A summary of recent developments in insurance, reinsurance and litigation law.
Euro Pools v RSA: Judge considers various issues arising from a claim under an insurance policy including notification and limitation
The claimant, a company which specialised in the installation and fitting of swimming pools, notified various problems under its 2006/2007 policy with the defendant insurer and then raised further problems during the 2007/8 policy (written by the same insurer). Several issues fell to be considered by the judge in this case, including the following:
(1) What was the scope of the notification under the 2006/7 policy and was there a separate valid notification under the 2007/8 policy? The policy in question required notification as soon as possible "after becoming aware of circumstances… which might reasonably be expected to produce a Claim". The total loss in this case exceeded the policy limit of £5 million for both years and so the insurer sought to argue that all the losses fell within the 2006/7 policy year. Much of this issue turned on the particular facts of the case, but Moulder J referred to the earlier decision of Kajima v The Underwriter (see Weekly Update 05/08) and emphasised the following two points in relation to notifications:
(a) It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification. Here, although certain problems were known, and notified, by the insured during the 2006/7 policy, other problems came to light during the 2007/8 policy and those problems were validly notified only in May 2008 under the second policy.
(b) There must be some causal, an opposed to some coincidental, link between the notified circumstances and the later claim/problem for all the loss to fall within the same policy year. No such causal connection was found to exist here between the different problems.
(2) Were costs incurred in respect of a claim brought against a third party covered by the policy?
The policy provided that the insurer "shall be entitled to … prosecute in the name of the Insured for its own benefit any Claim" and a dispute arose as to whether there was an implied obligation for the insurer to pay the insured's costs and expenses for any such claim.
The judge noted that the clause was not limited to subrogation claims once the insurer has paid out under the policy. She also found that proceedings against a third party (brought in the insured's name but not wholly for its benefit) had been approved by the insurer. However, she did not believe that it was necessary to imply a term that the insurer would indemnify the claimant for any costs and expenses which the insured incurred. However, that was only because "there was no reason why the [insured] should incur any costs and expenses if the [insurer] took proceedings in the name of the [insured]… Payment could be made directly by the [insurer] of costs and expenses and therefore there is no necessity to imply a term that the [insurer] would indemnify the [insured] for costs and expenses the [insured] incurred".
Although she did find that there was an implied term that the insurer would indemnify the insured in respect of any adverse costs orders against the insured, that was only for so long as the insurer was prosecuting the claim. The insured excluded the insurer from the conduct of the proceedings after August 2013. Accordingly adverse costs orders made after that date were not covered, even if they related to costs incurred before that date.
(3) The policy contained the following clause: "The Company will indemnify the Insured against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this Insurance". When does limitation for a claim for such mitigation expenses start to run? The judge held that, although there was no direct authority on the point, a mitigation of loss clause is a third party financial loss clause, with the result that "the insurer has agreed to hold the assured harmless against a specified loss or expense and once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense. Accordingly the right to an indemnity (and the cause of action) arises immediately the expense is incurred to mitigate a loss or potential loss".
However, where that right to be indemnified arose more than 6 years before the issue of proceedings (ie here before 28th January 2010), it would be time barred. This then led to a further discussion of whether the claimant was entitled to allocate lump sum interim payments from the insurer on account of its costs and expenses in chronological order (ie paying the claimant's earliest costs and expenses first), in order to ascertain what the insurer had paid so far in satisfaction of its obligation to indemnify the insured. The judge concluded (by analogy with an allocation case) that "if the appropriation is made bona fide and without collusion, the claimant has a choice as to how to appropriate the monies received between the different claims".
However, the claimant had not established a right to appropriate payments to a time barred debt. So payments made after 28th January 2010 had to be divided pro rata between expenses incurred before and expenses incurred after that date (and payments made after 28th January 2010 could not be treated as discharging only obligations after that date).
(4) On the facts, the judge rejected an argument that the insurer had agreed to indemnify the insured for the reasonable costs incurred on mitigation works, irrespective of the policy limit, provided those works were approved by the insurer's agent.
(5) On quantum, the parties disputed how much could be claimed by the insured for its overheads for mitigation work carried out by the insured's employees. The judge held that only overheads actually incurred could be claimed but rejected an argument that works unrelated to the pool repairs should not be allowed: "I accept the evidence of [the insured's expert] that overheads need only relate to the proper functioning of the business and should only be excluded if they were unrelated to the ordinary running of the business". In order to ascertain the amount of the overheads, it was held to be appropriate to take an average over the relevant period.
The judge also rejected an argument that because the Mitigation of Losses clause provided that the insurer "shall not be liable in respect of… the Insured's Contribution", that contribution should be deducted from the limit of indemnity. She found the policy wording to be ambiguous on this point, and if the insurer had wanted this result, it should have expressed it in plain terms.
COMMENT: Reference was made in this case to Teal Assurance v WR Berkley (see Weekly Update 29/13) in which it was noted by the Supreme Court that a freedom to adjust the order of payment of claims "cannot in the present context readily be reconciled with the basic philosophy that insurance covers risks lying outside an insured's own deliberate control". However, that case differed from this one in that the insured here was not seeking to control the order in which claims were presented to insurers: it was instead seeking to control the order in which payments received from the insurers were allocated in order to ensure that the overall liability of the insurer was not reduced (ie because allocations were made to the time-barred elements of the claim first). The insured was said to be entitled to control that, save that it could not allocate payments to time-barred expenses.
The judge's comments on notification are also interesting. It is possible to notify a "can of worms"-type situation (ie awareness of a general problem), but here, very broadly, at the time of the first notification the insured was aware of general problems with one aspect of the swimming pool design but only became aware of problems with another aspect when it introduced changes to rectify the first problem. The decision therefore highlights how fact-sensitive the issue of notification can be.
Contact (Print and Packaging) v Travelers Insurance: Judge comments on issues of proof and duty to warn in a property and BI insurance claim case
This case involved a claim under a combined insurance policy . The claimant insured sought payment under the physical damage and business interruption sections of the policy following the failure of a press at its print production facility. Much of the case turns on the particular factual circumstances but the judge made some comments which are of more general interest, including the following:
(1) Following a sale of the insured's business, the insured did not take steps to retain access to relevant historic data for the purpose of the claim. The judge concluded that "In those circumstances the view I take is that where the claimant might reasonably have been expected to provide more documentation in relation to a particular issue but has not done so I should not give it the benefit of the doubt in relation to that issue in circumstances where it has failed to take proper steps to ensure that relevant electronic information was preserved for the purposes of this claim". Similar issues arose because the insured did not call evidence from a number of witnesses who might have provided relevant evidence. Although he declined to draw an adverse inference about that (in part because the insurer had not notified the insured that it would raise this issue at trial), the judge held that he would not give the insured the benefit of the doubt where the insured might reasonably have been expected to at least take some steps to obtain a witness statement on a particular issue.
(2) One issue in the case was whether the claim was caused by subsidence (which was covered under the policy) or settlement (which was excluded). The policy contained no express definition of subsidence or settlement, so the judge considered the Oxford English Dictionary definitions for these words, as well as the experts' reports (which in turn referred to an Institution of Structural Engineers document) and the FOS's definitions. Referring to an argument raised by the insurer, the judge also commented that "An ordinary person would be surprised if the meaning of the same words in two clauses of the same insurance policy could differ significantly solely depending on whether the introductory “the” is present or absent".
(3) Given that the insured was seeking to argue that its claim fell within an exception to an exclusion, the judge held that it had the burden of proving that the damage resulted from a non-excluded cause. The claimant accepted that it was unable to adduce any direct evidence which conclusively proved the cause of the failure to be subsidence. The judge accepted, though, that he could here find the case proven on the basis of circumstantial evidence.
(4) Both sides criticised each other for failing to undertake further investigations of the cause of the damage. In relation to the insurer, the judge found that its advisers knew that these investigations could be carried out and might produce relevant information and that "The documents do not record why it chose not to undertake any further investigations or why it did not suggest to the claimant that since it was not going to do so the claimant might wish to do so". Although the judge thought that it was "deeply unattractive" for the insurer to now rely on the insured's lack of investigation and failure to prove an insured cause of the loss, he went on to observe that "The difficulty however in terms of the law is that it cannot be said that the defendant in its capacity as insurer owed some positive duty to investigate further or to warn the claimant that if it did not do so the defendant might seek to rely on the absence of material evidence should there be a subsequent dispute. There is no basis, pleaded or argued or otherwise, for treating the defendant as in some way estopped from relying on the absence of information in this respect. There is no basis for drawing adverse evidential inferences against the defendant".
Although the judge went on to find that the property damage claim succeeded in full, the business interruption claim largely failed, in part because the business had been in long-term decline for reasons unconnected to the failure of the press.
COMMENT: The judge's comments summarised in para (4) above might be contrasted with the recent decision of the Court of Appeal in Ted Baker v AXA (see Weekly Update 30/17), in which it was held that the insurer had been under a duty to warn in circumstances where it had led the insured to believe that there had been no breach of a condition precedent (at a time when the breach could have been rectified). However, there was no reference to Ted Baker in this case, and here the insurer was aware of a failure to investigate (and so a potential failure by the insured to prove a covered loss – although there ended up being no such failure), but had not done anything to give a misleading impression to the insured at the time that there was no problem. It is not clear whether Ted Baker was cited by the insured though – there is no discussion of it in this judgment.
Recovery Partners v Rukhadze: Court considers whether deed of indemnity from insurer is adequate security for costs
When the defendants intimated that they were going to make a security for costs application, the claimants' solicitors offered to give undertakings to hold sums of money as security for certain costs. The defendants accepted this. However, the claimants subsequently wanted to exchange those undertakings for a Deed of Indemnity provided by one of the claimants' ATE insurers. The defendants objected and the claimants sought an order from the court. Two issues arose:
(1) Was the Deed of Indemnity an acceptable form of security?
If it was, there was no need to consider the ATE policy. The judge held that, on the facts, it did provide adequate security. An offer to endorse the policy to the effect that monies paid out under the policy would be paid to the defendants' solicitors avoided the possibility that the insurer might first pay the claimants under the policy and thus reduce its liability under the deed (which would have created the possibility that the defendants would then have had to pursue the claimants for their costs).
(2) Should the undertakings be released in favour of the Deed of Indemnity?
The judge held that there had to be a material change in circumstances in order to engage the court's discretion to exchange the security. He was doubtful that there had been a material change here (because it was not clear whether the deed and policy could have been offered at an earlier stage), but the defendants were happy to proceed on the assumption that there had been a material change.
There is a general principle applicable to security for costs applications that security should be provided in the way least onerous to the provider and the judge said it was not enough for the defendants merely to show that the new security being offered was not as good as the existing security ("A London solicitor's undertaking backed by cash is at the very top of the range of types of security for cost"). The judge also took into account how long the old security had been in place and the explanation for the claimants' change of position. However, the most important factor here was the fact that the claimants had not suggested that they would suffer hardship or prejudice if the existing security were to stay in place.
Accordingly, the application was dismissed.
A v B: Judge finds party has not lost right to challenge commencement of two arbitration by one arbitration notice to the LCIA
"A" and "B" entered into two contracts with each other, each contract providing for LCIA arbitration. When a dispute arose in relation to both contracts, "B" commenced LCIA arbitration by sending a single Request for Arbitration.
It was accepted by the parties that two arbitrations should have been commenced. However, "B" argued that it is possible to commence two arbitrations by a single request and referred to the decision of Easybiz Investments v Sinograin ("The Biz") , in which one notice commenced 10 separate arbitrations. Phillips J distinguished that decision on the basis that, in that case, no arbitral rules were applicable and section 14(4) of the Arbitration Act 1996 ("the Act") (which provides for the service of a notice to commence arbitration) had to be interpreted widely and its requirements would generally be satisfied if the notice sufficiently identified the dispute to which it related and made it clear that the person giving notice was intending to refer the dispute to arbitration.
Here, the parties had agreed to LCIA arbitration, and an interpretation of the LCIA Rules led the judge to conclude that the written request for arbitration sent to the Registrar of the LCIA was invalid because it had been an attempt to refer separate disputes to a single arbitration.
Had "A" lost its right to object to the tribunal's jurisdiction? The judge held that the starting point for this issue was a consideration of sections 31 and 73 of the Act because they are mandatory and because it was "highly unlikely that the LCIA Rules were intended to have an effect which materially diverges from such provisions". Section 31 requires that an objection to the tribunal's jurisdiction must be raised no later than the time the objecting party "takes the first step in the proceedings" and that condition was met here.
The LCIA Rules are stricter, in that they require that an objection is raised "as soon as possible" and in any event no later than the time for the Statement of Defence. Referring to AIG v Faraday, (see Weekly Update 34/06), in which similar wording was used in a reinsurance notification clause, the judge concluded that notification by the latest time provided for in the clause (here, the time for the Statement of Defence) was valid, and the introduction of a new and stricter requirement of notification "as soon as possible" would have required express wording to that effect.
Although not required to decide the point, the judge noted that section 73 of the Act (loss of the right to object to jurisdiction) provides for the most extended time limit of all, and commented that (if it had been necessary), he would have held that "It would seem to follow that if the LCIA Rules were construed as imposing a stricter time limit than section 31(1), the limit in that section (and in section 73(1)) would take precedence".
LOCOG v Sinfield: Judge allows appeal against order awarding the claimant personal injury damages
The defendant appealed against a finding that the claimant was entitled to damages for personal injuries, on the basis that the claimant had been dishonest. In Fairclough Homes v Summer (see Weekly Update 23/12), the Supreme Court held that, although the court had jurisdiction to strike out a statement of case under CPR 3.4(2) for abuse of process, it should do so only "in very exceptional circumstances". After that decision, Parliament brought in section 57 of the Criminal Justice and Courts Act 2015, which provides that a claim for personal injury damages must be dismissed if it is found that the claimant is entitled to damages but the court is satisfied, on the balance of probabilities, that "the claimant has been fundamentally dishonest". However, the claim will not be dismissed if the claimant would suffer "substantial injustice".
Knowles J has now held that a claimant should be found to be "fundamentally dishonest" if it is proven that he/she acted dishonestly and that "he has thus substantially affected the presentation of his case, either in respects of liability or quantum, in a way which potentially adversely affected the defendant in a significant way, judged in the context of the particular facts and circumstances of the litigation". By "substantially affected" he meant "going to the root" of the claim, and by potentially affecting the defendant in the context of the case "I mean (for example) that a dishonest claim for special damages of £9000 in a claim worth £10 000 in its entirety should be judged to significantly affect the defendant's interests, notwithstanding that the defendant may be a multi-billion pound insurer to whom £9000 is a trivial sum".
On the facts of the case, the judge allowed the appeal and dismissed the claim for damages. He noted that "substantial injustice" to the claimant must mean more than the mere fact the claimant will otherwise lose damages to which he was genuinely entitled: "Parliament plainly intended that sub-section to be punitive and to operate as a deterrent. It was enacted so that claimants who are tempted to dishonestly exaggerate their claims know that if they do, and they are discovered, the default position is that they will lose their entire damages. It seems to me that it would effectively neuter the effect of s 57(3) if dishonest claimants were able to retain their 'honest' damages by pleading substantial injustice on the basis of the loss of those damages per se. What will generally be required is some substantial injustice arising as a consequence of the loss of those damages".
Ward v Hutt: Judge decides whether claimant can bring a new claim after discontinuance
CPR r38.7 provides that "A claimant who discontinues a claim needs the permission of the court to make another claim against the same defendant if (a) he discontinued the claim after the defendant filed a defence...." Matthew HHJ held that the defendant will be the same even if he/she is sued in a different capacity in the proposed second claim.
In this case, the claimant had discontinued its claim and then issued a new one before seeking the permission of the court. Was it a pre-condition under the rules that permission had to be sought in advance in order for the new proceedings to be valid? The judge accepted that a failure to obtain permission was an irregularity which made the claim liable to be struck out. He went on to hold that the second claim should be struck out here because the limitation period had now expired: "the claimant who has previously discontinued a sufficiently similar claim within CPR rule 38.7, and who then issues without permission before the limitation period has expired should not be treated more favourably than the claimant who does not issue first, but seeks permission only after the limitation period has expired. In both cases, permission should normally be refused".