UK: (Re)insurance Weekly Update 5 - 2016

Last Updated: 11 February 2016
Article by Nigel Brook

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

This week's caselaw:

ARC Capital v Brit Syndicates: Meaning of a "claim" and "in any way involving"/late notification and continuity of cover clause

An insured entered into an agreement in 2008 which arguably led to it entering into a further agreement in 2010. It was subsequently alleged that the insured had committed certain errors and omissions (namely, not taking adequate security) pursuant to the 2010 agreement. A claim was notified to insurers under a 2013/14 policy. Those insurers had provided continuous cover to the insured since 2009 (and also provided cover for 2014/15). The policy provided that there would be no cover for claims "arising from or in any way involving any act, error or omission alleged to have been committed prior to 5th June 2009" (the Retroactive Date Clause). It also made it a condition precedent to liability that notification of a Claim was made as soon as practicable (and in any event within 60 days) (Clause 14). A Claim was defined as including "a written demand for monetary damages or non-pecuniary relief". A further extension clause (Clause 5j, "Continuity of Cover") provided that where a policy was a renewal policy, coverage would be provided for claims or circumstances which should have been notified under the earlier policy (provided there was no interruption of the cover provided by the insurer).

Cooke J was required to decide the following issues:

  • How should the Retroactive Date Clause be interpreted?

The judge held that the "words must be read in context and with an eye to their most sensible construction in the light of the nature and object" of the policy. He held that there must be "some causal connection, whether direct or indirect, to the claims and liability alleged in order for the exclusion to operate". Turning to the language used in the clause, he held that "act, error or omission" should be construed in accordance with the Wrongful Acts clause of this professional indemnity policy and so referred to "matters which could in principle create liability under the policy". The phrases "arising from" and "in any way involving" must have different meanings, otherwise the latter phrase would be left "without any real content" (or else the former phrase would serve no purpose if the latter phrase did not require any causal element at all).

Referring to earlier authority, the judge confirmed that "arising from" meant "proximately caused by" or "directly caused by" and went on to find that "in any way involving" therefore meant "indirectly caused by" in this context. In that way, "the two phrases are given recognisably distinct meaning and the clause hangs together as a whole". The clause therefore required some act, error or omission which is "genuinely part of a chain of causation which leads to liability for the claim in question".

On the facts of the case, the 2008 agreement was just the background or "historical context" which led to the 2010 agreement, but there was no causative connection between the earlier agreement and the alleged breaches of duty under the later agreement. Furthermore, the primary case pleaded against the insured did not allege wrongful acts prior to the Retroactive Date, and an alternative case was not being "actively pursued". Accordingly, the Retroactive Date Clause did not give insurers a defence.

  • Was a written demand made against the insured 6 months before the start of the 2013/14 policy? At that time, the insured had received a letter from the claimant's solicitors reserving the claimant's rights and seeking an agreement of a protocol for a swift and effective recovery of sums. Cooke J noted that "there is no formality required for such a demand so long as it is in writing but there must be a demand". He held that this letter did not amount to a demand. Nor was a request for confirmation of agreement to the funding of the recovery strategy a written demand for monetary damages.
  • Did the breach of the notification condition precedent (Clause 14) afford insurers a defence?

Cooke J held that it did not, when read in conjunction with the Continuity of Cover clause (Clause 5j). The whole point of Clause 5j was to extend cover to claims where there had been a breach of the notification CP in the prior year. Any breach of the CP would preclude the insured from recovering under the prior year (and, if insurers did not renew, there would be no cover later on either). However, where insurers did renew on terms which included Clause 5j, there would be cover for claims which should have been notified under the prior year.

Accordingly, the insured was entitled to declarations to the effect that the claim fell to be covered under the policy.

Sobrany v UAB Transtira: Court of Appeal considers double insurance/subrogation issues

As Clarke LJ put it at the start of his judgment: "This is another chapter in the long running saga of disputes between insurers about liability to indemnify claimants in respect of the cost of hiring replacement vehicles whilst their cars are being repaired following a road traffic accident". This case was unusual in that the claimant (innocent) driver had taken out two insurance policies with the same insurer, covering different periods of hire of a replacement car. Much of the case concerned an appeal from that factual finding, but of more general interest is the further issue of whether this was a case of double insurance.

When he had hired the replacement car, the claimant had taken out free insurance covering him in respect of legal expenses and replacement vehicle charges. Clause 4.9 of that policy had excluded "any claims that You are indemnified for under any other policy of insurance". The judge found, on the facts, that the second policy contained the same exclusion. It was held at first instance that the claim was made on the basis of a single insurance policy and since there was also cover under a second policy, clause 4.9 was engaged, so that in respect of the second hire period there was, by virtue of that clause, no cover under the first policy even if the cover under the first policy extended as a matter of construction to the whole period of hire.

The Court of Appeal held that the judge had been wrong. The insurer had been subrogated to the claimant's rights under both policies, not one. It also found that Clause 4.9 covered claims for which the second policy provided an indemnity according to its terms, whether or not the insurers had actually paid out. Further, following the finding in Weddell v Road Transport and General Ins Co [1933], since Clause 4.9 was included in both policies, they should be treated as cancelling each other out, in order to ensure that the claimant was not left without cover. It made no difference that the same insurer was involved here.

The Court of Appeal also applied the decision of the Privy Council in King v Victoria Insurance [1896], which held that insurers are entitled to be subrogated to the insured's rights where they pay a claim in good faith and honestly, and the tortfeasor cannot argue that there is no subrogation because the claim did not actually fall within the terms of the policy. The Court of Appeal confirmed that the fact that an insurer does not seek to rely on a policy exclusion does "not mean that the sums paid were not to be regarded as the fruits of the insurance or that the tortfeasor could take them".

Even if the insurer ought to have relied on the exclusion, it still paid the claimant under the policy and so any damages recovered by the claimant would have to be held on trust for the insurer, because the policy had contained a clause requiring the claimant "to hold all damages ... recovered subject to a charge in Our favour in respect of all sums which We have paid out or which We have incurred a liability under this Policy" (emphasis added). Thus, the claimant would be bound to repay the payment of hire charges, whether or not the insurer had made a good faith payment under the insurance policy, so that there would be no double recovery.

COMMENT: There has been some textbook discussion as to whether rights of subrogation arise following an ex gratia payment by an insurer (ie where the insurer pays even though it was under no legal obligation to do so). As mentioned above, King v Victoria is authority for the proposition that subrogation arises so long as the payment by the insurer was made in good faith. However, Butler & Merkin's Reinsurance Law (para C-0372) has suggested that, rather than being an issue of subrogation, it can instead be argued (relying on the case of Hunt v Severs [1994]) that an implied trust arises over any recovered damages where an insurer has paid the insured (provided that there is no public policy ground for the refusal of a trust). In this case, the Court of Appeal did not need to find an implied trust, because an express one was provided for in the policy. It was clearly prepared, however, to accept the approach adopted in King v Victoria Insurance.

Vizcaya Partners v Picard: Privy Council considers whether defendant had submitted to a jurisdiction/enforcement of a foreign judgment

If a party obtains a judgment in a country with which the UK has no reciprocal regime (e.g. the USA and most of Canada), it will have to bring a fresh action to enforce its rights here, relying on the common law. It was recently confirmed by the Supreme Court in Rubin v Eurofinance (see Weekly Update 39/12) that at common law a foreign judgment can only be enforced in England if the judgment debtor has been present in, or agreed to submit to the jurisdiction of, the foreign country. Of issue in this case before the Privy Council was whether an agreement to submit must be express, or whether it can also be implied.

There have been conflicting cases on this point and the textbook Dicey, Morris and Collins on the Conflict of Laws originally stated that a submission could be made implicitly, but later editions said that an agreement to submit must be express and could not be implied.

The Privy Council reviewed the relevant authority and found as follows:

  1. An agreement to submit need not be contractual. The real question is whether the judgment debtor consented in advance to the jurisdiction of the foreign court.
  2. Agreement or consent can be implied or inferred. There just has to be an actual agreement.
  3. English law implies terms either as a matter of fact (in order to give effect to the intention of the parties – such terms are not implied lightly, hence the need for necessity or business efficacy) or as a matter of law (and are implied into classes of contractual relationship as a necessary incident to that relationship eg the implication of an obligation of confidentiality in arbitration agreements).
  4. An agreement to submit to the foreign jurisdiction cannot be implied by eg the fact the contract was made in the foreign country or governed by the law of that country, or was to be performed there.

In the present case, there was no suggestion under the foreign law that there was a term implied by fact or by law that the debtor had consented to the jurisdiction of the foreign court.

Khosravi v British American Tobacco: Judge decides whether extension of time to serve claim form should have been granted

One of the issues which the judge considered in this case (although not required to do so), was whether it had been correct to grant the claimant an extension of time for serving the claim form (pursuant to CPR r7.6). It is well-established that a good reason must be given for seeking the extension.

The claimant had advanced two reasons:

  1. Lack of funding. That argument was rejected by the judge: "it seems clear that the court will not generally recognise mere lack of funding as such a reason: Cecil v Bayat" (see Weekly Update 08/11). In the Bayat case it was held that although it might not have been viable for the claimants to take proceedings to trial without the benefit of a CFA or ATE insurance, they could still have commenced and served proceedings before funding had been finalised.
  2. Time was needed to gather further evidence. The judge said that although this might have justified the seeking of a stay once the proceedings were launched, it was hard to see how it would be a reasonable ground for holding up service of the claim form (in this case, for nearly 18 months).

More generally, the underlying allegation in this case involves physical mistreatment for which the claimant was said to be vicariously liable. It was argued that the court should have regard to the stress and poor health with which the claimant has had to contend in recent years.

Although the judge accepted that sometimes it may be appropriate to allow some generosity where a claimant's difficulties can already be seen as attributable to wrongdoing on the part of the defendant (eg in personal injury or clinical negligence cases) that did not apply here, since it was a fundamental issue as to whether any of this claimant's problems should be laid at the door of the defendants at all.

The judge cautioned that extensions should not go through "on the nod", and he said he would have set aside the extension granted in this case.

Morby v Gate Gourmet Luxembourg: Whether there had been "personal service" on a defendant

The issue in this case was whether the defendant had been personally served (of a bankruptcy petition, although it was accepted that the same principles apply as for service of a claim form). CPR r6.5 provides that a claim form can be served personally on an individual by "leaving it with that individual". Reference was made to the decision last year of Tseitline v Mikhelson (see Weekly Update 39/15). There, it was held that a document is "left with" the defendant if he has some degree of possession of it (even if the process server subsequently takes it away). In an earlier case, Kenneth Allison v AE Limehouse [1992], the House of Lords held that the document could also be left near the defendant.

In this case, the document was given to the defendant's friend, who was with the defendant at the time. The friend then put it in a bin when the process server refused to take it back.

Was the document left with or near the defendant? The judge held that it was. When the document was in the hands of his friend, the defendant clearly had "a sufficient opportunity of possession of the document to enable him to exercise dominion over it for any period of time, however brief'. The defendant could have had the document at any time by simply asking is friend to hand it to him, or by retrieving it from the bin. The natural conclusion was therefore that the document had been left "near" or even "with" the defendant. Leaving the document with the friend was no different to leaving it at a table next to the defendant.

COMMENT: This case continues a trend of cases to seemingly relax the rules on personal service, in order to find that service has been effected where the defendant either has possession of the claim form for however short a period of time, or could have possession of it, should he choose to do so (and is aware of the nature of the document).

Glencore International v PT Tera Logistic: Whether arbitration notice included counterclaim

Section 14(4) of the Arbitration Act 1996 provides that arbitral proceedings are commenced when a party serves notice requiring the other side to appoint an arbitrator or to agree to the appointment of an arbitrator. In this case, notice was given by one party (A) to commence arbitration in respect of their claims (and requiring the other party (B) to appoint a second arbitrator, and B responded by appointing an arbitrator "in relation to all disputes arising under the [contract]" (and a third arbitrator was subsequently appointed). However, by the time B served its defence and counterclaim, the limitation period for claims under the contract had expired. The arbitrators asked the court to decide whether the counterclaim was time-barred.

Knowles J noted that the claim and counterclaim arose out of a single set of facts giving rise to a balance of accounts or netting-off. In such circumstances, a reference to "claims" and "all disputes" in the notices had the effect of referring counterclaims, as well as claims, to the arbitrations. It did not matter that there had been no indication of a counterclaim at the time the notices were served. The situation was the same as if the notices had referred to "all claims and counterclaims", with no counterclaim at that time being indicated – the arbitrators would still have jurisdiction when a counterclaim was brought later on. However, the judge left open the issue (because he was not required to decide it) of whether a reference solely to "claims" would have been enough to include a reference to "counterclaims".

Gold Reserve v Venezuela: Whether arbitration claim form should have been served on a state/Interest rate on order enforcing award

One of the issues raised in this case was whether the claimant should have served an arbitration claim form on the defendant, the Republic of Venezuela. Section 12(1) of the State Immunity Act 1978 provides that "any writ or other document required to be served for instituting proceedings against a State shall be served by being transmitted through the Foreign and Commonwealth Office to the Ministry of Foreign Affairs of the State..."

The arbitration claim in this case was instituted by the issue of an arbitration claim form but it was never served because the claimant was relying on CPR r62.18. This provides that an application for permission to enforce an award in the same manner as a judgment (as was the case here) may be made without notice in an arbitration claim form. The rule further provides that the order giving permission must then be served on the defendant. The claimant argued that section 12(1) only applies to documents instituting proceedings which are "required to be served", and in this case only the order, and not the arbitration claim form, was required to be served. Teare J agreed with that approach (and disagreed with the judgment of Burton J in AIC Ltd v Nigeria [2003] on the same issue).

Although the judge also held that the claimant had not given full and frank disclosure (in part because no reference had been made to section 12(1)), he also held that this was a "rare" case where the original order should be maintained and the claimant's failure instead marked by an appropriate order as to costs.

A further issue in the case was whether the judge (when granting an order to enforce the arbitration award as a judgment of the court) had been right to award interest after judgment at the Judgment Act 1938 rate (ie 8%) – this had had the effect of making the judgment more valuable to the claimant than the award.

The defendant argued that the court cannot "improve" the award.

Teare J held that, since the award (and hence the judgment) were for sums in a foreign currency, the court has a discretion to order interest at such rate as it thinks fit, instead of at the statutory rate. However, the tribunal had considered that interest should run until payment at the rate stated in the award and "in principle the court's discretion should be exercised by awarding interest at the rate considered appropriate by the arbitral tribunal. The parties have submitted their dispute to arbitration and the arbitral tribunal has considered what rate of interest ought to be paid until the date on which the sum awarded by the tribunal has been paid. The court should respect that decision".

Commercial Management v Mitchell Design: Did a time bar clause in a contract satisfy the reasonableness test under UCTA?

A clause in a contract provided that "all claims under ...this Contract must, in order to be considered valid, be notified to us in writing within 28 days of the appearance of any alleged defect....and shall in any event be deemed to be waived and absolutely barred unless so notified within one calendar year of the date of completion of the works".

On the facts, Edwards-Stuart J found that this clause had not been incorporated into a sub-contract. Although not required to do so, he also considered whether the clause would satisfy the test of reasonableness under the Unfair Contract Terms Act 1977 ("UCTA"). Under UCTA, where one party deals as consumer or is required to deal on the other's written standard terms of business, a contract term can only be relied upon if it is reasonable.

The judge first construed the clause as requiring written notification within 28 days and the one-year alternative was a long-stop. A party could not protect itself by automatically giving written notice at the end of one year: a claim would only be valid if a defect had appeared within the preceding 28 days. The judge highlighted that each time bar clause must be looked at in the context of its particular situation. On the facts of the case, he found that the clause was not reasonable. The test is what it is reasonable to expect, rather than what actually happens. In cases such as this one, it is rare for a defect to manifest itself within months and initial cracking might not be readily visible at first. Furthermore, the contractor will not be a user of the building and so will not be able to observe if cracking appears.

(Re)insurance Weekly Update 5 - 2016

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Nigel Brook
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