UK: A summary of recent developments in insurance, reinsurance and litigation law

Last Updated: 7 June 2010
Article by Nigel Brook and John Balfour

Orient-Express Hotels v Generali

Hurricane Katrina case involving two concurrent independent causes and applicability of the "but for" test

The insured claimed that an arbitration tribunal had erred in law in finding that its claim did not fall to be covered under a combined property damage and business interruption policy of insurance. The insured owns a hotel in New Orleans. The hotel was damaged by Hurricanes Katrina and Rita and had to close for two months in 2005. The difficulty in this case was that, during that period, a curfew was imposed on the city. Accordingly, even if the hotel had been undamaged, it could not have received visitors. The tribunal held that the insured can only recover in respect of loss which it can be shown would not have arisen had the damage to the hotel not occurred – i.e. which satisfies the "but for" test of causation. The insured could not satisfy this test. It argued, though, that the tribunal had erred in law. Although the "but for" test is the normal rule for determining causation, the insured claimed that the test was inappropriate and unfair in this case. It is also an accepted principle that where there are two proximate causes of a loss an insured can recover on the basis that it is sufficient that one of the causes was a peril insured, provided that the other cause is not excluded – see Miss Jay Jay [1987]. However, to date, that principle has only been applied where there are concurrent interdependent causes, and not concurrent independent causes.

Hamblen J saw "considerable force" in much of the insured's argument. However, he was unable to conclude that the tribunal had erred in law. It was clear that the policy intended a "but for" test: "This is made clear in the Trends Clause which is predicated on calculating the recoverable losses on the basis of what would have happened "had the Damage not occurred" or "but for the Damage"". (The Trends Clause in question read as follows: "In respect of definitions under [ ] above for 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").

Furthermore, whether "fairness and reasonableness" require that the "but for" test should not be applied is very much a matter for the tribunal of fact, rather than for a court on an appeal limited to questions of law. In any event, the judge was not satisfied that the "but for" test was unfair or unreasonable. If such a test was not adopted, he could not see that another test would have been fairer.

The judge also held that on the true construction of the policy, the same event(s) which cause the damage to the insured property which give rise to the business interruption loss are also capable of being or giving rise to 'special circumstances' for the purposes of allowing an adjustment of the same business interruption loss within the scope of the Trends Clause.

Vienna Insurance Group v Bilas

EC 44/2001 and an action brought by the insurer in its own home state p&alldocrec=alldocrec&docj=docj&docor=docor&docop=docop&docav=docav&docsom=do csom&docinf=docinf&alldocnorec=alldocnorec&docnoj=docnoj&docnoor=docnoor&radtype ord=on&typeord=ALL&docnodecision=docnodecision&allcommjo=allcommjo&affint=affint& affclose=affclose&numaff=C- 111%2F09&ddatefs=&mdatefs=&ydatefs=&ddatefe=&mdatefe=&ydatefe=&nomusuel=&do maine=&mots=&resmax=100&Submit=Submit

A Czech insurance company brought an action in the Czech Republic against its policyholder, who is domiciled in Slovakia, for payment of an insurance premium. Broadly, EC Regulation 44/2001 provides that an insurer can only bring proceedings in the courts of the Member State where the defendant is domiciled (unless the parties agree otherwise after the dispute arises). This is a special jurisdictional rule which applies to direct insurance policies.

The problem in this case was that the policyholder did not contest jurisdiction, even though the case should have been brought in Slovakia, according to the special jurisdictional rule. The Czech court concluded that, if jurisdiction was not contested, it could not examine its own jurisdiction (since the dispute did not fall within the situations set out in Articles 25 and 26). However, if it were to rule on the substance of the dispute without examining its jurisdiction, its judgment could not be recognised for the purpose of Article 35 of the Regulation. The Czech court therefore asked the European Court of Justice if this conclusion was correct.

The ECJ (Fourth Chamber) held that the Czech court must declare itself to have jurisdiction if the defendant has entered an appearance and does not contest the Czech court's jurisdiction (because this amounts to a tacit agreement on jurisdiction). Furthermore, the Czech court's judgment should be recognised (since it did have jurisdiction). Thus, the rules on special jurisdiction aim to protect the weaker party but cannot be imposed on the weaker party. The ECJ also said there was no rule that the court must ensure that the defendant understands the effect of his actions, although it was open for courts to ensure that this was the case.

Yeganeh v Zurich Plc Allegations of fraud against an insured - importance of motive

This case illustrates the difficulties which insurers can face in proving allegations of fraud (and, in particular, arson) by a policyholder. The legal issues were not in dispute in this case and it was accepted by both sides that as soon as there is any fraud in the claims process, the whole insurance claim is fraudulent (see Axa General v Gottlieb [2005]). Whilst the standard of proof for fraud is the balance of probabilities, the more serious the allegation, the stronger the evidence needed to establish it. On the other hand, it is unlikely that there will be any documentary evidence of an insurance fraud and so the court may have to draw appropriate inferences from circumstantial evidence.

The property insurer alleged that the defendant had deliberately burnt down his property. The defendant admitted making untruthful claims to his local council in order to evade Council Tax and the judge said that there were doubts about the honesty of the defendant and the truthfulness and accuracy of his evidence. However, despite this, the judge found that there was no direct evidence of arson and there was no evidence to contradict his denials of guilt and about where he was on the night of the fire. The judge said that, if there had have been sound evidence of motive, he might have concluded that there had been arson because the likelihood of the only other possibility (that a heater was accidentally switched back on when it was tilted) was "so remote". However, the judge found that the list of reasons advanced by the defendant as to why he would not wish to burn down his house was "powerful".

In particular, it was hard to see how arson followed by reinstatement of the house would advance any planning ambitions which the defendant had. This lack of a motive was therefore fatal to the insurer's claim of arson: "Arson is a very serious crime in quite a different league, in terms of execution as well as gravity, from making dishonest claims for payment or to save money".

However, the judge did accept that the defendant had made a dishonest claim for the contents of the property. In this respect, the defendant's dishonesty regarding Council Tax went to more than just his credibility as a witness - "It points to a tendency consistent with the fraud alleged" by the insurer..."This was not the first time he had made a dishonest claim for limited financial advantage". As a result of this fraud, the entire claim by the insured failed.

Bloomsbury International v Holyoake & Ors

Worldwide freezing orders and need for cross-undertaking from administrators

The administrators of four companies obtained a worldwide freezing order against two of the companies' former directors (who the administrators alleged had committed a fraud on the companies). As is common with applications for a freezing order, a cross-undertaking in damages was required from the applicant for the order. This protects the respondent if it later turns out that the order should not have been made (because absent a crossundertaking, the law does not provide any automatic means of redress for a party who is harmed by litigation wrongly brought against him in good faith). In this case, the directors argued that the cross-undertaking should be fortified. It was argued that the one ordered did not offer any protection because it was not given by the administrators personally and was also limited to the sums for the time being in the estates being administered (and the four companies were heavily insolvent).

There is no rule that an injunction will never be granted if the cross-undertaking is of no real value. Nor are administrators required to give open-ended cross-undertakings. However, Floyd J reviewed the relevant caselaw and concluded that it might sometimes be right to order the administrators to give an undertaking which is limited in amount. An intelligent estimate of the harm which the defendant might suffer should be made. The judge pointed out, though, that it is necessary to distinguish between the harm caused by the existence of litigation and the harm caused by the fact that the freezing order has been made. That was a particularly difficult assessment to make in this case, where the directors argued that their standing had been called into question by bankers and business associates. The judge concluded that the existence of the freezing order in this case could cause significant damage to the directors (one of whom had an extensive asset portfolio with which he was unable to deal freely). It was no answer to say that the director could apply for permission to dispose of assets - the delay in obtaining such permission could well be damaging.

One material factor in this case was that the creditors of the companies (for whose benefit the administrators were bringing the litigation) were substantial undertakings (ie banks). It was therefore entirely realistic for the administrators to receive an indemnity from those creditors. Accordingly, the judge ordered that the cross-undertaking be fortified by the provision of a bank guarantee in the sum of Ł4 million

Pineway v London Mining

Application for pre-action disclosure

This case involved an application for pre-action disclosure. It is an established principle that CPR r31.16 requires only that the persons concerned in the application are likely to be parties if subsequent proceedings are issued. However, in this case, Steel J said that "although the likelihood of proceedings as such is not material, it does not follow in my judgment that the existence of a prima facie claim upon which such proceedings could be instituted does not remain a necessary requirement

On the facts of the case, the applicant had not yet established a properly arguable case which had a real prospect of success. Accordingly, there was no jurisdiction to make the order for pre-action disclosure. Furthermore, this was not a targeted request for specific documents and that was another ground for saying there was no jurisdiction to make the order. Finally, Steel J said that in order to obtain pre-action disclosure "circumstances must be outside the "usual run" to allow the hurdle to be surmounted" and there were no such circumstances in this case.

He would also have declined to exercise his discretion to make the order (even if the jurisdictional hurdle had been overcome). One important feature of the case was that the claim which might be pursued was to be brought in an inconvenient forum (England)- on any view the centre of gravity of the dispute was Sierra Leone.

FKI & Anor v Stribog

Which court is "first seised" when earlier action is amended

One of the issues in this case was whether the English or German courts had been "first seised" under Regulation 44/2001. Proceedings in the German court had been commenced in 2009. However, an issue relating to invalidity of an assignment was raised for the first time only in February 2010 (having initially been expressly excluded from the proceedings), by which time English court proceedings (raising the same issue) had already been commenced. Burton J noted that the recitals to Regulation 44/2001 refer to two important purposes which are intrinsic in the Regulation - namely, the need for the rules of jurisdiction to be highly predictable and the need to minimise the possibility of concurrent proceedings and irreconcilable judgments. The judge concluded that it would be inconsistent with predictability if a party could unilaterally change the nature of an earlier action: "where a first action is subsequently amended to add a party or a cause of action which has, in the meanwhile, been raised in a second action, it is the court of the second action which is first seised, so also where a first action which is not related to a second action is subsequently altered or amended so as to become so related, it is the court of the second action, unrelated at the time when it is issued, which is the court first seised for the purpose of Article 28". Article 28 provides that where related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings. Thus, in this case, there was no discretion for the English court to stay its proceedings because it is the court first seised. Absent any agreement between the parties, it was the German court which must consider an application for a stay.

Linklaters Business Services v Sir Robert McAlpine & Ors

Duty of care owed by sub-contractor where damage was caused to other parts of a building

Clyde & Co for sub-contractor

The developer of a building was sued by the lessee and occupier following a leak in a water pipe. The developer joined to the proceedings the sub-contractor responsible for installing insulation for certain pipework. The sub-contractor applied for summary judgment and for the purposes of the application it was assumed (without examining the facts) that, due to carelessly installed insulation, the pipework was damaged by corrosion and rusting.

There is substantial caselaw authority that a claimant cannot recover the costs of a negligently manufactured or designed "thing": "So, the purchaser of a ginger beer bottle which contains a snail may recover for personal injuries caused if she drinks the ginger beer but not for the cost of the bottle". It is also well-established that a builder's duty of care in tort does not usually extend to damage to the building itself (although if the building collapsed, damaging a car or adjacent building, the builder's duty of care would extend to such damage).

However, there is less authority on the extent of the duty of care owed by a sub-contractor who provides an element of a building which then causes consequential damage to other elements of the building. The scope of this duty remains to be explored.

Akenhead J (whilst acknowledging a "floodgates" argument) said that he saw little or no obvious conceptual difference between this case and that where flood or fire damage is caused to other parts of a building by a carelessly designed or installed boiler (and in the House of Lords decision of Murphy v Brentwood DC [1991], Lord Jauncey accepted that defects in ancillary equipment, such as boilers, could give rise to a duty of care if the defect gave rise to damage to other parts of a building). Akenhead J concluded that there were too many factual uncertainties at this stage to grant summary judgment. He also gave permission to appeal on the ground that this case raises interesting and important issues of law upon which the Court of Appeal might well wish to rule.

K/S Lincoln & Ors v CB Richard Ellis Hotels

Professional negligence claim against valuer - of possible interest to liability insurers

The claimants sought damages for professional negligence arising out of the defendants' valuation reports. Some noteworthy points from the case include:

1) Coulson J held that, in addition to the admitted duty which the defendants owed to the claimants in relation to the valuation exercise, the defendants also owed a separate duty to take reasonable care not to mis-state in their reports any important matter that they might have considered when undertaking that valuation exercise (in this case, the operation of a shortfall clawback provision and the related topic of rental growth). However, on the facts of the case, the claimants had failed to establish reliance. The judge found that the decision to buy the properties (four hotels) was taken because, despite knowledge of the shortfall clawback provision, the claimants believed that the properties still represented a worthwhile investment opportunity;

2) The judge confirmed that there it is a proposition of law that in valuation cases a valuer is not negligent if his valuation falls within a permissible bracket: "whilst a valuer might be in breach of duty because he fell below the standard of a reasonable valuer in his methodology, that valuer will not be liable in negligence if it can be shown that, notwithstanding the error, the valuation figure that he produced was within a reasonable bracket". Coulson J also held that, as "a matter of common sense", a valuer's performance should ordinarily be judged by reference to the final figure which he produces and "not the minutiae of how he got there"; and

3) The judge also confirmed that for a standard residential property, the margin of error may be plus or minus 5%, for the valuation of a one -off property it might be plus or minus 10% and if there are exceptional features of the property, it could be plus or minus 15% (or even higher). In this case, he felt that the margin of error might well be in excess of 10% and that 15% would have been "very much the upper limit of the permitted range". That was because: a) there were limited comparables; b) the investment market in hotels was premature; and c) when the hotel investment market did improve, this also gave rise to particular difficulties for valuers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nigel Brook
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