Climate Risks Series - Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
The global rise in climate litigation looks set to continue, with oil and gas companies increasingly accused of causing environmental damage, failing to prevent losses occurring, and improperly managing or disclosing climate risks. Implementation of decarbonisation and climate strategies is subject to scrutiny across all industry sectors, with claims proceeding in many jurisdictions seeking compensation for environmental harm as well as strategic influence over future regulatory, corporate or investment decisions.
Evolving risks associated with rising temperatures have significant implications for the (re)insurance market as commercial policyholders seek to mitigate exposure to physical damage caused by severe weather events; financial loss arising from business interruption; liability claims for environmental pollution, harmful products or ‘greenwashing’; reputational risks; and challenges associated with the transition towards clean energy sources and net zero emissions.
Litigation Trends
Cases in which climate change or its impacts are disputed have been brought by a wide range of claimants, across a broad spectrum of legal actions including nuisance, product liability, negligence, fiduciary duty, human rights and statutory planning regimes. Approximately 75% of cases so far have been commenced in the US, alongside a large number in Australia, the EU and UK.
Science plays a central role and can be critical to determining whether litigants have standing to sue. The emerging field of climate physics allows for quantification of greenhouse gas (“GHG”) emitters’ responsibility, with around 90 private and state-owned entities found to be responsible for approximately two-thirds of global carbon dioxide and methane emissions. Recent advances in scientific attribution may provide evidence for legal causation in claims relating to loss from climate change or severe storms, flooding or drought.
Directors of high-profile companies may be personally targeted in such claims as liable for breach of fiduciary duties to the company or its members, in failing to take action to respond to climate change, or approving policies that contribute to harmful emissions.
Recent Cases
An explosion of ‘climate lawfare’ has kicked off in recent years, with the cases highlighted below indicative of key themes.
Smith v Fonterra [2024]
The New Zealand Supreme Court reinstated claims, struck out by lower courts, allowing the claimant Māori leader with an interest in customary land to proceed with tort claims against seven of the country’s largest GHG emitting corporations, including a novel cause of action involving a duty to cease materially contributing to damage to the climate system. This was an interlocutory application and the refusal to strike out does not mean that the pleaded claims will ultimately succeed on the merits. However, the judgment is significant in demonstrating appellate courts’ willingness to respond to the existential threat of climate change by allowing innovative claims to be advanced and tested through evidence at trials.
R v Surrey County Council [2024]
In a case brought by Sarah Finch fighting the construction of a new oil well in Surrey, the UK Supreme Court (by a 3:2 majority) ruled that authorities must consider downstream GHG emissions created by use of a company’s products, when evaluating planning approvals. The Council’s decision to grant permission to a developer was held to be unlawful because the environmental impact assessment for the project did not include consideration of these “Scope 3” emissions, when it was clear that oil from the wells would be burned.
Verein KlimaSeniorinnen [2024]
An association of over 2,000 older Swiss women complained that authorities had not acted appropriately to develop and implement legislation and measures to mitigate the effects of climate change. The Grand Chamber of the European Court of Human Rights held that Article 8 of the European Convention encompasses a right for individuals to effective protection by state authorities from serious adverse effects of climate change on their life, health and wellbeing. Grand Chamber rulings are final and cannot be appealed: Switzerland is now required to take suitable measures to comply. While not binding on national courts elsewhere, the decision will be influential.
ClientEarth v Shell [2023]
The English High Court dismissed ClientEarth’s attempt to launch a derivative action against the directors of Shell plc in respect of their alleged failure to properly address the risks of climate change, indicating that claims of this nature brought by minority shareholders will face significant challenges. The Court noted that directors (especially those of large multinationals) need to balance a myriad of competing considerations in seeking to promote the success of the company, and courts will be reluctant to interfere with that discretion, making it harder to establish that directors have breached their statutory duties.
US Big Oil lawsuits
Following lengthy disputes over forum, proceedings against oil and gas companies in the US are gaining momentum, paving the way for the claims to be substantively examined in state courts. Many actions against the fossil fuel industry seek to establish that defendants knew the dangers posed by their products and deliberately concealed and misrepresented the facts, akin to deceptive promotion and failure to warn arguments relied upon in other mass tort claims in the US, arising from the supply of tobacco, firearms or opioids.
Implications for Policyholders
With increasing volatility and accumulation risk, insurers will look to mitigate exposures through wordings, exclusions, sub-limits and endorsements. The duty to defend is the first issue for liability insurers, given the number of policyholders affected and the potential sums at stake in indemnity and defence costs.
In 2021, the Lloyd’s Market Association published a model Climate Change Exclusion clause (LMA5570). Property policies exclude gradual deterioration, with express wording or impliedly by the requirement of fortuity, and liability insurance typically excludes claims arising from pollution.
Lawsuits have been filed in the US over insurance coverage for climate harm, including Aloha Petroleum v NUF Insurance Co of Pittsburgh (2022), arising from claims by Honolulu and Maui, and Everest v Gulf Oil (2022), involving energy operations in Connecticut. Policy coverage may depend on whether an “occurrence” or accident has taken place, as opposed to intentional acts or their reasonably anticipated consequences (Steadfast v AES Corp (2011).
Policyholders should review their insurance programmes with the benefit of professional advice to ensure adequate cover for potential property damage, liability exposures and legal defence costs.
In the following instalments of our Climate Risks Series, we will examine the impact of reinsurance schemes and parametric solutions, and coverage for storm and flood-related perils in light of recent claims experience.
Authors
Amy Lacey, Partner
Ayo Babatunde, Associate
Queenie Wong, Associate
Non-damage property cover in political violence insurance: Hamilton Corporate Member Ltd v Afghan Global Insurance Ltd
On 12 June, the Commercial Court handed down judgment in an important case for the political violence insurance market regarding the meaning of “direct physical loss” and also of the seizure exclusion.
Hamilton Corporate Member Ltd v Afghan Global Insurance Ltd [2024] EWHC 1426 (Comm) arose out of the Western withdrawal from Afghanistan and the subsequent assumption of control by the Taliban. In August 2021, Anham, the original insured, lost its warehouse at the Bagram airbase in Afghanistan when it was seized by the Taliban. Anham sought to recover the US$41m loss under its political violence policy which had been issued by an Afghani insurer, which in turn was reinsured by the Claimant reinsurers.
The Exclusion
The reinsurers denied the claim (and sought summary judgment for a declaration of non-liability), relying on the following exclusion:
“Loss or damage directly or indirectly caused by seizure, confiscation, nationalisation, requisition, expropriation, detention, legal or illegal occupation of any property insured hereunder, embargo, condemnation, nor loss or damage to the Buildings and/or Contents by law, order, decree or regulation of any governing authority, nor for loss or damage arising from acts of contraband or illegal transportation or illegal trade.”
Anham sought to argue that the exclusion was inapplicable, on the grounds that in the context of the exclusion the “seizure” had to be carried out by a governing authority, which could not be said of the Taliban at the material time. However, the court (Calver J) had little difficulty in holding that the exclusion did apply, on the basis that in both settled case law and ordinary language “seizure” means “all acts of taking forcible possession, either by a lawful authority or by overpowering force”. Clearly, the Taliban fell into the latter category. The court also rejected Anham’s submission that it should not reach a decision without first hearing expert evidence as to how the political violence insurance market understood this exclusion.
Direct physical loss
The Judgment also shed light on how the Courts in this context will construe the “physical loss” of property.
The policy contained the following Interest provision:
“In respect of Property Damage only as a result of Direct physical loss of or damage to the interest insured”.
Likewise, Insuring Clause 2 indemnified Anham against “Physical loss or physical damage to the Buildings and Contents”.
Anham submitted that the warehouse had been lost, on the grounds that it had been irretrievably deprived of possession of it because of the Taliban. In making this argument, Anham sought to rely on the definition in the Marine Insurance Act 1906 of constructive total loss (namely, that, where an insured is deprived of his property and there is little chance of recovery, the courts will consider that a constructive total loss). However, Calver J unhesitatingly held that, in the context of a political violence insurance policy, “direct physical loss” meant physical destruction, not mere deprivation of use.
Interestingly, the Judgment did not cite cases such as Moore v Evans [1917] 1 KB 458 (CA) [1918] AC 185 (HL) or Holmes v Payne [1930] 2 KB 301, which held that the word “loss” was not qualified by the word “physical”.
Summary
The Judgment in Hamilton is plainly unhelpful to policyholders insured under the AFB Political Violence wording, which is widely used in the London market. Unless successfully appealed, (re)insurers are likely now to reject any claim based on this wording for loss of property where the hostile forces have not caused any actual damage to the insured interest, notwithstanding that their actions deprived the insured of the use of or access to it.
Authors
Jonathan Corman, Partner and Dru Corfield, Associate
Bellini v Brit: The Court of Appeal serves up a slightly sour COVID-19 decision
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2024] EWCA Civ 435
The Court of Appeal has handed down judgment in a case that will have significant repercussions for business interruption cover and should be on every policyholder and broker’s radar.
Non-damage endorsements commonly supplement the predominantly damage-based cover afforded by business interruption insurance policies. However, as this case demonstrates, care must be taken to ensure that the policy wording reflects the intention for the endorsement to be triggered without the need for actual damage – or the policyholder might find itself without the cover the endorsement appears to provide.
The Background
The case related to the proper interpretation of a ‘Murder, suicide or disease’ extension (the “disease clause”), as set out below:
We shall indemnify you in respect of interruption of or interference with the business caused by damage, as defined in clause 8.1, arising from:
- a) any human infectious or human contagious disease (excluding [AIDS] an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a [25] mile radius of it;
- b) murder or suicide in the premises; […]
Many similar disease clause wordings, giving cover for cases of Covid-19 at the premises or within a certain vicinity, have been the subject of litigation arising out of the pandemic.
The core issue here was, whether on a true construction of the disease clause there could be cover in the absence of damage, as defined in the policy.
At first instance, the court had held that, on the wording of the disease clause, there was no cover without damage. Our article on that decision can be found here.
The Common Ground
It was common ground between the parties that standard business interruption insurance is contingent on physical loss or damage to the insured premises or other property, but that non-damage-based cover is typically available as an extension. Such extensions may take various forms and the FCA Test Case considered a number of examples which did not require physical damage to be triggered.
It was also common ground that there had been no physical loss of or damage to the premises or property used at the premises.
It is also worth noting that it was assumed for the purposes of the preliminary issues trial that the insured was able to establish that Covid-19 was manifested either at the premises or within the 25-mile radius. It was further assumed that the premises were closed by reason of government intervention, and this intervention amounted to "interruption or interference" within the meaning of the disease clause, resulting in financial loss.
The Principles
The principles of contractual interpretation are by now a well-trodden path in recent insurance coverage disputes. The concept of “correction of mistakes by construction” was considered in East v Pantiles (Plant Hire), where the Court found that two conditions must be satisfied: “…first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”
The principles of contractual interpretation in the context of insurance policies were neatly summarised by the Supreme Court in the FCA Test Case: “The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court's task.”
The Arguments
The policyholder argued that the disease clause should be understood as if the words "caused by damage, as defined by clause 8.1" were deleted. The words "in consequence of the damage", according to the policyholder, should instead read as "in consequence of the insured perils set out above at paragraphs (a)-(e) above". It was argued that this was the only way to make sense of the policy, and reflected how the court had interpreted the trends clause in FCA Test Case.
In addition, it argued that the words "damage, as defined in clause 8.1" made no sense on the basis that Damage was not defined in clause 8.1, which simply provided for business interruption coverage subject to certain defined provisos.
The court was invited to rewrite the policy in the most sensible way that accorded with the obvious intention of the parties (i.e. that the disease clause provided non-damage rather than damage cover).
The insurer asserted that such an approach was impermissible. They argued that it did not matter that the disease clause provided only very limited extensions of cover for disease, nor did it matter that it was hard to imagine how liability could ever arise under the disease clause on their interpretation: the parties should be held to their bargain.
The Decision
The Court of Appeal considered the well-established principles and held that it would only be permissible to rewrite the clause if something had gone wrong with the language used.
In circumstances where it was not clear that something had gone wrong, and where the clause was not ambiguous on its face, the court identified the correct approach as one that gave the clause its natural meaning - even where the end result was the provision of only limited, if any, additional cover.
In applying the principles to the facts of the case, the court considered that when objectively viewed, and taking into account the policy in its entirety, it did not provide non-damage business interruption cover as asserted by the policyholder.
The court’s reasoning can be summarised as follows:
- The standard business interruption cover clearly required damage to property. The extensions to the standard cover effectively provided cover for various things caused by physical damage;
- The same phraseology (which stated “Damage, defined in clause 8.1”) was used in most of the other extensions to the standard cover, and the reference was not a mistake, but instead made clear that the damage-based business interruption coverage in clause 8.1 was being extended to the indemnity clauses in clause 8.2;
- The policy must be interpreted as at 20 October 2019 when it incepted, and therefore cannot be interpreted through the telescope of Covid-19; and
- The fact that the disease clause provided limited additional cover does not in and of itself make it absurd. The court acknowledged that insurance policies are often somewhat repetitive and also sometimes clumsily drafted.
Comments
This judgment, while undeniably sound in its reiteration of well-established legal principles, still manages to feel particularly ugly for policyholders.
The disease clause in question, in all other respects, is a typical non-damage endorsement, and in our view should have been read as affording non-damage cover. We do not agree, as the court found, that a “reasonably informed small-business-owning policyholder” would conclude that they had only damage-based cover. Au contraire. Rather, we suggest, they would share the view of court in the FCA Test Case in finding the reference to “damage” inapposite and requiring of a wider interpretation in a non-damage context. Not least where the outcome is that the extent of cover the “extension” actually provides is so limited as to verge on being illusory.
Undoubtedly policyholders are swayed when making purchasing decisions by the idea that some policies are more extensive than others. This appeal serves as an apt reminder to policyholders and brokers that there is a real need to be alive to standard form wordings and extensions, which as this case shows, may not provide the policyholder with anything tangible.
As a parting comment, there is a theme emerging in the reporting of Covid-19 insurance disputes, including this judgment, which we find unpalatable as a concept: namely that where clauses are included automatically and no “additional” premium is paid, the policyholder is getting something it has not paid for. That cannot be right. The insurance market is not in the business in handing out “free” cover, and policyholders are not being provided with extensions free of charge. There has been and always will be a calculation of risk by insurers, for which a policyholder pays a premium and the insurer provides the end product. Free, it is not.
Authors
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
What is unfairly prejudicial conduct entitling a shareholder to relief from the Court – and are such claims indemnified under the company’s D&O Policy?
Successive versions of the Companies Act (most recently Section 994 of the 2006 Act (“CA 2006”)) have provided protection and relief for minority shareholders against unfairly prejudicial conduct of the company’s affairs by majority/controlling shareholders and the board of directors.
However, the petitioning shareholder has the burden of establishing such conduct.
The recent case of Re Cardiff City Football Club (Holdings) Ltd [2022] EWHC 2023 (Ch) (summarised below) emphasises that (i) even if a majority shareholder’s conduct is vindictive, unpleasant or morally unfair, it does not always follow that it will be classed as unfairly prejudicial and (ii) the conduct of a majority shareholder, even if unfairly prejudicial, must be within the affairs of the company itself, and not merely carried out in his or her personal capacity.
Background
Mr Issac was a minority shareholder in Cardiff City Football Club (Holdings Limited) (“the Company”) which is the holding company of Cardiff City Football Club (“the Football Club”). He brought a petition against Vincent Tan and the Football Club on the grounds that Company’s affairs had been conducted in a prejudicial manner. The claim related to an open offer of shares made by the Company following a board resolution in May 2018. Mr Tan was the majority shareholder of the Company who before the offer of shares owned 94.22% of the issued shares. No other shareholders took up the offer of shares. This increased Mr Tan’s shareholding to 98.3% and Mr Issac’s was reduced from 3.97% to 1.18%.
Mr Issac argued that this dilution was prejudicial because the value of his shares was diminished. He argued that the whole offer was arranged by Mr Tan due to his animosity to Mr Issac rather than for any proper commercial purpose. Whilst the Board of Directors approved the offer, Mr Issac contended that it had merely “rubber stamped” Mr Tan’s decision, in breach of Section 173 of the CA 2006, which requires directors to exercise their own independent judgment, and of Section 171 of the CA 2006, which requires an allotment of new shares to be for a proper purpose.
Mr Tan denied these allegations. He argued that he provided consideration for the new shares issued to him by agreeing to write off £67 million which was owed to him by the Company. Therefore, Mr Tan argued there was a good commercial purpose behind the offer - which improved the Company’s balance sheet - and it was not because of any animosity towards Mr Issac. and that the directors had exercised their allotment power for a proper purpose.
Mr Issac sought an order that Mr Tan should buy his shareholding for a fair value. He sought an order for sale on the basis of a 3.97% shareholding as opposed to a 1.18% shareholding.
Decision
In deciding whether there was any unfair prejudice, the Court asked the following three questions:
- Was Mr Tan's conduct the conduct of the Company’s affairs?
- Did the directors act independently?
- Did the directors act for a proper purpose?
Was Mr Tan's conduct the conduct of the Company’s affairs?
The Court answered that question in the negative.
Mr Issac argued that Mr Tan used his position as a majority shareholder to put pressure on the Board to give in to his demands. However, the Court held that this could not be seen as conduct of the Company because these acts were a personal or a private act. The Court cited Re Unisoft Group Ltd (No. 3) [1994] 1 BCLC to distinguish between the acts or conduct of a company and the acts of a shareholder in his private capacity. The Court held Mr Tan was entitled “qua” shareholder and creditor to exert commercial pressure and act in his own interests.
The Court acknowledged that Mr Tan did have personal animosity to Mr Issac, which was part of the reason he made the open offer of shares, and that his conduct was vindictive and unpleasant.
However, the Court held that there was nothing unlawful or unconscionable in Mr Tan's actions, and that what he did was unfair in a moral but not in a legal sense. There was no Shareholders' Agreement, and no provisions in the Articles of Association had been infringed. Accordingly, there was no breach of anything referable to the affairs of the Company.
The mere fact that respondents have caused prejudice to the petitioner does not always mean there has been unfairness. So, where two companies were always run as a single unit in disregard of the constitutional formalities of both of them, but with the acquiescence and knowledge of the petitioners, there was prejudice, but no unfairness (Jesner v Jarrad Properties [1992] BCC 807)
Conversely, conduct by those in control of the company may be unfair and reprehensible but not prejudicial. So, where directors entered into transactions pursuant to which (despite obvious conflicts of interest) they purchased company assets, this was unfair but no section 994 remedy was granted, as the price paid by the directors was not less than the company would have obtained from an arm’s length purchaser (Rock Nominees Limited v RCO (Holdings) Plc (In Liquidation) [2004] 1 BCLC 439 CA).
Did the directors act independently?
The Court held that the directors did act independently. There was a justifiable commercial rationale for what the Board was being asked to do. Board minutes were prepared in advance of the meeting, but there was nothing inherently wrong with that, so long as the Board had the opportunity to take its own view as the meeting developed.
Did the directors act for a proper purpose?
The Court decided that the directors did act for a proper purpose.
The Court cited Howard Smith v Ampol Petroleum [1974] AC 821, which held it would be "too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company".
The allotment of the shares was deemed as being for a proper purpose, namely clearing debt owed to Mr Tan. This would improve the Company's balance sheet and provide greater financial stability.
Therefore, the Court concluded that there was no unfair prejudice.
Impact on D&O Policyholders
Directors’ and Officers’ (D&O) policies will usually respond if there has been a claim made for a wrongful act by a director, provided the director has been acting in that capacity (rather than as a shareholder). The policy will likely provide indemnity or defence costs of any director against such allegations, which is important protection as such costs cannot lawfully be met by the company.
However, in this case, because Mr Tan was held to have been acting in a personal capacity (rather than as a director in the conduct of the Company’s affairs), his costs are unlikely to have been indemnified under the Company’s D&O policy.
Ironically, the very grounds relied upon by Mr Tan and the nature of the Company’s defence would themselves have excluded the right to indemnity for defence costs under the policy, and the directors would have to seek reimbursement of costs from the unsuccessful petitioner.
This case serves as a reminder that personal acts of directors, outside the scope of their directorial duties, cannot be relied upon in claims for minority shareholder relief, and nor will they be indemnified under the company’s D&O policy, if the subject of third-party claims.
Authors
Michael Robin, Partner
Ayo Babatunde, Associate
The End of Days, or Just the Beginning? Current AI use
It’s seemingly the only thing anyone can talk about. It is hard to go to any conference, panel discussion or networking event without someone paying it lip service. And most cyber articles, opinion pieces or business plans contain some nebulous reference to it. Artificial Intelligence (“AI”) is certainly the flavour of the month. But what it is, how is it used and what does it mean for us all? This article will look at the development of AI and hopefully alleviate concerns by demonstrating how it has been part of our everyday lives for some time.
Part of the problem is that most definitions of AI are either too complicated or too broad. One with which most people work is something along the lines of “AI is a computer’s ability to perform the cognitive functions or abilities that we usually associate with the human mind”. This tends to make people think of HAL from 2001: A Space Odyssey or the more recent example of ChatGPT. But AI elements are far more ingrained in our lives than science fiction or Large Language Models. Regardless of how we view AI, it is very much present in our everyday world; whether in the personal space of helping to enable safer online payments, or travelling to work through our smartphones, to offering greater efficiency for businesses and their clients through automation and autonomy.
Although the history of AI can be traced back to 1950 – for example, Alan Turing’s paper entitled ‘Computing Machinery and Intelligence’ [1] – for present purposes it makes sense to start in the late 1970s. The 1950s to mid-1970s were a time of great advancement for AI but (like ordinary computers) they had less impact on everyday lives. The emergence of arcade games in the late 1970s can be viewed as perhaps the earliest widespread societal engagement with AI. Games like Pong, Space Invaders and Pacman may not be what spring to mind when we think of AI, but the way in which the computer responded in real time to the player’s actions can certainly be considered as artificially intelligent gameplay. Similarly, the 1997 defeat of Gary Kasparov, chess world champion, by IBM’s ‘Deep Blue’ AI system has been viewed as a milestone in the history of AI. At the time, there was widespread unease that a computer had defeated one of humanity’s great intellectual champions.
In the grand scheme of things, however, AI in the 20th century was far more widespread in popular culture than in everyday life. After 2001: A Space Odyssey, films like Star Wars, Alien, Blade Runner, The Terminator, RoboCop and The Matrix had great impact in shaping society’s (mis)understanding about AI. The dystopian sci-fi genre of cinema has perhaps been the single biggest contributor to the concern and fear around the technology. Most of the stories in these films centre around the concept of computers ‘taking over’ and subduing humanity. This unhelpfully incepted ideas about the scope and purpose of AI in the popular conscience, despite the fact that the grand narratives were entirely fictitious.
In reality, AI deployment is more nuanced, precise and limited. While the potential of the technology is astounding, the current everyday uses of AI are surprisingly narrow (meaning task-specific) albeit certainly widespread. If you unlock your smartphone with facial recognition, you use AI several times a day. If you have predictive text enabled on texts or emails, you use AI whenever you are drafting. When you use maps on your phone to navigate a car or public transport journey, the real time traffic and transport updates are analysed and evaluated by AI to assess the swiftest route. If you call a service provider and speak to an automated voice – that’s AI. If you engage with a customer chatbot – that’s AI too. If you have social media and engage with suggested posts/videos, the AI algorithms that show the content have prioritised posts based on previous ‘likes’, your location, wider online activity and user demographic. Similarly, if you use Spotify or Apple Music, AI assesses your music taste and playlists and creates a track list in a similar vein.
In business, if your company does not use AI, it is almost certain that one of your service providers does. For example, while London-based law firms are unlikely to develop their own AI software, it is highly likely that their disclosure providers use AI in document review and processing. And in healthcare, it is highly likely your local hospital is using AI, given that NHS Trusts use AI to analyse X-ray images to support radiologists make assessments. AI is also used to assist clinicians with interpreting brain scans. Whenever you fly on a plane, air traffic control systems log your flight data and use it to feed AI systems that aid efficiency in air traffic management. And in the military, AI has been used in autonomous ground vehicles and unmanned drones and it assists in the prevention of cyber warfare. Even the food you eat may have been produced with the assistance of AI, given that sophisticated farms use AI and drones to analyse soil health, crop health and yield potential, thereby applying fertilisers and water more precisely – which optimises resource use and minimises environmental impact. In short, AI has permeated consumer life, healthcare, travel, defence and agriculture in ways that may not have been realised by the man on the Clapham omnibus but are highly unlikely to be reversed.
So AI is here to stay. But it is not omnipotent, and it is not yet omnipresent. It’s been around for far longer than ChatGPT although has had more targeted deployment than people tend to think. And you’re likely using it every day. While we can’t say for sure how the technology will develop, it’s not a future discussion: it’s already happening. AI has almost certainly improved efficiency and ease in your life and hasn’t locked the pod bay doors just yet.
This is the first in a series of articles about AI by Dru Corfield and Dr Joanne Cracknell.
Dru Corfield is an Associate at Fenchurch Law and inaugural committee member of the City of London Law Society’s AI Committee. Fenchurch Law was the first law firm in the UK to focus exclusively on representing policyholders in coverage disputes with their insurers and is top-ranked by both Legal 500 and Chambers.
Dr Joanne Cracknell is a Director in the Legal Services PI Team, Global FINEX, WTW. E: joanne.cracknell@wtwco.com W: https://www.wtwco.com/en-gb/solutions/services/legal-services-practice
WTW (Willis Towers Watson) is a global insurance broker, multidisciplinary consultancy, and risk advisor with a mission to empower companies amidst rapid change
[1] Source: Turing, Alan M. (1950). Computing machinery and intelligence. Mind 59 (October): 433-60.
Slowly but surely: policyholders make progress in their fight to recover Covid-19 BI losses from insurers
Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE [2024] EWHC 83 (Comm)
Introduction
Judgment has now been handed down following an eight-day preliminary issues hearing in October/November 2023 at which a number of different businesses, from a variety of industries, including bowling alleys, theatres, hotels, pubs, retail stores and a race course, sought to advance claims against their insurers for recovery of their COVID-19 losses.
It is the latest judicial consideration of prevention of access/non-damage denial of access wordings following: (i) the Divisional Court judgment in the FCA test case, which found that prevention of access/non-damage denial of access type wordings did not respond (a point that was not on appeal to the Supreme Court, and therefore did not benefit from a fresh look at the correct causation analysis); and (ii) Corbin & King, where further consideration of these types of wording found that there was cover based on the Supreme Court causation analysis and other factors.
The majority of the policyholders were insured by Liberty Mutual Insurance Europe (“LMIE”), as either the lead or sole insurer. There were a number of LMIE wordings and policy arrangements for the court to consider, albeit with very similar issues. Another case against Allianz Insurance Plc (“Allianz”) was heard alongside the LMIE group of claims, on a different wording, but again with similar coverage issues for determination.
In broad terms, the key preliminary issues that the court was asked to consider fell into the following categories:
- Trigger & Causation
- Limits
- Furlough
Not all issues were live in each of the claims. A full list of the answers to all preliminary issues can be seen in section H of the judgment.
Fenchurch Law acted for Hollywood Bowl and International Entertainment Holdings.
Trigger & Causation
LMIE’s starting position on causation was that Corbin & King was wrongly decided, and instead the correct analysis was that of the Divisional Court in the FCA Test Case. However, insurers ultimately accepted prior to the hearing that they would not be successful on this point at first instance, and instead were granted permission to appeal at a later date.
Despite declarations made both by the Divisional Court and the Supreme Court in the FCA test case, and then debated again in Corbin & King, insurers ran a number of arguments including that “statutory authority” assumed a peril which concerned restrictions imposed by bodies such as the police, or other bodies with authority from or created by statute, i.e. bodies with a local remit.
The court disagreed on all counts, and held that the actions taken by government were the “paradigm example” of action by a “Statutory Authority”. The judge agreed with policyholders that there was cover for interferences that resulted from the action of any person, body or entity which has lawful authority derived from statute or statutory instrument. It was also sufficient that person or body responsible for the relevant interference was exercising authority which was derived from statute.
In respect of the Allianz wording, the court found that a case or cases of Covid-19 did not amount to an “incident” within the meaning of an “incident likely to endanger human life” (notwithstanding the court also accepting that a case or cases of Covid-19 was likely to endanger human life). Furthermore, the term “policing authority” did not encompass the central government or Secretary of State for Health and Social Care, the court found that it instead refers to the police or other bodies whose function it was to ensure that the law is obeyed and enforced.
Limits
On the LMIE wordings the policyholders argued that the sub-limits applied on a per restriction and per premises basis, or alternatively, that it applied to any one occurrence. Insurers argued that sub-limit was an aggregate limit applicable to all claims under the relevant clause, irrespective of the number of separate restrictions, and regardless of the policies being composite or not.
The court’s findings were broadly as follows:
- The policies provided cover on a per occurrence basis (i.e. each occurrence was subject to the relevant sub-limit), with no annual aggregate limit for claims under the relevant clause;
- Relying on Corbin & King, the policyholders with composite polices (a policy which records the interest of a number of different companies or insureds in a single document, but with the effect that there was separate contract of insurance between the insurer and each policyholder) were not subject to an aggregate limit that applied across all insureds. Moreover, there was a sub-limit per policyholder company, per occurrence; and
- Despite the use of “limit” instead of the defined term “limit of indemnity”, which appeared elsewhere within the policy wording, the court considered there was no material distinction between the two. As a result, the single policyholders with multiple premises could not recover on a per premises basis, but instead per occurrence aggregation with no annual aggregate limit.
The Allianz wording, despite not extending to the central government’s response to the Covid-19 pandemic, was found to apply to each company (it was already agreed that there was a composite policy on these particular facts). Furthermore, in circumstances when multiple premises were owned by one insured, there was no basis to treat individual premises as one unit based on the terminology “interference with the Business”, or elsewhere in the relevant wording. Accordingly, the sub-limit applied to “any one claim”, and therefore potentially multiple premises, subject to proving an “incident” within the relevant radius of each of the premises.
Furlough
The issue of furlough was previously considered by the court in Stonegate v MS Amlin & Ors, where it was held that furlough payments were to be taken into account under a savings clause that provided for the reduction of costs normally payable out of turnover that ceased or were reduced as a result of the covered event.
Despite detailed submissions, the court reached the same view on the basis that the issue before it was the same as that considered in Stonegate, a number of the points made had already been rejected, and it was therefore appropriate to follow the decision. In respect of arguments made on causation, the court agreed with insurers that furlough could not be regarded as wholly separate and divorced from the restrictions which were introduced in consequence of the widespread prevalence of COVID-19, which happened prior to the introduction of the CJRS scheme. Furthermore, it was not appropriate to take a different (and stricter) approach on causation in the context of the savings clause than in the context of the insured peril - there was a sufficient proximate causal connection between the insured peril and furlough payments that reduced the wage costs of a business.
What does it mean and what happens next?
This most recent Covid-19 judgment is welcome news for policyholders, again reaffirming the decision in Corbin & King v Axa. However, as noted above, insurers have been granted permission to appeal on causation and we expect that those with wordings affected by this issue will be forced to await the outcome of that appeal, despite now having a number of significant authorities supporting their claims.
In the addition to insurers being granted permission to appeal on causation, policyholders were granted permission to appeal the decision on furlough, which remains of particular importance to the wider insurance market. Hopefully a decision at appellate level will provide the market with closure on a point that sometimes feels almost political – did the government really intend for shareholders of large insurers to benefit from taxpayers’ money?
All other grounds of appeal were refused by the first instance judge, meaning that the parties will have to seek permission directly from the court of appeal. More to come on that as matters progress.
The judgment confirmed a “per occurrence” based recovery for those on the LMIE wordings, with the issue of identifying the relevant occurrences to be determined at a later date. However, as a starter for ten, we anticipate that restrictions such as the nationwide lockdowns and local lockdowns will be the obvious first candidates.
Importantly, the recent judgment will come as particularly welcome news to those with composite polices, who in the absence of specific wording to the contrary should continue to pursue claims for each insured entity, and also multiple premises in certain circumstances.
Authors
Anthony McGeough, Senior Associate
Condonation and Aggregation - Decision by the Court of Appeal in Axis Specialty Europe S.E v Discovery Land [2024] EWCA Civ 7
This is the first Court of Appeal decision as to the meaning of “condoning” dishonest acts under the SRA Minimum Terms. As a reminder, solicitors’ professional indemnity policies must comply with the Minimum Terms. Under those terms insurers can decline to cover a claim which arises from dishonesty only if it had been committed or condoned by all partners in the firm.
The dispute concerned two fraudulent acts perpetrated against the claimants by their solicitor, Mr Stephen Jones, who was the senior partner in a two-partner firm. The other partner was a Mr Prentice. The firm became insolvent, and the claimants pursued two claims against the firm’s insurers, Axis, pursuant to the Third Parties (Rights against Insurers) Act 2010.
AXIS denied cover on the basis that the second partner, Mr Prentice, had condoned Mr Jones’ dishonesty (through “blind eye” knowledge), therefore engaging the exclusion considered below. While the Trial Judge found that Mr Prentice’s standards fell well below those required in his profession, he nevertheless concluded that Mr Prentice had not condoned the relevant fraudulent acts. Consequently, the claimants were entitled to be indemnified.
The appeal concerned Axis’ challenge to (1) the Judge’s finding of fact that Mr Prentice had not condoned Mr Jones’ dishonest behaviour and (2) the Judge’s decision that Axis was not entitled to rely on the aggregation clause.
Condonation
The exclusion in Axis’ policy was in the following terms:
"EXCLUSIONS
The insurer shall have no liability for: …
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that:
a) the policy shall nonetheless cover the civil liability of any innocent insured; and
b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of the company or in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
There was an argument as to what clause 2.8 requires to be “condoned”. The Court of Appeal agreed with the Trial Judge that the clause is wide enough to include condonation of a pattern of dishonest behaviour of the same type as that which gives rise to the claim. As a result, the question would be “whether or not knowledge and acceptance or approval of other acts in the same pattern amount to condonation of the act or acts which gave rise to the claim.”
For example, where partner B condoned the regular use of client funds by partner A for his/her own purpose, the Court of Appeal considered it would be more difficult for partner B to argue that he was unaware of “the specific instances of such behaviour which gave rise to the claim.”
In this case, the Court of Appeal acknowledged that, while the Trial Judge found that Mr Prentice’s evidence contained both truth and untruth, his evaluation of the evidence and ultimate decision was entirely “rational” and one he was entitled to reach.
Aggregation
The Court of Appeal had to consider whether the two claims arose from “similar acts or omissions in a series of related matters or transactions.” To do so, it applied the test for aggregation considered by the Supreme Court in AIG v Woodman.
Teare J (at first instance) found that the degree of similarity must be “real or substantial.” As to whether the claims were “related”, Lord Toulson found that this required that they “fitted together.” In considering this, the Court of Appeal in Discovery Land commented that assessing “a real or substantial” similarity requires a careful consideration of the “substance of each claim.”
Here, whilst the same property was involved and the victims were affiliated companies, the Court of Appeal considered these factors to be “insufficient to provide the necessary link between the two transactions.” The Judge’s decision not to aggregate the claims was upheld.
In determining both issues, the Court of Appeal commented that a thorough factual analysis of the evidence was required, which is what it accepted the Trial Judge had indeed carried out in “painstaking” detail. While each case turns on its own facts, this decision provides a helpful guide at Appellate level as to how a court should approach issues of condonation and aggregation.
Authors
Jessica Chappell, Senior Associate
Promised Land: Estoppel Trends in Policyholder Recoveries
Recent cases demonstrate how insurers’ claim handling may give rise to estoppel and extend the scope of policy coverage. Practices followed in earlier claims concerning the insured parties and/or operation of indemnity provisions could amount to a common assumption, conveyed between the parties and detrimentally relied upon by the policyholder, from which it would be inequitable for insurers to resile. Further, insurers are likely to be estopped from relying on breaches of policy conditions requiring consent to admissions or settlements, after refusing cover for liability claims.
George on High
In George on High Ltd & George on Rye Ltd v Alan Boswell Insurance Brokers & New India Assurance Co Ltd [2023], an historic pub hotel was largely destroyed by fire. The insurer (“NIAC”) agreed to indemnify the property damage but declined cover for a business interruption claim, alleging the company which suffered this element of loss was not named in or insured under the policy. Specifically, George on High Ltd (“GOH”) had owned the freehold property, whilst George on Rye Ltd (“GOR”) owned the business operating there. The named insured was “George on High Ltd t/a The George in Rye”. The defendant broker arranged the insurance and accepted it would be responsible for the losses claimed, if NIAC was not liable.
The claimants argued that earlier dealings with NIAC’s outsourced claim handlers proved knowledge on NIAC’s part that GOR ran the business, and that GOR had been confirmed as insured. Premiums had been paid by GOR, and the claims history included incidents relating to the business, with several previous claims reviewed by NIAC’s agents referring to GOR as the policyholder. In none of the earlier claims had concerns been raised as to whether policy coverage included GOR.
Deputy High Court Judge Tinkler decided a reasonable person having all the background knowledge available to the parties would have understood “George on High Ltd t/a The George in Rye” in the policy schedule to mean “George on High Ltd and the business operated by George on Rye Ltd t/a The George in Rye”. The Insurance Act 2015 states that insurers “ought to know” matters an employee or agent knows and ought reasonably to have passed on, or information held by the insurer and reasonably available to underwriters. The outsourced claim handlers were aware prior to policy inception that GOR ran the business, and this knowledge could be attributed to underwriters.
In the further alternatives, the Judge considered that all the requirements for rectification of the policy were satisfied. Applying the test in Swainland Builders Ltd v Freehold Properties Ltd [2002]: (1) the parties had a common continuing intention at the time of contracting, (2) there was an outward expression of accord, and (3) by mistake, the contract did not reflect that common intention. Even if the decision on construction was incorrect, the Judge would therefore have ordered the policy to be rectified to reflect the insured as: “GOH and the business operated by GOR t/a The George in Rye”.
The Judge also concluded that the claims history estopped NIAC from denying cover. Applying the test for estoppel by convention in HMRC v Benchdollar [2009]: (1) the policy included cover for business interruption and employer’s liability, demonstrating a common intention that GOR would be insured; (2) by accepting liability for earlier claims relating to staff and customers, NIAC had conveyed to the claimants that it believed GOR to be covered under the policy; and (3) the claimants relied upon that assumption by paying premiums. It would be unconscionable in the circumstances to allow NIAC to deny cover for GOR, even if those claims were not covered by the policy wording.
The decision stands in welcome contrast to the harsh outcome in Sehayek v Amtrust [2021], where insurers were entitled to avoid liability under a new home warranty based on failure to correctly name the developer on a certificate of insurance. The position in George on High was clearly distinguishable based on handling of the previous claims; and an application by the insurer for permission to appeal was refused.
World Challenge
In World Challenge v Zurich [2023], Fenchurch Law acted for a company running adventure trips, insured since 2016 under a bespoke travel and accident policy with Zurich. Following the outbreak of Covid-19, nearly all booked expeditions for 2020 had to be cancelled, and World Challenge refunded customers for deposits or advance payments as required by the applicable Terms & Conditions.
A dispute arose as to whether World Challenge was insured for all refunds paid to customers, or only for irrecoverable costs paid to third party suppliers. The policy wording provided that, if pre-booked travel arrangements for a journey were cancelled, curtailed or rearranged due to causes beyond World Challenge’s control, Zurich would pay:
“deposits and advance payments … reasonably and necessarily incurred that are forfeit under contract or are not otherwise recoverable.”
The policy specified a cancellation claims deductible of £200,000. Whilst many previous cancellation claims had been handled under the policies, the aggregate value had always fallen below the annual deductible, so that customer refunds in each case had been paid by World Challenge. A process had been agreed where cancellation details would be submitted to Zurich’s claim handlers, who would verify the customer’s entitlement to a refund in accordance with the Terms & Conditions, before authorising World Challenge to issue a refund payment, and tracking the policy deductible.
Zurich never asked how much of the refund payments related to irrecoverable costs and it was obvious that cancellation claims were being treated as equal in amount to the customer refunds. Based on this course of dealing, World Challenge believed that all refunds were covered under the policies. Zurich was slow to communicate its disagreement with this position when the pandemic struck, and urgent clarification became imperative to manage business operations and customer relationships.
Mrs Justice Dias held that the ordinary and natural meaning of the policy wording was that Zurich would indemnify customer refunds only if and to the extent they comprised irrecoverable third party costs. Zurich’s employees maintained that this is how they had always understood the policy to operate, yet the claims process above was followed without question because (as the Judge found): “neither the claims handlers nor the underwriters particularly cared what the refunds represented, since the amounts involved were all comparatively low and fell within the deductible so that it made no practical difference to Zurich”. This attitude was described in the judgment as cavalier, since the adjustment and agreement of a claim has just as much contractual significance where it goes to erode a deductible as when payment is made by the insurer.
Attempts in the witness box to explain why documents did not in fact mean what they appeared to were described by the Judge as “frequently incoherent and illogical”, creating a “dismal impression” and making Zurich’s witnesses “look more than a little foolish”. Whilst there was no suggestion of any conscious dishonesty, the Judge highlighted the inherent unreliability of witness recollection, since all “memory" of distant events depends on a process of reconstruction inevitably influenced by a multitude of factors including the selection of documents reviewed in preparing witness statements, and the natural human instinct to reconstruct events to put oneself in the most favourable light possible, particularly when the witness has a tie of loyalty to or dependence on one of the parties, such as an employer.
Applying the test in Benchdollar and Tinkler v HMRC [2021], the Judge found that a common but mistaken assumption of law or fact arose from the course of claims handling under the earlier policies, conveyed between the parties, and relied upon by World Challenge in relation to the cancellation of trips. Zurich was therefore estopped by convention from denying that World Challenge was entitled to be indemnified under the policy for the amount of its customer refunds, subject to giving credit for any recoveries.
As compared with estoppel by convention, promissory estoppel requires a clear and unequivocal promise or assurance by the defendant that it will not enforce its strict legal rights; an intention by the defendant that this promise/assurance should affect legal relations between the parties; and detrimental reliance by the claimant, so that it would be inequitable to permit the defendant to withdraw the promise, or act inconsistently with it. The Judge concluded that this was not established on the facts, since there was no understanding on the part of World Challenge that Zurich was giving up any right to rely on the true construction of the policy.
Permission to appeal has recently been granted and it will be interesting to see whether further nuances are introduced by the Court of Appeal.
Technip v Medgulf
In Technip Saudi Arabia v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023], the claimant (“Technip”) was principal contactor for an offshore energy project in the Middle East. A vessel chartered by Technip collided with a wellhead platform owned by the field operator, KJO, and Technip notified a liability claim under the project all risks policy, written on a WELCAR standard market wording. The defendant insurer (“Medgulf”) declined the claim and confirmed to Technip that it should act as a prudent uninsured.
Technip subsequently agreed to pay $33 million in respect of KJO’s claim, and informed Medgulf of the settlement. Medgulf considered that the insurance claim was excluded on other grounds, and raised a secondary argument that the loss did not fall within the policy definition of Damages, as follows: “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent”.
Whilst Mr Justice Jacobs ultimately found the claim to be excluded under an Existing Property Exclusion in the policy, he also agreed with Technip that the requirement for insurer’s consent to compromise settlements could not apply, as this provision presupposed the insurer’s acceptance of liability:
“It would in my view be a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent insured … [because the policyholder] would be acting in accordance with what it had been told to do. An uninsured person would, by definition, have no reason to consult or seek the consent of an insurer. I consider that a court would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured.”
The Judge also considered the effect of various common law authorities, including the New Zealand Court of Appeal decision in Napier City Council v Local Government Mutual Funds [2022], as instructive in identifying waiver and estoppel as potential reasons why an insurer, which has denied liability, cannot then rely on clauses which require the insured to obtain consent to a settlement.
The comments in this case on unauthorised settlements are in stark contrast to the judgment in Diab v Regent [2006], in which the Privy Council held that a policyholder must still comply with claim conditions even though the insurer had indicated that it would reject any such claim. The decision in Technip gives some comfort that being told to act as a prudent uninsured allows a policyholder flexibility when negotiating and settling claims, although the safest course of action will still be to seek to comply with policy conditions where possible, even if insurers are unresponsive.
Conclusion
In an insurance case heard last year in the Commercial Court, Counsel for the policyholder explained to the Judge that an estoppel argument advanced by his client in a preceding arbitration had failed. “But they always do”, languidly replied the Judge. On the contrary, recent decisions highlight that estoppel is proving to be a point worth taking for policyholders whose claims have been declined.
Policyholders and brokers should exercise caution when identifying and naming parties to be insured, to avoid potential disputes. The position in relation to deemed insurer knowledge reflects increasingly sophisticated electronic systems for information sharing across the industry, as compared with traditional hard copy files. Insurers should take a considered approach to claim handling, even for low value matters, and ensure proper oversight of appointed agents.
Authors:
Insurance News, views and more: October 2023
Insurance News, views and more - from Fenchurch Law
OCTOBER 2023
Introduction
Welcome to the latest Fenchurch Law newsletter: concise, topical and often opinionated articles on the insurance disputes market, all from a pro-policyholder perspective.
In this edition, Amy Lacey looks at the structural problems associated with RAAC and how it may affect the UK Construction sector.
Dru Corfield, assesses the UK regulatory landscape in Artificial Intelligence.
Jonathan Corman considers the Court of Appeal’s decision in RSA & Ors v Tughans, a successful outcome for our clients, Tughans, in their long-running dispute with their PI insurers.
In our “100 Cases Every Policyholder Needs to Know” series, we bring you two cases. Read why we think MacPhail v Allianz Insurance plc was an ugly decision and why Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd was a good one.
In our Team News section, discover how employees of Fenchurch Law completed the Chiltern 50 Ultra Challenge.
Lastly, we’ve got some great upcoming events this month, so please check out the events section below for more information.
I hope you enjoy reading Insurance News and Views and that you look out for future issues in your inbox
David Pryce
Founder and Managing Partner
Viewpoint
Bubble Trouble: Aerated Concrete Claims and Coverage
Reinforced autoclaved aerated concrete (“RAAC”) is a lightweight cementitious material pioneered in Sweden and used extensively in walls and floors of UK buildings from the 1950’s to 1990’s. Mixed without aggregate, RAAC is ‘bubbly’ in texture and much less durable than standard concrete, with an estimated lifespan of 30 years. The air bubbles can promote water ingress, causing decay to the rebar and structural instability.
Read more here.
Risk, Regulation and Rewards: Regulatory Developments in Artificial Intelligence
With the Government’s White Paper consultation – “A pro-innovation approach to AI regulation” – having closed at the end of June, and the UK scheduled to host the first global summit on AI regulation at Bletchley Park in early November, now is an appropriate time to assess the regulatory lay-of-the-land in relation to this nascent technology.
Read more here.
Insurance for fees claims: RSA & Ors v Tughans
This Court of Appeal decision, in which our firm represented the successful respondents, considered the scope of a professional indemnity policy written on a full “civil liability” basis. Will such a policy respond to a claim against a firm (in this case, a firm of Solicitors) for damages referable to its fee, for which the firm had performed the contractually agreed work, but where the fee was only paid by the client following a misrepresentation by the firm?
Read more here.
Top 100 cases - The Good, The Bad and the Ugly
We continue our “100 Cases Every Policyholder Needs to Know” feature – our 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. As a reminder, we call them:
· “The Good” – cases that are correctly decided and positive for policyholders.
· “The Bad” – decisions that are bad for policyholders, wrongly decided and in need of being overturned.
· “The Ugly” – cases that can trip up even the most honest policyholder with the most genuine claim. Bad for policyholders but (even to our policyholder-tinted eyes) correctly decidedIn this edition we’re looking at two cases.
The first is an “Ugly one” – MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch) – Read here.
The second is a “Good one” – Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd – Read here.
Team News
Chiltern 50 Ultra Challenge
We’re proud to share that on the 23rd of September 2023, employees of Fenchurch Law completed The Chiltern 50 Ultra Challenge.
The Chiltern 50 is a charity walk through the Chiltern Hills, a route that follows the Thames to Henley Bridge, then out into the picturesque countryside on Shakespears Way, Icknield Way, and Chiltern Way. The team walked a total distance of 50km (31 miles), with over 900 metres of climb.
We hit the trails to support MIND, a charity that’s doing incredible work in destigmatizing conversations around mental health and providing essential support to those in need.
A big thanks to everyone who supported us on this journey, if you’d like to donate, please visit our fundraising page here: https://www.justgiving.com/team/fenchurchlaw
And finally…
We want to know your views. If you have a question or an interesting point that you’d like to share about all things insurance related, please let us know by emailing info@fenchurchlaw.co.uk
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Collisions, Allisions and Prudent Uninsureds - Technip v Medgulf, and insurance for unauthorised settlements
Technip Saudi Arabia Ltd v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm) (21 July 2023)
This decision provides helpful insight into how the Courts will deal with insurance claims for sums due under a settlement agreement.
Technip was the principal contractor for a project in an offshore oil and gas field in the Persian Gulf. In 2015, a vessel that Technip had chartered collided with and damaged a platform in the field. Technip and the platform owner, KJO, reached a settlement for US$25 million, which Technip sought to claim from the defendant insurer (“Medgulf”), along with other alleged losses, under the liability section of its Offshore Constructions All Risks policy. The settlement had occurred some three years after Medgulf had declined indemnity for the original claim, instead telling Technip that it should act as a “prudent uninsured”.
Claiming losses under Settlement Agreements
Technip -v- Medgulf confirmed the general principle under English Law that it is not enough for a policyholder simply to prove that a settlement agreement reached with a third party is reasonable in order to claim for the resulting loss under a liability policy, but it must also prove that there was a legal liability to the third party and that the settlement does not exceed the amount of that liability. In other words, the law does not provide a carte blanche to policyholders to settle disputes with third parties and expect a liability insurer to pick up the tab.
Settlement Agreements and Insurer’s Consent
Liability policies very commonly require the insurer's consent before a policyholder takes various steps during a dispute with a third party. These can include admission of liability, settlement discussions, negotiations and entering settlement agreements.
Here, the Policy provided an indemnity to Technip for its 'Ultimate Net Loss' ("UNL"), which was defined as:
"the total sum the Insured is obligated to pay as Damages …"
Damages were defined as:
"…compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters' consent, but shall not include fines or penalties, punitive damages, exemplary damages, equitable relief, injunctive relief or any additional damages resulting from the multiplication of compensatory damages". (Our emphasis)
Technip did not obtain Medgulf’s consent before concluding the settlement agreement, and Medgulf predictably argued that the settlement sum therefore did not fall within the definition of “Damages”.
Technip successfully argued that the sums payable under the Settlement Agreement comprised, in part, "compensatory damages" and so fell under the definition of "Damages" under the Policy. Medgulf had argued that the four categories identified in the first part of the definition of “Damages” had a degree of separation and that, crucially, “compensatory damages” must be sums awarded by a court or tribunal, which would not be applicable to the US$25 million Technip paid to KJO. The Court rejected this argument, however, and did not view the four categories as disjunctive: the settlement payment was caught by the definition of “compensatory damages” within the ordinary meaning of the term, with the result that the absence of consent by Medgulf was irrelevant.
Furthermore, Technip argued that, even if the settlement sum did not constitute “compensatory damages” and instead was only potentially covered as a “compromise settlement”, there was still no need for Medgulf's consent given that it had refused to indemnify Technip in 2016 (three years before the Settlement Agreement) and told Technip to act as a 'prudent uninsured'. Technip contended that, in these circumstances, the provision requiring consent could not apply, as the provision presupposed the insurer's acceptance of liability under the Policy.
The Court agreed with Technip and held that it "would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured". So, in short, the Court found that Medgulf was prevented from relying on the “Underwriter’s consent” part of “compromise settlements”.
Summary
Although Technip’s claim for an indemnity ultimately failed on other grounds, the Court’s comments concerning insurers' inability to rely on terms requiring their consent once they have told the policyholder to act as a prudent uninsured (or use similar language) are plainly useful for other policyholders. The decision stands in welcome contrast to the Privy Council’s judgment in Diab v Regent [2006] UKPC 29, which had seemingly held that, where an insurer has declined indemnity, a policyholder is still bound by all the claim conditions, including the need to seek insurer’s consent for a settlement. The policyholder in Diab had also raised an estoppel argument, which failed because the Court viewed the alleged representation of the insurer as essentially a warning not to pursue a claim under the policy, and not as an indication that, if the policyholder did pursue the claim, it would not be expected to comply with the procedural requirements of the policy.
Fun Fact: The event leading to the Damage in Technip -v- Medgulf was referred to throughout the Trial as an allision rather than a collision, an allision being where one of the objects involved is stationary.
Authors: