This half-yearly update summarizes significant insurance coverage cases in the English courts in the first half of 2023 concerning: Covid-19 Business Interruption (“BI”) insurance; Covid-19 Travel Insurance and estoppel; the interpretation of pollution exclusions; insurable interest; the extent of an insured’s duty to produce information to insurers: the scope of co-insurance in Buildings Insurance; aggregation and the meaning of damage in Contractors All Risk Insurance; aggregation in Professional Indemnity Insurance; the legal test for accidental loss under a Public Liability Policy; the proximate cause of loss in Property Insurance; Warranty & Indemnity Insurance and their interrelationship with the relevant SPA and litigation procedure issues.
Significant Insurance Coverage Cases in H1 2023
Covid-19 BI Cases (1 of 3)
London International Exhibition Centre (the “Excel Centre”) -v- Royal & Sun Alliance Insurance [2023] EWHC 1481 (Comm)
This is an important pro-policyholder judgment and the first England and Wales judgment that has held that notifiable disease “at the premises” (“ATP”) BI insurance policy wording is capable of providing cover in principle for Covid-19 BI losses. Subject to any appeal, the judgment may result in significant numbers of policyholders with “at the premises” wording now being able to claim for Covid-19 losses.
Background
This significant judgment concerned six expedited test cases heard in succession by one judge. The lead action was the Excel Centre (a large and well-known exhibition and venue space in London) against RSA, which led the relevant policy, and a following market of five insurers: Allianz, CNA, Aviva, Zurich and Chubb. Other policyholders included well-known chains such as PizzaExpress and other restaurants, bars, nightclubs, gyms and hairdressers. There were a number of other insurers involved in those other cases.
The policy wording at issue in these cases was a form of ATP disease cover in each of the policyholder’s BI insurance policies. The ATP clause in the Excel Centre’s insurance policy concerned “closure of the Premises” resulting from an outbreak or occurrence of notifiable diseases “at the Premises”. Although there are differences in the policy wordings in the six test cases, a common feature is that they refer to occurrences (or some other events) “at the Premises” and to notifiable diseases.[1]
The central question across the six test cases was: does the decision of the Supreme Court on causation in the Financial Conduct Authority (“FCA”) test case[2] apply to disease cover requiring prevalence ‘at the premises’?
The FCA test case concerned policy wording that all provided localized cover for BI caused by any Covid-19 cases within the relevant radius, whether 1 mile or 25 miles. Each case of Covid-19 was held to be a concurrent cause of the restrictions and, therefore, even if there was only one case of Covid-19 in the relevant radius before the restrictions were introduced, the Supreme Court held there to be coverage. The FCA test case did not consider whether this approach was also applicable to “at the premises” wording. In all six cases, the policyholders claimed that the Supreme Court’s causation reasoning in the FCA test case was applicable to “at the premises” policy wording and meant that there was coverage for the policyholders’ Covid-19 losses. Ultimately, they argued that there was no reason not to apply the Supreme Court reasoning based on geographic size.
The insurers were not united in their approach. Some argued that (i) the scope and nature of cover intended to be provided by radius clauses (comprising a wide geographical area) is inherently different from that intended to be provided by ATP clauses (which are focused upon the specific premises in question) (the so called “chalk and cheese” distinction); and (ii) the exceptional principle of concurrent causation which was applied in the FCA test case in relation to radius clauses can have no application to ATP clauses, either as a matter of principle, or as a result of the language of such clauses (since they require disease actually occurring at the premises). Others argued that the outbreak of the disease at the premises must have had a meaningful causal significance because of what had happened at the premises; in other words, a policyholder must show that it was the occurrence (a case of Covid-19) being at the premises that caused the authorities to order the closure of the premises and not the national government orders as a whole.
Judgment
The court held that the Supreme Court’s reasoning on causation applicable to radius clauses was also applicable to ATP clauses and that none of the insurers’ arguments in support of the contrary conclusion were persuasive. It considered the following factors in reaching its conclusion:
First, the applicable causation test is ultimately a question of the construction of the relevant contract. It held that there are very obvious similarities between the clauses considered by the Supreme Court in the FCA test case and the ATP clauses in this case, in particular, that the diseases covered are the same and so are their potential to be widespread.
Second, the Supreme Court in the FCA test case did not draw a distinction between radius and ATP clauses. The Supreme Court had dismissed insurers’ arguments that cover was confined to the impact of occurrence (i.e. Covid cases) only within the radius and that the policyholders loss would have been suffered even if there had been no Covid cases within the radius due to the widespread occurrences outside the radius. The Commercial Court in this case held that those failed arguments were no different in substance to the arguments that were now being made by insurers in this case and they must also fail. Such a finding would “eviscerate the cover for contagious infectious diseases completely”, as any policyholder would find it difficult to prove that a widespread disease originated at its premises as opposed to having spread there.
Third, there is a clear geographical link between a radius clause and an “at the premises” clause and the answer to the causation question in relation to the alleged “chalk and cheese” difference between radius and ATP cover cannot depend on the size of the radius specified in a radius clause. It was thus accepted by insurers that even if the radius was smaller than 1 mile – for example the 250 meter radius provided for in some policies in the case – the Supreme Court test was still applicable. But no principled argument was advanced by insurers which identified the point at which the size of a radius would become so small that the Supreme Court’s reasoning would not apply and the Court held that it would be difficult to see how any such point could be identified. Logically, it must follow that it can be shrunk to something close to vanishing point (say even 10 meters around the property).
There were other issues considered by the case, for example, in relation to losses caused by disease prior to Covid-19 becoming notifiable (in England Covid-19 became a notifiable disease on 5 March 2020). The Court held on that issue that, depending on the policy wording, notifiable disease wording required notifiable disease to be present at the time of occurrence or outbreak which then leads to the premises closure. The Supreme Court’s conclusion that the government measures were taken in response to information about all the Covid-19 cases in the country as a whole was held not to affect this analysis.
Comment
The Court considered its decision to accord with a reasonable SME policyholder’s reading of the policy wording. There was no suggestion that the policies would have been read differently by an ordinary SME policyholder as compared to the two much larger businesses (i.e. Excel and PizzaExpress).
This decision is subject to appeal by some but not all the insurers. Policyholders may wish to re-engage with insurers that have previously reserved their rights or denied coverage in respect of ATP wording with a view to progressing their claims, at least as to quantum, pending any appeal on liability as to whether ATP wording covers Covid-19 losses. Relatedly, there are further cases dealing with similar issues working their way through the Commercial Court. We expect further decisions on these issues, which are subject to different BI policy wording, in the second half of 2023 and beyond. In the meantime, policyholders would be well advised to fully reserve their rights with insurers on Covid-19 claims whilst issues such as these are still “live” before the courts.
Covid-19 BI Cases (2 of 3)
Bellini v Brit and others EWHC 1545 (Comm)
In this unfavorable policyholder decision on Covid-19 BI insurance, the Court held that the BI disease clause in this case, which required physical loss or damage, did not cover Covid-19 losses in the absence of such physical loss or damage. The judgment is a reminder that a Court will interpret, so far as possible, the plain meaning of words in an insurance policy in the absence of inconsistency and ambiguity.
Background
The relevant insuring clause, which was an extension to the main cover, indemnified the policyholder for “interruption of or interference with the business caused by damage, as defined in clause 8.1 [which was the main BI insuring clause], arising from… any human infectious or human contagious disease (excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS related condition), an outbreak of which the local authority has stipulated shall be notified to them, manifested by any person whilst in the premises or within a twenty five (25) mile radius of it”. Damage was defined elsewhere in the policy as “physical loss, physical damage, physical destruction” and, on a plain reading of the policy, applied to both the main insuring clauses and extensions to cover. The preliminary issue considered by the Court was whether, on a true construction of this insuring clause, there can be cover in the absence of damage as defined in the Policy.
The policyholder (a restaurant) argued that the reasonable intention of the parties when using the language “caused by damage, as defined in clause 8.1” in the disease extension was to make reference to the contractual machinery in clause 8.1 (the main BI insuring clause) for the standard cover as a whole, and not specifically limiting the extension to physical damage. The policyholder drew on the fact that clause 8.1 was not concerned with defining the word damage but was more widely providing the machinery for the standard type of business interruption cover, including the method of calculating the amount of cover. The policyholder argued that when the disease insuring clause referred back to clause 8.1, it referred back to damage in its entirety and not to whether the damage was physical in nature. To hold otherwise, the policyholder argued, would be to render the disease insuring clause illusory.
The policyholder argued that the pro-policyholder FCA test case decision of the Supreme Court, which contained similarly worded disease clauses, should apply in favor of the policyholder.
Judgment
The court held in favor of the insurer that there was no inconsistency or ambiguity in the wording and the plain language of the policy did not permit the policyholder’s interpretation. Moreover, the disease clauses ruled on by the Supreme Court in the FCA test case did not require physical loss or physical damage unlike the disease clause in this case and so the FCA test case could be distinguished on that basis.
The Court gave limited weight to decisions of the Financial Ombudsman Service addressing a similar question based on identical wording and declining to treat it as a non-damage clause on the basis that FOS decisions (i) go to what is fair and reasonable rather than to legal entitlement; and (ii) show that the disease insuring clause in this case was not anomalous, erroneous or outlier wording. As such, physical loss or damage was required to be proven to claim for Covid losses, which had not occurred.
Comment
The judgment is a reminder of the principles of interpretation of insurance contracts. It is important to note that the parties agreed here that there had been no physical loss of, or damage to, the policyholder’s premises or property used by it at those premises and so there was no assessment in this case as to whether Covid-19 causes physical loss or damage.
Covid-19 BI Cases (3 of 3)
PizzaExpress Group Ltd v Liberty Mutual Insurance Europe SE and XL Insurance Company SE [2023] EWHC 1269 (Comm)
In another unfavorable policyholder decision on Covid-19 BI insurance, the Court dealt with an important preliminary issue concerning the construction of the policy provisions relating to policy limits. It resolved the preliminary issue in favor of insurers and is a reminder of the principles of interpretation of insurance contracts.
Background
PizzaExpress claimed for BI losses suffered between March 2020 and November 2020 as a result of closures of its 475 restaurants across the UK and Ireland (the majority of which were in England) following restrictions by the governments in each of the territories in which the restaurants were situated in response to the Covid-19 pandemic. PizzaExpress claimed £82 million pursuant to its ‘at the premises’ cover and/or £178 million pursuant to its ‘Prevention of Access’ cover under their Policy.[3]
The key provisions of the policy stated the following:
“Sub-limits:
- Sub-limits form part of the Limit of Liability and do not apply in addition to it;
- all Limits of Liability apply any one Occurrence;
- limits are inclusive of the Excess;
unless otherwise stated. If more than one Sub-limit applies to the same loss, the Insurer’s liability will be limited to the lesser Sub-limit.”
There then followed a table of combined and individual sub-limits including sub-limits for “Notifiable disease” and “Prevention of Access & Loss of Attraction” which were the relevant insuring clauses in this case.
The insurers argued that on any reasonable reading of the Schedule, all limits of liability, including the Sub-limits, applied “any one Occurrence” unless otherwise stated. “Limit of Liability” and “Sub-limits” were not defined in the policy. “Occurrence” was broadly defined in the Policy to encompass “any one loss or series of losses arising out of and directly resulting from one source or original cause”. As such, the Insurers contended that PizzaExpress’ BI losses, if covered at all, would constitute one or at most three Occurrences, giving rise to a maximum indemnity of either £250,000 (for one Occurrence) or £750,000 (for three Occurrences).
PizzaExpress contended that the relevant Sub-limits were not intended to be subject to any one Occurrence aggregation and instead applied ‘any one Incident’ defined as “loss or destruction of or damage to any property used by or for the benefit of the Insured at the Premises for the purpose of the Business” and would be capped at the higher Limit of Liability under the policy. PizzaExpress argued that the policy established a clear distinction between “Limits of Liability” and “Sub-limits”: Sub-limits will either form part of a Limit of Liability, or (where stated) will apply in addition to the Limit of Liability; but in neither case are they identified with the Limit of Liability. As such, Occurrence aggregation would not apply to Sub-limits of Notifiable Disease and Prevention of Access & Loss of Attraction coverages.
Judgment
The court interpreted the policy based on the understanding of a reasonable policyholder and held that there was no fundamental distinction between the Limit of Liability and the Sub-limits which formed part of it. The plain meaning meant that they were all subject to “any one Occurrence” aggregation. If there was to be a distinction, the draftsman would have been expected to make that distinction more clearly.
Comment
A trial of preliminary issues relating to the correct construction of the ‘prevention of access’ cover provided by this policy wording and by similar clauses in at least five other set of proceedings, will be heard later this year in October 2023.
Covid-19 (Travel Insurance) and Estoppel by Convention
World Challenge Expeditions Ltd v Zurich Insurance Plc [2023] EWHC 1696 (Comm)
An insurer’s handling of past claims gave rise to an estoppel by convention for the reimbursement of customer payments for trips cancelled by Covid-19, in circumstances where the true construction of the policy limited cover to irrecoverable third party costs.
Background
The claimant, World Challenge Expeditions (“WCE”), is a specialized travel company providing adventurous expeditions worldwide for school students (“Challengers”). From April 2016, Zurich provided personal accident travel insurance, including cancellation cover, to WCE. The present claim concerned the policy year running from 1 April 2019 to 31 March 2020 (the “Policy”).
As a result of the Covid-19 pandemic, WCE was obliged to cancel nearly all of its booked expeditions for 2020. WCE refunded over £10 million in deposits and advance payments it had received from Challengers. WCE believed that it was insured under the Policy for these sums, as Zurich had historically approved WCE’s cancellation claims in respect of any deposits that WCE was contractually obliged to refund to Challengers.
Zurich argued that, on the true construction of the Policy, it was only liable to indemnify WCE for irrecoverable costs paid out by WCE to third party suppliers (such as flights and accommodation), amounting to less than £150,000.
Judgment
The Court held that, on its true construction, the Policy only indemnified WCE’s irrecoverable third party costs up to the amount of the refunds it was obliged to make to Challengers.
However, both the WCE and Zurich claims handlers subjectively believed and understood that WCE was covered for the amount of its customer refunds. This established a sufficiently clear common assumption, arising from the course of claims handling under the earlier policies, to found an estoppel by convention. WCE was therefore entitled to be indemnified by Zurich under the Policy in the amount of refunds actually paid to Challengers, less the amount of any third party recoveries, in respect of expeditions which were due to depart from 1 June to 31 August 2020 and which were cancelled on or after 20 April 2020.
Comment
This judgment will be of interest to policyholders who may be concerned about the handling of claims for Covid-19 related cancellation cover. The judgment demonstrates that the subjective understanding and conduct of claims handlers, coupled with evidence of a past course of conduct, can be sufficient to establish an assumption of cover on the insurance company’s behalf.
From a legal perspective, the judgment contains a useful overview of the requirements for establishing different types of estoppel, which can be difficult in practice. It also illustrates the approach of English judges to trial witness evidence in light of recent procedural reforms. Mrs. Justice Dias noted her dissatisfaction with Zurich’s witnesses, whose evidence was treated with caution where it was inconsistent with the contemporaneous documentation.
Interpretation of Pollution Exclusions
Brian Leighton (Garages) Ltd v Allianz Insurance Plc [2023] EWCA Civ 8
This judgment is one of only a few in which the Court of Appeal has ruled on the interpretation of a pollution exclusion. The majority of the Court of Appeal held that an insurer was not entitled to avoid liability for the contamination of a garage due to a fuel leak, on the basis that the contamination was not a proximate cause of the damage.
Background
The appellant, Brian Leighton (Garages) (“BLG”), operated a garage and petrol station. The garage was shut down (and ultimately sold) due to a significant fuel leak that contaminated the forecourt and building, placing them at risk of fire and explosion. BLG claimed for material damage and business interruption under its motor trade insurance policy with Allianz. Allianz declined liability.
The key issue to be determined on appeal was whether the damage to the premises was “caused by pollution or contamination” (emphasis added) and so was excluded from cover under the policy’s pollution exclusion.
For the purposes of the appeal, it was assumed (because the issue arose in a summary judgment application by Allianz and because of the procedural history) that the leak had been caused by the pressure of a sharp object on a pipe, under pressure and movement from the weight of a concrete slab under the petrol station forecourt (although Allianz disputed this point). BLG argued that the proximate cause of the loss was the sharp object rupturing the pipe, which was not itself pollution or contamination, and so the pollution exclusion did not apply.
Judgment
The majority of the Court of Appeal allowed BLG’s appeal. The majority judgment discussed the requirement of proximate causation, noting that it is a “general principle of insurance law” that an insurer is only liable for losses proximately caused by a peril covered by the policy. The proximate cause of the loss is not the last cause of the loss, but the “dominant, effective or efficient cause”. The requirement of proximate causation is based on the presumed intention of the contracting parties. Importantly, this presumption is capable of being displaced if the policy provides for some other connection between loss and the occurrence of an insured or excepted peril.
Against this background, the majority of the Court of Appeal considered the wording of the policy’s pollution exclusion, and held that:
- The chain of causation leading to the damage included the process of contamination, but this was not its proximate cause. The proximate cause of the damage was the sharp object puncturing the pipe (on the assumed facts).
- Based on the language used in the policy, there was a strong presumption that the parties intended for the exclusion to apply to pollution or contamination as a proximate cause. This presumption was not displaced by any other wording in the policy.
- While this conferred a narrow meaning on the exclusion, this was not a reason to reject the interpretation. The risk of leakage of fuel is amongst the most obvious risks that a business like BLG would naturally desire to cover, and a narrow interpretation of the exclusion is consistent with such desire.
The dissenting judge concluded that, as a matter of ordinary language and construing the exclusion as a whole, it made perfect sense to say that the damage in this case was “caused by pollution or contamination” within the meaning of the exclusion.
Comment
The differing viewpoints of the Court of Appeal demonstrate that this was a finely-balanced decision, requiring in-depth and considered analysis of the policy wording and parties’ intentions. The second of the two judges forming the majority emphasized that he only agreed with the majority opinion after giving the judgment much thought. For a long time, he had shared the views of the dissenting judge.
The importance of judgments construing and interpreting the scope of pollution exclusion clauses, such as this one, will only increase as PFAS claims become more commonplace. PFAS (per- and polyfluoroalkyl substances) is an umbrella term for a “forever chemical” used in everything from everyday home goods to industrial materials. Due to allegations that exposure to PFAS can affect human health, companies that manufacture, use or distribute PFAS — or goods that contain or degrade into PFAS — have been the target of increased civil and environmental litigation, and government regulation in the US. As a result, policyholders’ efforts have also ramped up to recover insurance proceeds from their liability insurers for PFAS-related defense costs and any resulting liability and US PFAS-related litigation is seeing insurers rely on pollution exclusions in an attempt to evade their PFAS coverage obligations.[4] We are likely to see similar PFAS-related coverage litigation in the UK.
Insurable Interest
Quadra Commodities SA v XL Insurance Co SE [2023] EWCA Civ 432
In this pro-policyholder decision, the Court of Appeal considered that a commodity trader had an insurable interest in unascertained grain it had purchased but, due to overselling, may have had difficulty physically identifying. Evidence of payment was enough and the policyholder did not need to establish a proprietary interest.
Background
Quadra, an agricultural commodities trading and logistics company, was a victim of the ‘Agroinvestgroup Fraud’ in Ukraine discovered in 2019. Quadra had entered into contracts to purchase grain from two Ukrainian companies, who perpetrated a fraud by selling the same goods to different traders. Quadra claimed for its loss under a marine cargo open cover insurance policy. The key issue was whether the policyholder had an insurable interest in the grain, without which, the policyholder could not have suffered an insurable loss. Quadra had a warehouse receipt confirming that the relevant quantities of grain were held in common bulk in warehouses which it submitted to insurers as proof of loss. The Insurers denied the claim on the basis that there had been no physical loss of grain (which the policy covered), and if the grain did not exist or was not sufficiently identifiable then the loss was purely financial (i.e. the loss arose out of fraudulent warehouse receipts and the policy did not cover financial loss).
High Court Judgment
The High Court held that the insured did have an insurable interest in the goods as payment had been made under purchase contracts, and an insurable interest could be established in the unascertained goods based on the relevant description in the warehouse receipts. Further evidence of an insurable interest was the immediate right to possession of the grain under the warehouse receipts.
Court of Appeal Judgment
The Court of Appeal upheld the first instance judgment. Importantly, the Court of Appeal drew a distinction between an insurable interest in goods and a proprietary interest in goods; only the former was required to prove an insurable interest. The risk that other insureds with separate contracts of insurance may have received an indemnity in respect of the same physical goods was not sufficient to invalidate Quadra’s insurable interest in those same goods. The Court of Appeal’s comments in this regard are notable: “the insurers will have received the full premium from each insured for the risk they undertook, it is unremarkable that the law should require them to fulfil their contractual obligations.” Other grounds of appeal, relating to a challenge to a factual finding and the fact that the policyholder did not have an immediate right to possession under Ukrainian law, were also dismissed.
Comment
While an insurable interest will depend on the circumstances of each case and will be a question of construction of the policy, this case illustrates the English courts’ approach to err on the side of finding an insurable interest to exist.
We reported on the first instance judgment in this case in our Half Year Review, H1, 2022 on the issue of the application of section 13A of the Insurance Act 2015 which implies a term into insurance contracts that claims must be paid within a “reasonable” time, the remedy for which is damages. The High Court judgment was the first on that issue and it rejected the policyholder’s claim for damages under Section 13A. That aspect of the decision was not under appeal here.
Extent of Duty to Produce Information to Insurers
Cuckow v AXA Insurance UK Plc [2023] EWHC 701 (KB)
The High Court, on appeal from the County Court, considered the extent of an insured’s duty to produce information to insurers, and the approach to determining a reasonable request for information by an insurer.
Background
The Claimant was an individual who entered a contract with Mark Group Limited (“MGL”) to install cavity wall insulation at his home, after MGL had carried out a survey. The Claimant’s property subsequently developed damp, for which he blamed MGL. MGL went into liquidation and Deloitte LLP (“Deloitte”) were appointed as administrators. Deloitte failed to identify and retain the Claimant’s contract and survey (the “Documents”).
MGL was insured by AXA UK Plc (the “Insurer”). Upon being notified of the Claimant’s claim, the Insurer requested the Documents from Deloitte, which the Insurer considered they were entitled to under the terms of the insurance policy between MGL and the Insurer (the “Policy”). Deloitte failed to hand over, or look for, the Documents. The Insurer declined indemnity. The Claimant sued MGL and obtained judgment. The Claimant then issued proceedings against the Insurer, pursuant to the Third Party (Rights Against Insurers) Act 1930. The Claimant asserted that the 1930 Act entitled him to step into the shoes of MGL and claim an indemnity under the Policy to satisfy his judgment.
County Court Judgment
At first instance, the Claimant’s claim against the Insurer was dismissed. The judge found that key conditions in the Policy requiring the insured company to provide information to the Insurer were conditions precedent. Deloitte (while acting for MGL) were in breach of those conditions by failing to supply the Documents to the Insurer following a reasonable request. Therefore, MGL/Deloitte remained responsible for the sum.
The Claimant appealed, arguing that the judge did not construe the Policy terms correctly. As Deloitte did not have the Documents in their possession or power at the time of the Insurer’s request, they were not in breach. Alternatively, there was no breach because there was no finding of guilty disposal by Deloitte (meaning intentional, reckless or negligent disposal), and/or Deloitte was not aware of the importance of the Documents to the Insurer’s effective handling of any potential future claim by the Claimant when the Documents were disposed of.
High Court Judgment (on Appeal)
On appeal, the High Court identified the correct approach to considering whether a reasonable request has been made and broken:
- Using the normal principles of construction, determine the scope of the clause and whether it has been breached. This is to be done by looking at the whole policy and the circumstances and then by determining the common intention of the parties as to what the wording in the policy would have meant when the policy was entered.
- A reasonable request includes not only documents that the insured had in its possession or power at the date of the request, but also the information in documents which the insured should have had but which they had disposed of with guilty intent or recklessness (as opposed to merely lost innocently, such as due to a “staff member’s silly error”).
The High Court held that the judge was right to rule, as a matter of construction of the Policy, that Deloitte had breached the Policy conditions by failing to provide the Insurer with the Documents which they reasonably requested. The judge had rightly characterized the relevant conditions in the Policy as conditions precedent.
The High Court held that the judge’s ruling on guilty disposal and Deloitte’s knowledge of the importance of the Documents was correct and justified on the evidence. The Documents requested by the Insurer were obviously important “as a matter of pure logic because of their contents”, and MGL/Deloitte knew or ought to have known that. The fact that the Claimant had not yet claimed, but might or might not do so, was irrelevant. The High Court therefore dismissed the Claimant’s appeal.
Comment
Although each case will depend on the facts, the High Court’s judgment provides useful guidance on the correct approach to be taken when considering whether a reasonable request to produce information has been made by an insurer and breached by the insured.
Scope of Co-Insurance in Buildings Insurance
FM Conway Ltd v Rugby Football Union [2023] EWCA Civ 418
The Court of Appeal unanimously held that a co-insured contractor could not rely on an insurance policy’s waiver of subrogation as a defense to a claim for defective works.
Background
The case concerns refurbishment projects for Twickenham stadium before the 2015 Rugby World Cup. The Rugby Football Union (the “RFU”) engaged Clark Smith Partnership Limited (“CSP”) to design ductwork for high voltage power cables. The ductwork was then installed by FM Conway Ltd (“Conway”) under an amended JCT Standard Building Contract without Quantities (the “JCT”). The RFU took out insurance for the works with the second respondent insurer (“RSA”), with Conway as a co-insured.
The RFU alleged there were defects to the design and installation to the ductwork causing damage to the cables when they were pulled through, claiming a loss of around £4.4 million. Pursuant to the terms of the relevant insurance policy (the “Policy”), RSA indemnified the RFU in respect of the replacement costs of the damaged cables (around £3.3 million).
The RFU commenced a subrogated claim against Conway, alleging that Conway’s defective workmanship had caused the damage. Conway issued separate Part 8 proceedings against the RFU and RSA, seeking declarations to the effect that Conway had the benefit of the Policy on the same terms as the RFU; that the RFU could not claim against Conway under the Policy; and that RSA could not exercise subrogation rights against Conway because the loss and damage was covered under the terms of the Policy.
Judgment
The High Court held that, although the RFU and Conway were co-insured, the scope of cover was different between the parties. The Policy covered the RFU’s loss, but not the damage for the defective works caused by Conway. The Policy was no wider than the extent of the insurance cover documented in the JCT (JCT Insurance Option C), the basis of which RFU and Conway contracted on. As a result, Conway was not co-insured with respect to the relevant loss and could not rely on the Policy as a defense to the claim. Conway appealed.
The Court of Appeal unanimously upheld the High Court’s judgment. Notably, the Court of Appeal dismissed Conway’s argument that pre-contractual discussions between the parties displaced the terms of the JCT. If, as Conway had argued, the RFU had the authority and intention to secure wider cover than Option C, this should have been reflected in the form of an amendment to the JCT, but it was not.
Comment
The Court of Appeal’s judgment contains a helpful analysis of the relevant authorities and applicable legal principles on co-insurance.
An important practical takeaway from this case is that the parties chose JCT Insurance Option C without any express modification or expansion of its effect. If the parties had intended to contract on the basis that recourse to the Policy would be the sole avenue for redress for the relevant damage, then they could have made amendments to the standard JCT contract to provide for this in clear and express terms. It was significant that they did not do so. This is a useful reminder to parties to check that the underlying contractual documents accurately reflect the principally insured party’s intention and authority, and the co-insured parties’ intended level of insurance cover.
Aggregation and Meaning of a “Single Unifying Event” in Construction All Risk Insurance Policy
SKY UK Ltd v Riverstone Managing Agency Ltd [2023] EWHC 1207 (Comm)
This is a rare English court judgment on the interpretation of Construction All Risks Insurance policies, addressing various issues concerning the scope and effect of these policies. Notably, from a policyholder’s perspective, the judgment contains a detailed analysis of acts that are capable of constituting a single unifying event or occurrence for the purposes of aggregation.
Background
The employer, Sky, and the main contractor, Mace (collectively, the “Policyholders”), brought a claim against the underwriters of a syndicated construction all risks policy (the “Policy”) in relation to loss and damage allegedly suffered due to the widespread failure of the roof of Sky’s global headquarters building in West London. The roof, in part, comprised 472 large timber “cassettes”.
The Policy was made subject to a number of exclusions and exceptions. A material exclusion to the claim was the DE5 design improvement exclusion clause (“DE5”). DE5 provided that a deductible applied “in respect of defective design, materials or workmanship”, which in effect meant that the Policyholders retained liability for “£150,000 any one event” for any claims to which DE5 applied.
The Policyholders claimed that the retained liability of “£150,000 any one event” was an aggregation provision. The Underwriters argued that this was wrong, and DE5 did not contain any aggregation language. The judge identified the real question as being what, as a matter of construction, does the phrase “any one event” mean?
The Policyholders argued that the damage occurred due to a fundamental flaw in the design of the roof (specifically, in the temporary weatherproofing to be implemented pending completion of the permanent waterproofing of the secondary roof structure). The decision to build the defective design was the single unifying event by which any retained liability was to be judged. The Underwriters disagreed, arguing that a design decision cannot constitute an “event”, and any damage to each cassette must be treated as a separate event with a separate retained liability.
Judgment
After reviewing the authorities, the High Court concluded that an “event” is “something that happens at a particular time, at a particular place and in a particular way”, and potentially has an aggregating effect. Whether a decision constituted an “event” was a question of fact. In principle, the decision to design the roof without incorporating the use of a temporary roof until permanent waterproofing had taken place could constitute an “event”. Accordingly, the damage could be subject to a single retained liability of £150,000, rather than £150,000 for each cassette that suffered damage, for the purposes of the deductible applied to DE5 claims.
Comment
The judge’s finding concerning a single unifying event was highly beneficial for the Policyholders in this case and will be of interest to policyholders more generally. However, as is often the case in insurance disputes, the judge reminded the parties of the pitfalls in relying upon judgments that turned on specific policy wording as support for general propositions.
Aggregation in Professional Indemnity Insurance
Discovery Land Co LLC v Axis Specialty Europe SE [2023] EWHC 779 (Comm)
This Commercial Court judgment considered whether two claims should be aggregated under a solicitor’s professional indemnity insurance policy.
Background
AXIS, the defendant insurer (the “Insurer”), provided solicitor’s professional indemnity insurance (the “Policy”) to a solicitor’s practice (“Jirehouse”). The claims under the Policy arose from two judgments entered against Jirehouse for dishonest and fraudulent acts, errors and omissions. Both claims arose in respect of client money provided in connection with the purchase of the same property, Taymouth Castle. One claim concerned a purchase transaction; the other claim concerned a lending transaction.
The key question between the parties concerned whether the two claims were to be aggregated pursuant to the relevant Policy wording, (Clauses 5.2(c) and (e)), which was identical to the standard wording of the SRA minimum terms and conditions:
“5.2 ONE CLAIM
All claims against one or more insured arising from:[…]
(c) one series of related acts or omissions; […]
(e) similar acts or omissions in a series of related matters or transactions;
will be regarded as one claim for the purposes of this policy and the payment of any excess.”
Judgment
On the facts, the Court refused to aggregate the claims:
- The claims were not caused by the same series of acts so as to bring both within Clause 5.2(c). They originated from thefts that were brought about separately.
- The judge acknowledged that “in some cases a purchase transaction and a lending transaction might fit together”. However, in the present case they did not, and so the requirements of Clause 5.2(e) were not met. Although both claims involved Taymouth Castle, the first claim involved the theft of a client’s purchase monies under a proposed purchase transaction that did not depend on a loan, whilst the second claim concerned the theft of monies lent to a client under a secured lending transaction arranged later.
Comment
This is an important judgment concerning solicitor’s professional indemnity insurance, providing an overview of the relevant authorities and guidance on the aggregation of claims arising out of related matters or transactions.
Legal Test for Accidental Loss under a Public Liability Policy
Gueterbock v MacPhail [2023] EWHC 1035 (Ch)
A developer’s recklessness to the risk of trespass or nuisance when extending the basement of a property was held to not be accidental. As the trespass was not accidental, the policy did not respond, and the insurer was not liable under the terms of the public liability policy.
Background
Mr. and Mrs. Gueterbock (the “Claimants”) brought proceedings against their next-door neighbor, Mr. MacPhail (the “Defendant”), alleging that the newly-constructed basement of the Defendant’s property encroached upon the Claimant’s property, constituting a nuisance and trespass. The claim settled, and the Defendant agreed to pay the Claimants £100,000, plus costs.
The Defendant then sought to recover those losses, plus his own costs in the litigation, from the developer of the Defendant’s property (the “Developer”) and its insurer. The Developer carried an insurance policy with Allianz for the development of the property (the “Policy”). The Defendant claimed an indemnity against Allianz under the Policy, which contained provisions entitling the Defendant to claim under the Policy, despite not being an insured.
The cover under the Policy provided for an indemnity for public liability in respect of accidental nuisance and trespass. The critical question on appeal was whether the alleged trespass was accidental. If it was not accidental, then the Policy would not respond, whether it was the Developer or the Defendant who sought the indemnity.
A Central London County Court judge concluded that the Developer’s trespass on the Claimant’s property was not accidental within the meaning of the Policy. As a result, Allianz was not liable under the terms of the Policy to indemnify the Developer or the Defendant against any liability arising out of the respective claims brought against them. The Defendant appealed this decision to the High Court.
Judgment
The High Court held that the judge’s approach to framing the law was “impeccable”. The key question concerned the level of risk in the mind of the Developer that the intentional act of extending the basement out to the flank wall of the Claimant’s property ran the risk of trespass (or nuisance). The judge summarized this as the approach of a person who is aware of the risk, but has an attitude of “yes, there’s a risk, but let’s do it”.
The judge found a high degree of recklessness on the part of the Developer, which rendered the act of trespass (and nuisance) non-accidental within the terms of the Policy. The High Court held that the judge was entitled, on the facts he found, to reach this conclusion. Accordingly, the High Court dismissed the Defendant’s appeal.
Comment
This judgment is of interest for its practical consideration of coverage issues under public liability policies. The judgment is notable for the High Court’s approval of the trial judge’s articulation of the law, describing the judge’s approach to determining what constituted an “accidental” loss under the Policy as “unimpeachable”.
Proximate Cause of Loss in Property Insurance
Allianz Insurance Plc v University of Exeter [2023] EWHC 630 (TCC)
This High Court judgment considered whether property damage caused by a controlled detonation of an unexploded World War II bomb should trigger the war exclusion clause under a property damage and business interruption policy. Applying the test in Financial Conduct Authority v Arch Insurance, the Court decided that the dropping of the bomb, rather than its subsequent detonation, was the proximate cause of the loss. Consequently, the loss and damage caused fell within the scope of the war exclusion clause.
Background
In 1942, a German bomb was dropped in Exeter. It lay unexploded until 2021, when it was unearthed during construction works adjacent to the University of Exeter’s campus. Nearby student halls of residence fell within the safety cordon and were evacuated. Bomb disposal experts conducted a controlled detonation of the bomb, during which the halls of residence were damaged.
Allianz (the “Insurer”) issued a policy of insurance (the “Policy”) to the University of Exeter (the “Policyholder”). The Policyholder notified a claim under the Policy in respect of physical damage to the halls of residence and business interruption in connection with the temporary re-housing of students.
The Insurer declined the Policyholder’s claim on the basis that any loss or damage suffered by the Policyholder fell within the scope of the Policy’s War Exclusion clause, being loss and damage “occasioned by war”. The Insurer sought a declaration from the Court that it was entitled to decline the Policyholder’s claim.
Judgment
The central question to be determined by the Court was whether the loss was “occasioned by war”. To answer this question, the Court needed to consider what the “proximate cause” of the loss was.
The Insurer argued that the proximate cause of the loss was the dropping of the bomb. Alternatively, if the dropping of the bomb was only “a” (not “the”) proximate cause of the loss, the War Exclusion would still apply by operation of the concurrent causes rule (where there are concurrent proximate causes, one insured against and the other excluded, the exclusion applies: Wayne Tank and Pump v Employers Liability Assurance Corp).[5] The Policyholder argued that the deliberate detonation of the bomb was the proximate cause of the loss, not the dropping of the bomb some 80 years before the damage was caused.
The Court re-affirmed that the test of “proximate cause” is a matter of judgment based on common sense rather than over-analysis. The presence of the bomb led to both the need for the detonation and the inevitability of the damage. As a matter of common sense, the dropping of the bomb and its consequent presence at the site was “the” proximate cause of the damage. The reasonable and necessary human act of detonating the bomb did not change this analysis, nor did the passage of time.
If the Court was wrong, and the dropping of the bomb was not “the” proximate cause, then the Court was alternatively satisfied that it was “a” proximate cause. It followed that, by operation of the concurrent causes rule, the exclusion applied. There was nothing in the Policy to oust the operation of the rule.
As the dropping of the bomb was an act of war, the loss suffered was excluded from cover. The Insurer was therefore entitled to the declaration that it sought.
Comment
Although potentially subject to an appeal, this judgment provides a useful demonstration of how the English Courts identify a proximate cause for loss in the context of cover for property damage.
Warranty & Indemnity Insurance and their interrelationship with the relevant SPA
Finsbury Food Group PLC v Axis Corporate Capital UK Limited & Others [2023] EWHC 1559 (Comm)
This judgement is an important reminder to policyholders that having a Warranties and Indemnities (“W&I”) Insurance Policy is no substitute for thorough pre-contractual due diligence. Policyholders should carefully draft their Share Purchase Agreements (“SPA”) to avoid ambiguities over whether and when a W&I Policy is triggered.
Background
Finsbury Foods Group Plc (a food manufacturing group) acquired Ultrapharm Limited for £20 million pursuant to a SPA dated 31 August 2023. Ultrapharm was a specialist manufacturer of gluten-free baked goods supplying, among others, Marks and Spencer. Finsbury had a Buyer-Side W&I Policy in place from several insurers (“Underwriters”). The SPA contained a “Trading Conditions” Warranty (that there had been no material adverse change in Ultrapharm’s trading position) and a “Price Reduction Warranty” (that Ultrapharm would not offer or agree ongoing price reductions or discounts of the goods that would materially affect profitability).
Finsbury brought a claim under the W&I Policy, alleging that these two warranties had been breached by Ultrapharm, resulting in Finsbury overpaying for Ultrapharm.
The questions for the court were:
- Whether certain recipe changes and price reductions to the goods supplied to Marks and Spencer (the “Changes”) did in fact breach the warranties;
- Whether Finsbury had actual knowledge of any breaches (the warranties being subject to Finsbury’s actual knowledge); and
- Whether any losses would have in fact occurred from any warranty breaches.
Finsbury argued that the Changes meant that there had been warranty breaches and that it did not have sufficient knowledge of such breaches to constitute actual knowledge.
Judgment
The Court dismissed Finsbury’s claim in three key respects:
- Warranty Construction: The Court found that the Changes were not material by applying a measure of a 10% change in Ultrapharms’s global turnover to determine materiality, and that in any event they came into effect before the relevant determination date in the SPA and were an ordinary part of a bakery’s business. Thus, the Court held that the warranties were not breached and the claim fell at the first hurdle. However, the Court went on to consider the other issues.
- The Knowledge Exception: The Court agreed with Underwriters that it was sufficient for the purposes of the actual knowledge exception that Finsbury’s transaction team was given enough financial information about Ultrapharm, prior to the acquisition, to be able to calculate the materiality of the Changes on Ultrapharm’s financial position.
- Loss and Causation: The Court commented that even if there had been a breach of warranty, Finsbury still would have paid the £20 million purchase price rather than abandon the deal. Therefore, there would have been no loss.
Comment
This judgement is the first to consider a coverage dispute under a W&I insurance policy in the Commercial Court. The Court’s comments on how these policies work and their interrelationship with the relevant SPA will be valuable as W&I Policies continue to form an integral part of M&A transactions.
Litigation Procedure Issues
There have been three key decisions on litigation procedure on issues that often arise in insurance coverage disputes:
Aercap Ireland Ltd v AIG Europe SA [2023] EWHC 96 (Comm)
The Court permitted the joinder[6] of a defendant in an insurance coverage claim brought by AerCap against its All Risks insurers (AIG Europe), and alternatively, War Risks insurers (Lloyd’s Insurance Company) for claims arising out of the loss of leased aircrafts and parts to Russian airlines due to recent Russian sanctions legislation.
Background
AerCap had issued a claim against AIG Group as a representative on AIG’s own behalf and on behalf of the All Risks insurers, and against the Lloyd’s Insurance Company as a representative on its own behalf and on behalf of the War Risks insurers. Fidelis (amongst other insurers) subscribed to both the All Risks and War Risks sections of the policy and it was concerned that its position might not be adequately put forward by the representative parties. Fidelis sought to join the action through this joinder application and to be named as a defendant.
Judgment
In finding against AIG Europe (who opposed the application), Butcher J held that there would need to be “exceptional circumstances” to justify preventing a defendant that has a direct and significant financial interest in the litigation from representing themselves. Fidelis did not need to prove at the joinder stage that its position would not be adequately put forward by the representative parties, only that it had “a bona fide desire ‘to conduct its own case with its own lawyers who have only its own interests at heart’”.
Comment
The judgment clarifies the purpose of representative actions and will be important as such representative actions are often conveniently used by policyholders in insurance coverage disputes.
DC Bars Ltd v QIC Europe Ltd [2023] EWHC 245 (Comm)
This judgment considered whether a Covid-19 claim that was accepted and settled under a BI insurance policy, but where a policyholder later made further claims under the same policy, constituted a dispute over liability or a dispute over quantum, which was relevant as different jurisdiction forums were applicable to each.
Background
A chain of restaurants and bars sought to claim for Business Interruption losses due to COVID-19. Having recovered a first tranche of losses as a result of the first lockdown in March 2020 limited to a three month indemnity period, the insured made an additional three claims following a judgment of the Supreme Court based on closures resulting from government orders in September, November (for the second lockdown) and December 2020 as its policy period continued until the end of December 2020. The insurer disputed that the insured was entitled to any further indemnity. The policy contained an arbitration clause that applied where there was a difference between the parties “as to the amounts to be paid under this Policy (liability being otherwise admitted)”. The insurer argued that the arbitration clause applied because: (i) there was a dispute over the amount to be paid, and (ii) there was no dispute that the insurer would be liable where losses fell within the indemnity period (rather, they argued, this was a dispute as to whether a loss fell beyond the indemnity period in the first place). The insured argued that arbitration was only mandatory where quantum was the only issue in dispute, and here this was not the case, as the insurer was disputing liability.
Judgment
The court held that the arbitration clause was not triggered, and consequently that the proceedings should not be stayed. The judge held that the insurer was seeking to rely on the maximum indemnity period to refuse to hold the insured harmless against the claimed losses. Properly analysed, there was also a dispute as to liability; this was not purely a dispute as to quantum.
Comment
This judgment provides valuable guidance on where the line is drawn between the arbitration clause applicable to quantification of loss and the court jurisdiction clause applicable to liability in an insurance policy context.
Holt v Allianz Insurance Plc [2023] EWHC 790 (KB)
Where an insurer applies for pre-action disclosure which requires disclosure of a credit hire customer’s financial documents, it is likely to be dismissed as the at-fault insurer is unlikely to be a party to the underlying proceedings which is one of the requirements under CPR 31.16(b) for pre-action disclosure.[7] However, if the claim was brought by both the at-fault insurer and its at-fault insured, then this ground would be satisfied and permission would likely be granted where the other aspects of pre-action disclosure are met (such as the documents requested fall within the scope of standard disclosure of a substantive claim and disclosure of those documents before any proceedings were brought was desirable in order to assist the dispute to be resolved without proceedings).
Background
The insured claimant was involved in a car accident, which was the fault of the other driver (and was undisputed). The claimant received a rental car for 25 days from his credit hire provider (Auxillis), who then presented a demand for payment to the sum of £10,387.50 in respect of its credit hire charge for that hire period to Allianz (insurer for the at-fault driver).
Allianz disputed the rate, and responded with evidence that the market rate for a rental car on rental terms (as opposed to credit hire terms) was £1,736. Allianz asked Auxillis whether the insured was impecunious, and therefore not able to access credit hire at these lower rates hence the high sum claimed, and if that was the case, to disclose basic information. Auxillis refused, and Allianz applied for pre-action disclosure of the insured’s financial details and proof of income under CPR 31.16 which required that the applicant (Allianz) is likely to be a party to subsequent proceedings (CPR31.16(3)(b)).
The application was granted in the County Court and then appealed but was refused. A later renewed oral application at the High Court granted permission for the reasons explained below.
Judgment
Auxillis’ appeal was upheld on the grounds that the likely party to any subsequent proceedings was the at-fault insured driver and not Allianz (i.e. Allianz’s insured). As this could be rectified by bringing future applications in both the name of the insurer and the insured, the court went on to consider the substantive issue in the case: whether the pre-action disclosure of financial documents in credit hire cases is appropriate.
In essence, the court held on this substantive issue that impecuniosity issues should be explored in the pre-action stage of proceedings, and a claimant claiming for credit hire should disclose basic financial information when given a reasonable request by the insurer.
Comment
The judgment is a useful reminder of, and provides valuable guidance on, the requirements for pre-action disclosure in the context of an insurance claim.
