UK: Does Your Insurance Policy Do What You Think It Should?

Where the terms of a contract are clear, there is no need to rely on additional rules or practices that could result in a different interpretation. This was confirmed by the Court of Appeal in its most recent decision on contractual interpretation.

Spire Healthcare Limited v Royal & Sun Alliance Insurance Plc involved an appeal to the Court of Appeal on the construction of provisions of a combined liability insurance policy (the Policy) issued by Royal & Sun Alliance (RSA) to Spire Healthcare (SH).

Background

Over 700 former patients of private healthcare operator SH had made claims against it arising out of unnecessary and negligent operations carried out by the disgraced consultant breast surgeon, Mr Ian Paterson. SH agreed to pay almost £27 million into a settlement fund for those patients. A dispute then ensued between SH and RSA as to the level of cover provided by the Policy.

The schedule to the Policy (the Schedule) confirmed a Limit of Indemnity of £10 million for "any one claim" and a limit of £20 million in respect of all damages costs and expenses "arising out of all claims" during the period of insurance.

The general terms of the Policy, which dealt with medical negligence, stipulated at proviso 5(a), that "The total amount payable...in respect of....all claims.....consequent on or attributable to one source or original cause.... shall not exceed the Limit.". Proviso 5(b) then stated: "the total amount payable...in respect of all damages arising out of all claims ...shall not exceed the appropriate Limit". The Limit being the limit of indemnity.

SH argued that proviso 5(a) did not operate so as to limit cover for the various connected claims made against the surgeon to a total of £10 million. RSA argued that it did.

First Instance Decision

At first instance the court agreed with RSA. The court held that, when read with the Schedule, proviso 5(a) was effectively an aggregation clause, meaning that linked claims were to be treated as a single claim. Accordingly, where a number of claims were attributable to one source or original cause, they were to be treated as one claim and subject to the £10 million limit. SH appealed to the Court of Appeal.

Court of Appeal Decision

The appeal was dismissed.

Lord Justice Simon confirmed that, when construing insurance policies, the combined effect of the wording in both the Policy and the Schedule must be considered. Clearer words could have been used to put the question of whether proviso 5(a) was an aggregation clause beyond doubt, but the court is required to interpret the contract as it is and not as it might have been drafted. A party could always argue that a contentious term might have been better expressed.

Aggregation clauses may operate in favour of either the insured or the insurer. The court will accordingly not approach the issue of construction with a predisposition either to restrict or widen their effect.

Simon LJ accepted that the amount of £10 million was not expressly referred to in proviso 5(a). However, when such proviso was read together with the Schedule, it effectively created three categories of claim with three limits of indemnity, as follows:

  1. A £10m limit of indemnity in respect of a single claim;
  2. A £10m limit of indemnity in respect of a category of linked claims; and
  3. A £20m limit of indemnity in respect of all claims within the policy period - irrespective of their sources or original cause.

The judge at first instance had recognised that proviso 5(a) could have been expressed more clearly, but he accepted that in "frequently used, modified and revised policies of insurance, neatness and elegance are often lost". Simon LJ agreed.

He went on to confirm that the doctrine of contra proferentem, where a clause is interpreted in favour of the insured, is only to be applied where there is ambiguity. In this case, there simply was no doubt or uncertainty. Proviso 5(a) was not to be read as meaning something it did not, i.e. that linked claims should be treated separately, each one with its own £10 million limit of indemnity (albeit also subject to the £20 million 'all claims' limit).

Comment

This judgment is a short but important one.

As the Court of Appeal confirmed, aggregation clauses in insurance policies can operate in favour of both parties, either by capping the overall sum insured, or by capping the amount of excess per claim. The courts will not, therefore, deliberately seek to interpret them so as to benefit either party. The courts will give them the meaning intended by the contract, unless there is uncertainty. Even if, as in this case, that means an insurer can rely upon one limit of indemnity so as to cap the overall amount that will be paid out for numerous linked claims.

If ever there was any doubt, the judgment makes it crystal clear - careful drafting is key. Where the terms of a contract are clear and certain, the courts are reluctant to interfere with what parties have agreed - even where the terms could have been expressed in a neater and more elegant manner. If the provisions are clear, they should not be interpreted against the party seeking to rely on them, even if that may be fairer. Insureds must make sure they review and understand how the provisions in their policy work before a contract is concluded. If they do not, the provisions may not actually reflect what they think has been agreed and disputes will go on and on and on...

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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