UK: Insurance And Reinsurance - 29 January, 2013

Last Updated: 4 February 2013
Article by Nigel Brook

McManus & Ors v European Risk Insurance Co

Whether insurer was entitled to reject a "blanket notification" under a claims-made policy

The claimant firm of solicitors took over another firm of solicitors ("SF") – a firm which predominantly carried out conveyancing work – in June 2011. It was insured under a professional indemnity policy (which incepted on 1 October 2011) by the defendant. That policy was a claims-made policy, requiring notification when the insured first became aware of circumstances (meaning "an incident, occurrence, fact, matter, act or omission which may give rise to a claim" against the insured). One month after inception of the policy, the claimant received a claim from a former lender client of SF alleging breaches of contract and tort arising out of a mortgage transaction (for which the claimant, as the successor of SF, might be liable). This claim was notified to the insurer (and the notification was accepted as being valid). Thereafter, a further 17 claims relating to work carried out by SF were received by the claimant. Of these, 12 claims related to transactions involving the same borrower. The claimant notified these 17 claims (the insurer accepting that such notification was valid) and then carried out a review of these and 15 other files involving the same borrower, as well as some other randomly selected files ("the Corre report"). Thereafter, a further review was conducted by a third party. These reviews revealed a "consistent pattern of breaches" by SF (eg failing to report to the lender client conflicts of interest). The claimant made a "blanket notification" to its insurer, citing:

(a) the 17 claims already notified;

(b) similarities noticed by the claimant between these 17 claims and a number of other files;

(c) previous disciplinary proceedings taken by the SRA against former members of SF (which had resulted in a judgment on 12 October 2011 raising various "concerns" about how the firm carried out its work generally);

(d) comments by casehandlers who had previously worked at SF who claimed that the practices referred to in the October 2011 judgment had been "endemic"; and

(e) a random review of over 110 files which had revealed "shortcomings" in the overwhelming majority of those files.

This notification concluded that every file worked on at SF during the relevant period was "more likely than not to contain examples of malpractice negligence". There were more than 5,000 files falling into this category.

The insurer accepted notification for the files contained in the Corre report (ie 32 files) but argued that notification of all files which SF had worked on did not amount to valid notification as no specific incident etc had been identified by the insured. The insured commenced legal proceedings seeking a declaration that the notification was valid.

Rose J held that, applying the principles laid down in Rothschild v Collyear [1998] and HLB Kidsons v Lloyd's Underwriters (see Weekly Update 43/08), the insurer's stance was wrong, notwithstanding that the notification letter did not identify any particular clients or transactions which might have been affected by the breaches identified at SF during the relevant period. She held that this case satisfied the test laid down in Kidsons that there had been "a substratum of underlying external facts, over and above [the insured's] mere concerns".

However, she went on to reject the application for a declaration. This case was unusual in that notification was being contested before any actual claim had been made by a client of SF. The claimant alleged that the rejection of the notification had already had an adverse impact on it because it had been unable to buy renewal insurance and so had been obliged to enter the Assigned Risks Pool, with the result that its premium had more than doubled. The judge concluded that on a "balance of justice" between the parties, it would be unfair to effectively bind the insurer now to accept all claims in respect of the circumstances covered in the notification letter and it would be better to wait and see what claims actually materialised.

COMMENT: This case follows a line of recent caselaw which has adopted a lenient approach to the issue of whether a notification is valid or premature. For example, in Kajima v The Underwriter (see Weekly Update 05/08), Gloster J confirmed that it is possible to notify a "hornets' nest" or "can of worms" type of circumstance, provided that the insured is not merely guessing if there might be circumstances. Although insurers have traditionally been wary of accepting "blanket notifications", and the judge's decision on the notification issue here might be viewed as fairly generous, is worth noting that notification cuts both ways and insurers could also rely on this case to support an argument that a notification should have been made at an earlier stage by the insured.

Prudential Plc & Anor v Special Commissioner of Income Tax & Anor

Supreme Court holds that legal advice privilege should not be extended to non-lawyers

This was the appeal from the Court of Appeal's decision reported in Weekly Update 38/10. The claimant company had been served with certain statutory notices requiring the production of documents. Caselaw has established that such notices do not require disclosure of documents covered by legal professional privilege. The issue in this case was whether legal advice privilege covers communications with an accountant (and not just a lawyer), when that accountant is giving legal advice. Both the High Court and Court of Appeal rejected the claimant's case. The Supreme Court has now rejected an appeal from those decisions by a majority of 5:2.

The three primary grounds for the decision were as follows:

(a) it would create a risk of uncertainty if legal advice privilege was to be extended to other professions;

(b) it is a matter for Parliament (and not the courts) to decide whether the privilege should be further extended; and

(c) Parliament has already enacted legislation on the basis that legal advice privilege is restricted to lawyers.

Lord Sumption and Lord Clarke gave dissenting judgements, finding that it was the character of the advice that was important and not the status of the adviser. Lord Sumption formulated a test which included deciding if the advice was given in the course of a professional relationship and in the exercise by the adviser of a profession which has, as an ordinary part of its function, the giving of skilled legal advice on the subject in question. However, the majority considered that that test was too uncertain.

Gladman Commercial Properties v Fisher Hargreaves

Whether settlement agreement released joint tortfeasor

In the recent case of Ansari v Knowles & Ors (see Weekly Update 41/12), Eady J appeared to cast some doubt on the existence of a rule that the release of one joint tortfeasor in a settlement operates to release all other joint tortfeasors as well. In this case, Arnold J noted judicial criticism of the "rule" but said that it "remains the law". However, it is subject to two important exceptions, namely: (1) if the settlement agreement is construed as a covenant not to sue; or (2) if there is an express or an implied reservation on the part of the claimant of a right to sue another joint tortfeasor by separate action. It was agreed in this case that the only issue was whether there had been an implied reservation. The judge held that there had not.

Had the parties wanted to reserve the right to sue one of the joint tortfeasors, they could have expressly provided for this in the agreement. Although the net recovery to the claimant under the agreement of £1.3 million amounted to only 4.4% of the £30 million claim, this was still not an insignificant sum and, as at the date of the settlement, would have appeared to represent a reasonable proportion of the claimant's recoverable loss. Furthermore, the joint tortfeasors who had entered into the settlement were not impecunious – indeed, they could have settled the claim in full, if established.

Cummings & Ors v Ministry of Justice

Costs sanctions imposed for witness statements containing matters which are not relevant to the issues

Tugendhat J struck out certain parts of witness statements disclosed by the claimants because they were irrelevant to the issues in this case. The defendant sought its costs incurred in respect of the evidence which had been struck out. The claimants argued that the fact that a witness statement has been held to be inadmissible is not necessarily a reason to disallow the costs of obtaining it. Furthermore, a solicitor cannot assess whether a witness will be able to give admissible evidence until after the solicitor has spoken to the witness. The judge rejected that argument.

He drew attention to para 7.10.4 of the Queen's Bench Guide which advises that (inter alia) a witness statement must cover only those issues on which a party wishes the witness to give evidence in chief and should not include commentary on matters which may arise during trial. Also a witness statement should be as concise as possible and not include inadmissible or irrelevant material. He said that these parts of the Guide are "frequently disregarded" and as a result the inclusion of matters which ought not to be included "has a strong tendency to increase costs and delay". The time saved by adducing evidence in the form of witness statements is lost if irrelevant material is included. Accordingly, the claimants were not entitled to their costs of preparing those parts of the witness statements which were disallowed and, furthermore, they were ordered to pay the defendant's costs incurred in relation to those struck out parts.

Bank of Scotland v Watson

Amending a statement of case after expiry of the limitation period – is a claim a new claim?

The defendant sought to amend her defence and counterclaim after expiry of the limitation period. Under CPR r17.4, the court may allow an amendment to add or substitute a new claim provided the new claim arises out of the same facts (or substantially the same facts) as the existing claim. One of the issues in this case was whether a claim for dishonest assistance amounted to a new claim. The Court of Appeal here noted "a degree of inconsistency" between two earlier Court of Appeal judgements. In Paragaon Finance v Thakerar [1999], Millett LJ said that if, for instance, breach of fiduciary duty had already been pleaded, the addition of an allegation of intent amounted to the introduction of a new cause of action. However, Longmore LJ in Berezovsky v Abramovich [2011] said that if one element of a cause of action in tort is misstated or omitted, it did not mean that a correct statement or inclusion amounts to a new cause of action. In other words, it was enough if the essence of the facts alleged was the same in the existing case and the case which the claimant was seeking to introduce.

The Court of Appeal held that this case was closer to Paragon, since the existing defence and counterclaim did not make out a viable claim in dishonest assistance and Lloyd LJ concluded that "It may be that Millett LJ's observation in Paragon Finance has to be read as subject to possible qualification in a different kind of case, but in relation to the facts of the present case it seems to me to be a sound guide". Accordingly the claim for dishonest assistance did amount to a new claim but, as it did not arise out of the same facts as the existing claim, it failed to satisfy CPR r17.4.

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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