“When the lie is dishonest but the claim is not” – collateral lies and dishonest exaggerations
Two recent Supreme Court judgments have considered the impact of dishonesty – on an insurance claim and on a settlement agreement.
In one, where ship owners sought to embellish their insurance claim through the inclusion of a false, but irrelevant, statement, the court held that the owners were nevertheless able to recover under their insurance policy.
In the other, evidence that an employee had dishonestly exaggerated the extent of injuries sustained in the work place entitled his employer’s insurers to set aside a settlement entered into with him before that evidence was available.
Through their differing outcomes, these cases serve to illustrate that, while the courts remain as ready as ever to take a strong stance whenever there is evidence of fraud, nevertheless and in line with the current trend towards a more level playing field for policyholders, where “the lie is dishonest but the claim is not”, for an insurer to avoid all liability for the claim will not be an appropriate sanction.
Versloot Dredging BV v HDI Gerling Industrie Versicherung AG
In Versloot Dredging BV v HDI Gerling Industrie Versicherung AG, the owners of a ship damaged by a flood in the engine room made a false statement that the bilge alarm had sounded. The Supreme Court found that this did not prevent the ship owners from being able to recover under their insurance policy. This was because, although the lie was dishonest, the claim was genuine. On the facts, the policy would have responded in the same way and for the same amount whether or not the statement was true. The dishonest statement did not therefore go to the recoverability of the claim, and was not material. The insurer was required to meet the liability, which was a liability that it had always had.
This type of dishonest statement was previously known as a “fraudulent device” and is now termed a “collateral lie”. The question for the court was whether collateral lies, statements that dishonestly strengthen what would otherwise be entirely genuine claims, constitute “fraudulent claims”. Fraudulent claims entitle the insurer to avoid liability. They encompass both claims that have been fabricated in their entirety and claims that have been dishonestly exaggerated as to their amount. Following the judgment in Versloot Dredging it is now clear that collateral lies no longer fall to be considered as a further category of fraudulent claim and will not entitle an insurer to reject the claim.
The scope of ‘fraudulent claims’, and in particular whether it extends to collateral lies, was an issue that had been left open by the wording of the Insurance Act 2015 (the Act). The Act, which applies to policies entered into after 12 August 2016, sets out an insurer’s remedies for fraudulent claims. These include the right not to pay the claim and the right to recover from the insured any sums paid by the insurer. The decision in Versloot Dredging has resolved the uncertainty as to whether a collateral lie would be caught by the Act. It is now clear it is not. Where a policyholder seeks to strengthen a genuine claim with a collateral lie, if that collateral lie is immaterial to the insured’s right of recovery, the insurer is not entitled to avoid the claim.
Hayward v Zurich Insurance Company plc
By contrast, Hayward v Zurich Insurance Company plc demonstrates that, in line with the usual maxim, fraud will still unravel all. In this case, by dishonestly exaggerating his injuries, an employee had obtained a settlement from his employer’s insurer that was significantly higher in value than what he would otherwise have recovered. When conclusive evidence proving the dishonesty later emerged, the insurer sought to set aside the settlement. To do so, it was necessary for the insurer to show that it had been induced by the misrepresentation as to the extent of the injuries to enter into the settlement. The issue for the Supreme Court was whether the insurer could still be said to have been induced by the misrepresentation in circumstances where, at the time of entering into the settlement, the insurer suspected that the employee was dishonestly exaggerating his injuries. The court found that it was sufficient that the misrepresentations were a material cause of the insurer entering into the settlement. There was no requirement for the insurer to have believed the misrepresentations to be true and the settlement could consequently be set aside.
Significantly, in Hayward, where the Supreme Court was considering the impact of the fraud on a settlement agreement not an insurance policy, the employee remained entitled to damages for his actual, albeit modest, injury. Were the same type of dishonest exaggeration to occur in the context of a claim made under an insurance policy, it would constitute a fraudulent claim for which a policyholder could not recover anything at all, whether at common law or under the new statutory regime.
See Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45; Hayward v Zurich Insurance Company plc [2016] UKSC 48.
Joanna Grant is a Partner at Fenchurch Law.
Shock horror: "Innocent Non-Disclosure" clause applies to innocent non-disclosure
A case reported on 23 March involved a provision which one might ordinarily have described as an "Innocent Non-Disclosure" clause (albeit it was not entitled that): it protected the policyholder against the consequences of any material non-disclosure unless it had been "deliberate or fraudulent". The Insurers had nevertheless attempted to argue that the clause did not apply where the policyholder had failed to disclose information as a result of an honest but mistaken belief that the information had not needed to be disclosed.
Predictably enough(?), the court (Coulson J) rejected the Insurers' arguments, holding that they would lead to an "absurd [and] wholly unbusiness-like result".
Why did Insurers even take the point? Surely it wasn't simply because there was almost £18m at stake?
See Mutual Energy Ltd v Starr Underwriting & Travellers
The full judgment is here: http://www.bailii.org/ew/cases/EWHC/TCC/2016/590.html
Jonathan Corman is a Partner at Fenchurch Law.
INDIRECT CAUSATION MUST STILL BE REAL CAUSATION
In the recent decision of Arc Capital Partners Limited v Brit Syndicates Limited [2016] EWHC 141, the courts have yet again had to grapple with causation issues in the insurance context.
The case concerned a claim on a professional indemnity policy by a Fund Manager, which was facing a very substantial negligence claim from a former client.
The Commercial Court (Cooke J) was required to construe a Retroactive Exclusion, which excluded:
“… any claim … arising from or in any way involving any act, error or omission committed or alleged to have been committed prior to 5th June 2009”.
One of the key issues was how the phrase “in any way involving” should be construed, as compared with the phrase “arising from”.
The Insured contended that the two phrases in question were near identical, with both in effect equating to “proximately caused by”.
By contrast, the Insurers, while agreeing that “arising from” did indeed mean “proximately caused by”, argued that “in any way involving” meant only that there had to be “a broad or loose connection” between the claim and the act/error/omission which had occurred prior to 5 June 2009.
Ironically, in the event that their respective primary arguments failed, both the Insured and the Insurers had identical fall-back positions - namely that, while “arising from” meant “proximately or directly caused by”, the phrase “in any way involving” was to be construed as meaning “indirectly caused by”.
Perhaps unsurprisingly, the court held that this unintended compromise between the parties was indeed the correct construction, a construction which resulted in the two phrases being given recognisably distinct meanings and the clause hanging together as whole.
The court then went on to consider what was meant by “indirectly caused by”. It stated that it derived considerable assistance from the decision of Scrutton J (as he then was) in Coxe v Employers’ Liability Assurance Corporation Limited [1916] 2 KB 629, which involved a life insurance policy taken out by an Army Captain who had been fatally hit by a train while inspecting sentries guarding a railway line. The question was whether the insurers could rely upon an exclusion for death or injury “directly or indirectly caused by, arising from or traceable to … war”.
Scrutton J held, and nowadays this might be thought obvious, that:
“…A line must be drawn somewhere. For instance, the birth of Captain Ewing, even though it may be said to have led in the chain of causation to his being in the position in which he was killed, could not be considered as causing his death…”
Thus, stated Scrutton J, if for example Captain Ewing had been struck by lightning while he happened to be at a military camp, it could not be said that his death was indirectly caused by the war. In this case, however, he had been killed by the train while undertaking military duties, and thus his death was indeed indirectly caused by the war, so that the claim by his estate on the life policy failed.
Against that background, the court in Arc Capital held that the “act, error or omission” referred to in the Retroactive Exclusion had to have causative effect, and thus must have been the type of act, error or omission which could in principle give rise to liability on the part of the insured. Thus:
“It is not enough that circumstances arise prior to 5th June 2009 in which a wrongful act takes place thereafter. That would merely represent the historical context or background against which wrongful acts occurred. There must be some act, error or omission which could give rise to liability which occurs prior to the Retroactive Date which is genuinely part of a chain of causation which leads to liability for the claim in question.”
So, whereas “arising from” (or any other phrase connoting direct causation) requires an immediate causal connection between an event and an outcome, “in any way involving” (or any other such phrase connoting indirect causation) still requires a genuine causal connection between the two albeit not an immediate one. It is sufficient that the two are connected by a “chain of causation”, however many links apart they may be in that chain.
About the author
Jonathan Corman Partner
T: 020 3058 3077
E: jonathan.corman@fenchurchlaw.co.uk
Jonathan is a partner specialising in insurance disputes, with a particular focus on Professional, Financial and Construction risks. Jonathan has been an insurance specialist for over 20 years, concentrating primarily on professional indemnity claims, as well construction, EL/PL and D&O. He has litigated at all levels of the court system, is familiar with the arbitration process and a strong believer in mediation whenever it is appropriate.
The Insurance Act 2015: When excellence was the enemy of the good
In December 2014 a Special Public Bill Committee of the House of Lords took evidence on proposals in the Insurance Bill which, earlier this year, became the Insurance Act 2015. The Bill approved by the Committee saw revolutionary changes to insurance law which, as the law commissioner put it, had not received legislative attention since the period in which the first series of Downton Abbey was set.
The Insurance Act (effective August 2016) does much to realign the power balance between policyholders and insurers:
- The new duty on the policyholder to make a fair presentation (which replaces the old duty of disclosure) will introduce welcome transparency for policyholders in a process in which they were previously left to feel their own way (albeit hand in hand with their broker if they had one).
- Even more importantly, the remedies for breach of the new duty to make a fair presentation are to be proportionate. The new regime will mean that if the policyholder breaches the duty the remedy for the insurer will be proportionate to the breach rather than imposing an indiscriminate remedy of avoidance of the policy regardless of the significance of the breach. If, therefore, the insurer can show that the policyholder breached the new duty, the remedy available to the insurer will depend on what difference that would have made to the writing of policy. For example if the insurer would still have written the policy but have charged twice as much premium, the policy remains valid but the amount the insurer has to pay in claims is reduced proportionately i.e. in this example the insurer would only have to pay half the value of any claims made under the policy.
- Basis of contract clauses are outlawed. Under a basis of contract clause, information contained in the proposal or otherwise provided to the insurer is treated as having been warranted to be true and accurate. A basis of contract clause is a wolf disguised in sheepish lawyerly language and has caught out countless unsuspecting policyholders. lt does not describe itself as a warranty (but it is) and it does not say what the consequence of a breach is (it would be catastrophic to coverage). If it is breached the policy is treated as if it never existed but the insurer gets to keep the premium – regardless of whether the inaccuracy was material to the risk and regardless of whether the insurer paid any attention to it or otherwise relied on it. In 1927 Lord Wrenbury described the use of these clauses as “contemptible”. Now they are to be consigned to legal history.
- The law relating to warranties is significantly reformed. Previously a policy was vitiated from the moment of a breach of warranty regardless of whether or not the breach was remedied and regardless of the relevance of the breach to the type of loss actually suffered and claimed under the policy. Lord Mance was asked about this at the Special Public Bill Committee. He had considerable sympathy for a change in the law and gave a personal example of its unfairness:
“When I moved a very long time ago into our present house, I observed that there was in our household insurance a warranty that the cellar pump would be kept in working order. That seemed to me rather stringent if there was a burglary and I insisted that they confined the warranty in its operation to flooding in the cellar”
Lord Mance’s self-help exercise with his household insurance will now be applied generally under the new Act.
Insurance Act: good but not excellent
On its way through Committee the Lords asked why a proposal to make insurance companies liable to policyholders for losses they suffer as a result of unreasonably late payment of claims was not contained in the Bill (as the law commission had originally suggested). The problem with the law as it stands is that a Policyholder who suffers loss as a result of a valid insurance claim being paid unreasonably late is not entitled to compensation for that loss beyond interest on the policy claim amount. The problem with including this proposal was that the parliamentary fast track procedure being used for the Bill was suitable only for “uncontroversial” proposals. Among some sections of the insurance community (in particular Lloyd’s and those in the London Market writing US business) an obligation to pay claims within a reasonable time was controversial. The proposal was, therefore, jettisoned because it could have stymied the bill as a whole. As Lord Lea said “Excellence can be the enemy of the good”.
Is excellence honing into view?
The Insurance Bill having become law without any provision for damages for late payment of claims it seemed that this particular reform of the law was deep in the long grass. In the Enterprise Bill currently in Parliament, however, the government is striving to turn the ”good” reforms in the Insurance Act into “excellent” ones by now adding a provision relating to damages for unreasonably late payment of claims. This new provision is no less controversial than it was. Lloyd’s and others in the London Market oppose it and are understood to be trying to water down the proposed rights of policyholders by suggesting that damages for late payment should be limited to circumstances where the delay by the insurer is deliberate or reckless. That would leave the policyholder with the risk of incompetent or careless claims handling by the insurer. To some this may appear like an inappropriate allocation of risk. Shouldn’t the insurer bear responsibility in damages for its own negligence or unreasonable behaviour? Insurers may well face uncertainty if the proposal is introduced: for example as to whether this potential additional liability will be covered under reinsurances. But does this matter? Claims handling is part of the professional service insurers are providing. Other service providers protect themselves against negligence with professional indemnity insurance. Why can’t insurers? It might be a profitable new line of business for PI insurers – after all, they should understand the business!
The Enterprise Act is currently in committee in the House of Lords (the committee hearing commenced on 2 November). It may be worth watching to see if Lord Lea’s “excellence” does now have its day.
John Curran
Partner
AIG Europe Limited –v- OC320301 LLP and Others
While some in the market may regard the recent decision of AIG Europe Limited -v- OC320301 LLP [2015] EWHC 2398 (Comm) (14/08/2015) as a fairly dry analysis of a particular aggregation clause, others will see it as yet another example of the courts’ instinctive inclination to side with policyholders/claimants whenever that feels consistent with the overall “justice” of the case.
The dispute in AIG -v- OC320301 LLP was in substance between a large group of 214 claimants and AIG, the PI insurers of the firm of solicitors whom those claimants had retained.
The claimants had all become involved with a UK property developer, Midas International Property Development Plc (“Midas”), which planned to develop holiday homes at two sites, one in Turkey and one in Morocco. The claimants had either invested in one or other of those developments or had made payments in order to purchase a holiday home once the developments were complete.
Midas retained the Solicitors in respect of both developments. The claimants were told that they would be protected by security interests in the underlying assets (land, in the case of the Turkish development; shares in the company which owned the land, in the case of the Moroccan development) and that their funds were only to be released once the promised level of security was in place (“the cover test”).
In fact, and for different reasons in relation to each of the two developments, there was never adequate security. In both cases the Solicitors failed to apply the cover test properly, with the result that the claimants’ funds were released without their positions being protected.
Midas subsequently went into liquidation, so that the claimants’ only possible recovery was by claiming against the Solicitors. Crucially, the claimants’ claims totalled over £10m (albeit the average claim was for only about £46,000), whereas the limit of cover in the Solicitors’ PI policy was £3m. .
The aggregation clause was Clause 2.5 of the Minimum Terms & Conditions (“the MTCs”), which aggregated all claims, whether arising against one or more insured, 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;
(iv) similar acts or omissions in a series of related matters or transactions…”
AIG argued that sub-clause (iv) applied, ie that the 214 separate claims arose from “similar acts or omission in a series of related matters or transactions”.
The claimants sought to persuade the court (Mr Justice Teare) that, since solicitors are obliged to carry professional indemnity insurance so as to ensure that they are able to compensate their clients, the aggregation clause should be construed so as to give the public the greatest level of protection. The court held that this submission was “too simplistic”. It observed that the MTCs - including the aggregation clause - were the result of discussions between the SRA and the insurance industry: doubtless the aggregation clause could have been more narrowly expressed, but then the limit per claim might have been lower or the premium might have been greater. “Thus, when construing the MTCs, and in particular the aggregation clause, the court should do so in a neutral manner, neither predisposed to assist the public nor predisposed to assist the insurer.”
The court then went on to consider how the two limbs of sub-clause (iv) applied to the facts of this case.
“Similar acts or omissions”
The claims had to arise from “similar” acts or omissions, but what was meant by “similar” in this context? The court held that “the requisite degree of similarity must be a real or substantial degree of similarity as opposed to a fanciful or insubstantial degree of similarity”. It might be said that this is so obvious or trite as to deprive this supposed test of any utility.
Be that as it may, the court had little hesitation in concluding that, in relation to both the Turkish and Moroccan developments, all the claims arose from the Solicitors’ failure to ensure that there was effective security (albeit in the one case over land and in the other case over shares), so that the cover test was not properly applied and the claimants were exposed to loss in the event that, as occurred, the developments failed. The claims thus arose out of similar - if not identical - acts or omissions.
“In a series of related transactions”
The court concluded that this phrase has at least three possible meanings, which were variously supported by the claimants and AIG.
First, as submitted by AIG, the phrase could mean simply a number of transactions which, on the facts of the particular case, were sufficiently similar and/or connected. The court rejected that submission: “If it were correct, the scope of the unifying factor and hence of the aggregation clause would be very wide with no clear limit. Claims would be aggregated where they arose out of similar acts or omissions in … transactions which are sufficiently similar and/or connected… But such test is vague, uncertain and soft-edged. AIG offered no assistance as to how one judged whether transactions were “sufficiently” similar and/or connected…”
Secondly, the phrase “a series of related matters or transactions” could mean, in the context of this particular case, a number of independent transactions which nevertheless were related because they were investments in one particular development. That was the claimants’ fall-back position. It would at least have meant that they could recover £3m for the claims in respect of the Turkish development and a further £3m for the claims in respect of the Moroccan development.
Finally (and this was the claimants’ primary case), the phrase could mean a series of transactions which were related by reason of being dependent on each other. By dint of what can only be described as some very abbreviated reasoning, this was the construction favoured by the court, which held that this was the most natural meaning of the phrase in the context of a solicitors’ insurance policy, since it was “difficult to talk of transactions being related unless their terms are in some way inter-connected”.
That construction constituted an unambiguous triumph for the claimants, since it was not suggested that any of the 214 transactions was dependent on any of the others. Thus there was no aggregation, and AIG was left potentially liable to pay the entire £10m sought by the claimants.
However, it is far from clear why the court felt compelled to hold that transactions should only be described as “related” if “their terms were in some way inter-connected” or if the transactions were “dependent on each other”. Many might say that transactions can be “related” simply by virtue of having a near identical subject matter (in this case, the investment in one or other of the two developments) or involving the same central participant (in this case, Midas).
The court plainly appreciated that a different opinion on this issue might prevail, since it is understood that it gave AIG permission to appeal.
Blanket Notifications and Declaratory relief: European Risk Insurance Company v McManus
Summary
The recent decision of the Court of Appeal of European Risk Insurance Company v McManus [2013] EWCA Civ 1545 upheld the first instance decision which refused to grant declaratory relief in relation to a firm of solicitors' blanket notification of claims to their professional indemnity insurer. The first instance decision also reinforces the position that blanket notifications will be construed in favour of the policyholder (which was not subject of the appeal).Read more
Clark v In Focus: There is only one cherry, and no second bite at it
Summary
Financial advisers across the country will be breathing a sigh of relief as they digest the Court of Appeal’s decision in Clark v In Focus, meanwhile consumers which have suffered losses in excess of the statutory limit of the Financial Ombudsman Service’s scheme have been given a stark warning: by all means accept the Ombudsman’s award, but the Courts will give you no second bite at the same cherry.Read more
Coles v Hetherton: implications for recovery actions
Just before Christmas, the Court of Appeal delivered the long-awaited judgment in the case of Coles v Hetherton [2013] EWCA Civ 1704. As anticipated, its conclusions are likely to have wide-reaching implications for the insurance industry and may impact on every level of case, from the modest county court claims that were the subject matter of Coles itself, to multi-million pound property damage disputes.
Interpretation of combined commercial policy wording
Ted Baker Plc v AXA Insurance UK Plc [2012] EWHC 1406 (Comm)
The claimant clothing retailer discovered that an employee had been stealing stock from its warehouse. The claimant claimed on its commercial combined insurance policy that it held with AXA, for losses during the period of 2004-2008 in relation to loss of stock (£1 million) and losses for consequential loss or business interruption (£3 million).
Mediation shouldn't be seen as optional
High Court decision that highlights the importance of mediation
PGF II SA v OMFS Co 2012 EWHC 83 (TCC)
The claimant landlord claimed for dilapidations arising out of alleged breaches of the repairing covenants of an underlease, particularly in relation to the air conditioning system. Read more