UK: (Re)insurance Weekly Update 17- 2018

Last Updated: 23 May 2018
Article by Nigel Brook
Most Read Contributor in UK, November 2018

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

Travelers Insurance Company v XYZ: Court of Appeal upholds decision that insurer liable for costs of defending uninsured claims

The first instance decision in this case was reported in Weekly Update 8/17. The claimants in a group litigation action alleged that the defendant had supplied defective breast implants to them. The defendant's product liability insurers advised that the policy did not cover the "worried well" ie those claimants who were concerned about their implants but whose implants had not ruptured. Eventually, the insured claims (197 in total) were settled with the consent of the insurer (who paid a proportionate amount of the common costs attributable to the insured claims). The remaining 229 claimants (whose claims were uninsured) subsequently succeeded in their claim against the defendant. The defendant was by then in administration and the claimants sought, and were granted, a costs order against the insurer, pursuant to section 51 of the Senior Courts Act 1981. The insurer's appeal from that decision has now been rejected by the Court of Appeal.

The insurer had sought to argue that a liability insurer should only be held liable under section 51 if it has controlled the litigation in its own interest, without paying appropriate regard to the insured's interests. But the Court of Appeal placed more importance on the principle of reciprocity: if the insured had won, all the claimants (both insured and uninsured) would have been liable equally to contribute the other side's costs.

The Court of Appeal noted that the decision has caused consternation in the insurance industry and amongst insurance lawyers but went on to find that "It is, in my judgment, fanciful to suppose that when [the insurer] entered into the contract of insurance they expected that, if called upon to indemnify [the insured] against a claim for defective products, such a claim would be brought by a random mix of insured and uninsured claimants. The expectation must have been that, if called upon to indemnify [the insured], [the insurer] would potentially be liable for all the costs of an unsuccessful defence. It is in that sense that I agree with the judge that to require [the insurer] to pay the costs of the uninsured claimants is no more than [the insurer] bargained for. That feature in itself distinguishes this case from cases where the combined award of damages and costs exceeds the policy limit. In the present case there was no such limitation".

At first instance, the judge had placed emphasis on the fact that, but for the insurer's involvement, the defendant would have disclosed at an early stage that there was no insurance for the "worried well" claims and the applicants would most likely have discontinued their claims. The Court of Appeal was unpersuaded by the argument that the judge had been wrong to conclude that the lack of insurance should have been disclosed, given that there is no duty to disclose the cover limit in a policy of insurance (see Cormack v Excess Insurance Co Ltd [2002]). The Court of Appeal concluded that: "First, it was not alleged in that case that the failure to disclose the cover limit had any causative effect on costs. In our case, by contrast, the judge was satisfied that if the lack of insurance had been disclosed costs would not have been incurred. Second, the non-disclosure in that case was the cover limit. The non-disclosure in our case was the non-existence of any insurance at all". Furthermore, it was held that Cormack did not say that a failure to disclose the limit of cover was irrelevant.

Pakeezah Meat Supplies v Total Insurance: Judge assesses damages for breach of insurance broker's duties

The claimant's insurer avoided for non-disclosure and misrepresentation following a fire at the claimant's premises. The claimant then sued its broker for breach of the broker's duty to advise on the duty of disclosure. The broker was unable to defend the proceedings after its own insurers avoided its professional negligence policy and judgment was entered against it, damages to be assessed (the broker then went into liquidation).

The assessment of damages in this case is highly fact-specific, the judge finding that the claimant would have made full disclosure had the broker performed its duty correctly. The judge also accepted the level of cover which the claimant said it would have sought and that there was no reason to believe that the claimant had been uninsurable had all material information been disclosed. The claimant had also sought to argue that there should be no reduction to reflect a loss of chance. That argument was rejected by the judge, who held that there was a risk that the insurer (and other insurers) might have refused to insure the claimant, but the judge thought that risk was "fairly low" given "the relatively standard nature of the risk and...the type of premium" (the premium was just over £5,000, although the judge held that an additional premium of £2,000 would have been charged had the true circumstances been known), and so he ordered a reduction of 25% to take into account that chance.

COMMENT: This case is in line with prior caselaw which has held that a cause of action can accrue against a broker in respect of its alleged breach of duty in failing to advise its client as to how to comply with the disclosure obligations and in failing to take reasonable care to elicit matters which ought to be disclosed. So, for example, in Jones v Environcom (see Weekly Update 14/10) it was common ground between the parties that where a change in personnel led to a new person being responsible for insurance matters in the client's organisation, the broker must ensure that an appropriate understanding of questions of materiality is held by that person. Similarly, in this case, the person at the insured charged with placing the insurance had no prior experience or understanding of insurance matters. However, in Jones v Environcom, the judge concluded on the facts that, had the information been disclosed, the insured would have been unable to obtain cover from either the particular insurer in question or from any other group of underwriters. The same argument did not fully work in this case though.

Societe Generale v Goldas Kuyumculuk: Court of Appeal examines the requirements for an order for deemed service by an alternative method

The first instance decision in this case was reported in Weekly Update 13/17. After the grant of freezing orders in favour of the claimant, the claimant issued proceedings and purported to serve out of the jurisdiction, on the defendants in Turkey and Dubai. However, it failed to serve in either country by a valid method. In both cases, though, the claim form came to the notice of the defendant.

The English proceedings were then put on hold for some 8 years whilst insolvency proceedings in Turkey continued (the freezing orders were maintained throughout). The defendants then applied to strike out the English proceedings and the claimant applied for an order for deemed service by an alternative method (CPR r6.15) or an order dispensing with service (CPR r6.16). Popplewell J refused the claimant's application and struck out the claim and the claimant appealed.

At first instance, the judge had said that "negligence or incompetence on the part of the claimant's legal advisers is not a good reason; on the contrary it is a bad reason, a reason for declining relief". The Court of Appeal accepted that that had gone too far, and in the context of alternative service, it can't be said that negligent legal advice is always a "bad reason" (although that doesn't necessarily make it a "good reason" either). However, it also held that that error by the judge was not enough to vitiate his evaluation of the case as a whole.

The judge had also said that a good reason is needed for an order under CPR r6.15, but exceptional circumstances are needed if the good reason has not impacted on the expiry of the limitation period. The Court of Appeal rejected the claimant' argument that it should be irrelevant whether the good reason impacted on the expiry of the limitation period. It held that "Once it is clear that the claim is (or is arguably) time-barred, that must be highly relevant to the exercise of the court's discretion. A failure to serve by the proper method may be permissible if... the claimant did not know he had a claim until close to the end of the limitation period but the requirement of a good reason for the purpose of CPR 6.15 must contemplate an inquiry into the reason for not achieving proper service before the expiry of the limitation period; otherwise limitation becomes irrelevant and that is not the law".

In Abela v Baadarani (see Weekly Update 24/13), Lord Clarke appeared to suggest that it may be less easy to obtain an order under CPR r6.15 where the country where the claim form is to be served is a signatory to a service treaty/convention to which the UK is also a signatory. He referred to the case of Cecil v Bayat (see Weekly Update 08/11) in which the Court of Appeal held that "service on a party to the Hague Convention by an alternative method under CPR 6.15 should be regarded as exceptional, to be permitted in special circumstances only".

In this case, the Court of Appeal held that Abela had said nothing about the situation in a Hague Convention case and that Cecil v Bayat continued to apply and so exceptional circumstances were needed where service by an alternative method was sought in a case to which the Hague Convention applies (as was the case here). The Court of Appeal said that it would take a Supreme Court decision to override that position. Accordingly, the judge had not erred in requiring exceptional circumstances here and had been entitled to conclude that the claimant was not entitled to an order under CPR r6.15.

One further issue in the case was whether the judge had erred in ordering an inquiry into damages pursuant to the cross-undertaking in the freezing orders (which were discharged by the judge). The Court of Appeal held that he had because "delay in asking for an inquiry is a hugely important consideration to which the judge has attributed inadequate weight".

COMMENT: In deciding whether a good or exceptional reason is needed for an order under CPR r31.15 where the Hague Convention applies, the Court of Appeal referred to Lord Clarke's judgment in Abela but not to that of Lord Sumption (with whom Lords Neuberger, Reed and Carnwath agreed) who appeared to be of the opinion that an order under CPR r6.15 should not be seen as exceptional even where there the Hague Convention applies. (There was also no reference to the recent first instance decision of Koza v Akcil (see Weekly Update 09/18) that only a "good reason" is needed).

Rock Advertising v MWB Business: Supreme Court confirms that parties can agree a "No Oral Modification" clause

The parties entered into a contract which included a clause that all variations to the contract "must be agreed, set out in writing and signed on behalf of both parties before they take effect". Such a clause is commonly called a "No Oral Modification" clause and the issue in this case was whether it was effective. One of the parties argued that it was not because: " (i) a variation of an existing contract is itself a contract; (ii) precisely because the common law imposes no requirements of form on the making of contracts, the parties may agree informally to dispense with an existing clause which imposes requirements of form; and (iii) they must be taken to have intended to do this by the mere act of agreeing a variation informally when the principal agreement required writing". Those arguments have been accepted in other countries, such as Australia, Canada and Germany and also found favour in the Court of Appeal in this case.

However, the Supreme Court (by a 4:1 majority) has now allowed the appeal from that decision. Lord Sumption, giving the leading judgement said that "In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation". He further commented that the reasons advanced for disregarding No Oral Modification clauses "are entirely conceptual" and "there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation".

The same principle also applied to entire agreement clauses: "Both are intended to achieve contractual certainty about the terms agreed, in the case of entire agreement clauses by nullifying prior collateral agreements relating to the same subject-matter".

Irving v Morgan Sindall: Judge considers meaning of "impecunious" in a credit hire case – of possible interest to motor insurers

Where a claimant's car is damaged by the negligence of the defendant, the damages recoverable by the claimant for the loss of use of the car would be the basic hire rate of the replacement car. However, damages may be higher if the claimant is impecunious and can only hire a car with credit terms (see eg Lagden v O'Connor [2003]). One of this issues in this case was what is meant by "impecunious". In Lagden v O'Connor, the test was set out as follows: "what it signifies is inability to pay car hire charges without making sacrifices the plaintiff could not reasonably be expected to make".

In this case, at first instance it had been held that the claimant was not impecunious because she could have bought a replacement car of the value of the one which was written off by depleting her accounts which were in credit and spending up to her credit card limit. Turner J has now held that the judge was wrong to reach that conclusion. He said that "I cannot ignore the fact that by reducing her capital to the bare minimum and increasing her debt, the claimant would have been exposing herself to the risk of a serious financial challenge in the event that even a modest but unexpected financial reverse might have afflicted her before her claim was satisfied. Impecuniosity need not amount to penury".

Ashany v Eco-Bat Technologies: Court of Appeal considers costs consequences where claimant discontinued claim

Unless the parties agree, or the court orders, otherwise, the normal costs consequence of a claimant discontinuing its claim is that the claimant will be liable for the costs incurred by the defendant up to the date on which the notice of discontinuance was served. At first instance in this case, that presumption was disapplied, and the defendant appealed.

The Court of Appeal commented that "The presumption in r.38.6 arises because, in the ordinary case, the discontinuance of a claim by a claimant against a defendant will usually amount to an admission or an acceptance that the proceedings should never have been commenced. In such a case, the starting point must be that the defendant is entitled to its costs, and that is reflected in the default rule". But here, the proceedings had been commenced because of "considerable prevarication and delay" by the defendant and the action was discontinued at least in part because the claimants' original aim had been achieved.

The claimants had not sent a pre-action letter in accordance with Para 6 of the Pre-Action Conduct Practice Direction. Nevertheless, the Court of Appeal held that the Master had been entitled to conclude that this was not a case where another round of correspondence would have been useful: "The parties were, even before proceedings began, engaged in a feud which rendered such procedural matters irrelevant".

The Court of Appeal also found that the Master had been entitled to disapply the presumption in relation to the costs for a certain period because the defendant had acted unreasonably. However, in respect of a later period, the Court of Appeal held that she had erred in finding that the defendant's solicitors "ought reasonably to have stopped incurring costs" once it had been made sufficiently clear that the claimants would not be proceeding to trial. The Court of Appeal found that the claimants had not unequivocally said that they would discontinue and so there was no reason to disapply the default rule for that period.

COMMENT: In Nelson's Yard v Eziefula [2013] the Court of Appeal confirmed that, just because a claimant had already achieved almost all that it hoped for from the proceedings, that does not justify a departure from the normal rule. However, there, as here, the defendant's conduct was taken into account in deciding that the fall-back position would not apply (in that case, the defendant had unreasonably failed to comply with the Pre-Action Conduct PD and had shown no willingness to mediate or settle).

Stati v The Republic of Kazakhstan: Court sets aside notice of discontinuance where party had been seeking to enforce an award

The claimants sought to enforce a NY Convention award in their favour both in the UK and in other jurisdictions. In the proceedings here, the defendant sought to set aside the order granting permission to enforce the award. The court directed that the defendant's claim that the award was obtained by fraud should proceed to trial. In so doing, the court had found that there was prima facie evidence of fraud. The claimants then served a notice of discontinuance and the defendant applied under CPR r38.4 to have the notice of discontinuance set aside.

CPR r.38.4 gives no guidance as to the circumstances when a court will set aside a notice of discontinuance. However, prior caselaw has established that abuse of process is not a necessary or exclusive criterion which has to be satisfied, and the judge in this case re-confirmed that point. Although a party is not required to give an explanation for the discontinuance, the court is entitled to examine what the discontinuance is intended to achieve and the reason for it. The overriding objective will apply and there should be consideration of what is fair to all the parties in the case.

The judge did not accept the two reasons given by the claimants for discontinuing (there was no evidence that litigation funders had "carved out" the English proceedings from the funding arrangements, and the securing of attachment orders in other countries had not triggered the notice of discontinuance). Although the judge was not prepared to go so far as to say the claimants had discontinued because they had no answer to the fraud allegation, he did agree that the notice of discontinuance should be set aside, in part because "In the context of a global multi-jurisdiction enforcement exercise by the [claimants] I respectfully take the view that it will not be without use to the Courts of at least some other countries to have a concluded answer on the question of fraud .. and therefore on the question whether the English Court would enforce the Award". That was so even though England is not the seat of the arbitration: it is, however, a jurisdiction to which all the parties have submitted.

State Bank of India v Mallya: Court finds risk of dissipation in a freezing order application and considers material non-disclosure point

The judge in this case found that a risk of dissipation had been made out on the facts in an application for a freezing order. In particular, the respondent's lengthy delays in appealing a judgment against him in India were suggestive of a wish to avoid or delay as long as possible the satisfaction of his obligations. It was also relevant that he had been held to be in contempt of court on two counts by the Supreme Court of India, and his departure from India, coupled with a resistance to India's application to extradite him, provided some grounds for regarding him as a fugitive from justice. Those factors evidenced a risk of dissipation and "in those circumstances it is reasonable also to take into account the complexity of the structures used by [the respondent] for the holding of assets, which would be likely to facilitate any dissipation of assets".

The respondent had argued that there had been a material non-disclosure by the applicant, because it had failed to mention pre-existing attachment orders granted by a foreign court. The judge said that "As a general matter I consider that the court ought, when being asked to grant a freezing order on a without notice basis, be specifically directed to any pre-existing attachment orders granted by a foreign court, particularly when they extend to assets overseas. It would have been preferable here for the [earlier foreign] attachment orders not merely to have been exhibited but also to have been drawn to Picken J's attention. Having said that, in the present case I see force in the Claimants' point that this matter was in context not material and would have been unlikely to assist [the respondent]".

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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