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There have been a number of significant cases in the English courts since the previous edition. The covid-19 business interruption litigation has given rise to further judgments on issues not resolved by the Supreme Court’s judgment in January 2021, and at least two further judgments are imminent at the time of writing. Insurance disputes have not troubled the Supreme Court in the past year to the same extent as in preceding years, but the Court of Appeal has given two judgments on the meaning of commonly used forms of aggregation wording, and the first reported case on the new law on damages for late payment of claims under Section 13A of the Insurance Act 2015 is also covered below.
Two recent decisions of the English courts also illustrate the importance of consistency in policies within a tower of insurance when it comes to dispute resolution clauses, and Brexit continues to drive the use of the insurance business transfer regime in Part VII of the FSMA.
These and other key recent cases are summarised below, including important decisions in such areas as non-disclosure and fair presentation of the risk, notification, subrogation and the Third Parties (Rights against Insurers) Act 2010.
While business interruption cover is typically bought by policyholders as an extension to property damage policies, and primarily responds in cases of property damage, non-damage extensions to cover also exist in the market providing cover for losses caused by disease or the response of public authorities to disease. There has been a deluge of claims against such policies as a result of covid-19 and the national lockdowns in the UK, and considerable uncertainty as to whether such policies respond. The key coverage issues that arose on the most commonly used forms of policy were addressed by the Supreme Court in January 2021 in the first-ever case using the Financial Markets Test Case Scheme (the Test Case) under the Civil Procedure Rules (CPRs). The Test Case was brought by the regulator, the Financial Conduct Authority, on behalf of policyholders and with the consent and cooperation of eight insurers seeking to promote greater clarity on the legal issues.
We covered the outcome of both the Divisional Court and the Supreme Court judgments in the Test Case in the third and fourth editions. Since the Supreme Court’s judgment in the Test Case, there have been two further significant decisions in this area.
The first is the arbitration award in Various Policyholders v. China Taiping Insurance (UK) Co Ltd6 (which the parties agreed be published, notwithstanding the confidential nature of the arbitral process). The relevant policy provided cover for interruption as a consequence of ‘instructions issued by the Police or other competent local authority’. Lord Mance, sitting as a sole arbitrator, held that the UK government’s orders and advice issued during the covid-19 pandemic did not engage the relevant insuring clause, as the UK government was not a competent local authority but, rather, a central or countrywide authority. Although an arbitral award does not have precedential value, as a former Supreme Court justice, Lord Mance’s reasoning is likely to be highly persuasive in any case before the English courts considering the same question.
Corbin and King Limited & Ors v. Axa Insurance UK PLC7 concerned the interpretation of a non-damage denial of access (NDDA) clause similar, but not identical, to clauses considered by the Divisional Court in the Test Case. In the Test Case, the Divisional Court had held that those NDDA clauses did not provide cover as their wording concerned specific local occurrences of disease only, and not a national response to a pandemic. Those findings of the Divisional Court were not appealed to the Supreme Court. In Corbin and King, the High Court held that it was not bound to apply the Divisional Court’s judgment regarding the relevant NDDA clauses in the Test Case to the similar clauses in issue in Corbin and King. The High Court considered that the NDDA clauses at issue were not materially identical to those in the Test Case, and that the Supreme Court’s subsequent judgment on the correct approach to the causation analysis meant that the arguments before it were different from those made to the Divisional Court in the Test Case. The High Court held that the NDDA clauses at issue in Corbin and King insured specific local occurrences of disease but, in light of the Supreme Court’s approach to causation, also encompassed national disease events provided that they encroached on the relevant locality. The High Court also held that the limits of liability in the policy applied individually to each restaurant premises and for each lockdown, and not as an aggregate limit across all premises and lockdowns.
At the time of writing, judgments in two further cases before the High Court are expected imminently.8 Those judgments are expected to address further important issues, including the application of the policy limits provisions in the widely used Marsh Resilience wording to multiple premises and lockdowns, and the issue whether payments received by policyholders under the UK government’s furlough scheme should, or should not, be taken into account in quantifying claims.
Part VII of the FSMA provides a court-sanctioned procedure for the legal transfer of insurance policies between insurers. The court is required to consider a report on the viability of the transfer by an independent expert, along with submissions from the FCA and PRA and any objections made by policyholders (or any other person who alleges they are adversely affected by the proposed transfer).
A number of recent applications for sanction of a Part VII transfer have also had to consider issues raised by Brexit. Courts have frequently found themselves in the situation of having to balance:
While the courts have still been careful to consider the interests of policyholders, they have shown that they are prepared to approve a scheme despite some elements of prejudice to policyholders where the transfer is in response to an external circumstance, such as Brexit.10
In Re Mercantile Indemnity Co Ltd,11 the High Court sanctioned three Part VII transfers where UK insurance and reinsurance companies sought to transfer policies to another group company domiciled in Belgium, to allow their business to be conducted in the European Economic Area (EEA) following Brexit. The Court considered that it was appropriate to sanction the schemes because they were not intended to serve a commercial purpose but, rather, were intended to ensure that, following Brexit, a proper level of service could be provided to policyholders.
In Phoenix Life Ltd, Re12 the High Court gave guidance on the legislation permitting the English courts to continue to make orders sanctioning insurance business transfer schemes that included business carried on in an EEA state for two years after Brexit.13 The High Court held that the legislation only required the order sanctioning the scheme to be made by 31 December 2022, and not that the transfer itself be effected by that date.
In Ristorante Ltd (t/a Bar Massimo) v. Zurich Insurance Plc14 the High Court held that a question in a proposal form that asked whether specific individuals within the business had been the subject of an insolvency process was limited to those individuals. It did not require the policyholder to disclose information regarding any insolvency process in which any other connected person or company had been involved. Further, by asking that question in the proposal form, the insurer had waived its entitlement to disclosure of the requisite information regarding other connected persons or companies. Therefore, the policyholder’s failure to disclose that certain directors and shareholders had previously been directors of a company that entered liquidation did not entitle the insurer to avoid the policy for material non-disclosure or for failure to make a fair presentation of the risk.
This case concerned a policy that was entered into prior to the Insurance Act 2015 coming into force but was then renewed after the Act had come into force and materially changed English law on non-disclosure. However, in this case, the policyholder accepted that if its arguments as to the meaning of the question in the proposal form had failed, there would have been both a material non-disclosure and an unfair presentation of the risk, such that the insurer would have been entitled to avoid the policy. Therefore, the Court was not required to consider whether the changes to the law following the Insurance Act 2015 affected the outcome.
In Arch Insurance (UK) Ltd v. McCullough,15 the insured’s public liability policy made it a condition precedent to cover to provide notification of any circumstance that could give rise to a claim ‘as soon as reasonably practicable’. The insured failed to notify the insurer of an incident at his outdoor motorbike track until 11 months after the accident, in which a child fell from her bike and sustained serious injuries. The High Court held that the accident itself was a circumstance that a reasonable insured would have realised made a risk of a claim more than fanciful, and, therefore, required notification as soon as reasonably practicable. The 11-month period taken to notify was not as soon as reasonably practicable and, therefore, the condition precedent to the insurer’s liability was not satisfied and the insurer had no obligation to indemnify the insured for the claim by the child’s parents.
The Court of Appeal has recently given two judgments that starkly illustrate the importance of the specific wording used in aggregation clauses. Both cases concern sustained misconduct by professionals impacting multiple clients over a long period, linked by the professionals’ habitual malpractice or dishonesty. However, on the basis of one form of aggregation language, the Court of Appeal held that the claims concerned aggregated and, on another form, it held that the claims concerned did not.
In Spire Healthcare Ltd v. Royal and Sun Alliance Insurance Ltd16 the Court of Appeal considered the meaning of the phrase ‘consequent on or attributable to one source or original cause’ that commonly appears in aggregation clauses, in the context of a series of clinical negligence claims against the same surgeon. Those claims had been categorised by the insured healthcare provider into two groups – the first where surgery had been performed and the second where it had not. The High Court had held that the two groups of claims were attributable to two separate original causes and, therefore, should not be aggregated together for the purposes of the application of the policy limits. However, the Court of Appeal reached the opposite conclusion. It held that the relevant phrase was a traditional and well-known formula in insurance policies intended to achieve the widest possible search for a unifying factor, that there was no distinction between ‘source’ and ‘original cause’, and that ‘original cause’ connoted a ‘considerably looser causal connection’ than proximate cause (though not every ‘but for’ cause would amount to an ‘original cause’). In this case, the unifying factor was the surgeon who habitually acted in breach of duty, and, therefore, both groups of claims were attributable to the same source or original cause.
In contrast, in Baines v. Dixon Coles & Gill,17 the Court of Appeal held that multiple claims brought against a solicitors’ firm after a partner’s theft of client funds over a long period could not be aggregated for the purposes of a claim under a policy on the Solicitors’ Regulation Authority’s Indemnity Insurance Rules 2013 minimum terms and conditions. The aggregation clause in that policy required claims to ‘arise from one act or omission, or a series of related acts or omissions’. The Court of Appeal held that each theft was a separate act and the partner’s dishonest treatment of clients’ money was not a sufficient unifying factor for each theft to be considered part of a series of related acts or omissions, and, therefore, the aggregation clause did not apply.
Quadra Commodities SA v. XL Insurance Company SE and Others18 is the first judgment to consider the term implied by Section 13A of the Insurance Act 2015 that insurance claims must be paid within a reasonable time, which includes a reasonable time for the insurer to investigate and assess the claim. Section 13A(4) of that Act also provides that, where an insurer can show that there were reasonable grounds for disputing a claim, it will not breach the implied term merely by failing to pay, but its conduct in handling the claim may still be a relevant factor.
In Quadra Commodities the insured argued that the insurer’s failure to pay a marine cargo claim for a period of 15 months from notification was a breach of the implied term, and claimed losses calculated by reference to the return on its shareholders’ equity. Butcher J held that the burden of proof to establish that payment was made only after a reasonable time was on the insured, as the party alleging breach, but that the insurer had the burden of proving that there were reasonable grounds for disputing the claim. On the specific circumstances of the claim, which included the complexity of the underlying issues and certain factors beyond the insurers’ control, Butcher J concluded that a reasonable time was about a year from notice. However, he held that the insurer had reasonable grounds for disputing the claim – even though those grounds were ultimately unsuccessful at trial – and, therefore, there was no breach of the implied term.
Subrogation enables an insurer to recoup all or some of the money from a third party that caused or contributed to a loss for which the insurer has indemnified the insured. Commercial insurance commonly involves multiple insurers underwriting part of the relevant risk, often across multiple excess layers, and, therefore, each having a partial, several, subrogated interest in any third-party recoveries. In Royal and Sun Alliance Insurance Plc v. Textainer Group Holdings Ltd,19 an insurer successfully applied for an order under Rule 19.6(1)(b) of the English Civil Procedure Rules to act as a representative for other insurers in a subrogated claim for recoveries from a shipping container leasing business. The High Court held that the insurer had the same interest in the claim as those insurers whom it sought to represent, and it was appropriate for it to be granted permission to do so under Rule 19.6.
Two recent decisions of the English courts illustrate the importance of consistency in policies within a tower of insurance when it comes to dispute resolution clauses.
In AIG Europe SA v. John Wood Group Plc20 the primary policy in a tower of insurance policies did not contain a choice of law or jurisdiction clause. The excess policies then contained clauses that both purported to follow the choice of law and jurisdiction in the primary policy and separately provided for either the jurisdiction of the English courts or for London-seated arbitration. The insured was a defendant to a claim in the Canadian courts and commenced proceedings against the primary and excess insurers in the Canadian courts. The primary insurer did not dispute the Canadian court’s jurisdiction, but the English Court of Appeal upheld the High Court’s granting of an anti-suit injunction against those proceedings in the excess insurers’ favour. The Court of Appeal held that had the primary policy contained a jurisdiction clause, the follow-form clause in the excess policies would have superseded any separate jurisdiction clauses in those policies. However, as there was no jurisdiction clause in the primary policy, the follow-form clause did not apply, and the various different jurisdiction clauses in the excess policies prevailed.
This case is a salutary reminder of the importance of ensuring consistency and coherence of dispute resolution clauses across any tower of insurance. The outcome of this case left the insured pursuing substantially the same insurance claim against the primary insurer in the Canadian courts, against certain of the excess insurers in the English courts, and against one excess insurer in separate English arbitration proceedings.
The English court also bifurcated the determination of a dispute that impacted multiple layers in Axis Corporate Capital UK II Limited v. ABSA Group Ltd & Ors,21 in which it held that, in the context of reinsurance claims, where there are differing jurisdiction clauses in the primary and excess layers, there could be different proceedings in different jurisdictions. The High Court held that the primary reinsurance policy contained only a non-exclusive jurisdiction clause in favour of the English courts, whereas the excess reinsurance policies contained exclusive English court jurisdiction clauses. Therefore, the insured was able to continue claim proceedings commenced in the South African courts against the primary reinsurers but was required to discontinue those proceedings against the excess insurers and pursue any such claims in England. The insured subsequently sought a stay of the English proceedings on case management grounds pending the conclusion of the South African proceedings, as both proceedings concerned substantially the same issues. However, the High Court held that to grant such a stay would be ‘to do by the back door what cannot be achieved by the front door’, as it would be in substance a stay on forum non conveniens, rather than case management, grounds. It held, therefore, that it would be contrary to principle for the stay application to be granted, leaving the insured to pursue substantially same claim in two different fora.
In Irwell Insurance Co Ltd v. Neil Watson & Ors,22 the Court of Appeal held that an employment tribunal was a ‘court’ for the purposes of Section 2(6) of the Third Parties (Rights against Insurers) Act 2010. Therefore, it was within its remit to deal with the question of an insurer’s liability to a claimant under the Act for a claim for unfair dismissal against the employer, following the employer’s insolvency. The tribunal’s statutory exclusive jurisdiction to deal with the employee’s unfair dismissal claim also overrode the arbitration clause in the insurance policy. Therefore, that clause did not prevent the employee pursuing its claim against the insurer before the employment tribunal.
Trends and outlook
As in last year’s edition, covid-19 and the challenges deriving from the pandemic have been a dominant theme in insurance disputes this year. England and Wales was one of the first jurisdictions to examine, at speed, the issues of recovery of losses for business interruption as a result of the covid-19 pandemic. The first use of the Financial Markets Test Case Scheme by the regulator, the Financial Conduct Authority, for this purpose has meant that precedential clarity was obtained swiftly from the UK’s highest court on the most common forms of policy in the market, meaning that in 2022 insurers have continued to focus on resolving the large volume of claims against such policies resulting from covid-19 and the national lockdowns in the UK. However, inevitably, the Test Case did not resolve all issues, or deal with all policy wording variants and, as we have covered above, the follow-on litigation on issues not resolved by the Test Case has now reached the High Court and arbitral tribunals, and further important judgments have been handed down or are imminent.
The major global event of 2022 has undoubtedly been the conflict in Ukraine. Its effects on global markets have been widely felt and the insurance market is no exception. We are already seeing filed in courts around the world the first claims against aviation insurers in relation to aircraft leased to Russian airlines that have not been permitted to leave and have been re-registered in Russia. The first case of this kind in England and Wales is Aercap Ireland Limited’s US$3.4 billion claim against both its all risks and its war risks insurers, which was issued in June 2022, and many more are anticipated.
Although the Insurance Act 2015 has now been in force for over five years, it remains to be seen precisely how certain provisions of the Act will be applied. The Act potentially represents a major rebalancing of rights and obligations between insureds and insurers (in favour of insureds), but early indications are that insurers are seeking to contract out of many of the provisions of the Act where possible in commercial policies. The recent judgment on Section 13A covered above gives the first important indication as to how damages for late payment of insurance claims will be approached by the courts.
Warranty and indemnity insurance and cyber insurance are two of the fastest developing policy markets in England and the terms of both types of policy are becoming increasingly standardised. There have only been a limited number of significant disputes in relation to these types of policies, although we anticipate that will change in the next few years, especially with the increasing importance of private capital in global mergers and acquisitions markets, and as cyberattacks are becoming an increasingly common experience for businesses.
The coming into force of the General Data Protection Regulation has also generated interest in the extent to which the risks of failing to comply with the Regulation are insurable. The position is likely to be that insurance will not be available for any fines imposed under the Regulation or under the related Data Protection Act 2018 (either because English law prohibits the insurance of fines or because policies will specifically exclude them). However, insurance may be available for the costs of participating in an investigation by the Information Commissioner’s Office and defending any subsequent proceedings. Insurance disputes arising out of data protection breaches may also be a developing area in the coming years. Disputes relating to a failure to appreciate the effect of artificial intelligence also look likely to be a developing area.
The use of after the event insurance to cover costs risks in English litigation has also increased significantly in recent years, both as a result of reduction in availability of legal aid at one end of the scale and the increased importance of litigation funding in English disputes at the other end.
In addition to these areas of potential development, climate change remains an area where claims must surely begin to rise. There appear to be no insurance claims before the English courts in this area as yet, but all eyes are on that space. Individual directors or officers that find themselves targeted by third-party claims or by regulators may also have cover under directors’ and officers’ insurance policies. It is particularly noteworthy that the results of the Bank of England’s 2021 Climate Biennial Exploratory Scenario28 considered that directors’ and officers’ insurance policies were the most likely to pay out on climate change claims.
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