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.

Authors:

Amy Lacey, Partner

Serena Mills, Associate