The Good, the Bad and the Ugly Archives - Page 2 of 3

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #14 (The Good & Ugly). Arch Insurance (UK) Ltd v FCA and others

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.

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.

#14 (The Good & Ugly)

Arch Insurance (UK) Ltd v FCA and others [2021 UKSC 1]

The Good?

The circumstances of FCA Test Case are widely known, and the case has been fairly regarded as a resounding (if not absolute) win for policyholders, having established coverage for Covid-19 business interruption losses under a variety of non-damage business interruption extensions.

Aside from the key policy trigger determinations, which are to some extent confined to the specific circumstances of the Covid-19 pandemic given that most insurers have now withdrawn cover of the type under consideration in the Test Case, perhaps the more significant outcome was the Supreme Court’s findings on causation, and the overruling of the notorious Orient Express v Generali case.

Previously highlighted in our series as one of The Bad, Orient Express first codified the ‘wide area damage’ principle under which insurers decline or reduce a policyholder’s business interruption claim in the event of a loss event causing damage to the wider area, rather than to the insured property only. So in the case of Orient Express, the claimant hotel was denied indemnity for losses following Hurricane Katrina in New Orleans, on the basis that the entire city was effectively destroyed, and ‘but for’ the damage to the hotel, it could not have done any business anyway. The egregious effect of the case was that, the more severe the loss event, the less coverage was provided by insurers.

The case finally fell for consideration by the Supreme Court in the FCA Test Case ten years later, and was unanimously overturned (including by the very judge that issued the original Orient Express decision itself). The approach that should have been taken, the Supreme Court said, was to view the damage to the hotel and the damage to the surrounding area as concurrent causes of loss which, following the principle in The Miss Jay Jay, would not preclude coverage where neither cause was expressly excluded under the Policy. The policyholder in Orient Express should therefore have been entitled to recover the full extent of its losses arising from the hurricane, as should policyholders seeking indemnity for their Covid-19 BI losses.

The Ugly?

The Supreme Court’s approach to concurrent proximate causes is not necessarily all good news for policyholders, however.

It is a well-established principle of English law, affirmed by the Supreme Court in its judgment, that, where there are concurrent proximate causes of a loss, if one cause is an insured peril and the other cause(s) is / are uninsured then the policy should respond in full (The Miss Jay Jay), whereas if a cause is excluded then the policy will not respond (Wayne Tank). The potential for the Wayne Tank principle to be a practical problem for policyholders has historically been largely been mitigated by the Courts’ general reluctance to find that there is more than one proximate cause. However, the Supreme Court’s decision in the FCA Test Case suggests that concurrent proximate causes may be much more likely to arise in practice than had previously been appreciated. The Supreme Court noted that both The Miss Jay Jay, and Wayne Tank, concerned interdependent concurrent causes (so that it was the combination of the two which made the loss inevitable) and went on to find that there is “no reason in principle why such an analysis cannot be applied to multiple causes which act in combination to bring about a loss” (our emphasis). This significantly extends the doctrine of concurrent causes, particularly given that the Supreme Court went on to say that, in certain circumstances, the multiple concurrent causes do not have to meet the ‘but for’ test:

“there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause - indeed as a proximate cause -of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself” (our emphasis).

In some situations (the FCA Test case itself included!) this shift could lead to an increase in cover available to the policyholder and, on that basis, is a welcome development.

However, in our view there are also instances where this change would be unwelcome for policyholders in the context of exclusion clauses – for instance Design & Build contractors who almost always have a workmanship exclusion in their construction professional indemnity policies. The effect of the Supreme Court’s approach to the issue of proximate cause in the Test Case could be to encourage insurers to point to modest workmanship issues as being a proximate cause of the loss in an attempt to refuse cover on the basis of the Wayne Tank principle. Whilst that approach would, in our view, be wrong (unless restricted to the narrow type of interdependent concurrent proximate cause of the type considered in Wayne Tank itself), the possibility of insurers seeking to take a Wayne Tank point more often on the basis of the Supreme Court’s approach to proximate cause makes that aspect of the decision “Ugly” for some policyholders, such as Design & Building Contractors with restrictive workmanship exclusions in their professional indemnity policies.

Rob Goodship is a Senior Associate at Fenchurch Law

by Rob Goodship

The Good, the Bad & the Ugly: #13 (The Bad). Haberdashers’ Aske’s Federation Trust & v Lakehouse Contracts

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#13 (The Bad)

Haberdashers’ Aske’s Federation Trust Ltd & others v (1) Lakehouse Contracts Ltd & (2) Cambridge Polymer Roofing Ltd [2018] EWHC 588 (TCC)

This case arose from fire damage to a school during construction works. The main contractor (“Lakehouse”) settled proceedings brought by the claimants for £8.75million, paid by the project insurers, and sought to recover £5million from its roofing sub-contractor (“CPR”), being the limit of indemnity under a separate CAR/liability policy taken out by CPR in accordance with express terms of the building contract.

The court was required to determine as a preliminary issue whether CPR was covered under the project policy, which included Lakehouse and its sub-contractors as insureds, and agreement of insurers by endorsement to “waive all rights of subrogation which they may have or acquire against any insured party”. The court held that CPR was not insured under the project policy, given the clear intention expressed in the sub-contract for CPR to take out and rely on its own insurance cover.

In reaching this conclusion, the Judge considered competing theories as to how a sub-contractor may obtain the benefit of project insurance, i.e. (1) the main insured acting as agent, with its conduct subsequently ratified by the sub-contractor (this was considered problematic as sub-contractors would not necessarily have been ascertained at the time of policy inception, nor be able to ratify if they had no insurable interest as yet); (2) a “standing offer” by project insurers to provide cover for members of a defined group; or (3) acceptance by the sub-contractor’s conduct that it would become an insured under the project policy. The standing offer rationale was considered to be the most appropriate.

An appeal was listed in January 2019 but the case settled before the hearing. Given a number of difficulties with the first instance decision, it is unfortunate that the opportunity for further debate and clarification in the Court of Appeal was missed on this occasion.

The Haberdashers judgment seems unfair in terms of a windfall for project insurers, who receive premium based on cover for sub-contractors of any tier, despite sub-contracts likely imposing additional insurance obligations. It is impossible for insurers to accurately rate their exposure on this basis, without knowing at the time of writing the project policy what limits a future (as yet unidentified) sub-contractor may or may not take out.

It seems odd that terms of a contract between third parties should determine who is insured under a pre-existing project policy. The decision effectively confines the scope of project insurers’ standing offer to provision of cover for “sub-contractors who have not agreed to obtain their own insurance” but such a limitation was nowhere to be found in the terms of the project policy.

Given the express waiver of subrogation rights, the reasoning seems inconsistent with the Supreme Court majority view in Gard Marine - that a strong presumption applies in favour of an implied term precluding claims between co-insureds (even if the contract contains an express warranty from the defendant to protect insured property); and the effect of co-insurance is to exclude - as opposed to discharge - liability as between co-insureds. On this reasoning Lakehouse would have no liability to the claimants, which suggests that there is no basis on which a back-to-back claim could be pursued against CPR.

The subrogated claim against CPR was limited to £5million and the Judge suggested (obiter) that project insurers would not have been able to recover the full loss, i.e. the additional £3.75million settlement sum, as it was surely not anticipated that CPR would bear any additional uninsured loss where there was project insurance in place with a higher limit. This was not fully explained in the judgment and begs the question of whether a hybrid situation could arise whereby a sub-contractor is not co-insured up to the limit of its own separate cover, but in excess of that level, becomes insured by the project policy. Further peculiarities as to apportionment of liability could arise where a mismatch occurs between the scope of cover under a project policy and the sub-contractor’s liability insurance, giving rise to significant uncertainties for policyholders and insurers alike.

In our view, the decision in Haberdashers is a bad one. We prefer the approach adopted by the Court of Appeal in Rathbone Brothers v Novae, to the effect that an overlapping insurance situation may arise, even where one policy was specifically intended to cover the loss in question.

Debate as to whether, and in what circumstances, primacy should be given to express allocation of risk within a construction contract as opposed to inferences drawn from the existence of a project policy is likely to continue. Even if a contractor is presumed to fall within the definition of insured parties under a project policy, it should ensure that risk allocation and insurance provisions in its construction contract(s) are consistent, for example by specifying that any separate insurance required to be taken out by the contractor should operate in excess of the project cover, to minimise the prospect of subrogated claims.

Amy Lacey is a partner at Fenchurch Law.

by Amy Lacey

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #12 (The Ugly). Tesco Stores Ltd v Constable & Ors

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#12 (The Ugly)

Tesco Stores Ltd v Constable & Ors [2008] EWCA Civ 362

The case considered the scope of the cover provided by a “contractual liability” extension in a third party liability (“TPL”) policy (“the Policy”).

The claim by Tesco against its TPL insurers arose out of the collapse of a railway tunnel which had been built for Tesco in order to accommodate the construction of a new supermarket on top. The railway line was owned by Network Rail, but the trains were operated by Chiltern Railways (“Chiltern”). Luckily no one was injured by the collapse, but the track owned by Network Rail was damaged. No property owned by Chiltern was damaged, but as a result of the damage to the track it suffered a significant loss of profits due to the interruption of its services.

Tesco had entered into a Deed of Covenant (the “Deed”) with Chiltern, under which Tesco agreed to indemnity Chiltern for losses caused by the construction work for the new supermarket, including loss of profits. Following the collapse Chiltern made a substantial claim against Tesco under the Deed for its lost profits. Tesco, in turn, sought indemnity for its liability to Chiltern under its TPL policy.

Ordinarily, TPL policies cover policyholders for claims in tort by third parties, and are triggered by damage to or interference with property, or by bodily injury. TPL policies don’t ordinarily cover contractual claims, or claims for pure economic loss. The insuring clause in the Policy was in standard terms, and provided that:

“The insurer will indemnify [Tesco] against all sums for which [Tesco] shall be liable at law for damages in respect of:

Death of or bodily injury to or illness or disease of any person;
loss of damage to material property;
obstruction, loss of amenities, trespass, nuisance or any like cause.”

However, the Policy also contained the following extension, headed “Contractual Liability”, which said that the Policy would cover “liability under a contract or agreement…which would not have attached in the absence of such contract” (“the Extension”).

On its face the Extension appeared to significantly increase the scope of the cover provided by the Policy. As Chiltern’s claim against Tesco was a contractual claim which wouldn’t have attached in the absence of the Deed, Tesco (not entirely unreasonably) assumed the Extension meant that the Policy would cover Tesco’s liability to Chiltern. Tesco’s TPL insurers disagreed, and the point was ultimately determined by the Court of Appeal.

The Court of Appeal made clear that the Extension was not a separate insuring clause, and that in order for the Extension to apply it was necessary for Tesco to demonstrate that the claim for which it sought indemnity fell within the insuring clause of the Policy in the first place. Whilst the Court of Appeal was satisfied that the phrase “liable at law for damages” in the insuring clause was sufficiently wide to encompass contractual claims, unfortunately for Tesco the Court took the view that the remainder of the insuring clause made clear that the Policy was intended to respond only to the types of liability that would ordinarily be covered by a TPL policy because: (i) each of the types of loss referred to in the sub-paragraphs of the insuring clause would all give rise to ordinary tort claims; and (ii) the causation phrase “in respect of” meant “for”, rather than something looser such as “in connection with” so that the loss covered by the Policy had to have been directly caused by one of those standard tort types of loss, and not just be more loosely connected to it.

It was not, therefore, sufficient that Chiltern’s loss of profits was related to damage to someone else (Network Rail)’s property. The Court of Appeal decided that the Extension did no more than provide cover for contractual liabilities which were co-extensive with Tesco’s tortious liabilities. As Tesco had no tortious liability to third parties (such as Chiltern) for loss of profits, the Policy therefore didn’t respond.

We can’t criticise the reasoning of the Court of Appeal in Tesco, and we don’t suggest that the case was wrongly decided. However, the decision is problematic for policyholders for two reasons. Firstly, from a policyholder’s point of view the Extension doesn’t “do what it says on the tin”, and it would not be obvious to a policyholder that a contractual liability extension needs to be read carefully alongside a different clause in the policy altogether in order for its meaning to be understood. Secondly, when combined with standard TPL insuring clauses, contractual liability extensions don’t actually provide much additional benefit, so that the apparent benefit is in reality something of an illusion.

However, the Court of Appeal’s reasoning does point to two potential “fixes” to the problem, from the policyholder’s perspective, in both cases by amending the insuring clause. The first fix is to include in the list of the types of loss covered by the Policy something other than losses that would result from ordinary tort claims. That may seem too radical an approach for a TPL policy (although wordings do exist which take approach), and so an approach that may be easier for policyholders to achieve would be to replace the phrase “in respect of” in the insuring clause with something something looser, like “in connection with”, or “in any way related to”. That would allow TPL policies to give full effect to contractual liability extensions, so that they cover contractual liabilities which are connected to property damage (and so not entirely unrelated to what a TPL policy is intended to do), but which aren’t directly caused by property damage. Had Tesco’s policy been drafted in that way, the contractual liability extension would then have covered Tesco’s liability for Chiltern’s loss of profits claim.

Authors

Rob Goodship, Senior Associate

Toby Nabarro, Associate

by Rob Goodship & Toby Nabarro

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #11 (The Good). R&R Developments v AXA

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#11 (The Good)

R&R Developments Ltd v AXA Insurance UK Plc [2010] Lloyd's Rep. I.R. 521

The case concerned a question in a proposal which asked if any of the insured’s directors had ever been declared bankrupt, either personally or in connection with any business with which they were involved. The Court held that the question did not extend to the insolvency of any company with which they may have been involved. The Court also held that, by asking a limited question, the insurer had waived disclosure of the insolvency of any party other than the insured and its directors.

Background

R&R Developments Limited (“R&R”) was insured by AXA Insurance UK plc (“AXA”). Prior to inception of the relevant policy, R&R completed a proposal, which asked:

“Have you or any Partners or Directors either personally or in connection with any business in which they have been involved … ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?”

R&R answered this question (“the Insolvency Question”) in the negative. AXA contended that this was a misrepresentation, since one of R&R’s directors had been a director of a company which had gone into administrative receivership. AXA also said that R&R should have disclosed that insolvency in any event, as it was material.

The Decision

The Judge, Nicholas Strauss QC, held that the Insolvency Question was clearly worded. As a matter of simple grammar and syntax, it did not relate to anybody other than R&R and its directors. So, since R&R was solvent and none of R&R’s directors had ever been made bankrupt, the Insolvency Question was answered correctly. Three further considerations supported that conclusion:

AXA contended that the Insolvency Question referred, in effect, to “… you or any Partners or Directors or any business in which they had been involved”. Had this been its intention, it would have been very simple drafting to achieve that result.

On AXA’s interpretation, the disclosure required from R&R would have been unreasonably wide. In particular, the meaning of “involved” could potentially have extended to any company of which one of the directors had been employed in a junior position.

Looking at the proposal as a whole, and particularly the fact that a further question asked “Had any losses … or … any claims …. made against you (in this or any existing or previous business”), it was clear that the questions were targeted solely at R&R and its directors.

The Judge also rejected AXA’s secondary argument. Although AXA had in its mind the concept of other businesses with which R&R’s directors were involved, it chose not to ask about them. Therefore, by asking a limited question, R&R was entirely justified in thinking that AXA had waived its right to that information.

Comments

The decision is a helpful endorsement of the ‘natural and ordinary meaning’ rule of interpretation. AXA tried to argue, in effect, that words needed to be implied into the Insolvency Question which would significantly change its meaning, and that that should be done for its own benefit. Quite rightly, the Court gave short shrift to that argument.

Alex Rosenfield is a Senior Associate at Fenchurch Law.

by Alex Rosenfield

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #10 (The Bad). Orient-Express Hotels v Generali

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#6 (The Bad)

Orient-Express Hotels v Generali – an update

This note is an update to that which we provided on Orient Express on 1 July 2019. The Commercial Court considered Orient Express during the FCA Test Case in July 2020. The Test Case concerned the business interruption losses that arose following the outbreak of Covid-19 in the UK. Orient Express was a hotly contested issue, and we look here at how the Test Case may affect its application.

In Orient Express Hotels Ltd v Assicurazioni Generali SPA t/a Generali Global Risk [2010] EWHC 1186 (Comm), the Commercial Court held that the ‘but for’ causation test applies under standard BI policy wordings where there are two concurrent independent causes of loss, and there could be no indemnity for financial loss concurrently caused by: (1) damage to the insured premises – a luxury hotel in New Orleans, and (2) evacuation of the city as a result of Hurricanes Katrina and Rita.

Orient Express Hotels Ltd (OEH) was owner of the Windsor Court Hotel (the Hotel), which suffered significant hurricane damage in August and September 2005 leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks following the declaration of a state of emergency, and the imposition of a curfew and mandatory evacuation order.

The arbitral Tribunal held that OEH could only recover in respect of loss which would not have arisen had the damage to the Hotel not occurred, and this meant that OEH was to be put in the position of an owner of an undamaged hotel in an otherwise damaged city. Since New Orleans itself was effectively closed for several weeks due to widespread flooding, with no-one able to visit the area or stay at the Hotel even if it had (theoretically) been undamaged, OEH could not recover under the primary insuring provisions for BI loss suffered during this period. A limited award of damages was made under separate Loss of Attraction and Prevention of Access extensions to the policy.

OEH appealed to the Commercial Court, arguing that the Tribunal’s approach was inappropriate given the wide area damage to the Hotel and the vicinity caused by the same hurricanes. OEH sought to rely upon principles established in: Miss Jay Jay [1987] and IF P&C Insurance v Silversea Cruises [2004], that, where there are two proximate causes of a loss, the insured can recover if one of the causes is insured, provided the other cause is not excluded; and Kuwait Airways Corpn. v Iraqi Airways Co. [2002], that, where a loss has been caused by two or more tortfeasors and the claimant is unable to prove which caused the loss, the Courts will occasionally relax the ‘but for’ test and conclude that both tortfeasors caused the damage, to avoid an over-exclusionary approach.

Mr Justice Hamblen dismissed the appeal, concluding that no error of law had been established in relation to the Tribunal’s application of a ‘but for’ causation test under the policy on the facts as found at the arbitration hearing, whilst recognising “as a matter of principle there is considerable force in much of OEH’s argument”. The insurance authorities mentioned above were distinguished as involving interdependent concurrent causes, in which case the ‘but for’ test would be satisfied. The Court did appear to accept that there may be insurance cases where principles of fairness and reasonableness meant that the ‘but for’ causation test is not applicable, but OEH was unable to establish an error of law by the Tribunal where this argument had not been raised at the arbitration hearing. Given these evidential constraints on an appeal limited to questions of law, OEH was unsuccessful in the Commercial Court.

Permission to appeal was granted, indicating that the Court considered OEH’s grounds for further challenge had a real prospect of success. Settlement on commercial terms was agreed between the parties prior to the Court of Appeal hearing, however.

In a judgment handed down on 15 September 2020, Flaux LJ and Butcher J said at paragraph 523:

“We consider that there are several problems with the reasoning in Orient Express. First and foremost, as we see it, there was a misidentification of the insured peril… It seems to us that the error in the reasoning may have come about because the judge focused only on the “but for” causation issue and, to our minds surprisingly, did not pose the question of what was the proximate cause of the loss claimed…”

The judgment continues at paragraph 529:

“It follows that, if we had thought that the decision in Orient Express somehow dictated the consequences in terms of cover and the counterfactual analysis for which the insurers contend in the present case, we would have reached the conclusion that it was wrongly decided and declined to follow it…”

This is welcome news for policyholders. It is clear that Flaux LJ and Butcher J disagreed with the principles that underpinned the decision in Orient Express, and this can only be positive for the adjustment of insurance claims moving forward. However, importantly, the Court’s comments regarding the correctness of the decision in Orient Express are strictly obiter, since the case was distinguished from the fact under consideration in the Test Case. On that basis the ‘wide area damage’ principle set down in Orient Express, at least as applied to property-linked BI claims, remains good law and it is likely that Insurers will continue to rely on it unless and until the decision is overturned by a superior Court.

That said, readers will likely be aware that there is a chance that the insurers that participated in the FCA Test Case will appeal. We anticipate that we will learn of any such appeal on 2 October 2020, with the leapfrog appeal to the Supreme Court being heard in December 2020 / January 2021. While it may be frustrating for policyholders that there remains a risk that Orient Express could have some application moving forward, the possibility of the Supreme Court deciding the outcome one way or another must be welcomed. The law as it stands as now unsettled and ultimate clarification from the Supreme Court will provide the finality required by all stakeholders.

by Fenchurch Law

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #9 (The Good). UK Acorn Finance Ltd v Markel (UK) 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.

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

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#9 (The Good)

The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is UK Acorn Finance v Markel.

Issues

This case considered the scope of contractual discretion exercised by an insurer under an Unintentional Non-Disclosure clause and whether that discretion had been exercised in a fair and arbitrary way when considering whether a misrepresentation made by the insured was fraudulent or intended to deceive.

Background

UK Acorn Finance Ltd (“UKAF”) was a bridging finance lender who had obtained judgments in default in excess of £13m following allegedly negligent overvaluations on a number of agricultural properties. The Judgments were obtained against Westoe 19 (formerly named Colin Lilley Surveying Ltd (“CLS”)) who had entered into liquidation.

UKAF issued a claim against Markel pursuant to s.1 and s.4 of the Third Parties (Rights Against Insurers) Act 1930 for indemnity under a professional indemnity insurance policy issued by Markel in favour of CLS.

Markel sought to avoid the policy on the basis of alleged misrepresentations and non-disclosures made by CLS prior to renewal regarding the work it had done with sub-prime lenders. Before the Court, a lot of emphasis was placed upon whether or not the question raised by the Markel prior to renewal regarding work done with sub-prime lenders was understood by the insured and what was actually meant by “sub-prime lenders”. The term was not defined in the policy or within the renewal documentation. It was apparent that a lot of correspondence had been passed between Markel, CLS’s broker and CLS on this issue but ultimately, CLS confirmed it did not do work with sub-prime lenders.

Insurance dispute

The policy contained an Unintentional Non-Disclosure Clause (“UND clause”) which stated:

“In the event of non-disclosure or misrepresentation of information to Us,

We will waive Our rights to avoid this Insuring Clause provided that

(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive…”

Relying on the UND clause, Markel alleged that misrepresentations made by CLS regarding its work with “sub-prime” lenders were fraudulent and/or intended to deceive and consequently, avoided the policy and declined the claim.

The Court’s decision

Whilst there were a number of issues for the Court to determine in relation to whether the alleged misrepresentations were warranties, inducement and waiver, the crux of the Court’s decision was whether, in light of the UND clause, Markel was entitled to avoid.

The Claimants argued that it was for the Court to decide, as a matter of fact, whether the representations relied upon by Markel were free from any fraudulent conduct or intent to deceive, i.e. by the Court stepping into the shoes of the decision-maker. Markel disagreed and argued that the Court’s role should be limited to determining whether Markel’s decision to avoid the policy was one that was open to a reasonable decision-maker to make on a Wednesbury unreasonableness basis.

Construction of the UND clause was considered in light of numerous authorities and in particular, the Supreme Court judgment of Braganza v BP Shipping Limited [2015] UKSC 17. The nature of the UND clause is one by which “one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts” – as per Lady Hale in Braganza.

Following Braganza, where such a term is present in a contract permitting one party to exercise a discretion, there is an implied term that the relevant party “will not exercise its discretion in an arbitrary, capricious or irrational manner” (Mid Essex Hospital Services NHS Trust v Compass Group UK [2013] EWCA Civ 200.

When seeking to imply a Braganza implied term to give effect to the UND clause, the Court identified the need for consideration of the principles applicable to implied terms, as set out in Marks and Spencer Plc v BNP Paribas securities [2015] UKSC 72. Those principles are, namely:

i. Terms are to be implied only if to do so is necessary to give the contract business efficacy or if it was so obvious that it goes without saying;

ii. The term is a fair one or one that the court considers the parties would have agreed had it been suggested to them; and

iii. No term may be implied if it would be inconsistent with an express term.

Based upon the wording of the UND clause, in particular that the insured is to demonstrate to the satisfaction of the insurer that the misrepresentation was innocent and free from any fraudulent conduct or intent to deceive, the Judge concluded that it was wrong, as a matter of principle, to conclude that the Court could substitute itself for the contractually agreed decision-maker, as observed by Lady Hale in Braganza.

On the basis that Markel had a power to exercise a discretion or form an opinion as to relevant facts (i.e. whether the misrepresentations were innocent or fraudulent), the Judge considered it was necessary to imply a Braganza term in order to eliminate the possibility of the defendant making decisions in an “arbitrary, capricious or irrational manner”. The Judge considered that such an implied term was necessary to give the UND clause business efficacy and because the necessity for implication of such a term is so obvious that it goes without saying. The implied term did not contradict the agreement of the parties; on the contrary, it was giving effect to that which both are treated as having intended. As such, the test in Marks and Spencer Plc v BNP Paribas was satisfied.

Having determined the construction of the contract and the need for a term to be implied in accordance with Braganza, the Judge concluded the real issues which arose were three in number:

i. Did Markel, via its loss adjuster (who conducted the claims investigation):

a) fail to take into account any facts and matters that he ought to have taken into account; or

b) take into account any facts and matters that he ought not to have taken into account;

ii. would the decision have been the same even if any such errors had not occurred; and

iii. was the decision one that no reasonable decision-maker could have arrived at on the material that ought properly to have been considered.

When considering these issues in accordance with the principles identified in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, the Judge noted that it was necessary to bear in mind the often quoted direction in Re H (Minors) (Sexual Abuse: Standard of Proof) that “the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities”. Applying that notion to the wording of the UND clause, it required the decision-maker at Markel to bear in mind that it is inherently more probable that a misrepresentation had been made innocently or negligently, rather than dishonestly, based on an analysis of all the evidence. The more serious the allegation against the insured, the stronger the evidence of such dishonesty or fraud is required.

Whilst the Judge expressed that it would be a mistake to expect an insurance company in the position of the Defendant to adopt the same microscopic investigation as a Court, having considered all of the evidence, he concluded that Markel failed to approach the dishonesty issue with an open mind or bearing in mind that it was more likely that a misrepresentation has been made innocently or negligently rather than dishonestly. The Judge felt that too much weight was given to certain evidence, leading Markel to the conclusion that the misrepresentation was dishonest, resulting in the decision-maker failing to properly take into account other relevant evidence which should have been taken into account.

Ultimately, the decision was not one that Markel could safely arrive at if in reaching that decision, it had taken account of factors which ought not to have been considered or failed to take account of factors that ought to have been considered.

Implications for the policyholder

This decision illustrates the approach taken by the Courts when applying the principles in Braganza where one party to a contract has a discretionary power to make a decision as to a matter of fact, in particular in relation to Unintentional Non-Disclosure clauses. Insurers will need to be mindful of the need to act in a manner which is not arbitrary, capricious or irrational and should take extra care to ensure that sufficient evidence is obtained to support a conclusion where the allegations made are severe. The decision is a useful tool for policyholders who have made innocent misrepresentations to insurers prior to inception and renewal but also serves as a reminder that in circumstances where questions asked by an insurer are unclear or ambiguous, the insured and its broker should make effort to ensure they fully understand the questions being asked to avoid any later disputes.

by Fenchurch Law

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #8 (The Good). Thornton Springer v NEM Insurance Co Limited

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#8 (The Good)

The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is Thornton Springer.

Issues

This case covered the issue of Defence Costs, and more particularly an insurer's liability for Defence Costs which relate to both insured and non-insured claims, and which are incurred in successfully defending those claims.

Factual background

Thornton Springer was a firm of accountants which sought a declaration that its professional indemnity insurer was liable to indemnify it in defending a claim by a client, who alleged that one of Thornton Springer’s partners had given negligent advice in relation to a company in which that partner had an interest. The client sued both Thornton Springer and the partner. The claim against Thornton Springer was dismissed on the basis that the partner had advised in a private capacity, and not as a partner in Thorton Springer. The issue in the subsequent coverage dispute was whether Thornton Springer could recover the costs it had incurred in defending the claim from its professional indemnity insurer NEM.

Insurance dispute

The relevant clauses in the NEM Policy were:

• The Insuring Clause, which provided that NEM agreed:

“To indemnify the Assured against any claim or claims first made against the Assured during the period of insurance as shown in the Schedule in respect of any Civil liability whatsoever or whensoever arising (including liability for claimants’ costs) incurred in connection with the conduct of any Professional Business carried on by or on behalf of the Assured …” (our emphasis);

• Special Condition 1 which provided that:

“Underwriters shall, in addition, indemnify the Assured in respect of all costs and expenses incurred with their written consent in the defence or settlement of any claim made against the Assured which falls to be dealt with under this certificate …”.

NEM contended that, as the claim against Thornton Springer had been dismissed, it did not fall within the Insuring Clause and therefore Thornton Springer was not entitled to recover Defence Costs (i.e. the obligation to pay Defence Costs, said NEM, only applied to successful claims, not to ones which failed).

Thornton Springer disagreed. It argued that Speical Condition 1 extended to the costs of successfully defending a claim, provided that the claim was one which in substance could fall within the Insuring Clause.

In addition, even if Thornton Springer’s argument were upheld there remained a dispute over the apportionment of defence costs between the claims against the partner (which were not covered under the Policy) and the claims against Thornton Springer (which it alleged were covered under the Policy).

The decision, and the implications for policyholders

The Court found that, while the Insuring Clause itself was not engaged given the dismissal of the claim against Thornton Springer, Special Condition 1 did not require any actual liability on behalf of Thornton Springer. All that was required was for the claim against it to be one which in substance was capable of falling within the Insuring Clause.

In addition, the Court held that, if the work by Thornton Springer’s solicitors had a dual purpose (i.e. it related both to the claim against Thornton Springer and the claim against the partner), the indemnity for defence costs extended to the dual purpose work, and not just to the work which was exclusively for the defence of the claim against Thornton Springer. This followed the principle in New Zealand Products Limited v New Zealand Insurance Co [1997]. Therefore, Thornton Springer was entitled to an indemnity for all the Defence Costs, save where NEM was able to identify work which related exclusively to the claim against the partner.

The Court’s finding in respect of the Defence Costs for a claim which was ultimately unsuccessful is very helpful for policyholders. However, whether or not it applies in a particular case, will depend on the wording of the specific policy in question.

Perhaps of more significance is the Court’s comments regarding the apportionment of defence costs for insured and non-insured claims, and in particular the burden it places on an insurer to show that any costs which it does not wish to pay must relate exclusively to the non-insured claims.

by Daniel Robin

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #7 (The Good). Woodford and Hillman -v- AIG

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#7 (The Good)

Woodford and Hillman -v- AIG [2018] EWHC 358

There are few cases dealing with coverage issues under D&O policies. This isn’t necessarily because D&O policies are rarely the subject of dispute. It is more likely a reflection of the fact that if directors have to fund hefty legal costs in defending complex civil, criminal or regulatory actions because insurers are being difficult about costs or refusing outright to pay them, their personal finances are depleted to the point where suing the insurer is out of the question (and the Financial Ombudsman’s service is no help because that avenue of remedy is closed off to company directors). The consequence is that insurers’ obligations to fund defence costs are rarely scrutinised in court.

Occasionally, though, directors will take D&O insurers on, notwithstanding the power imbalance and the personal financial risk. Two such directors were Mr Woodford and Mr Hillman. They had been directors of the Olympus Corporation. They left in 2011 when Mr Woodford blew the whistle on a financial scandal.

In 2015 Olympus launched proceedings against them in the High Court in London for £50m, claiming that their involvement in an Executive Pension Scheme while at Olympus breached their duties as directors.

Olympus had D&O cover which covered past directors. Woodford and Hillman notified the claim to the D&O insurers, AIG, seeking an indemnity.

AIG’s resistance to Defence Costs

AIG refused to fund Woodford and Hillman’s defence costs (£4m and counting) claiming they were not reasonable. The policy was governed by German law but disputes fell to be determined in England.

The D&O policy made AIG liable for legal defence costs “provided these are reasonable with regard to the complexity and significance of the case”.

AIG argued that their liability for costs should be determined by a costs assessment. This is an assessment by a costs judge, normally undertaken when litigation ends, to determine how much of the winning party’s costs the loser should pay. The costs judge very critically examines the costs being claimed. The party whose costs are being assessed should expect to take a hair-cut on their recovery. A discount of 30% is not unusual and full recovery is very unlikely. On any view, therefore, a referral to costs assessment, as insisted on by AIG, would have involved Woodford and Hillman being left significantly out of pocket.

The Judge held that a costs assessment was not the right way to determine AIG’s liability for defence costs. Such an assessment was appropriate at the end of litigation as part of the court’s general discretion in relation to costs. An indemnity for defence costs under a D&O policy was “very different”. The Judge said that an insurance policy is intended to indemnify the directors for defence costs. Indemnity was a contractual right which meant that the court had no inherent discretion in relation to such costs. This meant that the (discretionary) costs assessment process had no application.

Instead, the court should assess the right to defence costs in the same way it would assess any issue of quantum. The criteria set out in the policy was that the costs were payable if “reasonable with regard to the complexity and significance of the case”.

The basis for the assessment of the “complexity and significance” of the case faced by the insureds was that it:

would involve a three-week High Court trial;
dealt with complex issues in a specialist area of law (pensions);
was for a significant sum (£50m);
had reputational significance for insureds because of the seriousness of the allegations.

AIG’s particular objection was to the charge-out rates of the insureds’ city lawyers: £508 for partners and senior lawyers; £389 for mid–level lawyers and £275 for junior lawyers. The Judge held that the complexity and significance of the matter meant it was reasonable to use a City firm at the rates charged. The Judge rejected AIG’s suggestion that the Guideline Hourly rates published by the Court Service for use in a costs assessment (rates significantly lower than City lawyers charge) had no application.

AIG’s determined resistance to paying the fees did not stop there. They complained of duplicated work, excessive billing, failure to delegate appropriately, churning of costs (an allegation that AIG dropped) and engagement of two QC’s. The Judge found that the QC appointments were reasonable in the context, the fees were reasonable and AIG’s other complaints were unsubstantiated.

Woodford and Hillman were awarded all their defence costs: they had been incurred reasonably in view of the complexity and significance of the case against them.

Implications

It is standard for a D&O insurer’s liability for costs to be qualified on grounds of reasonableness. It is now clear that an insurer’s attempts to call in aid the cost assessment process with a view to chipping away ultra-critically at the defence costs claimed by insureds should not work and there are better prospects of the directors’ outlay on defence costs being matched by insurance cover. Insureds now have a case to use when firing back at insurers’ attempts to lowball them, giving them some hope of prising the insurer’s purse open that little bit wider.

Enterprise Act Angle

Woodford and Hillman had to fund their defence costs from their pension funds because the D&O insurer was not responding. They incurred significant tax consequences as a result. Had the policy been governed by English law (and had it been taken out after May 2017) they may also have had a claim against AIG for damages for breach of the obligation to pay claims within a reasonable time (an obligation introduced by the Enterprise Act 2016) equal to the tax charge they suffered as a result of accessing their pension funds. Application of the Enterprise Act might have had an impact on the insurer’s approach to the case.

John Curran is a partner at Fenchurch Law

by Michael Hayes

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #6 (The Bad). Orient-Express Hotels v Generali

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#6 (The Bad)

Orient-Express Hotels v Generali

Business interruption (BI) policies in the UK ordinarily provide for recovery of loss caused by physical damage to property at the insured premises, subject to adjustment to reflect other factors that would have affected the business in any event.

In Orient Express Hotels Ltd v Assicurazioni Generali SPA t/a Generali Global Risk [2010] EWHC 1186 (Comm), the Commercial Court held that the ‘but for’ causation test applies under standard BI policy wordings where there are two concurrent independent causes of loss, and there could be no indemnity for financial loss concurrently caused by: (1) damage to the insured premises - a luxury hotel in New Orleans, and (2) evacuation of the city as a result of Hurricanes Katrina and Rita.

A dispute arose concerning the interpretation of OEH’s BI policy (subject to English law and an arbitration provision), which provided cover for BI loss “directly arising from Damage”, defined as “direct physical loss destruction or damage to the Hotel”. The trends clause provided for variations or special circumstances that would have affected the business had the Damage not occurred to be taken into account, “so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during [the indemnity period]”.

The decision in this case has been criticised by commentators as unfair, giving rise to the surprising result that the more widespread the impact of a natural peril, the less cover is afforded under the policy. Leading textbooks (including Riley on Business Interruption Insurance and Hickmott’s Interruption Insurance: Proximate Loss Issues) express concern at this unsatisfactory outcome, noting that the ‘windfall loss’ applied by Generali under the trends clause during the period when OEH itself was affected by its own damage did not reflect the approach adopted by insurers following, for example, the earlier London bombings, or severe flooding in Cumbria in 2009. We consider that that the true intention of the London market was that, in the event of wide area damage, claims would be met up to the level that would have applied had the damage been restricted solely to the insured’s own property at the premises.

In our view, the approach taken by the Tribunal and upheld by the Commercial Court in this case is wrong in principle. It is hoped that an opportunity will arise for the English Courts to revisit this issue and adopt a fairer approach to indemnity under standard UK wordings, to remedy the potential injustice for policyholders. In the meantime, those taking out BI policies should seek amendment of the trends clause to provide for the policyholder to be put in the position they would have been “but for the event(s) causing the damage” (instead of “but for the damage to insured premises”), and to agree sufficient limits of indemnity under extensions for Loss of Attraction and Prevention of Access.

by Michael Hayes

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #5 (The Ugly). AIG v Woodman

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.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#5 (The Ugly)

AIG Europe Ltd v Woodman & Ors [2017] UKSC 18

This decision represented the first time for almost 15 years in which an aggregation clause had been considered by the UK’s highest court. We have categorised it as “ugly”, not because we believe it was wrongly decided, but because it represents a missed opportunity by the Supreme Court to clarify an area which, absent that clarification, remains a likely source of disputes between policyholders and insurers.

AIG v Woodman arose out of a professional negligence claim against a firm of solicitors by 214 investors, who had invested in one or other of two developments, one in Turkey and one in Morocco. A firm of solicitors (“the Solicitors”) were instructed in respect of both developments, and were meant to have a system whereby the investors’ money was only to be released to purchase the development land once adequate security was in place.

Both developments failed. It transpired that, owing to the Solicitors’ negligence, the security had been wholly inadequate. The investors lost a total of £10m, and sued the Solicitors

The Solicitors had professional indemnity insurances with AIG, with a limit of £3m per claim. The question therefore was whether, in light of the aggregation provision in the policy (“the Aggregation Clause”), the Solicitors were facing one, two or 214 claims. The Aggregation Clause, taken from the SRA Minimum Terms & Conditions, aggregated all claims arising from:

“(i) one act or omission;

(ii) one series of related acts of omissions;

(iii) the same act or omission in a series of related matters or transactions;

(iv) similar acts or omissions in a series of related matters or transactions …”

It was limb (iv) which was relevant here.

At first instance, the Commercial Court held, and the parties subsequently accepted, that each claim had arisen out of a similar act/omission. However, that still begged the question of whether each such similar act/omission had occurred “in a series of related matters or transactions”.

The decisions below

At first instance, the Commercial Court held that the Aggregation Clause required the transactions to be interdependent in order for them to be “related”. On that basis, the claims did not aggregate and there was ample cover to satisfy the investors’ claims.

The Court of Appeal disagreed. It said that the requirement for interdependence was going too far. Instead, what was necessary, for transactions to be “related”, was an “intrinsic” relationship - a relationship of some kind between the transactions relied on, rather than a relationship with some outside connecting factor, even if that extrinsic relationship were common to the transactions. However, the Court of Appeal declined to say whether there was, indeed, an intrinsic relationship here between the various transactions, and decided to remit that issue to the Commercial Court.

The Supreme Court

The Supreme Court allowed AIG’s appeal, and held that the Court of Appeal’s requirement for an intrinsic relationship between the transactions was “neither necessary nor appropriate”, and represented an unwarranted gloss on the terms of the Aggregation Clause. Instead, it held - somewhat lamely, it might be thought - that the word “related” simply required a “real connection” between the transactions, “or in other words they must in some way fit together”.

On that basis, it was held that all the transactions involving the Morocco development were sufficiently inter-connected, and, likewise, all those involving the Turkey development; but it was not the case (as AIG had submitted) that all the transactions in respect of both developments were inter-related.

There were accordingly two claims and two indemnity limits, and a total of £6m available as compensation for the investors.

All this, however, provides very little guidance to policyholders and insurers in dispute over whether transactions are or are not “related”, other than where the factual situation is very similar to that in Woodman. During the hearing at the Supreme Court, AIG’s QC had come close to arguing that “related” should not be given any gloss or interpretation, but that instead each time the parties to an insurance contract would themselves have to resolve, or require a court to determine, whether the transactions in question were “related”.

Lord Mance’s response was dismissive:

“Just to leave the clause as it is … is not going to help anyone very much, is it? It is like saying ‘Brexit is Brexit’.”

It is ironic, therefore, that for the Supreme Court simply to have held that “related” requires some “real connection” was almost as unhelpful.

by Michael Hayes