Covid “Catastrophe” Triggers BI Reinsurance
The first UK court ruling on the reinsurance of Covid-19 losses has confirmed coverage under excess of loss policies taken out by Covéa Insurance plc (“Covéa”) and Markel International Insurance Co Ltd (“Markel”). Mr Justice Foxton allowed recovery against reinsurers for losses occurring while the underlying policyholders were unable to use their business premises, due to government restrictions, on the basis that the pandemic was a “catastrophe” within the meaning of the reinsurance contracts.
Covéa and Markel paid out a combined total of over £100 million to policyholders for Covid-19 business interruption (“BI”) losses and made claims under their respective reinsurances with UnipolRe Designated Activity Company and General Reinsurance AG. Disagreements arose concerning the scope of cover under the reinsurance contracts, and a consolidated judgment was given in two separate appeals under s.69 of the Arbitration Act 1996, against arbitration awards dated January and July 2023. In summary, the appeals raised the following issues:
- Whether the relevant Covid-19 losses arose out of and were directly occasioned by one catastrophe on the proper construction of the reinsurances. Both arbitration awards found that they did; and
- Whether the respective Hours Clauses in the reinsurances, which confined the right to indemnity to “individual losses” within a set period, meant that the reinsurances only responded to payment in respect of the closure of insured premises during the stipulated period. The Markel arbitral tribunal found that the relevant provision did have that effect, while the tribunal in the Covéa arbitration found that it did not.
The Judge found in favour of the reinsureds on both issues.
Loss Arising from One Catastrophe
Coincidentally, both Covéa’s and Markel’s losses arose through direct insurance of nurseries and childcare facilities, which had been forced to close from 20 March 2020 by the UK government’s Order of 18 March 2020. The reinsurance contracts contained similarly worded Hours Clauses based on the LPO 98 market wording, including a form of aggregation provision operating by reference to a specified number of hours’ cover for any “Event” or “Loss Occurrence” (terms previously held to have the same meaning), defined as “all individual losses arising out of and directly occasioned by one catastrophe”.
For any Event or Loss Occurrence “of whatsoever nature” which did not include losses arising from specified perils (such as hurricane, earthquake, riot or flood) listed in the Hours Clauses, the limit was 168 hours (i.e. 7 days). Infectious disease was not a named peril and the 168 hours limit applied.
In circumstances where the arbitral awards were based on mixed findings of fact and law, it was common ground that the court could not interfere on a s.69 appeal unless the arbitral tribunal either had erred in law or, correctly applying the relevant law, had reached a decision on the facts which no reasonable person could have done.
On general principles of construction, the Judge endorsed the comments of Mr Justice Butcher in Stonegate v MS Amlin [2022] that “in considering whether there has been a relevant ‘occurrence’, the matter is to be scrutinised from the point of view of an informed observer placed in the position of the insured” (per Rix J. in Kuwait Airways [1996]).
Reinsurers argued that the gradual unfolding of the pandemic did not qualify as a “catastrophe” under the reinsurance policies, taking account of the historical development of property excess of loss market wordings, which was said to implicitly demonstrate the requirement for a sudden and violent event or happening, which could not be established on the underlying facts. Further, reinsurers claimed that a catastrophe is a species of occurrence or event that must satisfy the “unities” of time, manner and place, applied by Lord Mustill in Axa v Field [1996].
The Judge concluded that terms of the reinsurance contracts supported a generous application of the unities test, given the requirements for losses under multiple policies, with a duration potentially exceeding 504 hours (the period specified in relation to flood perils, i.e. 21 days), within broad geographical limits, indicating that a covered catastrophe could have a potentially wide field of impact.
While acknowledging the difficulties inherent in distinguishing between a “catastrophe” properly so-called, as an appropriate basis for aggregation, and a series of discrete losses sharing some common point of ancestry, the Judge held for purposes of the reinsurance claims under consideration that a catastrophe:
- Must be capable of directly causing individual losses, likely in most cases to exclude “states of affairs”.
- Is a coherent, particular and readily identifiable happening, with an existence, identity and “catastrophic” character arising from more than the mere fact that substantial losses have occurred.
- Will be identifiable, in a broad sense, as to its time of coming into existence and of ceasing in effect.
- Involves an adverse change on a significant scale from that which proceeded it.
Applying these principles to the findings in each award, the Judge noted that both tribunals had referred to the outbreak of Covid-19, and the resulting disruption of life in the UK, leading up to and necessitating the 18 March Order, as a catastrophe. In circumstances where the various government directives, including the 18 March Order, were rational and considered measures taken in the public interest, it was not necessary to explore the issue of whether a government order in isolation could be viewed as a catastrophe, since “the pandemic and the response thereto could not be disentangled”, an approach consistent with the decisions in Star Entertainment v Chubb Insurance Australia [2021] and Gatwick Investment v Liberty Mutual [2024].
Interpretation of the Hours Clauses
Covéa and Markel argued that all BI losses arising from the 18 March Order were reinsured, notwithstanding the BI losses continuing after expiry of the 168 hour period. The Covéa arbitral award endorsed this approach, determining that the reference to “individual loss” meant “a loss sustained by an original insured which occurs as and when a covered peril strikes or affects insured premises or property”. However, the Markel tribunal found in favour of the reinsurer, reasoning that it was “natural to think that BI losses occur day by day”, and therefore construing the relevant words as not “dealing with causation but with the occurrence of a particular loss”, since the “subject matter of an ‘Event’, its duration and extent, and its occurrence, are all referenced to losses not perils.”
The effect of the Markel tribunal’s finding was that only 168 hours of BI losses could be recovered from the reinsurer (although the BI had in fact extended until at least June 2020, when the relevant restrictions were first lifted), so that most losses fell outside the scope of cover and Markel was unable to reach the specified attachment point under the reinsurance policy.
In reconsidering this issue on appeal, the Judge was not persuaded that a clear line could be drawn between damage and non-damage BI, as contended by reinsurers, since even the former might continue to manifest after the specified hours period, for example by damage worsening over time. Further, the Court concluded that the “wait and see” analysis applied by the Markel tribunal, premised on the occurrence of BI losses on a day-by-day basis, may lead to “uncommercial consequences” and does not sit easily with the findings in Stonegate and Various Eateries v Allianz [2022], which treated the closure orders as having immediate impact on the insured property with continuous effect, analogous to physical damage to buildings; or with the Supreme Court’s decision in FCA v Arch [2021], which suggested that the correct causal sequence for non-damage BI approximates that of damage-related BI.
The Court therefore dismissed the reinsurers’ appeals as to the meaning of “catastrophe” and allowed Markel’s appeal against the conclusion of the arbitral tribunal as to the effect of the Hours Clause.
Practical Implications
Figures published by the Financial Conduct Authority in March 2023 indicate that, since conclusion of the Test Case in 2021, insurers have paid around £1.4 billion in BI claims. The Commercial Court’s decision in this case provides comfort for cedants with ongoing recoveries, significantly restricting reinsurers’ ability to challenge the presentation of Covid-19 losses under similarly worded excess of loss property policies. It will be interesting to see how the decision may be applied in subsequent cases involving aggregation of losses across multiple jurisdictions. Given that reinsurance contracts typically provide for resolution of disputes by way of (confidential) arbitration proceedings, this clear judgment in favour of the cedants is particularly illuminating.
UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWHC 253
Amy Lacey is a Partner at Fenchurch Law
Slowly but surely: policyholders make progress in their fight to recover Covid-19 BI losses from insurers
Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE [2024] EWHC 83 (Comm)
Introduction
Judgment has now been handed down following an eight-day preliminary issues hearing in October/November 2023 at which a number of different businesses, from a variety of industries, including bowling alleys, theatres, hotels, pubs, retail stores and a race course, sought to advance claims against their insurers for recovery of their COVID-19 losses.
It is the latest judicial consideration of prevention of access/non-damage denial of access wordings following: (i) the Divisional Court judgment in the FCA test case, which found that prevention of access/non-damage denial of access type wordings did not respond (a point that was not on appeal to the Supreme Court, and therefore did not benefit from a fresh look at the correct causation analysis); and (ii) Corbin & King, where further consideration of these types of wording found that there was cover based on the Supreme Court causation analysis and other factors.
The majority of the policyholders were insured by Liberty Mutual Insurance Europe (“LMIE”), as either the lead or sole insurer. There were a number of LMIE wordings and policy arrangements for the court to consider, albeit with very similar issues. Another case against Allianz Insurance Plc (“Allianz”) was heard alongside the LMIE group of claims, on a different wording, but again with similar coverage issues for determination.
In broad terms, the key preliminary issues that the court was asked to consider fell into the following categories:
- Trigger & Causation
- Limits
- Furlough
Not all issues were live in each of the claims. A full list of the answers to all preliminary issues can be seen in section H of the judgment.
Fenchurch Law acted for Hollywood Bowl and International Entertainment Holdings.
Trigger & Causation
LMIE’s starting position on causation was that Corbin & King was wrongly decided, and instead the correct analysis was that of the Divisional Court in the FCA Test Case. However, insurers ultimately accepted prior to the hearing that they would not be successful on this point at first instance, and instead were granted permission to appeal at a later date.
Despite declarations made both by the Divisional Court and the Supreme Court in the FCA test case, and then debated again in Corbin & King, insurers ran a number of arguments including that “statutory authority” assumed a peril which concerned restrictions imposed by bodies such as the police, or other bodies with authority from or created by statute, i.e. bodies with a local remit.
The court disagreed on all counts, and held that the actions taken by government were the “paradigm example” of action by a “Statutory Authority”. The judge agreed with policyholders that there was cover for interferences that resulted from the action of any person, body or entity which has lawful authority derived from statute or statutory instrument. It was also sufficient that person or body responsible for the relevant interference was exercising authority which was derived from statute.
In respect of the Allianz wording, the court found that a case or cases of Covid-19 did not amount to an “incident” within the meaning of an “incident likely to endanger human life” (notwithstanding the court also accepting that a case or cases of Covid-19 was likely to endanger human life). Furthermore, the term “policing authority” did not encompass the central government or Secretary of State for Health and Social Care, the court found that it instead refers to the police or other bodies whose function it was to ensure that the law is obeyed and enforced.
Limits
On the LMIE wordings the policyholders argued that the sub-limits applied on a per restriction and per premises basis, or alternatively, that it applied to any one occurrence. Insurers argued that sub-limit was an aggregate limit applicable to all claims under the relevant clause, irrespective of the number of separate restrictions, and regardless of the policies being composite or not.
The court’s findings were broadly as follows:
- The policies provided cover on a per occurrence basis (i.e. each occurrence was subject to the relevant sub-limit), with no annual aggregate limit for claims under the relevant clause;
- Relying on Corbin & King, the policyholders with composite polices (a policy which records the interest of a number of different companies or insureds in a single document, but with the effect that there was separate contract of insurance between the insurer and each policyholder) were not subject to an aggregate limit that applied across all insureds. Moreover, there was a sub-limit per policyholder company, per occurrence; and
- Despite the use of “limit” instead of the defined term “limit of indemnity”, which appeared elsewhere within the policy wording, the court considered there was no material distinction between the two. As a result, the single policyholders with multiple premises could not recover on a per premises basis, but instead per occurrence aggregation with no annual aggregate limit.
The Allianz wording, despite not extending to the central government’s response to the Covid-19 pandemic, was found to apply to each company (it was already agreed that there was a composite policy on these particular facts). Furthermore, in circumstances when multiple premises were owned by one insured, there was no basis to treat individual premises as one unit based on the terminology “interference with the Business”, or elsewhere in the relevant wording. Accordingly, the sub-limit applied to “any one claim”, and therefore potentially multiple premises, subject to proving an “incident” within the relevant radius of each of the premises.
Furlough
The issue of furlough was previously considered by the court in Stonegate v MS Amlin & Ors, where it was held that furlough payments were to be taken into account under a savings clause that provided for the reduction of costs normally payable out of turnover that ceased or were reduced as a result of the covered event.
Despite detailed submissions, the court reached the same view on the basis that the issue before it was the same as that considered in Stonegate, a number of the points made had already been rejected, and it was therefore appropriate to follow the decision. In respect of arguments made on causation, the court agreed with insurers that furlough could not be regarded as wholly separate and divorced from the restrictions which were introduced in consequence of the widespread prevalence of COVID-19, which happened prior to the introduction of the CJRS scheme. Furthermore, it was not appropriate to take a different (and stricter) approach on causation in the context of the savings clause than in the context of the insured peril - there was a sufficient proximate causal connection between the insured peril and furlough payments that reduced the wage costs of a business.
What does it mean and what happens next?
This most recent Covid-19 judgment is welcome news for policyholders, again reaffirming the decision in Corbin & King v Axa. However, as noted above, insurers have been granted permission to appeal on causation and we expect that those with wordings affected by this issue will be forced to await the outcome of that appeal, despite now having a number of significant authorities supporting their claims.
In the addition to insurers being granted permission to appeal on causation, policyholders were granted permission to appeal the decision on furlough, which remains of particular importance to the wider insurance market. Hopefully a decision at appellate level will provide the market with closure on a point that sometimes feels almost political – did the government really intend for shareholders of large insurers to benefit from taxpayers’ money?
All other grounds of appeal were refused by the first instance judge, meaning that the parties will have to seek permission directly from the court of appeal. More to come on that as matters progress.
The judgment confirmed a “per occurrence” based recovery for those on the LMIE wordings, with the issue of identifying the relevant occurrences to be determined at a later date. However, as a starter for ten, we anticipate that restrictions such as the nationwide lockdowns and local lockdowns will be the obvious first candidates.
Importantly, the recent judgment will come as particularly welcome news to those with composite polices, who in the absence of specific wording to the contrary should continue to pursue claims for each insured entity, and also multiple premises in certain circumstances.
Authors
Anthony McGeough, Senior Associate
Fenchurch Law bolsters insurance disputes team in London with new hires
Fenchurch Law has announced the expansion of its coverage disputes team in London with two new hires; Jessica Chappell and Isabel Becker.
Jessica Chappell joins as a Senior Associate, bringing with her over eight years’ experience working across complex and high-value commercial litigation matters, including contractual and shareholder disputes, professional negligence claims, coverage disputes and claims against directors by liquidators. Jessica joins Fenchurch Law from Davis Woolfe where she was a Senior Associate, having previously held positions at Calibrate Law (Associate Solicitor) and Portner Law (Associate/Trainee Solicitor).
Isabel Becker joins Fenchurch Law’s Reinsurance & International Risks team as a Foreign Qualified Lawyer, having previously trained at Bach Langheid Dallmayr, a German law firm specialising in international insurance and liability. Representing insurers, Isabel worked on a number of claims related to Covid-19 business interruption and private health insurance. Isabel graduated from Heidelberg University with a Degree in law before moving to the UK in 2022 and achieving a Distinction in Insurance Law (LLM) at Queen Mary University of London.
The new appointments will bolster the business’ insurance disputes team, which was set up to provide improved access to justice for policyholders and their insurance brokers, when coverage disputes arise.
Managing Partner, David Pryce, commented:
“Jessica and Isabel both bring with them excellent legal and insurance knowledge with combined experience within the UK and international markets. Both will be invaluable in helping Fenchurch Law achieve its mission of levelling the playing field for policyholders.”
Jessica Chappell added: “First and foremost I was attracted to Fenchurch Law due to its excellent reputation within the legal insurance market and the team of experts I would have the opportunity to work alongside and learn from. But I was equally impressed by the business’ commitment to ensuring that when a dispute arises, the policyholder has the same advantage as the insurer, in an industry where traditionally this has not been the case. This purpose together with its forward thinking and unique values, drew me to Fenchurch from the start.”
Isabel Becker added: "I was drawn to Fenchurch Law by its excellent market reputation, as well as its inclusive and ambitious culture. I’m very excited to be working in an environment where I’ll have the opportunity to play an important role in helping the business achieve its growth objectives, whilst providing first-class legal support for policyholders.”
Various Eateries -v- Allianz – Court of Appeal prevents access to a different outcome
Background
The Court of Appeal has handed down judgment in Various Eateries v Allianz, one of the trio of cases along with Stonegate Pub Co v MS Amlin & Ors and Greggs v Zurich heard before Mr Justice Butcher in June 2022. This group of cases, which considered issues arising out of the Marsh Resilience wording found by the FCA Test Case to respond in principle, proceeded by way of a determination of certain preliminary issues that included: (i) Trigger; (ii) Aggregation; (iii) Causation: additional Increased Costs of Working (“AICW”); and (iv) Government Support (“Stage 1”).
Following judgment in Stage 1 (our summary of the Stonegate proceedings can be found here), the policyholders and insurers in each action appealed various points on their respective judgments.
Grounds of appeal on key issues such as furlough and AICW ultimately did not end up before the Court of Appeal as the parties in Stonegate and Greggs settled their actions prior to the appeal hearing. The remaining grounds of appeal in dispute between Various Eateries and Allianz included certain aggregation issues and a short point of construction on the scope of the prevention of access and enforced closure clauses.
Following a two-day combined appeal hearing, the Court of Appeal dismissed all grounds of appeal, essentially leaving the parties in the position they were in following Mr Justice Butcher’s judgments in the underlying proceedings.
The key findings in Various Eateries at first instance
In the underlying proceedings Allianz argued that all BI losses suffered by Various Eateries should be aggregated to single sub-limit by reference to a “single occurrence” to which all losses connected. Allianz put forward a number of potential “single occurrence” candidates, including an emergence event in Wuhan, and the arrival of Covid-19 in the UK. Various Eateries sought to persuade the court that there should be no aggregation, or that aggregation should only be applied on a per premises basis (i.e. there would be a separate sub-limit for each premises).
Ultimately the lower court rejected the parties’ primary cases, and found instead that BI losses should aggregate by reference to various Government actions, which meant that there were multiple sub-limits that applied to the business as a whole (not on a per premises basis). The judge also rejected Various Eateries’ argument that the various reviews and renewals of certain Government actions should be separate aggregating occurrences (and therefore attract additional sub-limits).
Aggregation
On appeal Allianz sought to revive an argument that there was a single occurrence in Wuhan to which all BI losses should aggregate on the basis that the judge found in Stonegate and Greggs that the initial animal to human infection(s) could constitute a single occurrence, but was then wrong to decide that it was too remote. Allianz also submitted that if the “initial outbreak” in Wuhan was something more widespread than the initial animal to human infection(s) there were still events in Wuhan that qualified as a single occurrence.
Allianz also maintained an alternative argument that the introduction of Covid-19 into the UK also qualified as a single occurrence, even if it could not be specifically identified, and that this single occurrence was “in connection with” the BI losses within the meaning of the relatively loose causal language of the policy wording.
The Court of Appeal held that the trial judge was entitled to reach the conclusions that he reached at trial following detailed and fully considered arguments on the events in Wuhan, and accordingly there was no error principle or other comparable error that would entitle the Court of Appeal to interfere.
In respect of the introduction of Covid-19 into the UK, the Court of Appeal departed from the trial judge’s findings and considered that there was a sufficient causal connection between the arrival of Covid-19 in the UK and the BI losses suffered by Various Eateries that would satisfy the weak causal link required by the wording. However, the Court of Appeal also found that the judge was entitled to have reached the conclusion that the introduction of Covid-19 in the UK was too remote on the basis that the first introduction was temporarily too remote from the losses, and the losses depended on the spread of the disease within the UK which was by no means certain.
Various Eateries sought to revive its case that if the BI losses fall to be aggregated, then it should be on a per premises basis, as the triggers for cover under the wording were expressed by reference to an “Insured Location”.
The Court of Appeal found that the Judge was right to have dismissed the per premises argument for the reasons given in the underlying proceedings. There was nothing within the wording that suggested that aggregation was intended to operate on a per “Insured Location” basis, which was further confirmed by (i) the definition of the “Insured’s Business”, which was defined as “Operating a chain of Italian restaurants” i.e. the business as a whole; and (ii) the Retention provision, which made clear that a Single Business Interruption Loss may affect multiple Insured Locations. Notably, the Court of Appeal distinguished Corbin & King & Ors v Axa from the present proceedings.
The Court of Appeal refused permission to appeal Various Eateries’ alternative argument that a decision to renew, change or relax a Government measure should also count as a single occurrence and therefore attract a separate sub-limit. However, the Court of Appeal did note that its analysis of the March 2020 regulations, which applied for 6 months unless revoked, may well have been different had the regulations applied for a specified period after which they were renewed by a positive decision to do so.
The Construction Point
Allianz also challenged the trial judge’s decision on the scope of cover under the Prevention of Access and Enforced Closure clauses. In summary, Allianz argued that the effect of the words (during the Period of Insurance” meant that it is only losses suffered during the policy period which would be covered, and losses which fell outside the policy period would not be.
The Court of Appeal agreed with the judge in the underlying proceedings, finding that VE was “entitled to recover the Business Interruption Loss proximately caused by that Covered Event, even if that loss extends beyond the Period of Insurance” subject to the longstop of the maximum indemnity period, based on an analysis of the definitions of “Indemnity Period” and “Reduction in Turnover” – “Reading these definitions together with the Insuring Clauses, Allianz agrees to pay the Business Interruption Loss proximately caused by a Covered Event which occurs during the Period of Insurance. The Business Insurance Loss which it agrees to pay is the Reduction in Turnover caused by the Covered Event, beginning on the date of the Covered Event and continuing for a maximum of 12 (or 24) months. Necessarily, therefore, the losses which VE is entitled to recover may continue beyond the end of the Period of Insurance”.
Comment
The Court of Appeal’s judgment, despite leaving matters as they were on the Marsh Resilience wording following the first instance decisions in Stonegate, Various Eateries and Greggs, is a positive outcome for policyholders. Had Allianz been successful on its primary arguments, it would have left policyholders on this wording with a single sub-limit in circumstances where most have claims significantly in excess.
The key points to take away for those with ongoing claims on the Marsh Resilience wording are:
- Policyholders are still able to claim multiple sub-limits by reference to various Government action.
The full range of the relevant Government actions that attract a separate sub-limit under the Marsh Resilience wording is yet to be tested by the court, and will be fact dependent on the industry in question.
- Policyholders with “composite” policies may still argue that there are separate sub-limits per separate company;
- The attribution of losses to specific occurrences has yet to be tested, and is likely to be a time consuming forensic exercise;
- Similarly, in respect of AICW, the question of what qualifies as economic or uneconomic remains unanswered;
- Furlough remains to be accounted for in the adjustment process.
It is worth noting for those on different wordings that furlough is still a live issue for the insurance market. It was considered in the recent group of cases before Mr Justice Jacobs in the commercial court as one of a number of preliminary issues arising out of disputes with Liberty Mutual and Allianz, Fenchurch Law represents Hollywood Bowl and International Entertainment Holdings in those proceedings. Judgment is currently awaited.
The full judgment from the Court of Appeal can be found here.
Anthony McGeough is a Senior Associate at Fenchurch Law.
Condonation and Aggregation - Decision by the Court of Appeal in Axis Specialty Europe S.E v Discovery Land [2024] EWCA Civ 7
This is the first Court of Appeal decision as to the meaning of “condoning” dishonest acts under the SRA Minimum Terms. As a reminder, solicitors’ professional indemnity policies must comply with the Minimum Terms. Under those terms insurers can decline to cover a claim which arises from dishonesty only if it had been committed or condoned by all partners in the firm.
The dispute concerned two fraudulent acts perpetrated against the claimants by their solicitor, Mr Stephen Jones, who was the senior partner in a two-partner firm. The other partner was a Mr Prentice. The firm became insolvent, and the claimants pursued two claims against the firm’s insurers, Axis, pursuant to the Third Parties (Rights against Insurers) Act 2010.
AXIS denied cover on the basis that the second partner, Mr Prentice, had condoned Mr Jones’ dishonesty (through “blind eye” knowledge), therefore engaging the exclusion considered below. While the Trial Judge found that Mr Prentice’s standards fell well below those required in his profession, he nevertheless concluded that Mr Prentice had not condoned the relevant fraudulent acts. Consequently, the claimants were entitled to be indemnified.
The appeal concerned Axis’ challenge to (1) the Judge’s finding of fact that Mr Prentice had not condoned Mr Jones’ dishonest behaviour and (2) the Judge’s decision that Axis was not entitled to rely on the aggregation clause.
Condonation
The exclusion in Axis’ policy was in the following terms:
"EXCLUSIONS
The insurer shall have no liability for: …
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that:
a) the policy shall nonetheless cover the civil liability of any innocent insured; and
b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of the company or in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
There was an argument as to what clause 2.8 requires to be “condoned”. The Court of Appeal agreed with the Trial Judge that the clause is wide enough to include condonation of a pattern of dishonest behaviour of the same type as that which gives rise to the claim. As a result, the question would be “whether or not knowledge and acceptance or approval of other acts in the same pattern amount to condonation of the act or acts which gave rise to the claim.”
For example, where partner B condoned the regular use of client funds by partner A for his/her own purpose, the Court of Appeal considered it would be more difficult for partner B to argue that he was unaware of “the specific instances of such behaviour which gave rise to the claim.”
In this case, the Court of Appeal acknowledged that, while the Trial Judge found that Mr Prentice’s evidence contained both truth and untruth, his evaluation of the evidence and ultimate decision was entirely “rational” and one he was entitled to reach.
Aggregation
The Court of Appeal had to consider whether the two claims arose from “similar acts or omissions in a series of related matters or transactions.” To do so, it applied the test for aggregation considered by the Supreme Court in AIG v Woodman.
Teare J (at first instance) found that the degree of similarity must be “real or substantial.” As to whether the claims were “related”, Lord Toulson found that this required that they “fitted together.” In considering this, the Court of Appeal in Discovery Land commented that assessing “a real or substantial” similarity requires a careful consideration of the “substance of each claim.”
Here, whilst the same property was involved and the victims were affiliated companies, the Court of Appeal considered these factors to be “insufficient to provide the necessary link between the two transactions.” The Judge’s decision not to aggregate the claims was upheld.
In determining both issues, the Court of Appeal commented that a thorough factual analysis of the evidence was required, which is what it accepted the Trial Judge had indeed carried out in “painstaking” detail. While each case turns on its own facts, this decision provides a helpful guide at Appellate level as to how a court should approach issues of condonation and aggregation.
Authors
Jessica Chappell, Senior Associate
Too Hot to Handle: Everything You Always Wanted to Know About Hot Works Conditions (But Were Afraid to Ask)
Introduction
Hot Works Conditions are a staple of contractors’ public liability policies. They require certain precautions to be taken before, during and after the carrying out of Hot Work activities, each of which are designed to reduce the risk of a fire breaking out.
The language and requirements of Hot Works Conditions vary across the market, and difficult questions often arise as to whether a particular activity engages the precautions, the meaning of “combustible”, and whether the precautions are even capable of being satisfied.
This short article considers some of the key issues.
The nature of Hot Works Conditions
Hot Works Conditions are usually written as “Conditions Precedent to Liability”. Those are fundamental terms of insurance contracts and must be complied with strictly before an insurer can become liable for a particular claim.
In some cases, the condition might not actually include the words “Condition Precent to Liability”, but it will have that effect if the consequences of breaching it are made clear. So, the condition might say: “We [the insurer] will not pay a claim unless you will have complied with the following …”.
The Courts generally treat conditions precedent to liability as onerous or draconian terms. This means that it is incumbent on the insurer to spell out any such terms clearly so that the insured knows precisely what they have to do – or else they are not going to be bound by them.
The meaning of “Hot Work”
Hot Work Conditions often define the term “Hot Work” precisely. Typically, that will cover any activity which uses or produces an open flame, or any other activity which could ignite any combustible or flammable material.
While that may seem relatively straightforward, the question of whether the precautions apply may turn on whether the condition refers to activities that apply heat, or which merely generate it. For example, suppose a contractor wishes to use an angle grinder and the definition of ‘Hot Works’ encompasses activities that only “apply heat”. Strictly speaking, a grinder does not apply heat – it merely generates it – and so the precautions would arguably not apply. Conversely, if the contractor wished to use a gas torch, then that would engage the precautions, as that activity clearly does apply heat.
Actions required in respect of combustible materials
Hot Works Conditions always include a hierarchy of steps which, before starting work, the insured must take in relation to combustible materials. Those are that the insured must:
- Examine the area of works for combustible materials; and
- If the materials are moveable, move them a certain distance away from the Hot Works.
- If the materials are not moveable, cover them with non-combustible materials.
Taking each of the above in turn:
The examination
The requirement to carry out a pre-work examination of the area of work will often be highly circumscribed. For example, it may require a specific individual in the insured’s organisation (usually the fire watcher or ‘responsible person’) to conduct the examination at a particular time, and in a particular way.
On the other hand, the requirement may contain no stipulation as to how the property should be examined, or by whom. In such a case, it would arguably be open to an insured to delegate the examination to someone outside of the insured’s organisation, or to carry out the inspection by way of a desktop study or video link.
In any given case, the insured must satisfy itself that the examination was comprehensive, and that it acted reasonably in carrying out the examination in a particular way.
What does “combustible” mean in this context?
As a matter of science, almost any material is combustible if heat is applied at a sufficiently high temperature. However, “combustible” has to be construed in the context of a commercial insurance policy, and with regard to its natural and ordinary meaning.
The Oxford Dictionary of English (3rd Ed.) defines “combustible” as “able to catch fire and burn easily” and other dictionaries give similar definitions. Accordingly, it is that meaning – not its scientific meaning – to which a Court must have regard. That is supported by the decision in Wheeldon Brothers v Millenium Insurance [2018] EWHC 834 where the Court held, when referring to the term “combustible”:
“If the underwriters had intended “combustible” to have a meaning other than that understood by a layperson interpreting the Policy, it was for underwriters to make that express in the Policy. I find that “combustible” as used in the Policy is the meaning which would be understood by a layperson. To take the example given by the experts, a layperson would not consider diamonds and metals to be “combustible.”
The question then arises as to whether “combustible” should also be interpreted with regard to the specific hot works being undertaken. For example, a gas torch is a more potent source of ignition than an angle grinder, and a given material may be readily combustible in the presence of a gas torch, but not in the presence of a spark from an angle grinder.
In our view, therefore, the nature of the hot work activity should be taken into account when considering whether a material is combustible (and therefore whether it should be moved or covered), as that makes more commercial sense in the context of an insurance policy.
Finally, an insured must have reasonable knowledge that a material is combustible in order to take the required precautions. So, an insured would be expected to know that an oil-soaked rag is combustible and so would need to move it. By contrast, if a non-combustible material had secretly been doused in petrol without the insured knowing (nor being reasonably capable of discovering that), the obligation to remove or cover it would not apply.
The requirement to move or cover up combustible materials
Several points arise on the construction of this requirement.
Firstly, while it may go without saying, the requirement to move combustible materials applies only to materials that are within a certain distance of the hot work activities (usually 6 or 10 metres). Therefore, there is no requirement to remove or cover material which is further away.
Secondly, the requirement to cover up combustible material would apply only to material that is not being worked upon. That is supported by the decision in Cornhill Insurance PLC v D E Stamp Felt Roofing Contractors Ltd [2002] EWCA Civ 395, in which the Court agreed with the Insured roofing contractor that it would be “absurd” to cover up a plywood deck of a roof over which roofing felt was to be laid.
Finally, consideration must be given to whether it is even possible to remove or cover the combustible material at all. In Milton v Brit Insurance [2016] Lloyd’s Rep IR 192, in which the Court considered the meaning of a condition which required insured premises not to be ‘left unattended’, it was held that the condition “clearly only applies to the extent possible, without requiring the insured to fulfil an impossible obligation … it would make no commercial sense for the clause to require the insured to do something which was impossible …”
So, imagine a roof consisted of two layers, the inner layer of which was made of combustible timber and was inaccessible. In that situation, it would plainly not be possible to cover the timber layer, and so, applying Milton, an Insurer cannot decline a claim on the basis that the requirement has not been satisfied.
The requirement to take reasonable precautions
Hot Works Conditions frequently include a requirement that the insured takes “reasonable precautions to prevent damage”. It is well-established principle of insurance law 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”.
So, acting carelessly will not be sufficient. The requirement is that the insured must be reckless and not care about its conduct.
Other precautions
As stated above, the requirements of Hot Works Conditions vary across the market but will typically include a requirement to appoint a fire watcher, to have a fire extinguisher available for immediate use, and to carry out a thorough post-work fire check for a period of no less than 30 minutes.
A detailed examination of those requirements is beyond the scope of this note, but whether an insured has satisfied the requirements is likely to be fact sensitive.
The consequences of breaching a Hot Works Condition
If an insured breaches a particular term of a Hot Works Condition, then, applying Section 11 of the Insurance Act 2015 (“Section 11”), Insurers will still have to pay the claim if the insured can show that any breach could not have increased the risk of damage occurring in the circumstances in which it occurred.
Section 11 is intended to prevent an insurer from relying on a failure to comply with a policy term where the loss that occurred is unrelated to the breach. So, it would prevent an insurer from relying on a breach of a burglar alarm where the loss is caused by falling debris from an aircraft. While that example is relatively straightforward, the position is more complicated in the context of breaches of hot works conditions and fire, because there is a link between the term in question and type of loss.
There are currently no authorities on the meaning and effect of Section 11, and its precise operation is a matter of legal debate. In particular, it is unclear whether the test requires there to be a causal link between the breach and the loss, or not.
Absent any authorities, it is open to an insured to argue that Section 11 that the test is one of causation. So, if an insured could establish that a fire started as a result of a discarded cigarette for example, and notwithstanding the fact that it had not complied with the Hot Works Condition strictly, it would be open to argue that compliance made no difference, and that Insurers must pay the claim.
Summary
The consequences of Hot Work activities can be devastating for a contractor, which may face large claims against them if property is damaged or destroyed. While public liability insurance is intended to protect an insured against that risk, insureds nevertheless need to be fully aware of their obligations under these conditions, and the consequences which could follow in the event of a non-compliance.
Alex Rosenfield is an Associate Partner at Fenchurch Law
Broker Negligence on BI Policy Advice
A recent ruling of the Commercial Court held brokers Heath Crawford Ltd (“HC”) liable to pay a former client £2.3 million in damages, for uninsured loss resulting from negligent advice on placement of a business interruption (“BI”) insurance policy.
Infinity Reliance Ltd v Heath Crawford Ltd [2023] EWHC 3022 (Comm)
The Claim
Following a fire at warehouse premises used for its online retail business, Infinity Reliance Ltd (“Infinity”) claimed for lost sales revenue and costs to fit out new premises under its insurance with Aviva. The BI sum insured was based on forecast gross profit of around £25 million over two years but the right figure would have been closer to £33 million. Infinity was underinsured and the doctrine of average applied (reducing pro rata the indemnity paid by the proportion of underinsurance) - since the insured exposure was 26% less than the total loss, Infinity recovered only 74% of its adjusted loss.
Infinity claimed the shortfall from HC, alleging it would have been fully insured if proper advice had been given on (1) calculation of the sum insured, (2) whether to obtain declaration linked cover, and (3) provision for costs to fit out alternative premises.
Types of BI Cover
Traditional “sum insured” BI cover requires the policyholder to forecast insured profit for the indemnity period, with a fixed premium payable in advance. If the policyholder has underestimated the risk or grows faster than expected, average would apply to any claim, however carefully the forecasts were made. So if the insured gross profit is £1 million but the actual gross profit is £2 million, the insurer will pay only 50% of the loss - even if the loss is far below £1 million. The policyholder is treated as having chosen to insure only part of its revenue, and to have self-insured the rest, so that the insurer and policyholder contribute rateably to any loss.
It is important for policyholders to estimate future gross profit correctly for the full indemnity period, bearing in mind that loss may be suffered on the last day of the insured period. For example, if the policy provides for a two year indemnity period (as Infinity’s did), i.e. it may compensate the policyholder for up to two years’ lost revenue after a loss begins, gross profit must be estimated for three years from inception of the policy.
Alternatively BI insurance may be taken out as “declaration linked” cover, originally developed during the 1970’s to cope with the problems faced by policyholders forecasting revenue during periods of high inflation. When covered on this basis, the policyholder must still declare its turnover and profit in advance, so that the initial premium can be assessed, but at the end of each period of insurance, the actual performance may be considered. Within broad limits, if it is higher than forecast, the policyholder pays an additional premium; if it is lower, premium is returned. The insurer agrees not to apply average. Effectively, the actual risk is retrospectively rated by adjusting the premium. It is only if the policyholder’s original estimate was very badly wrong that a claim may be at risk.
The policy arranged by Infinity’s previous brokers prior to 2018 was declaration linked cover. For the 2018/19 renewal, HC placed a new commercial combined policy with Aviva. At some point during the renewal process, Infinity told HC that it did not want BI cover on a declaration linked basis, because it had been hit by a premium adjustment previously and wanted premiums fixed in advance. However, HC did not explain to Infinity the potential downside of taking out BI insurance on this basis, including the significance of average in cases of underinsurance. HC did not make sure that Infinity knew what it was giving up, or whether its preference for traditional BI cover represented a genuine willingness to retain part of its BI risk.
Sum Insured Calculation
Leading up to the 2019/20 renewal, Infinity was provided with a generic document produced by HC entitled “How to Calculate Gross Profit”. The guidance contained the following statements under the heading “Sum Insured”:
"For many businesses, the basis of the Sum Insured will be the annual Gross Profit figure, which for BI purposes represents:
Annual turnover plus closing stock and work-in-progress less
Opening stock and work-in-progress plus variable expenses.
Variable expenses are those expenses which would reduce, or disappear entirely, in the event of a stoppage to the business.
Once an accurate and current BI Gross Profit figure has been calculated, it must be adjusted upwards to allow for anticipated growth in the business during the period of insurance itself and the Indemnity Period selected, bearing in mind that it is possible for a 'worst case scenario' loss to occur on the last day of the period of insurance.
As an example, if the current annual Gross Profit figure is £100,000, the period of
insurance is 12 months, the Indemnity Period selected is 24 months and business growth is estimated at 10% per annum, the correct Gross Profit sum insured is £254,100:
Gross Profit during 12 month period of insurance = £100,000 + 10% = £110,000
Gross Profit during 1st year of Indemnity Period = £110,000 + 10% = £121,000
Gross Profit during 2nd year of Indemnity Period = £121,000 + 10% = £133,100
Gross Profit sum insured = £121,000 + £133,100 = £254,100"
As a guide to calculating the sum insured for purposes of the Aviva policy, this was incorrect. Based on the Aviva policy insuring clauses and definitions, insured profit did not constitute the difference between turnover and “expenses which would reduce, or disappear entirely, in the event of a stoppage of the business”; it was the difference between turnover and the cost of material for production and discounts received.
HC’s guidance document included the warnings that: “In the event that the Gross Profit sum insured is not calculated correctly, there is likely to be underinsurance and average would apply to the settlement of ANY claim … If cover is arranged on a Declaration Linked basis this may well offset the need for projection but the selected indemnity period and any exceptional changes to the business will still need to taken into account.” Infinity’s finance director read these statements but did not appreciate the significance, because he did not know what “average” is and assumed the sum insured was a limit of liability, so that provided the ultimate loss was below £25 million, the claim would be paid in full. HC did not explain how declaration linked cover worked, or how it could alter the consequences of underinsurance.
Broker Duties
Brokers are required to exercise “reasonable skill and care in and about obtaining insurance on [the client’s] behalf” (JW Bollom v Byas Mosley [2000]). The extent to which an act or omission represents a breach of this duty depends on all the circumstances.
A major part of the broker’s role is to bridge a gap between the client’s knowledge and its own, in terms of cover available in the market. The broker must learn enough about the client’s needs and business to make sensible recommendations, and enable an informed decision to be made, depending on the attributes and sophistication of the individual client. Previous authorities demonstrate that brokers must:
- Aim to “match as precisely as possible the risk exposures which have been identified with the coverage available”, recommending “sufficient and effective” cover if available in the market (Standard Life v Oak Dedicated [2008]).
- Seek to assess the client’s needs beyond instructions to place specific insurance, in appropriate cases. A broker given highly specific instructions, for example, to place “mortality only” cover for a racehorse is not obliged to advise that theft cover should be obtained (O’Brien v Hughes-Gibb [1995]). However, a reasonable broker instructed to place suitable cover for exposure of a general class will consider the risks presented and what insurance will meet them.
- Enable an informed decision to be taken, by ensuring the client understands the key terms of the cover that is being obtained (Eurokey Recycling v Giles [2014]).
- Explain key aspects of the placement process including information required by insurers. There are technical complexities to insurance which a broker is expected to understand, but a client may not, which often relate to things that the broker personally cannot do for the client. The broker is required in such cases to educate the client so that it can do what it needs to do.
The duties apply on renewal as much as original placement of a risk. Whilst a broker comes to renewal with existing knowledge for use in the process, it cannot simply assume renewal is all that is required, even if nothing appears to have changed. Brokers must apply their minds to the client’s present circumstances and the sufficiency of cover in that situation.
Breach of Duty
HC admitted breach of duty in providing generic information about how to calculate the sum insured which was not accurate in relation to the policy placed for Infinity. The Court and both parties’ experts agreed that a reasonable broker would have recommended declaration linked cover to a client in Infinity’s position.
The Judge rejected HC’s attempt to rely in defence upon Infinity’s instructions that it did not want declaration linked cover, since that was not an informed decision. It is not for a broker to force upon its client a type of cover that is unwanted, even if the broker disagrees with that preference, and even if it a foolish preference. However, the broker must ensure the client understands any disadvantageous consequences - such as the risk that underinsurance would lead to any claim being reduced by average. That would be an important point to hammer home because it is an aspect of insurance that may not be obvious to the typical client, even an otherwise financially literate one. Even when a preference has been expressed, the reasonable broker should check that it remains a genuine and informed choice at renewal, especially as circumstances change.
In relation to fit out costs, the Judge held that HC was in breach of duty in failing to obtain sufficient information to make a suitable recommendation for cover to address the obvious risk that Infinity would need to find alternative premises, in the event of a fire or similar event, putting the warehouse used for its business out of action. The broker is not expected to second-guess or audit the information it is given but must follow up reasonably obvious gaps or uncertainties as part of the dialogue leading up to placement of a policy. HC knew that the warehouse premises (owned by a logistics company) were critical to Infinity’s business but failed to ask further questions, to facilitate advice on suitable Additional Increased Costs of Working provision to mitigate a potential gap in coverage.
The “How to Calculate Gross Profit” guide included a disclaimer:
“Whilst we are able to provide … information about how to calculate the sum insured, we do not accept any responsibility for the adequacy of your indemnity period and sum insured - and in some instances, you may need to consider the assistance of a suitable professional service.”
This did not absolve HC of responsibility. It was designed to make clear that HC could not undertake the BI sum insured calculations (which required a detailed financial understanding of Infinity’s business); but it was still obliged to provide accurate guidance on what the insurance policy required to be calculated.
In terms of quantum, Infinity’s recoverable loss was reduced by 20% due to contributory negligence, for carelessly failing to follow even the flawed guidance provided by HC.
Practical Implications
Brokers must take care to fully investigate and understand a client’s business and risk exposures prior to inception or renewal, so that appropriate cover can be obtained. The advantages and disadvantages of different options available in the market should be clearly explained, with detailed notes taken of client meetings for future reference.
The decision in this case highlights the perils of underinsurance for policyholders and brokers alike. BI sum insured calculations may be especially complex and declaration linked cover will be preferable in most cases, to ameliorate the potential consequences of inaccurate forecasts. Policyholders need to know that the price paid for certainty about the premium may be uncertainty about recovery in the event of a claim. Brokers should be wary of providing generic guidance notes on policy coverage or sum insured calculations if policies are placed with multiple insurers, on variable standard wordings.
In an increasingly volatile commercial landscape, with high inflation in the wake of challenges including Covid-19 and Brexit, policyholders and their brokers should proceed with caution in relation to declared values to avoid finding themselves caught short.
Amy Lacey is a Partner at Fenchurch Law
Terrorism Law Reform: Compliance and Coverage for Property Owners
The Terrorism (Protection of Premises) Bill was confirmed by the King’s Speech on 7 November 2023 for the legislative agenda in the year ahead. Also known as ‘Martyn’s Law’ in tribute to Martyn Hett, who was tragically killed in the Manchester Arena bombing in 2017, the proposals are aimed at enhancing security and mitigating risks of terrorism in public venues such as music halls, stadiums, theatres, festivals and shopping centres.
Mandatory requirements would be imposed on operators of crowded premises throughout the UK to prepare for and seek to prevent terrorist attacks, overseen by a regulator with powers to issue enforcement notices and impose fines or criminal sanctions. The new measures focus on risk assessment, planning, mitigation and security protection training, with the level of duty depending on the type of premises:
- Venues with capacity of 100 individuals or less fall outside the scope of the Bill. However, these premises are encouraged to adopt the spirit of the legislation and implement voluntary measures to reduce the risk (which may be relevant in the context of licensing applications).
- Venues with capacity over 100 people are ‘standard tier’ premises, required to undertake basic security measures including staff training, public awareness campaigns and development of a preparedness plan.
- Venues with capacity of 800 or more are ‘advanced tier’ premises subject to additional requirements including: notification to the regulator of the premises or event, and its designated senior individual, where the responsible person is a company; taking all reasonably practicable steps to reduce the risk of terrorist attacks or physical harm occurring, for example, bag searches and metal detectors in appropriate cases; and maintaining a security document evaluating the risk assessment and planned response, for submission to the regulator.
- Venues with capacity over 5,000 or hosting specific types of activities, such as major sporting events or concerts, will be subject to more stringent requirements covering the risk assessment and security planning process.
Government consultation is continuing with industry stakeholders on the scope of duties reasonably deliverable for standard tier locations, to strike a fair balance between public protection and the need to avoid excessive burdens on smaller premises.
The Home Affairs Select Committee raised concerns about proportionality, and the impact on small businesses or voluntary and community-run organisations. Implementation costs of £2,160 for standard tier premises and around £80,000 for enhanced premises were estimated by the Home Office, over a ten year period, but these figures have been queried amid concern that costs will escalate. The idea of staged implementation focusing initially on enhanced tier venues has been suggested by some commentators, whilst others believe this would increase the threat to smaller locations and put lives at risk.
Critics argue the draft Bill is not fit for purpose to adequately reduce terrorism risk, which may vary significantly based on the event or persons attending rather than the size of venue, especially since most provisions are directed towards mitigating the consequences of attacks, rather than preventing them from happening. Jonathan Hall KC, the Independent Reviewer of terrorism legislation, said that most attacks since 2010 would be outside the scope of the Bill; and campaigners argue current exemptions for outdoor Christmas markets and mass sporting events, such as marathons, should be lifted. Further improvements are recommended in areas including mandatory life-saving training, statutory provision for security to be considered in the design of new public buildings, and improved systems for procurement and training of security staff.
The events (re)insurance market is likely to see increased demand for terrorism-specific policies, or extensions to existing property programmes. It will be easier in future to identify whether operators of premises affected by terrorist attacks took reasonable steps to minimise risk, and respond appropriately to such events, judged against the new mitigation guidelines. Insurers will be apprehensive at the prospect of enhanced duties and liabilities, during the initial period whilst changes are introduced and understood, which may lead to increased casualty pricing or restricted terms of coverage. The scope of management liability insurance should also be considered for businesses operating in this sector, to cover potential mistakes by directors and officers tasked with implementation of additional controls.
There have been 14 terror attacks in the UK since 2017, representing a complex and evolving risk affecting a broad range of locations. Subject to fine-tuning during the process of detailed scrutiny through both Houses of Parliament, the new legislation is broadly welcomed as raising the bar on public safety, helping leisure, entertainment and retail premises to be better prepared and ready to respond to security threats.
Amy Lacey is a Partner at Fenchurch Law
Rome wasn’t built in a day – first thoughts on the Bletchley Park AI Safety Summit
The dust is beginning to settle on the much hyped (albeit nebulously orientated) Bletchley Park Artificial Intelligence Summit. Although it will take time for meaningful directives to filter out of the sleekly edited videos and beaming group photos of world leaders, some high-level observations can be made.
The first thing to note is the inherent contradiction between attempting to bring together a group of self-interested parties for the purpose of collective wellbeing. The ‘Bletchley Declaration’, signed by 28 countries, is an opaque commitment to co-ordinate international efforts on safeguarding against the dangers posed by AI. But a tension exists between nation states competing against each other for supremacy of the technology (and all the potential fiscal, technological and societal benefits that could entail) while recognising that in the wrong hands AI could have nefarious consequences and therefore needs a degree of regulation. In light of that fundamental conflict, the Bletchley Declaration can be viewed as a good start. It does not signal a new global regulatory framework, but it may be the blueprint for some such achievement in the future.
Perhaps the starkest demonstration of nations jostling for the title of world leader/global referee of AI development is the fact that on the first day of the Summit Kamala Harris, US Vice President, gave a speech at the US Embassy in London, unveiling the ‘United States AI Safety Institute’ on the responsible use of AI. This somewhat took the wind out of Rishi Sunak’s sails, who was hoping that the Bletchley Summit would be a springboard for the UK’s own Global AI Safety Institute. The UK Safety Institute is still going ahead, with various international partners, industry participants and academics, but significantly the USA has made clear that it will not be joining. Notably, the US Institute has had 30 signatories, one of whom is the UK.
Beyond typical Great Power rivalries, the Bletchley Summit was also forced to grapple between futuristic, dystopian deployment of AI on the one hand and real world ‘already happening’ AI risk on the other. Critics of the Summit pointed out that much of the discussion around AI safety and regulation focused on the former, at the expense of the latter. For example, the Prime Minister had an hour-long sit down with Elon Musk, who has been well documented in his “AI could end humanity” narrative, a position on which – among the tech community – the jury is still out. But little thought or discussion was given to the potential short-term impacts of AI, such as the warning by Nick Clegg of Meta that there is a real chance that invidious AI could generate disinformation and affect the elections next year in the US, India, Indonesia, Mexico and the UK. Likewise, little thought was given to the danger of discrimination bias in AI’s deep learning algorithms, which has already been demonstrated to have undesirable effects, for example in automated underwriting within the insurance industry (be it racial, geographical, or class bias).
Similarly, the TUC was one of a dozen signatories to a letter to the Prime Minister that outlined concerns about the interest groups of the Summit. The opinion and concerns of small businesses (who have been documented as some of those most concerned about the threat of AI) were almost entirely overlooked in favour of the big tech firms. The argument suggested was that the power and influence of the companies like Meta, Google and X created a narrow interest group for the Summit, whereby some of the parties most concerned about AI safety did not get representation, let alone a seat at the table.
Perhaps focusing on the criticisms levied at the Summit is unfair, given the old mantra ‘if you try to please everyone, you’ll please no one’: given the complexities of AI and the amount of interest groups involved, it was almost inevitable that there would be grumblings. In some sense, any agreement should be mildly heralded – it could be argued that managing to get China and the USA to attend the same Summit was a diplomatic win, let alone to have both of them signing the Declaration. And as mentioned above, the Bletchley Summit is only a starting point: the Republic of Korea will co-host a virtual summit within the next six months before France hosts the next in-person event in 12 months. While it is true that there few concrete commitments or directives emerged from Buckinghamshire, Roma uno die non est condita.
Dru Corfield is an associate at Fenchurch Law
Promised Land: Estoppel Trends in Policyholder Recoveries
Recent cases demonstrate how insurers’ claim handling may give rise to estoppel and extend the scope of policy coverage. Practices followed in earlier claims concerning the insured parties and/or operation of indemnity provisions could amount to a common assumption, conveyed between the parties and detrimentally relied upon by the policyholder, from which it would be inequitable for insurers to resile. Further, insurers are likely to be estopped from relying on breaches of policy conditions requiring consent to admissions or settlements, after refusing cover for liability claims.
George on High
In George on High Ltd & George on Rye Ltd v Alan Boswell Insurance Brokers & New India Assurance Co Ltd [2023], an historic pub hotel was largely destroyed by fire. The insurer (“NIAC”) agreed to indemnify the property damage but declined cover for a business interruption claim, alleging the company which suffered this element of loss was not named in or insured under the policy. Specifically, George on High Ltd (“GOH”) had owned the freehold property, whilst George on Rye Ltd (“GOR”) owned the business operating there. The named insured was “George on High Ltd t/a The George in Rye”. The defendant broker arranged the insurance and accepted it would be responsible for the losses claimed, if NIAC was not liable.
The claimants argued that earlier dealings with NIAC’s outsourced claim handlers proved knowledge on NIAC’s part that GOR ran the business, and that GOR had been confirmed as insured. Premiums had been paid by GOR, and the claims history included incidents relating to the business, with several previous claims reviewed by NIAC’s agents referring to GOR as the policyholder. In none of the earlier claims had concerns been raised as to whether policy coverage included GOR.
Deputy High Court Judge Tinkler decided a reasonable person having all the background knowledge available to the parties would have understood “George on High Ltd t/a The George in Rye” in the policy schedule to mean “George on High Ltd and the business operated by George on Rye Ltd t/a The George in Rye”. The Insurance Act 2015 states that insurers “ought to know” matters an employee or agent knows and ought reasonably to have passed on, or information held by the insurer and reasonably available to underwriters. The outsourced claim handlers were aware prior to policy inception that GOR ran the business, and this knowledge could be attributed to underwriters.
In the further alternatives, the Judge considered that all the requirements for rectification of the policy were satisfied. Applying the test in Swainland Builders Ltd v Freehold Properties Ltd [2002]: (1) the parties had a common continuing intention at the time of contracting, (2) there was an outward expression of accord, and (3) by mistake, the contract did not reflect that common intention. Even if the decision on construction was incorrect, the Judge would therefore have ordered the policy to be rectified to reflect the insured as: “GOH and the business operated by GOR t/a The George in Rye”.
The Judge also concluded that the claims history estopped NIAC from denying cover. Applying the test for estoppel by convention in HMRC v Benchdollar [2009]: (1) the policy included cover for business interruption and employer’s liability, demonstrating a common intention that GOR would be insured; (2) by accepting liability for earlier claims relating to staff and customers, NIAC had conveyed to the claimants that it believed GOR to be covered under the policy; and (3) the claimants relied upon that assumption by paying premiums. It would be unconscionable in the circumstances to allow NIAC to deny cover for GOR, even if those claims were not covered by the policy wording.
The decision stands in welcome contrast to the harsh outcome in Sehayek v Amtrust [2021], where insurers were entitled to avoid liability under a new home warranty based on failure to correctly name the developer on a certificate of insurance. The position in George on High was clearly distinguishable based on handling of the previous claims; and an application by the insurer for permission to appeal was refused.
World Challenge
In World Challenge v Zurich [2023], Fenchurch Law acted for a company running adventure trips, insured since 2016 under a bespoke travel and accident policy with Zurich. Following the outbreak of Covid-19, nearly all booked expeditions for 2020 had to be cancelled, and World Challenge refunded customers for deposits or advance payments as required by the applicable Terms & Conditions.
A dispute arose as to whether World Challenge was insured for all refunds paid to customers, or only for irrecoverable costs paid to third party suppliers. The policy wording provided that, if pre-booked travel arrangements for a journey were cancelled, curtailed or rearranged due to causes beyond World Challenge’s control, Zurich would pay:
“deposits and advance payments … reasonably and necessarily incurred that are forfeit under contract or are not otherwise recoverable.”
The policy specified a cancellation claims deductible of £200,000. Whilst many previous cancellation claims had been handled under the policies, the aggregate value had always fallen below the annual deductible, so that customer refunds in each case had been paid by World Challenge. A process had been agreed where cancellation details would be submitted to Zurich’s claim handlers, who would verify the customer’s entitlement to a refund in accordance with the Terms & Conditions, before authorising World Challenge to issue a refund payment, and tracking the policy deductible.
Zurich never asked how much of the refund payments related to irrecoverable costs and it was obvious that cancellation claims were being treated as equal in amount to the customer refunds. Based on this course of dealing, World Challenge believed that all refunds were covered under the policies. Zurich was slow to communicate its disagreement with this position when the pandemic struck, and urgent clarification became imperative to manage business operations and customer relationships.
Mrs Justice Dias held that the ordinary and natural meaning of the policy wording was that Zurich would indemnify customer refunds only if and to the extent they comprised irrecoverable third party costs. Zurich’s employees maintained that this is how they had always understood the policy to operate, yet the claims process above was followed without question because (as the Judge found): “neither the claims handlers nor the underwriters particularly cared what the refunds represented, since the amounts involved were all comparatively low and fell within the deductible so that it made no practical difference to Zurich”. This attitude was described in the judgment as cavalier, since the adjustment and agreement of a claim has just as much contractual significance where it goes to erode a deductible as when payment is made by the insurer.
Attempts in the witness box to explain why documents did not in fact mean what they appeared to were described by the Judge as “frequently incoherent and illogical”, creating a “dismal impression” and making Zurich’s witnesses “look more than a little foolish”. Whilst there was no suggestion of any conscious dishonesty, the Judge highlighted the inherent unreliability of witness recollection, since all “memory" of distant events depends on a process of reconstruction inevitably influenced by a multitude of factors including the selection of documents reviewed in preparing witness statements, and the natural human instinct to reconstruct events to put oneself in the most favourable light possible, particularly when the witness has a tie of loyalty to or dependence on one of the parties, such as an employer.
Applying the test in Benchdollar and Tinkler v HMRC [2021], the Judge found that a common but mistaken assumption of law or fact arose from the course of claims handling under the earlier policies, conveyed between the parties, and relied upon by World Challenge in relation to the cancellation of trips. Zurich was therefore estopped by convention from denying that World Challenge was entitled to be indemnified under the policy for the amount of its customer refunds, subject to giving credit for any recoveries.
As compared with estoppel by convention, promissory estoppel requires a clear and unequivocal promise or assurance by the defendant that it will not enforce its strict legal rights; an intention by the defendant that this promise/assurance should affect legal relations between the parties; and detrimental reliance by the claimant, so that it would be inequitable to permit the defendant to withdraw the promise, or act inconsistently with it. The Judge concluded that this was not established on the facts, since there was no understanding on the part of World Challenge that Zurich was giving up any right to rely on the true construction of the policy.
Permission to appeal has recently been granted and it will be interesting to see whether further nuances are introduced by the Court of Appeal.
Technip v Medgulf
In Technip Saudi Arabia v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023], the claimant (“Technip”) was principal contactor for an offshore energy project in the Middle East. A vessel chartered by Technip collided with a wellhead platform owned by the field operator, KJO, and Technip notified a liability claim under the project all risks policy, written on a WELCAR standard market wording. The defendant insurer (“Medgulf”) declined the claim and confirmed to Technip that it should act as a prudent uninsured.
Technip subsequently agreed to pay $33 million in respect of KJO’s claim, and informed Medgulf of the settlement. Medgulf considered that the insurance claim was excluded on other grounds, and raised a secondary argument that the loss did not fall within the policy definition of Damages, as follows: “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent”.
Whilst Mr Justice Jacobs ultimately found the claim to be excluded under an Existing Property Exclusion in the policy, he also agreed with Technip that the requirement for insurer’s consent to compromise settlements could not apply, as this provision presupposed the insurer’s acceptance of liability:
“It would in my view be a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent insured … [because the policyholder] would be acting in accordance with what it had been told to do. An uninsured person would, by definition, have no reason to consult or seek the consent of an insurer. I consider that a court would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured.”
The Judge also considered the effect of various common law authorities, including the New Zealand Court of Appeal decision in Napier City Council v Local Government Mutual Funds [2022], as instructive in identifying waiver and estoppel as potential reasons why an insurer, which has denied liability, cannot then rely on clauses which require the insured to obtain consent to a settlement.
The comments in this case on unauthorised settlements are in stark contrast to the judgment in Diab v Regent [2006], in which the Privy Council held that a policyholder must still comply with claim conditions even though the insurer had indicated that it would reject any such claim. The decision in Technip gives some comfort that being told to act as a prudent uninsured allows a policyholder flexibility when negotiating and settling claims, although the safest course of action will still be to seek to comply with policy conditions where possible, even if insurers are unresponsive.
Conclusion
In an insurance case heard last year in the Commercial Court, Counsel for the policyholder explained to the Judge that an estoppel argument advanced by his client in a preceding arbitration had failed. “But they always do”, languidly replied the Judge. On the contrary, recent decisions highlight that estoppel is proving to be a point worth taking for policyholders whose claims have been declined.
Policyholders and brokers should exercise caution when identifying and naming parties to be insured, to avoid potential disputes. The position in relation to deemed insurer knowledge reflects increasingly sophisticated electronic systems for information sharing across the industry, as compared with traditional hard copy files. Insurers should take a considered approach to claim handling, even for low value matters, and ensure proper oversight of appointed agents.
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