Chloe Franklin

The Good, the Bad & the Ugly: #23 (the Good): Scotbeef Limited v D&S Storage Limited (In Liquidation) Lonham Group Limited [2024]

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.

In our view, some cases are 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.

#23 (the Good): Scotbeef Limited v D&S Storage Limited (In Liquidation) Lonham Group Limited [2024]

The Technology and Construction Court (“the TCC”) has recently provided welcome guidance on the interpretation of the Insurance Act 2015 (“the IA 2015”), when considering preliminary issues in Scotbeef Limited v D&S Storage Limited (In Liquidation) Lonham Group Limited.

The Liability Dispute

Scotbeef Limited (“Scotbeef”) issued a claim against D&S Storage Limited (“D&S”) in July 2020 in relation to the supply of defective meat. D&S stated that, applying the terms of the Food Storage & Distribution Federation (“the FSDF”), of which they were a member, their liability for the defective meat was limited to £250 per tonne.

The TCC found that the FSDF terms had not been incorporated into the commercial contract between D&S and Scotbeef, and as such were unenforceable.

The Coverage Dispute

After D&S became insolvent, Scotbeef added its liability insurer, Lonham Group (“Lonham””) as a Second Defendant to the proceedings under the Third Parties (Rights against Insurers) Act 2010.

D&S’ insurance policy with Lonham included a “Duty of Assured Clause” which stated:

“It is a condition precedent to the liability of Underwriters hereunder:-

(i) that the Assured makes a full declaration of all current trading conditions at inception of the policy period;

(ii) that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;

(iii) that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. Reasonable steps are considered by Underwriters to be the following…”

…

If a claim arises in respect of a contract into which the Assured have failed to incorporate the above mentioned conditions the Assured's right to be indemnified under this policy in respect of

such a claim shall not be prejudiced providing that the Assured has taken all reasonable and practicable steps to incorporate the above conditions into contracts;

Following the decision in the underlying proceedings, Lonham advised Scotbeef that D&S had breached the Duty of Assured Clause (“the DOA Clause”), which was a condition precedent to liability (“CP”), because D&S had not incorporated the FSDF terms and conditions into the commercial contract. As such, Lonham argued that the Policy would not respond.

Scotbeef disagreed with Lonham’s interpretation of the Policy, and the Parties sought a decision on the meaning and effect of the DOA clause in a preliminary issues hearing.

The TCC considered the following two key issues:

1. Whether the construction of a CP effects its enforceability; and
2. When terms which depart from the IA 2015 are enforceable.

The TCC found in Scotbeef’s favour on the following basis:

Issue 1

• The labelling of a CP as such, is not always indicative of it being so, the true effect will be established by the construction of the whole clause.
• Despite the fact the DOA clause was labelled a CP, the clause contained a write back for instances where the policyholder takes all reasonable precautions.
• Further, the consequences of a breach of the CP were found later in the Policy, which made the write back and consequence for breach clauses difficult to reconcile. Therefore the ambiguity of the drafting made the CP unenforceable.

Issue 2

• Section 9 of the IA 2015 prevents insurers from including terms which convert the insured’s pre-contractual representations into warranties in which would effectively permit an insurer to avoid a policy as of right. Section 11 of IA 2015 prevents insurers from avoiding claims in circumstances where the breach was irrelevant to the loss. Therefore, subclauses (i) – (iii) must be read together as to do otherwise would be a clear contradiction to section 9 & 11 of the IA 2015.
• Although sections 16 and 17 of IA 2015 permit some contracting out of the Act, subject to the insurer ensuring the policyholder is aware of the terms, there was no evidence that insurers took any steps to highlight the onerous terms to policyholder and therefore they could not be enforced.

This case provides a new and helpful decision for Policyholders on the interpretation of the IA 2015.

The key takeaways:

1. Irrespective of whether a CP is explicitly named as such, the construction of the whole clause will determine whether it is a true CP in practice.
2. A true CP should spell out the consequence of a breach and where the consequences are contradictory to the drafting of the clause as a whole, the CP may not be valid.
3. Where an Insurer seeks to include terms which depart from the IA 2015 and/or include disadvantageous terms on the Policyholder, the Insurer must take steps to bring the clause to the attention of the policyholder as failing to do so makes them unenforceable.

Chloe Franklin is an Associate Solicitor at Fenchurch Law

by Chloe Franklin

The Good, the Bad & the Ugly: #22 (The Ugly) MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch)

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.

#22 (The Ugly): MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch).

In dismissing an appeal made by a property owner seeking an indemnity for a trespass claim made by his neighbour, the Chancery Division of the High Court has provided guidance on the test for what constitutes an “accident” in the context of a public liability policy, and when actions will cross the line into recklessness.

Background

A development company, Henderson Court Limited (“HCL”), of which MacPhail was a director, undertook the development of a three-house terrace on Henderson Road in London, the development included MacPhails’ own property, number 30. Upon completion of the development, their neighbour at number 28 alleged that McPhail’s basement encroached on their land as it had been extended beyond the boundary line and therefore amounted to trespass.

MacPhail settled the claim with his neighbour and proceeded to pursue a claim against Allianz, with whom HCL held public liability insurance that included an ‘indemnity to principal’ clause allowing for recovery by the third party that had suffered the damage.

The court found Allianz was not responsible for indemnifying MacPhail’s loss because, although MacPhail had a legal liability to his neighbours, the trespass was not “accidental” as required by the terms of the policy. This was because one of the other directors of HCL, Mr Harris, who was in charge of the works had acted recklessly in permitting the basement to be extended to the flank wall of number 28.

MacPhail appealed the decision stating that the Judge had erroneously applied the law in relation to the applicable test for “accidental” and “recklessness”.

The Decision

On appeal, the court upheld the first instance decision.

Firstly, the court agreed with the application of the test for “accidental” at first instance. As set out in Colinvaux’s Law of Insurance and agreed between the parties, this is as follows:

“It is settled law that an accident, for the purposes of an insurance policy, is from the assured's point of view an act, intentional or otherwise, which has unintended consequences. However, if the consequences were intended by the assured, or if the consequences while unintended were inevitable so that the assured can be regarded as having acted with reckless disregard for them, then it is clear from the authorities that there is no accident and the assured is precluded from recovery by the terms of the policy itself as well as on the grounds of public policy. The principle is that, by embarking upon a course of conduct that is obviously hazardous the assured intends to run the risk involved…"

The judge, HHJ Parfitt, had found that the construction of the basement in number 30 to the flank wall of number 28 was intentional and the act of trespass could not have been accidental as there was a willingness to take the risk that it was.

A criticism of the use of the phrase “willingly taking the risk” over the more usual, but archaic, phrase “courting the risk” was rejected, and was not found to lower the test or alter the threshold. The appeal judge, Smith J commented as follows:

“It seems to me that the Judge's formulation is actually quite a good one, provided one does not lose sight of the fact that it is the borderline between reckless and non-reckless conduct that one is focussing on. That borderline really concerns a person's "appetite for risk" (if I can introduce my own attempt at re-phrasing), with intentional conduct unequivocally on the non-accidental side of the line, and a state of mind consciously and reasonably not even anticipating the risk on the accidental side of the line.”

Secondly, Smith J considered whether Harris had acted recklessly in failing to consider where the true boundary line would be. MacPhail argued that there couldn’t possibly be a finding of recklessness when Harris didn’t know where the boundary line was. However, Smith J stated that in the test for recklessness, it is not a question of belief or understanding alone, but one of the quality of that belief or understanding. The court found that whilst Harris may have believed that the boundary line coincided with the flank wall of number 28, that he must have known that it was at least arguable that it didn’t, and therefore he acted recklessly.

Comment

The judgment in this case provides a useful reminder of the legal tests to be applied when considering where the boundary lies between reckless and accidental acts in the context of public liability policies.

Here, a decision was made to extend the basement either knowing it would be a trespass or willingly taking the risk that it would be. That was sufficient to cross the line and make the conduct not accidental. By contrast, conduct on the accidental side of the line would involve a state of mind where the risk was, consciously and reasonably, not even anticipated.

While the decision is undoubtedly correct, and in line with existing law, it is nevertheless a timely reminder for policyholders that their subjective belief as to a state of affairs, in and of itself, is insufficient to make an unintended outcome accidental in circumstances where, by embarking on a course of conduct that is obviously hazardous, they are willingly taking a risk such that the unintended consequences that follow will be deemed to have been inevitable.

Chloe Franklin is a Trainee Solicitor at Fenchurch Law

by Chloe Franklin