A summary of recent developments in insurance, reinsurance and litigation law
Equitas Insurance v Municipal Mutual: Court of Appeal gives permission to appeal an award which dealt with the issue of "spiking" of mesothelioma reinsurance claims
The Compensation Act 2006 provided, broadly, that where an employee has been exposed to asbestos whilst working for various employers, and as a result has contracted mesothelioma, each employer can be sued in full by the employee. In Zurich v International Energy Group (see Weekly Update 18/15), the majority of the Supreme Court (although not required to decide the point) opined that, where an insurer has insured an employer for only part of the period of exposure, that insurer must meet the whole of the employer's liability to the employee (although that insurer would also have a right to seek proportionate contributions from other insurers, or the employer (if the employer had not taken out insurance for a part of the period of exposure)).
The issue involved in this case is whether an insurer which has been on cover for the whole period can seek full reimbursement from a reinsurer who was on cover for only part of the period (ie whether it is possible to "spike" at the reinsurance level).
That issue was decided by an arbitral tribunal (Flaux LJ sitting as a judge-arbitrator), in favour of spiking, and in this case, the Court of Appeal gave permission to appeal the award on a question of law. The Court of Appeal was satisfied that the test set out in section 69 of the Arbitration Act 1996 had been met. In so doing, Gloster LJ explained why she thought the following issues decided by the tribunal were at least open to serious doubt:
(1) Implied allocation issue: Flaux LJ had held that, just as an insurer on risk for only part of the period of exposure can be required to pay in full (and then seek equitable contribution and recoupment), so the position is the same for a reinsurer in the same position. However, Gloster LJ said that she was persuaded that there is a serious arguable case for treating the insurance and reinsurance positions differently.
(2) Good faith issue: Flaux LJ had also held that the reinsured had an absolute contractual right to present the whole of its ultimate net loss to any reinsurance policy it chooses. In so doing, he determined that the duty of utmost good faith, in a claims context, is limited to only a duty not to act dishonestly in connection with the making of a claim and there was no room for implying an obligation of good faith in the context of this case. Again, Gloster LJ held that there was serious doubt that the reinsured could allocate its losses entirely as it wished and that in this specific context there could be a good faith basis for restraining the reinsured's freedom of choice.
(3) Recoupment and contribution issue: Flaux LJ had held that if the reinsured is allowed to "spike", the correct approach was to adopt the "independent liability" method used in double insurance situations (ie the ratio between the independent amounts which each insurer would have been liable to pay, regardless of the existence of another insurer, determines the allocation between the insurers). The judge also rejected a "from the ground up" method of apportionment which takes into account the first layer of retention in every year of reinsured exposure. However, Gloster LJ considered that a different position might apply to mesothelioma (re)insurance claims (and other claims falling within the so-called Fairchild enclave – ie those cases where there is an exception to the normal common law rule that a claimant must show, on the balance of probabilities, that the defendant's tort caused his injury) and she said "I see considerable force in the submission that the higher layers of reinsurance in subsequent years should be made good first in any contribution and recoupment process, on the basis that they should always be furthest from the risk".
In deciding to give permission to appeal, the Court of Appeal acknowledged that "The question as to how mesothelioma losses should be allocated for reinsurance purposes does appear to be a significant open question for many participants in this market. Clarity at the appellate level would have implications for the approach to be adopted market-wide and will be important insofar as the correct legal approach is held to involve principles of contribution". However, the Court of Appeal stressed that it had not reached any final views on the issues involved in this case.
The Cultural Foundation v Beazley Furlonge: Commercial Court considers issues of notification, causation, estoppel, defence costs and set-off
Clyde & Co (Roderic McLauchlan and Sara Larmour) for defendants
The main issue in this case was which policy year claims against a now insolvent insured fell under. Much of the case is fact specific, but the judge, Andrew Henshaw QC, covered the following issues, which are of general interest:
(1) Notification of a "hornet's nest"-type situation. The judge said that notification of such a situation may be limited where there is a requirement that the notified circumstances are such as to suggest that a claim is likely to arise: "Thus, to take an extreme example, a purported notification which simply stated at a high level of generality that the insured had performed a particular project badly in its entirety would be likely to be ineffective as a notification, if only because it failed to specify any particular failings or at least categories of failing that a reasonable person would consider likely to give rise to a claim. It would also fail to serve one of the purposes of a notification, namely to enable the insurer to make its own plans to deal with the potential liability. By contrast, the broad notification given in Rothschild Assurance Ltd v Collyear did refer to circumstances, namely the sample review by KPMG, that provided grounds on which to consider that the same problems had been replicated in other similar transactions that the firm had undertaken".
(2) The notification clause in question provided that the insurer agreed that any circumstance notified during the policy period "which subsequently gives rise to a claim" after the expiry of the policy shall be deemed to be a claim first made during the policy period. The judge commented that "it would be a mistake to attribute much weight to fine linguistic distinctions in this regard" and so all that was required is a causal, rather than merely coincidental, link between the notification and the eventual claim.
(3) Can an insured choose which policy to claim under? In this case, the insured argued that it could notify circumstances under one policy and a claim under a later policy, because there was no exclusion in the later policy of claims which are deemed first made in another period. The insurer sought to argue that the first notification takes priority but the judge (although not required to decide the point) favoured the argument that "In the absence of an exclusion of previously notified circumstances, and provided of course that proper disclosure is made, there is no sufficient reason why an insured should not place cover on a claims made basis for a later year and rely on such cover if claims are then made during that later year".
(4) The situation where there are two discrete losses. The Miss Jay Jay case has confirmed that where there is a single loss which has 2 proximate causes, one an insured peril and one a non-excluded uninsured peril, the loss will be covered. Conversely, if there are 2 proximate causes, one an insured peril and one an excluded peril, there will be no cover. However, the judge noted that these cases have not dealt with the situation where, rather than a unitary loss, there are two discrete losses arising from, for example, two discrete periods of delay. The judge held that in that situation, claims must be made separately and it makes no difference if a third party makes a global claim for both losses, which is then settled on a global basis. The insured must either prove its loss to the insurer in the usual way or else reach a settlement which allocates the settlement between the different losses.
(5) Had the insurer lost the right to rely on the breach of a notification condition precedent because it had not taken the point for over 6 years? On the facts, the judge found that there was no estoppel, as he did not consider that a reasonable person would have expected the insurer to tell the insured that the notification was too late, since the insurer had treated the claims as falling within a different notification. In any event, there had been no detrimental reliance by the insured: this was not a case like Ted Baker v AXA (see Weekly Update 30/17), where the insured could have easily provided missing documentation if alerted to a problem.
(6) Defence costs: The primary insurer had paid defence costs on behalf of the insured but it had subsequently become clear that the third party claim exceeded the limit of cover for its policy and fell partly within the limits of the excess policy for the same year. The primary policy contained the following provision: "In the event that a settlement is made with any party in excess of the amount of the Limit of Indemnity, Underwriters’ liability in respect of Defence Costs shall be in the same proportion that the Limit of Indemnity bears to the sum which would be eligible for payment but for the restriction of the Limit of Indemnity.”
The judge held as follows:
(a) The use of the word "settlement" in this context includes a judgment or award, as well as a compromise agreement. Accordingly, the primary insurer had overpaid defence costs as it should have paid only its proportionate share.
(b) Excess insurers said that there is a "traditional understanding", in the absence of express wording, that an insurer who assumes the conduct of a defence in exercise of a right under the policy will undertake to bear the costs. The primary insurer had paid the costs of defending the third party claim when the size of the claim under the policy was not yet known. The judge held that the primary insurer was entitled to recover its overpayment from the insured when it became clear that the claim had exceeded the policy limit, and it could not be said that the limit on the insurer's costs liability was ineffective.
(c) Having held that the primary insurer was entitled to a set-off against a claim for indemnity from the insured, the judge went on to consider whether the insurer was entitled to a set-off against a third party claimant under the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”). The 2010 Act specifically provides that there will be a right of set-off in these circumstances, but there was no such provision in the 1930 Act and there has been caselaw debate as to whether not only the insured's rights, but also its liabilities, are transferred to the third party under the 1930 Act
In the recent case of Denso Manufacturing v Great Lakes (see Weekly Update 09/17), the judge was not required to decide the point, but said she preferred the argument that the insured's liabilities are not transferred to the third party. She relied on the Supreme Court's decision in IEG v Zurich (see Weekly Update 18/15), in which it was opined that legal set-off is "probably" precluded under the 1930 Act.
However, in this case, the judge said that the 1930 Act makes it clear that the insurer is not to have any greater liability than it would have to the original insured and concluded as follows: "The Judge’s citation from International Energy Group v Zurich Insurance suggests only that any equitable set-off will require pleading and proof that the ‘manifestly unjust’ criterion has been satisfied. In my view, therefore, the observations in Denso do not undermine [the primary insurer]’s case for saying that a right of equitable set-off arising from defence cost payments in excess of the contracted-for share …. can be asserted as a defence to a 1930 Act claim".
(7) Separately, on the facts, there had been no agreement by the insurer to treat all claims in a certain way, but if there had been such an agreement between the insurer and the insured, the judge held that a third party bringing a claim under the 1930 Act would have been bound by such an agreement.
(8) Having determined that the primary layer had a right to set-off for the overpaid defence costs, the judge went on to find that the insured could have recovered those costs in turn from the excess insurers. However, such a claim would not fall within the 1930 Act as that Act does not transfer to the third party the insured's right to recover from his insurer the costs of defending the third party's claim. Even if a transfer was possible, it would be in favour of the defence lawyers and not the insured. (Similarly, had the primary insurer been unable to set-off, it would have been unable to bring a claim under the 1930 Act against the excess insurers).
(9) Post-award interest: The primary policy required the insurer to indemnify the insured against "any claim for compensation and/or damages (including claimant's costs and expenses)". There was no definition of "compensation" in the policy, but it was argued that this included post-award interest. In Cox v Bankside Members Agency Limited , it was held at first instance (and the Court of Appeal approved) that the phrase "compensatory damages" was wide enough to include pre-judgment interest awarded against the insured under section 35A of the Supreme Court 1981. However, in this case, the judge said that there was a difference between pre-judgment interest arising from a contested claim and post-judgment interest which arises from delay in paying the judgment, award, or settlement. As such, the claim for post-award interest fell outside of the scope of the policy.
Ageas Insurance v Stoodley: Co-Insurer challenges decision to avoid under the Consumer Insurance (Disclosure and Representations) Act 2012
The defendant was convicted of causing death by careless driving in an accident in which a passenger died (and another was severely injured). Three motor insurers had a potential liability in respect of claims arising from the accident: (1) the claimant, which had issued a policy to the defendant in relation to another vehicle (a motorhome) which included an extension covering the driving of other vehicles; (2) Insurer A, which had similarly issued a policy for another vehicle which included an extension for driving other vehicles; and (3) the insurer of the vehicle involved in the accident.
The claimant brought proceedings seeking a declaration that it was entitled to avoid its policy under the Consumer Insurance (Disclosure and Representations) Act 2012 ("the 2012 Act"). The defendant did not attend the hearing and judgment was given in favour of the claimant. Insurer A then sought to set aside that judgment under CPR r40.9 which allows "a person who is not a party but who is directly affected by a judgment or order" to apply to set the judgment or order aside.
The judge accepted that Insurer A was materially and adversely and directly affected by the judgment against the defendant. The discharge of a co-insurer of identical status to Insurer A from any liability in relation to a very substantial claim meant that "Put simply, the bill goes up substantially".
The judge was then required to determine whether there was a real prospect of Insurer A obtaining a different result from the judgment. He held that, on the fact, there was not.
The insured had failed to take reasonable care when answering the following question: "Have you or any person who will drive the motorhome had any accidents, claims, damage….involving any motor vehicle….during the past 5 years whether or not a claim was made and regardless of blame?"
The insured had disclosed a windscreen claim (which had not cost his insurer any money) but failed to disclose an accident 2 years earlier which was caused by his wife (who was to be insured to drive the motorhome) whilst she was driving another vehicle.
Insurer A had sought to argue that the question had been "rolled-up" and the ABI has issued guidance that such questions can be difficult for consumers to answer. The judge pointed out that the 2012 Act "does not make any reference to trade or other guidance" and that "the correct approach is to give primacy to the 2012 Act".
The question was described by the judge as "objectively straightforward, clear and specific" and was answered by "a person who clearly knew what was required and also, given the detail in the answer: why".
Although the covering letter sent to the insured at the time had not stressed the importance of correct answers and a specific warning in the terms and conditions had been small and hard to read, "the question itself was clear and the answer showed that the effect of an accident upon the obtaining of insurance was well appreciated". The claimant was entitled to rely on the statutory presumption that a consumer knew that a matter was relevant to the insurer where a clear and specific question was asked.
Nor did it matter that the claimant had decided to return the premium, even though premium need not be returned under the 2012 Act if the qualifying misrepresentation is deliberate or reckless, unless that would be unfair to the consumer. The judge apparently accepted the argument that an insurer will often return the premium in order to avoid a dispute as to whether it would be unfair to retain it. It was also "a curiosity; but no more" that the insured had disclosed his wife's accident to another insurer. Furthermore, even if the insured had not known the value of the loss arising from his wife's accident, he should have disclosed the accident and the claimant could have obtained more details elsewhere.
Finally, the claimant gave evidence as to what it would have done had the wife's accident been disclosed. The judge concluded that that evidence could not be challenged, even though no supporting internal documentation was produced, and that Insurer A's counsel "goes too far when he argues that a relatively straightforward assertion within a witness statement by a person who has been employed within the insurance industry for 25 years and in a role that involves day-to-day management of the company's underwriting operations in the UK, cannot be taken at face value without extensive supporting disclosure".
There was therefore no real prospect of obtaining a different result and Insurer A's application failed.
COMMENT: The 2012 Act lists a number of factors to be taken account by the court in determining whether a consumer has taken reasonable care. These include "(b) any relevant explanatory material" and "(c) how clear, and how specific, the insurer’s questions were". In this case, the judge took the view that (c) could outweigh (b), especially where a question is partially answered by the insured.
SCM Financial v Raga Establishment: Whether arbitrators had been unfair in refusing to defer award until the outcome of court proceedings
The claimants challenged an arbitration award on the ground of serious irregularity pursuant to section 68 of the Arbitration Act 1996. It was alleged that the arbitrators had breached their section 33 duty under the Act to conduct the arbitration fairly because they had refused to defer their award in order to await the outcome of court proceedings in Ukraine. Those proceedings did not undermine the parties' choice of arbitration, but instead might have provided relevant and important evidence for the arbitration.
Males J accepted that a decision not to defer the issue of an award until further evidence is available is capable of amounting to a breach of the section 33 duty and "to describe such a decision as a case management decision does not advance the matter". However, on the facts, the section 68 challenge failed. Arbitrators are charged with avoiding unnecessary delay and the arbitrators were given no information about the likely time until a decision by the Ukrainian courts. In the end, the delay was relatively short, but the arbitrators' task is to assess the position as it stood at the date of their award.
Balancing the prejudice which might be caused to each side by a deferral, the prejudice to the claimant was held to be only a possibility at the time of the award.