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FRAUDNo such thing as a white lie: Court of Appeal authoritatively confirms fraudulent devices rule 2
PROPERTYRiots revisited: making the Mayor pay 2
Sound the alarm 3
REINSURANCEDouble standards? a lesson in the meaning of “businesslike” manners 4
BROKERS Brokers’ conflicts of interest: the FCA is in a pugnacious mood 6
Business interruption insurance: what duties does a broker owe its client? 8
DISPUTE RESOLUTIONJackson reforms: a return to common sense? 9
PROFESSIONAL INDEMNITYAdvising a client to mind his own business: to do or not to do? 10
Enough said? the scope of duty owed by professionals 11
Architects’ net contribution: no longer a clause for concern? 12
CYBERCyber issues for insurers 14
W&I INSURANCEPost acquisition events and company valuations 15
IN BRIEF 17
INSURANCE E-BRIEFAUTUMN 2014
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FRAUDNo such thing as a white lie: Court of Appeal authoritatively confirms fraudulent devices ruleIn a judgment of great significance to insurers in all classes of business, in Versloot Dredging BV v HDI-Gerling & others, The DC Merwestone [2014] EWCA Civ 1349 the Court of Appeal has authoritatively ruled in underwriters’ favour as to the consequences of the use of a fraudulent device by an insured in connection with the presentation of an insurance claim.
The Court of Appeal has ruled that there is a “bright line rule” whereby an insured who employs a ‘fraudulent device’ forfeits his claim, despite the fact that the claim would otherwise have been recoverable under the policy.
The decision confirms (with one qualification) the correctness of Lord Justice Mance’s (as he then was) obiter (non-binding) and ‘tentative’ dicta in Agapitos v Agnew [2003] QB 556 (The Aegeon) which was to the effect that an insured who embellishes his claim with a lie will lose his claim (even if it would otherwise have been recoverable in full) if the lie directly relates to the claim and satisfies subjective and objective tests as to intention and materiality respectively.
Joe O’Keeffe and Elle Young of Ince & Co acted for the successful underwriters in the first instance and Court of Appeal proceedings. Faz Peermohamed and Paul Billowes of Ince & Co conducted the initial casualty investigation.
Click here to read our briefing note on the Court of Appeal decision and here for our note on the first instance decision.
PROPERTYRiots revisited: making the Mayor payEight months after the handing down of Mr Justice Flaux’s judgment as to the recoverability of compensation for losses suffered following damage to the Sony warehouse in the 2011 London riots (click here for our article on the first instance judgment), the Court of Appeal has reached its own conclusions in Mitsui Sumitomo Insurance Co (Europe) Ltd & Anor v The Mayor’s Office for Policing and Crime [2014] EWCA Civ 682.
Decision at first instanceThis case, which first came before Flaux J in July 2013, is concerned with the liability of the Mayor’s Office for Policing and Crime (the statutory body responsible for oversight of the Metropolitan Police) under s.2 of the Riot (Damages) Act 1886 to compensate various parties who suffered loss following the looting and burning down of the Sony distribution warehouse in Enfield Lock by a group of youths on 8 August 2011.
Flaux J decided at first instance that the group of youths were “persons riotously and tumultuously assembled together” within the meaning of the 1886 Act (as amended). As such, where property in a police area had been stolen or damaged, any person who had suffered loss “by such injury, stealing or destruction of property”, or his insurer in his place, was entitled under the 1886 Act to be compensated by the “police fund of the area”. That compensation would be limited, however, to physical damage to the property itself and would not include consequential losses, such as loss of profit or loss of rent.
The Mayor’s Office appealed against the finding of liability while insurers cross-appealed as to the finding on the extent of that liability. Losses paid out by the insurers of Sony, which occupied the warehouse, and Cresta Estates Ltd, which owned the warehouse, included £9.8 million for loss of profit as a result of the destruction of Sony’s distribution equipment and £1.5 million in loss of rent. A third claim relevant to the appeal was made by the owners of some uninsured trading stock stored in the warehouse and destroyed in the riot, in relation to which £3 million was claimed for loss of profit.
Decision of the Court of AppealThe Court of Appeal agreed with Flaux J that the “mob violence” of the group did amount to “persons riotously and tumultuously assembled together” and therefore losses were to be compensated under the 1886 legislation.
However, where the Court of Appeal disagreed with Flaux J was the extent of that compensation, which the Court of Appeal felt extended to cover consequential losses.
Heavily influenced by the history behind legislation preceding the 1886 Act, and the case law dealing with that legislation, Lord Justice Dyson emphasised the remedial, as well as penal, nature of riot legislation, and referred to the purpose of that legislation in transferring liability for losses, which prior to the Riot Act 1714 would have been payable by the trespasser himself, to ‘the hundred’. He could see nothing in the wording of s.2 to support a proposition that consequential losses are excluded, notwithstanding that the Regulations prescribing the manner in which claims under the 1886 Act are to be presented make no reference to any possibility of claiming such losses.
Joe O’KeeffePartner, Londonjoe.o’[email protected]
Elle YoungSolicitor, [email protected]
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Comment The Court of Appeal denied the Mayor’s Office permission to appeal its decision and an application has therefore been made to the Supreme Court directly. A decision as to whether or not permission will be granted is expected towards the end of this year. No doubt both insurers and those authorities falling within the remit of s.2 will be watching with interest.
In the meantime, following an independent review of the 1886 Act published by the Home Office in November 2013, the Queen’s Speech on 7 June 2014 announced a public consultation, which closed on 1 August 2014, on proposed amendments to the 1886 Act. Notwithstanding the judgment of the Court of Appeal, the Government agrees with the findings of the independent review that the Act is not designed to respond to consequential losses. Further, in circumstances where 90% of the £60 million paid out under the Act in respect of the August 2011 riots was paid to insurance companies, it is proposed that the amount insurers can claim be capped where the annual turnover of the insured company exceeds £2 million. The Association of British Insurers has expressed some concern that this approach could discourage larger companies from locating in certain areas and although the Government views this concern as “questionable”, the views of the public in this regard have been expressly requested as part of the consultation.
The consultation also invites public views on, among other things, whether an excess should be applied to riot compensation claims, whether the benefit cap should also be applied to uninsured businesses, the establishment of a Riot Claims Bureau and the adoption of a replacement value, rather than an indemnity, basis for the compensation method.
The next step in the process is for the responses to the consultation to be analysed. The Government will then publish a ‘Response to the Consultation’ document setting out the Government’s final policy intentions. The extent to which the views of the Government and the findings of the courts will overlap remains to be seen.
Kiran SoarPartner, [email protected]
Jennifer KleiserSenior associate, [email protected]
Sound the alarm Mr Justice Jay’s judgment in Milton Furniture Ltd v Brit Insurance Ltd [2014] EWHC 965 (QB) is a ringing reminder of the importance of an insured’s compliance with policy provisions relating to security. It also contains a useful discussion on the approach to be taken by the courts in construing policy terms.
The factsIn April 2005 a fire broke out at the premises of the claimant, Milton Furniture Limited, that destroyed almost all the company’s stock of furniture that it hired out for the purposes of exhibitions.
Milton submitted a claim under its Commercial Combined Insurance Policy taken out with Brit Insurance Ltd, the defendant, and which contained two terms in particular that came under scrutiny: Protection Warranty 1 (PW1) and General Condition 7 (GC7).
PW1 provided: “It is a condition precedent to the liability of the Underwriters in respect of loss or damage caused by Theft and/or attempted Theft that the Burglar Alarm shall have been put into full and proper operation whenever the premises... are left unattended and that such alarm system shall have been maintained in good order throughout the currency of this insurance policy under a maintenance contract with a member of NACOSS [emphasis added]”.
GC7 stated: “The whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interests of Underwriters without their prior consent [emphasis added]”.
On the night of the fire, which took hold in the early hours of the morning, two individuals were staying on the premises. The burglar alarm, which had been monitored by SECOM until February 2005 when the service ceased due to non-payment of invoices, was not set. Brit rejected Milton’s claim on the basis that it had failed to comply with GC7, which Brit claimed was a condition precedent.
Interaction between PW1 and GC7Milton argued that PW1 (which did not itself apply as the damage in question was not caused by “Theft and/or attempted Theft”) was a special condition and as such GC7 must be subordinate to it. GC7 could not of itself, therefore, act as a condition precedent to Brit’s liability. Alternatively, Milton said, Milton’s duties under GC7 could not be more onerous than those under PW1 and there was accordingly no obligation on Milton to set the burglar alarm outside of business hours.
Jay J did not accept that PW1 predominated over GC7 “to such an extent” that it could be read as the only condition precedent applicable to the use (or non-use) of a burglar alarm, as this would leave insurers with a ‘condition precedent’ defence only in circumstances involving “Theft and/or
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Attempted Theft”. This left the Judge with two relevant conditions precedent – one applying specifically to cases of theft and the other applying in more general terms – and the question of how these were to be interpreted together.
Brit’s argument that PW1 should have no impact on GC7 did not succeed; Jay J concluded that there was no legal principle obliging him to ensure that PW1 was “hermetically sealed and ring-fenced off” from GC7. The Judge preferred Milton’s argument that GC7 should be ‘read down’ in light of PW1, such that Milton’s obligation to set the burglar alarm only arose if the premises were left unattended.
Breach of GC7 In circumstances where two individuals were staying on the premises at the time the fire took place, the Judge held that there had been no breach of the first limb of GC7; the premises had not been left unattended (this phrase was to be construed as broadly akin to ‘left unoccupied’).
However, the Judge’s view (reluctantly reached) in relation to the second limb of GC7 was that in circumstances where Milton knew that (i) the monitoring charge was payable in advance; (ii) the charge had not been paid for over six months; and (iii) SECOM would not permit such a situation to continue indefinitely, it had acted, or failed to act, in such a way that there was “a real risk” of detriment to the interests of the underwriters. As such, the term was breached and the claim by Milton failed.
CommentThis judgment is a reminder that commercial purpose and commercial sense remain the driving forces behind policy interpretation; Milton’s argument that only PW1 was a condition precedent did not fit the context of the policy or a common sense reading of its terms and subsequently failed to find favour with the Judge.
It is also a lesson that the court will continue to judge compliance with policy terms firmly. Although Jay J reached his decision with “much reluctance and no pleasure”, Milton’s reckless conduct with regard to the alarm’s monitoring was sufficient for it to be found in breach.
Johanna EwenPartner, [email protected]
Jennifer KleiserSenior associate, [email protected]
REINSURANCEDouble standards? a lesson in the meaning of “businesslike” manners Two recent cases have dealt with the obligation on (re)insurers to act in a businesslike manner or to take businesslike steps in the course of their claims handling or settlement. The decisions reflect some interesting differences in approach to the language where it appears in different contexts.
It has long been established that, where a reinsurance contract requires the reinsurer to “follow the settlements” of the reinsured, the reinsurer will be bound subject to two provisos: “...[1] that the claim so recognised [by the reinsured] falls within the risks covered by the policy of reinsurance as a matter of law and [2] provided also that in settling the claim the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement” (see Insurance Company of Africa v SCOR (UK) Reinsurance Co Ltd [1985] 1 Lloyd’s Rep 312).
In Tokio Marine Europe Insurance Limited v Novae Corporate Underwriting Limited [2014] EWHC 2105 (Comm) Mr Justice Field had to consider the meaning of the phrase “proper and businesslike” in this context. The case arose out of losses suffered by Tesco as a result of the 2011 Thai floods. Tesco had purchased property damage and business interruption cover with ACE, in the form of a master policy with local policies issued in different jurisdictions around the world. The insurance provided cover on an ‘any one occurrence’ basis where an occurrence was broadly defined in the master policy as “any one Occurrence or any series of Occurrences consequent or attributable to one source or original cause.” The master policy also contained an hours clause providing that all flood losses in a 72 hour period shall be deemed to have been caused by a single occurrence.
Tesco made a claim of approximately £125 million (under its master and local Thai policies). The quantum of loss was adjusted down to approximately £113 million and subsequently settled for £82.5 million with a single deductible of £2.5 million on the basis of ‘one occurrence’. Tokio Marine had reinsured a percentage of ACE’s exposure on a ‘back to back’ basis and duly paid ACE’s claim against it. Tokio Marine, in its turn, had retroceded a portion of its exposure to the Tesco risk on an excess of loss basis to Novae, again on a ‘back to back’ form. The retrocession contained an unqualified ‘follow the settlements’ clause but when Tokio Marine presented its claim under the retrocession, Novae declined to pay and raised a number of issues, principally in relation to the operation of the follow the settlements clause.
A number of preliminary issues were identified and all were decided in Tokio Marine’s favour following a trial in 2013.
Novae had one remaining defence and in these proceedings, Tokio Marine made an application for summary judgment to dispose of this defence. The defence was that the reinsured, ACE, did not take all proper and businesslike steps in agreeing the £82.5 million settlement with Tesco and that, consequently, the second proviso for reliance on the follow the settlements
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clause had not been satisfied. Novae submitted inter alia that the requirement to act in a proper and businesslike manner imposes a duty on the reinsured to consider the wording of the direct policy under which liability arises and to determine on a reasonable interpretation the scope of cover for the insured’s claim. Novae also submitted that it was unbusinesslike for ACE to have failed properly to have analysed and investigated a number of coverage issues.
Tokio Marine had submitted in response to Novae’s case that: (i) an allegation that a reinsured did not act in a proper and businesslike manner in settling a claim was tantamount to an allegation of professional negligence, as to which the reinsurer had the burden of proof; (ii) the purpose of the second proviso in the Insurance Company of Africa v SCOR case mentioned above was to protect reinsurers against prejudicial settlements; (iii) if the bottom line was that the final settlement figure was a good one, it could not be said that there was anything improper or unbusinesslike in not taking points or pursuing enquires that would not have affected that bottom line. Alternatively, Tokio Marine submitted that (iv) where there was no further investigation into a point because it would not have an effect on the bottom line, it could not be said that that would be improper or unbusinesslike. Even if advice on Thai law had been taken and was completely in favour of ACE, the operation of the deductibles under the local policy would still render a settlement at £82.5 million of a claim of £113 million an excellent one.
The Judge found in favour of Tokio Marine, accepting its submissions, and held that Novae’s defence that ACE failed to act properly or in a businesslike manner had no real prospect of success, notwithstanding that ACE did not further investigate the coverage afforded by the local policy.
The Judge held that given: (i) that Tesco’s offer to settle for £82.5 million gross/£80 million net of the self insured retention on 14 February 2012, subject to the claim being included within its 2011/2012 financial year; and (ii) that ACE’s loss adjusters’ final figure for the adjusted loss was between £90 million and £100 million, ACE was clearly entitled to conclude that there was nothing additional to be gained by further investigation into coverage under the local policy or by disputing the English law advice which Tesco had obtained on the meaning and effect of the definition of “Occurrence” in the master policy (which was favourable to Tesco). The Judge commented that the settlement at £80 million net was undoubtedly a good settlement and that there was no good reason why the ordinary presumption that Novae as reinsurer will follow the settlement of ACE as the reinsured should not apply.
In The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd (formerly T&N plc) & Ors [2014] EWHC 2002 (Comm) case, the meaning of in a “businesslike manner” in relation to a claims handling obligation was considered.
In this case, an Asbestos Liability Policy (ALP) provided that, in relation to claims handling, “the Policyholder shall have full, exclusive and absolute authority, discretion and control, which
shall be exercised in a businesslike manner in the spirit of good faith and fair dealing”. In the event of the policyholder, T&N, becoming insolvent, this “authority, discretion and control” passed to the captive insurer, Curzon, and by operation of specific terms of the reinsurance, to the reinsurers.
The claimant in these proceedings was a trust, established on T&N’s insolvency. The trust was authorised to bring claims on behalf of a large number of individuals in the US who alleged injury as a result of asbestos/asbestos related products supplied and/or distributed by T&N. The trust assumed liability for making recoveries in respect of all of the claims and was obliged to make distributions from trust assets to the injured individuals who were the holders of such claims. The claims were to be considered and assessed by the trust in accordance with certain Trust Distribution Procedures.
The trust presented reinsurers with 200 anonymised claims but these were rejected by reinsurers who noted a series of deficiencies. The trust therefore brought proceedings, seeking a range of declarations including that, insofar as the reinsurers sought to rely on a different method to handle or quantify claims than those used by the trust, they would be in breach of the duty to act in a businesslike manner in the spirit of good faith and fair dealing.
Eder J held that the trust had no standing to seek declaratory relief relating to the manner in which the reinsurers should handle and settle asbestos claims on behalf of the trust. The trust was neither a party to the insurance nor reinsurance contracts and there was no dispute between the parties to those contracts in relation to the handling of the claims by the reinsurers.
The Judge decided that he would not have granted declaratory relief even if the trust had had standing. Eder J accepted the reinsurers’ submissions that the duty to exercise “authority, discretion and control... in a businesslike manner in the spirit of good faith and fair dealing” was only a “very loose constraint”, excluding only courses of conduct which no similarly situated reinsurer could take. He agreed that the concept of good faith and fair dealing required reinsurers only to act “honestly and conscionably vis-à-vis the other parties to the contracts”.
Eder J held that the reinsurers were not acting in an unbusinesslike manner by requiring the trust to pursue any claims in the US tort system: “there is no monopoly of what is businesslike.” It was not yet possible to ascertain how many claims might be brought in the US under the reinsurer’s approach and whether it would cost more in the long run. If it could be shown that the reinsurers’ strategy would inevitably cost more, Eder J conceded that there might be an argument that the reinsurers were being “unbusinesslike” but that was not the case here. Furthermore, if and to the extent the reinsurers were to incur claims handling and defence costs unreasonably then, because of the way “Ultimate Net Loss” was defined in the ALP, the reinsurers would have to bear those costs themselves.
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CommentAlthough the case of Tokio Marine is very fact specific, the Judge appeared to accept Tokio Marine’s submission that an allegation that the reinsured has not been reasonable and businesslike is akin to an allegation of professional negligence. It is interesting to contrast this decision with that of Federal Mogul in which the Judge considered the reinsurer’s duty to exercise its authority, discretion and control in a businesslike manner in its claims handling as a loose constraint. The different approaches may be explained by the different contexts in which the decisions were made; the Tokio Marine decision was made in the context of the retrocessionaire’s allegation that the reinsured had failed to act properly or in a businesslike manner for the purposes of enforcing a follow the settlements clause, whereas the Federal Mogul decision concerned the reinsurers’ duty to exercise authority, discretion and control in a businesslike manner in their claims handling.
The Court in Tokio Marine appeared to accept that a reinsured is unlikely to be unreasonable or unbusinesslike if it fails to take steps in its investigation of the claim which would have had no material impact on the outcome. The Court in Federal Mogul also appears to accept that the term “businesslike manner”, at least in the present context, relates to both the process and outcome of claims handling, not just the process. Therefore it seems from these cases that the actual outcome of a settlement or claims handling will be taken into account in relation to a consideration of whether a party has acted in a businesslike manner.
Simon Cooper, EditorPartner, [email protected]
Lucy EspleySolicitor, [email protected]
BROKERSBrokers’ conflicts of interest: the FCA is in a pugnacious mood The UK Financial Conduct Authority (FCA) has turned its glare on brokers and perceives a potential conflict of interest amongst those who use “integrated models”, including Managing General Agency (MGA) agreements, as a means to boost income. It is clearly gunning for those brokers whose internal systems for managing possible conflicts of interest they deem to be inadequate. As set out below, the consequences of being deemed inadequate are severe, including expensive Section 166 Reviews (carried out at the broker’s own cost) and potentially large fines. Early action by affected brokers could avoid much larger problems later on.
Following a Thematic Review of seven larger brokers that arrange cover for SMEs, the FCA has released a report that is strongly critical of what it perceives to be a systemic conflict of interest lying at the heart of many of the business models used by the brokers in this area. The FCA directs most of its fire on the growth of ‘Integrated Models’, where the broker undertakes broking activities as agent for insureds in conjunction with activities where it acts as agent of insurers (for example, binding authority or MGA business). Here the FCA perceives a failure of brokers to put in place sufficient procedures to manage the potential conflicts of interest between the broker’s fiduciary duties to its client insured and to the insurer, given the broker’s own financial interest.
We set out the background; the problem as perceived by the FCA; the worrying implications for affected firms (including fines and potentially very expensive Section 166 Skilled Person Reports); and some potential solutions below.
The backgroundThe FCA identifies the root cause of the problem as the commoditisation of SME insurance business. In order to earn a higher proportion of the underwriting revenue, many larger brokers are channelling much of the business into MGA structures: a solution that enables insurers to cut their fixed costs while the brokers take on more of the administrative functions in return for a greater cut of the premium.
The convenience of such an arrangement for insurers and brokers alike means that the structures are popular in the industry but the FCA considers that the “Dual role and the enhanced remuneration that can be derived from it, is likely to give rise to conflicts of interest.”
The problemThe FCA canvassed 1000 SMEs as to their expectations of the service to be provided by insurance brokers. They found that many SMEs are unlikely to be sophisticated buyers of insurance and that they may, therefore, require similar levels of protection (on a regulatory basis) as retail customers. Since SME insurance is generally more complex than consumer business, the FCA found that SMEs also rely on their brokers for a greater amount of advice than would ordinarily be the case with consumers.
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The FCA’s fundamental concern with Integrated Models is that the conflict of interest set out above could lead to SMEs paying more for core insurance products than they need to; that it could lead to brokers selling to the SMEs add-on insurances and services that are not required; or that the SMEs could pay more for secondary products like premium finance than they would otherwise need to. The FCA is also concerned that brokers involved in an MGA arrangement may, for example, not undertake any broking activity for a particular risk but simply funnel the risk into the ‘house’ MGA.
In breach of the FCA’s “treating customers fairly” principle, and other regulatory rules, the FCA:
> has found that some brokers do not have adequate management and control systems in place to address conflicts of interest (especially in terms of management information and the tender and review processes for new and existing products);
> has found that some brokers place too much reliance on disclosure of the conflict to the customer. The disclosures are often too generic to assist SMEs in understanding the structure and services and do not excuse the fundamental obligations on the brokers to manage conflicts of interest in the first place; and
> gives one example of a broker that permitted communications from internal MGAs to client-facing broking areas which focussed more on the benefits to the broker of the additional revenue arising from the MGA than the benefits to the customer.
The FCA emphasises that such an Integrated Model creates a “Need for clear controls and management information to address potential conflicts of interest in the selection and placement process and to help demonstrate that all reasonable steps have been taken to mitigate the risk these conflicts pose to the interests of customers” [our emphasis]. The FCA believes that failures in this regard are likely to be the result of out-dated control frameworks that have not been grown and adapted to mitigate the new and evolving risk of conflicts of interest that come with increasing numbers of Integrated Models and MGAs.
The implicationsThe FCA has clearly got the bit between its teeth on this issue and, amid rumblings of a desire to ‘make an example’ of at least one of the firms reviewed, it says that it will, among other things, enact “Supervisory engagement with the firms involved in the review to address specific issues identified, using the full range of regulatory tools available to us as appropriate.”
Those regulatory tools, of course, include large fines and Section 166 reviews of the brokers’ businesses. Section 166 reviews involve directing firms to engage third party specialists to check that their practices are up to scratch. The reviewed firm must pay the cost of the review: a cost that will of course vary according to the size of the broker involved but that can range from tens of thousands of pounds to over £1 million. The market will also recall the £315,000 fine levied on Besso for failing to maintain effective systems for countering risks of bribery and corruption.
While the FCA has not said that it would immediately widen the scope of its “supervisory engagement” on this issue beyond the seven brokers which were the subject of the thematic review, there is always a possibility that it will do so in the future.
The solutionThe FCA has made clear that the issue of conflicts is in its sights and is likely to focus on it in any future reviews of a broker’s business. Their guidance, however, is somewhat nebulous: affected brokers must “Put in place an effective control framework and [have] taken all reasonable steps to manage and mitigate the conflicts of interest in their business, to prevent them potentially damaging the interests of their SME customers.” That said, by the FCA setting out the problems it encountered in the Thematic Review, it does make it possible to glean what would be acceptable practice.
The key thing to bear in mind is not only that such guidance must be adhered to but that each firm must be able to “demonstrate” this to the FCA. This will require clear paper-trails setting out the policies and procedures of affected firms and within each individual client file. On a more strategic level, firms will have to consider the manner in which they segregate the roles, revenue and information between the insurer focused parts of their business (such as their MGAs) and the more traditional client-facing and broking arms: whether using Chinese walls or other mechanisms.
In the absence of more detailed guidance as to what precisely amounts to an “effective control framework”, this is a difficult task to get right and brokers might well think it advisable to obtain independent advice on their structures and procedures on their own terms, before finding themselves in a position where the FCA orders a Section 166 report.
Chris JefferisPartner, [email protected]
Roderic JonesSolicitor, [email protected]
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Business interruption insurance: what duties does a broker owe its client?A judgment has been handed down in the Commercial Court by Mr Justice Blair in the case of Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm) which has provided helpful guidelines regarding the duties of an insurance broker in relation to the placement of business interruption insurance.
The case was a brokers’ negligence claim for breach of contract and/or negligence which was brought by Eurokey Recycling Ltd against its insurance brokers, Giles Insurance Brokers Ltd, following a major fire which took place at Eurokey’s main site in May 2010.
Eurokey’s insurer, Paladin Underwriting Agency, threatened to avoid cover on the basis that Eurokey was woefully underinsured for material damage and business interruption. Eurokey alleged that Giles had failed to properly advise it regarding how the sum insured for business interruption ought to be calculated. Giles defended its position by stating that it had complied with its duties to ascertain the nature of Eurokey’s business and its insurance requirements (and relied on financial information provided by Eurokey in this regard) – but such duties did not extend to calculating the sum insured for business interruption or choosing the indemnity period.
A settlement was reached between Eurokey and Paladin under which Eurokey accepted £1.5 million. This, however, was insufficient to rebuild Eurokey’s premises and to cover Eurokey’s business interruption. Eurokey subsequently commenced proceedings against Giles alleging that the broker had given Paladin inaccurate information and advice and, therefore, Eurokey’s underinsurance arose from Giles’ negligence. Eurokey claimed over £16 million from Giles – the difference between the settlement sum and what Eurokey says it would have recovered from Paladin if it had been properly advised by Giles.
The judgmentBlair J dismissed Eurokey’s claim.
In summary, it was held that:
> Giles had provided Eurokey with an adequate explanation of business interruption cover;
> Giles had no reason to doubt the figures provided by Eurokey in respect of the sum insured for business interruption and turnover; and
> Giles had acted in accordance with Eurokey’s instructions (particularly regarding the 12 month indemnity period).
Whilst the general legal principles concerning insurance brokers’ duties were not in dispute, the judgment focuses upon the duties of an insurance broker to its client when placing business interruption cover. In particular, Blair J set out the following principles in relation to business interruption insurance:
1. The broker is not expected to calculate the level of business interruption cover required – however, the broker must provide a sufficient explanation (including an
explanation of technical terms such as ‘Insurable Gross Profit’ and ‘Maximum Indemnity Period’ for example) for his/her client to be able to do so.
2. In order to do this, the broker must take reasonable steps to ascertain the nature of the client’s business and its insurance requirements – but s/he is not required to undertake a detailed investigation. Notwithstanding this, the broker’s duties are not diminished because his/her company may offer an enhanced service at an additional cost. Regardless of the availability of any additional services, the duty to explain applies to any broker who agrees to place business interruption cover.
3. The precise extent of the broker’s obligation to assess its client’s business interruption needs will depend on the circumstances, including the level of client sophistication and the number of times the broker has previously met with the client.
4. A client may not need annual repetition of advice previously given and understood, however, this assumes that the personnel responsible for obtaining insurance cover remain the same, and that the giving of advice can be properly evidenced by documentation (or otherwise).
5. If a client who appears to be well informed about his/her business provides its broker with specific information, the broker is not expected the verify that information unless s/he has reason to believe that it is inaccurate.
6. Having satisfied the duties outlined above, where a broker is given express instructions to obtain specific cover, s/he must exercise reasonable care in carrying out such instructions.
Blair J concluded that, on balance, Giles had satisfied these principles.
CommentWhilst it is usually the case that the purpose of business interruption cover is to put the insured in the same trading position after the business interruption as it would have been had the loss not occurred, the practical reality of determining the amount of business interruption cover required is not always easy. This difficulty is borne out in the present case where the insured, Eurokey, alleged that its broker, Giles, had failed to satisfy its duties – leaving Eurokey grossly underinsured. The decision in favour of Giles no doubt comes as a relief to brokers.
This judgment serves as a helpful recap of the duties owed by an insurance broker to its client in the context of advising on business interruption cover.
Simon Cooper, EditorPartner, [email protected]
Lorraine FernandesSolicitor, [email protected]
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DISPUTE RESOLUTIONJackson reforms: a return to common sense? We reported in the Spring 2014 E-Brief on the impact of the Jackson Reforms a year after implementation (click here to read our article). At that time the Court of Appeal had recently handed down judgment in Mitchell v Newsgroup Newspapers [2013] EWCA Civ 1537, endorsing a tough new approach to cases of non-compliance with court rules, orders and directions. The Court advocated a two stage test:
1. Could the non-compliance properly be regarded as “trivial”? If so, relief from sanctions would be appropriate.
2. If the non-compliance was not trivial then the burden was on the defaulting party to prove that there were good reasons to grant relief.
Post MitchellThere followed a number of first instance cases in which judges applied the Mitchell guidance to applications for relief from sanctions. The contradictory approaches taken by the different judges in those cases led, however, to widespread confusion as to the approach which the court would take in future cases. The potential for the court to impose tough sanctions for relatively minor procedural breaches, including the striking out of claims or defences, led to a lack of cooperation between litigants in the hope of securing a significant advantage should the other party default.
In July 2014 the Court of Appeal heard three appeals concurrently in which one of the parties in each case was seeking relief from sanctions (Denton v White & Anor; Decadent Vapours Ltd v Bevan & Ors; Utilise TDS Ltd v Davies [2014] EWCA Civ 906). Lord Justice Dyson, giving the leading judgment, stated that while the guidance in Mitchell remained substantially sound, it had been misinterpreted. The Court therefore decided to “restate” the approach to be taken in future cases. Applications for relief from sanctions should now be dealt with in three stages:
1. The court should identify and assess the seriousness and significance of the failure to comply with the rule, practice direction or court order. If the breach was neither serious nor significant then relief would be granted.
2. The court should then consider why the default occurred.
3. Finally, the court should evaluate all the circumstances of the case to ensure that the matter was dealt with justly, but with particular weight given to the requirements under CPR 3.9 that (a) litigation must be conducted efficiently and at proportionate cost and (b) the court must enforce compliance with rules, practice directions and orders.
The main change to the hard line endorsed by Mitchell – and applied in many subsequent decisions – relates to the guidance given by Dyson LJ as to how courts should now approach the first stage. Instead of considering whether the breach is “trivial”, in the future the court should consider whether the breach has been “serious” or “significant”; for example, has it has imperilled future hearing dates or otherwise disrupted the conduct of the
litigation? Dyson LJ also made it clear that an assessment of the seriousness or significance of a breach should not involve, at the first stage, assessments of the general conduct of the parties. Instead the court should concentrate on an assessment of the serious and significance of the particular breach in respect of which relief from sanctions is sought.
Dyson LJ dealt with a concern raised by the legal profession that the Jackson Reforms and the Mitchell decision had encouraged non-cooperation between litigators. He made it clear that it would be inappropriate for litigants or their lawyers to take advantage of mistakes made by opposing parties in the hope that relief from sanctions would be denied and that they would obtain some litigation advantage, stating that it would be “very much the exceptional case where a contested application for relief from sanctions is necessary” and that the court will be more ready in the future to penalise opportunism. In particular, Dyson LJ suggested that heavy costs sanctions could be imposed by the courts on parties who behave unreasonably in refusing to agree extensions of time or unreasonably oppose applications for relief from sanctions (it remains to be seen to what extent there will be satellite litigation as to what is ‘unreasonable’). He also stated that, if a culture of compliance was to be encouraged, then judges must ensure that the directions given at the outset of the case are realistic and achievable.
Having given the above guidance, the Court of Appeal reversed the first instance decisions in each of the three cases (allowing relief from sanctions in two cases and reversing the decision to allow relief in the other).
CommentThe decision in Mitchell led to a lot of concern for insurers about the potential for satellite litigation and resulting increase in costs. The clarification from the Court of Appeal in Denton as to the proper approach to be taken in future cases is to be welcomed, but it remains to be seen how decision makers at first instance will apply the new guidance. That said, two things in particular stand out from the Denton decision. First, it is clear that the Court of Appeal wants to ‘wipe the slate clean’, Dyson LJ stating that “We hope that what follows will avoid the need in future to resort to the earlier authorities.” Second, the warning that only in an “exceptional case” should a litigant oppose an application for relief. Whilst this might indicate a softening of approach, failure to comply with a court rule, order or direction remains a risky business. Any party to English litigation must keep in mind that the courts remain determined to stamp out a perceived culture of delay and non-compliance with procedural requirements.
Kate ButtreyProfessional Support Lawyer, [email protected]
Ben OgdenPartner, [email protected]
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PROFESSIONAL INDEMNITYAdvising a client to mind his own business: to do or not to do? In Wellesley Partners LLP v Withers [2014] EWHC 556 (Ch) Mr Justice Nugee found the defendant solicitors to be liable for damages in excess of £1.6 million arising out of the unauthorised amendment of one very brief clause in an LLP Agreement.
BackgroundIn 2008 Withers acted for the Claimant in connection with the admission of new partners to an LLP, in particular a Bahrani bank (Addax) which had agreed to make a contribution of about £2.5 million (representing an interest of approximately 25%). The terms agreed between the Claimant and Addax allowed the latter the opportunity to exit the partnership and be repaid 50% of its contribution after 3.5 years. That unwinding provision was duly recorded in the first of numerous drafts of the Agreement. However, the version finally executed by the parties contained a very different unwinding provision which enabled Addax to exit at any time within 3.5 years. By February 2009 and in light of the global financial downturn Addax desperately needed funds and exercised its right to unwind. The Claimant eventually conceded that it had no choice but to repay 50% of Addax’s investment in accordance with the unwinding provision. The Claimant then commenced proceedings against Withers.
The absence of an attendance noteThe Judge identified a number of telephone conversations between the principal witnesses for the Claimant and Withers during a period in which drafts of the Agreement were passing between the parties, but one of particular importance because it was after this communication that the crucial amendment was made. The Claimant’s witness categorically denied giving instructions to Withers during this conversation to amend the clause to give Addax the opportunity to exit at any time within the first 3.5 years (upon giving the requisite notice) as opposed to locking Addax in for that period of time. Neither participant had made a note of the conversation and Withers’ witness admitted to having no recollection of the conversation. However, he said he could conceive of no reason why he would have amended the clause without being instructed to do so.
The Judge was urged at trial to find, on the basis of Middleton v Steeds Hudson [1998] 1 FLR 738, that the absence of an attendance note should of itself count against Withers. He rejected that submission, although he reiterated the point that making attendance notes is good practice. On the evidence the Judge found it difficult to decide how the amendment to the Agreement had come about and queried whether in those circumstances he should reject the claim on the basis that the Claimant had failed to discharge the burden of proof. However, he found that the amendment was so disadvantageous to the Claimant’s commercial interests that it could not sensibly have been approved by the Claimant and that it must have come about as a result of confusion on the part of Withers. On that basis he was satisfied on the balance of probabilities that Withers had amended the clause without instructions and were therefore in breach of their duty to the Claimant.
The client minding his own businessIt might be thought that such a disadvantageous amendment to the Agreement would have been spotted by the client and indeed it was argued by Withers that there should be a finding of contributory negligence against the client. It was submitted (albeit without authority) that a client who is being asked to sign a document should read it before doing so, even if the document had been drafted by the client’s solicitor. The Judge rejected that as a general principle and found that the client reasonably decided it was unnecessary to read the document in full again after Withers had submitted the draft containing the crucial amendment with an email stating that there was “nothing particularly different” from the previous version.
The solicitor minding his client’s businessThe Claimant made further allegations of negligence, including a complaint that Withers had failed to advise that the Agreement allowed Addax to insist on being repaid its capital contribution in US dollars. Withers had not been involved in the commercial negotiations between the parties relating to contributions, they were not asked to advise about issues such as exchange rate risk and so the Judge found they were under no duty in the circumstances to give such advice. He also rejected an allegation that Withers were under a duty to advise the Claimant about the effect on voting rights consequent upon Addax’s withdrawal on the basis this was not a technical point of law, a trap or a hidden pitfall.
The end resultThe Claimant established only one of four principal allegations of negligence, but the Judge found that the unauthorised amendment which allowed Addax to withdraw 50% of its contribution much earlier than had originally been agreed by the Claimant caused substantial loss to the Claimant. In particular, the Judge accepted evidence that had the Claimant been able to rely on the continued use of all of Addax’s capital contribution it would have successfully expanded its business in London and abroad.
John McGowanLitigation manager, [email protected]
David RutherfordPartner, [email protected]
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Enough said? the scope of duty owed by professionals The recent Court of Appeal decision in Mehjoo v Harben Barker [2014] EWCA Civ 358 provides guidance as to the limits of a professional’s duty to his client. The Court of Appeal made clear that professionals’ obligations are limited to the instructions set out in their retainer letter, which can be varied only by express agreement or a clear course of conduct that can be inferred as having that effect. In particular the Court drew a distinction between general and specialist advice and held that the giving of the former did not result in an implied duty to provide the latter.
BackgroundA professional adviser will provide his client with a letter of retainer which establishes the scope (and limit) of his contractual duty to the client. However, contractual terms may also be implied in certain circumstances, including where there has been a previous consistent course of dealings between the professional and his client.
The principle established in the case of Midland Bank Trust Co Ltd v Hett, Stubbs and Kemp [1979] Ch 384 is that professionals are under no duty to provide advice other than that requested of them and which they agree to provide. Mr Justice Oliver stated that:
“there is no such thing as a general retainer in that sense... The extent of his duty depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.”
He also said:
“the court must beware of imposing on solicitors, or other professional men in other spheres, duties which go beyond the scope of what they are requested and undertake to do”.
FactsMr Mehjoo, an Iranian businessman, built up a successful fashion business. He retained Harben Barker to provide accountancy services and advise generally in relation to tax and other financial and business affairs. In April 2005 the business was sold for £22 million and Mr Mehjoo personally realised a capital gain of £8.5 million. Mr Mehjoo had retained Iranian domicile for UK tax purposes, and as a non-dom he could have entered into a Bearer Warrant Scheme (since rendered ineffective by legislation) to avoid entirely CGT on his disposal of his shares. Mr Mehjoo had discussions with Harben Barker regarding minimisation of his capital gains tax liabilities and they alerted Mr Mehjoo to the possibility that there might be various (unspecified) capital gains tax saving schemes available to him but they were unaware of the Bearer Warrant Scheme. Mr Mehjoo ultimately entered into a scheme known as a Capital Redemption Plan (CRP) in August 2005. However, this was ineffective with the result that he was liable to HMRC for the CGT on the sale of his shares, as well as interest for late payment and penalties.
Mr Mehjoo brought proceedings against Harben Baker claiming that they should have advised him that he was or might be a non-dom, that this carried significant tax advantages and that he should take specialist advice. Harben Barker denied negligence and contended that they were not obliged to give tax-planning advice unless specifically asked to do so and had no duty to advise Mr Mahjoo to seek specialist tax advice.
First instance decisionAt first instance the High Court held that Harben Barker had been negligent. In particular, Mr Justice Silber noted that although Harben Barker’s retainer letter did not impose any obligation on them to advise Mr Mehjoo on ways in which he might minimise his tax liability, they had regularly provided Mr Mehjoo with unsolicited advice concerning his tax affairs and it was mutually understood that they would do so. This led to an implied change in the terms of the retainer, so that Harben Barker were under a duty to consider Mr Mehjoo’s tax position and to give appropriate advice, including on how to reduce his tax liability, even where such advice was not expressly requested.
Court of appeal decisionThe Court of Appeal stated that the scope and extent of a professional adviser’s retainer will be limited by the terms of their letter of engagement, which can be varied only by an express agreement or clear course of conduct. The Court held that the first instance Judge had erred in finding that the retainer had been varied as a result of Harben Barker’s conduct, in particular because the Judge had failed to distinguish between routine tax advice and more sophisticated forms of tax planning, such as the Bearer Warrant Scheme. The tax advice given by Harben Barker to Mr Mehjoo in relation to his financial affairs over many years, although proactive, had never been of this specialist nature. A course of conduct involving the tendering of routine tax advice could not lead to an implied duty to provide such specialist tax planning advice.
The Court was satisfied that a reasonably competent accountant would have been unaware of schemes that such as the Bearer Warrant Scheme. Given that Harben Barker could not be expected to know about this type of scheme, it followed that there was no reason for them to advise Mr Mehjoo to seek specialist tax advice relating to his non-dom status. Harben Barker had alerted Mr Mehjoo to the possibility that there might be various (unspecified) capital gains tax saving schemes available to him and the Court of Appeal considered that this was sufficient to discharge the duty of care.
CommentThe narrow scope of duty formulated by the Court of Appeal will be welcomed by accountants and other professionals. Nevertheless there may still be room for dispute as to the boundaries of the duty, given that the distinction between general and specialist advice may not always be clear in practice.
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Katy CarrSenior associate, [email protected]
Clearly there are lessons to be drawn from this case. In particular, professionals should ensure that the scope of the advice to be provided is clearly defined in their letter of engagement early in the professional relationship, and that they work within the confines of the retainer. The retainer should also be kept under review periodically to ensure that it remains an accurate representation of both parties’ expectations. Finally, practitioners should beware the dangers of trying to be too helpful – by proffering advice outside their area of expertise, they may unwittingly extend the scope of the retainer.
Ben OgdenPartner, [email protected]
Architects’ net contribution: no longer a clause for concern?In West and another v Ian Finlay & Associates (a firm) [2014] EWCA Civ 316, the Court of Appeal reversed the finding of the court at first instance and held a net contribution clause to be valid and binding, enabling the defendant architect to exclude losses for which an insolvent contractor party was responsible. After a controversial first instance decision which relied heavily on the facts, the Court of Appeal handed down a judgment summarising the relevant factors to be taken into account when interpreting the effect of a net contribution clause.
BackgroundThe default position under English law is that if more than one party is responsible for the same damage they are jointly and severally liable for any loss. For example, if an architect and a contractor were each liable to a client for the same defective work, the client could recover 100% of its damages from the architect. It would then be up to the architect, at his own risk, cost and expense, to pursue the other party, i.e. the contractor, under the Civil Liability (Contribution) Act 1978. In the event that the contractor became insolvent, the architect could be liable for 100% of the damages.
Net contribution clauses, also known as proportionate liability clauses, seek to limit a party’s liability to the amount that would be considered by a court to be just and equitable, based on the party’s actual responsibility for the loss. In this instance, if the court was to find the architect 80% liable and the contractor 20% liable, the client could recover only 80% of its damages from the architect. It would then be up to the client to bring a claim against the contractor to recover the remaining 20% of the damages. If the contractor became insolvent, the client could only recover 80% of its damages from the architect, leaving the client with a 20% uncollected loss.
The facts In 2006 Mr and Mrs West (the Client) engaged Ian Finlay Associates (the Architect) in relation to the alteration and refurbishment of their house. In order to keep the overall costs down the Client agreed to arrange certain discrete parts of the work itself. The Client sought a number of quotes for the building works and ultimately agreed to engage Maurice Armour (Contracts) Limited who had been introduced by the Architect, (the Main Contractor).
On completion of the works extensive damp was discovered due to improper waterproofing. Further investigations revealed serious problems with the plumbing and electrical works and the new floor slabs were defective and required replacement.
Prior to issuing proceedings, the Main Contractor became insolvent and the Client sought to recover the entirety of its loss (£800,000) from the Architect (negligence and consequential loss).
The appointment agreement (the Agreement) between the Client and the Architect included the following net contribution clause (the Clause), upon which the Architect
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sought to rely to limit its liability for the Main Contractor’s breaches:
“[the Architect’s] liability for loss or damage will be limited to the amount that is reasonable for [the Architect] to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by [the Client].”
First instanceIn the first instance decision of the Technology and Construction Court, Mr Justice Edwards-Stuart found that the Architect had fallen below the standard to be expected of a reasonably competent architect. Edwards-Stuart J then reviewed whether the Clause would limit the Client’s loss only to the loss which was caused by the Architect’s own negligence or the loss caused by the other contractor’s negligence. The Judge found the wording to be ambiguous as the words “other consultants, contractors and specialists appointed by [the Client]” could be read to either include or exclude the Main Contractor. Accordingly, Edwards-Stuart J held the Client should be afforded the most favourable interpretation of the Clause as per Regulation 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCC), i.e. the natural reading of the words included those contractors engaged by the Client for certain discrete parts of the work and not the Main Contractor, whose contract the Architect was expected to administer which meant that the Client could recover its complete loss from the Architect.
The Architect appealed on the grounds that the Clause did operate to limit its liability in the event that another contractor was responsible for some of the loss. The Client contended that the Clause could not exclude joint and several liability as it would be contrary to Regulation 5 of UTCC and sections 2, 3 and 11 and Schedule 2 of the Unfair Contract Terms Act 1977 (UCTA).
The Court of AppealIn the Court of Appeal Lord Justice Vos gave the leading judgment. He disagreed with Edwards-Stuart J’s analysis of the Clause, instead finding that it was “crystal clear”. Vos LJ considered that Edwards-Stuart J had placed too much reliance on the contextual background i.e. the parties’ knowledge that the Client would appoint other contractors directly. Having found that there was no ambiguity, Vos LJ went on to consider whether the Clause was unreasonable and unfair.
UTCC – test of unfairnessRegulation 5(1) of UTCC provides that:
“a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.”
Upon consideration of Director General of Fair Trading v First National Bank plc [2002] 1 AC 481, Vos LJ held that, while the Clause created an imbalance because it placed the
consequences of a party becoming insolvent on the shoulders of the consumer, on these particular facts, the imbalance was insignificant given:
a. the prevalence of net contribution clauses in standard RIBA forms;
b. the fact that the clause would be regarded as “not unusual” in a commercial contract;
c. the fact that the Client took the final decision on the choice of the Main Contractor;
d. The Client’s banking background and the likelihood that he would have been alive to the importance of the financial stability of the Main Contractor; and
e. The Client’s “savvy nature”.
Vos LJ stated that although it would have been preferable for the Architect to draw the Clause to the Client’s attention, the Clause did not fall foul of UTCC.
UCTA – test of unreasonablenessThe Court of Appeal also considered the position under UCTA and held that the Clause was not unreasonable because the Client:
a. was in an equal bargaining position with the Architect;b. could have renegotiated the Clause;c. could have used a different architect;d. could have protected itself e.g. with insurance, or a
performance bond; ande. undoubtedly ought to have reasonably known of the
existence of the Clause, which was placed prominently in the Agreement.
Vos LJ concluded that the Clause was unambiguous, was fair and reasonable and, therefore, would operate to limit the Architect’s liability.
ConclusionIn their present standard form, net contribution clauses may still present a litigation risk for professional indemnity insurers and their professional insureds and may need to be redrafted to ensure clarity. Assuming that the parties have equal bargaining power, the Court of Appeal seems to suggest that by highlighting the presence, and explaining the operation, of such a clause, coupled with clear drafting, the validity of a net contribution clause will not be in any doubt. However, after explanation of the workings of such a clause, there is a real risk that clients will refuse to accept them at all.
Nilam SharmaPartner, [email protected]
Gina PritchardSolicitor, [email protected]
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CYBERCyber issues for insurers The continued dependence on electronic and network-based systems, combined with the constant development and sophistication of the threats posed to those systems by criminals, political activists, terrorist groups and others, means that all businesses, regardless of their size or area of operation, are increasingly exposed to cyber risks. The UK Government’s concern about the threat posed by cyber insecurity to the national economy is reflected in the recently launch ‘Cyber Essentials’ initiative which aims to assist companies in achieving a minimum standard of information security.
Against this background, and the changing legislation and heightened regulation surrounding data protection internationally, it is not surprising that companies are looking more closely at their options for transferring cyber risk or that cyber insurance is one of the fastest developing classes in the insurance sector, with its market size expected to double by the end of next year.
Cyber insurance does, however, present a number of issues for insurers and their clients alike and we discuss some of these below.
AggregationThe potential aggregation of cyber risk should be a concern to everyone writing cyber risk, either directly or indirectly as an adjunct to more traditional classes. Cloud-computing is one example of this exposure: one single cyber event, such as a successful attack against or the failure of one of the cloud hosts, could cause loss to hundreds of thousands of parties by exposing large swathes of the data within the cloud. Alternatively, multiple hacking attacks might be instigated by one organisation against numerous targets simultaneously as part of an organised campaign. Depending on the language of the policies concerned, there may, in these circumstances, be grounds for aggregation of the losses both on an insurer’s inwards business and in respect of attempted recoveries from reinsurers. Similarly, it is by no means implausible, given appropriate language, that cyber related losses from a particular virus will aggregate, particularly for reinsurance purposes.
WordingsThe issue of aggregation is a potential problem not only for specialist cyber insurers but also for insurers of other classes of business who intentionally or not may well have an exposure to cyber related events, for example in the form of infrastructure breakdown, terrorism, theft or consequential property damage.
The structure of the direct policy and terminology employed is clearly important in this regard and the definition of terms such as “loss”, “event” or “originating cause” will have a significant impact as any express aggregation provisions.
The issue relating to policy structure and wordings is not, however, confined to matters of aggregating losses. There is an extremely broad variety of cyber insurance products in the
market, some produced by insurers and some by brokers, some designed to cover only specific elements of cyber risks and some to operate as comprehensive cyber insurance. On a macro-level, the result of this is a lack of consistency in the wordings and no standardised approaches to particular areas. Definitions differ between policies and there is no standard approach to terms, such as “damage”, “loss”, “network” and “property”. Insofar as these terms are relevant to the cover offered, they need to be considered carefully in line with what insurers or their clients are expecting to be covered under the policy. Further, the changing nature of cyber risks means that insurers and brokers will need to review wordings and definitions in particular to ensure that they encapsulate all relevant elements and to ensure that the policy still responds as expected in view of any emerging cyber risks. This is of course a challenge in itself when there is little in the way of settled legal precedent in this area, nor any market-standard definitions.
TriggersTriggers of coverage within the cyber policy wordings may also present challenges. This is not only important for matters such as notification of claims or circumstances, but also forms an integral part of specific types of cover, such as business interruption, where time deductibles are often applied. Focusing on expectations of how the policy should respond is crucial when deciding at what point the insured should be required to notify or deemed to be aware of notifiable circumstances, or at what point time starts running for any applicable time deductibles. For example, one policy may require notification of the circumstances once any member of staff has or should have discovered the issue and another policy may only require notification once a member of the insured’s management has been informed. Alternatively, rather than attaching the trigger to time of discovery at all, it is possible for a policy to require notification upon the occurrence of an event or loss. That itself presents a number of problems, especially where a cyber attack has gone unnoticed, either because it has not caused a loss that can be easily identified, or because a virus has remained dormant for some time prior to being identified. This kind of issue may present particular problems in policies which cover a different class of risk, such as property and where cover for cyber has been added subsequently as an additional benefit.
UncertaintyThe cyber insurance market has little in the way of track record; it is all still new. The lack of historic profile, including claims and case law, makes it difficult to base underwriting decisions on any meaningful evidence-based analysis. This is cause for a number of high-level issues.
With no claims having been tested in the courts in England and Wales, there is uncertainty as to how cyber policies might be interpreted in the event of a dispute. One example of this is the question of whether electronic data is considered to be ‘property’. This is particularly pertinent in respect of potential claims for cyber-related losses under other insurance policies, such as general liability. The UK courts have been reluctant to decide on this matter. The most recent case dealing with this
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particular issue is the Court of Appeal decision in Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281. The Court had to consider whether data could form the basis of a common law possessory lien. The Court stated that it could not on the basis that the data was not a tangible asset and that intangible property could not form the basis of a possessory lien. It remains for this point to be tested specifically in respect of an insurance claim.
The risks posed by the varied sources of cyber threat are not only here to stay but will continue to develop and become more advanced. Cyber insurance products have a crucial role to play in supporting the companies and bodies who have a need to mitigate their exposures, especially where they may be a particularly vulnerable target for directed cyber attacks. However, cyber insurers themselves face a number of issues and whilst it has demonstrated rapid advances, it remains to be seen how these issues can be overcome or how they will shape the future of the market. Similarly, insurers of other classes of business face the important task of understanding where they may have an incidental exposure to cyber risk with the potential to aggregate across a large book of business.
Simon Cooper, EditorPartner, [email protected]
Sam BatchelorTrainee solicitor, [email protected]
Post acquisition events and company valuations In Ageas (UK) Limited v Kwik-Fit (GB) Limited and AIG Europe Limited [2014] EWHC 2178 (QB), the High Court examined the legal authorities on measuring loss for breach of a warranty in a share and purchase agreement. The established rule for measuring such a loss is the difference between the value of the shares as warranted and the true value of the shares. The main issue for determination was whether the Court should allow facts which came to light post acquisition on the value of the shares to be taken into account in order to establish the measure of the loss for breach of warranty. The Court held that, on the facts of this case, there was no justifiable reason to depart from the well- established rule that damages for breach of contract would normally be assessed by reference to the position at the date of the breach.
BackgroundIn June 2010, Ageas (UK) Limited (Ageas) purchased the insurance business of Kwik-Fit (GB) Limited (Kwik-Fit) for a total of £214.75 million. The sale and purchase agreement included a £5 million cap on liability for any breach by Kwik-Fit in respect of a warranty as to the truth, fairness and accuracy of the accounts for the purposes of valuing the insurance business. Ageas also purchased warranty and indemnity insurance (W&I) from AIG Europe Limited (AIG) for any losses in excess of the £5 million liability cap. Ageas claimed on the W&I policy when it became evident there had been an overstatement of the revenue and assets in the accounts of the insurance business and therefore the warranty had been breached. The only issue before the Court was the correct method of valuing the loss arising from the breach in order to assess the amount of damages to be paid to Ageas, which in turn would affect what AIG would pay out under the W&I policy.
The overstatement in the accounts related to Time on Cover Bad Debt (TOCBD). This is a bad debt that results from customers remaining on cover for a period during which they have not paid the premium. Ageas valued the loss based on an assumption as to how TOCBD would affect the business using information available at the date of acquisition i.e. in June 2010, whereas AIG valued the loss based on the actual TOCBD figures since June 2010. The Court was asked to rule on whether, in valuing Kwik-Fit at the date of the acquisition, account should be taken of how the TOCBD figures had performed post acquisition.
AIG argued that the valuation of Kwik-Fit at the date of the acquisition involved an assumption being made about the future incidence of TOCBD because the assessment was made prospectively and it was based on uncertain contingencies. AIG asserted that the key difference now was these contingencies were certain. Accordingly, AIG submitted that in these circumstances, i.e. whenever an assessment of damages depends upon a contingency, which later becomes certain when damages fall to be assessed, the Court can and should take into account what it knows about the outcome of the contingency when assessing the loss for breach. AIG argued that to do
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otherwise in this case would be to value Kwik-Fit on the assumption that TOCBD would continue at 2010 levels, which would result in Ageas receiving a windfall and place Ageas in a better position.
Ageas, however, argued that the Court should follow the conventional approach of measuring damages by assessing the difference between the value of the shares as warranted and the true value of the shares with reference to the value of Kwik-Fit at the date of breach, and without reference to subsequent events.
JudgmentMr Justice Popplewell stated two uncontroversial legal positions regarding damages. The first was that damages are intended to put the innocent party in the same financial position as if the contract had been performed, i.e. the ‘compensatory principle’. The second was that damages are normally assessed by reference to the position between the parties at the date of the breach of the contract. However, a later date may be used for the assessment if to do so would more accurately reflect the overriding compensatory principle. With regard to the latter point, Popplewell J referred to Bwlfa and Merthyr Dare Steam Collieries (1891) v The Pontypridd Waterworks Company [1903] AC 426 and Golden Strait Corpn v Nippon Kubisha Kaisha (The Golden Victory) [2007] 2 AC 353 i.e. that when the value of a company depends upon a future contingency, account can be taken of what is subsequently known about the outcome of the contingency by looking at the facts that come to light after the valuation in the circumstances where that is necessary in order to give effect to the compensatory principle.
Popplewell J noted two important caveats: (i) the benefit of hindsight can only be applied in instances where it does not offend the compensatory principle, and (ii) the court must also have regard to the contractual allocation of risk. With regard to (i), AIG would have to show that it was necessary for the post acquisition incidence of TOCBD to be used in valuing Kwik-Fit at the date of acquisition and that a failure to do so would give Ageas a windfall. In respect of (ii) AIG would have to prove that any benefit Ageas receives is not one which the parties have already allocated in the sale and purchase contract.
The Court held that AIG failed on both points. As regards the first point, AIG had failed to show that Ageas would receive a windfall and that the conventional approach of assessing damages offended the compensatory principle. On the second point, the share purchase contract between Ageas and Kwik-Fit did not include any provisions for post-acquisition price adjustment based on subsequent trading performance. Therefore, Popplewell J considered that the bargain that was embodied in the sale and purchase contract was that the parties had conferred on Ageas, by the allocation of risk, any benefit or loss arising either as a result of the way Ageas chose to run the business or as a result of external influences post acquisition. Accordingly, the reduction in TOCBD from 2010,
was a benefit that the parties had accorded to Ageas by the contractual allocation of risk and as a result, Ageas should not be deprived of this benefit. Conversely if Ageas had suffered a detriment, the post contractual events would not serve to adjust a detriment if the parties had bargained for it.
CommentThis decision reinforces the standard measure of damages for breach of contract and more specifically that the measure of loss for breach of warranty in a share sale contract is the value of the shares as warranted and the true value at the date of the breach. In some circumstances the courts will depart from this principle and apply hindsight in order to determine damages. However, this case serves as an important reminder that the courts will rarely allow post contractual evidence to be introduced in order to assess damages.
Nilam SharmaPartner, [email protected]
Andrew McAdamTrainee solicitor, [email protected]
Faye ThompsonSolicitor, [email protected]
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IN BRIEFInsurance contract law reform Since 2006 the Law Commission of England and Wales and the Scottish Law Commission have conducted a joint project to reform UK insurance contract law. In July 2014 the Commissions produced a report and draft Bill considering three key issues in commercial insurance: the duty on a commercial policyholder to give information to the insurer before taking out insurance; insurance warranties; and the insurer’s remedy when the policyholder makes a fraudulent claim. On 17 July 2014 the Government introduced the Insurance Bill into Parliament and it is likely that the Bill will be passed in the 2014-2015 Parliamentary session via the special procedure for uncontroversial Law Commission Bills. Uncontroversial or not, should the Bill be enacted it will represent the most significant change in UK insurance contract law for over a century. Insurers, reinsurers and brokers will need to take steps to ensure they understand the potential impact of the reforms on their operations and working practices.
Unexpectedly, the Insurance Bill also contains provisions relating to the Third Parties (Rights Against Insurers) Act 2010 so that the Act can be brought into force. The purpose of the Act is to make it easier for third parties to bring direct actions against insurers where an insured has become insolvent. It was scheduled to become law by March 2011 but the discovery of a defect in its references to insolvency procedures has, until now, kept it on the shelf.
However, the enactment of the Bill may not be the end of the march towards reform. Two significant clauses of the Commissions’ draft Bill – relating to the late payment of claims and to contractual terms designed to reduce the risk of particular types of loss – were omitted from the Bill before it was presented to Parliament, on the basis that they were not considered sufficiently uncontroversial. The Commissions have said that they will work with industry participants to redraft the excluded clauses in the hope that they can be enacted when a legislative opportunity arises.
Personal injury claims and ‘fundamental dishonesty’In 2012 the Supreme Court held (in Fairclough Homes Ltd v Summers) [2012] UKSC 26) that the court has the power to strike out the entirety of a claim where a claimant has exaggerated the extent of their injury, including any award for a genuine injury). However the Supreme Court also indicated that this power should only be exercised in exceptional circumstances. The Government has now taken matters into its own hands and has inserted a clause into the Criminal Justice and Courts Bill, currently before the House of Lords, providing that in any personal injury claim where the court finds that the claimant is entitled to damages, but is satisfied on the balance of probabilities that the claimant has been “fundamentally dishonest” in relation to the claim as a whole, it must dismiss the claim entirely unless it is satisfied that the claimant would suffer substantial injustice as a result. What types of behaviour the courts will characterise as “fundamentally dishonest” remains to be seen.
NegligenceIn a warning shot to professional liability insurers, the Supreme Court has held (in Marley v Rawlings & Anor (Costs) [2014] UKSC 51) that the insurer of a solicitor, whose negligence led to mirror wills being ineffective, should pay the costs of both parties to the action to have the wills rectified. Notwithstanding that the solicitors’ insurers had admitted liability, they had required the appellant to bring rectification proceedings. The Court held that the appellant had a clear claim in tort against the solicitor, who would therefore be required, in the event that costs were ordered to be paid out of the estate, to reconstitute the estate. As the insurers had underwritten the solicitor’s liability, it was right to order the insurers to pay both parties’ costs.
ARIAS fast track arbitration rulesReaders may be familiar with ARIAS (UK), the ‘not for profit’ Insurance and Reinsurance Society formed in 1991 in response to market demand for improved arbitration procedures and better trained insurance arbitrators. It is worth knowing that last year, in response to a need raised by the industry for arbitral disputes to be resolved more quickly and at lower cost, ARIAS (UK) issued new ARIAS Fast Track Arbitration Rules (AFTAR). These are available for parties to adopt and are intended to ensure a speedy and cost effective determination of disputed issues. Further information and a copy of the rules can be found at http://arias.org.uk/arbitration-rules-and-clause.
Applicable lawIn the Winter 2013 edition of the E-Brief, we reported on the first instance decision in Amlin v Oriental, in which it was held that Oriental was in breach of a typhoon warranty in its reinsurance policy because a storm warning had been given before the vessel sailed from port (click here to read our article). That decision has now been upheld by the Court of Appeal: Amlin Corporate Member Ltd & Ors v Oriental Assurance Corporation [2014] EWCA Civ 1135.
The main point of interest arising from the Court of Appeal judgment is that of which law should determine the construction of the typhoon warranty. Oriental was reinsured by various Lloyd’s syndicates. The reinsurance contract incorporated the terms of the original policy. It also contained a follow the settlements clause and an exclusive English law and jurisdiction clause. The original and the reinsurance contracts contained typhoon warranties in very similar form.
Oriental argued that the typhoon warranty in the reinsurance policy was to be construed in the same way as that in the original policy and that the only sensible way in which the latter could be construed was “by reference to what would be understood by the typhoon warranty in that particular jurisdiction”. The Court of Appeal was prepared to accept that in the circumstances of this case, where the warranties in the original and reinsurance policies were in almost identical terms, where there was a follow the settlements clause and “it was common ground that there was no material difference between English law and Philippine law with respect to policy interpretation or the effect of a breach of warranty”, the two
clauses should be construed identically. However, there was no evidence adduced as to what would be understood in the Philippines by such a typhoon warranty or as to how the typhoon warranty in the original policy might be interpreted as a matter of Philippine law (which rather begs the question as to how it could have been common ground that there was no difference between English and Philippine law). Therefore the Court had to construe the clause in the reinsurance policy in accordance with its terms and in accordance with English law.
Jurisdiction and enforcement of judgments Since 2002, the Brussels Regulation has governed the jurisdiction and enforcement of judgments in European civil law matters. Concerns about aspects of the application of the Regulation led the European Commission to enter into a consultation, the result of which is a revised Regulation. The revised Brussels Regulation was published in the Official Journal of the European Union in December 2012 and will take effect from 10 January 2015.
The general rule that the courts in the EU Member State where the defendant is domiciled have jurisdiction is left unchanged. Likewise, the special jurisdiction rules remain largely unchanged.
The key changes are as follows:
> Under the Brussels Regulation, in order for an exclusive jurisdiction agreement in favour of an EU Member State to be valid, at least one of the parties has to be domiciled in an EU Member State. The revised Brussels Regulation extends its scope of application so that jurisdiction agreements in favour of courts in an EU Member State are in certain circumstances valid even if none of the parties is domiciled in an EU Member State.
> One of the great concerns with the Brussels Regulation is the lack of flexibility in the application of the lis pendens rule. This inflexibility allowed ‘torpedo’ tactics, whereby a prospective defendant takes the pre-emptive step of commencing proceedings in an EU Member State different from the one designated in the jurisdiction clause with the aim of causing delay, to flourish. The revised Brussels Regulation attempts to halt ‘torpedo’ tactics by giving more importance to exclusive jurisdiction agreements rather than the court first seised.
> Arbitration is excluded from the scope of the Brussels Regulation. The arbitration exclusion coupled with the European Court of Justice decision in Allianz SpA v West Tankers Inc (Case C-185/07) made it possible to bring, in breach of an arbitration clause, proceedings in another EU Member State to defeat and delay the arbitration clause. The revised Brussels Regulation attempts to overcome these difficulties and problems by reinforcing and clarifying the arbitration exemption.
> Under the Brussels Regulation, a judgment creditor has, before it can enforce a judgment handed down in one EU Member State in another EU Member State, to obtain a declaration of enforceability from the enforcing EU Member State court. As this process can take several months and be costly, the revised Brussels Regulation will simplify the procedure for the recognition and enforcement of one EU Member State judgment in other EU Member States.
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