Court confirms insurance policy exclusions are not construed narrowly/scope of an insolvency clause
The claimants brought a claim under the Third Parties (Rights against Insurers) Act 1930 against the professional indemnity insurers of their financial adviser. The adviser gave allegedly negligent investment advice in respect of bonds issued by a company which then went into liquidation (and so defaulted on payments due to the claimants).
The insurers applied for summary judgment or strike out on two grounds:
(1) The claim fell within the Insolvency Exclusion in the policy issued to the adviser (and the claimants could have no better claim than the adviser's claim under the policy). The Exclusion excluded any claims or loss "arising out of or relating directly or indirectly to the insolvency of the insured or of any...business...with whom the Insured arranged directly or indirectly any...investments".
The judge, MacDonald Eggers QC, rejected an argument that in order for an insurance exclusion clause to exclude negligence from cover, it should make express reference to negligence. Unlike exemption clauses in ordinary contracts, "The position in respect of insurance contracts is wholly distinguishable in that an exclusion clause in an insurance policy is not designed to exclude, restrict or limit a primary liability on the part of the insurer; instead, it is intended to define the risk which the insurer is prepared to accept by way of the insurance contract. Further, the exclusion clause in an insurance policy does not ordinarily operate to deprive the insured of rights which existed prior to or but for the cover afforded by the Policy". Accordingly, no contra proferentem approach to construction applied.
Furthermore, the language of the exclusion was "relatively clear". The causative effect of the relevant insolvency "need to be as strong or efficient so as to constitute a proximate cause". If a proximate cause was required, the exclusion would not have used both "arising out of" and "relating...to" (the latter phrase might be construed in some instances as only requiring "a mere connection or relation, by way of a common causal history" (although that was not suggested by the parties here). The use of the word "indirectly" strengthened the judge's view. He concluded that here "for the Insolvency Exclusion to apply, it must be specifically accountable as a cause of the claim, liability or loss: in this sense, it must be significant; it must stand out as a contributing factor, at least, to the claim, liability or loss".
The claimants had sought to rely on a change of wording from the prior year policy, and argued that the change of wording was not brought to its attention. That argument was also rejected by the judge: "both generations of the relevant exclusion were set out in the contractual document and were not incorporated by reference. In those circumstances, the Court is entitled to assume that the parties to the contract - both Insurer and Insured - have read those terms and therefore would have been aware of the difference... This is especially so where the Insured, as in this case, was represented by a professional insurance broker".
This construction did not leave the insured without substantial cover and although the regulatory background was relevant, there was no indication that the policy was intended to discharge the adviser's obligation to maintain professional indemnity insurance. On the facts, the judge concluded that the insolvency of the investment company had caused the claim and so the Insolvency Exclusion applied.
(2) The judge also considered a separate argument raised by the insurers, that the claimants' rights of action against the adviser had been assigned to the FSCS (which had paid some compensation to the claimants, but not the full value of their claim). However, he declined to express a concluded view on the extent of the assignment to the FSCS (although he felt it would be hard to see why the FSCS should be given an assignment of all the claimants' rights in respect of their full loss, if the claimants had only received partial compensation from the FSCS (unless the FSCS would account to the claimants for any sums recovered in excess of the compensation paid by the FSCS)). He also declined to express a concluded view on whether the claimants retained rights to sue following a re-assignment of rights after judgment.
(3) Prior caselaw has also established that an insurer is not necessarily bound by a judgment regarding its insured's liability to a third party. However, the judge suggested that there might be two situations in which the insurer might be bound:
(a) Where the insurance policy contains an express, or perhaps an implied, term requiring the insurer to be bound by the judgment; and
(b) where the insurer is a party, or otherwise privy to, the proceedings which resulted in the judgment. However where, as here, the insurer is invited, but declines to participate in the proceedings, the judge said that that was not sufficient to prevent the insurer from questioning the existence or nature of any liability of the insured to the claimants which was established by judgment.
(4) As a result of the Insolvency Exclusion, the insurer was entitled to summary judgment in its favour.
COMMENT: This decision is another High Court decision confirming the position set out in the Supreme Court judgment of Impact Funding v AIG Europe that exclusion clauses in insurance policies do not necessarily have to be construed narrowly. The rationale for that approach is again confirmed: policy exclusions usually serve to define the risk covered by the policy and do not deprive the insured of rights which it had before entering into the policy.
The comment that insureds should be taken to be aware of policy terms (especially when advised by a broker) is also noteworthy in light of the recent decision of Ted Baker v AXA on the insurer's duty to warn. In that case the Court of Appeal also confirmed that "an insurer is, generally speaking, under no duty to warn an insured as to the need to comply with policy conditions" and that was especially the case where brokers are involved.
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