Anatomy of an Insurance Dispute
In early 2025, we participated in a panel discussion about the similarities and differences in the process of resolving a disputed insurance claim. We were both so taken by the striking differences in the process and had such a good time learning about each other’s process that we decided to prepare this joint article to share with a wider audience.
Comparatively examining the anatomy of an insurance dispute in the US and the UK is an exercise in contrasts. In many ways, the two are strikingly opposite. Here, we examine, from start to finish, how the process differs in the two jurisdictions and how those differences may contribute to different outcomes, and discuss what lessons perhaps can be gleaned from each other’s experience.
Pre-litigation process
The US Perspective
What stands out about the insurance dispute process in the US as a point of comparison, is the vastness of the arena you are working in. In stark contrast to the UK (as will be discussed below), the US insurance market is sprawling. Hartford, Connecticut might claim to be the insurance capital of the US, while Des Moines, Iowa would claim to be the insurance capital of the Midwest, yet, while there might be more significant insurance companies formally based in either of those two cities than in other US cities, there are many multiples of that more sprawled out across the full country. On top of that, US insureds regularly access the excess and surplus lines market to place insurance through London-based insurers.
This makes the industry, for the average insured, rather impersonal. From the coverage lawyer’s perspective, dealing with a claim under a specialty line of insurance issued by a large insurer, even in the same jurisdiction or region, may result in experiencing the same combination of insurer counsel and assigned claim adjuster. However, more often than not, each dispute reveals an entirely new set of individuals to try to resolve your claim with.
Brokers placing multiple significant programs with larger insurers can sometimes create a more direct line to a personal relationship that can help influence the direction of the claim before it becomes too adversarial. Still, this seems to pale in comparison to the degree that relationships play a role in the UK process.
On top of the geographical scope of the arena, there are a vast number of playing fields within the arena in the US. The federal government does not regulate insurance, leaving insurance law entirely to the states. This means that each state resolves legal issues involving insurance differently and, in many cases, in ways that are directly contrary to each other. The first step in an insurance dispute in the US is not to determine how the issues are properly resolved, but to determine which US states’ law might govern the issue. Once you know which states’ law could apply, then there are often multiple states where the dispute could be filed, each of which will have a different set of rules to determine which of the states’ law should apply.
On top of all of that, there are federal courts sitting in each state, which have different jurisdiction over parties than the state courts do, and which apply substantive state law to decide the coverage issues, but federal law to govern the procedural process. A Florida federal court might conduct a different choice-of-law analysis than a Florida state court, resulting in a different state’s substantive law applying to a case depending on whether it is in the state’s own courts or the federal court sitting there.
In a claim where a company based in New York does work in California, but uses a broker in Texas to place its insurance through an insurance company based in Florida, an insured would be assessing (1) which state(s) would allow the insured to file litigation over the claim, (2) what state’s law each state the insured could file in would choose if conducting a choice of law analysis, and, finally, (3) which state’s substantive insurance law would be most favorable. Of course, the insurer is likely to contend that a less favorable set of state law will apply to the claim than the insured, who will argue for a more favorable set of state law. In other words, the parties may not even agree on the rules by which they are to have their dispute or on which “playing field” they should have it on.
On top of the differences in the states’ approaches to the substantive rules of insurance law, each state varies significantly in its approach to the concept of bad faith claims – referring to a situation where the insurer is deemed to have violated the implied covenant of good faith and fair dealing, which some US jurisdictions impose as a part of all contracts. Just as the different states take different approaches to the substantive issues, the insured may contend the appropriate body of law is that of a state that allows a bad faith claim, while the insurer contends a different state’s law applies, yielding the opposite result. A classic example of this friction is California, which allows bad faith, and New York, which effectively does not. Where the controlling state law is not settled in the pre-litigation claims process, this can make it very difficult to resolve a disputed claim, as the two jurisdictions have very different substantive law and also very different potential remedies, given the bad faith differences.
Finally, barring a few contrary specific rules in specific jurisdictions, parties to litigation in the US pay their own attorneys’ fees. This seems to have the effect of encouraging commercial litigation of insurance claims, while unfortunately dissuading personal litigation of insurance claims, usually except among wealthy individuals. The economics of the situation make this inevitable. For a corporation, if the insurance claim is large enough, it will almost certainly make sense to litigate a claim that has not resolved through the normal claim process, as even a partial recovery will easily cover the cost of the fees to bring the lawsuit and then some. The company can predict, based on its own attorney’s budget, what its costs will be for the lawsuit, without the unknown of a potential fee award to the other side if the company is not successful. On the other hand, for an individual, many insurance claims are simply cost-prohibitive, unless the lawyer is willing to work for discounted rates, pro bono, or on an alternative fee arrangement, such as a contingency.
Each of these factors influencing the pre-litigation claims process contribute to a claims environment where litigation often feels inevitable.
The UK Perspective
While sharing certain common characteristics, there are some key differences in how insurance disputes are resolved in the US and the UK.
The most central is that, unlike in the US, there is a single body of law applicable in England and Wales. Also, there is no concept of bad faith.
Further, compared with the US, the insurance market in the UK is geographically more defined – being centred around the Lloyds Building in what is known as the insurance district in the City of London. All of the major players in the London market, including insurers, brokers, and law firms, are situated within the same square mile.
While we would agree that, as in the US, aside from the largest industry participants, relationships with insurers are typically short-term, managed by the broker, and not significantly customized, equally it is a much smaller marketplace, and for those who have made their life’s work a career in insurance, those main players work cheek by jowl.
It would be fair to say that, traditionally, both insurance law and its application by the English courts were perceived to be, and indeed were, pro-insurer. That fact, combined with the “loser pays” cost regime in the UK, has led to a conservative approach to litigation: the stakes are high.
Notably, until recently, insurers were able to decline claims on the basis of a failure by the insured to disclose every circumstance they knew or ought to have known which would influence an insurer in underwriting the risk, and many policies contained ‘basis’ clauses which effectively meant that any and all representations made were warranties, the breach of which discharged an insurer from liability.
The introduction of the Insurance Act 2015 sought to level the playing field for policyholders by bringing in a duty of fair presentation, breach of which would not necessarily lead to a voidance of the policy but a more proportionate remedy based on the terms on which the insurer would have entered into the policy had the breach not occurred. The Act also banned ‘basis’ clauses, and brought in provisions whereby if non-compliance with a warranty did not increase the risk of the loss in the circumstances in which it occurred, insurers could not rely on that breach to avoid liability under the policy.
In terms of the pre-action process, this differs depending on the court in which the claim is brought. For complex high-value commercial disputes, including insurance coverage disputes, brought in the Commercial Court, which is a division of the High Court, the court expects the parties to have exchanged sufficient information to understand each other’s position and to try to settle the proceedings without proceedings, including considering ADR. This process will include sending a Letter of Claim and allowing the defendant time to respond, from 14 days to 3 months, depending on the complexity of the matter. For certain types of claims, there are more specific Pre-action Protocols.
Of particular relevance is the Pre-Action Protocol for Construction and Engineering Disputes brought before the Technology and Construction Court, which has a more prescribed process that includes deadlines that must be adhered to, exchanges of information, and a pre-action meeting. Costs sanctions can be applied for non-compliance with the Protocol. Compliance is taken seriously by the parties and the courts, such that it can be an effective tool for exploring whether pre-action resolution is possible, or if not, at least narrowing the issues in advance of the issue of formal proceedings.
Substantive Framework for contract/policy interpretation
The US Perspective
While the US states each have their own approach to insurance issues, there are certain fundamental rules where they tend to come together in near unanimity. At the most fundamental level, nearly every jurisdiction considering an insurance dispute is going to start with the question of whether the court can interpret the meaning of the policy provisions applicable to the claim solely from the policy’s plain language, without considering anything else. If the court decides that it can do this, that is the end of the analysis. If there is clear policy language, that will control. Further, there is extensive caselaw interpreting many common policy provisions, so there is a large body of guidance as to whether a particular term is or is not likely to be deemed clear from the plain language.
It is only if the court decides that the language at issue is subject to more than one reasonable interpretation, yielding different results (i.e., is ambiguous), that the court potentially looks beyond the policy language. However, even then, this is not guaranteed. Some jurisdictions simply interpret ambiguous policy language in favor of coverage, giving the benefit of the doubt automatically to the policyholder. Others will look to extrinsic evidence (i.e., the underwriting file) or the reasonable expectations of the insured to try to determine what the most appropriate interpretation is.
The UK Perspective
English law takes an objective approach to policy interpretation, asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. The subjective intention or understanding of the parties as to what the policy wording means or is intended to achieve is not relevant to the exercise. However, market practice or understanding, if it can be established that there was one, can form part of the background knowledge that would reasonably have been available to the parties.
Commercial common sense is not permitted to be invoked retrospectively to rewrite a clause in an attempt to assist an unwise party or to penalize an astute party: where the parties have used unambiguous language, the court will apply it. In recent years, the courts have taken an increasingly strict approach in this regard, making it clear that it is not their job to rescue a commercial party from a bad bargain. If the wording is clear, the court will give effect to it.
However, where there is ambiguity and there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. In an insurance context, the doctrine of contra proferentem applies so that where there is ambiguity, the clause is interpreted against the party responsible for drafting the wording – usually the insurer – and is, therefore, helfpul for the policyholder. Also helpful for policyholders is a recent ruling that held that “a construction which advances the purpose of the cover is to be preferred to one that hinders it.” (LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17, in the Federal Court of Australia, per Derrington and Colvin JJ at [15])
In the context of the recent Covid-19 business interruption litigation, the courts have identified what has been termed a ‘pick and mix’ approach to drafting insurance policies, with clauses adapted from other contracts such that the policy does not necessarily hang together as an internally consistent whole. That is a factor that may influence interpretation in that reference to the same or similar language elsewhere in the policy may carry little weight.
Litigation Process – Initial Stages and Discovery
The US Perspective
In most jurisdictions, there is essentially no procedural barrier to entry to begin litigating an insured’s disputed claim. An insured who has submitted a claim can file a lawsuit the next day, even if the claim has not yet been denied. Declaratory judgment actions, which ask the court to declare the parties’ respective rights and obligations under the policy, can be procedurally appropriate even without a denial.
There are few procedural opportunities to put a binding end to that lawsuit prior to trial. There is an opportunity for the defendant to challenge the sufficiency of the complaint at the outset, but the standard to prevail on that is exceedingly difficult. There is an opportunity to seek judgment based on the complaint and answer together but, again, the standard is challenging to meet. Finally, there is an opportunity to have the case decided prior to trial, through a motion for summary judgment, but only if the issues to be decided are exclusively legal ones. A single disputed issue of fact material to the outcome of the case will be cause for the case to be sent to trial.
This forces the parties through the fact-finding phase of the case, known as discovery. Discovery in US litigation can be extremely expensive and time-consuming, and there typically is not any limitation imposed on discovery in a case based on the nature or size of the case. Thus, an individual with a claim against an insurer may have the same right to take the deposition of a senior person at the insurance company as a Fortune 500 company would. The individual would be equally entitled to all potentially relevant documents and to ask the same number of interrogatory written questions in the process. Many high-profile individuals – i.e., Donald Trump, Mark Zuckerberg – have been deposed in US litigation. This is a high-stakes process, as there are few limitations on what can be sought and asked from the other party in discovery, provided it is credibly connected to the insurance dispute.
The cost and discomfort of this process force many claims to settle. The process of reviewing sometimes tens of thousands of documents to ensure only relevant non-privileged documents are produced is extremely time-consuming and expensive. Similarly, the process of having to go through the intensive full-day questioning of the deposition process can be a daunting prospect for decision-makers on both sides. The parties also gain a significantly more acute understanding of their cases during this time, given the amount of document scrutiny and preparation involved. Many, if not most, insurance disputes settle during the discovery phase of litigation.
The UK Perspective
Litigation in the UK begins with a sequential exchange of pleadings: the claim form and particulars of claim, the defense, and the reply.
Notably, and unlike in the US, in the UK, we have a split profession with the court advocacy being carried out by barristers who also draft the pleadings. Issuing proceedings, therefore entails instructing a barrister in addition to the existing solicitor firm that will have been initially instructed and had day-to-day conduct of the matter through the pre-action stages.
There are another three key reasons why litigation is not something one embarks upon lightly: although relatively modest, the £10,000 court fee for issue of claims above a certain value is sufficient to deter many a vexatious litigant; the potential liability for adverse costs triggered by commencing litigation coupled with the fact that once underway the litigation may take on a life of its own; and finally the level of specificity needed to plead the claim to the satisfaction of the court and/or the defendant. A poorly pleaded claim may lead to rounds of requests for further and better particulars or applications for strike out or summary judgment.
While not as onerous as in the US, disclosure – our equivalent of discovery – is nevertheless in many cases disproportionately time-consuming and expensive. The volume of electronic documents that are likely to have been generated in any dispute will typically require the parties to engage an e-disclosure provider and agree to search terms and a review process in an attempt to unearth the “smoking gun” that will unlock the dispute. The policyholder bears the brunt in that, since having suffered the insured event, they will hold the majority of the documents and have the burden of proving their case. Attempts by the courts in recent years to overhaul the process and make the exercise more manageable have, as often as not, only served to frontload the cost and add additional layers of procedure. Insurance cases often settle after the disclosure stage once insurers are satisfied that the claim is genuine and that any adverse documents that might provide justification for declining the claim have been shared.
There is no equivalent of the US deposition process. Written witness evidence is prepared by each party’s own legal team and exchanged. There is no opportunity to interrogate that evidence until the witness is cross-examined at trial. Few insurance cases ever make it that far.
The key to unlocking an insurance claim, particularly in the construction sector, can often be strong technical expert evidence. Although written expert evidence is not exchanged until relatively late in the process (after disclosure and witness statements), it can be helpful to share expert evidence at an earlier juncture – even pre-action – to demonstrate the robust basis for the claim.
Litigation Process – ADR
The US Perspective
Although a large percentage of insurance litigation settles during discovery, it rarely happens without assistance from a third party. The courts in the US know this well. Accordingly, it is almost uniformly true now that courts require the parties, from the outset, to participate in some form of official alternative dispute resolution process during the course of the litigation.
While private mediation is the most common in our experience, this can take other forms as well, depending on the jurisdiction. Many jurisdictions have judges in the same court, other than your assigned judge, conduct settlement conferences or early neutral evaluations, which are often similar in format to mediation, but have some additional formality around them due to the presence in the courthouse and the neutral being a judge.
Judges also have significant discretion in how they set the case calendar. It has become increasingly common, in our experience, for judges in insurance disputes to not set a date for trial until after motions for summary judgment have been resolved. A federal judge recently expressly told the SDV author of this article that she would not set a trial date until after summary judgment motions because, in her experience, most of her insurance disputes settle at or around that time. Sure enough, the case settled at the end of discovery, just before those motions would have been filed. This is a significant departure from the typical procedure for other forms of litigation in the US.
The UK Perspective
While ADR and, specifically, mediation has been a very common way of resolving insurance disputes, in recent years, a number of issues that have had wide-ranging implications for the entire insurance sector, with billions of pounds at stake, have meant an unprecedentedly high volume of insurance disputes going not just to trial, but to the Court of Appeal and the Supreme Court. This wave of litigation has included the Covid-19 business interruption litigation, the Russian aviation litigation, and the construction litigation relating to the cost of remedying fire-safety issues affecting buildings throughout the country following the Grenfell tragedy and introduction of the Building Safety Act 2022. In the context of disputes relating to those issues, insurers have often been reluctant to enter into commercial settlements through ADR pending clarity from the courts on the extent of their liability. Further, settling one claim would have repercussions for claims being brought by other policyholders on similar wordings.
More generally, the court’s approach had traditionally been to encourage – but not require – the parties to a dispute to engage in ADR. However, following the introduction of new procedural rules in 2024, courts now have the power to order parties to engage in ADR and can impose costs sanctions on a party for failing unreasonably to engage in ADR. The extent to which the courts elect to exercise that discretion remains to be seen, and certainly it remains open to the parties to argue that, in the particular circumstances of their case, ADR would not be appropriate at any particular juncture.
Litigation Process – Trial and Judgment
The US Perspective
At the end of all of the pre-litigation, pleading, discovery, and motion practice phases of the insurance dispute, if the parties have not yet settled, there is still the prospect of a trial. Provided there is a disputed factual issue involved in the dispute, the insured is typically entitled to have the dispute heard by a jury.
Insurance companies have traditionally not benefited from positive news coverage in the US. Juries are composed of local individuals within the geographic jurisdiction of the court and include people from all social classes and bands of life. All residents in the geographic jurisdiction are subject to being called into the court for jury duty. These individuals are also regularly exposed to negative news coverage about insurance companies pulling out of insurance markets, denying claims, and charging ever-increasing rates for reduced coverage. Accordingly, there is a negative perception of the industry from average US citizens. Aside from specific situations where the policyholder carries a similar negative public perception, policyholders typically feel more confident bringing a disputed fact issue to trial than insurers do. This also contributes to driving settlement.
Relatively few insurance disputes in the US are resolved through arbitration, usually only occurring in select situations where the insurer included a mandatory arbitration provision in the policy. For those disputes that do go through arbitration, the process is similar, but with more limited discovery and less predictability in the procedural rules, as the arbitrator is typically not bound by state or federal procedural rules in how they administer the proceeding. Policyholders find that the perceived advantage in perception typically lacks in arbitration, due to the absence of a jury.
Another reason for the policyholder’s aversion to arbitration is the inability to appeal. Insurance issues are often extremely complex. Appeal of a trial court decision is typically a matter of right for the policyholder, at least to the intermediate state or federal appellate court. Insurance issues are typically not heard by the US Supreme Court, but state supreme courts may also agree to hear a further appeal following the intermediate court of appeals’ decision. This gives policyholders a reasonable degree of assurance that the correct result will ultimately be reached. If an arbitrator applies the law wrong, on the other hand, the case is typically over.
The UK Perspective
Civil trials in England and Wales are heard by a single judge at first instance, and without a jury. Juries are reserved solely for criminal trials. On appeal to the Court of Appeal, there is a panel of three judges, and should the matter come before the Supreme Court, the panel will typically consist of five, but potentially seven or even nine, of the twelve appointed judges – or justices, as they are called, of the Supreme Court.
From issue of proceedings to trial typically takes a period of 18 months to 2 years, and the process involves exchange of written statements of case (particulars of claim; defence and reply); a procedural hearing known as a case management conference to agree the directions to trial; usually followed by disclosure of documents (akin to discovery); sequential exchange of factual and expert witness statements; and trial. There may be interlocutory hearings, for example, for summary judgment.
The successful party at trial is awarded their legal costs. That is, the losing side bears not only their own costs but also adverse costs, being those of their winning adversary. The reasonableness of those costs is assessed, but typically around 65% - 70% can be recovered. The court also has a discretion to award indemnity costs, which results in a higher recovery. That potential exposure can be a bar to issuing proceedings – although it is possible (at a price) to obtain After The Event insurance (ATE) to cover the risk of being liable for adverse costs.
In the UK, the courts do not have the power to award punitive damages. Recent legislation has brought in the ability to claim damages for the late payment of insurance claims, but the threshold is high, and as a remedy, this has yet to gain significant traction.
The courts of England and Wales will not necessarily have jurisdiction over insurance disputes: many insurance policies contain arbitration clauses whereby any disputes, or disputes over quantum, are referable to arbitration. The advantages of arbitration for insurers are that their confidential nature means that decisions on certain contested clauses are not made public; conversely, the fact of litigation proceedings being heard in open court can provide policyholders with commercial leverage to the extent that not paying claims may open an insurer to negative reputational consequences. There is also a perception that many experienced insurance arbitrators hail from a long career on the insurer-side of the market, meaning that the outcome might be an insurer-friendly foregone conclusion – which as, in the US – is unlikely to be appealable.
Conclusion
Will: Most likely not to anyone’s surprise, there are some significant distinctions in the US and UK systems. Some of these distinctions – the ease of instituting litigation, impersonal nature of the insurance industry, and entitlement to highly probing discovery processes – perhaps help to explain the US’s reputation for litigiousness. The US system provides many opportunities for strategic gamesmanship, given the many forums to file in and the differences in state substantive law. I am left thinking that these considerations create an environment more favorable to corporate policyholders, who can take advantage of these processes as long as they are able to fund the process along the way.
Joanna: Drawing the threads together, and notwithstanding the fascinating and clear differences that we have explored between the two systems, some common themes do emerge, such as the relatively similar approaches to policy interpretation and propensity for claims to settle before trial. Despite the greater risks that litigating in the UK may pose to policyholders, similarly, those corporate policyholders that can fund the process are able to take advantage of a more favorable landscape post the Insurance Act 2015 and in light of the number of recent policyholder-friendly rulings. The challenge for us on both sides of the pond is how we bring about our shared goal of leveling the playing field for all policyholders.
Authors
Joanna Grant, Managing Partner, Fenchurch Law
Will S. Bennett, Partner, SDV Law
Commercial Court grounds War Risks insurers in landmark Russian aircraft judgment
Please find a link to the judgment here - Russian Aircraft Lessor Policy Claims [2025] EWHC 1430 (Comm)
Introduction
On 11 June 2025, judgment was handed down following the long-awaited Russian aviation “mega trial” heard in the Commercial Court between October 2024 and January 2025.
The judgment is substantial for a number of reasons, not least because it runs to 230 pages, but also because the £809 million awarded is the largest amount ever awarded by the UK courts.
Of particular significance to policyholders however, is Mr Justice Butcher’s detailed application of causation principles, and his commentary on “the grip of the peril” which he first considered in Stonegate Pub Company Ltd v MS Amlin Corporate Member Ltd & Ors [2022] EWHC 2548 (Comm) and which was recently affirmed in Sky UK Ltd & Anor v Riverstone Managing Agency Ltd & Ors [2023] EWHC 1207 (Comm).
Background
On 10 March 2022, shortly after Russia’s invasion of Ukraine, the Russian Government issued an order which banned the export of aircraft and aircraft engines, initially for a period up until 31 December 2022 (“Order 311”). As a result, an estimated £7-10 billion of aircraft were retained by Russian lessees, and coverage proceedings were brought by affected lessors across a range of jurisdictions. Last winter, six sets of those proceedings were heard together by the Commercial Court, with AerCap acting as lead claimant on behalf of DAE, Falcon, KDAC, Merx and Genesis (together, “the Lessors”).
Each of the Lessors insured aircraft under policies which included two relevant sections, namely All Risks and War Risks cover. Whilst the All Risks cover insured against loss arising from property damage subject to certain exclusions, the War Risks cover protected against loss caused by war, which is typically excluded from standard All Risks cover.
Within those sections, there were two principal types of cover: Contingent Cover and Possessed Cover. The Contingent Cover was designed to respond when the aircraft were not in the physical possession of the Lessors, but were instead being operated by the Russian lessees, and was triggered in circumstances where the Lessors could not recover under the operator’s own insurance policies. In contrast, the Possessed Cover was designed to respond when the aircraft were in the actual possession of the Lessors, including during the course of any repossession.
Given that its War Risks cover was subject to an aggregate limit of $1.2 billion (around £892 million), AerCap’s primary claim was for All Risks cover for the full value of the aircraft at $3.5 billion (around £2.57 billion).
We set out the various points considered by the Court, and the key takeaways for policyholders, below.
Insurers’ position
Both All Risks and War Risks insurers denied liability for the Lessors’ claims on the basis that (inter alia):
a) the Lessors had not been permanently deprived of the aircraft;
b) in any event, both Political and Government Perils were excluded under the All Risks cover;
c) the loss was not covered under the War Risks cover; and
d) the effect of US and EU sanctions was that insurers were prohibited from paying the Lessors’ claims.
Contingent Cover or Possessed Cover?
AerCap advanced that it was the Contingent Cover which responded to the claim, given that the assets were stranded in Russia and were not therefore in the care, custody or control of the Lessors.
It was a requirement of the Contingent Cover that the Lessors were “not indemnified” under the lessee’s own insurance policy. The relevant leases obliged the lessees to take out their own insurance for the aircraft during the period of the lease, with the Lessors added as an additional insured. Those policies were referred to by the Court as the Operator Policies. It was an important factor that Lessors had also sought an indemnity under the Operator Policies, which is listed for trial in the Commercial Court in October 2026.
Despite each of the other Lessors seeking cover under the Possessed Cover, Mr Justice Butcher agreed with AerCap and held that each of the Lessors were entitled to claim under the Contingent Cover, given that the various requirements of the Contingent Cover were, prima facie, met.
Whilst the insurers argued that the Contingent Cover only responded in circumstances where the Lessors were “not indemnified” under the Operator Policies, and there was in fact a chance, pending the trial listed for October 2026, that they would be, the Court held that “not indemnified” actually meant “had not been paid”. On that basis, the Lessors’ outstanding claims under the Operator Policies were no bar to cover, as they had not been paid in respect of them.
In reaching that view, Mr Justice Butcher adopted guidance from the Australian case of LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17, which held that:
“The ease with which an insured may establish matters relevant to its claim for indemnity may influence questions of construction … a construction which advances the purpose of the cover is to be preferred to one that hinders it as a factor in construing the policies.”
In that vein, the Possessed Cover was not engaged because it was triggered where the aircraft were in the possession of, or alternatively were “in the course of repossession” by, the Lessors. The Court held that the latter required an overt act to physically repossess the aircraft, rather than simply an intention or a plan to do so. Therefore, as the Lessors had not taken steps to repossess the aircraft, the Possessed Cover could not be engaged.
Could the Lessors demonstrate permanent deprivation of the aircraft and, if so, when?
The relevant insuring clauses were triggered by “physical loss or damage” sustained to the aircraft during the period of insurance.
Each of the Lessors advanced a similar argument, which was that it was sufficient for them to show, on the balance of probabilities, that recovery of the aircraft was a “mere chance”.
In contrast, War Risks insurers argued that the appropriate test was whether there was no realistic prospect of recovery at any time within the commercial lifetime of the aircraft, a bar which they said had not been met. All Risks insurers accepted that there had been a loss of the aircraft, but argued that the loss was the result of a War Risks peril.
In holding that each of the Lessors had suffered permanent loss of possession of the aircraft upon the implementation of Order 331 on 10 March 2022, the Court held that the Lessors only needed to establish that deprivation of possession was, on the balance of probabilities, permanent which, in line with the judgment of the Supreme Court of New South Wales in Mobis Parts Australia Pty Ltd v XL Insurance Co SE [2019] Lloyd’s Law Rep IR 162, could be interpreted as being “more probable than not”. That case, whilst not binding in the UK, considered the notion of permanence and held that it should be assessed against the standard of “more probably than not”.
What was the proximate cause of the loss?
Having established a loss, the central issue was whether that loss was covered under the All Risks or the War Risks cover.
In relation to the All Risks cover, the Court had to consider whether the claims fell within either of two excluded perils, being:
a) Political Peril, defined as “any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional”; or
b) a Government Peril, defined as “confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government”.
If the claims did fall within either of those perils, the War Risks cover would be engaged.
Despite War Risks insurers’ attempts to argue a restrictive interpretation of the exclusions, Mr Justice Butcher found that the action taken by the Russian government on 10 March 2022 (Order 311) amounted to a “restraint” or “detention” that fell squarely within the definition of a Government Peril.
As a result, the claims were excluded by the All Risks cover and fell to the War Risks insurers.
Causation – Wayne Tank & Pump Cp. Ltd v Employers Liability Incorporation Ltd
Central to the arguments on causation was whether the Wayne Tank principle applied to independent concurrent causes (i.e. two causes each of which is sufficient to cause the loss on its own), or if Wayne Tank applied only to interdependent concurrent causes (i.e. where two causes, neither of which is sufficient on its own, act together to cause the loss).
In broad terms, the Wayne Tank principle dictates that, where there are two proximate causes of a loss, and one is covered and the other excluded, the exclusion will prevail, and the insurer will not be liable.
In seeking to limit the potential application of the Government Peril and Political Peril exclusions if it was found that the loss was also caused by a peril within the All Risks cover, War Risks insurers argued that the Wayne Tank principle did not apply to independent concurrent causes. In essence, the War Risks insurers were seeking to argue that, in addition to Order 311, the lessees of the planes had independently decided that it was in their interest to retain the aircraft and engines, which was a proximate cause which would be covered under the All Risks cover, and was completely independent from Order 311 such that the Wayne Tank principle did not apply.
Ultimately, Mr Justice Butcher found that Order 311 was the sole proximate cause. However, obiter, he commented that, even if there was an independent concurrent cause that fell within the scope of the All Risks cover (such as the lessees deciding themselves to retain the aircraft), the Wayne Tank principle would apply and the fact that Order 311 triggered the Government Peril exclusion would exclude cover in any event.
This part of the judgment is notable for policyholders as, while it is settled law that the Wayne Tank principle applies to interdependent concurrent causes (causes which act together to cause the loss), Mr Justice Butcher has now indicated, albeit obiter, that the same principle applies to independent concurrent causes (causes which would have been sufficient to cause the loss on their own).
As a result, each of the Lessors’ claims were found to be excluded under the All Risks cover and it was held that the claims fell to the War Risks insurers. Unfortunately, in Aercap’s case, this meant that it was entitled only to the lower limit of indemnity of $1.2 billion.
Do sanctions prevent payment to lessors?
Each of the policies contained an endorsement providing that insurers would not be liable where “providing coverage to the Insured is or would be unlawful because it breaches an embargo or sanction".
On that basis, insurers argued that they were prohibited from making payment under the War Risks section on account of sanctions introduced by the EU and US.
The Court considered the relevant sanctions and rejected insurers’ arguments on the basis of the specific wordings.
The grip of the peril – Stonegate v MS Amlin and Sky v Riverstone applied
Finally, in light of Mr Justice Butcher’s finding that the loss occurred on 10 March 2022, a separate issue arose in relation to the claims advanced by the Lessors whose War Risks policies contained provisions to review the geographical limits of the policies, pursuant to which insurers had terminated cover in Russia prior to 10 March 2022.
DAE, Falcon, Merx and Genesis advanced the “death blow” or “grip of the peril” concepts considered by Mr Justice Butcher in Stonegate v MS Amlin and again by the Court of Appeal in Sky v Riverstone. The lessors argued that the loss flowed from a peril that was operative within the policy period, and so, notwithstanding that the total loss occurred outside of it, they were entitled to cover.
In considering the authorities, Mr Justice Butcher clarified that:
“if an insured is, within the policy period, deprived of possession of the relevant property by the operation of a peril insured against and, in circumstances which the insured cannot reasonably prevent, that deprivation of possession develops after the end of the policy period into a permanent deprivation by way of a sequence of events following in the ordinary course from the peril insured against which has operated during the policy period, then the insured is entitled to an indemnity under the policy.”
Concluding that there were indeed restraints and detentions that took place prior to the implementation of Order 311, and that the loss of the aircraft on 10 March 2022 arose in a sequence of events that followed in the ordinary course of those restraints and detentions, it was held that the aircraft were in the grip of the peril by the time the relevant policies were terminated, and the relevant Lessors were therefore entitled to cover. In other words, whilst the aircraft were lost on 10 March 2022, they were in “the grip of the peril” from 5 March 2022 onwards.
In making this decision, the Court made several important findings, including:
a) relying on the explanation of the doctrine by the Court of Appeal in Sky v Riverstone, that a policy covering “loss occurring during” does not overcome the application of the “grip of the peril” principle;
b) there is no difference between (i) a loss where physical damage during the period of insurance later develops into a total loss after expiry and (ii) a loss where a deprivation during the period later becomes permanent after expiry, as a matter of construction; and
c) the “grip of the peril” principle naturally applies to deprivation of possession scenarios.
Lessons for policyholders
During a time of increased geopolitical tension, this decision is an important one given its key findings of fact and analysis of legal principles, which are likely to be applicable to all manner of coverage disputes arising out of Russia’s invasion of the Ukraine.
In particular, Mr Justice Butcher’s consideration of loss by way of deprivation in non-marine insurance policies is likely to be relevant to a range of insurance policies and policyholders that have been affected by the fallout from the Ukraine conflict and other ongoing geopolitical events.
Mr Justice Butcher’s consideration of the Wayne Tank principle is also of particular importance to policyholders given the apparent expansion of its previously accepted application to interdependent concurrent causes. It now seems that the principle will also apply to causes either of which is sufficient to cause the loss on its own, but which act in parallel.
Authors:
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
Fenchurch Law and Saxe Doernberger & Vita, P.C. Announce Strategic Partnership to Strengthen Policyholder Representation
Saxe Doernberger & Vita, P.C. (SDV) and Fenchurch Law have announced a new partnership, uniting two leading firms focused on representing insurance policyholders in coverage disputes. On either side of the pond, SDV and Fenchurch Law share a common mission of levelling the playing field between policyholders and insurers. Now, both firms look forward to joining forces to offer an expanded range of services for multinational policyholders and brokers.
SDV and Fenchurch Law’s Commitment to Policyholders
SDV is one of the few U.S.-based firms dedicated exclusively to representing policyholders in insurance coverage disputes. SDV has locations in the Northeast, Southeast, and West Coast, serving clients all across America. A versatile firm, SDV brings together Big Law expertise with a boutique service approach to provide legal options for policyholders, tailored to their needs. Besides advocating for clients during coverage disputes, SDV also assists with policy purchase, renewal, and modification to help clients find the coverage they need.
SDV represents policyholders across a wide array of areas of practice, including bad faith claims, cyber risk, Directors & Officers liability coverage, disability insurance claims, Employment Practices Liability claims, environmental insurance, insurance for international businesses, life and disability insurance, municipal coverage, natural disaster coverage, policy review and analysis. The firm’s Risk Transfer practice group, robustly staffed, is specifically concentrated on comprehensive review of insurance policy and contract language to protect the interests of both individual policyholders and brokers.
Fenchurch Law is an international firm with offices in Copenhagen and Singapore, in addition to London and Leeds in the UK, that has long provided insurance advice and representation in complex, high-value claims. True to its founding values, Fenchurch Law advocates only for policyholders, never insurers. Its team includes attorneys with previous experience working on all sides of the insurance market, including as brokers, claims adjusters or insurer-side representatives, bringing deep industry expertise to help secure recoveries for policyholders in disputed claims.
Fenchurch Law’s clients include global multinationals, high net-worth individuals, and businesses of all sizes across a wide variety of sectors, both UK-based and across the APAC and Scandinavian regions. The firm has particular strengths in handling claims involving construction, property, energy, financial lines, political violence, and international risks insured into the London market.
Both companies have a rich history and proven track record as elite firms in the field of policyholder coverage disputes.
Two Firms with Shared Values and a Shared Purpose
Both firms have a history of supporting the insurance broker community, combining the firms’ legal skills with brokers’ commercial leverage to achieve the best possible outcomes for both policyholders. Both firms have also lived their commitment to never bring claims against brokers.
It is these shared values of focusing exclusively on policyholder interests, and working closely with insurance brokers, that have brought the two firms together in this new collaboration. Through this partnership, SDV and Fenchurch Law look forward to offering representation to international policyholders and brokers worldwide, on a scale that has not previously been possible.
This will allow more multinational businesses access to specialized representation in their coverage disputes and expert counsel when they are making high-value insurance policy purchase and renewal decisions. It will also empower both firms to extend the range of services and areas of practice offered to their existing and future clients by tapping into each other’s deep expertise in specific insurance concerns.
Fenchurch Law - Annual Coverage Review
A panoply of coverage disputes reached the English courts in 2024 across diverse industry sectors, highlighting the London market’s sophisticated role in managing risk and boosting commercial resilience through geopolitically turbulent times.
Several judgments from the Court of Appeal reflect the trend for literal policy interpretation and a reluctance to interfere with unambiguous wording, including in marine cargo, offshore construction and W&I claims. The first reported decision on section 11 of the Insurance Act 2015 (‘IA 2015’) provides insight on the requisite causal connection. And guidance was provided on the scope of recovery for loss sustained over extended periods of time, in relation to construction projects and Covid BI losses.
The Invasion of Ukraine in February 2022 has led to a deluge of claims in the Commercial Court for losses arising from aircraft stranded in Russia, and damage to or expropriation of strategic assets including energy, mining and manufacturing interests. Several aircraft leasing companies are pursuing claims under contingent & possessed policies, case managed alongside parallel proceedings against various reinsurers, with related trials taking place in Ireland and the US.
Collectively these cases demonstrate the importance of precise language throughout insurance policies, with particular attention on key provisions around the description of insured parties, triggers for non-damage perils, aggregation, dispute resolution and any opt-out from statutory protections. Recent claims experience helps to inform best practice on pitfalls to avoid for policyholders and brokers, to secure coverage as broad as market conditions might realistically allow and minimise the prospect of disputes.
BUSINESS INTERRUPTION
Various Eateries v Allianz [2024] EWCA Civ 10
The latest decision on coverage under the Marsh Resilience wording considered various issues concerning the scope of prevention of access clauses, and aggregation of loss. Following settlement of related cases in Stonegate and Greggs, important questions on the treatment of furlough payments and additional increased costs of working were not included in continuing points of appeal and these matters are due to be revisited by the Court of Appeal in January 2025.
The remaining grounds of appeal from the first instance decision in Various Eateries were dismissed. The position remains that policyholders are entitled to claim for multiple sub-limits by reference to particular government actions, such as the nationwide lockdowns and regulations imposing restrictions on operation of different industry sectors; and those with ‘composite’ policies i.e. a number of separate contracts recorded in a single document, can recover individual sub-limits per company or per premises, depending on the insuring clauses and aggregation wording.
Gatwick Investment v Liberty [2024] EWHC 124 (Comm)
This case considered a number of preliminary issues in relation to coverage under prevention of access (‘POA’) or non-damage denial of access (‘NDDA’) clauses for policyholders operating in leisure, hospitality and retail industries.
The Commercial Court held that: (i) the Supreme Cout ruling on concurrent causation applies to POA / NDDA clauses in the same way as disease clauses, (ii) government action was that of a ‘statutory authority’, (iii) there was cover in respect of regulations imposed in response to a nationwide pandemic, (iv) furlough payments fell to be deducted from any sums otherwise due to policyholders, and (v) policy limits apply separately to multiple insured entities under a composite policy.
Bellini v Brit UW [2024] EWCA Civ 435
The claimant sought indemnity for Covid losses under a policy extension providing cover for: “interruption of or interference with the business caused by damage … arising from … any human infectious or human contagious disease … manifested by any person whilst in the premises or within a 25 mile radius …”
The Court of Appeal upheld the first instance decision, that there was no cover under this extension in the absence of physical damage. The claimant’s argument that something had gone wrong with the language, so that it was necessary to correct the error through contractual construction (applying Chartbrook v Persimmon Homes [2009]) was rejected. ‘Clumsy drafting’ resulting in limited cover did not mean that the provision was absurd, nor justify rewriting the contract. Where the parties have used unambiguous language, the courts must apply it, following the Supreme Court decision in Rainy Sky [2011].
London International Exhibition Centre v Allianz [2024] EWCA Civ 1026
The Court of Appeal considered coverage under insuring clauses triggered by disease ‘at the premises’ and held that the Supreme Court’s approach to causation applied to radius clauses in the FCA Test Case [2021] was equally applicable. The nature of the insured peril informs the causation test agreed between the parties and it must have been contemplated that an outbreak of disease could spread rapidly and widely. The appropriate causation test did not involve a ‘but for’ analysis and each individual case of illness resulting from Covid may constitute a separate and equally effective cause. Unfortunately, the judgment did not discuss in any detail the evidential requirements for policyholders to prove the presence of Covid at their premises and this remains contentious, given the limited availability of testing services in the early stages of the pandemic.
UnipolSai Assicurazioni v Covea Insurance [2024] EWCA Civ 1110
Covea provided cover for many children’s nurseries forced to close between March and July 2020. The Court of Appeal upheld the first instance decision that Covea, having paid out substantial sums in respect of BI losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The pandemic did constitute a ‘catastrophe’ giving rise to the insured losses, and there was no requirement in the policy for ‘suddenness’ or occurrence of a time-limited ‘event’.
On the issue of aggregation, pursuant to the Hours Clause in the reinsurance policy, the Court affirmed that, when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences (consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries). An apportionment of financial loss would be impractical and was deemed to be incorrect.
International Entertainment Holdings v Allianz [2024] EWCA Civ 1281
The Court of Appeal decided that restrictions brought in by the UK government, preventing or hindering access to the claimants’ theatres around the country, were not actions of a ‘policing authority’ and there was no indemnity available under policies imposing this requirement within the insuring clauses. Further, it was held that Covid can qualify as an ‘incident’ and coverage may be available on a per premises basis, in the absence of clear wording to the contrary.
CONSTRUCTION ALL RISKS
Technip Saudi Arabia v MedGulf Insurance [2024] EWCA Civ 481
Technip was the principal contractor for an energy project in the Persian Gulf. A vessel chartered by Technip collided with a platform within the project site, leading to a damages settlement of $25 million agreed with the platform owner, KJO.
Technip claimed under the liability section of its offshore construction policy, written on the WELCAR wording, which named both Technip and KJO as ‘Principal Insureds’ (the words Insured and Assured were used interchangeably in the policy). The insurer refused indemnity on grounds that the Existing Property Endorsement excluded cover for damage to existing property owned by any of the ‘Principal Assureds’, including the platform owner KJO, and this was upheld by the High Court.
Technip appealed, arguing that the policy was composite, and the exclusion only applied to property owned by the particular insured claiming the indemnity. The Court of Appeal refused, based on the natural meaning of the wording and how this would be understood by a reasonable person. Each insured under the policy was deemed to have separate insurance cover, but the term ‘Principal Assureds’ had the same meaning in each case.
Sky UK & Mace v Riverstone [2024] EWCA Civ 1567
The timber roof of Sky’s headquarters in West London suffered extensive water ingress, due to a design defect in failing to incorporate temporary waterproofing during installation. The building was constructed by Mace as main contractor and insured under a CAR policy. The damage occurred prior to practical completion in April 2016, but continued to develop thereafter, including subsequent to expiry of the period of insurance in July 2017.
The Court of Appeal affirmed that ‘damage’ means an adverse change which impairs the relevant property’s use or value. The roof was damaged as soon as it suffered water ingress. Insurers were held liable to indemnify both Sky and Mace for all damage that occurred during the period of insurance but deteriorated or developed thereafter, overturning the trial judge’s decision that the claimants were only entitled to recover for the cost of repairing damage in existence at the end of the insured period. Investigation costs reasonably incurred to determine how to remediate damage were also covered, whether or not damage was revealed.
The roof was made up of 472 modular ‘cassettes’ covering an area of 16,000 square metres. The policy deductible of £150,000 applied per any one event and the Court of Appeal held that the relevant event was the decision to build to a design that did not include temporary waterproofing, so that only one deductible applied.
Mace had pleaded and proved damage at practical completion and was entitled to a monetary judgment in addition to and distinct from Sky. Matters have been remitted to the trial judge, for determination of the sums due to each claimant under the policy.
INSURANCE ACT 2015
Scotbeef v D&S Storage [2024] EWHC 341 (TCC)
Scotbeef pursued a claim against D&S Storage in relation to the supply of defective meat. After D&S Storage became insolvent, its liability insurer was added to the proceedings pursuant to the Third Parties (Rights against Insurers) Act 2010 (‘TPRIA 2010’).
The insurance policy contained a ‘Duty of Assured’ clause, described as a condition precedent to liability, requiring Scotbeef to take reasonable steps to ensure that the Food Storage & Distribution Federation’s standard terms were incorporated into commercial contracts. The terms were not incorporated to the agreement with D&S Storage, and the insurer applied to strike out the insurance claim, based on Scotbeef’s non-compliance with the policy term. The High Court considered: (a) whether the construction of a condition precedent affects its enforceability; and (b) when terms which depart from the IA 2015 are enforceable.
On the first issue, it was held that construction of the entire clause must be evaluated in the context of the whole policy, to determine whether the provision would operate as a condition precedent, regardless of any label applied. In this case, the disputed term included a write-back for cover, where the policyholder acted reasonably in seeking to incorporate the standard terms, and the consequences of breach were detailed in a later section of the policy. This meant the provisions were difficult to reconcile and ambiguous in effect, so that the purported condition precedent was unenforceable.
On the second issue the Court held that, while it is possible to depart from the IA 2015, any such terms must be clearly brought to the policyholder’s attention prior to inception of the policy. The insurer had not done so and therefore could not rely on the purported opt-out term to deny indemnity.
Delos Shipholding v Allianz (“the WIN WIN”) [2024] EWHC 719 (Comm)
The claim arose from the ‘illegal parking’ of a bulk carrier just inside Indonesian territorial waters off Singapore. This minor infraction led to the vessel being detained by the Indonesian authorities for over a year, while the Master was prosecuted under local shipping laws. The claimants claimed under a war risks policy, which provided that the vessel became a constructive total loss after 6 months’ detainment.
The Insurers denied liability on grounds that (i) the loss was not fortuitous, as resulting from voluntary conduct to anchor in that location, (ii) an exclusion applied, for arrest restraint or detainment ‘under customs or quarantine regulations’, and/or (iii) the claimants had breached the duty of fair presentation, by failing to disclose that the sole director of the registered owner of the vessel was the subject of criminal charges in Greece.
The Commercial Court held that the exclusion did not apply, and the loss was fortuitous, since the crew did not realise the vessel had strayed into Indonesian territory or consciously chosen to do so. On alleged material non-disclosure, the Court held that the claimants did not have actual or constructive knowledge of the criminal charges, because the director was not ‘senior management’ for the purposes of section 4(3) of the IA 2015, instead being merely a nominee director with no decision-making powers. In any event, the defendants were held not to have been induced by the alleged non-disclosure.
The claimants’ separate claim for damages for late payment, pursuant to section 13A IA 2015 was dismissed. Based on the expert evidence, the Court was not satisfied that another similar vessel would have been available for the claimants to purchase, as alleged, and the claim for loss of trading profit, as a result of late payment of the insurance claim, was not made out.
MOK Petro Energy v Argo [2024] EWHC 1935 (Comm)
A cargo of gasoline loaded onto a tanker in Oman was insured under an all risks marine open cover on the ICC (A) wording. The gasoline was blended with methanol and the sale contract between MOK (the buyer) and PetroChina (the seller) required the cargo to have a phase separation temperature (‘PST’) below a stated level. On arrival at the discharge port, the cargo was found to significantly exceed the agreed limit. This meant that the octane rating was negatively affected, although the blend did not actually undergo phase separation, and the cargo was rejected by the end purchaser.
Insurers declined indemnity, on grounds that (a) no damage had occurred, and (b) a warranty in the policy, requiring inspection and certification of the cargo at the load port, had not been complied with. The cargo had been inspected, but there was no contemporaneous evidence of certification. MOK sought to rely on section 11, IA 2015, which provides that insurers cannot rely on breach of terms (such as warranties or conditions precedent) intended to reduce the risk of loss, if the insured can show that the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. MOK argued that its failure to comply with the certification element was irrelevant and would not have reduced the risk, since inspection of the cargo had taken place.
The Commercial Court held that no damage, i.e. adverse physical change, had occurred simply by mixing the blend in proportions which resulted in a defective product with propensity for a higher PST than contractually stipulated, applying Bacardi v Thomas Hardy [2002]. The comments on breach of warranty were therefore ‘obiter’, i.e. unnecessary to the decision and not binding in subsequent cases. The Judge agreed with the insurer that section 11 “is directed at the effect of compliance with the entire term and not with the consequences of the specific breach”. It was not disputed that compliance with the warranty as a whole was capable of minimising the risk of water contamination, so that the breach of warranty was made out.
This is the first judicial guidance on the operation of section 11, since the enactment of the IA 2015. There has been much debate as to whether this provision introduced a strict causation test, allowing policyholders to argue that the specific breach would have made no difference in the particular circumstances, even if compliance with the term would generally decrease the risk of that type of loss occurring. The decision in this case suggests a more onerous test for policyholders, and it will be interesting to see how the arguments are developed in subsequent cases.
JURISDICTION
Zephyrus Capital Aviation v Fidelis Underwriting [2024] EWHC 734 (Comm)
The defendant reinsurers applied to stay claims against them based on exclusive jurisdiction clauses (‘EJC’s) in favour of the Russian courts. The Commercial Court held that it was unlikely the claimants would receive a fair trial in Russia, in circumstances where the Russian state had a direct interest in the outcome of the litigation, and several claimants are from the UK and EU, which Russia had designated as ‘Unfriendly Foreign States’. The Court had regard to the multiplicity of proceedings and the risk of inconsistent judgments, as additional factors supporting its decision. This is a rare example of the English courts deciding that there are strong reasons not to apply an EJC.
AerCap Ireland v PJSC Insurance [2024] EWHC 1365 (Comm)
By contrast, the defendant reinsurers in this case were successful in obtaining a stay of English court proceedings on grounds that the policies, containing all risks and war risk coverage, included an EJC in favour of the Ukrainian courts. The Commercial Court held that the jurisdiction clauses were binding and enforceable, and the ongoing conflict was unlikely to result in substantial delays or other issues in litigating these claims in Ukraine.
‘PAY FIRST’ CLAUSES
MS Amlin v King Trader (“the Solomon Trader”) [2024] EWHC 1813 (Comm)
The policyholder chartered a ship, which became grounded in the Solomon Islands. The owner of the vessel, King Trader, obtained an arbitration award against the charterer in excess of $47 million. The charterer entered insolvent liquidation and King Trader sought to recover the loss from the charterer’s insurers, under the TPRIA 2010. The charterer’s liability insurance contained a clause stating: “it is a condition precedent to the Assured’s right of recovery … that the Assured shall first have discharged any loss, expense or liability.”
The insurers were successful in obtaining a declaration that they were not liable to indemnify the claim, because the insolvent charterer had not discharged the underlying liability. The High Court held that the ‘pay first’ clause was not repugnant to the purpose of the insurance or inconsistent with the other policy terms (including the right to terminate on insolvency, while preserving the insured’s right to indemnity for prior incidents). The clause was clearly worded and prominently stated, not a “fox in the henhouse … hidden away in the thickets of the Policy”.
The decision is a salutary reminder for policyholders to be wary of similar provisions. The Judge acknowledged that: “The state of English law on this issue in the light of the 2010 Act is not particularly satisfactory… Prudent operators seek to insure against those liabilities, and a range of third parties who suffer loss and damage as a result of accidents at sea will look to insurances of this kind to be made whole. ‘Pay first’ clauses reduce the efficacy of that protection when it is most needed”.
POLITICAL VIOLENCE
Hamilton Corporate Member v Afghan Global [2024] EWHC 1426 (Comm)
Following seizure of a US military warehouse by the Taliban, the owners sought to claim under a political violence reinsurance policy. The insurers declined cover in reliance on an exclusion for loss: “directly or indirectly caused by seizure, confiscation, nationalisation … expropriation, detention … nor loss or damage to the Buildings and/or Contents by law, order, decree or regulation of any governing authority, nor for loss or damage arising from acts of contraband or illegal transportation or illegal trade.”
The Commercial Court held that ‘seizure’ in this context was not restricted to seizure by law, order, decree or regulation of any governing authority, and the cover was limited to physical damage or destruction – not loss by way of deprivation. It was noted that ‘seizure’ has a settled legal meaning, namely “the act of taking forcible possession either by a lawful authority or by overpowering force”, following Kuwait Airways [1999]. The Judge rejected the claimant’s submission that the clause should be construed in light of factual matrix evidence addressing the market’s understanding of the differences between political risks and political violence insurance, and the history of similar clauses.
PROFESSIONAL INDEMNITY
Axis Specialty Europe v Discovery Land [2024] EWCA Civ 7
Discovery Land became interested in acquiring and developing Taymouth Castle in the Scottish Highlands. The solicitor instructed by Discovery Land on the purchase fraudulently misappropriated surplus client funds and then, nine months later, secretly mortgaged the castle to a third party.
The fraudulent solicitor was senior partner in a two-partner firm, which became insolvent, and Discovery Land pursued a claim against the firm’s PI insurers pursuant to the TPRIA 2010. A dispute arose as to whether the second partner in the firm had ‘condoned’ the dishonest acts of the fraudster, which would have engaged the following exclusion under the SRA Minimum Terms: “The insurer shall have no liability for … any claims … involving dishonest or fraudulent acts … 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 … shall be imputed to a body corporate unless it was committed or condoned by all directors of the company … or [LLP] members”.
The trial judge held that, while the second partner’s standards fell well below those required in the profession, he was not aware of and had not approved the fraud, or other acts in the same pattern of dishonest behaviour leading to the claim and nor was there any ‘blind-eye knowledge’ on his part. Further, the Court rejected insurers’ argument that the claims relating to (i) surplus funds and (ii) the secret mortgage should be aggregated, for purposes of the limit of indemnity.
The Court of Appeal upheld the first Instance decision as entirely rational. The aggregation clause in the policy provided that: “similar acts or omissions in a series of related matters or transactions will be regarded as one claim”. Applying the Supreme Court decision in AIG v Woodman [2017], it was necessary to consider whether the degree of similarity was real or substantial, and whether the claims fitted together, based on a thorough analysis of the underlying facts. Here, the trial judge had reviewed the evidence ‘painstakingly’, and while the two claims involved the same property and affiliated company victims, this was insufficient to provide the necessary link between the two transactions.
SUBROGATION
Dassault Aviation v Mitsui Sumitomo [2024] EWCA Civ 5
Dassault supplied aircraft to Mitsui Bussan Aerospace (‘MBA’) pursuant to a contract governed by English law including a non-assignment provision, as follows: “… this Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party”.
Following a delay in supply of aircraft on to the Japanese coastguard, Mitsui Sumitomo Insurance (‘MSI’) indemnified MBA for a liquidated damages claim from the coastguard and then sought to recover the loss by subrogated proceedings against Dassault. It was common ground that MBA’s claims against Dassault would be transferred to MSI by Article 25 of the Japanese Insurance Act, reproduced by the insurance policy, subject to operation of the non-assignment clause.
The Court of Appeal unanimously allowed the insurer’s appeal against the High Court decision, concluding that the language of the sales contract, in prohibiting an assignment ‘by any party’, did not prevent an assignment that took place by operation of law.
RSA Insurance v Textainer Group [2024] EWCA Civ 547
Textainer, a global supplier of shipping containers, incurred a loss of around $95 million following the collapse of Hanjin Shipping, in respect of thousands of missing and damaged containers and lost rental income. Textainer secured $70 million from primary and excess layer insurers and later recovered $15 million in Hanjin’s liquidation.
The Court of Appeal reaffirmed the well-established principle that recoveries are allocated on a ‘top-down’ basis, not proportionately (applying the House of Lords decision in Lord Napier and Ettrick [1993]). Sums obtained from third parties were therefore to be applied towards uninsured losses first, then paid down from the highest to the lowest layer of cover, before reimbursing the policy deductible. This approach applies to aggregate or excess layer placements and unitary losses alike. It confirmed that the concepts of under-insurance and average have no relevance to insurance written in layers.
WARRANTY & INDEMNITY
Project Angel Bidco v Axis Managing Agency [2024] EWCA Civ 446
The claimant sought indemnity under its buyer-side W&I policy for loss in value of the shares in a target company, on the basis that warranties given by the seller were alleged to be untrue. The relevant warranties stated that the company was not involved in legal proceedings or under investigation and had not committed any breach of contract or acts of bribery or corruption (‘ABC warranties’).
After the transaction completed, the target company became the subject of police investigations relating to compliance with anti-corruption and bribery legislation, and lost its key client, Liverpool City Council, resulting in insolvency of the target company and the policyholder. The insurers declined cover in reliance on a policy exclusion for “any liability or actual or alleged non-compliance with … [anti-bribery or anti-corruption laws]”. The policyholder argued that there was an obvious mistake in drafting of the exclusion, as it contradicted coverage provided in a cover spreadsheet listing the ABC warranties as insured obligations.
By a 2:1 majority, the Court of Appeal upheld the Commercial Court decision, that the policyholder’s proposed correction to the exclusion clause should not be permitted. While accepting that there was an obvious contradiction, the Court held it was not clear any mistake had been made in the drafting and nor did any clear remedy exist to correct the alleged mistake. There was a plain commercial rationale for the broad effect of the exclusion, from the insurer’s perspective, and the ordinary meaning of the words applied. In a dissenting judgment, Phillips LJ preferred the policyholder’s argument and would have allowed the appeal, based on the commercial purpose and intended effect of the insurance in the overall context of the Sale & Purchase Agreement.
This case illustrates the high bar for establishing a mistake in the drafting of commercial contracts, particularly a bespoke W&I policy, to justify rectification of a disputed provision.
Authors:
Catrin Wyn Williams, Associate
Pawinder Manak, Trainee Solicitor
The F1: A closer look at the Bacardi principle and section 11 of the Insurance Act
The Facts
MOK Petro Energy FZC v Argo (No. 604) Limited, The F1 [2024] EWHC 1935 (Comm) concerned a cargo of 11,800 MT of 92 RON unleaded gasoline (“the Cargo”) that had been loaded onto the tanker F1 (“the Vessel”) in Sohar, Oman. The Cargo was insured under an all-risks marine open cover on the ICC(A) wording (“the Policy”).
The Cargo consisted of a blend of gasoline and methanol. The gasoline and methanol used for the Cargo were drawn from four shore tanks (two gasoline, two methanol). They were loaded onto the Vessel via connecting pipelines and then blended in a tank on board the Vessel.
All gasoline-methanol blends have a phase separation temperature (PST), i.e., a temperature at or under which the blend will separate into a gasoline-rich upper layer and a methanol-rich lower layer. Phase separation is undesirable as phase-separated blends have a lower octane value and may damage the engine in which they are used. Put another way: the lower the PST, the better for the blend.
Also relevant is the fact that water increases the propensity of a gasoline-methanol blend to under phase separation. Unwanted water contamination therefore increases the PST of a blend.
The Cargo specifications, per the sale and purchase contract between MOK (the buyer) and PetroChina (the seller), required the Cargo to have a PST of 1°C or below. However, when the Vessel arrived at the discharge port, the Cargo was found to have a PST of 29°C. The Cargo was rejected by MOK’s end purchaser and ultimately sold by MOK to a salvage buyer. MOK claimed an indemnity under the Policy for the difference between (i) the value of the Cargo had it complied with specifications and (ii) the value at which it was actually sold.
Insurers declined the claim. In the ensuing trial, the Commercial Court upheld insurers’ declinature. While much of the judgment turned on the specific facts of the case, the Court’s findings on the following two issues carry wider implications for policyholders:
- Whether the mere fact that the Cargo had been defectively blended could constitute damage.
- How should a Court assess whether compliance with a warranty would reduce the risk of loss, as required under section 11 of the Insurance Act 2015.
Whether the mere fact of defective blending could constitute damage
Clause 1 of the ICC(A) wording provides that the insurance “covers all risks of loss of or damage to the subject-matter except as provided in Clauses 4, 5, 6 and 7 below”.
A policyholder seeking to obtain cover under the ICC(A) wording must generally establish (i) a fortuitous event which (ii) caused loss or damage to the insured cargo. Insured cargo is damaged only where it undergoes an adverse change in physical state.
In this case, one of MOK’s arguments was that (i) PetroChina’s decision to blend the gasoline and methanol in the proportions actually used was fortuitous, and (ii) this blending caused damage by resulting in a product that had a propensity to phase separate at 17°C, which was higher than the contractually stipulated PST of 1°C (although the blend did not actually undergo phase separation).
The question that arose was – could the blend be regarded as damaged merely because it was defective from the moment of its creation? Dias J held that it could not as there had never been a change to the physical state of the blend. The facts were on all fours with the well-known Bacardi Breezers case: Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd [2002] EWCA Civ 549 (“Bacardi”).
- In Bacardi, a drinks manufacturer mixed cardon dioxide which it did not appreciate had been contaminated with benzene with water and concentrate to form light alcoholic drinks. Unsurprisingly, the contaminated drinks were unmarketable. The issue was whether there had been “physical damage” to the drinks for the purpose of a limitation of liability clause. The English Court of Appeal held that there had been no damage – the drinks had not been subject to damage, but were merely defective from the moment of their creation.
- Similarly, in the present case, the blend was formed through the mixing of gasoline and methanol, and had a propensity to phase separate from the moment of its creation. It had never existed without this propensity. Since there was no change in the physical state of the blend to speak of, it could not, held the Court, be said to have suffered damage.
How should a Court assess whether compliance with a warranty would reduce the risk of loss?
Section 11 of IA 2015 applies to (among others) warranties which, if complied with, would tend to reduce the risk of loss of a particular kind. The general effect of section 11 is that, where an insured has breached a warranty to which section 11 applies:
- if the insured can show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”, per section 11(3); then
- the insurer would not be able to rely on the insured’s breach to exclude/limit/discharge its liability.
Put another way, section 11 obviates an insured’s breach of warranty where the warranty is not relevant to the insured’s actual loss.
In the present case, the Policy contained an express warranty requiring a surveyor to inspect and certify the connecting pipelines between the Vessel and the shore tanks. On the facts, MOK’s surveyor had done the former but not the latter. Accordingly, the Court found that MOK had not complied with the express warranty.
The issue then became whether section 11 negated MOK’s breach of warranty. This would be the case if MOK could show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”.
MOK’s primary case had been that the blend had been fortuitously contaminated with water either when the gasoline and methanol were loaded onto the Vessel via connecting pipelines, or when they were blended on board the Vessel. This water contamination in turn increased the PST of the blend (see above). The Court therefore assumed, for the purposes of its section 11 analysis, that the “loss which actually occurred” was the contamination of the blend with water as alleged by MOK.
On the facts, MOK’s surveyor had inspected the pipelines and found no water contamination, but had not issued a certificate in respect of the inspection. Arguably, the requirement to issue a certificate (when an inspection had already been carried out and no trace of water contamination had been found) was a mere formality and the failure to issue a certificate could not have increased the risk of loss (water contamination). The question then arose – in considering whether “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”:
- Should the Court consider only the effect of the particular breach of warranty committed by MOK (i.e., only the effect of its surveyor’s failure to issue a certificate)? If so, MOK’s breach arguably would not have increased the risk of water contamination, and MOK would be able to rely on section 11 to negate its breach of warranty.
- Alternatively, should the Court consider the effect of non-compliance with the warranty as a whole (i.e., the effect of both not inspecting and not certifying the pipelines)? If so, non-compliance with the warranty as a whole would probably have increased the risk of contamination, and MOK would not be able to rely on section 11.
Dias J preferred the second view, holding that section 11 was directed at the effect of compliance with the entire warranty and not with the consequences of the specific breach by the insured, and that paragraph 96 of the Explanatory Notes to IA 2015 supported this reading. Accordingly, MOK’s breach of warranty would have been fatal to its claim.
Implications for policyholders – English law
Neither of the findings discussed are policyholder-friendly.
That said, Dias J’s finding that the mere fact of defective blending cannot constitute damage intuitively accords with the reason why mere defects are not covered under all-risks insurance – namely, that all-risks insurance is not meant to guarantee the proper manufacture or construction of the property insured. A parallel can be drawn with construction all-risks policies, which typically do not cover the costs of rectifying defects in design or workmanship. Apart from this, the F1 is also significant for being the first case to explicitly endorse the applicability of Bacardi in an insurance context (Bacardi having been concerned with a dispute under a supply of goods contract).
As for section 11 of IA 2015, this case (as noted in an earlier article) is significant for being the decision to consider that section. That said, Dias J’s observations (i.e. that it is the effect of non-compliance with the entire warranty, rather than the insured’s particular breach, that should be taken into account) were obiter and it remains to be seen whether another Court would agree with her. In our view, notwithstanding Dias J’s observations, the use of the definitive article in section 11(3) (“the non-compliance”) might suggest on the contrary that it is the insured’s particular breach that should be looked at.
Implications for policyholders – Singapore Law
The authors – both of whom are APAC-based – will briefly consider the implications of this decision for Singapore law, a commonwealth jurisdiction whose law of insurance substantially reflects the English position prior to IA 2015.
There do not appear to be strong reasons why a Singapore Court would not consider Dias J’s findings on the issue of defective blending persuasive.
However, Dias J’s observations on section 11 of IA 2015 have less relevance. Under Singapore law, a breach of warranty has a draconian effect – the insurer is discharged from liability from the date of an insured’s breach of warranty: see section 33(3) of the Singapore Marine Insurance Act 1906. There is no equivalent of section 11 of IA 2015 that a policyholder can look to negate the breach of warranty. The Singapore law position accords with what had been the English law position prior to 2015, and its harshness was the reason behind the English reforms to insurance warranties as set out in the IA 2015.
Authors:
Toby Nabarro, Director Singapore
Fenchurch Law expands into Scandinavia with Denmark office launch
Fenchurch Law, the UK’s leading firm working exclusively for insurance policyholders and brokers, has announced plans to offer its specialist legal support across the Nordic region, with the launch of its new Denmark office.
The new office will be run by Morten Christensen, supported by his colleague Maria Bitsch, who have a combined 50 years of experience handling complex insurance and liability disputes across Scandinavia.
Morten brings with him extensive leadership expertise, having previously held the position of Co-Managing Partner, EMEA, at Kennedy’s and having also founded several independent specialist law firms. He has also been recognised as a leading individual by the Legal 500 for insurance in Denmark for the past 6 years. Maria also brings with her a deep understanding of the insurance industry, the broker sector, and reinsurance, having held senior legal positions at three of the top Danish insurance providers, including the Alm Brand Group.
This announcement coincides with the official opening of Fenchurch Law’s Singapore office and marks another major milestone in the firm’s ongoing global expansion strategy.
Senior Partner at Fenchurch Law, David Pryce, commented: “Today’s opening of our Singapore office, to serve policyholders across the APAC region, and the opening on 1st November of our Copenhagen office, to serve policyholders across the Nordic region, are key milestones towards achieving the firm’s purpose to level the playing field for policyholders globally. These office openings put us ahead of schedule to achieve our objective of having a presence in every region of the world by 2030.”
Morten Christensen, Managing Partner at Fenchurch Law DK, added: “We’re delighted to be joining Fenchurch Law to establish its presence in Scandinavia, and to be playing a key part in the firm’s growth around the world.
In my experience, I have often found that clients would have been better off with a representative who not only understands the law and the insurance industry but also exclusively stands on their side, which is exactly the type of support we will be offering them.”