UK: (Re)insurance Weekly Update 14- 2016

Last Updated: 26 April 2016
Article by Nigel Brook

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

This week's caselaw:

Mitsui Sumitomo v Mayor's Office for Policing and Crime: Supreme Court unanimously rules that consequential loss is not covered under the Riot (Damages) Act 1886

The previous decisions in this case were reported in Weekly Updates 32/13 and 19/14. During the widespread UK riots in 2011, a gang of youths broke into the Sony distribution warehouse in Enfield and stole goods and threw petrol bombs, which destroyed the warehouse. At both first instance and on appeal, it was found that this incident was a "riot" and so fell within the scope of the Riot (Damages) Act 1886. This Act provides that: "Where a ... building in [a police area] has been injured or destroyed, or the property therein has been injured, stolen, or destroyed, by any persons riotously and tumultuously assembled together, such compensation as hereinafter mentioned shall be paid out of [the police fund] of [the area] to any person who has sustained loss by such injury, stealing, or destruction the responsible statutory body". Of issue in this appeal to the Supreme Court was whether the claimants (here, the insurers of warehouse and stock) were entitled to recover consequential losses. The Court of Appeal held that they were so entitled (as there was nothing in the wording of the Act to exclude such losses), but the Supreme Court has now unanimously reversed that decision.

Lord Hodge, delivering the leading judgment, held that "this is a case in which history rather than legal theory casts light, revealing the correct answer". Linguistic analysis of the Act did not itself provide a clear-cut answer. However, it was noted that the Act provides only partial compensation for damage caused by rioters: for example, the Act does not expressly provide compensation for either personal injury caused by rioters or damage to property in the streets (even where such losses resulted from damage to, or the collapse of, a building).

Having regard to prior legislation, the Supreme Court concluded that such legislation made it clear that statutory compensation was to be confined to only the cost of repairing physical damage to property. Nothing in the 1886 Act removed that limitation and the preamble to the Act did not suggest an intention to alter the basis on which compensation would be paid. It was concluded that: "A claim for loss of rent or loss of profits in addition to the cost of restoring or replacing a building is different from an estimation of the diminution in value of a commercial building, in which the valuation of the undamaged building had regard to its income earning potential. They are different heads of loss".

COMMENT: In reaching its decision, the Supreme Court did not refer to the point raised by the judge in the first instance decision that the Act is analogous to a form of statutory insurance and "most insurance policies will not cover consequential losses without an express provision to that effect". The Court of Appeal did not refer to, or overrule, that general principle but its finding did raise the possibility that an insured might argue that the Court of Appeal's interpretation of compensation "for" property damage should be applied to similar wording in an insurance policy. The Supreme Court's ruling therefore excludes that possibility, albeit for reasons unrelated to the general principle.

AXA Corporate v Weir Services: Whether England was the appropriate forum to hear an application for declaratory judgment brought by insurers

Clyde & Co (Michelle Crorie and Erina Kawai) for claimant

Insurers issued, broadly, two types of policies to the insured: global liability policies issued in England covering companies in the insured's group, including an Australian subsidiary, and a "broadform" liability policy issued in Australia in favour of the insured's Australian subsidiaries. When a dispute arose, insurers issued proceedings in England seeking declaratory relief in relation to the global policies, and the insured's Australian subsidiary subsequently issued proceedings in Australia, seeking an indemnity under both the global policies and the Australian policy. Insurers sought an anti-suit injunction to restrain the Australian proceedings insofar as they relate to the global policies, and the subsidiary sought to set aside permission to serve out for the English proceedings.

The key issue in the case was therefore whether England was the appropriate forum to hear the claim relating to the global policies. They did not contain a jurisdiction clause but did provide that "The Insurer proposes that the policy will be governed by the laws of England and Wales, unless the Insured and the Insurer agree otherwise". The insurer and insured did not agree otherwise, and so Blair J held that the policy was governed by English law. Even if there had not been an express clause, the policies would be governed by English law since they were issued by the English branch of AXA (see Articles 4 and 19 of the Rome I Regulation).

After taking into account the various factors involved in the case, Blair J concluded that England was the appropriate forum to hear the claim under the global policies: "In a relatively balanced debate, the point that seems to me decisive is that the global policies are subject to what is in effect a choice of English law. Further, they stand at the apex of the worldwide, integrated liability insurance programme which AXA at the material time provided for the Weir group, with local policies in various different countries coming in beneath. Further and importantly, the evidence is that this form of global policy is widely used by AXA and in general such policies are governed by English law. I accept AXA's submission that it is desirable that key provisions of such policies (including something as fundamental as the definition of "Product") should be construed by the English courts".

The judge drew support for this conclusion from prior caselaw and textbook commentary, for example an extract from Dicey and Morris, Conflict of Laws, stating that "In cases concerned with insurance written on the London market and governed by English law, there is a strong tendency for the court to consider England as the natural forum". However, the judge declined to grant an anti-suit injunction (even though the commencement of the Australian proceedings had plainly been "tactical").

Accordingly, proceedings are to continue in both England and Australia.

Howe v Motor Insurers' Bureau: Whether claimant who sought indemnity from the Motor Insurers' Bureau was entitled to the benefit of QOCS

Weekly Update 12/16 reported the finding in this case that the defendant, the Motor Insurers' Bureau, was not liable to compensate the claimant, a driver who had been injured in a road traffic accident in France by an unidentified driver. Of issue in this decision was whether the claimant was entitled to the protection of Qualified One-way Costs Shifting (QOCS). This regime was introduced on 1 April 2013, and results in defendants generally being ordered to pay the costs of winning claimants but, subject to certain exceptions, they will not recover their own costs if they successfully defend the claim.

CPR r44.13 states that QOCS applies "to proceedings which include a claim for damages...for personal injuries". Stewart J was therefore required to decide whether the claim here fell within that definition.

He concluded that it did not. The claimant's claim against the MIB was not one for damages for personal injuries. Although the glossary to the CPR merely defines damages as "a sum of money awarded by the Court as compensation to the Claimant", the judge noted that he was not bound by this definition and instead approved textbook commentary to the effect that it is an essential feature of damages that there is a "wrong". In this case, there was no breach of duty by MIB, or any other wrong alleged against them, and so a claim based on the 2003 Regulations (which were brought in by the UK to comply with the fourth Motor Directive requirements) was not a claim within the meaning of CPR r44.13.

Webb v Liverpool Women's NHS: Court of Appeal holds that an issues-based costs order should not have been made where a Part 36 offer was beaten

The first instance decision in this case was reported in Weekly Update 14/15. The claimant made a Part 36 offer covering her entire claim. It was rejected but she went on to beat it at trial. However, she lost on one issue. The judge held that, leaving aside the Part 36 offer, an issues-based costs order would have been appropriate in this case (the issue on which the claimant had failed having been a separate, self-contained and discrete claim). He then concluded that the fact that there has been a successful Part 36 offer does not mean that the court is unable to make an issues-based order. The claimant appealed and the Court of Appeal has now allowed that appeal.

It held that an issues-based costs order would not have been appropriate in any event in this case: it is not unusual for a claimant to succeed on some, but not all, allegations (particularly in a personal injury case such as this one) and there was nothing in this case to take it out the ordinary or to justify the claimant being deprived of her costs.

As to the issue of whether the claimant was entitled to all her costs after having beaten her Part 36 offer, reference was made to the earlier Court of Appeal decision of Kastor Navigation v AXA [2004]. In Kastor, it had been held that it was necessary to determine, on the application of Part 44, to what costs the winning claimant was entitled and then to order the defendant to pay those costs on an indemnity basis (unless it was unjust to do so). The Court of Appeal distinguished Kastor, though, on the basis that it was decided on provisions of Part 36 and Part 44 which have now been materially altered. It held that, since Part 36 is a self-contained code, the court does not first exercise its discretion under Part 44 before deciding what costs order to make. The only discretion of the court is that conferred by Part 36 itself.

Although Part 36 does not preclude the making of an issues-based or proportionate costs order, a winning claimant should be deprived of all or part of its costs only if the court considers (having regard to all the circumstances of the case) that it would be unjust to make such an order. On the facts of the case, it would not be unjust to award the claimant all her costs. The defendant could have avoided all the costs of the trial by accepting the claimant's favourable Part 36 offer.

Coral Reef v Silverbond Enterprises: Security for costs application and whether Master bound by earlier decision of a High Court judge

The defendants applies for security for costs on the grounds that the claimant is resident outside the EEA and will be unable to pay the defendants' costs, if so ordered. A key issue was that the claimant, which is resident in Hong Kong, had (lawfully) failed to file any financial information. In the recent Court of Appeal decision of Sarpd Oil v Addax (see Weekly Update 10/16), which reversed an earlier decision by Smith J (see Weekly Update 31/15), it was held that "If a company is given every opportunity to show that it can pay a defendant's costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant's costs, it will be unable to do so".

Unfortunately for the claimant in this case, the Court of Appeal's ruling came out on the day of its hearing before Master Matthews. It sought to argue that it had relied on the earlier decision by Smith J, but the Master said that argument had "a strong air of unreality": other judges have reached different conclusions on the same issue and there would have been a doubt as to whether the decision would be followed. The Master pointed out that "the claimant was taking an obvious and significant risk in refusing to provide any information".

The Master acknowledged that the claimant could realistically have expected the application to be heard by a Master in the Chancery Division, and the claimant argued that a Master is bound by the decision of a High Court Judge. There is little prior caselaw on this point, but, having reviewed the available materials, the Master concluded that a Master exercising the jurisdiction of the High Court is bound by relevant decisions of the Court of Appeal and Supreme Court, but is not bound by a relevant decision of a High Court judge. He went on to conclude that Smith J had been wrong on the issue in this case. He found that there was reason to believe that the claimant would not pay a costs order in favour of the defendant, and so ordered security for costs.

Dinglis Properties v Dinglis Management: Freezing orders, disclosure and the consequences of a defendant accepting that that claimant has a good arguable case

The defendants applied to discharge a freezing order made against them and, for the purposes of the application, they accepted that the claimants have a good arguable claim on the merits, as pleaded in the particulars of claim. The defendants initially submitted that the claimants should be confined to their pleaded case, which did not allege fraud, but that argument was withdrawn when reference was made to The Lord Chancellor v Blavo [2016], in which it was concluded that there was a real risk of dissipation even though the pleaded allegation was simple breach of contract.

The judge held that, where the defendants have conceded a good arguable case on the merits, and where the pleaded facts are consistent with the breach of duty being either innocent or dishonest, the claimants will need further evidence of a propensity to dissipate assets (which they are free to adduce). (If the pleaded facts are consistent only with the breach of duty being dishonest, then those facts can show both a good arguable case and a propensity to dissipate, and no further evidence will be necessary). On the facts of the case, no propensity to dissipate assets was proven, since the defendants had taken no steps to dissipate, despite the parties being at war with each other since 2012.

An alternative argument, that there had been non-disclosure by the claimants when applying for the freezing order, was also considered by the judge. He rejected an argument that it would never be appropriate for the court to investigate allegations of non-disclosure of the merits of the claim where the defendant has admitted that there is a good arguable case. There is still a duty to disclose all material information at the without notice hearing (in order to protect the administration of justice), but any non-disclosure is "unlikely to be at the egregious end of the spectrum".

One further point made by the judge was that: "it is trite law that a claimant is deemed to join issue with every allegation in the defence and hence has no need to serve a reply unless he wishes to rely on additional facts or matters".

Prudential Assurance Company v HMRC: Court of Appeal explains procedural requirements for cases conducted under a Group Litigation Order ("GLO")

A GLO has been made in this case. CPR Part 19 Section III allows courts to make GLOs where there are, or are likely to be, a number of claims giving rise to the same issues. Although the claimant here had pleaded a claim in its particulars of claim, it did so only in very general terms, without any factual allegations. The defendant also pleaded a defence in only very general terms. Matters of contention were not identified in the pleadings.

The justification for this approach was said to be derived from observations of Lord Woolf in Boake Allen Ltd v HMRC (see Weekly Update 23/07). In this case, the Court of Appeal pointed out that Lord Woolf's observations were only obiter and that his comments that each procedural step need only be taken once where a GLO was in place did not suggest that basic steps in litigation may be ignored or not taken at all: "All that Lord Woolf was saying was that the steps in question need only be taken once, collectively, on behalf of all members of the group, rather than being taken by each litigant individually". It was in that context that he said that, for a GLO, "a claim form need be no more than the simplest of documents". He was not referring, though, to particulars of claim (or a defence).

The rules plainly envisage that particulars of claim will be served, and the Court of Appeal pointed out that relevant facts must be pleaded: "If they are facts generally applicable to all claimants, they may be pleaded in Group Particulars of Claim; if they are specific to a particular claimant they may be set out in a schedule".

Axon v Ministry of Defence: Whether losing claimant should pay the Third Party's costs

The claimant lost against the defendant, and so the Third Party joined to the proceedings by the defendant did not have to indemnify the defendant. There was no dispute that the claimant should pay the defendant's costs. Of issue here, though, was who should pay the Third Party's costs.

Nicol J noted that, under the general rule that additional claims are treated as if they are claims, and the loser pays the winner's costs, that would result in the defendant having to pay the Third Party's costs. However, that is only the starting point. According to the White Book, where the claimant is not impecunious (and that was not the case here, the claimant having adequate insurance cover), the claimant should usually be liable for the costs of both the defendant and the Third Party.

In this case, though, there had been an additional reason as to why the Third Party would never have been liable even if the claimant had won, and so it had not been reasonable for the defendant to join it to the proceedings. Accordingly, it was concluded that the claimant should not pay all the Third Party's costs. Nor was it relevant that the claimant had sufficient insurance cover: "insurance is a precaution against liability, not the cause of liability".

However, the claimant had chosen to obtain disclosure by encouraging the Third Party proceedings to continue, and so the claimant was ordered to pay the Third Party's costs up to the end of disclosure (and the defendant had to pay the Third Party's costs thereafter).


Law Commissions' Reforms: Insurable Interest

Weekly update 13/15 reported the issues paper published by the Law Commissions regarding their proposed reform of insurable interest. They have now reported that their proposals were well supported and a draft bill (linked to below) has been drafted to give effect to the proposals (and they hope that the bill will be able to follow the uncontroversial Law Commission bill route). A short consultation period on the bill will close on 20th May 2016. A paper on parametric insurance has also been produced, explaining how the insurable interest reforms will work with these products.

The main reforms introduced by the draft bill are as follows:

  1. Insurable interest is extended to include an interest in the lives of the insured's children and grandchildren and of a civil partner (where they are the subject of a life-related insurance policy). Group insurance policies are also covered. However, the Law Commissions stopped short of providing an automatic insurable interest in the lives of parents and grandparents.
  2. Insureds will meet the economic loss test if they have a reasonable prospect of suffering economic loss on the occurrence of the insured event.
  3. For non-life policies, it is confirmed that a policy will be void if the insured does not have an insurable interest at the time the policy is taken out, or a reasonable prospect of acquiring such an interest during the policy period. The insured must also have an insurable interest at the time of the insured event, in order for a claim to be payable (although the policy will not otherwise be void). It should be noted that, in any event, the indemnity principle requires an insured to suffer a loss in order to claim under a policy. An insurable interest includes where the insured would suffer an economic loss if the insured event occurs. The Law Commissions describe this provision as "very wide".
  4. The draft bill will, if enacted, repeal the Life Assurance Act 1774, the Marine Insurance (Gambling Policies) Act 1909 (which makes it a criminal offence to take out a marine insurance policy without an insurable interest) and the Marine Insurance Act 1788.

(Re)insurance Weekly Update 14- 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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