UK: (Re)insurance Weekly Update 38-2016

Last Updated: 15 November 2016
Article by Nigel Brook
Most Read Contributor in UK, November 2017

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

This Week's Caselaw

Impact Funding v AIG Europe: Supreme Court holds exclusion clauses do not always have to be construed narrowly/finds exclusion in PI policy applied

The Court of Appeal's decision in this case was reported in Weekly Update 5/15. The insured solicitors had arranged funding for disbursements incurred by their clients in order to pursue personal injury claims. When those claims were abandoned, following the solicitors' breach of duty to their clients, the funders sought recovery from the solicitors, on the basis that the solicitors were in breach of contract with the funders. The solicitors sought to claim under their professional indemnity policy. The policy excluded cover for any "(a) trading or personal debt of any insured, or (b) breach by any insured of the terms of any contract for the supply to, or use by, any insured of goods or services in the course of the insured firm's practice".

The Court of Appeal held that the loans had been part of the obligations assumed by a solicitor in respect of his professional duties to his clients, rather than obligations personal to the solicitor, and so the exclusion did not apply. The Supreme Court has now allowed the appeal from that decision (Lord Carnwath dissenting). It has held as follows:

(1) Exclusions should not always be construed narrowly. Lord Toulson said that: "The fact that a provision in a contract is expressed as an exception does not necessarily mean that it should be approached with a pre-disposition to construe it narrowly. Like any other provision in a contract, words of exception or exemption must be read in the context of the contract as a whole and with due regard for its purpose. As a matter of general principle, it is well established that if one party, otherwise liable, wishes to exclude or limit his liability to the other party, he must do so in clear words; and that the contract should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed. ..This applies not only where the words of exception remove a remedy for breach, but where they seek to prevent a liability from arising by removing, through a subsidiary provision, part of the benefit which it appears to have been the purpose of the contract to provide. The vice of a clause of that kind is that it can have a propensity to mislead, unless its language is sufficiently plain. All that said, words of exception may be simply a way of delineating the scope of the primary obligation".

Lord Hodge put the matter slightly differently. He agreed that an exclusion clause should be read in the context of the policy as a whole and went on to say that "There may be circumstances in which in order to achieve that end, the court may construe the exclusions in an insurance contract narrowly. ... But the general doctrine...that exemption clauses should be construed narrowly, has no application to the relevant exclusion in this Policy. An exemption clause, to which that doctrine applies, excludes or limits a legal liability which arises by operation of law, such as liability for negligence or liability in contract arising by implication of law.... The relevant exclusion clause in this Policy is not of that nature".

Lord Mance and Lord Sumption agreed with both judgments.

(2) Turning to the particular exclusion in question, Lord Hodge held that the loans provided to the solicitors' clients were a service which the funders provided to the solicitors. A breach of the contract to supply those services therefore fell within the scope of the exclusion clause. Lord Toulson held that the "essential purpose" of the exclusion should be seen in the context of the essential purpose of the policy. Here, the purpose of a solicitors' professional indemnity insurance policy is to protect "that section of the public that makes use of the services of solicitors" (broadly, clients, "quasi-clients" and third parties to whom undertakings are given). The funders did not fall within those categories. Instead, the funders and solicitors had struck a commercial agreement as principals for their mutual benefit.

The exclusion therefore applied and the insurers were not liable to indemnify the solicitors.

COMMENT: Textbook commentary frequently provides that there is a general rule that exclusions should be construed narrowly. This Supreme Court judgment provides a more nuanced approach, though. The exclusion here applied to breach of the terms of a contract, but Lord Hodge said that it did not fall within the definition of an exclusion which excludes liability "which arises by operation of law, such as...liability in contract arising by implication of law" (ie, (presumably) rather than by agreement between the parties). The rationale for that may be that the insurer and insured should be free to agree an exclusion of a liability which was in turn voluntarily agreed by the insured with a third party (rather than imposed on it by law, perhaps without the insured's awareness), and there is no reason to construe such an exclusion narrowly.

Premier Motorauctions v PWC LLP: Judge decides security for costs application where the claimant has ATE insurance/policy proceeds post-liquidation

The defendants applied for a security for costs order on the basis 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" (CPR r25.13(2)(c)). The defendants had acted for the claimants before the claimants were placed into administration (and subsequently compulsory liquidation). After the claim form was issued, the claimant took out ATE insurance cover. The issue in this case was whether the security for costs order should be made in light of the ATE insurance cover.

Snowden J held that although earlier caselaw focused on whether an ATE policy was a suitable alternative form of security to cash or a bank guarantee, the starting point is to ask whether there is reason to believe that the claimant will be unable to pay an adverse costs order (ie the threshold jurisdictional question). The judge saw no reason why the existence of an ATE policy should not be taken into account (together with the company's other assets) at this stage. Accordingly, the judge in Geophysical Service v Schlumberger (see Weekly Update 10/13) had been correct to find that the question was not whether the ATE policy is as good as cash or a bank guarantee, but, rather, whether there was reason to believe that the ATE policy would not respond.

Although that meant that the test was different where a security for costs order has already been made and the ATE policy then taken out (in which case it must be shown that the policy is as good a cash/a bank guarantee), the judge saw no principled reason for ignoring a policy when considering if the CPR r25.13 test has been met: "Moreover, I think that it must be acknowledged that there is a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders".

The judge then went on to consider possible criticisms of the particular ATE policy in issue in this case (and therefore whether there was reason to believe that insurers would not pay):

(1) Whether the insurers would be able to avoid for misrepresentation/non-disclosure. Although the underlying case involved doubts about the credibility of the claimant's managing director, of key importance, here, was the fact that the liquidators and their advisers were unlikely to have placed "unquestioning reliance" on him when completing the proposal form. Nor could it be said that the ATE insurers would fight "tooth and nail" to deny liability if an adverse costs order was made: "the ATE market in the UK is now a substantial and mature one, and a significant part of that market relates to the funding of insolvency cases. It is also one in which the relevant professionals such as insolvency practitioners and solicitors are well-informed as to the reputations of the rival ATE insurers. In this situation, whilst ATE insurers are of course entitled to take a stand on their policy terms and conditions, they are unlikely to have a commercial incentive to take an unusually defensive line in seeking to avoid liability under the policies they issue. If they were to do so, this would soon become known in the market, and potentially profitable future business would be placed elsewhere".

Nor could the managing director's knowledge be attributed to the claimant: under English law, the appointment as director comes to an end on the appointment of a compulsory liquidator, and so the director's knowledge will not be attributed to the company in relation to an insurance policy taken out after he as ceased to be a director.

(2) Although the policy had a non-standard condition precedent that the insurer would not be liable if the case is abandoned because the claimant runs out of funding, the judge found that it would be "commercially absurd" for an ATE insurer to avoid liability simply by cancelling the policy before a court order was actually made covering costs. Nor was it likely on the facts that the funding put in place by the liquidators was inadequate.

(3) Would any payment under the ATE policy go to the defendants? An argument was raised that any insurance proceeds might form part of the claimant's insolvent estate and so be divided between unsecured creditors. That argument was rejected by the judge: adverse costs order rank for payment ahead of other claims in a liquidation.

Although he left open the question whether the defendants could rely on the Third Parties (Rights against Insurers) Act 1930 if the ATE policy is taken out after the company is put into liquidation, the judge said there was a "clear case" for saying that, where a liquidator takes out ATE insurance in order to cover an adverse costs order in a particular case, any insurance proceeds would be paid and received by the liquidator upon an implied trust for the sole purpose of paying that costs order (and not for the purpose of distribution to other creditors).

(4) However, the judge did agree with the defendants that the credit-worthiness of the ATE insurer can be taken into account. One of the insurers was a Gibraltarian company and did not have a credit rating but the judge accepted that it had an established track record and there was no reason to believe it would not pay. One of the other Gibraltarian companies involved  did not have such a record and the judge had doubts about its financial standing. However, he concluded that that insurer's layer was unlikely to be reached.

Accordingly, the security for costs order was refused.

COMMENT: This case (together with the earlier decision in Geophysical) will provide support for the ATE insurance market, insofar as it covers insolvent companies. Such companies will not need to show that the policy is as good as cash. Furthermore, the types of argument raised here to question the chances of the claimant eventually recovering under the policy are the types of argument which are frequently run in such cases. Accordingly, the judge's robust approach to dealing with them will encourage claimants to believe that their ATE policy will be accepted as a reason to avoid a security for costs order.

Transocean Drilling v Providence Resources: Judge confirms that costs should not be taken into account when deciding whether Part 36 offer has been beaten

The claimant made a Part 36 offer to accept USD 13 million. The offer was not accepted and the claimant was eventually awarded USD 14.6 million, with no order for costs. However, the defendant argued that the judgment was not "at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer" (see CPR r36(1)(b)), because, had the offer been accepted, it would have had to pay the claimant's costs up to the date of acceptance ie an extra USD 3.3 million (thus resulting in a payment of USD 16.3 million as opposed to the USD 14.6 million ordered by the court).

That argument was rejected by Popplewell J.

The decision of Mitchell v James [2004] held that, in deciding whether a claimant had beaten a Part 36 offer, no account should be taken of costs. Although that was not a binding authority on the judge, and was decided under a former version of the Part 36 rules, the judge said he had "little hesitation" in accepting that costs do not fall to be considered when deciding whether CPRr 36.14(1)(b) has been satisfied.

That was because "judgment" means what the trial judge decides on the substantive issues in the case, as distinct from the ancillary question of costs. Furthermore, when deciding whether Part 36 is engaged, the court will not normally have embarked yet on the exercise of assessing what costs would have been in the absence of the Part 36 offer: "Moreover, if costs were to be taken into account in determining whether a Part 36 offer were effective to trigger the Part 36 consequences, this would create difficulties for the parties in determining where to pitch a Part 36 offer and whether to accept it".

However, the judge did accept that he was not bound to ignore the costs position when deciding whether it would be unjust to order the usual Part 36 costs consequences. But that is one of many factors to be taken into account. Here, other relevant factors included the conduct generally of the claimant and the fact its Part 36 offer was too high, but also the fact that it had been open to the defendant to make a counter-offer which protected its costs position.

Weighing up all the different factors, the judge concluded that it would be unjust for the full Part 36 consequences to follow, but it would not be right to disapply them in full either.

(Re)insurance Weekly Update 38-2016

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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