AXA v ARIG: Court of Appeal considers inducement argument in a reinsurance dispute

The first instance decision in this case was reported in Weekly Update 25/15. The reinsurer sought to avoid two reinsurance treaties entered into with the defendant reinsured on the basis that the reinsured had failed to disclose loss statistics and three incidents likely to result in claims. The reinsured accepted that the past loss statistics were material. However, the judge at first instance accepted the reinsured's argument that the particular underwriter had not been induced by the non-disclosure. The reinsurer appealed and the Court of Appeal has now rejected that appeal.

Much of the case turns on the particular facts, but the Court of Appeal made some general observations about proving inducement:

(1) It was acknowledged that a presentation must be judged objectively in order to determine whether it was fair (the Court of Appeal referred to a fair presentation in this case, even though the treaties were entered into before the Insurance Act 2015 came into force).

(2) In considering whether a presentation is fair, the court must decide what the insured or broker would have said in addition to that which was necessary to make the presentation fair, in order to encourage the insurer to write the risk. That is a subjective test and was relevant here because, had the loss statistics been disclosed, it was argued that the broker would also have told the reinsurer that a change of underwriter at the reinsured would result in a more rigorous approach to the selection of risks going forward. The Court of Appeal clarified that although the insurer must prove inducement, the insured or broker must prove that it would have raised additional matters had a fair presentation been made.

Although the Court of Appeal rejected the argument that there should be a presumption that the broker would have said everything good about the risk that could be said, it did accept that "the court may need little persuading that a competent broker would have endeavoured to say as many good things about it as were open to him".

Despite the test being subjective, Clarke LJ held that "I do not regard the judge as disabled from reaching a conclusion as to what would be a fair presentation (an objective question) by the absence of direct evidence from the broker about what he would have said or disabled from inferring what the broker would have said (in hypothetical circumstances) in the absence of such evidence. An inference can be drawn from surrounding circumstances. Further, evidence of what the broker did not say when making an unfair presentation is not necessarily a reliable guide to what he would have said or added when making a fair one". The judge had been entitled to conclude that the loss statistics would have been accompanied by a reference to the change of underwriting policy. The reinsurer's underwriter had agreed at trial that he would have written the treaty on the same terms in light of the explanation about the underwriting policy.

(3) Inducement is a subjective test: the fact that the reinsurer "could have been interested in something is irrelevant if in fact he would not have been".

Despite the use of "could" and not "would" in some of the passages of the first instance judgment, it was held that the judge had adopted the correct approach: "People, including judges, do not always speak with the precision in the use of modal verbs to which the submissions on this point have been directed, particularly when what is under consideration is a hypothetical situation".

However, the Court of Appeal, in a postscript to the judgment gave this warning about proving inducement at trial: "What seems to me undesirable is that the insurer /reinsurer should be faced at trial, without prior notice either in a pleading or in any witness statement, of what the insured/reinsured, if wrong in contending that there was no non-disclosure, says, in the alternative, would have been the content of a fair presentation or would have been raised by the insured/reinsured or his brokers in any broke in which the matter which constituted the material non-disclosure relied on was in fact disclosed. If the matter is raised for the first time in cross examination ("If this statistic had been revealed and you had been told this, you would have written the risk, wouldn't you?)" it may provide a good example of cross examination as an art form. But it involves the insurer/reinsurer coming to trial without notice of the hypothetical factual case that he has to meet and being required to answer on the hoof a question which on a presentation in the real world would not require so instant a response".

COMMENT: Although this case concerned policies written before the Insurance Act came into force, under the new Act (re)insurers must prove inducement in order to claim a remedy for the breach of the duty of fair presentation. That test of inducement appears to be a subjective one and so the above principles will still apply to policies written after the Act. The Court of Appeal's focus on what it called "the hypothetical broke" is of interest because it takes into account not just material facts which should have been disclosed at the time of placement but also additional factors which might have influenced the underwriter's decision, had a fair presentation been made. Underwriters will be concerned that insureds or brokers might use those additional factors effectively as a justification (perhaps years later) for not having made a fair presentation at the correct time. Instead, it should be up to underwriters to decide at the time of placement whether they would still write a risk (and if so on what terms), having been given a fair presentation.

Candy v Holyoake: Notification injunctions and whether an insurance policy is adequate fortification for a cross-undertaking

The claimants obtained an injunction against the defendants which prevented the defendants dealing with assets in excess of £1 million "without giving seven days advance notice in writing to the [claimants'] solicitors" (the "notification injunction"). The notification injunction differed from a "conventional" freezing order because it allowed the defendants to carry out a transaction in respect of which there had been proper notification (as opposed to preventing any dealing at all with the assets).

The Court of Appeal has now held that the test for dissipation of assets is the same for a notification injunction as for a conventional freezing injunction. Notification injunctions are "in effect a modified version of a conventional freezing order, rather than a distinct type of injunction". The Court of Appeal warned, though, that "The conclusion that all variants of freezing order must satisfy the same threshold in relation to risk of dissipation should not be taken to suggest that parties need only contemplate the most onerous form of a freezing order, under what would be a misapprehension that the intrusiveness of relief is immaterial. On the contrary, the intrusiveness of relief will be a highly relevant factor when considering the overall justice and convenience of granting the proposed injunction. Hence, even if there is solid evidence of a real risk of unjustifiable dissipation, an applicant should consider what form of relief a court is likely to accept as just and convenient in all the circumstances, including the scope of exceptions to the prohibition on dispositions".

Accordingly, the applicant had to show a real risk of dissipation, supported by solid evidence. The Court of Appeal held that the evidence presented here was not sufficient. For example, in line with earlier decisions, the Court of Appeal held that the complex corporate structure of the defendants' companies did not, without more, equate to a risk of dissipation: "An applicant must show a risk of dissipation as opposed to it merely being possible (without more) that the respondent could dissipate".

A separate issue considered by the Court of Appeal was whether an insurance policy taken out by the claimants was satisfactory fortification for their cross-undertaking in damages given in relation to the notification injunction.

The policy provided that the insurer would "not exercise any right to avoid ...on any grounds whatsoever" and that if the insurer has to pay where the insured had breached "any principle of law" (including loss arising out of or in relation to a fraudulent act of an insured), the insurer reserved the right to recoup its payment from the insured [clause 4.9]. It also provided that the insurer had not excluded or limited its remedies in respect of any fraudulent or dishonest statements prior to the start of the policy [clause 4.18]. The Court of Appeal held as follows:

(1) There is no element of subjectivity when deciding whether the policy was adequate fortification: it did not matter whether the policy was acceptable to the defendants.

(2) There was at least a real risk that the insurer could properly argue that it would not have to pay out if the insured had made a fraudulent misrepresentation or non-disclosure when placing the policy. Clause 4.9 did not exclude that remedy and clause 4.18 made it clear that the remedy had been retained. Accordingly, the policy was not adequate fortification.

(3) Furthermore, the defendants had alleged fraud against the claimants. The Court of Appeal said that, although it did not need to decide the point: "For present purposes it is sufficient merely to say that there is at least a real prospect that (on the hypothesis that the respondents lose the action and are found to have been dishonest) the insurer could properly argue that there is a rule of public policy which would entitle it to avoid on the grounds of the insured's fraud, regardless of the policy terms. This gives rise to an objectively reasonable appreciation of risk such as to render the policy an unsatisfactory form of fortification". However, the Court of Appeal left open the possibility that it would be able to rely on an insurance policy as fortification even if fraud has been alleged against the insured: "For example, it might be thought that a policy which in clear and specific terms waived the duty of disclosure altogether, coupled with an equally clear term and representation by the insurer that it would not avoid for fraud of the insured in presentation of the risk (or any other ground), would be good fortification, notwithstanding any principle of so-called public policy".

COMMENT: The last quote above appears to confuse the duty to make a fair presentation with the public policy principle that an insured should not benefit from his own fraudulent misconduct. However, in practice, this will often amount to the same thing: if an insured has been fraudulent, it will most likely be a fraudulent non-disclosure to fail to disclose this to the insurer when placing the policy.

The case also confirms that clear language is needed to exclude a remedy for fraud. That is noteworthy given the pressure which is being put on some insurers to waive the duty of fair presentation and/or agree that information which they have been given complies with the duty. In the absence of clear express wording, insurers would still be able to claim a remedy for fraudulent misrepresentation of non-disclosure (although a high burden of proof will have to be met).

XYZ v Travelers Insurance Company: Insurer which chose to pay defence costs for purely uninsured claims ordered to pay the winning claimants' costs

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. The remaining 229 claimants (whose claims were uninsured) subsequently succeeded in their claim against the defendant.  The defendant was by then in administration.

The claimants therefore applied, pursuant to section 51 of the Senior Courts Act 1981, for a costs order against the insurer (which was had not been a party to the proceedings).

The policy provided the insurer would pay the insured's defence costs of "proceedings in any respect of any act or omission causing or relating to any occurrence" (clause 3(a)(ii)) and "other costs and expenses reasonably relation to any matter...which may be the subject of indemnity" (clause 3(b)). The judge held that the insurer would therefore cover the defence costs for insured claims. However, she rejected an argument that Clause 3(b) required the insurer to pay the costs of defending the common issues in the uninsured claims: "the indemnity...arises only in respect of insured claims. The relevant provision is 3(a)(ii)".

The insurer in this case had taken the unusual step of agreeing to pay uninsured defence costs in group litigation. However, the judge held that the insurer had been wrong to treat all the claims as one because they raised common issues: "Each claimant had a separate cause of action and from the outset it was [the defendant]'s case that each claimant would have to prove that the particular implants supplied to her were defective".

The judge also held that this case differed from one where an insurer is ordered to pay because it has controlled the litigation without paying appropriate regard to any contrary interest of the insured (see eg Citibank v Excess Insurance [1999]). She said that "In my judgment it is not necessary for the applicants to establish that [the insurer] controlled the litigation of their claims. My starting point is that the uninsured claims were nothing to do with [the insurer]. Their involvement, if any, in the defence of the claims and their approach to [the defendant]'s conduct of them are nonetheless relevant considerations".

She concluded that "The fact that [the insurer] insured other claims did not entitle it to be involved in, still less influence, the conduct of the uninsured claims, both of which it did". But for the insurer's involvement, it was held that 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. These were said to be powerful factors for making the non-party costs order. Furthermore, had the applicants' lost, they would have been liable to pay all the insurer's costs of defending the claims against the defendant. It was held that the insurer could not take this benefit without bearing some risk too.

Accordingly, the costs order was made against the insurer.

COMMENT: Prior caselaw has established that (unless otherwise agreed between the parties) an insurer is only required to pay the defence costs of claims which fall within the scope of policy cover. Where both insured and uninsured claims are being defended by the insured, the insurer will be liable for the costs of defending all the claims (but may seek an allocation of those costs after judgment). However, in this case, only uninsured claims were being brought against the insured (although both insured and uninsured claims were originally notified). The insurer's continued involvement was therefore held to be exceptional enough to take the case out of the norm and to justify a non-party costs order against the insurer. Insurers should therefore bear this risk in mind when considering (perhaps for tactical or commercial reasons) whether to become involved in defending claims brought against the insured, none of which fall within the scope of the policy.

IPCO v Nigerian National Petroleum Co: Supreme Court rules that defendant did not have to put up security when challenging enforcement of a Nigerian arbitral award

The Court of Appeal's decision in this case was reported in Weekly Update 41/15. The defendant is seeking to challenge the enforcement of a Nigerian arbitration award, which was made in 2004 and is still being challenged before the Nigerian courts. The Court of Appeal ordered the defendant to put up security as a condition for remission of the proceedings to the Commercial Court to determine if the award should be enforced. The defendant appealed against that decision and the Supreme Court has now upheld that appeal.

It held that the Court of Appeal fell into error when it held that security could be ordered in a situation where the English court is deciding whether to refuse recognition or enforcement of the award. The Supreme Court clarified that the power to order security is only given to the English court where the (in this case) Nigerian courts will hear the challenge to the award and the English courts have therefore adjourned their proceedings. Here, the case was to be remitted to the English Commercial Court to hear the challenges to the award. Accordingly, an order for security had not been within the scope of the jurisdiction conferred on the English courts by section 103 of the Arbitration Act 1996. Nor did the ordinary procedural rules of the English courts give them the power to order security in these circumstances.

AAA v Unilever: Judge decides whether to stay claim brought against English holding company

The Kenyan claimants brought a claim against the first defendant, the English ultimate holding company of the second defendant (a Kenyan company). The first defendant applied for a stay of proceedings brought against it and argued that the claim should not be allowed to proceed in England. It argued that the claim against it had only been brought for the improper purpose of attracting the second defendant into the English court's jurisdiction.

The ECJ decision of Owusu v Jackson [2005] decided that if an English court is seised of proceedings against a defendant domiciled in England, it cannot stay proceedings in favour of a non-Member State court on the ground that the non-Member State court is the more appropriate forum to hear the case. (Under the recast Regulation, since 10th January 2015 the EU courts have a discretion to stay their proceedings in favour of a non-EU court if the non-EU court was first seised (which was not the position in this case)).

One of the issues in this case was whether a stay could be ordered because the claim did not raise a real issue to be tried. The judge held that it could not. Although the English court retains a residual discretion "The cases show that this residual discretion must not be exercised in such a way as to circumvent Owusu by, so to speak, the back door. The cases do not suggest that the merits of the claim are relevant to the question whether this discretion should be exercised; the court has other powers to deal with weak claims. The cases give no guidance about the 'exceptionally strong grounds' that are required to found the exercise of the discretion ... They do not suggest that the discretion can be exercised where there are no proceedings pending in a foreign jurisdiction against the non-domiciled defendant. In my judgment, the effect of a stay would be to circumvent Owusu".

The judge found that there was no real issue between the claimants and the first defendant (and so the claim against the first defendant could not proceed and service against the second defendant should be set aside). This case differed from Chandler v Cape Plc (see Weekly Update 14/12), where the Court of Appeal held that a parent company had been responsible for the health and safety of its subsidiary's employees. The second defendant here was not a direct subsidiary of the first defendant and the two defendants did not have close geographical links. Furthermore, the claimants here were seeking to impose liability on the defendants for the criminal acts of third parties, rather than the tortious acts of a defendant.

Merrix v Heart of England NHS: Court considers whether the costs budgeting regime fetters costs judge's discretion at a detailed assessment of costs

The novel issue in this case was whether the costs budgeting regime fetters a costs judge's powers and discretion at a detailed assessment of costs. A number of detailed assessments have been adjourned pending the outcome of this decision.

The appellant argued that where a receiving party claims costs which are at or less than the budgeted figure, those costs should be assessed as claimed (unless the paying party can show a good reason to depart from the budget). The respondent argued that the paying party is entitled to a full detailed assessment, with the budget being just one factor in determining reasonable and proportionate costs (ie the costs judge is not fettered by the budget).

Carr J agreed with the appellant and said that the words of CPR r.18 (the effect of a costs management order) were clear and concluded as follows: "Where a costs management order has been made, when assessing costs on the standard basis, the costs judge will not depart from the receiving party's last approved or agreed budget unless satisfied that there is good reason to do so. This applies as much where the receiving party claims a sum equal to or less than the sums budgeted as where the receiving party seeks to recover more than the sums budgeted".

Rezek-Clarke v Moorfields: Court considers whether ATE premium to cover experts' reports was proportionate

From 1 April 2013, ATE insurance premiums ceased to be recoverable by the winning party where the insurance policy is issued on or after 1 April 2013. However, there is an exception for that part of the premium which relates to the risk of incurring liability to pay for an expert report or reports relating to liability or causation in respect of clinical negligence in connection with the proceedings.

In this case, the defendant argued that the amount of the premium (£22,000 approx.) relating to the expert reports was disproportionate, given that the underling claim was at best worth £5,000, and in fact settled for £3,250. Master Simons agreed. Since 1 April 2013, costs can be disproportionate, even if they have been reasonably or necessarily incurred. Furthermore, the claimant's solicitors had been unable to produce any evidence that the choice of the insurance policy had been anything other than a mechanical exercise carried out by the fee earner: "Although it was quite clear from the moment the instructions were taken that this was going to be a low value claim, no consideration appears to have been given as to the proportionate costs of running the case. If the solicitors decided that they needed to utilise the services of five separate medical experts, it should have been obvious to them that if they were going to utilise this particular insurance policy then this would likely mean an expensive premium. No consideration was given by the solicitors as to whether or not this particular policy was appropriate to this particular low value case".

Although he held that he would have been entitled to disallow the premium, Master Simons chose not to interfere with his decision at the provisional assessment that £2,120 should be allowed.

(Re)Insurance Weekly Update 08- 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.