UK: Insurance And Reinsurance - Weekly Update - 21 December 2012

Last Updated: 2 January 2013
Article by Nigel Brook

Standard Life v Ace European

Court of Appeal decides whether apportionment principle applies in liability cases

The first instance decision in this case was reported in Weekly Update 04/12. The insured operated a fund which suffered a one-day 4.8% fall in value. It subsequently paid customers who it estimated would have a valid claim against it and sought to recover those payments under the Mitigation Costs section of its professional indemnity insurance policy.

At first instance, Eder J held that these payments fell within the definition of Mitigation Costs as they were "reasonably and necessarily taking action to avoid...or to reduce a third party claim". It did not matter that one motive was to avoid or reduce reputational damage.

The judge also rejected insurers' argument that if there are two equally dominant purposes in making a payment, there should be an apportionment of the Mitigation Costs. The insurers appealed on that point.

The Court of Appeal has now held that, as a matter of construction of the policy, the insured was entitled to all its Mitigation costs provided one purpose behind the payment was covered under the policy. It did not matter if the payment also achieved another "incidental objective".

Although not strictly required to do so, the Court of Appeal also considered the insurers' wider argument that cover for mitigation costs is analogous to a sue and labour provision traditionally found in marine insurance policies and so a principle of apportionment should be implied into liability insurance policies, as it is for marine policies.

That argument was rejected by the Court of Appeal. It held that marine insurance policies are different from liability policies in that the adjustment of losses under such policies proceeds on the assumption that the subject matter insured is fully covered by insurance. Where there is under-insurance (and so the insured is "his own insurer" for the uninsured balance) apportionment is required in order to ensure that insurers only contribute to the extent of their interest in the property. (Tomlinson LJ noted that "even within the confines of marine property insurance, there is no warrant for bringing into the averaging calculation interests which are not the subject of the insurance under which the claim is made"). The Court of Appeal found that the extension of the apportionment principle to liability insurance, where the extent of the liabilities to be incurred is unknown when the policy is agreed, would be "irrational and unprincipled".

The Court of Appeal also cast doubt on the view of Rix J in Kuwait Airways Corporation v Kuwait Insurance Company [1996] that apportionment could apply in a non-marine context – specifically in that case, aviation insurance. Tomlinson LJ said: "It may be that aviation property losses are traditionally adjusted in the same manner as marine property losses, but there is no finding to that effect in the Kuwait Airways case, and thus no immediately discernible rationale for the extension of the rule from marine property insurance to aviation property insurance".

COMMENT: Although both the first instance court and the Court of Appeal have now reached the same conclusion on apportionment, at first instance the possibility was mooted that the use of the words "solely" or "exclusively" in the clause might have supported a conclusion that there should be apportionment. There was no reference to that point, though, in the Court of Appeal. It remains to be seen whether the decision will be appealed to the Supreme Court.

Valiant Insurance v Sealion Shipping

Insurers appeal on aggregation point

The first instance decision in this case was reported in Weekly Update 03/12. Vessel owners sought an indemnity under a Loss of Hire insurance policy. The policy provided that periods of deductible had first to exceed "14 days any one occurrence, 21 days in respect of machinery claims" before the respective loss of hire could be recovered. It was agreed that this was a machinery claim and that there had been three occurrences here (the insured had tried to deal with the initial breakdown by installing a substitute motor and when that failed, another motor was installed (which also failed)). Insurers argued that the second occurrence had overtaken the first and broken the chain of causation. However, the insured had argued that the original machinery failure had caused the entire off-hire period (as they put it: "The vicissitudes attendant on the failed attempt to mitigate by juggling the engines did not affect the "critical path" of loss of time due to the ... breakdown"). The judge agreed with that argument, finding that "one thing led to another". The insurers appealed on the aggregation point.

The Court of Appeal has now dismissed that appeal. The judge's finding is essentially a factual one. The work which led to the second motor's failure "was closely and reasonably related to the owners' efforts to mitigate" and so told strongly against the suggestion that this was a new intervening act which broke the chain of causation. It also rejected the argument that the insurers should not be liable for loss of hire which would have happened in any event because of routine repairs which the vessel would have needed. The policy talked only of the owners being "prevented from earning hire" – there was no provision for exploring the ultimate net loss. Nor was there any requirement to read into the policy a provision that the owners give credit for time spent undertaking their own work – indeed, there were good reasons against construing the policy in this way because of the complexity which it would introduce. Finally, as a matter of construction, once the first 21 days had passed, the owners were entitled to a full indemnity under the policy and multiple excesses should not be applied to the claim: "In parting with this issue, I would simply observe that circumstances cannot be ruled out where the factual relationship between occurrences is such that multiple excesses might come into play; they would, however, come into play as a matter of fact or, perhaps, causation – not construction" (as per Gross LJ).

Starlight Shipping v Allianz Marine

Whether English court should stay proceedings brought by insurers

Mike Roderick and Angela Haylett of Clyde & Co for respondents

The first instance decision in this case was reported in Weekly Update 46/11. The insured had commenced proceedings in England for damages against its insurers (claiming damages for their refusal to pay a claim). Those proceedings settled and three years later the insured commenced proceedings in Greece against insurers claiming compensation for loss of hire and "due to moral damage". The insurers then commenced proceedings in England (alleging breach of the settlement agreement) and the insured sought a stay of the English proceedings. At first instance, the English court refused a stay and the insured appealed, seeking to rely on Articles 27 (which provides that, where there are two European proceedings involving the same cause of action and parties, the court which is not first seised must stay its proceedings) and 28 (which provides that, where there are related proceedings pending in two European courts, the court which is not first seised may stay its proceedings) of Regulation 44/2001.

The Court of Appeal re-affirmed that it is not possible to claim damages from insurers for failing to pay an insurance claim (or paying late) (Toulson LJ noting that the Law Commissions have proposed a reform of this principle). The Court of Appeal went on to find that Article 27 applied here. It held that the Greek claim was not the same cause of action as the original English claim and so the English court was never first seised of that cause of action. It rejected the insurers' argument based on the principle that a claimant ought to bring forward all his claims at the same time, rather than have them decided bit by bit. However, applying Article 28 here, the Greek proceedings were "related" to the original English proceedings and so the English courts were first seised under that article.

Accordingly, based on Article 27, the English proceedings were stayed.

Dar v Vonsak & Anor

Insurer seeks to withdraw admission following suspicion of fraudulent insurance claim

Following a road traffic accident, an admission of liability was made and the defendant's insurer paid out under his policy. Because of the admission, the claimant did not make any arrangements for an engineer's report to be carried out prior to the scrapping of his car. The insurer obtained such a report about 10 months later and, six months after that, a further report was obtained by the insurer. This report suggested that the details of the accident given to insurers had been false. The insurer therefore sought permission to withdraw the admission on the basis that the accident had been staged in order to make a fraudulent insurance claim. Permission was refused and the insurer appealed.

Eady J held that the judge had clearly taken into account the factors set out in PD14 para 7.2 for applications to withdraw an admission. Furthermore, she had been entitled to take account of the first report obtained by the insurer (which had been disclosed by it) and the claimant had not needed permission to rely on this report (even though the insurer had not sought permission to rely on this report – see Gurney v Gleeds Health and Safety [2006]). Although the court ought to refuse to allow its process to be abused by the advancement of false claims, it is also important to allow a litigant the chance to defend himself against serious allegations. In this case, the car would not have been scrapped had there been a doubt about the insurer's acceptance of liability or any hint of fraud. The judge was therefore correct in taking into account the prejudice to the claimant in not being able adequately to defend himself now. Eady J concluded that the insurer ought to have "sought to resolve its suspicions earlier".

Bulic v Harwoods & Ors

Application to disinstruct a single joint expert

The claimant agreed to the appointment of a single joint expert but, after receiving his report, wished to disinstruct him and appoints its own expert. At first instance, the judge refused the claimant permission to call another expert, holding that such an application could succeed only in "exceptional" circumstances. The claimant argued that this was not the correct test and that the judge should instead have applied the following test: was this a "substantial" case and were the claimant's reasons for the application "not fanciful" (see Daniels v Walker [2000]).

On appeal, Eady J held that there had been too much emphasis on the correct "test" to be applied: "no straitjackets were intended" and good reasons will vary from case to case. That said, the judge had placed too much emphasis on the "exceptionality" test. Here, it was of relevance that the issue to which the expert evidence was to go was not peripheral – in fact, it was fundamental. It was also technical and "the court is less likely to be ready to dispense with a single expert where the evidence is of a non-technical nature". The court would be assisted here by the comparison of two experts.

Although the judge held that this was not a substantial case, substantiality is not determined solely by reference to the amount claimed and, in any event, it is not of great importance.

However, the claimant's argument that there was apparent bias here, because the single joint expert had been instructed by the other side on other matters, was rejected. He was not involved in any retainer or "an especially "cosy" relationship" with the other side. Although it might have been better (in accordance with the protocol for the instruction of experts) if the expert had notified the parties about instructions which he subsequently received, this was not a significant matter in the context of this case.

Bunge SA v Kyla Shipping

Effect of insurance arrangements in a frustration case a+)&method=Boolean

As a general principle, the courts will disregard a party's insurance arrangements when determining a case involving that party. The rationale for this principle is that a party who has been prudent enough to spend his money purchasing insurance cover should not have to give credit for that insurance to the other side who has caused his loss (and to hold otherwise would cut across the insurer's rights of subrogation against the party who caused the loss -see, for example, Lister v Romford Ice [1957]). However, Flaux J held that in this case that principle can have no application where one party has expressly undertaken and warranted that particular insurance to a particular value will be taken out and maintained throughout the life of a contract between the insured and another party (in this case, a charterparty).

Here, the owners had sought to argue that the charterparty was frustrated when the cost of repairing its vessel was USD 9 million and the vessel was worth USD 16 million, making it a "commercial total loss". The judge rejected that argument. The owners had warranted to maintain insurance cover of USD 16 million and so there could be no frustration of the charterparty where the vessel could be repaired for less than the insured value.

Olympic Airlines v ACG Acquisition

Whether appellant should be required to put up security

Following judgement in favour of the defendant, the court ordered the claimant to make a payment on account to the defendant pending the claimant's appeal. The claimant sought a stay of that order, arguing that under Greek law (the applicable law of the dispute), the claimant could not "at this time" lawfully make the payment. The defendant sought security for its costs. Various issues were considered by the Court of Appeal, including:

(1) The applicability of CPR r25.13(2)(c). This ground for ordering security for costs covers the situation where "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". Although the claimant here was in insolvent liquidation, the Court of Appeal decided that it had assets with which it could pay the defendant's costs. However, the claimant is asserting that it cannot lawfully use those assets in that way and so "it might be arguable that such a legal inability (if in fact justified) would satisfy the 'will be unable' condition". However, the Court of Appeal declined to decide the point.

(2) The applicability of CPR r52.9. This provides that an appeal court may impose conditions upon which an appeal may be brought. The Court of Appeal held that there was a compelling reason here to impose a payment into court as security for the defendant's costs as a condition for the bringing of the appeal. That was because there were sufficient assets and because the claimant's position with regard to the limits of what it can lawfully do under Greek law "is not entirely consistent".

F&M Bunkering v Bulgarian Shipping

Effect of failure to serve certificate of service in time/response pack for foreign defendant

The defendant applied to set aside default judgement. One of the grounds was that the claimant filed the certificate of service late. CPR r6.17 provides that the claimant must serve a certificate of service (unless the defendant has filed an acknowledgement of service) within 21 days of service of the particulars of claim. The certificate here was served two weeks late. Burton J held that this was no bar to obtaining judgement in default (although it would be a bar if it had never been served at all). Should an extension of time be necessary, the court has power to do so under CPR r3.10.

As the case involved a foreign defendant, it should have been served with a response pack (including an acknowledgement of service). The defendant denies receiving this pack (or the claim form/particulars of claim). In the certificate of service eventually filed by the claimant, it stated, in answer to the question "what documents did you serve?" the following: "The Claim Form and Particulars of Claim". Burton J suggested that this question in the certificate might be inappropriate or unnecessary and that the Rules Committee should look into this. In any event, he found that the answer was inadequate because the acknowledgement of service had in fact also been served, but that this had not caused any prejudice.

On the merits of the case, though, the judge decided to give leave to set aside the judgement on terms.

Durham County Council v Dunn

Claimants' requests for disclosure and the Data Protection Act

Recent legal developments have made it easier for civil proceedings based on allegations of historic abuse to be pursued. Of issue in this case was the ambit of a defendant's duty of disclosure. Here, the claimant requested disclosure of certain documents prior to commencement of proceedings. That letter referred to the Data Protection Act 1998 ("the Act") and the defendant replied that under the Act it was necessary to balance the interests of the claimant with the interests of third parties. After proceedings commenced, at a case management conference a district judge ordered the defendant to disclose certain documents in a redacted form. On appeal, the judge ordered disclosure in unredacted form. The Court of Appeal has now held as follows:

(1) The district judge erred in treating the Act as the governing regime. The CPR applied in these circumstances instead.

(2) The judge had erred in referring to a duty to protect data as if it were a category of exemption from disclosure under CPR r31. The appropriate balancing act which the court must carry out is between a party's right to a fair trial and the right of his opponent (or a third party) to privacy. Denial of disclosure must be strictly necessary. It is a distraction to start with the Act itself. Nevertheless, the judge had reached the correct conclusion and the documents should be disclosed in unredacted form.

(3) Munby LJ also held that the White Book was "so succinct as to be inadvertently misleading" when it gave the impression that public interest immunity privilege applies to local authority social work records. Although the documents here were not social work records, they were not dissimilar and so should be treated the same way.

Steigrad v BFSL 2007 Limited (Bridgecorp)

New Zealand Court of Appeal overturns important D&O caselaw decision

Please see attached a summary of the recent New Zealand Court of Appeal in the Bridgecorp case, prepared by our colleagues in our Sydney office. The decision confirms that a charge by the receiver of a company over any insurance proceeds does not prevent the directors of that company obtaining reimbursement under a D&O policy for their defence costs. It therefore overturns the first instance decision, which sent shockwaves through the Australian and New Zealand D&O insurance market.

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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