UK: Professional Indemnity: Cover For Co-Insureds

Last Updated: 4 October 2007
Article by Nicola Cowan

The reversal of the first instance decision in Brit Syndicates and others v Italaudit SpA and another highlights the dangers of ambiguous policy wording, as well as the difficulty of avoiding it.

Facts

Brit wrote a professional indemnity insurance policy for the organisation of accountancy firms practicing under the name Grant Thornton, which, at the time, included the Italian member firm now known as Italaudit SpA ("GT Italy"). Under Extension 3 of the policy, Grant Thornton International ("GTI"), the not-for-profit umbrella corporation which manages the organisation, was included as an Assured Firm solely in respect of claims made against it "arising from claims made against a member firm of [GTI] insured by the terms and conditions of this policy".

A class action suit was brought in the USA against Grant Thornton Italy and GTI arising out of an audit carried out by GT Italy of a subsidiary of Parmalat Finanziaria, SpA. GTI’s liability was said to arise as an entity said to be in control of GT Italy.

Brit avoided the policy as against GT Italy on the grounds of misrepresentation and/or non-disclosure. It was not disputed that this was valid. However, Brit also asserted that the consequence of avoidance was that GT Italy was not at any time "a member firm of GTI insured by the terms and conditions of this policy", and so it followed that GTI was also not entitled to be indemnified under the policy. Brit brought proceedings seeking a declaration to this effect.

Issue

The question at issue was whether the words "insured by the terms and conditions of the policy" in Exclusion 3 was simply descriptive of the member firms listed in the Schedule (in which case GTI’s status was not altered by avoidance of the policy), or whether they qualified the prior word "claimed" and meant "entitled to an indemnity" or "validly insured" under the policy.

Decision

At first instance, the court held that the wording in question was descriptive, and GTI was granted summary judgment. The judge said that he saw no reason why the composite nature of the insurance should not extend to GTI when it fulfilled the stated criteria and thought that, in principle, GTI should not then be affected by the conduct of other assureds of which it was ignorant. This conclusion avoided the uncertainty which would arise if cover for GTI was dependent on the conduct of a member firm and on whether the policy responded to that member firm (which would of course often be in issue).

This decision was overturned by the Court of Appeal, which held that the words "insured by the terms and conditions of the policy" qualified "claimed", meaning that the claim in question had to fall within the ambit of existing cover. Extension 3 read as if it was intended to be parasitic on claims already covered by the policy and not as if it was intended to provide totally independent and far reaching cover to GTI. The court accepted that it might appear harsh for an insured to be sued, incur costs, and then have the rug pulled from under them. However, this would only occur in cases where cover was disputed.

Comment

It is frequently stated that this kind of case illustrates the need for both insureds and insurers to ensure that policy wording is clear and precise. The differing decision reached at first instance does, however, also show the extent to which minute attention to detail may be needed if this is to be achieved.

Further reading: Brit Syndicates & Ors v. Italaudit SpA & Anor [2007] 1 All ER (Comm) 785.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 03/10/2007.

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