Short and sweet: insurers liable for bank’s cocoa product losses
ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWCA Civ 1789
The Court of Appeal has given insurers short shrift in their appeal against the finding of the Commercial Court that they were liable to the claimant bank, ABN Amro for losses it incurred following the collapse of two leading players in the cocoa market.
In a judgment notable for its brevity – a mere 26 pages compared to the 263-page first instance judgment - the Court of Appeal took just 5 paragraphs to set out their reasons for dismissing the appeal, finding that it simply did not ‘get off the ground’. It was, however, a sweet victory for the defendant broker, Edge, who, was successful in its appeal from the first instance decision, with an earlier finding of liability against it, arising from an estoppel by convention, being overturned.
The short first appeal
At first instance, the claimant bank, ABN Amro, succeeded in its claim for indemnity under an insurance policy placed in the marine market, relying on a clause the effect of which was to provide the equivalent of trade credit insurance. Such a clause was unusual in that marine policies typically provide an indemnity for physical loss and damage to the cargo, and not for economic loss. However, the court found the wording of the clause to be clear and to extend to the losses incurred by the bank on the sale of the cargo.
The insurers appealed this finding on the basis that the judge ought to have interpreted the clause as providing only for the measure of indemnity where there was physical loss or damage to the cargo.
The Court of Appeal disagreed, finding firstly that add-ons to standard physical loss and damage cover were common in the market and, where there were clear words, could result in wider cover; and secondly, that the wording of the clause was clear and operated to provide cover for economic loss. The wording of the clause was that of coverage, not of measure of indemnity or basis of valuation contingent on physical loss. Therefore, the bank’s losses incurred when selling the cargo, comprising various cocoa products, following the default by its cocoa market playing-customers on their credit policies, were covered by the policy.
The sweet second appeal
At first instance, the broker had been found liable to two of the defendant insurers, Ark and Advent, as a result of a finding of estoppel by convention. Ark and Advent had contended that they had been induced to write the policy following a representation that the policy being renewed was the same as the prior policy. It was, however, not in fact the same but included the clause in question providing trade credit cover. Neither Ark nor Advent read the policy and so were unaware of the inclusion of the clause. The representation that the policy was “as expiry” was found to give rise to an estoppel by convention meaning that the bank could not rely on the clause as against Ark and Advent, which in turn gave rise to a liability for the broker.
In appealing the finding of estoppel by convention, the broker sought to argue that the terms of a non-avoidance clause in the policy, which provided that the insurers would not seek to avoid the policy or reject a claim on the grounds of non-fraudulent misrepresentation, operated to preclude them from doing so. The Court of Appeal agreed, finding that the “as expiry” representations were non-fraudulent misrepresentations and as such, pursuant to the terms of the non-avoidance clause, the insurers could not rely on them to reject the claim. The judge at first instance was found to have erroneously focused on the ‘non-avoidance’ aspect of the clause, overlooking the fact that it also prohibited the rejection of a claim.
In sum
Given what the Court of Appeal described as the “sound and comprehensive” nature of the first instance analysis on the interpretation of the clause, it is perhaps surprising that the insurers sought to appeal, and certainly no surprise that they were not successful. Equally, the first instance finding of liability on the part of the broker was regarded by many as being out of keeping with the rest of the judgment – not least since Ark and Advent were effectively being relieved of their obligations by virtue of their failure to read the terms of the policy. As such, the finding is a welcome one on both counts, making it clear that, for good or ill, parties will be bound by the terms of the contracts they enter into.
Joanna Grant is a partner at Fenchurch Law
No Time To Be Without Cover
This short article considers a handful of the possible insurance claims that arise in the latest James Bond outing, No Time to Die, as well as paying homage to Daniel Craig’s brilliant 5-film stint as 007.
Warning: this article contains major spoilers. So, to all those who are yet to see the film, read no further.
Matera – the prologue
The film opens with Mr Bond enjoying some downtime in Matera, Italy, with his beloved Madeleine Swann. It’s an idyllic scene. Glorious weather; a spectacular backdrop; and a stylish cave hotel. What could possibly go wrong here? Quite a lot, sadly.
After visiting the grave of his first (and perhaps one) true love, Vesper Lynd, Bond is attacked by scores of Spectre henchmen. There’s then a frantic car chase through Matera’s ancient streets, before Bond casually disposes of said henchmen by turning the headlights of his Aston Martin DB5 into revolving machine guns. Very cool.
Sadly, the Aston Martin takes quite a battering, and presumably is no longer road-worthy. That’s a fairly chunky insurance claim, which gives rise to some non-disclosure issues. At inception of the Policy, Mr Bond’s insurers would have most likely asked: “have you or any person who will drive the motorhome had any accidents, claims, damage, theft or loss involving any vehicle during the past 5 years”.
Unfortunately for Bond, he’s had his fair share of rotten luck behind the wheel. In particular, if one assumes that the events of Skyfall and Spectre were within the last 5 years, the following incidents come to mind: –
- Aston Martin DB5 – destroyed at the end of Skyfall, after a fist-fight with Raoul Silva (estimated damage of £850,000);
- Aston Martin DB10 – sank at the bottom of the River Tiber in Spectre, after Bond is chased by one of Blofeld’s henchmen (estimated damage of £2.6m).
Given the above, a failure to disclose these incidents would probably be treated as a deliberate breach of Bond’s duty of fair presentation under the Insurance Act. Insurers would invariably avoid the Policy, refuse all claims and keep the premium. Bond could always try arguing that it wasn’t a qualifying breach, because Insurers would have written the Policy anyway, but that seems speculative.
Another issue to address is the duty to take reasonable precautions. As many of us will be aware, such provisions mean no more than the insured must avoid reckless behaviour (Sofi v Prudential Assurance [1993] 2 Lloyd’s Rep. 559). So, in order to rely on a breach, Insurers would need to demonstrate that Bond was indifferent about looking after his vehicle. Acting carelessly will not be sufficient. Once again, that poses something of a conundrum for Bond. At the time of the incident, he’s clearly courting danger by inviting Spectre’s goons to shoot at him, and makes very little effort to conduct his affairs in a prudent and businessmanlike manner. All in all, this doesn’t smell like a winner.
Cuba – Bond comes of retirement
Five years after the events in Matera, Bond is blissfully retired in Jamaica. Not before long, one of MI6’s brightest and best shows up, who tells Bond that she now stands in his shoes as the new 007, and has been tasked with recovering a Russian scientist (a subrogated recovery, one might say). Bond, suitably unimpressed, decides to buddy up with the CIA’s Felix Leiter to try and get to the scientist first.
This leads Bond to Cuba, where literally all hell breaks loose. The number of insurance claims that could arise here is mind-boggling. Those include:
- Cuban drinking establishment/Property damage – there’s fairly significant damage here, after Bond gate-crashes a birthday party held in the honour of his arch-nemesis, Ernst Stavro Blofeld;
- Cuban drinking establishment/BI Loss – more hefty losses, one would imagine;
- Cuban drinking establishment/Public Liability – given that all of the attendees meet their maker after being infected by DNA-targeting nanobots (more on that below), this could give rise to another sizeable claim.
- Property damage/boat & helicopter – catastrophic damage to a boat after a terse fist-fight between Bond and Leiter’s duplicitous associate, Logan Ash (Rest in peace, Felix). Presumably the helicopter which Bond pilots to get to the boat is also a write-off.
Lytusifer Safin – he’s been expecting you, Mr Bond
In the film’s third act, we’re properly introduced to Bond’s main adversary, Lyutsifer Safin, played by the brilliant Rami Malek. We’d seen precious little of Mr Safin until this point, but all the familiar Bond-villain tropes are there. He’s creepy as hell, has set up shop on a secret island, and has a name which literally sounds like Lucifer (definitely evil, then).
Mr Safin, it would seem, has had a bit of a chip on his shoulder since Spectre murdered his family as a boy. Having recently wiped out Spectre, thusly achieving his revenge, Safin now wants to conquer the world by using the aforementioned nanobots as a biological weapon. Bond obviously isn’t having any of this, and heroically stops Safin in his tracks; but not, in a surprising and devastating turn, before he’s inflicted with mortal wounds. Sadly, this really is the end for Bond, who shortly afterwards succumbs to his injuries whilst he’s blown to smithereens by a British warship.
We assume that Mr Bond was sensible enough to procure a policy of life insurance before his untimely passing, and that he named Ms Swann as his beneficiary. To make a claim, Ms Swann would need to provide, as a minimum: (i) the name of the deceased (Bond, James Bond); (ii) the Policy number; and (iii) the cause of death.
The price and cover available would depend on a number of factors, which include the nature of Bond’s profession, as well as the fact that he indulges in what some would say is an unhealthy lifestyle i.e. a heavy alcohol intake. One can only imagine how high the premium must have been.
Mr Bond’s estate would also need to satisfy that his death wasn’t the result of reckless or dangerous behaviour. Whether that’s the case here is debateable, but we’d argue that Bond is just on the right side. Indeed, having agreed to cover Mr Bond, the underwriter would be ‘presumed to be acquainted with the practice of the trade he insures’ (Noble v Kennaway [1780]), and therefore should have appreciated that taking on a megalomaniac and his machine-gun wielding disciples was merely an occupational hazard. In circumstances where Bond quite literally saved the world, paying this claim feels like the right thing to do.
Given that Ms Swann is seen happily driving an Aston Martin V8 Vantage at the end of the film, we’re going to assume that the claim succeeded. Happy days for all. Well, apart from Bond, of course. May his memory live on.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC
In one of the first cases to be decided under the Insurance Act 2015 (“the Act”), the High Court was asked to consider whether an insured breached its duty of fair presentation under the Act by failing to disclose criminal charges against one of its directors.
Background
In 2018, Berkshire Assets (West London) Limited (“Berkshire”), purchased a Construction All Risks and Business Interruption Policy (“the Policy”) underwritten by AXA Insurance UK Plc (“AXA”) for a property development project in Brentford.
The quote contained a number of provisions, including the following:
“The proposer for insurance, its partners or directors or any other person who plays a significant role in managing or organising the business activities, have not, either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence.”
The policy renewed in 2019. Unbeknown to the director who was tasked with handling its insurances, one of its other directors, Mr Sherwood (and various other companies and individuals), had criminal charges filed against him by the Malaysian public prosecutor in August 2019 in connection with a $4.3bn fraud.
In January 2020, an escape of water resulted in substantial damage to the development. Berkshire thereafter made a claim under the Policy.
After investigating the claim, AXA avoided the Policy on the basis that Berkshire failed to disclose the charges against Mr Sherwood at renewal, and, had it done so, said that cover would not have been provided.
Berkshire argued that Mr Sherwood was not personally involved in the planning, approval or execution of the transactions which gave rise to the charges. To the contrary, the charges related solely to his capacity as a director of an investment banking company.
Issues for the Court
There were two issues for the Court to consider:
- Were the charges against Mr Sherwood material, for the purposes of the duty of fair presentation?
- If they were, and had they been disclosed, would AXA have agreed to insure Berkshire?
Materiality
The Court considered the definition of a material circumstance under section 7(3) of the Act. This provides that a circumstance is material if it would influence the judgment of a prudent insurer in determining whether to take the risk, and if so, on what terms.
The Court agreed with AXA that the principles relevant to material circumstances were already well established, and there was no reason to suggest that the Act had changed those principles.
There was, however, a debate about whether the charges against Mr Sherwood amounted to a moral hazard which Berkshire was required to disclose.
The Court considered there to be no settled definition of ‘moral hazard’, as each case will necessarily depend on its own facts. It was therefore preferable, in this instance, to rely on the statutory definition of material circumstance when considering the facts of the case before it.
In considering materiality, the Court found that being charged with a criminal offence will often constitute a material circumstance (March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep. 169). Also, the time such facts are to be considered is at the time of the renewal, and not with the benefit of hindsight (Brotherton v. Aseguradora Colseguros (No. 2) [2003] EWCA Civ 705, 1 Lloyd’s Rep. IR 746). Therefore, the fact that the charges were dismissed was ultimately irrelevant.
The fact that the charges did not relate to deceit or dishonesty was equally irrelevant, as AXA could not be expected to resolve the issue of whether or not they involved allegations of deceit or dishonesty at renewal. Facts raising doubt as to the risk were, without more, sufficient to be material, and the Court therefore found they should have been disclosed.
Inducement
It was common ground between the parties that AXA’s branch office had no authority to write the risk under an internal practice note that had been disclosed. The Court found that there was no reason to suppose that the regional or London offices would have considered the matter any differently if the charges against Mr Sherwood had been disclosed, nor was there a reason that the conclusions of the underwriting team would have been any different.
Comment
The case is a salutary reminder for policyholders and brokers that questions around criminal conduct and charges, whether proven or otherwise, are likely to be material. A thorough investigation into all directors’ backgrounds is advisable at each renewal, and when in doubt, it is better to err on the side of caution.
Authors:
Alex Rosenfield, Senior Associate
Ristorante Limited t/a Bar Massimo v Zurich¬ [2021]: – Food for thought about the questions in insurance applications
This recent High Court decision considers the proper construction of questions put to an insured in insurance applications, and the circumstances in which they can amount to waiver.
Background
Ristorante Limited (“Ristorante”) was the leaseholder of a bar and restaurant in Glasgow (“the Property”). Ristorante took out an insurance policy with Zurich in 2015, which renewed in 2016 and 2017 (“the Policy”). Prior to inception of the Policy, and at each renewal, Ristorante confirmed that the following state of affairs was true:
“No owner, director, business partner or family member involved with the business:
i) ...
ii)...
iii) Has ever been the subject of a winding up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation
iv) ...
(“the Insolvency Question”)
On 3 January 2018, a significant fire broke out at the Property. After being notified of a claim, Zurich purported to avoid the Policy on the basis that Ristorante failed to make a fair presentation of the risk. In particular, it asserted that Ristorante misrepresented/failed to disclose that three of its directors had been directors of companies which previously entered liquidation (“the Other Insolvencies”), and that cover would not have been provided had they been disclosed.
Issues
There were two issues for the Court to determine at a trial of preliminary issues:
- Whether, on the true construction of the Insolvency Question, there was a misrepresentation/non-disclosure; and
- Whether, by asking the Insolvency Question in the way that it did, Zurich waived disclosure of the Other Insolvencies.
The Decision
The Judge, Mr Justice Snowden, found for Ristorante on both issues.
On the first issue, the Judge observed that the Insolvency Question limited its enquiry to any “owner, director, business partner or family member involved with the business”. There was no express enquiry in relation to any corporate bodies, and, accordingly, a person completing the Insolvency Question would not come to it “with any predisposition to think that the Defendant was interested in that information.”
The Judge also relied on cases such as R&R Developments v AXA [2010] 2 All ER (Comm) 527 (see our previous article on the case here) and Doheny v New India Assurance [2005] 1 All ER (Comm), both of which also addressed the proper construction of insolvency questions. The Judge found that a reasonable insurer in 2015 would be expected to know of those decisions, and to have understood the importance, if it wished to make enquiries of the insolvency of companies with which the insurer’s directors were involved, of using language which referred to those companies.
Zurich made a number of further arguments about the correct interpretation of the Insolvency Question, which included an argument that the words “has ever been the subject of” were sufficient, without more, to require disclosure of companies with which Ristorante’s directors were involved. Unsurprisingly, the Judge rejected that construction, noting that it made neither grammatical nor legal sense.
Zurich also said that, regardless of the precise wording used, a reasonable broker would have understood the Insolvency Question to mean that the Other Insolvencies were material facts which needed to be disclosed. However, absent any evidence on what a “hypothetical reasonable broker” would have done, the Judge rejected that argument.
On the second issue, the Judge, having regard to the authorities on the effect of asking a limited question, held that Zurich waived disclosure of the Other Insolvencies. Although Zurich contended that past insolvencies was a relevant moral hazard from the perspective of an insurer and “certainly information about which they would ordinarily expect to be told”, the Other Insolvencies related to a different set of persons identified in the Insolvency Question. Therefore, it was reasonable for Ristorante to infer that Zurich had no interest in them.
Summary
Ristorante v Zurich is another in a recent run of policyholder friendly decisions, and a timely reminder that Insurers’ attempts to re-write questions in insurance applications, when doing so would require a completely different meaning to be given to them, will be impermissible.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Covid-19 BI Update: Denial of Access – Access Granted?
“I doubt whether the Divisional Court could or would have taken the approach it did, had it had the benefit of the Supreme Court’s reasoning on causation.”
Lord Mance
The latest Covid-19 BI decision to arrive following the conclusion of the test case provides fresh hope for policyholders with denial of access clauses whose claims currently remain declined.
It will be recalled that the Divisional Court in the test case found that such clauses provided a “narrow, localised form of cover” which did not respond to the broader circumstances of the pandemic. Many policyholders were disappointed at the FCA’s decision not to appeal these rulings, and have subsequently argued that the Supreme Court’s ultimate conclusions on causation rendered the Divisional Court’s ruling an unsound authority for declining coverage under such clauses.
In an arbitral Award issued on 10 September 2021 by Lord Mance[1], clear support is provided for exactly that proposition.
The China Taiping Proceedings
In arbitration proceedings commenced by Fenchurch Law on behalf of a group of 183 hospitality policyholders against China Taiping Insurance[2], coverage was considered under two limbs of a Denial of Access clause which responded to:
“b – the closing down or sealing off of the Premises or property in the vicinity of the Premises in accordance with instructions issued by the Police or other competent local authority for reasons other than the conduct of the Insured or any director or partner of the Insured or the condition of the Premises or the carrying out of repair or maintenance work at the Premises;
c – the actions or advice of the Police or other competent local authority due to an emergency threatening life or property in the vicinity of the Premises;”
The Issues
There were three key disputed issues. First, whether the existence of Notifiable Disease cover elsewhere in the policy (which did not extend to Covid-19) negated the possibility of the Denial of Access wording responding to the pandemic. Secondly, whether the requirement for an “emergency in the vicinity of the premises” in limb (c) meant that the clause could only respond to narrow, localised events, rather than national ones, per the Divisional Court decision in the test case. Thirdly, whether the UK Government was a ‘competent local authority’ within the meaning of the clause.
On the first issue, Lord Mance found in favour of the policyholders. The existence of the express notifiable disease cover elsewhere in the policy did not limit the cover under the prevention of access extension. It was common for the coverage provided by various insuring clauses and extensions to overlap, and if insurers intended to exclude diseases from the scope of the prevention of access clause, they should have used clear language to do so.
On the third issue, Lord Mance agreed with insurers that the UK Government was not a “competent local authority” within the meaning of the clause, meaning that there could be no coverage under limbs (b) or (c) of the Denial of Access extension for losses caused by closures and other restrictions imposed by the UK Government in response to the Covid-19 pandemic. This issue was ultimately therefore fatal to the policyholders’ claim, which failed at the last hurdle.
Issue 2 – Emergency threatening life or property in the vicinity of the premises
On Issue 2, however, Lord Mance agreed with the policyholders, and despite the fact that it did not alter the outcome in this particular case, his discussion and conclusions on the issue are of potentially much broader significance and merit close examination.
Lord Mance noted that Clause 1(c) was drafted in materially identical terms to two of the representative sample of policy wordings considered in the test case, namely RSA 2.1 and 2.2. The RSA clauses required “an emergency likely to endanger life or property in the vicinity of the Premises”.
In the test case, the Divisional Court concluded in relation to RSA 2.1 and 2.2, that
“There could only be cover under this wording if the insured could also demonstrate that it was an emergency by reason of COVID-19 in the vicinity, in that sense of the neighbourhood, of the insured premises, as opposed to the country as a whole, which led to the actions or advice of the government. […] it is highly unlikely that that could be demonstrated in any particular case[3].”
Similar conclusions were reached in relation to the other denial of access wordings under consideration, and the findings were not appealed to the Supreme Court. In the arbitration, insurers unsurprisingly therefore relied on the Divisional Court’s judgment to resist coverage under limb 1 (c) of the China Taiping clause.
Lord Mance began his analysis of the issue by noting that, as an arbitrator, he must regard the Divisional Court’s approach to the NDDA clauses as being, at the very least, highly persuasive, and that it may even, on the face of it, bind him. However, that was subject to, first, the relevant point having been squarely argued and decided in the Divisional Court, and second the Supreme Court’s judgment.
As to the first point, Lord Mance noted that the Divisional Court appeared to have reached its conclusions on the basis that RSA 2.1 and 2.2 were analogous with MSA 1. However, in Lord Mance’s view, the China Taiping and RSA wordings were clearly distinguishable from the MSA 1 wording, in leaving open for consideration whether cover extends to an emergency outside the vicinity threatening life or property within the vicinity, in contrast with the MSA 1 wording that required that the emergency be within the vicinity of the premises. It was unclear how far RSA had argued the point, but a requirement that the emergency be in the vicinity of the premises was central to the Divisional Court’s reasoning in relation to RSA 2.1 and 2.2.
In relation to the Supreme Court judgment, Lord Mance’s words speak for themselves:
“…although there was no appeal in respect of RSA2.1 and 2.2, I find the Supreme Court’s analysis of the operation of other wordings, and particularly its analysis of the correct approach to causation, hard to reconcile with the analysis of RSA 2.1 and 2.2 adopted by the Divisional Court in paragraphs 466 and 467.[…] Paragraphs 466 and 467 of the Divisional Court’s judgment indicate that it was the Court’s view of the causation required that ultimately dictated the likelihood of recovery under the relevant wordings. The Supreme Court held that the Divisional Court had erred in significant respects in its understanding of the operation of causation under other policy wordings before it. As I read its judgment, the Supreme Court also thought that its understanding would, at least prima facie, carry through generally into other wordings.”
“… the Supreme Court was, contrary to the Insurer’s submission, prepared to state quite generally that its general approach to causation was applicable across the whole range of wordings”
“That is particularly so, if the emergency may be outside the vicinity, so long as it threatens life or property within the vicinity. But it is also so if both the emergency and the threat must be in the vicinity. Once it is accepted that the emergency may at the same time be elsewhere and threaten life or property elsewhere, the Supreme Court’s analysis of the relevant elements of cover and its conclusion that a “but for” test of causation was inappropriate would seem readily transposable to a NDDA clause like Extension 1(c)”
“I therefore doubt whether the Divisional Court could or would have approached the matter as it did in paragraphs 466 and 467 had it had the benefit of the Supreme Court’s analysis.”
“The absence in the Arch wording of the words “in the vicinity” in relation to the emergency appears an inadequate basis on which to distinguish the Supreme Court’s approach in relation to that Arch wording from the present.”
Lord Mance apparently therefore concluded that he was not bound by the Divisional Court’s findings as far as relevant to Issue 2, and despite the negative outcome in the present case, set out a powerful and clear basis on which a case for coverage under the RSA 2.1 and 2.2 wordings (and others on similar terms, including the other denial of access wordings considered in the test case) might be made in reliance on the Supreme Court judgment.
Comment
Lord Mance’s comments in the China Taiping Award are far from the end of the story. The Award is not binding on any third party, and despite his detailed and helpful analysis, Lord Mance found it unnecessary to issue any final ruling or declaration on the issue, due to his conclusions on the meaning of ‘competent local authority’ which were conclusive to the outcome of the proceedings. Noting that the issue was complex, and because the Award was to be published and the issue may arise in other contexts, Lord Mance concluded that he should say “nothing more definite” about it.
But as an ex-Deputy President of the Supreme Court and the author of many seminal decisions on English insurance law, his clearly-expressed views on the matter will doubtless be influential in future judicial consideration of the issue, and will need to be studied closely by insurers and policyholders alike in considering the position under Denial of Access and other clauses where coverage is still in dispute.
A copy of the award can be accessed here.
[1] The arbitration proceedings were brought with the agreement of the insurer, who agreed to cover the costs of the proceedings, and not to seek its own costs from the policyholders regardless of the outcome. Confidentiality in the arbitral award was also waived, meaning that it can be made public.
[3] Divisional Court para.467
(De)sign of the Times: Blurred Lines on Build Performance Liabilities
Design requirements are at the heart of any construction contract, and the precise formulation of applicable standards is crucial to evaluation of risk. Recent trends indicate that designers in the UK construction industry are assuming increasing levels of liability on build performance, with significant implications for coverage under professional indemnity insurance.
In Arbitration Appeal No 1 of 2021 [2021] CSOH 41, the Scottish Court of Session recently considered the interpretation of deemed design liability clauses, and upheld a provision imposing responsibility on a consultant for designs pre-dating its appointment and which had been proposed without its involvement. Whilst similar clauses may be given a narrower interpretation in a multi-disciplinary design context involving several third party consultants, the scope of such provisions should be carefully considered at the outset, to limit exposure and potential uninsured loss.
Reasonable Skill & Care vs. Fitness for Purpose
A contractor or professional with design responsibility should exercise reasonable skill and care, based on standards expected of an ordinary skilled person performing and professing to have that special skill, so that liability will not arise unless they have acted negligently.
Express contract terms often impose more onerous fit for purpose type obligations, providing a warranty that the works will conform to specified employer requirements. Liability arising from a higher contractual standard than that imposed by ordinary common law, including certification of compliance with specified design, will usually fall outside the scope of cover under professional indemnity insurance.
Strict liability can be implied in relation to design elements of work under a design and build contract (Viking Grain Storage v TH White Installations (1985) 3 Con. L.R. 52); or where the contractor is informed of the purpose for which the works are required and the employer relies upon the contractor’s skill and judgement (Greaves v Baynham Meikle [1975] 1 W.L.R. 1095).
Industry standard forms address the issue in different ways, with JCT contracts requiring reasonable skill and care, whilst all FIDIC contracts impose some degree of fitness for purpose obligation. This divergence in part reflects the usual approach in different industry sectors, with design and construction contracts for energy or infrastructure projects typically including output specifications capable of measurement through testing, as compared with the performance standard ordinarily assumed by an architect or other professional designer in the real estate development sector.
Conflicting Standards
In MT Højgaard v E.ON [2017] UKSC 59, the Supreme Court considered a contract containing both a reasonable skill and care obligation, and a warranty ‘tucked away’ in a technical schedule requiring a service life of 20 years. The latter took precedence, in circumstances where wind turbine foundations designed and installed by the defendant in accordance with the claimant’s requirements and certifying authority’s specification began to fail during the defects period, due to a subsequently identified error in a value in the authority’s specification. The case demonstrates that a contractor can be found to assume the risk if they have agreed to work to a design which would render the item incapable of meeting the performance criteria.
An obligation to ensure that works constructed in accordance with the build design “shall meet the requirements described in the Specification” may be construed as imposing strict liability, notwithstanding the designer having separately undertaken to exercise reasonable skill and care (Costain v Charles Haswell & Partners [2009] EWHC 3140). This depends on the particular contract wording, however, and conversely a design and build contract requiring a consultant to comply with a specific design, alongside an obligation to act with reasonable skill and care, may be construed on the basis that the obligation to comply with the specification is to be read as expressly or impliedly subject to the reasonable skill and care provision (MW High Tech Projects v Haase Environmental Consulting [2015] EWHC 152).
For complex contracts incorporating schedules from multiple sources, a priority of documents provision may be helpful to deal with potential inconsistencies.
Implementation of Design
Following on from the decision in SSE Generation v Hochtief Solutions [2018] CSIH 26, we are seeing an increase in professional indemnity disputes based on a distinction between preparation and implementation of design, with reference to the scope of ‘professional activities’ defined in the policy and declared in the proposal form.
In SSE Generation, a design and build contractor was held liable under the NEC2 contract for costs of repairing a tunnel collapse at the Glendoe hydroelectric power scheme in Scotland, due to breach of contract requirements on appropriate support for erodible rock encountered in a fault zone. The court decided by a majority that Hochtief could not rely on a limitation of liability for design defects, despite having exercised reasonable skill and care in preparing the design statement, as the damage was caused by implementation of design.
This conclusion was reached in light of specific contract terms and the interface between design and its implementation is highly fact sensitive (Bellefield Computer Services Ltd v E Turner & Sons Ltd [2002] EWCA Civ 1823), particularly in cases involving complex construction and engineering decisions.
Design Life
Construction contracts often require completed works to deliver a specified minimum ‘design life’.
The meaning of this concept was considered in Blackpool B.C. v Volkerfitzpatrick [2020] EWHC 1523, a case concerning alleged premature corrosion to a tram depot situated in a seafront location. The court referred to relevant British Standards on service life planning and structural design in concluding that an acceptable level of not “unusually onerous” maintenance is a key ingredient of performance expectations for individual parts of a building, and a specified design life implies that “major repairs” should not be needed during that period. The extent of standard maintenance will be a matter of fact and degree, which could be addressed in O&M manuals produced by the contractor.
Depending on the words used in the contract, several discrete obligations may be separately imposed and cumulatively applied to the design life and quality of particular components within a complex structure (125 OBS (Nominees1) v Lend Lease Construction [2017] EWHC 25).
Conclusion
In view of ongoing hard market conditions, policyholders are understandably reluctant to accept requirements outside the scope of conventional insurance cover, with extensive negotiation on design risk allocation at the pre-contract stage often resulting in a form of compromise wording.
The nuanced approach adopted in recent court rulings demonstrates a blurring of lines between the traditional reasonable skill and care vs. fitness for purpose dichotomy, acknowledging that different standards can apply to various aspects of design under a single contract.
Designers should exercise particular caution in relation to deeming provisions in appointment documents and standard form contracts, imposing liability for plans initially developed by the employer or third parties.
To avoid ambiguity, contractors and consultants should expressly exclude fitness for purpose obligations where possible, and consider inclusion of contract terms defining the output of building design, with reference to intended maintenance procedures. Where exclusion of fitness for purpose obligations cannot be agreed, policyholders should talk to their brokers and insurers to obtain clarity about the extent to which any onerous contractual obligations are covered by their professional indemnity insurance.
Amy Lacey is a Partner at Fenchurch Law.
Latest aggregation decision
In what will be a relief both to the victims of dishonest solicitor Linda Box (pictured, and christened by the press the "Gangsta Granny") and to her innocent partners in the former firm of Dixon Coles & Gill, the Court of Appeal handed down judgment today (06.08.21) in this important decision for those involved with solicitors' professional indemnity disputes. The Court of Appeal dismissed the insurer's appeal and instead confirmed the decision below that the various claims, emanating from Mrs Box's numerous thefts from numerous clients, did not arise from "one series of related acts and omissions" and thus did not aggregate. In short, the Court of Appeal held that each client's claim arose from the specific thefts which it had suffered, rather than all of the different clients' claims having arisen from the totality of the thefts. Put another way, a theft from client A did not cause client B's loss and vice-versa.
Adding salt to the insurer's wounds, the Court of Appeal did identify (at para. 82 of its judgment) an ingenious argument which might have worked in the insurer's favour, or at the very least have enabled it to survive what was an application for summary judgment and instead have the argument tested at a trial. However, the argument had formed no part of the insurer's submissions and the Court of Appeal held it was too late for it to be pursued.
The full judgment is here: https://www.bailii.org/ew/cases/EWCA/Civ/2021/1211.html
Jonathan Corman is a partner at Fenchurch Law
If your name’s not down…: no policy cover where developer incorrectly named
Sehayek and another v Amtrust Europe Ltd [2021] EWHC 495 (TCC) (5 March 2021)
A failure to correctly name the developer on a certificate of insurance has entitled insurers to avoid liability under a new home warranty policy.
The homeowner claimants had the benefit of insurance that covered them for the cost of remedying defects in their new build property at the Grove End Garden development in St John’s Wood.
Under the policy, “developer” was a defined term, being an entity registered with the new home warranty scheme from whom the policyholder had entered into an agreement to buy the new home, or who had constructed the new home. Cover was available under the policy for the cost of rectifying defects for which the developer was responsible, but had not addressed for various reasons including its insolvency.
Following the discovery of significant defects at their property, the claimants sought to bring a claim under the policy.
The certificate of insurance named a particular company called Dekra Developments Limited (Dekra) as the developer. Dekra was an established developer and had been registered with the new home warranty scheme since 2005. One of Dekra’s directors had confirmed to insurers that it was the developer of the Grove End Garden development. However, in fact, the developer was an associated company of Dekra set up for the purpose called Grove End Gardens London Limited.
Insurers therefore declined the claim on the basis that Dekra did not meet the policy definition of developer, being neither the entity named as seller on the sale agreement, nor the builder of the new homes. Its insolvency was not therefore a trigger for cover.
The homeowners sought to argue for an implied term extending the definition of developer to include its associated companies, and brought alternative claims based on estoppel and waiver.
Their claims did not succeed. The court found that this was not a “misnomer” case, in that the claimants were not able to demonstrate that there was a clear mistake on the face of the certificate of insurance as an objective reading of the evidence was consistent with cover having been agreed between Dekra and the insurer. Further, the proposed correction to imply the words “associated companies” was not a clear correction nor one that would be understood by an objective reader as needing to be made.
The alternative case based on estoppel and waiver also failed as no representation was made by the insurers to the effect that the cover extended to associated companies of Dekra. Nor did the initial rejection of the claim by insurers on other grounds amount to a waiver of the right subsequently to refuse cover on a different ground.
While undoubtedly legally correct, this was a harsh result in circumstances where Dekra effectively held itself out as being the developer, both to insurers and the world at large. This case highlights some of the challenges claimants under new home warranty policies can face as a result of the fact that, despite being the policyholders and having the benefit of the insurance, they are not involved in placing the policies. Nor will they necessarily be aware of the complex corporate structures common in the construction industry, including the use by developers of special purpose vehicles for different projects. The mismatch between the entity named on the sale agreement and that referred to on the certificate of insurance may however be one that they, or their conveyancing solicitor, might have been expected to identify and query at the time of purchase.
Joanna Grant is a partner at Fenchurch Law
Covid-19 BI Update: The Curious Case of the Missing Declarations, and litigation round up.
It is now over five months since the Supreme Court handed down its largely policyholder-friendly judgment in the FCA Test Case, but for a majority of policyholders, the end is not yet in sight.
The FCA’s latest figures, published on 14 June 2021, indicate that, of 46,854 claims reported to have been accepted by insurers, or where a decision on coverage is still pending, only 34% (16,159) have so far been paid in full. Moreover, the data published by the FCA does not include numbers of claims declined by insurers which may be disputed by policyholders, and excludes ‘contracts of large risks’ [i]. Whilst giving an indication of the (some might say slow) progress being made by insurers in settling undisputed SME BI claims, the data does not therefore shed any light on areas of ongoing dispute.
Meanwhile, an examination of cases proceeding in the courts (including the Test Case itself) reveals that the stage is set for a raft of further litigation in relation to issues that were either undetermined in the Test Case, or where a degree of uncertainty persists.
Supreme Court Declarations
Most notably, the Supreme Court Declarations, giving effect to the rulings set out in the Supreme Court’s judgment of 15 January 2021, as applied to the 21 sample policy wordings under direct consideration in the Test Case, are still awaited. It is unfortunate (whilst not intended as criticism levelled in any particular direction) that the outcome of the Test Case has yet to be finalised in this way, following the herculean efforts of the Parties and the Court in bringing the case all the way from inception to the Supreme Court on such an expedited timetable.
The Supreme Court’s conclusions on the legal issues, as set out in its 114-page judgment of 15 January, might be thought to be clear and not susceptible to further dispute between the parties. However, the Draft Declarations, published by the FCA on 15 February 2021, setting out the outstanding areas of disagreement between the parties and the alternative versions of the Declarations sought by each side, shows that not to be the case. In particular, the FCA and Insurers have clearly reached different views on what amounts to ‘restrictions imposed‘ according to the Supreme Court’s judgment, and the final form of Declarations will therefore be welcomed by policyholders and insurers alike in bringing some finality to the issue. The FCA last announced on 30 April 2021 that the Supreme Court Declarations ‘may be available’ in the next week, but has remained silent on the matter since then.
Other litigation – Coverage and Quantum
Whilst impressive in its scope, it was always acknowledged that the Test Case would not be capable of resolving all outstanding issues in relation to Covid-19 BI coverage. For some policyholders, the issue of whether their policy responds at all to losses flowing from the pandemic and the UK government response remains undetermined. For others who have had coverage confirmed, the focus has now turned to the issue of how much insurers are liable to pay. Unsurprisingly, that is frequently contentious, and affected by a number of common issues.
Coverage Issues
Specified Disease
The Disease clauses under consideration in the Test Case generally responded to any disease which is required to be notified to the authorities under the relevant public health legislation. Other, more restrictive Disease clauses only respond to losses caused by an occurrence or outbreak of one of a specified list of diseases, which in all cases did not include Covid-19. In Rockcliffe Hall v Travelers [1], the Court determined by way of summary judgment that such clauses are not capable of responding to Covid-19, rejecting the policyholder’s argument that Covid-19 was a form of ‘plague.’
See our update on the case here.
Damage to /Loss of Property
The Test Case itself considered coverage under ‘non-damage’ clauses i.e. extensions of cover responding to BI losses where no insured property damage has taken place. The issue of whether the presence of Covid-19 or Sars-Cov-2 on the premises could amount to or cause damage to or loss of property, thus triggering the core BI cover under most property insurance policies, fell for consideration in the early case of TKC v Allianz[2]. The Court held emphatically (again by way of summary judgment) that it could not. See our earlier update on the case here.
More recently, a claim filed by Xerox against FM Global[3] seeks to establish coverage for BI losses flowing from ‘physical loss or damage’, although that claim is being pursued as a satellite claim to litigation under a global master policy in the USA. It is not yet clear the basis on which Xerox will invite the Court to depart from the principles set down in TKC v Allianz.
Prevention of Access
The High Court’s findings in the Test Case in relation to Prevention of Access wordings were, by and large, negative, and many policyholders were disappointed by the FCA’s decision not to appeal the negative rulings. Following the outcome of the largely-successful appeal to the Supreme Court on other issues, the coverage position in relation to many Prevention of Access wordings now stands in stark relief to the position under the Disease wordings, and the findings of the High Court on which most insurers have now relied to decline coverage under Prevention of Access clauses are difficult to reconcile with the Supreme Court’s analysis of the covered peril and causation issues.
Unsurprisingly, many policyholders with Prevention of Access wordings are not content to abandon their claims, and a number of disputes are now moving forward to test the point further. The first of these to be litigated is Corbin & King v Axa[4], in which the Policyholder seeks to establish that the Covid-19 pandemic amounted to a ‘danger or disturbance’ within 1 mile of the insured premises, resulting in closure on the advice of a public authority, and triggering coverage for BI losses under a Denial of Access (non damage) clause.
The outcome of that case – and any others that may be joined to or managed with it – is likely to be highly influential on the coverage available under other typical Prevention of Access wordings in the market, and will therefore be closely watched by parties on both sides of the fence.
Disease ‘at the Premises’
The dispute as to whether Disease clauses requiring an occurrence of disease at the insured premises are capable of responding to Covid-19 BI losses in the same way as ‘radius’ clauses rumbles on. Following the conclusions of the Supreme Court on insured peril and causation, many Policyholders have argued that an occurrence of Covid-19 at their insured premises ought to be viewed as a proximate cause of loss in the same way as occurrences of Covid-19 within a specified radius of the premises (indeed some might say that an occurrence at the premises should be viewed as more proximate than occurrences away from the premises), and some insurers appear to have accepted coverage on this basis. A majority have not, however, and it remains to be seen how the point will be resolved.
For its part, the FCA has clearly indicated that it considers the ‘at the premises’ wordings to be capable of responding in the same way as the ‘radius’ clauses, and has instructed insurers to include such wordings in their most recent submissions confirming those policy wordings that are now capable of providing cover for Covid-19 BI losses. Whether insurers will go one step further in confirming indemnity under such policies without further litigation remains to be seen.
Quantum Issues
Aggregation
Non-damage BI extensions are typically sub-limited to 10% or less of the main BI sum insured, and in light of the scale of the losses suffered by many policyholders, the issue of how the sub-limits are available to meet the covered losses is therefore key. If Insurers’ liability is limited to a single sub-limit of liability, the policyholder is unlikely to make a material recovery in relation to the majority of its losses. If, on the other hand, the Policyholder can establish that it is entitled to recover multiple sub-limits of liability under the relevant non-damage BI extension(s), there may be better prospects of recovering all (or the majority) of its losses. How the covered losses are ‘aggregated’ for the purpose of the application of sub-limits is highly dependant on the individual policy wording, but typically depends on whether the sub-limit is expressed as applying ‘per loss’, ‘per claim’, ‘per occurrence’, per ‘event’, or ‘per originating cause’. There are many other variations and permutations of these words, and a long line of complex (and often contradictory) case law considering the meaning of these aggregating terms, typically in the context of war/terrorism, natural catastrophes, and professional risks. Of disease perils, there has been very little judicial consideration in the English courts, either in terms of aggregation or more generally, and unsurprisingly aggregation of Covid-19 losses is therefore set to be a key focus of the next wave of Covid-19 BI litigation.
Because of the peculiarities of specific policy wordings and the manner in which individual Policyholders have suffered loss, the issue of aggregation is less suitable for determination as a general market test case in the same way that the FCA sought to determine the coverage trigger issue. Nonetheless, there will be various points of principle that, once determined, will be influential in the determining the outcome under a variety of different wordings (including reinsurance contracts.) Various cases are now proceeding in the Commercial Court, in particular focusing on the issue of aggregation under the Marsh Resilience policy wording, one of the clear winners in the Test Case (where it was referred to as ‘RSA4’), and which contains occurrence-based aggregating wording.
Government Support
Many (if not all) policyholders have received some form of government support, in the form of grants, rates relief, and furlough payments over the course of the pandemic, and the issue of whether and how these amounts are to be applied to insurance claim calculations is hotly contested. Insurers for their part insist that any receipt of government support goes to reduce the loss suffered by the policyholder, and therefore the value of any claim under the Policy. Policyholders, in response, point out that government support payment are neither ‘Turnover’ nor a ‘Saving’ within most Policy definitions, and are not therefore to be taken into account within a typical Specification setting out the correct basis for calculating a BI indemnity under most policies. In light of the low sub-limits of liability available under most non-damage BI extensions, the suggestion by some insurers that failing to make deductions for government support results in a ‘windfall’ for policyholders, is viewed by many policyholders as insulting and a further example of insurers’ egregious attempts to limit their own liability.
The FCA has written to insurers expressing concern over the issue on several occasions, and the ABI has confirmed that some of its members have agreed not to deduct government grants from Covid-19 BI claims. However, the position in relation to other types of support, in particular furlough payments, remains highly contentious and unlikely to be resolved without litigation. It is likely that one or more of the existing cases proceeding through the courts will seek to test the issue.
Loss of Rent
While the Test Case considered and determined which events connected with the Covid-19 pandemic were capable of triggering coverage, the case did not consider the matter of what type of loss is covered by the sample clauses. In most cases, policies respond to loss of Gross Profit in one form or another, but in the case of commercial landlords, coverage is often provided for Loss of Rent Receivable. In relation to these policies, insurers have commonly taken the position that the landlord has not suffered a loss of Rent Receivable merely by virtue of the fact that its tenants have been unable to pay rent during periods of closure (due to a total lack of revenue); the landlord must also be able to show that the tenant has been relieved of its obligation to pay rent during the closure period, which in most cases will not be satisfied. Otherwise, the insurers say, the loss should fall on the tenant (who may or may not have BI cover), and not the landlord.
Landlords may reasonably question the commercial utility of such clauses if their response is limited in the way insurers claim, as the coverage provided would in real life be largely illusory. The issue has fallen for consideration, somewhat obliquely, in two recent cases, that were also decided on summary judgment, unfavourably for policyholders. In Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd[5] and Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others[6] it was determined that the government-ordered closure of various retail premises did not activate rent cessor clauses or otherwise relieve the tenants from their obligation to pay rent under the relevant lease. The tenant’s argument that the landlord held insurance for loss of rent was also rejected on the basis that the insurance policies were only designed to respond where the rent cessor clauses were activated, and the existence of the insurance did not therefore affect the obligations as between the tenant and the landlord.
The initial view of the courts therefore appears to be that commercial landlords will in most cases have no valid claim for a loss of Rent Receivable due to Covid-19 closures. However, considering that both cases were decided by a Master on summary judgment, and with the insurance coverage issue being determined very much as a secondary issue (the Master in one case expressing reservations over determining the issue with no insurer as a party to the case), the reasoning in the two judgments might be viewed as far from final, and in view of the importance of the issue to a large number of policyholders, it seems likely that the point will be further tested in the courts in the near future.
The Path Ahead
It is clear that the Covid-19 BI has not only given rise to a host of new coverage issues, but also reignited a number of traditional areas of dispute in the field, each of which is generating further litigation now emerging in the courts. Although it will be regrettable for many policyholders that additional legal hurdles must be overcome before coverage of their claims can be established and or quantified, the further consideration by the courts of these issues in the round will, it must be hoped, lead to further clarification of the law underpinning business interruption insurance, and as such may be a welcome development in the longer term.
Aaron Le Marquer is a Partner at Fenchurch Law
[1] [2021] EWHC 412 (Comm)
[2] [2020] EWHC 2710 (Comm)
[3] Commercial Court Claim No. CL-2021-000138
[4] Commercial Court Claim No. CL-2021-000235
[5] [2021] EWHC 863 (Ch)
[6] [2021] EWHC 1013 (QB)
[i] i.e. where the policyholder exceeds the limits of at least two of the following three criteria: (i) balance sheet total: €6.2 million; (ii) net turnover: €12.8 million; (iii) average number of employees during the financial year: 250
Fenchurch Law joins City law firms in commitment to levelling up on social mobility in the profession
A group of trailblazing City law firms including Fenchurch Law Ltd have published a pioneering action plan to boost social mobility and widen opportunities within the legal sector and launched a Levelling Up Law Coalition to deliver on the recommendations.
Fenchurch Law and fourteen other City of London Law Society (CLLS) member firms have been working with Rt Hon Justine Greening’s Social Mobility Pledge on a strategy to open up the sector to a diverse range of backgrounds.
The firms have collaborated with a number of universities across the regions, including Bradford, Staffordshire, Lincoln, York St John and Liverpool John Moores in a bid to create new and wider pathways from higher education into the legal sector.
The action plan sets out recommendations for leading law firms to work together on solutions that benefit the whole legal profession. Research shows that more diverse companies are now more likely than ever to outperform less diverse peers on profitability* and the plan looks at how the profession can tap into talent from a range of backgrounds.
The project has been led by former Government Minister, Member of Parliament and city Solicitor, Seema Kennedy OBE. Fenchurch Law and the other firms now plan to go further and play a leading role in Britain’s national recovery from coronavirus, opening up greater access to careers in the legal sector.
The publication of the action plan also marks the launch of the group of firms forming a Levelling Up Law Coalition, coming together to take leadership on the levelling up agenda through the lens of the legal sector.
Seema Kennedy said: “The pandemic has caused many young people to lose jobs or have their future opportunities restricted. Meanwhile, there is now a building demand and need for reskilling and career changes.
“What is now abundantly clear is that levelling up needs to go far beyond just government action, we need businesses to play their role if we are to succeed. Through this action plan, CLLS members have shown that they are committed to playing their part in boosting opportunity and social mobility as part of our recovery.”
David Pryce, Managing Partner, Fenchurch Law “Levelling Up Law is the most effective initiative that I’ve come across with regard to promoting social mobility within the legal profession. The project’s goal of creating true equality of opportunity is vitally important not just in terms of basic fairness, but also because law firms have for too long drawn on an artificially limited pool of talent.
“If the UK is to retain its place as a leading global legal market, it is essential we start to recruiting based on potential, and stop favouring people based on their background and upbringing. Like most firms we have further to go on our journey to creating a truly diverse team, but I have no doubt that we will only be able to unlock our full potential once we do”.
