A summary of recent developments in insurance, reinsurance and litigation law.
Crowden v QBE Insurance: Court confirms insurance policy exclusions are not construed narrowly/scope of an insolvency clause
The claimants brought a claim under the Third Parties (Rights against Insurers) Act 1930 against the professional indemnity insurers of their financial adviser. The adviser gave allegedly negligent investment advice in respect of bonds issued by a company which then went into liquidation (and so defaulted on payments due to the claimants).
The insurers applied for summary judgment or strike out on two grounds:
(1) The claim fell within the Insolvency Exclusion in the policy issued to the adviser (and the claimants could have no better claim than the adviser's claim under the policy). The Exclusion excluded any claims or loss "arising out of or relating directly or indirectly to the insolvency of the insured or of any…business…with whom the Insured arranged directly or indirectly any…investments".
The judge, MacDonald Eggers QC, rejected an argument that in order for an insurance exclusion clause to exclude negligence from cover, it should make express reference to negligence. Unlike exemption clauses in ordinary contracts, "The position in respect of insurance contracts is wholly distinguishable in that an exclusion clause in an insurance policy is not designed to exclude, restrict or limit a primary liability on the part of the insurer; instead, it is intended to define the risk which the insurer is prepared to accept by way of the insurance contract. Further, the exclusion clause in an insurance policy does not ordinarily operate to deprive the insured of rights which existed prior to or but for the cover afforded by the Policy". Accordingly, no contra proferentem approach to construction applied.
Furthermore, the language of the exclusion was "relatively clear". The causative effect of the relevant insolvency "need to be as strong or efficient so as to constitute a proximate cause". If a proximate cause was required, the exclusion would not have used both "arising out of" and "relating…to" (the latter phrase might be construed in some instances as only requiring "a mere connection or relation, by way of a common causal history" (although that was not suggested by the parties here). The use of the word "indirectly" strengthened the judge's view. He concluded that here "for the Insolvency Exclusion to apply, it 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, at least, to the claim, liability or loss".
The claimants had sought to rely on a change of wording from the prior year policy, and argued that the change of wording was not brought to its attention. That argument was also 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 difference… This is especially so where the Insured, as in this case, was represented by a professional insurance broker".
This construction did not leave the insured without substantial cover and although the regulatory background was relevant, there was no indication that the policy was intended to discharge the adviser's obligation to maintain professional indemnity insurance. On the facts, the judge concluded that the insolvency of the investment company had caused the claim and so the Insolvency Exclusion applied.
(2) The judge also considered a separate argument raised by the insurers, that the claimants' rights of action against the adviser had been assigned to the FSCS (which had paid some compensation to the claimants, but not the full value of their claim). However, he declined to express a concluded view on the extent of the assignment to the FSCS (although he felt it would be hard to see why the FSCS should be given an assignment of all the claimants' rights in respect of their full loss, if the claimants had only received partial compensation from the FSCS (unless the FSCS would account to the claimants for any sums recovered in excess of the compensation paid by the FSCS)). He also declined to express a concluded view on whether the claimants retained rights to sue following a re-assignment of rights after judgment.
(3) Prior caselaw has also established that an insurer is not necessarily bound by a judgment regarding its insured's liability to a third party. However, the judge suggested that there might be two situations in which the insurer might be bound:
(a) Where the insurance policy contains an express, or perhaps an implied, term requiring the insurer to be bound by the judgment; and
(b) 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.
(4) As a result of the Insolvency Exclusion, the insurer was entitled to summary judgment in its favour.
COMMENT: This decision is another High Court decision confirming the position set out in the Supreme Court judgment of Impact Funding v AIG Europe (see Weekly Update 38/16) that exclusion clauses in insurance policies do not necessarily have to be construed narrowly. The rationale for that approach is again confirmed: policy exclusions usually serve to define the risk covered by the policy and do not deprive the insured of rights which it had before entering into the policy.
The comment that insureds should be taken to be aware of policy terms (especially when advised by a broker) is also noteworthy in light of the recent decision of Ted Baker v AXA (see Weekly Update 30/17) on the insurer's duty to warn. In that case 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.
Ivey v Genting Casino: Supreme Court re-defines the test for criminal dishonesty
The claimant, a professional gambler, sued a casino for winnings which he had obtained by, broadly, persuading a croupier to rotate face-down cards, having deceived her that the request was innocuous (when in fact this greatly improved his chances of winning). Both the judge at first instance and the Court of Appeal found that he was not entitled to the winnings because he had cheated. The claimant was adamant that what he had done was "legitimate gamesmanship" (and the judge accepted that he was genuinely convinced that what he did was not cheating). The claimant appealed and the Supreme Court has now unanimously dismissed that appeal. In so doing, it has re-defined the criminal test for dishonesty.
In R v Ghosh , the Court of Appeal (Criminal Division) set out a two stage test for dishonesty: (1) whether the conduct complained of was dishonest by the lay objective standards of ordinary reasonable and honest people. If yes, (2) whether the defendant must have realised that ordinary honest people would so regard his behaviour.
The Supreme Court noted that the principal objection to the second stage of this test is that the more warped the defendant's standards of honesty, the less likely that he will be found to have been dishonest. As Lord Hughes put it: "the defendant who thinks that stealing from a bookmaker is not dishonest is entitled to be acquitted. It is no answer to say that he will be convicted if he realised that ordinary honest people would think that stealing from a bookmaker is dishonest, for by definition he does not realise this".
For civil cases, the test for dishonesty was confirmed by the Privy Council in Barlow Clowes v Eurotrust : "If by ordinary standards, a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards". The Supreme Court held that there was no logical basis for the meaning of dishonesty (as opposed to the standard of proof) to differ depending on whether it arises in a civil or criminal case.
The Supreme Court therefore held that the second test in Ghosh is no longer correct law.
COMMENT: This change in the test potentially makes it easier to secure a criminal conviction for a dishonesty offence, because defendants can no longer rely on the defence that they genuinely believed they were not dishonest. That will be of interest to insurers who write policies which refer to (and perhaps exclude) conduct which is dishonest according to the criminal standard of dishonesty.
Ashdown v Griffin: Judge considers court's approach where expert instructed by only one side
One of the issues in this case was that only one side had instructed an expert on a certain issue (but he was not a single joint expert). The judge considered what the court's approach should be in relation to his evidence. He referred to an earlier Court of Appeal decision (which had concerned a single joint expert), where it was suggested that if no direct evidence is called on an issue of fact (eg a valuation), then the expert's evidence is likely to be compelling, and the judge should depart from it only in exceptional circumstances. However, if his evidence is on an issue of fact on which direct evidence is given (eg the speed of a car at a particular time), there is no rule of law requiring the judge to favour the expert's opinion over a factual witness's opinion.
In this case, the factual basis for the decision quantum was not established by separate evidence, but was instead found in the facts found by the judge in an earlier liability judgment.
The judge concluded that "It seems to me that I am in much the same position as the judge before whom a single joint expert gives evidence. The expert evidence is there, and being relevant must be taken into account. There is no expert evidence to contradict it. It must be weighed up together with all the other evidence to reach a conclusion. Assuming that the expert evidence tendered is not based on wrong assumptions as to the facts, or incredible, it is not likely to be disregarded, but instead accepted".
The Libyan Investment Authority v Societe Generale: Whether the claimant could use documents disclosed to it to see if separate proceedings could be brought
CPR r31.22 provides that a party to whom a document has been disclosed in the course of proceedings may use the document only for those proceedings (except where the document has been read in court, the court has given permission or the disclosing party agrees). This is known as the "collateral use" protection.
In this case, documents had been disclosed to the claimant by the defendant in one set of proceedings, and it applied to the court for permission to review those documents in order to investigate whether to seek permission to use those documents in separate proceedings against further parties.
In Tchenguiz v Grant Thornton (see Weekly Update 07/17) the judge held that "In my judgment if the purpose of a review of documents that were disclosed in litigation is in order to advise on whether other proceedings would be possible or would be further informed, then the review would be a use for a collateral purpose. ..If however the purpose of the review of documents disclosed in litigation was to advise on that litigation, but when undertaken the review showed that other proceedings would be possible or would be further informed, then (i) the review would not have been for a collateral purpose, (ii) a further step would be a use for a collateral purpose, but (iii) the use of the document for the purpose of seeking permission or agreement to take that further step would be impliedly permitted".
The judge in this case, Teare J, held that the claimant's receiver did not have power to make the application. Nevertheless, he went on to consider whether the application should have been granted had the receiver had power to make it. He noted that prior caselaw has established that, in the absence of injustice, the public interest in facilitating the investigation of criminal offences will take precedence over the public interest of encouraging disclosure of material documents. He held that it made no difference that the claimant was not a public body charged with the investigation and prosecution of criminal offences: "there is a strong public interest in facilitating the just resolution of civil litigation".
Nor did it matter that the claimant could not have brought an action under CPR r3.16 (for a pre-action disclosure order) or CPR r3.17 (for a third party disclosure order) to obtain the documents because the relevant third party is resident out of the jurisdiction: "in circumstances where the documents are already in the [the claimant]'s possession and the application is simply to review them I do not consider that the non-availability of applications under CPR 31.16 and 17 requires the review application to be denied if there are otherwise good reasons for making the order sought". Accordingly, he would have granted permission to review the documents.