UK: (Re)insurance Weekly Update 12- 2016

Last Updated: 6 April 2016
Article by Nigel Brook

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

Mutual Energy v Starr Underwriting: Judge considers the meaning of "deliberate" in an exclusion clause

Clyde & Co (Nigel Chapman, Paul Lowrie and Alexandra Vitai) for defendants

The policy entered into between the parties contained the following clauses: Clause 5, in which the insurers acknowledged that they had received adequate disclosure prior to the start of the policy "on the assumption that such information is not materially misleading", and Clause 6 in which the insurers agreed not to avoid the policy for non-disclosure or misrepresentation "unless deliberate or fraudulent non-disclosure or misrepresentation or breach by that Insured is established in relation thereto".

Of issue in this case was the meaning of "deliberate", as used in Clause 6. Did it (as the insured contended) mean a deliberate decision not to disclose information which it knew was material (such that the non-disclosure involved an element of dishonesty) or did it (as the insurers contended) mean an awareness that information was not being disclosed but the insured held the honest, but mistaken, belief that it need not be disclosed (which was the case on the facts here). Coulson J preferred the insured's argument for the following reasons:

(1) The dictionary definition of "deliberate" connotes an intentional act or omission. The words used in Clause 6 suggested that serious misconduct or culpability was needed. No distinction could be drawn between a deliberate breach of a (for example) warranty and a deliberate non-disclosure: "A deliberate breach or default incorporates an element of wrongdoing, but so too does deliberate non-disclosure".

(2) There was no need to give "deliberate" a different meaning to "fraudulent". The presumption against surplusage was not a "hard-edged" rule: "Of course, the court should strive to give meaning to every word in the contract... But at the same time, the court should guard against giving such a rule too much prominence in circumstances where, as we all know, some tautology, some overlapping terms, some surplusage, will often be found in commercial contracts".

(3) In any event, the judge was not persuaded that "deliberate" and "fraudulent" necessarily meant the same thing. For example, a representation may be deliberate or dishonest but, if there is no intention to deceive, it will not be fraudulent. Similarly, information may be withheld deliberately to save the insured from embarrassment, but without any deceitful intention to obtain an advantage.

(4) The judge said that his decision was confirmed when Clause 6 was looked at in context and in conjunction with Clause 5. The two clauses were intended to protect the insured against the normal consequences of non-disclosure or misrepresentation, and so any carve-out "would be of relatively narrow compass".

(5) Finally, the judge held that his interpretation accorded with commercial common sense: the insured loses cover for dishonesty, but not for an honest mistake.

COMMENT: The Insurance Act 2015 retains the right to avoid a policy where the insured acts "deliberately" (or recklessly) and so Coulson J's interpretation of that word will be of interest when the Act comes into force (even where the policy itself makes no reference to deliberate non-disclosure or misrepresentation).

Minister Finansow v Aspiro SA: The European Court of Justice rules that claims handling services by an external company are not exempt from VAT

Article 135(1)(a) exempts from VAT "insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents".

This case involved an appeal by the Finance Minister of Poland against a national court decision that Aspiro, a claims handling company, was exempt from VAT. The European Court of Justice ("the CJEU") has now held as follows:

(1) The essentials of an "insurance transaction" are that an "insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded". Such transactions necessarily imply the existence of a contractual relationship between the provider of the insurance service and the insured.

(2) As a result, an insurer, who has a contractual relationship with the insured, will fall within the exemption set out in Article 135(1)(a).

(3) However, the claims handling service provided by Aspiro did not fall within the meaning of an "insurance transaction", even though its claims settlement service was an essential part of an insurance transaction. That is because it "does not itself undertake to ensure that the insured person is covered in respect of a risk and is not connected in any way to the insured person through a contractual relationship".

(4) Nor are Aspiro's services "related services performed by insurance brokers and agents". Although the settlement of claims is "related" to insurance transactions, Aspiro could not be said to be a broker or agent. Although it did have a relationship with both the insurer and the insured, it did not meet the pre-condition that its services are "linked to the essential aspects of the work of an insurance broker or agent". Crucially, it did not find prospective customers and introduce them to the insurers, with a view to the conclusion of insurance contracts.

Accordingly, Aspiro's claims settlement service did not fall within the VAT exemption.

COMMENT: It is not yet known whether the UK's HMRC will alter its stance on this issue in light of the CJEU decision. However, it should be noted that, although this decision affects claims handling services carried out by third party claims handling companies, it does not impact on claims handling services provided internally to an insurer. Where external claims handling companies are used, though, this decision may eventually lead to an increase in the cost of their services.

Howe v Motor Insurers' Bureau: Judge decides whether MIB only liable if equivalent EU body is liable

The English claimant was injured in a road traffic accident in France in March 2007. The French authorities were unable to identify the driver of the other vehicle. The fourth Motor Directive provides that a victim who suffers an accident in a Member State other than his home Member State can make a claim in his own Member State. Article 6 of that directive requires every Member State to establish a compensation body (which is the Motor Insurers' Bureau ("MIB") in the UK and the Fonds de Garantie ("FDG") in France). Article 7 of the same directive provides that where there is an unidentified vehicle and unidentified insurer, the injured party can apply for compensation from the compensation body in the Member State where he resides (which can then claim against the compensatory body where the accident took place).

The 2003 Regulations were brought in by the UK to comply with the fourth Directive requirements. Regulation 13(2)(b) provides that "the compensation body shall compensate the injured if it were the body authorised under paragraph 4 of [Article 1 of the second Motor Directive] and the accident had occurred in Great Britain". Of issue in this case was whether MIB had to compensate the injured party as if it was FDG or as if it was MIB. In other words, is MIB only liable to compensate the injured party if FDG is also liable.

Stewart J concluded that he was bound by earlier caselaw to find that MIB's liability to compensate the claimant under the 2003 Regulations was not dependent on the claimant establishing that FDG was liable to compensate him.

Although not required to do so, he found that the claim was time-barred under French law. He also found that the claim was time-barred under the 2003 Regulations. Nor could the claimant rely on estoppel or waiver on the basis that MIB had made certain interim payments. That did not amount to an unambiguous promise that MIB would not enforce its strict legal rights.

Khanty-Mansiysk Recoveries v Forsters: Judge considers meaning of "in connection with"/"arising out of"

This was not an insurance case, but the judge's comments on one issue are of possible interest to insurers. Eder J was required to interpret the following phrase in a settlement agreement which defined "claims": "arising out of or in connection with the Action or the invoice...referred to in the Action".

The judge accepted that the claim which the claimant was bringing did not "arise out of" the Action or the invoice. However, the defendant sought to argue that "in connection with" had a wider meaning, which included matters which were indirectly connected (relying on the earlier decision of Barclays Bank plc v HMRC [2007], in which the Court of Appeal concluded that a connection may be indirect for the purpose of the definition in that case).

Eder J cautioned that reference to earlier authorities as to the meaning of a particular word or phrase "is often unhelpful and sometimes dangerous", given the different context in which the word or phrase may have been used. However, he added that: "Here, it is sufficient to say that, as a matter of language, the words "in connection with" are plainly of wider scope than the words "arising out of". On the facts, he accepted that the proceedings being brought were "connected with" the Action and invoice, and therefore caught by the settlement agreement.

COMMENT: These two phrases commonly appear in aggregation clauses in (re)insurance policies and so Eder J's general comment that linguistically "in connection with" is wider than "arising out of" is of interest. The use of the word "or" in the phrase is also probably of relevance. It will be recalled that in the recent case of ARC Capital v Brit Syndicates (see Weekly Update 05/16), where the phrase in question was "arising from or in any way involving", Cooke J 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".

Barton v Wright Hassall: Court of Appeal refuses to validate service of claim form

The claimant, a litigant in person, sought to serve his claim form on the solicitors appointed by the defendant's insurers by email. Under the CPR, service by email is only allowed where the recipient has previously confirmed in writing that it is willing to accept service in this way. This was not the case here (the claimant had thought that the solicitors would accept service by email because their website did not say that they would not allow service in this way). The solicitors had only informed the litigant in person that service was not valid after the time for service had expired (and the claim was now time-barred). When the claimant's application under CPR r6.15(2), for an order that the steps he had taken to bring the claim form to the attention of the defendant should count as good service, was refused, he appealed to the Court of Appeal. The Court of Appeal has summarised the key principles to be derived from prior caselaw as follows:

(1) The court must be satisfied that there is a "good reason" to validate service.

(2) A critical factor is whether the claim form has come to the attention of the person intended to be served. However, that in itself is not a sufficient reason for making the order.

(3) When assessing if there is a good reason, the reason why the claim form was not served properly will be taken into account, as will the conduct of the claimant and defendant. However, it is not necessary for the claimant to show that he has taken all the steps he could have reasonably taken to effect service by the proper method.

(4) The fact that a party is a litigant in person will not in itself amount to a good reason, although "it may have some relevance at the margins".

(5) If one side is playing technical games, this will count against it.

On the facts of the case, the Court of Appeal was satisfied that the judge had applied the correct test. The claimant had had no good reason not to effect service properly: "The claimant had simply not taken advantage at all of the generous time period allowed for service, when no obstacles stood in his way". Nor did it matter that he is a litigant in person: the rule was not difficult to find or ambiguous. The Court of Appeal also said that no criticism could be levelled at the solicitors. They had been under no duty to inform the claimant of the defect in service and they had done nothing to encourage the claimant to believe that he had effected good service. Furthermore, "they would need to take their clients' instructions before expressly alerting the claimant to the defect in service, thereby exposing their clients to an action which would otherwise be statute barred".

Accordingly no order was made under CPR r6.15(2).

National Iranian Oil v Crescent Petroleum: Whether English law governed the issue of separability of an arbitration agreement and the meaning of "obtaining" consent

An agreement between the parties provided that it was governed by Iranian law and also provided for arbitration. A further clause provided that neither party could assign the contract without first "obtaining the prior written consent of the other". Several issues fell to be decided and Burton J has held as follows:

(1) Section 7 of the Arbitration Act 1996 provides that, unless otherwise agreed by the parties, an invalid arbitration agreement is to be treated as a distinct agreement, separable from the contract in which it is found. The Act applies where the seat of the arbitration is in England and Wales (which was the case here). Section 2(5) of the Act provides that section 7 applies where the law of the arbitration is the law of England and Wales (even if the seat is outside England and Wales). The judge rejected an argument that separability is a matter of substantive, not procedural, law, which in this case was Iranian law. He held that section 2(5) only applies if the seat is outside this jurisdiction, which was not the case here. Nor was there an agreement to disapply section 7 just because the proper law of the contract was Iranian law.

(2) The arbitration agreement had provided that the arbitration "will survive termination or suspension" of the contract. That did not mean that it would not survive if the contract was found to be invalid.

(3) The phrase "obtaining" consent did not mean that that consent had to be received by, or delivered to, the other side. Here, consent had been given by the claimant's board but had never been sent to the defendant. That did not mean that the defendant had not "obtained" the consent.

J Murphy v Beckton Energy: Whether deleted words can be taken into account

In Mopani Copper Mines v Millennium Underwriting (see Weekly Update 25/08), Clarke J concluded, after reviewing the relevant caselaw authority, that in general it is illegitimate to look at deleted words, except where (a) the deleted words resolve an ambiguity in a neighbouring paragraph or (b) the deleted words show what it is the parties agreed that they did not agree and there is ambiguity in the words which remain.

In this case, the parties had deleted certain words which normally appear in a standard wording. The judge held that "to the extent that recourse to deleted words is permissible, care must be taken as to what inferences, if any, may properly be drawn. Here of course, the position is that the parties chose to agree a clause wholly different from the standard wording ....It is relevant background at least".

Group Seven v Nasir: Judge comments on costs budget

The parties prepared costs budgets which they had not agreed. Morgan J was therefore required to make a costs management order approving the budgets (in relation to future costs). He noted that: "The rules do not prescribe any particular mathematical relationship between the costs and the sums in issue. It would obviously be inappropriate to do so". However, having reviewed prior caselaw, he concluded that the claimants' combined costs budget should be about half of the claim. Accordingly, their combined budget of £5.05 million was a disproportionate sum in relation to a claim for £7.08 million. The case would essentially be a factual dispute which was not particularly complex (and the judge was not required to manage the costs of any future appeal at this stage).

Rule 44.3(5)(d) refers to the relationship of the costs to any additional work generated by the paying party. That rule applies where an order for costs has been made and one knows who the paying party is. At the costs budget stage, there is not yet an order that anyone pay the budgeted costs but the judge said that: "I consider that the question of proportionality should be judged on the hypothetical basis that the party who has prepared the budget turns out to be the receiving party". Here, the judge was prepared to allow the claimants sums for contingencies to reflect the possibility that there will be future procedural difficulties which might be attributable to a lack of cooperation from some of the defendants.

(Re)insurance Weekly Update 12- 2016

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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