UK: (Re)Insurance Weekly Update 28- 2016

Last Updated: 12 August 2016
Article by Nigel Brook
Most Read Contributor in UK, December 2017

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

Atlasnavios-Navegacao v Navigators Insurance: Court of Appeal discusses proximate cause and construes a policy exclusion

The earlier decisions in this case were reported in Weekly Updates 12/12 and 46/14. When the claimant's vessel was being loaded in Venezuela, an underwater inspection revealed that bags of cocaine had been strapped to its hull. The drugs had been affixed by persons unknown (presumably a drug cartel). The vessel was detained and the crew arrested. The vessel was abandoned by the owners 2 years later and eventually confiscated by the Venezuelan authorities following a court order. The claimant owners claimed under their war risks insurance policy. It was accepted that the vessel was a constructive total loss.

The policy covered "malicious damage" and "malicious mischief". However, the insurers sought to rely on an exclusion under the policy, which excluded cover for loss arising from "arrest restraint detainment confiscation .... by reason of infringement of any customs or trading regulations". Although Hamblen J had held (as a preliminary issue) that insurers did not have to prove that the insured or its agents committed the infringement for the exclusion to apply, Flaux J held that the exclusion did not apply where the infringement was brought about by the malicious act of a third party. The insurers appealed to the Court of Appeal, which has now held that the exclusion did apply to the facts of this case.

The Court of Appeal discussed the situation where there are said to be two proximate causes (events A and B, where B is last in time). A number of possibilities arise in such a situation. Either A or B may be said to be the sole proximate cause: "The court may, depending on the facts, select A as the proximate cause because its causative potency is such as to eclipse the significance of the fact that it is earlier in time than B or that something else had to happen before the loss arose; or because putative cause B is the inevitable consequence of cause A or will, in the ordinary course of events, arise from A without any intervening fortuity, or will usually do so". Alternatively, both A and B may be said to be the proximate causes (ie both must occur for the loss to arise or the loss would have arisen if either A or B occurred, but on the facts both caused it).

If there are two proximate causes one of which is covered and one of which is within the exclusion, insurers are not liable, at any rate if, as here, both causes need to operate if the loss is to occur (see Wayne Tank and Pump Co Ltd v Employers Liability Corporation Ltd [1974]).The effect of the exclusion is that, if the matter excluded is a cause, liability does not arise even if an insured peril is also one. On the facts of the case, putting the drugs on the vessel would not have caused the owners any loss if the detainment had not occurred; and the detainment by reason of the customs infringement was, itself, a proximate cause.

The Court of Appeal rejected the argument that the exclusion does not apply if the malicious act constituted the infringement. Smuggling is a paradigm case in which detention occurs because of the infringement. The proposition that "infringement" cannot include an infringement which is itself no more than the manifestation of the malicious act would involve writing in words which are not there: "The court should be reluctant to do some form of writing in in clauses drafted for use in insurance contracts throughout the world".

In reaching its conclusion, the Court of Appeal also considered arguments that the insurers' stance was "unbusinesslike": "As so often, the question of what is business-like depends on whose business is being considered. For present purposes it is sufficient to state that there is nothing unbusinesslike in the insurers' position even though it is favourable to them".

Moreno v Motor Insurers' Bureau: Supreme Court rules on applicable law governing assessment of damages where English national injured by uninsured driver in Greece

The first instance decision in this case was reported in Weekly Update 14/15 (permission was granted to appeal directly to the Supreme Court). The claimant, an English national, was injured by an uninsured driver in Greece who was driving a car which had been registered there. She therefore made a claim against the Motor Insurer's Bureau under Regulation 13 of the 2003 Regulations (which implemented the fourth motor insurance directive and provides, broadly, that the MIB shall compensate the injured party as if the accident had occurred in Great Britain). Liability was admitted but there was a dispute as to whether the measure of compensation payable should be assessed in accordance with Greek or English law (in this case, the level of damages would be higher if assessed by English law).

The same issue was considered by the Court of Appeal in Jacobs v Motor Insurers' Bureau (see Weekly Update 40/10). There, it was held that English law governed the assessment of damages (and it was said that the Rome II Regulation would not change this position). Gilbart J held that he was bound by the decision in Jacobs (even though he believes it was wrongly decided). The Supreme Court has now unanimously allowed the appeal from that decision, finding that Greek law governs the assessment of damages.

It was held that "The inference is that, to whichever special provision of the Fourth Directive the victim of a motor accident may have to have recourse, the compensation to which he or she is entitled is and remains the same. It is the same compensation as that to which the victim is entitled as against the driver responsible, or his or her insurer, or, that failing, as against the guarantee fund of the state of the accident. .. On the analysis accepted by the Court of Appeal in Jacobs, however, the measure of compensation could vary according to the happenchance of the route to recovery which the victim chose or was forced to pursue". Regulation 13 should be read as having a "purely mechanical or functional operation" and it was unnecessary for the Supreme Court to consider arguments about the Rome II Regulation. There was also no need to contemplate a reference to the European Court of Justice because "the scheme of the Directives is clear, and that they do not leave it to individual member states to provide for compensation in accordance with any law that such states may choose. On the contrary, they proceed on the basis that a victim's entitlement to compensation will be measured on a consistent basis, by reference to the law of the state of the accident, whichever of the routes to recovery provided by the Directives he or she invokes".

Bill Kenwright v Flash Entertainment: Place of characteristic performance of a settlement agreement/alternative and "deemed" service out of the jurisdiction

Various issues fell to be considered in this case:

(1) What was the governing law of a settlement agreement entered into between the English claimant and the defendant, which is incorporated in the UAE? Under the Rome 1 Regulation, in the absence of an express choice of law, a contract is governed by the law of the country with which it is most closely connected, and for a contract that is presumed to be the country where the party required to effect the "characteristic performance" of the contract has its habitual residence. The issue here was whether the "characteristic performance" was the payment of settlement amounts by the defendant (which would result in the law of the UAE), or the forbearance by the claimant not to sue (which would result in English law). Haddon-Cave held that: "where, as here, one is concerned with a 'vanilla' settlement agreement, i.e. the mere payment of money by A to discharge a debt or sums due by way of compensation to B with no obligation on B save for forbearance to sue, the "characteristic performance" of the settlement agreement may properly to be regarded as the payment of money".

However, that presumption was a weak one and displaced here by the fact that the settlement agreement was more closely connected with England, in particular because key meetings and negotiations took place there, and, additionally, the invoices provided for payment in England.

(2) The defendant appealed against an earlier order permitting service by an alternative method (pursuant to CPR r6.15), namely service by registered mail. The defendant sought to rely on Deutsche Bank v Sebastian Holdings (see Weekly Update 05/14), in which it was held that questions of convenience and possible speed were not sufficient in themselves to justify service by alternative means. The judge distinguished that case on the basis that the delay in Deutsche would not have been significant, whereas here there was a risk of serious delay (possibly up to 8 months to serve under the treaty between the UK and the UAE, according to the Foreign Process Section of the RCJ). Although the existence of a treaty is something which the court should take into account, "the matter is not immutable". Furthermore, service by registered post was not contrary to UAE law and the defendant had been aware of these proceedings for a long time.

Accordingly, the order for service by an alternative method was not set aside.

(3) The defendant had sought to argue that the court had had no power to order that service by this alternative method would be deemed to take place on the second business day after posting. That argument was rejected by the judge. Although the general position is that there is no deemed service for service out of the jurisdiction (CPR r47), CPR r6.15(4) allows the court which authorises service by an alternative method to specify "the date on which the claim form is deemed served".

COMMENT: The high watermark for claimants seeking permission to serve by an alternative method was the Supreme Court decision of Abela v Baadarani (see Weekly Update 24/13). Since then, there appears to have been some rowing back by the lower courts in cases such as Deutsche and so this case is of interest in that the judge was prepared to accept an alternative method should be allowed in view of the possible long period of delay for service otherwise (although the defendant had sought to argue that the delay would only be three months it was held that the master had been entitled to assume the longer period and regard it as inordinate delay). In any event, in Key Homes v Patel (see Weekly Update 2/14), the judge (although it was strictly unnecessary for him to do so, since he had already concluded that valid service had been effected) concluded that there were exceptional circumstances which would have permitted him to allow alternative service. There, the Foreign Service Section of the RCJ had advised that service in the UAE would take between 6 and 12 months.

National Bank Trust v Yurov: Judge refuses to discharge freezing order where there had been material non-disclosure by the applicant

The defendant applied for the discharge of a freezing order granted against it on the basis that there had been a failure by the claimant to provide full and frank disclosure when it applied for the order.

Males J noted that, although an applicant must make the court aware of potential difficulties with its case, it "need not extend to a detailed analysis of every possible point which may arise; and the defendant must identify with clarity (and, if necessary, restraint) the failures of which it complains, rather than adopting a scatter gun approach". (The defendant was criticised here for failing to set out its grounds in the application notice and instead served 130 pages of written evidence in which it included its allegations of non-disclosure. Males J said that that that was "not an acceptable to way to proceed").

The judge found that there had been 3 material non-disclosures by the claimant. He therefore considered whether the freezing order should be discharged or continued. Various factors were taken into account:

(1) The importance of the fact not disclosed to the judge's decision to grant the freezing order. Here, it was held that the order would and should have still been granted even in the absence of the non-disclosed facts.

(2) The need to ensure compliance with the duty of full and frank disclosure and whether or not the failure to disclose was "culpable": "If the failure was "innocent" ... the question of punishment will not arise, while even in a case involving various and numerous failures, the requirement of deterrence can sometimes be met by an appropriate order as to costs". A failure will be "innocent" if the fact in question was not known to the applicant or its relevance was not perceived. The judge decided that the three failures here were innocent.

(3) The injustice to the claimant if the order is discharged should also be taken into account. That was a powerful factor here because a risk of dissipation had been proven here. (The defendant had made use of offshore companies, which can provide support for an argument that there is a risk of dissipation. Nor did it matter that the defendant no longer had access to that network: "The significance of this network is that it demonstrates that the defendant is ready and able to use such structures dishonestly in order to conceal the true beneficial ownership of assets").

Accordingly, the application to discharge was dismissed and the freezing order continued: "any other course would involve a major loss of perspective".

COMMENT: Males J's approach in this case might be contrasted with the comments of the judge in Otuo v Brierley (see Weekly Update 35/13) that it is no excuse for an applicant to say he was not aware of the importance of the matters which were not disclosed, or that he had forgotten those matters, and the freezing injunction may be discharged even if it would have been granted had full disclosure been made. However, in Otuo, criticism was also made of an application to discharge which is made on slender grounds or in relation to "trifling errors".

Courts therefore approach applications to discharge a freezing order as a balancing exercise, and it is hard to lay down hard and fast rules as to when an order may, or may not, be discharged.

WH Newson v IMI: Court of Appeal considers contribution claim where Part 20 defendant argued claim against Part 20 claim was time-barred

The Part 20 claimants ("D1") in this case settled with the claimant ("C") in the main proceedings and then sought a contribution from the Part 20 defendants ("D2"). D2 argued that the claim against the D1 had been time-barred (a defence which D1 had raised in the main proceedings, before settling). The case turned on the interpretation of section 1(4) of the Civil Liability (Contribution) Act 1978, which provides that "A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage ... shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.' (emphasis added). D1 argued that this section precluded D2 from advancing the time bar argument. At first instance, the judge agreed and D2 appealed.

The Court of Appeal considered the earlier decision of Arab Monetary Fund v. Hashim [1993], in which it was held that the proviso in section 1(4) permitted an investigation as to whether any "collateral defence" which D1 had against C might have succeeded. A collateral defence was defined by the Court of Appeal as "a defence raised by D1 that does not involve a denial of the factual basis of C's cause of action against him, but is in the nature of a defence of confession and avoidance and may be one of limitation".

It held that Hashim had been wrongly decided and that the proviso in section 1(4) does not permit an investigation as to whether the collateral defence would have succeeded. The section "has provided expressly that there is to be no inquiry as to whether D1 was or was not actually liable to C". All that is required is proof by D1 that the factual basis of the claim against him disclosed a reasonable cause of action. Accordingly, D1 satisfied the requirements of the proviso, and could therefore seek a contribution from D2.

Bailey v Angove's: Supreme Court considers whether authority of agent is irrevocable

One of the issues in this case was when will the law treat the authority of an agent as irrevocable. The general rule is that the authority may be revoked by the principal, even if it is agreed by their contract to be irrevocable. The revocation is effective to terminate the agent's authority, but may give rise to a claim for damages.

The main exception to this rule is where the agent has a relevant interest of his own in the exercise of his authority (and two conditions are satisfied: 1) the authority is agreed to be irrevocable; and 2) the authority was given to secure an interest of the agent). The Supreme Court held that the exception should not be confined solely to cases where the authority exists solely to secure the agent's financial interest: it can apply where the agent may be said to act both for himself and his principal.

Lord Sumption went on to note that "There are a number of special cases in which the authority of an agent has been held to be irrevocable on what appears to be a wider basis". These include the irrevocable authority conferred by a Lloyd's Name on his managing agent to underwrite (see Daly v Lime Street Underwriting [1987] and Society of Lloyd's v Leighs [1997]). Lord Sumption then commented that: "The result in these cases was undoubtedly convenient, but they do not lend themselves to analysis along the lines discussed above. Nothing that I have said should therefore be taken to refer to them."

(Re)insurance Weekly Update 28- 2016

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Nigel Brook
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