The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #6 (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.
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.
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.
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.
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 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.
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.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #5 (The Ugly). AIG v Woodman
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.
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.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #4 (The Good). The Orjula
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 are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#4 (The Good)
Losinjska Plovidba v Transco Overseas Ltd (The Orjula) 14 June 1995
In a useful decision for policyholders under construction all risks insurance, the Commercial Court in The Orjula determined that the spillage of hydrochloric acid onto a vessel requiring decontamination was “damage”, even on the assumption that there was no corrosion. Although decided in the context of a negligence claim, the case opened up the possibility of greater recoveries under policies triggered by damage, demonstrating that even transient or reversible physical changes to insured property should suffice.
The decision
The claimant was a bareboat charterer of a vessel which operated a liner service. Two containers each containing 72 drums of acid were loaded on to the vessel in England, for transportation to Libya. The second defendant, whose application to strike out the claimant’s claim was being determined by the Court, was the physical supplier of the drums to the first defendant, the named shipper in the Bill of Lading.
On its route to Libya the vessel docked in Holland, where one of the containers was discovered to be leaking. On inspection it was found that the drums inside were damaged and required replacement and reloading, with the boat having to be decontaminated and the drums repacked inside the containers.
The Court, in refusing to strike out the claim against the second defendant, held that although it was only necessary to wash the acid off the boat before it could again be in a useable condition, a specialist cleaner had to be employed for this purpose before the vessel could again set sail. As a result, the claimant had suffered actual damage, not pure economic loss (which would not have been recoverable from the second defendant in negligence[1]).
The second defendant’s solicitor argued that there was no physical damage to the vessel. The contamination could be and was cleaned off with a soda solution and the only loss was the financial cost of the operation. The Judge summed up the defence argument as being, in effect, that prior to the cleaning the vessel remained undamaged albeit with a layer of hydrochloric acid over part of her deck or hatch.
Taking guidance from civil and criminal authorities, the Court considered whether there had been “injury impairing value or usefulness” of the property in question, and the need for effort and expense to restore the property to its former usable condition. The Judge rejected the submission that there was no damage, noting:
“Here, specialist contractors were engaged in undertaking the decontamination work using soda to neutralise the acid before washing the deck and hatch covers down with fresh water; further, it is pleaded, perhaps not surprisingly, that the vessel was required to be decontaminated of the hydrochloric acid before she could sail from the special berth to which she had been directed after discovery of the leakage. On these alleged facts, I would have no hesitation in concluding that the vessel should be regarded as having suffered damage by reason of her contamination”.
The alleged contamination of the vessel was held to constitute damage sufficient to enable the claimant to claim in tort against the second defendant for recovery of its loss and mitigation costs arising from negligence in the stowage of the containers.
Comment
In determining that damage was suffered in these circumstances, the Court acknowledged the reality that “injury impairing value or usefulness” (the dictionary definition of damage) can be sustained without there having been a permanent change to the damaged material.
The question of whether damage has occurred is often contentious in CAR insurance claims and this case is helpful in support of improved outcomes for policyholders, subject to expert evidence in appropriate cases and applicable policy wording.
[1] Murphy v Brentwood District Council [1991] 1 AG 398
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #3 (The Ugly). Pioneer Concrete
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 are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#3 (The Ugly)
Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 2 All ER 395
As Bingham J put it: “this action raises one question of some interest and importance in the law of insurance.”
The issue here was: does an insurer have to show that it has suffered prejudice, when relying on a breach of a condition precedent?
Pioneer Concrete (UK) Ltd (“the Claimants”) sued East London Ltd (“the Insured”), after they had negligently installed some machinery ten months earlier.
The Insured had a public liability policy with National Employers Mutual General Insurance Association Ltd (“the Insurers”), which contained a condition precedent requiring them to give written notice to the Insurers of “any accident or claim or proceedings immediately the same shall have come to the knowledge of the Insured or his representative” (‘the Condition’).
The Claimants obtained a judgment against the Insured, who then became insolvent. The Claimants then claimed against the Insurers under the Third Party (Rights Against Insurers) Act 1930.
Although the Insurers knew about the original allegations, they said they had not been made aware of the proceedings, and therefore relied on a breach of the Condition to avoid paying the claim. The Claimants argued that the claim should be covered, as the Insurers had not suffered any prejudice.
The decision
It was held, dismissing the Claimants’ claim, that a breach of a condition precedent to liability, however trivial, will entitle an insurer to escape liability for a particular claim. It was not necessary for the Insurers to show they had suffered any prejudice as a result of the breach.
The case laid to rest a line of authorities indicating that insurers could not rely on a breach of a condition precedent when the breach caused no prejudice to them. In our view, this decision was extremely harsh for the policyholder, as the Insurers had always known about the incident, and even the claim itself. While we recognise that the law ought to make a distinction between a condition precedent and a ‘mere condition’, arguably it was open to the Court in Pioneer Concrete to have held that an insurer needed to establish at least some more than minimal prejudice before the draconian effect of a condition precedent was triggered.
Lastly, a point worth mentioning is that, although the Insurance Act 2015 has sought to level the playing field between policyholders and insurers, it is likely that a breach of a condition precedent, however innocuous, would still give an insurer a complete defence to a claim.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #2 (The Ugly). Kosmar Villa Holidays plc
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 are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#2 (The Ugly)
Kosmar Villa Holidays plc -v- Trustees of Syndicate 1243 [2008] EWCA Civ 147
The issue in Kosmar Villa Holidays plc was whether an insurer’s conduct in investigating a claim prevented it from subsequently relying on a breach of a condition precedent to avoid liability.
The policyholder, a tour operator, Kosmar, made a claim under its public liability insurance in respect of injuries suffered by an individual who was paralysed after diving into the shallow end of a swimming pool at apartments in Greece operated by Kosmar.
In breach of a condition precedent requiring it to notify the insurer immediately after the occurrence of any injury, Kosmar did not do so for a year.
Once notified, the insurer did not immediately deny liability for breach of condition precedent but sought further information about the accident.
The Court of Appeal had to consider whether in dealing with the claim in this way, without expressly reserving its position or denying liability, there had been a waiver, either by election or estoppel, that meant that the insurer was no longer able to decline indemnity because of the late notification.
The Court found that waiver by election had no application to a breach of a procedural condition precedent. However, where, through its handling of a claim, an insurer made an unequivocal representation that it accepted liability, or would not rely on a breach of a condition precedent, and where there had been detrimental reliance by the policyholder, the doctrine of estoppel would protect the policyholder.
On the facts, there had been no unequivocal communication by the insurer and insufficient reliance or detriment on the part of Kosmar. It was not therefore inequitable for the insurer to rely on Kosmar’s breach of the condition precedent to decline indemnity.
In its judgment, the Court explored the tension between an insurer’s need to have sufficient time to investigate claims and the insured’s need to know where it stands as regards policy coverage. On one hand, insurers were not to be encouraged to repudiate claims or to reserve their rights without asking questions about the claim simply to avoid being taken to have waived their rights in respect of a breach of a condition precedent. To do so would be to push insurers into an over-hasty reliance on their procedural rights. On the other hand, insurers were not entitled to give the impression that they were treating the claim as covered without running the risk of having waived their right to avoid the policy.
The message for policyholders is that, in the absence of an express communication to that effect, it is not safe to assume from conduct alone that an insurer has waived a breach of a procedural condition precedent.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #1 (The Bad). Why Wayne Tank is wrongly decided.
Welcome to a new 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 are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#1 (The Bad)
Concurrent proximate causes and insurance claims: why Wayne Tank is wrongly decided.
As Rob Merkin says in Colinvaux, there is a logical fallacy at the heart of the Court of Appeal’s decision in Wayne Tank and Pump Co v Employers’ Liability Assurance Corporation [1974] QB 57. The case concerns concurrent proximate causes of liability / loss sustained by a policyholder in an insurance context. The Court of Appeal, held that whereas the policyholder can recover when one cause is insured and the other is not insured, the policyholder is unable to recover when one cause is covered and the other is excluded.
The problem with that approach is exemplified when a policyholder has two insurance policies which each cover one of the two concurrent causes, and exclude the other. The issue is more common than most policyholders would expect, and arises perhaps most often where physical damage occurs to someone else’s property as a result of both a workmanship failure (commonly insured by public liability policies, but excluded by professional indemnity policies), and a design failure (insured by professional indemnity policies, but commonly excluded by public liability policies).
In that situation Wayne Tank says that the policyholder cannot recover under either policy, despite having paid premiums in respect of both of the risks which have given rise to the loss. For that reason we believe the case is wrongly decided, and should not be followed when the issue next reaches the Supreme Court. In the meantime, while the decision remains good law, here are our thoughts about arguments that policyholders can use if their insurers refuse to pay a claim on the basis of Wayne Tank.
Option 1: to apply the approach taken by the House of Lords in Fairchild v Glenhaven Funeral Services Ltd [2003] 1 AC 32, where the usual rules of causation were abandoned in order to ensure that the Claimant was able to recover damages where it could demonstrate that one of two defendants must be at fault, but to determine which one. As has been noted, the Fairchild decision seeks to avoid the very consequence created by “mirroring” exclusions in professional indemnity and public liability policies.
Option 2: to follow the Court’s approach to “other insurance” clauses: i.e. to uphold the clause when an insured has two policies, and one contains an “other insurance” clause and the other policy does not, but to treat the clauses as cancelling each other out when they are present in both policies (It is worth noting that in Wayne Tank the Court only considered the application of a single policy, and so the insured had not paid a premium to cover the full extent of the exposure which gave rise to its loss). The leading authority on “concurrent escape clauses” is Weddell v Road Traffic and General Insurance Co Ltd [1932], where the absurdity of the result that would have been created by giving effect to the escape clauses in each policy was the basis of the Court’s decision:
“The reasonable construction is to exclude from the category of co-existing cover any cover which is expressed to be itself cancelled by such co-existence, and to hold in such cases that
both companies are liable… [otherwise] one would reach the absurd result that whichever policy one looks at it is always the other one which is effective”.