MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale
MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale
MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) [2024] EWHC 1813 (Comm) is the latest in a string of recent cases that confirm the court’s reluctance to interfere with the wording of an insurance contract where the wording is clear. In this case, the wording was no ‘fox in the henhouse’, hidden away in the ‘thickets of the policy’ but front and centre.
Background
King Trader was the owner of a ship, Solomon Trader, which was chartered to Bintan Mining Corporation (“BMC”). MS Amlin issued a charterers’ liability policy to BMC (“the Policy”). In a run of bad luck, the ship became grounded in the Solomon Islands in 2019, BMC became insolvent in 2021, and an arbitration award in excess of US$47m (including interest) was made against BMC in 2023.
As BMC was no longer in the picture, King Trader and its P&I Club sought to recover under the Policy via the Third Parties (Rights Against Insurers) Act 2010.
You would be forgiven for thinking that is the end of the tale - a clear liability had been established, the policyholder had a liability policy, presumably the policy would respond? Sadly not, the wording contained a "pay first" clause, and MS Amlin therefore issued proceedings against King Trader and its P&I Club, seeking a declaration that there could be no indemnity in circumstances where the policyholder had not first discharged their legal liability.
The terms of the Policy
The relevant terms of the Policy for the purposes of this case were set out across various sections of a policy wording that was sub-divided into five parts, and accompanied the insurance certificate, as follows:
Part 1 provided that "The Company shall indemnify the Assured against the Legal Liabilities, costs and expenses under this Class of Insurance which are incurred in respect of the operation of the Vessel, arising from Events occurring during the Period of Insurance as set out in sections 1 to 17 below".
"Legal Liability" was defined as "Liability arising out of a final unappealable judgment or award from a competent Court, arbitral tribunal or other judicial body".
Section 25 of Part 5 stated "It is a condition precedent to the Assured's right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability."
And finally, Section 30 of Part 5 contained the all-important “pay first” clause- “It is a condition precedent to the Assured's right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability.”
Third Parties (Rights against Insurers) Act 2010
It is worth noting that in most circumstances the usual position under section 9(5) of the Act is that transferred rights are not subject to a condition requiring the prior discharge by the policyholder of its liability to the third party (i.e. a “pay first” clause). However, there is a significant caveat to the usual position, which applies in most circumstance except where the policy is a “contract of marine insurance”, as set out in section 9(6) of the Act.
The Issues for the Court
Without the protection of the Act, the third party’s only hope was to persuade the court that the “pay first” clause either (i) did not form part of the Policy; or (ii) as a matter of construction does not apply where a third party seeks to enforce the Policy, or (iii) is inoperative where the insured is unable to discharge the liability or is insolvent.
The court summarised the relevant considerations as being:
- Where there is inconsistency between a clause specifically agreed for the contract vs. a provision in an incorporated set of pre-existing printed terms, the court may find that the second clause is either not incorporated at all, or if it is, the court may read it down.
- Where there is inconsistency between two clauses that appear in the same document, the court may conclude that the clauses co-exist.
- When considering if two clauses can co-exist, attention will be paid to whether giving effect to the “repugnant” clause leaves the more substantive clause with a real and sensible content, and, if the subsidiary clause is to be read down, whether it will be left with a meaningful and sensible content.
- The court may be more willing to read down or read out a subsidiary clause which is inconsistent with a provision that forms part of the main purpose of the contract, or which is inapposite to the main contract.
The Judgment
In respect of arguments on inconsistency / repugnancy, the court held that it was not possible to establish any inconsistency between the “pay first” clause and the terms of the insurance certificate on the basis that the certificate clearly incorporated and attached the entirety of the wording.
Furthermore, there was not an inherent inconsistency between MS Amlin’s promise to provide liability cover and a clause making enforcement of the obligation to pay the indemnity conditional on prior discharge of that liability by the insured.
Nor was there a conflict between sections of the Policy that allowed MS Amlin to terminate the Policy on BMC's insolvency but preserve BMC's rights to indemnity in respect of incidents occurring prior to termination, and the “pay first” clause, which would require an insolvent insured to discharge its liability as a condition precedent to an indemnity.
Finally, the court considered that the “pay first” clause was not “hidden away in the thickets of the Policy”, as it was clear from the insurance certificate and the index of the wording that it included general provisions effecting the scope of rights under the Policy. Furthermore, the “pay first” clause appeared in a section which imposed a number of obligations, which left the judge unpersuaded that the clause “in this context is in the nature of a fox in the henhouse (or a wolf in the flock)”.
As for the arguments on construction and implied terms, the court held that there was no legitimate process of contractual construction that could subject the clear language of the “pay first” clause to restrictions such as only being applicable in circumstances where the insured has the means to pay a claim or in the event that a third party must pursue a claim under the Act, nor could it be argued that necessity or business efficacy required the implication of words limiting the operation of the clause.
Comments
Perhaps not a surprising outcome, especially in the context of a number of recent commercial court and appellate level decisions such as Bellini v Brit and Project Angel Bidco v Axis, that have reinforced that the courts generally will be reluctant to interfere with clear wording in an insurance contract.
In this case, and in circumstances where there is an absence of statutory control for “contracts of marine insurance”, there was little support at common law that would assist these third parties under this particular wording.
That being said, the judge’s parting remarks certainly leave the reader with the impression that this can be seen as a particularly ugly outcome for parties involved, “The state of English law on this issue in the light of the 2010 Act is not particularly satisfactory… Prudent operators seek to insure against those liabilities, and a range of third parties who suffer loss and damage as a result of accidents at sea will look to insurances of this kind to be made whole. "Pay first" clauses reduce the efficacy of that protection when it is most needed”.
Anthony McGeough is a Senior Associate at Fenchurch Law.
Establishing Liability under the TPRIA 2010
A recent decision of the Scottish Court of Session (Outer House), Scotland Gas Networks plc v QBE UK Limited & QBE Corporate Limited [2024] CSOH 15, gives helpful guidance on the operation of the Third Parties (Rights against Insurers) Act 2010 (“the 2010 Act”).
Background
Scotland Gas Networks plc (“SGN”) operated a pipeline running adjacent to a quarry, operated by D Skene Plant Hire Limited (“Skene”). A landslip occurred at the quarry, causing damage to part of the pipeline. SGN claimed the damage was a result of quarrying operations carried out by Skene. It had to divert the pipeline away from the quarry and incurred costs in doing so.
SGN brought a claim against Skene for £3 million for damage to the pipeline. A decree by default was granted against Skene, as a result of failing to appear at a procedural hearing.
Skene was insured under a public liability policy (“the Policy”). SGN claimed against the defendants (“Insurers”) under Section 1(4) of the 2010 Act (which gives third parties rights against insolvent persons) as Skene was in liquidation.
The TPRIA
Under Section 1(2) of the 2010 Act, the rights of a “relevant person” (i.e. the insolvent insured party) are transferred to the third party who has suffered loss for which the relevant person is liable.
Section 1(3) of the 2010 Act states that an injured party can bring proceedings against an insurer without first establishing the insured’s liability.
For the purposes of Section 1(4) of the 2010 Act, liability is proven only if the existence and amount of liability are established by way of a judgment or decree, arbitral award, or binding settlement).
The main issues explored in this case were:
- Whether the decree by default “established” Skene’s liability?
- Whether SGN’s claim against Skene was excluded by terms of the Policy?
Did the decree by default “establish” Skene’s liability?
Insurers’ Argument
Insurers argued that the granting of a decree by default did not establish liability under the Act. This was on the basis that the decree granted to SGN established the loss suffered, but did not establish the actual liability of Skene. Insurers relied on case law applicable to the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”) suggesting that it is necessary to show how Skene was liable to SGN. In addition, Insurers argued that establishing liability must take into consideration the merits of the dispute.
SGN’s Argument
SGN argued that Insurers’ position did not take into account the innovations of the 2010 Act and the effect of Section 1(3), which meant that proceedings could be brought without liability being established. Under the 1930 Act, the insured’s liability to a third party had to be established by judgment, arbitration or agreement before proceedings could be brought. By contrast, Section 1(4) of the 2010 Act already addresses how that liability is established. Sub-section 1(4)(b) confirms that this can be established by a decree and therefore the old case law referred to by Insurers was irrelevant.
The Decision
The Court noted that there are two elements to Section 1(4) when considering the establishment of liability:
- Firstly, the existence of liability and the amount; and
- Secondly, how the existence and amount of liability is established.
Both these elements were satisfied based on the existence of Skene’s liability in the amount of £3 million, established by decree.
Therefore, it rejected Insurers’ arguments that “establish” requires a consideration of the merits and instead concluded that “establish” does not require any additional elements apart from those contained in Section 1(4).
Was SGN’s claim against Skene excluded?
Clause 3.1.1 of the Policy provided that Insurers would indemnify the policyholder for loss resulting from damage or denial of access.
Insurers’ Argument
Insurers argued that liability founded upon a decree by default was not covered; and that the decree effected a “judicial novation” which meant that the rights SGN were enforcing against Skene through litigation were replaced with the right to enforce the decree, which did not fall within Clause 3.1.1. Further, Insurers argued that the pipeline had not suffered “damage” as defined under the Policy, and that instead SGN was claiming for pure financial loss. Clause 7.11 of the Policy contained an exclusion for financial loss not consequent upon bodily injury or property damage.
SGN’s Argument
SGN argued that the terms of the decree were “in full satisfaction of the summons” and this meant that the liability which the decree created fell under Clause 3.1.1 of the Policy. The requirements for Section 1(4) had been satisfied and this superseded the judicial novation. Insurers were wrong to say that financial loss consequent upon damage to property of a third party fell within the scope of the exclusion, taking into account the express provision for indemnity with respect to denial of access liabilities.
The Decision
The Court concluded that the decree by default “established” Skene’s liability to SGN for purposes of Section 1(4), and that Skene’s liability arguably fell within the scope of the Policy. A decree by default cannot be viewed in isolation, and in this case it was granted in an action brought by SGN against Skene. A judicial novation could not extinguish the underlying liability for the purposes of Section 1(4) of the 2010 Act. The Insurers’ motions for dismissal were rejected and SGN’s overall claim under the Policy was held over to trial.
Impact on Policyholders
The decision is helpful for policyholders in demonstrating that a judgment (or decree, in the Scottish parlance) in default will suffice to establish liability for purposes of a claim under the 2010 Act. The statutory provisions operate as an exception to the general rule that insurers are entitled to ‘look behind’ underlying claims to evaluate policy indemnity based on a merits assessment of legal liability, highlighting the risks faced by insurers where insolvent insureds fail to defend incoming claims in full, or at all.
Ayo Babatunde is an Associate at Fenchurch Law.
Seven things a good Insurer will never do
- Give You Up: Are you looking to your existing insurance provider to renew your cover and continue supporting your business through the good times and bad? A good insurer will always do that.
- Let you down: Under ICOBS rule 8.1.1, a good insurer will handle claims promptly and fairly, provide reasonable guidance to help a policyholder make a claim, provide appropriate information on its progress, and not unreasonably reject a claim (including by terminating or avoiding a policy).
- Run around: When investigating a claim, an insurer will never run around trying to find reasons not to pay. It will always treat its customer fairly.
- Desert you: In the case of liability insurance, a good insurer will always step up and pay defence costs, even where coverage might be under the microscope, and will not leave its policyholder in the lurch.
- Make you cry: Following a heavy loss, a good insurer will always take an even-handed approach to its claims process, rather than taking the opportunity to carry out a ‘post-loss underwriting process’.
- Tell a lie: A good insurer will never tell its policyholder that a claim is not covered by a policy when it clearly knows otherwise.
- Hurt you: Quick, lastly – A good insurer will always investigate and pay a claim quickly, lest it be on the wrong side of S13A damages for late payment claim, and will never add to the pain often felt by policyholders at such difficult times.
Alex Rosenfield is an Associate Partner at Fenchurch Law
Condonation and Aggregation - Decision by the Court of Appeal in Axis Specialty Europe S.E v Discovery Land [2024] EWCA Civ 7
This is the first Court of Appeal decision as to the meaning of “condoning” dishonest acts under the SRA Minimum Terms. As a reminder, solicitors’ professional indemnity policies must comply with the Minimum Terms. Under those terms insurers can decline to cover a claim which arises from dishonesty only if it had been committed or condoned by all partners in the firm.
The dispute concerned two fraudulent acts perpetrated against the claimants by their solicitor, Mr Stephen Jones, who was the senior partner in a two-partner firm. The other partner was a Mr Prentice. The firm became insolvent, and the claimants pursued two claims against the firm’s insurers, Axis, pursuant to the Third Parties (Rights against Insurers) Act 2010.
AXIS denied cover on the basis that the second partner, Mr Prentice, had condoned Mr Jones’ dishonesty (through “blind eye” knowledge), therefore engaging the exclusion considered below. While the Trial Judge found that Mr Prentice’s standards fell well below those required in his profession, he nevertheless concluded that Mr Prentice had not condoned the relevant fraudulent acts. Consequently, the claimants were entitled to be indemnified.
The appeal concerned Axis’ challenge to (1) the Judge’s finding of fact that Mr Prentice had not condoned Mr Jones’ dishonest behaviour and (2) the Judge’s decision that Axis was not entitled to rely on the aggregation clause.
Condonation
The exclusion in Axis’ policy was in the following terms:
"EXCLUSIONS
The insurer shall have no liability for: …
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that:
a) the policy shall nonetheless cover the civil liability of any innocent insured; and
b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of the company or in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
There was an argument as to what clause 2.8 requires to be “condoned”. The Court of Appeal agreed with the Trial Judge that the clause is wide enough to include condonation of a pattern of dishonest behaviour of the same type as that which gives rise to the claim. As a result, the question would be “whether or not knowledge and acceptance or approval of other acts in the same pattern amount to condonation of the act or acts which gave rise to the claim.”
For example, where partner B condoned the regular use of client funds by partner A for his/her own purpose, the Court of Appeal considered it would be more difficult for partner B to argue that he was unaware of “the specific instances of such behaviour which gave rise to the claim.”
In this case, the Court of Appeal acknowledged that, while the Trial Judge found that Mr Prentice’s evidence contained both truth and untruth, his evaluation of the evidence and ultimate decision was entirely “rational” and one he was entitled to reach.
Aggregation
The Court of Appeal had to consider whether the two claims arose from “similar acts or omissions in a series of related matters or transactions.” To do so, it applied the test for aggregation considered by the Supreme Court in AIG v Woodman.
Teare J (at first instance) found that the degree of similarity must be “real or substantial.” As to whether the claims were “related”, Lord Toulson found that this required that they “fitted together.” In considering this, the Court of Appeal in Discovery Land commented that assessing “a real or substantial” similarity requires a careful consideration of the “substance of each claim.”
Here, whilst the same property was involved and the victims were affiliated companies, the Court of Appeal considered these factors to be “insufficient to provide the necessary link between the two transactions.” The Judge’s decision not to aggregate the claims was upheld.
In determining both issues, the Court of Appeal commented that a thorough factual analysis of the evidence was required, which is what it accepted the Trial Judge had indeed carried out in “painstaking” detail. While each case turns on its own facts, this decision provides a helpful guide at Appellate level as to how a court should approach issues of condonation and aggregation.
Authors
Jessica Chappell, Senior Associate
Broker Negligence on BI Policy Advice
A recent ruling of the Commercial Court held brokers Heath Crawford Ltd (“HC”) liable to pay a former client £2.3 million in damages, for uninsured loss resulting from negligent advice on placement of a business interruption (“BI”) insurance policy.
Infinity Reliance Ltd v Heath Crawford Ltd [2023] EWHC 3022 (Comm)
The Claim
Following a fire at warehouse premises used for its online retail business, Infinity Reliance Ltd (“Infinity”) claimed for lost sales revenue and costs to fit out new premises under its insurance with Aviva. The BI sum insured was based on forecast gross profit of around £25 million over two years but the right figure would have been closer to £33 million. Infinity was underinsured and the doctrine of average applied (reducing pro rata the indemnity paid by the proportion of underinsurance) - since the insured exposure was 26% less than the total loss, Infinity recovered only 74% of its adjusted loss.
Infinity claimed the shortfall from HC, alleging it would have been fully insured if proper advice had been given on (1) calculation of the sum insured, (2) whether to obtain declaration linked cover, and (3) provision for costs to fit out alternative premises.
Types of BI Cover
Traditional “sum insured” BI cover requires the policyholder to forecast insured profit for the indemnity period, with a fixed premium payable in advance. If the policyholder has underestimated the risk or grows faster than expected, average would apply to any claim, however carefully the forecasts were made. So if the insured gross profit is £1 million but the actual gross profit is £2 million, the insurer will pay only 50% of the loss - even if the loss is far below £1 million. The policyholder is treated as having chosen to insure only part of its revenue, and to have self-insured the rest, so that the insurer and policyholder contribute rateably to any loss.
It is important for policyholders to estimate future gross profit correctly for the full indemnity period, bearing in mind that loss may be suffered on the last day of the insured period. For example, if the policy provides for a two year indemnity period (as Infinity’s did), i.e. it may compensate the policyholder for up to two years’ lost revenue after a loss begins, gross profit must be estimated for three years from inception of the policy.
Alternatively BI insurance may be taken out as “declaration linked” cover, originally developed during the 1970’s to cope with the problems faced by policyholders forecasting revenue during periods of high inflation. When covered on this basis, the policyholder must still declare its turnover and profit in advance, so that the initial premium can be assessed, but at the end of each period of insurance, the actual performance may be considered. Within broad limits, if it is higher than forecast, the policyholder pays an additional premium; if it is lower, premium is returned. The insurer agrees not to apply average. Effectively, the actual risk is retrospectively rated by adjusting the premium. It is only if the policyholder’s original estimate was very badly wrong that a claim may be at risk.
The policy arranged by Infinity’s previous brokers prior to 2018 was declaration linked cover. For the 2018/19 renewal, HC placed a new commercial combined policy with Aviva. At some point during the renewal process, Infinity told HC that it did not want BI cover on a declaration linked basis, because it had been hit by a premium adjustment previously and wanted premiums fixed in advance. However, HC did not explain to Infinity the potential downside of taking out BI insurance on this basis, including the significance of average in cases of underinsurance. HC did not make sure that Infinity knew what it was giving up, or whether its preference for traditional BI cover represented a genuine willingness to retain part of its BI risk.
Sum Insured Calculation
Leading up to the 2019/20 renewal, Infinity was provided with a generic document produced by HC entitled “How to Calculate Gross Profit”. The guidance contained the following statements under the heading “Sum Insured”:
"For many businesses, the basis of the Sum Insured will be the annual Gross Profit figure, which for BI purposes represents:
Annual turnover plus closing stock and work-in-progress less
Opening stock and work-in-progress plus variable expenses.
Variable expenses are those expenses which would reduce, or disappear entirely, in the event of a stoppage to the business.
Once an accurate and current BI Gross Profit figure has been calculated, it must be adjusted upwards to allow for anticipated growth in the business during the period of insurance itself and the Indemnity Period selected, bearing in mind that it is possible for a 'worst case scenario' loss to occur on the last day of the period of insurance.
As an example, if the current annual Gross Profit figure is £100,000, the period of
insurance is 12 months, the Indemnity Period selected is 24 months and business growth is estimated at 10% per annum, the correct Gross Profit sum insured is £254,100:
Gross Profit during 12 month period of insurance = £100,000 + 10% = £110,000
Gross Profit during 1st year of Indemnity Period = £110,000 + 10% = £121,000
Gross Profit during 2nd year of Indemnity Period = £121,000 + 10% = £133,100
Gross Profit sum insured = £121,000 + £133,100 = £254,100"
As a guide to calculating the sum insured for purposes of the Aviva policy, this was incorrect. Based on the Aviva policy insuring clauses and definitions, insured profit did not constitute the difference between turnover and “expenses which would reduce, or disappear entirely, in the event of a stoppage of the business”; it was the difference between turnover and the cost of material for production and discounts received.
HC’s guidance document included the warnings that: “In the event that the Gross Profit sum insured is not calculated correctly, there is likely to be underinsurance and average would apply to the settlement of ANY claim … If cover is arranged on a Declaration Linked basis this may well offset the need for projection but the selected indemnity period and any exceptional changes to the business will still need to taken into account.” Infinity’s finance director read these statements but did not appreciate the significance, because he did not know what “average” is and assumed the sum insured was a limit of liability, so that provided the ultimate loss was below £25 million, the claim would be paid in full. HC did not explain how declaration linked cover worked, or how it could alter the consequences of underinsurance.
Broker Duties
Brokers are required to exercise “reasonable skill and care in and about obtaining insurance on [the client’s] behalf” (JW Bollom v Byas Mosley [2000]). The extent to which an act or omission represents a breach of this duty depends on all the circumstances.
A major part of the broker’s role is to bridge a gap between the client’s knowledge and its own, in terms of cover available in the market. The broker must learn enough about the client’s needs and business to make sensible recommendations, and enable an informed decision to be made, depending on the attributes and sophistication of the individual client. Previous authorities demonstrate that brokers must:
- Aim to “match as precisely as possible the risk exposures which have been identified with the coverage available”, recommending “sufficient and effective” cover if available in the market (Standard Life v Oak Dedicated [2008]).
- Seek to assess the client’s needs beyond instructions to place specific insurance, in appropriate cases. A broker given highly specific instructions, for example, to place “mortality only” cover for a racehorse is not obliged to advise that theft cover should be obtained (O’Brien v Hughes-Gibb [1995]). However, a reasonable broker instructed to place suitable cover for exposure of a general class will consider the risks presented and what insurance will meet them.
- Enable an informed decision to be taken, by ensuring the client understands the key terms of the cover that is being obtained (Eurokey Recycling v Giles [2014]).
- Explain key aspects of the placement process including information required by insurers. There are technical complexities to insurance which a broker is expected to understand, but a client may not, which often relate to things that the broker personally cannot do for the client. The broker is required in such cases to educate the client so that it can do what it needs to do.
The duties apply on renewal as much as original placement of a risk. Whilst a broker comes to renewal with existing knowledge for use in the process, it cannot simply assume renewal is all that is required, even if nothing appears to have changed. Brokers must apply their minds to the client’s present circumstances and the sufficiency of cover in that situation.
Breach of Duty
HC admitted breach of duty in providing generic information about how to calculate the sum insured which was not accurate in relation to the policy placed for Infinity. The Court and both parties’ experts agreed that a reasonable broker would have recommended declaration linked cover to a client in Infinity’s position.
The Judge rejected HC’s attempt to rely in defence upon Infinity’s instructions that it did not want declaration linked cover, since that was not an informed decision. It is not for a broker to force upon its client a type of cover that is unwanted, even if the broker disagrees with that preference, and even if it a foolish preference. However, the broker must ensure the client understands any disadvantageous consequences - such as the risk that underinsurance would lead to any claim being reduced by average. That would be an important point to hammer home because it is an aspect of insurance that may not be obvious to the typical client, even an otherwise financially literate one. Even when a preference has been expressed, the reasonable broker should check that it remains a genuine and informed choice at renewal, especially as circumstances change.
In relation to fit out costs, the Judge held that HC was in breach of duty in failing to obtain sufficient information to make a suitable recommendation for cover to address the obvious risk that Infinity would need to find alternative premises, in the event of a fire or similar event, putting the warehouse used for its business out of action. The broker is not expected to second-guess or audit the information it is given but must follow up reasonably obvious gaps or uncertainties as part of the dialogue leading up to placement of a policy. HC knew that the warehouse premises (owned by a logistics company) were critical to Infinity’s business but failed to ask further questions, to facilitate advice on suitable Additional Increased Costs of Working provision to mitigate a potential gap in coverage.
The “How to Calculate Gross Profit” guide included a disclaimer:
“Whilst we are able to provide … information about how to calculate the sum insured, we do not accept any responsibility for the adequacy of your indemnity period and sum insured - and in some instances, you may need to consider the assistance of a suitable professional service.”
This did not absolve HC of responsibility. It was designed to make clear that HC could not undertake the BI sum insured calculations (which required a detailed financial understanding of Infinity’s business); but it was still obliged to provide accurate guidance on what the insurance policy required to be calculated.
In terms of quantum, Infinity’s recoverable loss was reduced by 20% due to contributory negligence, for carelessly failing to follow even the flawed guidance provided by HC.
Practical Implications
Brokers must take care to fully investigate and understand a client’s business and risk exposures prior to inception or renewal, so that appropriate cover can be obtained. The advantages and disadvantages of different options available in the market should be clearly explained, with detailed notes taken of client meetings for future reference.
The decision in this case highlights the perils of underinsurance for policyholders and brokers alike. BI sum insured calculations may be especially complex and declaration linked cover will be preferable in most cases, to ameliorate the potential consequences of inaccurate forecasts. Policyholders need to know that the price paid for certainty about the premium may be uncertainty about recovery in the event of a claim. Brokers should be wary of providing generic guidance notes on policy coverage or sum insured calculations if policies are placed with multiple insurers, on variable standard wordings.
In an increasingly volatile commercial landscape, with high inflation in the wake of challenges including Covid-19 and Brexit, policyholders and their brokers should proceed with caution in relation to declared values to avoid finding themselves caught short.
Amy Lacey is a Partner at Fenchurch Law
Rome wasn’t built in a day – first thoughts on the Bletchley Park AI Safety Summit
The dust is beginning to settle on the much hyped (albeit nebulously orientated) Bletchley Park Artificial Intelligence Summit. Although it will take time for meaningful directives to filter out of the sleekly edited videos and beaming group photos of world leaders, some high-level observations can be made.
The first thing to note is the inherent contradiction between attempting to bring together a group of self-interested parties for the purpose of collective wellbeing. The ‘Bletchley Declaration’, signed by 28 countries, is an opaque commitment to co-ordinate international efforts on safeguarding against the dangers posed by AI. But a tension exists between nation states competing against each other for supremacy of the technology (and all the potential fiscal, technological and societal benefits that could entail) while recognising that in the wrong hands AI could have nefarious consequences and therefore needs a degree of regulation. In light of that fundamental conflict, the Bletchley Declaration can be viewed as a good start. It does not signal a new global regulatory framework, but it may be the blueprint for some such achievement in the future.
Perhaps the starkest demonstration of nations jostling for the title of world leader/global referee of AI development is the fact that on the first day of the Summit Kamala Harris, US Vice President, gave a speech at the US Embassy in London, unveiling the ‘United States AI Safety Institute’ on the responsible use of AI. This somewhat took the wind out of Rishi Sunak’s sails, who was hoping that the Bletchley Summit would be a springboard for the UK’s own Global AI Safety Institute. The UK Safety Institute is still going ahead, with various international partners, industry participants and academics, but significantly the USA has made clear that it will not be joining. Notably, the US Institute has had 30 signatories, one of whom is the UK.
Beyond typical Great Power rivalries, the Bletchley Summit was also forced to grapple between futuristic, dystopian deployment of AI on the one hand and real world ‘already happening’ AI risk on the other. Critics of the Summit pointed out that much of the discussion around AI safety and regulation focused on the former, at the expense of the latter. For example, the Prime Minister had an hour-long sit down with Elon Musk, who has been well documented in his “AI could end humanity” narrative, a position on which – among the tech community – the jury is still out. But little thought or discussion was given to the potential short-term impacts of AI, such as the warning by Nick Clegg of Meta that there is a real chance that invidious AI could generate disinformation and affect the elections next year in the US, India, Indonesia, Mexico and the UK. Likewise, little thought was given to the danger of discrimination bias in AI’s deep learning algorithms, which has already been demonstrated to have undesirable effects, for example in automated underwriting within the insurance industry (be it racial, geographical, or class bias).
Similarly, the TUC was one of a dozen signatories to a letter to the Prime Minister that outlined concerns about the interest groups of the Summit. The opinion and concerns of small businesses (who have been documented as some of those most concerned about the threat of AI) were almost entirely overlooked in favour of the big tech firms. The argument suggested was that the power and influence of the companies like Meta, Google and X created a narrow interest group for the Summit, whereby some of the parties most concerned about AI safety did not get representation, let alone a seat at the table.
Perhaps focusing on the criticisms levied at the Summit is unfair, given the old mantra ‘if you try to please everyone, you’ll please no one’: given the complexities of AI and the amount of interest groups involved, it was almost inevitable that there would be grumblings. In some sense, any agreement should be mildly heralded – it could be argued that managing to get China and the USA to attend the same Summit was a diplomatic win, let alone to have both of them signing the Declaration. And as mentioned above, the Bletchley Summit is only a starting point: the Republic of Korea will co-host a virtual summit within the next six months before France hosts the next in-person event in 12 months. While it is true that there few concrete commitments or directives emerged from Buckinghamshire, Roma uno die non est condita.
Dru Corfield is an associate at Fenchurch Law
Legal Expenses Insurance – A Brief Introduction
After the Event Insurance (“ATE”) is an insurance policy available to litigants to cover their disbursements and their liability to pay adverse costs in the event that the case is lost. This article will also discuss the latest Supreme Court decision about litigation funding agreements (“LFAs”) and how it may impact ATE insurance.
ATE insurance is not cheap, and obtaining it is not always straightforward. Before ATE insurance can be secured, the underwriter will evaluate the merits of the case. To do so, the insurer will generally require an opinion from counsel outlining the strengths and weaknesses of the insured’s case. The underwriter will also likely want to be provided with (amongst other things) any costs estimates that have been filed, information about the opponent’s ability to pay, and the details of any conditional fee agreement, damages based agreement (“DBA”) or LFA (more on that later).
Premiums and their recoverability
ATE premiums can vary significantly depending on different factors. It naturally follows that, if the risk is higher, the premium will increase, the situation will be the same if a greater level of cover is sought. Often, premiums will be “stepped” or “staged” and increase as the case proceeds. This reflects that the risk of paying out increases the closer the matter gets to court.
In policies issued before 1 April 2013, ATE premiums are recoverable. However, after this date, premiums are only recoverable from the other side as costs in certain cases (mesothelioma claims; publication & privacy proceedings; and insolvency-related proceedings where the policy was issued prior to 6 April 2016).
ATE as security for costs
ATE insurance can be used as security for costs in certain circumstances. In Premier Motorauctions Ltd (in liquidation) & Anor v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872, the Court held that an ATE policy could, in principle, be considered as sufficient security for costs. However, the ATE policy did not offer sufficient protection in that case, because it was vulnerable to being avoided for misrepresentation or non-disclosure. The Juge, in that case, noted that the words of the ATE policy were important, and if the insurer’s ability to avoid was restricted, it may be sufficient security.
This case was cited in Saxon Woods Investment Ltd v Francesco Costa and others [2023] EWHC 850, where the ATE insurance policy contained an endorsement that placed restrictions on the insurer’s ability to avoid. The Judge found that the anti-avoidance endorsement (“AAE”) did not need to explicitly state that the insurer could not avoid in the event of fraud or dishonesty provided that was indeed its effect, but that the words had to be sufficiently clear, as such, to indicate “an extraordinary bargain”. In Saxon, the policy was expressed as non-voidable and non-cancellable, and the insurer agreed to indemnify the insured for any claim under the policy “irrespective of any exclusions or any provisions of the Policy or any provisions of general law, which would otherwise have rendered the policy or the claim unenforceable…”. The court held that the policy could be used as security for costs.
Avoidance of an ATE policy
A policy with an AAE is likely to come at a price, and for many insureds the premium will be prohibitively high. In the event that an insured’s policy does not have an AAE endorsement, insurers of an ATE policy can avoid it for all the usual reasons, e.g. non-disclosure or misrepresentation. This was confirmed in Persimmon Homes Ltd & Anor v Great Lakes Reinsurance (UK) plc [2010] EWHC 1705 (Comm). In that case, the insurer was entitled to avoid the policy due to material misrepresentations and non-disclosures. The alleged material non-disclosures included, amongst other things, bankruptcy and untruthful statements (which had come to light in the Judgment) and undisclosed financial difficulties.
ATE and LFAs
Litigation funding agreements are where a third-party funder agrees to fund the litigant’s costs. In the event of success, litigation funders are typically compensated in three different ways:
- A percentage of the proceeds, e.g. the funder claims 30% of the proceeds
- A multiple of the invested amount, e.g. the funder obtains 1.5 x the invested amount
- A combination of the above, e.g. the funder obtains either 30% of the proceeds or 1.5x the invested amount (whatever is the greater).
Many third-party funders require the litigant to obtain ATE insurance so that in the event of losing, the costs that the litigant is responsible for are covered, protecting both the funder and the litigant (a third-party funder is generally only liable for costs up to the amount it invested, although a discussion on the ‘Arkin’ cap and the case of Chapelgate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246 is beyond the scope of this article).
LFAs, and the decision in Paccar
In Paccar Inc and Ors v Road Haulage Association Limited and UK Claims Limited [2023] UKSC 28, the Supreme Court examined s 58AA of the Courts and Legal Services Act 1990 (“CSLA”) and considered whether LFAs were DBAs for the purpose of s 58AA(3)(a), which stated that:
a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—
(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and
(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.
The Court found that third-party litigation funders were providing “claims management services”, and LFAs where the funder is remunerated on a percentage of the proceeds basis would thus be caught by s 58AA(3).
LFAs that remunerate the funder on a multiple of the invested amount basis are not caught by s 58AA. S 58AA states that a DBA cannot be enforced unless it complies with the requirements of s 58AA(4), including regulations (the Damages-Based Agreements Regulations 2013 (“the DBA Regulations”)). In summary, this means that an LFA will be unenforceable if the funder is remunerated on a percentage of proceeds basis (unless it complies with the DBA Regulations, which is unlikely).
Following this decision, funders and litigants will need to ensure that LFAs either are not DBAs (i.e. providing for a multiple of investment model of remuneration) or are compliant with the regulations. If the LFA is not re-negotiated and is thereby void, ATE insurers should be notified of this, as this could result in a change to the risk and could lead to the insurer avoiding the policy.
Grace Williams is an Associate at Fenchurch Law
Webinar - The current climate for D&O claims and coverage issues
Agenda
The webinar will focus upon the current D&O liability climate, with some examples of real life claims and coverage issues faced by a wide range of policyholders, and highlighting some potential traps for the unwary.The webinar will focus upon the current D&O liability climate, with some examples of real life claims and coverage issues faced by a wide range of policyholders, and highlighting some potential traps for the unwary.
Speaker
Insurance for fees claims: RSA & Ors v Tughans
Introduction
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?
That was the issue in Royal and Sun Alliance Insurance Limited & Ors v Tughans (a firm) [2023] EWCA Civ 999 (31 August 2023), although it is important to stress that the Court of Appeal hearing, like the Commercial Court before it, proceeded on the assumption that there had in fact been a misrepresentation. Whether that was or was not the case remains to be determined in the underlying proceedings against the Solicitors.
The underling facts of the case were complex, but the appellant Insurers’ argument was summarised by the Court of Appeal as follows:
“Because the fee was procured by misrepresentation, Tughans had no right to retain it; and if it was obliged to return it, as part of a damages claim, it had not lost something to which as a matter of substance it was entitled, just as much as if the contract were avoided and it was obliged to return it or its value in a restitutionary claim… Tughans had not suffered a loss in the amount of the fee, and cover for that element of a damages claim would violate the indemnity principle.”
That argument failed at first instance before Foxton J, and failed again in the Court of Appeal.
The indemnity principle
At the heart of Insurers’ argument was reliance on the indemnity principle, the principle that a policy of indemnity insurance (as distinct from contingency insurance) will only indemnify an insured’s actual loss, and no more than that. The Court of Appeal held that Insurers’ reliance on the indemnity principle here was misplaced, for a number of reasons.
First, a professional who has done the contractually agreed work, and has earned the contractually agreed fee, does suffer a loss if he is ordered to return the fee because the retainer had been procured by a misrepresentation.
Secondly, the Insurers’ argument was inconsistent with the public interest in there being compulsory PI cover for certain professionals, so that, if a firm and its partners were not good for the money, a client would be unprotected where its damages claim included the fee which it had paid.
Thirdly, the implication of the Insurers’ argument would leave uninsured those partners, and potentially also those employees, who had no involvement with the misrepresentation and/or who had not benefited in any way from the fee.
Restitutionary claims
In RSA v Tughans, the underlying claim was one for damages, albeit damages calculated by reference to the fee which the client had paid. The Insurers argued that, since a claim framed in restitution would certainly not (they said) be covered, the same must be true of an analogous damages claim.
The Court of Appeal was unpersuaded. First, a damages claim is different from a restitutionary one. In any case, the Court of Appeal held that not only would a professional indemnity policy cover a restitutionary claim in respect of a fee which had been earned, it might in some circumstances also cover a fee which had not been earned. Thus, said Popplewell LJ, if a professional “… receives money on account of fees, and an employee steals them from the client account, or negligently transfers them to a third party, before the work is done to earn the fee, a claim by the client for the money, advanced as a restitutionary claim, would seem to me to give rise to a liability which constitutes a loss; and would, moreover, appear to fall squarely within the intended scope of PII cover, and be a necessary part of cover if the PII policy is to fulfil the public protection function of a compulsory insurance scheme”.
Conclusion
This is a very welcome decision for professional firms facing claims which extend to the fees which they have received and where previously PI insurers would have inevitably asserted that their policy would not cover such a claim.
Jonathan Corman is a partner at Fenchurch Law
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: