Promised Land: Estoppel Trends in Policyholder Recoveries
Recent cases demonstrate how insurers’ claim handling may give rise to estoppel and extend the scope of policy coverage. Practices followed in earlier claims concerning the insured parties and/or operation of indemnity provisions could amount to a common assumption, conveyed between the parties and detrimentally relied upon by the policyholder, from which it would be inequitable for insurers to resile. Further, insurers are likely to be estopped from relying on breaches of policy conditions requiring consent to admissions or settlements, after refusing cover for liability claims.
George on High
In George on High Ltd & George on Rye Ltd v Alan Boswell Insurance Brokers & New India Assurance Co Ltd [2023], an historic pub hotel was largely destroyed by fire. The insurer (“NIAC”) agreed to indemnify the property damage but declined cover for a business interruption claim, alleging the company which suffered this element of loss was not named in or insured under the policy. Specifically, George on High Ltd (“GOH”) had owned the freehold property, whilst George on Rye Ltd (“GOR”) owned the business operating there. The named insured was “George on High Ltd t/a The George in Rye”. The defendant broker arranged the insurance and accepted it would be responsible for the losses claimed, if NIAC was not liable.
The claimants argued that earlier dealings with NIAC’s outsourced claim handlers proved knowledge on NIAC’s part that GOR ran the business, and that GOR had been confirmed as insured. Premiums had been paid by GOR, and the claims history included incidents relating to the business, with several previous claims reviewed by NIAC’s agents referring to GOR as the policyholder. In none of the earlier claims had concerns been raised as to whether policy coverage included GOR.
Deputy High Court Judge Tinkler decided a reasonable person having all the background knowledge available to the parties would have understood “George on High Ltd t/a The George in Rye” in the policy schedule to mean “George on High Ltd and the business operated by George on Rye Ltd t/a The George in Rye”. The Insurance Act 2015 states that insurers “ought to know” matters an employee or agent knows and ought reasonably to have passed on, or information held by the insurer and reasonably available to underwriters. The outsourced claim handlers were aware prior to policy inception that GOR ran the business, and this knowledge could be attributed to underwriters.
In the further alternatives, the Judge considered that all the requirements for rectification of the policy were satisfied. Applying the test in Swainland Builders Ltd v Freehold Properties Ltd [2002]: (1) the parties had a common continuing intention at the time of contracting, (2) there was an outward expression of accord, and (3) by mistake, the contract did not reflect that common intention. Even if the decision on construction was incorrect, the Judge would therefore have ordered the policy to be rectified to reflect the insured as: “GOH and the business operated by GOR t/a The George in Rye”.
The Judge also concluded that the claims history estopped NIAC from denying cover. Applying the test for estoppel by convention in HMRC v Benchdollar [2009]: (1) the policy included cover for business interruption and employer’s liability, demonstrating a common intention that GOR would be insured; (2) by accepting liability for earlier claims relating to staff and customers, NIAC had conveyed to the claimants that it believed GOR to be covered under the policy; and (3) the claimants relied upon that assumption by paying premiums. It would be unconscionable in the circumstances to allow NIAC to deny cover for GOR, even if those claims were not covered by the policy wording.
The decision stands in welcome contrast to the harsh outcome in Sehayek v Amtrust [2021], where insurers were entitled to avoid liability under a new home warranty based on failure to correctly name the developer on a certificate of insurance. The position in George on High was clearly distinguishable based on handling of the previous claims; and an application by the insurer for permission to appeal was refused.
World Challenge
In World Challenge v Zurich [2023], Fenchurch Law acted for a company running adventure trips, insured since 2016 under a bespoke travel and accident policy with Zurich. Following the outbreak of Covid-19, nearly all booked expeditions for 2020 had to be cancelled, and World Challenge refunded customers for deposits or advance payments as required by the applicable Terms & Conditions.
A dispute arose as to whether World Challenge was insured for all refunds paid to customers, or only for irrecoverable costs paid to third party suppliers. The policy wording provided that, if pre-booked travel arrangements for a journey were cancelled, curtailed or rearranged due to causes beyond World Challenge’s control, Zurich would pay:
“deposits and advance payments … reasonably and necessarily incurred that are forfeit under contract or are not otherwise recoverable.”
The policy specified a cancellation claims deductible of £200,000. Whilst many previous cancellation claims had been handled under the policies, the aggregate value had always fallen below the annual deductible, so that customer refunds in each case had been paid by World Challenge. A process had been agreed where cancellation details would be submitted to Zurich’s claim handlers, who would verify the customer’s entitlement to a refund in accordance with the Terms & Conditions, before authorising World Challenge to issue a refund payment, and tracking the policy deductible.
Zurich never asked how much of the refund payments related to irrecoverable costs and it was obvious that cancellation claims were being treated as equal in amount to the customer refunds. Based on this course of dealing, World Challenge believed that all refunds were covered under the policies. Zurich was slow to communicate its disagreement with this position when the pandemic struck, and urgent clarification became imperative to manage business operations and customer relationships.
Mrs Justice Dias held that the ordinary and natural meaning of the policy wording was that Zurich would indemnify customer refunds only if and to the extent they comprised irrecoverable third party costs. Zurich’s employees maintained that this is how they had always understood the policy to operate, yet the claims process above was followed without question because (as the Judge found): “neither the claims handlers nor the underwriters particularly cared what the refunds represented, since the amounts involved were all comparatively low and fell within the deductible so that it made no practical difference to Zurich”. This attitude was described in the judgment as cavalier, since the adjustment and agreement of a claim has just as much contractual significance where it goes to erode a deductible as when payment is made by the insurer.
Attempts in the witness box to explain why documents did not in fact mean what they appeared to were described by the Judge as “frequently incoherent and illogical”, creating a “dismal impression” and making Zurich’s witnesses “look more than a little foolish”. Whilst there was no suggestion of any conscious dishonesty, the Judge highlighted the inherent unreliability of witness recollection, since all “memory" of distant events depends on a process of reconstruction inevitably influenced by a multitude of factors including the selection of documents reviewed in preparing witness statements, and the natural human instinct to reconstruct events to put oneself in the most favourable light possible, particularly when the witness has a tie of loyalty to or dependence on one of the parties, such as an employer.
Applying the test in Benchdollar and Tinkler v HMRC [2021], the Judge found that a common but mistaken assumption of law or fact arose from the course of claims handling under the earlier policies, conveyed between the parties, and relied upon by World Challenge in relation to the cancellation of trips. Zurich was therefore estopped by convention from denying that World Challenge was entitled to be indemnified under the policy for the amount of its customer refunds, subject to giving credit for any recoveries.
As compared with estoppel by convention, promissory estoppel requires a clear and unequivocal promise or assurance by the defendant that it will not enforce its strict legal rights; an intention by the defendant that this promise/assurance should affect legal relations between the parties; and detrimental reliance by the claimant, so that it would be inequitable to permit the defendant to withdraw the promise, or act inconsistently with it. The Judge concluded that this was not established on the facts, since there was no understanding on the part of World Challenge that Zurich was giving up any right to rely on the true construction of the policy.
Permission to appeal has recently been granted and it will be interesting to see whether further nuances are introduced by the Court of Appeal.
Technip v Medgulf
In Technip Saudi Arabia v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023], the claimant (“Technip”) was principal contactor for an offshore energy project in the Middle East. A vessel chartered by Technip collided with a wellhead platform owned by the field operator, KJO, and Technip notified a liability claim under the project all risks policy, written on a WELCAR standard market wording. The defendant insurer (“Medgulf”) declined the claim and confirmed to Technip that it should act as a prudent uninsured.
Technip subsequently agreed to pay $33 million in respect of KJO’s claim, and informed Medgulf of the settlement. Medgulf considered that the insurance claim was excluded on other grounds, and raised a secondary argument that the loss did not fall within the policy definition of Damages, as follows: “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent”.
Whilst Mr Justice Jacobs ultimately found the claim to be excluded under an Existing Property Exclusion in the policy, he also agreed with Technip that the requirement for insurer’s consent to compromise settlements could not apply, as this provision presupposed the insurer’s acceptance of liability:
“It would in my view be a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent insured … [because the policyholder] would be acting in accordance with what it had been told to do. An uninsured person would, by definition, have no reason to consult or seek the consent of an insurer. I consider that a court would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured.”
The Judge also considered the effect of various common law authorities, including the New Zealand Court of Appeal decision in Napier City Council v Local Government Mutual Funds [2022], as instructive in identifying waiver and estoppel as potential reasons why an insurer, which has denied liability, cannot then rely on clauses which require the insured to obtain consent to a settlement.
The comments in this case on unauthorised settlements are in stark contrast to the judgment in Diab v Regent [2006], in which the Privy Council held that a policyholder must still comply with claim conditions even though the insurer had indicated that it would reject any such claim. The decision in Technip gives some comfort that being told to act as a prudent uninsured allows a policyholder flexibility when negotiating and settling claims, although the safest course of action will still be to seek to comply with policy conditions where possible, even if insurers are unresponsive.
Conclusion
In an insurance case heard last year in the Commercial Court, Counsel for the policyholder explained to the Judge that an estoppel argument advanced by his client in a preceding arbitration had failed. “But they always do”, languidly replied the Judge. On the contrary, recent decisions highlight that estoppel is proving to be a point worth taking for policyholders whose claims have been declined.
Policyholders and brokers should exercise caution when identifying and naming parties to be insured, to avoid potential disputes. The position in relation to deemed insurer knowledge reflects increasingly sophisticated electronic systems for information sharing across the industry, as compared with traditional hard copy files. Insurers should take a considered approach to claim handling, even for low value matters, and ensure proper oversight of appointed agents.
Authors:
The world’s first LEG3 Court decision, and what it means for the Builders’ Risk market
Introduction
27 years after the London Engineering Group (“LEG”) introduced its suite of defects exclusions, a Court in the District of Columbia in the USA has delivered the world’s first Court decision on the most generous of the three LEG clauses, LEG3, in the case of South Capitol Bridgebuilders v Lexington Insurance Company, No. 21-cv-1436, 2023 US Dist. LEXIS 176573 (D.D.C. Sep 29, 2023). That fact that the Builders’ Risk market (or what we in the UK would call the Construction All Risks, or “CAR” market) has been waiting for a LEG3 decision for this long means that SCB v Lexington was always going to receive a lot of attention. However, the unrestrained and intemperate language used by the Judge means that there is a risk that the decision will create more heat than light, and has the potential to lead to a reaction by Builders’ Risk insurers, particularly in the US, which could negatively affect the interests of policyholders. That would be a great shame, as the availability of appropriate Builders’ Risk insurance is essential for the global construction community. This article therefore attempts to take a step back from the eye-catching language used by the Judge in SCB, and to discuss what a constructive response to the case might look like.
The facts
I’ll start with a very brief description of the facts. The policyholder, SCB, was hired to build the new Frederick Douglas Memorial Bridge, which is a stunningly designed bridge which crosses the Anacostia River in Washington DC, and which is the biggest public works project in the history of the District of Columbia. The design involves three consecutive steel arches on either side of the bridge, which are supported by concrete abutments on either side of the river, and by two v-shaped concrete piers which provide support towards the centre of the river.
The concrete was placed in each of the abutments and piers in separate pours, with workers standing within the formwork and vibrating the concrete in order to achieve even placement. Due to the vibration being carried out inadequately the concrete never achieved even placement, and when the concrete had dried and the formwork was removed, the policyholder saw that the concrete contained voids, referred to as “honeycombing”. The honeycombing diminished the concrete’s weight bearing capabilities, and meant that the concrete had to be repaired so that an even distribution of concrete, without honeycombing, could be achieved.
The policyholder had the benefit of a Builder’s Risk insurance policy issued by Lexington, which contained the 2006 version of the LEG3 defects exclusion. The policyholder submitted a claim to the insurer on the basis that the honeycombing of the concrete constituted “damage” which triggered the main insuring clause of the policy, which was not excluded by LEG3. The insurer refused indemnity on the basis that, in order for there to be damage which triggered the policy it was not sufficient for the honeycombed concrete components to have been in a defective condition from time they were made. Rather, for there to be damage, a subsequent alteration in the physical condition of the concrete components was required.
The insurer also argued that, even if the concrete was damaged, the LEG3 clause excluded coverage because the whole of the remedial works constituted an improvement, on the basis that “if something broken gets fixed, hasn’t that thing been improved?”.
Based on the above the Court (which, although it was in the District of Columbia was applying Illinois Law) was required to address the following questions:
- Did the honeycombing of the concrete components constitute damage, so as to trigger the main insuring clause of the policy?
- Is the meaning of the LEG3 clause unambiguous?
- If the meaning of the LEG3 clause is ambiguous, how should that ambiguity be resolved?
I’ll explain what the Court held in relation to each issue, and add some comments of my own, in turn.
Did the honeycombing comprise damage?
Lawyers from common law jurisdictions who work regularly with policies which are triggered by property damage, whether in relation to works under construction, completed works, or products, will be familiar with the extensive body of authority from around the world in relation to the question of what constitutes “damage”. In this respect it is common for the Courts of a variety of different jurisdictions to look to decisions in other jurisdictions to help inform that issue, not because decisions from other jurisdictions are binding, but because they can be helpful in understanding an issue which has received a significant amount of prior judicial attention.
The insurer in SCB appears to have drawn a significant amount of authority to the Court’s attention, but the Judge could not have been less interested in it (“Lexington does not bother to explain how these non-binding cases are analogous, or why the Court should consider them persuasive”). Ouch. Had the Judge taken the view that the damage authorities were persuasive then the outcome of the case would almost certainly have been different, because most common law jurisdictions clearly do regard damage as a “happening” (which requires a change in physical condition), as opposed to a “condition” (which does not require a change in physical condition). In SCB’s case, there was no change in physical condition, as the concrete components contained honeycombed voids from the outset. According to the authorities in most common law jurisdictions, and certainly in England & Wales, the honeycombing would therefore have meant that the concrete components were in a defective condition from their creation, and the lack of a subsequent change in physical condition would therefore have meant that they didn’t suffer damage.
However, the Judge in SCB not only took the opposite view, but did so in the clearest terms. Asking himself the question of “whether ‘damage’ is properly understood to include the costs of fixing the concrete flaws that weakened the bridge”, he found that “the answer is unambiguously, yes”. So, how did he reach a view that for lawyers in other jurisdictions would find so surprising?
The reason starts with the fact that “damage” was not a term that was defined in the policy issued by Lexington. That meant that under Illinois Law the way to understand the meaning of the term was not to consider any authorities, but to look instead to “plain, ordinary, and popular meaning of the term”. To determine that meaning the Judge looked at Black’s Law Dictionary (10th ed., 2014), which defined damage as “loss or injury to person or property” or “any bad effect on something”.
Applying the above definition, the Judge found that the policyholder’s inadequate vibration of the concrete “caused a decrease in the weight bearing capacity of the bridge and supporting structures”, and that “a decreased weight bearing capacity is surely an injury, or at the very least a bad effect, on the bridge and its support structures”. That analysis may be true as far as it goes, but it can only be justified on the basis that the “decreased capacity” exists in comparison with the intended capacity, and not as compared with a capacity which existed before a change in physical condition which resulted in the decrease. The problem with that approach, is that a decreased capacity as compared with an intended capacity is describing contract works which are in a defective condition, and Builders’ Risk policies are not intended to cover the cost of repairing defective but undamaged property. That is a commercial risk for builders which the Builders’ Risk insurance market isn’t, and never has been, prepared to insure.
That problem is not a small one, in practice. If it is right that, under Illinois Law, property which is in a defective condition triggers an insuring clause which requires “damage”, it gives rise to a risk that Builder’ Risk insurers in that jurisdiction (and other similar jurisdictions) will use another way to ensure that they aren’t required to pay for the cost of repairing defective but undamaged property. One way to do so would be to withdraw the availability of the more generous LEG clauses (LEG2 & LEG3), and restrict cover to LEG1, which excludes the cost of repairing any damage which is caused by mistakes of any kind. That would be a significant backward step for the Builders’ Risk market, and would be a terrible development for affected policyholders.
Fortunately, there is a simple fix, which is that if a Builders’ Risk policy is issued in a jurisdiction which, like Illinois, looks to the dictionary definition of damage if it isn’t defined by the policy, rather than to any of the damage authorities, then insurers and brokers need to ensure that their policies do include a definition of damage. I would suggest the following (other formulations are available):
“Damage means an accidental change in physical condition (whether permanent and irreversible, or transient and reversible) of insured property, which impairs either the value or the usefulness of that property”.
Is the meaning of LEG3 unambiguous?
Both policyholder and insurer argued that LEG3 was unambiguous. The policyholder argued that LEG3 unambiguously provided cover for the cost of repairing the honeycombed concrete components, and the insurer argued that LEG3 unambiguously excluded cover. The Judge disagreed with both parties, finding that “LEG3… is ambiguous, egregiously so”. Ouch (again). Is it, though?
Again, it is important to remember that the Judge was applying Illinois law to the question of ambiguity, and Illinois Law in this respect isn’t necessarily going to be the same as other jurisdictions. It certainly isn’t the same as the approach that would be taken by the English Courts, which only find that a clause is ambiguous if there are competing interpretations which the Court is unable to choose between. According to the Judge in SCB, however, under Illinois Law a clause is ambiguous if it is “subject to more than one reasonable interpretation”. That is a very low bar, and the Judge may well have been right that the low bar was met in this case. Of course, that does not mean that a Judge applying a different test, with a higher bar for ambiguity, wouldn’t have been able to make a finding about what LEG3 does actually mean. However, the SCB Judge’s (too) scathing comments about the drafting of LEG3 may have the positive effect of prompting a re-draft of the clause which addresses an issue with the clause which clearly exists in theory, but which thankfully I haven’t yet seen in practice.
The specific problem with the way in which LEG3 is drafted is that it mixes up causation on the one hand, and the condition of the relevant property, on the other. Defect exclusions should be concerned with either causation (which is the intended focus of LEG1 and DE1) or with the condition of the relevant property (which is the intended focus of DE2, DE3, and DE4), but not with both. The problem with LEG3 is that the exclusionary words which begin the clause (“all costs rendered necessary by [mistakes]…”) are concerned with causation. That part of the clause is a full exclusion for the cost of fixing mistakes of all types, whether workmanship, design, materials, specification, or plan, just as with LEG1 or DE1. There is then a write back (“should damage … occur to any portion if insured property containing any of the said defects…”) which brings back cover for the cost of fixing damage to insured property where the mistakes have been built into the works (with the end of the clause limiting the write back so that it only excludes improvement costs). The problem with that is that the write back is not expressed to extend to cover the cost of repairing damage caused by mistakes which are sustained by property which is not in a defective condition prior to the occurrence of the damage. A literal reading therefore suggests that LEG3 provides greater cover for the cost of fixing damage to defective insured property than it does for the cost of fixing damage to un-defective insured property. That was clearly not the intention of the LEG committee when drafting LEG3, and it is not how CAR insurers in the UK approach LEG3, but unfortunately it is what LEG3 actually says.
Given that damage is required to trigger the insuring clause of a Builders’ Risk policy then, as long as damage is properly defined, the cost of fixing defective but undamaged property should never trigger the insuring clause, and so does not need to be excluded. That being the case, the intention of the current LEG3 clause (which is to only exclude improvement costs) could be achieved by the following much simpler formulation:
“The insurer shall not be liable for that cost incurred to improve the original material workmanship design plan or specification”.
Wouldn’t the above formulation be much easier for policyholders to understand? Clearly yes. In my view nothing useful from the current clause would be lost, but I would be very interested to hearing from anyone who takes a different view (david.pryce@fenchurchlaw.co.uk).
Resolving the “ambiguity”
Having found that LEG3 was ambiguous, the consequence under Illinois Law was that the clause must be “construed against its drafter”, which in this case meant that the clause needed to be construed against the insurer, Lexington. That was the case notwithstanding that, of course, LEG3 is a standard clause that wasn’t in fact drafted by either of the parties in SCB, but by the LEG committee in London, and has been commonly used by parties to Builders’ Risk insurance policies across the world for more than a quarter of a century.
Outcome & final comment
Given the above, the Judge found wholly in favour of the policyholder. As a policyholder representative I can only applaud the effectiveness of the arguments made by SCB’s attorneys, but I am concerned about the potential for the outcome to have a negative effect on Builders’ Risk policyholders in the future. I hope the suggestions above can help those who, like me, want to ensure that doesn’t happen.
I’d like to finish with a final comment on a point that didn’t ultimately affect the outcome in SCB, but which touches on a point of general importance, which is the issue of how to assess improvement costs, which the Judge addressed in an interesting, and quite neat, way. What constitutes improvement costs is an issue that comes up frequently in practice, and there remains no clear guidance from the Courts on how improvement costs should be determined.
In SCB the insurer argued that fixing property which had been defective before the damage occurred must necessarily constitute an improvement. The extension of that argument is that the cost of fixing design mistakes which have resulted in damage must all constitute improvement costs. That interpretation is not only contrary to the intention of LEG3, but is also wrong as a matter of principle for the reasons explained in our previous article (“You have to be pulling my LEG(3)"). The way the Judge dealt with the point in SCB was as follows:
“The context of [LEG3] suggests that to improve means to make a thing better than it would have been if it were not for the defective work”.
That formulation, in my view, works well as far as it goes, and is a useful way to look at what constitutes improvement costs where damage has been caused by workmanship failures. However, it is less clear that it works for damage which is caused by design mistakes, which need to repaired by utilising a superior and more expensive design the second time around. It remains my view that the best way to assess improvement costs is by adopting the three-stage test outlined in our earlier article.
David Pryce is the Managing Partner at Fenchurch Law
Insurance News, views and more: October 2023
Insurance News, views and more - from Fenchurch Law
OCTOBER 2023
Introduction
Welcome to the latest Fenchurch Law newsletter: concise, topical and often opinionated articles on the insurance disputes market, all from a pro-policyholder perspective.
In this edition, Amy Lacey looks at the structural problems associated with RAAC and how it may affect the UK Construction sector.
Dru Corfield, assesses the UK regulatory landscape in Artificial Intelligence.
Jonathan Corman considers the Court of Appeal’s decision in RSA & Ors v Tughans, a successful outcome for our clients, Tughans, in their long-running dispute with their PI insurers.
In our “100 Cases Every Policyholder Needs to Know” series, we bring you two cases. Read why we think MacPhail v Allianz Insurance plc was an ugly decision and why Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd was a good one.
In our Team News section, discover how employees of Fenchurch Law completed the Chiltern 50 Ultra Challenge.
Lastly, we’ve got some great upcoming events this month, so please check out the events section below for more information.
I hope you enjoy reading Insurance News and Views and that you look out for future issues in your inbox
David Pryce
Founder and Managing Partner
Viewpoint
Bubble Trouble: Aerated Concrete Claims and Coverage
Reinforced autoclaved aerated concrete (“RAAC”) is a lightweight cementitious material pioneered in Sweden and used extensively in walls and floors of UK buildings from the 1950’s to 1990’s. Mixed without aggregate, RAAC is ‘bubbly’ in texture and much less durable than standard concrete, with an estimated lifespan of 30 years. The air bubbles can promote water ingress, causing decay to the rebar and structural instability.
Read more here.
Risk, Regulation and Rewards: Regulatory Developments in Artificial Intelligence
With the Government’s White Paper consultation – “A pro-innovation approach to AI regulation” – having closed at the end of June, and the UK scheduled to host the first global summit on AI regulation at Bletchley Park in early November, now is an appropriate time to assess the regulatory lay-of-the-land in relation to this nascent technology.
Read more here.
Insurance for fees claims: RSA & Ors v Tughans
This Court of Appeal decision, in which our firm represented the successful respondents, considered the scope of a professional indemnity policy written on a full “civil liability” basis. Will such a policy respond to a claim against a firm (in this case, a firm of Solicitors) for damages referable to its fee, for which the firm had performed the contractually agreed work, but where the fee was only paid by the client following a misrepresentation by the firm?
Read more here.
Top 100 cases - The Good, The Bad and the Ugly
We continue our “100 Cases Every Policyholder Needs to Know” feature – our opinionated and practical guide to the most important insurance decisions relating to the London/English insurance markets, all looked at from a pro-policyholder perspective. As a reminder, we call them:
· “The Good” – cases that are correctly decided and positive for policyholders.
· “The Bad” – decisions that are bad for policyholders, wrongly decided and in need of being overturned.
· “The Ugly” – cases that can trip up even the most honest policyholder with the most genuine claim. Bad for policyholders but (even to our policyholder-tinted eyes) correctly decidedIn this edition we’re looking at two cases.
The first is an “Ugly one” – MacPhail v Allianz Insurance plc [2023] EWHC 1035 (Ch) – Read here.
The second is a “Good one” – Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd – Read here.
Team News
Chiltern 50 Ultra Challenge
We’re proud to share that on the 23rd of September 2023, employees of Fenchurch Law completed The Chiltern 50 Ultra Challenge.
The Chiltern 50 is a charity walk through the Chiltern Hills, a route that follows the Thames to Henley Bridge, then out into the picturesque countryside on Shakespears Way, Icknield Way, and Chiltern Way. The team walked a total distance of 50km (31 miles), with over 900 metres of climb.
We hit the trails to support MIND, a charity that’s doing incredible work in destigmatizing conversations around mental health and providing essential support to those in need.
A big thanks to everyone who supported us on this journey, if you’d like to donate, please visit our fundraising page here: https://www.justgiving.com/team/fenchurchlaw
And finally…
We want to know your views. If you have a question or an interesting point that you’d like to share about all things insurance related, please let us know by emailing info@fenchurchlaw.co.uk
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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
