Welcome to the latest in the series of blogs from Fenchurch Law:\u00a0100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London \/ English insurance markets, all looked at from a pro-policyholder perspective.<\/p>\n
Some cases are correctly decided and positive for policyholders. We celebrate those cases as\u00a0The Good.<\/em><\/p>\n Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as\u00a0The Bad.<\/em><\/p>\n Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as\u00a0The Ugly.<\/em><\/p>\n At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.<\/p>\n #7 (The Good)<\/p>\n Woodford and Hillman -v- AIG<\/em> [2018] EWHC 358<\/strong><\/p>\n There are few cases dealing with coverage issues under D&O policies. This isn\u2019t necessarily because D&O policies are rarely the subject of dispute. It is more likely a reflection of the fact that if directors have to fund hefty legal costs in defending complex civil, criminal or regulatory actions because insurers are being difficult about costs or refusing outright to pay them, their personal finances are depleted to the point where suing the insurer is out of the question (and the Financial Ombudsman\u2019s service is no help because that avenue of remedy is closed off to company directors). The consequence is that insurers\u2019 obligations to fund defence costs are rarely scrutinised in court.<\/p>\n Occasionally, though, directors will take D&O insurers on, notwithstanding the power imbalance and the personal financial risk.\u00a0 Two such directors were Mr Woodford and Mr Hillman. They had been directors of the Olympus Corporation. They left in 2011 when Mr Woodford blew the whistle on a financial scandal.<\/p>\n In 2015 Olympus launched proceedings against them in the High Court in London for \u00a350m, claiming that their involvement in an Executive Pension Scheme while at Olympus breached their duties as directors.<\/p>\n Olympus had D&O cover which covered past directors. \u00a0Woodford and Hillman notified the claim to the D&O insurers, AIG, seeking an indemnity.<\/p>\n AIG\u2019s resistance to Defence Costs<\/strong><\/p>\n AIG refused to fund Woodford and Hillman\u2019s defence costs (\u00a34m and counting) claiming they were not reasonable. The policy was governed by German law but disputes fell to be determined in England.<\/p>\n The D&O policy made AIG liable for legal defence costs \u201cprovided these are reasonable with regard to the complexity and significance of the case<\/em>\u201d.<\/p>\n AIG argued that their liability for costs should be determined by a costs assessment. This is an assessment by a costs judge, normally undertaken when litigation ends, to determine how much of the winning party\u2019s costs the loser should pay. The costs judge very critically examines the costs being claimed.\u00a0 The party whose costs are being assessed should expect to take a hair-cut on their recovery. A discount of 30% is not unusual and full recovery is very unlikely. On any view, therefore, a referral to costs assessment, as insisted on by AIG, would have involved Woodford and Hillman being left significantly out of pocket.<\/p>\n The Judge held that a costs assessment was not the right way to determine AIG\u2019s liability for defence costs. Such an assessment was appropriate at the end of litigation as part of the court\u2019s general discretion in relation to costs. An indemnity for defence costs under a D&O policy was \u201cvery different\u201d. The Judge said that an insurance policy is intended to indemnify the directors for defence costs. Indemnity was a contractual right which meant that the court had no inherent discretion in relation to such costs. This meant that the (discretionary) costs assessment process had no application.<\/p>\n Instead, the court should assess the right to defence costs in the same way it would assess any issue of quantum. The criteria set out in the policy was that the costs were payable if \u201creasonable with regard to the complexity and significance of the case\u201d.<\/em><\/p>\n The basis for the assessment of the \u201ccomplexity and significance<\/em>\u201d of the case faced by the insureds was that it:<\/p>\n AIG\u2019s particular objection was to the charge-out rates of the insureds\u2019 city lawyers: \u00a0\u00a3508 for partners and senior lawyers; \u00a3389 for mid\u2013level lawyers and \u00a3275 for junior lawyers. The Judge held that the complexity and significance of the matter meant it was reasonable to use a City firm at the rates charged. The Judge rejected AIG\u2019s suggestion that the Guideline Hourly rates published by the Court Service for use in a costs assessment (rates significantly lower than City lawyers charge) had no application.<\/p>\n AIG\u2019s determined resistance to paying the fees did not stop there. They complained of duplicated work, excessive billing, failure to delegate appropriately, churning of costs (an allegation that AIG dropped) and engagement of two QC\u2019s. The Judge found that the QC appointments were reasonable in the context, the fees were reasonable and AIG\u2019s other complaints were unsubstantiated.<\/p>\n Woodford and Hillman were awarded all their defence costs: they had been incurred reasonably in view of the complexity and significance of the case against them.<\/p>\n\n