The Good, the Bad & the Ugly: #15 (The Good & Bad). West Wake Price & Co v Ching
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.
#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 2nd & 3rd 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.
Covid-19 BI Update: Denial of Access – Access Granted?
“I doubt whether the Divisional Court could or would have taken the approach it did, had it had the benefit of the Supreme Court’s reasoning on causation.”
Lord Mance
The latest Covid-19 BI decision to arrive following the conclusion of the test case provides fresh hope for policyholders with denial of access clauses whose claims currently remain declined.
It will be recalled that the Divisional Court in the test case found that such clauses provided a “narrow, localised form of cover” which did not respond to the broader circumstances of the pandemic. Many policyholders were disappointed at the FCA’s decision not to appeal these rulings, and have subsequently argued that the Supreme Court’s ultimate conclusions on causation rendered the Divisional Court’s ruling an unsound authority for declining coverage under such clauses.
In an arbitral Award issued on 10 September 2021 by Lord Mance[1], clear support is provided for exactly that proposition.
The China Taiping Proceedings
In arbitration proceedings commenced by Fenchurch Law on behalf of a group of 183 hospitality policyholders against China Taiping Insurance[2], coverage was considered under two limbs of a Denial of Access clause which responded to:
“b – the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority for reasons other than the conduct of the Insured or any director or partner of the Insured or the condition of the Premises or the carrying out of repair or maintenance work at the Premises;
c – the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises;”
The Issues
There were three key disputed issues. First, whether the existence of Notifiable Disease cover elsewhere in the policy (which did not extend to Covid-19) negated the possibility of the Denial of Access wording responding to the pandemic. Secondly, whether the requirement for an “emergency in the vicinity of the premises” in limb (c) meant that the clause could only respond to narrow, localised events, rather than national ones, per the Divisional Court decision in the test case. Thirdly, whether the UK Government was a ‘competent local authority’ within the meaning of the clause.
On the first issue, Lord Mance found in favour of the policyholders. The existence of the express notifiable disease cover elsewhere in the policy did not limit the cover under the prevention of access extension. It was common for the coverage provided by various insuring clauses and extensions to overlap, and if insurers intended to exclude diseases from the scope of the prevention of access clause, they should have used clear language to do so.
On the third issue, Lord Mance agreed with insurers that the UK Government was not a “competent local authority” within the meaning of the clause, meaning that there could be no coverage under limbs (b) or (c) of the Denial of Access extension for losses caused by closures and other restrictions imposed by the UK Government in response to the Covid-19 pandemic. This issue was ultimately therefore fatal to the policyholders’ claim, which failed at the last hurdle.
Issue 2 – Emergency threatening life or property in the vicinity of the premises
On Issue 2, however, Lord Mance agreed with the policyholders, and despite the fact that it did not alter the outcome in this particular case, his discussion and conclusions on the issue are of potentially much broader significance and merit close examination.
Lord Mance noted that Clause 1(c) was drafted in materially identical terms to two of the representative sample of policy wordings considered in the test case, namely RSA 2.1 and 2.2. The RSA clauses required “an emergency likely to endanger life or property in the vicinity of the Premises”.
In the test case, the Divisional Court concluded in relation to RSA 2.1 and 2.2, that
“There could only be cover under this wording if the insured could also demonstrate that it was an emergency by reason of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions or advice of the government. […] it is highly unlikely that that could be demonstrated in any particular case[3].”
Similar conclusions were reached in relation to the other denial of access wordings under consideration, and the findings were not appealed to the Supreme Court. In the arbitration, insurers unsurprisingly therefore relied on the Divisional Court’s judgment to resist coverage under limb 1 (c) of the China Taiping clause.
Lord Mance began his analysis of the issue by noting that, as an arbitrator, he must regard the Divisional Court’s approach to the NDDA clauses as being, at the very least, highly persuasive, and that it may even, on the face of it, bind him. However, that was subject to, first, the relevant point having been squarely argued and decided in the Divisional Court, and second the Supreme Court’s judgment.
As to the first point, Lord Mance noted that the Divisional Court appeared to have reached its conclusions on the basis that RSA 2.1 and 2.2 were analogous with MSA 1. However, in Lord Mance’s view, the China Taiping and RSA wordings were clearly distinguishable from the MSA 1 wording, in leaving open for consideration whether cover extends to an emergency outside the vicinity threatening life or property within the vicinity, in contrast with the MSA 1 wording that required that the emergency be within the vicinity of the premises. It was unclear how far RSA had argued the point, but a requirement that the emergency be in the vicinity of the premises was central to the Divisional Court’s reasoning in relation to RSA 2.1 and 2.2.
In relation to the Supreme Court judgment, Lord Mance’s words speak for themselves:
“…although there was no appeal in respect of RSA2.1 and 2.2, I find the Supreme Court’s analysis of the operation of other wordings, and particularly its analysis of the correct approach to causation, hard to reconcile with the analysis of RSA 2.1 and 2.2 adopted by the Divisional Court in paragraphs 466 and 467.[…] Paragraphs 466 and 467 of the Divisional Court’s judgment indicate that it was the Court’s view of the causation required that ultimately dictated the likelihood of recovery under the relevant wordings. The Supreme Court held that the Divisional Court had erred in significant respects in its understanding of the operation of causation under other policy wordings before it. As I read its judgment, the Supreme Court also thought that its understanding would, at least prima facie, carry through generally into other wordings.”
“… the Supreme Court was, contrary to the Insurer’s submission, prepared to state quite generally that its general approach to causation was applicable across the whole range of wordings”
“That is particularly so, if the emergency may be outside the vicinity, so long as it threatens life or property within the vicinity. But it is also so if both the emergency and the threat must be in the vicinity. Once it is accepted that the emergency may at the same time be elsewhere and threaten life or property elsewhere, the Supreme Court’s analysis of the relevant elements of cover and its conclusion that a “but for” test of causation was inappropriate would seem readily transposable to a NDDA clause like Extension 1(c)”
“I therefore doubt whether the Divisional Court could or would have approached the matter as it did in paragraphs 466 and 467 had it had the benefit of the Supreme Court’s analysis.”
“The absence in the Arch wording of the words “in the vicinity” in relation to the emergency appears an inadequate basis on which to distinguish the Supreme Court’s approach in relation to that Arch wording from the present.”
Lord Mance apparently therefore concluded that he was not bound by the Divisional Court’s findings as far as relevant to Issue 2, and despite the negative outcome in the present case, set out a powerful and clear basis on which a case for coverage under the RSA 2.1 and 2.2 wordings (and others on similar terms, including the other denial of access wordings considered in the test case) might be made in reliance on the Supreme Court judgment.
Comment
Lord Mance’s comments in the China Taiping Award are far from the end of the story. The Award is not binding on any third party, and despite his detailed and helpful analysis, Lord Mance found it unnecessary to issue any final ruling or declaration on the issue, due to his conclusions on the meaning of ‘competent local authority’ which were conclusive to the outcome of the proceedings. Noting that the issue was complex, and because the Award was to be published and the issue may arise in other contexts, Lord Mance concluded that he should say “nothing more definite” about it.
But as an ex-Deputy President of the Supreme Court and the author of many seminal decisions on English insurance law, his clearly-expressed views on the matter will doubtless be influential in future judicial consideration of the issue, and will need to be studied closely by insurers and policyholders alike in considering the position under Denial of Access and other clauses where coverage is still in dispute.
A copy of the award can be accessed here.
[1] The arbitration proceedings were brought with the agreement of the insurer, who agreed to cover the costs of the proceedings, and not to seek its own costs from the policyholders regardless of the outcome. Confidentiality in the arbitral award was also waived, meaning that it can be made public.
[3] Divisional Court para.467
(De)sign of the Times: Blurred Lines on Build Performance Liabilities
Design requirements are at the heart of any construction contract, and the precise formulation of applicable standards is crucial to evaluation of risk. Recent trends indicate that designers in the UK construction industry are assuming increasing levels of liability on build performance, with significant implications for coverage under professional indemnity insurance.
In Arbitration Appeal No 1 of 2021 [2021] CSOH 41, the Scottish Court of Session recently considered the interpretation of deemed design liability clauses, and upheld a provision imposing responsibility on a consultant for designs pre-dating its appointment and which had been proposed without its involvement. Whilst similar clauses may be given a narrower interpretation in a multi-disciplinary design context involving several third party consultants, the scope of such provisions should be carefully considered at the outset, to limit exposure and potential uninsured loss.
Reasonable Skill & Care vs. Fitness for Purpose
A contractor or professional with design responsibility should exercise reasonable skill and care, based on standards expected of an ordinary skilled person performing and professing to have that special skill, so that liability will not arise unless they have acted negligently.
Express contract terms often impose more onerous fit for purpose type obligations, providing a warranty that the works will conform to specified employer requirements. Liability arising from a higher contractual standard than that imposed by ordinary common law, including certification of compliance with specified design, will usually fall outside the scope of cover under professional indemnity insurance.
Strict liability can be implied in relation to design elements of work under a design and build contract (Viking Grain Storage v TH White Installations (1985) 3 Con. L.R. 52); or where the contractor is informed of the purpose for which the works are required and the employer relies upon the contractor’s skill and judgement (Greaves v Baynham Meikle [1975] 1 W.L.R. 1095).
Industry standard forms address the issue in different ways, with JCT contracts requiring reasonable skill and care, whilst all FIDIC contracts impose some degree of fitness for purpose obligation. This divergence in part reflects the usual approach in different industry sectors, with design and construction contracts for energy or infrastructure projects typically including output specifications capable of measurement through testing, as compared with the performance standard ordinarily assumed by an architect or other professional designer in the real estate development sector.
Conflicting Standards
In MT Højgaard v E.ON [2017] UKSC 59, the Supreme Court considered a contract containing both a reasonable skill and care obligation, and a warranty ‘tucked away’ in a technical schedule requiring a service life of 20 years. The latter took precedence, in circumstances where wind turbine foundations designed and installed by the defendant in accordance with the claimant’s requirements and certifying authority’s specification began to fail during the defects period, due to a subsequently identified error in a value in the authority’s specification. The case demonstrates that a contractor can be found to assume the risk if they have agreed to work to a design which would render the item incapable of meeting the performance criteria.
An obligation to ensure that works constructed in accordance with the build design “shall meet the requirements described in the Specification” may be construed as imposing strict liability, notwithstanding the designer having separately undertaken to exercise reasonable skill and care (Costain v Charles Haswell & Partners [2009] EWHC 3140). This depends on the particular contract wording, however, and conversely a design and build contract requiring a consultant to comply with a specific design, alongside an obligation to act with reasonable skill and care, may be construed on the basis that the obligation to comply with the specification is to be read as expressly or impliedly subject to the reasonable skill and care provision (MW High Tech Projects v Haase Environmental Consulting [2015] EWHC 152).
For complex contracts incorporating schedules from multiple sources, a priority of documents provision may be helpful to deal with potential inconsistencies.
Implementation of Design
Following on from the decision in SSE Generation v Hochtief Solutions [2018] CSIH 26, we are seeing an increase in professional indemnity disputes based on a distinction between preparation and implementation of design, with reference to the scope of ‘professional activities’ defined in the policy and declared in the proposal form.
In SSE Generation, a design and build contractor was held liable under the NEC2 contract for costs of repairing a tunnel collapse at the Glendoe hydroelectric power scheme in Scotland, due to breach of contract requirements on appropriate support for erodible rock encountered in a fault zone. The court decided by a majority that Hochtief could not rely on a limitation of liability for design defects, despite having exercised reasonable skill and care in preparing the design statement, as the damage was caused by implementation of design.
This conclusion was reached in light of specific contract terms and the interface between design and its implementation is highly fact sensitive (Bellefield Computer Services Ltd v E Turner & Sons Ltd [2002] EWCA Civ 1823), particularly in cases involving complex construction and engineering decisions.
Design Life
Construction contracts often require completed works to deliver a specified minimum ‘design life’.
The meaning of this concept was considered in Blackpool B.C. v Volkerfitzpatrick [2020] EWHC 1523, a case concerning alleged premature corrosion to a tram depot situated in a seafront location. The court referred to relevant British Standards on service life planning and structural design in concluding that an acceptable level of not “unusually onerous” maintenance is a key ingredient of performance expectations for individual parts of a building, and a specified design life implies that “major repairs” should not be needed during that period. The extent of standard maintenance will be a matter of fact and degree, which could be addressed in O&M manuals produced by the contractor.
Depending on the words used in the contract, several discrete obligations may be separately imposed and cumulatively applied to the design life and quality of particular components within a complex structure (125 OBS (Nominees1) v Lend Lease Construction [2017] EWHC 25).
Conclusion
In view of ongoing hard market conditions, policyholders are understandably reluctant to accept requirements outside the scope of conventional insurance cover, with extensive negotiation on design risk allocation at the pre-contract stage often resulting in a form of compromise wording.
The nuanced approach adopted in recent court rulings demonstrates a blurring of lines between the traditional reasonable skill and care vs. fitness for purpose dichotomy, acknowledging that different standards can apply to various aspects of design under a single contract.
Designers should exercise particular caution in relation to deeming provisions in appointment documents and standard form contracts, imposing liability for plans initially developed by the employer or third parties.
To avoid ambiguity, contractors and consultants should expressly exclude fitness for purpose obligations where possible, and consider inclusion of contract terms defining the output of building design, with reference to intended maintenance procedures. Where exclusion of fitness for purpose obligations cannot be agreed, policyholders should talk to their brokers and insurers to obtain clarity about the extent to which any onerous contractual obligations are covered by their professional indemnity insurance.
Amy Lacey is a Partner at Fenchurch Law.
