Case Alert -  EWHC 46 (Comm)
The claimant, a company which specialised in the installation and fitting of swimming pools, notified various problems under its 2006/2007 policy with the defendant insurer and then raised further problems during the 2007/8 policy (written by the same insurer). Several issues fell to be considered by the judge in this case, including the following:
(1) What was the scope of the notification under the 2006/7 policy and was there a separate valid notification under the 2007/8 policy? The policy in question required notification as soon as possible "after becoming aware of circumstances… which might reasonably be expected to produce a Claim". The total loss in this case exceeded the policy limit of £5 million for both years and so the insurer sought to argue that all the losses fell within the 2006/7 policy year. Much of this issue turned on the particular facts of the case, but Moulder J referred to the earlier decision of Kajima v The Underwriter and emphasised the following two points in relation to notifications:
(a) It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification. Here, although certain problems were known, and notified, by the insured during the 2006/7 policy, other problems came to light during the 2007/8 policy and those problems were validly notified only in May 2008 under the second policy.
(b) There must be some causal, an opposed to some coincidental, link between the notified circumstances and the later claim/problem for all the loss to fall within the same policy year. No such causal connection was found to exist here between the different problems.
(2) Were costs incurred in respect of a claim brought against a third party covered by the policy?
The policy provided that the insurer "shall be entitled to … prosecute in the name of the Insured for its own benefit any Claim" and a dispute arose as to whether there was an implied obligation for the insurer to pay the insured's costs and expenses for any such claim.
The judge noted that the clause was not limited to subrogation claims once the insurer has paid out under the policy. She also found that proceedings against a third party (brought in the insured's name but not wholly for its benefit) had been approved by the insurer. However, she did not believe that it was necessary to imply a term that the insurer would indemnify the claimant for any costs and expenses which the insured incurred. However, that was only because "there was no reason why the [insured] should incur any costs and expenses if the [insurer] took proceedings in the name of the [insured]… Payment could be made directly by the [insurer] of costs and expenses and therefore there is no necessity to imply a term that the [insurer] would indemnify the [insured] for costs and expenses the [insured] incurred".
Although she did find that there was an implied term that the insurer would indemnify the insured in respect of any adverse costs orders against the insured, that was only for so long as the insurer was prosecuting the claim. The insured excluded the insurer from the conduct of the proceedings after August 2013. Accordingly adverse costs orders made after that date were not covered, even if they related to costs incurred before that date.
(3) The policy contained the following clause: "The Company will indemnify the Insured against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this Insurance". When does limitation for a claim for such mitigation expenses start to run? The judge held that, although there was no direct authority on the point, a mitigation of loss clause is a third party financial loss clause, with the result that "the insurer has agreed to hold the assured harmless against a specified loss or expense and once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense. Accordingly the right to an indemnity (and the cause of action) arises immediately the expense is incurred to mitigate a loss or potential loss".
However, where that right to be indemnified arose more than 6 years before the issue of proceedings (ie here before 28th January 2010), it would be time barred. This then led to a further discussion of whether the claimant was entitled to allocate lump sum interim payments from the insurer on account of its costs and expenses in chronological order (ie paying the claimant's earliest costs and expenses first), in order to ascertain what the insurer had paid so far in satisfaction of its obligation to indemnify the insured. The judge concluded (by analogy with an allocation case) that "if the appropriation is made bona fide and without collusion, the claimant has a choice as to how to appropriate the monies received between the different claims".
However, the claimant had not established a right to appropriate payments to a time barred debt. So payments made after 28th January 2010 had to be divided pro rata between expenses incurred before and expenses incurred after that date (and payments made after 28th January 2010 could not be treated as discharging only obligations after that date).
(4) On the facts, the judge rejected an argument that the insurer had agreed to indemnify the insured for the reasonable costs incurred on mitigation works, irrespective of the policy limit, provided those works were approved by the insurer's agent.
(5) On quantum, the parties disputed how much could be claimed by the insured for its overheads for mitigation work carried out by the insured's employees. The judge held that only overheads actually incurred could be claimed but rejected an argument that works unrelated to the pool repairs should not be allowed: "I accept the evidence of [the insured's expert] that overheads need only relate to the proper functioning of the business and should only be excluded if they were unrelated to the ordinary running of the business". In order to ascertain the amount of the overheads, it was held to be appropriate to take an average over the relevant period.
The judge also rejected an argument that because the Mitigation of Losses clause provided that the insurer "shall not be liable in respect of… the Insured's Contribution", that contribution should be deducted from the limit of indemnity. She found the policy wording to be ambiguous on this point, and if the insurer had wanted this result, it should have expressed it in plain terms.
COMMENT: Reference was made in this case to Teal Assurance v WR Berkley in which it was noted by the Supreme Court that a freedom to adjust the order of payment of claims "cannot in the present context readily be reconciled with the basic philosophy that insurance covers risks lying outside an insured's own deliberate control". However, that case differed from this one in that the insured here was not seeking to control the order in which claims were presented to insurers: it was instead seeking to control the order in which payments received from the insurers were allocated in order to ensure that the overall liability of the insurer was not reduced (ie because allocations were made to the time-barred elements of the claim first). The insured was said to be entitled to control that, save that it could not allocate payments to time-barred expenses.
The judge's comments on notification are also interesting. It is possible to notify a "can of worms"-type situation (ie awareness of a general problem), but here, very broadly, at the time of the first notification the insured was aware of general problems with one aspect of the swimming pool design but only became aware of problems with another aspect when it introduced changes to rectify the first problem. The decision therefore highlights how fact-sensitive the issue of notification can be.