The Good, the Bad and the Ugly Archives

The Good, the Bad & the Ugly: #24 The (mostly) Ugly: Tynefield Care Ltd (and others) v the New India Assurance Company Ltd

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

#24 The (mostly) Ugly: Tynefield Care Ltd (and others) v the New India Assurance Company Ltd

Background

A substantial fire broke out at a care home which was owned and operated by the insured Claimants. At the time of the fire, the Claimants had a policy of insurance with New India Assurance co Ltd (“New India”), under which New India agreed to indemnify them against various losses.

Following the fire, the Claimants claimed from New India the cost incurred of having to move residents out of the care home for four weeks in order to carry out remedial work, as well as the cost of the remedial work itself.

New India refused to indemnify the Claimants on the basis that they misrepresented and failed to disclose that their Mr Khosla, a de facto director (a director who performs the duties and functions of a director, but without being legally appointed as such), was a de jure director (a legally appointed director) of a company that previously went into administration (“the Khosla Insolvency”).

The Claimants accepted that Mr Khosla was a de facto director at all relevant times, but denied making a misrepresentation or failing to disclose the Khosla Insolvency.

Although the Claimants had been taken out policies with New India from 2013 onwards, this article will address the parts of the Judgment that deal with the post-Insurance Act 2015 (“the IA 2015”) position.

The Good – was there a misrepresentation?

The relevant question in the Proposal asked: “Have you or any director or partner been declared bankrupt, been a director of a company which went into liquidation, administration or receivership. If so give details” (“the Insolvency Question”).

The Claimants answered the Insolvency Question in the negative. New India asserted that their answer was a misrepresentation, because any person who had the status of a director, if not the title, was nevertheless a director for the purposes of the Companies Act. It also argued that any reasonable person completing the Proposal would have realised that “what was being asked related to the reality of the position”.

The Claimants disagreed. They said that the word ‘director’ should be restricted to its plain meaning, i.e., a legally appointed director, and that to hold otherwise would create uncertainty and confusion because a policyholder needs to understand precisely what is being asked of it.

The Judge, Judge Rawlings, agreed with the Claimants: the Claimants were not taken to be qualified lawyers who understood the concepts of de facto and shadow director (and he accepted their evidence that they didn’t even know what those terms meant). The Judge also held that while one could determine if a person had been appointed as a de jure director with certainty, that was not the case with de facto directors, which would turn on a number of factors, including that individual’s role and responsibilities and how they were perceived by others in the organisation.

So far, so Good. But that was not the end of the story.

The Ugly – Was there a failure to disclose a material circumstance under s. 3 of the IA 2015

The duty of fair presentation requires an insured to disclose to an insurer every material fact which it knows or ought to know, in a manner which would be reasonably clear and accessible. A circumstance will be material if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.

Therefore, quite apart from the Insolvency Question – which the Judge found did not embrace the Khosla Insolvency – the question was whether the Khosla Insolvency was material, and therefore disclosable, in any event.

Applying the summary of the law provided by Lionel Percy QC in Berkshire Assets (West London) Ltd v AXA Insurance UK PLC (see our article on that decision here), and particularly the principle that facts which raise doubt as to the risk, without more, are sufficient to be material, the Judge found that the Khosla Insolvency was a material fact. Specifically, the Judge held:

“Whist I cannot say whether a prudent underwriter would, if asked to provide insurance for the first time, refuse to provide that insurance, or only agree to do so on more stringent terms than would otherwise be the case, because of those concerns, it seems to me clear that a prudent underwriter would, at least be influenced or affected by those concerns and would.”

The Judge also considered – but had no hesitation in rejecting – the Claimants’ further argument that New India waived disclosure of the Khosla Insolvency because the Insolvency Question only used the term “director”. That argument was wrong, the Judge found, because a reasonable person would have appreciated that New India had not waived the requirement to disclose that Mr Khosla controlled the management of the Claimants, and was their director in all but name. Accordingly, the case was distinguished from cases such as Ristorante v Zurich (see our article on that decision here), because the insolvency question in that case enquired only about “owners, directors, business partners or family members of the business” i.e., unlike in this case, it did not extend to other business with which those individuals were involved.

Having found that the Claimants failed to disclose a material circumstance, and thus breached their duty of fair presentation, the next issue to be decided was whether that failure was deliberate, reckless, or innocent. The judge held it was the latter. In particular, he accepted the Claimants’ evidence that they did not, at the relevant time, understand what “de facto director” and “shadow director” meant, and therefore would not have understood the Insolvency Question to be referring to Mr Khosla. The Judge also accepted Mr Khosla’s evidence that he had not read the proposal forms, and was unlikely to have read the Statement of Facts, either. While the Judge was satisfied that those failings were negligent, we can see how a different Judge could just as easily have found it to have been reckless (i.e., where a claimant “does not care” whether or not it was in breach of the duty).

The final issue to be decided was the remedy to which New India was entitled. New India’s evidence, which the Judge accepted, was that it had a strict policy of refusing to incept policies if it was disclosed to it that a director (which included Mr Khosla) had been a director of a company which had gone into liquidation. Accordingly, pursuant to the IA 2015, New India was entitled to refuse the Claimants’ claim, but had to refund the premiums.

Conclusion

We think Tynefield is a paradigm example of an ugly decision. In particular, while we sympathise with the Claimants given the wording of the Insolvency Question, the position in this case was that Mr Khosla was essentially “running the show”, such that his insolvency history was disclosable.

The decision is a salutary reminder that there is a critical difference between a misrepresentation and a non-disclosure, and that even an honest and correct answer to a question in a Proposal will not avail an insured of its duty under the IA 2015 to disclose material facts.

Alex Rosenfield is an Associate Partner at Fenchurch Law

by Alex Rosenfield

The Good, the Bad & the Ugly: #23 (the Good): Scotbeef Limited v D&S Storage Limited (In Liquidation) Lonham Group Limited [2024]

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned. We highlight those decisions as The Bad.

#23 (the Good): Scotbeef Limited v D&S Storage Limited (In Liquidation) Lonham Group Limited [2024]

The Technology and Construction Court (“the TCC”) has recently provided welcome guidance on the interpretation of the Insurance Act 2015 (“the IA 2015”), when considering preliminary issues in Scotbeef Limited v D&S Storage Limited (In Liquidation) Lonham Group Limited.

The Liability Dispute

Scotbeef Limited (“Scotbeef”) issued a claim against D&S Storage Limited (“D&S”) in July 2020 in relation to the supply of defective meat. D&S stated that, applying the terms of the Food Storage & Distribution Federation (“the FSDF”), of which they were a member, their liability for the defective meat was limited to £250 per tonne.

The TCC found that the FSDF terms had not been incorporated into the commercial contract between D&S and Scotbeef, and as such were unenforceable.

The Coverage Dispute

After D&S became insolvent, Scotbeef added its liability insurer, Lonham Group (“Lonham””) as a Second Defendant to the proceedings under the Third Parties (Rights against Insurers) Act 2010.

D&S’ insurance policy with Lonham included a “Duty of Assured Clause” which stated:

“It is a condition precedent to the liability of Underwriters hereunder:-

(i) that the Assured makes a full declaration of all current trading conditions at inception of the policy period;

(ii) that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;

(iii) that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. Reasonable steps are considered by Underwriters to be the following…”

…

If a claim arises in respect of a contract into which the Assured have failed to incorporate the above mentioned conditions the Assured's right to be indemnified under this policy in respect of

such a claim shall not be prejudiced providing that the Assured has taken all reasonable and practicable steps to incorporate the above conditions into contracts;

Following the decision in the underlying proceedings, Lonham advised Scotbeef that D&S had breached the Duty of Assured Clause (“the DOA Clause”), which was a condition precedent to liability (“CP”), because D&S had not incorporated the FSDF terms and conditions into the commercial contract. As such, Lonham argued that the Policy would not respond.

Scotbeef disagreed with Lonham’s interpretation of the Policy, and the Parties sought a decision on the meaning and effect of the DOA clause in a preliminary issues hearing.

The TCC considered the following two key issues:

Whether the construction of a CP effects its enforceability; and
When terms which depart from the IA 2015 are enforceable.

The TCC found in Scotbeef’s favour on the following basis:

Issue 1

The labelling of a CP as such, is not always indicative of it being so, the true effect will be established by the construction of the whole clause.
Despite the fact the DOA clause was labelled a CP, the clause contained a write back for instances where the policyholder takes all reasonable precautions.
Further, the consequences of a breach of the CP were found later in the Policy, which made the write back and consequence for breach clauses difficult to reconcile. Therefore the ambiguity of the drafting made the CP unenforceable.

Issue 2

Section 9 of the IA 2015 prevents insurers from including terms which convert the insured’s pre-contractual representations into warranties in which would effectively permit an insurer to avoid a policy as of right. Section 11 of IA 2015 prevents insurers from avoiding claims in circumstances where the breach was irrelevant to the loss. Therefore, subclauses (i) – (iii) must be read together as to do otherwise would be a clear contradiction to section 9 & 11 of the IA 2015.
Although sections 16 and 17 of IA 2015 permit some contracting out of the Act, subject to the insurer ensuring the policyholder is aware of the terms, there was no evidence that insurers took any steps to highlight the onerous terms to policyholder and therefore they could not be enforced.

This case provides a new and helpful decision for Policyholders on the interpretation of the IA 2015.

The key takeaways:

Irrespective of whether a CP is explicitly named as such, the construction of the whole clause will determine whether it is a true CP in practice.
A true CP should spell out the consequence of a breach and where the consequences are contradictory to the drafting of the clause as a whole, the CP may not be valid.
Where an Insurer seeks to include terms which depart from the IA 2015 and/or include disadvantageous terms on the Policyholder, the Insurer must take steps to bring the clause to the attention of the policyholder as failing to do so makes them unenforceable.

Chloe Franklin is an Associate Solicitor at Fenchurch Law

by Chloe Franklin

The Good, the Bad & the Ugly: #22 (The Ugly) MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch)

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#22 (The Ugly): MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch).

In dismissing an appeal made by a property owner seeking an indemnity for a trespass claim made by his neighbour, the Chancery Division of the High Court has provided guidance on the test for what constitutes an “accident” in the context of a public liability policy, and when actions will cross the line into recklessness.

Background

A development company, Henderson Court Limited (“HCL”), of which MacPhail was a director, undertook the development of a three-house terrace on Henderson Road in London, the development included MacPhails’ own property, number 30. Upon completion of the development, their neighbour at number 28 alleged that McPhail’s basement encroached on their land as it had been extended beyond the boundary line and therefore amounted to trespass.

MacPhail settled the claim with his neighbour and proceeded to pursue a claim against Allianz, with whom HCL held public liability insurance that included an ‘indemnity to principal’ clause allowing for recovery by the third party that had suffered the damage.

The court found Allianz was not responsible for indemnifying MacPhail’s loss because, although MacPhail had a legal liability to his neighbours, the trespass was not “accidental” as required by the terms of the policy. This was because one of the other directors of HCL, Mr Harris, who was in charge of the works had acted recklessly in permitting the basement to be extended to the flank wall of number 28.

MacPhail appealed the decision stating that the Judge had erroneously applied the law in relation to the applicable test for “accidental” and “recklessness”.

The Decision

On appeal, the court upheld the first instance decision.

Firstly, the court agreed with the application of the test for “accidental” at first instance. As set out in Colinvaux’s Law of Insurance and agreed between the parties, this is as follows:

“It is settled law that an accident, for the purposes of an insurance policy, is from the assured's point of view an act, intentional or otherwise, which has unintended consequences. However, if the consequences were intended by the assured, or if the consequences while unintended were inevitable so that the assured can be regarded as having acted with reckless disregard for them, then it is clear from the authorities that there is no accident and the assured is precluded from recovery by the terms of the policy itself as well as on the grounds of public policy. The principle is that, by embarking upon a course of conduct that is obviously hazardous the assured intends to run the risk involved…"

The judge, HHJ Parfitt, had found that the construction of the basement in number 30 to the flank wall of number 28 was intentional and the act of trespass could not have been accidental as there was a willingness to take the risk that it was.

A criticism of the use of the phrase “willingly taking the risk” over the more usual, but archaic, phrase “courting the risk” was rejected, and was not found to lower the test or alter the threshold. The appeal judge, Smith J commented as follows:

“It seems to me that the Judge's formulation is actually quite a good one, provided one does not lose sight of the fact that it is the borderline between reckless and non-reckless conduct that one is focussing on. That borderline really concerns a person's "appetite for risk" (if I can introduce my own attempt at re-phrasing), with intentional conduct unequivocally on the non-accidental side of the line, and a state of mind consciously and reasonably not even anticipating the risk on the accidental side of the line.”

Secondly, Smith J considered whether Harris had acted recklessly in failing to consider where the true boundary line would be. MacPhail argued that there couldn’t possibly be a finding of recklessness when Harris didn’t know where the boundary line was. However, Smith J stated that in the test for recklessness, it is not a question of belief or understanding alone, but one of the quality of that belief or understanding. The court found that whilst Harris may have believed that the boundary line coincided with the flank wall of number 28, that he must have known that it was at least arguable that it didn’t, and therefore he acted recklessly.

Comment

The judgment in this case provides a useful reminder of the legal tests to be applied when considering where the boundary lies between reckless and accidental acts in the context of public liability policies.

Here, a decision was made to extend the basement either knowing it would be a trespass or willingly taking the risk that it would be. That was sufficient to cross the line and make the conduct not accidental. By contrast, conduct on the accidental side of the line would involve a state of mind where the risk was, consciously and reasonably, not even anticipated.

While the decision is undoubtedly correct, and in line with existing law, it is nevertheless a timely reminder for policyholders that their subjective belief as to a state of affairs, in and of itself, is insufficient to make an unintended outcome accidental in circumstances where, by embarking on a course of conduct that is obviously hazardous, they are willingly taking a risk such that the unintended consequences that follow will be deemed to have been inevitable.

Chloe Franklin is a Trainee Solicitor at Fenchurch Law

by Chloe Franklin

The Good, the Bad & the Ugly: #21 (the Good). Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned. We highlight those decisions as The Bad.

#21 (the Good): Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1984]

The House of Lords' decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep. 437 (“Pan Atlantic”) is significant, as it established inducement as an element of non-disclosure.

In Pan Atlantic, the House of Lords examined the law on materiality as set out in the case of Container Transport International Inc. v. Oceanus Mutual Underwriting Association (Bermuda) Ltd. [1984] 1 Lloyd’s Rep. 476 (“the C.T.I. case”). The C.T.I. case had confirmed that a material circumstance was one that would have influenced the judgment of a notional “prudent insurer” in fixing the premium or determining whether he would take on the risk as compared with one which had affected the actual underwriter’s decision-making process.

The leading speech in Pan Atlantic was given by Lord Mustill. As he noted, critics of the C.T.I. case had thought it was too harsh. The decision meant that, when an insured had made a material non-disclosure or misrepresentation, the insurer would be entitled to avoid the policy, even where its underwriter would still have written the risk, albeit on different terms, or even where the underwriter was entirely unaffected by the non-disclosure. The harshness of the C.T.I. case led critics to question whether the materiality test should be altered so that only misrepresentations or non-disclosures that would have “decisively influenced” a prudent insurer would be material.

The majority in Pan Atlantic rejected the proposed “decisive influence” test. They examined the words in s 18(2) of the Marine Insurance Act 1906, which said:

“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk”.

Lord Mustill said that the words “influence the judgment of a prudent insurer” “denotes an effect on the thought process of the insurer in weighing up the risk”. The words in s 18(2) referred to the underwriter’s decision-making process rather than the final decision that was made. As such, the “decisive influence” test was rejected.

The words of the 1906 Act have more or less been repeated in the Insurance Act 2015, which states that:

“a circumstance or representation is material if it would influence the judgment of a prudent insurer in determining whether he will take the risk and, if so, on what terms”.

(See our article “Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC”, which discusses materiality.)

While the materiality test was left largely undisturbed, the majority found that inducement should be introduced as an element of non-disclosure or misrepresentation. Lord Mustill said:

“There is to be implied in the Act of 1906 a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using “induced” in the sense in which it is used in the general law of contract.”

The need for inducement was in line with the common law position for misrepresentation generally. Lord Mustill noted that there was no equivalent common law for non-disclosure. However, given that in the insurance context misrepresentation and non-disclosure are very similar concepts, the inducement test should, he said, apply also to the latter. He then went on to say:

“A circumstance may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on the prudent underwriter’s decision whether to accept the risk and if so at what premium. But…if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract”.

Analysis

This case was plainly “good” for policyholders. The introduction of the inducement test meant that it was more difficult for an insurer to avoid a policy if there had been a material non-disclosure. As mentioned above, before introducing the inducement test, an insurer only needed to show that the non-disclosure was material. Since Pan Atlantic, an insurer has also needed to establish that the non-disclosure either affected whether it would have written the policy at all or at least affected the terms it offered.

The inducement test espoused in Pan Atlantic has now been codified in s 8(1) of the Insurance Act 2015, which provided that:

“(1) The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer—

(a) would not have entered into the contract of insurance at all, or

(b) would have done so only on different terms.”

It had initially been suggested that inducement could be presumed where it has been proven that the non-disclosure or misrepresentation was material. However, in Assicurazioni Generali v ARIG [2003] Lloyd’s Rep IR 13 it was held that there is no such presumption. Therefore, when an insurer avoids a policy because of an alleged material non-disclosure or misrepresentation, that is not the end of the road. To prove inducement, evidence from the underwriter is generally required. Without such evidence, the insurer will face difficulties proving that the underwriter would not have written the risk. The contents of underwriting guidelines and the underwriter’s track record are likely to be highly relevant.

Grace Williams is an Associate at Fenchurch Law

by Grace Williams

The Good, the Bad & the Ugly: #20 (The Good) Brian Leighton (Garages) Limited v Allianz Insurance Plc

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#20 (the Good): Brian Leighton (Garages) Limited v Allianz Insurance Plc

Background

The policyholder, Brian Leighton (Garages) Limited (“BLG”), operated a petrol station. The case concerned a fuel leak caused by a sharp object perforating a fuel pipe, under pressure and movement from the heavy concrete slab forecourt. This caused contamination of the property and the business needed to be closed, as it was at risk of fire or explosion. The insurer, Allianz Insurance Plc (“Allianz”), declined the claim on the basis that a pollution / contamination exclusion applied.

The Policy

The Policy provided cover for “damage to Property Insured at the Premises … by any cause not excluded occurring during the Period of Insurance”.

Extension 26 provided cover for “Damage in consequence of escape of water or fuel from any tank, apparatus or pipe, or leakage of fuel from any fixed oil heating installation …”.

Exclusion 9 excluded “Damage caused by pollution or contamination, but We will pay for Damage to the Property Insured not otherwise excluded, caused by … (a) pollution or contamination which itself results from a Specified Event … (b) any Specified Event which itself results from pollution or contamination”.

Specified Events were defined as “Fire, lightning, explosion … riot, civil commotion, strikers, locked out workers … earthquake, storm, flood, escape of water from any tank apparatus or pipe …”. It was common ground that no Specified Event had occurred.

Issue

Allianz considered that Exclusion 9 applied as the damage had been caused by pollution and contamination. On a summary judgment application, the High Court agreed.

On appeal, BLG maintained that the cause of the damage was the sharp object rupturing the pipe and that the pollution or contamination was the resulting damage, rather than the cause of the damage.

Decision

By a 2:1 majority, the Court of Appeal held that “caused by” meant the proximate cause, and for the exclusion to bite, the contamination or pollution needed to be the proximate cause of the loss. While the chain of causation which led to the damage included pollution or contamination, the puncturing of the pipe, not pollution or contamination, was the proximate cause of the damage.

Other exclusions in the policy used the words “directly or indirectly caused by”, indicating that the drafter of Exclusion 9 envisaged the words “caused by” to mean the proximate cause. Popplewell LJ said that the general rule, which requires proximate causation, could be “displaced whenever it appears on the proper interpretation of the policy to be what the parties intended”.

In reaching this decision, reference was made to the Supreme Court judgment in FCA v Arch [2021] UKSC 1, where it was said:

“In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis … It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.”

Popplewell LJ observed, however, that many policies of insurance contain technical terms which have acquired their meaning through consistent use and judicial interpretation, which it is the duty of brokers to understand and advise policyholders upon, if necessary. He He went on to say that Exclusion 9 was to be read as a whole, and he would “not regard that strong presumptive meaning of the exclusionary words as displaced unless the wording of the write-back cannot be reconciled with it”. Reasonable readers would expect the scope of the exclusion clause to be determined by the words used, “namely the exclusionary words, rather than by what follows”, and the presumption would only be displaced if the write-back was inconsistent with it.

Popplewell LJ found that the words of the write-back did not prevent the words “caused by” from meaning the proximate cause. Further, he considered that a restrictive interpretation of Exclusion 9 was appropriate since: “the risk of leakage of fuel from pipes, tanks and apparatus, is amongst the most obvious risks arising from a business like that of BLG, and one against which the operator of the business would naturally desire cover”. On this basis, it was held that Exclusion 9 did not apply.

Nugee LJ likewise allowed the appeal. He agreed that the exclusion only applied where pollution or contamination was the proximate cause and that the words of the write-back did not require “caused by” to include non-proximate causes.

In a dissenting judgment, Males LJ concluded that Exclusion 9 was not limited to excluding damage proximately caused by pollution or contamination. Construing the language of the exclusion clause as a whole, he considered that such a narrow interpretation cannot have been intended, noting also that this argument had not been raised until oral submissions on the appeal.

Analysis

This case was plainly “good” for this particular policyholder. It reinforces the principle that “caused by” generally will mean “proximately caused by”. The case is useful for policyholders in confirming that non-proximate causes will be relevant to operation of exclusion clauses only where this is clear from the policy wording or to avoid inconsistencies.

Whilst finely balanced, the Court of Appeal judgment represents the latest in a series of pro-policyholder decisions, demonstrating flexibility on causation and a restrictive approach to exclusion clauses, in view of the wider commercial context (for example, see also - Manchikalapati and others v Zurich Insurance plc and others [2019] EWCA Civ 2163; Burnett or Grant v International Insurance Company of Hanover Ltd [2021] UKSC 12; Arch Insurance (UK) Ltd v FCA and others [2021] UKSC 1; Martlet Homes Ltd v Mulalley & Co. Ltd [2022] EWHC 1813).

Grace Williams is an Associate at Fenchurch Law

by Grace Williams

The Good, the Bad & the Ugly: #19 (The Ugly). Rashid v Direct Savings

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#19 (The Ugly): Rashid v Direct Savings Limited [2022] 8 WLUK 108

Rashid v Direct Savings Limited considered the novel issue of how limitation applies to claims made under the Third Parties (Rights Against Insurers) Act 2010 ("the 2010 Act"), as compared with claims under the “old” Act (“the 1930 Act”).

The 1930 and 2010 Acts in summary

Both Acts, generally speaking, provide a mechanism for persons with claims in against an insolvent but insured defendant to seek indemnity from that defendant insurer. The 1930 Act was given a significant and welcome overhaul in the shape of the 2010 Act.

Under the 1930 Act, following Post Office v Norwich Union [1967] 2 QB 363, claimants with a claim against an insolvent, insured defendant first had to establish a liability against that defendant before being able to bring an ascertained claim against its insurer. This created a two-stage process: (i) establish a liability against the insured, and (ii) bring a claim under the 1930 Act for payment by its insurer. Step (i) was required despite the possibility that step (ii) might fail.

By contrast, section 1(3) of the 2010 Act includes the express provision that:

"The third party may bring proceedings to enforce the rights against the insurer without having established the relevant person's liability; but the third party may not enforce those rights without having established that liability."

The 2010 Act thus removes the first stage required under the 1930 Act and instead allows claimants to bring a claim directly against insurers of insolvent defendants where they have policies which might respond to the claim but where the insurer has denied indemnity.

Limitation, and FSCS v Larnell

There is a long-established principle for claims against insolvent defendants that, where the claim was not time-barred at the onset of the insolvency process, time ceases to run for limitation purposes (Re General Rolling Stock Co Ltd (1872) LR Ch App 646).

In Financial Services Compensations Scheme Limited v Larnell (Insurances) Limited [2005] EWCA Civ 1408, the Court of Appeal was required to determine the question of limitation for claims brought under the 1930 Act.

The claimant in Larnell had commenced proceedings more than six years after the cause of action had accrued and more than three years after he had the knowledge relevant for the alternative limitation period under section 14A of the Limitation Act 1980. However, the insured had entered liquidation just within that three-year limitation period. The claimant argued that under statutory regime of the Insolvency Ac 1986 the provisions of the Limitation Act were suspended, and the claim was in the time.

The Court of Appeal held that the two-stage process for bringing a claim under the 1930 Act meant that the first stage (the claim against the insolvent defendant to establish a liability) fell within the insolvency regime. This stage was a claim in the insolvency. Therefore, in line with Re Rolling Stock Co, limitation ceased at the onset of the insolvency.

It followed that limitation for the second stage (the claim against the insurers) also ceased at onset of the insolvency, and the insurers were unable to rely on the limitation defence.

Rashid v Direct Savings Limited

The cessation of limitation under the 1930 Act established in Larnell was considered in Rashid but this time with reference to the 2010 Act. The Judge concluded that the benefit of the insurance policy issued by the insurers was not an asset in the insolvency and that the right to bring a claim against them was not dependent on first establishing liability against the insolvent defendant and instead arose at the onset of the defendant’s insolvency event occurs. Accordingly, held the Judge, claims under the 2010 Act do not fall within the insolvency regime, and so the usual limitation requirements applied.

The Claimant in Rashid argued that someone in his position should not be worse off under the 2010 Act as compared with the 1930 Act. However, as the Judge commented:

"In most respects a claimant was better off under the 2010 Act with the ability to sue the insurer direct without first having to establish liability against the insolvent insurers … It may be that an unintended effect of these changes is that the pause on limitation first recognised in Larnell would no longer be available to a claimant but it would be unwise to assume that this was seriously considered by the drafting team."

We therefore consider Rashid “ugly” for policyholders – or, more accurately, for claimants bringing claims against insolvent policyholders. It represents an important but correctly decided change to the law regarding limitation in insolvency and claims made directly against insurers. Policyholders and their brokers should be conscious of this change and consider bringing direct claims against insurers under the 2010 Act well before limitation becomes a potential problem.

Toby Nabarro is an Associate at Fenchurch Law.

by Toby Nabarro

The Good, the Bad & the Ugly: #18 (The Good). Carter v Boehm (1766)

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#18 (The Good): Carter v Boehm (1766)

Carter v Boehm is a landmark case in English contract law. The judgment by Lord Mansfield established the duty of utmost good faith on each party to a contract of insurance. The duty is placed on both the insured and the insurer, and as such the case (and establishment of the principle) can be considered ‘Good’ for policyholders.

Facts

The case concerned Fort Marlborough in Sumatra. Mr Carter was the Governor of the Fort and bought an insurance policy with Boehm against the risk of attack by a foreign enemy. Carter knew that the Fort was not capable of resisting an attack by a European enemy and further knew that the French were likely to attack but did not disclose this information to Boehm at the formation of the policy. The French duly took the Fort and Carter claimed under the policy. Boehm refused to indemnify Carter and Carter subsequently sued.

Judgment

With regard to the actual decision, Lord Mansfield found in favour of Carter. The reasoning was nestled in the context of 18^th century geopolitics and the state of affairs between Britain and France at that time: the two nations had been at war and Lord Mansfield held that Boehm knew (or ought to have known) the political situation. As the conflict was public knowledge, the judge held that Carter not informing Boehm of the likely attack could not amount to non-disclosure:

“There was not a word said to him, of the affairs of India, or the state of the war there, or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void.”

More significantly, however, the case established the duty of utmost good faith in insurance contracts, specifically in regard to disclosure, which Lord Mansfield explained as follows:

“Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risk, as if it did not exist.

The keeping back of such circumstance is a fraud, and therefore the policy is void. Although the suppression could happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because the risk run is really different from the risk understood and intended to be run, at the time of the agreement.

The policy would equally be void, against the under-writer, if he concealed; as, if he insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium. The governing principle is applicable to all contracts and dealings.

Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.”

Analysis

The standard position in English contract law is ‘caveat emptor’, meaning buyer beware. There is no implied duty of good faith, unlike, for example, the French Civic Code. This differs, however, in insurance law, and Carter v Boehm was the case that established that.

The case is Good for policyholders because it established the contractual environment in which insurance policies could successfully operate. The historical context of insurance law is important to grasp in this point: in the 17^th, 18^th, 19^th and majority of the 20^th century there was no way for the London Market to know the specific details of risks in far flung corners of the world (albeit Lord Mansfield differentiated well known geopolitical realities in this specific case). The insurer had to rely on honest disclosure by the insured. Carter v Boehm provided the legal framework in which the insured was under a duty to disclose facts that only he knew but would be material to an insurer when assessing a risk. Lord Mansfield concluded that this duty went both ways – an insurer could not “insure a ship on her voyage which he privately knew to be arrived”. Without the principle established in Carter v Boehm, it is arguable that the placing of insurance would for a long period have been weighed too much in favour of insureds as to make insurance a commercially viable business.

It is important to note how the information imbalance between an insured and insurer has shifted dramatically since Carter. In 1766, an insurer was heavily, if not entirely, reliant on the open and honest disclosure of an insured when considering a risk (especially in an overseas context). Unfortunately, for policyholders in the 21^st century, insurers have considerable ability and appetite to scrutinise what the insured knew or ought to have known at the formation of policy, with the means and resources to question whether the policyholder had indeed complied with his duty disclosure.

The fact that the pendulum had swung too much towards the interests of insurers explains why it became necessary to ameliorate the position in the shape of the Insurance Act 2015 and its well-known reforms of the scope of disclosure and, even more so, of the consequences of a non-disclosure.

Dru Corfield is an Associate at Fenchurch Law

by Dru Corfield

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #16 (The Good). Technology Holdings Ltd v IAG New Zealand Ltd [2008]

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#16 (The Good)

The Good

In another useful decision for policyholders under CAR policies (see our earlier article regarding ‘The Orjula’), but also damage policies generally, the High Court of New Zealand found (at para 65 of its judgment) that damage (as distinct from physical damage) can be established by one of more of:

a) a material risk to insured property which did not exist before the relevant event;

b) an event which rendered the insured property not fit for its intended use; and/ or

c) the possibility of malfunction during use as a result of the relevant event, which would require the insured property to be dismantled to determine the risk.

Whilst this authority isn’t binding on an English court, it would certainly be persuasive and the last category in particular is helpful to policyholders seeking cover for damage, as the mere possibility of malfunction which itself has not occurred would trigger cover under a policy responding to damage based on this authority.

The decision

The claimant supplied credit card terminals to retailers, 2,051 of which were stored in a basement that flooded on 7 February 2005. All of the containers in which the terminals were stored came into contact with flood water (but only around a quarter of the terminals themselves), and all containers were exposed to increased humidity. The claimant claimed under its Business Assets insurance policy (“the Policy”) for loss or damage to all of the terminals, the insuring clause in the Policy stating:

If during the Period of Insurance specified in the Schedule there happens Loss or Damage unintended and unforeseen by the Insured, except as may be excluded, to the PROPERTY AND EXPENSES INSURED, then the Insurers will indemnify the Insured in respect of such Loss or Damage as expressed in the BASIS OF LOSS SETTLEMENT and in addition the Insurers will indemnify the Insured in the manner and to the extent separately stated herein.

Despite being capitalised terms, Loss and Damage were not defined in the Policy. The claimant’s claim was accepted in relation to the terminals which came into direct contact with flood water, but insurers declined cover for the remaining terminals on the basis that they were neither lost nor damaged.

The court was asked to consider whether the insuring clause had been triggered in relation to the other terminals stored in the basement, essentially whether they were damaged because the manufacturer of the terminals had withdrawn its warranty and / or because the operator of the terminals’ intended network had refused to permit those units to be connected because of the risk that they would malfunction.

The claimant relied on expert evidence which included that it was standard industry practice for manufacturers to dismantle terminals returned to it to ensure their continued security and reliability following suspected damage. This, coupled with the low cost of producing terminals compared with the higher cost to dismantle, meant that terminals were often written off/ disposed of rather than being repaired.

The court’s analysis included a discussion concerning the difference between “physical damage” on the one hand and “damage” on the other, and concluded that the parties had intended the Policy to have the wider, unqualified damage cover, as opposed to cover being restricted to physical damage.

There was a detailed discussion of the damage authorities, including Transfield and Quorum AS, but most notably Ranicar v Frigmobile Pty Ltd, which the court regarded as the leading authority on “damage” in an insurance context. That case concerned scallops which could no longer be exported as they were temporarily and accidentally stored above -18 degrees Celsius, with that change in temperature being enough to constitute the physical change required to trigger cover for damage under the relevant insurance policy. The court in Ranicar held that whereas “physical damage” may require a permanent and irreversible change in physical condition, “damage” could occur when an adverse change in physical condition was both transient and reversible.

Deciding the Technology Holdings case, Woodhouse J (quoting a leading insurance text) said that the essence of Ranicar in relation to damage was that “it is normally sufficient if the damage is in the form of diminution in value or functionality”, but that element was not enough by itself – for damage something must happen to the property itself followed by the impairment in value or usefulness.

Applying Ranicar to the terminals which did not directly come into contact with flood water, Woodhouse J said that:

“…there was an occurrence – the flooding – which was unintended and unforeseen by the insured and which happened to the property. Following this event, which may or may not be similar to the temperature rise in Ranicar, the plaintiff found it could not sell the units. For the reasons discussed, I am satisfied that, if the plaintiff cannot prove that the units were “physically damaged”, there nevertheless will have been “damage to the property” for the purposes of the plaintiff’s Business Assets insurance policy if the plaintiff can establish the following: Because the units were stored in premises affected by flooding the units would malfunction during use in the network on a date earlier than the date on which the units would normally be withdrawn from use and in consequence they are not fit for their intended use”.

Comment

In addition to helping to cement Ranicar’s status as a leading authority on damage in the insurance context, it arguably goes one step further by holding that the mere possibility of malfunction was sufficient to constitute damage where that risk impacting on value or usefulness. The logic of the decision is sound, and merely extends existing principles rather than taking an entirely new approach, and the decision is certainly Good for policyholders.

Rob Goodship is a Senior Associate at Fenchurch Law

by Rob Goodship

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #17 (The Ugly). Diab v. Regent Insurance Company

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#17 (The Ugly): Diab v. Regent Insurance Company Ltd [2006] UKPC 29

This Privy Council decision considered whether a policyholder, whose insurer has declined cover, is nevertheless still bound by the claims conditions in the policy.

Background

This case arose from a fire which destroyed a shop owned by the policyholder, Mr Diab, as well as all its contents. Mr Diab made a claim under his material damage policy with Regent Insurance Company Limited (“Regent”).

A meeting (“the Meeting”) took place ten days later at Regent’s offices between Mr Diab and Regent’s Managing Director, Mr Flynn. Mr Flynn made it clear that, if Mr Diab made a claim under the policy, it would be rejected because Regent believed that he had started the fire.

About four weeks after that, Mr Diab’s solicitor sent a letter to Regent persisting with a claim for indemnity and setting out the amount of his loss.

Regent declined the claim. It asserted that:

a) Mr Diab had breached a condition precedent (“the Condition”) requiring that any claim should be notified in writing forthwith and that particulars of the loss be provided in writing within 15 days, and that any oral notice given by Mr Diab at the Meeting was thus insufficient; and

b) and in any event the claim was fraudulent because Mr Diab had started the fire.

Mr Diab duly sued Regent.

At the trial, Regent dropped its allegation of fraud and relied solely on the alleged breach of the Condition.

Regent was successful in that regard, with the trial judge rejecting Mr Diab’s argument that the representations made by Mr Flynn at the Meeting had constituted a waiver by Regent or an estoppel by representation, relieving him of the need to comply with the Condition.

Mr Diab appealed, eventually to the Privy Council, the central issue being the construction and effect of the Condition, namely whether it remained binding even where Regent had told Mr Diab that it would not pay the claim. Mr Diab’s position was that a repudiation of liability by an insurer relieved the policyholder of the need to comply with any outstanding procedural requirements under a policy. In other words, Mr Diab was relieved of the obligation to comply with the Condition given what Mr Flynn had said at the Meeting.

The Decision

The Privy Court dismissed Mr Diab’s appeal. It held that, while Mr Diab had been entitled to take what was said by Mr Flynn to be a repudiation of liability by Regent, Mr Diab had not accepted it or treated it as putting an end to the insurance contract. The obligations owed by each party under the policy therefore continued.

Put another way, a policyholder who is asking an insurer for an indemnity under a policy will ordinarily remain bound by the terms of that policy – unless he can show that the insurer has lost its right to rely on the term in question because it is estopped from doing so; and an estoppel in this situation will usually require both a clear representation by the insurer that it is waiving the condition and the policyholder relying on that representation to his detriment.

Comments

In our view this decision is problematic for policyholders for the reasons set out below.

Policyholders should be aware that, where an insurer has denied a claim, this is not on its own enough to ‘tear up the contract’ and therefore policy conditions must continue to be observed. Although in certain circumstances a policyholder may be able to establish that an estoppel means that the insurer has lost its rights to rely on a condition, that is by no means straightforward.

When faced with a denial of cover by insurers, a policyholder must decide whether to accept that denial as a repudiatory breach of the policy. The practical effect of that would be that both parties are discharged from further performance of the contract. This can be problematic for a policyholder either if the policy is still running or if there are other claims which have been made under the policy. If the repudiatory breach is accepted, a policyholder will be entitled to claim damages for the breach (the purpose of which will be to put the policyholder in the position it would have been in had the breach not occurred).

If the denial of cover is not accepted as a repudiatory breach, the policyholder is obliged (for example) to continue to provide information and co-operation and to observe the other claims conditions in the policy. Failure to do so may result in insurers successfully relying on the technical argument raised in the Diab case. While it may seem unfair that an insurer can hold a policyholder to the conditions in the policy even when cover has been declined, this decision still represents the law on this point and we do not suggest that it was wrongly decided. We therefore categorise it as “Ugly”.

Serena Mills is an Associate at Fenchurch Law.

by Serena Mills

The Good, the Bad & the Ugly: #15 (The Good & Bad). West Wake Price & Co v Ching

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

#15 (The Good & Bad)

West Wake Price & Co v Ching [1957] 1 WLR 45.

This case is known for three important principles of insurance law, which we consider below.

The Plaintiffs (a firm of accountants) were insured by the Defendant (a Lloyd’s underwriter) for any “claim” in respect of an act of neglect, default or error. A clerk employed by the Plaintiffs had stolen £20,000 which had been entrusted to the firm by a client, who duly issued a writ against the Plaintiffs for:

Damages for negligence in failing properly to supervise the clerk;
Monies had and received; and
Monies converted by the Plaintiffs for their own use.

The case is a difficult one for the modern reader, not least because the 2^nd & 3^rd grounds of the claim (money had & received, and conversion) are relatively unfamiliar. For present purposes, both can be regarded as the equivalent to vicarious liability for the clerk’s fraud.

A further source of difficulty is that the case was concerned with an obscurely drafted and now archaic form of QC clause. This required the insurer (i) to settle a claim if it appeared likely that there would otherwise be a liability covered by the policy, but also (ii) to settle a claim which was not likely to result in liability at trial but where the policyholder nevertheless reasonably objected to defending it (eg, because of adverse publicity).

Thus in West Wake the Plaintiff accountants argued that the insurer was obliged to settle the claim because (i) they did indeed wish to avoid the publicity of a trial and, as they argued, (ii) “the claim” based on their allegedly negligent failure to supervise the clerk was ostensibly covered by the policy.

Devlin J found in the insurer’s favour, and, in so doing, established these three points of principle.

First, he distinguished between a “claim” and a cause of action. He held that, in the context of a liability policy such as this one, a “claim” was characterised by the object which was being claimed and was not the same as the cause of action supporting it. Thus, “You are liable to me for £100” is a claim. “You are liable to me for £100 for fraud and for negligence” is still a single claim, not two claims. This reasoning has proved crucial in the context of aggregation disputes.

Secondly, Devlin J held that, in a dispute between insured and insurer, the court will look at the substance of a claim (ie, its true underlying facts) and not how it may have been pleaded against the insured by the claimant. A claimant may well have his own reasons for trying to depict a fraud claim as one for negligence or a claim for poor workmanship as one for inadequate design. (And the lesser-known corollary to that principle is that an insured, who has been held liable to a claimant in fraud, is nevertheless entitled to argue, in a subsequent dispute with his insurer, that he was not in fact fraudulent but merely negligent and thus entitled to indemnity under his policy: Omega Proteins v Aspen [2011] 1 Lloyd’s Rep IR 183.)

We have no hesitation in categorising both these aspects of the judgment as “Good”.

The third aspect of the judgment in West Wake was Devlin J’s view that the policy did not cover a “mixed” claim: a policy covering claims for negligence did not cover one based on both negligence and fraud, let alone one which was (in his view) primarily for fraud and only secondarily for negligence.

It is not obvious how the Judge’s reasoning here sits with two later and equally well-known decisions - Wayne Tank [1974] 1 QB 557, and the “Miss Jay Jay” [1987] 1 Lloyd’s Rep 32. In those cases, the Court of Appeal held that, where there are two proximate causes, one of which is covered, the policy will respond if the other proximate cause is simply not mentioned but will not respond if it is specifically excluded.

In the light of those cases (and, indeed, also in the light of the Supreme Court’s judgement in FCA v Arch, considered in a previous blog in this series), we consider that the better analysis of the facts in West Wake would be that the clerk’s fraud and the Plaintiffs’ negligent failure to supervise him were both proximate causes so that, since the former was not excluded, there would have been cover (and thus the Plaintiffs could try to insist, by virtue of the QC clause, on the claim being settled).

Devlin J’s decision that, as a matter of causation, the clerk’s fraud “trumped” the Plaintiffs’ alleged negligence seems to have been the result of a disinclination to hold that there could in practice be two truly proximate causes of a loss, with him instead preferring the view that one of two competing causes will almost always be more dominant.

Nowadays, the courts will be far quicker to find that two causes, whether they be independent or interdependent, were both proximate.

In that respect, and in that respect only, we categorise West Wake as “Bad”.

Jonathan Corman is a Partner, and Toby Nabarro is an Associate, at Fenchurch Law.

by Jonathan Corman & Toby Nabarro

The Good, the Bad and the Ugly

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