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The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #7 (The Good). Woodford and Hillman -v- AIG

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#7 (The Good)

Woodford and Hillman -v- AIG [2018] EWHC 358

There are few cases dealing with coverage issues under D&O policies. This isn’t necessarily because D&O policies are rarely the subject of dispute. It is more likely a reflection of the fact that if directors have to fund hefty legal costs in defending complex civil, criminal or regulatory actions because insurers are being difficult about costs or refusing outright to pay them, their personal finances are depleted to the point where suing the insurer is out of the question (and the Financial Ombudsman’s service is no help because that avenue of remedy is closed off to company directors). The consequence is that insurers’ obligations to fund defence costs are rarely scrutinised in court.

Occasionally, though, directors will take D&O insurers on, notwithstanding the power imbalance and the personal financial risk.  Two such directors were Mr Woodford and Mr Hillman. They had been directors of the Olympus Corporation. They left in 2011 when Mr Woodford blew the whistle on a financial scandal.

In 2015 Olympus launched proceedings against them in the High Court in London for £50m, claiming that their involvement in an Executive Pension Scheme while at Olympus breached their duties as directors.

Olympus had D&O cover which covered past directors.  Woodford and Hillman notified the claim to the D&O insurers, AIG, seeking an indemnity.

AIG’s resistance to Defence Costs

AIG refused to fund Woodford and Hillman’s defence costs (£4m and counting) claiming they were not reasonable. The policy was governed by German law but disputes fell to be determined in England.

The D&O policy made AIG liable for legal defence costs “provided these are reasonable with regard to the complexity and significance of the case”.

AIG argued that their liability for costs should be determined by a costs assessment. This is an assessment by a costs judge, normally undertaken when litigation ends, to determine how much of the winning party’s costs the loser should pay. The costs judge very critically examines the costs being claimed.  The party whose costs are being assessed should expect to take a hair-cut on their recovery. A discount of 30% is not unusual and full recovery is very unlikely. On any view, therefore, a referral to costs assessment, as insisted on by AIG, would have involved Woodford and Hillman being left significantly out of pocket.

The Judge held that a costs assessment was not the right way to determine AIG’s liability for defence costs. Such an assessment was appropriate at the end of litigation as part of the court’s general discretion in relation to costs. An indemnity for defence costs under a D&O policy was “very different”. The Judge said that an insurance policy is intended to indemnify the directors for defence costs. Indemnity was a contractual right which meant that the court had no inherent discretion in relation to such costs. This meant that the (discretionary) costs assessment process had no application.

Instead, the court should assess the right to defence costs in the same way it would assess any issue of quantum. The criteria set out in the policy was that the costs were payable if “reasonable with regard to the complexity and significance of the case”.

The basis for the assessment of the “complexity and significance” of the case faced by the insureds was that it:

  • would involve a three-week High Court trial;
  • dealt with complex issues in a specialist area of law (pensions);
  • was for a significant sum (£50m);
  • had reputational significance for insureds because of the seriousness of the allegations.

AIG’s particular objection was to the charge-out rates of the insureds’ city lawyers:  £508 for partners and senior lawyers; £389 for mid–level lawyers and £275 for junior lawyers. The Judge held that the complexity and significance of the matter meant it was reasonable to use a City firm at the rates charged. The Judge rejected AIG’s suggestion that the Guideline Hourly rates published by the Court Service for use in a costs assessment (rates significantly lower than City lawyers charge) had no application.

AIG’s determined resistance to paying the fees did not stop there. They complained of duplicated work, excessive billing, failure to delegate appropriately, churning of costs (an allegation that AIG dropped) and engagement of two QC’s. The Judge found that the QC appointments were reasonable in the context, the fees were reasonable and AIG’s other complaints were unsubstantiated.

Woodford and Hillman were awarded all their defence costs: they had been incurred reasonably in view of the complexity and significance of the case against them.

Implications

It is standard for a D&O insurer’s liability for costs to be qualified on grounds of reasonableness. It is now clear that an insurer’s attempts to call in aid the cost assessment process with a view to chipping away ultra-critically at the defence costs claimed by insureds should not work and there are better prospects of the directors’ outlay on defence costs being matched by insurance cover.  Insureds now have a case to use when firing back at insurers’ attempts to lowball them, giving them some hope of prising the insurer’s purse open that little bit wider.

Enterprise Act Angle

Woodford and Hillman had to fund their defence costs from their pension funds because the D&O insurer was not responding.  They incurred significant tax consequences as a result.  Had the policy been governed by English law (and had it been taken out after May 2017) they may also have had a claim against AIG for damages for breach of the obligation to pay claims within a reasonable time (an obligation introduced by the Enterprise Act 2016) equal to the tax charge they suffered as a result of accessing their pension funds. Application of the Enterprise Act might have had an impact on the insurer’s approach to the case.

John Curran is a partner at Fenchurch Law


Exclusion clauses clarified

In the recent decision of Impact Funding v. AIG the Supreme Court gave important guidance on the construction of exclusion clauses in the context of Insurance policies. Whilst of particular interest to Solicitors and their insurers the decision is of wider importance.

Barrington Support Services Limited (Barrington) was a firm of Solicitors who acted for claimants wanted to pursue claims for industrial deafness. Public funding was no longer available for such claims and hence the clients needed to fund their actions by way of CFA and ATE insurance. Impact Funding Solutions Limited “Impact” provided cover for disbursements which would be incurred in pursuit of those claims. The intention was that if the litigation was successful, the loans would be repaid by the defendants to the action and, if unsuccessful, by ATE insurers. Crucially in this case, Impact also had a direct cause of action against Barrington under the terms of a Disbursement Funding Master Agreement (DFMA). It provided amongst other things;

(a) at clause 6.1, that each party would “comply with all applicable laws, regulations and codes of practice from time to time in force… and each party indemnifies the other against all loss, damages, claims, costs and expenses… which the other party may suffer or incur as a result of any breach by it of this undertaking”; and

(b) at clause 13.1, Barrington represented and warranted to Impact that “the services provided or to be provided by [Barrington] to the Customer shall be provided to the Customer in accordance with their agreement with the Customer as set out in the relevant Conditional Fee Agreement”.

Loans amounting to £581,353 were made by Impact. Barrington failed to investigate the claims properly which either failed or were never pursued. ATE insurers refused to pay out as a result of Barrington’s negligence, leaving Impact substantially out of pocket. Barrington became insolvent and Impact brought a claim against Professional Indemnity Insurers, AIG, under the Third Party Rights against Insurers Act.

The professional indemnity policy written by AIG (“the Policy”) was written on materially the same terms as the Minimum Terms and Conditions.

The insuring clause provided: “The insurance must indemnify each Insured against civil liability to the extent that it arises from Private Legal Practice in connection with the Insured Firm’s Practice…”.

At clause 6.6 the Policy contained an exclusion for:

(a) trading or personal debt of any Insured; or

(b) breach by any Insured of the terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of the Insured Firm’s Practice; or

(c) guarantee, indemnity or undertaking by any particular Insured in connection with the provision of finance, property, assistance or other benefit or advantage directly or indirectly to that insured…”

The judge at first instance decided that the exclusion applied. The Court of Appeal overturned that decision, holding that it was inapplicable and that AIG were liable under the policy. AIG appealed to the Supreme Court. By a majority of 4 to 1 the Appeal was allowed. The Supreme Court had to decide:

(a) Whether the contract between Impact and Barrington was a contract or arrangement for the supply of services to Barrington by Impact and hence excluded (notwithstanding that Impact’s loss arose from Barrington’s negligence in handling its clients claims)

(b) Whether it was necessary to construe the exclusion clause narrowly limiting its effect so as to make it consistent with the purpose of the Policy as a whole, given that this was a Professional Indemnity policy.

In relation to (a) the Supreme Court found that the contract was indeed a contract for Impact to supply services to Barrington: (i) Barrington contracted with Impact as a principal and not as an agent for the clients (ii) Barrington clearly obtained a benefit from the funding of disbursements since it enabled the claims to be fully funded. Barrington’s clients were able to pursue their claims which they could not otherwise afford and hence it was able to earn fees (iii) Barrington itself had paid an administration fee and had agreed to pay the loan itself should the client(s) breach the credit agreement.

In relation to (b) the Supreme Court found that there was no reason to imply additional words to limit it’s scope, it was not necessary to give the contract business efficacy or was so obvious that it went without saying. The Policy should be construed as having a broad insuring clause but subject to a number of exclusions which were “an attempt to identify the types of liability against which solicitors are not required by law to be covered by way of professional liability insurance”. There was no reason to construe those exclusions narrowly.

Good news for Insurers and bad for insureds? Not necessarily. Although obviously bad news for Impact. The decision as a whole should be welcomed as it provides clarification in relation to the construction of the policy. Many firms are considering their options not only in relation to Alternative Business Structures, but also in relation to litigation funding as a whole. We would also suggest it is good news for the Solicitors Profession as a whole. As had the decision gone the other way, potential sky high premiums for next renewal should insurers be obliged to cover claims such as this?

Pauline Rozario is a Consultant at Fenchurch Law