UK: Insurance And Reinsurance Weekly Update - 6 August 2013

Last Updated: 19 August 2013
Article by Nigel Brook

Welcome to the twenty-ninth edition of Clyde & Co's (Re)insurance and litigation caselaw weekly updates for 2013.

A summary of recent developments in insurance, reinsurance and litigation law.

This week's caselaw

Teal Assurance v WR Berkley & Anor
The Supreme Court decides the order in which claims can be presented to liability (re)insurers.

Amlin & Ors v Oriental Assurance
Court determines whether there had been a breach of warranty in a reinsurance contract.

JSC BTA Bank v Ablyazov
Court of Appeal considers freezing orders and whether the right to borrow is an asset.

Tchenguiz & Anor v SFO
A decision on litigation privilege and whether litigation was reasonably in prospect/loss of confidentiality argument.

Singh v Moorlands Primary School
A case on whether a party could be sued for applying undue pressure on a witness.

Hackney Empire Ltd v Aviva Insurance UK
Court decides the appropriate rate of discretionary interest where a claimant is a charity.

Teal Assurance v WR Berkley & Anor

Supreme Court decides order in which claims can be presented to liability (re)insurers

Clyde & Co for respondents

The first instance and Court of Appeal decisions in this case were reported in Weekly Updates 05/11 and 45/11. In essence, this was a dispute about whether a (re)insured could present its losses to its (re)insurance programme in whatever order it chose. The claimant insurer wanted to hold back incurred losses on two large Non-American claims until such time as the underlying policies in its insurance programme had paid out on future expected losses on an American claim (because the layer which the defendants reinsured excluded cover for US claims, whereas the underlying policies did not). Both the trial judge and the Court of Appeal found in favour of the defendant reinsurers and the Supreme Court has now unanimously rejected the reinsured's appeal.

Lord Mance, delivering the lead judgment, confirmed that an insurer's liability does not arise until the liability of the insured to a third party is established and quantified by judgment, arbitration award or settlement. He declined to comment on the claimant's criticism of the traditional view that an insurer's liability is a liability for damages for breach of duty in failing to hold harmless or to provide the indemnity. Instead, the appeal turned on whether policy cover is exhausted when a claim is ascertained or only when it is paid (so that a later claim can be presented first if it is paid before an earlier claim (even if liability under the earlier claim was established first)). That argument was rejected by the Supreme Court, which confirmed that "The policy thus serves the purpose of meeting each ascertained loss when and in the order in which it occurs". Although it is possible to withdraw a claim, if a claim is pursued, there can be no adjustment of its priority as against other layers.

Moreover, it was recognised that this issue had arisen only because the claimant was a captive insurer and hence willing to assist the insured in the presentation of its claims. A freedom to adjust the order of payment of claims "cannot in the present context readily be reconciled with the basic philosophy that insurance covers risks lying outside an insured's own deliberate control". On the other hand, Lord Mance conceded that it was true to argue that a (re)insured can exercise some control over the presentation of claims by eg delaying settlement so that a later arising third party claim would lead to an ascertained liability sooner than an earlier claim.

Much of the decision also turned on the wording of Clause 1 of the policy which provided that "liability to pay under this Policy shall not attach unless and until the Underwriters of the Underlying Policy/ies shall have paid, or have admitted liability or have been held liable to pay, the full amount of their indemnity". It was said that references to the insured "paying" the deductible did not mean monetary disbursement, and, even if it did, this was only a pre-condition of cover and did not allow the insured to alter the order of presentation to insurers. The same principle applied to the presentation by the claimant to excess layer (re)insurers.

COMMENT: Although the clarity achieved in this judgment regarding the chronological ordering of ascertained losses will be welcomed by (re)insurers, it should be noted that the Supreme Court did not take this opportunity to resolve other contentious issues. It had been suggested that the appeal might be used to finally confirm the nature of reinsurance and whether it covers the reinsured's liability or the primary risk (an issue which, in turn, impacts on limitation arguments) but there was no discussion about reinsurance in the judgment. There was also no discussion of whether the fiction that an insurer's primary obligation is to hold harmless (and hence the payment of an insurance claim is a payment of damages) remains applicable (thus precluding claims for damages where a claim is wrongly declined or paid late (because there can be no damages on damages under English law) – a position which has been criticised by the Law Commissions in their Issues Paper 6).

Amlin & Ors v Oriental Assurance

Court determines whether there had been a breach of warranty in a reinsurance contract

Weekly Update 37/12 reported the decision in this case on whether the action should be stayed. The claimant reinsurer alleged that there had been a breach of a Typhoon Warranty contained in both the reinsurance and insurance policies and had commenced proceedings in England for a declaration that it was not liable. Smith J dismissed an application to stay the action pending the outcome of actions brought in the Philippines against both the insured and the insurer and the Court of Appeal rejected the appeal from that decision.

In this decision, Field J determined whether there had been a breach of the warranty. It read as follows: "Notwithstanding anything contained in this policy or clauses attached hereto, it is expressly warranted that the carrying vessel shall not sail or put out of Sheltered Port when there is a typhoon or storm warning at that port nor when her destination or intended route may be within the possible path of the typhoon or storm announced at the port of sailing, port of destination or any intervening point. Violation of this warranty shall render this policy void".

Field J held as follows:

(1) There had been a breach of warranty because a storm warning had been given before the vessel had sailed from port. It did not matter that the reinsurer's construction of the policy would mean that scheduled vessels might need to remain in a port for some hours when the port is not predicted to be in imminent danger from a typhoon. The manifest object of the warranty was to protect reinsurers from liability arising from the grave danger of typhoons, which can travel at varying speeds and in directions that cannot be reliably predicted: "It follows that the underlying policy of the Warranty is "safety first"".

Nor was there need to have regard to guidelines issued by the local coastguard – if the parties had intended that, they could have made express reference to the guidelines in the warranty.

(2) There had also been a breach of the second part of the warranty. The "intended" route of a vessel was its usual route (the captain of the ship having intended to follow the usual route, departing from it only if the weather became "really, really bad"). The judge also rejected an argument by the reinsured that the word "announced" qualified the words "the possible path", so that regard must be had to the announced "predicted path" of the typhoon when determining whether the intended route of the vessel may have been in the possible path of the typhoon". Field J held that if the parties had intended that interpretation, they would have used the word "forecast" rather than "possible" and the words "may be" would have been unnecessary.

Accordingly, the reinsurance contract was avoided.

JSC BTA Bank v Ablyazov

Court of Appeal considers freezing orders and whether the right to borrow is an asset EWCA/Civ/2013/928.html&query=jsc+and+ablyazov&metho d=Boolean

The first instance judgment in this case was reported in Weekly Update 24/12. The claimant obtained a freezing order preventing the respondent from disposing of, or dealing with, his assets (whether or not such assets were in his own name and including assets which he has the power (directly or indirectly) to dispose of or deal with as if his own). The respondent then entered into four loan agreements (pursuant to which he instructed the lenders to make payments to third parties (to cover his legal and living expenses)). At first instance, Clarke J held that the right to borrow was not an asset. The claimant appealed and the Court of Appeal has now held as follows:

(1) There are three legal principles governing the courts' approach to freezing orders: (a) the purpose of a freezing order is to prevent the dissipation of assets which would otherwise be available to meet a judgment; (b) the jurisdiction to make a freezing order should be exercised in a flexible and adaptable manner in order to deal with new situations; and (c) a freezing order should be construed strictly. There is a tension between these principles eg because the need for flexibility may involve not giving the order a strict construction.

(2) There is no fundamental objection to the recognition of the right to borrow money from a lender under a loan facility agreement as an asset. However, the terms of the order must in fact make the right an asset.

(3) The wording of the order here did not naturally extend to the exercise of a right to borrow. It could not be said that all choses in action were covered: "while it is open to a claimant to do this by using clear and unequivocal language, the principle that these orders should be construed strictly means that the claimant, who has control of the form of the order when he seeks it, but who has not used such language, cannot rely on the court giving the terms of the order a broad meaning" (as per Beatson LJ).

It was also held that the respondent did not have the power to deal with the chose in action because that power was subject to the lender's consent and to the lender not cancelling the facility. Rimer LJ added that when monies were paid to third parties, those monies belonged to the lenders, and not the respondent, and were thus not a disposition of assets.

COMMENT: This decision is supported by both earlier caselaw and the commentary in the White Book. However, it does allow a defendant to borrow large sums and to pay these out to third parties before defaulting on the loans, thereby enabling the lender to possibly obtain judgment against the defendant's assets before the claimant's claim has been established, hence allowing the defendant to potentially make himself "judgment-proof" against any eventual judgment in favour of the claimant. It is worth noting, though, that the Court of Appeal saw no objection in principle to the right to borrow being classified as an asset, should the order be clearly worded to that effect.

Tchenguiz & Anor v SFO

Litigation privilege and whether litigation reasonably in prospect/loss of confidentiality argument

The claimants brought proceedings against the SFO. They sought third party disclosure from the liquidators of a company with which the claimants were in dispute. The liquidators had instructed accountants to prepare reports for them. Those reports were shown (but not copied) to the SFO and it is alleged that the reports played a key role in enabling the SFO to obtain search warrants in respect of the claimants' premises (which the claimants allege caused them substantial losses). The liquidators claimed the reports were subject to litigation privilege and Eder J considered the following:

(1) Could the claim for privilege be supported by evidence from someone other than the person who was responsible for the creation of the document? In this case, it was the liquidators' solicitor, rather than the liquidators themselves, who gave evidence to justify the claim for litigation privilege. Eder J held that that was not necessarily fatal to the privilege claim. However, he said that "I accept that it is entirely proper and justifiable to subject such evidence a fortiori to "anxious scrutiny" in particular because of the difficulties in going behind that evidence".

(2) Were the reports produced for the dominant purpose of obtaining information or advice in connection with pending or contemplated litigation? The judge concluded that the liquidators had been complying with their statutory duties with regard to the orderly collection of assets and settlement of liabilities. Thus they were seeking to identify what (if any) assets or liabilities existed and "perhaps what legal proceedings might possibly be brought against any third parties" (but that would be further down the line – and, in fact, such proceedings had not been brought even now, some two and a half years later). The judge said the dominant purpose test was a relatively high threshold and the reference by the liquidators' solicitor to "potential" causes of action and "possible" claims fell short of the requirement that litigation be "reasonably in prospect" and more than a mere possibility.

(3) Had privilege in the reports in any event been lost because of loss a loss of confidentiality (because they had been shown to the SFO)? Although the judge did not need to consider this point, he concluded that there had not been any loss of confidentiality. A limited waiver of privilege does not necessarily cause the privilege to be lost. Here the reports had been shown to a limited number of third parties (officers of the SFO) and there was an inference that the information was intended to be confidential. The courts have traditionally taken a lenient view where copies of privileged reports have been shown to prosecuting authorities.

The SFO had taken notes from the reports and these had been exhibited to a witness statement. Eder J held that although there was a loss of confidentiality in respect of information contained in the notes, that did not mean that there had been a loss of confidentiality in the reports themselves.

Singh v Moorlands Primary School

Whether a party could be sued for applying undue pressure on a witness EWCA/Civ/2013/909.html&query=singh&method=Boolean

It is a long-standing legal principle that no action in defamation can be brought against a witness for anything said in evidence before a court or tribunal. The policy behind the rule is that witnesses should be able to speak freely and there should be no multiplicity of actions (with a later court having to examine whether evidence given to an earlier court was true). There have been various unsuccessful attempts to outflank the rule. For example, the English court has rejected an attempt to frame a cause of action as conspiracy to give false evidence (rather than as defamation). However, in other cases, limits on the rule have been achieved (see, for example, Jones v Kaney (see Weekly Update 13/11) in which the Supreme Court held that expert witnesses were no longer immune from suit for negligence).

In this case, the claimant, a head teacher, sought to sue a council for allegedly applying undue pressure on the school's business manager to give false evidence. The Court of Appeal held that the council had no immunity from suit. The allegations against the council were based on events which took place outside the tribunal and "The means by which the Council procured the witness statement is a free-standing act... the complaint is not about the content of the statement, but the means by which it was procured". Furthermore, the nub of the complaint against the council was that it had done something which would destroy the trust and confidence which is inherent in an employment relationship (and not that the witness statement itself would cause damage).

Hackney Empire Ltd v Aviva Insurance UK

Appropriate rate of discretionary interest where claimant is a charity

The claimant won and sought discretionary interest on its claim. Three issues arose:

(1) The basic position is that interest starts running from the date the cause of action accrues. However, in this case, Edwards-Stuart J ordered interest to start running from the later date of three weeks after the date of a demand because up until that date the defendant insurer had not known what sum it should pay.

(2) This was not a case where interest should be disallowed for a certain period of time because of the claimant's delay in pursuing the claim. There had been a delay here of over four years before the letter of claim was sent. However, the judge said that the delay would have had to have been "truly exceptional and inexcusable" and here the claimant had done its best to move forward eg by attempting to secure ATE insurance cover to avoid a potential security for costs application.

(3) As for the appropriate rate of interest to be awarded, the claimant is a medium-sized charity and it would be artificial to treat it as if it was a medium-sized commercial company. As in the case of Challinor v Bellis (see Weekly Update 11/13), the claimant did not rely on commercial lending and had a number of sources of funding on an interest-free basis. The judge held that, since interest was being claimed for almost 10 years (and hence some of the period pre-dated the fall in interest rates following the global financial crisis), the appropriate rate of interest here would be 2% over the Barclays base rate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nigel Brook
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