insurance contracts are: “contracts of adhesion between parties who are not equally situated” … or because the Courts have … adopted the principle of giving effect to the objectively reasonable expectations of the insured for the purpose of rendering a fair interpretation of the boundaries of insurance cover … For the most part these are notions which reflect a substantial element of public policy and are not part of the principles of construction of contracts under English law.”
Arguably this benevolent approach is reflected in recent US decisions on defectively mixed concrete, suggesting that “any bad effect” may qualify as damage in the context of LEG defect exclusion clauses under Construction All Risks policies (South Capitol Bridgebuilders [2023]; Archer [2024]).
Contamination
In determining the issue in Fairview, Justice Wigney was influenced by cases concerning the harmful effects of asbestos, observing that:
“The affixation of combustible panels to a residential building can … be compared with the integration of a dangerous or toxic substance, such as asbestos, into a building. Just as the integration into a building of a potentially hazardous material such as asbestos resulted in physical injury to the building at the time of installation (even if at that time the dangers were not realised, or the toxic substances had not been released) … so the affixation to a building of potentially hazardous combustible panels can be seen to result in physical damage to the building at the point of installation.”
As noted by Paul Reed KC in Construction All Risks [at 14-014] some English and Australian authorities suggest that the courts may be willing to treat contamination as a separate category of damage that does not require an obvious physical change in characteristics of the property insured.
Applying the courts’ reasoning in The Orjula [1995] and Hunter v Canary Wharf [1996] it may be possible to infer that the property has undergone a change in physical condition, where remedial costs have been incurred.
Conclusion
Insurers would typically argue that no fortuitous physical damage has occurred in respect of combustible cladding panels, in the absence of a fire or other adverse event post-installation, and any need for replacement following identification of harmful characteristics represents, at most, an economic loss to owners.
By contrast, recent authorities in Australia and the US lend support for the proposition that damage may be established based on changes in condition through physical attachment of cladding panels, involving integration of dangerous substances with a ‘contaminating’ effect, given the adverse unexpected consequences and need for remedial works. Each case will depend on its individual facts in terms of the location of insured property, type of external wall system(s), and applicable policy wording.
The argument remains largely untested in the English courts, presenting a novel potential route to recovery under insurance policies triggered by physical damage.
Amy Lacey is a Partner at Fenchurch Law
Climate Risks Series, Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
The global rise in climate litigation looks set to continue, with oil and gas companies increasingly accused of causing environmental damage, failing to prevent losses occurring, and improperly managing or disclosing climate risks. Implementation of decarbonisation and climate strategies is subject to scrutiny across all industry sectors, with claims proceeding in many jurisdictions seeking compensation for environmental harm as well as strategic influence over future regulatory, corporate or investment decisions.
Evolving risks associated with rising temperatures have significant implications for the (re)insurance market as commercial policyholders seek to mitigate exposure to physical damage caused by severe weather events; financial loss arising from business interruption; liability claims for environmental pollution, harmful products or ‘greenwashing’; reputational risks; and challenges associated with the transition towards clean energy sources and net zero emissions.
Litigation Trends
Cases in which climate change or its impacts are disputed have been brought by a wide range of claimants, across a broad spectrum of legal actions including nuisance, product liability, negligence, fiduciary duty, human rights and statutory planning regimes. Approximately 75% of cases so far have been commenced in the US, alongside a large number in Australia, the EU and UK.
Science plays a central role and can be critical to determining whether litigants have standing to sue. The emerging field of climate physics allows for quantification of greenhouse gas (“GHG”) emitters’ responsibility, with around 90 private and state-owned entities found to be responsible for approximately two-thirds of global carbon dioxide and methane emissions. Recent advances in scientific attribution may provide evidence for legal causation in claims relating to loss from climate change or severe storms, flooding or drought.
Directors of high-profile companies may be personally targeted in such claims as liable for breach of fiduciary duties to the company or its members, in failing to take action to respond to climate change, or approving policies that contribute to harmful emissions.
Recent Cases
An explosion of ‘climate lawfare’ has kicked off in recent years, with the cases highlighted below indicative of key themes.
Smith v Fonterra [2024]
The New Zealand Supreme Court reinstated claims, struck out by lower courts, allowing the claimant Māori leader with an interest in customary land to proceed with tort claims against seven of the country’s largest GHG emitting corporations, including a novel cause of action involving a duty to cease materially contributing to damage to the climate system. This was an interlocutory application and the refusal to strike out does not mean that the pleaded claims will ultimately succeed on the merits. However, the judgment is significant in demonstrating appellate courts’ willingness to respond to the existential threat of climate change by allowing innovative claims to be advanced and tested through evidence at trials.
R v Surrey County Council [2024]
In a case brought by Sarah Finch fighting the construction of a new oil well in Surrey, the UK Supreme Court (by a 3:2 majority) ruled that authorities must consider downstream GHG emissions created by use of a company’s products, when evaluating planning approvals. The Council’s decision to grant permission to a developer was held to be unlawful because the environmental impact assessment for the project did not include consideration of these “Scope 3” emissions, when it was clear that oil from the wells would be burned.
Verein KlimaSeniorinnen [2024]
An association of over 2,000 older Swiss women complained that authorities had not acted appropriately to develop and implement legislation and measures to mitigate the effects of climate change. The Grand Chamber of the European Court of Human Rights held that Article 8 of the European Convention encompasses a right for individuals to effective protection by state authorities from serious adverse effects of climate change on their life, health and wellbeing. Grand Chamber rulings are final and cannot be appealed: Switzerland is now required to take suitable measures to comply. While not binding on national courts elsewhere, the decision will be influential.
ClientEarth v Shell [2023]
The English High Court dismissed ClientEarth’s attempt to launch a derivative action against the directors of Shell plc in respect of their alleged failure to properly address the risks of climate change, indicating that claims of this nature brought by minority shareholders will face significant challenges. The Court noted that directors (especially those of large multinationals) need to balance a myriad of competing considerations in seeking to promote the success of the company, and courts will be reluctant to interfere with that discretion, making it harder to establish that directors have breached their statutory duties.
US Big Oil lawsuits
Following lengthy disputes over forum, proceedings against oil and gas companies in the US are gaining momentum, paving the way for the claims to be substantively examined in state courts. Many actions against the fossil fuel industry seek to establish that defendants knew the dangers posed by their products and deliberately concealed and misrepresented the facts, akin to deceptive promotion and failure to warn arguments relied upon in other mass tort claims in the US, arising from the supply of tobacco, firearms or opioids.
Implications for Policyholders
With increasing volatility and accumulation risk, insurers will look to mitigate exposures through wordings, exclusions, sub-limits and endorsements. The duty to defend is the first issue for liability insurers, given the number of policyholders affected and the potential sums at stake in indemnity and defence costs.
In 2021, the Lloyd’s Market Association published a model Climate Change Exclusion clause (LMA5570). Property policies exclude gradual deterioration, with express wording or impliedly by the requirement of fortuity, and liability insurance typically excludes claims arising from pollution.
Lawsuits have been filed in the US over insurance coverage for climate harm, including Aloha Petroleum v NUF Insurance Co of Pittsburgh (2022), arising from claims by Honolulu and Maui, and Everest v Gulf Oil (2022), involving energy operations in Connecticut. Policy coverage may depend on whether an “occurrence” or accident has taken place, as opposed to intentional acts or their reasonably anticipated consequences (Steadfast v AES Corp (2011).
Policyholders should review their insurance programmes with the benefit of professional advice to ensure adequate cover for potential property damage, liability exposures and legal defence costs.
In the following instalments of our Climate Risks Series, we will examine the impact of reinsurance schemes and parametric solutions, and coverage for storm and flood-related perils in light of recent claims experience.
Authors
Amy Lacey, Partner
Ayo Babatunde, Associate
Queenie Wong, Associate
"Top Down" still top law: RSA & Ors v Textainer
In the recent decision of Royal & Sun Alliance & Ors v Textainer Group Holdings Limited & Ors [2024] EWCA Civ 542, the Court of Appeal rejected an attempt by Insurers to avoid the application of the (seemingly) well-established “top down” principle to the allocation of recoveries.
Background
The (much simplified) background was as follows.
Textainer is one of the largest owners/suppliers of shipping containers.
In 2016, approximately 113,000 of its containers were on lease to a Korean company, Hanjin Shipping Co Limited (“Hanjin”). Hanjin became insolvent, and Textainer incurred a significant loss, partly in relation to containers which were never recovered and partly in relation to the cost of retrieving/repairing the others, as well as lost rental income.
Textainer had a “container lessee default” insurance programme, written in layers up to (for present purposes) $75 million, with a $5m retention. Textainer’s overall loss, as a result of Hanjin’s default, was approximately $100m. It absorbed the first $5m through its retention, and its primary and excess layer insurers (“Insurers”) paid out policy limits amounting to $75m, leaving an uninsured loss of $20m.
Textainer subsequently recovered approximately $15m in Hanjin’s liquidation.
Under ordinary “top down” principles, all of that recovery would have inured to Textainer. Insurers nevertheless claimed that they were entitled to a proportionate element of it (amounting, on the above figures, to approximately 75%).
The top down principle, and Insurers’ attempt to circumvent it
The top down approach to the allocation of recoveries was established by the House of Lords’ decision in Lord Napier and Ettrick v Hunter[1993] AC 713. It equates to assuming that the recoveries are made simultaneously with the loss and then considering how the net loss would be borne (ie, first by the retention/deductible, then by the primary layer, then carrying up the excess layers, and finally to the uninsured element).
Insurers argued that the policies in the present case were distinguishable from the stop loss policies considered in Napier. The stop loss policies, they argued, applied to a single (or "unitary") financial loss for a specified period of underwriting by the name. In contrast, the container lessee default policies did not (they argued) insure a unitary loss, but “covered the physical loss of or damage to individual containers and related costs/loss of earnings as and when those losses were incurred, eroding first the retention, then the layers of cover, one by one”.
Insurers argued that there was a fundamental distinction between the case of a single or unitary loss (as considered in Napier) and that of multiple losses, such as the present case. They argued that, although in the former case subsequent recoveries would reduce that single loss top down, where there were “multiple losses of different items of property at different times, recoveries in respect of those specific items not only could but must be allocated to the insurer who had indemnified against their loss”.
However, those arguments were at odds with the decision by Langley J in Kuwait Airways Corporation v Kuwait Insurance Co S.A.K [2000] 1 Lloyd’s Rep 252 (“Kuwait Airways”).
Kuwait Airways
In that case, the policyholder, Kuwait Airways (“KAC”), had lost 15 aircraft when they were seized Iraqi forces during the 1990 invasion of Kuwait. The relevant aviation insurers paid KAC the policy limits of $300m, leaving it with $392m of uninsured losses.
Subsequently, 8 of the aircraft, valued at c $395m, were recovered. Under conventional top down principles, that recovery would have inured to KAC, leaving its residual loss covered by the insurance payout.
The aviation insurers nevertheless attempted to have the value of the recovered aircrafts apportioned pro rata between them and KAC, on the supposed basis that “each aircraft loss was a separate loss, exemplified by the fact that each had its own agreed value in the policy, the premium was based on that value and…the payment made of $300m was in effect a payment of 300/692 of the agreed value of each aircraft”.
Langley J rejected that argument. He held that there could not be:
“… any justification for “disaggregating” recoveries where there is an aggregate limit to the indemnity. Moreover the aggregate limit (in the case of one occurrence) applied regardless of the number of aircraft lost…whether or not there were a number of losses or only one loss (there was certainly only occurrence) is my judgment nothing to the point…”.
He also held that:
“… that conclusion accords with commercial good sense. Had KAC lost only the 7 aircraft which were in fact destroyed, its insurers would unarguably have had to pay up to the limit of the indemnity without any recovery. It would be remarkable if the policy was to be so construed that, because KAC lost those 7 aircraft but also 8 others which were later recovered intact, insurers became entitled to a credit for proportion of the value of the aircraft recovered”.
Faced with those comments, which seemed to apply so closely to the present case, Insurers were compelled to submit that Kuwaiti Airwayscould be distinguished or, failing that, was wrongly decided.
The Court of Appeal’s decision
Insurers had lost in the Commercial Court in front of David Railton KC, sitting as a Deputy Judge, and were no more successful when they appealed to the Court of Appeal.
The Court of Appeal’s judgment was given by Phillips LJ, with Arnold & Falk LJJ concurring.
The Court of Appeal agreed with the Deputy Judge that the true nature of Textainer’s insurance was cover “against particular layers of loss” and that, if recoveries were not applied top down but proportionately to the insured layers as well as to the uninsured losses, Textainer would not receive the extent of the indemnity for which it had contracted. Moreover, Textainer would, if Insurers were correct, have been in a worse position than if the recoveries had been achieved before Insurers had paid out. By contrast, Dillon LJ, in the Court of Appeal in Napier, was clear that the outcome should be the same “whether the underwriters have or have not already paid the amount for which they are liable for the time the recovery is achieved”.
In short, the Court of Appeal agreed with Textainer that the reality was that the insurance was not provided in relation to individual containers, most of which, if lost, would eventually be recovered, but that “the real subject of the insurance is the multiple strands of lost rental, costs and expenses which will be ongoing and intertwined…”
Accordingly Insurers’ challenge to the top down principle failed.
Other issues
The Court of Appeal’s judgment covered two other issues.
(a) Which losses were paid by whom?
This was a factual issue. Some of Textainer’s containers had been leased to Hanjin on operating leases and some on finance leases. However, the settlement by the liquidator only applied to the containers supplied on operating leases.
This required Insurers to show (assuming their challenge to the top down principle had succeeded) precisely which containers they had indemnified and which formed part of Textainer’s uninsured loss. Only then could one allocate the recovery.
Insurers argued that there should be a “pragmatic assumption” that the losses in respect of finance leases would have occurred at the same time as, or at least in proportion to, losses in respect of operating leases, so that there was nothing to stop a pro rataapportionment of the recovery between insured and uninsured losses.
The Court of Appeal rejected that approach. It said it had been open to Insurers to adduce evidence on this issue and that, having failed to do so, they could not resort to an assumption.
(b) Under-insurance
Finally, Insurers sought belatedly to argue that, because there had been an element of uninsured loss, this indicated that Textainer had been under-insured and that its loss should be reduced by the application of average.
That argument failed. Phillips LJ held the concept of under-valuation or under-insurance has no relevance to insurance written in layers. Unlike a single policy insuring (say) a ship, where under-insurance exposes the insurer to the same risk (up to the limit of cover) but the premium has been unfairly supressed, where cover is written in layers, the cover by definition matches precisely the value of the risk which the insurer has accepted.
Conclusion
It is gratifying that Insurers’ attempt to circumvent the top down principle was so robustly rejected by the Court of Appeal. Likewise, its clarification that under-insurance and average have no relevance to insurance written in layers will also be welcomed by policyholders.
Non-damage property cover in political violence insurance: Hamilton Corporate Member Ltd v Afghan Global Insurance Ltd
On 12 June, the Commercial Court handed down judgment in an important case for the political violence insurance market regarding the meaning of “direct physical loss” and also of the seizure exclusion.
Hamilton Corporate Member Ltd v Afghan Global Insurance Ltd [2024] EWHC 1426 (Comm) arose out of the Western withdrawal from Afghanistan and the subsequent assumption of control by the Taliban. In August 2021, Anham, the original insured, lost its warehouse at the Bagram airbase in Afghanistan when it was seized by the Taliban. Anham sought to recover the US$41m loss under its political violence policy which had been issued by an Afghani insurer, which in turn was reinsured by the Claimant reinsurers.
The Exclusion
The reinsurers denied the claim (and sought summary judgment for a declaration of non-liability), relying on the following exclusion:
“Loss or damage directly or indirectly caused by seizure, confiscation, nationalisation, requisition, expropriation, detention, legal or illegal occupation of any property insured hereunder, embargo, condemnation, 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.”
Anham sought to argue that the exclusion was inapplicable, on the grounds that in the context of the exclusion the “seizure” had to be carried out by a governing authority, which could not be said of the Taliban at the material time. However, the court (Calver J) had little difficulty in holding that the exclusion did apply, on the basis that in both settled case law and ordinary language “seizure” means “all acts of taking forcible possession, either by a lawful authority or by overpowering force”. Clearly, the Taliban fell into the latter category. The court also rejected Anham’s submission that it should not reach a decision without first hearing expert evidence as to how the political violence insurance market understood this exclusion.
Direct physical loss
The Judgment also shed light on how the Courts in this context will construe the “physical loss” of property.
The policy contained the following Interest provision:
“In respect of Property Damage only as a result of Direct physical loss of or damage to the interest insured”.
Likewise, Insuring Clause 2 indemnified Anham against “Physical loss or physical damage to the Buildings and Contents”.
Anham submitted that the warehouse had been lost, on the grounds that it had been irretrievably deprived of possession of it because of the Taliban. In making this argument, Anham sought to rely on the definition in the Marine Insurance Act 1906 of constructive total loss (namely, that, where an insured is deprived of his property and there is little chance of recovery, the courts will consider that a constructive total loss). However, Calver J unhesitatingly held that, in the context of a political violence insurance policy, “direct physical loss” meant physical destruction, not mere deprivation of use.
Interestingly, the Judgment did not cite cases such as Moore v Evans [1917] 1 KB 458 (CA) [1918] AC 185 (HL) or Holmes v Payne [1930] 2 KB 301, which held that the word “loss” was not qualified by the word “physical”.
Summary
The Judgment in Hamilton is plainly unhelpful to policyholders insured under the AFB Political Violence wording, which is widely used in the London market. Unless successfully appealed, (re)insurers are likely now to reject any claim based on this wording for loss of property where the hostile forces have not caused any actual damage to the insured interest, notwithstanding that their actions deprived the insured of the use of or access to it.
Authors
Jonathan Corman, Partner and Dru Corfield, Associate