UK: (Re)insurance Weekly Update 02- 2017

Last Updated: 30 January 2017
Article by Nigel Brook
Most Read Contributor in UK, November 2017

This Week's Caselaw

Maccaferri v Zurich Insurance: Court of Appeal construes a notification CP requiring notice "as soon as possible"

The first instance decision in this case was reported in Weekly Update 23/15. A worker was seriously injured using a tool which had been hired by the claimant insured (via a builders' merchant). The insured did not give notice to its insurer until the builders' merchant issued Part 20 proceedings against it, almost 2 years after the accident.

The notification condition precedent in the policy required notification "as soon as possible after the occurrence of any event likely to give rise to a claim". The insurer argued that this required the insured to give notice when it becomes aware of an event that is likely to give rise to a claim, or when it ought to have become so aware. In other words, the insured had to be pro-active in making inquiries. That argument was rejected by the judge at first instance and the Court of Appeal has now dismissed the appeal from that decision.

The Court of Appeal noted that the effect of a breach of the CP here would be to completely exclude liability for an otherwise valid claim. As such, the insurer had to use clear wording. The Court of Appeal did accept that it was possible to construe "as soon as possible" as not just specifying the time for notification but also requiring notification whenever the insured knew, or should have known, that an event which had occurred in the past was likely to give rise to a claim. However, it concluded that such an interpretation would be "strained" and "erroneous", and any ambiguity had to be resolved in favour of the insured. Any requirement to carry out something of a "rolling assessment" of a past event would have to be clearly spelt out in the CP.

On the facts of the case, the insured had not been aware, when the accident occurred (an occasion not limited to the exact moment of the accident), that there was at least a 50% chance that a claim against it would eventuate. The insured had not been blamed at the time, and the seriousness of the accident did not increase the likelihood of an allegation against the insured. A faulty tool was a possibility, but just one of many other possibilities.

Accordingly, the insurer could not rely upon a breach of the CP to deny liability.

In any event, even if the CP had required "reasonable diligence" by the insured, it had sufficed that the insured had asked for information from those to whom the tool had been hired (even though there had been no response). The insured did not need to press for information when no blame was being directed against it at the time.

Channon v Ward: Assessment of damages in a broker negligence case where insurance policy was not placed

Judgment in default was obtained against an insurance broker who had negligently failed to obtain indemnity insurance for the claimant. However, the judge assessed damages at nil, on the basis that the insurers would have been able to rely on two exclusions in the policy and/or would have found that the claims did not arise out of the claimant's conduct of his insured business as a chartered accountant (in so doing, the judge rejected an argument that the insurer would not have wanted a reputation for refusing indemnity).

On appeal, the claimant sought to argue that there was a significant prospect that the insurers would have sought and received legal advice which would have caused them to take a different course. The Court of Appeal held that the insurers would not have taken legal advice: "It has to be remembered that insurers, not unnaturally, can be very influenced by what they perceive to be the flavour of the case... In these circumstances the attempt to persuade this court that the insurers would probably have taken legal advice was in my view forlorn. They might have done, but that is speculation. The claim stank, and in the view of their own insured it was a contrivance". Furthermore, the QC clause in the policy did not assist the claimant: the role of the QC does not extend to resolving disputes as to the scope of cover. It is instead limited to deciding whether, in the event that cover is accepted, the insurers can require their insured to defend a third party claim: "The reason for this is obvious. Professional men ought not to be required to defend claims in circumstances where no defence can conscientiously be advanced".

(The Court of Appeal declined to express a view on the two exclusions in the policy, although in relation to the exclusion for claims or loss arising from any express or implied warranty or guarantee relating to the financial return of any investment or portfolio of investments, the Court of Appeal saw force in the argument that it relates principally to contractual claims against the insured (rather than a particular type of financial advice, namely that relating to financial return guarantees). In relation to the other exclusion (excluding cover for loss "arising from" trading losses or liabilities), the Court of Appeal recognised that "arising from" required the excepted cause to be the proximate cause, and agreed that the proximate cause of the claimant's liability here was not that a trading loss had been made, but accepted that "it may be too simplistic to assert that exception (6) serves simply to exclude liability in respect of the insured's business activities carried on in businesses other than the insured professional practice").

The Court of Appeal agreed with the judge at first instance that "This would have been a claim which insurers would have stoutly resisted from the outset on the basis that it was a plain contrivance in an attempt to formulate a claim in such a manner as to engage [the claimant]'s professional indemnity cover".

RR Securities v Towergate: Broker's negligence case and argument that loss would not have taken place at all if no breach of duty

Following a fire at the insured's premises, its insurer declined cover on the basis that the insured had failed to comply with minimum security requirements. The insured's broker admitted that it had failed to draw the insured's attention to those requirements prior to inception of the policy. Whilst liability was not in dispute, causation was disputed.

The broker argued that even if it had notified the insured of the minimum security requirements, it would not have implemented them. That argument was rejected by the judge on the facts. The broker further argued that if the requirements had been implemented, the fire would not have happened. Again on the facts, the judge found that the fire would have happened anyway.

Although not required to do so, the judge went on to consider whether the broker would have had a defence if it had been able to show that the fire would not have happened in the first place if there had been no breach of the broker's duty. The broker had relied on certain comments by the judge and Court of Appeal in Jones v Environcom (see Weekly Updates 14/10 and 37/11). In that case, it was indicated that an argument that there would have been no loss had the broker complied with its duty (because the insured would have taken the necessary precautions in order to obtain cover, and so there would have been no fire) might have succeeded.

The judge rejected the broker's argument on this point. He said that it was dangerous to derive a general principle from Jones and that, in any event, this was a very different case from Jones: Here, "the brokers had a duty to advise of certain safety precautions required by the brokers and, had they done so, then they would have been taken. In those circumstances, there is a much closer and direct connection between the "insurance cover" duty and any putative expansion of that duty to cover the taking of security precautions". The judge emphasised that there are no hard and fast rules on this issue.

A further argument raised was that, even if the insured would have implemented the minimum security requirements, it had nonetheless also failed to take Reasonable Precautions to avoid the loss (a separate requirement under the policy). That argument also failed. The judge noted that "although the expression is "Reasonable Precautions", it is common ground that what has to be shown here is recklessness as to the security of the property; ie not caring whether it was secure or not (see Sofi v Prudential [1993])". Here, there was no evidence that the insured simply ignored the security of the building, so as to be reckless in the required sense.

Pinn v Guo & Ors: Judge interprets the meaning of "racing" in a motor insurance policy

The motor insurance policy issued to the third defendant contained the following exclusion: "while the automobile is used for commercial travelling, racing, pacemaking, speed testing or the carriage of goods or samples in connection with any trade or business and use for any purpose in connection with the motor trade" (emphasis added). Of issue in this case was whether the third defendant had been "racing" at the time of the accident, so as to fall within the scope of this exclusion.

The claimants to the action had been spectators at an event at which the third defendant and another defendant had been competitively driving.

The insurer of the other defendant argued that the word "commercial" in the exclusion clause applied not just to "travelling" but also to "racing" and other words in the clause, and so the exclusion did not apply. The third defendant's insurer countered that "commercial" applied only to travelling ("commercial travelling" being a term or art, and, it was argued, "commercial racing" sounded odd, and it would make no commercial sense for an insure to exclude professional racing but not amateur racing).

The judge held that the exclusion applied and that, construing the word "racing" in the context of the clause, the word "commercial" applied only to "travelling". He went on to consider "how is the word to be limited to exclude those occasions when ["racing"] might be used to describe an activity which is plainly intended to be covered by the policy?"

He concluded that "control is to be found in each case in an assessment of the facts". Thus, if someone is "racing" home, that is not racing at all, it is instead a synonym for rushing. Similarly, two drivers racing each other at traffic lights was "probably" not racing within the terms of the policy. Of essence here was the fact that the drivers had come from different parts of the country to a pre-arranged meeting: "they did not just happen to be adjacent in queues of traffic at traffic lights". An element of competition was also obvious on the facts. The judge concluded that an ordinary man would reasonably have understood that his insurance policy did not cover competitive driving of the sort which took place in this case.

COMMENT: This judgment was handed down in 2014, but has only just been reported. It therefore pre-dates the Supreme Court's judgment in Impact Funding v AIG Europe (see Weekly Update 38/16) on the construction of exclusion clauses: namely, that there is no general rule that exclusions in insurance policies should be construed narrowly. Nevertheless, the judge here also declined to accept the argument that the exclusion should be construed narrowly, instead preferring the approach adopted by Clarke LJ in MDIS Ltd v Swinbank [1999], where he said that "in any process of construction it is appropriate to take the language of the particular clause as the starting point. It is however not in dispute that the words used must be considered in the context of the particular clause as a whole and that the clause must in turn be considered in the context of the policy as a whole, which must in its turn be set in its surrounding circumstances or factual matrix".

Michael Wilson & Partners v Sinclair: Abuse of process and prior arbitral award

The first instance decision in this case was reported in Weekly Update 34/12. In essence, the issue was whether it would be an abuse of process for a claimant to bring a claim in legal proceedings against a defendant on a basis which had already been decided in an earlier arbitration to which the claimant, but not the defendant, had been a party. At first instance, it was held that although this would not usually be an abuse of process, it was in this case because of certain "special circumstances" (namely, the defendant had been a witness in the arbitration and funded the defence).

The Court of Appeal has now upheld the appeal from that decision. It held as follows:

(1) Prior caselaw has established that there is no prima facie assumption that it is an abuse to re-litigate previously decided issues. Instead, the court's power is used only where justice requires it. A close "merits based" analysis of the facts is required. The fact that the parties are not the same in the two proceedings is not dispositive.

(2) A prior arbitral award can form the basis of an abuse of process, although the court should exercise caution. Simon LJ said that "that caution should not inhibit the duty to act in appropriate circumstances. I would also add my agreement with Teare J's observation ... that it will probably be a rare case, and perhaps a very rare case, where court proceedings against a non-party to an arbitration can be said to be an abuse of process".

(3) Although factual findings in a case are inadmissible in subsequent proceedings, a court can still consider the contents of an earlier judgment or award in order to see if a later claim is an abuse of its process.

(4) The trial judge had been wrong to conclude on the facts that the claim was an abuse of process. A highly material, if not dispositive, factor here had been the fact that the defendant had been asked to join as a party to the arbitration, but had refused to do so. It was felt to be unfair that he now wished to rely on the award from that arbitration to claim an abuse of process. Furthermore, there is no general rule preventing a party asking a court to reach a decision which is inconsistent with that reached in another case. The facts that the defendant had been a witness in the arbitration and funded the defence did not bear any "material weight".

One further issue arose: The general rule is that a claimant which discontinues its claim is liable for costs incurred by the defendant up to the date on which the notice of discontinuance was served. In Safeway Stores v Trigger (see Weekly Update 01/11), Pill LJ considered that service of a notice of discontinuance has the legal consequences that costs orders already made in favour of the discontinuing party are automatically reversed without further order. The Court of Appeal noted that Longmore and Lloyd LJJ had disagreed with Pill LJ on that point (although they acknowledged that the discontinuance should have that effect in practice).

Although unnecessary to decide the point in this case, Simon LJ said that "I express my strong doubts that [the claimant] would have been entitled as of right to secure the reversing of the order for costs ...two years after the date of the judgment under appeal and at a time when the appeal appeared not to be proceeding to a hearing".

Silver Dry Bulk v Homer Hulbert: Application to court where respondent to arbitration had been dissolved

There can't be a valid arbitration when one of the parties has ceased to exist (see Baytur v Finagro [1992]). In this case, the respondent to an arbitration had been dissolved, but the claimant sought to argue that it nevertheless survived (at least in order to continue the arbitration). The claimant wished the arbitrator who it had appointed to decide this issue. However, in order to avoid pursuing an arbitration which might eventually turn out to have been an nullity from the start, the claimant sought an order under section 18 of the Arbitration Act 1996 ("the Act") from the court. It hoped that such an order would encourage the respondent's parent company (the real, albeit indirect, target of the arbitration) to participate in the determination by the arbitrator about whether the respondent still survived.

Section 18 provides that in the event of a failure of the procedure for the appointment of the tribunal, the court can make an order, if the parties fail to agree.

Males J held that an application under section 18 does not require the court to finally determine if the arbitral tribunal has jurisdiction (preferring the decision of Noble Denton (see Weekly Update 43/10) to that of The Lapad [2004] on this point). The judge accepted that the claimant had a "good arguable case" (a relatively low threshold in this context) that the respondent continues to exist. However, the application under section 18 failed because there had been no failure of the appointment procedure here. The issue of whether one of the parties was still in existence was entirely separate. Even if he was wrong on that point, the judge said that he would have refused to exercise his discretion to make the order. Nor was there any other order which the court could usefully make.

The claimant had also separately sought orders for the production of documents against various third parties. The judge issued a witness summons for production of documents held by a company situated in England (pursuant to section 43 of the Act). The company has 14 days from the date of service of the summons to raise any objections. However, the judge's provisional view was that the company would be entitled to its reasonable costs of collecting and producing the documents but not the costs of obtaining legal advice.

Section 43 is only available if the witness is in the UK. Accordingly, the claimant also sought the issue of a Letter of Request directed to the Korean courts for the production of documents held by witnesses based there (pursuant to section 44 of the Act). The judge refused the order, on the basis that he was not prepared to conclude that the claimant had the better of the argument that the respondent continues in existence (and so could not represent to the foreign court that there probably is an arbitration in existence, for which the production of documents is requested).

Lalana Hans Place v Michael Barclay: Request for further information from CPR r35 expert

The defendant applied for an order requiring the claimant to answer a request for further information. The claimant had instructed an expert to prepare evidence for the purpose of proceedings (and so the expert fell within the scope of CPR r35). As such, this expert's advice is covered by litigation privilege. However, the defendant wanted further information about the expert's advice to the claimant.

Coulson J held that the request did go to a relevant issue in the case. He then considered the issue of privilege. He pointed out that questions of privilege and waiver do not prevent a party from answering a request for further information: the correct course is to set out privilege arguments in the answer to the request.

Although unable to decide the question of privilege without further evidence, the judge accepted that there is a possibility that relevant elements of the expert's advice were not privilege: "That is because it is not uncommon for a litigation expert, who is involved early in the relevant decision-making process, to give advice as to what should be done or not done. That advice may then be a matter of fact relevant to, for example, a decision to demolish or... Notwithstanding his instructions as a litigation expert, in those circumstances (and subject of course to the facts) that is a matter that may properly be the subject of cross-examination of the expert". Expressions of opinion or advice are generally covered by CPR r35 litigation privilege. However, experts sometimes carry out their own investigations at the scene (eg interviewing eye witnesses). Coulson J held that "Privilege does not usually attach to those aspects of their work and the material produced, such as their notes of the interviews, are disclosed to all parties".

Accordingly, the claimant was ordered to answer the request. The judge pointed out that the claimant was still entitled to seek to claim privilege over the requested documents, though, and, if the assertion is made out, no criticism could be levelled at the claimant for declining to waive privilege and no adverse inference could be drawn from the claim for privilege.

COMMENT: The distinction between an expert's advice and any factual investigation carried out by the expert, in relation to claiming privilege, is an important one. Initial factual investigations of a property loss should therefore be carried out by an "expert adviser" (ie an expert instructed before proceedings are started and on whom the party does not intend to rely in the litigation), rather than a CPR r35 expert, where possible. The Guidance on Instructing Experts (annexed to PD 35) states that "advice which the parties do not intend to adduce in litigation is likely to be confidential".

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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