In Crowden v QBE Insurance (Europe) Ltd1, the High Court has given important guidance on how insurance policy exclusion clauses should be interpreted. The Court's decision will be welcomed by Insurers generally.

Background and the claim against the Insurer

The Claimants invested in (i) Keydata bonds and (ii) securities linked to Lehman Brothers, following investment advice given by a financial adviser (the Insured). The Claimants incurred material losses when Keydata and Lehman Brothers went into administration.

The Claimants issued proceedings alleging the Insured was negligent in advising on these investments. No defence was entered as the Insured was by now insolvent itself and judgment in default was obtained for approximately 200,000. The Insured's professional indemnity Insurer (QBE) was aware of these proceedings but declined to participate on the basis that they did not consider that they were liable to indemnify the Insured. The Claimants then brought a claim direct against QBE under the Third Party (Rights Against Insurers) Act 1930, standing in the shoes of the Insured.

The Policy Insolvency Exclusion

QBE was, of course, entitled to assert (against the Claimants) any policy defence it could have taken against the Insured. QBE therefore applied for summary judgment and/or an order striking out the claim on a number of bases, including that the Claimants' claim was excluded from indemnity under the Policy based on the policy's Insolvency Exclusion2.

This Insolvency Exclusion excluded claims, liability, loss, costs or expenses:

"arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or any insurance company, building society, bank, investment manager...or any other business, firm or company with whom the Insured has arranged directly or indirectly any insurances, investments or deposits".

The correct interpretation of the Insolvency Exclusion

Not surprisingly, the Claimants argued that the Insolvency Exclusion should be interpreted narrowly and that the correct rules of legal interpretation should be the restrictive rules applicable to negligence exclusion clauses i.e. clauses where one party seeks to exclude its tortious liability for negligent acts. The Claimants also argued that the contra proferentem rule should apply meaning any drafting ambiguity should be read in their favour. Amongst other points, they argued:

+ The exclusion should not apply where the Insured had given negligent advice;

+ The exclusion should not apply to claims relating to investments made on behalf of the Insured's customers as opposed to investments made by the Insured itself;

+ To hold the exclusion applicable would mean that the PI cover given by QBE was largely illusory; and

+ The purpose of the policy was to provide cover to a FSA (as it then was) regulated body and if the exclusion applied this ran contrary to the FSA PI requirements.

QBE pressed for a wide interpretation, arguing that the exclusionary language used was clear and meant that the insolvency of Keydata and Lehmans did not even need to be a proximate cause of the loss being claimed for the exclusion to apply.

Decision

In finding in favour of QBE, the Court held that the meaning of the Insolvency Exclusion was `clear and unambiguous' and followed the Supreme Court's approach in Impact Funding v AIG3 confirming that "...the Court should not adopt [narrow] principles of construction which are appropriate to exemption clauses...to the interpretation of insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford".

The Court recognised that there had to be negligence on the part of the Insured to engage the policy's main insuring clause ("... the Insurer agrees to indemnify... against legal liability to pay... damages... for any claim first made... in respect of any civil liability...").

However, the Court found that "... The question is, for the purposes of the Insolvency Exclusion, whether the relevant insolvency was a cause of the claim, liability or loss, even if it operates in combination with [the Insured's] own negligent liability...".

The Court gave fairly short shrift to each of the Claimants' arguments and concluded that the Claimants' losses were caused, in each case, by the inability of Keydata and Lehmans to pay their debts as they fell due and the Claimants had no real prospect of contending otherwise. Properly interpreted (between the insuring clause and the Insolvency Exclusion) this was not an area of insurance risk QBE had agreed to take on. Accordingly, the Claimants' claim against QBE was struck out.

Is Proximate cause required for an exclusion to bite?

The Court also considered the specific exclusionary language used, "arising out of", and endorsed the High Court's view previously expressed in Beazley v Travelers4 that "arising out of... does not dictate a proximate cause test and that a somewhat weaker causal connection is allowed...That does not however determine what degree of causal connection is required...In my judgment a relatively strong degree of causal connection is required".

In opining on the degree of casual connection required, and noting the risk of getting caught up in a game of semantics, the Court in Crowden said "... a line must be drawn somewhere... the... Exclusion... must be specifically accountable as a cause of the claim, liability or loss: in this sense, it must be significant; it must stand out as a contributing factor..."

Commentary

+ Insurance exclusions are drafted to define the scope of cover (just as much as the insuring clause) and the Court will not ordinarily apply a restrictive or contra proferentem approach to their interpretation.

+ Insurers may wish to use the language of "... arising out of or relating directly or indirectly" in any effort to ensure a wide interpretation of their policy exclusions.

+ Future cases may turn on "where the line is drawn" as regards the adequacy of causal connection required for a policy exclusion to bite. The language used in the Crowden judgment identifies the difficulty in determining precisely where that line is to be found.

+ Finally, the Court also helpfully held that Insurers will not ordinarily be bound by the underlying Court's judgment between Claimant and their insolvent Insured5, except where (i) the policy contains an express or implied term to that effect or (ii) the Insurer is party or privy to those proceedings.