UK: (Re)insurance Weekly Update 22- 2018

Last Updated: 2 July 2018
Article by Nigel Brook
Most Read Contributor in UK, November 2018

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

Axa Insurance v Financial Claims Solutions Ltd & Ors: Court of Appeal awards exemplary damages following fraud against an insurer

The appellant insurer appealed against a judge's decision not to award it exemplary damages against the three respondents in this case.

The three respondents had carried out a "sophisticated, well-planned and brazen" fraud: two alleged road traffic accidents were faked, false documentation (such as hire agreements and medical records) were created and the claimants themselves may not have existed. The first respondent (which was operated by the second and third respondents) conducted proceedings on the basis that it was authorised to do so as a firm of solicitors (which it was not) and it misused the court process (by falsely representing that court documents had been served) in order to obtain default judgments for a sum in the region of £85,000. It was only through the diligence of the insurer that the fraud was exposed and enforcement prevented.

The judge below awarded the insurer compensatory damages of just under £25,000, comprising the value of time spent by the insurer's staff, plus investigators and solicitors, in unravelling the fraud and setting aside judgments against the insurer. However, he refused to order exemplary damages and the insurer has now succeeded in the appeal from that decision.

The Court of Appeal noted that exemplary damages are an exception to the general rule that damages should be compensatory and held that "It would therefore be inappropriate to extend the circumstances in which they can be awarded beyond the three categories of case identified by Lord Devlin" (which was a reference to the earlier decision of Rookes v Barnard [1964], in which one of the categories identified by Lord Devlin was where " the defendant's conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff").

The Court of Appeal held that the judge had erred in finding that the profit sought to be gained (the £85,000) was entirely by means of abstracting money from the insurer and the profit and the compensation would be identical. The Court of Appeal said that that approach was wrong and imposed an "unjustified limitation on the second category of case". The court should instead "analyse the position prospectively when the tort is committed, at which time the tortfeasor may or may not ultimately achieve the profit it seeks to achieve". Here, had the wrongdoers succeeded, and enforced the judgments in their favour, there was little doubt that the insurer would have been unable to recover that money.

Furthermore, it was nothing to the point that criminal proceedings could also have been brought.

Having found that this was a "paradigm" case for exemplary damages, the Court of Appeal awarded exemplary damages of £20,000 against each of the respondents (so £60,000 in total).

Absolute Living v DS7: Judge refuses to grant security for costs on basis that the claim would be stifled

This case involved an application for security for costs. The ground that the claimant is a company and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so had been met (the claimant company is an insolvent company in liquidation). Accordingly, Smith J was required to decide whether it would be just to make the order.

He noted that it is important for the court to avoid a situation where the underlying merits of the claim are analysed by the judge. It was enough, here, that the underlying claim was a bona fide one, genuinely brought and clearly not a sham.

The judge concluded that it would not be just to make the order in this case. That was because it would stifle the claim being brought by the claimant's liquidators on behalf of the claimant, for the benefit of the claimant's creditors. The judge noted that the key question when considering whether a claim will be stifled is if the company (and the company alone) can or cannot provide the security. Here, even if the liquidator was prepared to take the highly unusual step of causing the security to be paid out of her firm's coffers, those funds would be coming from a third party, and not the company itself. Furthermore, the liquidator had agreed a "no win no fee" structure and had chosen not to approach the claimant's creditors for funding, which led the judge to conclude that "there is no source of funding available to the Claimant that would enable it to finance an order for security for costs were I to make one". That therefore led to a clear risk that a bona fide claim would be stifled.

COMMENT: This case might be contrasted with Northampton Regional v Cowling (see Weekly Update 24/13), in which the judge agreed with commentary in the White Book that in considering whether a claim might be unfairly stifled, the court should consider not just whether a claimant can raise security out of its own resources, but also whether it could raise the amount needed from outside sources (eg directors or shareholders). See too the Accident Exchange case below.

In this case, though, the judge said that even if the company's creditors (or liquidators) would be prepared to provide funding, that would not suffice as that would not be funding from the company itself. In so holding, the judge relied on the Supreme Court decision of Goldtrail Travel v Onur Air (see Weekly Update 28/17), where, in deciding whether the company could raise funds from its controlling shareholder, it was held that the approach should be as follows: "The question should never be: can the shareholder raise the money? The question should always be: can the company raise the money?"

Accident Exchange v McLean & Ors: Court orders security for costs and rejects argument that claim would be stifled

The background to this case was reported in Weekly Update 21/17. The claimant in this case is a car hire company. It has established that Autofocus Limited ("AF"), which was hired by the insurers of at-fault drivers, was involved in a widespread systematic fraud, whereby the company fabricated evidence to show that the basic hire rate of a replacement car (ie the damages recoverable for the loss of use of his/her damaged car where the claimant hires a replacement car on credit terms, even though he/she could have afforded to hire one without credit terms) was lower than the hire rate charged by the claimant. AF is now in liquidation and this action is brought against AF's former directors and the solicitors of the at-fault drivers.

Those solicitors applied for security for costs against the claimant. It was accepted that the claimant would be unable to pay any costs ordered against it if it loses the case. However, it argued that a security for costs order against it would stifle its claim. Teare J reviewed prior caselaw and noted that "The fact that the man has no capital of his own does not mean that he cannot raise any capital; he may have friends, he may have business associates, he may have relatives, all of whom can help him in his hour or need" (as per Brandon LJ in the Court of Appeal Yorke Motors case).

In this case, the claimant was 100% owned by a finance company, which had provided a witness statement to the effect that additional investment in the claimant could not be obtained. The claimant's solicitors had refused to answer the defendant solicitors' request for information about whether enquires had been made to find out if investor funds could be obtained to meet an order for security.

Teare J concluded that the claimants had failed to show that they could not, on the balance of probabilities, obtain funding from those associated with them. Accordingly, an order for security for costs was granted (albeit with some deduction (40%) to reflect the delay of the defendants in making this application).

Perkins Engines v Ghaddar: Judge interprets meaning of "reciprocal enforcement procedures" in an arbitration agreement

The applicant sought an anti-suit injunction in respect of proceedings commenced by the respondent in Lebanon, which, the applicant alleged, breached the arbitration agreement entered into between the parties.

The relevant arbitration agreement provided that the parties agreed to arbitrate in London "to the extent there is no reciprocal enforcement procedures between the UK and the country in which the [respondent] is located". The applicant argued that that phrase meant that there had to be a bilateral or multilateral treaty in force between the UK and Lebanon (there is no such treaty in force). The respondent countered that all that was required was that the domestic laws of the two countries allowed for mutual enforcement of judgments (eg under English common law, and its equivalent in Lebanon).

Bryan J found in favour of the applicant. He referred to the dictionary definition of "reciprocal" and said that "Whilst I am, of course, alive, to the fact that dictionary meanings in themselves do not give an answer to the meaning of words or phrases in a contract in the abstract divorced from their context ... in the context of the present clause and its wording, such dictionary definitions accords with the ordinary and natural meaning of the words used, namely, that ...reciprocal enforcement procedures between the United Kingdom and [Lebanon]... are procedures for the enforcement of a judgment which "exists on both sides" or are mutual, and bind equally the UK and Lebanon". In other words, what is required are "reciprocal enforcement procedures" between the UK and Lebanon, which binds both countries equally.

Accordingly, the dispute here should have been arbitrated and so the anti-suit injunction was granted (as this was not a case where the proceedings brought in breach of the arbitration agreement were taking place in a Member State country).

Law Commissions have produced an updated draft bill on Insurable Interest

The draft bill produced by the Commissions in 2016 had included a provision that a non-life policy will be void if an 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), and a claim will not be payable if the insured does not still have an insurable interest at the time of the insured event. However, the Commissions have now concluded that reform is only required for life and life-related insurance (although it has retained the provision repealing the statute which makes it a criminal offence to take out a marine policy without an insurable interest).

Accordingly, the above provisions have now been removed from the bill, insofar as they related to non-life insurance (although 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).

The latest version of the bill continues to provide that insurable interest is extended to include an interest in the lives of the insured's children and grandchildren and of a civil partner. Group insurance policies are also covered. However, there is no automatic insurable interest in the lives of parents and grandparents.

The latest version of the bill can be found here:

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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