BAE Systems Pension Funds – v – RSA
Third Parties (Rights against Insurers) Act 2010
An analysis of the first judgment on the Third Parties (Rights against Insurers) Act 2010 (‘the Act’)
BAE Systems Pension Funds Trustees Limited (‘the Claimant’) brought proceedings against 4 Defendants following the construction of a large warehouse. The damages sought exceeded £10 million.
Protective proceedings were issued against the Defendants on 24 August 2016. In February 2017, the third Defendant, Twintec Limited (‘Twintec’), went into administration, and a few weeks later Twintec’s solicitors revealed that it was insured by RSA. The Claimant accordingly applied to join RSA to the claim.
RSA resisted the application on the grounds that:
- They were not in fact liable to indemnify Twintec for the claim;
- The policy and any dispute as to coverage was subject to French law and must be determined by arbitration or by the French courts.
The First Ground
It was uncontroversial that Twintec had become a ‘relevant person’ under section 1 of the Act i.e. it had incurred a liability to the Claimant, and had become insolvent in one of the ways specified by the Act.
Section 2 entitled the Claimant to bring proceedings directly against RSA seeking a declaration as to Twintec’s liability and/or a declaration as to RSA’s potential liability to the Claimant.
RSA argued, somewhat ambitiously, that Twintec was not entitled to indemnity because of an exclusion for pre-existing circumstances, and, if there was thus no cover, section 2 was not engaged.
The Judge, Mrs Justice O’Farrell DBE, found that Section 2 was engaged even where there was a dispute as to coverage. This did not require the Claimant to establish that there was a relevant insurance policy which necessarily responded to the loss – all that was needed was for the Claimant to make a claim that there was such a policy.
RSA argued that a number of difficulties could arise if Section 2 was engaged where cover was disputed. In particular, they suggested that this could pave the way for any insurer to be joined to an action, or possibly an insurer who had provided cover for a previous irrelevant period. The Judge gave short shift to this point, and stated that the Court, in these circumstances, could simply strike out those proceedings as having no prospect of success. The Judge’s decision was obviously right. Were it otherwise, the 2010 Act would not avail a Claimant where an insurer had denied indemnity.
RSA also suggested that there was an irreconcilable conceptual difficulty insofar as they would be faced with defending a claim for a declaration, when, in their view, the Claimant did not have the right to step into Twintec’s shoes. Again the Judge was unpersuaded, and found that it was entirely a matter for RSA as to the submissions they wished to make in response to the Claimant’s claim (and whether they wished to take any substantive part in the proceedings at all).
The Second Ground
The policy contained two dispute resolution clauses. The first clause provided for any dispute between the parties to be referred to the French courts and “shall be subject exclusively to French legislation”.
The second clause provided that, in the event of a dispute regarding the activation of cover, the parties agreed to refer their disputes to two arbitrators chosen by each party.
The claimant argued that the coverage dispute was caught by neither of the clauses. RSA, by contrast, argued that the coverage dispute was caught by both clauses.
The Judge was satisfied that the coverage dispute would be covered by one or other of the clauses i.e. it should be decided by either the French courts, or by arbitration. It did not, however, affect her finding as to whether section 2 was engaged.
The Result
The Judge granted the Claimant’s application to join RSA to the Claim, and, somewhat predictably, made it clear that in order to engage section 2 of the Act, a Claimant need not establish, as a pre-condition, that there is valid coverage. Were it otherwise the case, insurers would have carte blanche to reject any claims made against insolvent insureds.
Alexander Rosenfield is an associate at Fenchurch Law
Not Too Slender a Thread - Supreme Court decision in MT Højgaard v E.ON
The Supreme Court has upheld an appeal concerning liability to comply with fitness for purpose obligations in a design and build contract, in a case with significant ramifications for policyholders involved in construction projects. The judgment highlights the difficulties which arise when accepted industry practices are exposed as inadequate and reinforces the importance of precise drafting of contract terms, and associated policy wordings, given the literal interpretation likely to be applied notwithstanding potentially harsh consequences for unwary contractors.
The dispute arose from a significant error in an international standard for the design of offshore wind turbines known as J101. The contractor, MT Højgaard (“MTH”), relied on J101 whilst engaged by E.ON to design, fabricate and install foundations for the Robin Rigg wind farm in the Solway Firth, Scotland. Following completion of the works, it was discovered that J101 contained an inaccuracy such that the load-bearing capacity of grouted connections had been substantially over-estimated, resulting in remedial works at a cost of €26 million.
In April 2014, the trial judge held that MTH was liable to E.ON because the foundations were not fit for purpose, in breach of a provision in the Technical Requirements section of the Employer’s Requirements in the contract which imposed an obligation that the design “shall ensure a lifetime of 20 years in every aspect without planned replacement”. This provision applied in addition to less onerous contract terms requiring MTH to exercise reasonable skill and care, and to comply with J101.
The Court of Appeal overturned that decision, concluding that the 20 year service life provision in the Technical Requirements was qualified by compliance with J101 and good industry practice, in light of the inconsistency between that provision and other contractual terms. The relevant wording tucked away in the Technical Requirements was described as “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations, viewed in context of the contractual provisions as a whole and commercial implications.
In a unanimous decision, the Supreme Court ruled that MTH was liable for breach of the fitness for purpose obligations, construed either as a warranty that the foundations (1) would have a minimum service life of 20 years, or alternatively (2) be designed to last for 20 years. The court referred to UK and Canadian authorities where contractor warranties to complete works without defects were held to override any prescribed specification, noting: “it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”. J101 was expressed to be a minimum standard and the court was not prepared to disregard or give a different meaning to provisions of the Technical Requirements incorporated to the contract.
Construction contracts routinely incorporate schedules and technical documents with less than complete harmonisation as to intended legal standards of design and workmanship. The contract in this case was acknowledged to be of a “complex, diffuse and multi-authored” nature with many “ambiguities, infelicities and inconsistencies”. Nevertheless the court saw no reason to depart from the natural meaning of the fitness for purpose provisions, alongside MTH’s other obligations, in accordance with the prevailing approach of judicial non-interventionism that parties will be taken to mean what they say in their contracts (Arnold v Britton [2015] UKSC 36).
To avoid ambiguity, contracting parties should consider the inclusion of express provisions clarifying whether and how technical schedules are to affect overall obligations as to design and workmanship, clearly distinguishing requirements to exercise skill and care from performance warranties or guarantees of fitness for purpose. This in turn will allow policyholders to properly evaluate the risks assumed under the contract, and liaise with their insurance brokers to ensure adequate professional indemnity and all risks cover for potential liabilities.
MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59
https://www.supremecourt.uk/cases/docs/uksc-2015-0115-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
The 1930 Third Party (Rights Against Insurers) Act – still relevant for years to come
Shirley Anne Redman (suing as widow and administratix of the estate of Peter Redman) v (1) Zurich Insurance Plc (2) ESJS1 Limited
The recent decision of Mr Justice Turner in Redman v (1) Zurich Insurance (2) ESJS1 Limited confirms that the Third Party (Rights Against Insurers) Act 2010 (“the 2010 Act”) does not have retrospective effect.
As a result, a third party must still bring a claim under the 1930 Act where both the relevant insolvency and the relevant insured liability occurred before the commencement date of the 2010 Act (which is 1 August 2016).
Mrs Redman’s husband worked for a company latterly known as ESJS1 (“the Company”) between 1952 and 1982. On 5 November 2013 he died from lung cancer alleged to have been caused by exposure to asbestos during the course of his employment. On 30 January 2014 the Company was wound up and was eventually dissolved on 30 June 2016.
Mrs Redman sought to recover for her husband’s illness and death in a claim brought against the Company’s insurers, Zurich, under the Third Party Rights regime.
It is well understood that the 2010 Act has advantage over the 1930 Act in this regard. Whereas the 1930 Act requires the liability against the insured to be established (by agreement or judgment, with the latter sometimes requiring the insured first to be restored to the register followed by proceedings against it) prior to the covered claim being brought against the insurer, the 2010 Act allows a claim encompassing both liability and coverage to be made against the insurer alone.
Mrs Redman therefore sought to bring a claim under the 2010 Act. However, both the date of the Company’s insolvency and the date of the Company’s alleged liability had arisen prior to the commencement of the 2010 Act (the date of liability arising at least some thirty years prior) and the 2010 Act provides that the 1930 Act is to continue to apply in such circumstances.
As a result, the Judge struck out the claim, saying that to apply the interpretation of the Act favoured by Mrs Redman (ie, to read into the Act that the relevant date was the date that liability against the insured was established) would be tantamount to ”judicial legislation”.
Accordingly, the 1930 Act will continue to apply to those cases where the insolvency event (and the underlying liability) pre-dates 1 August 2016, with the 2010 Act applying where either event occurred thereafter. As a result, until about 2022 (when any third party liability will be time-barred) the old regime will remain relevant, and insureds, brokers and insurers will have to live with two potentially relevant regimes.
Tom Hunter is an associate at Fenchurch Law
Dalecroft Properties Limited – v – Underwriters
Dalecroft Properties Limited – v – Underwriters subscribing to Certificate Number 755/BA004/2008/OIS/00000282/2008/005
[2017] EWHC 1263 (Comm)
This recent decision by the Commercial Court provides a neat recap of the applicable law pre the Insurance Act 2015, which still applies to many claims brought by policyholders today.
The Claimant, Dalecroft Properties Limited (‘Dalecroft’), owned a property in Margate (‘the property’). The property was a mixture of commercial and residential parts, and was insured with the Defendants (‘the Underwriters’).
The property was a five-storey building, and included a restaurant, a charity shop and an amusement arcade, the upper floor of which had previously been used as a discotheque (‘the disco building’).
The brief insurance history is as follows:
- On 1 August 2007, Tristar (the Underwriters’ Agents) issued Dalecroft with a schedule for the period 1 August 2007 – 31 July 2008 (‘certificate 001’).
- Shortly after, Dalecroft requested an increase to the sums insured. Accordingly, on 16 August 2007, Tristar issued Dalecroft with a new schedule marked CANCEL & REPLACE (‘certificate 002’).
- At the August 2008 renewal, Tristar issued Dalecroft with a schedule for the period 1 August 2008 – 31 July 2009 (‘certificate 003’).
- On 19 November 2008, Dalecroft’s brokers requested that “the property should be registered in the name of Dalecroft Properties Ltd’. On 20 November 2008, Tristar issued Dalecroft with a new schedule marked CANCEL & REPLACE (‘certificate 004’). The period of insurance ran from 19 November 2008 to 31 July 2009, and the premium was stated to be £0.00.
- On the same day, Dalecroft’s broker noted that Tristar had failed to correct Dalecroft’s name on the policy and so, on 21 November 2008, Tristar issued a further schedule marked CANCEL & REPLACE (‘certificate 005’). Again, the insured period ran from 19 November 2008 – 31 July 2009, and the premium was stated to be “£0.00.”
A fire occurred on 16 May 2009, which required the property to be demolished and rebuilt. Dalecroft then made a claim on the policy, which the Underwriters sought to avoid.
In the subsequent proceedings, Dalecroft claimed an indemnity from the Underwriters for its losses arising from the fire. The Underwriters counterclaimed for a declaration that they were entitled to avoid the policy on the grounds of misrepresentation/non-disclosure, and a breach of warranty.
In all but one of allegations of misrepresentation, Dalecroft denied that what it said was untrue. It also said the matters complained of by the Underwriters did not induce the making of the contract, as the relevant contract was not made until 2008, by which point the Underwriters had issued a revised certificate headed “Cancel and Replace.”
The issues to be decided were:
a) Which was the relevant policy?
b) Did Dalecroft misrepresent any matters to the Underwriters?
c) Were there any breaches of warranty?
d) Was the risk divisible into commercial and residential parts?
Which was the relevant policy?
Dalecroft submitted that the relevant policy was contained in certificate 005, this being the policy in force at the date of the fire.
The Underwriters, by contrast, submitted that correct policy was certificate 003 i.e. the policy issued at renewal in August 2008.
The Judge, Mr Richard Salter QC, agreed with the Underwriters. He accepted that certificates 004 and 005 were marked CANCEL & REPLACE; however, neither certificate was a new policy.
Misrepresentation/Non-Disclosure
The Underwriters relied on the following misrepresentations/non-disclosures in the August 2008 Proposal/Statement of Fact:
a) That the residential units were vacant for refurbishment;
b) That the property was in a good state of repair;
c) That the property had no flat roof;
d) That the property had not been subject to malicious acts or vandalism;
e) The non-disclosure of the fact that the property had been the subject of an Emergency Prohibition Order (‘EPO’) dated 6 June 2008.
Apart from point (a), the Underwriters made out their case in respect of each alleged misrepresentation/non-disclosure.
There was compelling evidence that the property had suffered from broken windows, leaking and drainage issues (amongst other issues). Accordingly, Dalecroft had misrepresented that the property was in a good state of repair.
As regards the status of the roof, the Judge noted the experts’ views that the flat proportion of the roof comprised 50.43% of the entire roof area. As such, the representation that there was no flat roof was also incorrect.
As to the alleged malicious acts of vandalism, the Judge found that there was a history of “continual disturbances of vandalism and drug taking”, together with at least one further specific incident where a police officer was assaulted. Therefore, this too had been misrepresented.
Finally, the Judge accepted that the EPO had been misrepresented. There was a long list of defects to the property (which significantly increased the risk of fire), and nothing to suggest that the issues had been remedied. In the circumstances, the Judge found that this was a matter about which a prudent insurer would have wished to know.
The Judge found that each of points (b) – (e) were material, and that the Underwriters had made out their case on inducement. Accordingly, Dalecroft’s claim had to fail.
Although not strictly necessary, the Judge went on to consider the remaining issues.
Were there any breaches of warranty?
The Underwriters alleged that Dalecroft breached a Commercial Unoccupancy Condition in the policy (‘the Condition’) in that it had failed to ensure that:
a) The Basement and disco building were free of combustible materials;
b) The charity’s letterbox was sealed;
c) The Charity Shop and the Basement were properly secured;
On the evidence, the Judge was satisfied that Dalecroft was in breach of the Condition. In particular, it was clear from the available photographs that there were loose combustible materials in the disco building, and that neither the charity shop nor its letterbox were secured against unauthorised entry.
Was the risk divisible into commercial and residential parts?
Dalecroft argued that the risk was divisible, and that, because the alleged misrepresentations/non-disclosures related only to the residential parts, it was entitled to an indemnity for their losses in relation to the commercial part.
The Judge disagreed. The condition broken by Dalecroft was directed at risks which jeopardised the entire property. It followed that the Underwriters were discharged from all liability.
Summary
The Underwriters, on the facts of this case, were entitled to reject all claims made against them. The Judge was keen to emphasise, however, that even if the new law had applied, Dalecroft’s claim would still have failed. In this respect, he was satisfied that Dalecroft made “no real effort” to make a fair presentation, and that Underwriters would still have declined to take on the risk.
Alexander Rosenfield is an associate at Fenchurch Law
Peel Port Shareholding Finance Company Ltd – v – Dornoch Ltd
Can a Claimant obtain an order for pre-action disclosure against a solvent insured?
The Claimant, Peel Port Shareholder Finance Company Ltd (‘Peel Port’), suffered a fire at its premises at Sheerness Docks, Kent, on 14 January 2013. Its case was that the damage was caused by the activities of ‘European Active Projects Ltd’ (‘EAPL’).
Peel Port claimed that EAPL had no defence to the claim, and that judgment would be awarded in its favour for sums exceeding £1m. Further, it claimed that EAPL would be unable to meet any judgment, and would be wound up as a result.
EAPL’s insurers, Dornoch Ltd (‘Dornoch’) denied that the claim was covered, on the basis that EAPL did not comply with the “hot working” endorsement to their public liability policy (“the policy”). Dornoch did not, however, disclose a copy of the policy to Peel Port.
Peel Port took issue with Dornoch’s non-disclosure, and argued that sight of the policy was essential to their understanding of (a) whether the endorsement had been properly incorporated into the policy; and (b) the effect of the endorsement when construed in the context of the policy as a whole.
The application
Under the framework provided for in CPR 31.16, Peel Port issued an application for pre-action disclosure against Dornoch for a full copy of the EAPL policy. CPR 31.16 states as follows:
1) This rule applies where an application is made to the court under any Act for disclosure before proceedings have started.
2) The application must be supported by evidence.
3) The court may make an order under this rule only where–
a. the respondent is likely to be a party to subsequent proceedings;
b. the applicant is also likely to be a party to those proceedings;
c. if proceedings had started, the respondent’s duty by way of standard disclosure, set out in rule 31.6, would extend to the documents or classes of documents of which the applicant seeks disclosure; and
d. disclosure before proceedings have started is desirable in order to –
i. dispose fairly of the anticipated proceedings;
ii. assist the dispute to be resolved without proceedings; or
iii. save costs
The parties’ submissions
Peel Port argued that disclosure of the policy should be ordered, as this might obviate the need for any further litigation against EAPL, thereby preventing wasted costs.
Dornoch accepted that the procedural grounds for issuing the application were made out, and that the policy itself was disclosable. However, they resisted the application on the basis that a statutory mechanism for obtaining information about the policy already existed in Third Parties (Rights against Insurers) Act 2010 (‘the Act’).
In light of the above, Dornoch argued that any order for disclosure under CPR 31.16 would undermine and be inconsistent with the Act.
The decision
The Judge, Mrs Justice Jefford, refused Peel Port’s application. In arriving at her decision, the Judge gave weight to the following factors:
1) The advent of the Act meant it was unlikely that Parliament envisaged a situation where litigants could use CPR 31.16 to obtain insurance policies from the insurers of insolvent insureds;
2) There had never been an express statutory mechanism which entitled a litigant to obtain the policy of a solvent insured;
3) CPR 31.16 would not come to a prospective litigant’s avail in proceedings against the insured, as the policy could not fall within the parameters of standard disclosure i.e. it was not relevant to the case.
It was central to the Judge’s decision that EAPL was not insolvent. Peel Port tried to deflect this point by saying that EAPL would not be able to meet a judgment awarded against it. However, the Judge found that the circumstances were not sufficiently exceptional. Accordingly, there was no basis to depart from the established practice against disclosure of a solvent insured’s policy.
Alexander Rosenfield is an associate at Fenchurch Law
Leeds Beckett University – v – Travelers Insurance Co Ltd
A recent decision by the Technology and Construction Court has considered causation issues in the context of a property insurance claim. Was the damage accidental or inevitable?
The insured, Leeds Beckett University (‘the University’), acquired the site of a former brewery on which to build a number of accommodation blocks in 1993. The blocks were completed by 1996.
In December 2011, large cracks appeared in the largest of the buildings (“the building”). Subsequent investigations revealed that the concrete walls below ground-level had turned to mush. The building was then demolished in 2012.
The University insured the building with Travelers, who declined the claim in May 2012. In support of their declinature, Travelers said that the building had been subjected to sulphate attack by ground water beneath, and that the exclusions for gradual deterioration, faulty or defective design, or contamination applied.
The University disagreed, and argued that the relevant damage was “accidental” such that it was caught by the policy’s definition of “damage.” Further, it sought to characterise the damage as “flood” damage, so as to bring it within the meaning of “defined peril.”
The issues to be decided at trial were as follows:
a. Could the damage be characterised as “accidental damage” within the meaning of the policy?
b. If so, was it caught by any of the exclusions which the insurers sought to rely upon?
Was the damage accidental?
The Judge, Mr Justice Coulson, began his analysis by setting out the detailed history of the building and the land upon which it was sited. He referred specifically to the fact that the building was built over an existing watercourse, and to the historic geotechnical reports which raised concerns with the sulphate content of the soil and the damage it might cause. The Judge also made reference to the defective design of the groundwater drainage system, remarking that “this was going to be a difficult site to develop because of the numerous water issues.”
The University tried to deflect these issues, and asserted that the watercourse did not show up on every O/S map, and could not be identified when construction commenced. Further, it said that the occurrence of the damage over the watercourse was just a coincidence. The Judge gave short shrift to these points, and rejected any notion that the damage could be described as “flood damage.”
As to whether the damage was accidental; again, the Judge found against the University. His view was that “accidental simply means an event occurs by chance, which is non-deliberate.” In framing his view, he drew a distinction between the risk of something happening, which would usually be covered by a policy, and the inevitability of something happening (such as wear and tear), which would not.
On the facts, the Judge was left with little doubt that the damage was not accidental or fortuitous, a fact on which both parties’ experts agreed. There was not simply a risk that the concrete walls would fail – it was an inevitability. Accordingly, the University could not succeed on causation, and its claim failed.
Did any of the exclusions apply?
1. Gradual deterioration?
The University argued that, if the damage was accidental, the exclusion could not apply. The Judge disagreed, and concluded that there was nothing in the policy which supported such an analysis. Further, he considered the University’s argument to be ‘contrary to commercial common sense.’
As to the meaning of the words “gradual deterioration”, the Judge concluded that “gradual deterioration can be caused by the interaction between the property insured and the circumstances in which the property exists.” In other words, one had to take a holistic view when looking at gradual deterioration – it was wrong to look at the building itself without considering any external influences i.e. the ground and flowing water.
In the present case, the damage was caused by an inherent defect or weakness of the building, and occurred over a period of at least 10 years. Accordingly, the Judge found that the exclusion applied.
2. Faulty design?
The Judge was satisfied that this exclusion also applied. He made reference to the lack of a suitable drainage system (or rather, the lack of one at all), and the fact that the risks were brought to the University’s attention at an early stage. It followed that the design was unfit for purpose, and the exclusion applied.
3. Contamination?
As above, the Judge found in favour of the insurers. The evidence made it clear that there were ‘probably’ old mineshafts underneath the site (albeit they were never found), which was agreed as being the most likely source of the contaminated water which was discovered in December 2011.
The ‘proviso’ clause
The final issue to be decided was whether the University’s claim was capable of being salvaged by the ‘proviso’ to the exclusion clause. This provided that the exclusion could not exclude subsequent damage from a cause not otherwise excluded.
The nub of the University’s argument was that, whilst the original damage was to the blockwork, the subsequent damage was the cracking and the other damage to the superstructure.
The Judge rejected this argument. The damage to the sub-structure and the visible damage to the superstructure above were all part of the same damage, the cause of which was excluded.
Comments
The judgment is a useful yardstick of how the Courts will resolve claims for property damage which was inevitable rather than fortuitous.
It also provides some helpful commentary as to how exclusion for wear and tear or gradual deterioration will be assessed – namely, by considering the interaction between the insured property and its environment.
Alexander Rosenfield is an associate at Fenchurch Law
No on-going obligation to assess if a claim is likely: Zurich -v- Maccaferri
In a (predictably?) pro-policyholder decision, the Court of Appeal (Black and Christopher Clark LJJ) yesterday dismissed Insurers’ appeal. Instead it agreed with the trial judge that the policyholder (Maccaferri) had not breached a condition in its public liability policy requiring it to notify insurers “as soon as possible after the occurrence of any event likely to give rise to a claim”.
Maccaferri’s business involved the hiring out of “Spenax Guns” (pictured - in effect, giant staplers used to tie steel mesh gabions together) to builders’ merchants, who in turn hired them out to building contractors. In this case, an employee of one such building contractor was badly injured by a Spenax Gun. Maccaferri quickly found out that there had been an incident involving one of its Guns, but did not know either that there had been a serious injury or that the Gun might have been faulty - as opposed to its having been mis-used or the accident having happened without anyone’s fault.
Zurich argued, however, that further information about the incident which Maccaferri subsequently discovered meant that many months after the incident Maccaferri knew or should have known that a claim was likely, and thus should have - but failed - to notify them, thereby disentitling it from cover.
The Court of Appeal disagreed. Instead, it agreed with the trial judge that the clause in question required a reasonable assessment by the insured at the time of the “event” as to whether it was likely to give rise to a claim and did not, as Zurich had submitted, impose an obligation on the insured to “carry out something of a rolling assessment, as circumstances develop, as to whether a past event is likely to give rise to a claim”. The Court of Appeal held that:
“This is a condition introduced by Zurich into its policy which has the potential effect of completely excluding liability in respect of an otherwise valid claim for indemnity. If Zurich wished to exclude liability it was for it to ensure that clear wording was used to secure that result. It has not done so. It is possible to construe the use of the phrase “as soon as possible” as meaning that even if, when the event occurred, it was not likely to give rise to a claim, the obligation to notify would arise whenever thereafter the insured knew or should have known that an event which had occurred in the past was likely to give rise to a claim. But I regard this as a strange interpretation and erroneous.
It is, in any event, far from clear that that is the right interpretation and, given the nature of the clause, the ambiguity must be resolved in favour of Maccaferri.”
Putting the boot in (or kicking an insurer when it’s down), the Court of Appeal went on to find that, even if Zurich’s construction of the clause had been correct, nothing in fact had subsequently occurred which meant that Maccaferri ever knew or should have known that a claim was in the offing, until it had eventually received (and promptly notified) civil proceedings against it.
The Court of Appeal’s decision is yet another instance of the courts deciding coverage disputes in the policyholder’s favour when that outcome is open to it on the relevant policy wording and when there is no evidence of any real culpable conduct by the policyholder.
However, one should sound a note of caution. As the Court of Appeal mentioned in passing (see paragraph 33 of the judgment), while the above might apply to a typical clause in a public liability policy requiring the policyholder to notify “an event likely to give rise to a claim”, the position will be different in professional indemnity policies, where the obligation is to notify a circumstance which is likely to (or, depending on the wording, which might) give rise to a claim. Whereas an event is a one-off occurrence, whose likelihood to give rise to a claim is (as we now know) to be assessed then and there, circumstances can and do evolve during the currency of a professional indemnity policy. Thus, whereas a client’s failure to pay a professional's invoice would, in isolation, almost always fall short of a notifiable “circumstance”, the position would change if, a few months later, the client explained that his failure to pay was the result of his dissatisfaction with the services which he had received.
See: Zurich Insurance plc -v- Maccaferri Ltd [2016] EWCA Civ 1302(12/01/2017)
http://www.bailii.org/ew/cases/EWCA/Civ/2016/1302.html
Jonathan Corman is a partner at Fenchurch Law.
“The Worst of Both Worlds”: Spire Healthcare Ltd v RSA
2016 was a bumper year for aficionados of aggregation cases. (One might say that it saw a series of related cases…) In April the Court of Appeal in AIG v Law Society considered aggregation under the Solicitors’ Minimum Terms, with the outcome of AIG’s expedited appeal to the Supreme Court expected this month or next. In October, the Commercial Court in MIC Simmonds v AJ Gammell had to decide whether claims for respiratory injuries suffered by thousands of rescue workers after 9/11 arose out of one event. And just before Christmas the Commercial Court, in Spire Healthcare Ltd v RSA, again considered aggregation, this time in the context of a private healthcare company facing claims from over 700 patients alleging that one particular surgeon had carried out unnecessary and/or negligent procedures.
The case involved a combined liability policy taken out by Spire, which included cover for medical negligence. Put crudely, the intention of the policy seems to have been to confer an indemnity limit of £10m for any one claim together with an annual aggregate cap of £20m. There was also a badly drafted clause, whereby all claims attributable to one source or original cause would attract only one “Limit of Indemnity”.
Thus, if that clause operated as a conventional aggregation clause, the policyholder could only recover £10m from insurers, since all 700 claims would be treated a single claim. If the clause didn’t have that effect, it could recover £20m.
In addition, the policyholder and insurers disagreed about whether aggregation applied to the £25,000 each-and-every-claim excess. The policyholder argued that it did, and that it only had to pay the £25,000 once. The insurers disagreed, arguing that the excess was payable in respect of each claim (albeit, as it happened, capped at £750,000 in all).
The case involved some interesting comments by the Judge (HHJ Waksman QC) about principles of policy construction. He confirmed, as had the Court of Appeal in the AIG case, that aggregation clauses should be construed neutrally, without any preconceptions that they should work in one or other of the parties’ favour. He also held that, just because a particular phrase or clause was redundant or duplicative in one part of the policy, that didn’t mean that it had no function or effect elsewhere in the policy.
Desperately interesting though this might all be to insurance lawyers, brokers and underwriters, the outcome of the case was disastrous from the policyholder’s perspective. The Judge held that the clause in question did mean that there was indeed only £10m of cover available. To rub salt into the policyholder’s wounds, the Judge also rejected its fall-back contention that, in that case, there should be “parity of aggregation” and that it should be implied - in the absence of an express provision to that effect - that the 700 claims, unquestionably linked as they were, should attract only one excess. So the policyholder, which had fought the case arguing that there was £20m of cover and just one £25,000 excess due, was held to be entitled to just £10m of cover and liable to pay £750,000-worth of excesses.
I understand that, predictably enough, the policyholder is applying to the Court of Appeal for permission to appeal.
See: Spire Healthcare Limited v Royal & Sun Alliance Insurance plc [2016] EWHC 3278 (Comm) http://www.bailii.org/ew/cases/EWHC/Comm/2016/3278.html
Jonathan Corman is a partner at Fenchurch Law.
“One event or two?” What is the proper construction of the phrase “arising from one event” within the aggregation clause in a reinsurance contract?
Re MIC Simmonds v. AJ Gammell
The commercial court upheld an arbitration award and concluded that the arbitrators had correctly applied the test for the interpretation of an aggregation clause. The arbitrators had to decide what was the proper construction of the phrase “arising from one event” within the aggregation clause in a reinsurance contract.
The facts
The dispute centred around on whether or not claims made against the Port of New York (PONY) following the attacks on the World Trade Centre (WTC) were to be aggregated as liabilities arising from that event. The allegation was that PONY had failed to provide adequate protective equipment to around 10,000 rescue workers in the course of the clean-up operation causing respiratory conditions. The claims were settled and a claim was made on the excess of loss reinsurance programme.
The dispute
The arbitrators found that reinsurers were liable to indemnify the loss as the policy provided for cover for “loss, damage, liability or expense or a series thereof arising from one event”. As all claims could be aggregated together as losses or liabilities arising from one event, namely the attacks on the WTC which caused the destruction of the twin towers. The appellants argued that it did not. The argument was this: where the insured’s liability arises as a result of a continuing state of affairs, was this to be treated as a single event of negligence or does the relevant event only arise when the harm giving rise to the insured’s liability occurs? The appellants argued:
- The failure to provide adequate protective equipment did not constitute one event, in other words, the attack on the WTC which was disassociated form the negligence which gave rise to the underlying claims could not be a single event for the purposes of the aggregation clause.
- The respiratory claims arose from a continuing failure and there were therefore many events.
- The attacks on the WTC were too remote to constitute an event.
Judgment
The court reviewed the relevant authorities and affirmed:
There are three requirements for a “relevant event” when considering a “series of losses and / or occurrences arising out of one event” for the purposes of aggregation, namely that:
- there is a common factor which could properly be described as an event;
- the event satisfies the test of causation;
- it is not too remote.
The court agreed with the arbitrators that:
- The event in question here was identified as the attack on the WTC so the issue was whether the losses or liabilities arose from it.
- There was a sufficiently causal connection between the attack on the WTC and the losses that justified aggregation.
- The test is much less strict than that for a proximate cause. Here, although the attack on the WTC may not have been a proximate cause of the respiratory attacks, the causal link between them was clear and obvious, namely the link between the attacks and the inhalation of harmful and toxic dust.
Good news for policy holders? Yes, the court has taken a common sense approach in finding that the attacks on the WTC and the subsequent clean-up operation, was part and parcel of the same event for insurance purposes.
Pauline Rozario is a Consultant at Fenchurch Law.
The ordinary measure of indemnity: Great Lakes Reinsurance (UK) SE v Western Trading Limited
In the latest in a series of pro-policyholder decisions by the courts, the Court of Appeal yesterday handed down a judgment upholding the trial judge’s ruling that a policyholder was entitled to be reimbursed by its insurers as and when it reinstated its premises (the historic Boak Building in Walsall) which had been destroyed by fire.
The Insuring Clause in the policy merely stated that insurers agreed “to the extent and in the manner provided herein to indemnify the Assured against loss of or damage to the property specified in the Schedule.” However, there was a separate reinstatement clause (“the Memorandum”) which stated that, in the event of damage or destruction, the indemnity was to be calculated by reference to the reinstatement of the property destroyed or damaged but only if the reinstatement was carried out “with reasonable despatch”, failing which only the amount which would have been payable under the policy, absent the Memorandum, would be due.
No reinstatement had occurred by the time of the trial, for the simple reason that the insurers had denied all liability under the policy, relying on various defences in relation to misrepresentation, breach of warranty and insurable interest. These were all rejected by the Judge, and there was no appeal on that score, the Insurers’ appeal being confined to the correct measure of indemnity.
There was disagreement between the parties as to whether the Memorandum could be relied on, and thus the Court of Appeal considered what would be the correct measure of indemnity assuming it were indeed inapplicable.
Insurers argued that, on the facts of this case, the relevant measure of indemnity was the reduction in the building’s value. Its market value just before the fire had been a mere £75,000. That reflected the fact that it was virtually derelict but, since it was Grade II Listed, it was not capable of being economically converted into (say) a block of flats. Ironically, its value had increased after the fire, since it lost its listed status and thus could now be redeveloped. Insurers thus argued that there was no loss, and nothing for them to indemnify.
The Court of Appeal disagreed. It held that, where the policyholder was the owner of the property or, if not, where it was obliged to replace the property (here the policyholder was the lessee of the building and owed the owner an obligation to repair it), the indemnity under the policy was ordinarily to be assessed as the cost of reinstatement. The Court of Appeal recognised that the position would be different if, at the time of the loss, the policyholder was trying to sell the property or intended to demolish it anyway.
The Court of Appeal also recognised, as had the trial judge, that an insurer who paid out the cost of reinstatement would have no redress if the policyholder then decided simply to keep the insurance proceeds. It held that the insurers could be protected if, rather than their being ordered to pay an immediate sum of money, the court instead made a declaration requiring insurers to reimburse the policyholder for the actual reinstatement costs as and when incurred.
Finally, it should be noted that the Court of Appeal held that, where a reinstatement clause required the policyholder to undertake the works of reinstatement “with all reasonable despatch”, it would not be in breach of that requirement unless and until insurers had confirmed indemnity under the policy. That is an obvious victory for common sense, even if it might be thought depressing that the Insurers would really have wished to argue that a policyholder could legitimately be prejudiced by a combination of its own impecuniosity and insurers’ unlawful refusal to affirm cover.
See: Great Lakes Reinsurance (UK) SE v Western Trading Limited [2016] EWCA Civ 1003.
http://www.bailii.org/ew/cases/EWCA/Civ/2016/1003.html
Jonathan Corman is a Partner at Fenchurch Law.