UK: Insurance And Reinsurance - Weekly Update - 7 August 2012

Last Updated: 13 August 2012
Article by Nigel Brook

Parker & Anor v National Farmers Union Mutual Insurance Society

Fraudulent claim and joint/composite policy/breach of condition precedent html

Clyde & Co (Roger Doulton and Steven Gilberg) for defendant

It was undisputed that the property owned by the first claimant (Mrs Parker) was substantially damaged by fire in December 2009. She sought to claim under an insurance policy which was taken out in July 2009 in her name (which was then Mrs Cooke). In September 2009, the second claimant (Mr Parker) was added as an assured to the policy. At the time of the fire, the claimants were living together (although not at the property) and they later married in April 2010.

The insurers denied liability on several grounds:

(1) They were entitled to avoid the policy because of two earlier fraudulent claims (in 2002 and 2007). Teare J found, on the facts, that one of the earlier claims was not fraudulent but the other was. However, he also concluded that Mrs Parker was unaware that this dishonest claim had been made. The judge went on to find that the fire had been caused by Mr Parker's wilful misconduct. The insurer did not allege that Mrs Parker was party to any conspiracy to set fire to the property. He therefore held that the insurer was entitled to avoid its obligation to indemnify Mr Parker (and in any event Mr Parker could not recover because of his involvement in the fire). Mr Parker was also liable to pay the insurer the costs of its investigation, plus simple interest and the insurer was entitled to restitution of the sums paid out in respect of earlier fraudulent claim, plus compound interest.

(2) Could the insurer also avoid against Mrs Parker? Although the schedule to the policy described Mr Parker as a "joint policyholder", the judge concluded that this was in fact a composite policy. That was because Mr and Mrs Parker had different interests in relation to the property. She was the owner but the judge said it was difficult to identify any interest at all of his in the property. Accordingly, her right to claim was not affected by Mr Parker's wilful misconduct.

(3) Could the insurer rely on a condition precedent in the policy? It was undisputed that it was a condition precedent that the insured provide all written details and documents which the insurer asked for. During its investigation, the insurer asked for copies of the claimants' bank statements, in order to verify a statement by Mr Parker that he had sufficient money in his bank to pay for the demolition and reconstruction of the property. The claimants refused to comply with this request and instead sent a letter from their bank (which confirmed there were sufficient funds for a rebuild). Teare J held that this was a breach of the condition precedent (since the letter did not confirm how much was actually in the account) and it did not matter that no reliance was placed on this breach until service of the defence – he held that there had been no waiver of the right to rely on the condition precedent.

(4) Could Mrs Parker rely on the Unfair Terms in Consumer Contracts Regulations 1999 and/or the Insurance Conduct of Business Sourcebook ("ICOBS") to avoid the consequences of breaching the condition precedent? Teare J held that she could not. The condition precedent was not an "unfair term" – it is the assured, rather than the insurer, who will be in possession of relevant documents. Furthermore, the insurer had not rejected the claim unreasonably. The breach of the condition precedent was connected to the claim – the bank statements were relevant to the question of motive. Furthermore, the insurer's solicitors had given the insured a "clear warning" as to the consequences of the breach by drawing attention to the relevant term in the policy and by reserving the insurer's rights.

(5) Although unnecessary to decide the point, Teare J added that where (a) the right to subrogation arises on payment; and (b) Mr Parker would be liable to Mrs Parker for the damage which he caused to her property; and (c) the making of a declaration would avoid the need for fresh proceedings to be issued by the insurer against Mr Parker, it would be just and convenient to make a "pre-payment declaration of entitlement to be subrogated".

Finally, although it was unnecessary to decide the amount which the claimants could have claimed, Teare J gave his opinion on this matter. Under the terms of the policy, where the property was not replaced but instead a larger house was built on the site, the measure of indemnity would be the lesser of the cost of replacement and the loss in market value. Here, the reduction in market value was said to be the difference between £1,050,000 (the midway between two valuations) and £625,000 (the value of the plot, taking into account the possibility that a private buyer might be willing to pay more than the "residual valuation"). Since that was less than the agreed costs of reconstruction, that would have been the measure of indemnity.

Simmons v Castle

Court of Appeal confirms 10% increase in general damages for tort claims post-April 2013

In his review of costs in civil cases, Jackson LJ recommended that (to compensate for success fees and after the event insurance premiums becoming irrecoverable), general damages awards for personal injuries and other civil wrongs should be increased by 10%. The Legal Aid, Sentencing and Punishment of Offenders Act 2012, which comes into force on 1 April 2013, envisages that the judiciary will give effect to this 10% increase in damages.

Accordingly, in this case the Court of Appeal (which monitors and alters the guideline rates for general damages in tort actions) confirmed that, with effect from 1 April 2013, "the proper level of general damages for (i) pain, suffering and loss of amenity in respect of personal injury, (ii) nuisance, (iii) defamation and (iv) all other torts which cause suffering, inconvenience or distress to individuals, will be 10% higher than previously. It therefore follows that, if the action now under appeal had been the subject of a judgment after 1 April 2013, the proper award of general damages would be 10% higher than that agreed in this case".

SG v Hewitt

Part 36 offers and whether the offeror should get its costs following acceptance of offer

Clyde & Co for respondent

Where a Part 36 offer is accepted after expiry of the relevant period, CPR r36.10(5) provides that the claimant will be entitled to its costs up to date on which the relevant period expired, and thereafter the offeree must pay the offeror's costs up to the date of acceptance "unless the court orders otherwise".

In this case, the claimant was six years old when he was injured by the defendant's negligence. The defendant made a pre-action Part 36 offer and this was accepted by the claimant some two years later. At first instance the judge approved the settlement and held that the offeree (the claimant) must pay the offeror's costs. The claimant appealed.

The Court of Appeal has now allowed that appeal. The parties accepted that the court should take into account the same matters set out in CPR r36.14(4) (which relates to a claimant failing to obtain a judgment more advantageous than a defendant's Part 36 offer). The Court of Appeal rejected other formulations of the test suggested by the parties. In this case, the Court of Appeal accepted that the judge had erred in failing to given any (or enough) weight to the fact that the impact of the claimant's injury could not be properly predicted until the claimant had matured/reached adolescence. The judge had also erred in holding that "the fact that any settlement would require the approval of the court is not of itself a relevant factor". However, the Court of Appeal also cautioned that costs decisions are particularly fact sensitive.

Brit Inns & Ors v BDW Trading

Whether insurer could recover on subrogated claim

Flooding of a restaurant arose out of admittedly defective work carried out by a contractor and its sub-contractors. The insurers of the property paid out under their policy and then brought a subrogated claim against the contractor/ sub-contractors. Coulson J noted that "although not strictly a principle of recovery of damages, it is right to note that where (as here) the scope of the works and their cost were the subject of scrutiny by a third party (the insurers and the loss adjusters acting on their behalf) with a clear incentive to ensure that the sums paid out were kept to a minimum, the court is likely to attach significant weight to the reasonableness of the sums paid out". Despite that general approach, the judge found that in this particular case the insurance claim had been exaggerated and the "sheer scale and range of the problems with the claim as submitted to the insurer" (ie no record was kept of the works actually carried out to repair the property, invoices were inadequate and there was no evidence of payment of those invoices) made it impossible to accept the invoices submitted to the insurer, without more, as support for the subrogated claim. A retrospective valuation was therefore preferred.

The insured also sought to recover for its uninsured losses in this case. One part of this claim was for increased costs of insurance (ie for increased insurance premiums following the flooding). The judge said this claim was "fundamentally flawed" in part because there was no proof that he had had to pay higher premiums, but also because "It presupposes that 3, 4 and 5 years after the base date of 2007, the insurance premiums would not otherwise have gone up at all. Such an assumption is unwarranted. Insurance premiums across the board have gone up over those periods, so that the mere fact that there was an increase in 2010, 2011 and 2012 could not be ascribed to the second inundation in any event".

EnerG v Hormell

Service of documents in accordance with a contractually agreed method

In addition to service under the CPR, it is possible for the parties to agree service in accordance with a contractually agreed method (CPR r6.11). In this case, the parties entered into a contract which provided that, in order to bring a claim for breach of warranty, a notice must first be served and proceedings had to be served within 12 months of that notice. The contract also contained the following provision: "Clause 13.2 Service: Any such notice may be served by delivering it personally or by sending it ..recorded delivery... at or to the address referred to in the agreement."

The claimant believed that there had been a breach of warranty and on 30 March 2010 sent a process server with a notice to the relevant property. He left the notice on a table (where it was opened by the defendant later that same day). The notice was then also sent by recorded delivery on the same day and hence was deemed to have been received (under the agreement) on 1 April 2010. A year later, on 29 March 2011, a process server left a copy of the claim form in the letterbox serving the property. Under CPR r6.14, this was deemed to have been served on 31 March 2011.

At first instance the judge held that service of the claim form was out of time and the claimant appealed. The Court of Appeal has now considered the following issues:

(1) Was the first notice "personally served"? If it was, the claim form would have been served in time. The Court of Appeal held that it was not. In order to comply with the contractual provision, service had to be made on the recipient personally and the notice could not just be left at the property

(2) Could the claimant rely instead on the second notice, which was validly served? In order to succeed on this argument, the claimant had to prove that Clause 13.2 was exclusive, rather than permissive- ie service could only be made under that clause and not by any other method. The Court of Appeal (Longmore LJ dissenting) rejected that argument too. It held that the first notice, although not personally served (as required under the contract) was still validly served on 30 March 2010 and there was "no room" for a second notice as well. Accordingly, the claim form had been served late

Eagle Ltd v Falcon Ltd

Security for costs application and the test of being unable to pay

The defendant applied for security for its costs up to the end of the disclosure process. It sought to rely on the condition in CPR r25.13(2)(c): "the claimant is a company... and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so".

It was common ground that the claimant was insolvent on the balance sheet test. However, the claimant argued that it was "unduly mechanistic" to look simply at assets and liabilities in order to see if the condition had been met. It sought to rely on the case of BNY Corporate Trustees v Eurosail [2011]. However, Coulson J pointed out that that case had involved a dispute under the Insolvency Act and whether the simple balance sheet test justified the winding up of a company. That was said to be different from this case – the condition under CPR r25.13(2)(c) required a "different (and plainly lesser) test". Even if that was wrong, the claimant was also insolvent on the "cash-flow" test too.

The judge commented that it had been appropriate to limit the application to the next stage of the defendant's costs, rather than its costs as a whole. However, he found that the costs figures had been exaggerated and that estimates had fluctuated "wildly". He held that a figure of £295,000 was just and proportionate.

Khans Solicitors v Chifuntwe & Ors

Entitlement of solicitors to costs following settlement by client

The claimant firm of solicitors acted for the defendant in proceedings which were settled. The other side agreed to pay the defendant's reasonable costs. The solicitors submitted a bill for £9, 500 but the defendant agreed with the other side that it would accept £6,000. That amount was eventually paid to the defendant (who has since gone abroad). The solicitors sought to argue that their lien over their costs was still "in play" provided the paying party knew about the lien (as it did here). Mackay J held, however, that knowledge alone did not suffice. The key factor here was that the defendant had not intended to "cheat" his solicitors by settling his claim. The paying party here had checked with the court that the solicitors were no longer on the record and there had been no collusion between the paying party and the defendant.

Jackson v Dear & Anor

Implied terms and the business efficacy test

When summarising the law relating to the implication of terms into a contract, a point of dispute arose between the parties. One side argued that the Court of Appeal in Mediterranean Salvage v Seamar Trading (see Weekly Update 21/09) had "rowed back" from Lord Hoffmann's analysis in the case of Attorney General of Belize v Belize Telecom (see Weekly Update 20/09).

In the Belize case, Lord Hoffmann said that there is only one question to be asked when the court decides whether to imply a term – namely, "is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?" He added that whether the implied term is "necessary to give business efficacy to the contract" is not a different or additional requirement. In the Mediterranean Salvage case, though, the Court of Appeal restated the importance of the business efficacy/necessity test.

Briggs J did not consider that the Court of Appeal had rowed back from Lord Hoffmann's analysis. He concluded that "although necessity continues ... to be a condition for the implication of terms, necessity to give business efficacy is not the only relevant type of necessity. The express terms of an agreement may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. In such a case an implied term is necessary to spell out what the contract actually means".

He also said that where alternative interpretations are possible, the court can choose the one which makes more common sense (see Rainy Sky v Kookmin, Weekly Update 39/11) – but that does not elevate commercial common sense into an overriding criterion.

Other News

The Civil Justice Council has published updated guidance for instructing experts to give evidence in civil claims. It is anticipated that this guidance will be annexed to PD 35 in due course. Much of this guidance restates the current position but there are some new points to note, for example:

f. The terms of appointment agreed with the expert should include guidance that the expert's fees and expenses may be limited by the court

g. The instructions to the expert should include the dates fixed by the court (or agreed by the parties) for the exchange of experts' reports, as well as the name of the court, the claim number and the track to which the claim has been allocated

h. Experts should confirm as soon as possible after being instructed that they have access to all relevant information (ie the same information that has been disclosed by all the parties) and they must continue to monitor this

i. Any request for further information from the other side by the expert should state why the information is necessary and also the significance of the information in the context of a particular aspect of the case

j. Where there is sequential exchange of reports, the claimant's expert's report should be produced first. The guidance sets out various matters which the defendant's expert must contain in his report (see para 3.7.17)

k. Experts must not seek to settle the proceedings when they meet

l. Sanctions for breaches of CPR r35/PD 35 or court orders are also set out – these include costs penalties on those instructing the expert or the expert himself and possibly contempt charges

Further details can be found below: CJC/Publications/Pre-action%20protocols/CJC%20 Guidance%20for%20the%20Instruction%20of%20Experts. pdf

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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