Worldwide: Insurance And Reinsurance Weekly Update - 28 October 2014

Last Updated: 10 November 2014
Article by Nigel Brook

Sugar Hut Group v AJ Insurance

Calculation of business interruption losses

This is a rare case on calculating a business interruption insurance claim. The claimant owned four nightclubs, one of which was damaged by a serious fire in September 2009. The nightclub re-opened in August 2010. The claimant was unable to claim under its insurance policy because of non-disclosure and breaches of warranties (and that position was confirmed by Burton J in 2010 (see Weekly Update 40/10). The claimant therefore sought to sue its brokers and the brokers admitted certain allegations of negligence. This case concerned the calculation of the claimant's business interruption losses (ie the amount which the claimant would have been able to claim under its policy, but for the brokers' negligence).

The main issue in contention was the calculation of the claimant's loss of turnover for 2009/10. The difficulty in this case was the lack of evidence on turnover before October 2008. The claimant's expert based his calculation on an average between two perspectives: (1) an extrapolation of the turnover 11 months prior to the fire (allowing for any trends in business, the policy having contained a trends clause), minus holiday periods; and (2) actual turnover after the club re-opened. Although Eder J accepted a general and significant increase in turnover over 2008/9, he thought this was around 20% (rather than the 27% claimed by the claimant). However, it was "mere speculation" that this increase would be spread over the entire following year (including holiday periods) and some further modification was made because of that. As the judge put it: "I should make plain that this figure is not based on any mathematical exercise" and "I fully recognise that this exercise is necessarily somewhat crude and inexact". Although the judge recognised that the turnover actually achieved after the club re-opened was potentially relevant, in the circumstances of this case, it should be ignored (because, eg, some of the figures extended beyond even 2011 and so were some distance in time away from the relevant period of 2009/10).

Other losses were also considered by the judge, eg:

(i) staff wages (on the basis that some staff were still paid after the fire because the claimant did not wish to lose their skills from the business). The judge accepted that this head of claim might be recoverable, but it failed because of a lack of evidence about what these staff members actually did.

(ii) loss of profits at the claimant's other nightclubs because of the loss of files and data at the damaged nightclub's premises – in particular, the loss of an extensive client mailing list. The judge accepted that this too could have been recoverable but, again, a lack of evidence, together with the likely impact of the general recession at the relevant time, meant that he rejected this claim for loss of profits. He also felt that some customer data would still have been available via other means.

The judge also decided that an appropriate rate of interest on the claimant's damages in this case was 5% pa (which was the rate of interest generally payable by a company like the claimant, even though the claimant was actually liable to pay interest of over 6% on certain of its loans). Furthermore, the claimant could not be criticised for delay in suing the brokers because it had been entitled to sue its insurers first.

Bluefin Insurance Services v FOS

Whether a director under a D&O policy is a "consumer" for FOS purposes

The applicant broker acted for a company in obtaining D&O insurance. Mr Lochner was a director of that company and hence an "insured person" under the policy. The broker failed to pass on his notification of a potential claim against him to the insurers and hence the insurer rejected the claim. Mr Lochner sought to bring a complaint against the broker to the Financial Ombudsman Service ("FOS"). The broker argued that FOS had no jurisdiction to hear the complaint because Mr Lochner was not a "consumer". This is defined in the glossary to the FCA Handbook as "a natural person acting for purposes outside his trade, business, or profession". FOS held that it did have jurisdiction to hear the complaint and the broker sought judicial review of that decision.

Wilkie J has now held that:

(1) The FOS decision was a decision on "precedent fact", and hence was a decision which the court is entitled to review (in order to establish whether the facts upon which the FOS decision was based did exist). Even if that was wrong, the judge would consider whether the FOS decision was right or wrong (and, if wrong, that would render the decision challengeable by way of judicial review).

(2) Under the relevant rules, a complainant must be eligible at the time the complaint is brought.

(3) Mr Lochner did not fall within the definition of a "consumer". Wilkie J rejected an argument that Mr Lochner was a beneficiary of an insurance policy which served to protect him in his private life against liabilities which he incurred as a director. Instead, the judge held that "the subject matter of his complaint was wholly concerned with the potential loss arising from lack of insurance cover in respect of a liability which he had incurred in the course of his trade, business, or profession".

The judge also held that D&O policies differ from other group protection policies, such as a private health insurance policy entered into for the benefit of a workforce. A complaint made by a beneficiary under that sort of policy in respect of a failure properly to manage the policy, thereby causing loss, could be made as a consumer. The point of such a policy is to provide protection in respect of the private interests of the members of the scheme in having a particular level of healthcare or a particular level of income in the event of ill-health.

Accordingly, the FOS decision was quashed.

Moss-Davies v Celtic Technologies

Whether claimant had a good reason for late service of the claim form

Transcript attached

Clyde & Co (Victor Rae-Reeves and Jana Zaujecova) for defendant

The defendant's solicitors informed the claimant's solicitors that they were nominated to accept service of the claim form. Under the CPR, service therefore had to be effected on them. However, the claimant's solicitors instead posted the claim form to the defendant's registered office and then (on the next day, after the time for service of the claim form, and limitation, had expired), it sent copies of the claim form to the defendant's solicitors. The claimant accepted that service on the defendant had not been valid (and it could not rely on the Companies Act 2006 either because service under the Act is deemed to take place at the time of delivery, which was too late in this case). Furthermore, "notifying the claim or sending a sealed copy of the claim form otherwise than for the purpose of service is not itself service" (and hence the defendant's solicitors had not been validly served either). The claimant therefore applied under CPR r6.15(2) for an order validating service by an alternative method (instead of applying under CPR r7.6 to extend time for service, since it was felt that the threshold requirements under that rule could not be met).

The claimant sought to rely on the Supreme Court decision in Abela v Baadarani (see Weekly Update 24/13), in which it was held that only a "good reason" (and not exceptional circumstances) was required to justify an order under CPR r6.15(2). The judge, David Berkley QC, held that it would be "wrong to characterise the bar as being a modest one" though. It is not enough just to show that the defendant has been notified of the claim by some other means. Abela could be distinguished from this case on the basis that there the defendant had not been co-operative and it had been impracticable to serve in Lebanon.

The only reason for non-compliance with the CPR here had been the claimant's own error in using an impermissible mode of service. It did not matter that there had been no prejudice to the defendant (other than the loss of a limitation defence) or that the non-compliance had been minimal.

Accordingly, the claimant's application was dismissed.

COMMENT: Although Abela suggested a relaxation of the approach to the exercise of the court's discretion to validate service, this case demonstrates that the burden of still demonstrating a "good reason" will not easily be discharged and will require more than simply an honest mistake having been made, or a lack of real prejudice to the defendant.

Caliendo v Mishcon de Reya

Application for relief from sanctions where notice of funding given late/whether recoverability of success fees/ATE premiums infringes Human Rights

CPR r44.15 (before it was replaced on 1 April 2013) provided that a party who seeks to recover an "additional liability" (eg a success fee or ATE insurance premium) had to provide information about its funding arrangements to the court and the other parties (and the Practice Direction on Pre-Action Conduct contained a similar provision). The sanction for failing to comply is that the additional liability will be irrecoverable. In this case, the notice was served late, due to an oversight by the claimant's solicitors, and so the claimant applied for relief from sanctions under CPR r3.9.

The claimant accepted that it had no "good reason" for this breach. However, following the guidance in Denton v TH White (see Weekly Update 26/14), Hildyard J decided to grant relief because the defendants had been unable to show material prejudice as a result of the breach and because of all of the circumstances of the case.

One further argument raised by the defendant was based on certain comments by Lord Neuberger in the Supreme Court decision of Coventry v Lawrence [2014], to the effect that it may be that the pre-2013 regime enabling recovery of success fees and the ATE premium infringed the European Convention on Human Rights (and that this was a "circumstance" to be taken into account by the court). Hildyard J refused to assess this argument, given that there is also existing House of Lords authority to the effect that the pre-2013 regime is compatible with the Convention. Even in Coventry v Lawrence, the Supreme Court had said it would be wrong to decide that point without HM Government having had an opportunity to address the court on this issue.

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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