High Court holds that an Insolvency Exclusion applies in respect of a claim under the Third Parties (Rights Against Insurers) Act 1930 (“1930 Act”) and awards summary judgment accordingly but declines to provide much-needed guidance on insurers’ liability in the case of claims partially settled by the Financial Services Compensation Scheme (“FSCS”).
The insured financial adviser provided investment advice to the Claimants, who were the trustees and sole beneficiaries of a self-administered personal pension scheme. In 2005, the Claimants invested £200,000 in a bond issued by the now well-known “Keydata”. In 2008, the Claimants invested £150,000 in securities issued by Lehman Brothers through a plan known as “Meteor”. Following the collapse of Keydata and Lehmans, the claimants suffered significant losses. The insured having entered liquidation in 2013 (but, prior to that, having been in administration since late 2011), the Claimants sought to pursue the insured's professional indemnity insurer, QBE, under the 1930 Act.
The insurer applied for summary judgment or strike out, on the basis that the claim had no reasonable prospects of success, because:
- The insurer was not liable to the insured under its professional indemnity insurance as a result of the application of an insolvency exclusion in the policy; and/or
- The Claimants did not have the standing to pursue the insured (or its insurers) in circumstances where they had assigned their rights of action against the insured to the FSCS.
1) The application of the Insolvency Exclusion
The policy excluded cover for any Claims, liability, loss, costs or expenses “arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or of any insurance company, building society, bank, investment manager, stockbroker, investment intermediary, or any other business, firm or company with whom the Insured has arranged directly or indirectly any insurances, investments of deposits” (the "Insolvency Exclusion").
The insurer made plain to the Claimants early on that it considered that the Insolvency Exclusion applied on the basis that the insolvencies of Keydata and Lehmans were a cause of the liability faced by the insured (which cause need not be a proximate cause – attention was drawn to the words "arising out of" and "relating…to" with the Judge concluding "If the intention had been to import a requirement of a proximate cause, the Insolvency Exclusion would not have used both of these expressions." Taken with the words "directly or indirectly", this indicates that the causative link may be more remote than proximate cause). The insurer accepted that this would give the exclusion potentially very broad effect but contended that this was intentional in light of the financial crisis of 2008.
The Claimants sought to persuade the Court of several competing narrower constructions of the Insolvency Exclusion, none of which was accepted in light of the “clear and unambiguous” drafting of the clause. The Judge held that exclusions need not be interpreted contra preferentem automatically, continuing the trend set by recent cases. Citing the 2016 decision of Impact Funding v Barrington, the Judge held that the Court should not adopt principles of construction which are appropriate to exemption clauses to the interpretation of insurance exclusions; these exclusions define the risk which the insurer is prepared to accept, rather than depriving the insured of rights it might otherwise have had. For the Insolvency Exclusion to apply, insolvency must be “specifically accountable as a cause” of, and “stand out as a contributing factor” to, the claim, liability or loss - which was the case on these facts.
That conclusion was reinforced when the Insolvency Exclusion was construed as against the prior year policy, which contained an insolvency exclusion in materially different terms, and which included a carve-back where the claim or loss arises directly from the insured’s legal liability. The Court confirmed the established principle that it is entitled to take a prior agreement into account as an aid to interpretation (albeit on the facts the same conclusion would have been reached in any event).
The Claimants further sought to argue that the change of wording should have been brought to their attention. This was rejected by the Judge: "both generations of the relevant exclusion were set out in the contractual document and were not incorporated by reference. In those circumstances, the Court is entitled to assume that the parties to the contract - both Insurer and Insured - have read those terms and therefore would have been aware of the … This is especially so where the Insured, as in this case, was represented by a professional insurance broker". This comment is noteworthy in light of the recent decision of Ted Baker v AXA on the insurer's duty to warn in which the Court of Appeal also confirmed that "an insurer is, generally speaking, under no duty to warn an insured as to the need to comply with policy conditions" and that was especially the case where brokers are involved.
The Claimants also submitted that the wide application of the Insolvency Exclusion contended for by the insurer deprived the insured of substantial cover, which it was under a regulatory obligation to maintain. The Court declined to accept that the Insolvency Exclusion, broad as it was, would leave the Insured without substantial cover given the numerous other bases on which a financial adviser may face a liability and where insolvency plays no factor. Further the Court concluded that it was for the insured, rather than its insurers, to ensure that it maintained professional indemnity cover sufficient to discharge its regulatory obligations.
2) The assignment of the Claimants’ rights of action against the insured to the FSCS
In February 2011, the FSCS upheld the Claimants’ complaint in respect of Keydata and paid compensation to the Claimants in the sum of approximately £85,000 (FSCS compensation limits having been applied). The FSCS duly took an assignment of the Claimants’ rights against the insured. Shortly thereafter, the FSCS reassigned those rights to the Claimants, provided that the proceeds of any successful claim be first applied to repay the FSCS with interest.
In April 2013, the FSCS paid further compensation to the Claimants relating to Keydata in the sum of approximately £78,000, and took a further assignment of their rights. The Claimants subsequently commenced proceedings against the insured. Although there was correspondence between the Claimants and the FSCS as to a further reassignment of rights back to the Claimants, no evidence was provided to the Court that such reassignment was in fact effected.
In February 2015, judgment was entered against the insured in favour of the Claimants (insurers having declined to intervene or conduct the defence in light of their position on coverage). When faced with a claim under the 1930 Act, insurers maintained that the insured had no liability to the Claimants in respect of Keydata as a result of the assignment to the FSCS and that the proceedings resulting in judgment against the insured were an abuse of process.
The Claimants maintained that they had only assigned their rights up to the £78,000 compensated by the FSCS, which rights could not be shown to have been reassigned.
The Judge, having considered the elements of the standard assignment of rights wording contained within the FSCS application form signed by the Claimants, declined to share his preliminary view about the extent of the assignment, in the absence of full submissions on the purpose and remit of the FSCS and the relevant provisions of the FCA Handbook, (for example, the provisions of COMP 7.6). He therefore concluded that this was not an appropriate ground for summary judgment or strike out.
COMMENT: The judgment in Crowden v QBE is to be welcomed by insurers in that the Court has shown itself willing to determine appropriate coverage points by way of summary judgment without the need for a full trial. In upholding the application of the Insolvency Exclusion, the Court has followed in the path of the recent Supreme Court decision of Impact Funding v Barrington  UKSC 57 as to the interpretation of exclusion clauses.
The judgment contains another point of interest for insurers: prior caselaw has established that an insurer is not necessarily bound by a judgment regarding its insured's liability to a third party. However, the Judge here suggested that there might be two situations in which the insurer might be bound:
- where the insurance policy contains an express, or perhaps an implied, term requiring the insurer to be bound by the judgment; and
- where the insurer is a party, or otherwise privy to, the proceedings which resulted in the judgment.
However where, as here, the insurer is invited, but declines to participate in the proceedings, the Judge said that that was not sufficient to prevent the insurer from questioning the existence or nature of any liability of the insured to the claimants which was established by judgment.
Regrettably, however, for insurers of financial services firms exposed to consumer and FSCS claims, the Court declined to give a view on the extent to which the Claimants' rights had been assigned to the FSCS and, accordingly, the extent to which a consumer may itself pursue sums in excess of any compensation received. This case does not therefore provide the clarity provided in respect of the Financial Ombudsman Service ("FOS") by the case of Clark v In Focus  EWCA Civ 118 (where it was made clear that acceptance of a FOS final decision was in full and final settlement of a complaint and so extinguished the ability to make follow on claims for the balance of any loss said to have been suffered over and above the FOS's £150,000 compensation limit). It does, however, highlight potential areas of uncertainty in the current FSCS regime despite the existence of relatively detailed regulatory rules in this area (see COMP 7 of the FCA Handbook) and invites the regulator to provide guidance that is much needed by the industry and its insurers.