An extract from The Insurance Disputes Law Review, 4th Edition

Recent cases

There have been a number of significant cases in the English courts since the previous edition. Perhaps the most high-profile case was the Supreme Court's decision on whether the most common forms of non-damage business interruption policies provided cover for businesses interrupted by the covid-19 pandemic. The Supreme Court has also been called on to consider non-party costs orders against insurers and the application of the Brussels Regulation (Recast) 1215/2012 (the Recast Brussels Regulation), and the Court of Appeal considered the statutory provisions governing the transfer of insurance business for the first time in the 150-year history of those provisions. We summarise below these and other key recent cases, including important decisions on English law in areas including the interpretation of policy terms, non-disclosure, the quantum of an insured's loss, subrogation, jurisdiction, and Brexit and retained EU law. We also cover a case in the Scottish Appeal Court, which is the first case in the UK to consider aspects of the new duty of fair presentation of the risk in the Insurance Act 2015.

i Business interruption and covid-19

While business interruption cover is typically bought by policyholders as an extension to property damage policies, and primarily responds in cases of property damage, non-damage extensions to cover also exist in the market providing cover for losses caused by disease or the response of public authorities to disease. There has been a deluge of claims against such policies as a result of covid-19 and the national lockdowns in the UK, and considerable uncertainty as to whether such policies respond. The key legal issues to resolve that uncertainty have now been addressed by the Supreme Court in the first-ever case using the Financial Markets Test Case Scheme (the Test Case) under the Civil Procedure Rules (the CPR). The Test Case was brought by the regulator, the Financial Conduct Authority, on behalf of policyholders and with the consent and cooperation of eight insurers seeking to promote greater clarity on the legal issues arising in certain policies thought to be representative of the types of wordings available in the market. The Test Case commenced during the first lockdown in the UK in June 2020 and was heard remotely over two weeks by the High Court in late July 2020. There were two main types of non-damage business interruption coverage clauses at issue:

  1. disease clauses that insured loss caused by an occurrence of a notifiable disease within a specified area around the insured's business (typically a 25-mile or one-mile radius); and
  2. hybrid clauses that insured loss caused by specific consequences of a notifiable disease – typically an inability to use, enforced closure of or prevention of access to the insured's business premises as a result of government action directed at the business.

The High Court gave judgment on 15 September 2020 and much of that judgment was appealed by both the FCA and six of the eight insurers directly to the Supreme Court under the 'leapfrog' procedure (which enables an appeal in exceptional circumstances to bypass the Court of Appeal). The Supreme Court heard the appeals over four days in mid-November 2020 and gave judgment on 15 January 2021.

Both the High Court and the Supreme Court held that the majority (although not all) of the clauses at issue provided cover for business interruption losses resulting from the covid-19 pandemic, and the judgments determined the meaning of concepts such as 'notifiable disease', 'infectious disease', 'inability to use', 'prevention of access', 'interruption' and 'restriction imposed by a public authority', on which the scope of the cover in the representative clauses at issue turned.

The Test Case also raised fundamental issues as to the application of the 'but for' causation test in cases of concurrent, competing causes. The disease clauses raised the question of whether, when the loss was caused by a government response to a pandemic (i.e., to the disease everywhere), the cases of the disease within the relevant specified area that are insured can be said to be a cause of the loss. The hybrid clauses raised questions as to whether the insured suffered loss (as a result of the particular type of government action insured against) when the same loss would also be likely to be caused by other government actions (such as the restrictions on freedom of movement) or the public response to the virus, which were not insured. Both these questions turned on how the but-for test should – or should not – be applied where there are two independent causes of the relevant loss, neither of which alone would satisfy the but-for test.

The Supreme Court's answer to these questions lay in the doctrine of proximate causation – a rule of English insurance law that requires the insured risk to have been the dominant or effective cause of the loss but not necessarily the only cause. Previous cases6 had established that where two causes are sufficiently interlinked and of sufficiently equal efficacy such that one cannot be distinguished as the sole proximate cause, and if one is insured and one uninsured – but not excluded, the policy covers the entirety of the loss. Conversely, if one cause is insured and the other excluded, then the policy does not cover any of the loss.

The line of reasoning from these cases had previously only been applied in cases of interdependent concurrent causes – causes where each alone is necessary but not sufficient to bring about the loss (and thus both satisfy the but-for test). The Supreme Court extended the application of that line of reasoning to instances of independent concurrent causes – although neither cause alone satisfied the but-for test. Thus, in relation to the two types of clause, it held that:

  1. cases of the disease within the relevant radius should be treated as a concurrent proximate cause with all cases of the disease outside the radius – and so the policyholder should recover all its loss; and
  2. the government action closing the insured's premises was held to be a concurrent proximate cause with all other government and public actions in response to the virus, and so the policyholder should recover all its loss.

In addition to the FCA Test Case, there have already been two other significant decisions in this area and at least three further cases are currently before the High Court.7 In TKC London Ltd v. Allianz Insurance Plc,8 TKC sought to claim under its standard form business interruption policy, which was written on an all risks basis but did not contain any disease clause or relevant denial of access extension of the type in the Test Case. The policy provided cover for 'business interruption by any event', with 'event' defined as 'accidental loss or destruction of or damage to property'. The issue for the court was whether TKC could claim under the policy on the basis that the enforced closure and loss of use of a café constituted an insured 'loss of property'. The court accepted the insurer's submission that the policy did not respond to mere temporary loss of use and was only triggered by the physical loss of property. Neither the losses resulting from the business interruption nor the loss or destruction of stock as a result of the forced closure were recoverable under the terms of the policy.

Similarly, in Rockliffe Hall v. Travelers Insurance Company Ltd,9 a golf course and hotel sought to recover losses resulting from covid-19 under its business interruption insurance cover. Unlike the notifiable-disease clauses considered in the FCA Test Case, Rockliffe's policy provided cover for business interruption caused by an outbreak of any of 34 specified 'infectious diseases' (which did not include covid-19). The court held that the reasonable person would have understood the contracting parties to have intended the list of diseases to be exhaustive or closed and that:

while a 'catch-all' 'Notifiable Disease' clause is (depending on the wording) likely to be inclusive of diseases which are added (after the time of contracting) to the statutory list of 'Notifiable Diseases', a defined list of diseases is not.10
ii Part VII transfers

Part VII of the FSMA provides a court-sanctioned procedure for the legal transfer of insurance policies between insurers. The court is required to consider a report on the viability of the transfer by an independent expert, along with submissions from the FCA and PRA and any objections made by policyholders (or any other person who alleges they are adversely affected by the proposed transfer). The rejection by the High Court11 of the proposed transfer of approximately £12.9 billion in annuity liabilities from the Prudential Assurance Company Limited to Rothesay Life in 2019 was thought to signal a more interventionist approach to Part VII applications than the industry had previously seen, with a greater weight being given to the subjective expectations and concerns of policyholders. However, following Prudential and Rothesay's successful appeal and the Court of Appeal's12 restatement of the principles for the exercise of the court's discretion, the focus remains the objective question of whether the transfer will have a material adverse effect on the receipt by policyholders of their benefits.

Several recent applications for sanction of a Part VII transfer have also had to consider issues raised by Brexit. Courts have frequently found themselves in the situation of having to balance:

the inevitable prejudice to a large body of EEA policyholders of their policies not being able to be serviced or paid after the end of 2020 if the scheme were not to be sanctioned, against any potential risk of prejudice to individual policyholders or reinsurers under the scheme's terms.13

In two recent cases, insurers have transferred policies to businesses in the EU, either to another business14 or to a subsidiary located outside the UK.15 While the courts have still been careful to consider the interests of policyholders, they have shown that they are prepared to approve a scheme despite some elements of prejudice to policyholders where the transfer is in response to an external circumstance, such as Brexit.16

iii Interpretation of policy terms

The terms of an English law-governed insurance policy are to be interpreted in accordance with the ordinary principles of the English law of contractual interpretation, which requires the words used in the contract to be given the meaning they would convey to a reasonable person with all the background knowledge available to the parties. Those principles were most recently restated in Wood v. Capita,17 which emphasised that contractual interpretation is a unitary exercise in which the court must engage in an iterative process of balancing the indications given by the factual background, including commercial or business common sense, and a close examination of the relevant language.

Where parties have used unambiguous language, the court must apply that language,18 but the English law of contractual interpretation gives the English courts the flexibility to resolve cases where a policy term cannot sensibly be given its literal meaning. In Hongfa Shipping Co Ltd v. MS Amline Marine NV,19 the insurers denied the charterers' insurance claim arising from damage that had occurred to cargo on board the vessel that they had chartered. The insurers argued that a policy exclusion applied, which provided that there would be no entitlement to recovery where the claim or dispute arose in circumstances where:

the Assured recklessly or intentionally employed or caused the Insured Vessel to be employed in an unlawful or unduly hazardous or improper trade or voyage or that the Cargo carried and/or the method of its securing or unsecuring, carriage, loading, discharging, inspection, maintenance, treatment or lack thereof during the voyage was unduly hazardous, patently inappropriate or improper

The issue for the Commercial Court was whether the 'recklessly or intentionally' qualification in the exclusion applied only to the employment of the insured vessel (as the insurer contended) or also applied to the remainder of the clause, including the carrying and securing of the cargo in an unduly hazardous manner (as the charterer contended). The Court considered that the clause at issue was 'incoherent',20 and so recourse was to be had to 'the terms of the document as a whole, its commercial purpose and the context in which the policy was written as well as to commercial common sense' in reaching the conclusion that the words 'recklessly or intentionally' were not restricted to the first part of the clause. Accepting the charterer's arguments, it held that the commercial purpose of the contract was to provide the charterer with cover for damage to a vessel and cargo; there was no commercial logic in treating losses in an unlawful or inappropriate voyage more narrowly than if the cargo or method of discharge was unduly hazardous, patently inappropriate or improper.21

Conversely, in ABN Amro Bank NV v. Royal & Sun Alliance Plc,22 it was emphasised that commercial common sense should not be invoked retrospectively to rewrite policy terms if the wording of the policy is clear.23 The fact that the inclusion of a transaction premium clause in the policy was unusual did not mean that the background should be considered, given that the language of the clause was sufficiently clear. The insurers' argument that it would make no commercial sense for a marine cargo underwriter to offer credit risk cover did not outweigh the construction of words that the parties had chosen to use.

In interpreting insurance policies, English courts may imply terms into the policy that are not expressly included in its wording. In UK Acorn Finance Limited v. Markel (UK) Ltd,24 an unintentional non-disclosure clause made the insurer the decision-maker in respect of the question of whether any non-disclosure was innocent. Applying Braganza v. BP Shipping Ltd,25 the court held that 'neither party can be treated sensibly as having intended to permit the defendant to make decisions that were arbitrary, capricious or irrational',26 and the clause was therefore held to be subject to an implied term that the insurer would not exercise its decision-making powers under the clause in such a manner.

Hiscox Dedicated Corporate Member v. Weyerhaeser Co27 also illustrates the importance of consistency in policies within a tower of insurance when it comes to dispute resolution clauses. The service of suit clause in the excess policy in question was different from that in the lead policy, but the choice of law and jurisdiction clause was stated as being 'as per the underlying policy'. It was held that using a different service of suit clause did not mean that the parties did not intend to incorporate the wording from the underlying policy.

iv Non-disclosure and fair presentation of the risk

The Court of Appeal held in Zurich Insurance Plc v. Niramax Group Ltd28 that it was necessary for the insurer to show that the non-disclosure was an effective cause of the underwriter writing the insurance on less onerous terms than would have been the case had the disclosure been made, to avoid the policy. If that standard is not fulfilled, 'it is not sufficient merely to establish that the less onerous terms would not have been imposed but for the non-disclosure'29 (emphasis added). It was noted, by reference to Financial Conduct Authority v. Arch Insurance (UK) Ltd,30 that the effective cause test can exceptionally be satisfied where the but-for test is not. On the facts, the insurer had taken no account of the insured's attitude to risk, which was what the undisclosed facts consisted in, and so the non-disclosure could not have caused the renewal being written on cheaper terms than if the disclosure had been made.

Notably, Zurich Insurance Plc v. Niramax dealt with a contract pre-dating the Insurance Act 2015, which replaced the insured's duty to disclose all known material facts about the risk to be insured with a new duty to make a fair presentation of that risk, and it remains to be seen whether the same result would be reached under the new regime. Section 8(1) of the Insurance Act 2015 provides that:

The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that but for the breach, the insurer –
  1. would not have entered into the contract of insurance at all, or
  2. would have done so only on different terms. (emphasis added)

It could therefore be open to insurers to contend that the but-for language of Section 8 supports a different approach being taken from that of the Court of Appeal in Zurich Insurance Plc v. Niramax. However, the Explanatory Notes to Section 8 state that it 'reflects the current law on inducement following the decision in Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd', which was relied on by the Court of Appeal in reaching its decision in Zurich Insurance Plc v. Niramax.

In an appeal to the Scottish Appeal Court,31 which upheld the first-instance decision of the first case to be decided under the Insurance Act 2015, it was held that the Insurance Act 2015 did not alter the law's position on waiver by the insurer of the duty of disclosure. The judge at first instance had 'held that the Insurance Act 2015 had shifted the burden of identifying what is material to the insured',32 but the appeal court stated that there was no basis for inferring any legislative intention of this kind from the Insurance Act 2015. Section 3(1) imposes a duty to make to the insurer a fair presentation of the risk before the contract is entered into, but an insurer can waive this duty in the ways established in the case law preceding the Insurance Act 2015.

v Quantum

In Endurance Corporate Capital Limited v. Sartex Quilts & Textiles Limited,33 the Court of Appeal confirmed that an insured is generally entitled to be indemnified by the insurer for property damage on a reinstatement basis, regardless of whether the insurer intended to reinstate the property after the occurrence of the insured event. It was common ground that no costs of reinstatement had been incurred, but the insurer's argument – that it was essential for the insured to show that it had a genuine, fixed and settled intention to reinstate the property if it wanted to be indemnified on the reinstatement basis – was unanimously rejected.

vi Subrogation

Subrogation enables an insurer to recoup all or some of the money from a third party that caused or contributed to a loss for which the insurer has indemnified the insured. In Arag Plc v. Jones,34 two co-tenants brought a claim for disrepair against their landlord. The co-tenants' solicitors took out 'after the event' insurance, but only in the name of one of the co-tenants. When their claim failed and they were ordered to pay the landlord's costs, the insurer paid these costs and then pursued the uninsured tenant for a 50 per cent contribution. It was held that the insured tenant had discharged her own costs liability by means of the indemnity and the insurer was therefore entitled to be subrogated to the right of the 50 per cent contribution.

The Supreme Court has also provided clarity on when an insurer might expect to face third-party costs orders in Travelers Insurance Company Ltd v. XYZ.35 Travelers had funded the defence of its insolvent insured against over 600 claims for the supply of defective silicone implants. At a late stage in the proceedings, the insured disclosed that two-thirds of the claimants' claims were in fact uninsured. Travellers agreed to pay the costs of insured claimants only and the uninsured claimants sought a third-party costs order.

The Supreme Court confirmed that there are two bases upon which an insurer might be subject to a third-party costs order: by 'intermeddling' or 'becoming the real defendant'.36 The principles applying to the 'real defendant' basis were set out by the Court of Appeal in TGA Chapman Ltd v. Christopher.37 However, the Supreme Court held that those principles only applied where insurance exists but some part of the claim is outside the scope of cover. Where claims are wholly uninsured, the principles do not apply. A third-party costs order can be made on the intermeddling basis if it is shown that the insurer has engaged in unjustified intermeddling in litigation to which it was not a party and that the insurer 'caused the incurring by the claimants of the relevant costs'.38 The Supreme Court held that Travelers had a legitimate interest in the defence of the insured claims and its involvement in the litigation was a natural result of its status as an insurer of some of the claims and therefore did not amount to unjustified intermeddling.

vii Asbestos litigation

In a decision that only applies to policies underwritten before 1997, the High Court held in R (Aviva Insurance Limited) v. Secretary of State for Work and Pensions39 that the Secretary of State's scheme for the recovery of state benefits from insurers in asbestos-related claims was incompatible with the insurers' right under Article 1 of the First Protocol of the European Convention on Human Rights. The Social Security (Recovery of Benefits) Act 1997 (the 1997 Act) and regulations made under it require a negligent employer (and, by extension, their insurer) in personal injury litigation to reimburse the Compensation Recovery Unit in respect of benefits received by claimants. The Court found that, to the extent that it requires payments to the state that do not correspond to the insured's real contribution to the injury, the 1997 Act does not strike a fair balance between the rights of the state and those of the claimants. However, the UK government obtained permission to appeal in January 2021, so it remains to be seen whether the Court of Appeal's decision will stand.

viii Jurisdiction

Two recent cases have considered the application of the Recast Brussels Regulation in matters 'relating to insurance'.

In Aspen Underwriting Ltd v. Credit Europe Bank NV,40 a marine insurer sued a Dutch-domiciled assignee of, and loss payee under, the issued marine insurance policy, for misrepresentation in relation to a settlement of a claim under the policy between the insurer and the insured assignor. The Supreme Court held that the insurer could not rely on the English court jurisdiction clauses in either the policy or the settlement agreement to establish jurisdiction in England, as the Dutch assignee was not a party to nor seeking to assert third-party rights under either contract. Overturning the decision of the Court of Appeal, the Supreme Court also held that the English courts had no jurisdiction over the claims. While the Supreme Court agreed with the Court of Appeal that the dispute was a 'matter relating to insurance' within the meaning of Chapter II of Section 3 of the Recast Brussels Regulation that would otherwise require the insurer to sue the assignee in the Netherlands, it disagreed with the Court of Appeal's finding that, as professional ship financier, the assignee was not within a class of persons that merited the protection of those special rules such as to preclude the English court taking jurisdiction. Instead, the Supreme Court found that a person categorised as a policyholder, insured or beneficiary is entitled to the protection of Section 3 of the Regulation, whatever its economic power relative to the insurer.

In Cole and Others v. IVI Madrid SL and Zurich Insurance Plc,41 the High Court has referred several questions on Article 13(3) of the Recast Brussels Regulation to the Court of Justice of the European Union (the CJEU). The parties agreed that the English courts had jurisdiction to hear the direct claims against the insurer, but it was not agreed whether Article 13(3), which states that 'if the law governing such direct actions provides that the policy holder or the insured may be joined as a party to the action, the same court shall have jurisdiction over them', allowed the claimants to sue the insured (a Spanish company) in England as a claim 'parasitic' upon the claim against the insurers brought under Article 13(2). In particular, the questions referred are:

Is it a requirement of Article 13(3) of the recast Judgments Regulation 1215/20121 that the cause of action on which the injured person relies in asserting a claim against the policy holder/insured involves a matter relating to insurance?
If the answer to (a) is yes, is the fact that the claim which the injured person seeks to bring against the policy holder/insured arises out of the same facts as, and is being brought in the same action as the direct claim brought against the insurer sufficient to justify a conclusion that the injured person's claim is a matter relating to insurance?
If the answer to (a) is no, is it sufficient that the joining of the insured to the direct action against the insurer is allowed by the law governing the direct action against the insurer?

This has not yet been considered by the CJEU42 at the time of writing.

ix Brexit and retained EU law

Only three months after the UK's exit from the EU, the High Court was faced with an issue caused by the new lack of ability to make referrals to the CJEU. The European Union (Withdrawal) Act 2018 converted EU law as it previously applied into domestic law and, under Section 6, English courts are required to interpret retained EU law in accordance with retained principles of EU law. In Covea Insurance Plc v. Greenaway,43 a 16 year-old boy crashed his father's car, which he had taken without permission. The insurer could, on the face of it, rely on Section 151(4) of the Road Traffic Act 1988 to escape the obligation to indemnify the owner of the car if the owner knew or had reason to believe that the car had been unlawfully taken or stolen, but the claimants argued that Section 151(4) was not compliant with Directive 2009/103/EC as it required that the claimants knew that the vehicle had been unlawfully taken, not merely taken. The court was unable to make a reference to the CJEU on the meaning of 'stolen' as translated in the Directive and how it was implemented across the EU, and so the insurer was permitted to adduce evidence from four experts on the translation of the meaning of the word 'stolen'.

The practical implications of the 'nightmare'44 position in which English courts find themselves in trying to interpret retained EU law have yet to be fully seen, but it is clear that an increase in foreign law expert evidence and a greater burden on English courts are inevitable consequences of losing the ability to make a reference to the CJEU.

Trends and outlook

As in last year's edition, covid-19 and the challenges deriving from the pandemic have been a dominant theme in insurance disputes this year. England and Wales was one of the first jurisdictions to examine, at speed, the issues of recovery of losses for business interruption as a result of the covid-19 pandemic. The first use of the Financial Markets Test Case Scheme by the regulator, the Financial Conduct Authority, for this purpose has meant that precedential clarity was obtained swiftly from the UK's highest court on the most common forms of policy in the market, meaning that in 2021 insurers could focus on resolving the deluge of claims against such policies resulting from covid-19 and the national lockdowns in the UK. However, inevitably, the Test Case did not resolve all issues, or deal with all policy wording variants and, as we have covered above, the follow-on litigation on issues not resolved by the Test Case is beginning to emerge.

Leaving aside that very topical subject, we should also mention that although the Insurance Act 2015 has come into force, it remains to be seen precisely how its provisions will be applied. The Act potentially represents a major rebalancing of rights and obligations between insureds and insurers (in favour of insureds), but early indications are that insurers are seeking to contract out of many of the provisions of the Act where possible in commercial policies.

There also remains a good deal of uncertainty as to how damages for late payment of insurance claims will be approached by the courts and the first case where an insured claims such damages is awaited with interest. This issue was not considered by the Supreme Court in the Test Case, but may well be examined in one or more of the subsequent covid-19 business interruption claims now before the English courts.

Warranty and indemnity insurance and cyber insurance are two of the fastest developing policy markets in England and the terms of both types of policy are becoming increasingly standardised. There have only been a limited number of significant disputes in relation to these types of policies, although we anticipate that will change in the next few years, especially as cyberattacks are becoming an increasingly common experience for businesses.

The coming into force of the General Data Protection Regulation has also generated interest in the extent to which the risks of failing to comply with the Regulation are insurable. The position is likely to be that insurance will not be available for any fines imposed under the Regulation or under the related Data Protection Act 2018 (either because English law prohibits the insurance of fines or because policies will specifically exclude them). However, insurance may be available for the costs of participating in an investigation by the Information Commissioner's Office and defending any subsequent proceedings. Insurance disputes arising out of data protection breaches may also be a developing area in the coming years. Disputes relating to a failure to appreciate the effect of artificial intelligence also look likely to be a developing area.

The use of after the event insurance to cover costs risks in English litigation has also increased significantly in recent years, both as a result of reduction in availability of legal aid at one end of the scale and the increased importance of litigation funding in English disputes at the other end.

In addition to these areas of potential development, climate change remains an area where claims must surely begin to rise. There are no claims in this area as yet, but all eyes are on that space.