UK: Weekly Update: A Summary of Recent Developments in Insurance, Reinsurance and Litigation Law - 34/10

Last Updated: 22 September 2010
Article by Nigel Brook


Omega Proteins v Aspen Insurance

Whether judgment between insured and third party is binding on liability insurers

The insured was ordered to pay a third party damages after it failed to comply with a new law banning the supply of animal material containing the vertebral column of cattle aged over 24 months. The judgment found that the insured had breached express and implied contractual terms. The insured was placed in liquidation and so the third party brought a direct claim against the insured's liability insurers under the Third Parties (Rights Against Insurers) Act 1930. Insurers sought to rely on a policy exclusion which provided that the insurers would not indemnify the insured against any liability arising under a contract "unless such liability would have attached in the absence of such contract". Clarke J held as follows:

  1. The exclusion clause in question requires the court to consider what liability there would have been had there been no contract between the insured and the third party (and not what liability there would have been taking into account the existence of the contract (the existence of a contract sometimes helping to establish the necessary proximity between the parties to found a tortious duty of care)).
  2. The judgment against the insured was not determinative of whether or not the loss is covered under the policy. It is open for both insurers and the insured to dispute whether the insured was in fact liable and, if so, on what basis: "Unless B and C have by contract agreed something different, a judgment given in proceedings between A and B is neither binding on, nor enforceable by, C in subsequent proceedings between B and C".

    Insurers had sought to rely on the observations of Tomlinson J in London Borough of Redbridge v Municipal Mutual Insurance [2001], where he held that it would not normally be possible to "look beyond or outside the four corners of the determination itself for the basis of the liability to which the insured has become subject". Clarke J said that as a first instance decision, these comments were not binding on him and, even if they were, Tomlinson J had only referred to what would "normally" be the position,, In any event, he did not agree with Tomlinson J's conclusion and even if Tomlinson J was correct, it is only the primary facts which are fixed by the judgment against the insured.

    In reinsurance, it is an implied term of the reinsurance contract which is governed by English law that the decision of a foreign court as to the liability of the reinsured to its original insured will be treated as binding (save for certain exceptions), even if the English court might have reached a different conclusion (see Commercial Union v NRG [1998]). Clarke J held that no such implied term arose in this case which did not involve worldwide reinsurance cover and, in any event, did not involve the decision of a foreign court.
  3. In this case, the insured would have been liable even in the absence of the contract pursuant to which it supplied the material. It had failed to take reasonable care to ensure that the product which it supplied was safe and could be lawfully supplied. As part of its duty of care, it should also have kept itself informed of changes in the law (which were reasonably discoverable). Accordingly, it had been negligent.
  4. As for the burden of proof, the judge held that since the policy term in issue was an exclusion clause with an exception (ie every liability which arises under any contract is excluded unless it would have attached anyway) and so it was for the insurer to show that the liability in question arose under a contract and also that the exception was inapplicable. The judge therefore rejected the argument that, once the insurer proves that the loss arose under a contract, it was then for the insured to show that the exception to the exclusion applies. However, it should be noted that this decision was confined to the particular clause in question in this case. The insurers were unable to discharge their burden of proof on the facts. Accordingly, the third party was entitled to be indemnified under the terms of the policy.

COMMENT: In this case, Clarke J was determining a question ("would the insured still have been liable in the absence of the contract?") which could not have been determined in the original action against the insured because that question was not in issue. However, Clarke J also commented that it was open to parties to re-argue questions which had already been decided in the original action. For example, an insured who had been held to be fraudulent in the original action might argue, in a subsequent action between the insured and his insurers, that he was in fact negligent (and therefore covered under his policy). Thus the original action establishes the primary facts (eg that a representation was made and what it included), but in a further action, the judge could look again at whether the representation was fraudulent or negligent (whatever was decided in the original action). In practice this approach will often entail the re-examination of witnesses and other evidence and could therefore be a potentially costly and time-consuming exercise for both the insured and its insurers.

Stonebridge Underwriting v Ontario Municipal

Whether England was the proper place for a reinsurance dispute to be heard

A dispute arose between a Canadian reinsured and its London excess of loss reinsurers. The reinsured commenced proceedings in Canada claiming damages for the reinsurers' alleged failure to honour the terms of the reinsurance contract and the reinsurers then commenced proceedings in England seeking a declaration that they were not liable to indemnify the reinsured. The reinsured applied to the Commercial Court for an order setting aside service of the claim form on it in Canada.

It was accepted by the reinsured that the claim had a realistic prospect of success and that the reinsurers had a good arguable case that each of the relevant causes of action fell within one of the grounds of PD6 para 3.1. However, it argued that England was not the proper place for the claim to be brought.

The reinsurance contract did not contain an express choice of law clause. The reinsured accepted that, as a matter of English choice of law rules, there was a strong chance that the court would conclude that English law was the applicable law. However, it argued that this was not because of an implied choice of English law (as the reinsurers contended) but because English law governed the characteristic performance of the contract (ie the provision of an indemnity).

The reinsured argued that, in not agreeing (expressly or impliedly) to any proper law, the parties were content to have the applicable law (as determined in accordance with private international rules) applied by any court of competent jurisdiction before which any claim was brought. Clarke J held as follows:

  1. The reinsurers had much the better argument for saying that the parties had impliedly chosen English law. Agreeing with Hobhouse LJ in Vesta v Butcher [1986] that "there is something surprising about 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, being governed by a law other than that of England, particularly when the contract in question is replete with reference to Lloyd's market clauses (themselves likely to be habitually used in contracts governed by English law), and when the characteristic performance is to be by an English underwriter. Although the latter point is of most immediate relevance for determining the law applicable in the absence of an express or implied choice of law, it is not without relevance in deciding whether there was an implied choice".
  2. The fact that the parties had impliedly chosen English law was, in this case, "of considerable significance" when determining the proper forum. If the case was heard in Canada, reinsurers might be deprived of the benefit of English law. Also, the proper construction of the relevant terms of the contract was particularly suited for determination by the Commercial Court, which regularly resolves reinsurance disputes. Nor was it particularly significant that the reinsured had been the first to commence proceedings. The risk of concurrent proceedings is not, of itself, a reason for the English court to decline jurisdiction.

Clarke J added that he would have reached the same conclusion had he decided that English law was applicable only because England was the place of characteristic performance. The disadvantage to the reinsurers of running the risk that the Canadian courts will apply a different law (thus depriving them of a defence otherwise available under English law) is the same, whatever the reason for the application of English law.

Accordingly, the judge declined to grant an order setting aside service of the claim form on the reinsured.

Akzo Nobel v European Commission

ECJ (Grand Chamber) dismisses appeal over legal professional privilege and in-house lawyers (in relation to EU competition investigations)

As reported in Weekly Update 17/10, in April 2010 Advocate General Kokott issued an opinion approving the 2007 decision of the Court of First Instance of the ECJ that communications with in-house lawyers did not qualify for legal professional privilege in the context of EU competition investigations. As was widely predicted, the ECJ Grand Chamber has now followed that opinion and rejected an appeal against the Court of First Instance's judgment. The reasoning of the Grand Chamber was as follows:

  1. Following the decision in AM&S Europe v Commission [1982], legal professional privilege (in relation to EU competition investigations) does not cover exchanges within a company with in-house lawyers because such lawyers are not "independent": "An in-house lawyer, despite his enrolment with a Bar or Law Society and the professional ethical obligations to which he is, as a result, subject, does not enjoy the same degree of independence from his employer as a lawyer working in an external law firm does in relation to his client. Consequently, an in-house lawyer is less able to deal effectively with any conflicts between his professional obligations and the aims of his client". It was said that, as an employee, an in-house lawyer cannot ignore commercial strategies pursued by his employer and so cannot exercise professional independence.
  2. This approach does not violate the general EU law principle of equal treatment because "an in-house lawyer does not enjoy a level of professional independence equal to that of external lawyers".
  3. There is no predominant trend across all the Member States towards affording legal professional privilege to communications with in-house lawyers. A larger number of Member States still exclude in-house lawyers from the scope of legal professional privilege or do not allow them to be admitted to a Bar or Law Society.
  4. Even if consultation with in-house lawyers was covered by the right to obtain legal advice (which the ECJ did not believe was the case), in-house lawyers are not always able to represent their employer before all the national courts.
  5. The conclusion of the ECJ does not undermine the principle of legal certainty and nor does it violate the principle of national procedural autonomy.

COMMENT: This decision, though expected following Advocate General Kokott's opinion, will be disappointing for in-house lawyers, not least because the decision might be deployed in argument in other areas of EU law, beyond competition law. Nevertheless, it should be recalled that this position was first established almost 30 years ago in AM&S and there has been no impact since then from that decision on the general English law position regarding in-house lawyers and privilege. The case of Alfred Compton v Customs & Excise Commissioners (No.2) [1972] confirmed that under English law, in-house lawyers do qualify for legal professional privilege (provided that advice is given in a legal context). Alfred Compton has been continually applied by the English courts, even after AM&S and, more recently, Akzo Nobel and there is no reason to anticipate that this position will change following the Grand Chamber's decision.

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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