(1) Timothy Crowden and (2) Carol Crowden v. QBE Insurance (Europe) Limited  EWHC 2597 (Comm)
This case involved a claim in respect of negligent investment advice brought directly against the insurer of an insolvent financial adviser, pursuant to the Third Parties (Rights against Insurers) Act 1930 (the “1930 Act”).
The insurer successfully relied on an insolvency exclusion clause contained within the insolvent adviser’s professional indemnity policy in order to deny liability to the claimants.
The claimants were the trustees and beneficiaries of a self-administered pension scheme. Following advice received from their financial adviser, Target Financial Management Limited (“Target”), the claimants invested in two investment products, one of which involved securities issued by Lehman Brothers Inc. Following the financial crisis of 2008 both issuers became insolvent and defaulted on returns due to the claimants. Target subsequently entered into liquidation in May 2013. In February 2015 the claimants obtained judgment against Target (in liquidation) for negligent advice and were awarded damages of £197,700.
QBE, as Target’s professional indemnity insurer, was informed of the proceedings but declined to participate on grounds that it did not consider itself to be liable to indemnify Target under the terms of the professional indemnity policy (the “Policy”).
In August 2016 the claimants brought proceedings directly against QBE pursuant to the 1930 Act. Under the 1930 Act, Target’s rights under the Policy for indemnity cover in respect of its liability for negligent advice were transferred to and vested in the claimants.
QBE applied for summary judgment to dismiss the claim on the basis that QBE was not liable to indemnify Target (and therefore the claimants) by relying on the following exclusion clause in the Policy (the “Insolvency Exclusion”):
“This Insured section excludes and does not cover any claims, liability, loss, costs or expenses arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or any insurance company, building society, bank, investment manager, stockbroker, investment intermediary, or any other business, firm or company with whom the Insured has arranged directly or indirectly any insurance, investments or deposits…”
High Court Decision
Mr Peter MacDonald Eggers QC allowed QBE’s application for summary judgment on grounds that QBE was not liable to indemnity Target under the Policy as a result of the Insolvency Exclusion.
The claimants argued that the Insolvency Exclusion was ambiguous in its scope and could not have been intended to exclude liability for the insolvency of the two security issuers. They argued that the Insolvency Exclusion should be interpreted in accordance with the narrow rules of construction for ordinary contractual exclusion clauses, with any ambiguity arising to be construed against QBE (as the party seeking to rely on the clause).
Contrary to the claimants’ arguments, the Judge found that it was not necessary for the narrow rules of construction of exemption provisions in ordinary contracts to be applied to the Insolvency Exclusion. He held that the position in respect of insurance contracts is “wholly distinguishable” from ordinary exclusion of liability clauses on the basis that they are designed to define the scope of the relevant insurance policy, as opposed to excluding, restricting or limiting the insurer’s primary liability.
When interpreting insurance exclusions, the judge said that the Court must adopt an approach “sensitive to [the clause’s] purpose and place” within the policy, although in the case of genuine ambiguity the Courts would be entitled to apply a narrower construction of the relevant clause.
In this case, the judge accepted QBE’s submission that the policy was drafted with intentional caution so as to limit the scope of cover in the context of the volatile economic climate following the financial crisis of 2008. He observed that the language of the Insolvency Exclusion was relatively clear in excluding from cover any claim, liability or loss “arising out of or relating directly or indirectly to the insolvency or bankruptcy” of Target or any other third party with whom it had arranged “directly or indirectly” any insurance, investment or deposit. The causative effect of the relevant insolvency therefore “need not be as strong or efficient so as to constitute a proximate cause” of the claimant’s loss. On the facts, the Judge determined that the Insolvency Exclusion was engaged because the claim, liability or loss associated with the two investment products was caused by the insolvency of the issuers.
As an aside, the judge confirmed that it is now well established in case law that an insurer is not necessarily bound by a Court judgment determining the insured’s liability to a third party, on the basis that the insurer may either challenge the decision on the insured’s liability as a matter of fact, or question whether the liability falls within the scope of cover. However, he did set out two situations in which an insurer would unavoidably be bound by a judgment obtained against the insured, namely where (1) the policy contains an express or implied term requiring the insurer to be bound; or (2) the insurer is a party or otherwise privy to the proceedings resulting in the judgment.
It is notable that in this case the Court deemed it appropriate to dismiss the claim at summary judgment, without the need for full trial. In the context of a series of recent cases considering similar issues, the decision reinforces the view that the Court is willingly prepared to approve the broad construction of exclusion clauses within insurance policies when assessing claims brought against insurers under the 1930 Act.
It remains to be seen whether the decision will lead to more insurers seeking to rely on broad exclusion clauses to limit the scope of their policy cover and their potential indemnity liability under the 1930 Act.
Practical considerations regarding claims against an insolvent defendant
The decision in Crowden v QBE highlights one of the many factors which should be considered when critically assessing the merits of a potential claim, namely the possibility for recovering damages (and costs) from the defendant.
In cases where the defendant is insolvent or otherwise unlikely to meet its obligations if the claim is successful, it may be possible for a claim to be brought against the defendant’s insurer under the 1930 Act (as was the case in Crowden v QBE) or the Third Parties (Rights against Insurers) Acts 2010 (the “2010 Act”). Both Acts have the effect of transferring the defendant’s rights under the policy to the claimant, who will then be able to bring their claim direct against the insurer.
The 2010 Act came into force on 1 August 2016 and applies to all matters where the insured either entered insolvency proceedings or incurred liability to a third party after 1 August 2016 (the 1930 Act continues to apply to earlier matters). Where the 2010 Act applies, it is easier to bring a claim direct against an insolvent defendant’s insurer because there is no longer a requirement for the insolvent defendant to be restored to the Register of Companies in order to be added to the proceedings.
The Crowden v QBE judgment emphasises the value in closely reviewing the terms of the defendant’s insurance policy before deciding whether to bring a claim. Where the defendant is insolvent, it may be possible to obtain a copy of the policy from its officeholders or from the insurer direct. In a recent case where the defendant’s insurer refused to provide a copy of the insurance policy, the claimant was granted permission by the High Court to commence proceedings against the insurer without establishing whether the claim was covered under the policy (BAE Systems Pension Funds Trustees Limited v RSA  EWHC 2082 (TCC)). It should be noted, however, that a claimant has no express right to obtain a copy of the insurance policy where the defendant is still technically solvent, even if arguably unable to pay ( EWHC 876 (TCC)).