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.”