The Cost of Alleging Fraud: Costs Judgment Handed Down in Malhotra Leisure Ltd v Aviva [2025]
Introduction
This article examines the Commercial Court’s recent costs judgment in Malhotra Leisure Ltd v Aviva [2025], a case with significant implications for policyholders facing fraud allegations from their insurers. The decision underscores the risks insurers face when making serious allegations without sufficient evidence, and the potential for substantial costs consequences if those allegations fail.
Background
Earlier this year, we reported on the Commercial Court’s decision in Malhotra Leisure Ltd v Aviva [2025] EWHC 1090 (Comm).
To recap, during the Covid-19 lockdown in July 2020, water had escaped from a cold-water storage tank at one of the Claimant’s hotels causing significant damage.
Aviva, the Claimant’s insurer under a property damage and business interruption policy, refused to indemnify the Claimant on the basis that:
- the escape of water was deliberately and dishonestly induced by the Claimant; and
- there were associated breaches by the Claimant of a fraud condition in the policy.
However, considering that there was no evidence that (a) the escape of water had been induced by the Claimant, or (b) there was any financial motive for it to have been, the Commercial Court held that Aviva’s fraud allegations failed.
The judgment read as a cautionary tale, reminding insurers that allegations of dishonesty cannot be pleaded lightly and that reasonably credible evidence must exist to establish a prima facie case of fraud.
You can read our article on the underlying judgment here - Court pours cold water on insurer’s fraud claims: Malhotra Leisure Ltd v Aviva - Fenchurch Law UK.
The Costs Judgment
This month, the Commercial Court handed down judgment on a number of consequential matters. Crucially; whether Aviva should pay the Claimant's costs of the proceedings on an indemnity or standard basis.
An award of costs on the indemnity basis is considerably more favourable than an award on the standard basis because it:
- places the onus of showing that costs are unreasonable on the paying party;
- disapplies the requirement for proportionality; and
- renders the parties’ approved budgets irrelevant for the purposes of assessment.
In this case, the Claimant had budgeted costs of £546,730.50 but incurred costs of £1,202,957.09. The difference—over £650,000—depended on whether indemnity costs were awarded.
The starting point in all cases is that costs should be assessed on the standard basis and the burden of proving that costs should be assessed on an indemnity basis lies with the receiving party (in this case, the Claimant). Whilst there is no presumption in favour of indemnity costs where a defendant makes unsuccessful allegations of fraud, it will frequently attract indemnity costs in practice.
In Clutterbuck v HSBC Plc [2016] 1 Costs LR 13, David Richards J, as he then was, stated that “the seriousness of allegations of fraud are [sic] such that where they fail they should be marked with an order for indemnity costs because, in effect, the defendant has no choice but to come to court to defend his position”.
In other words, failed allegations of fraud should be a significant factor in persuading a court that indemnity costs should be awarded.
The Claimant referred the Court to the test set out in Suez Fortune Investments Ltd v. Talbot Underwriting Ltd [2019] Costs LR 2019. Namely whether, when one looks at the circumstances of the case as a whole, they are “out of the norm” in such a way as to make it just to order costs on the indemnity basis.
The Parties’ Arguments
The Claimant argued that, because Aviva’s allegations were so serious, they had inflicted financial and reputational damage and, because those allegations had turned out to be misconceived, justice demanded that costs should be recovered on an indemnity basis. An order for indemnity costs would allow it to recover a higher percentage of the costs that it had been forced to incur in order to defend and vindicate itself. It is no answer to an application for indemnity costs to say, as Aviva did, that the allegations were reasonably made or advanced by experienced and responsible counsel (Farol Holdings v Clydesdale Bank [2024] EWHC 1044 (Ch)).
In support of its argument that it’s conduct did not warrant such an outcome, Aviva submitted that what is required for an order of indemnity costs is conduct that is unreasonable to a high degree, and that a fraud defence supported by credible, lay and expert evidence is not deemed to be speculative, weak, opportunistic or thin simply because it ultimately proves unsuccessful at trial.
It pointed out that the insurance industry is plagued with fraudulent claims and the financial pressures facing businesses both during and following the Covid-19 lockdowns only exacerbated the problem. It submitted that insurers have a duty to challenge insurance claims which appear disingenuous (in whole or in part) otherwise fraudulent claims go unchallenged, premiums across the industry increase and all policyholders suffer. Legally, it pointed out that the Court must be careful not to use hindsight when assessing the strength of an unsuccessful party's case pursuant to Governors and Company of the Bank of Ireland & Anr v Watts Group Plc [2017] EWHC 2472 (TCC).
The Decision
Despite Aviva’s plea, in a judgment handed down on 6 November 2025, Nigel Cooper KC ordered it to pay the Claimants' costs on an indemnity basis, for the following reasons:
- The allegations of dishonesty made by Aviva (that individuals at the Claimant had devised a fraudulent scheme to damage the Claimant’s own property in order to defraud, and had subsequently lied to the court in respect of this) were of the highest level of seriousness.
- Both the Claimant and individuals at the Claimant had suffered financial and reputational harm as a result of Aviva’s allegations.
- Aviva had pursued the allegations through to the end of trial without entertaining settlement discussions with the Claimant.
- The risks associated with making the allegations were reasonably apparent from when they were first raised, given that there was no evidence that the flood had been induced by the Claimant.
- Aviva’s case evolved at trial without any attempt to amend its pleadings.
Implications for Policyholders and Insurers
This case serves as a salient reminder that fraud cannot be pleaded lightly. Aviva’s argument that it has a duty to challenge insurance claims that appear disingenuous is perhaps telling of what is at the heart of an increasing issue in the insurance industry; insurers being too willing to pursue fraud allegations. While there is no suggestion that insurers should not be able to allege fraud in circumstances where there are bona fide reasons to do so, those allegations must be balanced against the damage and harm they cause to policyholders if they prove to be incorrect. The starting point should a holistic assessment, considering all factors before such allegations are pursued, rather than the presumption that any suspicion of dishonesty should lead to a fraud allegation.
For policyholders, the case demonstrates that robustly defending unfounded fraud allegations can lead not only to vindication but also to recovery of costs on the indemnity basis.
An insurer must assess the risk, consider engaging in settlement discussions and ensure that all allegations are appropriately pleaded. Otherwise, it may well pay a significant price.
Authors
Daniel Robin, Deputy Managing Partner
The unattractive reality of the King Trader Decision - a botched appeal
The Court of Appeal has handed down its judgment in MS Amlin v King Trader.
The case stems from the 2019 grounding of MV Solomon Trader. After Bintan Mining Corporation (“BMC”), the charterer insured by MS Amlin, became insolvent, the vessel’s owner (King Trader Ltd) and its P&I Club sought to enforce a US$47 million arbitration award against MS Amlin under the Third Parties (Rights Against Insurers) Act 2010. The policy included a “pay-first” clause, requiring the insured to pay the liability before receiving an indemnity. Anticipating BMC’s inability to pay due to insolvency, MS Amlin sought a declaration that it owed no indemnity due to the pay-first clause. In July 2024, the High Court (Foxton J) granted the declaration. King Trader and the P&I Club appealed on three grounds.
Issues forming the appeal
Three issues below were considered by the Court of Appeal:
- Incorporation: Were the policy’s general conditions (including the pay-first clause) part of the insurance contract?
- Inconsistency: If incorporated, did the pay-first clause conflict with the primary insuring terms (and thus not apply)?
- “Red Hand” Notice (Onerous Term): Was the pay-first clause so onerous or unusual that it should not bind the insured (or its assignees) since it wasn’t sufficiently brought to their attention?
On 5 November 2025, the Court of Appeal (Sir Geoffrey Vos MR, Singh LJ, Males LJ) dismissed the appeal on all grounds, confirming that the pay-first clause defeated the owners’ and Club’s claim.
Court of Appeal Decision
Incorporation
The Court of Appeal agreed with the first instance judge that the pay-first clause was indeed part of the policy, was enforceable, and had been properly incorporated into the contract. The policy’s Certificate of Insurance expressly incorporated a policy booklet containing the general conditions, and no reasonable reader would assume that only the Certificate contained all terms. The Court saw no merit in the suggestion that the pay-first clause “was not part of the contract”.
Inconsistency
The court also found no inconsistency between the pay-first clause and the policy’s insuring clause. The charterers’ liability insuring agreement promised to indemnify the insured against liabilities (such as the arbitration award) that were established by final judgment or award. The pay-first clause qualified that promise by making actual payment of the liability a precondition to indemnity. The owners argued this “emasculated” the cover, but the Court held it merely “qualifies and supplements” the indemnity; it does not negate it. The Court found no actual conflict, so the pay-first condition remained effective alongside the main insuring terms.
“Red Hand” Notice
On the “red hand” argument (a reference to Lord Denning’s dictum that especially onerous clauses must be printed with a red hand pointing to them), the Court of Appeal gave a definitive response. Vos MR preferred the term “onerous clause doctrine” for this principle. He emphasised the high threshold for declaring a contract term unenforceable due to lack of notice in a commercial setting. The pay-first clause, though harsh in outcome, was not unusual in marine insurance, and such clauses are common and well understood in that market. Moreover, BMC had a professional insurance broker, who is presumed to know the significance of standard terms and explained this significance to the insured. The Court held the pay-first provision was neither onerous nor unusual enough to require special notice beyond what was given. Therefore, the owners and Club could not avoid it on that basis. The Judgment clarifies that the onerous clause doctrine has little application between sophisticated parties of equal bargaining power in commercial insurance.
Policyholder Perspective – Key Takeaways:
This decision confirms that English law will uphold clear “pay first” or “pay-to-be-paid” provisions in marine insurance contracts, even where this leaves an insolvent policyholder’s creditors without recourse. This outcome is harsh, as pay-first clauses reduce the efficacy of insurance protection just when it’s most needed. However, the Court of Appeal’s confirmation that there is little room to escape these clauses puts further emphasis on the need for insureds to carefully consider whether a “pay-first” requirement is acceptable to them, or if they (and their brokers) should really negotiate these clauses out of policies before inception.
From a policyholder’s standpoint, the case is the latest stark reminder to scrutinise policy wordings for onerous conditions, such as pay-first clauses. Such terms can fundamentally restrict coverage in scenarios of insolvency, and also will have a broader impact on the cash flow of an insured.
It’s worth noting that the 2010 Act does, however, invalidate pay-first requirements for certain kinds of claims (notably personal injury or death in marine policies), but aside from those exceptions, the clause will bite.
In King Trader, the inability of the insured to pay meant the loss ultimately stays where it fell – on the insolvent insured and the third parties – rather than shifting to the insurer.
Our colleague, Anthony McGeough, concluded that the underlying Judgment was an ugly decision for policyholders, (bad for policyholders, but correctly decided). The resounding failure of the appeal suggests that the Court of Appeal has made this case uglier still.
For our commentary on the underlying Judgment, click here.
Authors
Toby Nabarro, Partner, Fenchurch Law Singapore
Dru Corfield, Associate, Fenchurch Law
Fenchurch Law bolsters Construction and Property insurance team with two new appointments
Fenchurch Law, the UK’s leading firm working exclusively for insurance policyholders and brokers, has announced the expansion of its Construction and Property team, with Rob Goodship joining as Partner and former structural engineer, Duncan Gray, joining as a Trainee Solicitor.
Rob Goodship brings 15 years of insurance litigation experience with him, including considerable experience in resolving complex and high-value claims for corporate policyholder clients. He started his career at Kennedys, becoming an Associate, before joining Fenchurch Law in 2019 and being promoted to Associate Partner in 2022. He has spent the last 2 years at the Ardmore Group, one of the UK’s leading main contractors, as Head of Risk, Insurance & Compliance. During this time, he gained in-depth experience in construction risks as well as continuing impact of the Building Safety Act 2022 on the sector. He returns to Fenchurch Law as Partner.
Duncan Gray has joined as a Trainee Solicitor at Fenchurch Law to develop his legal career, leveraging his extensive background in the construction industry. Before joining the law firm, Duncan worked as a structural engineer predominantly for engineering consultants and for tier one contractors in design management roles. He is also a Chartered Structural Engineer and a member of the Institute of Structural Engineers. He brings unique first-hand experience of the construction industry to his new role at Fenchurch Law.
These two hires come at a time of continued expansion for Fenchurch Law, as it grows its offering both in London and internationally, most recently with the opening of its Istanbul office on 1st October.
Managing Partner at Fenchurch Law, Joanna Grant, commented: “We are delighted to welcome Rob back and have Duncan join the team. Rob’s proven track record and extensive legal experience supporting policyholders and, in particular, contractors will be invaluable in helping our construction sector clients navigate this new legal landscape. In addition, Duncan’s industry experience will bring an important new perspective and knowledgebase to the company as we continue to deepen our specialist expertise in managing complex construction and property claims. Together, their combined experience will be invaluable in supporting Fenchurch Law in its mission to level the playing field for policyholders in the UK and around the world”
Rob Goodship shared: “I am excited to return to Fenchurch Law, and bring my experience working with one of the UK’s leading contractors to the Construction and Property team. To be joining as a Partner is a genuine privilege. During my time at Ardmore, I worked extensively on the risks arising from the Building Safety Act, including Building Information Orders and Building Liability Orders. Unfortunately for those in the sector, I think that we are only just beginning to see the systemic impact which the remedies under the BSA are going to have, such that this should be a real focus area for brokers and their clients.”
Duncan Gray added: “I was attracted to Fenchurch Law because of its reputation for high-quality work, combined with an innovative and dynamic culture. What really stood out to me was their individualised approach, both in the service they provide to clients and in how they develop their people. As someone who came into law through a non-traditional route, that made a real difference.”
The underinsurance crisis: legal repercussions, broker responsibilities, and growing solutions
Underinsurance is still a major, pressing issue in the UK insurance market, with recent figures revealing that a huge 76% of commercial buildings are currently underinsured. While this is an improvement from 81% in 2023 and 83% at its peak, the statistics reveal a systemic issue which affects businesses, policyholders, and every facet of the insurance ecosystem.
In a recent webinar on Underinsurance and the Insurance Act 2015, Alex Rosenfield, Partner at Fenchurch Law, delved into the world of underinsurance, why it’s become such a huge problem for our industry, the remedies that insurers may apply under the Insurance Act 2015, the legal and financial consequences for policyholders and brokers, and finally, some suggested strategies to mitigate the risks of underinsurance.
What is underinsurance?
Taking it back to basics, underinsurance arises when the total sum insured cannot cover the full cost of rebuilding or repairing a property. The gap between the true value, and the insured value can be created for many reasons.
- Failure to factor in full rebuild costs: Including demolition, debris removal, professional fees (e.g. architects and builders).
- Inflation: Rising costs of labour, materials, and equipment may not be reflected in outdated valuations.
- Forgetting VAT: This can be especially problematic for businesses that cannot reclaim VAT.
- Intentional underinsurance: The deliberate choice to disclose lower values to reduce premiums, a risky choice which can have detrimental implications on the policy holder.
Even financially educated clients and policyholders can end up underinsured, and one of the biggest reasons is a lack of diligence.
The implications of being underinsured can be very serious. Insurers tend to apply an average clause, and the policyholder may find themselves in financial crisis, needing to fund the difference between the sums insured, and the true asset value.
Alex stressed, “Underinsurance can be disastrous with large claims, but even partial losses can still leave policyholders under-compensated.”
As an alternative (and potentially in addition) to applying average, the insurer can apply a remedy for a breach of the duty of fair presentation under the Insurance Act 2015 (“the IA 2015”), which will depend on whether the breach was deliberate or reckless, or merely carless. If it was deliberate or reckless, the insurer can refuse to pay the claim, or void the policy altogether.
If this happens, the policyholder would most likely have to share this information with a future insurer, and they may be marked as a ‘moral hazard’, reducing their perceived capacity to suffer a loss of a particular kind.
It could also frustrate business continuity in some cases, as the insured may need to wait for financial stability, and in another commercial sense, beyond the financial hit, the act of underinsuring may put directors in breach of their statutory duties.
Insurer remedies for underinsurance
Alex explained that insurers most commonly utilise one of two remedies:
The Average Clause is the most common contractual remedy, proportionally reducing the claim to discourage underinsurance and reinforce the importance of accurate valuations.
There is also the possibility of the insurer applying a remedy for a breach of the duty of presentation under the IA 2015. If the breach was deliberate or reckless, the insurer can avoid the policy and refuse all claims, and keep the premium. If it was careless or negligent, the insurer’s remedy will be proportionate, and turn on what the underwriter would have done differently had the true insured sums been disclosed.
Can insurers apply both remedies?
Alex addressed a nuanced and (currently) legally untested question: Can an insurer apply both average and a proportionate remedy under the Insurance Act to the same failure?
While technically possible, Alex argued this would likely be seen as commercially unfair and commercially unattractive, creating a double punishment. A more reasonable response, he argues, is a single repercussion based on the circumstances and severity of the breach.
“To my mind, applying both remedies cumulatively doesn't sound very attractive, because policyholders effectively be punished twice for the same failure. I think a better analysis, which I think sounds a lot more commercial, is that the insurer picks one or the other, which may just depend on how this has all happened.”
Declaration-linked and waiver of average cover
Declaration-Linked Cover (a premium based on estimated gross profit), avoids average application, unless dishonesty is involved, and is especially useful for those businesses with changeable values and success. Traditional Sum Insured with Waiver of Average promises full claim payouts without average deductions, which is also ideal for businesses that struggle with accurate valuations. However, with a waiver of average, not disclosing ‘material’ changes, such as business value growth, may still be considered a breach of the duty of fair presentation.
“Average and the remedies that insurers have under the Insurance Act can be targeted for very different things. Where an average deals with inactive, inadequate cover that the insured chooses, which is a contractual term, the values of the Insurance Act address inadequate disclosure, which affect the risk so they do address different things.”
Having covered the insurer’s and policyholder’s responsibilities at length, where does the broker stand, what are their responsibilities?
The broker’s role
Alex went on to highlight the role of the broker in helping clients to mitigate the risk of underinsurance. The Infinity Reliance v Heath Crawford case serves as a significant warning to brokers about the importance of comprehensive client advice and clear communication about insurance terms.
Infinity Reliance, an online retailer, experienced a devastating warehouse fire, but after realising that the business was underinsured, the covered value was only 26% of the actual rebuild cost (which was around £33m). The insurer, Aviva, decided to apply average, leaving the business £3 million out of pocket.
But how was the broker implicated? Infinity alliance sued their broker, Heath Crawford, claiming that he had shared misleading documentation, failed to provide proper advice on the insurance calculation, and that he had not considered the alternative premises and additional costs in his advice.
The court agreed with the policyholder, finding the broker had breached his duty. How?
- Not explaining the potential downsides of the chosen insurance type
- Failing to clarify the implications of average and coverage limits
- Not ensuring that the client’s insurance choice was informed and genuine.
Indeed, while Infinity Reliance expressed that they didn’t want to suffer a premium change, the broker was ultimately in breach of duty, as a reasonable broker would recommend a declaration of cover.
“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... even when a preference isn't expressed, the reasonable broker should check that it remains a genuine and informed choice,” Alex clarified.
Today’s legal landscape and practical solutions
While the Insurance Act 2015 introduced clearer frameworks, case law is still limited, leaving policyholders and insurers uncertain, especially on the potential for “double dipping” and the full implications of negligent misrepresentations.
So, what does Alex suggest to help combat the major issue?
- Address the root cause: diligence
There are many reasons for underinsurance, but there is one key theme amongst all reasons: a lack of diligence. It is of the highest importance to express the need for regular evaluations make sure that the policy covers all the necessary rebuild elements, and also to take account of inflation. It is also imperative that the policy holder reviews these figures annually.
"Never assume that the figures and costs that were adequate yesterday will be relevant today."
- Clarify remedy application
Insurers can, theoretically, apply cumulative remedies to the same ‘failure’, even if it feels “very draconian”. A practical solution is to actually discuss the remedy that might apply with insurers, and in what circumstances. That therefore creates certainty for all parties involved.
- Educate clients thoroughly
Brokers must explain the consequences to the policyholder of not insuring adequately; “It does go about saying that policyholders do need to be aware that other insurance can lead to serious shortfalls, even for partial losses.”
“Concepts such as average or declaration linked cover won't be obvious to everybody, so it is important to make sure that your policyholder clients know precisely what those terms mean.”
Underinsurance is not just a hidden gap in coverage, but a systemic vulnerability that has the capacity to shake business stability. With 76% of buildings underinsured, this is a problem that demands urgent attention from the entire insurance ecosystem: from insurers to policyholders to brokers.
The combined force of regulatory obligations, court decisions like Infinity Alliance, makes it clear: accurate valuation, diligent disclosure, and client education are necessities to combating this widespread issue in the current risk market.
Alex Rosenfield is a Partner at Fenchurch Law
Commercial Court grounds War Risks insurers in landmark Russian aircraft judgment
Please find a link to the judgment here - Russian Aircraft Lessor Policy Claims [2025] EWHC 1430 (Comm)
Introduction
On 11 June 2025, judgment was handed down following the long-awaited Russian aviation “mega trial” heard in the Commercial Court between October 2024 and January 2025.
The judgment is substantial for a number of reasons, not least because it runs to 230 pages, but also because the £809 million awarded is the largest amount ever awarded by the UK courts.
Of particular significance to policyholders however, is Mr Justice Butcher’s detailed application of causation principles, and his commentary on “the grip of the peril” which he first considered in Stonegate Pub Company Ltd v MS Amlin Corporate Member Ltd & Ors [2022] EWHC 2548 (Comm) and which was recently affirmed in Sky UK Ltd & Anor v Riverstone Managing Agency Ltd & Ors [2023] EWHC 1207 (Comm).
Background
On 10 March 2022, shortly after Russia’s invasion of Ukraine, the Russian Government issued an order which banned the export of aircraft and aircraft engines, initially for a period up until 31 December 2022 (“Order 311”). As a result, an estimated £7-10 billion of aircraft were retained by Russian lessees, and coverage proceedings were brought by affected lessors across a range of jurisdictions. Last winter, six sets of those proceedings were heard together by the Commercial Court, with AerCap acting as lead claimant on behalf of DAE, Falcon, KDAC, Merx and Genesis (together, “the Lessors”).
Each of the Lessors insured aircraft under policies which included two relevant sections, namely All Risks and War Risks cover. Whilst the All Risks cover insured against loss arising from property damage subject to certain exclusions, the War Risks cover protected against loss caused by war, which is typically excluded from standard All Risks cover.
Within those sections, there were two principal types of cover: Contingent Cover and Possessed Cover. The Contingent Cover was designed to respond when the aircraft were not in the physical possession of the Lessors, but were instead being operated by the Russian lessees, and was triggered in circumstances where the Lessors could not recover under the operator’s own insurance policies. In contrast, the Possessed Cover was designed to respond when the aircraft were in the actual possession of the Lessors, including during the course of any repossession.
Given that its War Risks cover was subject to an aggregate limit of $1.2 billion (around £892 million), AerCap’s primary claim was for All Risks cover for the full value of the aircraft at $3.5 billion (around £2.57 billion).
We set out the various points considered by the Court, and the key takeaways for policyholders, below.
Insurers’ position
Both All Risks and War Risks insurers denied liability for the Lessors’ claims on the basis that (inter alia):
a) the Lessors had not been permanently deprived of the aircraft;
b) in any event, both Political and Government Perils were excluded under the All Risks cover;
c) the loss was not covered under the War Risks cover; and
d) the effect of US and EU sanctions was that insurers were prohibited from paying the Lessors’ claims.
Contingent Cover or Possessed Cover?
AerCap advanced that it was the Contingent Cover which responded to the claim, given that the assets were stranded in Russia and were not therefore in the care, custody or control of the Lessors.
It was a requirement of the Contingent Cover that the Lessors were “not indemnified” under the lessee’s own insurance policy. The relevant leases obliged the lessees to take out their own insurance for the aircraft during the period of the lease, with the Lessors added as an additional insured. Those policies were referred to by the Court as the Operator Policies. It was an important factor that Lessors had also sought an indemnity under the Operator Policies, which is listed for trial in the Commercial Court in October 2026.
Despite each of the other Lessors seeking cover under the Possessed Cover, Mr Justice Butcher agreed with AerCap and held that each of the Lessors were entitled to claim under the Contingent Cover, given that the various requirements of the Contingent Cover were, prima facie, met.
Whilst the insurers argued that the Contingent Cover only responded in circumstances where the Lessors were “not indemnified” under the Operator Policies, and there was in fact a chance, pending the trial listed for October 2026, that they would be, the Court held that “not indemnified” actually meant “had not been paid”. On that basis, the Lessors’ outstanding claims under the Operator Policies were no bar to cover, as they had not been paid in respect of them.
In reaching that view, Mr Justice Butcher adopted guidance from the Australian case of LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17, which held that:
“The ease with which an insured may establish matters relevant to its claim for indemnity may influence questions of construction … a construction which advances the purpose of the cover is to be preferred to one that hinders it as a factor in construing the policies.”
In that vein, the Possessed Cover was not engaged because it was triggered where the aircraft were in the possession of, or alternatively were “in the course of repossession” by, the Lessors. The Court held that the latter required an overt act to physically repossess the aircraft, rather than simply an intention or a plan to do so. Therefore, as the Lessors had not taken steps to repossess the aircraft, the Possessed Cover could not be engaged.
Could the Lessors demonstrate permanent deprivation of the aircraft and, if so, when?
The relevant insuring clauses were triggered by “physical loss or damage” sustained to the aircraft during the period of insurance.
Each of the Lessors advanced a similar argument, which was that it was sufficient for them to show, on the balance of probabilities, that recovery of the aircraft was a “mere chance”.
In contrast, War Risks insurers argued that the appropriate test was whether there was no realistic prospect of recovery at any time within the commercial lifetime of the aircraft, a bar which they said had not been met. All Risks insurers accepted that there had been a loss of the aircraft, but argued that the loss was the result of a War Risks peril.
In holding that each of the Lessors had suffered permanent loss of possession of the aircraft upon the implementation of Order 331 on 10 March 2022, the Court held that the Lessors only needed to establish that deprivation of possession was, on the balance of probabilities, permanent which, in line with the judgment of the Supreme Court of New South Wales in Mobis Parts Australia Pty Ltd v XL Insurance Co SE [2019] Lloyd’s Law Rep IR 162, could be interpreted as being “more probable than not”. That case, whilst not binding in the UK, considered the notion of permanence and held that it should be assessed against the standard of “more probably than not”.
What was the proximate cause of the loss?
Having established a loss, the central issue was whether that loss was covered under the All Risks or the War Risks cover.
In relation to the All Risks cover, the Court had to consider whether the claims fell within either of two excluded perils, being:
a) Political Peril, defined as “any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional”; or
b) a Government Peril, defined as “confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government”.
If the claims did fall within either of those perils, the War Risks cover would be engaged.
Despite War Risks insurers’ attempts to argue a restrictive interpretation of the exclusions, Mr Justice Butcher found that the action taken by the Russian government on 10 March 2022 (Order 311) amounted to a “restraint” or “detention” that fell squarely within the definition of a Government Peril.
As a result, the claims were excluded by the All Risks cover and fell to the War Risks insurers.
Causation – Wayne Tank & Pump Cp. Ltd v Employers Liability Incorporation Ltd
Central to the arguments on causation was whether the Wayne Tank principle applied to independent concurrent causes (i.e. two causes each of which is sufficient to cause the loss on its own), or if Wayne Tank applied only to interdependent concurrent causes (i.e. where two causes, neither of which is sufficient on its own, act together to cause the loss).
In broad terms, the Wayne Tank principle dictates that, where there are two proximate causes of a loss, and one is covered and the other excluded, the exclusion will prevail, and the insurer will not be liable.
In seeking to limit the potential application of the Government Peril and Political Peril exclusions if it was found that the loss was also caused by a peril within the All Risks cover, War Risks insurers argued that the Wayne Tank principle did not apply to independent concurrent causes. In essence, the War Risks insurers were seeking to argue that, in addition to Order 311, the lessees of the planes had independently decided that it was in their interest to retain the aircraft and engines, which was a proximate cause which would be covered under the All Risks cover, and was completely independent from Order 311 such that the Wayne Tank principle did not apply.
Ultimately, Mr Justice Butcher found that Order 311 was the sole proximate cause. However, obiter, he commented that, even if there was an independent concurrent cause that fell within the scope of the All Risks cover (such as the lessees deciding themselves to retain the aircraft), the Wayne Tank principle would apply and the fact that Order 311 triggered the Government Peril exclusion would exclude cover in any event.
This part of the judgment is notable for policyholders as, while it is settled law that the Wayne Tank principle applies to interdependent concurrent causes (causes which act together to cause the loss), Mr Justice Butcher has now indicated, albeit obiter, that the same principle applies to independent concurrent causes (causes which would have been sufficient to cause the loss on their own).
As a result, each of the Lessors’ claims were found to be excluded under the All Risks cover and it was held that the claims fell to the War Risks insurers. Unfortunately, in Aercap’s case, this meant that it was entitled only to the lower limit of indemnity of $1.2 billion.
Do sanctions prevent payment to lessors?
Each of the policies contained an endorsement providing that insurers would not be liable where “providing coverage to the Insured is or would be unlawful because it breaches an embargo or sanction".
On that basis, insurers argued that they were prohibited from making payment under the War Risks section on account of sanctions introduced by the EU and US.
The Court considered the relevant sanctions and rejected insurers’ arguments on the basis of the specific wordings.
The grip of the peril – Stonegate v MS Amlin and Sky v Riverstone applied
Finally, in light of Mr Justice Butcher’s finding that the loss occurred on 10 March 2022, a separate issue arose in relation to the claims advanced by the Lessors whose War Risks policies contained provisions to review the geographical limits of the policies, pursuant to which insurers had terminated cover in Russia prior to 10 March 2022.
DAE, Falcon, Merx and Genesis advanced the “death blow” or “grip of the peril” concepts considered by Mr Justice Butcher in Stonegate v MS Amlin and again by the Court of Appeal in Sky v Riverstone. The lessors argued that the loss flowed from a peril that was operative within the policy period, and so, notwithstanding that the total loss occurred outside of it, they were entitled to cover.
In considering the authorities, Mr Justice Butcher clarified that:
“if an insured is, within the policy period, deprived of possession of the relevant property by the operation of a peril insured against and, in circumstances which the insured cannot reasonably prevent, that deprivation of possession develops after the end of the policy period into a permanent deprivation by way of a sequence of events following in the ordinary course from the peril insured against which has operated during the policy period, then the insured is entitled to an indemnity under the policy.”
Concluding that there were indeed restraints and detentions that took place prior to the implementation of Order 311, and that the loss of the aircraft on 10 March 2022 arose in a sequence of events that followed in the ordinary course of those restraints and detentions, it was held that the aircraft were in the grip of the peril by the time the relevant policies were terminated, and the relevant Lessors were therefore entitled to cover. In other words, whilst the aircraft were lost on 10 March 2022, they were in “the grip of the peril” from 5 March 2022 onwards.
In making this decision, the Court made several important findings, including:
a) relying on the explanation of the doctrine by the Court of Appeal in Sky v Riverstone, that a policy covering “loss occurring during” does not overcome the application of the “grip of the peril” principle;
b) there is no difference between (i) a loss where physical damage during the period of insurance later develops into a total loss after expiry and (ii) a loss where a deprivation during the period later becomes permanent after expiry, as a matter of construction; and
c) the “grip of the peril” principle naturally applies to deprivation of possession scenarios.
Lessons for policyholders
During a time of increased geopolitical tension, this decision is an important one given its key findings of fact and analysis of legal principles, which are likely to be applicable to all manner of coverage disputes arising out of Russia’s invasion of the Ukraine.
In particular, Mr Justice Butcher’s consideration of loss by way of deprivation in non-marine insurance policies is likely to be relevant to a range of insurance policies and policyholders that have been affected by the fallout from the Ukraine conflict and other ongoing geopolitical events.
Mr Justice Butcher’s consideration of the Wayne Tank principle is also of particular importance to policyholders given the apparent expansion of its previously accepted application to interdependent concurrent causes. It now seems that the principle will also apply to causes either of which is sufficient to cause the loss on its own, but which act in parallel.
Authors:
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
Win for policyholder in triple insurance case
Watford Community Housing Trust v Arthur J Gallagher Insurance Brokers Limited [2025] EWHC 743 (Comm)
In a judgment favourable to policyholders delivered on 8 April 2025, the Commercial Court upheld a policyholder’s right to choose on which policy to claim where cover was provided under multiple policies. The Court also confirmed that, where insufficient cover is provided by an individual policy, the policyholder may claim sequentially under two or more policies.
Background
The Claimant was responsible for a serious data breach, the financial consequences of which were covered under three separate insurance policies arranged by the Defendant broker (a Cyber Policy, a Combined Policy, and a PI Policy, which contained indemnity limits of £1m, £5m and £5m respectively).
Each Policy contained an ‘Other Insurance’ clause, which provided that, where multiple policies covered the same loss, the Policy would only cover losses in excess of those covered by the other policy.
Following the breach, and on the Broker’s advice, the Claimant notified the Cyber Insurer but not the Combined or PI Insurers, resulting in late notification. The Combined Insurer eventually affirmed cover despite this; but the PI Insurer maintained a declinature, and it was common ground that it had been entitled to do so. As a result, the Claimant had £6m of available cover under the Cyber and Combined Policies.
The Broker subsequently accepted that its advice had been negligent.
As its losses arising from the data breach exceeded the £6m of available cover, the Claimant sued the Broker, alleging that but for its negligence, the Claimant would have been entitled to a total indemnity of £11m (being the sum of the indemnity limits of all three policies).
The Broker’s position
The Broker argued that the maximum total indemnity to which the Claimant would have been entitled, even absent its Broker’s negligence, was the maximum liability under any one Policy, i.e. £5m. The Broker further argued that, since the Policyholder had already received £6m from the Cyber and Combined Policies, it had suffered no loss in not being covered under the PI Policy, as it had already recovered more than the maximum indemnity to which it would have been entitled.
In support of its case that the maximum recoverable indemnity was only £5m, the Broker submitted, and the Court accepted, that the ‘Other Insurance’ clauses in each of the Policies all cancelled out one another. Accordingly, argued the Broker, this was a case of triple insurance where the Policies provided primary cover for £1m, £5m and £5m respectively.
The Broker then argued that. in such a case of triple insurance, a general principle of ratable contribution applied, such that the maximum indemnity to which the Claimant was entitled was the maximum liability under any one policy. As a result, each Insurer’s liability would be limited to an equitable proportion of that capped liability. For example in the current situation, the Cyber, Combined and PI insurers would each be liable for one-third of the first £1m of the Claimant’s loss, and (ii) the Combined and PI insurers would each be liable for one-half of the next £4m of the Claimant’s loss, such that the Claimant would be entitled to £333,333, £2,333,333 and £2,333,333 from the Cyber, Combined and PI Insurers respectively - ie, a total of £5m.
In addition, the Broker had an alternative argument that, since the Policies were worded such that none of the insurers had agreed to provide primary coverage when another primary policy existed, effect should be given to that intention, by limiting the total indemnity available to the maximum indemnity under any one policy, thus reducing each individual insurer’s liability.
Decision
In finding for the Claimant, the court held that, contrary to the Broker’s principal submission (which the court said had been mistakenly based on cases involving claims between insurers) ,there was no general principle of rateable contribution in cases involving double (or triple) insurance whereby a policyholder’s indemnity was capped at the highest limit of any one policy. Further, the policyholder could choose the order in which to claim under the available policies, and, if it failed to recover the whole loss from one, it could recover the balance from the other(s). It would then be a matter for the insurers to establish contribution between themselves.
In addressing the Broker’s alternative argument that the wording of the policies operated to restrict the total indemnity to the highest single limit, the Court accepted that the general proposition that the wording of the policies could have displaced the usual rule outlined above, but held that, as a matter of construction, that was not the effect here.
As the Judge explained:
“It seems to me that if an insured has paid more than one premium for more than one primary policy against liability incurred above a specified attachment point and up to a specified limit, absent an express contractual provision that provides otherwise, as a matter of general principle the insured should be able to recover the whole of its loss under one or more of the policies up to a maximum of the combined limits. Contribution, if it arises, is a matter for the insurers inter se and absent a rateable proportion clause in the policy is of no concern to the insured”.
The Broker was therefore liable for the Claimant’s losses which subsisted after payment by the Cyber and Combined Policies, subject to the limit of indemnity under the PI Policy.
The full judgment can be read here:
https://www.bailii.org/ew/cases/EWHC/Comm/2025/743.pdf
Authors
Matthew King, Associate (Foreign Qualified Lawyer)
Neurodiversity Celebration Week – Q&A with Daniel Robin
Neurodiversity Celebration Week (NCW) is a global initiative aimed at challenging stereotypes and misconceptions about neurological differences. As part of NCW, Deputy Managing Partner Dan Robin takes part in an open and insightful Q&A with Associate Dru Corfield, sharing his personal experiences and perspectives.
Dru: Hi Dan, thank you for agreeing to speak about your neurodiversity as part of neurodiversity week. It is an important conversation and something that the firm is big on supporting. I suppose the obvious first question is in what way are you neurodiverse?
Dan: I have dyspraxia.
Dru: And what does that mean to a layman? How does your dyspraxia manifest?
Dan: It affects my co-ordination, particularly hand-eye as my wife found out when we went (or tried to go) motorbike riding when we first met in Australia. Workwise it makes organisation challenging and has in the past affected my ability to write. It has also occasionally had an adverse effect on my time management.
Dru: How old were you when you were diagnosed, and what gave the game away?
Dan: 12. I think my parents sought a diagnosis based on issues with coordination and how disorganised I was with schoolwork.
Dru: What was the most difficult part of being dyspraxic as a teenager?
Dan: Back when I was in teenager in the late 90’s/early 00’s (don’t let the hairline fool you, I’m only 38) there was a real lack of awareness about dyspraxia, and at school the perception was that I was lazy and sloppy rather than ascertaining whether there was another reason behind it. It was also a challenge when first learning to drive, I started to learn on a manual car but quickly learnt that was not going to happen.
Dru: And how has public awareness of neurodiversity improved since you were diagnosed / a teenager?
Dan: It’s come on loads in the last 20 years. I think the biggest change is that neurodiversity has gone from being seeing as detrimental, to being accepted, to being seen in some circumstances as an asset.
Dru: How can being neurodiverse be an asset?
Dan: Where you have to work on certain things that don’t come naturally, it can make you better at then than those to whom it came naturally. As a Spurs fan (unfortunately), I will use Harry Kane as an analogy, had he not had setbacks and had to work on parts of his performance, he would not be the best striker in the world that he is today. There are also some neurological differences that lend themselves to the skills needed for professional services, running business etc.
Dru: How has it affected you rise at Fenchurch Law from an Associate in 2018 to the Deputy Managing Partner in 2024?
Dan: I think having to work on organisation skills and other elements of the roles I have had puts me in a unique position to help others / young members of staff – because simply put there were areas of my role which I wasn’t good at it but had to improve in order to develop. I would like to think that I am a good example of the fact that there are no barriers to progression if you are neurodiverse.
Dru: How have Fenchurch been with your neurodiversity?
Dan: The support has always been incredible; I was open from start and they immediately tried to put measures in to help me. I felt comfortable being able to tell the firm and they didn’t take it as a negative, because even 7 years ago the way neurodiversity was viewed in wider society was different to how it is seen today.
Dru: And finally, what advice would you give to neurotypical people when dealing with people with dyspraxia?
Dan: Take the time to understand. Particularly because it can manifest in a way that can be misinterpreted as someone having a lack of care, attention to detail or even laziness. There are measures in place to help with nearly all aspects needed for a professional services role, and it’s about working with the individual to work out what support they require. For example, with a junior lawyer, it may be accepting that they struggle with note taking in meetings, and finding a way to work with that, or they require instructions to them in a certain way.
Dru: Thanks very much for sharing, Dan.
Daniel Robin is the Deputy Managing Partner at Fenchurch Law.
Reinsurance Cover for Covid BI Losses Upheld on Appeal
In UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWCA Civ 110, the Court of Appeal has upheld the first instance finding that the reinsured (Covea), having paid out substantial sums in respect of Covid business interruption (BI) losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The decision provides clarification on the operation of aggregation clauses and the proper interpretation of a “catastrophe” in treaty reinsurance arrangements.
Covea provided cover for a large number of children’s nurseries which were forced to close between 20 March 2020 and July 2020, as a result of the pandemic. The factual background and outcome at first instance are explained in detail in our earlier article. The decision was appealed by reinsurers and the following questions arose for re-evaluation:
1. Whether Covid-19 losses arose out of, and were directly occasioned by, a “catastrophe”; and
2. Whether the “Hours Clause” - by which the duration of any “Loss Occurrence” was prescribed depending on the nature of the underlying peril - meant that:
(i) an “individual loss” occurs on the date the covered peril strikes, including where the insured peril is the loss of ability to use premises; and
(ii) where the (re)insured first sustains indemnifiable BI loss within a nominated 168-hour period, subsequent losses after that period fall to be aggregated as part of a single “Loss Occurrence”.
Meaning of Catastrophe
At first instance, Mr Justice Foxton held that Covid-19 did amount to a “catastrophe,” as required under the reinsurance wording. On appeal, the reinsurers argued that a catastrophe must be a sudden or violent event, capable of causing physical damage, whereas the pandemic was an ongoing state of affairs.
The Court of Appeal rejected these submissions, highlighting the absence of any reference to an “event” within the policy wording, and noting that the unities test in Axa v Field [1996] is merely an aid to be used with broad application. Their Lordships also rejected the argument that “suddenness” was a pre-requisite for all catastrophes, and, in any event, the “exponential increase in Covid 19 infections in the UK […] did amount to a disaster of sudden onset.” The attempt by reinsurers to rely on an ejusdem generis argument, in relation to the alleged need for physical damage, was flawed, as the types of catastrophes mentioned in the policy were not intended to be a prescribed class. The expert evidence that BI cover may include cover for non-damage BI was unchallenged.
Operation of the Hours Clause
The central question for consideration under the Hours Clause was when the relevant loss occurred. If it fell outside the period stipulated, then it would not be recoverable. It was also noted that the term “Loss Occurrence” was defined in the policy to mean “individual losses”. Discussing this further, the Court of Appeal emphasised that the term “occur” means when a loss first happens during a period of time. In relation to BI specifically, it was held that when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues - consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences. An apportionment of financial loss would give rise to considerable practical difficulties and was deemed to be incorrect.
Implications for Policyholders
The decision is welcomed by cedants with the benefit of similarly worded reinsurance policies. The implications are far-reaching, with total payouts for Covid BI claims estimated in the region of £2 billion, according to the Association of British Insurers. This policyholder-friendly precedent is particularly helpful, since most reinsurance disputes are resolved in confidential arbitrations.
Authors:
Pawinder Manak, Trainee Solicitor
Climate Risks Series, Part 3: Aloha v AIG - Liability Cover for Reckless Environmental Harm
Aloha v AIG - Liability Cover for Reckless Environmental Harm
Increasing numbers of claims are proceeding around the world alleging that the public were misled about the risks associated with climate change, resulting from fossil fuels and greenhouse gas (“GHG”) emissions.
A recent decision in the Supreme Court of Hawaii, Aloha Petroleum Ltd v National Union Fire Insurance Co. of Pittsburgh and American Home Insurance Co. [2024], held that an “occurrence” in this context included the consequences of reckless conduct, and GHG emissions were a “pollutant” for purposes of a pollution exclusion under a commercial general liability policy.
Background
The Appellant, Aloha Petroleum Ltd (“Aloha”), was insured with two subsidiaries of AIG under a series of liability policies, in respect of its business as one of the largest petrol suppliers and convenience store operators in Hawaii.
The counties of Honolulu and Maui sued several fossil fuel companies, including Aloha, claiming that the defendants knew of the effects of climate change and had a duty to warn the public about the dangers of their products. It was alleged that the defendants acted recklessly by promoting climate denial, increasing the use of fossil fuels and emitting GHGs, causing erosion, damage to water infrastructure and increased risks of flooding, extreme heat and storms.
Aloha sought indemnity under the policies and AIG refused to defend the underlying claims, alleging that the harm caused by GHGs was foreseeable and therefore not “accidental”; and alternatively, seeking to rely upon an exclusion to cover for losses arising from pollution.
Aloha issued proceedings seeking a declaration that the policies would respond, and the District Court of Hawaii referred the following questions to the Supreme Court, to assist with determining the parties’ motions for summary judgment:
- Does an “accident” include recklessness, for purposes of the policy definition of “occurrence”?
- Are greenhouse gases “pollutants” within the meaning of the pollution exclusion?
Policy Wording
The policies provided occurrence-based coverage, with two different definitions of “occurrence” for the relevant periods:
- “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”, or
- “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured”
The pollution exclusion clauses varied across the policies, but the differences were immaterial for purposes of the issues before the Supreme Court.
The 2004-2010 policy excluded cover for:
“Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.
. . . .
“Pollutants” [mean] “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Is Reckless Conduct Accidental?
Aloha argued that it was entitled to indemnity, as the allegations of recklessness were sufficient to establish an “accident” and therefore an “occurrence” under the policies. Aloha relied on Tri-S Corp v Western World Ins. Co. (2006), which held - in the context of unintentional personal injury resulting from proximity to high voltage power lines - that reckless conduct is accidental, unless intended to cause harm, or expected to with practical certainty.
AIG claimed that Aloha understood the climate science, and the environmental damage was intentional, not fortuitous. It relied on AIG Hawaii Ins. Co. v Caraang (1993), which held - in the context of torts involving obvious physical violence - that an “occurrence” requires an injury which is not the expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.
The Supreme Court agreed with Aloha, ruling that:
“when an insured perceives a risk of harm, its conduct is an ‘accident’ unless it intended to cause harm or expected harm with practical certainty … interpreting an ‘accident’ to include reckless conduct honors the principle of fortuity. The reckless insured, by definition, takes risk.”
Are GHGs “Pollutants”?
Aloha argued that GHGs are not pollutants, because they are not “irritants” (applicable in the context of personal injury, not property damage) or “contaminants”. The drafting history was said to indicate that the exclusion should be limited to clean-up costs for traditional pollution caused by hazardous waste from the insured’s operations, not liability resulting from its finished products.
The Supreme Court held that a “contaminant”, and therefore “pollutant” for purposes of the exclusion, is determined by whether damage is caused by its presence in the environment. Although a single molecule of carbon dioxide would not be viewed as pollution, a fact-specific analysis is required, and the Supreme Court was satisfied that Aloha’s gasoline production is causing harmful climate change. This approach was supported by the regulation of GHG emissions in Hawaii and the federal Clean Air Act.
Not all of the policies contained a pollution exclusion clause, however, and the question of whether AIG is required to indemnify Aloha for that policy period (covering 1986 to 1987) will now be considered by the District Court.
Impact On Policyholders
The finding that reckless conduct is covered by liability policies in the context of climate harms is highly significant and will be welcomed by energy companies.
While the issues are yet to be fully explored in European jurisdictions, it is interesting to compare the UK Supreme Court decision in Burnett v Hanover [2021], where merely reckless conduct was insufficient to engage a ‘deliberate acts’ exclusion in a public liability policy; and the recent decision in Delos Shipping v Allianz [2024], confirming that a defence based on lack of fortuity requires the insurer to establish that consequences of the insured’s actions were inevitable, i.e. “bound to eventuate in the ordinary course”.
The precise wording of any pollution or climate change exclusion should be carefully considered prior to inception of the policy period. The causative language used can significantly alter the scope of coverage and prospects of indemnity (see, for example, Brian Leighton v Allianz [2023]).
Authors:
Climate Risk Series:
Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
Part 2: Flood and Storm Risk – Keeping Policyholders Afloat
Will someone think of the Lenders? Co-insurance issues for funders
Recent Court decisions such as Sky UK Ltd & Mace Ltd v Riverstone Managing Agency Ltd (which we wrote about previously in more detail here) have discussed “Project Insurance” policies taken out by employers in relation to construction projects, confirming the principles by which contractors, sub-contractors and other consultants may become insured under these policies. However, such policies normally also name lenders as insured parties (either specifically by name, or by general description) and in this article we discuss how these principles apply to lenders and what lenders need to do to ensure they are entitled to claim under the policies.
By way of recap, a Project Policy or OCIP normally covers insured parties in respect of physical damage to the “works”, as well as providing third party liability cover (both in respect of negligence and “non-negligence” under JCT 6.5.1). The employer, and/or any lenders, will frequently also want the policy to provide Delay in Start Up cover, which covers financial loss in the event that practical completion is delayed by damage[1] to the works.
A policy will normally define the “Principal Insured” as the employer, being the party who contracts with insurers when the policy is taken out. As I say, contractors, sub-contractors and lenders may also be named under the policy although, as was stated by Eyre J in RFU v Clark Smith Partnership [2022]:
“Being named as an insured does not without more make a person a party to the insurance contract. A person who is named as an insured but who is not otherwise a party to the insurance contract does not become a party to the contract simply by reason of having been named in it. That person remains a third party unless and until it becomes a party in a way recognised as constituting it in law a party to the insurance contract or obtains the benefit of the policy in question in some other way. … Similarly, the editors of Colinvaux rightly say at 15-018 “the mere fact that a policy states that it covers the interests of named or identifiable third parties does not of itself give those third parties the right to enforce the contract or to rely upon its terms (e.g. the benefit of a waiver of subrogation clause)”.
Where a third party insured, such as a contractor or lender, becomes an insured by agreement between an insurer and a Principal or contractual insured, the existence and scope of the cover the third party insured enjoys under the policy depends on the intention of the parties to be gathered from the terms of the Policy and the terms of any contract between the contractual assured and the relevant third party insured.
In a construction context, the Courts have stated that a third party insured contractor can become a party to the policy:
- If the employer taking out the policy is authorised to insure on the third party’s behalf (the “agency” route); or
- On the basis there is a standing offer from the project insurers to insure persons described in the policy such as “Main Contractor” or “Sub-Contractor”, which offer is capable of being accepted by those persons upon execution of a building contract, provided it is not inconsistent with the standing offer (this was the approach which the Court said was relevant in Haberdashers’ Aske Federation Trust Ltd v Lakehouse Contracts Ltd).
Whether a (sub) contractor becomes insured because of agency principles or accepting a standing offer, as well as looking at the policy, it will therefore be necessary to look at the (sub) contract to determine the extent to which the (sub) contractor is entitled to claim, and also to determine the extent to which the (sub) contractor will benefit from a waiver of subrogation.
For similar reasons, a lender will not be insured under a project policy where that policy has been arranged by a principal insured, unless the lender has provided authority to the principal insured to arrange insurance on its behalf and, even then, the lender will only be insured to the extent of the authority provided (even if the cover provided under the policy is wider than the authority provided).
In many cases, this will not cause any issues for a lender to a development finance project since the loan agreement with the borrower will authorise the borrower to arrange insurance in respect of the works, naming the lender as co-insured and first loss payee. Where the borrower is the principal or contracting insured in these circumstances, it will have the requisite authority to insure and the lender will be insured to the extent that the policy reflects the authority.
However, if for some reason the borrower is not the contracting insured, the lender may need to grant authority to the contracting insured via means other than the loan agreement. Further, if the lender wants to benefit from certain bespoke coverage not normally catered for in standard LMA facility agreement drafting (such as DSU cover), it will need to ensure that the principal insured is specifically authorised to obtain such cover on its behalf, and to the extent required.
A final point to note is that these principles will also apply where lenders are looking to be insured under other types of insurance policy in addition to project policies, which the lender has not taken out directly with insurers, such as latent defects or rights of light policies.
Christopher Ives is a Partner at Fenchurch Law
[1] Policies normally contain certain non-damage triggers as well, such as murder, suicide and disease.