Webinar - Traps for Contractors and their Brokers
Practical issues to be aware of for those dealing with CAR and Contract Works policies, including the correct trigger for damage, when a defect may constitute damage and an overview of the two leading suites of defect exclusion clauses.
Rob Goodship is a Senior Associate at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #11 (The Good). R&R Developments v AXA
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#11 (The Good)
R&R Developments Ltd v AXA Insurance UK Plc [2010] Lloyd's Rep. I.R. 521
The case concerned a question in a proposal which asked if any of the insured’s directors had ever been declared bankrupt, either personally or in connection with any business with which they were involved. The Court held that the question did not extend to the insolvency of any company with which they may have been involved. The Court also held that, by asking a limited question, the insurer had waived disclosure of the insolvency of any party other than the insured and its directors.
Background
R&R Developments Limited (“R&R”) was insured by AXA Insurance UK plc (“AXA”). Prior to inception of the relevant policy, R&R completed a proposal, which asked:
“Have you or any Partners or Directors either personally or in connection with any business in which they have been involved … ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?”
R&R answered this question (“the Insolvency Question”) in the negative. AXA contended that this was a misrepresentation, since one of R&R’s directors had been a director of a company which had gone into administrative receivership. AXA also said that R&R should have disclosed that insolvency in any event, as it was material.
The Decision
The Judge, Nicholas Strauss QC, held that the Insolvency Question was clearly worded. As a matter of simple grammar and syntax, it did not relate to anybody other than R&R and its directors. So, since R&R was solvent and none of R&R’s directors had ever been made bankrupt, the Insolvency Question was answered correctly. Three further considerations supported that conclusion:
- AXA contended that the Insolvency Question referred, in effect, to “… you or any Partners or Directors or any business in which they had been involved”. Had this been its intention, it would have been very simple drafting to achieve that result.
- On AXA’s interpretation, the disclosure required from R&R would have been unreasonably wide. In particular, the meaning of “involved” could potentially have extended to any company of which one of the directors had been employed in a junior position.
- Looking at the proposal as a whole, and particularly the fact that a further question asked “Had any losses … or … any claims …. made against you (in this or any existing or previous business”), it was clear that the questions were targeted solely at R&R and its directors.
The Judge also rejected AXA’s secondary argument. Although AXA had in its mind the concept of other businesses with which R&R’s directors were involved, it chose not to ask about them. Therefore, by asking a limited question, R&R was entirely justified in thinking that AXA had waived its right to that information.
Comments
The decision is a helpful endorsement of the ‘natural and ordinary meaning’ rule of interpretation. AXA tried to argue, in effect, that words needed to be implied into the Insolvency Question which would significantly change its meaning, and that that should be done for its own benefit. Quite rightly, the Court gave short shrift to that argument.
Alex Rosenfield is a Senior Associate at Fenchurch Law.
Aggregation decisions - a bit like buses...
Hot on the heels of the High Court's decision last month that numerous defalcations by a dishonest solicitor could not be aggregated (see my post on that at https://lnkd.in/dkN2UY2) comes a further High Court judgment on 10 December 2020, again ruling against aggregation, in Spire Healthcare Ltd v RSA
The dispute arose out of the activities of the rogue surgeon, Ian Paterson, who was ultimately jailed for 15 years (increased to 20 years on appeal) for carrying out unnecessary mastectomies. As well as being a Consultant Breast Surgeon in the NHS, he also maintained a lucrative private practice, working at two Spire hospitals, and it was there that he performed numerous mastectomies on patients whom he had falsely told had breast cancer.
In fact, there were two strands to Mr Paterson's wrongdoing:
First, he had, as described, carried out unnecessary surgery on healthy patients ("over-treating"). It is almost certain that his motive here was financial.
Secondly, he had - in both his NHS practice and his private work - performed partial rather than full mastectomies ("under-treating") on patients who did have breast cancer, thereby exposing them without their consent to the risk of the cancer returning, having adopted this forbidden procedure either to save time or because the result was considered aesthetically preferable.
About 750 of Mr Paterson's victims sued Spire, either for "over-treating" or "under-treating" (and, in a few cases, for both). The claims cost Spire a total of £37m in damages, claimants' costs and defence costs.
Spire was insured for those claims under a policy written by RSA, with a limit of £10m for all claims "...consequent on or attributable to one source or original cause...".
RSA argued that all the claims were "caused" by Mr Paterson and/or to his propensity to negligence or dishonesty. That argument failed, the court (HH Judge Pelling QC, sitting as a Judge of the High Court) instead agreeing with Spire that the cause of the over-treating claims was entirely distinct from the cause of the under-treating claims. In paragraphs 24 & 25 of the judgment, Judge Pelling QC spelt this out:
"If the result was not as I have summarised it, then there would be no effective causative link between what is contended to be the originating cause and the loss in each case that it was sought to aggregate nor would what is alleged to be the originating cause explain adequately or at all why the negligent act or omission leading to the claims had occurred. A hypothetical example may help to explain the point. An orthopaedic surgeon performs both knee replacement and hip replacement procedures. He operates under a mis-appreciation as to the manner in which hip replacements are to be carried out which constitutes negligence applying established principles resulting in multiple claims by patients on whom he performed hip replacement surgery. At the same time in relation to his knee replacement practice he operates under another and different mis-appreciation relevant exclusively to knee replacement surgery which constitutes negligence applying established principles resulting in multiple claims by patients on whom he performed knee replacement surgery. In my judgment each mis-appreciation would constitute a separate originating cause unless for example it could be said that the existence of the mis-appreciations was for example the result of the Insured's failure properly to train the individual concerned.
Characterising the originating or original cause as "… negligent and inappropriate clinical care …" or, alternatively, as deliberate misconduct does not assist because in the hypothetical example set out above, the cause of the negligent hip replacement surgery whilst causative of all the hip claims was not in any sense causative of the knee claims and vice versa. Submitting as [RSA] does that in this case it is a statement of the obvious that all the claims were the result of Mr Paterson and his conduct ignores the need to search for an effective original cause of all the losses it is sought to aggregate..."
The result, in financial terms, was that Spire was entitled to £20m, and not just £10m, from RSA.
It is far too soon to know whether RSA will try to appeal. But my own view (famous last words...) was that this decision - like its predecessor last month - was entirely correct.
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Comm/2020/3299.html
Jonathan Corman is a partner at Fenchurch Law.
Webinar - Virtual Coverage Symposium
A series of short topical sessions on a variety of insurance coverage issues. This virtual event is aimed at providing brokers with information on common coverage issues and tips on how to avoid them arising.
Session 1: Excess layer insurance
Session 2: Key exclusions in Construction All Risks insurance
Session 3: Reinstatement: when is it the appropriate measure of indemnity?
Session 4: Cover for COVID-19 under BI & other policies
Court declines to re-write existing EL insurance law
Komives v Hick Lane Bedding Ltd & Anor [2020] EWHC 3288 (QB)
This recent High Court decision was on any view a sad case, although the Court appears to have been mindful of the adage that “hard cases make bad law”.
The Claimants were two Hungarian nationals, who had been trafficked to the UK and who then worked for the First Defendant, Hick Lane Bedding Limited (“the Company”), in conditions of modern slavery. Both Claimants suffered psychiatric injuries, and one of them had also suffered a severe accident at work.
The Company went into administration in 2015; and its managing director was sentenced to prison for conspiracy to traffic individuals into the UK with intent to exploit them.
The Company’s employers’ liability insurer at the relevant time was the Second Defendant, AmTrust Europe Limited (“AmTrust”). AmTrust had written the Company's EL policy based, it appears, on relatively limited information, but it had been provided with a glowing survey as to the Company’s working practices.
The Claimants issued proceedings for their injuries against both the Company and AmTrust. AmTrust responded by avoiding the policy - a fairly predictable stance, one might have thought, in light of the Company’s clear non-disclosure of its criminal conduct.
The Claimants’ Counsel, instructed by the Anti-Trafficking and Exploitation Unit, nevertheless sought to challenge AmTrust’s avoidance, on various grounds:
- The Claimants argued that, by writing the policy based on relatively scant information, AmTrust had turned a blind eye to the possibility of the Company’s criminal conduct, or alternatively was not allowed to take this point against the victims of that conduct.
- The legislative scheme, represented by the Employers’ Liability (Compulsory Insurance) Act 1969 and the similarly entitled 1998 Regulations, which restrict which conditions/warranties can be contained in an EL policy, were intended to protect employees like the Claimants and to ensure that insurance was available. Coupled with Rule 8.1.1 of ICOBS, which states that an insurer must “not unreasonably reject a claim (including by terminating or avoiding a policy)”, it followed, submitted the Claimants, that AmTrust’s avoidance was unreasonable.
- The Claimants’ underwriting expert, Mr Flaxman, accepted that, had its involvement with modern slavery been known, the Company would have been “uninsurable” and that, in the scale of non-disclosures or misrepresentations, the Company’s non-disclosure “couldn’t get much worse”. He nevertheless gave evidence that, as a matter of “market practice”, AmTrust should have paid the claims.
The Court rejected these submissions. While understandably sympathetic to the Claimants’ position, the Court predictably recognised that the scheme to mandate insurance for employees was nothing like that afforded to the victims of road accidents, where the Road Traffic Act 1988 severely restricts an insurer’s ability to avoid a motor policy for breach of the duty of fair presentation. The Court concluded that the present framework of EL insurance may well produce very unsatisfactory results, but that it was for Parliament, and not the courts, to put that right.
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/QB/2020/3288.html
Jonathan Corman is a partner at Fenchurch Law
Reasonable precautions conditions – what do they really mean?
Conditions which require insureds to exercise ‘reasonable precautions’ are a staple of insurance policies. However, there is often a misunderstanding as to their meaning and effect, and what an insurer must show in order to rely on a breach to decline the claim. In this article we take a look at the applicable principles.
Reasonable precautions in a Professional Indemnity policy
Professional indemnity (“PI”) insurance is designed to protect an insured which has incurred a civil liability to a third party arising from negligence.
PI policies almost always require insureds to take reasonable care or reasonable precautions not to cause loss or damage to a third party. If “reasonable care”, in this context, had the same meaning as a tortious duty of care, the policy would be deprived of any real value, since that would effectively exclude the very liability that the policies are intended to cover.
To overcome that issue, the Courts have consistently held that an insurer can only rely on a reasonable precautions clause where it shows recklessness by the insured. In particular, in Fraser v Furman [1967]1 WLR 898, the Court held that it must be “shown affirmatively that the failure to take precautions … was done recklessly, that is to say with actual recognition of the danger and not caring whether or not that danger was averted”. Therefore, acting carelessly will not be sufficient; the requirement is that the insured must be reckless and not care about its conduct.
Reasonable precautions in a property policy
Over time, reasonable precautions clauses have become more commonplace in property and other first-party insurance policies (such as travel or motor insurance); but what does a requirement to take reasonable precautions in a property policy mean? Can an insurer decline a claim if an insured fails to take reasonable care? Does negligence suffice?
The Court of Appeal has confirmed that the recklessness threshold applies equally in property insurance. So, in Devco Holder Ltd v Legal and General Insurance Society [1993] Lloyd’s Rep 567, where a driver deliberately left his keys in the ignition for a few minutes whilst visiting his place of work, the Court of Appeal found that the driver breached the reasonable precautions condition in his policy because he was “deliberately courting a danger”. On that basis, the driver was not entitled to recover under the Policy.
The Court of Appeal in Sofi v Prudential Assurance Company [1993] 2 Lloyd's Rep. 559 reaffirmed the decision in Devco Holder that mere negligence will not suffice. So, in order to prove recklessness, it must be shown that the insured appreciated the risk (and that appreciation will be assessed subjectively). If it can be shown that an insured appreciates the risk but simply didn’t care or ignored it, he will be found to be reckless.
On the basis that a reasonable care clause is intended to exclude liability, the burden is on the insurer to prove recklessness.
In which situations might reasonable precautions conditions be relevant?
The drafting of reasonable precautions conditions is usually broad. For example, the clause may require an insured to “take all reasonable precautions to prevent or diminish damage or any occurrence or cease any activity which may give rise to liability under this Policy and to maintain all Property insured in sound condition.”
The general actions expected from insureds to diminish or reduce danger are likely to vary on a case by case basis and therefore not readily summarised; however, examples in a property context would include locking all doors and windows when the premises are empty (so as to minimise the risk of theft); taking precautions against fire or alerting the fire brigade promptly in the event of a fire; and adhering to guidance from professionals such as surveyors.
It is perhaps more illustrative, by comparison, to consider the sorts of actions which have been found to constitute a breach i.e. where an insured has acted recklessly. In particular:
- Lambert v Keymood Ltd [1990], in which an insured continued to set bonfires at its premises, despite being warned about the dangers of doing so;
- Limit (No.3) Ltd v Ace Insurance Ltd [2009], where an insured took no steps to repair a building, notwithstanding the fact that it was warned that it might collapse;
- Grace Electrical Engineering Pte Ltd v EQ Insurance Co Ltd [2016], where an insured ignored advice regarding cooking operations taking place in the basement of its premises.
There is however an important distinction to be drawn between reasonable precautions and positive obligations under the policy which require insureds to take specific actions, such as hot works conditions, unoccupied buildings conditions, and security conditions. In Aspen Insurance v Sangster & Annand Ltd, the Court commented that the recklessness threshold will not apply where there is “a highly defined and circumscribed set of particular safeguards which have to be put in place” which involved a detailed hot works condition clause with which the insured had failed to comply.
Reminder for brokers and policyholders – a health warning
In order to avoid the risk of insurers seeking to decline the policy for a breach of reasonable precautions conditions, it is important for brokers and policyholders to be fully aware of their continuing obligations throughout the duration of policy.
Failure to warn the insured about such policy conditions may result in a broker being held liable in the event that indemnity is declined due to breach of a reasonable precautions or other specific condition - RR Securities & Ors v Towergate Underwriting Group Ltd [2016]. In this case, following a fire caused by arson, the insurer sought to decline the claim due to failure to comply with the minimum-security standards and failure to take reasonable precautions to avoid the loss. The Court found that the insured had not been reckless and therefore there had been no breach of the reasonable precautions condition. However, the broker was found to be liable to the insured for failing to bring the onerous security conditions to the insured’s attention.
Whilst we see insurers seeking to rely on reasonable precautions conditions in circumstances where the insured has merely been careless or negligent, equally care should be taken to ensure that policyholders are fully aware of their obligations and to distinguish between reasonable precautions conditions and other more onerous requirements defined in the policy. In short:
- Where the policy contains a reasonable precautions clause, the insured must not act recklessly or against advice where it appreciates that a risk exists which might cause a loss; and
- Where the policy contains specific obligations, such as a hot works condition or unoccupied buildings condition, the reckless threshold does not apply – the insured must therefore take extra care to fully comply with those obligations or avoid a declinature of a claim at a later date.
