“Condoning dishonesty”: Discovery Land Co LLC & Ors v Axis Specialty Europe SE
Those dealing with Solicitors’ professional indemnity claims will know that the SRA Minimum Terms are intended to provide very wide cover, and will indemnify claims involving dishonesty unless the dishonest act/omission in question was committed or condoned by all the partners in the firm or by all the members of an LLP.
What is meant in this context by “condoning” was considered in the recent case of Discovery Land Co LLC & Ors v Axis Specialty Europe SE [2023] EWHC 779 (Comm), a decision by Robin Knowles J.
The Claimants were the victims of two multi-million pound frauds carried out by Mr J, a solicitor, who was a Member of Jirehouse Partners LLP and a director of two related legal practices, Jirehouse and Jirehouse Trustees Ltd (collectively, “Jirehouse”). A second person, Mr P, was likewise a member/director of the relevant entities.
Mr P hadn’t been involved with the two frauds - indeed, he resigned shortly after discovering them - but Jirehouse’s professional indemnity insurer (Axis) sought to decline indemnity by arguing that he had nevertheless condoned them.
Axis’s policy provided that
"EXCLUSIONS
The insurer shall have no liability under the policy for:
…
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly arising out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that:
(a) the policy shall nonetheless cover the civil liability of any innocent insured; and
(b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company or, in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
The court accepted that in this context to “condone” was an ordinary word meaning to convey acceptance or approval, and in some situations it does not require an overt act.
Axis’s case was that the frauds formed part of a longstanding pattern of dishonest behaviour on the part of Mr J, involving the temporary - but still unquestionably prohibited - practice of using client monies to address temporary cashflow problems, and various other dishonest acts, and that Mr P had been aware of or had turned a blind eye to that pattern.
Seemingly supportive of that argument were cases such as Zurich Professional Ltd v Karim [2006] EWHC 3355 (QB) and Goldsmith Williams v Travelers Insurance Co Ltd [2010] EWHC 26 (QB), where it had been held it was sufficient for two partners to have condoned the dishonesty of a third partner (the actual fraudster) when they were aware a persistent course of dishonesty by that partner, even if they weren’t aware of the actual act of fraud which had given rise to the claim.
However, that type of argument failed in this case. Robin Knowles J held that Mr P needed to have condoned the acts through which the two frauds by Mr J had been committed, and that simply condoning the occasions on which Mr J had illicitly “borrowed” client monies or his various other dishonest improprieties wasn’t sufficient.
Robin Knowles J’s assessment of Mr P was as follows:
“In my judgment the true story of this case is that [Mr P’s] standards fell well below those required in his profession. Indeed there are episodes that show he was untrustworthy and prepared to behave dishonestly. But these episodes were not such as to justify a conclusion that he in any way appreciated that [Mr J] could be embarked on multi-million pound fraud, extracting client monies in connection with the commercial entities with which he was involved. [Mr P] did not condone, either generally or specifically in relation to the two claims, what AXIS described in closing as a Ponzi scheme by [Mr J] …”
Robin Knowles J felt able to distinguish the two previous authorities mentioned above on this basis:
“…in Karim the Court accepted that the two condoning partners knew that flows of money out of the firm to themselves could not come legitimately from the income of the firm. In Goldsmith Williams, the Court found that, before the relevant transactions, the condoning partner engaged in mortgage fraud in her own right and knew that her partner did. There are not true parallels between those facts and the facts of the present case.”
Perhaps a more valid point of distinction was that, as the Judge noted in passing, the wording of the policy in this case was subtly different to the Minimum Terms considered in the two earlier cases. Those cases had required an assessment of whether the “dishonesty [of] or [the] fraudulent act or omission [by]” the fraudulent partner had been condoned by the other partner(s). In the present case, the wording of Axis’s policy had been replaced with a reference to the “dishonest or fraudulent acts, errors or omissions” committed by the fraudulent partner. Accordingly, condoning a general pattern of dishonesty was plainly not enough: the other partner must have condoned some specific dishonest acts or omission with which the claim in question was directly or indirectly involved.
The full judgment can be found here:
https://www.bailii.org/ew/cases/EWHC/Comm/2023/779.html
Jonathan Corman is a Partner at Fenchurch Law
The Good, the Bad & the Ugly: #19 (The Ugly). Rashid v Direct Savings
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#19 (The Ugly): Rashid v Direct Savings Limited [2022] 8 WLUK 108
Rashid v Direct Savings Limited considered the novel issue of how limitation applies to claims made under the Third Parties (Rights Against Insurers) Act 2010 ("the 2010 Act"), as compared with claims under the “old” Act (“the 1930 Act”).
The 1930 and 2010 Acts in summary
Both Acts, generally speaking, provide a mechanism for persons with claims in against an insolvent but insured defendant to seek indemnity from that defendant insurer. The 1930 Act was given a significant and welcome overhaul in the shape of the 2010 Act.
Under the 1930 Act, following Post Office v Norwich Union [1967] 2 QB 363, claimants with a claim against an insolvent, insured defendant first had to establish a liability against that defendant before being able to bring an ascertained claim against its insurer. This created a two-stage process: (i) establish a liability against the insured, and (ii) bring a claim under the 1930 Act for payment by its insurer. Step (i) was required despite the possibility that step (ii) might fail.
By contrast, section 1(3) of the 2010 Act includes the express provision that:
"The third party may bring proceedings to enforce the rights against the insurer without having established the relevant person's liability; but the third party may not enforce those rights without having established that liability."
The 2010 Act thus removes the first stage required under the 1930 Act and instead allows claimants to bring a claim directly against insurers of insolvent defendants where they have policies which might respond to the claim but where the insurer has denied indemnity.
Limitation, and FSCS v Larnell
There is a long-established principle for claims against insolvent defendants that, where the claim was not time-barred at the onset of the insolvency process, time ceases to run for limitation purposes (Re General Rolling Stock Co Ltd (1872) LR Ch App 646).
In Financial Services Compensations Scheme Limited v Larnell (Insurances) Limited [2005] EWCA Civ 1408, the Court of Appeal was required to determine the question of limitation for claims brought under the 1930 Act.
The claimant in Larnell had commenced proceedings more than six years after the cause of action had accrued and more than three years after he had the knowledge relevant for the alternative limitation period under section 14A of the Limitation Act 1980. However, the insured had entered liquidation just within that three-year limitation period. The claimant argued that under statutory regime of the Insolvency Ac 1986 the provisions of the Limitation Act were suspended, and the claim was in the time.
The Court of Appeal held that the two-stage process for bringing a claim under the 1930 Act meant that the first stage (the claim against the insolvent defendant to establish a liability) fell within the insolvency regime. This stage was a claim in the insolvency. Therefore, in line with Re Rolling Stock Co, limitation ceased at the onset of the insolvency.
It followed that limitation for the second stage (the claim against the insurers) also ceased at onset of the insolvency, and the insurers were unable to rely on the limitation defence.
Rashid v Direct Savings Limited
The cessation of limitation under the 1930 Act established in Larnell was considered in Rashid but this time with reference to the 2010 Act. The Judge concluded that the benefit of the insurance policy issued by the insurers was not an asset in the insolvency and that the right to bring a claim against them was not dependent on first establishing liability against the insolvent defendant and instead arose at the onset of the defendant’s insolvency event occurs. Accordingly, held the Judge, claims under the 2010 Act do not fall within the insolvency regime, and so the usual limitation requirements applied.
The Claimant in Rashid argued that someone in his position should not be worse off under the 2010 Act as compared with the 1930 Act. However, as the Judge commented:
"In most respects a claimant was better off under the 2010 Act with the ability to sue the insurer direct without first having to establish liability against the insolvent insurers … It may be that an unintended effect of these changes is that the pause on limitation first recognised in Larnell would no longer be available to a claimant but it would be unwise to assume that this was seriously considered by the drafting team."
We therefore consider Rashid “ugly” for policyholders – or, more accurately, for claimants bringing claims against insolvent policyholders. It represents an important but correctly decided change to the law regarding limitation in insolvency and claims made directly against insurers. Policyholders and their brokers should be conscious of this change and consider bringing direct claims against insurers under the 2010 Act well before limitation becomes a potential problem.
Toby Nabarro is an Associate at Fenchurch Law.
The Good, the Bad & the Ugly: #18 (The Good). Carter v Boehm (1766)
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#18 (The Good): Carter v Boehm (1766)
Carter v Boehm is a landmark case in English contract law. The judgment by Lord Mansfield established the duty of utmost good faith on each party to a contract of insurance. The duty is placed on both the insured and the insurer, and as such the case (and establishment of the principle) can be considered ‘Good’ for policyholders.
Facts
The case concerned Fort Marlborough in Sumatra. Mr Carter was the Governor of the Fort and bought an insurance policy with Boehm against the risk of attack by a foreign enemy. Carter knew that the Fort was not capable of resisting an attack by a European enemy and further knew that the French were likely to attack but did not disclose this information to Boehm at the formation of the policy. The French duly took the Fort and Carter claimed under the policy. Boehm refused to indemnify Carter and Carter subsequently sued.
Judgment
With regard to the actual decision, Lord Mansfield found in favour of Carter. The reasoning was nestled in the context of 18th century geopolitics and the state of affairs between Britain and France at that time: the two nations had been at war and Lord Mansfield held that Boehm knew (or ought to have known) the political situation. As the conflict was public knowledge, the judge held that Carter not informing Boehm of the likely attack could not amount to non-disclosure:
“There was not a word said to him, of the affairs of India, or the state of the war there, or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void.”
More significantly, however, the case established the duty of utmost good faith in insurance contracts, specifically in regard to disclosure, which Lord Mansfield explained as follows:
“Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risk, as if it did not exist.
The keeping back of such circumstance is a fraud, and therefore the policy is void. Although the suppression could happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because the risk run is really different from the risk understood and intended to be run, at the time of the agreement.
The policy would equally be void, against the under-writer, if he concealed; as, if he insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium. The governing principle is applicable to all contracts and dealings.
Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.”
Analysis
The standard position in English contract law is ‘caveat emptor’, meaning buyer beware. There is no implied duty of good faith, unlike, for example, the French Civic Code. This differs, however, in insurance law, and Carter v Boehm was the case that established that.
The case is Good for policyholders because it established the contractual environment in which insurance policies could successfully operate. The historical context of insurance law is important to grasp in this point: in the 17th, 18th, 19th and majority of the 20th century there was no way for the London Market to know the specific details of risks in far flung corners of the world (albeit Lord Mansfield differentiated well known geopolitical realities in this specific case). The insurer had to rely on honest disclosure by the insured. Carter v Boehm provided the legal framework in which the insured was under a duty to disclose facts that only he knew but would be material to an insurer when assessing a risk. Lord Mansfield concluded that this duty went both ways – an insurer could not “insure a ship on her voyage which he privately knew to be arrived”. Without the principle established in Carter v Boehm, it is arguable that the placing of insurance would for a long period have been weighed too much in favour of insureds as to make insurance a commercially viable business.
It is important to note how the information imbalance between an insured and insurer has shifted dramatically since Carter. In 1766, an insurer was heavily, if not entirely, reliant on the open and honest disclosure of an insured when considering a risk (especially in an overseas context). Unfortunately, for policyholders in the 21st century, insurers have considerable ability and appetite to scrutinise what the insured knew or ought to have known at the formation of policy, with the means and resources to question whether the policyholder had indeed complied with his duty disclosure.
The fact that the pendulum had swung too much towards the interests of insurers explains why it became necessary to ameliorate the position in the shape of the Insurance Act 2015 and its well-known reforms of the scope of disclosure and, even more so, of the consequences of a non-disclosure.
Dru Corfield is an Associate at Fenchurch Law
Webinar - Fraud & dishonesty in the context of PI Policies
Agenda
Jonathan Corman, a Partner at Fenchurch Law, and Senior Associate Daniel Robin present a webinar the above topic.
The webinar covers:
- The current test for dishonesty
- Corporate insureds – the attribution of knowledge
- Dishonesty at the placing stage:
- Legal consequences
- Innocent Non-Disclosure clauses
- Claims involving dishonesty:
- Exclusions for committing/condoning dishonesty
- Exclusions once reasonable grounds for suspicion have arisen
Speakers
Jonathan Corman, Partner
Daniel Robin, Senior Associate
Better late than never: the first reported case on damages for late payment
Quadra Commodities S.A v XL Insurance Co SE and Others
Ever since the Enterprise Act 2016 ushered in the ability of insureds to claim damages against their insurers for the late payment of insurance claims, the sector has been waiting to see how this legislation would play out in practice, and in particular what would constitute a ‘reasonable’ time for paying claims.
That wait is finally over.
Background
The policyholder, Quadra Commodities, specialised in the trade of agricultural commodities including grains, oil seeds and vegetable oils. In 2019, a fraud now known as the ‘Agroinvestgroup Fraud’ unravelled and revealed that Agroinvestgroup, a loosely associated group of companies involved in the production, storage and processing of agricultural products, had defrauded the policyholder.
A claim was notified under the policyholder’s marine cargo open cover insurance policy in February 2019. The insurer denied all liability for a variety of reasons, including that the policyholder had no insurable interest, and that the loss was purely financial with no loss of physical property (for which the insurer maintained the policyholder was not insured).
Section 13A of the Insurance Act 2015 (“the Act”)
While the details of this claim are well worth a read (see here for the full judgment) interest in the case has focused on the claim for damages pursuant to s.13A of the Act (a copy of the wording of s.13A can be found here).
As a primary point the Court was clear that the issue of what was a “reasonable time” in which the claim should have been paid must be considered separately to the Defendants’ case as to whether there were reasonable grounds for disputing the claim.
The onus is on the insured to show payment was made after the “reasonable time” within which the insurer should have paid sums due in respect of the claim: whereas the insurer carries the burden of proof for showing that there were reasonable grounds for disputing the claim.
In considering the question of what was a “reasonable time”, the Court considered that the fact that the Defendants’ actual conduct of the claims handling could be said to have been too slow or lethargic, was not of itself an answer. The Court looked to the non-exhaustive list of factors referred to in s. 13A (3) of the Act and the accompanying Explanatory Notes (all the while attempting to keep separate the question of whether or not there were reasonable grounds for disputing the claim).
The Court concluded that, given the nature and complicating circumstances of the claim, including the origins of the claim in the Agroinvestgroup Fraud and the destruction of documents, the reasonable time in which the claim should have been paid was not more than about a year from the notice of loss.
The one-year period would have been a reasonable time for the insurer to investigate and evaluate the claim, and then pay it. However, this was predicated on the assumption that there were no reasonable grounds for disputing the claim or part of it.
Turning then to whether or not there were reasonable grounds for disputing the claim the fact that the Court may ultimately find that those grounds were wrong did not automatically infer that those grounds were unreasonable. On the facts, the Court agreed that in the circumstances there were reasonable grounds for reaching that conclusion.
Ultimately, while it could be said that the way in which the Defendants conducted their investigations was too slow, as this aspect of their conduct occurred within a period throughout which there were reasonable grounds for disputing the claim there was no breach of the s.13A implied term.
Conclusion
While the policyholder was successful in its claim for an indemnity, it was not successful in its argument relating to s.13A of the Act.
Any s.13A claim will be highly fact specific, but in circumstances where there are fairly significant complicating factors, a “reasonable time” of no more than a year to investigate, evaluate and pay a claim (which is not a lot of time in the grand scheme of a complex loss) appears to be a positive decision for policyholders. Large losses can be unpalatable for insurers, but they may now think twice before delaying investigations in order to test a policyholder’s resolve, especially in circumstances where ultimately there are no reasonable grounds to dispute the claim.
Anthony McGeough is a Senior Associate at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #17 (The Ugly). Diab v. Regent Insurance Company
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#17 (The Ugly): Diab v. Regent Insurance Company Ltd [2006] UKPC 29
This Privy Council decision considered whether a policyholder, whose insurer has declined cover, is nevertheless still bound by the claims conditions in the policy.
Background
This case arose from a fire which destroyed a shop owned by the policyholder, Mr Diab, as well as all its contents. Mr Diab made a claim under his material damage policy with Regent Insurance Company Limited (“Regent”).
A meeting (“the Meeting”) took place ten days later at Regent’s offices between Mr Diab and Regent’s Managing Director, Mr Flynn. Mr Flynn made it clear that, if Mr Diab made a claim under the policy, it would be rejected because Regent believed that he had started the fire.
About four weeks after that, Mr Diab’s solicitor sent a letter to Regent persisting with a claim for indemnity and setting out the amount of his loss.
Regent declined the claim. It asserted that:
a) Mr Diab had breached a condition precedent (“the Condition”) requiring that any claim should be notified in writing forthwith and that particulars of the loss be provided in writing within 15 days, and that any oral notice given by Mr Diab at the Meeting was thus insufficient; and
b) and in any event the claim was fraudulent because Mr Diab had started the fire.
Mr Diab duly sued Regent.
At the trial, Regent dropped its allegation of fraud and relied solely on the alleged breach of the Condition.
Regent was successful in that regard, with the trial judge rejecting Mr Diab’s argument that the representations made by Mr Flynn at the Meeting had constituted a waiver by Regent or an estoppel by representation, relieving him of the need to comply with the Condition.
Mr Diab appealed, eventually to the Privy Council, the central issue being the construction and effect of the Condition, namely whether it remained binding even where Regent had told Mr Diab that it would not pay the claim. Mr Diab’s position was that a repudiation of liability by an insurer relieved the policyholder of the need to comply with any outstanding procedural requirements under a policy. In other words, Mr Diab was relieved of the obligation to comply with the Condition given what Mr Flynn had said at the Meeting.
The Decision
The Privy Court dismissed Mr Diab’s appeal. It held that, while Mr Diab had been entitled to take what was said by Mr Flynn to be a repudiation of liability by Regent, Mr Diab had not accepted it or treated it as putting an end to the insurance contract. The obligations owed by each party under the policy therefore continued.
Put another way, a policyholder who is asking an insurer for an indemnity under a policy will ordinarily remain bound by the terms of that policy – unless he can show that the insurer has lost its right to rely on the term in question because it is estopped from doing so; and an estoppel in this situation will usually require both a clear representation by the insurer that it is waiving the condition and the policyholder relying on that representation to his detriment.
Comments
In our view this decision is problematic for policyholders for the reasons set out below.
Policyholders should be aware that, where an insurer has denied a claim, this is not on its own enough to ‘tear up the contract’ and therefore policy conditions must continue to be observed. Although in certain circumstances a policyholder may be able to establish that an estoppel means that the insurer has lost its rights to rely on a condition, that is by no means straightforward.
When faced with a denial of cover by insurers, a policyholder must decide whether to accept that denial as a repudiatory breach of the policy. The practical effect of that would be that both parties are discharged from further performance of the contract. This can be problematic for a policyholder either if the policy is still running or if there are other claims which have been made under the policy. If the repudiatory breach is accepted, a policyholder will be entitled to claim damages for the breach (the purpose of which will be to put the policyholder in the position it would have been in had the breach not occurred).
If the denial of cover is not accepted as a repudiatory breach, the policyholder is obliged (for example) to continue to provide information and co-operation and to observe the other claims conditions in the policy. Failure to do so may result in insurers successfully relying on the technical argument raised in the Diab case. While it may seem unfair that an insurer can hold a policyholder to the conditions in the policy even when cover has been declined, this decision still represents the law on this point and we do not suggest that it was wrongly decided. We therefore categorise it as “Ugly”.
Serena Mills is an Associate at Fenchurch Law.
Even a Solicitors’ PI policy has its limits - Doorway Capital Limited v AIG
In this recent decision, the High Court considered whether a liability incurred by a solicitor under a factoring agreement was covered by its professional indemnity policy.
Background
In 2016, Doorway Capital Limited (“Doorway”) entered into a Receivable Funding Agreement (“the Agreement”) with Seth Lovis & Co Solicitors Ltd (“the Solicitors”). The relevant terms of the agreement were as follows:
- Doorway would provide funding to the Solicitors for use as working capital and to repay certain of their debts.
- The Solicitors would sell to Doorway its “Receivables” i.e., the Solicitors’ trading debts, together with the right to pursue those debts.
- the Solicitors would be appointed as Doorway’s agents to collect the Receivables.
- On receipt, the Solicitors would hold the Receivables in their client account on trust for Doorway, before paying the sums over to Doorway’s nominated account.
Doorway claimed that the Solicitors collected c. £2m worth of Receivables between 2017 and 2018 but in breach of the Agreement, only paid over a small portion of them. Doorway also asserted that the Solicitors breached fiduciary duties owed to Doorway.
As the Solicitors had entered into administration, Doorway claimed directly against the Solicitors’ professional indemnity insurers, AIG, under the Third Parties (Rights Against Insurers) Act 2010.
The Application
AIG applied for summary judgment, arguing that Doorway’s claim had no prospects of success. For the purposes of the application, AIG did not dispute that the Solicitors had breached the Agreement nor that they had breached fiduciary duties owed to Doorway.
There were two principal issues for the Court to decide:
- Did the liability that the Solicitors incurred to Doorway fall within the insuring clause of the policy (“the Policy”)?
- If so, did the ‘Debts and Trading Liabilities’ exclusion (“the Exclusion”) nevertheless apply?
The insuring clause
The insuring clause indemnified the Solicitors against “… civil liability to the extent that it arises from Private Legal Practice in connection with the Firm’s Practice.”
“Private Legal Practice” was defined as meaning “the provision of services in Private Practice as a solicitor … including, without limitation … (c) any Insured acting as a personal representative, trustee, attorney, notary, insolvency practitioner, or in any other role in conjunction with a Practice.
Doorway argued that the Solicitors’ services fell within the definition of “Private Legal Practice.” In particular, it said that acting as a trustee, without more, was sufficient. It also argued that (i) the Solicitors exercised “professional judgment in relation to the assessment of obligations which would arise in the course of the solicitor’s practice”, because they were required to determine whether, as a matter of law, a Receivable was payable to Doorway; and (ii) the holding of monies in their client account showed that they were providing a service in private practice.
The Judge, Mr Justice Butcher, paid short shrift to Doorway’s arguments. Any liabilities that the Solicitors owed to Doorway derived from Agreement alone; the fact that the Solicitors were holding monies on trust was merely “a part of the mechanism” of fulfilling their obligations under the Agreement. The Judge came to the same conclusion in respect of the Solicitors’ use of “legal judgment” to recover the Receivables, as well as the use of their client account – neither were for the provision of services in private practice as a solicitor.
In the circumstances, the liabilities incurred by the Solicitors did not arise from Private Legal practice, and were therefore not covered by the insuring clause. Accordingly, AIG’s application for summary judgment succeeded.
The Exclusion
Although it was not necessary for the Judge to decide this given his findings on the insuring clause, the Judge nevertheless also expressed a view on the applicability of the Exclusion.
The Exclusion stated: “The Insurer will have no liability to indemnify an insured in relation to any … legal liability assumed or accepted by an Insured under any contract or agreement for the supply to, or use by, the Insured of goods or services in the course of the Insured Firm’s Practice.”
In considering this issue, the Judge referred to the Supreme Court decision in Impact Funding Solutions Limited v AIG Europe Insurance Ltd [2016] UKSC 57. As with the present case, Impact Funding concerned a commercial agreement between a firm of solicitors and a third-party funder, and required to court to decide whether services conducted in connection with that agreement were covered (or, in the circumstances, excluded) under the solicitor’s PI policy. The policy contained an exclusion for “breach by any Insured of terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing legal services.” By a majority of 4 to 1, the Supreme Court found that the exclusion applied. Of particular relevance, Lord Toulson said that the commercial agreement “did not resemble a solicitor’s professional undertaking as ordinarily understood, and it falls aptly within the description of a “trading liability” which the minimum terms were not intended to cover.”
Therefore, by analogy with Impact Funding, the liability incurred by the Solicitors to Doorway was not the type of liability which would be covered by a solicitors’ PI policy. Therefore, had he been required to do so, the Judge would have found that the Exclusion applied.
Conclusion
The case is confirmation that not every service provided by a solicitor will be covered by its professional indemnity policy. In any case, one has to look at the substance of the service being provided; merely acting as a trustee or using a client account, for example, will not necessarily be enough.
As to the Exclusion, although the Judge’s comments were obiter, it is difficult to see how the issue could have been decided any other way in light of Impact Funding. As with that case, the meaning and effect of the Exclusion were clear, and the Judge had no doubt that it applied.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Original cause? It’s all the same: Spire Healthcare Ltd v RSA
Background
Spire Healthcare Limited (“Spire”) operated two private hospitals at which Mr Paterson, a consultant breast surgeon employed by the Heart of England NHS Foundation Trust ("HEFT"), carried out unnecessary and inadequate procedures from around 1993 to 2011.
Mr Paterson had been performing sub-total mastectomies ("STMs") which involved leaving some breast tissue behind - a practice that that went against the universally accepted practice of removing all tissue in the event that a mastectomy was clinically indicated. Mr Paterson had carried out this procedure in both his NHS and private practice.
His negligent methods had been discovered by NHS officials at HEFT in 2007, who sought assurances from Mr Paterson that he would cease carrying out STMs. Despite giving those assurances, Mr Paterson continued to carry out STMs. He was subsequently suspended from practice in 2011 by the General Medical Council ("GMC").
Following Mr Paterson’s suspension, Spire discovered that he had also carried out unnecessary surgical procedures – typically, wide local excisions ("WLEs") - in circumstances where there was no clinical indication for the surgical procedure to be undertaken.
High Court Proceedings
Around 750 former patients commenced proceedings against Mr Paterson, Spire and HEFT. Spire settled the proceedings by way of a confidential settlement and sought an indemnity from its insurer, RSA.
The policy had a Limit of Indemnity of £10m and was subject to an aggregate limit of indemnity of £20m. The policy also contained the following wording of relevance:
“The total amount payable by the Company in respect of all damages costs and expenses arising out of all claims during any Period of Insurance consequent on or attributable to one source or original cause irrespective of the number of Persons Entitled to Indemnity having a claim under this Policy consequent on or attributable to that one source or original cause shall not exceed the Limit of Indemnity stated in the Schedule”
RSA had accepted that it would indemnify Spire under the policy, but only to the Limit of Liability of £10m. RSA asserted that all of the claims arose out of one source or original cause, i.e. Mr Paterson or Mr Paterson’s conduct.
Spire’s position was that it should be entitled to the aggregate limit of £20m as there had been two distinct groups in the underlying claim:
- Those attributable to his negligent conduct by carrying out STMs where a full mastectomy was clinically required; and
- Those attributable to his deliberate conduct by carrying out unnecessary surgery.
Ultimately the High Court decided that Spire was entitled to the full £20m from RSA on the basis that there had been a different source and/or original cause between the two groups of patients.
The Court of Appeal Decision
The Court of Appeal considered the previous case law in relation to aggregation wording where loss was consequent on or attributable to one source or original cause, and confirmed the following principles:
- In general, an aggregation clause should be approached neutrally, as opposed to with a predisposition towards either a narrow or broad construction;
- However, the wording in this case requires the widest possible search for a unifying factor in the history of the losses it is sought to aggregate;
- There is no distinction between an "original cause" on the one hand and an "originating cause" on the other, and nor is there a distinction between “cause” and “source”.
- The doctrine of proximate cause does not apply, since “original cause” connotes a considerably looser causal connection; and
- There must still be a causative link between what is contended to be the originating cause and the loss and there must also be some limit to the degree of remoteness that is acceptable.
The Court of Appeal allowed the appeal as it considered the High Court had erred in its consideration of a single effective cause of all the claims, which was not the correct test. Instead, the High Court should have searched for a unifying factor to the claims. Had the High Court done so, it would have identified the unifying factor as a single "rogue consultant" who habitually acted in breach of his duties to his patients.
Furthermore, all the patients' claims were based on Mr Paterson's improper and dishonest conduct. That conduct, in all cases, involved operating on the patients without their informed consent and with disregard for their welfare. Any analysis of Mr Paterson’s motivation was both unnecessary and inappropriate.
The High Court had relied heavily on Cox v Bankside, but the passages relied upon provided no justification for the High Court’s approach. Instead, it had introduced unnecessary complication into what the Court of Appeal considered should have been a relatively simple and straightforward exercise. The claims were not based on a negligent misunderstanding; they were based on a pattern of deliberate and dishonest behaviour by one individual.
The Court of Appeal concluded that:
“As a matter of ordinary language, and applying the principles applicable to aggregation clauses expressed in these wide terms, it seems to me to be plain that any or all of (i) Mr Paterson, (ii) his dishonesty, (iii) his practice of operating on patients without their informed consent, and (iv) his disregard for his patients' welfare can be identified either singly or collectively as a unifying factor in the history of the claims for which Spire were liable in negligence, irrespective of whether the patients concerned fell into Group 1 or Group 2 (or both)”.
Comment
While disappointing for policyholders with similar aggregation wording, the decision does serve as useful reminder on the test to be applied for “original cause” wording.
It should be noted that the Court of Appeal deliberately stepped back from creating a general rule for claims arising from the actions of an individual, and acknowledged that there will still be cases in which the behaviour of an individual will be too remote or vague a concept to provide a meaningful explanation for the claims.
Aggregation disputes will remain highly fact-specific, and policyholders should bear in mind that separate negligent acts with their own individual context may still avoid the sting of “original cause” aggregation wording.
Anthony McGeough is an Associate at Fenchurch Law
Webinar - Euro Pools v RSA – diving into notification issues
Agenda
This webinar looks at the seminal Court of Appeal decision in Euro Pools v RSA, and will provide an overview of the core legal principles surrounding notifying circumstances under professional indemnity insurance policies. The session also addresses the vexed issue of “hornet’s nest” or “can of worms” notifications, and the practical considerations involved.
Alex Rosenfield is a Senior Associate at Fenchurch Law
The Good, the Bad & the Ugly: #15 (The Good & Bad). West Wake Price & Co v Ching
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#15 (The Good & Bad)
West Wake Price & Co v Ching [1957] 1 WLR 45.
This case is known for three important principles of insurance law, which we consider below.
The Plaintiffs (a firm of accountants) were insured by the Defendant (a Lloyd’s underwriter) for any “claim” in respect of an act of neglect, default or error. A clerk employed by the Plaintiffs had stolen £20,000 which had been entrusted to the firm by a client, who duly issued a writ against the Plaintiffs for:
- Damages for negligence in failing properly to supervise the clerk;
- Monies had and received; and
- Monies converted by the Plaintiffs for their own use.
The case is a difficult one for the modern reader, not least because the 2nd & 3rd grounds of the claim (money had & received, and conversion) are relatively unfamiliar. For present purposes, both can be regarded as the equivalent to vicarious liability for the clerk’s fraud.
A further source of difficulty is that the case was concerned with an obscurely drafted and now archaic form of QC clause. This required the insurer (i) to settle a claim if it appeared likely that there would otherwise be a liability covered by the policy, but also (ii) to settle a claim which was not likely to result in liability at trial but where the policyholder nevertheless reasonably objected to defending it (eg, because of adverse publicity).
Thus in West Wake the Plaintiff accountants argued that the insurer was obliged to settle the claim because (i) they did indeed wish to avoid the publicity of a trial and, as they argued, (ii) “the claim” based on their allegedly negligent failure to supervise the clerk was ostensibly covered by the policy.
Devlin J found in the insurer’s favour, and, in so doing, established these three points of principle.
First, he distinguished between a “claim” and a cause of action. He held that, in the context of a liability policy such as this one, a “claim” was characterised by the object which was being claimed and was not the same as the cause of action supporting it. Thus, “You are liable to me for £100” is a claim. “You are liable to me for £100 for fraud and for negligence” is still a single claim, not two claims. This reasoning has proved crucial in the context of aggregation disputes.
Secondly, Devlin J held that, in a dispute between insured and insurer, the court will look at the substance of a claim (ie, its true underlying facts) and not how it may have been pleaded against the insured by the claimant. A claimant may well have his own reasons for trying to depict a fraud claim as one for negligence or a claim for poor workmanship as one for inadequate design. (And the lesser-known corollary to that principle is that an insured, who has been held liable to a claimant in fraud, is nevertheless entitled to argue, in a subsequent dispute with his insurer, that he was not in fact fraudulent but merely negligent and thus entitled to indemnity under his policy: Omega Proteins v Aspen [2011] 1 Lloyd’s Rep IR 183.)
We have no hesitation in categorising both these aspects of the judgment as “Good”.
The third aspect of the judgment in West Wake was Devlin J’s view that the policy did not cover a “mixed” claim: a policy covering claims for negligence did not cover one based on both negligence and fraud, let alone one which was (in his view) primarily for fraud and only secondarily for negligence.
It is not obvious how the Judge’s reasoning here sits with two later and equally well-known decisions - Wayne Tank [1974] 1 QB 557, and the “Miss Jay Jay” [1987] 1 Lloyd’s Rep 32. In those cases, the Court of Appeal held that, where there are two proximate causes, one of which is covered, the policy will respond if the other proximate cause is simply not mentioned but will not respond if it is specifically excluded.
In the light of those cases (and, indeed, also in the light of the Supreme Court’s judgement in FCA v Arch, considered in a previous blog in this series), we consider that the better analysis of the facts in West Wake would be that the clerk’s fraud and the Plaintiffs’ negligent failure to supervise him were both proximate causes so that, since the former was not excluded, there would have been cover (and thus the Plaintiffs could try to insist, by virtue of the QC clause, on the claim being settled).
Devlin J’s decision that, as a matter of causation, the clerk’s fraud “trumped” the Plaintiffs’ alleged negligence seems to have been the result of a disinclination to hold that there could in practice be two truly proximate causes of a loss, with him instead preferring the view that one of two competing causes will almost always be more dominant.
Nowadays, the courts will be far quicker to find that two causes, whether they be independent or interdependent, were both proximate.
In that respect, and in that respect only, we categorise West Wake as “Bad”.
Jonathan Corman is a Partner, and Toby Nabarro is an Associate, at Fenchurch Law.
