Court of Appeal, 18 July 20142
High Court, 26 September 20143
Two decisions have been handed down this year in relation to the dispute between the ship owner of the vessel Alexandros T and the insurers of the vessel which sunk in May 2006. Starlight, the ship owner, and other co-assureds commenced proceedings against the insurers in 2006 (the “2006 Proceedings”) for the loss against their Lloyd’s and Company Market Insurers (the “Syndicates” and the “Company Market Insurers” respectively), who denied the claim, alleging amongst other things that the vessel was unseaworthy with the insured’s knowledge. Similar allegations were also raised in an arbitration between Starlight and another insurer of the vessel, Hellenic. The 2006 Proceedings were resolved through settlements (in the form of Tomlin orders) between Starlight and the insurers shortly before the trial began.
In 2011, the insured commenced proceedings against the insurers in the Greek courts under the Greek Civil and Criminal Code. The insurers responded by seeking to invoke the Tomlin
orders and the indemnity under the settlement agreements in favour of the insurers and also by initiating new English proceedings for relief and damages for breach of the jurisdiction clauses within the settlement agreements.
The High Court held in favour of the insurers in its judgment dated 19 December 2011, granted the insurers summary relief and held, among other things, that the Greek proceedings were:
- in breach of the exclusive jurisdiction clauses in the underlying policies;
- in breach of the jurisdiction clauses in the settlement agreements; and
- in breach of the terms of the settlement agreements.
The Court of Appeal, in its judgment dated 20 December 2012, allowed the insured’s appeal holding that the claims brought by the Company Market Insurers and Syndicates should be stayed under Article 27 of the Judgments Regulation because these claims involved the same cause of action as the Greek proceedings and the English Court was second seised.
The Supreme Court, in its judgment dated 6 November 2013, allowed the insurers’ further appeal, holding that Article 27 did not apply to the insurers’ claims since they did not involve the same cause of action as the Greek proceedings. The orders of Burton J in the High Court were reinstated and the remainder of the appeal against his judgment on the merits was remitted to the Court of Appeal.
New Court of Appeal judgment dated 18 July 2014
The Court of Appeal dismissed the entire appeal (in favour of the insurers) and upheld the orders of Burton J granting summary judgment for the insurers with damages to be assessed and the insurers to be indemnified by the insured for their expenses in defending against the Greek proceedings.
1 See our previous commentary summarising the decisions of the High Court ( EWHC 3361 (Comm)), the Court of Appeal ([2012 EWCA Civ 1714) and the Supreme Court ( UKSC 70) at page 1 of our Annual (Re)insurance Review 2013 available here: http://www.taylorwessing.com/fileadmin/files/docs/Insurance-and-Reinsurance-Review-2013.pdf
2  EWCA Civ 1010
3  EWHC 3068 (Comm)
Regarding the indemnity provision, the Court of Appeal concluded that, regardless of their basis being tortious rather than contractual, the Greek proceedings were related to the loss of the Alexandros T and so fell within the indemnity provision. The insured agreed to indemnify the insurers against any claim that might be brought against them in relation to the loss of the Alexandros T and the Greek proceedings were certainly in relation to that loss.
Regarding the settlement provision, the Court of Appeal stated that it was “the obvious intention of the parties that the settlement provision and the indemnity provision should march together and complement one another…”. The Court of Appeal extended the principle from Fiona Trust v Privalov4 (which related to the application of an arbitration agreement) to
settlement clauses, concluding that the sensible commercial meaning of the words “full and final settlement” indicated that the intention of the parties was that all claims relating to the loss of the Alexandros T should be included in the settlement agreement.
The Court of Appeal also extended the Fiona Trust principle to jurisdiction clauses and held that the Greek proceedings also fall within the jurisdiction clauses of the settlement agreements. Further, the Court of Appeal concluded that the Greek proceedings fell within the exclusive jurisdiction clauses contained within the underlying policies as the insured had promised, through those jurisdiction agreements, to submit to the exclusive jurisdiction of the English courts
and thus promised not to bring claims in other courts where such claims might (or might not) succeed.
The insured’s argument that the claims for damages or declarations in favour of the insurers would interfere with the jurisdiction of the Greek court or infringe EU law was rejected. Following the Supreme Court’s ruling lifting the stay on the insurers’ English proceedings, on the basis that the English proceedings and Greek proceedings did not involve the same cause of action, there was therefore no question of any interference with the jurisdiction of the Greek court. The Greek court would be free to consider the Greek proceedings but will have to decide whether to recognise any judgment of the English court that the Greek proceedings fall within the terms of the settlement agreements and any award for damages made by the English courts against the insured for the breach of the settlement agreements and the policies. That, however, the Court of Appeal held, is not an interference with the Greek court’s jurisdiction but rather an acknowledgement of the Greek court’s jurisdiction.
New High Court judgment dated 26 September 2014
The Greek proceedings were brought not only against the insurers but also individual employees and underwriters of the insurers. The issues remaining to be determined by the High Court were:
- the relief sought by the insurers in respect of the employees/underwriters of the insurers; and
- specific performance of the Syndicates’ settlement agreement sought by the Syndicate insurers and Syndicate individual defendants.
We focus below on the first issue.
The settlement agreement with Hellenic expressly stated that it was in full and final settlement of claims against “…the Underwriters [i.e. Hellenic] and/or against any of its servants and/
or its agents…” and therefore was not in issue. However, the settlement agreements with the Company Market Insurers and Syndicates stated that they were in full and final settlement of claims against “…the Underwriters…” and did not contain wording in respect of servants
or agents. The Company Market Insurers and Syndicates argued that the true construction of the word “underwriters” encompassed the servants and agents of the underwriter. The insured argued that “underwriters” meant the corporate entities set out in the preambles of
4  UKHL 40. A House of Lords decision which approved the Court of Appeal’s approach setting out the principle that (in the absence of express wording to the contrary) sensible business people likely intend for any dispute arising out of a relationship to be determined by the same tribunal rather than different courts or tribunals.
The High Court considered that the correct approach to the construction of the agreements was to consider the language used and ascertain what a reasonable person would have understood the parties to have meant and that if there were two possible constructions the court would be entitled to adopt that construction which is consistent with business common sense. With this approach, the High Court concluded that the word “underwriters” encompassed its servants and agents and that the alternate interpretation – that it was restricted to the named corporate entities – defied business common sense (since it would entail the Greek proceedings potentially resulting in awards against the servants or agents who would be entitled to seek to be indemnified from the underwriters and they, in turn, would be entitled to seek cover under the indemnity from the insured in the Company Market Insurers’ and Syndicates’ settlement agreements). Further, the High Court considered that the clear intention of the parties was for the settlement agreements to provide a general release and a “clean break”.
The High Court also accepted the insurers’ argument that the joint tortfeasor rule – that where there is a joint cause of action against two or more persons, a discharge against one tortfeasor operates as a discharge against all – supported the insurers’ interpretation of the settlement agreements. The High Court did not consider any exceptions to the joint tortfeasor rule to be applicable in the circumstances.
High Court challenges the Financial Ombudsman Service’s jurisdiction in relation to a Directors’ and Officers’ policy
R (on the application of Bluefin Insurance Services Ltd) v Financial Ombudsman Service Ltd5
High Court, 20 October 2014
Bluefin acted as a broker in obtaining a D&O policy for Betbroker Ltd. Mr Lochner, a director of Betbroker Ltd who was an insured person under the D&O policy, gave notice to Bluefin of a potential claim against him. The insurer refused to provide cover and Mr Lochner alleged that this was because Bluefin did not inform the insurer of the claim. Mr Lochner complained to the Financial Ombudsman Service (the “FOS”), which ruled that it had jurisdiction to hear his complaint against Bluefin.
Bluefin sought judicial review of that decision, asserting that at the relevant time Mr Lochner was not acting as a consumer and therefore not entitled to complain to the FOS under the relevant rules. As an initial issue, the question arose whether, as the FOS argued, it alone had discretion to determine the potential claim unless there was an error of law or it was clear that an irrational decision had been made or whether the court was entitled to consider whether the eligibility requirements were satisfied. Where a tribunal’s authority over a claim depends on a set of objective facts being satisfied, it is established that it is for the courts, and not the tribunal itself, to consider whether those “precedent facts” have been met.
The Court held that: (i) it was within its jurisdiction to decide whether the individual was acting as a consumer as a question of “precedent fact”; and (ii) on the facts, as a matter of precedent fact Mr Lochner was not a consumer. Alternatively, the FOS had misdirected itself as a matter of law, and had it not done so it would have concluded that the FOS did not have jurisdiction, as at the relevant time the insured was not eligible as a consumer or otherwise.
5  EWHC 3413 (Admin)
The decision confirms that eligibility to make a complaint to the FOS is a matter of “precedent fact” which the courts may review, and provides some much-needed clarity regarding the definition of “a consumer” for this determination.
The decision also highlights an avenue for parties such as insurers or brokers to challenge the FOS’ jurisdiction to entertain complaints regarding D&O policies, based on the eligibility of the complainant.
Bluefin Insurance Services Ltd (“Bluefin”) acted as a broker for a D&O policy (the “Policy”) taken out by Betbroker Ltd (“Betbroker”). The Policy named Mr Wayne Lochner (“Mr Lochner”) as an insured person.
The Policy included cover in respect of claims made for management liability of individuals for “wrongful acts”. A claim was brought against Mr Lochner personally for alleged fraudulent
or reckless misrepresentations he made about Betbroker which induced Aberdeen Asset Management to invest approximately £500,000 in Betbroker.
The Policy had expired on 8 September 2008, but the claim was brought against Mr Lochner on 7 September 2011. The insurer refused cover contending that they had not received any notice of a claim or circumstance likely to give rise to a claim prior to the expiry of the Policy. Mr Lochner stated that he had made Bluefin aware of the potential claim against him prior to the expiration of the Policy, but that this information had not been passed on to the insurer. Mr Lochner made a complaint to the FOS against Bluefin for its alleged failure to pass on this information.
The FOS’ jurisdiction flows from s.226 Financial Services and Markets Act 2000 (“FSMA”) and the delegated legislation made by the Financial Conduct Authority (the “FCA”) in the form of the “Dispute Resolution: Complaints” section of the Financial Services Handbook (“DISP”).
The FOS published a decision dated 3 May 2013, which set out a series of findings including: “The jurisdiction of the FOS is set out in the Financial Conduct Authority’s dispute resolution
DISP rules. These rules stipulate exactly what the Financial Ombudsman Service can and
The decision proceeded to set out DISP 2.7.3R, which states that “an eligible complainant must be a person that is: (i) a consumer…” and definition of “consumer” in the Glossary to the FCA Handbook was at the relevant time “any natural person acting for purposes outside his trade, business or profession”. The FOS concluded that the question was whether Mr Lochner “was acting outside his employment when bringing this complaint”, and concluded that he was.
Bluefin argued that Mr Lochner did not fall within this definition.
Relevant issues examined by the Court
(a) Is a decision whether Mr Lochner was acting as a consumer an issue of “precedent fact” for the Court to determine regardless of the FOS assessment?
The Court first addressed whether the issue of whether Mr Lochner was acting as a consumer was an issue of “precedent fact”, such that the Court then has jurisdiction to make a decision on the basis that there is a right or wrong answer (as argued by Bluefin), or whether the issue was reserved for the FOS’ discretion (as argued by the FOS).
The judge agreed with Bluefin on the basis of Lady Hale’s judgment in the Supreme Court in R (A) v Croydon London Borough Council6. While the FOS has compulsory jurisdiction to
6  1 WLR 2557
further the aim of resolving certain disputes quickly, it still must be shown that the incident case is one to which the compulsory jurisdiction rules apply. The answer to this question would lie in a “hard-edged finding of objective fact”.
It was therefore held that this was a matter of “precedent fact” for the Court to determine. However, on the hypothetical basis that this was not the case, the Court also assessed whether the FOS had misdirected itself in law.
(b) If the issue is for the FOS, did the FOS misdirect itself in law in reaching its decision?
- Time when assessment of eligibility is to be made
The FOS had argued that the correct point in time is the point at which the complainant makes their complaint, while Bluefin argued that the assessment should be made at the earlier time of when the Policy was entered into, or, at the latest, the date of the act or omission which forms the basis of the complaint.
On this aspect, the judge agreed with the FOS and held that the correct interpretation under s.226 FSMA was that if the complainant was a consumer at the time of the complaint, then he would be an eligible complainant.
- Did the FOS incorrectly conclude that Mr Lochner was a consumer?
The Court was asked to assess whether, at the time of making the complaint, Mr Lochner was “acting for purposes outside his trade, business or profession”.
Bluefin argued that it does not follow that if the claim is brought personally it is therefore outside the “trade, business or profession”. The fact that the liability is personal does not make it, without more, consumer liability. Bluefin further argued that Mr Lochner could not have been acting as a consumer, as the alleged wrongdoing was in the course of promoting the business of which he was founder, CEO and shareholder. Distinguishing the
Policy from other group policies such as private health insurance, Bluefin argued that whilst those policies covered purely private matters, this Policy only covered an individual against professional or business liabilities.
The FOS argued that, given Mr Lochner’s spouse was also a beneficiary under the Policy, the question of whether Mr Lochner was a consumer was no different than if she has made the complaint. The FOS argued that the Policy was exactly like a private health insurance policy in that it protected an individual in their private life from liabilities or misfortunes that may, or may not, occur through employment.
The judge held that the complaint made by Mr Lochner to the FOS was “to obtain redress which would compensate him for the loss sustained by virtue of his being left unprotected under the Policy in respect of loss arising from the Claim for his wrongful acts undertaken in the course of his trade, business or profession”. There was no proper basis that the FOS could conclude that the subject matter of Mr Lochner’s complaint was “outside his trade, business or profession”.
The judge rejected the analogy made between the Policy and a purely private group insurance policy, because such policies provide protection in respect of the private interests of the members of the scheme.
Therefore, as a matter of precedent fact, the judge held that Mr Lochner was not “acting as a consumer” at the time that the complaint was made. Further, or in the alternative, the FOS had misdirected itself in law when concluding that Mr Lochner was doing so. Mr Lochner was not an eligible complainant.
The Court granted an order quashing the FOS’ decision to entertain the complaint.
This decision provides much needed clarity regarding the eligibility of complainants regarding policies, such as D&O policies, which provide a personal benefit to the directors. It also confirms that eligibility issues are ones of “precedent fact” to be assessed by the Court, to be objectively assessed based on the facts, rather than remaining within the FOS’ sole discretion. This clarifies the limits to the FOS’ ability to determine its own jurisdiction.
The decision will have importance for parties who are seeking to challenge the scope of the FOS’ jurisdiction. It could also lead to the FOS being more cautious about entertaining such complaints in the first place.
No declaratory relief in relation to non- contracting third parties
The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd (formerly T&N Plc) & Others7
High Court, 27 June 2014
The High Court considered the law relating to third parties’ ability to seek declaratory relief in respect of contractual rights where they are not parties to the contract. This is particularly difficult where the parties to the contract are not themselves in dispute as to their rights or obligations. Here, a trust sought various declarations from the High Court regarding the handling and settlement of the asbestos claims by reinsurers. However, the trust was not a party to either the insurance policy or the reinsurance contract.
Parties and the insurance policies
The claimant in these proceedings was a trust (the “Trust”) established by an order of the US Bankruptcy court to deal with asbestos related personal injury claims against Federal-Mogul Ltd (“Federal Mogul”).
The history of this matter relates to T&N plc (and its subsidiaries) (“T&N”), which was one of the largest producers and distributors of asbestos and products containing asbestos for much of the 20th century, and which was subsequently acquired by Federal-Mogul Corporation in 1998. T&N was faced with an enormous number of asbestos related personal injury claims. For a period of time, T&N’s strategy was to settle the asbestos claims as quickly and cheaply as possible without litigation and it became a member of a joint claims-handling organisation – the Center for Claims Resolution (“CCR”) – for further costs savings in defending the asbestos claims.
By the mid-1990s, T&N shifted its primary business to engineering. In December 1996, T&N put in place an asbestos liability policy (the “Policy”) with Curzon Insurance Ltd (“Curzon”) with the aim of drawing a line under the exposure to the asbestos claims and allowing the engineering business to develop unimpaired by that exposure. Curzon ceded liabilities in three equal shares under a reinsurance agreement (the “Reinsurance Contract”) to three reinsurers – Centre Re (a subsidiary of Zurich Re), EIRC (a subsidiary of Swiss Re), and Munich Re (the “Reinsurers”).
Insolvency and claims-handling issues
The asbestos claims proved to be far in excess of what T&N expected: between 1976 and 2001 T&N resolved 245,000 asbestos claims at a cost of US$835m. By January 2001, the CCR had essentially collapsed and T&N was forced back into the US tort system as a “standalone” defendant.
In October 2001, Federal-Mogul and T&N filed for bankruptcy in the US and went into administration in the UK. In the context of this insolvency, a Plan of Reorganisation (the “Plan”) under Chapter 11 of the US Bankruptcy Code was put in place which culminated in the creation of the Trust. The Plan required T&N to grant the Trust a power of attorney to “take all
necessary and/or appropriate steps…to pursue [recoveries] in respect of [the asbestos claims]… and do anything else which the [Trust] considers to be necessary or desirable to achieve the purposes…” (the “POA”). The Trust itself established a mechanism for valuing individual asbestos claims in accordance with what were referred to as Trust Distribution Procedures (the “TDPs”).
The terms of the Policy provided wide scope for asbestos claims-handling to T&N as follows:
7  EWHC 2002 (Comm)
“…full, exclusive and absolute authority, discretion and control, which shall be exercised in a businesslike manner in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to [the Policy] and of the reinsurers thereof, with respect to the administration, defence and distribution (including but not limited to settlement) of all Asbestos Claims…“
The Policy provided that this claims-handling power would transfer to Curzon in the event that there was an insolvency event in respect of T&N (it was common ground that an insolvency event had occurred). The Policy also stated that the appropriate standard for handling asbestos claims could not be specified completely at its signing date but that T&N was required to specify a standard from time to time. At the time of the inception of the Policy, the CCR’s standards were stated in the Policy as being the best practice at the time.
The Reinsurance Contract provided that if Curzon became entitled to exercise the asbestos claims-handling power then this power would transfer from Curzon to the Reinsurers.
The Trust alleged that the TDPs would ascribe a lower value to asbestos claims than the likely settlement or award values if the claims were litigated in the US tort system and that therefore handling the asbestos claims in accordance with the TDPs was an economic “no-brainer” – and the only business-like approach for the Reinsurers to settle the asbestos claims. On this basis, the Trust sought various declarations which the High Court described as falling into four broad categories:
- standing of the Trust to claim the declarations;
- obligations of Curzon/Reinsurers with regard to claims-handling;
- methodology utilised by the Trust in relation to settlement/discharge of asbestos claims presented by the Trust (including in respect of two specific claims which had been previously settled); and
- potential limitation issues and the effect of the Plan and its relationship with the Policy.
The first two categories are of particular interest and we discuss the High Court’s analysis in relation to these further below.
Standing of the Trust
The High Court came to the conclusion that the Trust did not have standing to seek the declarations in respect of claims-handling obligations either by virtue of having sufficient interest or under the terms of the POA provided by T&N in favour of the Trust.
The Reinsurers argued that since the Trust was not a party to the Policy or the Reinsurance Contract it had no standing to interfere with these contractual arrangements. Absent any exceptional circumstances warranting such interference, the principle of privity of contract (preventing a non-contracting third party from claiming contractual rights/obligations) would be undermined. Further, the Reinsurers argued, interference was particularly unwarranted given that there was no dispute between the contracting parties as to the exercise of their rights and that the issue was compounded by the fact that the Trust was seeking to interfere with the exercise of extremely wide contractual powers of discretion.
The Trust accepted that it was not a party to the Policy or the Reinsurance Contract. However, the Trust argued that this was not a necessary precondition to granting declaratory relief
and that the law had moved on from the Meadows8 case. The Trust relied on the principles summarised by Aiken LJ in Rolls Royce Plc v Unite the Union9 in respect of the grant of declaratory re which included the point that “the fact that the claimant is not a party to the
8 Meadows Indemnity Co Ltd v Insurance Corp of Ireland Plc  2 Lloyd’s Rep 298; which held that it would only be in exceptional circumstances that a party not privy to a contract who had no locus standi would be entitled to obtain a declaration of rights under that contract
9  1 WLR 318
The High Court agreed that the law had clearly moved on since the Meadows case. However, the High Court accepted the Reinsurers’ argument that a non-contracting third party cannot obtain declarations in respect of the rights of parties to a contract where those contracting are not themselves in dispute as to their respective rights and obligations.
The Trust also argued that it had standing by virtue of the terms of the POA which gave the Trust wide scope to pursue or recover sums for the asbestos claims. The High Court disagreed with this argument. It held that the present dispute related not to what is “recoverable” but rather to determine the scope of such coverage and what “may” be recoverable – and that it was unlikely that T&N and the Trust had intended the POA to grant the Trust a power to seek declaratory relief from the Court in respect of claims-handling.
As a result of the High Court’s conclusion on standing, the Trust was not entitled to seek the declarations relating to claims-handling. However, the High Court considered the substantive merits of these declarations in case it was wrong on the issue of standing – and concluded, on various grounds, that it would also refuse to grant these declarations on their merits.
In particular, the High Court concluded that the wording of the Policy and the Reinsurance Contract – which, following T&N’s insolvency, granted wide discretion to the Reinsurers in terms of claims-handling (i.e. full, exclusive and absolute authority, discretion and control to be exercised in a businesslike manner) – was incompatible with the Trust’s suggestion that it was entitled to limit the Reinsurers’ exercise of these contractual rights.
The Reinsurers’ broad contractual rights as to claims-handling were caveated in that they must be exercised in a businesslike manner (as well as in good faith and fair dealing and with regard to legitimate interests). The Trust’s TDPs were not the only businesslike manner for handling claims and there is no monopoly on what may be “businesslike”.
Mesothelioma claim allowed despite prior settlement with other employers
Dowdall v William Kenyon & Sons Ltd10
High Court, 12 August 2014
The Court held that the claimant, who had previously settled a claim arising from asbestosis against seven of his 11 former employers, was not precluded from now pursuing a new personal injury claim against the remaining three employers (one was irrelevant), in respect of the development of mesothelioma. The case is important because it raises uncertainty over settlement agreements and orders in hundreds of asbestos cases brought in the last 20 years. Defendants who were previously sued for damages arising from exposure to asbestos may now be liable for a further contribution from other employers when the condition develops into mesothelioma.
The claimant was exposed to asbestos by 10 employers over a long period of time. In 1998 he was diagnosed with asbestos and pleural plaque with a 15-20% level of disability.
In 2001, he brought an action for damages against seven of his 10 former employers in respect of asbestosis, pleural plaque and for the risk of developing mesothelioma (the “First Action”). The claim was settled in 2003 for £26,000 (the “First Settlement”). It is important to note that, in
10  EWHC 2822 (QB)
the First Action, the claimant made a claim for provisional damages in relation to the risk that he would later develop a serious disease or condition, but he did not pursue it. The First Settlement was on a full and final basis and excluded the development of mesothelioma.
The other three employers were not included as defendants in the First Action because the claimant’s solicitors did not know the name of one of the former employers and could not identify the relevant insurers for the other two employers (which are now dissolved). At the time, there was no scheme in place to trace insurers that had provided employer’s liability insurance in respect of obsolete employers.
The claimant later developed mesothelioma and, because of the full and final nature of the First Settlement, he was unable to seek further damages from the original defendants. Therefore, he brought an action against the three remaining employers in these proceedings for damages in respect of contracting pleural mesothelioma.
These defendants argued that they would have joined in the First Settlement had they been sued at the time, and would therefore have had a complete defence to these proceedings, namely compromise.
The Special Case of Mesothelioma
The Court noted the special nature of cases involving mesothelioma: being an indivisible injury, mesothelioma may be caused by a single fibre. If an employee has been exposed to asbestos by several employers, it cannot be proven which employer actually caused the disease.
Fairchild v Glenhaven Funeral Services Limited11 established the special rule of causation in mesothelioma cases. The claimant only has to prove that an employer has increased the
risk of the development of mesothelioma in order to recover in full against that employer for the consequences. Then the employers who are being sued can apportion liability between themselves.
The Court had to consider three preliminary issues, pursuant to an Order of Master McCloud dated 9 June 2014, summarised as follows:
- Whether, in light of the First Action, these proceedings were an abuse of the court process.
- Whether the claimant was estopped from bringing a second action because the First Settlement with the original employers included compensation for the risk of mesothelioma.
- Whether the second action was time barred under the Limitation Act 1980.
Abuse of Process
The argument of abuse of process arose out of the principle that there should be finality in litigation and so the courts discourage multiple proceedings arising from the same proceedings. The defendants in the second action argued that were they party to proceedings in the First Action, they would not now be exposed to paying such a large sum in these proceedings. However, the court held that these proceedings were not an abuse of process. The three defendants were not parties to the First Action. There was also no evidence that the claimant had deliberately secured compensation for the risk of mesothelioma and deliberately omitted the three defendants from the First Action so he could sue them later should he develop mesothelioma. The decision not to sue the three defendants was honestly made at the time. He and his solicitors could not find an insurer liable to meet the claim. This was a reasonable, not abusive, decision-making process.
The Court held that there was no automatic cause of action estoppel here because the parties in the First Action were different from the parties to these proceedings. However, the Court had to consider whether estoppel arose because of the principles set out in Heaton v Axa Equity &
11  UKHL 22
Law Life Assurance Society Plc12. The principle was that where there are concurrent tortfeasors (several independent wrongdoers whose actions combine to produce the same damage to another), a settlement against one will not extinguish the claim against the others, unless there has been full satisfaction of the entire claim. The question that flowed from this was, as posed by Lord Bingham in Heaton, “has the claimant accepted a sum which was intended to represent the full measure of this estimated loss?” The answer here was no. Following from the First Action, the First Settlement accepted by the claimant was for the risk of mesothelioma and not for the development of mesothelioma. The claimant, at the time of the First Action, decided not to seek an order allowing him to return to court should mesothelioma develop. The First Settlement
did not include any sum that would arise from the development of mesothelioma. In these proceedings, the claimant had suffered a loss arising from mesothelioma, which had developed after the First Settlement and for which the claimant had not been compensated. Therefore, the Court decided to allow the claim to proceed.
On the face of it, these proceedings were time barred, as the claimant had ‘knowledge’, within the meaning of s.14(1) Limitation Act 1980, in 1998 in relation to two of the defendants. The claimant had knowledge 12 months later in relation to William, Kenyon & Sons Ltd, as he and his solicitors could reasonably have been expected to determine the company as the claimant’s employer. However, the court decided to use its discretion in disapplying the limitation period under s.33 Limitation Act 1980 and allowing the action to proceed.
The Court considered arguments in the defendants’ favour, such as the fact that witnesses would have died or become unavailable since 1998. It was also noted that the defendants would suffer the financial prejudice of having to pay damages if the arbitrary time limit were disapplied.
The liability that the defendants now faced was much higher than if they had contributed to the First Settlement. Being excluded from the First Settlement which was agreed before
the condition developed meant that these defendants lost the chance of avoiding paying the defendant the damages to which he was otherwise entitled. The defendants also argued that they had uncertain prospects of whether they would be able to recover contributions from the defendants in the First Action in respect of damages arising from the development of mesothelioma.
Overall, however, the Court decided that there was little prejudice due to loss of evidence and that the only prejudice the defendants faced was financial. On balance, the Court disapplied the limitation period because the claimant had a substantial claim for a very serious injury and the medical evidence in respect of this was uncontroversial.
12  UKHL 15
Co-insurance: Interpretation of a Follow Clause
San Evans Maritime Inc & Ors v Aigaion Insurance Co SA13
High Court, 4 February 2014
The Court held that the defendant following underwriter was required to follow a settlement reached by lead underwriters under a Follow Clause, despite the following underwriter being excluded from the settlement agreement between the lead underwriters and assureds.
The three preliminary issues tried in this case arise out of a hull and machinery policy covering the vessel St. Efrem. On 27 July 2010, the vessel grounded at Paranagua, Brazil and suffered a generator breakdown. It was then towed to Abidjan, Ivory Coast.
The claim was bought by three claimants. The first claimant was the vessel owner, the second claimant was the vessel manager and the third claimant was a mortgagee of the vessel. The first and second claimants were Liberian companies which had been dissolved. Their claims were stayed on 20 December 2013 as they failed to provide security for costs. The third claimant’s (Mrs Chariklia Livanou’s) claim proceeded and the court’s determination was binding upon all the claimants.
50% of the interest in the vessel was insured under a policy written on 16 and 17 March 2010 by three Lloyd’s syndicates; Catlin, Ark and Brit (the “Lloyd’s Policy”). Catlin was the slip leader. 30% of the interest in the vessel was insured by the defendant, Aigaion Insurance Co SA (“Aigaion”) under a policy issued on 24 March 2010 (the “Aigaion Policy”). The remaining 20% interest was uninsured. A claim was made under both policies. The Aigaion Policy contained the Follow Clause below:
“Agreed to follow London’s Catlin and Brit Syndicate in claims excluding ex-gratia payments” On 6 April 2011, Aigaion complied with a request to send a copy of the Aigaion Policy to the
Lloyd’s syndicates. On 24 April 2012, the Lloyd’s syndicates settled the claim brought against
them. Clause 7 of the settlement agreement included the following wording:
…none of the Underwriters that are party to this Agreement participate in the capacity of a Leading Underwriter under
the Policy and do not bind any other insurer providing hull and machinery cover in respect of the St. Efrem.
The claimants argued that Aigaion is obliged to follow the settlement in respect of its cover for 30% of the interest in the vessel. Aigaion denied that it was required to do so.
The preliminary issues
The three preliminary issues arising are summarised as follows:
- Did the Follow Clause require Aigaion to follow any settlement by the Lloyd’s syndicates or did it merely authorise the Lloyd’s syndicates to act on Aigaion’s behalf in negotiating or agreeing the settlement?
13  EWHC 163 (Comm)
- If the Follow Clause required Aigaion to follow the settlement, was the Follow Clause triggered by the settlement agreement?
- Did the claimants agree by clause 7 of the settlement agreement that Aigaion would not be bound by the settlement and, if so, can Aigaion rely on the Contract (Rights of Third Parties) Act 1999 (the “Act”) to enforce clause 7?
Teare J Mr Justice. considered the third issue before the second issue, and we summarise the Court’s ruling in the same order below.
The first issue – interpretation of the Follow Clause
Aigaion argued that the Follow Clause created an agency relationship such that Catlin and Brit were required to act as agents on behalf of Aigaion in respect of negotiations and settlement (and had therefore not acted as agents for Aigaion when they entered into the settlement agreement in their own right). Teare J rejected this argument and stated that a simple approach must be taken to the construction of the Follow Clause. Teare J stated that introducing
the concept of agency when there was no agreement between Aigaion and Catlin and Brit “unnecessarily complicates the operation of the clause”. Teare J also relied on the obiter comments of Rix J in Mander v Commercial Union Assurance14 where he stated:
“…the agreement of the leading underwriter works as a ‘trigger’ rather than as an act of agency…It seems to me that the trigger analysis also has the virtue of avoiding the danger of imposing upon a leading underwriter the unrealistic fiduciary obligations of an agent, e.g. to avoid any conflict of interest”.
Teare J noted, however, that there was conflicting authority on this issue. He highlighted the cases of Roadworks (1952) Ltd v JR Charman and Others15 and Youell v Bland Welch16 where the agency analysis was accepted, and the case of Unum Life Insurance v Israel Phoenix Assurance17 where Mance LJ stated that the agency analysis was “thoroughly arguable”.
The third issue – whether the claimants agreed by clause 7 of the settlement agreement that Aigaion would not be bound by the settlement (and whether Aigaion could enforce this term)
The claimants argued that the purpose of clause 7 was to set out the capacity in which the Lloyd’s syndicates entered into the settlement agreement. This, the claimants argued, had at least two functions: (i) to avoid the possibility of Brit or Ark arguing that Catlin (the slip leader) was not authorised to agree a settlement on their behalf; and (ii) to protect Catlin from a claim for breach of duty by Brit or Ark alleging that the settlement should not have been reached on the terms in the settlement agreement.
Aigaion argued that the plain commercial intention of clause 7 was to ensure that the settlement agreement was not binding upon “any other insurer providing hull and machinery cover in respect of the St. Efrem” and that Aigaion fell within the meaning of this phrase.
Teare J accepted Aigaion’s argument and rejected the claimants’ arguments. He found that the settlement agreement was clearly an agreement into which the three Lloyd’s syndicates entered in their own right and that there was no need for clause 7 to make this clear.
However, Teare J found that Aigaion was not entitled to rely upon the Act to enforce clause 7. He relied on the comments of Christopher Clarke J in Dolphin Maritime v Sveriges18 which stated that a “benefit” conferred under a contract to a party connotes that it must, as a purpose of the bargain, intend to benefit that party (rather than “one of its incidental effects if performed”).
-  Lloyd’s Rep. I.R. 93
-  2 Lloyd’s Rep. 99
-  2 Lloyd’s Rep 423
-  Lloyd’s Rep I.R. 374
-  2 Lloyd’s Rep 123
Teare J held that the purpose of clause 7 was not to confer a benefit on Aigaion but to avoid any possible liability to Aigaion (as the Lloyd’s syndicates were aware of the Aigaion Policy and the Follow Clause).
Teare J went on to consider the claimants’ further submission that the effect of the Follow Clause was a contractual agreement between the claimants and Aigaion and that, pursuant to this contractual agreement, Aigaion was required to follow a settlement reached by Catlin and Brit. Teare J accepted this submission. While clause 7 meant that the Lloyd’s syndicates were acting in their own rights and Aigaion was not bound by the settlement agreement, the claimants could still rely on the Follow Clause directly against Aigaion. Teare J held that this
was an important right that would require clear words to justify a conclusion that the claimants intended to waive this right.
The second issue – whether the Follow Clause was triggered by the settlement agreement
Aigaion argued that the Follow Clause would not be triggered by a settlement that was clearly not intended to be binding on Aigaion and that the Follow Clause should be subject to an implied term to that effect. Aigaion further argued that it was unreasonable and uncommercial to construe the Follow Clause as requiring Aigaion to follow a settlement under a settlement agreement which clearly excluded Aigaion.
Teare J rejected Aigaion’s argument. He stated that where a lead underwriter made clear that it was entering into a settlement in its own right and not purporting to bind a following underwriter, the purpose was to avoid any liability under a duty of care to the following
underwriter. However, that did not countermand the effect of a follow clause which obliged the following underwriter to follow the settlement regardless of whether the lead underwriter acted as an agent of the following underwriter. Teare J also rejected Aigaion’s further argument on the Follow Clause being interpreted unreasonably/non-commercially where Aigaion is required to follow a settlement which the parties to the settlement agreement agreed would not be binding on Aigaion. Teare J stated that Aigaion had itself agreed to follow a settlement reached by Catlin or Brit and it did not matter that Catlin and Brit purported to act on their own behalf when settling the claim. Teare J held that the Follow Clause was triggered by the settlement agreement.
Interpretation and interaction of conditions precedent to liability under an insurance policy Milton Furniture Limited v Brit Insurance Limited19
High Court, 1 April 2014
The High Court determined that two potentially conflicting conditions, despite both being held to be conditions precedent to an insurance policy, interacted so that one qualified the
other, rather than one being subordinate to the other. In doing so, the judge examined the true commercial purpose of the conditions in light of the terminology used and rejected the approach adopted in some American authorities, that where there are two or more conditions precedent, each clause must be seen as “an island unto itself”. He also found that a condition precedent requiring that an alarm be monitored could be breached by permitting the monitoring service to lapse, regardless of whether the alarm was activated at the relevant time.
19  EWHC 965 (QB)
The claimant hired out furniture to its clients for events. In the early hours of 9 April 2005, a catastrophic fire at its premises destroyed the vast majority of its stock.
The parties had entered into a Commercial Combined Insurance Policy (the “Policy”) under which fire was a specified risk. The Policy covered loss or damage to stock in trade, loss of gross profit and increase cost of working with an indemnity period of 12 months.
The evidence indicated that the fire resulted from arson, caused by an intruder. The burglar alarm at the property was not fully set at the time of the fire, and was not monitored externally as the claimant has stopped paying for this service during the term of the Policy. The owner of the claimant was asleep in a house joined to the business premises at the time of the fire.
Following the fire, the claimant sought to claim under the indemnity, which the defendant underwriter resisted alleging that the claimant had breached two conditions precedent to its liability:
- Protection Warranty 1 (“PW1”) made it a condition precedent to liability “in respect of loss or damage caused by Theft or attempted Theft that the Burglar Alarm shall have been put into full and proper operation whenever the premises … are left unattended and that such alarm system shall have been maintained in good order throughout the [life of the Policy] under a maintenance contract with a member of NACOSS”.
- General Condition 7 (“GC7”) required that “the whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interest of the Underwriters without their prior consent”.
Relevant issues examined by the Court
- Is GC7 subordinate to PW1 so that, as regards the obligations therein specified, compliance with GC7 is not a condition precedent to the defendant’s liability?
- Does PW1 qualify GC7 – as regards the obligation to ensure that the burglar alarm was in use
– such that the claimant’s duties in that regard were the same under both provisions, and no more onerous than those set out in PW1?
- Was the claimant in breach of its obligations under the first part of GC7 by not ensuring that the burglar alarm was in use at the material time?
- Was the claimant in breach of the second part of GC7, in particular by causing or permitting the withdrawal of the monitoring of the burglar alarm?
- If GC7 is not a condition precedent to the defendant’s liability, was any breach by the claimant of its obligations under GC7 causative of the loss sustained?
The first and second issues – is GC7 subordinate to or qualified by PW1?
The judge sought to examine the commercial purpose of GC7 in the light of the terminology deployed and other relevant contractual positions, rather than looking at each clause in isolation. Wording containing in the quotation was not helpful because it did not form part of the contract of insurance. A distinction was drawn between the wording in PW1, which required as a condition precedent that there be a burglar alarm, and that in GC7, which applied to any alarm that happened to be present in the insured property. On this basis the judge believed that one of the commercial purposes of PW1 was to ensure that the insured had a burglar alarm with certain attributes.
The judge rejected the suggestions that PW1 set a high watermark, or that the sole purpose of a burglar alarm was to reduce the risk of theft or attempted theft. He did not feel that the use of the words “theft or attempted theft” limited the condition precedent to claims for such loss. On these bases the judge held that the GC7 was not subordinate to PW1.
Turning to the second issue, the judge again took a commercial view. He believed that it made little sense to suggest that GC7 created greater obligations but which would only apply if the loss was not caused by theft or attempted theft. GC7 should therefore have been read down so that the insured was only required to set the alarm when the premises were unattended.
The third issue – was the claimant in breach by not having armed the alarm at the time of the fire?
The claimant’s argument was that the clause should not be interpreted as imposing a requirement to set the alarm at a time when it almost certainly would have gone off due to persons legitimately being in the premises. Instead GC7 should be construed so that the burglar alarm would only have to be set out of business hours when the premises were closed and therefore unattended, or during business hours when they were unattended. The wording ‘the whole of the protection’ excluded any argument that the alarm should have been part set.
The defendant argued that such an interpretation effectively deleted the consideration of business hours from GC7 and instead favoured reading in words to the effect that the alarm must be set out of business hours.
The judge favoured the claimant’s submission regarding business hours. He also determined that the factual and legal matrix had to be considered when assessing whether the premises were “left unattended” at the relevant time. One person was asleep in a large complex, but this was sufficient for the premises not to be unattended. In ordinary terms, houses or premises become unattended when their occupants leave. Therefore, the judge held that the claimant was not in breach of the first part of GC7.
The fourth issue – was the claimant in breach by having permitted the withdrawal of monitoring from the alarm?
The judge rejected an interpretation of this fairly standard wording that required that the withdrawal has a causative effect on the loss, as to do so would take this from a condition precedent to a mere condition. Despite finding for the claimant on the previous issues, he concluded that the claimant was in breach by failing to pay the monitoring charge. The claimant knew that the monitoring charge was payable in advance and that it had not been paid for over six months. Even considering the suggested disputes between the claimant and the monitoring service, the claimant had been reckless as to the risk that the service would be cut off. Therefore, the claimant was in breach of the second part of GC7.
The fifth issue – if GC7 was not a condition precedent, was the breach of it causative of the loss?
The judge had earlier concluded that GC7 was a condition precedent and, as such, was not required to determine whether the breach had been causative of the loss. However, even if he was wrong and the clause was not a condition precedent, he concluded that causation would have been established in any event, as it was likely that an intruder would have triggered an active burglar alarm much earlier than the fire alarm. Irrespective of whether the alarm was monitored, this could have prevented the arsonist from setting the fire.
The case acts as a useful reminder of the importance and possible interplay between conditions precedent and the need for precision when drafting.
Rathbone Brothers PLC & Michael Paul Egerton-Vernon v Novae Corporate Underwriting Ltd & Others20
UK Court of Appeal, 14 November 2014
The Court of Appeal construed a PI policy taken out by a trust management company broadly to extend cover to a personal trustee during his roles as both an employee and later as a consultant for the company. The Court of Appeal also considered how the PI policy applied where the trust management company had also indemnified the employee and the extent to which the insurers had a right of subrogation against that indemnity.
Rathbone Brothers PLC (“Rathbone PLC”) is a large international investment management firm whose trust business included managing family trusts for wealthy private clients. Rathbone Trust Company Jersey Limited (“Rathbone Jersey”) employed Paul Egerton-Vernon (“PEV”) in a full time role until June 2007 after which PEV continued to act as a consultant for Rathbone Jersey on materially the same terms (it had employed PEV since 1984 when it existed as Nigel Harris and Partners and was later acquired by Rathbone PLC). Rathbone Jersey provided management services in a corporate capacity to the trust set up by the late Mr Jack Walker, an industrialist, (the “Walker Trust”), while PEV provided management services as a personal trustee to the Walker Trust (a common structure for trust management in Jersey).
The dispute arises out of a claim commenced in the Jersey courts by certain beneficiaries of the Walker Trust alleging that the trustees, including PEV, made poor investment decisions in breach of their professional and fiduciary duties from the end of 1999. In July 2003, Rathbone PLC and Rathbone Jersey had provided an indemnity to PEV in respect of certain liabilities arising from the performance of his duties (the “Rathbone Indemnity”). Rathbone PLC had also taken out PI cover and claimed coverage under the PI policy for itself and for PEV.
The primary underwriter, AIG, accepted cover whilst reserving its position depending on the outcome of this case. The excess insurers comprised of members of the Lloyd’s Syndicate 2007 and other underwriters (the “Excess Insurers”) denied coverage and further argued that, even if they were liable to PEV, they were only liable after the Rathbone Indemnity had been exhausted. The Excess Insurers also argued that they were entitled to be subrogated to PEV’s contractual right to the Rathbone Indemnity.
The first instance decision was in favour of the insureds as the judge held that PEV could recover under the PI policy which did not apply as a secondary layer to the Rathbone Indemnity. However, the judge held that the Excess Insurers were subrogated to PEV’s right to sue on the Rathbone Indemnity. The Excess Insurers appealed on the coverage and coverage priority issues while Rathbone PLC and PEV appealed against the subrogation issue. The Court of Appeal therefore considered the following three issues:
- Was the risk covered by the PI policy in respect of PEV?
- Did the PI policy apply secondary to the Rathbone Indemnity?
- If the Excess Insurers were liable to PEV, were they subrogated to PEV’s right to sue on the Rathbone Indemnity?
20  EWCA Civ 1464
Was PEV covered when acting as a personal trustee?
The scope of the PI policy was that the Excess Insurers would indemnify any “insured” for any loss as a result of a civil liability arising out a claim during the policy period. “Insured” parties included any “insured company” and “insured persons” – the latter of which included, among other defined persons, “a paid employee (full time, part time or temporary) working under the direct control or supervision of an insured company”. The policy further required that an “insured person” means “exclusively those persons employed by an insured company in the performance of professional services”.
“Professional services” was defined in the PI policy as “the financial services…performed by or on behalf of an insured company pursuant to an agreement with a third party…for compensation…”.
The Excess Insurers’ argued two distinct reasons as to why PEV was not an insured person. Firstly, he was not performing his duties as a personal trustee in the capacity of a “paid employee” as defined in the PI policy. Secondly, PEV was not performing “professional services” as defined in the PI policy.
The Court of Appeal rejected the Excess Insurers’ arguments. In summary, it held (in respect of various “limbs” of the two grounds argued by the Excess Insurers) as follows:
- The argument that PEV was not a “paid employee” during the term of his contract of employment (on the alleged basis that he was not under Rathbone Jersey’s direct supervision or control when acting as a personal trustee) was not convincing.
- PEV’s conduct was under the control and/or supervision of Rathbone Jersey.
- PEV continued to act as a “paid employee” of Rathbone Jersey during his role as a consultant (for the purposes of the definition under the PI policy and not the common law concept of an “employee”) since his role did not change in any substantive way.
- PEV was acting “for and on behalf of” Rathbone Jersey during his role as a personal trustee. The PI policy would have required very clear words to exclude personal trustees acting for the Rathbone group.
- PEV was appointed as a trustee by a trust deed to which Rathbone Jersey was not a party. The Excess Insurers argued that the PI policy required PEV to act on Rathbone Jersey’s behalf pursuant to an agreement and that Rathbone Jersey must be a party to this agreement. The Court of Appeal held that it did not matter that Rathbone Jersey was not a party to any agreement between the Walker Trust and PEV, that there was no need to read such a limitation into the PI policy and that, even if this was required on the face of the PI policy, the Court of Appeal would have been willing to imply an agreement between Rathbone Jersey and the Walker Trust.
Did the PI policy apply secondary to the Rathbone Indemnity?
Clause 5.14 of the PI Policy provided that:
“Insurance provided by this policy applies excess over insurance and indemnification available from any other source”.
The Excess Insurers relied on this excess clause for their argument that the PI policy applied secondary to the Rathbone Indemnity.
The Court of Appeal held that, although the wording of the clause was wide enough to capture both insurance policies and non-insurance indemnities, the Excess Insurers were not entitled to rely on an indemnity given by one co-insured to another as that would significantly undermine the protection afforded by the PI policy. The PI policy would have required very clear wording to treat the Rathbone Indemnity as the primary source of cover.
The Court of Appeal outlined the right of subrogation, quoting Lord Bingham in Caledonia North Sea Ltd v British Telecommunications plc (Scotland) & Others21:
“The law has long been settled in England and Wales…an insurer who has fully indemnified an insured against a loss covered by a contract of insurance between them may ordinarily enforce, in the insurer’s own name, any right of recourse available to the insured…”.
The Court of Appeal further explained that a right of subrogation could be excluded in two ways:
- by way of a waiver of the right in the policy itself; or
- under the terms of the underlying contract between the insured and the third party preventing the exercise the right.
The Court of Appeal discussed the arguments raised by Rathbone PLC and PEV which it described as running both grounds for exclusion i.e. that an implied waiver should be read into the PI policy and that, in any event, on the proper construction of the contract providing the Rathbone Indemnity it is clear that the parties intended to treat the PI policy as the primary cover.
The Excess Insurers argued that the terms of the PI policy were unambiguous and provided that the parties had specially addressed the issue of exclusion and chose not to exclude the right of subrogation.
The Court of Appeal held (by 2:1 majority) that, although the PI policy plainly did not include an express waiver of a right of subrogation with respect to the Rathbone Indemnity, a term should be implied into the PI policy that the Excess Insurers would not seek to be subrogated to PEV’s right to sue on the Rathbone Indemnity. Such an implied term was, in the Court’s view simply making clear what the parties must have intended (as opposed to the Court deciding on how the risks ought to have been allocated). The Court of Appeal decided that not implying such a waiver would defeat the very benefit which the PI policy was intended to confer (and for which Rathbone PLC had paid the premiums). The parties could not reasonably have intended to give priority to the Rathbone Indemnity over the PI policy and it was “pure happenstance” that the Rathbone Indemnity was in place.
The Court of Appeal further held that, even if an implied waiver was incorrect, the terms of the contract for the Rathbone Indemnity precluded the exercise of the right of subrogation. Rathbone PLC had, in substance, made two forms of cover available to PEV and PEV would have been indifferent to how he was protected, provided either the Rathbone Indemnity or the PI policy applied. The Court of Appeal held that, in the circumstances, it would have readily
implied a term into the contract for the Rathbone Indemnity to the effect that the PI policy was intended as the primary cover.
Beatson LJ provided a minority opinion in that, while he agreed with the majority’s overall conclusion (i.e. that there was no recourse available to the Excess Insurers against the Rathbone Indemnity), he did not consider an implied waiver in the PI policy to be appropriate. Very clear words would have been required to remove the right of subrogation from the PI policy in all but exceptional cases, given the nature of such an important right. However, he agreed that the terms of the contract for the Rathbone Indemnity could be construed such that PEV would have no claim against the Rathbone Indemnity in respect of sums received from the Excess Insurers. As a result, the Excess Insurers would, in principle, have a right of subrogation but there would be no claim to which the right could attach.
21  UKHL 4
The relevance of events subsequent to valuation date when quantifying under a Warranty and Indemnity Policy
Ageas (UK) Ltd v Kwik-Fit (GB) Ltd and AIG Europe Ltd22
High Court, 4 July 2014
The High Court has held that when assessing damages for breach of warranty in a sale and purchase agreement (and a resulting claim under a warranty and indemnity policy), subsequent events can only be taken into account, where necessary, to give effect to the compensatory principle where it does not contradict the parties’ contractual allocation of risk.
Ageas entered into the agreement to purchase the full share capital of Kwik-Fit Insurance Services Ltd for £215m. Ageas valued the company on the basis of the accounts provided by Kwik-Fit.
Kwik-Fit gave warranties that the audited accounts were prepared in accordance with professional standards, and gave a true and fair view of the assets, liabilities and financial position of the company and its subsidiaries. In addition to this Kwik-Fit warranted that they did not materially misstate the assets or liabilities. At the same time as entering into the agreement, Ageas entered into a warranty and indemnity policy (“W & I Policy”) with AIG to protect it against losses resulting from breaches of warranty in excess of a £5m cap. The measure of loss recoverable by Ageas under the W & I Policy is that which would be recoverable from Kwik-Fit under the SPA, subject to one £5m excess.
Kwik-Fit breached the warranties by failing to treat properly certain aspects of projected bad debt, including “Time on Cover Bad Debt” (“TOCBD”) (bad debt which arises out of customers remaining on cover for a period that they have not paid the premium). This resulted in the profits and assets in the warranted accounts being overstated.
Ageas’ claim against Kwik-Fit settled and AIG admitted liability under the W & I Policy. Ageas claimed that the total loss for breach of warranty amounted to £17.6m (and its claim under the W & I Policy was, therefore, £12.6m); this figure was calculated on the basis of TOCBD rates as at the date of completion in 2010. AIG contested this figure on the basis that it would “over- compensate” Ageas because it failed to take account of events that followed post-acquisition. Essentially, the figure relied upon those 2010 TOCBD rates continuing to apply in future, whereas those rates represented an historical peak and subsequently fell. AIG claimed that, with reference to hindsight, the amount overstated was lower and so the damage claim should be limited to £8.7m.
With two qualifications, the Court held that it was “consistent with principle and justice” that, when assessing damages for breach of contract by reference to the value of a company at the date of the breach, whose value depends on a future contingency, account can be taken of what is subsequently known about the outcome of the contingency as a result of events subsequent to the valuation date (see The Golden Victory23). The qualifications were that this approach:
22  EWHC 2178 (QB)
23  2 AC 353
Here, the defendants had not shown that assessing damages as at the date of the breach offended the compensatory principle. In addition, post-acquisition events were part of the contractual risk assumed by Ageas. Ageas’ claim against AIG was therefore entitled to succeed in the principal sum of £12.6m.
This decision reaffirms the overriding compensatory principle which dictates that in breach of warranty claims damages are generally assessed as at the date of breach; the principle also encompasses the proposition that to give effect to the principle hindsight can be taken into account, but only if justified and necessary.
Court of Appeal upholds Commercial Court decision concerning avoidance of residential insurance policy
Alan Bate v Aviva Insurance UK Ltd 24
Court of Appeal, 21 March 2014
We previously commented on the High Court decision in our Annual (Re)insurance Review 201325. The Appellant, Mr Alan Bate, appealed against HHJ Mackie QC’s decision to dismiss his claim against the Respondent insurers, Aviva, for damages and an indemnity arising out of a fire to his property. The judge held that the insurers were entitled to rescind the policy by reason of non-disclosure, material misrepresentation and breach of condition. The judge also dismissed a claim for damages pursuant to s.150 FSMA 2000 and explained that, in its rejection of the claim, the insurers had not, as alleged by Mr Bate, acted in breach of Rule 7.3.6 of the Insurance Conduct of Business (ICOB) Rules (now ICOBS 8.1).
The Court maintained that the description given by Mr Bate did not give Aviva a fair presentation of the risk. Arguments that such statements did not amount to misrepresentation were incomprehensible and the Commercial Court’s decision that the statements made by Mr. Bate “constituted a material representation which could have affected the terms on which the insurance would have been given was fully justified, measured and inevitable”.
The Court also confirmed that Aviva had not acted in breach of Rule 7.3.6 of the ICOB rules. The misrepresentation which Mr Bate relied upon was negligent and so, pursuant to Rule 7.3.6(2)(b), Aviva could refuse to meet M. Bate’s claim. Tomlinson LJ distinguished for the purposes of Rule
7.3.6 an claim which is fraudulent and that which showed “evidence of fraud”. A fraudulent claim relates to a claim which dishonestly asserts that an insured peril has occurred when it has not. Tomlinson LJ explained that there was no doubt that Mr Bate’s claim related to an accidental fire and so was by that meaning genuine, not amounting to a fraudulent claim. “Evidence of fraud”, however, relates to fraud used in pursuing a claim, as was the case in the actions of Mr. Bate. For these two reasons, Aviva was not required under Rule 7.3.6 of the ICOB rules to meet the claim of Mr Bate.
It is worth noting that ICOBS 8.1, which applies to policies entered into from 6 April 2013, also permits a consumer’s claim to be rejected if there is evidence of fraud, and, as such, the case remains relevant to the application of the revised rule.
-  EWCA Civ 334
- See page 25 of our Annual (Re)insurance Review 2013 available here:
Beacon Insurance Company Ltd v Maharaj Bookstore Ltd26
Privy Council, 9 July 2014
The Privy Council held that, in the absence of any dishonest intent, the insured’s alterations to invoices submitted in processing its coverage claim did not constitute a “fraudulent device”.
The Privy Council’s decision overturned the judgment of the Court of Appeal of the Republic of Trinidad and Tobago.
A bookstore owner, Maharaj Bookstore Ltd (“Maharaj”), took out a policy with Beacon Insurance Company Ltd (“Beacon”) in respect of fire damage and other perils. A fire broke out at the bookstore during the policy period which destroyed stock and other property on the premises. Maharaj sought indemnification under the policy and, as a part of the quantification of its losses, submitted numerous invoices to Beacon.
The loss adjustors acting on behalf of Beacon repudiated liability under the policy, alleging that Maharaj had made false or fraudulent declarations in particular invoices for purchases of stock. They relied on condition 8 of the policy which stated:
“If any claim be in any respect fraudulent, or any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the insured or anyone acting on his behalf to obtain any benefit under this policy…all benefits under this policy shall be forfeited”.
Maharaj conceded that it made errors in respect of certain invoices but that other invoices were genuine. Maharaj explained that it had bought books through intermediaries as it had faced difficulties sourcing stock directly from suppliers and that the alterations to the invoices by replacing the intermediaries’ names with its own was intended to reflect that Maharaj was the owner of the goods which had been purchased for it. Maharaj submitted testimony to Beacon from the intermediaries in support of this explanation. Beacon remained unsatisfied with these explanations and, as a result, Maharaj commenced proceedings against Beacon.
First Instance and Court of Appeal decisions
The First Instance Court held in favour of Maharaj on the basis that the testimony in support of Maharaj’s claim was convincing and that Maharaj had not made a fraudulent claim or used fraudulent devices in seeking coverage.
On appeal by Beacon, the Court of Appeal overturned the first instance decision on three principal grounds. We discuss in detail further below two key grounds which were as follows:
- the trial judge failed to distinguish between a “fraudulent claim” and a “fraudulent device” and failed to address the latter allegation; and
- the trial judge failed to draw proper inferences from the evidence. Maharaj appealed to the Privy Council.
Privy Council decision
The Privy Council reversed the Court of Appeal’s decision and held in favour of Maharaj.
The Privy Council highlighted various cases concerning the role of an appeal court – it noted that it should only intervene against the first instance decision if the trial judge has gone “plainly wrong” and that “a court of appeal will only rarely even contemplate reversing a trial judge’s findings of primary fact”.
26  UKPC 21
1) Distinguishing between a fraudulent claim and fraudulent device
The Privy Council rejected this ground outright. It held that the trial judge had clearly identified the difference when he quoted provisions of the decision in Agapitos v Agnew27 which stated that “a fraudulent device is used if the insured believes that he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie”.
The Privy Council held that while Maharaj altered the documents to explain the facts as it understood them and, thus, by inference, to improve the processing of its claim, this “could not be fraudulent absent dishonest intent”.
2) Inferences from the evidence
The Court of Appeal rejected evidence from witnesses for Maharaj and treated them as liars on the basis that they supported an untruthful claim that Maharaj was blacklisted from sourcing stock directly from a supplier (Maharaj had, however, conceded in cross- examination at first instance that this was not the case). The Privy Council also noted that the Court of Appeal did not have the complete transcript of the trial. As such, the Privy Council held that the Court of Appeal’s position was not supported by the evidence.
The Privy Council further held that the trial judge was entitled to come to the conclusion that the alterations to the invoices had not been dishonest and that the Court of Appeal had not exercised caution in being slow to reverse a first instance decision and primary findings of fact. The trial judge’s finding that there was no fraudulent intention on the part of Maharaj “could be displaced only on the clearest grounds”.
Fraudulent device rule should be followed as a matter of ratio
Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (The DC Merwestone)28
The Court of Appeal has upheld the first instance decision of Mr Justice Popplewell29. Popplewell J expressed reservations at the extension of the fraudulent device rule to vitiate an otherwise valid claim and allowed the appeal. However, giving the leading judgment, Lord
Justice Clarke held that the correct test for fraudulent devices was that set out by Lord Justice Mance in Agapitos v Agnew (The Aegeon) (No. 1)30. Clarke LJ rejected an argument that forfeiture must be proportionate. This was on the basis that it is a proportionate means of securing the aim of deterring fraud in relation to insurance claims, which relies on a longstanding doctrine of good faith between an insurer and the insured. This decision will no doubt please insurers whilst serving as a warning to insureds.
The ship owners appealed against the first instance decision that they could not recover losses from the respondent hull and machinery underwriters. Before embarking on a voyage, the crew of the Merwestone had used the emergency fire pump but failed to empty it properly or close
27  QB 556
28  EWCA Civ 247 EWCA Civ 1349
29 We previously commented on the High Court decision at page 6 in our Annual (Re)insurance Review 2013 available here:
30  EWCA Civ 247,  QB 556
the sea inlet valve to the pump. The result of this was that water entered the duct keel tunnel and made its way to the engine room, which it eventually flooded, incapacitating the vessel. The main engine was damaged beyond repair.
The alleged fraudulent statements were made in a letter that the ship owners’ general manager wrote in April 2010, in which he referred to the bilge alarm going off, but asserted that no one investigated because it was attributed to the rolling of the vessel. Popplewell J considered that the general manager genuinely believed that his account of the alarm was a realistic explanation of events, but he was reckless as to whether it was supported by the crew’s recollection, as he was concerned to support the owner’s arguments that they did not act without due diligence.
First Instance Decision
Commercial Court, 14 June 2013
The underwriters resisted the claim under the policy for the resultant loss. They advanced three alternative defences to the claim: (i) they denied that the loss was caused by an insured peril asserting crew negligence and lack of due diligence by the ship owners, (ii) they contended that the loss was caused instead by the unseaworthiness of the vessel, and (iii) alternatively, even if the claim was covered, they asserted it was forfeited because it was supported by fraudulent statements.
The Court conducted a detailed analysis of the law of proximate cause when determining loss by peril of the seas. It concluded that it was concerned with a casualty in which the chain of causation was (i) an external fortuitous event (crew negligence), (ii) unseaworthiness (but not debility), (iii) the effect of the sea on the vessel (which was not the ordinary action of wind and waves, meaning the wind and waves were not extraordinary but that their action on the vessel was), (iv) ingress of seawater, and (v) damage to the subject matter insured. The casualty was
a fortuity because the crew negligence was fortuitous. The fortuitous ingress of seawater was a peril of the seas, which was a proximate cause of the loss and damage.
In applying the Agapitos v Agnew31 materiality test, the Court was in no doubt that the April 2010 letter was a fraudulent device. It was intended to promote the claim in the hope of a prompt settlement. The purported factual account about the bilge alarm was part of that promotion. The general manager was reckless as to whether or not that account was true and, therefore, the letter amounted to an untruth told recklessly in support of the claim. The fraudulent device met the “limited objective element” of the test of materiality. However, the Court considered the Mance LJ test to impose a low and relatively inflexible threshold, which was unsatisfactory in a number of respects.
Court of Appeal, 16 October 2014
The ship owners appealed and contended that: (i) Popplewell J had erred in concluding that the narrative amounted to a fraudulent device when it had in fact been an attempt to explain what had happened; (ii) Popplewell J had applied the materiality test to the wrong representation;
- the special common law rule of forfeiture on a fraudulent insurance claim did not apply to fraudulent means or devices, and was a disproportionately harsh sanction; and (iv) the
application of the forfeiture rule to fraudulent devices had produced manifest injustice so that forfeiture was neither just nor proportionate.
The Court of Appeal held that Popplewell J had been entitled to find that the ship owner had used fraudulent devices. The insurers could reasonably expect that answers to their questions would be based on inquiry, as opposed to a hypothesis, even if they may uncover the hypothesis following their questioning of the crew.
The test for fraudulent devices which Mance LJ had set out in The Aegeon was that the device must be (i) directly related to the claim, (ii) intended by the assured to promote his
31 Referred to throughout this article as The Aegeon.
prospect of success and (iii) if believed, tend to yield a not insignificant improvement in the assured’s prospects of success before any final determination of the parties’ rights. Clarke LJ’s preference was that the part (iii) requirement be to demand a significant improvement in the insured’s prospects, as opposed to the negative formulation.
For several reasons, the Court of Appeal held that the decision in The Aegeon should be followed as a matter of ratio (it had been obiter dicta in The Aegeon). These reasons included that The Aegeon is authoritative, albeit not binding. A fraudulent device is a subspecies of a fraudulent claim and thus the application of the rule to fraudulent devices is consistent with its application to fraudulent claims, providing a coherent whole. The foundation of the rule is
the obligation of the utmost good faith between insured and insurer; its effect being that if the insured lies to its insurer in respect of anything significant in the presentation of the claim, it will not recover anything. There is a public policy justification for the rule as applied to both claims and devices, since its draconian consequences only apply to those who are dishonest.
This was supported by the Law Commissions of England and Scotland’s review of the fraudulent device doctrine between 2010 and 2012. The final Insurance Bill presented to Parliament in July 2014 provides that “If the insured makes a fraudulent claim under a contract of insurance – (a). The insurer is not liable to pay that sum”. Fraudulent claim is not defined in the bill, but the notes to the initial draft indicated that one of the fraudulent acts which made a claim fraudulent would be the use of a fraudulent means or device to support a genuine claim.
The ship owners argued that the extension of the forfeiture rule should either be just and proportionate as a requirement of its extension or by virtue of Article 1 of the First Protocol of the European Convention of Human Rights. Article 1 provides for the protection of property and that “Every natural or legal person is entitled to the peaceful enjoyment of his possessions”.
The Court of Appeal rejected this because the critical question was whether the “bright line rule” that the use of a fraudulent device forfeits the claim is, looking at the matter overall, a proportionate means of securing the aim of deterring fraud in relation to insurance claims. The Court of Appeal considered it was. The fact that forfeiture was harsh, and in some circumstances very harsh, did not mean it was disproportionate to the legitimate aim of deterring fraud in relation to insurance claims.
The appeal was unanimously dismissed on all grounds. This judgment is a strong marker in the ground for the strict and uncompromising stance the courts are likely to take where there is any fraud in relation to insurance claims. However, it should not be forgotten that a fraudulent device must still be proven on the facts and the Privy Council case of Beacon Insurance v Maharaj Bookstore32 (reported on in this review) shows that this can be difficult to achieve.
32  UKPC 21 - reported on page [X] of this review
Assuranceforeningen Gard Gjensidig v International Oil Pollution Compensation Fund 197133
High Court, 7 May 2014
This judgment provides specific guidance on the interpretation of the immunity provisions under Article 5 of the UK Headquarters (“HQ”) Agreement and section 6 of the International Oil Pollution Compensation Fund (Immunities and Privileges) Order 1979 (the “Order”). More generally, however, the case also demonstrates the willingness of English courts to look behind winding up orders, granting freezing injunctions when satisfied that there is a real risk of dissipation of assets.
In this case, the respondent tried to argue that the English Court did not have jurisdiction to grant a freezing order against it as it had immunity from ‘suit and legal process’ under the Order as interpreted in accordance with the HQ Agreement.
Mr Justice Hamblen disagreed because the Order only permitted immunity against freezing orders in respect of claims which did not fall within listed exceptions. As the UK claim did fall within one of the listed exceptions, the power to award such relief remained.
The P&I club, Gard, applied for a freezing order against funds held by the respondent international fund providing for compensation for oil pollution (the “Fund”). The Venezuelan criminal courts had found that the owners of the vessel Nissos Amorgos and Gard, their insurer, were liable for over US$60m in respect of Venezuela’s claims for pollution damage arising out of the vessel’s grounding off the Venezuelan coast in 1997 and subsequent escape of 3,600
mt crude oil from it. Gard and the Fund had already paid approximately US$6.5m in respect of the claims made between June 1997 and December 2000. Thereafter the Fund had paid approximately US$18.5m.
Gard brought claims in the UK and in Venezuela against the Fund. The claim in Venezuela, which is ongoing, seeks a declaration that the Fund is liable for Venezuela’s claim and reimbursement
of any money paid by Gard. The claim in the UK contended that pursuant to arrangements made between Gard and the Fund, Gard had a right of indemnity from the Fund in respect of any liability that Gard has to Venezuela in excess of the limit under the Convention on Civil Liability for Oil Pollution Damage of 1969 (“CLC”).
The need for a freezing order application arose because of the imminent winding up of the Fund. The Fund asserted that the English court had no jurisdiction to make the freezing order.
The Fund asserted that it had immunity from the grant of freezing order relief based on section 6 of the Order and the HQ Agreement.
Section 6 of the Order provides:
“(1) Within the scope of its official activities the Fund shall have immunity from suit and legal process except:…
33  EWHC 1394 (Comm)
- in respect of any contract for the supply of goods or services, and any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation;…”
The immunity set out in the HQ Agreement was in similar, but not identical, terms.
Immunity in the UK
Gard argued that immunity from freezing order relief only applied if the action was one which did not fall within one of the exceptions listed in section 6(1) of the Order. The Fund’s case was that the words of section 6 of the Order are unclear and that, as there was ambiguity, regard should be had to the HQ Agreement, which gave a wide immunity from “provisional judicial constraint”, including freezing orders. Mr Justice Hamblen agreed with Gard. The immunity under section 6(1) is a qualified immunity, which is only granted if and to the extent that the suit or legal process does not fall within one of the listed exceptions. He found that there
was a good arguable case that the claim against the Fund was in respect of ‘a loan or other transaction for the provision of finance’, and, therefore, under section 6(1)(c) an exception, to the grant of immunity. The definition of legal process is wide, so that if there is no ‘immunity from legal process’, therefore, there is no immunity from freezing orders.
He considered that the claim amounted to ‘a loan or other transaction’ on the basis that Gard made payments of compensation up to the CLC limit (even though they were recoverable in part from the Fund) in reliance on the Fund’s agreement, through established practice, first, that once the shipowner’s limit was reached the Fund would take over the remaining claims and secondly, that at the end of the case, once all claims had been dealt with, a balancing payment would be made by the Fund to Gard.
Gard’s case was that this practice amounted to a contractual agreement. Hamblen J considered that, despite there being no formal loan arrangement, Gard could show a good arguable case that its claim fell within the section 6(1)(c) exception and therefore that the Fund had no immunity in the UK.
Immunity in Venezuela
Conversely, however, Hamblen J held that the Fund did have immunity from freezing relief in relation to the Venezuelan proceedings. Gard had submitted that it had a good arguable case that its claim for relief fell within section 6(1)(b) of the Order, i.e. that its claim was made ‘in accordance with the provisions of the Convention’.
Hamblen J did not accept this. There was no provision in the Fund Convention which entitled Gard to bring a claim of this nature. The fact that the claim related to an alleged liability of the Fund to Venezuela did not mean that the claim was made ‘in accordance with the provisions of the Convention’. It remained a claim which was not conferred by or recognised in the Fund Convention. In addition, the alleged liability was not a liability to the person bringing the claim and it made no difference that the Venezuelan court had exclusive jurisdiction over Fund Convention proceedings.
Accordingly, Gard could not show it had a good arguable case that the Venezuelan proceedings fell within an immunity exception, meaning the Fund, in turn, had immunity in respect of the application for freezing relief made in relation to those proceedings.
Freezing order relief
Gard could satisfy the good arguable case threshold regarding its claim in the UK. There was a real risk of dissipation of the Fund’s assets, since resolutions were to be put to the Fund shortly for its winding up and the return of funds currently held to contributory oil receivers in contracting states. This is of particular interest, and must have been persuasive since insolvency is not normally sufficient to justify a finding of a real risk of dissipation. Freezing
order relief was granted in respect of the claim made by Gard in proceedings in the UK, but not in respect of the claim made in the Venezuelan proceedings.
Mitsui Sumitomo Insurance Co (Europe) Ltd and Others v Mayor’s Office for Policing and Crime34
Court of Appeal, 20 May 2014
The Court of Appeal has overturned the High Court’s decision that consequential losses were not recoverable under the Riot (Damages) Act 1886 (the “Act”) and has held that the Mayor’s Office for Policing and Crime (the “MOPC”) was liable for such consequential losses arising out of damage caused by riotous behaviour. This liability arose in respect of uninsured claimants as well as insurers claiming in relation to sums paid out under policies.
On 8 August 2011, during the 2011 riots in London (and other cities across the UK), a gang of youths looted and set fire to a Sony distribution warehouse in Enfield. Sony (the occupier of the warehouse) claimed under its insurance policy for damage to the contents and business interruption losses while Cresta Estates Ltd (the owner of the warehouse) claimed under its insurance policy for physical damage to the warehouse and loss of rent. The insurers, Mitsui Sumitomo Insurance (Europe) Ltd, Tokio Marine Europe Insurance Ltd and Royal & Sun Alliance Insurance PLC paid out under these policies and sought recovery against the MOPC under the Act. The other claimants to the proceedings claimed against the MOPC for destruction of stock stored in the warehouse (they were not insured against this loss).
The Act provides35 that:
Where a house, shop, or building in a police area has been injured or destroyed, or the property therein has been injured, stolen, or destroyed, by any persons riotously and tumultuously assembled together, such compensation as hereinafter mentioned shall be paid out of the police fund of the area to any person who has sustained loss by such injury, stealing, or destruction...
Where insurers have indemnified an insured against those losses falling under the scope of the Act, they are entitled to claim compensation in place of the insured36.
At first instance, the High Court held that the gang involved in the looting and arson were “persons riotously and tumultuously assembled” and that the MOPC was liable under the Act to compensate the claimants for their direct losses – but that this liability did not extend to consequential losses.
The MOPC appealed against the finding of liability while the claimants cross-appealed against the decision on the extent of the liability. The Court of Appeal, therefore, considered two issues in the appeal:
- whether the perpetrators of the damage fell within the description of “persons riotously and tumultuously assembled together”; and
- whether compensation was recoverable only in respect of the physical damage/destruction, or whether it also extended to consequential losses caused by that damage/destruction.
-  EWCA Civ 682
- Section 2(1) of the Act.
- Pursuant to S.2(2) of the Act.
The Court of Appeal agreed with the High Court’s ruling that the perpetrators were persons riotously and tumultuously assembled together and that the MOPC was therefore liable to the claimants.
The Court of Appeal considered specifically the meaning of the terms “riotously” and “tumultuously”. The MOPC argued that a “riotous and tumultuous” assembly is one which is: (i) of considerable size; (ii) excited and emotionally aroused; and (iii) behaving in such an agitated, volatile, noisy, angry and threatening manner that it should be obvious to the police
that something needs to be done. That definition, the MOPC argued, was to be contrasted with a group acting secretly or furtively (which the MOPC argued was how the perpetrators of the damage acted in this case).
However, the Court of Appeal determined that the test is not whether the perpetrators’ behaviour is such that it should have been obvious to the police that something needed to be done, nor whether the police could notionally have prevented the incident. This would entail
a counter-factual assessment of whether the police could have prevented the damage which comes very close to asking whether the police were in some way at fault (the Act creates strict liability and not fault-based liability). Whether persons are riotously and tumultuously assembled is a factual assessment which does not turn on the ability of the police. The focus of the inquiry is, therefore, whether the property has been damaged or destroyed as a result of mob violence. This is a question of degree and it is for the trial judge to carry out an evaluative exercise on the primary facts of the case.
The Court of Appeal determined that the High Court judge had directed himself correctly in law and that the conclusion which he reached on his evaluation was one to which he was entitled to come. The Court of Appeal was reluctant to reassess such an evaluation and dismissed the appeal on the question of liability.
The Court of Appeal overturned the High Court’s findings that consequential losses were not recoverable under the Act.
The High Court considered the wording in the preamble to the Act (which has since been repealed but the High Court took it as indicative of what Parliament had intended) and S.7 of the Act (which deals with the persons deemed to have sustained the loss in relation to damage to particular buildings) and came to the conclusion that recoverable loss under the Act was limited to physical damage. In particular, the High Court judge considered that the preamble wording “…which property is damaged…liable in certain cases to pay compensation for such damage…” indicated that compensation was only available “for” damage to property.
The Court of Appeal noted that the purpose of compensation under the Act was remedial and that it should therefore receive a “liberal interpretation” – it did not see any reason to construe the preamble of the Act in the limited way the High Court had done. Further, the Court of Appeal considered that the purpose of S.7 of the Act was simply to identify who may be the claimant (and not the type of losses which are recoverable). Therefore, the Court of Appeal held that there was nothing in the Act which showed that consequential losses could not be recovered.
The MOPC also submitted that if a police authority is strictly liable for the consequences of riotous behaviour it could only be because it was fair and appropriate for them to be notionally and collectively responsible for failing to prevent those consequences – and that it was one thing to be taken to have knowledge of, for example, the property about to be attacked but quite another to suggest that it should also have knowledge of a private citizen’s economic affairs (and thus be liable for consequential losses). The Court of Appeal rejected this appeal to fairness. It noted that the law as well as the liberal interpretation of the law on this matter was well established. Even if it was unfair, it was for Parliament to change this position and, although Parliament could have excluded consequential losses from the Act, it had not done so.
Insurance broker not liable despite providing inadequate insurance cover to a commercial client
Eurokey Recycling Ltd v Giles Insurance Brokers Ltd37
High Court, 12 September 2014
The Court held that an insurance broker was not liable under contract or in tort despite the fact that one of its commercial clients was found to be grossly underinsured following a fire. The broker had adequately explained the business interruption cover to be provided and had no reason to believe the figures, provided by the client, and on which the cover was based, were inadequate.
Giles acted for Eurokey, a waste recycling company, in placing its business interruption cover. Eurokey’s main premises in Leicestershire were destroyed by fire in 2010. When Eurokey sought to claim under the insurance, the combined commercial insurers threatened to avoid the policy by reason of gross underinsurance. While Eurokey had declared turnover of £11 million it should have been £17 million; this had thereby altered the cover required for the company. A settlement was reached with insurers and Eurokey claimed the shortfall plus consequential losses from Giles. Eurokey alleged that Giles had, among other things:
- Given no explanation of how to calculate the appropriate BI sum insured;
- Incorrectly sought cover for turnover of £11m, when in fact Eurokey’s turnover was more like
£17 million; and
- Not paid attention to Eurokey’s accounts, provided after the policy had been placed, which showed the turnover at over £17 million.
Mr Justice Blair dismissed the claim in its entirety. He held that Giles had acted upon the instructions given by Eurokey regarding its required insurance. Giles had been entitled to do so because it had given a proper explanation of the insurance and had no reason to doubt the figures which had been provided by Eurokey for the calculation. There were a number of
mistakes in the records and presentations carried out by Giles but the Court was able to see past them and get to the core issue of why the cover in place was for the sums it was.
Although not relevant given the finding, Mr Justice Blair also said, obiter, that a contributory negligence deduction of 50 per cent would have applied had he found Giles negligent. This was because Eurokey had to take responsibility for providing incorrect figures; indeed they provided the same incorrect figures to alternative insurers when trying to obtain cheaper insurance.
A Useful Test
The judgment contains a number of interesting points on the duties of an insurance broker:
- A broker is not expected to calculate the business interruption sum insured or to choose a maximum indemnity period. These are matters for the client.
- The client must, however, be given an adequate explanation of how to calculate the sum insured and choose a maximum indemnity period. The broker should take reasonable steps to ensure that the client fully understands this.
37  EWHC 2989 (Comm.)
- A broker must take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but is not required or expected to conduct a detailed investigation into the client’s business.
- The nature and scope of a broker’s obligation to assess a commercial client’s business interruption insurance needs will depend upon the particular circumstances of the case, including the client’s sophistication and the number of times the broker has met the client in the past.
- A client may not need annual repetition of advice previously given and understood – this is assuming that the responsible personnel remain the same.
- If an apparently sophisticated client provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
- Where a broker is given express instructions as to the cover to be obtained, he must exercise reasonable care to adhere to those instructions.
The Supreme Court hands down judgment on PPI mis-selling and unfair relationships under the CCA
Plevin v Paragon Personal Finance Ltd38
The Supreme Court, 12 November 2014
This case revisited the issue of unfair relationships in payment protection insurance (PPI) mis- selling claims in respect of S.140A Consumer Credit Act 1974 (CCA) and focussed on two key issues:
- Whether the failure to disclose the amount of commission paid in respect of the PPI created an unfair relationship; and
- Whether the broker’s failure to assess and advise upon the suitability of the PPI for Mrs Plevin’s demands and needs was something done or omitted on “behalf of” the lender for the purposes of the CCA.
The Supreme Court ruled that the non-disclosure of the amount of commission (at 71.8%) had the result of making Paragon’s relationship with Mrs Plevin unfair. The Court also clarified that the failure to conduct a demands and needs appraisal did not apply here and that Paragon was under no obligation to do so.
Mrs Plevin was a 59 year old lecturer and a widow. She lived in her own house with a mortgage and unsecured personal debt; she had no dependents and had generous sickness cover provided by her employer.
Mrs Plevin received an unsolicited leaflet from a broker called LLP Processing UK (LLP) a broker authorised by the FSA (now the FCA) to be an insurance intermediary subject to the FSA’s Insurance Conduct of Business sourcebook (ICOBS). The offer was to refinance Mrs Plevin’s debts with security provided by her home.
Mrs Plevin called LLP and expressed an interest in the offer and LLP assessed her demands and needs as required by ICOBS. During the call a quotation for a product was made by LLP to Mrs Plevin. The proposal was for her to borrow £34,000 from Paragon Personal Finance Ltd (Paragon). Alongside the loan a PPI policy was offered paid as a single premium added onto the loan. After the call, LLP provided an application form and a ‘Key Facts’ document to Mrs Plevin.
38  UKSC 61
Paragon then contacted Mrs Plevin for a “speak with” in line with their anti-money laundering policy. This, along with the cheques sent by Paragon as part of the refinancing was the only contact Mrs Plevin had with Paragon.
In a unanimous decision, the Supreme Court overturned the leading authority on S.140 CCA; the case of Harrison and Harrison v Black Horse39. Here the Court of Appeal had ruled that a relationship could not be found to be unfair where there had been no breach of the relevant statutory regulations.
In his sole judgment Lord Sumption provided that the ICOB rules (now ICOBS) “impose a minimum standard of conduct” and that a relationship could be unfair for reasons “which do not have to involve a breach of duty”. Rather, the assessment of fairness requires “a wide range of considerations” including:
The characteristics of the borrower, her sophistication or vulnerability, the facts which she could reasonably be expected to assume, the range of choices available to her, and the degree to which the creditor was or should have been aware of these matters.
In ruling that the relationship was unfair, Lord Sumption held that the non-disclosure of commission was unfair because it led to a “sufficiently extreme inequality of knowledge and understanding”. He stated that there is a “tipping point” at which commissions become so large that it renders the relationship as such. Here, he identified the 71.8% commission charged as well beyond this tipping point but did not define when this would occur.
In respect of the failure of Paragon to assess the suitability of the PPI provided to Mrs Plevin, the Supreme Court held that Paragon could not have been expected to carry out its own suitability assessment. This is because this statutory obligation was expressly assigned to LLP and the key question was, therefore, whether the acts or omissions of LLP were done or not done “on behalf of” Paragon. Lord Sumption gave the term its ordinary meaning and confined it to agency and deemed agency relationships. Here, LLP was not acting as Paragon’s agent.
The appeal was dismissed, although for reasons different to those given by the Court of Appeal, and the case will be remitted to the County Court at Manchester to decide what (if any) relief under S.140B CCA should be ordered.
It is now apparent that the fairness of a debtor-creditor relationship will be fact specific and involve an assessment of “a large number of forensic factors”. Indeed, codes of conduct are just that and no more; while they provide the minimum standards to be expected they do not create legal relations. Thus, while compliance with regulatory obligations is a factor it is not the deciding factor.
It is thus less apparent at what point a debtor-creditor relationship becomes unfair. Lord Sumption provided that there is a “tipping point” but where that may be remains undefined. Here, the commission rate of 71.8% was deemed unfair and it likely that cases of a similar nature will be hotly contested where the commission was below this level. Further, this case does little to clarify what remedy can be expected in circumstances where the relationship has passed that tipping point.
39 [2012 Lloyd’s Rep IR 521
Court grants reinsurer’s application for summary judgment – retrocessionaire’s defence had no reasonable prospect of success
Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd40
Commercial Court, 2 July 2014
We reported last year on the Commercial Court’s ruling on a number of preliminary issues concerning the proper continuation of a retrocession contract and, in particular, the follow-the- settlements clause41. Hamblen J rejected Novae’s construction and upheld that advanced by Tokio.
Mr Justice Field has now granted an application for summary judgment made by reinsurer, Tokio Marine Europe Insurance Limited (“Tokio”). It was held that the defence raised by the retrocessionaire, Novae Corporate Underwriting Limited (“Novae”), that the underlying
settlement was entered into by the original insurer, ACE Europe (“ACE”), without ACE having taken all “proper and businesslike steps”, had no reasonable prospect of success.
Novae’s defence stated that, applying the principles established in Insurance Company of Africa v Scor (UK) Reinsurance42, ACE was required to take all proper and businesslike steps in its settlement with the original insured. Novae argued that such steps were not taken by ACE, submitting that ACE did not consider numerous factors including i) the definition of “Occurrence” in the Master Policy, ii) the different causes of the flooding and heavy rainfall in Thailand in 2011 and iii) whether the original insured’s losses could be attributed to different sources.
Mr Justice Field granted Tokio’s application for summary judgment; it was held that Novae’s defence had no reasonable prospect of success. ACE was entitled, in Mr Justice Field’s opinion, to conclude that there was nothing additional to be gained by further investigation into coverage under the local policy or by disputing the meaning and effect of the definition of “Occurrence” in the Master Policy. This was principally based upon his conclusion that a
settlement of £80m net was “undoubtedly a good settlement” as it was substantially less than the projected final adjusted loss of £90 to £100m. He found that, assuming Novae’s appeal to the Court of Appeal on the preliminary issues is not successful, there should be no good reason why the ordinary presumption that Novae, as the reinsurer, will follow the settlement of ACE, as the reinsured, should not apply. The case emphasises that insurers are not obliged to ensure that any settlement maximises returns for excess of loss reinsurers when meeting the obligation to take such proper and businesslike steps.
40  EWHC 2105 (Comm)
-  1 Lloyd’s Rep 312
- See our previous commentary at page 36 in our Annual (Re) Insurance 2013 available here:
Amlin Corporate Member Ltd v Oriental Assurance Corp43
Court of Appeal, 7 August 2014
The Appellant, Oriental Assurance Company (“Oriental”), appealed against Field J’s decision44 that, by reason of a breach of a typhoon warranty in a reinsurance contract between the reinsurers and the Appellant, the reinsurers were not liable to indemnify Oriental in respect of cargo liabilities arising out of the loss of the vessel.
The Court considered Oriental’s argument that the typhoon warranty should be construed by reference to the way in which typhoon warnings were generally understood and acted upon by the maritime community in the Philippines. Oriental asserted that a circular containing revised guidelines on the movement of vessels during heavy weather that had been issued by the Headquarters of the Philippine Coast Guard (the “Circular”) and which provided the ship owners and masters with a discretion as to whether or not to sail when this type of warning
was given, should be taken into account. Oriental maintained that only if an experienced insured understood the warning as advising against setting sail in all circumstances would there have been a breach of the typhoon warranty. LJ Gloster, however, held that on the plain reading of the warranty used by the parties, reference was simply made to typhoon warnings and storm warnings without distinction. If the parties intended the warranty to refer to the Circular, or what an experienced insured would have understood the warning to prohibit, this would have been expressly stated in the warranty itself.
With regard to whether Field J was entitled to conclude on the evidence that the intended route was the usual route, LJ Gloster explained that such a conclusion should not be in dispute. The relevant intention was that of the Master, and there was no documentary evidence of a voyage plan for the alternative route having been prepared by the Master. Instead, both formulations produced by the Master represented an intention at the relevant time to take the usual route.
43  EWCA Civ 1135
44 See our previous commentary at page 16 in our Annual (Re) Insurance 2013 available here:
The Federal Court of Justice on the German Insurance Act 2008
The judgments of the Federal Court of Justice (“BGH”) on the new German Insurance Act 2008 (“VVG”) are relatively sparse in numbers, albeit the VVG has been in force for nearly six years. However, with the two judgments set out below, the BGH has shed some light on the interpretation of two areas of law.
Wilful increase of risk
BGH, 10 September 2014 – IV ZR 322/13
The BGH had to decide on the following case regarding the interpretation of when an increase of the insured risk was “wilful”. The insured farmer had insured a solar power system installed on the roof of his barn. In this barn the insured stored dry hay. Subsequently, the insured parked a tractor in the barn. A fire ensued and destroyed the barn as well as the solar power system. The insurer refused to pay and alleged that the insured had wilfully increased the insured risk without the insurer’s consent.
The insured’s claim for insurance benefits was dismissed by the Regional Court as well as the Higher Regional Court. The Higher Regional Court held that the insurer was released from liability as the insured wilfully drove the tractor into the barn and thereby wilfully increased the insured risk.
On appeal, the BGH set aside the lower court’s judgment. It held that the insured’s knowledge of the facts that lead to an increase of the insured risk alone is not sufficient, but that, in addition, the insured has to realise that his actions lead to the increased probability of the materialisation of the insured risk. The BGH reasoned that if the interpretation of the High Court was right, cases of gross or slight negligence or even complete blamelessness would be hardly possible as nearly every insured increasing the insured risk knows about the facts that lead to the increase. This would go against the legislator’s intention of providing a tiered system of partial or full exclusion of coverage depending on the degree of fault in section 26 para. 1
of VVG and abandoned its “all or none” principle of the old Insurance Contract Act that was reformed in 2008.
Insurers’ duty to inform of the legal consequences of non-performance of pre-contractual obligations
BGH, 12 March 2014 – IV ZR 306/13
If an insured does not fulfil his pre-contractual obligations, the insurer may withdraw (“Rücktritt”) from or terminate (“kündigen”) the contract under section 19 of the VVG, depending on the degree of fault, and thereby be partially or completely released from liability. This obviously seems to be a very beneficial provision for the insurer, especially if avoiding a policy due to fraudulent misrepresentation (“Anfechtung wegen arglistiger Täuschung”) is not possible due to e.g. preclusion. It is, however, a requirement that the insurer informs the
insured of the consequences of any non-performance of pre-contractual obligations according to section 19 para. 5 of the VVG. More often than not, the insurer fails to fulfil the strict information requirements.
With its judgment dated 12 March 2014, the BGH however held that the insurer is not obliged to inform a fraudulent insured, thereby upholding the general principle that a fraudster shall not be protected by the law. The decision was based on the following facts: the insured applied
for private health insurance and withheld information on pre-existing severe illnesses from the insurer who asked for such conditions in a questionnaire. The questionnaire did not, however, contain information about the consequences of not fulfilling the pre-contractual obligation. After the insurer had knowledge of the pre-existing illnesses, it withdrew from the contract. A subsequent avoidance due to fraudulent misrepresentation was time-barred. With declaratory
action, the insured claimed that the insurance contract was still in force, as he had not been duly informed of the legal consequences of his non-performance of pre-contractual obligations.
The lower courts dismissed the claim and the BGH subsequently dismissed the insured’s appeal against the judgment. It held that since avoidance for fraudulent misrepresentation does not require fulfilling any duty to inform the insured, it would be inappropriate if a withdrawal for the same reason would have to fulfil such duty. The court further held that the legislator itself stated in its reasons for the VVG regarding a provision on contractual obligations that the fraudulent insured does not require information on the consequences of non-performance. The BGH applied this principle on the pre-contractual obligations accordingly. This decision of the BGH has clearly strengthened the legal position of insurers vis-à-vis fraudulent insureds.
An ageing population and complementary insurance in Belgian Social Security
Following the elections that took place in Belgium in 2014, Assuralia, the Belgian professional union for insurance companies, has published a memorandum pointing out the issues that will have to be dealt with by the new government among which one of the major issues: pensions.
Pension, health and dependency expenditures have tremendously increased in the past years reinforcing the role of complementary insurances in order to maintain the Social Security in Belgium. According to a Study Commission on ageing, as from 2030, €17billion of supplemental financial means will have to be found per year to face the effects of ageing and maintain the Social Security as it is. Complementary insurances will play a core role in the coming years. Currently 70% of the workers benefit from a complementary pension subscribed by their employer, 95% of which have opted for an insurer. In order to maintain the purchasing power of each worker after retirement, this practice will have to generalised. Such practice has been driven by the Belgian law on complementary insurance of 2003 but it will not be sufficient.
Assuralia’s suggestions are, amongst others, the following:
- raising of awareness by social partners on the need to guarantee the purchasing power from the age of 65 by guiding the salary standards and indexation towards supplementary pension rather than increases of salary;
- establishing free supplementary pensions for workers through the creation of an obligation for each employer not having a pension plan to provide his workers with the necessary structure to constitute a supplementary pension;
- giving the possibility to the members of a group pension plan to increase their personal contribution above the limit provided for in the plan; and
- giving the possibility to workers of a certain age to transform a part of their gross salary in supplementary contributions.