Promised Land: Estoppel Trends in Policyholder Recoveries
Recent cases demonstrate how insurers’ claim handling may give rise to estoppel and extend the scope of policy coverage. Practices followed in earlier claims concerning the insured parties and/or operation of indemnity provisions could amount to a common assumption, conveyed between the parties and detrimentally relied upon by the policyholder, from which it would be inequitable for insurers to resile. Further, insurers are likely to be estopped from relying on breaches of policy conditions requiring consent to admissions or settlements, after refusing cover for liability claims.
George on High
In George on High Ltd & George on Rye Ltd v Alan Boswell Insurance Brokers & New India Assurance Co Ltd [2023], an historic pub hotel was largely destroyed by fire. The insurer (“NIAC”) agreed to indemnify the property damage but declined cover for a business interruption claim, alleging the company which suffered this element of loss was not named in or insured under the policy. Specifically, George on High Ltd (“GOH”) had owned the freehold property, whilst George on Rye Ltd (“GOR”) owned the business operating there. The named insured was “George on High Ltd t/a The George in Rye”. The defendant broker arranged the insurance and accepted it would be responsible for the losses claimed, if NIAC was not liable.
The claimants argued that earlier dealings with NIAC’s outsourced claim handlers proved knowledge on NIAC’s part that GOR ran the business, and that GOR had been confirmed as insured. Premiums had been paid by GOR, and the claims history included incidents relating to the business, with several previous claims reviewed by NIAC’s agents referring to GOR as the policyholder. In none of the earlier claims had concerns been raised as to whether policy coverage included GOR.
Deputy High Court Judge Tinkler decided a reasonable person having all the background knowledge available to the parties would have understood “George on High Ltd t/a The George in Rye” in the policy schedule to mean “George on High Ltd and the business operated by George on Rye Ltd t/a The George in Rye”. The Insurance Act 2015 states that insurers “ought to know” matters an employee or agent knows and ought reasonably to have passed on, or information held by the insurer and reasonably available to underwriters. The outsourced claim handlers were aware prior to policy inception that GOR ran the business, and this knowledge could be attributed to underwriters.
In the further alternatives, the Judge considered that all the requirements for rectification of the policy were satisfied. Applying the test in Swainland Builders Ltd v Freehold Properties Ltd [2002]: (1) the parties had a common continuing intention at the time of contracting, (2) there was an outward expression of accord, and (3) by mistake, the contract did not reflect that common intention. Even if the decision on construction was incorrect, the Judge would therefore have ordered the policy to be rectified to reflect the insured as: “GOH and the business operated by GOR t/a The George in Rye”.
The Judge also concluded that the claims history estopped NIAC from denying cover. Applying the test for estoppel by convention in HMRC v Benchdollar [2009]: (1) the policy included cover for business interruption and employer’s liability, demonstrating a common intention that GOR would be insured; (2) by accepting liability for earlier claims relating to staff and customers, NIAC had conveyed to the claimants that it believed GOR to be covered under the policy; and (3) the claimants relied upon that assumption by paying premiums. It would be unconscionable in the circumstances to allow NIAC to deny cover for GOR, even if those claims were not covered by the policy wording.
The decision stands in welcome contrast to the harsh outcome in Sehayek v Amtrust [2021], where insurers were entitled to avoid liability under a new home warranty based on failure to correctly name the developer on a certificate of insurance. The position in George on High was clearly distinguishable based on handling of the previous claims; and an application by the insurer for permission to appeal was refused.
World Challenge
In World Challenge v Zurich [2023], Fenchurch Law acted for a company running adventure trips, insured since 2016 under a bespoke travel and accident policy with Zurich. Following the outbreak of Covid-19, nearly all booked expeditions for 2020 had to be cancelled, and World Challenge refunded customers for deposits or advance payments as required by the applicable Terms & Conditions.
A dispute arose as to whether World Challenge was insured for all refunds paid to customers, or only for irrecoverable costs paid to third party suppliers. The policy wording provided that, if pre-booked travel arrangements for a journey were cancelled, curtailed or rearranged due to causes beyond World Challenge’s control, Zurich would pay:
“deposits and advance payments … reasonably and necessarily incurred that are forfeit under contract or are not otherwise recoverable.”
The policy specified a cancellation claims deductible of £200,000. Whilst many previous cancellation claims had been handled under the policies, the aggregate value had always fallen below the annual deductible, so that customer refunds in each case had been paid by World Challenge. A process had been agreed where cancellation details would be submitted to Zurich’s claim handlers, who would verify the customer’s entitlement to a refund in accordance with the Terms & Conditions, before authorising World Challenge to issue a refund payment, and tracking the policy deductible.
Zurich never asked how much of the refund payments related to irrecoverable costs and it was obvious that cancellation claims were being treated as equal in amount to the customer refunds. Based on this course of dealing, World Challenge believed that all refunds were covered under the policies. Zurich was slow to communicate its disagreement with this position when the pandemic struck, and urgent clarification became imperative to manage business operations and customer relationships.
Mrs Justice Dias held that the ordinary and natural meaning of the policy wording was that Zurich would indemnify customer refunds only if and to the extent they comprised irrecoverable third party costs. Zurich’s employees maintained that this is how they had always understood the policy to operate, yet the claims process above was followed without question because (as the Judge found): “neither the claims handlers nor the underwriters particularly cared what the refunds represented, since the amounts involved were all comparatively low and fell within the deductible so that it made no practical difference to Zurich”. This attitude was described in the judgment as cavalier, since the adjustment and agreement of a claim has just as much contractual significance where it goes to erode a deductible as when payment is made by the insurer.
Attempts in the witness box to explain why documents did not in fact mean what they appeared to were described by the Judge as “frequently incoherent and illogical”, creating a “dismal impression” and making Zurich’s witnesses “look more than a little foolish”. Whilst there was no suggestion of any conscious dishonesty, the Judge highlighted the inherent unreliability of witness recollection, since all “memory" of distant events depends on a process of reconstruction inevitably influenced by a multitude of factors including the selection of documents reviewed in preparing witness statements, and the natural human instinct to reconstruct events to put oneself in the most favourable light possible, particularly when the witness has a tie of loyalty to or dependence on one of the parties, such as an employer.
Applying the test in Benchdollar and Tinkler v HMRC [2021], the Judge found that a common but mistaken assumption of law or fact arose from the course of claims handling under the earlier policies, conveyed between the parties, and relied upon by World Challenge in relation to the cancellation of trips. Zurich was therefore estopped by convention from denying that World Challenge was entitled to be indemnified under the policy for the amount of its customer refunds, subject to giving credit for any recoveries.
As compared with estoppel by convention, promissory estoppel requires a clear and unequivocal promise or assurance by the defendant that it will not enforce its strict legal rights; an intention by the defendant that this promise/assurance should affect legal relations between the parties; and detrimental reliance by the claimant, so that it would be inequitable to permit the defendant to withdraw the promise, or act inconsistently with it. The Judge concluded that this was not established on the facts, since there was no understanding on the part of World Challenge that Zurich was giving up any right to rely on the true construction of the policy.
Permission to appeal has recently been granted and it will be interesting to see whether further nuances are introduced by the Court of Appeal.
Technip v Medgulf
In Technip Saudi Arabia v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023], the claimant (“Technip”) was principal contactor for an offshore energy project in the Middle East. A vessel chartered by Technip collided with a wellhead platform owned by the field operator, KJO, and Technip notified a liability claim under the project all risks policy, written on a WELCAR standard market wording. The defendant insurer (“Medgulf”) declined the claim and confirmed to Technip that it should act as a prudent uninsured.
Technip subsequently agreed to pay $33 million in respect of KJO’s claim, and informed Medgulf of the settlement. Medgulf considered that the insurance claim was excluded on other grounds, and raised a secondary argument that the loss did not fall within the policy definition of Damages, as follows: “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent”.
Whilst Mr Justice Jacobs ultimately found the claim to be excluded under an Existing Property Exclusion in the policy, he also agreed with Technip that the requirement for insurer’s consent to compromise settlements could not apply, as this provision presupposed the insurer’s acceptance of liability:
“It would in my view be a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent insured … [because the policyholder] would be acting in accordance with what it had been told to do. An uninsured person would, by definition, have no reason to consult or seek the consent of an insurer. I consider that a court would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured.”
The Judge also considered the effect of various common law authorities, including the New Zealand Court of Appeal decision in Napier City Council v Local Government Mutual Funds [2022], as instructive in identifying waiver and estoppel as potential reasons why an insurer, which has denied liability, cannot then rely on clauses which require the insured to obtain consent to a settlement.
The comments in this case on unauthorised settlements are in stark contrast to the judgment in Diab v Regent [2006], in which the Privy Council held that a policyholder must still comply with claim conditions even though the insurer had indicated that it would reject any such claim. The decision in Technip gives some comfort that being told to act as a prudent uninsured allows a policyholder flexibility when negotiating and settling claims, although the safest course of action will still be to seek to comply with policy conditions where possible, even if insurers are unresponsive.
Conclusion
In an insurance case heard last year in the Commercial Court, Counsel for the policyholder explained to the Judge that an estoppel argument advanced by his client in a preceding arbitration had failed. “But they always do”, languidly replied the Judge. On the contrary, recent decisions highlight that estoppel is proving to be a point worth taking for policyholders whose claims have been declined.
Policyholders and brokers should exercise caution when identifying and naming parties to be insured, to avoid potential disputes. The position in relation to deemed insurer knowledge reflects increasingly sophisticated electronic systems for information sharing across the industry, as compared with traditional hard copy files. Insurers should take a considered approach to claim handling, even for low value matters, and ensure proper oversight of appointed agents.
Authors:
Insurance News, views and more: October 2023
Insurance News, views and more - from Fenchurch Law
OCTOBER 2023
Introduction
Welcome to the latest Fenchurch Law newsletter: concise, topical and often opinionated articles on the insurance disputes market, all from a pro-policyholder perspective.
In this edition, Amy Lacey looks at the structural problems associated with RAAC and how it may affect the UK Construction sector.
Dru Corfield, assesses the UK regulatory landscape in Artificial Intelligence.
Jonathan Corman considers the Court of Appeal’s decision in RSA & Ors v Tughans, a successful outcome for our clients, Tughans, in their long-running dispute with their PI insurers.
In our “100 Cases Every Policyholder Needs to Know” series, we bring you two cases. Read why we think MacPhail v Allianz Insurance plc was an ugly decision and why Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd was a good one.
In our Team News section, discover how employees of Fenchurch Law completed the Chiltern 50 Ultra Challenge.
Lastly, we’ve got some great upcoming events this month, so please check out the events section below for more information.
I hope you enjoy reading Insurance News and Views and that you look out for future issues in your inbox
David Pryce
Founder and Managing Partner
Viewpoint
Bubble Trouble: Aerated Concrete Claims and Coverage
Reinforced autoclaved aerated concrete (“RAAC”) is a lightweight cementitious material pioneered in Sweden and used extensively in walls and floors of UK buildings from the 1950’s to 1990’s. Mixed without aggregate, RAAC is ‘bubbly’ in texture and much less durable than standard concrete, with an estimated lifespan of 30 years. The air bubbles can promote water ingress, causing decay to the rebar and structural instability.
Read more here.
Risk, Regulation and Rewards: Regulatory Developments in Artificial Intelligence
With the Government’s White Paper consultation – “A pro-innovation approach to AI regulation” – having closed at the end of June, and the UK scheduled to host the first global summit on AI regulation at Bletchley Park in early November, now is an appropriate time to assess the regulatory lay-of-the-land in relation to this nascent technology.
Read more here.
Insurance for fees claims: RSA & Ors v Tughans
This Court of Appeal decision, in which our firm represented the successful respondents, considered the scope of a professional indemnity policy written on a full “civil liability” basis. Will such a policy respond to a claim against a firm (in this case, a firm of Solicitors) for damages referable to its fee, for which the firm had performed the contractually agreed work, but where the fee was only paid by the client following a misrepresentation by the firm?
Read more here.
Top 100 cases - The Good, The Bad and the Ugly
We continue our “100 Cases Every Policyholder Needs to Know” feature – our opinionated and practical guide to the most important insurance decisions relating to the London/English insurance markets, all looked at from a pro-policyholder perspective. As a reminder, we call them:
· “The Good” – cases that are correctly decided and positive for policyholders.
· “The Bad” – decisions that are bad for policyholders, wrongly decided and in need of being overturned.
· “The Ugly” – cases that can trip up even the most honest policyholder with the most genuine claim. Bad for policyholders but (even to our policyholder-tinted eyes) correctly decidedIn this edition we’re looking at two cases.
The first is an “Ugly one” – MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch) – Read here.
The second is a “Good one” – Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd – Read here.
Team News
Chiltern 50 Ultra Challenge
We’re proud to share that on the 23rd of September 2023, employees of Fenchurch Law completed The Chiltern 50 Ultra Challenge.
The Chiltern 50 is a charity walk through the Chiltern Hills, a route that follows the Thames to Henley Bridge, then out into the picturesque countryside on Shakespears Way, Icknield Way, and Chiltern Way. The team walked a total distance of 50km (31 miles), with over 900 metres of climb.
We hit the trails to support MIND, a charity that’s doing incredible work in destigmatizing conversations around mental health and providing essential support to those in need.
A big thanks to everyone who supported us on this journey, if you’d like to donate, please visit our fundraising page here: https://www.justgiving.com/team/fenchurchlaw
And finally…
We want to know your views. If you have a question or an interesting point that you’d like to share about all things insurance related, please let us know by emailing info@fenchurchlaw.co.uk
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Collisions, Allisions and Prudent Uninsureds - Technip v Medgulf, and insurance for unauthorised settlements
Technip Saudi Arabia Ltd v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm) (21 July 2023)
This decision provides helpful insight into how the Courts will deal with insurance claims for sums due under a settlement agreement.
Technip was the principal contractor for a project in an offshore oil and gas field in the Persian Gulf. In 2015, a vessel that Technip had chartered collided with and damaged a platform in the field. Technip and the platform owner, KJO, reached a settlement for US$25 million, which Technip sought to claim from the defendant insurer (“Medgulf”), along with other alleged losses, under the liability section of its Offshore Constructions All Risks policy. The settlement had occurred some three years after Medgulf had declined indemnity for the original claim, instead telling Technip that it should act as a “prudent uninsured”.
Claiming losses under Settlement Agreements
Technip -v- Medgulf confirmed the general principle under English Law that it is not enough for a policyholder simply to prove that a settlement agreement reached with a third party is reasonable in order to claim for the resulting loss under a liability policy, but it must also prove that there was a legal liability to the third party and that the settlement does not exceed the amount of that liability. In other words, the law does not provide a carte blanche to policyholders to settle disputes with third parties and expect a liability insurer to pick up the tab.
Settlement Agreements and Insurer’s Consent
Liability policies very commonly require the insurer's consent before a policyholder takes various steps during a dispute with a third party. These can include admission of liability, settlement discussions, negotiations and entering settlement agreements.
Here, the Policy provided an indemnity to Technip for its 'Ultimate Net Loss' ("UNL"), which was defined as:
"the total sum the Insured is obligated to pay as Damages …"
Damages were defined as:
"…compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters' consent, but shall not include fines or penalties, punitive damages, exemplary damages, equitable relief, injunctive relief or any additional damages resulting from the multiplication of compensatory damages". (Our emphasis)
Technip did not obtain Medgulf’s consent before concluding the settlement agreement, and Medgulf predictably argued that the settlement sum therefore did not fall within the definition of “Damages”.
Technip successfully argued that the sums payable under the Settlement Agreement comprised, in part, "compensatory damages" and so fell under the definition of "Damages" under the Policy. Medgulf had argued that the four categories identified in the first part of the definition of “Damages” had a degree of separation and that, crucially, “compensatory damages” must be sums awarded by a court or tribunal, which would not be applicable to the US$25 million Technip paid to KJO. The Court rejected this argument, however, and did not view the four categories as disjunctive: the settlement payment was caught by the definition of “compensatory damages” within the ordinary meaning of the term, with the result that the absence of consent by Medgulf was irrelevant.
Furthermore, Technip argued that, even if the settlement sum did not constitute “compensatory damages” and instead was only potentially covered as a “compromise settlement”, there was still no need for Medgulf's consent given that it had refused to indemnify Technip in 2016 (three years before the Settlement Agreement) and told Technip to act as a 'prudent uninsured'. Technip contended that, in these circumstances, the provision requiring consent could not apply, as the provision presupposed the insurer's acceptance of liability under the Policy.
The Court agreed with Technip and held that it "would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured". So, in short, the Court found that Medgulf was prevented from relying on the “Underwriter’s consent” part of “compromise settlements”.
Summary
Although Technip’s claim for an indemnity ultimately failed on other grounds, the Court’s comments concerning insurers' inability to rely on terms requiring their consent once they have told the policyholder to act as a prudent uninsured (or use similar language) are plainly useful for other policyholders. The decision stands in welcome contrast to the Privy Council’s judgment in Diab v Regent [2006] UKPC 29, which had seemingly held that, where an insurer has declined indemnity, a policyholder is still bound by all the claim conditions, including the need to seek insurer’s consent for a settlement. The policyholder in Diab had also raised an estoppel argument, which failed because the Court viewed the alleged representation of the insurer as essentially a warning not to pursue a claim under the policy, and not as an indication that, if the policyholder did pursue the claim, it would not be expected to comply with the procedural requirements of the policy.
Fun Fact: The event leading to the Damage in Technip -v- Medgulf was referred to throughout the Trial as an allision rather than a collision, an allision being where one of the objects involved is stationary.
Authors:
Challenging times for Zurich: insurer ordered to pay out on Covid 19 claim
World Challenge Expeditions Limited v Zurich Insurance Company Limited [2023] EWHC 1696 (Comm)
The court has held that, having operated a business travel policy in a certain way for nearly four years, Zurich was estopped from denying that it provided cover on that basis.
An estoppel by convention had arisen such that it would be inequitable for Zurich to resile from the common assumption between the parties as to the operation of the policy.
As such, the successful policyholder, World Challenge (represented by Fenchurch Law), was entitled to an indemnity of almost £9m, being the amount of refunds paid to its customers following the cancellation of its global programme of expeditions necessitated by the pandemic.
The court further criticised Zurich for its handling of the claim and the time that it taken to clarify its position. This was a matter of utmost importance and urgency in circumstances where it was critical to World Challenge’s business and customer relations that it was able to confirm whether it had a covered claim. Mrs Justice Dias commented that: “This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way”.
A full copy of the judgment can be found here.
Background
The policyholder, World Challenge, provides adventurous, “challenging” expeditions worldwide for secondary school students, or “challengers”. As a result of the pandemic it was obliged to cancel nearly all of its booked expeditions for 2020.
The insurer, Zurich, provided World Challenge with wide ranging cover including cover for cancellation of trips by the challengers.
Prior to the pandemic, Zurich had handled and approved more than one hundred cancellation claims since 2016 in the amount of the refund paid to challengers. The amount of the refund, less an administration fee, was recorded against the aggregate deductible in the event of a trip cancellation. Prior to the onset of Covid-19, that aggregate deductible was never exhausted.
When the pandemic struck in early 2020, Zurich faced substantial claims for refunds to challengers for trips that would be cancelled in the coming months, and which would significantly exceed the aggregate deductible. World Challenge’s position was that Covid-19, and the mass trip cancellations which could eventuate, was precisely the type of ‘black swan’ event that it thought it had insurance cover for. It sought confirmation of that cover from Zurich prior to cancelling the relevant trips and exposing itself to the millions of pounds of refunds to its customers that it would need to make as a result.
In light of the significant losses it now faced, Zurich, after an extended period of delays in confirming its position, in a complete volte-face sought to depart from the “common assumption” of cover for refunds and instead informed World Challenge that it only had cover (and only ever had cover) for irrecoverable third party costs (for example, hotel or airline costs which World Challenge had paid out and was unable to recover).
The claim
The issue before the court was the correct construction of the policy and whether Zurich was precluded by estoppel or collateral contract from denying that the policy provided the cover that World Challenge thought it had.
Mrs Justice Dias concluded that, although the policy in fact only covered irrecoverable third party costs, Zurich’s previous conduct in agreeing claims in the amount of the refunds and setting them against the deductible had clearly conveyed to World Challenge that they shared its assumption as to the scope of cover and World Challenge was strengthened and confirmed in its own reliance on that assumption.
Zurich’s argument that the subjective understanding of its claims handlers was insufficient to establish any assumption on the part of the company was rejected.
Further, the court found that the delays in cancelling trips caused by Zurich’s delay in confirming its position on cover caused World Challenge to lose its opportunity to explore other avenues in order to maintain customer goodwill and manage its exposure.
It was therefore inequitable for Zurich to resile from the common assumption. Zurich had every opportunity to correct the error in handling claims, but took no steps to do so until such time as it became apparent that the aggregate deductible would be exceeded.
Conclusion
This judgment provides a welcome reminder to insurers about the importance of handling claims in a timely manner that responds to the needs of its customers, particularly in the face of a devastating loss with significant repercussions for the continued operation of its business.
Also welcome is the confirmation that the conduct of claims handlers in approving or rejecting claims will bind an insurer as they are the people charged with handling the claims on the company’s behalf.
From a legal perspective, in addition to being essential reading for anyone interested in the requirements of a variety of types of estoppel, practitioners will do well to take note of the comments made about the witness evidence and the dangers of putting forward statements that are inconsistent with the contemporaneous documents. This made for an uncomfortable time for Zurich’s witnesses in the box, and should be a salutary tale, particularly given the spotlight on witness evidence in light of the recent changes to the rules in respect of trial witness statements.
Authors:
Rob Goodship, Associate Partner
Anthony McGeough, Senior Associate
Not so peachy – a disappointing Covid-19 decision for policyholders
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2023] EWHC 1545 (Comm)
In a month where Covid-19 decisions are coming in thick and fast, policyholders will be disappointed by the most recent judgment concerning a disease wording. A copy of the judgment can be found here.
On this occasion the policyholder, Bellini (N/E) Ltd, was issued with a policy by its insurer, Brit UW Limited, that contained an extension to business interruption cover for business interruption caused by damage arising from a notifiable disease manifested by any person whilst in the premises or within a 25-mile radius.
Disease wordings like these will be familiar to those who are acquainted with the FCA test case and Covid-19 litigation, but in this particular case the quirk is a reference to the defined term “damage” in the introductory paragraph to the extension. Damage within this policy was defined as “physical loss, physical damage, physical destruction”. However, it was common ground between the parties that there had been no physical loss of or damage to the policyholder’s premises or property.
The policyholder argued that policy provided both basic cover for physical damage and also extensions of cover for other matters that would not ordinarily result from or in physical damage. In particular, the provision of a radius clause of 25 miles for the manifestation of disease went beyond the basics of physical damage to the premises or property therein, which the policyholder asserted was reinforced by the court’s analysis of similar wordings in the FCA test case.
Among other arguments on the construction of the policy, the policyholder contended that if the extension only responded to physical damage it would “render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away”.
The court, however, was unpersuaded by the policyholder’s arguments, instead relying upon the “ordinary meaning” of the clause, which provided no cover in the absence of physical loss, damage or destruction. In particular, the court considered it to be significant that the clauses dealt with in the FCA test case were not expressed as to cover interruption caused by damage, and had been recognised as non-damage in that cover was not contingent on physical damage.
The court considered that the policyholder’s arguments effectively required it to re-write the policy contrary to the parties' express agreement and the established approach to contractual construction.
Comment
Recognising that the impact of a notifiable disease will be non-damage related losses, many wordings make it clear that the extension is intended to be triggered in the absence of physical damage, and that is how the clause would be understood to operate.
In circumstances where the parties agreed that a disease at the premises or within 25 miles of the premises does not cause physical damage, it is difficult to see what purpose, if any, can served by a clause that only provides cover for physical damage.
It is therefore difficult to reconcile the court’s attempts to give effect to the wording of the policy with what most policyholders (and we assume those insuring them) would expect to be covered when offering a 25-mile radius clause as part of the policy cover.
It is notable that the courts in the FCA test case grappled with similar difficulties on wordings where the standard form of certain clauses assumed the paradigm case of business interruption by reference to physical damage. The Supreme Court, albeit in the context of trends clauses, came to the view at [257] that the “reference to “damage” is inapposite to business interruption cover which does not depend on physical damage to insured property such as the cover with which these appeals are concerned. It reflects the fact that the historical evolution of business interruption cover was as an extension to property damage insurance. It was held by the court below, and is now common ground, that for the purposes of the business interruption cover which is the subject of these appeals, the term “damage” should be read as referring to the insured peril”. It appears that in the right circumstances the courts are not opposed to manipulating the wording of a policy to give it proper effect, and one might have expected the court in this matter to have taken a similar approach to the 25-mile radius clause.
Undoubtedly the market will be watching this one closely for any signs of an appeal, especially in light of the body of Covid-19 case law that appears to support a disease clause such as the one in dispute here.
Authors:
Anthony McGeough, Senior Associate
Joanna Grant, Partner
Building a safer future: the courts’ approach to fire safety cases
The Grenfell tragedy in 2017 has prompted safety investigations in myriad buildings across the UK, with owners and occupiers questioning whether other settings are similarly defective. Many disputes have arisen, with a handful of cases now determined following trials in the Technology & Construction Court. Overall the courts have adopted a robust approach to responsibility for cladding defects, rejecting typical defence arguments around scope of duty, causation and assessment of loss.
Recent Judgments
Martlet Homes Ltd v Mulalley & Co. Ltd
In July 2022, the claimant was awarded £8 million in damages to remediate high rise residential blocks in Gosport where a “StoTherm Classic” cladding system, including combustible expanded polystyrene insulation, had been applied to external walls during refurbishment in 2005 - 2008. This was held to contravene fire safety standards (the specification breach case), and the system had been defectively installed with inadequate fire breaks (the installation breach case). Costs incurred in removal and replacement of the cladding with a non-combustible alternative could be recovered, together with expenses of a waking watch fire patrol interim measure.
St James’s Oncology SPC Ltd v Lendlease Construction (Europe) Ltd & another
In October 2022, a company set up by Leeds Teaching Hospitals NHS Trust to deliver a new oncology centre was successful in its £5 million claim against Lendlease, based on fire safety and electrical engineering defects to an internal plant room. The defendants’ argument that derogation from applicable standards had been approved by all parties in a revised fire strategy document was rejected, given the overriding contract obligations: “Lendlease was at all times responsible for the design of the Works and for achieving compliance with the requirements of the D&B Contract, irrespective of any review, approval or comments made by Project Co and/or the Trust. This seems … to render the question of approval otiose”.
LDC (Portfolio One) Ltd v George Downing Construction Ltd & European Sheeting Ltd
In December 2022, the owner of student accommodation blocks in Manchester secured judgment in excess of £21 million for remedial works and lost rental income, against a specialist sub-contractor responsible for inadequate fire stopping/barriers, and composite cladding defects which led to substantial water ingress. The claimant and first defendant agreed to settle the claims between them for c. £17 million shortly before trial; the second defendant was insolvent and unrepresented at the hearing, which proceeded in any event as the liquidator could not consent to judgment being entered.
Performance Standards
The defendant contractors were in each case appointed pursuant to JCT Design and Build Contracts, with terms including an unqualified design and specification duty, obligation to comply with statutory requirements, and duty to exercise reasonable skill and care.
The judgments include discussion on performance standards and reaffirm the MT Hojgaard [2017] UKSC 59 principle, that - if there are two clauses imposing different or inconsistent design requirements, the courts are likely to interpret the less demanding clause as a minimum obligation, since treating it as qualifying the other clause gives a meaning which effectively renders the more demanding provision redundant.
The St James’s Oncology and LDC (Portfolio One) cases illustrate how bespoke amendments to standard form contracts may be used to improve prospects for recovery down the contractual chain, through “back to back” requirements for sub-contractors to indemnify the employer against liability arising under the main contract as a result of sub-contract breaches, and acknowledging that associated losses are within the parties' contemplation.
Building Regulations
The analysis of statutory requirements is particularly illuminating, in view of ubiquitous disputes over interpretation of relevant provisions now acknowledged by the government to have been “faulty and ambiguous”.
In Martlet v Mulalley, the judge concluded that Approved Document B (“ADB”), Fire Safety, 2000 edition (with 2002 amendments) does not mean that whatever was not expressly prohibited was permitted and acceptable; and ADB, 2006 edition, marked a significant change in guidance from the earlier regime, with only materials of limited combustibility to be used as external wall insulation in buildings over 18 metres.
Further, the Building Regulations 2000, Schedule 1, B(4)1 requirement for external walls to “adequately” resist the spread of fire, having regard to a building’s height, use and position, turned on whether the contractor had followed guidance in BRE 135 (2003), which recommended that combustible cladding should not be used on high rise residential blocks unless it met the Annex A performance standard in accordance with the test method set by British Standard 8414-1. It was not sufficient to “blindly” rely on a British Board of Agrement (BBA) certificate for the cladding system.
Negligence
The selection and use of a cladding system with combustible EPS insulation in Martlet v Mulalley was in breach of the contractor’s obligation to exercise the degree of skill and care in its design of the work as would an architect or other professional designer.
In reaching this decision, the judge rejected defence arguments to the effect that they cannot have been negligent because everyone else was making the same mistakes. On a proper application of the Bolam principle, there must be “evidence of a responsible body of opinion that has identified and considered the relevant risks or events and which can demonstrate a logical and rational basis for the course of conduct or advice that is under scrutiny”. A defendant is not exonerated simply by proving that others were equally negligent (199 Knightsbridge Development Ltd v WSP UK Ltd [2014]).
Negligent design in relation to cladding works means that professional indemnity policies are likely to be triggered, and exclusions for contractual liabilities won’t usually apply.
Failure to comply with building regulations may be strong evidence of breach of a designer’s duty to exercise reasonable skill and care, in the absence of an express clause requiring adherence to statutory requirements, as discussed in LDC (Portfolio One).
Causation
Another defence commonly raised in cladding disputes is that enhanced fire safety standards implemented after completion of the contract works, and/or the changed regulatory perspective post-Grenfell, are the true cause of remedial action undertaken or proposed. This was rejected in Martlet v Mulalley, with the judge suggesting that an “effective cause” test would be more appropriate to a “but for” standard in this case, to avoid the claimant being left without a remedy.
Had the building owner succeeded only on the installation breach, it could have recovered the cost of repairing defects but not those of replacing the cladding. Both the installation and specification breach cases were upheld on the facts, so the owner was entitled to recover replacement costs.
Remedial Costs
In St James’s Oncology, the defendants’ argument that there was no intention to carry out remedial works was dismissed. The court is not normally concerned with how the claimant will use any damages awarded, providing the loss can be established, although intention may be relevant to the reasonableness of reinstatement and thereby the extent of loss. It was legitimate (and prudent) for the claimant to take account of commercial considerations and await conclusion of the proceedings before commencing planned remediation, given the defendants’ complete denial of liability until shortly before trial.
Remedial works to the Gosport towers were already complete when Martlet v Mulalley reached trial. Costs incurred are the starting point for what is reasonable in such cases, especially if works are carried out based on expert advice. The claimant has a duty to mitigate loss, “but the court will not be too critical of choices made as a matter of urgency or on incomplete information”. It is not sufficient that defects could have been rectified more cheaply; the defendant must prove the remedial scheme was unreasonable.
Further, the costs of temporary measures such as waking watch patrols are likely to be recoverable. The judge in Martlet v Mulalley dismissed the suggestion that this aspect of the claim was too remote, saying that any lack of awareness of the potential need for such interim protections in the context of combustible cladding was more reflective of a “culture of endemic complacency” than any reasoned assessment.
Where works of repair or reinstatement result in the claimant having a better or newer building than it would otherwise have had, a deduction for "betterment" will not usually be made if the claimant has no reasonable choice (Harbutt’s Plasticine v Wayne Tank [1970]). This includes betterment resulting from compliance with legislation introduced since the original works were carried out, imposing additional or enhanced standards.
Looking Ahead
The emerging direction of travel underlines the difficulty for designers (and insurers) in defending these types of claims.
The Building Safety Act 2022 provides further impetus on cladding disputes, introducing new causes of action for defective works and construction products, subject to a maximum 30 years’ retrospective limitation period. The Grenfell Inquiry phase 2 report is due for publication later this year, with Sir Martin Moore Bick’s findings expected to significantly impact upon the liability landscape, and potential manufacturer claims in particular.
Owners will look to progress claims swiftly in light of insolvency risks, with expert technical and quantum evidence crucial in justifying schemes of remedial work. Construction professionals with cladding exposures will be keen to extricate themselves through commercial settlements, whilst pursuing possible recoveries. Moving forward, contractors should endeavour to agree supply chains on back to back terms with their main contract, to limit exposures and improve prospects in the event of breach.
The courts’ focus on ensuring that buildings are made safe and compliant with current statutory requirements is closely aligned with public policy. Further developments in this area, including jurisprudence around Building Liability Orders and s.38 of the Building Act 1984, for example, are eagerly anticipated.
Authors:
Amy Lacey is a Partner at Fenchurch Law
Grace Williams is an Associate at Fenchurch Law
Court hands down judgment in much anticipated Covid-19 BI cases: the takeaways for policyholders
Fenchurch Law represents Stonegate Pub Company Limited in its claim for Covid-19 business interruption losses against its three insurers: Ms Amlin; Liberty Mutual; and Zurich.
760 of Stonegate’s premises were insured under a Marsh Resilience wording, which was a wording considered by the Divisional Court and Supreme Court as part of the FCA Test Case. The Test Case confirmed that the policy responded to business interruption losses. However, a number of secondary issues remained in dispute despite the Courts having confirmed coverage.
The key issues for consideration were as follows:
- Trigger;
- Aggregation;
- Causation;
- Additional Increased Costs of Working (“AICW”); and
- Government Support.
In its judgment, notably, the Court rejected the Insurers’ primary argument that all cases aggregate to the emergence of the virus or pandemic, and agreed with Stonegate’s position that losses are recoverable after the end of the policy period. The Court found in favour of Insurers on other issues, and in particular with regard to furlough.
Below we consider the Court’s judgment in relation to each of the issues, as well as the related judgments in the cases of Greggs v Zurich [2022] EWHC 2545 (Comm) and Various Eateries v Allianz [2022] EWHC 2549 (Comm), and what they mean for policyholders.
Trigger
The Court was asked to consider the trigger (a colloquial shorthand for the matter or matters which gave rise to a right to claim under a policy) under the Disease, Enforced Closure and Prevention of Access perils present in the Marsh Resilience wording. The Court made the following findings:
- The Disease peril is triggered whenever there were cases of Covid-19 which were either discovered at an insured location, or within the relevant vicinity, and each example is separate Covered Event;
- The Enforced Closure peril triggered whenever all or part of an insured location was closed under a relevant compulsion or instruction. The policy is “triggered” in respect of each such closure, and the number of locations closed is the number of triggers. A location opening and then closing again at a different time would be considered a separate trigger;
- The review, reiteration, continuation or renewal of regulations which were materially of the same effect does not constitute a separate closure or separate ‘trigger’;
- The Prevention of Access peril trigger was the number of such actions or advices which prevented or hindered the use of or access to the insured location;
- Steps or advice which merely repeated or renewed an existing prevention or hindrance of access forms part of one set of ‘actions or advice’, and therefore is only one ‘trigger’ or Covered Event;
Policyholders with different aggregation wording, or with no aggregation wording, could find the Court’s analysis on trigger particularly useful.
Aggregation
With regard to aggregation, ever the tricky area for policyholders and insurers alike, the Court considered the extent to which Stonegate’s claimed losses arose from, were attributable to, or were in connection with one more single occurrence for the purposes of aggregation as one or more Single Business Interruption Loss.
In determining the number and nature of occurrences, the Court had regard to ‘the degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible’. The Court also considered the concept of remoteness between the aggregating event and the loss, which acts as a counterbalance to the more aggressive aggregation clauses and issues that arise from causation.
Insurers maintained a number of alternative cases in relation to aggregation in an attempt to limit Stonegate’s losses to a single sub limit of liability to which all losses could be aggregated.
The Judge disagreed with a number of the Insurers’ proposed occurrences for the purposes of the aggregating wording, including tracing Covid-19 back to its evolutionary roots, the original zoonotic transmission of Covid-19 in Wuhan, and the virus’ entry into the UK. The Court rejected these arguments on the basis that these proposals were either geographically, temporally or causally too remote (or a combination of).
Instead, the Court held that there had been at least two occurrences that satisfied the relevant aggregating test and fell within Stonegate’s policy period (which ended on 30 April 2020), and acknowledged a possible third occurrence, being:
i) The decision taken at the COBR 16 March meeting to advise people to stop non-essential contact with other and to not visit crowed areas such as pubs, restaurant and clubs (a finding that went against the previously established precedent that a decision did not constitute an occurrence);
ii) The instruction given on 20 March that all pubs, bars and restaurants were to close; and
iii) The announcement of the national lockdown on 23 March 2020.
The Court considered that at this point in time the decisions taken by the devolved administrations were taken jointly, and therefore there was only one occurrence across the UK. However, the Court accepted that if it was wrong on this point, there would be an occurrence in the form of the decisions of each home nation.
It is notable, however, that there was no finding in relation to losses in the pre-aggregated period (16 March 2020), therefore, the occurrences thereafter did not aggregate any of the losses incurred before the COBR meeting on 16 March 2020.
The judgment does not consider other occurrences from 30 April 2020, as this is the date on which Stonegate’s policy expired. However, in Greggs v Zurich, the Court provided some further clarity for policyholders, and held that there was a separate occurrence for each announcement or measure relevant to Greggs’ business, with the exception of those that simply continued, made trivial changes to, or reduced existing restrictions.
In Greggs, the Court considered decisions taken from May 2020 by the home nations as being separate and therefore not single occurrences in the meaning the policy wording. The result is that business with locations in each administration will benefit from cover for a separate occurrence (and therefore a separate sub limit if applicable).
Policyholders with longer policy periods should be aware of other examples of an “occurrence” within the meaning of the Marsh Resilience aggregating wording, which may include:
i) In England, the bringing into force of the three-tiered system on 14 October 2020;
ii) The announcement and implementation of the second national lockdown,
iii) The announcement and implementation from 20 December 2020 of the Tier regulations;
iv) Restrictions imposed on limited areas of the country, for example, the local lockdown in Leicester on 04 July 2020.
Causation
Stonegate, as with most hospitality and leisure businesses, continued to feel the effects of Covid-19 long after the expiration of its policy period. The Court found that losses suffered after the expiry of the policy period were attributable to Covered Events, and rejected the Insurers’ argument that any losses suffered after the expiry of the policy period could not have been caused by a Covered Event.
Stonegate’s losses, from 1 May 2020 until 4 July 2020 (in England), 6 July 2020 (in Scotland) and 13 July 2020 (in Wales) were all proximately caused by Covered Events that occurred between 17 February and 30 April 2020.
Losses beyond those dates were considered to be in response to the subsequent developments of Covid-19, and predominantly caused by more recent cases.
The Court did accept that there were several individual categories of causal linkage that could continue after the dates outlined above, such as continued losses caused by deaths or long covid, and loss of momentum in relaunching premises prior to the expiry of the policy period.
Within those categories was the cancellation of events which had been organised to occur after the dates outlined above, by reason of uncertainty as to whether they would be able to go ahead. This category is undoubtably important to the hospitality industry, and the same logic may equally apply across other industries.
The Court gave further consideration to the issues of causation in Various Eateries v Allianz. The Court held that in Various Eateries’ circumstances (where this particular policy expired on 28 September 2020), cases of Covid-19 occurring in the Vicinity during the Period of Insurance were potential proximate causes of government action for a time after 28 September 2020 and in particular, that they were at least equal proximate causes of the tier system announced by the government on 14 October 2020 (but not the movement of some areas within the tier system to tier 2 on 29 October 2020).
The causation findings are very fact sensitive and will be dependent on the length of the policy, the length of the indemnity period and the significance to that policyholder’s business of the different announcements, measures and regulations.
AICW
The Court confirmed that AICW applied per Single Business Interruption Loss (i.e. per occurrence) and in addition to the notifiable disease sub-limit, but it did not apply to economic increased costs of working. The wording of the policy, correctly construed, meant that the AICW limit only applied to additional costs which were uneconomic (i.e. that which exceeds the amount of reduction in turnover avoided) but not to increased cost of working where the limit applicable to the ICW has been exhausted.
Government Support
The Court considered that payments received under the Coronavirus Job Retention Scheme (“CJRS”) should be taken into account for Insurers’ benefit when calculating sums recoverable by policyholders. The significance of this finding is subject to the wording of policy specific savings provisions. However, it is likely to be applicable to most policyholders (not just the Stonegate, Various Eateries and Greggs parties).
Payments made under the Business Rates Relied (“BRR”) would not be accounted for to insurer’s benefit if the business shows that normally business rates would have been paid out of turnover. Unlike the Court’s finding in relation to CJRS, the BRR is fact specific per policyholder.
Where next
A spokesperson for the Stonegate Group said:
“The outcome of this case is far from conclusive. We are pleased that the Judge found in our favour on a number of key issues and note that he sided with our insurers on others. In this sense, the outcome is similar to the judgment of the Divisional Court in the Test Case brought by the FCA last year.
However, we believe that the Court’s interpretation on a number of issues which are generally applicable to policyholders is out of step with the approach taken by the Supreme Court in the Test Case and with the approach of Courts in other jurisdictions (such as on furlough). We intend to appeal those elements of the decision.
Whilst our recovery from the pandemic has been strong, we cannot ignore the significant disruption caused during the last two years and, along with most businesses in the UK, we are now grappling with inflationary challenges and a cost of living crisis for the UK consumer. In the circumstances, we, and other businesses, are entitled to look to our insurers to provide the cover promised under our policy”
Copies of the judgments can be accessed here:
Stonegate - https://www.bailii.org/ew/cases/EWHC/Comm/2022/2548.html
Various Eateries - https://www.bailii.org/ew/cases/EWHC/Comm/2022/2549.html
Greggs - https://www.bailii.org/ew/cases/EWHC/Comm/2022/2545.html
Authors:
Anthony McGeough is an Associate at Fenchurch Law
Joanna Grant is a Partner 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/
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
Stonegate v MS Amlin & Ors
Commercial Court Claim no. CL-2021-000161
Background
Fenchurch Law is representing Stonegate Pub Company Limited in its claim for Covid-19 business interruption losses against three insurers: MS Amlin, Zurich, and Liberty Mutual.
Stonegate owns and operates over 4,500 public houses, bars, restaurants and other hospitality businesses in the UK and, like all hospitality businesses, suffered interruption and interference to its business as a result of the emergence of the Covid-19 pandemic, and the government’s actions in response.
The three insurers in the case provided coverage for 760 of Stonegate’s establishments under a policy issued using the Marsh Resilience wording, which was one of the representative sample of wordings considered by the Court in the FCA test case. The test case confirmed that the Resilience wording was capable of responding to business interruption losses arising from the Covid-19 pandemic under three insuring clauses, and insurers have not challenged those findings. Coverage is therefore not in dispute.
The Issues in the Case
Stonegate’s case focuses on the limits of liability available to meet Stonegate’s losses, which itself turns on four issues of principle:
(i) Aggregation
The case will determine how Stonegate’s losses suffered at different locations, at different times, and in different ways are to be aggregated for the purposes of the relevant (sub)-limits of liability. Insurers contend that Stonegate’s losses are to be aggregated as one ‘Single Business Interruption Loss’, and that its claim for Business Interruption Loss is therefore subject to a single (sub)-limit of liability of £2.5m. Stonegate claims that it is entitled to claim multiple (sub)-limits of liability. The outcome of the issue will depend in part on the court’s determination of the meaning of the term “occurrence” in the context of Stonegate’s policy.
(ii) Causation of Post Policy Period Losses
The policy provides a Maximum Indemnity Period of 36 months. Stonegate, like all hospitality operators, continued to suffer loss after the expiry of its policy period. The case will determine the applicable indemnity period(s) to Stonegate’s claim, and specifically how long the indemnity period extends after the expiry of the policy period.
(iii) Additional Increased Costs of Working
In addition to cover for Business Interruption Loss, the policy provides cover for Additional Increased Costs of Working. The case will determine the limit of liability under this cover, and the nature of the costs that may be claimed.
(iv) Government Support
Insurers contend that as a matter of law and/or the proper construction and/or application of the policy, governmental support (including Coronavirus Job Retentions Scheme payments or “furlough” payments, and Business Rates Relief) is to be taken into account for the insurers’ benefit when calculating any Business Interruption Loss and/or other sums recoverable under the policy. Stonegate denies that insurers are entitled to make any deduction from its claim in respect of these kinds of governmental support.
The respective positions of the parties are set out in detail in the statements of case, which are documents of public record, and may be downloaded below:
Updates
Because of the relevance of these issues to many other policyholders with unresolved Covid-19 business interruption claims, including those insured under the Marsh Resilience wording as well as those under other policy wordings, Stonegate recognises that the outcome of the case is of significant interest to many market stakeholders. Fenchurch Law will therefore share regular updates on the progress of the case.
Current Procedural Status
The case is currently listed for a Case Management Conference on 29 October. At that hearing, the Court will hear the parties’ proposals for the management of the case, and may give directions as to timetable, procedure and any other preliminary matters.
A further update will be posted sharing any Order granted by the Court following the CMC.