UK: (Re)Insurance 2015 End Of Year Review

Last Updated: 22 January 2016
Article by Clyde & Co LLP

Aggregation

Judge interprets an aggregation clause and the meaning of "similar" acts and "related" matters

An insurer sought a declaration that certain claims brought against the insured firm of solicitors should be aggregated. The claims were brought by various investors who had invested in two holiday home developments to be undertaken by a UK development company (Midas) in Turkey and Morocco, which failed when the local Midas companies were unable to complete contracts for the purchase of the relevant land in Turkey or shares in the land-owning company in Morocco. The investors alleged, broadly, that the solicitors had wrongly released monies from an escrow account without adequate security being in place to protect their investment. The investors claimed to have lost over GBP 10 million, and the relevant policy provided cover of GBP 3 million for any one claim.

Clause 2.5 of the Solicitors Regulation Authority Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors applied and (in the relevant part) provided that claims "arising from ... similar acts or omissions in a series of related matters or transactions" would be regarded as one claim for the purposes of the application of policy limits. Teare J was therefore required to interpret the scope of that clause.

He considered that the phrase had to be interpreted in its context and, accordingly, prior caselaw involving a different context was of no real assistance in this case. He concluded that:

(1) "Similar acts or omissions" required a "real and substantial degree of similarity" and that that similarity should not be "fanciful nor insubstantial". That test was satisfied here since, common to all the individual claims (assuming the claims to have been made out), the local Midas company could not pay the vendor, there was a failure to provide effective security so that the relevant test for releasing the escrow monies had not been properly applied, and thus the investors had been exposed to loss in the event that the developments failed. (Teare J held that he was not required to further decide whether the phrase "arising from", used in the Minimum Terms, required only some causative element or, instead, whether the acts/omissions had to be the proximate cause).

(2) "A series of related matters or transactions". Three possible interpretations of that phrase were put forward by the parties between them:

(a) A series of independent transactions which are related because they were of a similar kind (ie there was the same security structure, with Midas as the hub). That argument was rejected by the judge as being very wide, with no clear limit.

(b) A series of independent transactions which are related because they are investments in one particular development. That interpretation was also rejected in favour of the third interpretation.

(c) A series of transactions which are related because they are dependent on each other. That was the interpretation adopted by Teare J and, since the transactions here were not conditional or dependent on each other, the aggregation clause did not apply and the claims could not be aggregated.

Permission to appeal this decision was granted by Teare J.

AIG Europe Ltd v OC320301 LLP [2015] EWHC 2398 (Comm)

Apportionment

Court construes meaning of a war risks marine policy (including the term "malicious")/whether a perverse foreign judgment breaks the chain of causation/sue and labour provisions

When the claimant's vessel was being loaded in Venezuela, an underwater inspection revealed that bags of cocaine had been strapped to its hull. The drugs had been affixed by persons unknown (presumably a drug cartel). The vessel was detained and the crew arrested. The vessel was abandoned by the owners 2 years later and eventually confiscated by the Venezuelan authorities following a court order. The claimant owners claimed under their war risks insurance policy. It was accepted that the vessel was a constructive total loss.

The policy provided cover for "malicious damage" and "malicious mischief" and "loss of the vessel ... caused by ... any person acting maliciously". It was common ground between the parties that what constituted "malice" was the criminal law definition, which includes recklessness. The decision of Colman J's decision in "The Grecia Express" (2002) was cited: "...the words therefore cover casual or random vandalism and do not require proof that the person concerned had the purpose of injuring the assured".

However, the insurers sought to rely on two exclusions in the policy:

(1) Loss arising from "detainment, confiscation ... by reason of infringement of any customs ... regulations". Insurers made an important concession: namely, that the deliberate acts of the Venezuelan authorities (in placing drugs on the hull in order to facilitate the confiscation of the vessel) would not have triggered the exclusion. Flaux J held that this indicated that the insurers accepted that there was an implied limitation to the scope of the exclusion. The judge saw no reason to distinguish between that scenario and the present case where the malicious (albeit there was recklessness here, rather than actual malice) acts of a drug smuggler had led to the vessel being detained. To conclude that the exclusion applied to this case would, he said, "not accord with the spirit of the policy". He concluded that "as a matter of construction of the policy in this case, the exclusion does not apply where the infringement is brought about by the malicious act of a third party".

(2) Loss arising from "the operation of ordinary judicial process, failure to provide security ...". The insurers' argument here failed because the claimant had taken reasonable steps to provide security (and it was likely that the Venezuelan authorities would have insisted on security for the full value of the vessel, and that is unlikely to have been acceptable to either the claimant or the insurers).

The insurers' arguments therefore failed. Accordingly, the judge was not required to decide the alternative case advanced by the claimant: namely, that the exclusion did not apply because the real cause of detainment of the vessel was the perverse and wrong decisions of the Venezuelan courts. He did, however, conclude that, in any event, the decisions of the Venezuelan courts had been correct as a matter of Venezuelan law and there had been no unwarranted political interference.

However, in considering this issue, Flaux J did conclude that, as a matter of principle, a decision of a foreign court which is clearly perverse and not even reasonably arguable as a matter of foreign law would break the chain of causation, so that the customs exclusion would no longer have applied. He held that there was no additional requirement that the decision be made in bad faith, or that the court knowingly acted without jurisdiction (and said that comments to the contrary by the Court of Appeal in The Anita (1971) were obiter, since that case had not been dealing with a perverse decision). Furthermore, any political interference will be of relevance only if it leads to a wholly unjustified decision.

Further arguments also arose as to the entitlement of the claimant to recover its sue and labour expenses:

(1) When the claimant served its notice of abandonment, the leading underwriter declined the notice but scratched it with the so-called "writ clause" (ie that insurers agreed to put the claimant in the same position as if a writ had been issued that day and thus, under marine insurance law, the position between the insurer and the claimant was crystallised at that point). Rix J held in Kuwait Airways v Kuwait Insurance (1996) that that meant that the obligation or right to sue and labour ceases when a writ is issued (and so sue and labour expenses can no longer be recovered after that date). Although Flaux J accepted that Rix J "may well be" right where a writ is issued, he also held that the entitlement to sue and labour does not cease at the earlier date of the writ clause.

(2) Flaux J also said that it was wrong, as a matter of law, to argue that legal fees incurred for a dual purpose (namely, the release of the vessel and the defence of the crew) were not recoverable as sue and labour: "Where expenses are incurred both for the purpose of extricating the vessel from the insured peril and for some other purpose which is not sue and labour (here the defence of the crew), there is no principled basis for apportioning the expenses between those purposes, so they are all to be properly regarded as sue and labour expenses". The legal fees would therefore only have been irrecoverable if they had been incurred solely in defence of the crew. Here, it was not possible to separate the expenditure since "if all the crew had been released and acquitted, the vessel would have been released". Flaux J also held that voluntary funding provided by Gard should be disregarded when assessing the recoverable loss.

Finally, Flaux J held that the costs of running the vessel during the period of detention were recoverable under the terms of the policy (even though there was a current charterparty: the expenses were incurred not because of any contractual commitment but because the claimant wanted to be ready to sail as and when the opportunity arose).

Comment

Although apportionment in a marine policy context is possible where there is underinsurance, Flaux J has confirmed here (citing the Court of Appeal decisions in Standard Life v ACE (2012) and Royal Boskalis v Mountain (1997)) that there is no general principle that there can be apportionment where at least one purpose was to safeguard or recover insured property.

Atlasnavios Navegacao Lda (formerly Bnavios Navegacao Lda) v Navigators Insurance Co Ltd "The B Atlantic" [2014] EWHC 4133 (Comm)

Whether employer severally liable after exposure to asbestos by several employers caused employee's lung cancer

The claimant employee was exposed to asbestos over the course of his working life, during which he was employed by the six defendant employers. He died from lung cancer and the issue in this case was whether each defendant was liable and, if so, whether it would be liable in full or in part. The parties agreed that the claimant's cumulative exposure to asbestos had increased his risk of developing lung cancer fivefold. Since the claimant was also a smoker, this risk had further increased by a multiple of five.

Following the decision in Fairchild v Glenhaven Funeral Services Ltd (2002), a defendant to a mesothelioma claim is liable if the negligent exposure "materially increased the risk" of the claimant developing the disease. This is an exception to the normal common law rule that that a claimant must show, on the balance of probabilities, that the defendant's tort caused his injury (applying the "but for" test). This exception was developed because for mesothelioma it is impossible to say which exposure to asbestos triggered the disease. It resulted in an employee being able to sue any one of his employers in full.

The issue in this case was whether the common law should, for these purposes, treat lung cancer in the same way as mesothelioma. Jay J held that it should, because the two are "legally indistinguishable". He therefore rejected the defendants' argument that there is an "intermediate" category of cases which fall between the conventional approach and Fairchild.

However, the judge also held that apportionment was appropriate in this case: "A proportionate recovery may not be a particularly principled one, in the sense that in an indivisible injury case such as the present principle would require full recovery; but ... after all, adherence to the conventional common law approach, which is entirely principled, would lead to no recovery at all".

Heneghan v Manchester Dry Docks Ltd [2014] EWHC 4190 (QB)

Avoidance

Whether insurer was stopped from relying on right to avoid

An insured under an After The Event insurance policy brought unsuccessful proceedings against a third party (its insurance broker) and was ordered to pay the third party's costs. The insured became insolvent and so the third party claimed (pursuant to the Third Parties (Rights against Insurers) Act 1930) against the ATE insurers. It was accepted that the insurers had been entitled to avoid the policy because of a serious fraudulent misrepresentation. However, the third party alleged that insurers were estopped from relying on that right.

It has been established by prior caselaw that, in order to establish a waiver by estoppel, there must be a clear and unequivocal message from the insurer to the insured that it will not exercise its relevant rights and the insured must rely on that message in a manner making it inequitable for the insurer to go back on it.

It is clear that the insurer must know about the relevant facts before it can be said to be estopped. However, there has been some caselaw debate as to whether an insurer must also know that those facts give rise to the relevant rights. Although there is textbook commentary to the contrary (eg see Good Faith and Insurance Contracts, Eggers and Foss, paras 17.71-2), in this case the judge (Richard Seymour QC), said that the "insurer need not necessarily know that those facts give rise to the relevant rights". However, he added that "nonetheless, to be effective the relevant message must show an awareness of the relevant rights and an intention not to rely upon them" (ie apparent, rather than actual, awareness). In reality, as the judge recognised, it will be difficult for an insurer to give that message without actually being aware of the those rights (as was also recognised by Tuckey LJ in HIH v AXA (2002)).

It was argued in this case that the insurer had given an unequivocal message by: (1) making an interim payment; and (2) agreeing to increase the policy limit. The judge described that argument as "pure Alice in Wonderland". It was plain that neither "representation" carried with it any "apparent awareness" of the insurer's right to avoid. Furthermore, the insurer had been unaware of the insured's fraudulent misrepresentation at the time. It could not be implied, either, that the insurer had not cared about the insured's truthfulness when completing the proposal form. Accordingly, the insurer had been unaware of the relevant facts and so could not be said to be estopped from relying on its right to avoid.

IHC (A Firm) v Amtrust Europe Ltd [2015] EWHC 257 (QB)

Whether reinsurer entitled to avoid treaty because of alleged misrepresentation/non-disclosure by reinsured

The reinsurer claimed to be entitled to avoid two reinsurance treaties entered into with the defendant reinsured on the basis that the reinsured had failed to disclose loss statistics relating to the reinsured's book of inwards marine energy construction risks, and had also failed to disclose three incidents likely to result in claims under one of the treaties. The reinsured accepted that the past loss statistics were material but argued that they would not have influenced the judgment of a prudent underwriter because (a) energy construction risks are all unique (so that little or nothing is to be gained from considering past results achieved by the reinsured on the insurance of such risks), and (b) there had been a change of underwriter at the reinsured, who had a "much more rigorous" approach to the selection of risks. Much of the case turns on the particular factual evidence but one point from the case is of more general interest (especially in light of the upcoming changes being introduced by the Insurance Act, which will require an insurer to prove what he would have done had he known about the breach of the duty of fair presentation in order to ascertain which remedy will apply).

Males J noted that there was a need for caution regarding the witness evidence in this case, given that most of the relevant events had taken place almost 20 years ago and: "...the need for caution applies with even greater force to hypothetical evidence as to what a witness would have done if circumstances had been different". He also approved the comment by Colman J in North Star Shipping v Sphere Drake (2006) that "...hypothetical evidence by its very nature lends itself to exaggeration and embellishment ... it is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information". He concluded that: "As usual, however, where documents are available they represent much the best evidence not only of what the parties did, but also of what they were thinking at the time".

Males J also noted that first loss reinsurance is like quota share reinsurance, in that the reinsurer's fortunes are closely tied to the original book of risks written by the reinsured. However, since the first loss reinsurer is also liable for 100% of the losses up to a specified limit, the reinsurer will be liable for each and every minor loss for which the reinsured is liable. Accordingly, the first loss reinsurer "....is heavily dependent on the success of the reinsured's underwriting and is in particular vulnerable to a large number of low level claims". As to the particular facts of the case, he held that:

(a) The statement that "This is a new Treaty for the Reassured and as such does not have a corresponding loss record" clearly referred to losses under the new reinsurance treaty and not the reinsured's past losses from energy construction risks.

(b) Past loss records of a prospective reinsured would influence the judgment of a prudent reinsurer even if the risks were energy construction risks or there had been a change of underwriter. Further explanations could be given to the reinsurer but material information should be disclosed in the first place.

(c) The reinsurer had not known that the reinsured was writing energy construction risks (a hazardous type of risk) and so no issue of waiver arose just because the reinsurer had failed to ask for the past loss records. Nor did it matter that the change of underwriter had diminished the risk – the records ought still to have been disclosed.

(d) On the facts, it was the head of treaty business who had to be shown to have been influenced by the non-disclosure, and not his assistant, even though the assistant had dealt with matters in his absence. The final decision had been taken by the head.

(e) In general, disclosure of figures going back 5 years should be sufficient to constitute a fair presentation of the risk. However, in this case, earlier losses should have been disclosed because there had been massive losses in years 6 and 7, whereas loss ratios had been only marginally negative in year 5 and positive in year 4.

(f) However, the judge concluded that the underwriter in this case had not been induced. He had written the treaty despite the absence of key information and on the facts it was evident that he was not averse to writing hazardous risks.

(g) It was not correct to suggest that the reinsured needn't disclose incidents for which no reserve had been made or where a loss adjuster had positively advised against a reserve: "There would be occasions when an incident not recorded as a reserve would be material for disclosure, and it is necessary to consider substance rather than form". On the facts, though, the three incidents not disclosed to the reinsurer would not have influenced the particular underwriter.

AXA Versicherung AG v Arab Insurance Group (BSC) [2015] EWHC 1939 (Comm)

Avoidance of a policy and an argument of affirmation

The claimant insurer sought a declaration that it had validly avoided a contractors' combined liability policy on the ground of non-disclosure of material information. Much of the case turns on the particular facts, but a few points mentioned by the judge are of more general interest.

The judge said that she was able to reach conclusions on materiality based on common sense, rather than having to resort to expert evidence (which, in any event, supported her conclusions). She pointed out that the "central flaw" in the insured's argument was that it overlooked the objective nature of the test for materiality: "[The insured's] own opinion of the significance or otherwise of the earth settlement and the road void does not determine materiality, though any subjective concern on its part would be relevant. An absence of subjective concern because, for example, [the insured] (and others) had formed the (preliminary) view that [the insured's] tunnelling was not the cause of the void does not relieve the appearance of the void of materiality for underwriting purposes. The question is whether, on an objective assessment, the facts known to the insured were material. Otherwise, ... [the insured] (or others) become "judge and jury" on the risk which the underwriter is contemplating".

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(Re)Insurance 2015 End of Year Review

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