Collisions, Allisions and Prudent Uninsureds - Technip v Medgulf, and insurance for unauthorised settlements
Technip Saudi Arabia Ltd v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm) (21 July 2023)
This decision provides helpful insight into how the Courts will deal with insurance claims for sums due under a settlement agreement.
Technip was the principal contractor for a project in an offshore oil and gas field in the Persian Gulf. In 2015, a vessel that Technip had chartered collided with and damaged a platform in the field. Technip and the platform owner, KJO, reached a settlement for US$25 million, which Technip sought to claim from the defendant insurer (“Medgulf”), along with other alleged losses, under the liability section of its Offshore Constructions All Risks policy. The settlement had occurred some three years after Medgulf had declined indemnity for the original claim, instead telling Technip that it should act as a “prudent uninsured”.
Claiming losses under Settlement Agreements
Technip -v- Medgulf confirmed the general principle under English Law that it is not enough for a policyholder simply to prove that a settlement agreement reached with a third party is reasonable in order to claim for the resulting loss under a liability policy, but it must also prove that there was a legal liability to the third party and that the settlement does not exceed the amount of that liability. In other words, the law does not provide a carte blanche to policyholders to settle disputes with third parties and expect a liability insurer to pick up the tab.
Settlement Agreements and Insurer’s Consent
Liability policies very commonly require the insurer's consent before a policyholder takes various steps during a dispute with a third party. These can include admission of liability, settlement discussions, negotiations and entering settlement agreements.
Here, the Policy provided an indemnity to Technip for its 'Ultimate Net Loss' ("UNL"), which was defined as:
"the total sum the Insured is obligated to pay as Damages …"
Damages were defined as:
"…compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters' consent, but shall not include fines or penalties, punitive damages, exemplary damages, equitable relief, injunctive relief or any additional damages resulting from the multiplication of compensatory damages". (Our emphasis)
Technip did not obtain Medgulf’s consent before concluding the settlement agreement, and Medgulf predictably argued that the settlement sum therefore did not fall within the definition of “Damages”.
Technip successfully argued that the sums payable under the Settlement Agreement comprised, in part, "compensatory damages" and so fell under the definition of "Damages" under the Policy. Medgulf had argued that the four categories identified in the first part of the definition of “Damages” had a degree of separation and that, crucially, “compensatory damages” must be sums awarded by a court or tribunal, which would not be applicable to the US$25 million Technip paid to KJO. The Court rejected this argument, however, and did not view the four categories as disjunctive: the settlement payment was caught by the definition of “compensatory damages” within the ordinary meaning of the term, with the result that the absence of consent by Medgulf was irrelevant.
Furthermore, Technip argued that, even if the settlement sum did not constitute “compensatory damages” and instead was only potentially covered as a “compromise settlement”, there was still no need for Medgulf's consent given that it had refused to indemnify Technip in 2016 (three years before the Settlement Agreement) and told Technip to act as a 'prudent uninsured'. Technip contended that, in these circumstances, the provision requiring consent could not apply, as the provision presupposed the insurer's acceptance of liability under the Policy.
The Court agreed with Technip and held that it "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". So, in short, the Court found that Medgulf was prevented from relying on the “Underwriter’s consent” part of “compromise settlements”.
Summary
Although Technip’s claim for an indemnity ultimately failed on other grounds, the Court’s comments concerning insurers' inability to rely on terms requiring their consent once they have told the policyholder to act as a prudent uninsured (or use similar language) are plainly useful for other policyholders. The decision stands in welcome contrast to the Privy Council’s judgment in Diab v Regent [2006] UKPC 29, which had seemingly held that, where an insurer has declined indemnity, a policyholder is still bound by all the claim conditions, including the need to seek insurer’s consent for a settlement. The policyholder in Diab had also raised an estoppel argument, which failed because the Court viewed the alleged representation of the insurer as essentially a warning not to pursue a claim under the policy, and not as an indication that, if the policyholder did pursue the claim, it would not be expected to comply with the procedural requirements of the policy.
Fun Fact: The event leading to the Damage in Technip -v- Medgulf was referred to throughout the Trial as an allision rather than a collision, an allision being where one of the objects involved is stationary.
Authors:
Cladding PI Notifications - A View from Down Under
A recent decision in the Federal Court of Australia provides guidance on broad professional indemnity insurance notifications for external cladding works, confirming that a wide problem may be validly notified with reference to appropriate supporting information - MS Amlin Corporate Member Ltd v LU Simon Builders Pty Ltd [2023] FCA 581.
A full copy of the judgment can be found here.
The Policies
LU Simon Builders Pty Ltd and LU Simon Builders (Management) Pty Ltd (the “Policyholders”) operated a construction and project management business. Professional indemnity (“PI”) insurance was arranged through local Australian and London placing brokers for the 2014/2015 period, including excess layers.
The insuring clause provided cover for civil liability arising from claims first made against the Policyholders during the policy period, and reliance was placed upon section 40(3) of the Insurance Contracts Act 1984, whereby an insurer is also liable for claims made after expiry of the period of insurance:
“where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired”.
This creates a statutory mechanism similar to the common position in the English PI market, where claims made covers are frequently extended to allow notification of circumstances known to the policyholder that may give rise to a claim: if notification of circumstances is made during the policy period then the third party claim itself – even though it may actually come in at a later date – is deemed to have been made during that same policy year.
The Claims
In 2019 proceedings were commenced against the Policyholders by developers and owners of Atlantis Towers in Melbourne, alleging that unsuitable ”Alcotex” aluminium composite panels (“ACP”) were used as cladding for the building (the “Atlantis Claims”). The Policyholders sought indemnity for the Atlantis Claims, and excess layer insurers applied for a declaration that the PI policies would not respond.
The Atlantis Claims came about following investigation by the Metropolitan Fire Brigade (the “Fire Brigade”) and Municipal Building Surveyor for the City of Melbourne (the “Municipal Surveyor”) into a fire on 25 November 2014 at Lacrosse Tower, another building constructed by the Policyholders. The investigation found that ACP at Lacrosse Tower (Alucobest) was not compliant with the Building Code of Australia, and had contributed to the rapid spread of fire.
The Victorian Building Authority (the “Building Authority”) subsequently commenced an investigation and audited around 170 high-rise buildings in Melbourne. The Building Authority concluded that ACP on the Atlantis Tower (Alcotex) was combustible, and Building Orders were issued requiring replacement.
The Notifications
The dispute centred around two notification emails headed “Potential Claim”, sent to insurers in May 2015, neither of which identified Atlantis Towers or the Alcotex brand of ACP which had been used in its construction.
The first notification email referred to: “a notification of circumstances that may result in a claim under [the Policyholders’] Policy … Really most of the noise is around the press release … No formal claim has been made against [the Policyholders] at this point in time”.
The email attached: (1) a newspaper article dated 28 April 2015, referring to the Building Authority’s investigation into the Policyholders’ building practices, to identify whether non-compliant ACP had been used elsewhere; and (2) a document headed “Lacrosse Apartments - Docklands” including commentary from the managing director of the Policyholders in relation to ACP having been widely used in Australia for decades with “no like product passing the test for combustibility”, and referencing a potential class action by owners of Lacrosse Tower.
The second notification email attached a report on Lacrosse Tower by the Fire Brigade entitled “Post Incident Analysis Report”, together with the design and construct contract. The report stated that the Fire Brigade was not aware of any competitor aluminium / polyethylene panel product which had satisfied combustibility tests, and expressed the Fire Brigade’s firm opinion that ACP without appropriate accreditation / certificates of conformity represented an unacceptable fire safety risk, given the need to prevent similar incidents. The Fire Brigade’s report contained hyperlinks to four media reports, suggesting that the Building Authority’s audit had revealed a pattern of poor compliance with regulations, and that “buildings may be a risk to occupants in a fire situation”.
The Decision
His Honour Justice Jackman concluded that the notification emails clearly pointed to a wider problem than one confined to the Lacrosse Tower, or to Alucobest products. The reference to broader investigations, alongside the proposal form statement that 100% of the Policyholders’ work in the last financial year related to high-rise buildings, had the effect of conveying to insurers that there was (at least) a real and tangible risk of the Policyholders facing claims for rectification of that aspect of its work on this building, and on others that it had constructed.
Applying principles discussed in P&S Kauter Investments Pty Ltd v Arch Underwriting at Lloyd’s Ltd [2021] NSWCA 136, the Court acknowledged notification need not be given in a single document, nor the likely claimant(s) identified. Information included by hyperlinks formed part of the notification, since the task of clicking “is not significantly more demanding than turning a physical page” - provided that the link is to a specific page or document. Opinions expressed by public authorities with appropriate expertise (such as the Fire Brigade or the Municipal Surveyor) were held to be capable of constituting “facts” for the purpose of s.40(3), despite the contrary Federal Court decision in Uniting Church (NSW) v Allianz Australia Ltd [2023] FCA 190.
Given a clear causal connection between investigations reported in the notification emails, and later proceedings against the Policyholders, the Court concluded that insurers had been notified before expiry of the policies of facts giving rise to the Atlantis Claims, within the meaning of s.40(3).
English Law
Australia is a common law jurisdiction originating from the English legal system, applying statutory provisions enacted by its various states and federal governments.
Policyholders are similarly able to make “hornets’ nest” notifications under English law, i.e. general notification of a problem even where the cause of the problem or its potential consequences are not yet known (HLB Kidsons v Lloyd’s Underwriters [2008]; Kajima UK Engineering v The Underwriter [2008]; Euro Pools plc v RSA [2019]).
The operation of notification of circumstances provisions under liability policies is often contentious, and careful consideration should be given to the content and timing of notices to insurers, with supporting documents, to maximise the scope of cover. Policyholders should be mindful of precise wording in their PI policy conditions on the knowledge threshold for notifications (whether based on “may” or “likely to” give rise to claims language), and ensure that the trigger remains consistent between policy years and insurance layers where possible, in order to avoid potential gaps in cover.
Amy Lacey is a Partner at Fenchurch Law
Challenging times for Zurich: insurer ordered to pay out on Covid 19 claim
World Challenge Expeditions Limited v Zurich Insurance Company Limited [2023] EWHC 1696 (Comm)
The court has held that, having operated a business travel policy in a certain way for nearly four years, Zurich was estopped from denying that it provided cover on that basis.
An estoppel by convention had arisen such that it would be inequitable for Zurich to resile from the common assumption between the parties as to the operation of the policy.
As such, the successful policyholder, World Challenge (represented by Fenchurch Law), was entitled to an indemnity of almost £9m, being the amount of refunds paid to its customers following the cancellation of its global programme of expeditions necessitated by the pandemic.
The court further criticised Zurich for its handling of the claim and the time that it taken to clarify its position. This was a matter of utmost importance and urgency in circumstances where it was critical to World Challenge’s business and customer relations that it was able to confirm whether it had a covered claim. Mrs Justice Dias commented that: “This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way”.
A full copy of the judgment can be found here.
Background
The policyholder, World Challenge, provides adventurous, “challenging” expeditions worldwide for secondary school students, or “challengers”. As a result of the pandemic it was obliged to cancel nearly all of its booked expeditions for 2020.
The insurer, Zurich, provided World Challenge with wide ranging cover including cover for cancellation of trips by the challengers.
Prior to the pandemic, Zurich had handled and approved more than one hundred cancellation claims since 2016 in the amount of the refund paid to challengers. The amount of the refund, less an administration fee, was recorded against the aggregate deductible in the event of a trip cancellation. Prior to the onset of Covid-19, that aggregate deductible was never exhausted.
When the pandemic struck in early 2020, Zurich faced substantial claims for refunds to challengers for trips that would be cancelled in the coming months, and which would significantly exceed the aggregate deductible. World Challenge’s position was that Covid-19, and the mass trip cancellations which could eventuate, was precisely the type of ‘black swan’ event that it thought it had insurance cover for. It sought confirmation of that cover from Zurich prior to cancelling the relevant trips and exposing itself to the millions of pounds of refunds to its customers that it would need to make as a result.
In light of the significant losses it now faced, Zurich, after an extended period of delays in confirming its position, in a complete volte-face sought to depart from the “common assumption” of cover for refunds and instead informed World Challenge that it only had cover (and only ever had cover) for irrecoverable third party costs (for example, hotel or airline costs which World Challenge had paid out and was unable to recover).
The claim
The issue before the court was the correct construction of the policy and whether Zurich was precluded by estoppel or collateral contract from denying that the policy provided the cover that World Challenge thought it had.
Mrs Justice Dias concluded that, although the policy in fact only covered irrecoverable third party costs, Zurich’s previous conduct in agreeing claims in the amount of the refunds and setting them against the deductible had clearly conveyed to World Challenge that they shared its assumption as to the scope of cover and World Challenge was strengthened and confirmed in its own reliance on that assumption.
Zurich’s argument that the subjective understanding of its claims handlers was insufficient to establish any assumption on the part of the company was rejected.
Further, the court found that the delays in cancelling trips caused by Zurich’s delay in confirming its position on cover caused World Challenge to lose its opportunity to explore other avenues in order to maintain customer goodwill and manage its exposure.
It was therefore inequitable for Zurich to resile from the common assumption. Zurich had every opportunity to correct the error in handling claims, but took no steps to do so until such time as it became apparent that the aggregate deductible would be exceeded.
Conclusion
This judgment provides a welcome reminder to insurers about the importance of handling claims in a timely manner that responds to the needs of its customers, particularly in the face of a devastating loss with significant repercussions for the continued operation of its business.
Also welcome is the confirmation that the conduct of claims handlers in approving or rejecting claims will bind an insurer as they are the people charged with handling the claims on the company’s behalf.
From a legal perspective, in addition to being essential reading for anyone interested in the requirements of a variety of types of estoppel, practitioners will do well to take note of the comments made about the witness evidence and the dangers of putting forward statements that are inconsistent with the contemporaneous documents. This made for an uncomfortable time for Zurich’s witnesses in the box, and should be a salutary tale, particularly given the spotlight on witness evidence in light of the recent changes to the rules in respect of trial witness statements.
Authors:
Rob Goodship, Associate Partner
Anthony McGeough, Senior Associate
Reach for the Sky? – judgment handed down on Sky Central
Sky UK Limited & Mace Limited v Riverstone Managing Agency Limited & Others [2023] EWHC 1207 (Comm)
Summary
The High Court has handed down the hotly anticipated judgment in Sky & Mace v Riverstone, which concerned a claim by Sky and Mace for the cost of remedial works to the roof at Sky Central, Europe’s largest flat timber roof. The sums claimed for the two remedial schemes put before the Court were both in excess of £100m.
Whilst Sky, as principal insured and loss payee under the building contract, has been awarded an indemnity in principle, the quantum of that indemnity is subject to either agreement or, failing that, determination by the Court, given Mr Justice Pelling’s finding that none of the remedial schemes put before the Court sufficiently represented the remedial works necessary to address the damage as at the end of the Period of Insurance. That said, the Judge found that one of the schemes presented by insurers “most closely approximates” to the damage in need of remediation at the end of the Period of Insurance, and has encouraged the parties to agree the quantum of the appropriate temporary works which need to be added to that scheme.
Issues
The full judgment is worth a read for all CAR practitioners (and enthusiasts) but the real take aways are:
DE5
Whilst Sky is the first court decision anywhere in the world to consider the DE5 defect exclusion, it actually does no more than provide (at paragraph 29) a slightly clearer articulation as, based on the Judge’s findings, he didn’t need to consider what actually constituted an additional cost of any additional improvement works.
The reason for that is because his judgment was premised on one of insurers’ schemes being the most appropriate (in the circumstances) which (unsurprisingly) did not include any improvements to the original design, plan, specification, materials or workmanship.
Co-insurance
Sky follows closely after the Court of Appeal’s decision in RFU that was handed down in April (https://www.fenchurchlaw.co.uk/worth-a-try-judgment-handed-down-on-rugby-football-union-appeal/).
The Judge followed the reasoning in the first instance decision in RFU which Lord Justice Coulson said was “unassailable” by the Court of Appeal. Here, Mace was found to be a co-insured under the project policy but, as a result of the building contract entered into with Sky, only to Practical Completion (“PC”) and not to expiry of the Maintenance Liability Period (“MLP”) - only Sky had the benefit of that cover.
Mr Justice Pelling rejected Mace’s argument that a distinction should be drawn, and that it therefore benefited from, being a named in the policy (as opposed to falling into a prescribed category) as being “unprincipled and unsupported”. He found that there was “ample authority” that when deciding the scope and extent of the insurance cover available, it was necessary to consider the scope that the contracting insured agreed to procure, and that cover will not generally extend beyond what is contained in that agreement.
Mr Justice Pelling confirmed (at paragraph 58), and in line with the thinking of the majority in Gard Marine, that the effect of this particular contract was that neither Sky nor insurers can recover any pre-PC loss or damage against Mace, but that Mace was required to remediate and has no entitlement to a sum beyond that which was recovered under the policy.
Physical damage
The judge rejected insurers' definition of physical damage as occurring at a ‘tipping point’ when “structural change of such severity as to require replacement of the affected timber” as being "impermissibly narrow".
Instead he found that the physical damage occurred once water entered the roof cassettes on the basis that “the entry of moisture into the cassettes during the Period of Insurance is in my view a tangible physical change to the cassette as long as the presence of the water, if left unattended, would affect the structural stability, strength or functionality or useable life of the cassettes during the Period of Insurance or would do so if left unremedied”.
In relation to the timing of the occurrence of damage, this is arguably in line with Tioxide where it was found that damage occurred once the environmental conditions where damage was liable to occur were present.
The articulation in Sky is potentially wider than that though, which is likely to be very helpful for policyholders when there is ambiguity over the timing of the damage occurring, as it permits the earliest possible date on which damage is liable to occur if left unattended, which is frequently a source of dispute, particularly in relation to water ingress claims.
Aggregation/ deductibles
The other major battle ground between Sky/Mace and insurers, and a point that this is increasingly being taken by CAR insurers in relation to modern methods of construction (including cassettes and modular pods), was the applicable number of deductibles which was determined by the number of ‘events’.
Insurers’ position was that the damage to each of the 472 cassettes was an ‘event’, whereas the Claimants said that there was one event, namely the decision not to use a temporary waterproofing system when installing the roof cassettes, which permitted water ingress during construction.
Mr Justice Pelling said that, in this policy, the “single unifying event must be an error or omission in the design plan specification materials or workmanship of the property Insured that has suffered damage as a result of such defect” when a claim was recoverable under DE5.
Applying the unities of time, place and cause, and following Mr Justice Butcher's finding in Stonegate (https://www.fenchurchlaw.co.uk/court-hands-down-judgment-in-much-anticipated-covid-19-bi-cases-the-takeaways-for-policyholders/) that a decision (or plan) was capable of being an event if it satisfied those unities, the judge agreed with Sky and Mace that there was only one event and, therefore, one deductible was to be applied to Sky's claim.Appropriate remedial scheme
The claim presented by Sky and Mace was slightly unusual given that the remedial works had not taken place by the time the claim got to trial, which seemingly resulted in the Judge being in some difficulty when determining the appropriate indemnity. Helpfully for policyholders though, Mr Justice Pelling’s instinct in response to assertions that Sky and Mace’s claims had failed as neither of their schemes were ultimately awarded was that it would be “counter intuitive” that an insured which had proved some damage would be left without remedy.
The actual quantum of Sky’s claim remains unresolved, but the judge saw no difficulty in principle with the various schemes being ‘mixed and matched’ in order to identify the appropriate indemnity.
Comment
Although the judgment does not delve into the correct interpretation and application of DE5 as perhaps hoped, it does contain a number of helpful nuances in relation to typical coverage issues under CAR policies, which will be helpful to property and contract works policyholders generally.
Rob Goodship is an Associate Partner at Fenchurch Law
Not so peachy – a disappointing Covid-19 decision for policyholders
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2023] EWHC 1545 (Comm)
In a month where Covid-19 decisions are coming in thick and fast, policyholders will be disappointed by the most recent judgment concerning a disease wording. A copy of the judgment can be found here.
On this occasion the policyholder, Bellini (N/E) Ltd, was issued with a policy by its insurer, Brit UW Limited, that contained an extension to business interruption cover for business interruption caused by damage arising from a notifiable disease manifested by any person whilst in the premises or within a 25-mile radius.
Disease wordings like these will be familiar to those who are acquainted with the FCA test case and Covid-19 litigation, but in this particular case the quirk is a reference to the defined term “damage” in the introductory paragraph to the extension. Damage within this policy was defined as “physical loss, physical damage, physical destruction”. However, it was common ground between the parties that there had been no physical loss of or damage to the policyholder’s premises or property.
The policyholder argued that policy provided both basic cover for physical damage and also extensions of cover for other matters that would not ordinarily result from or in physical damage. In particular, the provision of a radius clause of 25 miles for the manifestation of disease went beyond the basics of physical damage to the premises or property therein, which the policyholder asserted was reinforced by the court’s analysis of similar wordings in the FCA test case.
Among other arguments on the construction of the policy, the policyholder contended that if the extension only responded to physical damage it would “render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away”.
The court, however, was unpersuaded by the policyholder’s arguments, instead relying upon the “ordinary meaning” of the clause, which provided no cover in the absence of physical loss, damage or destruction. In particular, the court considered it to be significant that the clauses dealt with in the FCA test case were not expressed as to cover interruption caused by damage, and had been recognised as non-damage in that cover was not contingent on physical damage.
The court considered that the policyholder’s arguments effectively required it to re-write the policy contrary to the parties' express agreement and the established approach to contractual construction.
Comment
Recognising that the impact of a notifiable disease will be non-damage related losses, many wordings make it clear that the extension is intended to be triggered in the absence of physical damage, and that is how the clause would be understood to operate.
In circumstances where the parties agreed that a disease at the premises or within 25 miles of the premises does not cause physical damage, it is difficult to see what purpose, if any, can served by a clause that only provides cover for physical damage.
It is therefore difficult to reconcile the court’s attempts to give effect to the wording of the policy with what most policyholders (and we assume those insuring them) would expect to be covered when offering a 25-mile radius clause as part of the policy cover.
It is notable that the courts in the FCA test case grappled with similar difficulties on wordings where the standard form of certain clauses assumed the paradigm case of business interruption by reference to physical damage. The Supreme Court, albeit in the context of trends clauses, came to the view at [257] that the “reference to “damage” is inapposite to business interruption cover which does not depend on physical damage to insured property such as the cover with which these appeals are concerned. It reflects the fact that the historical evolution of business interruption cover was as an extension to property damage insurance. It was held by the court below, and is now common ground, that for the purposes of the business interruption cover which is the subject of these appeals, the term “damage” should be read as referring to the insured peril”. It appears that in the right circumstances the courts are not opposed to manipulating the wording of a policy to give it proper effect, and one might have expected the court in this matter to have taken a similar approach to the 25-mile radius clause.
Undoubtedly the market will be watching this one closely for any signs of an appeal, especially in light of the body of Covid-19 case law that appears to support a disease clause such as the one in dispute here.
Authors:
Anthony McGeough, Senior Associate
Joanna Grant, Partner
AI: The Wizard behind the Data Curtain?
“What is Chat GPT?” is a frequently heard question this year. “What is AI? How does it work?” is occasionally the follow up. And for the sceptics, “Will it take my job? Is it dangerous?” One cheerful BBC News headline recently read “Artificial Intelligence could lead to extinction, experts warn”.
Artificial Intelligence (AI) and Machine Learning Technologies (MLTs) have rapidly gone from the stuff of science fiction to real world usage and deployment. But how will they affect the insurance industry, what are the legal implications, and is the whole issue really that much of a concern?
Taking the final question first, the evidence suggests that jobs are already being lost to this new technological revolution. In March 2023, Rackspace surveyed IT decision-makers within 52 insurance companies across the Americas, Europe, Asia and the Middle East. 62% of the companies said that they had cut staff owing to implementation of AI and MLTs in the last 12 months. In the same period, 90% of respondents said they had grown their AI and MLTs workforce.
It is worth drilling into the specifics of what AI and MLTs actually are. McKinsey & Company define AI as “a machine’s ability to perform the cognitive functions we usually associate with human minds”. MLTs, according to IBM, are best considered as a branch of AI, in which computers “use data and algorithms to imitate the ways that humans learn, gradually improving their accuracy”. So, taking ChatGPT (released 30 November 2022) as an example, Open AI (the developer) has trained ChatGPT on billions of documents that exist online. From news, to books, to social media, to TV scripts, to song lyrics. As explained by Boston Consultancy Group, the “trained model leverages around 175 billion parameters to predict the most likely sequence of words for a given question”. In many ways, it has to be seen to be believed. If you haven’t already, it is worth signing up to ChatGPT. It’s free and takes moments. The author has just asked it to write a Jay-Z song about the London Insurance Market and to write a story about Sun Tzu waking up in the world of Charles Dickens – both with instant, detailed results. The absurdity of the requests was done to demonstrate the power of the MLT: it is quite remarkable.
What is exciting, or scary, depending on your position, is that GPT-4 (the next version of ChatGPT) has 1 trillion parameters. It was released at the end of March and is behind a paywall. But the point is that the never-seen-before power behind the technology released only at the end of last year has become nearly 6 times more advanced in four months. Not unlike the Sorcerer’s Apprentice wielding his axe and doubling and redoubling broomsticks carrying pails of water, MLTs scythe through and consume data at an exponential rate.
So, what does it all mean for the insurance industry? MLTs can sift through data vastly faster than humans, and with far greater accuracy. The tech poses the most immediate threat to lower-level underwriters and claims handlers, as well as general administrative roles. But what about to the wider London Market?
As this firm’s David Pryce has explained*, the London Market does not have as many generalised wordings as do other insurance markets around the world. The policies written here are highly sophisticated and frequently geared towards bespoke risks. The specialism of the London Market means that, in terms of senior underwriters, while they may be informed by AI/MLTs, their judgement, gained through experience, will mean their role is fairly safe – machine learning tech is far superior at analysing past knowns than conceptualizing future risks.
Similarly, in high-value, sophisticated non-consumer insurance contracts that are the norm within Lloyd’s, questions arise about AI’s/MLTs’ potential to remove the broker role. Consider a cutting-edge ChatGPT equivalent that does the role of a broker, but is developed by an insurer for an insured. There is an inherent conflict between acting as an agent of an insured and seeking to maximise profit for the insurer. There would undoubtedly be a data bias in this metaphorical ChatGPT. In the same vein, a ChatGPT equivalent could be developed by London Market brokers, but this would miss the personalised touch that (human) brokers bring to the table (and policyholders enjoy). James Benham, Insurtech guru and podcast host, recently said that AI could stop brokers doing menial form-filing and spend more time doing what policyholders want – stress testing the insured’s policy and giving thought to what cover they need but had not considered. So while in the short term low-level work will likely be made more efficient by AI/MLTs, and lead to reductions in staff, a wholesale revolution or eradication of vast swathes of the London Market broking sector remains unlikely.
Finally, it is worth noting the speech on 14 June 2023 by Sir Geoffrey Vos, Master of the Rolls, given to the Law Society of Scotland’s Law and Technology Conference. After highlighting a recent example of an American lawyer who used ChatGPT for his legal submissions, in which ChatGPT not only grossly misunderstood/misrepresented the facts of some cases but actually made up another one for the purposes of the submissions, he cautioned the use of the MLT in legal proceedings. He further observed dryly that “clients are unlikely to pay for things they can get for free”. Perhaps specific MLTs will be successful developed in the near future to assist or stress test lawyers’ approaches (for example, Robin AI is a London-based startup that uses MLTs to assist lawyers with contract drafting), but ChatGPT is not there yet. A similar point could be made in its application to the insurance industry – simple, concise deployment of the technology will remove grunt work and effectively and cheaply simplify data, but human experience will not be replaced just yet. As with blockchain, in the short term we are likely to see more of an impact on consumer insurance contracts than high-value, bespoke, London Market insurance.
Dru Corfield is an Associate at Fenchurch Law
* See The Potential impact of ChatGPT on insurance policy wordings, Insurance Business Mag
Covid-19 BI claims update: policyholder-friendly judgment in At The Premises litigation
London International Exhibition Centre Plc -v- Royal & Sun Alliance Insurance Plc and others [2023] EWHC 1481 (Comm)
In the latest instalment in the wave of Covid-19 business interruption litigation making its way through the courts since the pandemic, a group of policyholders have been successful in their claim that the Supreme Court’s approach to causation in relation to ‘radius’ wordings should equally apply to the ‘at the premises’ wordings.
This result has a much broader application than simply for the parties to this litigation, and paves the way for large numbers of policyholders on similar wordings to argue that their claims are covered.
The background
While the FCA test case litigation represented a victory for policyholders in many respects, it also left a number of loose ends – one of which this recent ruling ties up in their favour.
With regard to ‘radius’ wordings, that is, business interruption policies that respond to cases of a notifiable disease occurring within a specified radius of the premises, the Supreme Court concluded that that each case of Covid-19 was a concurrent cause of the restrictions. As such, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of Covid-19, it was sufficient to prove that the interruption was the result of government action taken in response to cases of disease which included at least one case of Covid-19 within the geographical area covered by the clause.
‘At the premises’ wordings, namely clauses providing for cover for losses caused by restrictions resulting from cases of notifiable diseases at the premises themselves – as opposed to within a specified radius of the premises – were not within the ambit of the FCA test case.
As a result, there was uncertainty as to whether the Supreme Court’s causation analysis was equally applicable to such clauses. This judgment now clarifies that it is.
The policyholders’ position
The claimant policyholders, who included the London International Exhibition Centre the restaurant chain, Pizza Express, as well as a number of smaller businesses including a hairdresser, two gyms, and various hospitality venues, had all suffered significant BI losses as a result of the pandemic, and all had ‘at the premises’ cover as part of their business interruption insurance. Applying the same approach to proximate causation as adopted by the Supreme Court in the FCA test case, they argued that their policies should respond to cover their losses.
The insurers’ position
The insurers disagreed. One of the main themes was that ‘at the premises’ clauses and ‘radius’ clauses provided a “fundamentally and qualitatively different” nature of cover: they were “chalk and cheese”. The fact that they are engaged by incidents of disease at a precise location means that a direct causal connection is required, which in turns requires proof of ‘but for’ causation between the occurrence of disease at the premises, the action by the authorities, the consequent business interruption and loss.
The judgment
Mr Justice Jacobs held that the policyholders were correct in their submission that “at the premises” is simply about the geographical or territorial scope of the coverage, and where the parties have chosen to draw the line in that respect - it has no impact on the appropriate approach to causation. In their analysis, the Supreme Court did not draw a distinction between ‘radius’ clauses where the radius was 25 miles, 1 mile, or the vicinity, and there was no reason why the radius could not be further shrunk from the vicinity to the premises itself without making any difference to the causation analysis. He added that this seemed to him to be an appropriate result, since any other conclusion would give rise to anomalies which it would be difficult rationally to explain to a reasonable SME policyholder who read the policy.
Cover for cases pre-5 March 2020
He did however find for insurers in relation to another issue before the court, namely whether cases of Covid-19 that occurred before it was made a notifiable disease on 5 March 2020 were capable of falling for cover. On the basis that a disease must be notifiable at the time of the occurrence or outbreak he found that they did not qualify. He stated that an approach that asks whether the disease was notifiable at the time of the relevant occurrence was straightforward to apply and perfectly sensible. That this meant that some occurrences would, depending upon when they occur, fall outside coverage was simply the ordinary consequence of the application of the words of the policy.
What next?
This is not the end of the story for Covid-19 claims – the next instalments will come towards the end of the year when another group of policyholders with claims against insurers for business interruption losses under policies with ‘denial of access’ wordings will have their cases heard - closely followed by the appeals in the Stonegate, Various Eateries and Greggs cases – it is very much a case of watch this space!
Joanna Grant is a partner at Fenchurch Law
Worth a Try? – judgment handed down on Rugby Football Union appeal
FM Conway Limited v The Rugby Football Union, Royal & Sun Alliance Insurance PLC, Clark Smith Partnership Limited
The Court of Appeal has handed down its judgment following FM Conway’s appeal of the High Court’s decision that it did not enjoy the same level of cover as its employer. Our previous article commenting on the first instance judgment can be found here.
Summary
The decision regards the potentially complicated factual and legal issues about the nature and extent of insurance cover obtained by one party on behalf of another. It was common ground at the first instance hearing that FM Conway was an insured under the project policy secured for the refurbishment of Twickenham stadium, but the extent of that cover was disputed by insurers.
FM Conway’s appeal was rejected by the Court of Appeal, with the leading judgment from Lord Justice Coulson providing a firm endorsement of Mr Justice Eyre’s decision that FM Conway was not insured under the project policy for damage to existing structures caused by its own defective work, but cover was instead restricted to specified perils in accordance with the (unamended) JCT Option C.
It is clear from the judgment that Lord Justice Coulson was in full agreement with Mr Justice Eyre, referring to his decision as “careful”, “unassailable” and “entirely in accordance with the authorities”.
Issues
The background facts are contained in our previous article but, in short, the underlying claim includes a subrogated claim by RSA in relation to the cost of remediating damaged cables, for which it had indemnified RFU as principal insured. FM Conway raised a co-insurance defence to that claim, asserting that it enjoyed the full benefit of the project policy obtained on its behalf by RFU.
FM Conway appealed the first instance decision on five grounds, albeit ground 1 was clearly FM Conway’s primary argument: whether the High Court applied the correct test for ascertaining the necessary authority and intention of the insuring party, the RFU. It was submitted on behalf of RFU and RSA, and then accepted by Lord Justice Coulson, that if ground 1 failed then so too must grounds 2, 3 and 4 as they were largely variations of the first ground and/ or were contingent on that ground succeeding.
It was held by the Court that Mr Justice Eyre did apply the correct test, given that he “paid particular attention to the underlying contract between the RFU and FM Conway. In that, he was following what Lord Toulson said was the correct approach in Gard Marine”. Lord Justice Coulson went on to say that “in any case where there is an underlying contract … it would be counter-intuitive if that was not at least the starting point for any consideration of authority and intention” to insure.
Lord Justice Coulson went on, as Mr Justice Eyre had in the first instance decision, to make clear that whilst the pre-contractual discussions between representatives for Conway and the RFU, respectively, regarding insurance arrangements could be taken into account (which were the main thrust of Conway’s argument that it had wider cover), they could not displace the clear interpretation of the building contract.
It was affirmed by the Court that “extraneous evidence” of a contrary authority or intention to insure could be relied on (similarly to Mr Justice Eyre’s finding that “compelling evidence” could be relied on), but the relevant investigations “will start (and possibly finish) with the underlying contractual arrangements agreed between the parties”.
The Court also made frequent reference, contrary to FM Conway’s reliance on the witness evidence which it said demonstrated an authority and intention of the RFU to secure wider cover, that both parties were represented by legal and insurance professionals such that had there been an intention to secure wider cover beyond that in Option C of the JCT Contract then it would have been reflected in the building contract ultimately agreed. Lord Justice Coulson said that to adopt FM Conway’s attempt to rely on early/ pre-contract discussions was “untenable” as it would enable a party to “ignore any subsequent stages of the actual negotiations”.
Guidance on co-insurance generally
Following his summary of the law in this area generally, Lord Justice Coulson provided (at paragraph 53 of the judgment) the following guidance in relation to co-insurance:
“53.1 The mere fact that A and B are insured under the same policy does not, by itself, mean that A and B are covered for the same loss or cannot make claims against one another;
53.2 In circumstances where it is alleged that A has procured insurance for B, it will usually be necessary to consider issues such as authority, intention (and the related issue of scope of cover). Such issues are conventionally considered by reference to the law relating to principal and agent …
53.3 An underlying contract between A and B is not a necessary pre-requisite for a proper investigation into authority, intention and scope …
53.4 On the other hand, where there is an underlying contract then, in most cases, it will be much the best place to find evidence of authority, intention and scope …
53.5 That is not to say that the underlying contract will always provide the complete answer. Circumstances may dictate that the court looks in other places for evidence of authority, intention and scope of cover”
Comment
Whilst the result is not surprising (especially as Lord Justice Coulson said that the first instance decision was in accordance with the existing authorities), it represents a clear articulation of the principles in this often complex area.
For policyholders in FM Conway’s shoes, it is key that if there is an intention for contractors to enjoy the same level of cover under the project policy as the employer/ principal insured, that the contractual documents make that clear and, where necessary, any standard forms are appropriately amended. That way, there is no need to look for other compelling or extraneous evidence to demonstrate that wider authority and intention which, as is made clear in the facts of this case, might be difficult to do.
Rob Goodship is an Associate Partner at Fenchurch Law
“Condoning dishonesty”: Discovery Land Co LLC & Ors v Axis Specialty Europe SE
Those dealing with Solicitors’ professional indemnity claims will know that the SRA Minimum Terms are intended to provide very wide cover, and will indemnify claims involving dishonesty unless the dishonest act/omission in question was committed or condoned by all the partners in the firm or by all the members of an LLP.
What is meant in this context by “condoning” was considered in the recent case of Discovery Land Co LLC & Ors v Axis Specialty Europe SE [2023] EWHC 779 (Comm), a decision by Robin Knowles J.
The Claimants were the victims of two multi-million pound frauds carried out by Mr J, a solicitor, who was a Member of Jirehouse Partners LLP and a director of two related legal practices, Jirehouse and Jirehouse Trustees Ltd (collectively, “Jirehouse”). A second person, Mr P, was likewise a member/director of the relevant entities.
Mr P hadn’t been involved with the two frauds - indeed, he resigned shortly after discovering them - but Jirehouse’s professional indemnity insurer (Axis) sought to decline indemnity by arguing that he had nevertheless condoned them.
Axis’s policy provided that
"EXCLUSIONS
The insurer shall have no liability under the policy for:
…
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly arising 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 that company or, in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
The court accepted that in this context to “condone” was an ordinary word meaning to convey acceptance or approval, and in some situations it does not require an overt act.
Axis’s case was that the frauds formed part of a longstanding pattern of dishonest behaviour on the part of Mr J, involving the temporary - but still unquestionably prohibited - practice of using client monies to address temporary cashflow problems, and various other dishonest acts, and that Mr P had been aware of or had turned a blind eye to that pattern.
Seemingly supportive of that argument were cases such as Zurich Professional Ltd v Karim [2006] EWHC 3355 (QB) and Goldsmith Williams v Travelers Insurance Co Ltd [2010] EWHC 26 (QB), where it had been held it was sufficient for two partners to have condoned the dishonesty of a third partner (the actual fraudster) when they were aware a persistent course of dishonesty by that partner, even if they weren’t aware of the actual act of fraud which had given rise to the claim.
However, that type of argument failed in this case. Robin Knowles J held that Mr P needed to have condoned the acts through which the two frauds by Mr J had been committed, and that simply condoning the occasions on which Mr J had illicitly “borrowed” client monies or his various other dishonest improprieties wasn’t sufficient.
Robin Knowles J’s assessment of Mr P was as follows:
“In my judgment the true story of this case is that [Mr P’s] standards fell well below those required in his profession. Indeed there are episodes that show he was untrustworthy and prepared to behave dishonestly. But these episodes were not such as to justify a conclusion that he in any way appreciated that [Mr J] could be embarked on multi-million pound fraud, extracting client monies in connection with the commercial entities with which he was involved. [Mr P] did not condone, either generally or specifically in relation to the two claims, what AXIS described in closing as a Ponzi scheme by [Mr J] …”
Robin Knowles J felt able to distinguish the two previous authorities mentioned above on this basis:
“…in Karim the Court accepted that the two condoning partners knew that flows of money out of the firm to themselves could not come legitimately from the income of the firm. In Goldsmith Williams, the Court found that, before the relevant transactions, the condoning partner engaged in mortgage fraud in her own right and knew that her partner did. There are not true parallels between those facts and the facts of the present case.”
Perhaps a more valid point of distinction was that, as the Judge noted in passing, the wording of the policy in this case was subtly different to the Minimum Terms considered in the two earlier cases. Those cases had required an assessment of whether the “dishonesty [of] or [the] fraudulent act or omission [by]” the fraudulent partner had been condoned by the other partner(s). In the present case, the wording of Axis’s policy had been replaced with a reference to the “dishonest or fraudulent acts, errors or omissions” committed by the fraudulent partner. Accordingly, condoning a general pattern of dishonesty was plainly not enough: the other partner must have condoned some specific dishonest acts or omission with which the claim in question was directly or indirectly involved.
The full judgment can be found here:
https://www.bailii.org/ew/cases/EWHC/Comm/2023/779.html
Jonathan Corman is a Partner at Fenchurch Law
Still on the starting block? Implications of blockchain for the Insurance Industry
Blockchain is a digital ledger technology that allows for secure and transparent record-keeping of transactions without the need for a centralised intermediary. It is a distributed database that is used to maintain a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data, and is open to inspection by all participants to the ledger. Once a block is added to the chain, it cannot be altered or deleted, making the blockchain tamper-resistant and immutable.
Blockchain technology is best known for its use in cryptocurrencies, such as Bitcoin, where it is used to securely record and verify transactions. However, the nascent technology has potential to enhance the business model of insurers, brokers and policyholders.
Potential benefits of blockchain
- Transparency
One of the primary benefits of blockchain for the insurance industry is increased transparency. Policies can be complex and confusing for consumer policyholders and blockchain can be used to expediate and simplify claims handling. For example, the UK start-up InsurETH is developing a flight insurance policy that utilises blockchain and smart contracts. When a verified flight data source signals that a flight has been delayed or cancelled, the smart contract pays out automatically. This type of policy can improve trust between the insurer and customer, as the policies exist on a shared ledger that is accessible to both and there is little or no scope for dispute as to when an indemnity should be provided.
- Fraud Prevention
Another issue within insurance, especially consumer insurance, is fraudulent claims. The ABI detected over 95,000 dishonest insurance claims in 2020 alone with an estimated combined value of £1.1 billion. Blockchain could significantly assist with preventing fraud by providing a secure and transparent way to record and verify claims made. While the process would require extensive cooperation between parties, it is perfectly plausible (and indeed likely in the future) that blockchain could substantially reduce fraud by cross-referencing police reports in theft claims, verifying documents such as medical reports in healthcare claims, and authenticating individual identities across all claims.
- Efficiency
Underpinning the above two points is blockchain’s clear potential to reduce operational costs. The technology’s automated nature can cut out middle men and streamline the insurance process. Another UK start-up, Tradle, has developed a blockchain solution that expediates ‘Know your customer’ checks – a time-consuming process for companies and a source of annoyance for clients. Tradle’s technology verifies the information once, and then the customer can pass a secure ‘key’ to whoever else may have a regulatory requirement to verify identity and source of funds. This simple utilisation of blockchain saves time and money in what is usually a tedious process.
Possible issues
- Participants (standardisation)
Blockchain’s potential impact may be impeded, however, by various issues preventing a revolutionary deployment of the technology. As pointed out above, there needs be a wide level of consensus for blockchain to work properly. There is currently no standardisation in the Market in relation to how and when the technology should be implemented, and participants are understandably cautious about making investment into blockchain when there is no guarantee that it will initiate efficient solutions (due to the current ‘state of play’). Consensus among competitors will take time to evolve. It is telling that the two companies mentioned above as ones who use blockchain are start-ups – the traditional Market is somewhat glacial.
- Scalability
And even if the London Market effected a wholesale adoption of blockchain tomorrow, there could be issues of scalability. Blockchain relies on an ever-increasing storage of data, meaning that the longer the blockchain becomes the more demanding the need for bandwidth, storage and computer power. The data firm iDiscovery Solutions found that 90% of the world’s data was created in the last two years, and there will be 10 times the amount of data created this year compared to last. Some firms may be faced with the reality that they do not have the computational hardware and capacity to provide for the technology, especially when the blockchains will be fed by data that is ever-increasing in terms of quantity and complexity.
- London Market use?
Finally, questions arise about exactly which insurance contracts stand the most to gain from blockchain. Consumers would certainly benefit from smart contracts with their home/health/travel insurance policies. But within sophisticated non-consumer insurance, where the figures are large but the number of parties involved is limited, it is questionable whether current transaction models need blockchain. Where there is trust between a policyholder and broker, and a personal relationship between the broker and the underwriter (as is often the case at Lloyd’s), it is unclear what blockchain would really add to the process. It is worth mentioning that in late 2016 Aegon, Allianz, Munich Re and Swiss Re formed a joint venture known as B3i to explore the potential use of Distributed Ledger Technologies within the industry. B3i filed for insolvency in July 2022 after failing to raise new capital in recent funding rounds. It seems, at least in relation to the London Market, blockchain will have a slower, organic impact as opposed to revolutionising the industry.
Dru Corfield is an Associate at Fenchurch Law