Even a Solicitors’ PI policy has its limits - Doorway Capital Limited v AIG
In this recent decision, the High Court considered whether a liability incurred by a solicitor under a factoring agreement was covered by its professional indemnity policy.
Background
In 2016, Doorway Capital Limited (“Doorway”) entered into a Receivable Funding Agreement (“the Agreement”) with Seth Lovis & Co Solicitors Ltd (“the Solicitors”). The relevant terms of the agreement were as follows:
- Doorway would provide funding to the Solicitors for use as working capital and to repay certain of their debts.
- The Solicitors would sell to Doorway its “Receivables” i.e., the Solicitors’ trading debts, together with the right to pursue those debts.
- the Solicitors would be appointed as Doorway’s agents to collect the Receivables.
- On receipt, the Solicitors would hold the Receivables in their client account on trust for Doorway, before paying the sums over to Doorway’s nominated account.
Doorway claimed that the Solicitors collected c. £2m worth of Receivables between 2017 and 2018 but in breach of the Agreement, only paid over a small portion of them. Doorway also asserted that the Solicitors breached fiduciary duties owed to Doorway.
As the Solicitors had entered into administration, Doorway claimed directly against the Solicitors’ professional indemnity insurers, AIG, under the Third Parties (Rights Against Insurers) Act 2010.
The Application
AIG applied for summary judgment, arguing that Doorway’s claim had no prospects of success. For the purposes of the application, AIG did not dispute that the Solicitors had breached the Agreement nor that they had breached fiduciary duties owed to Doorway.
There were two principal issues for the Court to decide:
- Did the liability that the Solicitors incurred to Doorway fall within the insuring clause of the policy (“the Policy”)?
- If so, did the ‘Debts and Trading Liabilities’ exclusion (“the Exclusion”) nevertheless apply?
The insuring clause
The insuring clause indemnified the Solicitors against “… civil liability to the extent that it arises from Private Legal Practice in connection with the Firm’s Practice.”
“Private Legal Practice” was defined as meaning “the provision of services in Private Practice as a solicitor … including, without limitation … (c) any Insured acting as a personal representative, trustee, attorney, notary, insolvency practitioner, or in any other role in conjunction with a Practice.
Doorway argued that the Solicitors’ services fell within the definition of “Private Legal Practice.” In particular, it said that acting as a trustee, without more, was sufficient. It also argued that (i) the Solicitors exercised “professional judgment in relation to the assessment of obligations which would arise in the course of the solicitor’s practice”, because they were required to determine whether, as a matter of law, a Receivable was payable to Doorway; and (ii) the holding of monies in their client account showed that they were providing a service in private practice.
The Judge, Mr Justice Butcher, paid short shrift to Doorway’s arguments. Any liabilities that the Solicitors owed to Doorway derived from Agreement alone; the fact that the Solicitors were holding monies on trust was merely “a part of the mechanism” of fulfilling their obligations under the Agreement. The Judge came to the same conclusion in respect of the Solicitors’ use of “legal judgment” to recover the Receivables, as well as the use of their client account – neither were for the provision of services in private practice as a solicitor.
In the circumstances, the liabilities incurred by the Solicitors did not arise from Private Legal practice, and were therefore not covered by the insuring clause. Accordingly, AIG’s application for summary judgment succeeded.
The Exclusion
Although it was not necessary for the Judge to decide this given his findings on the insuring clause, the Judge nevertheless also expressed a view on the applicability of the Exclusion.
The Exclusion stated: “The Insurer will have no liability to indemnify an insured in relation to any … legal liability assumed or accepted by an Insured under any contract or agreement for the supply to, or use by, the Insured of goods or services in the course of the Insured Firm’s Practice.”
In considering this issue, the Judge referred to the Supreme Court decision in Impact Funding Solutions Limited v AIG Europe Insurance Ltd [2016] UKSC 57. As with the present case, Impact Funding concerned a commercial agreement between a firm of solicitors and a third-party funder, and required to court to decide whether services conducted in connection with that agreement were covered (or, in the circumstances, excluded) under the solicitor’s PI policy. The policy contained an exclusion for “breach by any Insured of terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing legal services.” By a majority of 4 to 1, the Supreme Court found that the exclusion applied. Of particular relevance, Lord Toulson said that the commercial agreement “did not resemble a solicitor’s professional undertaking as ordinarily understood, and it falls aptly within the description of a “trading liability” which the minimum terms were not intended to cover.”
Therefore, by analogy with Impact Funding, the liability incurred by the Solicitors to Doorway was not the type of liability which would be covered by a solicitors’ PI policy. Therefore, had he been required to do so, the Judge would have found that the Exclusion applied.
Conclusion
The case is confirmation that not every service provided by a solicitor will be covered by its professional indemnity policy. In any case, one has to look at the substance of the service being provided; merely acting as a trustee or using a client account, for example, will not necessarily be enough.
As to the Exclusion, although the Judge’s comments were obiter, it is difficult to see how the issue could have been decided any other way in light of Impact Funding. As with that case, the meaning and effect of the Exclusion were clear, and the Judge had no doubt that it applied.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Covid-19 BI Update: Access Granted to Corbin & King and Deduction of Furlough from Claims
“… the decision of the Supreme Court has moved the goalposts and the argument which has emerged is materially different.”
Mrs Justice Cockerill, Corbin & King v Axa [2022] EWHC 409 (Comm)
Two further policyholder-friendly judgments last week continued the trend of extending the scope of coverage available for Covid-19 BI losses under non-damage extensions. This time the focus falls on (i) prevention of access wordings; (ii) aggregation of losses at multiple premises; and (iii) deduction of furlough and other government support payments.
1. Prevention of Access – Access Granted!
In our September 2021 Update ‘‘Denial of Access – Access Granted", we set out Lord Mance’s reasoning in the China Taiping Arbitration, noting that it set out a clear pathway to coverage for policyholders with Prevention of Access and similar wordings, whose claims had been declined following the Divisional Court judgment in the FCA test case.
In a judgment handed down on Friday in Corbin & King v Axa, Mrs Justice Cockerill endorsed that approach and signalled a wholesale reversal of the coverage position under such wordings.
Recap
The FCA test case examined coverage under a number of non-damage Prevention of Access or Denial of Access clauses. At first instance, the Divisional Court found that the majority of such clauses provided a “narrow, localised form of cover” which did not respond to the broader circumstances of the pandemic. The basis for this conclusion was encapsulated at paragraph 467 of the Divisional Court judgment (repeated in similar terms elsewhere in relation to different wordings):
“There could only be cover under this wording if the insured could also demonstrate that it was an emergency by reason of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions or advice of the government. […] it is highly unlikely that that could be demonstrated in any particular case[3].”
Many policyholders were disappointed at the FCA’s decision not to appeal that aspect of the Divisional Court judgment, and have subsequently argued that the Supreme Court’s ultimate conclusions on causation rendered the Divisional Court’s ruling an unsound authority for declining coverage under such clauses.
The China Taiping Arbitration
The point was subsequently argued on behalf of policyholders in the China Taiping Arbitration, decided by Lord Mance in a published award. Although the China Taiping policyholders’ claim ultimately fell down on the issue of whether the UK government was a ‘competent local authority’ within the meaning of the clause, on the key issue of whether the Covid-19 pandemic was capable of triggering coverage under a clause requiring, “an emergency likely to endanger life or property in the vicinity of the Premises” Lord Mance agreed with the policyholders that the position was indeed altered by the Supreme Court judgment in the test case.
In Lord Mance’s words:
“I therefore doubt whether the Divisional Court could or would have approached the matter as it did in paragraphs 466 and 467 had it had the benefit of the Supreme Court’s analysis.”
The door was therefore left wide open for the point to be fully argued before the Courts, which it duly was by Corbin & King in their case against Axa.
Corbin & King v Axa
In Corbin & King, the policyholders sought coverage for their BI losses flowing from closure and other restrictions places on eight insured restaurants, under a Non-Damage Denial of Access (NDDOA) clause, which responded to:
“the actions taken by police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises.”
Insurers denied coverage in reliance on the Divisional Court, in much the same terms as China Taiping.
Coverage
On behalf of Corbin & King Jeffrery Gruder QC argued, relying on Lord Mance’s reasoning in China Taiping, that government action to close down the insured restaurants had been taken in response to the nationwide pandemic, that included cases of Covid-19 within a 1 mile radius of the insured premises, which amounted to a danger. On the Supreme Court’s concurrent causation analysis, the action had been taken in response to a danger or disturbance within 1 mile of the premises, which therefore was a proximate cause of loss, triggering coverage under the NDDA clause.
Axa for its part contended that the Supreme Court’s findings on causation could not be transposed from disease clauses to prevention of access clauses, which were qualitatively different, but that in any case in the present case the insured peril had simply not been triggered. There had been no “danger or disturbance at the insured premises or within a 1-mile radius of the insured premises”, and the question of causation did not therefore arise.
Mrs Justice Cockerill first concluded that she was not bound by the ruling of the Divisional Court, not only because the Axa clause was sufficiently different from the clauses considered in the test case, but also because the Supreme Court decision in the test case had “moved the goalposts”, and that consequently the legal argument had “developed somewhat … in the way that legal argument inevitably develops, like water, to find its way round an obstacle.”
Approaching the matter from first principles, but drawing heavily on the Supreme Court’s ruling on concurrent causation, and Lord Mance’s persuasive discussion of the issue, Cockerill J therefore found that:
- Covid-19 was capable of being a danger within one mile of the insured premises;
- which, coupled with other uninsured but not excluded dangers outside;
- led to the regulations which caused the closure of the businesses and caused the business interruption loss.
There was therefore cover for Corbin & King’s losses under the Axa NDDOA clause.
2. Prevention of Access - Aggregation
A secondary issue was whether the limit of £250,000 available under the NDDOA clause applied as an aggregate limit to Corbin & King’s losses, or to each of the eight insured premises. Axa accepted that a fresh limit applied for each new set of government restrictions, but maintained that in each case the limit applied to Corbin & King’s business as a whole, and not to each restaurant individually.
On that issue the Court also found in the Claimants’ favour, for two reasons.
First, as Corbin & King pointed out, their policy was a composite one under which the insurer had agreed to indemnify a number of different insured entities, each holding one or more insured premises. The Court found that the insureds’ interest was not joint, and that each had their own claim under the policy.
Moving on to construction, Cockerill J noted that the policy referred to cover in respect of interruption and interference with the business where access to the Premises was restricted, and that each of the Premises was in a different location. The closure of two restaurants “must be seen on any analysis as two separate incidents”, and that was said to be regardless of whether there was one common danger causing the closure, or two separate dangers. The word “premises” pointed to each restaurant/café, and that pointed to separate limits. Cockerill J found that these were powerful points that unequivocally supported the Claimant’s position, and therefore had no difficulty concluding, apparently regardless of the ‘composite policy’ issue, that the Policy provided a separate limit of £250,000 for each insured restaurant.
The ruling marks the first aggregation decision in the Covid-19 BI context, and may serve to dramatically increase insurers’ liability in cases where policyholders have insured multiple locations under a single policy.
3. Furlough and Government Support
A near-universal point of contention in the adjustment of Covid-19 BI claims (where coverage is established), has been the treatment of certain types of government financial support received by policyholders. While insurers have by and large agreed that government grants are to be ignored for the purposes of a BI indemnity, they have generally maintained that any support received in the form of Coronavirus Job Retention Scheme payments (“Furlough”), and Business Rates Relief, should be either be accounted for as turnover or as a saving, thus reducing the value of the covered claim under the Policy.
For their part, many policyholders have maintained that (i) the terms of the policies do not generally support such an approach; (ii) as a matter of common law, such payments do not go to reduce the policyholders’ covered loss, and (iii) as a matter of public policy, government financial support provided to the hospitality industry and other hard-hit sectors was not intended to inure to the benefit of insurers.
Insurers’ approach has had the effect of drastically reducing, or in some cases effectively wiping out, the amount paid by the insurer to policyholders for their claims. The underlying question therefore remains: who should stand first in line to benefit from the government’s financial support measures – the hospitality industry which is still struggling to recover 2 years later, or insurers, who were largely cushioned from the effects of the pandemic, and who have in many cases reported record profits in 2021?
The issue remains untested in the English courts, although a distinguished panel led by Lord Mance in the Hiscox Action Group Arbitration was reported in July 2021 to have found in favour of the policyholders on the issue.
More recently, in the second Australian test case[1], the Federal Court of Australia found at first instance that JobKeeper payments (the Australian equivalent of furlough) were properly deductible from Covid-19 BI claim calculations as a saving. That decision was appealed to the Full Court of the Federal Court of Australia, which last week overturned the ruling and found that JobKeepers payments, and certain other forms of government support, were not to be treated as a saving because they were not made and received “in consequence of” the interruption or interference resulting from the insured peril, i.e. the policyholder would have received the payments regardless of whether there had been an outbreak of disease within the specified radius of the premises.[2]
Whilst the decision of the Australian Full Court is not binding on UK insurers, it provides further support for policyholders’ position in the UK, and will no doubt come under close scrutiny by the Commercial Court, when the issue falls for determination for the first time in the English courts in the forthcoming trial of Stonegate v MS Amlin in June 2022[3].
4. Comment
This week’s developments will come as welcome news to a great many policyholders who have either had their Covid-19 BI claims declined under Prevention/Denial of Access wordings, or who have had the value of their claims reduced for government support received. The Corbin & King decision will also serve as an important authority for those policyholders who are seeking full indemnity for losses suffered at multiple premises. Policyholders in any of these groups should now therefore review their position with their advisors, to consider whether any further action is now required.
Aaron Le Marquer is a Partner at Fenchurch Law
[1] Swiss Re International Se v LCA Marrickville Pty Limited (Second COVID‑19 insurance test cases) [2021] FCA 1206
[2] LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC
[3] https://www.judiciary.uk/you-and-the-judiciary/going-to-court/high-court/queens-bench-division/courts-of-the-queens-bench-division/commercial-court/test-and-grouped-cases-including-covid-19-bii-cases/
Original cause? It’s all the same: Spire Healthcare Ltd v RSA
Background
Spire Healthcare Limited (“Spire”) operated two private hospitals at which Mr Paterson, a consultant breast surgeon employed by the Heart of England NHS Foundation Trust ("HEFT"), carried out unnecessary and inadequate procedures from around 1993 to 2011.
Mr Paterson had been performing sub-total mastectomies ("STMs") which involved leaving some breast tissue behind - a practice that that went against the universally accepted practice of removing all tissue in the event that a mastectomy was clinically indicated. Mr Paterson had carried out this procedure in both his NHS and private practice.
His negligent methods had been discovered by NHS officials at HEFT in 2007, who sought assurances from Mr Paterson that he would cease carrying out STMs. Despite giving those assurances, Mr Paterson continued to carry out STMs. He was subsequently suspended from practice in 2011 by the General Medical Council ("GMC").
Following Mr Paterson’s suspension, Spire discovered that he had also carried out unnecessary surgical procedures – typically, wide local excisions ("WLEs") - in circumstances where there was no clinical indication for the surgical procedure to be undertaken.
High Court Proceedings
Around 750 former patients commenced proceedings against Mr Paterson, Spire and HEFT. Spire settled the proceedings by way of a confidential settlement and sought an indemnity from its insurer, RSA.
The policy had a Limit of Indemnity of £10m and was subject to an aggregate limit of indemnity of £20m. The policy also contained the following wording of relevance:
“The total amount payable by the Company in respect of all damages costs and expenses arising out of all claims during any Period of Insurance consequent on or attributable to one source or original cause irrespective of the number of Persons Entitled to Indemnity having a claim under this Policy consequent on or attributable to that one source or original cause shall not exceed the Limit of Indemnity stated in the Schedule”
RSA had accepted that it would indemnify Spire under the policy, but only to the Limit of Liability of £10m. RSA asserted that all of the claims arose out of one source or original cause, i.e. Mr Paterson or Mr Paterson’s conduct.
Spire’s position was that it should be entitled to the aggregate limit of £20m as there had been two distinct groups in the underlying claim:
- Those attributable to his negligent conduct by carrying out STMs where a full mastectomy was clinically required; and
- Those attributable to his deliberate conduct by carrying out unnecessary surgery.
Ultimately the High Court decided that Spire was entitled to the full £20m from RSA on the basis that there had been a different source and/or original cause between the two groups of patients.
The Court of Appeal Decision
The Court of Appeal considered the previous case law in relation to aggregation wording where loss was consequent on or attributable to one source or original cause, and confirmed the following principles:
- In general, an aggregation clause should be approached neutrally, as opposed to with a predisposition towards either a narrow or broad construction;
- However, the wording in this case requires the widest possible search for a unifying factor in the history of the losses it is sought to aggregate;
- There is no distinction between an "original cause" on the one hand and an "originating cause" on the other, and nor is there a distinction between “cause” and “source”.
- The doctrine of proximate cause does not apply, since “original cause” connotes a considerably looser causal connection; and
- There must still be a causative link between what is contended to be the originating cause and the loss and there must also be some limit to the degree of remoteness that is acceptable.
The Court of Appeal allowed the appeal as it considered the High Court had erred in its consideration of a single effective cause of all the claims, which was not the correct test. Instead, the High Court should have searched for a unifying factor to the claims. Had the High Court done so, it would have identified the unifying factor as a single "rogue consultant" who habitually acted in breach of his duties to his patients.
Furthermore, all the patients' claims were based on Mr Paterson's improper and dishonest conduct. That conduct, in all cases, involved operating on the patients without their informed consent and with disregard for their welfare. Any analysis of Mr Paterson’s motivation was both unnecessary and inappropriate.
The High Court had relied heavily on Cox v Bankside, but the passages relied upon provided no justification for the High Court’s approach. Instead, it had introduced unnecessary complication into what the Court of Appeal considered should have been a relatively simple and straightforward exercise. The claims were not based on a negligent misunderstanding; they were based on a pattern of deliberate and dishonest behaviour by one individual.
The Court of Appeal concluded that:
“As a matter of ordinary language, and applying the principles applicable to aggregation clauses expressed in these wide terms, it seems to me to be plain that any or all of (i) Mr Paterson, (ii) his dishonesty, (iii) his practice of operating on patients without their informed consent, and (iv) his disregard for his patients' welfare can be identified either singly or collectively as a unifying factor in the history of the claims for which Spire were liable in negligence, irrespective of whether the patients concerned fell into Group 1 or Group 2 (or both)”.
Comment
While disappointing for policyholders with similar aggregation wording, the decision does serve as useful reminder on the test to be applied for “original cause” wording.
It should be noted that the Court of Appeal deliberately stepped back from creating a general rule for claims arising from the actions of an individual, and acknowledged that there will still be cases in which the behaviour of an individual will be too remote or vague a concept to provide a meaningful explanation for the claims.
Aggregation disputes will remain highly fact-specific, and policyholders should bear in mind that separate negligent acts with their own individual context may still avoid the sting of “original cause” aggregation wording.
Anthony McGeough is an Associate at Fenchurch Law
Fenchurch Law launches new Reinsurance and International Risks practice
Fenchurch Law, the leading UK legal firm working exclusively for policyholders and brokers on insurance coverage disputes, has launched a new practice group focused on Reinsurance & International Risks. The new group will focus on representing non-UK policyholders in complex and high value insurance disputes under policies placed either directly into the London Market, or placed locally and then reinsured, into the London Market.
Led by the firm’s Managing Partner, David Pryce, the new practice group will also take instructions from captives, and from non-UK insurers which have coverage disputes with London Market insurers.
Commenting on the launch of the new practice group, managing partner, David Pryce explained:
“The London Market has a long and well-established reputation for paying claims. However, it is a fact of business life that occasionally disagreements do arise between policyholders and insurers, particularly when losses are large.
“We’ve launched this new dedicated practice group to reflect the increasingly international nature of our work, which is itself a reflection of the way the London Market continues to be a global leader in writing bespoke and complex risks. In doing so, we’re furthering our purpose of levelling the playing field between policyholders and their insurers, not just in the UK, but across the world”.
Visit the Reinsurance & International Risks page for more information.
Short and sweet: insurers liable for bank’s cocoa product losses
ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWCA Civ 1789
The Court of Appeal has given insurers short shrift in their appeal against the finding of the Commercial Court that they were liable to the claimant bank, ABN Amro for losses it incurred following the collapse of two leading players in the cocoa market.
In a judgment notable for its brevity – a mere 26 pages compared to the 263-page first instance judgment - the Court of Appeal took just 5 paragraphs to set out their reasons for dismissing the appeal, finding that it simply did not ‘get off the ground’. It was, however, a sweet victory for the defendant broker, Edge, who, was successful in its appeal from the first instance decision, with an earlier finding of liability against it, arising from an estoppel by convention, being overturned.
The short first appeal
At first instance, the claimant bank, ABN Amro, succeeded in its claim for indemnity under an insurance policy placed in the marine market, relying on a clause the effect of which was to provide the equivalent of trade credit insurance. Such a clause was unusual in that marine policies typically provide an indemnity for physical loss and damage to the cargo, and not for economic loss. However, the court found the wording of the clause to be clear and to extend to the losses incurred by the bank on the sale of the cargo.
The insurers appealed this finding on the basis that the judge ought to have interpreted the clause as providing only for the measure of indemnity where there was physical loss or damage to the cargo.
The Court of Appeal disagreed, finding firstly that add-ons to standard physical loss and damage cover were common in the market and, where there were clear words, could result in wider cover; and secondly, that the wording of the clause was clear and operated to provide cover for economic loss. The wording of the clause was that of coverage, not of measure of indemnity or basis of valuation contingent on physical loss. Therefore, the bank’s losses incurred when selling the cargo, comprising various cocoa products, following the default by its cocoa market playing-customers on their credit policies, were covered by the policy.
The sweet second appeal
At first instance, the broker had been found liable to two of the defendant insurers, Ark and Advent, as a result of a finding of estoppel by convention. Ark and Advent had contended that they had been induced to write the policy following a representation that the policy being renewed was the same as the prior policy. It was, however, not in fact the same but included the clause in question providing trade credit cover. Neither Ark nor Advent read the policy and so were unaware of the inclusion of the clause. The representation that the policy was “as expiry” was found to give rise to an estoppel by convention meaning that the bank could not rely on the clause as against Ark and Advent, which in turn gave rise to a liability for the broker.
In appealing the finding of estoppel by convention, the broker sought to argue that the terms of a non-avoidance clause in the policy, which provided that the insurers would not seek to avoid the policy or reject a claim on the grounds of non-fraudulent misrepresentation, operated to preclude them from doing so. The Court of Appeal agreed, finding that the “as expiry” representations were non-fraudulent misrepresentations and as such, pursuant to the terms of the non-avoidance clause, the insurers could not rely on them to reject the claim. The judge at first instance was found to have erroneously focused on the ‘non-avoidance’ aspect of the clause, overlooking the fact that it also prohibited the rejection of a claim.
In sum
Given what the Court of Appeal described as the “sound and comprehensive” nature of the first instance analysis on the interpretation of the clause, it is perhaps surprising that the insurers sought to appeal, and certainly no surprise that they were not successful. Equally, the first instance finding of liability on the part of the broker was regarded by many as being out of keeping with the rest of the judgment – not least since Ark and Advent were effectively being relieved of their obligations by virtue of their failure to read the terms of the policy. As such, the finding is a welcome one on both counts, making it clear that, for good or ill, parties will be bound by the terms of the contracts they enter into.
Joanna Grant is a partner at Fenchurch Law
No Time To Be Without Cover
This short article considers a handful of the possible insurance claims that arise in the latest James Bond outing, No Time to Die, as well as paying homage to Daniel Craig’s brilliant 5-film stint as 007.
Warning: this article contains major spoilers. So, to all those who are yet to see the film, read no further.
Matera – the prologue
The film opens with Mr Bond enjoying some downtime in Matera, Italy, with his beloved Madeleine Swann. It’s an idyllic scene. Glorious weather; a spectacular backdrop; and a stylish cave hotel. What could possibly go wrong here? Quite a lot, sadly.
After visiting the grave of his first (and perhaps one) true love, Vesper Lynd, Bond is attacked by scores of Spectre henchmen. There’s then a frantic car chase through Matera’s ancient streets, before Bond casually disposes of said henchmen by turning the headlights of his Aston Martin DB5 into revolving machine guns. Very cool.
Sadly, the Aston Martin takes quite a battering, and presumably is no longer road-worthy. That’s a fairly chunky insurance claim, which gives rise to some non-disclosure issues. At inception of the Policy, Mr Bond’s insurers would have most likely asked: “have you or any person who will drive the motorhome had any accidents, claims, damage, theft or loss involving any vehicle during the past 5 years”.
Unfortunately for Bond, he’s had his fair share of rotten luck behind the wheel. In particular, if one assumes that the events of Skyfall and Spectre were within the last 5 years, the following incidents come to mind: –
- Aston Martin DB5 – destroyed at the end of Skyfall, after a fist-fight with Raoul Silva (estimated damage of £850,000);
- Aston Martin DB10 – sank at the bottom of the River Tiber in Spectre, after Bond is chased by one of Blofeld’s henchmen (estimated damage of £2.6m).
Given the above, a failure to disclose these incidents would probably be treated as a deliberate breach of Bond’s duty of fair presentation under the Insurance Act. Insurers would invariably avoid the Policy, refuse all claims and keep the premium. Bond could always try arguing that it wasn’t a qualifying breach, because Insurers would have written the Policy anyway, but that seems speculative.
Another issue to address is the duty to take reasonable precautions. As many of us will be aware, such provisions mean no more than the insured must avoid reckless behaviour (Sofi v Prudential Assurance [1993] 2 Lloyd’s Rep. 559). So, in order to rely on a breach, Insurers would need to demonstrate that Bond was indifferent about looking after his vehicle. Acting carelessly will not be sufficient. Once again, that poses something of a conundrum for Bond. At the time of the incident, he’s clearly courting danger by inviting Spectre’s goons to shoot at him, and makes very little effort to conduct his affairs in a prudent and businessmanlike manner. All in all, this doesn’t smell like a winner.
Cuba – Bond comes of retirement
Five years after the events in Matera, Bond is blissfully retired in Jamaica. Not before long, one of MI6’s brightest and best shows up, who tells Bond that she now stands in his shoes as the new 007, and has been tasked with recovering a Russian scientist (a subrogated recovery, one might say). Bond, suitably unimpressed, decides to buddy up with the CIA’s Felix Leiter to try and get to the scientist first.
This leads Bond to Cuba, where literally all hell breaks loose. The number of insurance claims that could arise here is mind-boggling. Those include:
- Cuban drinking establishment/Property damage – there’s fairly significant damage here, after Bond gate-crashes a birthday party held in the honour of his arch-nemesis, Ernst Stavro Blofeld;
- Cuban drinking establishment/BI Loss – more hefty losses, one would imagine;
- Cuban drinking establishment/Public Liability – given that all of the attendees meet their maker after being infected by DNA-targeting nanobots (more on that below), this could give rise to another sizeable claim.
- Property damage/boat & helicopter – catastrophic damage to a boat after a terse fist-fight between Bond and Leiter’s duplicitous associate, Logan Ash (Rest in peace, Felix). Presumably the helicopter which Bond pilots to get to the boat is also a write-off.
Lytusifer Safin – he’s been expecting you, Mr Bond
In the film’s third act, we’re properly introduced to Bond’s main adversary, Lyutsifer Safin, played by the brilliant Rami Malek. We’d seen precious little of Mr Safin until this point, but all the familiar Bond-villain tropes are there. He’s creepy as hell, has set up shop on a secret island, and has a name which literally sounds like Lucifer (definitely evil, then).
Mr Safin, it would seem, has had a bit of a chip on his shoulder since Spectre murdered his family as a boy. Having recently wiped out Spectre, thusly achieving his revenge, Safin now wants to conquer the world by using the aforementioned nanobots as a biological weapon. Bond obviously isn’t having any of this, and heroically stops Safin in his tracks; but not, in a surprising and devastating turn, before he’s inflicted with mortal wounds. Sadly, this really is the end for Bond, who shortly afterwards succumbs to his injuries whilst he’s blown to smithereens by a British warship.
We assume that Mr Bond was sensible enough to procure a policy of life insurance before his untimely passing, and that he named Ms Swann as his beneficiary. To make a claim, Ms Swann would need to provide, as a minimum: (i) the name of the deceased (Bond, James Bond); (ii) the Policy number; and (iii) the cause of death.
The price and cover available would depend on a number of factors, which include the nature of Bond’s profession, as well as the fact that he indulges in what some would say is an unhealthy lifestyle i.e. a heavy alcohol intake. One can only imagine how high the premium must have been.
Mr Bond’s estate would also need to satisfy that his death wasn’t the result of reckless or dangerous behaviour. Whether that’s the case here is debateable, but we’d argue that Bond is just on the right side. Indeed, having agreed to cover Mr Bond, the underwriter would be ‘presumed to be acquainted with the practice of the trade he insures’ (Noble v Kennaway [1780]), and therefore should have appreciated that taking on a megalomaniac and his machine-gun wielding disciples was merely an occupational hazard. In circumstances where Bond quite literally saved the world, paying this claim feels like the right thing to do.
Given that Ms Swann is seen happily driving an Aston Martin V8 Vantage at the end of the film, we’re going to assume that the claim succeeded. Happy days for all. Well, apart from Bond, of course. May his memory live on.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC
In one of the first cases to be decided under the Insurance Act 2015 (“the Act”), the High Court was asked to consider whether an insured breached its duty of fair presentation under the Act by failing to disclose criminal charges against one of its directors.
Background
In 2018, Berkshire Assets (West London) Limited (“Berkshire”), purchased a Construction All Risks and Business Interruption Policy (“the Policy”) underwritten by AXA Insurance UK Plc (“AXA”) for a property development project in Brentford.
The quote contained a number of provisions, including the following:
“The proposer for insurance, its partners or directors or any other person who plays a significant role in managing or organising the business activities, have not, either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence.”
The policy renewed in 2019. Unbeknown to the director who was tasked with handling its insurances, one of its other directors, Mr Sherwood (and various other companies and individuals), had criminal charges filed against him by the Malaysian public prosecutor in August 2019 in connection with a $4.3bn fraud.
In January 2020, an escape of water resulted in substantial damage to the development. Berkshire thereafter made a claim under the Policy.
After investigating the claim, AXA avoided the Policy on the basis that Berkshire failed to disclose the charges against Mr Sherwood at renewal, and, had it done so, said that cover would not have been provided.
Berkshire argued that Mr Sherwood was not personally involved in the planning, approval or execution of the transactions which gave rise to the charges. To the contrary, the charges related solely to his capacity as a director of an investment banking company.
Issues for the Court
There were two issues for the Court to consider:
- Were the charges against Mr Sherwood material, for the purposes of the duty of fair presentation?
- If they were, and had they been disclosed, would AXA have agreed to insure Berkshire?
Materiality
The Court considered the definition of a material circumstance under section 7(3) of the Act. This provides that a circumstance is material if it would influence the judgment of a prudent insurer in determining whether to take the risk, and if so, on what terms.
The Court agreed with AXA that the principles relevant to material circumstances were already well established, and there was no reason to suggest that the Act had changed those principles.
There was, however, a debate about whether the charges against Mr Sherwood amounted to a moral hazard which Berkshire was required to disclose.
The Court considered there to be no settled definition of ‘moral hazard’, as each case will necessarily depend on its own facts. It was therefore preferable, in this instance, to rely on the statutory definition of material circumstance when considering the facts of the case before it.
In considering materiality, the Court found that being charged with a criminal offence will often constitute a material circumstance (March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep. 169). Also, the time such facts are to be considered is at the time of the renewal, and not with the benefit of hindsight (Brotherton v. Aseguradora Colseguros (No. 2) [2003] EWCA Civ 705, 1 Lloyd’s Rep. IR 746). Therefore, the fact that the charges were dismissed was ultimately irrelevant.
The fact that the charges did not relate to deceit or dishonesty was equally irrelevant, as AXA could not be expected to resolve the issue of whether or not they involved allegations of deceit or dishonesty at renewal. Facts raising doubt as to the risk were, without more, sufficient to be material, and the Court therefore found they should have been disclosed.
Inducement
It was common ground between the parties that AXA’s branch office had no authority to write the risk under an internal practice note that had been disclosed. The Court found that there was no reason to suppose that the regional or London offices would have considered the matter any differently if the charges against Mr Sherwood had been disclosed, nor was there a reason that the conclusions of the underwriting team would have been any different.
Comment
The case is a salutary reminder for policyholders and brokers that questions around criminal conduct and charges, whether proven or otherwise, are likely to be material. A thorough investigation into all directors’ backgrounds is advisable at each renewal, and when in doubt, it is better to err on the side of caution.
Authors:
Alex Rosenfield, Senior Associate
Ristorante Limited t/a Bar Massimo v Zurich¬ [2021]: – Food for thought about the questions in insurance applications
This recent High Court decision considers the proper construction of questions put to an insured in insurance applications, and the circumstances in which they can amount to waiver.
Background
Ristorante Limited (“Ristorante”) was the leaseholder of a bar and restaurant in Glasgow (“the Property”). Ristorante took out an insurance policy with Zurich in 2015, which renewed in 2016 and 2017 (“the Policy”). Prior to inception of the Policy, and at each renewal, Ristorante confirmed that the following state of affairs was true:
“No owner, director, business partner or family member involved with the business:
i) ...
ii)...
iii) Has ever been the subject of a winding up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation
iv) ...
(“the Insolvency Question”)
On 3 January 2018, a significant fire broke out at the Property. After being notified of a claim, Zurich purported to avoid the Policy on the basis that Ristorante failed to make a fair presentation of the risk. In particular, it asserted that Ristorante misrepresented/failed to disclose that three of its directors had been directors of companies which previously entered liquidation (“the Other Insolvencies”), and that cover would not have been provided had they been disclosed.
Issues
There were two issues for the Court to determine at a trial of preliminary issues:
- Whether, on the true construction of the Insolvency Question, there was a misrepresentation/non-disclosure; and
- Whether, by asking the Insolvency Question in the way that it did, Zurich waived disclosure of the Other Insolvencies.
The Decision
The Judge, Mr Justice Snowden, found for Ristorante on both issues.
On the first issue, the Judge observed that the Insolvency Question limited its enquiry to any “owner, director, business partner or family member involved with the business”. There was no express enquiry in relation to any corporate bodies, and, accordingly, a person completing the Insolvency Question would not come to it “with any predisposition to think that the Defendant was interested in that information.”
The Judge also relied on cases such as R&R Developments v AXA [2010] 2 All ER (Comm) 527 (see our previous article on the case here) and Doheny v New India Assurance [2005] 1 All ER (Comm), both of which also addressed the proper construction of insolvency questions. The Judge found that a reasonable insurer in 2015 would be expected to know of those decisions, and to have understood the importance, if it wished to make enquiries of the insolvency of companies with which the insurer’s directors were involved, of using language which referred to those companies.
Zurich made a number of further arguments about the correct interpretation of the Insolvency Question, which included an argument that the words “has ever been the subject of” were sufficient, without more, to require disclosure of companies with which Ristorante’s directors were involved. Unsurprisingly, the Judge rejected that construction, noting that it made neither grammatical nor legal sense.
Zurich also said that, regardless of the precise wording used, a reasonable broker would have understood the Insolvency Question to mean that the Other Insolvencies were material facts which needed to be disclosed. However, absent any evidence on what a “hypothetical reasonable broker” would have done, the Judge rejected that argument.
On the second issue, the Judge, having regard to the authorities on the effect of asking a limited question, held that Zurich waived disclosure of the Other Insolvencies. Although Zurich contended that past insolvencies was a relevant moral hazard from the perspective of an insurer and “certainly information about which they would ordinarily expect to be told”, the Other Insolvencies related to a different set of persons identified in the Insolvency Question. Therefore, it was reasonable for Ristorante to infer that Zurich had no interest in them.
Summary
Ristorante v Zurich is another in a recent run of policyholder friendly decisions, and a timely reminder that Insurers’ attempts to re-write questions in insurance applications, when doing so would require a completely different meaning to be given to them, will be impermissible.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Covid-19 BI Update: Denial of Access – Access Granted?
“I doubt whether the Divisional Court could or would have taken the approach it did, had it had the benefit of the Supreme Court’s reasoning on causation.”
Lord Mance
The latest Covid-19 BI decision to arrive following the conclusion of the test case provides fresh hope for policyholders with denial of access clauses whose claims currently remain declined.
It will be recalled that the Divisional Court in the test case found that such clauses provided a “narrow, localised form of cover” which did not respond to the broader circumstances of the pandemic. Many policyholders were disappointed at the FCA’s decision not to appeal these rulings, and have subsequently argued that the Supreme Court’s ultimate conclusions on causation rendered the Divisional Court’s ruling an unsound authority for declining coverage under such clauses.
In an arbitral Award issued on 10 September 2021 by Lord Mance[1], clear support is provided for exactly that proposition.
The China Taiping Proceedings
In arbitration proceedings commenced by Fenchurch Law on behalf of a group of 183 hospitality policyholders against China Taiping Insurance[2], coverage was considered under two limbs of a Denial of Access clause which responded to:
“b – the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority for reasons other than the conduct of the Insured or any director or partner of the Insured or the condition of the Premises or the carrying out of repair or maintenance work at the Premises;
c – the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises;”
The Issues
There were three key disputed issues. First, whether the existence of Notifiable Disease cover elsewhere in the policy (which did not extend to Covid-19) negated the possibility of the Denial of Access wording responding to the pandemic. Secondly, whether the requirement for an “emergency in the vicinity of the premises” in limb (c) meant that the clause could only respond to narrow, localised events, rather than national ones, per the Divisional Court decision in the test case. Thirdly, whether the UK Government was a ‘competent local authority’ within the meaning of the clause.
On the first issue, Lord Mance found in favour of the policyholders. The existence of the express notifiable disease cover elsewhere in the policy did not limit the cover under the prevention of access extension. It was common for the coverage provided by various insuring clauses and extensions to overlap, and if insurers intended to exclude diseases from the scope of the prevention of access clause, they should have used clear language to do so.
On the third issue, Lord Mance agreed with insurers that the UK Government was not a “competent local authority” within the meaning of the clause, meaning that there could be no coverage under limbs (b) or (c) of the Denial of Access extension for losses caused by closures and other restrictions imposed by the UK Government in response to the Covid-19 pandemic. This issue was ultimately therefore fatal to the policyholders’ claim, which failed at the last hurdle.
Issue 2 – Emergency threatening life or property in the vicinity of the premises
On Issue 2, however, Lord Mance agreed with the policyholders, and despite the fact that it did not alter the outcome in this particular case, his discussion and conclusions on the issue are of potentially much broader significance and merit close examination.
Lord Mance noted that Clause 1(c) was drafted in materially identical terms to two of the representative sample of policy wordings considered in the test case, namely RSA 2.1 and 2.2. The RSA clauses required “an emergency likely to endanger life or property in the vicinity of the Premises”.
In the test case, the Divisional Court concluded in relation to RSA 2.1 and 2.2, that
“There could only be cover under this wording if the insured could also demonstrate that it was an emergency by reason of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions or advice of the government. […] it is highly unlikely that that could be demonstrated in any particular case[3].”
Similar conclusions were reached in relation to the other denial of access wordings under consideration, and the findings were not appealed to the Supreme Court. In the arbitration, insurers unsurprisingly therefore relied on the Divisional Court’s judgment to resist coverage under limb 1 (c) of the China Taiping clause.
Lord Mance began his analysis of the issue by noting that, as an arbitrator, he must regard the Divisional Court’s approach to the NDDA clauses as being, at the very least, highly persuasive, and that it may even, on the face of it, bind him. However, that was subject to, first, the relevant point having been squarely argued and decided in the Divisional Court, and second the Supreme Court’s judgment.
As to the first point, Lord Mance noted that the Divisional Court appeared to have reached its conclusions on the basis that RSA 2.1 and 2.2 were analogous with MSA 1. However, in Lord Mance’s view, the China Taiping and RSA wordings were clearly distinguishable from the MSA 1 wording, in leaving open for consideration whether cover extends to an emergency outside the vicinity threatening life or property within the vicinity, in contrast with the MSA 1 wording that required that the emergency be within the vicinity of the premises. It was unclear how far RSA had argued the point, but a requirement that the emergency be in the vicinity of the premises was central to the Divisional Court’s reasoning in relation to RSA 2.1 and 2.2.
In relation to the Supreme Court judgment, Lord Mance’s words speak for themselves:
“…although there was no appeal in respect of RSA2.1 and 2.2, I find the Supreme Court’s analysis of the operation of other wordings, and particularly its analysis of the correct approach to causation, hard to reconcile with the analysis of RSA 2.1 and 2.2 adopted by the Divisional Court in paragraphs 466 and 467.[…] Paragraphs 466 and 467 of the Divisional Court’s judgment indicate that it was the Court’s view of the causation required that ultimately dictated the likelihood of recovery under the relevant wordings. The Supreme Court held that the Divisional Court had erred in significant respects in its understanding of the operation of causation under other policy wordings before it. As I read its judgment, the Supreme Court also thought that its understanding would, at least prima facie, carry through generally into other wordings.”
“… the Supreme Court was, contrary to the Insurer’s submission, prepared to state quite generally that its general approach to causation was applicable across the whole range of wordings”
“That is particularly so, if the emergency may be outside the vicinity, so long as it threatens life or property within the vicinity. But it is also so if both the emergency and the threat must be in the vicinity. Once it is accepted that the emergency may at the same time be elsewhere and threaten life or property elsewhere, the Supreme Court’s analysis of the relevant elements of cover and its conclusion that a “but for” test of causation was inappropriate would seem readily transposable to a NDDA clause like Extension 1(c)”
“I therefore doubt whether the Divisional Court could or would have approached the matter as it did in paragraphs 466 and 467 had it had the benefit of the Supreme Court’s analysis.”
“The absence in the Arch wording of the words “in the vicinity” in relation to the emergency appears an inadequate basis on which to distinguish the Supreme Court’s approach in relation to that Arch wording from the present.”
Lord Mance apparently therefore concluded that he was not bound by the Divisional Court’s findings as far as relevant to Issue 2, and despite the negative outcome in the present case, set out a powerful and clear basis on which a case for coverage under the RSA 2.1 and 2.2 wordings (and others on similar terms, including the other denial of access wordings considered in the test case) might be made in reliance on the Supreme Court judgment.
Comment
Lord Mance’s comments in the China Taiping Award are far from the end of the story. The Award is not binding on any third party, and despite his detailed and helpful analysis, Lord Mance found it unnecessary to issue any final ruling or declaration on the issue, due to his conclusions on the meaning of ‘competent local authority’ which were conclusive to the outcome of the proceedings. Noting that the issue was complex, and because the Award was to be published and the issue may arise in other contexts, Lord Mance concluded that he should say “nothing more definite” about it.
But as an ex-Deputy President of the Supreme Court and the author of many seminal decisions on English insurance law, his clearly-expressed views on the matter will doubtless be influential in future judicial consideration of the issue, and will need to be studied closely by insurers and policyholders alike in considering the position under Denial of Access and other clauses where coverage is still in dispute.
A copy of the award can be accessed here.
[1] The arbitration proceedings were brought with the agreement of the insurer, who agreed to cover the costs of the proceedings, and not to seek its own costs from the policyholders regardless of the outcome. Confidentiality in the arbitral award was also waived, meaning that it can be made public.
[3] Divisional Court para.467
(De)sign of the Times: Blurred Lines on Build Performance Liabilities
Design requirements are at the heart of any construction contract, and the precise formulation of applicable standards is crucial to evaluation of risk. Recent trends indicate that designers in the UK construction industry are assuming increasing levels of liability on build performance, with significant implications for coverage under professional indemnity insurance.
In Arbitration Appeal No 1 of 2021 [2021] CSOH 41, the Scottish Court of Session recently considered the interpretation of deemed design liability clauses, and upheld a provision imposing responsibility on a consultant for designs pre-dating its appointment and which had been proposed without its involvement. Whilst similar clauses may be given a narrower interpretation in a multi-disciplinary design context involving several third party consultants, the scope of such provisions should be carefully considered at the outset, to limit exposure and potential uninsured loss.
Reasonable Skill & Care vs. Fitness for Purpose
A contractor or professional with design responsibility should exercise reasonable skill and care, based on standards expected of an ordinary skilled person performing and professing to have that special skill, so that liability will not arise unless they have acted negligently.
Express contract terms often impose more onerous fit for purpose type obligations, providing a warranty that the works will conform to specified employer requirements. Liability arising from a higher contractual standard than that imposed by ordinary common law, including certification of compliance with specified design, will usually fall outside the scope of cover under professional indemnity insurance.
Strict liability can be implied in relation to design elements of work under a design and build contract (Viking Grain Storage v TH White Installations (1985) 3 Con. L.R. 52); or where the contractor is informed of the purpose for which the works are required and the employer relies upon the contractor’s skill and judgement (Greaves v Baynham Meikle [1975] 1 W.L.R. 1095).
Industry standard forms address the issue in different ways, with JCT contracts requiring reasonable skill and care, whilst all FIDIC contracts impose some degree of fitness for purpose obligation. This divergence in part reflects the usual approach in different industry sectors, with design and construction contracts for energy or infrastructure projects typically including output specifications capable of measurement through testing, as compared with the performance standard ordinarily assumed by an architect or other professional designer in the real estate development sector.
Conflicting Standards
In MT Højgaard v E.ON [2017] UKSC 59, the Supreme Court considered a contract containing both a reasonable skill and care obligation, and a warranty ‘tucked away’ in a technical schedule requiring a service life of 20 years. The latter took precedence, in circumstances where wind turbine foundations designed and installed by the defendant in accordance with the claimant’s requirements and certifying authority’s specification began to fail during the defects period, due to a subsequently identified error in a value in the authority’s specification. The case demonstrates that a contractor can be found to assume the risk if they have agreed to work to a design which would render the item incapable of meeting the performance criteria.
An obligation to ensure that works constructed in accordance with the build design “shall meet the requirements described in the Specification” may be construed as imposing strict liability, notwithstanding the designer having separately undertaken to exercise reasonable skill and care (Costain v Charles Haswell & Partners [2009] EWHC 3140). This depends on the particular contract wording, however, and conversely a design and build contract requiring a consultant to comply with a specific design, alongside an obligation to act with reasonable skill and care, may be construed on the basis that the obligation to comply with the specification is to be read as expressly or impliedly subject to the reasonable skill and care provision (MW High Tech Projects v Haase Environmental Consulting [2015] EWHC 152).
For complex contracts incorporating schedules from multiple sources, a priority of documents provision may be helpful to deal with potential inconsistencies.
Implementation of Design
Following on from the decision in SSE Generation v Hochtief Solutions [2018] CSIH 26, we are seeing an increase in professional indemnity disputes based on a distinction between preparation and implementation of design, with reference to the scope of ‘professional activities’ defined in the policy and declared in the proposal form.
In SSE Generation, a design and build contractor was held liable under the NEC2 contract for costs of repairing a tunnel collapse at the Glendoe hydroelectric power scheme in Scotland, due to breach of contract requirements on appropriate support for erodible rock encountered in a fault zone. The court decided by a majority that Hochtief could not rely on a limitation of liability for design defects, despite having exercised reasonable skill and care in preparing the design statement, as the damage was caused by implementation of design.
This conclusion was reached in light of specific contract terms and the interface between design and its implementation is highly fact sensitive (Bellefield Computer Services Ltd v E Turner & Sons Ltd [2002] EWCA Civ 1823), particularly in cases involving complex construction and engineering decisions.
Design Life
Construction contracts often require completed works to deliver a specified minimum ‘design life’.
The meaning of this concept was considered in Blackpool B.C. v Volkerfitzpatrick [2020] EWHC 1523, a case concerning alleged premature corrosion to a tram depot situated in a seafront location. The court referred to relevant British Standards on service life planning and structural design in concluding that an acceptable level of not “unusually onerous” maintenance is a key ingredient of performance expectations for individual parts of a building, and a specified design life implies that “major repairs” should not be needed during that period. The extent of standard maintenance will be a matter of fact and degree, which could be addressed in O&M manuals produced by the contractor.
Depending on the words used in the contract, several discrete obligations may be separately imposed and cumulatively applied to the design life and quality of particular components within a complex structure (125 OBS (Nominees1) v Lend Lease Construction [2017] EWHC 25).
Conclusion
In view of ongoing hard market conditions, policyholders are understandably reluctant to accept requirements outside the scope of conventional insurance cover, with extensive negotiation on design risk allocation at the pre-contract stage often resulting in a form of compromise wording.
The nuanced approach adopted in recent court rulings demonstrates a blurring of lines between the traditional reasonable skill and care vs. fitness for purpose dichotomy, acknowledging that different standards can apply to various aspects of design under a single contract.
Designers should exercise particular caution in relation to deeming provisions in appointment documents and standard form contracts, imposing liability for plans initially developed by the employer or third parties.
To avoid ambiguity, contractors and consultants should expressly exclude fitness for purpose obligations where possible, and consider inclusion of contract terms defining the output of building design, with reference to intended maintenance procedures. Where exclusion of fitness for purpose obligations cannot be agreed, policyholders should talk to their brokers and insurers to obtain clarity about the extent to which any onerous contractual obligations are covered by their professional indemnity insurance.
Amy Lacey is a Partner at Fenchurch Law.
