UK: The Taylor Wessing Insurance And Reinsurance Review Of 2012

The TW Annual Insurance and Reinsurance Review summarises the key case law developments in insurance and reinsurance throughout the year. Please note that some cases covered in this review may be subject to further appeal.

Law and jurisdiction

Court of Appeal reverses decision on issue of utility

Ace European Group Ltd & Others v Howden North America Inc & Anor1

In the first instance decision, given by Field J, judgment was given for the insurers who sought a declaration from the English Court that certain insurance policies were governed by English, as opposed to Pennsylvanian, law. In granting the declaration, Field J found that there was sufficient utility in an English judgment being given and that England was also the more appropriate forum for the case.

However, the insured successfully appealed. The Court of Appeal reversed the decision of the lower court and set aside the order granting the insurers permission to serve out of the jurisdiction.


Howden North America, Inc. ("HNA"), an engineering group supplying fans and gas cleaning equipment, brought an application to set aside an order granting the claimants (insurers subscribing to various layers of an excess public and product liability insurance programme) permission to serve out of the jurisdiction.

HNA faced personal injury claims in the U.S. alleging that HNA was responsible for exposure to asbestos products. HNA, in turn, brought claims against its insurers in the federal court in Pennsylvania, which are ongoing. HNA joined the insurer claimants in this case to the Pennsylvania proceedings but the insurers sought a declaration from the English Court that: (i) the policies are governed by English law; and (ii) on a proper construction of the policies the insurers are not liable for asbestos-related claims where the third-party claimant had not suffered actionable personal injury or loss of or damage to material property which happens or occurs within the policy period or where a claim arising out of faulty materials was not made or notified within the policy period. The benefit for insurers of the policies being governed by English law as opposed to Pennsylvanian law is two-fold: (1) exposure to a hazardous condition does not trigger liability; and (2) the period clause is of fundamental importance and the relevant trigger must occur during the policy period.

First Instance Decision

Commercial Court, 17 September 2012

In granting insurers leave to serve out of the jurisdiction, the Court applied well established general principles. HNA conceded for the purposes of its application to set aside that insurers had a good arguable case that the claims in respect of certain policies (which do not have an express English law or jurisdiction clause) fell within CPR Part 6.36 and paragraphs 3.1 (6)(a) (contract made within the jurisdiction) and 3.1 (6)(b) (contract made by or through an agent trading or residing in the jurisdiction) of Practice Direction 6B. Moreover, Field J stated that, in his opinion, these claims also fell within paragraph 3.1(6)(c) (contract governed by English law) because the policies were placed in England through London brokers. Other policies contained express English law and jurisdiction clauses.

It was also not disputed by HNA that there was a serious issue to be tried on the merits of the claim. What was disputed, however, was whether insurers had shown that the granting of the declaration sought would be of sufficient utility (purpose) and/or that England was the proper forum.

In finding that the proceedings were properly served out of the jurisdiction, the Court made it clear that it did not merely follow its decision in Faraday2 without consideration (Faraday subscribed to three of the same policies in the excess layers and sought the same declaration). Field J applied the relevant principles in the context of the facts of this case. The Court took a broad view in deciding whether insurers had established sufficient utility for it to exercise jurisdiction over the claims. Field J found that there was sufficient utility despite Judge Conti indicating in the Pennsylvania proceedings that English law was unlikely to apply. The Court found there to be utility of an English judgment as there remained a real prospect that the Pennsylvania court would find English law to apply and, in such an event, the Pennsylvania Court would at the very least find the English ruling of "considerable assistance".

The Court also noted that the claimant insurers are "London market insurers who have a legitimate expectation that the parties to the policies would be bound by their express or implied agreement that the policies were governed by English law". As such, there was further utility in providing a judgment that could be used by the claimant insurers to resist any judgment of a foreign court that ignores the choice of law under the policies.

England was found to be the more appropriate forum following Beatson J's comments in Faraday that a local court is more apt to apply its own law and, additionally, for the reasons that the trial would be short, with limited factual evidence and unlikely to prejudice the Pennsylvania proceedings.


UK Court of Appeal, 6 December 2012

The Court of Appeal allowed HNA's appeal and reversed the decision of the lower court, thereby setting aside the order granting permission to insurers to serve out of the jurisdiction. The Court of Appeal drew several factual distinctions between this case and the Faraday case3, where permission to serve out was allowed. In particular, the Court of Appeal noted that in Faraday insurers commenced proceedings in England several months before they were joined to the US proceedings whereas in this case the action was commenced by insurers two months later.

Aikens LJ further highlighted that: (a) the Court of Appeal was not formally bound to follow the earlier appellate decision in Faraday; and (b) as in Faraday, the lower court's decision here was not an "exercise of discretion" (a judgment based on one of several equally legitimate courses) but in fact an "exercise of judgment" (requiring a reasoned conclusion, the merits of which can be more readily challenged on appeal). As such, the Court of Appeal in this case found it appropriate to consider the merits of Field J's decision based on the facts of the case.

Firstly, the Court of Appeal disagreed with Field J's view that an English Court ruling would at least be of considerable assistance to the Pennsylvania Court. The English Court of Appeal noted that Judge Conti (in the Pennsylvanian proceedings) had already indicated that she did not believe English law to apply to the policies in question and she was, in any event, capable of applying English law without the assistance of the English courts. Aikens LJ commented that providing such unsolicited judgment as advice to the Pennsylvania Court was "presumptuous and condescending".

Secondly, the Court of Appeal, in acknowledging the Pennsylvania Court's ability to apply conflict of laws rules appropriately, considered that the English Court's exercise of jurisdiction would amount to a pre-emptive strike in England to undermine the legitimacy of any Pennsylvanian judgment. Such a decision from the English Court, obtained with the sole aim of laying the ground for a defence to enforcement, was held by the Court of Appeal to not be a "useful" exercise of the English Court's jurisdiction.

Result: Judgment for the insured.

Court of Appeal has no jurisdiction to hear a dispute arising under life insurance contracts

Sherdley v Nordea Life and Pension SA4

UK Court of Appeal, 16 February 2012

The Court of Appeal upheld the first instance decision that the English courts did not have jurisdiction over proceedings commenced by two insureds, who were based at different times in Wales and Spain, against a Luxembourg based insurer. However, the Court of Appeal came to this conclusion by pointing to article 13 of the Brussels Regulation5, which had not been raised by the parties or considered at first instance.


The insured appellants, Mr and Mrs Sherdley (the "Appellants"), invested in two individual unitlinked life insurance contracts with Nordea Life and Pension ("Nordea") in 2006 / 2007. The capital sums invested were secured against the Appellants' residential investments in Spain. At the time of the formation of the contracts, the Appellants were living in both Wales and Spain. The Appellants' investments went disastrously wrong which prompted them to sell their home in Wales and move to Spain. At the time of the commencement of proceedings (23 June 2010), the Appellants were found to be habitually resident in Spain (they moved back to Wales in October 2011). The Appellants brought their claim in the English courts and alleged that there was an initial agreement in favour of jurisdiction in England and Wales.

The agreement between the Appellants and Nordea involved various contractual documents and included several countervailing provisions for jurisdiction. The Appellants initially signed "application forms", which provided for English law and jurisdiction, and "General Conditions", which provided for Luxembourg law and jurisdiction. Nordea then sent the Appellants a "Proposal" which provided for Spanish law and jurisdiction and which was signed by the Appellants. Nordea then issued (but apparently did not actually send to the Appellants) a contract document described as "Specific Conditions", which included a specific contract reference number, and which reproduced the provision for Spanish law and jurisdiction. Finally, Nordea wrote to the Appellants stating that it enclosed a copy of the original contract documentation and asking the Appellants to sign a declaration confirming that they had received this original contract documentation. The Declaration referred to the specific reference number which indicated that the original contract documentation was the "Specific Conditions". Therefore, the "Specific Conditions" itself was signed by Nordea but not the Appellants. A similar set of events followed for the second unit-linked life insurance contract.

At first instance, Justice Vos considered jurisdiction in light of article 9 of the Brussels Regulation (which states that an insurer domiciled in a Member State may be (a) sued in the courts of the Member State where it is domiciled or (b) in another Member State, in an action brought by a policyholder, in the courts of the place where the plaintiff is domiciled) and/or article 23 (which allows parties to agree to exclusive jurisdiction of a particular Member State).

He determined that at the time of the agreement in 2006 / 2007 the Appellants were habitually resident in Wales. Further, he determined that there was an "inchoate" consensus (as no final contract was signed by all parties) that the contracts were subject to English law and jurisdiction. However, Justice Vos found that the subsequent contract documentation that the Appellants were asked to sign provided for a default provision for Luxembourg jurisdiction and that there was a more compelling argument for Spanish than English jurisdiction. As such, he held that the Appellants were unable to demonstrate a "much better case" for English jurisdiction and, as such, the English Court had no jurisdiction.

The Appellants appealed on the grounds that: (a) the inchoate consensus for English law and jurisdiction should not have been displaced; (b) the burden should have been on Nordea to displace the inchoate agreement for English jurisdiction; and (c) the provision for Luxembourg jurisdiction would apply only in the absence of any choice of law.


The Appellants' appeal was dismissed (albeit, as expressed by two of the three Lord Justices, with some regret). The Court of Appeal found that the key provision was in fact article 13(2) of the Brussels Regulation which provided that, for insurance contracts, the default provisions for jurisdiction under article 9 of the Brussels Regulation could be departed from only if the scope of jurisdiction was expanded rather than narrowed. The Appellate court highlighted that under article 23(5) of the Brussels Regulation any provision contrary to article 13 would not have any legal force. As such, the exclusive jurisdiction clauses all fell foul of this protection of choice of jurisdictions under article 13(2).

In these circumstances, article 9 of the Brussels Regulation would apply and the Appellants could either sue Nordea in Luxembourg (Nordea's domicile) or in Spain (the Appellants' domicile at the time proceedings were commenced). The Court of Appeal found that the Appellants could not argue that they were domiciled in England and Wales on the grounds that their habitual residence in Spain was only temporary, as raising this argument at such a late stage would be unjust.

Therefore, the Appellate Court came to the same conclusion as the First Instance Court i.e. that the English courts did not have jurisdiction, but for entirely different reasons.

Jurisdiction: the court first seized?

Starlight shipping Co v Allianz Marine & Aviation Versicherungs AG & 26 ORS & Overseas Marine Enterprise INC (Third party)6

We commented previously on the First Instance Decision and parallel Greek proceedings (summarised below) between the insurers and the insured in last year's annual review.

Starlight was the former owner of the vessel ALEXANDROS T, which sunk off the coast of South Africa in May 2006, with the loss of many lives. In August of that year, Starlight (and others) commenced proceedings for the loss against their Lloyd's and company market insurers, who denied the claim, alleging amongst other things that the vessel was unseaworthy with the insureds' knowledge 7. The parties entered into settlement agreements shortly before the trial began. The settlement agreements were in the form of a Tomlin Order. The parties agreed to stay the litigation, save for the purposes of enforcing the terms of the settlement.

Starlight (and others) then brought claims against the insurers in the Greek courts in tort, akin to the torts of defamation and malicious falsehood in English law. In the English courts the insurers sought to enforce the terms of the settlement agreements and brought a new action for damages, alleging that the insureds had breached the exclusive jurisdiction clauses of the settlement agreements.

At first instance, the English Court gave summary judgment for the insurers. The insureds appealed, arguing that the English proceedings should be stayed under Article 27 of the Brussels Regulation (Reg44/2001), as the Greek Court was the court first seized of the proceedings. The Court of Appeal held for the insureds. The Court of Appeal found that although the Greek proceedings were a separate cause of action from the original English proceedings, the causes of action in the new English proceedings and the Greek proceedings (in which the Greek Court was held to be the court first seized) were the same. Therefore, summary judgment for the insurers was set aside and the English proceedings were stayed. It was left to the Greek courts, as the courts first seized, to determine whether the English exclusive jurisdiction clauses under the settlement agreements should be adhered to, and whether the Greek proceedings should be stayed.


The dispute was hard fought, and particularly notable for the way in which insurers were alleged to have procured evidence in support of their unseaworthiness case. In correspondence issued by Starlight's then lawyers they alleged "serious misconduct" by at least one of the insurers, and accused insurers of "behaving in a reckless and irresponsible fashion in making ... an allegation when they have no evidence to substantiate what they allege". At a hearing shortly before trial of the action, the allegations were developed further, in the form of a witness statement from Starlight's lawyer, in which he accused insurers of having paid members of the crew to give false evidence in support of unseaworthiness.

At the same time, Starlight sought to amend its pleaded case to claim, in addition to the insured loss, consequential losses over and above the measure of indemnity to which it was entitled under the policy. It was Starlight's case that, had the defendant insurers complied with their obligations to indemnify in accordance with the terms of the policy, it would have been possible to purchase a replacement vessel. Starlight had thus lost around US$45m by way of increased capital cost, together with chartering losses in excess of US$31m. The Court declined the application to amend, noting that there can be no claim for such losses beyond the measure of the contractual indemnity, as a matter of English law.8

Shortly before the trial was due to start, the Lloyd's market insurers entered into a settlement of the litigation, followed soon after by the company market insurers. Upon the payment of a compromise sum, the parties agreed to resolve the dispute "in full and final settlement of all and any claims [the assured] may have under Policy No ... against the Underwriters in relation to the loss of Alexandros T...". As part of the settlement, the insured also agreed "to Indemnify each Underwriter against any claim that might be brought against it by any of the Assureds or the Claimant's associated companies or relation to the Alexandros T...". The agreement with the company market insurers was expressly subject to "exclusive" English jurisdiction, whereas that concluded with the Lloyd's market insurers was simply stated to be "subject to English law and the jurisdiction of the High Court of London".

The settlement agreements were scheduled to a court order in a form known as a "Tomlin Order", under the provisions of which the parties agreed to stay the litigation, save for the purposes of carrying into effect the terms of the settlement. The effect was to transform the settlement agreements into an order of the court.

There matters rested until some three years later, when Starlight (and others) commenced fresh proceedings against insurers in the Greek courts. In those proceedings, the claimants initially pursued a claim for loss of hire and loss of opportunity; in essence consequential losses in the same or similar form to those previously declined by the English Court.

Insurers responded in two ways. On the one hand, they sought to invoke the Tomlin Order. This recorded a full and final settlement of the dispute, and furthermore an indemnity from Starlight to insurers in relation to any fresh proceedings that might be brought. On the other hand, and without prejudice to their right to relief under the Tomlin Order, they initiated new English proceedings for like relief and damages for breach of the exclusive jurisdiction clauses.

First Instance Decision

Commercial Court, 19 December 2011

The English Court was required to consider a number of issues, including the following:

i) Starlight submitted that the Greek proceedings were not "in relation to the loss of the Alexandros T" or "under" the policies, and therefore fell outside the ambit of the previous settlement agreements; rather these were claims for bad faith brought under the Greek Criminal Code, covering perjury and the like, and should be treated as akin to "fraud". A settlement agreement that was intended to exclude such claims would, they said, have to be very clear in its intent .

The Court rejected this argument. The so-called "fraud exemption" in Satyam Computer Services Ltd v Unpaid Systems Ltd9 applied only to claims unknown at the time of the settlement, whereas in this case Starlight not only knew of the claims it was now asserting but had attempted (unsuccessfully) to introduce them to the English action three years earlier.

The Greek claims all related to the investigations by the insurers (whether in bad faith or otherwise), and to the way in which those investigations had been carried out (whether or not maliciously). As such, they were clearly all claims "in relation to the loss", and in any event were covered by the release in so far as it discharged "any claims [the assured] may have under" the Policy.

ii) Having determined that the subject matter of the Greek claims fell within the settlement release, the Court held that it was also a breach of those agreements for Starlight to bring the said claims by way of litigation in Greece, since the parties had agreed in the settlements to exclusive English jurisdiction. This was expressly so in the case of the company market settlement, but also held to be so in the case of the Lloyd's market agreement even though the word "exclusive" was not used. On this, the judge's conclusions were put this way:

In the absence of any argument that the word exclusive was for some reason... deliberately left out, I am satisfied both by reference to the context and to the fact that the provision would otherwise be idle, that the parties did mean to and intend exclusive jurisdiction.

iii) It was not necessary for the insurers to rely upon fresh English proceedings to enforce the settlement agreements, so the Court held, since the Tomlin Order gave the Court jurisdiction to order the relief sought by the insurers - including their claim for damages for breach of the English jurisdiction clause, and an indemnity as provided for under the settlement agreements. As to the latter, the Court also ordered "fortification" of the indemnity in the form of a fund to meet future losses caused to insurers by Starlight's continued pursuit of the Greek proceedings, in breach of the settlement agreements.

Summary judgment was given for insurers.


UK Court of Appeal, 20 December 2012

The insured appealed and sought a stay of the English proceedings under the Brussels Regulation.

On the procedural points raised the Court of Appeal held, firstly, that a claimant could raise a new point on appeal if the respondent suffered no prejudice which could not be cured by costs. Secondly, it is no bar to an application under Article 27 (or Article 28) of the Brussels Regulation that a defendant had filed an acknowledgement of service and a defence. Thirdly, it is not necessary that a final judgment be set aside before an application for stay can be made. As long as permission to appeal has been given, which it had been in this case, the application could be made.

On the substantive point of whether the English Court was the court first seized, the Court of Appeal had to consider whether the proceedings now brought by the insurers in England (to enforce the settlement agreements and a new claim for damages), involved the same cause of action as the proceedings in Greece. The Court of Appeal stated that it was clear from the authorities that if a cause of action in one Member State is a "mirror image" of a cause of action in another Member State, the cause of action will be regarded as the same and the second action must therefore be stayed, applying Article 27 of the Brussels Regulation.

The key assertion in the Greek proceedings was that the claims were non-contractual claims. The key assertion in the insurers' newly issued proceedings in the English courts was that the non-contractual claims had already been resolved by the settlement agreements. The Court of Appeal held that there was an identity of issues between the proceedings and that the causes of action were in fact the same.

The Court of Appeal then considered whether the causes of action in the insured's original claim in the English courts (i.e. in 2006) were the same as the causes of action in the Greek proceedings. The Court of Appeal held that they were not. The Greek claimants had abandoned their initial contractual claims under the insurance policy and were bringing claims in Greece in tort, based on the alleged misconduct of the insurers. It could not therefore be said that the two causes of action were the same.

The Court of Appeal further held that the rule under English law that a claimant must bring all of its claims at the same time was not an absolute rule and could not, in this case, make the English Court the court first seized. Further, the Court of Appeal held, on a variant of this point, that the original English proceedings had not been 'kept alive' by the present proceedings to enforce the settlement agreements. The original cause of action was over, except for the purposes of suing on the settlement agreements.

In light of these considerations the Court of Appeal concluded that the causes of action in the insurer's new claims in England and the claimants' claims in Greece were essentially the same. The insurers' English applications were therefore stayed and the summary judgment was set aside.


Stay of proceedings

Amlin Corporate Member Ltd v Oriental Assurance Corp10

Court of Appeal, 17 October 2012 The Court of Appeal upheld a first instance decision refusing a stay of proceedings brought by the reinsurers against the reinsured, despite Philippine proceedings pending between the reinsured and the insured. The ruling determined that where, under the reinsurance contract, the reinsurers were bound to follow the settlements of the reinsured, there was no general exception to the normal position that a stay of proceedings could only be granted in rare and compelling circumstances11.

A shipping catastrophe off the coast of the Philippines in June 2008, in which a vessel (the "Princess of the Stars") sailed through and was lost in a typhoon, led to the loss of over 500 lives and the vessel's cargo. In numerous proceedings, cargo owners brought claims against the shipowner and Oriental Assurance Corp ("Oriental"), the Philippine cargo liability insurer.

The policy between Oriental and the insured contained a Typhoon Warranty that the vessel would not set sail whilst a typhoon warning had been issued at its docked port or if the vessel's route might come within the path of the typhoon. The insurers were reinsured by Amlin and others (the "reinsurers"). The reinsurance contract incorporated the conditions of the original policy including, in effectively the same terms, the Typhoon Warranty. Further, the reinsurance contract contained an English law and jurisdiction clause, and a follow the settlements clause.

The reinsurers issued English proceedings seeking a declaration that they were not liable to indemnify Oriental on the basis that the Typhoon Warranty had been breached. Oriental's application to stay the English proceedings was dismissed on 17 February 2012 by Andrew Smith J.

Oriental appealed this decision. Oriental argued on appeal that the normal position under reinsurance contracts (or, at the very least, in situations where the reinsurers were bound to follow the settlements of the reinsured) was that the reinsurers should wait for the reinsured to settle their claim before the reinsurers could determine their liability. This argument was rejected because such an exception would go against the normal position that a stay of proceedings must only be granted in rare and compelling circumstances.

Oriental further argued that there did in fact exist such rare and compelling circumstances to warrant a stay of the English proceedings, on several grounds including: (a) that there was a risk of inconsistency between the English and Philippine courts; (b) that Oriental would be placed in an inherently unfair position by being forced to argue in the English proceedings the precise opposite of its main case in the Philippine proceedings (i.e. that the Typhoon Warranty had not been breached); and (c) that its case in the Philippine courts could potentially be prejudiced by a ruling in the English courts that there had been no breach of the Typhoon Warranty.

Oriental's arguments were rejected. The Court of Appeal held that Andrew Smith J was mindful of the risk of inconsistent judgments and was well within his discretion to decide that such risk was relatively modest. Further, Andrew Smith J was found to be right to take into account the delayed proceedings in the Philippines (estimated to be potentially delayed by up to 10 years). While the Court of Appeal judges did sympathise with Oriental's predicament, they made clear that the decision by Andrew Smith J was correct and that "[a] conclusion does not have to be reached with enthusiasm in order to be right"12.

Late defences by insurers

The English Commercial Court considered two cases in which insurers sought to introduce new defences to the claim very late in the day.

Elafonissos Fishing & Shipping v Aigaion Insurance Co SA13

Commercial Court, 4 April 2012

The Agios Spyridon involved a hull and machinery policy claim arising from storm damage to a fishing vessel while at anchor in Madagascar. The policy contained a warranty to the effect that the vessel was "laid up in port of Mahanjanga", and insurers contended that the vessel was in fact not laid up in port at the time of the loss. They also alleged material non-disclosure.

The matter was due to proceed to trial on 14 May 2012, but on 7 March 2012 insurers sought to add a new defence; that compliance with the lay-up warranty required the vessel to be maintained in "hot lay-up", meaning that she was still manned and with at least her main engine operable. This, they alleged, was the customary meaning of the lay-up warranty, and they sought to adduce expert witness evidence to that effect. They also alleged that the lay-up warranty meant that the vessel would be laid up in a seaworthy condition and in accordance with the port regulations.

The Court permitted the last of these amendments, but refused permission in respect of the balance. Although the assured would have suffered no prejudice by the late amendments (that is to say, no prejudice that could not be compensated in costs), the Court still had to be satisfied in considering such a late application whether the proposed amendments had any real prospect of success. This question should be scrutinised all the more where, as here, a relatively small sum was in issue. In this case, it was held that the insurers had no prospect of showing that the lay-up warranty specifically meant "hot" lay-up as distinct from "cold", or that a vessel not laid up in a seaworthy condition was thereby in breach of any alleged implied warranty. Consequently, the amendments were rejected.

Societe Generale v Wurttembergische Versicherung AG & Others14

Commercial Court, 5 April 2012

The Societe Generale case arose under a policy insuring both precious and non-precious metals, and concerned a US$500m claim for loss of gold in store at the assured's site in Turkey. The insurer's defence had been based upon breach of warranty and the date when title to the gold had passed to the insured under Turkish law. However, the insurer latterly sought to amend its defence to include an allegation of misrepresentation or non-disclosure. Specifically, it was said that the insured had failed to disclose that no shipments of non-precious metals were ever intended, and that the premium had been mis-priced accordingly.

The Court noted that the amendments, if granted, would "make a mockery" of the existing timetable, and said the onus was clearly on the insurer to show that they were just and necessary. However, in this case the amendments were pleaded with particularity, and had a prospect of success, which left the Court to consider the reasons for lateness, and in particular whether the insurers should have considered the point earlier. Again, prejudice to the insured was also a factor. On balance, the Court said it was just to allow the insurers to amend their defence, although considerable leeway would be given to the insureds in responding to the amendments.

The Court noted that there was less readiness nowadays to accept late amendments than was the case in the past. Although the balance was held to be in favour of allowing the amendments in this case, insurers should be careful not to delay in bringing forward all defences available to them. A defence asserted late in the day that could and should be considered much earlier will receive little sympathy.

Declaration of non-liability and insured's failure to notify

Axa Insurance UK PLC v Thermonex Limited (in liquidation)15

London Mercantile Court, 8 August 2012

In this case, AXA successfully obtained negative declaratory relief stating that it was not liable to the defendant insured under a Commercial Combined policy of insurance because, amongst other reasons, the insured failed to notify AXA properly of the loss.

The potential claims in respect of which the negative declaratory relief was sought by AXA arose from Thermonex's involvement in a construction project in Ireland between 2004 and 2008 for the development of 118 golf villa residences in County Kildare. In September 2009, the main contractor, Gem Construction Company Ltd ("Gem"), started proceedings against Thermonex and another company in the High Court of Ireland claiming, inter alia, damages for breach of contract and/or warranty and negligence arising out of Thermonex's involvement in the design, supply and installation of some basements at the development. Leaks were alleged to have occurred and remedial works were carried out at an estimated cost of just under €4.1m. Gem's solicitors, on learning that Thermonex had gone into liquidation, informed AXA in the middle of 2011 that unless AXA confirmed coverage for Thermonex in respect Gem's claims it would seek to join AXA to the Irish proceedings.

The case is rather unusual in that Thermonex never notified AXA of any claim under any part of the policy. Thermonex had taken the view that it did not have any claim under the policy and that only its professional indemnity policy with Chartis might respond to the claims made by Gem. However, on the basis of Gem's intention to join AXA to the Irish proceedings, AXA sought negative declaratory relief.

Brown J held that AXA had a complete defence to any claim under the policy on the grounds that Thermonex failed to notify AXA of any claim either at all or timeously. The Public Liability section of the policy contained a notification provision at Special Condition 4 that, in the event of any occurrence which may give rise to a claim, the insured shall immediately give written full particulars to AXA. Special Condition 4 did not expressly state that compliance with the notification provisions was a condition precedent to liability, but Special Condition 1 stated that due observance of the conditions of the policy was a condition precedent to the liability of AXA. Brown J observed that it is well established that such a general provision in insurance contracts is effective to create conditions precedent.

Brown J considered whether the correspondence from Gem's solicitors to AXA in 2011 constituted sufficient notification for the purpose of the policy. Brown J said that, even ignoring the fact that notification could in no way be said to be given immediately, this argument runs into fundamental difficulty in that the notification conditions required the insured to give notice to AXA. Brown J highlighted that the recent trend of authorities suggests that the formal requirements of notification are fairly undemanding but that where they do impose specific requirements they have to been met.

Interpretation of policy and scope of coverage

Interpretation of warranties - Hull and machinery policy

Elafonissos Fishing & Shipping v Aigaion Insurance Co SA16

Commercial Court, 31 May 2012

Under English law, the legal effect of breach of warranty is draconian, entitling the insurer to treat himself as discharged from all liability under the policy, irrespective of causation. For this reason, warranties are interpreted strictly - a position vividly illustrated by the decision of the Court of Appeal in Hussain v Brown [1995].

In that case, involving a property policy, the assured had been asked in the proposal form "are any premises fitted with any system of intruder alarm?". The assured gave the answer "yes", which was true at the time. However, it had ceased to be case by the time the premises were damaged by a fire some five months later, in that there was no longer an operable intruder alarm system in place. Insurers failed in their argument that the warranty imposed an ongoing obligation to maintain the warranted system. If underwriters wished to impose such a warranty, said the Court of Appeal, it was open to them to specify it.

A similar point was considered more recently in the Agios Spyridon. The dispute in that case involved a hull and machinery policy claim arising from storm damage to a fishing vessel while at anchor in Madagascar. The policy contained a warranty to the effect that the vessel was "laid up ... in port of Mahanjanga". Shortly before trial, insurers sought to amend their defence, seeking to plead a case of breach of the warranty. According to the customary meaning of the warranty, argued insurers, the vessel had to be in "hot lay-up", meaning that she was still manned, and with at least her main engine operable. They also alleged that the lay-up warranty meant that the vessel would be laid up in a seaworthy condition. In a judgment handed down on 4 April 201217, the Court refused to allow the amendments, on the grounds that neither had any real prospect of success.

The Court did, however, allow the insurers to argue that "laid up in port" meant laid up in accordance with the regulations of the relevant port, it being the insurers' case that the assured had failed to comply with those regulations. The matter proceeded to trial on that question, among various others.

On the facts, the Court found at trial that insurers had failed to prove the existence of any formal written "regulations" governing lay-up at Mahanjanga. In so far as there might have existed some informal "oral requirements" these would not be enough. However, the judge went on to state that he would have rejected insurers' argument, as a matter of law, even if the insurers had been able to point to written regulations that had not been complied with. He noted that the express warranty simply required the vessel to be "laid up from 1/11/06 until 28/2/07 ... in Port of Mahajanga". This warranty was not breached. During the period specified, the vessel was in the port of Mahajanga, and it was laid up. Citing the Hussain v Brown case, the Court held that there was no basis for implying some additional requirement as to compliance with the port regulations. If insurers wanted such protection, said the Court, then it was up to them to stipulate it in clear terms.

This case provides a further lesson for insurers in connection with the drafting of warranties. Literal compliance will usually be required, but is sufficient.

The timing of damage

European Group Ltd & Others v Chartis Insurance UK Ltd18

Commercial Court, 11 May 2012

The Claimants in this case were insurers under an Erection All Risks ("EAR") policy, issued in connection with a project for the installation of economiser blocks to a UK waste recycling plant. The Defendants were the marine project cargo insurers in relation to the same equipment, which had been produced by a manufacturer in Romania and was required to be brought to the site by road to Constanta and from there by ship to Southampton.

Both policies also covered delay in start up caused by damage to the property covered by the respective policy. Each policy also incorporated a "50/50 clause", providing that, in the event it was not possible to ascertain whether the damage occurred before or after the arrival of the equipment at the facility, the two policies would each contribute 50% to the adjusted claim.

After the economisers had been on site for between four and six months, fatigue crack damage was discovered in weld joints where vertical tubes in the economisers were welded to tubular headers. It was common ground that the fatigue cracking was caused by resonant vibration occurring between the time the blocks left the factory in Romania and the discovery of the cracks on site. The EAR insurers settled the claim in full, but without prejudice to their position that the damage in fact occurred during transit and so was covered by the marine project cargo policy alone. Accordingly, they sought to recover the appropriate indemnity amount from the insurers under the cargo policy, having taken an assignment of the insureds rights.

The cargo policy was on the Institute Cargo Clauses (A), which exclude liability for loss or damage caused by inherent vice. However, the normal ICC(A) exclusion in respect of insufficiency of packing was amended, such that it applied only to packing deficiencies known to the assured.

The marine insurers contended that the damage had been caused by wind excitation after the arrival and installation of the blocks. Alternatively, they argued that, if the damage occurred during transit, its proximate cause was inherent vice, on account of stresses introduced in the welding procedure during manufacture, or because of defects in the welds themselves.

After hearing the parties' expert evidence, the Court was satisfied that resonant vibration by wind buffeting could effectively be ruled out as a cause of the loss. As a mechanism to explain the damage, it was held to be "not a realistic possibility".

As to the 50/50 clause in the two policies, it was held that this would be applicable only if there was such uncertainty that it was not possible to reach any conclusion as to when the damage occurred. Having eliminated the possibility of wind excitation, therefore, the Court went on to consider the alternative hypothesis, namely vibration during transit. If this alternative was, in fact, "more likely than not" then the 50/50 clause would not apply. On that question, the Court accepted the Claimants' evidence that the overland leg in Romania was sufficiently rough to have caused the necessary vibration, and that enough of the packing was missing or ineffective to account for the damage. Accordingly, damage during the road transport in Romania was a realistic and credible possibility, perhaps exacerbated by further damage during the road journey in England. It was much more the likely of the two alternative explanations.

As to inherent vice, the Court was satisfied that the condition of the economiser blocks when they left the factory was such that they could reasonably be expected to survive the transportation, if properly packed. There was nothing in the inherent condition or design of the economisers which could be described as a proximate cause of the loss. On the evidence, therefore, the damage arose through an external fortuity during transit, translating into an insured loss under the marine project cargo policy, from which the EAR insurers were entitled to seek reimbursement in full.

Result: Judgment for EAR insurers.

Loss of cargo in labour dispute

Clothing Management Technology Ltd v Beazley Solutions Limited19

London Mercantile Court, 26 March 2012

Although the sum at issue in this case was relatively modest, it gave rise to a good number of issues central to the marine cargo insurance market.

The assured, Clothing Management Technology ("CMT"), was (and still is) a supplier of garments to the UK retail sector. For a number of years, it had sent samples and raw materials to a factory in Morocco for mass production of its goods. In September 2008, the owners of the factory disappeared, leaving the workers unpaid, with the result that production slowed or stopped. Initially, CMT entered into direct dialogue with the workers, and made a payment to them to settle unpaid wages and secure the release of a consignment of goods awaited by its UK High Street customers. Unfortunately, by November 2008 wages were in further arrears and the relationship broke down. At that point, the workers refused to resume work and they declined to release the remaining goods and materials.

CMT pursued a resulting claim under its insurance, a marine cargo policy covering all sendings of garments, but which was also expressly extended to include goods whilst in store at the Moroccan factory. The parties doubtless appreciated that pre-shipment storage in Morocco would likely be regarded as something other than a marine insurance risk, and accordingly the policy expressly provided that "all the terms, conditions, warranties and other matters contained within the Marine Insurance Act 1906 shall be applicable hereto", including those elements of cover that might not otherwise be subject to it.

Actual or constructive total loss

The first question concerned the nature of loss. CMT's primary case was that it had suffered an actual total loss ("ATL"),20 having been "irretrievably deprived" of the goods. The Court rejected this. Referring to the recent decision of the Court of Appeal in Masefield AG v Amlin [2011]21, the Court noted that the test of an ATL was to be applied with "utmost rigour". In this case, the goods still existed, and might well have been recoverable by taking legal action locally, or by paying the further sum of wages demanded by the workers. While there may have been good business reasons for not taking either of these courses of action, the fact remained that the goods were not "irretrievably lost".

In the alternative, CMT argued for a constructive total loss ("CTL"). To prove a CTL it is enough that an ATL appears to be unavoidable, or that it cannot be avoided without an expenditure which would exceed the value of the cargo.22 Under section 60(2) of the Marine Insurance Act 1906, there will also be a CTL "...where the assured is deprived of possession of his ... goods and ... it is unlikely that he can recover [them]".23

In most cases, however, a CTL requires the assured to have tendered a notice of abandonment, and there had been no such express notice in this case. Nevertheless, the assured is relieved of the requirement to give notice if "at the time when the assured receives information about the loss, there would be no possibility of benefit to the insurer if notice were given to him".

On the facts of this case, the Court held that there was a CTL as at November 2008. At that point, it had become clear that the garments were not going to be released within a reasonable time, that is to say within a time frame corresponding to the commercial shelf life of the goods in question. Moreover, there would have been no possibility of benefit to the insurer had notice of abandonment been given, since there were no realistic salvage opportunities. In any case, the Court noted, the insurers by then knew what was going on and could have intervened if they wanted to.

Failure to notify

On the basis that a CTL was proved, insurers relied in the alternative upon the assured's alleged failure to give "immediate notice in writing" and/or "in any event within seven (7) working days" both being expressed as a "condition precedent" to liability in the policy. Notification, they said, should have been given when the problem first arose in September 2008. In the event, insurers were not advised until 8 October, and even then they received less than the full picture.

Again, insurers' defence was rejected. The obligation to notify could only arise at the point when the assured perceived the loss of goods to have become likely. Up to the end of September, CMT believed the problem with the workers had been contained, a deal having been struck by which work would resume and the company would receive finished goods. As late as 19 and 20 October, the workers were sending out finished goods. Consequently, CMT were not in breach of the notification requirement.


Cover under the policy was expressed to be subject to the Institute Cargo Clauses (A) and to the Institute Strikes Clauses (Cargo). However, the policy also contained a provision excluding loss by theft "unless following forcible and/or violent entry". There was no such violent entry in this case, argued insurers, and so the claim failed. The court rejected insurers' argument, holding that the proximate cause of loss was not theft to begin with, and hence the exclusion was not engaged. There was no proof as to exactly who took what, and when, and in any case the workers may have been doing no more than exercising legitimate rights over their employer's assets, in pursuit of an unpaid wages claim.

Withholding of labour

In so far as the loss of the cargo fell within the insuring terms of the Institute Strikes Clauses (Cargo), insurers contended that the true cause was within the exclusion at clause 3.7 of those clauses, being "loss, damage or expense arising from the absence, shortage or withholding of labour ... resulting from any strike [or] labour disturbance...". This argument was also rejected. The Court held that exclusion 3.7 was concerned only with consequential loss proceeding from the fact of a labour disturbance or withdrawal of labour, whereas the claim in this case was for the direct physical deprivation of the cargo caused by the strike, a peril covered by the Institute Strikes Clauses.

Capture, seizure etc

In the further alternative, insurers contended that the true cause fell within exclusion 6.2 to ICC(A), namely "capture, seizure, arrest, restraint or detainment". However, this exclusion calls for an act by some government or other body in authority, which was not the case here. While insurers suggested that the local governor exercised the "say so" as to who could enter the factory, they were unable to produce any court order indicating that the goods had been detained pursuant to formal judicial process.

Sue and labour

With respect to sue and labour, insurers argued that CMT was in breach of the obligation, at section 78(4) of the Marine Insurance Act, to "take such measures as may be reasonable for the purpose of averting or minimising a loss". Specifically, they complained that CMT had sent further fabric to Morocco on 18 and 19 October, at a time when the situation was already volatile and unpredictable. With hindsight, the Court agreed that this was unwise, but it accepted CMT's case that it was a risk worth taking, as part of an overall strategy to finish the garments for which there were existing orders, and at a time when CMT reasonably believed the situation had been brought under control. Citing the leading authority of Philips LJ in State of Netherlands v Youell [1998]24, the Court noted that it would be a "rare case where breach of [the duty] is so significant as to be held to displace the prior insured peril as the proximate cause of the loss".


The last remaining significant issue was that of valuation, the assured having pursued a claim based upon the value of the goods stated in the invoices rendered to its own High Street customers.

The policy stated the Basis of Valuation ("BOV") to be "Invoice Value, plus 0%, plus duty if incurred". Insurers contended that "invoice value" could only mean the incoming wholesale invoice value, and since there were no relevant wholesale invoices for these purposes, the policy must in fact be taken as an unvalued policy25. In that case, the amount payable under the policy was the insurable value26, being prime cost (that is, the cost of the raw materials and labour) plus the cost of freight and insurance on an arrived basis.

Alternatively, argued insurers, if the policy were to be seen as a valued policy the value could not include the assured's expected on-sale profit element. The percentage uplift in the BOV clause was designed to take account of that very profit element, but in this case the parties had agreed that such uplift would be 0%.

The Court also rejected this argument, holding that this was in fact a valued policy and that the value in question was the price stated in the assured's onward invoices to its customers. That reflected the true commercial operation that the parties knew was being insured. It was clear to both sides, said the Court, that CMT would have wanted to insure against the loss that it would suffer if the garments did not come out of the factory, namely the price customers would pay for them.

Mesothelioma and the insurance trigger

Durham v BAI27

Supreme Court, 28 March 2012


This litigation concerned claims brought against insured employers by sufferers of mesothelioma, an incurable form of lung cancer caused by prolonged exposure to asbestos. A notable characteristic of the disease is that it can take many decades for it to develop after the original exposure to asbestos, and in some cases it might only be diagnosed by way of postmortem. In the past, the medical evidence suggested that malignant changes associated with the disease typically occurred about 10 years before the onset of symptoms, although more recently this has been revised by many experts to five years. At any rate, once the disease is identified the prognosis is poor. Most sufferers die within about 18 months of diagnosis. The condition is a major issue for the employers' liability insurance market, as current projections forecast a peak in the number of mesothelioma sufferers in the next 20 years.

Traditionally, EL insurers in the UK have as a matter of practice adopted the "exposure" principle in determining cover for mesothelioma claims. In other words, the responsive EL policy will be that in place at the time when the claimant was exposed to asbestos, rather than that prevailing at the time of onset of the symptoms, or diagnosis of the condition. Where, as is common, exposure spanned a number of policy years (perhaps an entire working life) liability would be shared between the various insurance interests pro rata to their time on risk.

That practice was thrown into doubt by the decision of the Court of Appeal in Bolton Metropolitan Borough Council v Municipal Mutual Insurance [2006]28. Importantly, the Bolton case was concerned with public liability, not employers' liability insurance. Under the terms of the relevant policy in Bolton, the insurer agreed to indemnify the insured in the event that it became liable for injury or illness which "occurs during the currency of the policy". The Court held that the injury to mesothelioma sufferers occurred not when they were exposed to asbestos but much later, at the point when they became fatally ill, which typically was thought at the time to be about 10 years before exhibiting outward symptoms.

First instance decision

Commercial Court, 21 November 2008

The Bolton decision caused many EL insurers to look again at their approach to settlement, as it appeared that they might not be liable to indemnify on a time exposed basis after all. Accordingly, the matter went before the Commercial Court in a series of consolidated test cases, known as the Employers' Liability Policy Trigger Litigation, and on which Judgment was issued on 21 November 2008.

Generally speaking, the Commercial Court held that EL policies were not the same as public liability insurance. A typical EL policy was not concerned with the date of "occurrence", so much as the point at which "injury or disease was sustained or contracted" or "injury or disease caused". The Judge held these latter two formulations to be synonymous; the trigger for payment under an EL policy was in each case the date of exposure, such that several policies covering an extended period of exposure to asbestos would continue to be liable, as had been assumed previously.


UK Court of Appeal, 8 October 2010

The insurers appealed against this decision, upon which the Court of Appeal handed down its judgment on 10 October 2010.

Mindful that the various policies contained slightly different wordings, the judges in the Court of Appeal considered separately the meaning of the phrase "injury sustained" and "disease contracted". Agreeing with the insurers, both Rix LJ and Burnton LJ held that an "injury" was "sustained" only when the claimant became ill, and hence the "sustained" wording in an EL policy had the same meaning as the "occurring" wording in the public liability policy considered in the Bolton case. To this extent, therefore, they disagreed with the decision of the Commercial Court. While it was true that this meaning would, on the face of it, conflict with the apparent commercial purpose of an EL policy, it was not an absurd or meaningless or irrational interpretation.

As to the meaning of the phrase "disease contracted", all of the judges in the Court of Appeal held that this was capable of referring to the disease in its origin (i.e. exposure), albeit for slightly different reasons. The result, by a majority, was that EL policies containing "injury sustained" wording were found not to be responsive to mesothelioma claims on an exposure basis, whereas the reverse was true of those issued on a "contracted" basis.

Supreme Court

UK Supreme Court, 28 March 2012

The matter proceeded then to the Supreme Court, in which both sides appealed. In judgment handed down on 28 March 2012, the Supreme Court upheld the view of the Court of Appeal that policies with "contracted" language were obliged to indemnify by reference to the time of exposure, and by a majority found the same to be true of those with the "sustained" wording, thereby overturning the Court of Appeal on the latter point.

In arriving at the proper construction of the "sustained" wording, it was necessary to look beyond the strict words and to consider the general nature and purpose of the policies. If the purpose of employer's liability was to focus upon the consequences of employment activities during the insurance period, such purpose would not be served if "sustained" were to be understood as meaning "manifested". In most cases, the condition would only become manifest long after the employment had come to an end. This interpretation was also supported by the implementation of the Employers' Liability (Compulsory Insurance) Act 1969, after which employers were obliged to take out insurance in respect of bodily injury sustained by employees and arising out of and in the course of their employment. Against this background, the Supreme Court held that the "sustained" trigger was concerned with the causation of the disease, being the exposure from which the disease arose, even though it may only manifest itself subsequently.

This still left the obligation to demonstrate the presence of an actual causal link between exposure to which the employer had subjected its employees and the manifestation of a disease many years later. The Supreme Court acknowledged that exposure to asbestos could in part be attributable to general environmental dust, and that in some cases mesothelioma could be due to an unknown cause unconnected with asbestos altogether. However, where such independent factors could each be sufficient to cause the disease, the majority of the Supreme Court was satisfied that the case could be made out on a weaker causal link. Applying the principle in Fairchild v Glenhaven Funeral Services Ltd [2001]29, it was enough that exposure in the course of employment could have caused the mesothelioma, even though it could not be shown as a matter of probability to have done so.

PI insurance – Mitigation costs and dominant purpose

Standard Life Assurance Ltd v Ace European Ltd & Others30

In the first instance decision, the Commercial Court held that the insured was entitled to claim under a professional indemnity policy for the costs incurred in preventing or reducing third party claims, ("Mitigation Costs"). The insurers appealed, arguing that the Claimant's purpose in making the cash injection had been to prevent brand damage and not the prevention of third party claims; and therefore the insurers' liability should have been apportioned. The Court of Appeal refused the appeal.


This dispute arose under a professional indemnity policy issued by the Defendant insurers to the Claimant, Standard Life ("SLAL"). The claim concerned the operation of one of SLAL's pension funds, which had been marketed as a temporary home for short term investment, and described as being invested in cash, though by 2007 the fund's assets included a substantial proportion of asset backed securities. Following the failure of Lehman Brothers in September 2008, trades in the underlying securities came to a halt, rendering the fund illiquid and increasingly difficult to value.

In January 2009, SLAL took the decision to switch to a different valuation model, resulting in a one-off one-day fall in value of units in the fund of around 4.8%. This generated a mass of complaints and claims from customers, and severe pressure from the Financial Services Authority.

Standard Life's research suggested that some 64%, by value, of customers invested in the fund would have valid claims for mis-selling, equating to an exposure of £124 million, on the assumption that 100% of those entitled to claim would in fact do so. The company considered setting up a claims process and inviting claims to be met on a case by case basis. However, it subsequently decided that a better option was to restore the one-day 4.8% fall in the fund by means of a cash injection into the fund of just under £82 million. It also made payments totalling nearly £25 million to customers who had left the fund since the price reduction to compensate them for the 4.8% fall. Arguably, this solution produced a "windfall" for those investors who it was felt, at least by some, did not have a valid claim.

Having made these payments, SLAL sought an indemnity under the PI policy, on the grounds that the payments constituted Mitigation Costs, defined under the policy as follows:

...any payment of loss, costs or expenses reasonably and necessarily incurred by the assured in taking action to avoid a third party claim or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this Policy...

Insurers denied liability. Their main arguments were as follows:

i) that the payments were not incurred for the purposes of avoiding or reducing claims. Rather, their dominant purpose was to avoid or reduce damage to SLAL's brand. This was partly evidenced by the fact that the beneficiaries of the injection included customers who it was felt had no mis-selling claim to begin with;

ii) though the payments made by SLAL may have been entirely "reasonable" in pursuit of SLAL's desire to "do the right thing", they were (in whole or in part) not "necessarily" incurred for the purpose of avoiding or reducing third party claims;

iii) in so far as SLAL's motive for the payments was other than the avoidance or reduction of claims, any corresponding right to a policy indemnity as Mitigation Costs must be reduced accordingly, by way of apportionment. Citing marine insurance authority,31 insurers gave the example of under-insurance, where sue and labour expenditure is treated as incurred partly for the benefit of the insurers and partly for the insureds as to their uninsured interest, each to their due proportion.

First Instance Decision

Commercial Court, 1 February 2012 The Commercial Court found for the insured, SLAL, holding that the payments qualified as a recoverable cost falling within the definition of Mitigation Costs. It was not necessary to show that avoiding or reducing claims was the dominant purpose or motive for the payments. Indeed, the court held that SLAL's motive in making the payment was irrelevant, not least because it would often be difficult to determine the motive of a large organisation such as SLAL. It was enough that the payment was made in taking action to avoid or reduce a third party claim or claims, of a type that would have been covered under the policy.

As to the meaning of "necessarily", the court accepted that this presented the insured with a "high threshold"32, but added that the precise meaning must depend upon the context. It could not be said that Option A was not "necessarily" undertaken merely because it would have been possible to pursue an alternative Option B. By way of example, the Court noted that it was "possible" or "open" for a passenger not to wear a seatbelt but it did not follow that it is not "necessary" to wear a seatbelt to avoid or to reduce the risk of injury in a car accident.

As to apportionment, the judge considered this a novel concept outside of marine insurance, and more particularly in the context of liability insurance. While there was less objection, in principle, to apportionment applying in the specific context of costs incurred by way of mitigation, the Court said that it was a matter of policy construction – rather than legal principle – that would determine whether apportionment should in fact occur in the relevant circumstances. In this case, the wording of the policy did not support a case for apportionment. Provided it could be said that the relevant costs were reasonably and necessarily incurred in taking action to avoid or to reduce third party claims of the stipulated type, then under the terms of the policy such expenditure fell within the definition of Mitigation Costs and was recoverable in full. There was nothing in the language of the clause overlaying a requirement to apportion those costs simply because some further or additional benefit was derived by the insured in incurring them. The judge noted that the words "solely" or "exclusively" did not appear in the clause, and there was no justification for importing them into the wording.


UK Court of Appeal, 18 December 2012

The insurers appealed against the conclusion by the trial judge, Elder J, that no apportionment was required so that the insured was entitled to recover the full amount of the cash injection.

The insurers argued that, unless the policy otherwise provides, there is a rule of law which requires in cases such as the present, an apportionment of the Mitigation Costs by reference to the respective insured and uninsured interests at risk and sought to be preserved by that expenditure. The insurers therefore argued that in this case neither brand damage nor liabilities to third parties in excess of £100M in aggregate were insured interests and, therefore, the insured should not have been entitled to the full amount of the cash injection.

The Court of Appeal rejected this argument. Under the policy the insurers undertook to indemnify the Assured for Mitigation costs. The trial judge found that the payment by the Claimant had been both reasonably and necessarily incurred in taking action to avoid or reduce third party claims and therefore fell within the scope of Mitigation Costs under the policy, against which permission to appeal was refused. The Court of Appeal held that any apportionment of the costs would therefore involve the insurers failing to honour their promise to indemnify the insured for those costs. The Court of Appeal further held that it was clear from the authorities that the rationale underlying the principle of apportionment within marine property insurance has no place in liability insurance and it would be irrational and unprincipled to attempt to introduce it. The extension of the principle of apportionment to the liability context would produce great uncertainty due to the fact that the liability sought to be avoided would often be difficult to quantify.

Judgment was given for the insured. The insurers were therefore required to indemnify SLAL in respect of the entirety of the cash injection.

Non-disclosure, want of due diligence and aggregation

Sealion Shipping Ltd & Anor v Valiant Insurance Co33

We reported on the first instance decision in this case in January last year.

In the first instance decision, the Commercial Court held that the insured was entitled to claim under a loss of hire policy following technical faults which had occurred to its vessel. The insurers appealed, arguing that there had been three separate technical faults, none of which, taken individually, caused a loss of hire for more than 21 days as stipulated by the policy, and therefore the insured was not entitled to claim. The Court of Appeal refused the appeal.


This case concerned a loss of hire claim by the owners of the "TOISA PISCES", a support vessel used in connection with drilling operations in the Gulf of Mexico, and which at the relevant time was under charter to the Mexican oil company, Pemex.

On 25 February 2009, the vessel suffered a motor breakdown in one of the thrusters, caused by a short circuit in the port motor stator core. Pemex placed the vessel off hire, for which the Claimant owners pursued a corresponding claim under their loss of hire policy, equivalent to the policy limit of 30 days.

Insurers denied the claim and contended that they were entitled to avoid the policy on grounds of material non-disclosure and/or misrepresentation. In the alternative, they relied upon a policy defence of want of due diligence by the assureds.

Firstly, the insurers pointed to an undisclosed incident in 2004, when the starboard motor had failed due to a loose stator, causing the vessel to be off hire for 7½ days. At that time, the vessel was insured for loss of hire by another insurer, Transmarine, but under a policy imposing a 34 day excess. Consequently, no policy claim arose, although the incident was disclosed to Transmarine on subsequent renewal.

The repairs in 2004 involved the replacement of the motor, although the old motor was repaired and kept in storage. A further incident followed in 2005, when vibration was detected in the port motor, for which again a loose stator was thought to be responsible. Upon inspection, however, the cause was found to be a problem with a rotor, which was replaced with a rotor from the old starboard motor. Both the 2004 and 2005 incidents were claimed for under the prevailing hull and machinery policy.

After the 2005-06 policy, the insured stopped taking out loss of hire insurance, but decided to resume loss of hire cover from 2008, at which point their brokers approached the defendant insurers, Valiant. It was stated during the broking process that the vessel had suffered only one hull and machinery claim, and noted that the vessel had no history of major business interruption. The loss of hire cover was duly issued, with a 30 day limit and subject to a 21 day excess in respect of machinery breakdown. The insuring clause in the policy also contained the standard exception with respect to breakdowns resulting from the assured's "want of due diligence".34

Following the February 2009 breakdown, the port motor was replaced with the old starboard motor, but during testing two further failures were experienced, on 11 March and 25 April 2009, and the vessel was off hire in total for almost three months. In the alternative to the avoidance and due diligence defences, insurers contended that the events of 2009, in fact, constituted three separate breakdowns, each attracting an excess of 21 days, and since no single breakdown was responsible for more than 21 days loss of hire, no claim was payable.

First Instance Decision

Commercial Court, 20 January 2012

The Commercial Court found for the insured on all issues. On the question of avoidance, the Court held that the undisclosed loss of hire in 2004 was not material. It was for a short period only, far less than the 21 day excess imposed by the Valiant policy, it was more than four years before the current policy and it had not resulted in a claim on the prior policy. Moreover, the fact that the brokers had seen fit to advise the 2004 loss of hire to Transmarine did not render material to the Valiant policy something which, objectively, was not so. Similarly, in the proper context, the statement that there was no history of major business interruption was true.

As to the prior hull claims, neither of these was in fact material to the loss of hire risk underwritten by Valiant. They could only be relevant insofar as they had given rise to any (undisclosed) period of loss of hire, and, since the latter had been found not material, the same had to be true of the hull claims. The fact that the brokers had elected to disclose one hull claim did not render the second a material fact warranting disclosure. In other words, if the hull claims were immaterial, they remained so, even if one was mentioned and not the other.

As to due diligence, want of due diligence meant negligence, or in other words "a lack of reasonable care".35 Insurers complained that the insured could have diagnosed the problem with the port stator following the earlier inspection or at any rate prior to its breakdown, but failed to take the appropriate steps. Having considered the expert evidence, the Court rejected this. There was no reason to doubt the adequacy of the prior inspection when the stator was found to be secure, and the rotor was diagnosed as the cause. No problem was then identified with the stator.

Finally, on the question of aggregation, it was accepted that there was no technical causal link between the failures on 25 February 2009 and those experienced on 11 March and 25 April 2009. They were therefore three separate "occurrences". Nevertheless, so the Court found, the insured was entitled to treat the entire 82 days off hire as being consequent upon the original breakdown, even though other work may have been undertaken during that time. Doing the best they could, the insureds could not have made the repair time any shorter. The reality is that after the failure of the port motor on 25 February 2009, one thing led to another. The insureds had reasonably tried to deal with the problem by substituting the starboard motor. Had this succeeded, there would have been no claim for loss of hire at all. Unfortunately, a separate hydraulics failure had frustrated that effort. When the starboard motor was eventually installed, it failed after a couple of days at sea, with the result that the process of substitution had to be undertaken all over again. Consequently, the whole period counted from the date of the original breakdown, and the insured was entitled to pursue a claim for a limits loss of 30 days loss of hire.


UK Court of Appeal, 14 December 2012

The insurers appealed against part of the judgment of Blair J on the grounds of aggregation and the operation of the policy excess clause. As to whether the three separate technical failures should have triggered three separate excess periods, the Court of Appeal held that this was a question of causation, which was a fact-sensitive issue to be determined by the trial judge. The Court of Appeal saw no reason to overturn the decision of the trial judge, and in any event, agreed that the second and third technical failures had been an "incidental vicissitude" of the events set in motion by the first breakdown. The later failures had therefore not broken the chain of causation.

In relation to the construction of the policy, the Court of Appeal held that the policy did not oblige account to be taken of multiple excess periods in this case but that this was again an argument of causation, which the Court of Appeal had already considered.

In dismissing the appeal, the Court of Appeal held that the first technical failure had had continuing effect causing a loss of hire of 82 days. The insureds had therefore been entitled to make a claim under the loss of hire policy and were entitled to the indemnity awarded by the trial judge.

Court applies ordinary and literal meaning to "theft"

Ted Baker PLC & Anor v AXA Insurance UK PLC & Others36

Commercial Court, 25 May 2012

The Court interpreted "theft" literally in a commercial combined policy such that direct losses arising from non forcible or violent theft by employees were covered. Lacking any ambiguity in the wording of the policy, the Court found that it was not necessary, as the defendants alleged, for a literal interpretation to give way to a business commonsense meaning based on the facts of the case.


The insured, Ted Baker PLC ("Ted Baker"), investigated losses in stock from one of its warehouses over the 2006-2008 period and found that one of its employees had been stealing. The employee was subsequently arrested and pleaded guilty in relation to stock stolen between 2000 and 2008. Ted Baker claimed under its insurance policy with AXA Insurance UK PLC ("AXA") and other co-insurers for certain periods, under loss of stock and business interruption provisions.

AXA argued that the wording did not, as a matter of construction, cover theft by an employee and that any such cover would only have been available to Ted Baker under a discrete form Fidelity Insurance cover which was available from AXA.

The AXA policy provided a "Theft" section which provided cover for theft by forcible or violent means. This was extended by endorsement to provide additional cover for non forcible or violent theft.

A separate section entitled "Theft by Employee Section" was not selected by Ted Baker and did not therefore form part of the cover provided by AXA.

Interpretation of "theft"

The Court acknowledged that, in circumstances where a term of a contract is open to more than one interpretation, it may be appropriate to adopt an interpretation that is most consistent with business commonsense.

In this case, however, the Court disagreed with the AXA's arguments that the supposed business commonsense of the wording in the AXA policy should overrule a literal interpretation. The Court did not consider the wording to be open to more than one interpretation - which provided cover for non forcible / violent theft by an employee.

The Court did consider whether the non-selection of the Theft by Employee Section could be construed in favour of AXA. The Court referred to Mopani Copper Mines v Millennium Underwriting37 in which the court held that deleted words could be considered to resolve ambiguity of neighbouring paragraphs. However, the Court here found that the AXA policy was simply considered on its wording and the Court found no need to rely on the selection or nonselection of the Theft by Employee Section at all as doing so would "...involve reading words into that theft extension endorsement which are not there".

Noting an interest not sufficient

Eurocrest Ventures v Zurich Insurance38

UK High Court (Chancery division), 25 April 2012

The High Court held that noting the interest of a lessee on an insurance policy did not mean that the policy was concluded for the benefit of the lessee.

Eurocrest was the assignee lessee of two flats. Mr Halpern was the freeholder. Following a partial flooding of the commercial premises below the Eurocrest flats, the lessee of those premises commenced proceedings against Mr Halpern for breach of covenant, nuisance and negligence. Mr Halpern denied liability, and issued part 20 proceedings against Eurocrest, for an indemnity against any liability to the original claimant.

Eurocrest, in turn, sought a declaration that the Defendants, Zurich, were obliged to indemnify it against Mr Halpern's part 20 claim on the basis that Eurocrest was entitled to the benefit of the liability cover in Mr Halpern's insurance policy, issued by Zurich.

Eurocrest attempted to argue that it was entitled to the benefit of the policy because reference was made in the certificate of insurance to the noting of interests of various lessees in the Property. The certificate stated:

It is understood and agreed, that the interest of various lessees in the Property Insured may be noted at the request of the Insured but only in respect of the parts of the premises demised by the lease to the individual tenant.

The court held that the, "noting of an interest means no more than recording its existence", and did not "give rise to an additional and separate insurance of the lease". The fact that the interests of other lessees could have been noted, even though the interest of Eurocrest was not in fact noted, would not have given rise to an additional and separate insurance of the lease.

Furthermore, the reference to the noting of other interests appeared only under Section A of the policy which was concerned with material damage, not with the public liability cover.

Eurocrest also argued that a clause within the lease, pursuant to which the Lessor covenanted to insure the building, provided Eurocrest with the benefits of the policy taken out by the freeholder, Mr Halpern. Judge Donaldson, did not agree that this clause provided such a right. The judge commented that the policy was not taken out in joint names and the Insured was expressly defined as being Mr Halpern. The policy therefore did not purport to cover the public liability of anyone other than the insured.

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