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Policy construction, non-disclosure and misrepresentation and duties of an insurance broker: ABN AMRO Bank NV v Royal and Sun Alliance Insurance Plc & Others [2021] EWHC 442 (Comm)

  • Legal Development 14 May 2021 14 May 2021
  • UK & Europe

  • Insurance & Reinsurance

The Court found in favour of the Bank, holding that the language of a bespoke Transaction Premium Clause clearly provided cover in respect of all risks of financial default, regardless of whether there was physical loss or damage to the cargo.

Overview

The claimant bank (the "Bank") sought an indemnity of approximately £33.5 million under a marine cargo insurance policy for losses suffered via a subsidiary when two major cocoa supplier customers (Euromar and Transmar) defaulted under a series of “repo” financing deals and became insolvent.

The policy was placed by the defendant broker ("Edge") with 14 subscribing underwriter defendants. The policy was an "all risks" marine cargo and storage policy but it also contained extensions to the cover which went beyond ordinary physical loss or damage to the cargo, including a bespoke clause drafted by the Bank’s external lawyers known as the Transaction Premium Clause (the "TPC"), which is at the heart of this dispute. 

The Bank sold the cocoa products and made a claim for the balance of its losses under the policy on the basis that the TPC had the effect of providing cover in respect of all risks of financial default, even if there was no physical loss or damage to the cargo. 

Insurers denied liability for the claim contending that the TPC should not be construed so as to provide what was, in effect, trade credit insurance absent any physical loss or damage to the cargo; cover for the risk arising from the default of customers would ordinarily be placed with trade credit underwriters not cargo underwriters. Insurers also advanced other arguments including that: statements made by the broker gave rise to rectification of the policy or estoppel; that the policy should be avoided because the Bank and Edge had not disclosed the purpose and intention behind the TPC; that the TPC and a non-avoidance clause (“NAC”) were not specifically drawn to Insurers' attention, particularly in the context of renewal discussions; and that the Bank acted recklessly or negligently when it entered into the repo transactions, by not requiring the quality of the cargo being financed to be independently checked, and that this negligent or reckless conduct was in breach of an express term in the policy and precludes any claim.

The Court found in favour of the Bank, holding that the language of the TPC clearly provided cover in respect of all risks of financial default, regardless of whether there was physical loss or damage to the cargo.  The Bank's claim against the underwriters therefore succeeded in full, apart from in relation to two underwriters where it failed because of an estoppel arising from statements made by Edge on renewal that the risk was "as expiry", without flagging the new provisions. This had the effect of precluding the Bank from relying upon the TPC in relation to those underwriters. The Bank also succeeded in its claim against the broker, with the Court finding that the broker failed to obtain insurance cover which met the Bank's requirements, and which did not expose it to an unnecessary risk of litigation.

The judgment addresses some important aspects of insurance law, which we outline below.

  1. Policy interpretation - the construction of the TPC

The Court examined the line of authorities on the principles governing the construction of insurance contracts including Rainy Sky SA v Kookmin Bank [2011] UKSC 50, Arnold v Britton [2015] UKSC 36, Wood v Capita Insurance Services Ltd [2017] UKSC 24, and Engelhart CTP (US) LLC v Lloyd's Syndicate 1221 [2018] EWHC 900 (Comm).

The Court agreed with the Bank's construction of the TPC, finding that the language of the carefully drafted clause was sufficiently clear so as to be construed to provide cover for financial losses, regardless of any occurrence of physical loss or damage to cargo. Where the parties have used unambiguous language, the court must apply it (Rainy Sky).  

The Court found that Insurers' argument (that the TPC applied only following an occurrence of physical loss or damage) was not based on the language actually used in the TPC "but rather upon the proposition that various considerations – factual matrix, the contract as a whole, and commercial consequences – should lead to the ordinary and natural meaning of the words used in the TPC being circumscribed".  The Court found that Insurers' argument that it would make no commercial sense for a marine cargo underwriter to offer credit risk cover, did not outweigh the construction of words which the parties actually used. Commercial common sense should not be invoked retrospectively, or to rewrite a contract in an attempt to assist an unwise party, or to penalise an astute party (Arnold v Britton). The Court stated that the "purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed."

On the admissibility of factual matrix evidence on issues of construction, the Court stated that, the subjective views expressed by witnesses, both factual and expert, as to their understanding of the TPC or its clarity were not relevant to the factual matrix. Where clear language exists, the factual matrix background "should not be used to create an ambiguity where none exists."

  1. Non-disclosure and misrepresentation – the effect of unusual clauses and non-avoidance clauses

In addition to disputing the construction of the TPC, Insurers also argued that the policy should be avoided due to material misrepresentation and non-disclosure. Insurers' basic case for avoidance was that the purpose and intention behind the TPC was a material circumstance which should have been disclosed. They also alleged non-disclosure of the NAC and certain insurers alleged that misleading statements were made by the broker in the context of renewal discussions.   It should be noted that the pre-Insurance Act 2015 principles applied.

Alleged non-disclosure of the purpose of the intention behind the TPC

The Court rejected Insurers' argument that the TPC was an unusual clause and the purpose or intention behind it i.e. that it was intended to provide credit risk cover, was a material circumstance which should have been disclosed.

The Court found that the meaning or effect of policy terms are clearly either known or presumed to be known to the insurer, given an underwriter scratches the slip containing those terms, and in the absence of enquiry, need not be disclosed under s. 18(3)(b) of the Marine Insurance Act 1906.  Referring to the cases Iron Trades Mutual Insurance v Companhia De Seguros Imperio (1992) Lloyd's Rep. IR 213, 224 and The Elena G [2001] 2 Lloyd's Rep 378, 382, the Court found that the Bank and Edge were under no obligation to disclose subjective intentions or understandings about the meaning and effect of a contractual term. Matters of inference or opinion are not material circumstances for disclosure, and neither the insured or broker are under a duty to offer the insurer advice – to do so would require the insured to estimate the risk for the underwriter. The duty is to make a fair presentation of the risk to the insurer and the "contractual effect of the clause is a matter on which the underwriter should form his own view." 

Alleged non-disclosure of the NAC

The NAC prevented avoidance other than for fraudulent non-disclosures or fraudulent misrepresentations. While Insurers did not allege fraud, they argued that the NAC was an unusually restrictive clause which should have been specifically disclosed at placement and, as such, the Bank could not rely on it to prevent avoidance of the policy; the NAC was itself "vulnerable to being avoided". The Bank and Edge argued that the NAC itself provided a complete answer to the Insurers' avoidance case, since fraud was not alleged. Insurers' evidence that they did not notice the clause or reflect upon its meaning was irrelevant.

The Court stated that the starting point is the principle that a person who signs a document knowing that it is intended to have legal effect is generally bound by its terms, whether he/she has actually read them or not; here, the NAC was agreed by underwriters in a signed document.  Further, what matters is the true construction of the relevant clause. The Court found that the NAC was comprehensive and suitably worded and its effect was that any avoidance case must be based on fraudulent non-disclosure or misrepresentation. Given that fraud was not alleged, the Insurers' non-disclosure and misrepresentation defences failed.  There was no justification for arguing that the NAC itself was subject to "a special regime", whereby contrary to the ordinary reading of the clause, innocent non-disclosure or misrepresentation would be sufficient to enable avoidance.  The Court considered the line of authorities on NACs including Toomey v Eagle Star (No. 2) [1995] 2 Lloyd's Rep 88; HIH Casualty and General Insurance Ltd. v New Hampshire Insurance Co and others [2001] EWCA Civ 735; HIH Casualty and General Insurance Ltd. v Chase Manhattan Bank [2003] UKHL 6; Mutual Energy Ltd. v Starr Underwriting Agents Ltd. [2016] EWHC 590 (TCC)

Misrepresentation and the test for inducement

The Court found that there was a misrepresentation by the broker to three of the following insurers on renewal for the 2016/17 policy year in confirming that the risk was "as expiry", given the following market had no knowledge of the 2015 endorsement agreed by the slip leader, and would therefore have understood "as expiring" and similar statements to mean that the renewal terms were materially the same as to the terms written in 2015.

In the case of two of the insurers, the Court was satisfied on their evidence (one of the underwriters being described as an "ardent note-taker") that there was inducement and had the "as expiry" representation not been made, they would not have written the policy on the terms that they did.  The Court found that there was no inducement in relation to the third insurer (that underwriter had read through the policy and did not raise any questions about either the TPC or NAC).  

The Court considered the applicable test for inducement, referring to the cases of Assicurazioni Generali SpA v Arab Insurance, Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland [2010] EWHC 1392 (Comm) and Involnert Management v Aprilgrange Ltd. [2015] EWHC 2225 (Comm). The Court noted that in Involnert the question of whether the insurer would still have contracted on the same terms if the representation had not been made, is not, however, the same as asking what the insurer would have done if told the truth.

Policy affirmation

The Court noted that before there can be an affirmation precluding an underwriter from avoiding the policy, the underwriter must have full knowledge of the facts entitling him to avoid the policy. The underwriter then has a reasonable time in which to decide what course of action to take, and cannot be said to have affirmed the policy until after such time. A party's election to affirm must be communicated either by words or conduct. It must be communicated in clear and unequivocal terms and the communication itself or the surrounding circumstances must demonstrate objectively or unequivocally that the party affirming is making an informed choice (Insurance Corporation of the Channel Islands v The Royal Hotel Ltd. [1998] Lloyd's Rep IR 131).

The Court agreed with the Bank that, even if there were any substance to Insurers' avoidance case, on the particular facts of this case, Insurers had in any event affirmed the policy by serving their defence which crucially, did not include any plea of avoidance or reserve any right to do so.  While Insurers had intimated reservations of the right to avoid in prior correspondence, when the defence was served there was no such reservation or any plea of avoidance and instead, Insurers advanced a specific plea of rectification. This line of defence was only raised at a later date in the Insurers’ amended defence. This, the Court held, could only be seen as a positive statement that the policy was binding, stating, "a plea of rectification is necessarily affirmatory, since it positively avers that there is an enforceable agreement between the parties and seeks to have the documentary record of the contract rewritten." Even though there had been prior reservations, the significant point was that these were not repeated when Insurers submitted their detailed defence, including a specific plea of rectification.

  1. Reasonable conduct clauses

The policy contained a clause requiring the Bank to "do (to the extent it reasonably can do) all things reasonably practicable to prevent any claim being made under this contract".  Insurers argued that the Bank breached this clause by acting recklessly or negligently when it entered into the repo transactions, by failing to obtain independent checks of the quality of the cargo being financed. There was dispute around whether this clause required the higher standard of recklessness to constitute a breach or ordinary negligence.

The Court agreed with the Bank that a reasonable precautions clause in the conventional form is breached by recklessness, not mere negligence (The Board of Trustees of the Tate Gallery v Duffy Construction Ltd (No. 2) [2007] EWHC 912 (TCC)).  The Court rejected Insurers' argument that the clause should be construed differently in the context of the TPC which itself did not cover negligence, such that ordinary negligence would suffice to constitute a breach of the reasonable conduct clause. The Court, referring to Sofi v Prudential Assurance Co Ltd [1993] 2 Lloyd's Rep. 559, held that "a consistent meaning should be given to a "reasonable steps" clause when applied to all parts of a policy providing different aspects of coverage. The meaning cannot, in the absence of clear words, fluctuate depending upon which part of a policy is being considered." This was reinforced by the fact that the condition was expressed to apply to all sections of the contract.  

  1. The alleged failure to “sue and labour”

Insurers alleged that the Bank failed to “sue and labour” (the policy contained a standard sue and labour provision) after the first default by Euromar and should have exercised swap options, entered new hedges and sold cargo more speedily. The judgment provides a reminder of the principles around the duty to sue and labour stating, “It was common ground that if any of the sue and labour arguments were to succeed, it was necessary for the chain of causation to be broken. Accordingly, the bare assertion that losses could have been avoided by some conduct on the part of the insured was not sufficient. A breach of the duty to sue and labour only provides a defence if the assured's conduct was such as to break the chain of causation, and supplant the original insured peril (here the "Default" leading to a loss of the Transaction Premium under the TPC) as the proximate cause of loss.”

The Court held that there was no failure by the Bank to take appropriate steps to “sue and labour”. The Court found that the Bank took a number of steps including sending inspectors to check that the goods were in warehouses, requesting quality certificates, engaging in discussions with Euromar and Transmar, the chief restructuring officer and other bankers about the liquidity issues and accomplishing some sales. Also, the Court was not persuaded that a prudent uninsured in the position of the Bank would have taken out hedges or exercised the swap options.

  1. The duties of insurance brokers

It was not in dispute that Edge owed a duty of reasonable skill and care to the Bank to obtain insurance cover which "clearly and indisputably" met the Bank's requirements, and which did not expose it to an unnecessary risk of litigation (Standard Life Assurance v Oak Dedicated [2008] EWHC 222 (Comm)).  The Court concluded that Edge had breached those duties and was liable for the irrecoverable costs incurred by the Bank in pursuing Insurers. The Court also found Edge liable for 100% of the recovery the Bank would have made against two of the Insurers but for the estoppel.

The Court rejected Edge's argument that because the TPC had been drafted by the Bank's external lawyers, any issues with the drafting of the TPC, or its effect within the policy, were the responsibility of the lawyers, not Edge. The facts showed that the Bank was looking to Edge for its professional expertise and advice as the market experts; Edge's duties to the Bank "did not reduce, still less disappear" because lawyers had drafted the TPC.

The Court found that a reasonably competent broker would have advised the Bank, at the outset, that the credit risk market was the appropriate market in which to place the cover which the Bank was seeking (not the marine cargo insurance market) and that (since the individual broker did not have the relevant expertise) specialist brokers within Edge should have become involved. The starting point was for Edge to identify to the Bank the underwriters who provided the cover that was being requested.  Such advice would have enabled the Bank to take an informed decision as to how to proceed.  

The Court found that, on the facts in this case, any reasonably competent broker would have explained the purpose of the TPC to underwriters (i.e. that it was credit risk cover) in order to avoid the scope for potential future dispute on the cover and in circumstances where "Edge was seeking to place credit cover in a market which was not its natural home" and where the TPC was an unusual clause.  The placement of such cover, without any discussion with subscribing underwriters, exposed the Bank to the risk of unnecessary litigation.

The Court disagreed with Edge's submission that there was no duty to explain anything in the absence of an express instruction or an enquiry from underwriters, stating that there were "no fixed rules which delineate what the broker should or should not do in order to procure cover that clearly and indisputably meet its client's requirements, and so does not expose it to an unnecessary risk of litigation." This depends upon the circumstances and the particular facts of the case.

In relation to Edge's argument that imposing a "duty to nanny" was insupportable, the Court clarified that it was not suggesting that brokers generally owe duties to their clients to explain particular clauses, including unusual clauses, to underwriters. Ultimately, the question is what is required in order to fulfil a broker's duty to procure cover that clearly and indisputably meets its client's requirements, and so does not expose it to an unnecessary risk of litigation.  In this case, a specific query was raised by the Bank regarding the scope of the TPC which should have prompted the broker, in the interests of the client, to check whether the underwriters had the same understanding as the Bank so as to avoid the potential for future dispute.

Comment

This decision addresses numerous important issues for insurers, including policy construction, non-disclosure and misrepresentation, non-avoidance clauses, affirmation, and duties of insurance brokers.

In particular, this case highlights how clear and unambiguous language can outweigh other considerations such as the factual matrix, commercial background and the appropriate insurance market. The Court's comments also serve as a further reminder of the importance of reading the policy terms to which one is subscribing.

The case also affirms a broker's duty to obtain insurance cover which clearly and indisputably meets its client's requirements, and which does not expose it to an unnecessary risk of litigation. The Court stated that there are no fixed rules which delineate what the broker should or should not do in order to fulfil this duty and that would depend upon the particular facts of the case. In this case, the Court found that the broker should have had a specific discussion with underwriters to explain the purpose of the TPC.

End

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