In Oldham v QBE Insurance (Europe) Limited  EWHC 3045 (Comm) the court was asked to consider challenges to an arbitration award. In a welcome clarification on the interpretation of clause C10.2 of the Institute of Chartered Accountants of England and Wales ("ICAEW") minimum terms (the "Minimum Terms"), the court held that the arbitrator had not erred on the law and the insurer was entitled to reimbursement of defence costs that it had advanced to the insured pending resolution of the coverage dispute between them.
Mr Oldham is an accountant and licensed insolvency practitioner who was subject to a claim for misappropriating company money in his role as a joint administrator of MK Airlines (currently under appeal). Mr Oldham sought an indemnity and defence costs under the Policy. The insurer disputed cover on the basis that the claim was made against Mr Oldham prior to inception of the Policy and referred the matter to arbitration, as required by the Minimum Terms. The insurer nonetheless advanced defence costs in the underlying claim pursuant to its obligations under clause C10.2 of the Minimum Terms which provides:
"In the event of any dispute concerning liability to indemnify the Insured…the Insured and the Insurers agree that Insurers will advance Defence Costs and indemnify the Insured in accordance with clauses A1-A3 [the insuring clauses] and clause C5 [the Advancement of Defence Costs clause] pending resolution of any such dispute."
The arbitrator, on the basis of written submissions only, held in Part I of his award that there was no cover under the Policy and ordered Mr Oldham to pay the arbitration costs. The insurer then served submissions on costs and Mr Oldham was given a number of extensions to respond. However, before expiry of the latest extension, the arbitrator issued Part II of his award, finding that the insurer was entitled to reimbursement of the defence costs and ordered Mr Oldham to make a payment on account of costs within 28 days of the award.
Mr Oldham challenged the insurer's entitlement to reimbursement of defence costs under section 69 of the Arbitration Act 1996 (the "Act") on the grounds that as a matter of law the insurer had no such entitlement under the terms of the Policy. He further challenged the orders for costs and a payment on account under section 68 of the Act on the grounds that he was not given a reasonable opportunity to address arguments as to why these orders should not have been made. Mr Oldham had brought both challenge applications late (they are required within 28 days of the award) so the Court considered and ruled on the applications for extensions of time to bring the challenge applications at the same time as substantively considering them.
Reimbursement of defence costs
The arbitrator held that as there was no cover under the Policy due to the claim having been made prior to inception, it followed that defence costs already advanced were repayable to the insurer.
In challenge, the written skeleton of Counsel for Mr Oldham (who withdrew from the case several months before the hearing) argued that the word "pending" in clause C10.2 connoted only a temporal qualification and meant "until", noting that there was no express right of repayment in the clause. Counsel contrasted this with the express right provided for in Clause C5 (which requires reimbursement of defence costs if the insured admits or is found to have been dishonest or fraudulent) to demonstrate that the draftsman did not intend there to be such a right in clause C10.2. The Court held that the arbitrator made no error as to the insurer's right to repayment of the defence costs though came to the conclusion for different reasons.
Citing Wood v Capita  on contractual interpretation, Popplewell J stated that where there were rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which is more consistent with business sense, in what is an iterative process. Having considered Counsel's argument, he rejected Counsel's construction on the basis that this would "have the effect of altering the scope of cover, to provide coverage for defence costs incurred provided they were incurred at a time when coverage was in dispute"; and that could not have been the intention of the draftsman. Popplewell J went on to state: "It is absurd to suppose that in that context the expression meant simply "until" resolution of the dispute, with no right to reimbursement to insurers if coverage were held not to exist. It would allow an assured to establish liability on the part of insurers where it did not exist in relation to the core purpose of the policy merely by asserting it without any foundation for doing so…the natural conclusion is that in each case the payment is to be provisional and subject to repayment in the event that the dispute is resolved in favour of there being no coverage."
Challenges under section 68 of the Act
Mr Oldham had also challenged the orders from the award for him to pay the insurer's costs of the arbitration and to make a payment on account, on the basis that he was not given a reasonable opportunity to address arguments as to why these orders should not have been made. The Court held that Mr Oldham had been deprived of any fair opportunity to advance his arguments and the arbitrator was therefore in breach of his duty under section 33 of the Act. Popplewell J also held that the arguments met the required threshold as arguments which the arbitrator might well have accepted had he given Mr Oldham the opportunity to advance them. This was especially so given that Mr Oldham was a litigant in person claiming straitened financial circumstances. The Court therefore remitted these matters to the arbitrator for reconsideration.
The minimum terms of other professions contain similar provisions entitling insurers to reimbursement of defence costs. For example, in the solicitors' minimum terms, clause 7.3 provides: "The insurance may provide that each insured will reimburse the insurer for defence costs advanced on that insured’s behalf which the insurer is not ultimately liable to pay." However, the entitlement to reimbursement is expressly set out in this clause and the construction arguments ran by the insured in the Oldham case would not arise.
The requirement under minimum terms to advance defence costs even where coverage is in dispute can be onerous on insurers. Significant costs can be incurred in defence of a claim which the insurer must then try to recover, sometimes from an insured that may be claiming financial difficulties. The Court's confirmation, therefore, that insurers are entitled to reimbursement once a coverage dispute is resolved in favour of there being no coverage is a positive for insurers; however, the practical logistics of obtaining reimbursement remain a hurdle.