Waste not, want not: recycling plant’s claim for cover upheld
Zurich Insurance PLC v Niramax Group Ltd [2021] EWCA Civ 590 (23 April 2021)
Finding that the ‘but for’ test is insufficient to establish inducement, the Court of Appeal has dismissed an insurer’s claim that it would not have underwritten the policy had the material facts been disclosed.
Zurich’s appeal was from a first instance decision that had found largely in its favour in respect of cover for losses arising out a fire at the policyholder’s waste recycling plant. Zurich challenged a finding of partial cover in respect of mobile plant on that basis that, as with the policyholder’s claim for the fixed plant that had not succeeded, it had similarly been induced by a material non-disclosure to underwrite the Policy renewal.
The main focus of the appeal was on whether, in circumstances where the premium charged would have been higher had full disclosure been made, the judge at first instance had been wrong to hold that inducement had not been established. Zurich argued that the increase in premium that would have resulted was of itself sufficient to meet the causation test for inducement, irrespective of the amount of the increase or the thought process by which the additional premium would have been calculated. Niramax contended that the non-disclosure had to be an effective and real and substantial cause of the different terms on which the risk would have been written if full disclosure had been made and there was no such causation on the facts.
The Court of Appeal found that the relevant test is whether the non-disclosure was an efficient cause of the difference in terms: it is not sufficient merely to establish that the less onerous terms would not have been imposed but for the non-disclosure.
The distinction is of particular relevance on the facts of this case because the impact of the non-disclosure was that the premium was calculated by a junior trainee who made a mis-calculation. Conversely, had the disclosure been made, the risk would have been referred to the head underwriter who would have priced the premium correctly. The non-disclosure therefore fulfils a ‘but for’ test of causation in that it provided the opportunity for a mistake to be made in the calculation of premium that would not otherwise have been made.
It was, however, necessary to apply the relevant test, namely whether the non-disclosure was an effective, or efficient cause, of the contract being entered into on the relevant terms. On the facts of this case, the process by which the premium was calculated took into account: the amount insured, nature of the trade, and the claims history. The undisclosed facts, which related to Niramax’s attitude to risk, were irrelevant to the rating of the risk. Therefore, the non-disclosure could not have had any causative efficacy in the renewal being written on cheaper terms than would have occurred if disclosure had been made.
The underlying principle is that if a non-disclosure has not had any influential effect on the mind of the insurer, impacting on the underwriting judgment, then there is no connection between the wrongdoing and the terms of the insurance, and no justification for the insurer to be awarded a windfall.
Of note is that this decision is based on the law prior to the Insurance Act 2015, the application of which may have led to a different outcome. Under the provisions of the Act, an insurer has a remedy for a breach of the duty of fair presentation if, but for the breach, the insurer would not have entered into the contract of insurance at all or would have done so only on different terms. Policyholders should be aware, therefore, that under the new law, the ‘but for’ test alone may be sufficient to entitle the insurer to a remedy.
Joanna Grant is a Partner at Fenchurch Law
Insurers bound by the small print? I should cocoa!
ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWHC 442 (Comm)
In the latest in a line of policyholder-friendly judgments, this recent ruling from the Commercial Court confirms that underwriters will be bound by the terms of policies they enter into whether they have read them or not.
The court found no grounds for departing from the important principle of English law that a person who signs a document knowing that it is intended to have legal effect is generally bound by its terms. Any erosion of that principle, which unpins the whole of commercial life, it was noted, would have serious repercussions far beyond the business community.
A foregone conclusion perhaps? Indeed the judge commented that prior to this case he would have regarded as unsurprising the proposition that underwriters should read the terms of the contract to which they put their names. What was it then that spurred the 14 defendant underwriters to seek to argue the contrary, apparently oblivious to the irony of their taking a point which routinely falls on deaf ears when more commonly made by policyholders unaware of implications of the small print for their claims?
In brief, the claimant bank, ABN Amro, was seeking an indemnity of £33.5 million under a policy placed in the marine market that unusually, and perhaps unprecedentedly, contained a clause the effect of which was to provide the equivalent of trade credit insurance, and not simply an indemnity for physical loss and damage to the cargo. As such, when the cargo, which in this instance comprised various cocoa products, was sold at a loss following the collapse of two of the leading players in the cocoa market and the default by them on their credit facility, the bank incurred losses that it contended were covered by the policy.
The underwriters submitted that the non-standard nature of this clause was such that clear words would have been required to widen the scope of cover beyond physical loss and damage, given the presumption that marine cargo insurance is limited to such loss. The court however found that, applying the well-established principles of legal construction, the wording of the clause was clear, and therefore its natural meaning should not be rejected simply because it was an imprudent term for the underwriters to have agreed, given the adverse commercial consequences for them.
The underwriters further submitted that they had not read the policy, and that the particular wording and its effect should have been brought to their attention as it was unfair to expect a marine cargo underwriter to understand the purpose of the clause. The bank contended that it was “frankly bizarre” for the underwriters to be essentially arguing that they, as leading participants in the London insurance market had to be told what terms were contained in the written policy wording presented to them and what those terms meant. The court agreed, finding that the underwriters could not properly allege that the clause was not disclosed to them when it was there in the policy to which they subscribed, and that further, as the bank contended, the insured was under no duty to offer the insurer advice. The insurer was presumed to know its own business and to be able to form its own judgment on the risk as it was presented.
Many other principles of insurance law were raised by this case and are covered in the wide-ranging 263-page judgment including (i) the applicable principles of legal construction; (ii) the incorporation and impact of a non-avoidance clause in the policy (it prevented the insurers from repudiating the contract for non-disclosure or misrepresentation in the absence of fraud); (iii) whether the underwriters had affirmed the policy by serving a defence that was consistent with a position that recognised its continuing validity (they had); (iv) whether mere negligence, as opposed to recklessness, was sufficient to breach a reasonable precautions clause in the policy (it was not); and (v) the scope of a broker’s duty to procure cover the meets the insured’s requirements and protects it against the risk of litigation (which duty had been breached and would have led to a liability on the part of the broker had the claims against the underwriters not succeeded).
However, the key takeaway for insurers, policyholders and commercial contracting parties alike is that a court will not step in to relieve a party of the adverse consequences of a bad bargain: the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. In other words, it always pays to read the small print.
Joanna Grant is a Partner at Fenchurch Law.
Covid-19 BI Update: Coronavirus, the plague of the 21st Century? Apparently not.
Rockliffe Hall Limited v Travelers Insurance Company Limited [2021] EWHC 412 (Comm)
On 25 February 2021, Mrs Justice Cockerill handed down judgment in the latest Covid-19 BI coverage dispute to come before the Courts. The case was brought against Travellers Insurance Company Limited over a dispute as to the interpretation of the Disease Clause extension of the Policy and whether it would extend to cover Covid-19 losses.
Mrs Justice Cockerill found in favour of the insurer, granting an application to strike out the claim brought by the owners of Rockliffe Hall Limited, a 5-star hotel and resort in County Durham, which like many businesses across the country was forced to close during the pandemic.
The parties’ arguments focused on wording of the Infectious Disease extension to the Business Interruption Section of the Policy. The extension, like many others in use, contained a list of 34 specified diseases, which did not include Covid-19.
The wording and construction of many Business Interruption clauses have of course been considered in detail by the High Court and the Supreme Court in the Test Case brought by the FCA. They did not however, deal with the type of wording which is at the forefront of this dispute.
In this case, the insurer maintained that cover provided by the Disease Clause extends only to loss resulting from one of the 34 diseases specifically listed in the policy wordings. It stressed that this list is “closed and exhaustive” and as Covid-19 was not included on this list, losses resulting from Covid-19 would not be covered.
Rockliffe on the other hand argued that the disease wording was ambiguous as it contained a number of what it termed ‘General Diseases’, which are not attributable to specific causes or pathogens, one of which was “Plague”. The hotel contested the insurer’s position that the list was “closed and exhaustive”, arguing that the definitions of the ‘General Diseases’ should be read widely to include any disease bearing a reasonable similarity, such as Covid-19.
Rockliffe went on to argue that the term ‘Plague’ could have various meanings, one of which is “Any infectious disease which spreads rapidly and has a high mortality rate; an epidemic of such a disease.”
Mrs Justice Cockerill was not convinced. She applied the ordinary principles of construction, in considering what a reasonable reader would have understood the parties to have meant by the language used and concluded that it would be “fanciful in the extreme” to believe that a reasonable reader, would interpret the term “Plague” in that way.
Rockliffe also asserted that Covid-19 could be associated with or cause some of the more specific diseases included in the Disease Clause, such as meningitis and encephalitis as there is evidence of these conditions being associated with and or caused by Covid-19. Again, Justice Cockerill dismissed this argument as an “Alice in wonderland” approach.
The “contra proferentem” rule was also considered briefly, as it was introduced by Rockliffe, in respect of the meaning of the word “Plague” in the context of the Policy. Mrs Justice Cockerill refused to apply the principle as there was no ambiguity, which serves as a useful reminder that the Courts will not invoke the “contra proferentem” rule in the absence of any genuine ambiguity.
The end of the Covid-19 pandemic may be in sight but the subsequent impact and unanswered questions over coverage are likely to linger for some time. Whilst a negative outcome for the policyholder in this case, every judgment that deals with the interpretation of policy wording, assists policyholders and insurers alike as it clarifies the position on these issues and provides consistency.
This case is one example of an issue that has been the subject of some debate over the past year, but is now settled conclusively.
Serena Mills is an Associate at Fenchurch Law.
FCA Test Case – the Supreme Court Judgment: A guide for policyholders
On Friday 15 January 2021 the UK Supreme Court handed down its judgment in the FCA Test Case. The case was brought under the Financial Markets Test Case scheme by the FCA against 8 insurers, and considered the extent to which BI coverage was available under a selection of ‘non-damage’ BI extensions provided in a sample of 21 policy wordings.
The judgment is wide-ranging and extends to 114 pages. This guide does not attempt to capture all of the Supreme Court’s findings nor to describe the legal issues in any detail, but aims to provide Policyholders with what they need to know.
Who won?
The Supreme Court found resoundingly in favour of policyholders, essentially upholding the findings of the High Court and in some cases broadening the coverage available for Covid-19 BI losses.
Did insurers succeed on any aspects of their appeals?
No, insurers’ appeals were dismissed in their entirety.
Which Policyholders does the judgment assist?
Policyholders with coverage under those Prevention of Access and Hybrid clauses that the High Court found would respond to Covid-19 BI losses are now likely to have broader coverage in two important respects:
- Some policyholders whose coverage would not have been triggered at all under the ruling of the High Court will now be able to claim – in particular businesses that were only partially closed (for example a restaurant that was able to continue to offer takeaways services.)
- Policyholders whose coverage would not have been triggered until the coming into force of legal Regulations on 21 or 26 March 2020 may now claim from an earlier date, if their business was affected by instructions issued by the Government.
Importantly, no policyholder with a valid claim will now have the value of their claim reduced by virtue of a downturn in business caused by the effects of Covid-19 prior to coverage being triggered, or by taking into account any Covid-19 related factors whatsoever in considering the benchmark performance of the business against which the losses should be measured.
Are there any policyholders whose position is not affected?
Policyholders with coverage under those Prevention of Access clauses which were unsuccessful in the High Court, because of findings that the clauses were intended to respond to specific localised events such as gas leaks and bomb scares, rather than broader circumstances of the pandemic, do not benefit from the Supreme Court’s decision, as the FCA chose not to appeal the High Court’s findings in relation to those policies.
Are there any policyholders who are now worse off?
No. The Supreme Court dismissed all of the Insurers’ multiple grounds of appeal which, if successful, would have resulted in a less favourable position for policyholders.
What is the effect of the decisions on causation, trends clauses and the Orient Express case?
Complex cases were argued by all the parties before the Supreme Court on the linked issues of causation, trends clauses and the Orient Express v Generali case. Whilst the court’s findings in relation to those issues are of significant importance for the industry and English insurance law going forward, any detailed discussion is beyond the scope of this note.
The takeaway for Policyholders is that, in overruling Orient Express and taking a ‘concurrent causes’ approach generally to the issue of causation, policyholders whose coverage is triggered will now be entitled to an indemnity for the full extent of their Covid-19 related losses. Whilst there will inevitably be room for significant disagreement as to the correct measure of those losses, the Supreme Court has made it clear that the comparison against which the actual performance of the business must be measured must not take into account any impact of Covid-19 on the business, including any downturn in business prior to the business being closed and Policy coverage being triggered.
Are there issues left unresolved that the SC does not address?
The Supreme Court decision is final and now represents the settled position under English law as far as coverage, causation and the application of trends clauses is concerned.
There are other issues that will affect the coverage and quantification of business interruption claims which the Supreme Court did not consider, including:
Aggregation
For the purposes of the application of sub-limits of liability and deductibles, how many ‘losses’, ‘events’ or ‘occurrences’ has the policyholder suffered? This is particularly pertinent to policyholders with multiple premises and to consideration of further local and national lockdowns.
Disease at the premises
The Test Case did not consider, and did not therefore make any ruling in relation to Infectious or Notifiable Disease clauses that respond to losses caused by occurrences of disease ‘at the insured premises’ (as opposed to occurrences within a specified radius of the insured premises). The findings of the Supreme Court may now cause coverage under those clauses to be revisited.
Loss of Rent
The Test Case only considered policies providing ‘traditional’ BI coverage i.e. for loss of gross profit and increased cost of working. Policies providing express coverage for loss of rent by landlords were not considered. Different coverage issues arise in relation to those policies, which are not straightforward.
Deduction of government assistance
Many policyholders bringing claims will have benefited from various forms of government assistance since the emergence of the pandemic, and the correct treatment of such financial assistance for the purpose of calculating a BI claim indemnity is unsettled. The FCA issued a ‘Dear CEO’ letter on 18 September 2020 in which it advised insurers “We therefore do not consider the Government’s treatment of the Small Business, Retail, Hospitality and Leisure or Local Authority Discretionary grants for tax purposes is a proper basis for insurers treating those payments as turnover under the policies. Nor do we see that insurers can apply these amounts as savings against fixed business expenses”. As to other forms of government support, there remains ample scope for further disagreement.
Damages for late payment
The Enterprise Act 2016 introduced into law a new right for policyholders to claim damages for late payment of insurance claims, which did not previously exist. The right to claim damages remains untested by the courts, but the present circumstances may well lead to policyholders seeking to recover the additional costs they have incurred as a result of not being paid their claims promptly since notification in March 2020, including additional costs of financing, and in some cases costly corporate re-organisations and administration processes.
What should I do next?
The FCA and Insurers will now work with the Supreme Court to agree a set of declarations giving effect to the Supreme Court’s findings. The FCA has also indicated that it intends to issue a Q&A document for policyholders, giving guidance on who is now entitled to claim.
Previous guidance from the FCA required all insurers with ‘potentially affected claims’ to communicate with policyholders on the status of claims already submitted, and to review the coverage status of such claims following the High Court judgment in September 2020. Policyholders who have previously received communications from insurers in this respect can expect further communications following the Supreme Court judgment.
Policyholders that submitted claims earlier but that have not heard from insurers since the commencement of the Test Case, but who believe that their claim may be affected, should contact their broker or insurer to seek clarification on the status of their claim.
Policyholders that did not submit a claim earlier but believe that they may now have a valid claim following the Supreme Court judgment should contact their broker or insurer to discuss how to notify a new claim.
For a more detailed discussion and analysis of the Supreme Court judgment, please join our webinar on 21 January. Joining details can be found here.
Aggregation decisions - a bit like buses...
Hot on the heels of the High Court's decision last month that numerous defalcations by a dishonest solicitor could not be aggregated (see my post on that at https://lnkd.in/dkN2UY2) comes a further High Court judgment on 10 December 2020, again ruling against aggregation, in Spire Healthcare Ltd v RSA
The dispute arose out of the activities of the rogue surgeon, Ian Paterson, who was ultimately jailed for 15 years (increased to 20 years on appeal) for carrying out unnecessary mastectomies. As well as being a Consultant Breast Surgeon in the NHS, he also maintained a lucrative private practice, working at two Spire hospitals, and it was there that he performed numerous mastectomies on patients whom he had falsely told had breast cancer.
In fact, there were two strands to Mr Paterson's wrongdoing:
First, he had, as described, carried out unnecessary surgery on healthy patients ("over-treating"). It is almost certain that his motive here was financial.
Secondly, he had - in both his NHS practice and his private work - performed partial rather than full mastectomies ("under-treating") on patients who did have breast cancer, thereby exposing them without their consent to the risk of the cancer returning, having adopted this forbidden procedure either to save time or because the result was considered aesthetically preferable.
About 750 of Mr Paterson's victims sued Spire, either for "over-treating" or "under-treating" (and, in a few cases, for both). The claims cost Spire a total of £37m in damages, claimants' costs and defence costs.
Spire was insured for those claims under a policy written by RSA, with a limit of £10m for all claims "...consequent on or attributable to one source or original cause...".
RSA argued that all the claims were "caused" by Mr Paterson and/or to his propensity to negligence or dishonesty. That argument failed, the court (HH Judge Pelling QC, sitting as a Judge of the High Court) instead agreeing with Spire that the cause of the over-treating claims was entirely distinct from the cause of the under-treating claims. In paragraphs 24 & 25 of the judgment, Judge Pelling QC spelt this out:
"If the result was not as I have summarised it, then there would be no effective causative link between what is contended to be the originating cause and the loss in each case that it was sought to aggregate nor would what is alleged to be the originating cause explain adequately or at all why the negligent act or omission leading to the claims had occurred. A hypothetical example may help to explain the point. An orthopaedic surgeon performs both knee replacement and hip replacement procedures. He operates under a mis-appreciation as to the manner in which hip replacements are to be carried out which constitutes negligence applying established principles resulting in multiple claims by patients on whom he performed hip replacement surgery. At the same time in relation to his knee replacement practice he operates under another and different mis-appreciation relevant exclusively to knee replacement surgery which constitutes negligence applying established principles resulting in multiple claims by patients on whom he performed knee replacement surgery. In my judgment each mis-appreciation would constitute a separate originating cause unless for example it could be said that the existence of the mis-appreciations was for example the result of the Insured's failure properly to train the individual concerned.
Characterising the originating or original cause as "… negligent and inappropriate clinical care …" or, alternatively, as deliberate misconduct does not assist because in the hypothetical example set out above, the cause of the negligent hip replacement surgery whilst causative of all the hip claims was not in any sense causative of the knee claims and vice versa. Submitting as [RSA] does that in this case it is a statement of the obvious that all the claims were the result of Mr Paterson and his conduct ignores the need to search for an effective original cause of all the losses it is sought to aggregate..."
The result, in financial terms, was that Spire was entitled to £20m, and not just £10m, from RSA.
It is far too soon to know whether RSA will try to appeal. But my own view (famous last words...) was that this decision - like its predecessor last month - was entirely correct.
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/Comm/2020/3299.html
Jonathan Corman is a partner at Fenchurch Law.
Court declines to re-write existing EL insurance law
Komives v Hick Lane Bedding Ltd & Anor [2020] EWHC 3288 (QB)
This recent High Court decision was on any view a sad case, although the Court appears to have been mindful of the adage that “hard cases make bad law”.
The Claimants were two Hungarian nationals, who had been trafficked to the UK and who then worked for the First Defendant, Hick Lane Bedding Limited (“the Company”), in conditions of modern slavery. Both Claimants suffered psychiatric injuries, and one of them had also suffered a severe accident at work.
The Company went into administration in 2015; and its managing director was sentenced to prison for conspiracy to traffic individuals into the UK with intent to exploit them.
The Company’s employers’ liability insurer at the relevant time was the Second Defendant, AmTrust Europe Limited (“AmTrust”). AmTrust had written the Company's EL policy based, it appears, on relatively limited information, but it had been provided with a glowing survey as to the Company’s working practices.
The Claimants issued proceedings for their injuries against both the Company and AmTrust. AmTrust responded by avoiding the policy - a fairly predictable stance, one might have thought, in light of the Company’s clear non-disclosure of its criminal conduct.
The Claimants’ Counsel, instructed by the Anti-Trafficking and Exploitation Unit, nevertheless sought to challenge AmTrust’s avoidance, on various grounds:
- The Claimants argued that, by writing the policy based on relatively scant information, AmTrust had turned a blind eye to the possibility of the Company’s criminal conduct, or alternatively was not allowed to take this point against the victims of that conduct.
- The legislative scheme, represented by the Employers’ Liability (Compulsory Insurance) Act 1969 and the similarly entitled 1998 Regulations, which restrict which conditions/warranties can be contained in an EL policy, were intended to protect employees like the Claimants and to ensure that insurance was available. Coupled with Rule 8.1.1 of ICOBS, which states that an insurer must “not unreasonably reject a claim (including by terminating or avoiding a policy)”, it followed, submitted the Claimants, that AmTrust’s avoidance was unreasonable.
- The Claimants’ underwriting expert, Mr Flaxman, accepted that, had its involvement with modern slavery been known, the Company would have been “uninsurable” and that, in the scale of non-disclosures or misrepresentations, the Company’s non-disclosure “couldn’t get much worse”. He nevertheless gave evidence that, as a matter of “market practice”, AmTrust should have paid the claims.
The Court rejected these submissions. While understandably sympathetic to the Claimants’ position, the Court predictably recognised that the scheme to mandate insurance for employees was nothing like that afforded to the victims of road accidents, where the Road Traffic Act 1988 severely restricts an insurer’s ability to avoid a motor policy for breach of the duty of fair presentation. The Court concluded that the present framework of EL insurance may well produce very unsatisfactory results, but that it was for Parliament, and not the courts, to put that right.
The full judgment is here: https://www.bailii.org/ew/cases/EWHC/QB/2020/3288.html
Jonathan Corman is a partner at Fenchurch Law
Reasonable precautions conditions – what do they really mean?
Conditions which require insureds to exercise ‘reasonable precautions’ are a staple of insurance policies. However, there is often a misunderstanding as to their meaning and effect, and what an insurer must show in order to rely on a breach to decline the claim. In this article we take a look at the applicable principles.
Reasonable precautions in a Professional Indemnity policy
Professional indemnity (“PI”) insurance is designed to protect an insured which has incurred a civil liability to a third party arising from negligence.
PI policies almost always require insureds to take reasonable care or reasonable precautions not to cause loss or damage to a third party. If “reasonable care”, in this context, had the same meaning as a tortious duty of care, the policy would be deprived of any real value, since that would effectively exclude the very liability that the policies are intended to cover.
To overcome that issue, the Courts have consistently held that an insurer can only rely on a reasonable precautions clause where it shows recklessness by the insured. In particular, in Fraser v Furman [1967]1 WLR 898, the Court held that it must be “shown affirmatively that the failure to take precautions … was done recklessly, that is to say with actual recognition of the danger and not caring whether or not that danger was averted”. Therefore, acting carelessly will not be sufficient; the requirement is that the insured must be reckless and not care about its conduct.
Reasonable precautions in a property policy
Over time, reasonable precautions clauses have become more commonplace in property and other first-party insurance policies (such as travel or motor insurance); but what does a requirement to take reasonable precautions in a property policy mean? Can an insurer decline a claim if an insured fails to take reasonable care? Does negligence suffice?
The Court of Appeal has confirmed that the recklessness threshold applies equally in property insurance. So, in Devco Holder Ltd v Legal and General Insurance Society [1993] Lloyd’s Rep 567, where a driver deliberately left his keys in the ignition for a few minutes whilst visiting his place of work, the Court of Appeal found that the driver breached the reasonable precautions condition in his policy because he was “deliberately courting a danger”. On that basis, the driver was not entitled to recover under the Policy.
The Court of Appeal in Sofi v Prudential Assurance Company [1993] 2 Lloyd's Rep. 559 reaffirmed the decision in Devco Holder that mere negligence will not suffice. So, in order to prove recklessness, it must be shown that the insured appreciated the risk (and that appreciation will be assessed subjectively). If it can be shown that an insured appreciates the risk but simply didn’t care or ignored it, he will be found to be reckless.
On the basis that a reasonable care clause is intended to exclude liability, the burden is on the insurer to prove recklessness.
In which situations might reasonable precautions conditions be relevant?
The drafting of reasonable precautions conditions is usually broad. For example, the clause may require an insured to “take all reasonable precautions to prevent or diminish damage or any occurrence or cease any activity which may give rise to liability under this Policy and to maintain all Property insured in sound condition.”
The general actions expected from insureds to diminish or reduce danger are likely to vary on a case by case basis and therefore not readily summarised; however, examples in a property context would include locking all doors and windows when the premises are empty (so as to minimise the risk of theft); taking precautions against fire or alerting the fire brigade promptly in the event of a fire; and adhering to guidance from professionals such as surveyors.
It is perhaps more illustrative, by comparison, to consider the sorts of actions which have been found to constitute a breach i.e. where an insured has acted recklessly. In particular:
- Lambert v Keymood Ltd [1990], in which an insured continued to set bonfires at its premises, despite being warned about the dangers of doing so;
- Limit (No.3) Ltd v Ace Insurance Ltd [2009], where an insured took no steps to repair a building, notwithstanding the fact that it was warned that it might collapse;
- Grace Electrical Engineering Pte Ltd v EQ Insurance Co Ltd [2016], where an insured ignored advice regarding cooking operations taking place in the basement of its premises.
There is however an important distinction to be drawn between reasonable precautions and positive obligations under the policy which require insureds to take specific actions, such as hot works conditions, unoccupied buildings conditions, and security conditions. In Aspen Insurance v Sangster & Annand Ltd, the Court commented that the recklessness threshold will not apply where there is “a highly defined and circumscribed set of particular safeguards which have to be put in place” which involved a detailed hot works condition clause with which the insured had failed to comply.
Reminder for brokers and policyholders – a health warning
In order to avoid the risk of insurers seeking to decline the policy for a breach of reasonable precautions conditions, it is important for brokers and policyholders to be fully aware of their continuing obligations throughout the duration of policy.
Failure to warn the insured about such policy conditions may result in a broker being held liable in the event that indemnity is declined due to breach of a reasonable precautions or other specific condition - RR Securities & Ors v Towergate Underwriting Group Ltd [2016]. In this case, following a fire caused by arson, the insurer sought to decline the claim due to failure to comply with the minimum-security standards and failure to take reasonable precautions to avoid the loss. The Court found that the insured had not been reckless and therefore there had been no breach of the reasonable precautions condition. However, the broker was found to be liable to the insured for failing to bring the onerous security conditions to the insured’s attention.
Whilst we see insurers seeking to rely on reasonable precautions conditions in circumstances where the insured has merely been careless or negligent, equally care should be taken to ensure that policyholders are fully aware of their obligations and to distinguish between reasonable precautions conditions and other more onerous requirements defined in the policy. In short:
- Where the policy contains a reasonable precautions clause, the insured must not act recklessly or against advice where it appreciates that a risk exists which might cause a loss; and
- Where the policy contains specific obligations, such as a hot works condition or unoccupied buildings condition, the reckless threshold does not apply – the insured must therefore take extra care to fully comply with those obligations or avoid a declinature of a claim at a later date.
A Christmas Tale: The Latest on Aggregation - Lord Bishop of Leeds v Dixon Coles & Gill [2020] EWHC 2809 (Ch)
Summary
In a judgment handed down on 28 October, the High Court (His Honour Judge Saffman) applied the test in AIG Europe Ltd v OC320301 LLP [2016] EWCA Civ 3 for “interconnectivity or unifying factors” in relation to the aggregation of claims under the SRA Minimum Terms, and clarified that the mere fact that a number of different dishonest acts have been committed by the same individual is unlikely to be a sufficient unifying factor.
Background
Dixon Coles & Gill was a long-established three-partner firm of solicitors. Its senior partner was a Mrs Box. On Christmas Eve 2015, the two other partners discovered that Mrs Box had stolen over £4m from various clients in a series of thefts over a number of years. She ended up being jailed for seven years.
DCG was quickly faced with claims from a number of those clients. These proceedings were brought by two sets of such clients (collectively, “the Claimants”).
DCG’s professional indemnity insurer was HDI Global Specialty SE (“HDI”). Its policy had an indemnity limit of £2m any one claim.
Pursuant to the SRA Minimum Terms & Conditions (“the MTCs”), HDI was obliged to indemnify the innocent partners of DCG. However, it argued that all of the misappropriations should be classed as a single “claim” under the MTC. That would have meant that that a single indemnity limit, of £2m, would have applied to all the claims which DCG were facing, leaving an uninsured exposure of a further £2m.
The Claimants brought a claim directly against HDI under the Third Parties (Rights against Insurers) Act 1930 for a declaration that each of their claims against DCG should be treated as a separate claim (with a separate £2m limit of indemnity) and that the test for aggregation under the MTCs was not satisfied.
The aggregation provision
The MTCs aggregate all claims arising from:
i. one act or omission;
ii. one series of related acts or omissions
iii. the same act or omission in a series of related matters or transactions; or
iv. similar acts or omissions in a series of related matters or transactions.
This case involved a consideration of limbs (i) and (ii).
HDI’s “one act” argument: limb (i)
The MTCs define a “claim” not just as a demand for, or an assertion of a right to, civil compensation, but also as including any obligation on the part of the insured firm to remedy a breach of the SRA Account Rules
HDI argued that DCG’s obligation to remedy that breach was one indivisible obligation and therefore constituted one “claim” under the MTC. It argued that Mrs Box’s dishonest conduct constituted a single “act”, using the analogy of building a house whereby:
“an individual engages in a single act when he builds a house. That may involve a number of individual steps but at the end of the day there was one act intended.”
The Court rejected that analysis, instead holding, in agreement with the Claimants, that each theft was a separate dishonest act. Using HDI’s own analogy of house-building, the Court stated that the situation of multiple thefts was more akin to a whole housing development:
“There may be a single intention to build a housing estate in the same way that Mrs Box may have had the single intention of stealing as much money as possible but each house, and each theft, must, in my judgment, be a different act although they may be taken with a view to accomplishing one ultimate objective.”
HDI’s “related acts” argument: limb (ii)
HDI’s alternative argument was that the thefts were sufficiently “related” so as to satisfy limb (ii) of the aggregation provision in the MTCs. It argued that Mrs Box’s modus operandi of teeming & lading (using funds from one client to cover up the theft committed in relation to another client) was a “unifying factor” pursuant to the test laid out by the Supreme Court in AIG Europe Ltd v OC320301 LLP [2016] EWCA Civ 3 (“the AIG case”) - albeit that that decision had considered the meaning of the word “related” in the context of limb (iv) (“related matters or transactions”).
HDI’s alternative argument was also rejected by the Court. Based on the AIG case, it held that, in order for matters or transactions (or in this case thefts) to be “related”, there must be sufficient interconnection or unifying factors between them. However, the fact that the thefts that were all committed by the same person and concealed by the same process was not enough.
The teeming & lading did not constitute the acts which had to be related, but were merely a process of concealing the thefts. It was the thefts themselves which had to be related for the purposes of aggregation, and that required a degree of inter-dependence which was entirely absent here. On the contrary, what caused the financial losses to the two sets of Claimants were separate thefts from each of them.
Conclusion
This case thus provides considerable reassurance for solicitors seeking an indemnity from their insurers (or Claimants ultimately seeking recovery from those insurers), where those insurers might otherwise have attempted to aggregate a raft of thefts committed by one person by one method. More generally, it emphasises the high bar for insurers in demonstrating that discrete acts or omissions are nevertheless sufficiently “related” so that multiple claims, arising from those acts, can be aggregated.
Covid-19 BI Update: Supreme Court to hear FCA Test Case appeal on 16-19 November 2020
Further to the ‘leapfrog’ applications for appeal filed by the FCA and 6 insurers in October, the Supreme Court has now granted the applications, and listed the matter to be heard from 16-19 November 2020.
Whilst RSA has notably abandoned its appeal in relation to the RSA4 (Resilience) wording, it appears that the remaining insurers have maintained their appeals in full as set out in the original requests for leapfrog certificates. As a result, the majority of the other 21 wordings considered in the Test Case remain subject to appeal by insurers and/or the FCA to a greater or lesser degree.
The Supreme Court has summarised the scope of the appeal as follows:
1. certain matters of construction relating to:
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- "Disease Clauses" (i.e. those which can be triggered by the occurrence of severe acute respiratory syndrome coronavirus 2 ("COVID-19"), typically within a specified distance of the insured’s premises);
- "Prevention of Access Clauses" (i.e. those triggered by public authority intervention preventing access to, or use of, premises as a result of COVID-19); and
- "Hybrid Clauses" (i.e. those clauses which contain wording from both Disease and Prevention of Access Clauses), and
2. whether the Divisional Court was correct:
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- to apply certain counterfactual scenarios in relation to the operation of the clauses in relevant policies which provided for loss adjustments (the "Trends Clauses"); and
- in its analysis of Orient-Express Hotels Ltd v Assicurazioni Generali S.p.A.
The last point is perhaps the most contentious and far-reaching, since in the Test Case judgment Flaux LJ and Butcher J found that they were able to distinguish the facts and circumstances of the Test Case from the findings in Orient Express, and did not therefore need to apply it, but that if it had come to it they would have found that it was wrongly decided. Since the Supreme Court panel includes both Lord Hamblen (who as Hamblen J issued the original judgment in Orient Express), and Lord Leggatt (who sat on the tribunal which issued the arbitral award from which the Orient Express case was appealed), the hearings will make for interesting viewing.
Most importantly, whichever way the decision goes, the Supreme Court’s ‘final word’ on the issue of wide area damage, trends clauses and the decision in Orient Express will bring some welcome clarity and finality to the issue which can only benefit policyholders and insurers alike.
