So there is no limit to what a QC can do after all…

In Allianz Insurance plc v Tonicstar Limited [2018] EWCA Civ 434 the Court of Appeal has overturned the decision of Mr Justice Teare to remove a QC as an arbitrator on the grounds that he did not have the requisite experience of insurance or reinsurance. Under clause 15.5 of the Joint Excess Loss Committee Clauses arbitrators had to be persons from the “trade or business of insurance”, and so a QC with more than 10 years’ experience of acting in insurance and reinsurance disputes did not qualify for appointment (see my post “There are some things that even a QC cannot do…” November 15 2017).

Mr Justice Teare felt bound by an earlier unreported decision of Mr Justice Morison in Company X v Company Y (2000) although he indicated that, uninhibited by that authority, he might have decided the case differently. Lord Justice Leggatt in the Court of Appeal was not so constrained and found that Mr Justice Morison’s interpretation of the clause was indefensible and that it did not impose any restriction on how the ten years’ experience was to be acquired.

Counsel for the Respondent did not attempt to support Mr Justice Morison’s interpretation but instead argued that although the QC undoubtedly had considerable more than 10 years’ experience of insurance and reinsurance law, there was no evidence that he had any experience of insurance or reinsurance “itself”. He took as an example a sports arbitration and suggested that having experience of sports law would not be enough to demonstrate experience of sports. Similarly, experience of engineering or telecommunications law was not the same as experience of engineering or telecommunications.

Lord Justice Leggatt rejected this argument. Insurance and reinsurance differ from sports, engineering and telecommunications in that insurance contracts create legal rights and obligations whereas the law regulating sports, engineering and telecommunications is clearly distinct from the activities themselves. Those who work in insurance, whether as brokers, underwriters or in claims, need to have some legal knowledge and understanding. The practical and legal aspects of insurance and reinsurance are intertwined and there is no such thing as insurance or reinsurance “itself” which is separate and distinct from the law of insurance and reinsurance.

Two points: the capability of QCs to do anything and everything is restored, and the crucial importance of the legal elements of the CII and CILA examinations is underlined.

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Aggregation of Claims

In Spire Healthcare Ltd v Royal and Sun Alliance Insurance PLC [2018] EWCA Civ 317, the Court of Appeal considered the wording of the schedule and a proviso in a liability policy. The schedule set limits of £10 million for any one claim and £20 million for all claims during the period of cover. The proviso provided that the total amount payable arising out of all claims consequent on or attributable to one source or original cause ‘shall not exceed the limit in the schedule’ without specifying whether that limit was £10 million or £20 million.

The claim arose out of unnecessary and negligent operations performed by a surgeon for which Spire Healthcare Ltd (“Spire”) agreed to pay compensation to the patients. His Honour Judge Waksman QC ruled that the insurer’s liability to indemnify Spire was limited to £10 million as the claims were consequent on or attributable to one source or original cause. Spire appealed.

Spire’s arguments were that the proviso was inconsistent with the schedule and that a reasonable reader would have focused on the schedule. The schedule contained no reference to the proviso and as the proviso did not expressly say that linked claims were to be treated as a single claim it was wrong to assume that they would be treated as such. The wording of the schedule and proviso was ambiguous and applying the contra proferentem rule the construction more favourable to the insured should apply.

In dismissing the appeal, Lord Justice Simon’s starting point was to consider the combined effect of the schedule and proviso without giving greater or lesser weight to either. The approach to the interpretation of the policy of was that of sophisticated insured who is assisted by professional advice and who does not restrict their reading to the limits of indemnity in the schedule. The judge acknowledged that the wording of the proviso could have been clearer (HHJ Waksman QC had said ‘in frequently used, modified and revised policies of insurance, neatness and elegance are often lost’) but also that in some circumstances, for example where there is a deductible or excess, the aggregation of claims might work to the insured’s advantage. There was no real ambiguity in the schedule and proviso when read together and so the contra proferentem rule did not apply.

Two observations on the case. First, Lord Justice Simon recognised that the insured in a liability policy of this type was a sophisticated reader who read all the policy and was  professionally advised. Second, a lot of time and expense might have been saved if neatness, elegance and a greater degree of precision had been retained in the modification and revision of the policy.

Warranty or condition precedent to liability?

In Bluebon Limited (in liquidation) and (1) Ageas UK Limited (2) Aviva Insurance Limited (3) Towergate Underwriting Group Limited [2017] EWHC 3301 (Comm) the High Court considered whether a term in an insurance policy was a warranty or a condition precedent to liability.

The Claimant insured owned a hotel that was destroyed by fire. The insurers were the First and Second Defendants and the brokers were the Third Defendants. The policy contained a term, described as an Electrical Inspection Warranty (“EIW”), that required the electrical installation to be inspected and tested every five years. It was agreed that the electrical installation had not been tested within the five years prior to policy inception or at any time since.

The insurers contended that the EIW was a warranty and that the breach entitled them to declare the policy void from inception. Alternatively, they contended that the term was a suspensive warranty and that cover was suspended from inception until the electrical installation was inspected. In practical effect there was no difference of outcome whether the EIW was a ‘true’ or a ‘suspensory’ warranty as there was no dispute that the electrical installation had not been inspected post-inception. Under both a true and suspensory warranty the insurers were entitled to declare the policy void from inception and refund the premiums paid, less an amount paid for an earlier burst pipe claim.

The insured and their brokers contended that the compliance with the EIW was a condition precedent to the insurers’ liability for a fire caused by a fault in the electrical installation. Unless the fire was caused by a fault in the electrical installation then the insurers were liable.   The construction of the EIW was tried as a preliminary issue and the cause of the fire was not considered.

The Honourable Mr Justice Bryan considered that the description of the EIW in the policy as a warranty was not necessarily conclusive, not least because, as Mr Justice Mackinnon observed in Roberts v Anglo Saxon Insurance Company [1927], the word warranty “is often used with the greatest possible ambiguity in insurance policies”. The consequences of a breach, that the policy would be null and void from inception, were not spelled out and the policy’s general conditions provided that due observance and fulfilment of the policy terms, which included the EIW, were conditions precedent to the liability of the insurers to make any payment.

Instead the judge applied the three-stage test identified by Mr Justice Rix in HIH Casualty & General Insurance v New Hampshire Insurance Co. [2001] (“HIH”). The first question was whether the EIW was a term that went to the root of the contract. Here the purpose of the EIW was to ensure that, as far as possible, the electrical installation was sound and without defect and thereby the risk of fire was reduced. It was clear, therefore, that the EIW went to the root of the contract.

 

The second question was whether the EIW was descriptive of or had a material effect on the risk of loss. Fire was an insured peril under all sections of the policy and therefore the test was satisfied.

The third question was whether, in the event of breach by the insured, damages would be an unsatisfactory and inadequate remedy for the insurer. Damages would be a suitable remedy if the insurers could reduce or extinguish their liability to the extent that a fire was caused by a fault in the electrical installation that would have been discovered and remedied through compliance with the EIW. The judge considered that it might be impossible to establish whether a fire was caused by a defect in the electrical installation, particularly in the event of destruction in a particularly fierce fire. Damages were not, therefore, a satisfactory or adequate remedy for the insurer.

The three tests in HIH were satisfied and so the EIW was a warranty and not a condition precedent to liability. The judge, however, preferred the construction of the EIW as a suspensive rather than a true warranty (although it made no practical difference in the circumstances of this claim). He considered that the EIW should reflect the intention of the parties by reference to what a reasonable person having all the background knowledge of the parties would understand it to mean. The EIW clearly contemplated that if there had not been an inspection within the last five years then one was to be undertaken immediately, and that cover would be suspended until it took place. It would be wrong to say that if an inspection was outstanding at the time of inception, but one was undertaken shortly afterwards, the policy would nevertheless be null and void.

The significant point to note from the decision is that the judge did not consider the description in the policy of the EIW as a warranty to be conclusive. Care should be taken when drafting terms that an insurer wishes to rely on as warranties that the consequences of a breach are made clear and that they are consistent with the general policy conditions.

 

Claims notification conditions

In Zurich Insurance plc and Maccaferri Limited [2016] EWCA Civ 1302 the Court of Appeal upheld a High Court finding that Zurich Insurance was not entitled to decline to indemnify its insured on the grounds of breach of the claims notification clause.

The claim arose out of an accident at work in which the claimant, who had already lost the sight of one eye, lost the sight in his other eye, rendering him blind. Maccaferri supplied the allegedly faulty machine to Jewsons who in turn supplied it to the claimant’s employers, Drayton.

The claim notification condition in Maccaferri’s public and products liability policy with Zurich was in two parts. The first part provided that the insured had to give notice in writing to the insurer “as soon as possible after the occurrence of any event likely to give rise to a claim with full particulars thereof”. The second part provided the insured shall also “on receiving verbal or written notice of any claim intimate or send same or a copy thereof immediately to the Insurer”.

The accident occurred on 22 September 2011 although it did not appear in Drayton’s accident book until 27 November 2011. On 28 September 2011 both Drayton and Jewson informed Maccaferri by telephone that there had been an incident involving the machine and that it was to be taken off hire and retained for investigation. The recipient of the telephone call at Maccaferri said that neither Drayton or Zurich gave him any further details of the incident and he was not told of any serious personal injury having been caused nor was there any complaint about the machine. By 24 October 2011 Maccaferri were aware that there had been an accident involving the machine because they agreed to provide test certificates. By 12 January 2012 Maccaferri know that someone had been injured because telephone calls were made enquiring as to the injured party’s condition. In June 2012 the Maccaferri employee who had taken the telephone calls in September 2011 overheard a pub conversation that appeared to relate to the same incident but introduced the injured party’s loss of sight. He reported the conversation to his superior and whilst he thought that the injured party might bring a claim, he thought it unlikely that the claim would be brought against Maccaferri because he considered that there was nothing wrong with the machine.

The claimant began a claim against Drayton in July/August 2012. Judgment was entered for damages to be assessed on 18 February 2013. On around 29 March 2013 Drayton brought Jewson into the proceedings for a contribution toward the damages to be paid to the claimant and then on 18 July 2013 Jewson wrote to Maccaferri to inform them that they had issued a claim against them for a contribution. On receipt of that letter, two years and nine months after the accident, Maccaferri notified Zurich. Zurich refused to indemnify Maccaferri on the grounds of late notification in breach of the first part of the notification clause.

Zurich’s case was that Maccaferri were required to notify Zurich of the incident as soon as they were aware of both the occurrence of the incident and that it might lead to a claim. This might not occur simultaneously as they might be notified of the occurence and only later become aware that it might lead to a claim. Lord Justice Christopher Clarke rejected this construction of the first part of the notification condition. Whether an event is one likely to give rise to a claim is to be determined by reference to the position immediately after it occurs. Zurich sought to impose an obligation on Maccaferri to carry out a continuous assessment of past events in order to see whether a claim might be forthcoming. Lord Justice Clarke found that the construction of the Zurich notification clause did not impose such an obligation, although he noted that other clauses in other policies can have that effect.

As drafted, the Zurich notification condition required Maccaferri to notify Zurich if, when it became aware of the incident and with the actual knowledge it possessed at that time, a reasonable person would have thought it at least 50% likely that a claim wold be made. Clearly that would be a desirable obligation to impose on their insured but in order to do so, the notification clause would have to be re-drafted.

Fraudulent claims and the consequences

The consequences of pursuing fraudulent claims have been shown on two recent motor cases. Both claimants have been committed to prison.

In Ewere, the claimant was at home and answered the door to a motorist who admitted that she had accidentally collided with his parked car whilst parking her own. The two went to look at their cars and discovered a mark on the claimant’s car, although it was later decided that the mark was there already. They exchanged details and went their separate ways. Some weeks later, the claimant began a personal injuries claim for neck and shoulder whiplash, saying that he had been in the car when the collision occurred. He then produced his GP records which recorded him as having said that he had hit his head on the steering wheel in the collision but made no mention of neck or shoulder pain. The claim was pursued to trial where it was dismissed.

The defendant’s insurers applied for the claimant to be committed to prison for contempt of court. Mr Justice Slade found that the claimant had had not been in the car and had not suffered any injuries in the collision and committed him to prison.

In Ahmed the claimant overtook on the inside lane, cut in front of the defendant’s car and then braked suddenly for no reason, causing the defendant to collide with him. The claimant alleged that he had been in the same lane all along, in slow moving traffic and that the defendant had driven into the back of his car. Unfortunately for the claimant, the incident was captured on CCTV. The claim was pursued to trial where it was dismissed and the District Judge found that the claim was fundamentally dishonest.

The defendant’s insurers applied for the claimant to be committed to prison. Mr Justice Spencer found that the claimant’s version of events was false and that he had made false statements that he could not have honestly believed were true and committed him to prison.

In contempt proceedings the applicant must prove beyond a reasonable doubt (one of the few exceptions to the usual test of balance of probabilities in civil proceedings[1]) that the respondent had made false statements, that the respondent had no honest belief in the truth of his statements, that the statements were likely to interfere with the course of justice and that the respondent knew that the statements were likely to interfere with the course of justice. Both claimants will now have an extended opportunity to reflect on whether the potential financial gain was really worth the risk of the loss of their liberty.

[1] The others are proceedings in the Election Court, sexual offences prevention orders and risk of sexual harm orders.

Motor insurer’s liability for damage caused by negligent DIY repairs.

In UK Insurance Limited and R&S Pilling t/as Phoenix Engineering [2017] EWCA Civ 259 the Court of Appeal held that motor insurers were liable to indemnify their insured against his liability when he negligently started a fire when repairing his car.

The policyholder was a mechanic employed in a garage. His car had failed its MOT due to corrosion on its underside and his employers agreed that he could use their loading bay and welding gear to do the necessary repairs. Unfortunately, however, sparks ignited flammable material inside the car. The fire spread and caused damage in excess of £2 million. Under their rights of subrogation, the employers’ insurers brought a claim against the mechanic who in turn sought an indemnity against his liability from his motor insurers.

The operative clause of the policy provided the insured with cover for his legal responsibility ‘if you have an accident in your vehicle’. The insurers also certified that the policy satisfied the requirements of the ‘relevant law applicable in Great Britain’, which was taken to be the  compulsory insurance requirements of section 143 of the Road Traffic Act 1988 and European Directive 2009/103/EC.

The motor insurers denied that they were liable to indemnify the mechanic on the grounds that their cover did not extend to circumstances where the car was immobilised and being repaired, and that the  that compulsory insurance requirements of the Road Traffic Act and the European Directive did not extend to the circumstances of the claim. At first instance the judge upheld the motor insurers’ defence, primarily because the mechanic was not ‘using’ the car at the time of the welding and consequent fire. The employers’ insurers appealed.

 

The Court of Appeal agreed with the trial judge that the operative clause on the motor policy was not happily worded and that something had ‘gone wrong’ with the language of the clause. As written, it applied only to liability incurred if the policyholder was in the car when the accident occurred. Whereas the trial judge rule that the proper meaning of the clause was to cover liability for an accident resulting from the use of the car, the Court of Appeal rejected this meaning as unjustifiably narrowing the cover provided and instead found that the proper meaning of the clause was cover for accidents involving the policyholder’s vehicle. The appeal was therefore allowed on this issue and the insured was entitled to an indemnity

The Court of Appeal went on to rule, however, the requirements of the Road Traffic Act and European Directive extended to the circumstances of the fire. The legislative requirements refer to liability arising out of the ‘use’ of a vehicle and ‘use’ is of wider application than ‘driving’ or ‘operating’ which would have been used if the legislators had intended cover to be restricted to accidents whilst the vehicle was being driven. The earlier cases of Dunthorne v Bentley [1999] Lloyd’s Rep IR 560, Elliot v Grey [1960] and Pumbien v Vines [1996] were good authority that RTA cover extended to circumstances where a car was parked or even immobilised.

In Elliott the driver was held to be in breach of the requirement to hold insurance because his car, with its wheels raised off the road, missing its battery and self-starter and with an empty fuel tank, was being used on the road. Similarly, in Pumbien a car was being used on the road even though its brakes had seized, its tyres were deflated and the gearbox contained no oil. In Dunthorne, a motorist who ran out of petrol and got out of her car to cross the road in order to seek help was still using her car because the help she sought was to enable her to continue her journey.

The decision of the Court of Appeal may appear to be somewhat surprising. The operative clause of the policy was unfortunately drafted and cover that only applied to accidents occurring when the insured was in the vehicle was not the intention of the parties. It is unlikely, however, that underwriters would have intended cover to extend to the consequences of the negligent use of welding gear when the car was off the road and being repaired. Nevertheless, the Court of Appeal stressed that there were limits to which the policy would respond to accidents arising out of work being done on a car. If the car had not been driven for some time, or the work was reconstruction rather than repair, or the car was not to be used in the immediate or near future, then the policy might not apply.

 

Does an insured’s deliberate but honest and mistaken non-disclosure entitle the insurer to avoid a policy?

In Mutual Energy Limited and (1) Starr Underwriting Agents Ltd (2) Travellers Syndicate Management Ltd [2016] EWHC 590 (TCC) the court was asked to decide whether an insurer was entitled to avoid a policy on the grounds of deliberate non-disclosure if that non-disclosure was due to the insured’s honest but mistaken belief that the matters in question did not need to be disclosed.

The claim involved damage to undersea electricity cables between Northern Ireland and Scotland. The facts concerning the cause of the damage, and whether it was poor design, poor manufacture or poor installation, were disputed and the court considered the non-disclosure question as a preliminary issue.

The non-disclosure, misrepresentation and breach clause in the policy provided that the insurer would not avoid the insurance unless there was ‘deliberate or fraudulent’ non-disclosure or misrepresentation. The case predated the coming into force of the Insurance Act 2015 and the clause was recognised as modifying the more onerous disclosure requirements of sections 17 and 18 of the Marine Insurance Act 1906. The insurers did not contend that the insured had acted in bad faith or that they were guilty of any misrepresentation or deceit. Their case was that deliberate non-disclosure was distinct from fraudulent non-disclosure and would include an honest but mistaken decision not to disclose a document or fact. The insured contended that deliberate non-disclosure meant a conscious decision not to disclose something that they knew they should disclose and therefore included some element of dishonesty.

Both parties and the judge drew on examples of conduct that that is deliberate and dishonest but not fraudulent. The insurers argued that they should be entitled to avoid a policy where an insured made a misrepresentation that he knew to be inaccurate but in the belief that the inaccuracy did not matter. The insured showed the judge guidance from the Financial Ombudsman Service which said that a customer who withholds information because they are embarrassed about it is acting dishonestly and deliberately but not acting fraudulently because there is no deceitful intention to obtain an advantage.

The Honourable Mr Justice Coulson presented his own example of what he described as the absurd consequences of the insurers’ approach. Two employees are each given a file to review and decide which of the documents in them must be disclosed. Employee A conscientiously reviews each document in his file and concludes that about half should be disclosed and half should not. In reaching that conclusion he makes an honest mistake on one of the non-disclosed documents. The insurers content that they would be entitled to avoid the policy. Employee B meanwhile buries his file beneath some other papers and never gets round to reviewing it and it is not disclosed before it is swept away for recycling. That would be inadvertent, non-deliberate, non-disclosure and the insurer would not be entitled to avoid the policy. The insured would be penalised for A’s honesty but not for B’s inefficiency.

The judge concluded that deliberate or fraudulent non-disclosure means a deliberate decision not to disclose something which the insured knows should be disclosed and does not extend to an honest mistake. A failure to disclose something which is the result of an honest but mistaken belief that the fact or document does not need to be disclosed is not enough for the insurer to avoid the policy.

It should be noted that the case concerned the wording of the non-disclosure clause in the policy. Without knowing the detail of the non-disclosed information, it is impossible to say whether the insured would have been in breach of the fair presentation requirement of the section 3 of the Insurance Act 2015 or what remedy the insurers might have been entitled to if there was a breach.