The Taylor Wessing
Insurance and Reinsurance
Review of 2010
January 2011
The Taylor Wessing annual Insurance and Reinsurance Review summarises
the key English case law developments in insurance and reinsurance
throughout 2010. Please note that some cases covered in this review
may be subject to further appeal.
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Contents
Property insurance
Fraudulent claims and the burden of proof
02
Business interruption and the “but for” test
03
Non-disclosure and breach of warranty
05
Double-insurance and the “Other Insurance” clause
06
The effect of exaggerated claims
22
Misrepresentation and inducement revisited
23
Marine insurance
Bunker oil pollution liability insurance and Iranian sanctions
08
Total loss and seizure by pirates
10
Reinsurance
The “Double-Proviso” follow settlements clause
12
Foreign reinsurer participation in a London programme
13
Forum conveniens and governing law in reinsurance contracts
15
Liability insurance
“Contractual Liability” exclusions
18
Mesothelioma and the insurance trigger
20
Arbitration time limits and third party claims
28
Utmost good faith
Non-disclosure and breach of warranty
05
The effect of exaggerated claims
22
Misrepresentation and inducement revisited
23
Broker duties
Failure to advise on duty of disclosure
25
Procedure
Subrogated claims – Insurers’ costs and disclosure obligations
27
Arbitration time limits and third party claims
28
Law and jurisdiction
Forum conveniens and governing law in reinsurance contracts
15
Foreign reinsurer participation in a London programme
13
Prior US proceedings and the forum non conveniens test
30
Other developments
Anti-bribery and corruption in commercial insurance
32
Consumer loan and payment protection insurance “connected”
34
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Property insurance
Fraudulent claims and the burden of proof
Yeganeh v. Zurich Insurance Co [2010]1
London Mercantile Court, 24 May 2010
This case concerned a claim under a buildings and contents insurance policy following a fire at
the insured property.
The policy provided that, in the event of the insured pursuing a claim that was “fraudulent or
false in any way, we will not make any payment and all cover will end”, although it was common
ground that, on the present facts, this clause added little to the common law position2.
In defence of the claim, the insurer alleged fraud or misconduct by the insured in two respects,
either of which it was said would defeat the claim:
1. that the fire was caused deliberately, by or at the behest of the insured;
2. that the insured had sought to inflate the contents claim, in particular by falsely alleging the
destruction of a quantity of high value clothing, the alleged evidence for which had in fact –
so insurers contended - been planted after the fire.
Cause of the fire
Dealing firstly with the cause of the fire, the court noted the long established common law
position on the question of burden of proof. Where an insurer alleges that the insured property
has been lost by the deliberate act or with the connivance of the insured, the onus is on the
insurer to prove it, but to what standard of proof? Although based upon the civil test of the
“balance of probabilities”, the courts have held that a higher degree of proof is in fact required in
these cases, something approaching the criminal standard, in order to reflect the gravity of the
accusation. The position was summarised by Neil LJ. in Continental Illinois National Bank & Trust
Co v. Alliance Assurance Co (The Captain Panangos DP) [1989]3 thus:
“I turn now to the central issue in this case… (e) that the onus of proving the privity of the
owners rests on the insurers…(f) that the burden of proof, though not quite equivalent to
that required in a criminal case, is a heavy burden, commensurate with the gravity of the
matter…”4
Difficulties arise, however, where the court is presented with alternative theories, none of
which it finds attractive on its own. In the present case, the only theory put forward, other than
deliberate ignition, was an accident involving a halogen heater, the likelihood of which the judge
considered to be “remote” on the evidence. Was the judge then compelled to find in favour of
the only other theory in play, namely arson by the insured?
The answer to that question is to be found in Rhesa Shipping Co SA v. Edmunds (The Popi M)
[1985] 1 WLR 948 HL. In that case, Lord Brandon declined to apply what he called the “dictum
of Sherlock Holmes”, namely that “when you have eliminated the impossible, what remains,
however improbable, must be the truth”. The correct position, he said, was this:
“A judge is not bound always to make a finding one way or the other with regard to the facts
averred by the parties. He has open to him the third alternative of saying that the party on
whom the burden of proof lies… has failed to discharge that burden. No judge likes to decide
cases on burden of proof if he can legitimately avoid having to do so. There are cases,
however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding
on the burden of proof is the only just course for him to take.”
1 [2010] EWHC 1185 (QB)
2 To which, see Axa General Insurance v. Gottlieb [2005] EWCA Civ 112
3 [1989] 1 Lloyd’s Rep 33
4 See also National Justice Compania Naviera SA v. Prudential Assurance Co (The Ikarian Reefer) [1995] 1 Lloyd’s Rep 459
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The judge concluded that the present claim was just such a case. In the absence of having
shown any discernible motive for the insured to burn down the property, the insurers had not
done enough to discharge their burden of proving deliberate act as the cause of the fire.
Inflated claim
The court then turned to the allegedly inflated claim. On this, the judge was able to make a much
more definitive finding on the evidence available, concluding that the insured was, in this matter,
clearly “the sort of person who is casual about the truth”. On the basis of the factual statement
of the two loss adjusters involved, the judge concluded that the insured had indeed planted
clothing on the premises after the fire, in a bid to restore the integrity of an inflated contents
claim that had by then been demolished by the insurer’s investigations. Applying the principle in
Axa v. Gottlieb [2005], the result was that the entire claim failed.
Result: Judgment for the insurer.
Business interruption and the “but for” test
Orient-Express Hotels v. Assicurazioni Generali SpA (UK Branch)5
Commercial Court, 27 May 2010
The case concerned a claim under a combined property policy covering physical damage and
business interruption in respect of the Windsor Court Hotel, a 23-storey property in the central
business district of New Orleans.
The property suffered significant physical damage from wind and water in the course of
Hurricane Katrina, and it was closed throughout September and October 2005. The Hotel reopened on 1 November 2005, albeit not fully repaired and with its services and amenities not fully
operational. The insured sustained significant business interruption losses.
The basic insuring clauses in the policy were in fairly standard terms. Specifically, the insurers
agreed to indemnify:
a)under the Material Damage and Machinery Breakdown Sections “against direct physical loss
destruction or damage except as excluded herein to Property as defined herein…;”
b)under the Business Interruption Section against loss due to “interruption or interference with
the Business directly arising from Damage and as otherwise more specifically detailed herein...”
As to the adjustment of BI losses, the policy also contained a “Trends Clause” as follows:
“… Gross Revenue and Standard Revenue adjustments shall be made as may be necessary to
provide for the trend of the Business and for variations in or special circumstances affecting
the Business either before or after the Damage or which would have affected the Business
had the Damage not occurred so that the figures thus adjusted shall represent as nearly
as may be reasonably practicable the results which but for the Damage would have been
obtained during the relative period after the Damage.”
The central issue concerned the business interruption claim, and in particular, whether and how
far it could be said that the claimed BI losses were in fact “directly arising” from the physical
damage to the hotel. It was common ground that the hotel was indeed severely damaged, to
an extent necessitating its closure for a time, but the same was also true of the wider vicinity.
A curfew had been imposed throughout New Orleans shortly after the hurricane and the city
remained effectively closed to all but emergency services until early October 2005. Thereafter,
business remained slow for some time due to the difficulty of access and loss of attraction.
Properly speaking, therefore, the insured’s BI claim was the result of concurrent causes, namely
the physical damage to the hotel on the one hand, and the wider damage to the vicinity on the
other. In cases where more than one factor contributes independently to the loss, it is common
5 [2010] EWHC 1186 (Comm)
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to apply the “but for” test to determine which is the effective cause; in other words a given
cause, act or circumstance will be said to be the effective cause if the relevant loss or damage
would not have occurred without it.
The difficulty for the insured in this case was that the premises would clearly have remained
closed, due to the curfew and the closure of the city, even if the hotel itself had escaped with
no physical damage at all. It could not be said that the BI loss would not have occurred “but
for” the physical damage to the hotel, and hence the claim failed the test. Consequently, the
arbitration Tribunal found in favour of insurers on this point, against which decision the insured
appealed to the Commercial Court.
Relying upon the judgment of Lord Nicholls in Kuwait Airways Corporation v Iraqi Airways Co
(Nos 4 and 5) [2002]6, the insured argued that this was one of those few cases where the “but
for” approach was unfair and unreasonable, and that the Tribunal had erred in law by applying
such a test to this case. Logically, so the insured argued, the “but for” test could yield no
effective cause at all on the facts of this case, because neither the damage to the hotel nor the
damage to the vicinity could – independently – satisfy the requirement. Instead, so the insured
contended, it was enough that at least one of the concurrent causes was an insured cause, so
long as the other was not excluded.7
While the Commercial Court Judge, Mr Justice Hamblen, saw “considerable force” in much of
the insured’s argument, he still had to be satisfied that the Tribunal had gone so far as to err in
law by applying the standard test. He concluded that they had not, for three reasons:
1. It was clear from the language appearing elsewhere in the policy that the parties were
perfectly comfortable with a “but for” approach. Specifically, the Trends Clause was
predicated on calculating the recoverable losses on the basis of what would have happened
“had the Damage not occurred” or “but for the Damage”;
2. whether “fairness and reasonableness” demanded a departure from the standard test was a
question of fact for the Tribunal, rather than a question of law;
3. While there may be issues of fairness associated with the “but for” test, the alternatives
were even more stark. The judge surveyed a number of possibilities, none of which he found
satisfactory. Among the options considered was allowing the insured to recover for all BI that
would have happened “but for the damage to the hotel and the city”. However, that would
compensate the insured for all business interruption losses howsoever caused, even where
those losses were not in any way caused by the physical damage to the hotel. This was
clearly not the intention of the insuring clause.
Having so ruled on the applicability of the “but for” test to the main insuring clause, the Judge
then turned to the second issue under appeal, concerning the purpose and effect of the Trends
Clause. While it was accepted that, under the terms of the clause, a BI loss had to be adjusted
to reflect deteriorating (or rising) trends affecting the gross revenue of the business, the insured
argued that this should not extend to trends caused by the very same peril that caused the
damage giving rise to the BI claim in the first place. The Trends Clause, argued the insured, must
be concerned with trends taking place independently of the hurricane, causing its gross revenue
to decline (or, indeed, rise).
Again, the Judge found for insurers. Nowhere in the Trends Clause did it state that the relevant
“variations or special circumstances” affecting the business had to be something unconnected
with the actual damage, in the sense that it had to have a cause independent of that which
resulted in the damage. Consequently, in so far as a residual BI claim survived the finding on the
main insuring clause8, the court held that the claim fell to be adjusted to reflect the declining
gross revenues brought about in the wake of Hurricane Katrina.
Result: Judgment for the insurers.
6 [2002] 2 AC 883
7 The Miss Jay Jay [1987] 1 Lloyd’s Rep 3
8 Under a secondary Prevention of Access / Loss of Attraction extension, which was not the subject of the appeal
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Non-disclosure and breach of warranty
Sugar Hutt Group Ltd v. Great Lakes Reinsurance (UK) Plc & Ors [2010]9
Commercial Court, 26 October 2010
This litigation concerned a claim by the owners and operators of four nightclubs under a property
insurance policy issued by the Defendant insurers, following a fire at one of the insured premises.
By way of a slip scratched on 24 March 2009, the policy insured various companies within the
Sugar Hut Group, including the then holding company and its four subsidiaries through which
the clubs were each operated (the “Old Companies”). Soon afterwards, insurers were presented
with an endorsement, requesting the substitution of the Old Companies by four new group
companies, the Claimants in the litigation. Ostensibly, this amendment was sought merely to
reflect a change in the name of the relevant operating companies. The endorsement was duly
agreed on 31 March 2009.
The slip contained various warranties concerned with fire and intruder protection, and cover was
also expressly subject to receipt of a satisfactory proposal form, in fact provided two weeks after
inception.
Non-disclosure
On 13 September 2009 a fire occurred at one of the insured nightclubs. In the course of insurers’
investigations into the loss, it emerged that the original insureds (that is, the Old Companies),
had gone into administration only a few weeks prior to the insurers agreeing to underwrite the
policy, this being the real (but undisclosed) reason for the requested endorsement. Relying upon
section 18 of the Marine Insurance Act 1906, insurers contended that these were material facts
that ought to have been disclosed, thereby entitling them to avoid the policy.
On the question of materiality, the court had little difficulty in concluding that a reasonable and
prudent underwriter would have wanted to know why the Claimant companies had been formed,
what had happened to the Old Companies and why they were no longer to be the subject of
insurance. There was, as it turned out, much more to the requested endorsement than a mere
change of corporate name, and these matters were clearly material to the decision whether to
accept the risk and, if so, on what terms.
However, applying the two stage test set down in the well known case of Pan Atlantic Insurance
Co Ltd v Pine Top Insurance Co Ltd [1995]10, the court also needed to be satisfied that the
particular underwriter in this case had been induced to enter into the contract as a result of the
said non-disclosure. On that, the judge asked himself two alternative questions:
1. Was the underwriter so keen to accept the risk, so uninquisitive and so complacent, that he
would not have batted an eyelid had the undisclosed facts been disclosed to him?
2. If the underwriter would have batted an eyelid and had called for (and received) the relevant
explanations, would he still have proceeded with the insurance contract as arranged?
On the facts, the Judge was satisfied that the underwriter was indeed induced. Moreover, the
specific questions put (and answers given) in the proposal form about the insureds’ trading
history did not serve to limit the duty of disclosure or waive the obligation to disclose matters
beyond the particular questions raised.
Breach of fire risk warranties
The judge also went on to consider two fire risk warranties in the policy, namely the requirement
to keep cooking equipment and ducting “free from combustible materials” and the requirement
that extraction ducts be “checked at least once every six months by a specialist contractor”.
On the first, the experts agreed that there had been contact with combustible materials, but
9 [2010] EWHC 2636 (Comm)
10 1995] AC 501
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the insured contended that this was not a “true” warranty, so much as merely a suspensory
condition, suspending cover during the actual period of breach, but not otherwise. The court
disagreed. Taking into account the agreed evidence of the experts of the risk of ignition of the
combustible materials, the warranty bore materially on the risk of loss and the insurers were
entitled to regard it as an important protection. Moreover, given that all four premises had
kitchens at risk of fire, it qualified as a true warranty in respect of all of them, such that breach
in one kitchen would entitle insurers to treat the contract as discharged in all four premises, and
whether or not the breach had occurred in the premises that actually suffered the fire. As to the
question of six monthly inspection, the court was more sympathetic to the argument that this
was merely suspensory in nature, but on the facts this approach could not assist the insureds in
this case. They were in actual breach of the six monthly inspection requirement at the date of
the fire, and hence without cover on either view.
Breach of burglar alarm warranty
Finally, the court also went on to consider the effects of a warranty requiring that “a
N.A.C.O.S.S. Central Monitoring Station Alarm is installed and operational”, and a corresponding
obligation to comply with any risk improvement notices issued by insurers following survey.
The court concluded that the express warranty was, again, a true warranty, whereas the
need to comply with more detailed risk improvement notices issued from time to time might
be suspensory only in effect. On the facts, however, the result here would be the same. The
burglar alarm system installed at the fire damaged premises lacked any connection to the police
station or to an alarm centre, and as such fell short of a “Central Monitoring Station Alarm”, as
required by the express warranty. It also failed to meet the standards requested under the risk
improvement notices issued by insurers, a breach that remained current on the date of the fire.
On either basis, therefore, there would be no cover at the time of the fire.
Result: Judgment for the insurers on avoidance and (in the alternative) breach of warranty.
Double insurance and the “Other Insurance” clause
National Farmers Union Mutual Insurance Society Ltd v. HSBC Insurance (UK) Ltd)11
Commercial Court, 19 April 2010
It is not uncommon for insurance contracts to contain provisions dealing with the situation
where the insured has access to more than one policy in relation to the same risk. In many
cases, either or both policies may stipulate that they operate only excess to the other, and
where both policies contain such a provision then they may cancel each other out. Absent
some specific provision as to double insurance, however, an insured covered by two policies may
elect to pursue the entire claim under either; it is then incumbent upon the paying insurer to
seek an equitable contribution from his co-insurer.
In the present case, the defendant insurance company, HSBC, had provided buildings cover to
owners of a property under a policy that expressly extended cover to any buyer of the property
until the sale was completed, but subject to the proviso that a buyer would not enjoy such cover
“if the buildings are insured under any other insurance”.
The HSBC policy also contained a more general “other insurances” clause, as follows:
“We will not pay any claim if any loss, damage or liability covered under this insurance is also
covered wholly or in part under any other insurance except in respect of any excess beyond
the amount which would have been covered under such other insurance had this insurance
not been effected.”
11 [2010[ EWHC 773 (Comm)
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The owners subsequently agreed to sell the property, and upon exchange the buyers took out
their own policy with the Claimant insurers, National Mutual (NF). The NF policy contained the
following stipulation:
“Other insurance
If when you claim there is other insurance covering the same accident, illness, damage or
liability, we will only pay our share…”
Between the dates of exchange and completion, a fire broke out at the property, causing
extensive damage. The buyers made a claim on their buildings cover with NF in respect of the
fire damage and were paid a sum in settlement of the claim. NF then sought a contribution from
HSBC for its share, on the basis that, at the time of the fire, the risk was double insured. For its
part, HSBC denied liability, contending that the buyers had no cover under the HSBC policy at all,
or alternatively that it operated only as an excess policy to that issued by NF.
The court found for HSBC. Under the terms of the HSBC policy, the buyer was simply not insured
at all where, as here, it had taken out its own policy. By contrast, the NF policy contained no
provision excluding coverage in the event that the buyer was otherwise insured in respect of the
same risk. It followed that the only policy covering the buyer for physical loss to the property was
the NF policy, and hence the question of a contribution for double-insurance simply did not arise.
Result: Judgment for the Defendant insurer, HSBC.
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Marine insurance
Bunker oil pollution liability insurance and
Iranian sanctions
Islamic Republic of Iran Shipping Lines v. Steamship Mutual Underwriting Association
(Bermuda) Ltd [2010]12
Commercial Court 26 October 2010
Background
In common with many maritime States, the United Kingdom is party to the International
Convention on Civil Liability for Bunker Oil Pollution Damage, 2001 (“the Convention”).
Under Article 7(1) of the Convention, shipowners are required to maintain insurance or other
financial security to meet their liability for bunker oil pollution under the applicable local or
international limitation regime. Evidence of satisfactory insurance must be presented to the
ship’s relevant State authority, who will in turn issue a certificate confirming that such insurance
is in place. Certification issued by a State party is accepted by the authorities of all other States
that are party to the Convention.
The Convention also makes provision for rights of direct action with respect to bunker pollution
claims against the shipowner. Specifically, Article 7(10) of the Convention permits any such claim
to be brought directly against the insurer, although the insurer may invoke all defences that
would have been available to the shipowner. The insurer may also limit its liability to the amount
of the insurance cover, but otherwise policy defences may not be asserted13.
In the present case, the insured Claimant (“IRISL”), an Iranian shipowner, was entered with the
Defendant P&I Club (“the Club”), in respect of the 28 vessels then in its ownership, including
the vessel “ZOORIK”. In accordance with the normal procedure, the Club issued a “Blue Card” to
the UK Maritime and Coastguard Agency, confirming that the relevant insurance was in place, in
response to which the MCA duly issued an Article 7 Certificate for each of the entered vessels,
including the ZOORIK.
During the period of the insurance, however, HM Treasury promulgated the Financial
Restrictions (Iran) Order 2009, pursuant to the Counter-Terrorism Act 2008. That Order
prohibited transactions and business relationships between relevant persons and designated
Iranian entities, including IRISL, but always subject to derogation by licence where appropriate.
In the present case, HM Treasury issued a licence permitting the club to “continue to provide
insurance cover in accordance with the Blue Cards issued to IRISL for a period of three months
starting on 30 October 2009”.
Nevertheless, the Club terminated cover in respect of IRISL’s ships because it took the view
that the terms of the licence meant that it was no longer permitted to provide insurance cover
to IRISL. Soon afterwards, and during the three month licence extension, the ZOORIK suffered a
casualty in Chinese waters, causing bunker oil pollution and rendering it a constructive total loss.
The club advanced two submissions:
1. on the correct interpretation of the licence issued by the MCA, it was not permitted to go on
providing insurance in respect of claims brought against the shipowner. All that was permitted
under the licence, argued the Club, was to meet claims brought directly against it (the Club)
pursuant to Article 7(10) of the Convention;
12 [2010] EWHC 2661 (Comm)
13 The proper course in pursuit of policy defences is for insurers to pay the third party’s claim and then seek
corresponding reimbursement from the insured
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2. whether or not it was correct about the above, the Club argued that the contract of insurance
between it and IRISL had been discharged by frustration and/or supervening illegality when it
became unlawful for the Club to insure IRISL in respect of all other P&I risks.
Terms of the licence
The court noted that the language of Article 7(1) made no distinction between the position of
third parties and that of the insured. Whether the claims were for losses suffered by third parties,
or for the insured’s own costs of preventative measures and reinstatement, they both fell within
the compulsory insurance required by Article 7(1), and in respect of which the Blue Card had
been issued. While it was true that the main purpose of the Convention was to protect third
parties, the concept of “insurance cover in accordance with the Blue Cards” was not necessarily
limited to third party claims brought by way of direct action. On its proper construction,
therefore, the licence permitted the Club to continue to provide IRISL with insurance cover in
respect of all of the risks required to be insured under the Convention, and to meet claims made
in respect of those risks.
Frustration
As to frustration, the court referred to the leading authority of Lord Radcliffe in Davis
Contractors Ltd v. Fareham UDC [1956]14, that frustration occurs when:
“without default of either party a contractual obligation has become incapable of being
performed because the circumstances in which performance is called for would make it a
thing radically different from that which was undertaken by the contract”.
The court also cited the judgment of Lord Simon in National Carriers Ltd v Panalpina (Northern)
Ltd [1981]15, referring to a supervening event “for which the contract makes no sufficient
provision” which “so significantly changes the nature… of the outstanding contractual rights”
from those contemplated that “it would be unjust to hold [the parties] to the literal sense of [the
contract’s] stipulations in the new circumstances…”.
On the authorities, the Club submitted that the contract of insurance had to be viewed as a
whole. Whatever may have been permitted by the licence, the fact remained that it had become
unlawful for the Club to cover all of the other risks customarily insured as part of a shipowner’s
P&I Club entry. The entirety of the contract, save for one small part, had become illegal, such
that the obligation had become “radically different” from that originally undertaken, a scenario for
which the contract made no provision.
The court accepted that the scope of the cover had become much narrower than before, and
that this scenario was not catered for in the contract. Nevertheless, adopting what it called
a “multi-factorial” approach, it was possible to view the surviving bunker pollution coverage
as a severable contractual obligation, unchanged from that previously undertaken. The Club’s
continued performance of its surviving obligations was not dependent upon other parts of the
contract, and moreover a finding of frustration would provide the club with a windfall.
Since the contract of insurance was not discharged by reason of frustration, IRISL was entitled
to be indemnified in respect of its costs and liabilities arising out of the casualty, and the Club
could not seek reimbursement from IRISL in respect of the strict liabilities owed by the Club to
third parties under Article 7(10) of the Convention.
Result: Judgment for the insured.
14 [1956] AC 696
15 [1981] AC 675
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Total loss and seizure by pirates
Masefield AG v. Amlin Corporate Member Ltd [2010]
Commercial Court 18 February 201016
Under the provisions of the Marine Insurance Act 1906, a total loss of the insured subject
matter may be actual or constructive; a marine policy will cover both, unless it expressly
provides otherwise. An actual total loss calls for the subject matter to be destroyed or for the
assured to be “irretrievably deprived thereof”. A constructive total loss (CTL), exists where the
subject matter is “reasonably abandoned on account of its actual total loss appearing to be
unavoidable”. This will be so where the assured be presently “deprived” of the subject matter
and that either (a) it is unlikely that he can recover it, or (b) the cost of doing so would exceed
the value once recovered17.
Where a CTL exists, the assured may either treat the loss as a partial loss, or he may elect
to treat it as if it were an actual total loss, by giving notice of abandonment to the insurer18.
In many cases, the insurer will decline the notice of abandonment, often disputing that
circumstances exist amounting to a CTL, but typically the parties will agree that proceedings
are deemed to have been commenced as at the date of the relevant notice. Consequently, the
question of whether a CTL existed, or not, is measured against the circumstances present at
the date of the notice, rather than by reference to what happened subsequently.
The present case concerned an insured cargo of bio-diesel on board a tanker bound from
Malaysia to Rotterdam, seized by pirates while passing through the Gulf of Aden.
The pirates took the vessel to Somali waters, but negotiations soon ensued with the owners of
the vessel, with a view to the release of the vessel, cargo and crew. While those negotiations
were still ongoing, notice of abandonment was served on the insurers, who refused to accept it,
but agreed to the date of notice as the deemed date of proceedings.
The negotiations with the pirates were ultimately successful. Some 10 days after the date of
the notice of abandonment, shipowners paid an agreed ransom to the pirates and the vessel
was released. She proceeded to Rotterdam where the cargo was safely discharged.
The insured cargo owners nevertheless pursued their total loss claim on the policy, in preference
to taking delivery of the cargo. The court was therefore required to decide whether the seizure
by Somali pirates amounted to a total loss, notwithstanding the subsequent recovery of the cargo.
Firstly, on the question of actual total loss, the court noted that the test of whether the assured
had been “irretrievably denied” the cargo was an objective one, to be assessed at the relevant
time against the true facts then present, whether all of those facts were known to the assured
or not19. Although the actual fact of recovery of the vessel and cargo within a short period was
not directly material, let alone decisive, the court said it was entitled to consider what in fact
happened after the relevant date in so far as that might assist in showing what the probabilities
really were20. Moreover, the correspondence following the seizure, and the information in the
public domain at that time, showed that all interested parties were fully aware that the cargoes
were likely to be recovered, a view also consistent with the unchallenged expert evidence.
Other vessels seized by Somali pirates had been promptly released following negotiations over
a relatively short period. The vessel and cargo were safely recovered only 11 days later upon
payment of a ransom, representing only a tiny proportion of the value of the ship and cargo.
16 [2010] EWHC 280 (Comm)
17 s. 60(2) Marine Insurance Act 1906
18 ss. 61 and 62 Marine Insurance Act 1906
19 Marstrand Fishing Co Ltd v Beer [1936] 56 Ll L Rep 163
20Bank Line Ltd v Arthur Capel & Co [1919] AC 435
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The judge also noted that an assured could not be said to be “irretrievably deprived” of property
if it was legally and physically possible to recover it, even though such recovery could only be
achieved by disproportionate effort and expense21. Rather, the assured had to establish that
the recovery was not possible. Mere capture by pirates did not, of itself, constitute an actual
total loss22, not least since acts of pirates did not necessarily occasion any loss at all. The impact
and effect of such a capture was very much dependant upon the facts, and on the facts of the
present case the assured had lost only possession and not the property in its goods. Recovery
of possession was not legally or physically impossible, and indeed was expected after the usual
period of negotiation. The court also declined to hold that, as a matter of public policy, the ability
to recover the goods by paying a ransom should not be treated as relevant when considering
whether the loss of the cargo was irretrievable.
As to the alternative CTL claim, this also failed, for two reasons. Firstly, the cargo had not,
in truth, been “abandoned” within the meaning of s.60, which required abandonment of any
hope of recovery23. Although notice of abandonment had been served, the reality was that the
shipowners and the cargo owners had every intention of recovering their property and were fully
hopeful of doing so. Secondly, for all the reasons considered in the context of the actual total
loss claim, it could not be said that there was a reasonable basis for regarding an actual total loss
as “unavoidable”, without which there could be no valid CTL.
Result: Judgment for the insurers.
21 Fraser Shipping Ltd v Colton [1997] 1 Lloyd’s Rep 586 QBD
22Dean v Hornby [1854] EngR 113
23 Court Line Ltd v R [1945] 78 Ll L Rep 390
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Reinsurance
The “Double-Proviso” follow settlements clause
The Commercial Court revisits the test
IRB Brasil Reasseguros SA v. CX Reinsurance Company Ltd [2010]24
Commercial Court, 7 May 2010
Not all follow settlements provisions are the same. In many cases, the reinsurance will be
expressed to be “subject to the same terms, clauses and conditions as the original” and the
stated obligation of the reinsurer will be quite simply to “follow the settlements of the reinsured”.
In such cases, the reinsurer is required to follow any settlement so long as: (1) the reinsured has
acted honestly and taken all proper and businesslike steps in reaching the settlement; and (2)
the claim so recognised by the reinsured falls within the risks covered by the reinsurance as a
matter of law25. It is no defence for the reinsurer to show that the underlying claim, whether on
its facts or in law, would have (or would likely have) failed had the reinsured defended it to trial.
In other cases, however, the follow settlement provisions may be much more restrictive. In Hill v
Mercantile & General Reinsurance Co [1996]26, for example, the House of Lords had to consider
a clause in the following terms:
“All loss settlements by the Reassured, including compromise settlements … shall be
unconditionally binding upon the Reinsurers provided such settlements are within the
terms and conditions of the original policies and/or contracts and within the terms of this
reinsurance”.
Faced with such a clause, it is not enough that the reinsured has acted in a proper and
businesslike manner, since the clause requires that the inward settlement actually falls within the
terms of the direct policy. Quite simply, as Lord Mustill put it, “the reinsurer cannot be held liable
unless the loss falls within the cover of the policy reinsured and within the cover created by the
reinsurer”.
But how, precisely, does the reinsured go about satisfying these two provisos? Does he, for
example, have to litigate the underlying claim to its ultimate conclusion? In Hiscox v. Outhwaite
(No. 3) [1991]27, Evans J. concluded not; it may be sufficient, he suggested, that the underlying
claim was “arguably, as a matter of law” within the scope of the original insurance, even if a
court might hold otherwise were the claim fully argued before it. The burden of proof was also
considered more recently in Equitas Ltd v. R&Q Reinsurance Co [2009]28, in which the court
confirmed that the burden was on the reinsured to demonstrate compliance with the provisos,
but only to the standard of the “balance of probabilities”. In that case, the reinsured was able to
discharge the burden by recourse to reconstructed actuarial modelling.
The present case concerned an appeal to the Commercial Court from an arbitration award in
favour of the reinsured, arising under an XL reinsurance programme protecting the reinsured’s
casualty book of business from 1976 to 1983. The relevant reinsurance contracts containing a
double-proviso follow clause remarkably similar to that in Hill v. M&G.
To pursue an appeal from an arbitration award, it is not enough to contend that the arbitrators
erred in their assessment of the facts; what is required is an error in their application of the
law. In this case, the reinsurers complained that the arbitrators had wrongly transposed the
test of “arguability” into the question of whether the claim so settled fell within the terms
of the reinsurance contract (that is, the second proviso), when clearly it applies only to the
24 [2010] EWHC 974 (Comm)
25Insurance Company of Africa v. SCOR [1985] 1Lloyd’s Rep 312 CA
26[1996] 3 All ER 865
27 [1991] 1 Lloyd’s Rep 524
28[2009] EWHC 2787
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issue of whether the claim falls under the underlying policy (the first proviso). The Commercial
Court rejected the appeal on this ground. While there were indeed several passages in the
award where the arbitrators’ choice of words was “infelicitous”, the court was satisfied that the
tribunal’s intention was (correctly) to apply the relevant test only to the question of liability for
the underlying claim. Having properly reached the conclusion that the claim was one for which
liability arguably existed under the terms of the direct policy (the first proviso), they had rightly
gone on to conclude that the claims so recognised as such actually fell within the terms and
conditions of the reinsurance (the second proviso). That was the correct approach.
The reinsurers also contended that the tribunal had erred on the question of both allocation and
on that of whether the loss in each year for which indemnity was sought actually stemmed from
one “event”. As to the first point, the court noted and approved the reasoning adopted by the
tribunal in each case. One of the claims complained about, for example, was concerned with
the application of the “triple trigger” theory, favoured in many US courts, by which damage or a
defect, once identified, can result in insurance liability for up to 100% of the loss, falling on any
one or more of three different occasions. Faced with that prospect, the tribunal was entitled to
conclude, as it did, that there existed liability for perhaps 100%, but certainly arguably 70%, on
the relevant contract of insurance. To allocate on that basis could not be criticised.
Finally, as to the question of “event”, the tribunal had indeed committed what the court
described as a “howler”, by on one occasion referring in its award to the relevant losses in each
year stemming from one “cause”, when in fact the aggregation language called for one “event”.
As was made clear in Axa Reinsurance v. Field [1996]29, the concepts of “cause” and “event” are
two very different things. The court was satisfied, however, that this was simply a typographical
oversight in the award. The tribunal clearly meant to conclude that the losses resulted from one
event, in accordance with the relevant test in Kuwait Airways v. Kuwait Insurance Co [1996]30, to
which express reference was made in the award.
Result: Judgment for the reinsured.
Governing law and jurisdiction in reinsurance Foreign reinsurer participation in a
London programme
Gard Marine & Energy v. (1) Lloyd Tunnicliffe ; (2) Glacier Re & Anor [2010]31
Court of Appeal 6 October 2010
The background
This was a case giving rise to issues of both jurisdiction and governing law under a contract (or
contracts) of excess of loss reinsurance issued by the Defendants, to the Claimant (“Gard”), a
reinsured domiciled in Bermuda.
The reinsurance was arranged under two separate placements. An order for 7.5% of the whole
was placed by way of a London market slip, to which various Lloyd’s syndicates subscribed. A
separate slip, for 5% of the whole, was placed with the second Defendant, Glacier Re (“Glacier”)
a company domiciled in Switzerland.
A dispute emerged under the reinsurance between Gard and certain of the subscribing
reinsurers, specifically under the Sum Insured clause and the application of the policy deductible.
In March 2007, Gard issued English proceedings against the reinsurers then in dispute, namely
three Lloyd’s syndicates and Glacier. Glacier challenged the jurisdiction of the English court, on
the grounds that the law governing its participation was Swiss law and that it could be sued only
in the courts of Switzerland.
29[1996] 1 WLR 1026
30[1996] 1 Lloyd’s Rep 664
31 [2010] EWCA Civ 1052
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Applicable law
Dealing with applicable law first, the English court noted that it was obliged to apply the
principles of the Rome Convention32. Article 3 of the Convention provides that a contract is
to be governed by the law chosen by the parties. Such a choice may be express or it may be
“demonstrated with reasonable certainty by the terms of the contract or the circumstances of
the case.” The 1980 report of Professors Giuliano & Lagarde, a guiding text which accompanies
the Convention, offers examples of where this may be so, including where the contract is in a
standard form known to be governed by a particular system of law “such as a Lloyd’s policy of
marine insurance...”
If no choice can be discerned at all, either expressly or by implication as above, then the general
presumption is that the contract will be subject to the law of the place of business of the
“characteristic” performer of the contract (Art 4(2)), which in the case of reinsurance is taken
to be that of the reinsurer33.
In a judgment handed down in October 2009, the Commercial Court concluded that there was a
good arguable case in favour of English law, in preference to Swiss, on four grounds:
1. The contract with Glacier was not, in truth, a Swiss market placement. It was a London
market placement in which Glacier had merely been invited to participate. The risk was placed
by London brokers who had offered Glacier a share of an existing reinsurance programme,
expressly to make up for capacity constraints faced by the existing participants. The fact that
the Glacier participation was recorded under a separate order did not detract from this fact;
2. The use of a Lloyd’s slip and policy pointed towards English law, applying the reasoning in
Giuliano & Lagarde;
3. The slip specifically incorporated a number of London market wordings, such as LSW196A, CL
356A, CL 365 and LSW 1001. This had previously been held persuasive in favour of an implied
choice of English law34;
4. The slip adopted a number of formulations and turns of phrase recognisable to English law,
such as the form of Notice of Cancellation or the provision “Subject to all terms, clauses,
conditions as original and to follow the original in every respect...”. In the Aegis case the
judge had considered this to be “terminology which associates it with the law of England”.
Consequently, the default presumption at Article 4(2) of the Rome Covention (which in this
case would have pointed to Swiss law) did not come into play.
Jurisdiction
Matters of jurisdiction as between England and Switzerland are subject to the Lugano
Convention. The default position under the Lugano Convention (Art 2) is that a defendant
should be sued only in his own domicile, such that in this case Glacier could only be sued in
Switzerland.
There are, however, a number of specific derogations from this position, one of which is to
be found at Art 6(1). This provides that where (as here) the Defendant is one of a number of
defendants, he may be sued “in the courts for the place where any one of them is domiciled”.
The purpose of Art 6(1) is of course to avoid the risk of contradictory judgments in different
jurisdictions, but it will only apply where the claims against the various defendants are so closely
connected that it is expedient to hear and determine them together in the interests of avoiding
irreconcilable judgments35. Such irreconcilability may arise from potential conflicting findings of
fact or from potential conflicting decisions on questions of law36.
Glacier contended that there was no such risk in this case. Even if (contrary to its primary
case) English law applied to the contract, it pointed out that the two slips were separate and
32Recently superseded by the Rome I Regulation, with respect to contracts entered into after 17 December 2009
33Dornoch v. Mauritius Union Assurance [2006] 1 Lloyd’s IR 786
34Gan v. Tai Ping [1999] Lloyd’s Rep IR 229 (CA); Aegis v. Continental Casualty (11 May 2006)
35Kalfelis v. Schroeder, Muenchmeyer, Hengst & Co [1988] ECR 5565
36Gascoine v. Pyrah [1994] IL Pr 82
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contained distinct annotations. The claims also concerned different facts, in that exchanges were
relied upon between the brokers and the London market reinsurers that were not relevant to
Glacier’s position.
Nevertheless, the Commercial Court found that the Art 6(1) exception applied. While it was true
that the two slips bore some minor differences, these were not sufficient to call for separate
proceedings. By declining English jurisdiction over the claim against Glacier (and so forcing Gard
to sue Glacier in Switzerland) the court perceived a risk of irreconcilable judgments between
the English litigation and that in Switzerland. Both claims turned on the proper construction
of an identical Sum Insured clause in the contracts, together forming a common reinsurance
programme. Further, the issue of construction fell to be determined (so the court had already
held) under English law.
Accordingly, the English court confirmed jurisdiction over Gard’s claims against both the London
market syndicates and Glacier, as well as the contingent claim against the broker.
The Court of Appeal decision
Glacier appealed against the decision of the Commercial Court, upon which judgment was
handed down on 6 October 2010. On governing law, the Court of Appeal affirmed the decision
of the Commercial Court for essentially the same reasons. The Glacier participation was clearly
“part of” a London market programme, a fact borne out by its correspondence with the broker.
The fact that the Swiss reinsurer participated by way of a separate slip was, said the court,
of “little significance”, and indeed it would make “no commercial sense” for part of a single
reinsurance programme to be subject to one governing law and the remainder to a different law.
The parties had demonstrated “with reasonable certainty” a choice of English law for the whole
programme.
However, even if that were wrong, the Court of Appeal said that this was one of those rare
cases where the Art 4(2) presumption - which would normally favour the law of the reinsurer’s
place of business - would be rebutted in any event. From the circumstances as a whole, this
contract was “clearly more closely connected” with England, whether the parties had chosen
English law or not.
The Court of Appeal also approved the decision of the Commercial Court judge with respect to
jurisdiction. While there were minor variations between the two slips, and in the manner of their
placement, it would be wrong to conclude that these gave rise to a “different factual situation”.
Consequently, for the reasons given by the trial judge, there existed a clear risk of irreconcilable
judgments if Gard were required to pursue Glacier in Switzerland.
Result: Judgment for the reinsured.
Forum conveniens and governing law in
reinsurance contracts
Stonebridge Underwriting Ltd v. Ontario Insurance Exchange [2010]37
Commercial Court 10 September 2010
This case was a dispute about forum. However, as with many such disputes it also involved
determination of important threshold questions as to governing law.
The Defendant (OMIE) was a Canadian mutual insurance carrier, whose business was reinsured
under excess of loss contracts underwritten in the London market by the Claimant reinsurer,
Stonebridge, a member of the XL Group (XL).
The reinsurance was arranged by Canadian brokers via their London operation, in the form of a
typical London market slip, incorporating a number of standard London market terms. There was,
however, no express choice of law.
37 [2010] EWHC 2279 (Comm)
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A dispute arose under the excess of loss contracts, specifically as to compliance (or not) with
notification requirements, and the operation of the aggregate annual deductible. OMIE launched
proceedings on the claim against XL in Canada, asserting that the contract was subject to the laws
of Ontario. XL retaliated with the commencement of English proceedings, seeking various heads of
declaratory relief from the English court, and asserting that English law governed the contracts.
Initially, XL obtained the permission of the English court to serve the proceedings on OMIE, that is
outside the jurisdiction, on the interim grounds that the reinsurance contract was made in England,
through an English placing broker and was governed by English law, thereby satisfying one or more
of the grounds specified for service out of the jurisdiction under the Civil Procedure Rules.
OMIE applied for an order setting aside service of the Claim Form on it in Ontario on the ground
that England was not, in fact, the proper forum (the forum conveniens) for the dispute between
the parties.
In deciding questions of forum conveniens, the court is required to determine the forum where
the claim can most suitably be tried in the interests of all the parties and the ends of justice.
It is necessary for the party seeking to invoke the English jurisdiction, in this case XL, to show
that England is clearly and distinctly the most appropriate forum, a question that will take into
account a number of factors including:
1. which is the natural forum, that is to say the place with which the dispute has it most real
and substantial connection;
2. the nature of the dispute and the law by reference to which the dispute is to be determined;
3. the location of the parties and of the likely witnesses and their availability; and
4. considerations of costs, convenience and expense.
Among the arguments advanced by OMIE in this case was the contention that the parties had
neither expressly nor by inference made any choice of law, and hence there was no immediately
identifiable “law by reference to which the dispute is to be determined”. That being so, there was
no reason not to let matters simply run their course in the Ontario proceedings, during which
that court would need to reach a decision on governing law under its own conflict principles.
OMIE also noted that the Ontario proceedings had been commenced first, and it pointed out
that related proceedings were also in progress, in Ontario, against its broker. All of these matters,
it said, weighed in favour of Ontario forum.
Having considered the above arguments, the English court held as follows:
1. It being common ground that, in determining the governing law of a contract such as this, the
English court was obliged to apply the principles found in the Rome Convention38, the first
question asked by the Convention, in the absence of an express choice of law, was whether
a choice of law could nevertheless be “demonstrated with reasonable certainty”. In other
words, the court needed to consider whether an implied choice of law could be discerned
in this case. It was strongly arguable, said the court, that such an implied choice of English
law existed here. It would be surprising if a policy on a Lloyd’s slip, broked through a Lloyd’s
broker with a Lloyd’s underwriter on behalf of a Lloyd’s syndicate, was to be governed by a
law other than that of England, particularly when the contract referred to London market
clauses39;
2. If the parties had, by implication, reached a choice of English law to govern their contract
then there was a distinct advantage in having the issues of construction determined by the
English Commercial Court. Indeed, it appeared that the only alternative venue might in fact
deprive XL of the benefit of English law, to which the parties had impliedly agreed, because
the conflict principles applicable in the Ontario court were likely to find in favour of Ontario
law, which law was unlikely to recognise one or more of the legal rights relied upon;
38Since superseded by the Rome I Regulation in relation to contracts entered into since 17 December 2009
39Tryg Baltica v. Boston Cia de Seguros [2005] Lloyd’s Rep IR 40; Tiernan v. Magen [2000] I.L.Pr. 517; Gan v. Tai Ping
[1999] Lloyd’s Rep IR 229. Vesta v. Butcher [1986] 2 Lloyd’s Rep. 179
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3. Even if it could not be said that the characteristics of the contract were enough to convey an
implied choice of English law, the court would simply be required to take the next step in the
Rome Convention, by asking itself who was the “characteristic performer” of the contract,
since the Convention stipulates that the contract shall be governed by the law of the place
of business of the “characteristic performer”, in the absence of party choice. In the case of
reinsurance, the courts have previously held the “characteristic performer” to be the reinsurer40;
4. Once the court had decided that English law was applicable, there existed a disadvantage
to XL in sending the litigation to Ontario, namely the risk that the Ontario court would apply
a different law and would thereby deprive XL of a defence otherwise available to it under
English law. That disadvantage was the same, whether the court had found in favour of
English law on the grounds of implied party choice or by virtue of the default “characteristic
performer” test under the Rome Convention;
5. There was also a clear practical advantage in having the issue of construction determined
by the English Commercial Court. If evidence of the circumstances and context in which the
slip was signed was relevant, such evidence was likely to be located in London where the
underwriters and placing brokers were located;
6. The fact that OMIE commenced proceedings first was not a factor of significant weight. The
proceedings in England were, in any case, more developed than in Ontario;
7. The fact that OMIE had commenced Ontario proceedings against its broker did not outweigh
the factors in favour of English jurisdiction. The overlap and risk of inconsistent decisions was
slight and could be avoided by joining the broker to the English proceedings.
Result: Judgment for the reinsurer, XL.
40Dornoch v. Mauritius Union Assurance [2006] Lloyd’s Rep IR 127
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Liability insurance
Interpretation of the “contractual liability”
exclusion in a liability insurance policy
Omega Proteins Ltd v. Aspen Insurance UK Ltd [2010]41
Commercial Court 10 September 2010
Public or general liability policies will often include terms that seek to exclude coverage in the
case of liabilities assumed purely by contract. Generally speaking, public liability insurance is
concerned with extra-contractual duties only42.
In this case, the Claimant (“Omega”) carried on business processing by-products from animal
carcasses used in the meat industry, which it then supplied to pet food manufacturers and
others. A meat processing company, Northern Counties Meat Limited (“Northern Counties”)
supplied Omega with contaminated animal carcasses which Omega then, unaware of the
contamination, supplied to one of its customers who used the material and suffered losses in
consequence. In the ensuing litigation, Omega was found liable to pay damages to its customer
for breach of contract and Northern Counties was found liable to indemnify Omega against its
liability to its customer. The judgment against Northern Counties was based purely in contract,
namely breach of an express contractual term regarding the category of material to be supplied,
as well as a breach of the implied terms of satisfactory quality and fitness for purpose. No claim
or allegation was made in those proceedings that Northern Counties had been negligent or that
it was liable to Omega by virtue of any non contractual obligation.
Northern Counties was in liquidation and was unable to satisfy the judgment against it. Omega
therefore claimed against Northern Counties’ liability insurer, Aspen, in exercise of its rights
under the Third Party (Rights Against Insurers) Act 1930. The policy in question comprised a
combined policy, covering employers’ liability, as well as public, product and pollution liability. The
relevant insuring provision provided:
“Section C: Product Liability
The Company will indemnify the Insured against all sums which the Insured becomes legally
liable to pay for damages and claimants’ costs and expenses arising out of or in connection with
i) accidental Bodily Injury to any person
ii) accidental loss or damage to tangible property
happening during the Period of Insurance in connection with the Business and caused by any Product.
The Company will also pay Defence Costs in addition to the Limit of Indemnity.”
However, the policy also contained the following exclusion:
“The Company will not indemnify the Insured against any liability arising ... under any
contract or agreement unless such liability would have attached in the absence of such
contract or agreement.”
Aspen, relying on London Borough of Redbridge v Municipal Mutual Insurance Limited [2001]43
Lloyd’s Rep IR 545, submitted that Omega could not revisit the judgment, which conclusively
determined that the liability of Omega was in contract, and lacked any finding of liability on any
other basis. In the absence of any collateral determination as to extra-contractual liability, Aspen
argued, the claim had to be excluded, whether or not it could now be shown, in fact, that some
other alternative basis of liability also existed.
41 [2010] EWHC 2280
42Contrast with, for example, professional indemnity insurance
43[2010] Lloyd’s Rep IR 545
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Omega argued that such a proposition went beyond the language of the exclusion. So long as
the facts found by the court would translate into a liability, absent that imposed by the contract,
it mattered not whether the court had reached its conclusion on this basis or not. It could not be
right, argued Omega, that the question of what cover the insured is entitled to under the policy
should be determined by the choice that the third party made in relation to the way it formulated
its claim against the insured.
Having considered the arguments, the court held as follows:
1. The exclusion invited consideration as to what liability would have attached in the absence of
a contract; not as to what liability in tort would have arisen in the presence of one; nor as to
whether there was liability in tort as well as in contract. The court simply had to consider what
liability there would have been if there had been no contract between Omega and Northern
Counties (but the facts were otherwise as they were). On that basis, there would have been
a liability on Northern Counties in tort if it had been negligent in allowing the material to be
supplied without any warning that it was only fit for disposal;
2. In relation to liability insurance the insured must establish that it had suffered a loss which was
covered by one of the perils insured against44. That may be done by showing a judgment or
an arbitration award against the insured or an agreement to pay. The loss must be within the
scope of the cover provided by the policy. As a matter of practicality, the judgment, award,
or agreement might settle the question as to whether the loss was covered by the policy
because the insurers would accept it as showing a basis of liability which was within the scope
of the cover. But neither the judgment nor the agreement are determinative of whether or
not the loss is covered by the policy. It is open to the insurers to dispute that the insured is in
fact liable, or that it was liable on the basis specified in the judgment; or to show that the true
basis of liability fell within an exception45. Equally, the insured was entitled to seek to prove
that liability existed on an insured basis, whether this was a basis actually considered by the
underlying court judgment or not.
3. On the facts, Northern Counties would have been liable in negligence in the absence of a contract.
4. In order for the insurer to bring itself within the exclusion in must show that the liability in
question arose under a contract and that the exception is inapplicable. In this case that would
involve showing that, absent a contract, there would have been no liability in negligence.
Insurers could not establish that to be so.
Result: Judgment for the insured.
44West Wake Price & Co v Ching [1957] 1 WLR 45 QBD
45MDIS Ltd v Swinbank [1999] 2 All ER (Comm) 722 CA (Civ Div) and Enterprise Oil Ltd v Strand Insurance Co Ltd
[2006] EWHC 58 (Comm), [2006] 1 Lloyd’s Rep 500 considered and Redbridge LBC v Municipal Mutual Insurance Ltd
[2001] Lloyd’s Rep IR 545 QBD (Comm) doubted
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Mesothelioma and the insurance trigger
Employers’ liability policy trigger litigation
Durham v. BAI [2010]46
Court of Appeal, 10 October 2010
This litigation concerned claims brought against insured employers by sufferers of mesothelioma,
an incurable form of lung cancer caused by prolonged exposure to asbestos. A notable
characteristic of the disease is that it can take many decades for it to develop after the original
exposure to asbestos, and in some cases it might only be diagnosed by way of postmortem. In
the past, the medical evidence suggested that malignant changes associated with the disease
typically occurred about 10 years before the onset of symptoms, although more recently this
has been revised by many experts to five years. At any rate, once the disease is identified the
prognosis is poor. Most sufferers die within about 18 months of diagnosis. The condition is a
major issue for the employers’ liability insurance market, as current projections forecast a peak in
the number of mesothelioma sufferers in the next 20 years.
Traditionally, EL insurers in the UK have as a matter of practice adopted the “exposure” principle
in determining cover for mesothelioma claims. In other words, the responsive EL policy will be
that in place at the time when the claimant was exposed to asbestos, rather than that prevailing
at the time of onset of the symptoms, or diagnosis of the condition. Where, as is common,
exposure spanned a number of policy years (perhaps an entire working life) liability would be
shared between the various insurance interests pro rata to their time on risk.
That practice was thrown into doubt by the decision of the Court of Appeal in Bolton
Metropolitan Borough Council v Municipal Mutual Insurance [2006]47. Importantly, the Bolton
case was concerned with public liability, not employers’ liability insurance. Under the terms
of the relevant policy in Bolton, the insurer agreed to indemnify the insured in the event that
it became liable for injury or illness which occurred “during the currency of the policy”. The
court held that the injury to mesothelioma sufferers occurred not when they were exposed to
asbestos but much later, at the point when they became fatally ill, which typically was thought
at the time to be about 10 years before exhibiting outward symptoms.
The Bolton decision caused many EL insurers to look again at their approach to settlement, as it
appeared that they might not be liable to indemnify on a time exposed basis after all. Accordingly,
the matter went before the Commercial Court in a series of consolidated test cases, know as the
Employers’ Liability Policy Trigger Litigation, and on which judgment was issued on 21 November 2008.
Generally speaking, the Commercial Court held that EL policies were not the same as public
liability insurance. A typical EL policy was not concerned with the date of “occurrence”, so
much as the point at which “injury or disease was sustained or contracted” or “injury or disease
caused”. The Judge held these latter two formulations to be synonymous; the trigger for
payment under an EL policy was in each case the date of exposure, such that several policies
covering an extended period of exposure to asbestos would continue to be liable, as had been
assumed previously.
The insurers appealed against this decision, upon which the Court of Appeal handed down its
judgment on 10 October 2010.
Mindful that the various policies contained slightly different wordings, the judges in the
Court of Appeal considered separately the meaning of the phrase “injury sustained” and
“disease contracted”. Agreeing with the insurers, both Rix LJ and Burnton LJ held that an
“injury” was “sustained” only when it actually occurred, and hence the “sustained” wording
in an EL policy had the same meaning as the “occurring” wording in the public liability policy
considered in the Bolton case. To this extent, therefore, they disagreed with the decision of the
46[2010] EWCA Civ 1096
47 [2006] 1 WLR 1492
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Commercial Court. While it was true that this meaning would, on the face of it, conflict with the
apparent commercial purpose of an EL policy, it was not an absurd or meaningless or irrational
interpretation.
As to the meaning of the phrase “disease contracted”, all of the judges in the Court of Appeal
held that this was capable of referring to the disease in its origin (i.e. exposure), albeit for slightly
different reasons. In the case of Rix LJ, this was because the commercial purpose of EL policies
pulled towards the causal origins of the disease in the employee’s exposure to the noxious
activities of his employment. Burnton LJ came to the same conclusion on the basis of the policy
wording alone, without recourse to the “commercial purpose” of the EL policies. The result,
by a majority, was that EL policies containing “injury sustained” wording were found not to be
responsive to mesothelioma claims on an exposure basis, whereas the reverse was true of those
issued on a “disease contracted” basis.
This being the conclusion as a matter of construction of the insuring clauses, the court also
had to consider the effect of the Employer’s Liability (Compulsory Insurance) Act 1969, and in
particular the corresponding standard wording that applied in post-1972 EL policies as follows:
Employers’ Liability (Compulsory Insurance) Act 1969
“The indemnity granted by this Policy is deemed to be in accordance with the provisions of
any law relating to compulsory insurance of liability to employees in Great Britain… But the
Insured/Policyholder shall repay to the Company all sums paid by the Company which the
Company would not have been liable to pay but for the provisions of such law…”The Court
of Appeal held that the effect of the 1969 Act was to render post-1972 EL policies obliged to
respond on an exposure basis in the first instance, even those on “injury sustained” language.
However, the insurers would have a claim against the employers to recover such part of the
said liability as went beyond the insuring terms of the policy.”
The Court of Appeal held that the effect of the 1969 Act was to render post-1972 EL policies
obliged to respond on an exposure basis in the first instance, even those on “injury sustained”
language. However, the insurers would have a claim against the employers to recover such part
of the said liability as went beyond the insuring terms of the policy.
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Utmost good faith
The effect of exaggerated claims
Joseph Fielding Properties (Blackpool) Ltd v. Aviva Insurance Ltd [2010]
Queen’s Bench Division (Merc), 23 August 2010
The claimant insured, JFP, claimed an indemnity from the defendant insurer, formerly known as
Norwich Union (NU), in respect of a fire on 26 November 2008 at the insured’s industrial estate
in Blackpool. The principal shareholder in and director of JFP was a Mr Peter Leonard.
Aside from duties owed at common law, general condition 7 of the policy entitled NU, at their
option, to avoid the policy from inception or from the date of the claim:
“a) if a claim made by you or anyone acting on your behalf to obtain a policy benefit is
fraudulent or intentionally exaggerated, whether ultimately material or not or
b) a false declaration or statement is made or fraudulent device put forward in support of a
claim.”
The fire claim was substantial, totalling some £2m sought in respect of the alleged costs of
reinstatement of the tenanted units at the estate. NU denied the claim, however, and further
sought to avoid the policy on the following grounds:
1. During the currency of the policy JFP had made a prior fraudulent claim for which NU had
paid it £9,870, in respect of damage to drain at the estate in September 2008 (“the Drainage
Claim”); and/or
2. JFP failed to disclose to NU at inception that Mr Leonard and his wife had made a fraudulent
claim against a prior insurer, NIG, in respect of water damage to a holiday lodge owned by
them in Windermere in February 2007; and/or
3. The failure by JFP to disclose to NU at inception the fact that on numerous occasions
previously, Mr Leonard had made misrepresentations and/or non¬disclosures when
presenting to other insurers in the past.
With respect to the prior drain claim, NU’s loss adjuster had been told that the drain had
collapsed and that a contractor had given a quotation of £8,000 for the repair works. A copy
invoice from the contractor was later tendered for £8,400 plus VAT making £9,870. Although
NF had paid the claim, it contended subsequently that the contractor’s invoice was bogus
and the amount claimed was exaggerated, entitling it to avoid the policy from inception under
condition 7.
Upon considering the evidence, the court agreed that the drain claim had been exaggerated.
JFP had, in fact, paid the contractor only £5,000 at most, but he had arranged with the
contractor to submit an invoice for the originally quoted sum of around £8,000 plus VAT, which
was then presented to the insurers bearing the stamp “paid in full with thanks”. This was clearly
designed to show, so the court found, that the monies claimed were properly due and had been
paid, being a false and fraudulently statement.
Thus JFP had acted dishonestly, and it was no defence to say that they could have made a
lesser claim in a non-fraudulent manner, or that they had in fact paid out most of the sum
claimed. Moreover, NU did not have to show under condition 7 that it had relied on the
fraudulent statements. NU was not liable to indemnify in respect of the instant claim and could
reclaim the sums paid out on the drainage claim and any other prior claim.
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NU would also have been entitled to avoid on the basis that Mr and Mrs Leonard had made a
false claim against the insurers in respect of their holiday lodge. On the evidence, they had taken
out a policy to cover the lodge after they had discovered that it had been affected by flood
damage and then made a claim representing that the damage had occurred after inception. Such
a fraudulent claim should have been disclosed to NU, thereby entitling them to avoid the policy
from inception and reclaim all sums paid.
Finally, it was found that Mr Leonard also had a conviction for criminal damage which he had
failed to disclose to previous insurers, and which at the time of disclosure was yet to become a
“spent” conviction under the Rehabilitation of Offenders Act 1974. His businesses had also made
other false statements to other insurers when seeking insurance or when making a claim. Even
if it was possible to conclude that one false statement in isolation was relatively insignificant,
together the collection of facts not disclosed was clearly material, and on the evidence
inducement was made out.
Result: Judgment for the insurer.
Misrepresentation and inducement revisited
Synergy Health (UK) Ltd v. CGU Insurance Plc & Ors [2010]48
Commercial Court, 19 October 2010
Synergy was an insured under a Combined Commercial Policy issued by the Defendant, CGU,
and sought to pursue a claim under the policy for physical damage and business interruption
following a fire at its premises in Dunstable in February 2007. CGU denied the claim and sought
a declaration that it was entitled to avoid the policy for material misrepresentation and/or nondisclosure.
Background
On 28 December 2005 the brokers had sent a letter to Fusion, the underwriting agents acting
for CGU, concerning various matters of risk improvement outstanding from previous surveys,
including the need to install an intruder alarm. The letter stated the required work “will be
completed by end December” but this failed to happen. Indeed, the work was still not completed
prior to the subsequent policy renewal in April 2006, a fact that came to light only after the
fire. CGU’s case was that the statement in the letter was a misrepresentation of fact as at 28
December 2005, which was never withdrawn or corrected prior to renewal. Accordingly, they
contended that there was a continuing material misrepresentation, whether express or implied,
at the time of renewal. Alternatively, they contended that there was a material non-disclosure of
the fact that there was no intruder alarm installed at the Dunstable premises. Either way, those
responsible for underwriting the risk were, so CGU contended, induced to renew the policy by
such misrepresentation or non-disclosure, entitling them to avoid.
Misrepresentation
Dealing firstly with the question of misrepresentation, Synergy argued that the statement “will
be completed by end December” was not a statement of present fact so much as one only of
future intention. It was, in other words, a representation of expectation and belief only, which is
deemed to be true if made in good faith49, even if the expectation is not subsequently realised.
The Court rejected this. With less than two working days remaining to the end of December, it
was necessarily implicit in the statement, when made, that the work was in fact underway and
was about to be completed.
48[2010] EWHC 2583 (Comm)
49s.20(5) Marine Insurance act 1906
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Synergy then contended that, if the statement was a misrepresentation, it could not have been
a misrepresentation “made during the negotiations for the contract”50 because in fact the
statement was made part way through the policy year and fully four months before the next
renewal. This argument was also rejected. The court held that, where a statement was made
to the insurers during the policy period, about a matter which was material to the risk and to its
subsequent renewal, and that statement was a misrepresentation which went uncorrected, the
misrepresentation was implicitly repeated at renewal.
Non-disclosure and waiver
Having found for Insurers on misrepresentation, an additional finding of non-disclosure was not
necessary to the judgment, but nevertheless the judge went on to consider the point. Synergy
argued that Insurers had waived their right to disclosure of the matters about which they now
complained, because they had only required completion of a document entitled “Declaration of
Material Facts” which was simply directed to moral hazard and previous declinatures, but said
nothing about the installation (or not) of an intruder alarm at the Dunstable site. Again, the
court rejected this argument. There was, said the judge, nothing to justify a reasonable person
in thinking that the insurers had restricted their right to receive all other material information
and/or that they had consented to the omission of information about the non-installation of the
intruder alarm.
Inducement
In the context of the avoidance case, all that remained then was inducement. On this question,
the judge found against CGU. Although the misrepresentation and non-disclosure were clearly
material, insurers were unable to demonstrate that they had been induced into writing the
insurance as a result. The true explanation for the failure to install the alarm was a catalogue
of error and oversight, rather than any wilful conduct or endemic failure of risk management
on the part of the insured. The underwriter accepted in evidence that he regarded Synergy
as a well-managed risk and indeed a valued account, for whom he had previously agreed to
take a flexible attitude. Faced with an innocent explanation for what had happened about the
Dunstable alarm, the underwriter would not have wanted to do anything that might endanger
the renewal of the business. The judge added that a clue as to how the underwriter would in
fact have responded was to be found in the reaction to a previous outstanding risk improvement
matter, relating to the fire alarm at a different site operated by the insured. The requirement, in a
survey dated 5 July 2005, was that the fire alarm be connected to a remote monitoring system
by 5 September of that year and yet four months later the underwriter was informed that this
remained outstanding “because Chubb were being very slow”. The underwriter never followed
up this “loose end” prior to the subsequent renewal. The picture that emerged was that the
underwriter had confidence that this insured would, in due course, comply with required risk
improvements without any need to impose contractual conditions. In the circumstances, the
court was satisfied that the insurers would not have adopted any different attitude in relation to
the Dunstable alarm if the true position had been disclosed prior to renewal.
Result: Judgment for the insured.
50A requirement of s. 20(1) Marine Insurance Act 1906
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Broker duties
Failure to advise on duty of disclosure – loss of
a “chance”
Nicholas G Jones v. Environcom Ltd & Ors [2010]51
Commercial Court, 14 October 2010
The claimant in this litigation was a representative name of Woodbrook Underwriting Agency Ltd
(“Woodbrook”), suing on behalf of all Lloyd’s underwriters subscribing to a property and BI cover
issued to the Defendant, Environcom, a company involved in the business of recycling waste
electrical goods.
The insurers sought a declaration that that they were entitled to avoid the relevant policies
by reason of the Defendants’ failure to disclose the use of plasma guns on their refrigerator
disassembly line. It was alleged that the use of these tools involved a risk of fire, and that, indeed,
a number of “small fires” were known to have occurred on the line. It was also alleged that there
were other fires at the facility, both before and after the inception of the policies, which had
gone undisclosed.
Environcom denied that the insurers were entitled to avoid as alleged, but in the alternative
joined their brokers, Miles Smith Insurance Brokers (MSIB) as a Third Party to the litigation. On
the premise that insurers were entitled to avoid as alleged, Environcom pleaded against MSIB
that they had failed in their duty as brokers to advise Environcom as to the disclosure obligations
owed to insurers.
As between the insurers and Environcom, the claim of some £6 million was settled at a mediation
in November 2009, on terms whereby insurers paid Envrincom just £950,000 inclusive of costs.
This left Environcom with a substantial unsatisfied loss, for which is continued its third party
claim against MSIB.
By way of history, Environcom had been insured by Woodbrook for some years, always through
MSIB. However, after a series of fires at the premises, Woodbrook indicated in 2007 that it
did not intend to invite renewal. Subsequently, insurers were persuaded to renew but on more
stringent terms. Further fires occurred, however, including one final, major, fire in September
2007, destroying the whole of the plant and machinery, and giving rise to the need to demolish
the facility.
It was common ground that the following had not been disclosed:
1. use of the plasma guns,;
2. recurrent ignitions of insulation by virtue of the plasma guns, and
3. the fact that a further fire had occurred two months or so before the policy had been finally
renewed
MSIB had not advised Environcom, in terms, that fires were disclosable, and had not asked them,
specifically, at the time of the final renewal preparations, whether further fires had occurred.
Environcom submitted that MSIB had a duty to ask about the use of plasma guns, about
processes involving heat, and hazardous processes and fires, and that making such inquiries
would have revealed the use of plasma guns. Furthermore, Environcom argued that there would
still have been a realistic and substantial prospect of obtaining insurance cover if it had properly
disclosed details of the fires, and so it was entitled to recover in respect of the loss of the
chance of an insurance recovery52.
51 [2010] EWHC 759 (Comm)
52For “loss of a chance” principle in such cases, see Allied Maples Group Ltd v. Simmons & Simmons [1995] 1 WLR 1602
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For its part, MSIB submitted that it had provided, in the documents it sent to Environcom, an
adequate explanation of the latter’s disclosure obligations. It further contended that, even if it had
raised specific queries with its principal, Environcom would not have provided the information.
The court found in favour of Environcom on the question of breach of duty, but against it on
causation.
On breach of duty:
1. The documents sent by MSIB to Environcom were inadequate to satisfy a broker’s duty to
explain the obligation of disclosure to his insured principal. A broker must satisfy himself that
the position is understood by the insured, and that would usually require a specific oral or
written exchange on the topic, both at the time of the original placement and at renewal,
particularly if (as here) a new person had in the meantime been appointed as the insured’s
risk manager. There was no evidence of any such exchange, let alone one accompanied by
inquiries by MSIB to help unearth material facts;
2. Where an inappropriate and incomplete explanation was given to a client as to his obligations,
there was a higher standard of care required on the part of the broker in eliciting material
information for disclosure;
3. MSIB did not have a duty to inquire about the use of plasma guns, as it would not have
occurred to a reasonably competent broker to ask specifically whether plasma guns were
being used in the insured’s process. Furthermore, asking about the use or development of
heat would not have unearthed the use of plasma guns. Asking about hazardous processes
would probably have resulted in an equally uninformative answer as regards plasma guns;
4. Consequently, it had not been proved that, if MSIB had complied with its duty to give
appropriate disclosure advice, the use of plasma guns would have been revealed. However,
MSIB should have made it very clear that all outbreaks of fire were material matters and
should be disclosed. They should have asked specifically, at the time of renewal, about
outbreaks of fire. If such questions had been asked against the background of sound advice
on disclosure, MSIB would have received a full and frank response. A train of enquiry leading
to the revelation about regular outbreaks of fire would also have led to the emergence of the
use of plasma guns. MSIB had therefore breached its duty;
On causation:
5. Woodbrook had initially refused to renew. If disclosure had been made of the use of the
plasma guns and the incidence of further fires during the run-up to the renewal, the evidence
was that Woodbrook would have been even less willing to offer terms. The disclosable fact of
Woodbrook’s refusal would have been a further factor weighing heavily against the provision
of cover by any other underwriters. Environcom had conceded that it would have had to
adopt a more proactive role in obtaining an offer of cover, which would have included making
proposals to reduce, if not eliminate, fire risks. However, it had not established that there was
any realistic chance that such risk improvements would have been proposed to underwriters,
let alone in due time;
6. Environcom had also been conducting its operations in breach of its waste management
licence. That was a matter for disclosure, and so even if cover had been obtained the
resulting policy would have been highly vulnerable to avoidance for further non-disclosure.
The prospects of obtaining cover were purely speculative, and it therefore could not be said
that MSIB’s breach of duty had resulted in an actionable loss of a chance.
Result: Judgment for defendant broker (on causation)
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Procedure
Subrogated claims
Insurers’ costs and disclosure obligations
Owners of the Dredger “KAMAL XXVI” and the Barge “KAMAL XXIV” v. Catlin (Five) Ltd
[2010]53
Commercial Court, 14 October 2010
Under section 51(3) of the Senior Courts Act 198154, the English High Court has the power to
determine by whom, and to what extent, the costs of the litigation are to be paid. Typically, the
requirement is simply that the costs of the winning litigant be paid by the loser, but not always.
What happens, for example, where the loser is insolvent, or perhaps a shell company with no
assets? In many cases, the nominal litigant will in fact be supported in the litigation by a third
party interest, most obviously in the case of subrogated actions pursued by insurers. In such
cases where insurers have maintained the litigation, they can be made subject to a costs order
under section 51(3), where it is considered “just and equitable” to do so55, even though they are
not themselves a party to the litigation. This liability falls on insurers directly, and thus is additional
to any applicable policy limits.
In the present case, the Respondent insurers (Catlin) had paid a claim to their assureds, the
owners of the dredger KAMAL XVI and the barge KAMAL IV (together, “Kamal”), following
a collision with the vessel ARIEL, owned by the Claimants. Having indemnified Kamal, Catlin
became subrogated to the claim against Ariel, and, jointly with their assured, they instructed
solicitors, Ince & Co, to pursue the recovery, both for their subrogated interest and for the
uninsured losses of Kamal.
As is common in collision cases, the litigation was split into a trial of liability and a separate trial as
to quantum. In a judgment handed down in 2007, the Commercial Court concluded that ARIEL
was the vessel at fault for the collision, and hence liable in principle for the claim. Accordingly,
Ariel was ordered to pay the litigation costs of Kamal to date.
Matters then proceeded to quantum, which came on for trial in the Commercial Court in January
2009. From Kamal’s point of view, the trial did not go well. Having found their factual evidence
to be entirely unreliable, and their expert witness in breach of his duties to the court, the Judge
dismissed almost the entirety of Kamal’s alleged claim for damage arising from the collision. At
a separate hearing, he went on to determine that Kamal’s claim was indeed fraudulent from the
outset, containing fraudulent statements as to the extent of the damage and concealing other
matters highly relevant to the litigation. Accordingly, he reversed the earlier costs order made in
favour of Kamal, following the liability trial, and ordered that the costs of the litigation be paid
instead by Kamal to Ariel, on an indemnity basis.
With a costs order in its favour, Ariel then sought to pursue Catlin for the said costs, or at any
rate for such of the costs award as remained unpaid by Kamal. In the course of that application,
they asked the court to order disclosure of various documents probative of Catlin’s participation
in the action, and in particular their involvement in the instructions given to Ince & Co. The
requested documents encompassed correspondence with solicitors and counsel, including
reports of advice to insurers from Ince & Co.
53[2010] EWHC 2531 (Comm)
54Formerly known as the Supreme Court Act 1981
55Aden Shipping Co v. Interbulk Ltd [1986] AC 965
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It was common ground between the parties that, upon a section 51(3) application against
insurers, the following features may justify a costs order against insurers56:
1. if the insurers determined that the claim would be fought;
2. if the insurers funded the litigation;
3. if the insurers had the conduct of the litigation;
4. if the insurers fought the claim exclusively, or in the alternative, if they fought it predominantly
to defend their own interests;
5. if the litigation failed in its entirety.
Relying upon the judgment of Blake J. in Thomas v. Berkhamsted Collegiate School [2009]57,
Ariel argued that disclosure of the relevant documentation was necessary in order to determine
many of the above points, and generally to assist the court in determining whether it was “fair
and equitable” to award costs against Catlin. Moreover, Ariel contended positively that Catlin
had failed to investigate the claim properly, or to give proper consideration to its merits before
proceeding. Again, the documentation sought was said to be necessary to determine this
question.
For its part, Catlin described itself as merely the innocent victim of its assured’s fraud, and it
rejected “the inference” that it should have been suspicious of the claim. As to the Ince & Co
reports, Catlin argued that these were subject to privilege, and ought not to be disclosed. While
it accepted that claims of privilege could be defeated in cases of fraud, it contended that the
privilege in this case belonged to Catlin (not Kamal) and so was not tainted by the latter’s fraud.
The court rejected Catlin’s arguments and found for Ariel. There was at least an arguable case,
said the court, that Catlin could and should have been alive to the fraud, and this argument
could only be resolved by disclosure of the documents sought, most crucially the legal advice
it had been given. As to privilege, while it was true in principle that Catlin enjoyed privilege,
independent of that of its assured, the reality was that the insurers and the solicitors were
together being used as the mechanism by which Kamal carried out the fraud. Consequently, the
fraud exception applied to all of the documents, and hence the protection of privilege was not
available to the insurers or their solicitors.
Result: Judgment for the Applicant, Ariel.
Arbitration time limits and the Third Party
(Rights Against Insurers) Act 1930
William McIlroy Swindon v. Quinn Insurance Ltd [2010]58
Technology and Construction Court, 12 October 2010
The claims in this case arose under a liability policy issued by the Defendant insurer, Quinn, to a
building and roofing contractor, A Lenihan Ltd (“Lenihan”).
Upon two judgments being issued (in August and December 2009), Lenihan was found liable to
indemnify the Claimant (“WMS”) for fire damage sustained to a shop and residential premises in
Lewes, East Sussex, in September 2006.
Lenihan had sought indemnity for the claim under its liability policy, but Quinn denied coverage
on the grounds of breach of certain policy conditions, and took no part in the defence of the
litigation against its insured. Accordingly, the judgment against Lenihan was not satisfied, and it
went into voluntary liquidation.
56Chapman Ltd v. Christopher [1998] 1 WLR 13; Cormack v. Excess Insurance [ 2002] Lloyd’s Rep IR 398
57 [2009] EWHC 2374 (QB)
58[2010] EWHC 2448 (TCC)
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WMS then sought to pursue the claims for recovery directly against Quinn, pursuant to the Third
Party (Rights Against Insurers) Act 1930. Quinn mounted a defence based upon contractual time
bar. The policy that Quinn had issued to Lenihan contained a requirement that all disputes were
to be referred to arbitration within nine months of a dispute arising. In the absence of a referral
to arbitration within nine months, the claim was deemed to be abandoned. Quinn argued that the
nine month clock started to tick from the point at which it informed Lenihan that coverage was
denied59. As no proceedings had been commenced within the time stipulated under the policy,
WMS’s claim was destined to fail. Quinn sought summary judgment to dismiss the case against it.
WMS argued that, under a liability policy, a right of action arises against an insurer only once the
insured’s liability to the third party is established. Lenihan’s liability had been established by the
judgments of August and December 2009, and therefore the nine month time period had not
expired by the time that WMS brought its claim against Quinn.
The following issues were required to be determined:
1. Whether, if properly construed, the arbitration clause still allowed the right to pursue a claim
by litigation, or was an exclusive remedy.
2. Alternatively, if the arbitration clause was exclusive and the right to bring a claim in arbitration
did expire after nine months, was the clause sufficiently unusual and onerous that it could be
said not to have been incorporated in the policy, Quinn having failed to bring it to the attention
of Lenihan?
3. Alternatively, if the arbitration clause was incorporated and the right to pursue litigation was
excluded, had the nine months period expired?
4. Alternatively, if time had expired, could an extension of time be granted for referring the
dispute to arbitration, pursuant to section 12 Arbitration Act 1996?
Taking each point in turn the Court found as follows:
1. The wording of the clause was quite clear, prescribing a mandatory mode of dispute
resolution, with a time limit, failing which a claim in respect of that dispute was no longer
recoverable. It was intended to provide an exclusive remedy.
2. Just because the clause was unusual did not make it onerous. Lenihan had had the same
policy wording for two years and had been told specifically by Quinn to read it carefully. In
addition, the insurance had been arranged through brokers who would have advised Lenihan
on the policy60. The clause was incorporated into the policy.
3. Applying the principle in Post Office v. Norwich Union [1967]61, an insured could not sue the
insurer for a particular sum by way of an indemnity until the liability of the insured had been
established, and the amount of such liability ascertained. However, this did not prevent the
insured from seeking declaratory relief where it alleged the insurer to be in breach of contract.
Lenihan considered it was entitled to an indemnity in respect of liability it might incur as a
result of the fire at the property in Lewes. When it discovered that Quinn had no intention
of granting the same, Lenihan acquired the right to refer the dispute to arbitration under the
terms of the policy. Thus, liability under the policy arose at the latest by the end of February
2009 and any arbitration should have commenced before the end of November 2009. No
such dispute was referred to arbitration.
4. As to the application for an extension, the court was not satisfied that it had the relevant
jurisdiction under s12 of the Arbitration Action 1996, because the law applicable to the
insurance policy was that of Ireland, but added that it would decline to grant such an
extension even if it had the power to do so.
Result: The Claimant’s claims in the two action failed.
59Quinn initially sent notice of this to Lenihan on 2 July 2008 but allegedly that notice was never received. However,
the notice was re-sent on 18 February 2009, and it was common ground between the parties that this was the effective
date of notice of refusal of cover by Quinn
60Although no evidence was submitted in this regard at the hearing.
61 [1967] 2 QB 363
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Law and jurisdiction
Prior US proceedings and the forum non
conveniens test
Royal & Sun Alliance Insurance Plc & Ors v. Rolls-Royce Plc
Ace European Group Ltd & Ors v. Rolls-Royce Plc
Axa Corporate Solutions Assurance SA (UK Branch) v. Rolls-Royce Plc [2010]62
Commercial Court, 21 July 2010
Background
The Defendant, Rolls-Royce, was the manufacturer of a marine propulsion device known as the
Mermaid Pod, widely fitted to cruise ships from about 1998. Shortly after installation, operational
issues began to emerge with the device, resulting in litigation partly in France but predominantly
in Florida, on the part of the affected cruise ship operators. Most of that litigation subsequently
came to be settled.
Rolls-Royce claimed on its primary and excess layer liability insurance in respect of the amounts
payable to settle the US proceedings and the costs of those actions as well as the costs of
investigating and remedying the alleged defects. The insurance policies were expressly governed
by English law but did not contain an exclusive jurisdiction clause. The insurers denied the claims
on coverage grounds, partly concerned with the interpretation of the contracts of insurance,
and partly to do with factual and technical issues and questions of notification.
Thereafter, Rolls-Royce commenced proceedings in Florida against the insurers, seeking a
declaration that the various insurance policies were responsive and that they were entitled to an
indemnity. Before the said US proceedings were served on the insurers, the latter began their
own actions in the English Commercial Court, claiming that they were not liable to indemnify
Rolls-Royce or its subsidiaries as alleged. The insurers challenged the jurisdiction of the US
court.
In response, Rolls-Royce issued an application in the Commercial Court to stay the English
proceedings, either generally or at least pending determination by the US court of its own
jurisdiction in the proceedings brought by Rolls-Royce.
It was common ground that the English court had prima facie jurisdiction to hear the matter;
the English proceedings had been served within England, upon a Defendant (Rolls-Royce) at its
registered office in England, and the dispute arose under a contract expressly subject to English
law. The only question was whether the English court could (and, if so, should) stay the English
proceedings in deference to the pre-existing litigation in Florida.
Jurisdiction to stay in principle
Logically, the first question for the court to consider was whether a stay was permissible at all,
as a matter of law. In a European context, matters of jurisdiction are determined by reference
to EU Council Regulation 44/200163, which stipulates that proceedings by an insurer may be
brought only in the member state jurisdiction of the insured. The purpose of the rule is to
protect the insured, who is perceived to be the weaker party in the commercial relationship, and
thus it is applied inflexibly. Paradoxically, in this case, the rule would result in English jurisdiction,
which was precisely what the insured did not want.
62[2010] EWHC 1869 (Comm)
63And prior to that, the Brussels Convention 1968
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The US is of course not a party to the relevant EU Regulation, but nevertheless the English court
(and other EU member state courts) are expected, save in limited circumstances, to exercise the
jurisdiction conferred upon them by the Regulation whether or not the “competing” jurisdiction is
that of a member state64. While the authorities are clear that they may surrender that jurisdiction
in cases where the parties have expressly agreed to the exclusive jurisdiction of the competing
non-member state court65, they are much less consistent on what is to happen in the absence of
an exclusive jurisdiction clause, or indeed where the competing proceedings already exist, as here.
Nevertheless, one important principle was common ground: whether or not the English court
was actually permitted in principle to stay its own proceedings, it could only ever exercise its
discretion to do so if satisfied on the “forum conveniens” test that the competing jurisdiction
was, in fact, a “clearly more appropriate and available forum for the resolution of the dispute”66.
The court therefore resolved to determine this second question first. Clearly, if Rolls-Royce could
not clear the forum conveniens hurdle, there could be no question of stay in any case, whether
or not the court had power to grant one.
Forum non conveniens
So was Florida then a “clearly more appropriate and available forum”? The burden lay with
Rolls-Royce to prove that it was, and the court held that it had failed to do so. The presence
of other (non-English) companies in Rolls-Royce’s group as plaintiffs in the Florida proceedings
did not make much, if any, practical difference and certainly did not outweigh the fact that all
the insurers were either registered in the UK or wrote the policies from branches in London. By
contrast, none of the parties to the Florida proceedings were Florida companies. The location of
the parties pointed to England as the appropriate forum, rather than Florida.
As to the substance of the dispute, this had no real connection with Florida, except that the
claims by the cruise line companies had been brought against Rolls-Royce in the Florida courts.
While that was a significant factor pointing to Florida as the appropriate forum, it did not carry
decisive weight. Technical and factual issues would have a world-wide ambit, since the underlying
failures of the devices, which were manufactured in France and Sweden, took place all over the
world. The matters relating specifically to the insurance, on the other hand, arose in England.
Considerable weight also had to be given to the fact that the dispute was between an English
insured and predominantly English insurers under an insurance policy placed by London market
brokers. The fact that the contract of insurance was governed by English law was also a factor
pointing towards England as the most appropriate forum. Substantial points of English law might
arise, going well beyond a straightforward reading of the provisions in the contract. The location
of witnesses did not point decisively in favour of either jurisdiction. The claims in England and
Florida were also begun about the same time and the respective dates of commencement should
not, said the court, be given any weight as a factor. The main factor that pointed in the direction
of Florida was the accumulated knowledge and experience in Florida, particularly of Rolls-Royce’s
Florida lawyers. But that factor was not decisive.
Having determined that Florida was not the most appropriate forum, there could be no stay of the
English proceedings. Accordingly, the court did not need to answer the threshold question as to
whether it had the jurisdiction to permit such a stay in any case. That issue remains, as yet, unresolved.
Result: Judgment for the insurers.
64Owusu v. Jackson [2005] QB 801
65Winnetka Trading Corp v Julius Baer International Ltd [2009] Bus L.R
66Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460
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Other developments
Anti-bribery and corruption in commercial
insurance broking
In May 2010, the FSA published its final report following its thematic review of anti-bribery and
corruption risks in the commercial insurance broker industry. The review was implemented by
the FSA following the £5.25M it imposed on Aon in January 2009 in connection with antibribery and corruption risks.
In a nutshell:
Four key messages emerged from the FSA’s feedback:
1. The FSA was underwhelmed by the approach taken by firms so far, finding that firms had
“approached higher risk business involving third parties far too informally and many firms are
still not operating at acceptable standards”.
2. The FSA expects a clear and demonstrable response from brokers at a number of different
operational levels. The FSA identify nine key operational areas within a broking business that
should have anti-bribery and corruption controls. It is important that firms can demonstrate
they have considered what needs to be improved in each of these areas and have taken any
necessary steps.
3. In the short to medium term the FSA is likely to have this topic on its agenda whenever it
makes supervisory contact with broker firms, through ARROW visits or otherwise.
4. Many of the regulatory principles identified by the FSA are relevant to other types of firms
that use third parties to help win business. This note is therefore not just relevant to the
immediate subject of the FSA’s review (commercial insurance brokers) but any insurance
intermediary.
What is your firm doing about the detailed good practice / bad practice points identified
across the FSA’s selected 9 operational areas?
The FSA’s review focused on nine operational functions within broker firms. Although not
exhaustive, these areas are a clear indication of the minimum areas that firms should focus on
in ensuring they have appropriate anti-bribery and corruption systems and controls in place. The
areas are:
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Governance and Management Information
Risk Assessment and responses to significant bribery and corruption events
Due diligence on third party relationships
Payment controls
Staff recruitment and vetting
Training and awareness
Risks arising from remuneration structures
Incident reporting
The role of compliance and internal audit
The FSA has reported back on ‘good’ and ‘bad’ practice in each of these areas. The practice
points picked up by the FSA are extensive, granular and prescriptive, and represent a clear
challenge to firms.
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Specific practice points
The following specific themes are of note:
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The Bribery Act 2010:
The FSA is of the view that many firms are not currently in a position to demonstrate
‘adequate procedures’ to prevent bribery - being able to do so is a crucial defence to the
Bribery Act 2010’s new criminal offence of ‘failing to prevent bribery’67.
The FSA’s ‘take a view’ approach to regulation:
The FSA’s approach of regulating through thematic feedback raises issues that are
increasingly common following the FSA’s adoption of a more intensive and ‘take a view’
approach to regulation. There are already FSA rules and FSA approved industry guidance
(i.e. from BIBA) on some of the issues addressed by the recent ‘good’ practice points: such
as the circumstances in which commission should be disclosed. If the good practice point,
“routinely informing all parties involved in the insurance transaction about the involvement of
third parties being paid commission” expands on ICOB rules or approved industry guidance
on this issue (and it seems to us there are arguments it does) is it appropriate to regulate in
this way and should there have been a wider consultation about it?
Remuneration:
Remuneration is a ‘hot topic’ generally and the FSA has advised that, although the January
2010 Remuneration Code (the “Code”) does not currently apply to insurance intermediaries,
the FSA will shortly revert with a consultation as to a basis on which the Code (or a variation
of it) should apply to insurance intermediaries. In the meantime the FSA considers that,
despite the Code not applying to insurance brokers, it is nonetheless good practice for broker
firms to consider whether their remuneration structures give rise to an increased risk of
bribery and corruption and whether they should introduce arrangements to reduce significant
risks.
7 factors that indicate a ‘higher risk’ situation:
The FSA sets out a non-exhaustive list of 7 factors that, if present, suggest there is likely
to be an increased risk of a third party being the recipient of a bribe or paying a bribe.
Examples of factors are: where the third party is an individual (or a ‘company’ which in fact
represents an individual); the level of commission is disproportionate to the amount of work
carried out; the third party does not want others to know it will receive a commission; and
the commission needs to be paid before premiums are paid. Even where a firm is connected
to the third party via a perceived lower risk contact such as an EEA regulated broker, client,
solicitor, loss adjuster or reinsurer, the firm still needs to assess everyone’s role and the
underlying position clearly.
The long arm of the FSA: Jurisdictional reach
The FSA has clarified the occasions where it can apply its supervisory powers to overseas
business, as follows:
„„ if the FSA can show that a firm’s (or related third parties’) actions overseas have
negatively impacted UK market confidence;
„„ if a UK firm or one of its employees pays a bribe or makes a suspicious payment to an
overseas person or in an overseas country; and
„„ if a UK firm fails to take reasonable steps to assure itself that third parties acting on its
behalf are not making illicit payments to secure or retain business or otherwise acting in a
corrupt fashion.
The scope is extensive; indeed it is difficult to think of many examples of overseas business
interaction that could not fit into at least one of these categories.
Conclusion
There is a clear sense that, after the Dear CEO letter of 22 November 2007, Aon fine (January
2009), interim feedback (September 2009) and the report of May 2010, the FSA has given its
final ‘warning’ on this topic and is expecting strong compliance.
67 For more information regarding the Bribery Act 2010 please see Taylor Wessing’s note:
What is the Bribery Act and why is it important to you?
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German High Court
Consumer loan and payment protection insurance “connected contracts”
Consumers who take out a loan to finance the purchase of goods or services will very often
be offered an accompanying policy of payment protection insurance, designed to meet
their repayment liabilities in the event of death and (for example) sickness, disability or their
becoming unemployed. Under German law, however, an important question has, until now,
remained unresolved, namely the precise legal relationship between the purchase and loan
contracts (on the one hand) and the insurance contract (on the other).
Under German law, as elsewhere in the EU, consumers have a statutory right to withdraw from
certain contracts within a specified period (often referred to as a “cooling off period” in English).
Under section 358 (2) of the German Civil Code, where a consumer exercises his or her right to
withdraw from a consumer loan agreement, he/she will also thereby be permitted at the same
time to withdraw from the underlying contract for goods or services with which the loan was
“connected”.
As to whether there exists the necessary connection, the relevant provisions appear at section
358(3) of the Civil Code, thus:
“A contract for the supply of goods or for the provision of some other performance and a
consumer loan contract are connected, if the loan fully or partially serves to finance the
other contract and both contracts constitute an economic unit.”
So the link between the underlying purchase contract and the loan agreement is obvious
enough. But what of the payment protection insurance policy? Could that also be said to
be a contract “connected” to the loan agreement under the above definition? That was an
issue on which the German High Court (“BGH”) recently handed down judgment (judgment
XI ZR 45/09), holding that (at least on the facts of that case) consumer loan agreements and
payment protection insurance contracts were indeed “connected contracts” under section 358.
The BGH noted that in the case before the court, the loan had “partially served to finance” the
payment protection insurance, because part of the loan amount was actually used to pay the
premium.
Furthermore, the BGH stated that the loan agreement and the insurance were to be seen as an
“economic unit”, because they were connected in such a way that one contract would not have
been concluded without the other. In summary, they noted in particular the following aspects:
1. The loan agreement served the financing of the payment protection insurance contract;
2. The lender and the insurer used contractual forms with a similar layout and design, and in
both contracts reference was made to the respective other contract;
3. The lender and the insurer used the same distribution organisation;
4. The payment protection insurance was only available in connection with the loan agreement,
not on a stand-alone basis;
5. It was held irrelevant that the consumers may have been presented with a choice, when
taking out the loan, whether also to purchase payment protection insurance; the fact
remained that those consumers who did purchase the insurance would not have taken out
the loan amount relating to the insurance premium without it.
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The decision has the following legal consequences:
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A consumer exercising his right to withdraw from the consumer loan agreement will also no
longer be bound by the connected payment protection insurance contract, and vice versa. At
the point of entering into the relevant contracts, the consumer’s attention must be directed
to his right to withdraw within a specified statutory period, and the said period will only begin
to run once this notification has been given. Hence, in the absence of proper notice, the
consumer may have the right to withdraw from both the loan and insurance agreement at
any stage, including at the end of the contract term;
A consumer may refuse to make payments under the loan agreement to the extent that
objections under the connected contract, e.g. the payment protection insurance, entitle him
to refuse performance under the connected contract (Sec. 359 BGB), and vice versa.
While it may be said that this case is limited to its facts (i.e. cases where the loan partially
finances the insurance premium) there are nevertheless important messages for insurers and
their distribution partners participating in the payment protection market in Germany. Most
consumer loan agreements currently do not contain instructions on the customer’s withdrawal
right with regard to connected contracts, with potentially adverse consequences for the
providers of both the loans and the insurance.
Finally, it is to be noted that the BGH does not directly concern group insurance payment
protection, a popular concept in Germany. Under this arrangement, the lending bank maintains a
group policy, to which the borrower customers have the opportunity to accede as insured persons
without becoming policyholders. It remains to be seen whether (and, if so, to what extent) the
German courts will apply the recent BGH decision to these group insurance structures.
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