UK: Insurance and Reinsurance Review of 2010

Last Updated: 20 December 2010
Article by Nigel Brook and David Langley


IRB Brasil Resseguros SA v CX Reinsurance CO Ltd [2010] EWHC 974 (Comm)

Whether arbitrators correctly applied law in a reinsurance dispute.

The reinsured was one of a number of insurers who settled various US liability insurance claims. It then sought to recover from its reinsurer, who had participated in an excess of loss reinsurance programme protecting the reinsured's casualty book of business. After the reinsurer refused to pay, the dispute went to arbitration and the arbitrators found in favour of the reinsured. The reinsurer then sought to challenge the award on the ground that there had been an error of approach in law by the arbitrators. Three particular issues were raised:

  1. The reinsurance policy contained a "double proviso" "follow settlements" clause - i.e. all loss settlements by the reinsured would bind the reinsurers provided such settlements were within the conditions of the original policies as well as within the terms of the reinsurance. Gross J in Equitas v R&Q [2009] concluded that both provisos had to be proven on the balance of probabilities. Burton J decided that although the arbitrators had referred in some parts of the award to arguability rather than a balance of probability, they were expressing themselves to be satisfied on the balance of probabilities that the arguable claims which were settled fell within the terms of the insurance and reinsurance policies. Thus they had applied the law correctly;
  2. In relation to an issue regarding allocation, Burton J held that the failure of the arbitrators to refer expressly to the case of Municipal Mutual v CSEA [1998] did not mean that they had adopted an approach which was inconsistent with that case; and
  3. The "each and every loss" clause in the reinsurance policy referred to a loss or series of losses arising out of one event. In the award, the arbitrators did "commit what might be termed a "howler"" by referring to whether "the loss each year stemmed from a single cause". As Lord Mustill held in Axa Re v Field [1996], "cause" and "event" are "not at all the same". Nevertheless, Burton J said that he was clear that the arbitrators had in fact meant to say "event" instead of "cause".


Employers' Liability Insurance "Trigger" Litigation [2008] EWHC 2692 (QB) – ON APPEAL TO THE SUPREME COURT

Whether cover for mesothelioma claims under EL policies triggered by exposure or onset of disease

This is the appeal from an earlier decision of Burton J. The underlying issue is whether the correct employers' liability policy to respond to mesothelioma claims is the one in place when the asbestos dust was first inhaled or the one in place at the onset of the disease (in many cases, the onset of disease takes place up to 35 years after inhalation). The particular policy wordings in question differ slightly but, broadly, they provided cover for "injury sustained" or "disease contracted" during the policy period

At first instance, Burton J found that there was no injury at the date of inhalation. However, taking into account the factual matrix of the case, he concluded that the policies had to be construed as meaning that injury was sustained when it was caused (ie at the date of inhalation). Equally, he construed that disease was contracted when it was caused. The Court of Appeal has now found as follows:

1. Mesothelioma is not an "injury" (and injury is not "sustained") until its onset. The Court of Appeal reached this conclusion, on the basis that they were bound by the earlier Court of Appeal decision of Bolton MBC v MMI [2006] (concerning mesothelioma in relation to a public liability policy). However, although Rix LJ did not say that Bolton was wrongly decided, he did indicate that, had he not been bound by precedent, he would have preferred the view that, once mesothelioma develops, it is the risk of mesothelioma created by the exposure which is the injury. Burnton LJ, however, found Bolton convincing; However, both Rix LJ and Burnton LJ (Smith LJ dissenting) rejected the judge's decision that something had gone wrong with the language and that this finding would be in conflict with the commercial purpose of EL insurance. Accordingly, injury was not sustained at the date of inhalation and the appellants (with this policy wording) won on this point;

2. However, all 3 Lords Justices agreed (Burnton LJ with hesitation) that "disease contracted" referred to the time of the disease's causal origins (ie the date of exposure) (Rix LJ opining that the commercial purpose of the policy should prevail on this issue and Burton LJ opining that little, if any, assistance was to be gained by referring to the commercial purpose of the policy). Accordingly, the appellants (with this policy wording) lost on this point; and

3. One further argument was that the wordings only applied to employees in the course of their employment and did not apply to ex-employees. At first instance the judge held that this point favoured a construction that cover was intended to be the date of causation in all cases. Smith LJ agreed with the judge, Rix LJ agreed that the wordings did not apply to ex-employees but felt that that did not point to a causation trigger, and Burnton LJ held that (certain) wordings did apply to ex-employees.

Permission to appeal to the Supreme Court on all the above issues has been granted.

COMMENT: From a practical viewpoint, it is arguable that linking cover to the date of onset (for injury sustained wording) is unsatisfactory. Whereas the date of causation can be fixed with relative certainty, victims will often only learn that they are suffering from mesothelioma once they have started to experience symptoms. Onset will usually be "around 5 years" before manifestation but (retrospectively) determining the exact date of onset will be almost impossible in most cases. As a result of this, Burton J suggested the adoption of a prima facie rule of 5 years before manifestation, but this issue was not argued on appeal. More importantly, though, where an employer has become insolvent or is no longer in business, there will be no policy in place at the time of onset of mesothelioma. It might be expected that the Supreme Court and/or government will not favour an approach which leaves victims without any redress against an employer/insurer.


Joseph Fielding Properties (Blackpool) Limited v Aviva Insurance Limited [2010] EWHC 2192 (QB)

Fraudulent claims, non-disclosure, moral hazard and the Rehabilitation of Offenders Act 1974

An insurer denied liability to indemnify the insured following a fire at its commercial premises on the basis that the insured had (1) made an earlier fraudulent claim (during the currency of the policy); (2) failed to disclose at inception that it had made a fraudulent claim to a prior insurer; and (3) failed to disclose at inception that it had made misrepresentations to other insurers in the past. Much of the case therefore turns on the particular facts and the insurer was able to prove its allegations. Here are the main points of the case:

1. The policy contained a condition which gave the insurer the option of avoiding the policy from either inception or the date of the claim (or of avoiding the claim alone) in the event of a fraudulent or intentionally exaggerated claim. The judge, Waksman QC, rejected an argument by the insured that the condition did not apply where the insured could have made a lesser claim in a non-fraudulent manner. Even if the condition did not apply, and the insured had to rely on fraud at common law instead, it was sufficient that the fraud here was substantial and the size of the genuine claim was irrelevant. The judge also rejected that a proportionality requirement should be introduced (and any observations to the contrary by Staughton LJ in Orakpo v Barclays [1995] were a minority (and obiter) view).

The policy condition also meant that the insurer did not need to prove reliance and that it could also avoid the policy and recoup monies paid out on a first (honest) fire claim (even though the insurer conceded that this would not have been the position at common law). It is worth noting, though, that the judge highlighted that Mance LJ's observations in Axa v Gottlieb [2005] that a fraudulent claim should not have any retrospective effect on earlier honest claims were only obiter.

2. As for the non-disclosure argument, Waksman QC said that materiality must be considered "in the round" and that "it is the full picture which has to be assessed". He rejected an argument that if an initial false statement would have been immaterial to a prior insurer, then it should be removed from the picture altogether.

Furthermore, if there was a moral hazard in insuring this insured, that was "unlikely to be something which can be cured by the imposition of a further condition on the policy".

3. The insured also argued that the insurer could not rely on false statements about a previous conviction in light of the Rehabilitation of Offenders Act 1974. That Act provides that questions seeking information about a person's previous convictions shall be treated as not applying to spent convictions (section 4(2)) and "any obligation imposed on any person by any rule of law or by the provisions of any disclose any matters .....shall not extend to requiring him to disclose a spent conviction" (section 4(3)).

The judge held that section 4(2) did not apply because no express question about previous convictions had been asked (notwithstanding that the insured was under a general duty to disclose). As for section 4(3), the judge agreed that the obligation on the insured to make disclosure to the insurer of all material facts was a duty imposed by a rule of law or agreement. However, the judge said that the section should not be "so broadly interpreted" and the restriction on the duty of disclosure which it imposes "applies where its direct object is the spent conviction". So the insured was under no duty to disclose the fact of a previous (spent) conviction (even if it was otherwise material).

However, in this case, the insurer's argument about non-disclosure related to the false statement to a prior insurer that the insured's director had no convictions at a time when that conviction was not spent. What section 4(3) could not outlaw "is the duty to disclose the making of false statements if material to the present insurance. A string of lies to previous insurers, for example, should be disclosed". Even if the insured was under no duty to disclose what the false statement was about to the current insurer (because the conviction was spent), it was likely that that insurer would have refused to write the risk.

Accordingly, the insurer was under no liability to pay the insured.

Sugar Hut Group & Ors v Great Lakes Reinsurance & Ors [2010] EWHC 2636 (Comm)

Insurers relying on defences of non-disclosure, breach of warranties and breach of condition precedent

Clyde & Co for defendants

The defendants insured four nightclubs. A fire at one of the nightclubs caused substantial damage and the claimants sought an indemnity from insurers. Insurers denied liability on the following grounds:

1. Material non-disclosure. The proposal form asked "how long have you traded in this name", to which the response was "2007". A further question asked "have you ever traded in any other names", to which the reply was "yes". Some two months prior to completion of the proposal form 3 companies in the insured group went into administration due to financial difficulties and new companies were then formed to take over their businesses and were substituted as insureds. Insurers argued that had they known about the background to this they would have had grave concerns. It was alleged that a former shareholder of the 3 "old" companies had been siphoning money from the business. Burton J accepted that a prudent underwriter would have wanted to know whether there was a risk that the financial viability of the business going forward was endangered. The judge said that there was no criticism of the underwriter due to the fact that he did not have any Underwriting Guidelines;

The insured argued that, however careful and experienced an underwriter is, if he has avoided for non-disclosure he will be "bound to say" that information not disclosed to him was material. Accordingly, the judge looked at the surrounding circumstances of the case. He found no evidence that the underwriter had been so keen to accept the risk that he would "not have batted an eyelid" had the undisclosed facts been disclosed to him; and

Nor did the judge find that there had been a waiver of disclosure. The insured had sought to argue that as the insured was invited to disclose "any other facts not covered by the questions in this form ", given that the only information sought about trading history was covered by express questions, no other information was required. Burton J dismissed that argument: "the Claimants cannot rely on factors not being "covered by the questions" if the reality is that they were not covered by the answers".

2. Breach of warranties. The insurers argued the breach of two warranties:

a) a Frying and Cooking Equipment warranty (requiring (inter alia) that ducting be kept free from combustible materials and checked "at least once every 6 months"). Burton J rejected the argument by the insured that the duct should be checked every 6 months starting from the date of inception of the policy. Instead, (as a matter of business efficacy) the check should be every 6 months since the last check. There had therefore been a breach. The judge held that the part referring to 6-monthly inspections could be regarded as a suspensive condition. Unlike the position for ordinary warranties, where the breach of a suspensive condition is repaired, the insurer will be back on risk. However, in this case the inspection was not just late - it had not taken place by the time of the fire and hence cover was in any event suspended as at the date of the fire. There was also a breach of the combustible materials part of the warranty and Burton J rejected an argument that this should be treated as "de minimis". There was no caselaw to support the argument that the de minimis concept applied to breaches of insurance warranties. Also, this was a warranty as to a state of affairs; and

b) a Burglar Alarm warranty (requiring a NACOSS Central Monitoring Station Alarm be installed and operational). Again, the judge found this to be a "true" warranty which, on the facts, had been breached. The slip contained a term that cover was subject to a satisfactory survey and the carrying out of necessary risk improvements. The judge held that these obligations survived into the policy and/or that contrary to any general presumption, the policy did not supersede the obligations in the slip. Compliance with a risk improvement notice was a suspensory condition. Since the fire took place before the work was carried out, there was no cover in place at the date of the fire.

Brokers' Duties

Nicholas G Jones v Environcom Ltd [2010] EWHC 759 (Comm)

Duty of broker to explain to the insured the duty of disclosure

Following a fire, the insured sought to claim under its commercial combined insurance policy (covering property and business interruption risks). The insurers declined the claim on the basis that it had elected to avoid the policy due to material non-disclosure. The insurers and the insured settled their dispute but the insured alleged that the brokers had been negligent in failing to adequately advise it as to its duty of disclosure.

It was undisputed that the broker must advise his client of the duty to disclose all material circumstances and of the consequences of failing to do so. He must indicate the sort of matters which ought to be disclosed as being material and must take reasonable care to elicit matters which ought to be disclosed, but which the client might not think it necessary to mention (see the FSA Insurance Conduct of Business Handbook). It was also common ground between the parties that where a change in personnel led to a new person being responsible for insurance matters in the client's organisation, the broker must ensure that an appropriate understanding of questions of materiality is held by that person.

The judge concluded that in this case the broker had breached its duty because the documentation forwarded to the insured contained an inadequate explanation of the duty of disclosure. Steel J held "I am not persuaded that it is sufficient simply to rely upon written standard form explanations and warnings annexed to proposals or policy documents.... The broker must satisfy himself that the position is in fact understood by his client and this will usually require a specific oral or written exchange on the topic, both at the time of the original placement and at renewal (particularly if a new person has become that client's representative)".

The judge went on to find that the broker had not been under a duty to inquire about a particular tool used in the insured's fridge recycling process. However, the broker should have advised that all previous fires (whether significant or not) ought to have been disclosed and he rejected the broker's argument that "it must have been perfectly obvious to a competent business man like Mr. Hamilton who was responsible for obtaining insurance cover against the risks of fire that the fact of fires was a material matter requiring disclosure". The broker should have elicited the information from the insured.

Nevertheless, the judge concluded that, had the information been disclosed, the insured would have been unable to obtain cover from either the particular insurer in question or from any other group of underwriters (and if cover would have been obtained it would have been on the pre-condition that the particular tool in question was not used and so no fire would have taken place).


Orient-Express Hotels Limited v Assicurazoni Generali S.p.A (UK Branch) [2010] EWHC 1186 (Comm)

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.

Chubb Fire Ltd v Vicar of Spalding [2010] EWCA Civ 981

Duty to warn and the doctrine of a "new intervening act"

Vandals discharged a fire extinguisher in a church. The operation to clean up the fine dust which was released cost about £240,000. Insurers paid and, exercising their right of subrogation, brought a claim against the suppliers of the extinguisher. As a contractual claim would have been time-barred, they claimed in tort, alleging that the suppliers had negligently failed to warn the church that any discharge of the extinguisher was likely to cause a mess. At first instance, the judge found that the suppliers were liable and the suppliers appealed.

The Court of Appeal rejected the submission that the judge should, on the facts, have found that a warning about the messiness of the extinguisher was given to the church. However, it was also held that the judge had erred in finding that, if the warning had been given, the church would not have installed the extinguisher. On the available evidence, the judge should have concluded that the church would have taken further advice and would, ultimately, have installed the extinguisher in any event.

In light of that finding, the appeal was allowed. Nevertheless, Aikens LJ went on to consider the argument that the action of the vandals should be regarded as a "new intervening act", such that the suppliers were not liable (even if the extinguisher would not have been installed in any event).

He found that the judge had failed to properly apply the correct legal principles (in particular because the suppliers did not owe a duty to protect the church against vandals). The four issues set out in Clerk & Lindsell on Torts had to be addressed: (1) Did the third party's intervening conduct render the original wrongdoing "merely a part of the history of events"?; (2) was the third party's conduct either deliberate or wholly unreasonable?; (3) was the intervention foreseeable?; and (4) does the defendant owe the claimant any responsibility for the conduct of the third party?

Aikens LJ concluded that the suppliers were not liable for the damage caused by the vandals. The attack took place 7 years after the failure to warn and although malicious discharge was foreseeable in 1999, no one thought then that there was any degree of likelihood that the exact combination of events which did occur (eg that the vandals would enter the church in the short space of time when it was unattended and would go into the room where the extinguisher was stored before returning to the body of the church to discharge it) would in fact do so. The particular combination was, at most, a mere possibility.

However, Longmore LJ and Arden LJ refused to comment on the new intervening act argument, since it was not determinative of the appeal


Widefree Ltd v Brit Insurance Ltd [2009] EWHC 3671 (QB)

Whether condition precedent had been breached

The claimants (jewellery shop owners) believed that a theft had taken place at their premises. Only one of the five CCTV cameras in the shop contained any relevant footage of the incident. Acting on police advice (and in accordance with normal procedure), the relevant footage was downloaded onto a DVD and the rest of the footage was automatically wiped. They notified a claim to their insurers and loss adjusters were appointed. The insurance policy contained a condition precedent that the insured should give to the insurer such information as the insurers might reasonably require and as might be in the insured's power to give. The claimants had been unable to meet the insurers' request that they provide them with footage from all five cameras and the insurers argued that this was a breach of the CP. They argued that the claimants should have asked them if they wanted to see the footage before it was deleted.

It was held that there had not been a breach of the CP. The insured's obligation to provide the footage only arose after the insurers' request and in this case the request had been made only after the footage had already been deleted. The claimants did not have to guess what the insurers might want to see. Furthermore, the insurers knew or should have known that images recorded by CCTV cameras were regularly wiped. It was proper for the insured to download only footage which the police advised him would be relevant to proving the theft and loss.

Loyaltrend Ltd and another v Creechurch Dedicated Ltd and Ors [2010] EWHC 425 (Comm)

Date of material damage in subsidence claim

The insured was a company trading as a fashion clothing retailer. By the late summer of 2003, cracks had started to appear to the front of one of its shops. The factual evidence was that the situation had deteriorated significantly by November 2003, with significantly more cracks appearing. The situation was said to have become much worse towards the end of 2004 (the insured talking of a "step change" in October 2004, with water regularly leaking into the property from that time and it no longer being possible to "patch up" damage). By March 2005, the insured had written to the landlord's agents demanding a suspension of rent, referring to loss of profits at the shop. It was found by the judge that notice to its insurers had not been given until August 2005.

The insured was insured by three different insurers from 11 December 2002 to 11 December 2006. When its claim for damage and business interruption arising from the subsidence was rejected, it pursued proceedings against only one of the insurers - Brit Insurance- which had written the policy covering the period 11 December 2003 to 11 December 2004.

Mackie J held that the claim against Brit failed because the insured had breached a condition precedent in the policy requiring notice to be given within 30 days of "the happening of any damage in consequence of which a claim is or may be made under this Policy". That is an objective test (see Laker Vent v Templeton [2009]). In this case, although the judge accepted that there was a "step change" in October 2004 (in the sense of the witnesses' sudden perception of a change in what was a gradual process), that did not detract from the seriousness of what was already apparent in December 2003, which the insured should have notified to insurers. Accordingly, the insured was in breach of the CP and the claim failed on that basis.

The judge also went on to state that, if he was wrong on the CP issue, "it would be surprising if Brit, who insured only the middle of three years over which the relevant events occurred, was liable for the entirety of the loss sustained". Although the picture of when material damage occurred was confused, the position was materially worse in autumn 2004. He stated that "it is inaccurate to express the progressive deterioration caused by subsidence in terms of a series of sudden changes. The appearance of "step change" is the result of inspection and testing necessarily occurring only at intervals". The trigger for business interruption loss was not the subsidence but the material damage to the shop and on the evidence available the judge could only conclude that there must have been some material damage during Brit's year but less than in the other two relevant years. Although subsidence was continuing throughout Brit's year of cover, most of the material damage was in 2005.

William McIlroy Swindon Ltd v Quinn Insurance Ltd [2010] EWHC 2448 (TCC)

When did a dispute arise between an insured and insurer/whether an insurer must highlight onerous terms

General Condition 16 of a liability policy provided that any dispute between the insured and the insurer on the insurer's liability in respect of a claim must be referred to arbitration within 9 months of the dispute arising (failing which, the claim shall be deemed to have been abandoned). The insurer denied liability on the grounds that the insured had breached certain policy conditions. The insured was subsequently found liable to a third party (and shortly afterwards went into voluntary liquidation, resulting in a claim against the insurer under the Third Parties (Rights against Insurers) Act 1930.

The main issue in the case was when the dispute between the insured and the insurer arose (and hence whether the 9 month deadline to commence arbitration had expired). The claimants argued that a dispute could not have arisen until the insured's liability to the third party had been established. Edwards-Stuart J held as follows:

1. Reference to a "claim" in General Condition 16 was to a claim by the insured under the policy (and not a claim by a third party). Post Office v Norwich Union [1967] establishes that until the liability of the insured has been established, and the amount of that liability has been ascertained, an insured cannot sue its insurer for a particular sum of money. However, that does not always prevent an insured from seeking a declaration that the insurer is in breach of contract before liability has been ascertained. That is because the insurer will often be in breach of a policy obligation - for example, the policy might require the insurer to consider whether or not to conduct the defence of a third party claim. In this case, as soon as the insurer notified the insured that it was refusing indemnity, a dispute had arisen and that dispute should have been referred to arbitration within 9 months.

2. General Condition 16 had been incorporated as a term of the policy. "Cases on the incorporation of terms....must be approached with some care in the context of an insurance policy". It is well-known that commercial insurance policies contain many detailed requirements: "Whether or not he has read them, any reasonable businessman can be expected to know that his policy will contain many such detailed provisions". Nor was General Condition 16 unduly onerous. Although it is clearly much shorter than the statutory 6 year limitation period, "9 months is a reasonably generous time within which to explore the merits of any dispute that has arisen". Nor was the judge persuaded that an insurer should draw an insured's attention to every term in a commercial insurance policy which might prove onerous (apart from the duty to notify a claim within a particular period). To impose such a duty "could lead to endless disputes about whether such notification had been adequate. It would simply provide kindling for claims

3. The judge doubted whether he had jurisdiction to extend time to begin arbitral proceedings under section 12 of the Arbitration Act 1996, since it appeared that the policy was governed by Irish law and that the seat of any potential arbitration under General Condition 16 would be Ireland. He nevertheless expressed his view that (had he had jurisdiction) he would not have extended time. In the absence of unusual circumstances, the conduct of the party resisting the application under section 12 must have been such as to have in some way caused or contributed to the failure of the applicant to comply with the time bar. In this case, there was no obligation on the insurer to advise that time was about to expire.

4. Paragraph 7.3.5 of the Insurance Conduct of Business Rules ("ICOB") (now ICOBS paragraph 8.1.1) referred to guidance to help an insured make a claim under the policy. The judge said that he did not believe this paragraph applied where an insurer has rejected the claim (rightly or wrongly). Even if that was wrong, the paragraph did not require the insurer to alert the insured to the existence of a time bar (such as the one in General Condition 16): "That time bar applies to the time for referring any dispute to arbitration once a dispute has arisen in relation to the insurer's liability in respect of a claim: it is not a period within which the insured must make his claim".

COMMENT: In Post Office, the insurers had not sought to deny liability. Instead, they argued that the claim for indemnity under the policy was premature. However, this case confirms that where an insurer repudiates liability, the insured can bring a claim for a declaration against its insurer even before it has been ordered to pay anything to a third party (and thus seek to obtain (if the policy allows it) indemnity for any defence costs incurred in defending the third party claim). Hence the limitation period in such circumstances begins to run from the date when the insured has been notified that the insurer will not pay the claim.

Clare Horwood & Ors v Land of Leather Ltd [2010] EWHC 546 (Comm)

Breach of condition giving control of claims to insurer/scope of implied duty of good faith during the policy

The claimants alleged that they suffered personal injury from the use of sofas purchased from (inter alia) Land of Leather ("LoL"). LoL was insured in respect of product liability by Zurich. After LoL went into administration, the claimants sought to claim against Zurich pursuant to the Third Parties (Rights Against Insurers) Act 1930. Zurich claimed that it was not liable to indemnify LoL and so was not liable to the claimants. Zurich claimed that LoL was in breach of a condition ("Condition 3") which gave it the right (inter alia) to control settlements and prohibited settlements by the insured without the consent of Zurich. LoL had entered into a settlement with the sofa manufacturer, whereby the manufacturer compensated it for damage to reputation and unsold stock. However, a further agreement was entered into a few months later, under which (the judge found) LoL had agreed that it would not pursue any right of indemnity from the manufacturer in respect of any liability for personal injury which LoL owed to the claimants. Teare J went on to consider whether, as a result of that agreement, insurers could rely on two defences:

1. Breach of Condition 3. The judge rejected the argument that the prohibition on settling claims applied only to claims against the insured and not to claims which the insured itself could bring against third parties. Furthermore, the condition was given the status of a condition precedent to liability in the policy. Accordingly, Zurich was not liable to indemnify LoL.

2. Breach of an implied term. Zurich argued that if the agreement with the manufacturer had not extended to the release of the personal injury claims (or, if it did, but the agreement was unenforceable), LoL was still in breach of an implied term of the policy to act reasonably and in good faith with due regard to Zurich's interests and rights of subrogation. In view of the judge's conclusion that Zurich did not have to indemnify LoL, he did not need to reach a decision on this issue but he stated what his decision would have been had it been necessary.

It was argued on behalf of LoL that the implied duty did not extend to the situation where a settlement was not actually concluded and so the insurer was not prejudiced. That argument was rejected by Teare J. The implied term arises because the insurer has a contingent right to be subrogated to the rights of the insured when he indemnifies the insured. If the insured acts without regard to that contingent right, he may harm the value of that right to the insurer. Obviously a settlement may deprive the insurer of that right, "But in principle harm may be caused to the insurer's rights of subrogation where the claim against the third party is not lost or reduced in value by settlement. For example, the documents necessary to establish such claim may be destroyed". However, on the facts of the case, if there was no settlement by LoL, there was no breach of the implied term even on this formulation of the implied term (although if the settlement had been concluded but was unenforceable, the judge said that that would have been a breach of the implied term, but that it could not have caused any loss).

Double Insurance

The National Farmers Union Mutual Insurance v HSBC Insurance (UK) Limited [2010] EWHC 773 (Comm)

Whether double insurance arose in this case

Double insurance arises when the same party is insured with two (or more) insurers in respect of the same interest on the same subject-matter against the same risks. The general rule is that (subject to the terms of each policy), the insured can recover in full from either insurer and the paying insurer is entitled to a contribution from the other insurer.

In this case, following exchange of contracts on a property, the risk of damage to the property passed to the buyers (under common law). The buyers therefore took out a policy with NFU, which insured them against damage by fire. The policy provided that if there was insurance covering the same damage, the insurer would only pay its share (ie its rateable proportion). Following a fire at the property 17 days after exchange of contracts, NFU paid out and the issue then became whether there was any "other insurance", and so whether it could claim a contribution from the other insurers.

The sellers were insured by HSBC at the time of the fire against damage to the building, and the policy contained an extension covering anyone buying the property (until completion of the sale or the end of the policy, whichever was sooner) but provided that the insurer would not pay "if the buildings are insured under any other insurance".

The judge (Gavin Kealey QC) held that the only policy covering the buyers in respect of the fire was the NFU policy: "the grant of buildings cover by HSBC to buyers...was directly qualified by the proviso [i.e. that there is no other insurance in place]: the one cannot properly be separated from the other". Accordingly, this was not a case of double insurance (the buyers were never covered under the HSBC policy) and NFU was not entitled to a contribution from HSBC. In reaching this conclusion, the judge had regard to the primary purpose of the policy extension: it was intended to provide valuable protection to HSBC's own original insured (the sellers), in the event that the buyers were otherwise uninsured (and so the cover would enable or encourage the buyers to complete the property purchase following damage to the property post-exchange but pre-completion).

It was also held that general Claims Condition 2 in the HSBC policy (which provided "we will not pay any claim if any loss...covered under this policy is also covered...under any other insurance except in respect of any excess beyond the amount which would have been covered under such other insurance") was overridden by the special clause in the HSBC policy referred to above, to the extent of any conflict between the two terms.

The judge also commented (obiter) on the case of Austin v Zurich [1944]. It is an established principle that where there is double insurance, if both policies (which would otherwise cover the loss) purport to exclude indemnity altogether in the event of other insurance, the two exclusions cancel each other out and liability is therefore shared between the insurers (see Weddell v Road Transport & General [1932]). In Austin v Zurich, one policy ("A") provided that in the event of other insurance, the insurer would only pay its rateable proportion. The other policy ("B") provided that it would only pay in excess of any sums recovered from the other insurance. The judge concluded that each insurer was liable for 50% of the loss (the two "escape" clauses cancelling each other out). Kealey QC said that in his view it would have been more correct to say that policy A was liable to the full extent of its limits and that policy B only provided excess cover.

COMMENT: It might be difficult in practice to distinguish between a condition in a policy which provides that it will cover a loss but will not pay out in the event of double insurance and a condition which provides that there will be no cover at all if another policy covers the same risk and subject matter. Care should therefore be taken to ensure that the exact nature of the condition is spelt out when drafting the insurance policy.


Axa Corporate Solutions SA v National Westminster Bank Plc

Clyde & Co for winning claimant

In 2005, NatWest was sued in the USA by victims of Hamas suicide bombings in Israel who allege that a British charity, Interpal, is a fundraiser for Hamas and that it collected donations through NatWest bank accounts. NatWest notified its insurer of potential claims under its public liability and products liability ("PPL") combined policy for the policy years when the relevant suicide bombings occurred. Of issue in this case was whether the policy in question contained an express term excluding liability for terrorism (the insurer sought a declaration that it did).

Much of the case therefore turns on the particular factual events surrounding the renewal for the policy. Hamblen J (having agreed that it made no difference if NatWest, or its parent company RBS Group, were ignorant of the fact that the insurer had told RBS/NatWest's broker that it would only renew on terms which included a terrorism exclusion) accepted that a terrorism exclusion had been included in the PPL policy.

The exclusion was agreed in the following terms: "Terrorism exclusion (wording to be agreed)". Hamblen J rejected the argument that this did not amount to an effective agreement to a terrorism exclusion in the absence of any wording being agreed. He said that the further wording was not an essential term of the contract: "The fact that the parties then contemplated a fuller expression of the same exclusion in a wording subsequently to be agreed could not and does not undermine the fact that the exclusion was cast in terms which are capable of both interpretation and application. It is a common feature of the London market that parties contemplate a fuller wording to follow the slip or short-form statement of their agreed terms".

The insured also sought to argue that the exclusion should be construed as referring only to an act of terrorism affecting premises owned or occupied by it. The judge said that it would not be appropriate for him to seek to construe the term agreed in the abstract. If the insured wished to have the term construed by the courts, it should make a separate application to the court.

Goldsmith Williams v Travelers Insurance Company Ltd [2010] EWHC 26 (QB)

Meaning of "condone" in a dishonesty exclusion in a PI policy

The claimant brought a claim under the Third Parties (Rights Against Insurers) Act 1930 after the insured was made the subject of a winding up order. The insured was a company trading as solicitors. It had two directors, Mr Atikpakpa and Ms Usman. Mr Atikpakpa had made a false mortgage application and stolen the funds advanced by the lender. The claimant (who had been instructed by the lender in relation to the transaction and had indemnified the lender for its loss) obtained judgment against the insured and brought a claim against the insured's professional liability insurers. The insurers argued that they were entitled to repudiate liability because of the policy's dishonesty exclusion, which read (in relevant part) as follows: [The insurers] "shall not be respect of..Fraud or dishonesty...any claim....arising from dishonesty or a fraudulent act or omission committed or condoned by such insured, except such dishonesty, act or omission will be imputed to a body corporate unless it was committed or condoned by....all directors of that body corporate".

Williams J applied the test for dishonesty set out in Twinsectra v Yardley [2002] (ie that the defendant's conduct is dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest). It was agreed that the word "condoned" in the exclusion meant that a non-dishonest director knows of the dishonesty of his co-director yet overlooks it. The judge found, on the facts, that Ms Usman had knowingly provided false information on the mortgage application form and condoned the false application by her co-director. However, there was no suggestion that she had benefited directly from the theft by her co-director or condoned it: "It is one thing to obtain loans by making fraudulent statements, it is quite another to steal the loans".

Nevertheless, the judge held that the insurer was entitled to repudiate liability. It was wrong to suggest that the theft of the money did not arise from the mortgage application - there could have been no theft without the application. He referred to the recent case of Zurich Professional v Karim [2006], in which the judge found that if an insured condones a course of conduct which is dishonest or fraudulent and that course of conduct leads to or permits the specific acts or omissions upon which the claim is founded, the insurer will be entitled to repudiate liability (although the wording of the dishonesty exclusion in Karim differed from the exclusion in this case, that was held to be no reason to adopt a different approach).

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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