October 31, 2018

(Re)insurance Weekly Update 36- 2018

A summary of recent developments in insurance, reinsurance and litigation law.

AIG Europe Ltd & Anor, Re: Court sanctions Part VII scheme involving an EU cross-border merger ahead of Brexit


The applicant English insurance company sought approval of the court under Part VII of the Financial Services and Markets Act 2000 ("Part VII") for its proposed transfer of insurance business. In order to allow it to continue to service its existing business and to write new business across the UK and the rest of Europe after Brexit, it intended (with effect from 1 December 2018) to: (1) transfer the UK and non-EEA part of its business to a new English company, regulated by the FCA and PRA; and (2) transfer the EEA part of its business to a new Luxembourg company by an EU cross-border merger between the existing English company and the new Luxembourg company. The applicant would then cease to exist. The applicant intended to use a cross-border merger company because it was advised that this would maximise the prospect of recognition in overseas jurisdictions.

Snowden J has now approved the scheme. In so doing, he noted that the use of a Part VII scheme which involves an EU cross-border merger is novel and held as follows:

  1. He had jurisdiction to sanction a scheme where the transfer of insurance policies is to be achieved in part by an order under section 112 of the FSMA and in part by means of a cross-border merger under EU Directive 2017/1132 and the Cross-Border Mergers ("CBM") Regulations.
  2. Although there are no express provisions in the Directive or the CBM Regulations dealing with the continuity of legal proceedings in the event of a cross-border merger, the judge thought that such a result could be implied. In any event, he believed he could make an order under section 112  in relation to the continuation of proceedings and claims by and against the new Luxembourg company.
  3. The judge noted that the current situation regarding Brexit differs from previous applications to sanction a scheme: "The evidence of [the applicant] is that the uncertainty over the Brexit negotiations means that if it delayed further and did nothing, there is a real risk that substantial numbers of policyholders would be materially prejudiced in event of a "hard" Brexit by the loss of [the applicant]'s EU passporting rights, and a resultant inability of [the applicant] to continue to service policies through its overseas branches or even pay policyholders' claims in other EU jurisdictions. The concerns expressed by [the applicant] seem genuine and reasonable…" Furthermore, the judge said he had to balance the risk of prejudice to a large body of policyholders in the EEA if the scheme is not sanctioned against any potential risk of prejudice to individual policyholders.
  4. Taking into account the independent expert's reports and the views of the regulators and objecting policyholders, the judge concluded that the scheme "is entirely fair as regards the different groups of policyholders and does not cause them any material prejudice". There was no tangible material prejudice to policyholders arising from a loss of insurer identity. Furthermore, although the policyholders whose policies were transferred to the new Luxembourg company will lose access to the Financial Services Compensation Scheme, the judge concluded that "the prospect that [the new Luxembourg company] will default on its obligations so as to bring access to a compensation scheme into play is not a real risk, but is remote in the extreme".

VM Morrison Supermarkets v Various Claimants: Court of Appeal dismisses appeal from decision that company was vicariously liable for data protection breach by employee


The first instance decision in this case was reported in Weekly Update 44/17. A disgruntled employee of the defendant employer leaked the personal details (including bank account details) of almost 100,000 other employees on the internet. The employee was a senior IT auditor and had been motivated by a grudge against his employer. At first instance, the judge found that the employer was not directly liable for the breach, which it had not authorised or required, and it had not been the "data controller" at the time of the breach. The employer had put in place adequate and appropriate controls and there had been no indication that the employee, although upset by recent disciplinary action, could not be trusted to do his job. There was no appeal from that decision. However, the judge found that the employer was vicariously liable for the breach and the employer appealed against that decision.

The Court of Appeal has now dismissed that appeal. It agreed with the judge that it is possible for an employer to be held to be vicariously liable for breaches by its employee of the Data Protection Act 1998 ("the DPA"). It held that it was not implicit that Parliament had intended to exclude vicarious liability from the scope of the Act: "if Parliament had intended such a substantial eradication of the common law and equitable rights, it might have been expected to say so expressly".

The Court of Appeal also agreed that, on the facts, the judge had been correct to find that there had been a "seamless and continuous sequence" of events between the breach and the employment relationship. Dealing with the employees' data was a task specifically assigned to this employee. Nor did it make any difference that the breach took place away from the workplace, using his own computer on a Sunday. The Court of Appeal referred to the recent decision in Bellman v Northampton Recruitment (see Weekly Update 36/18) (which was handed down the day after the hearing in this case), in which the employer was held vicariously liable for a tort committed away from the workplace.

At first instance, the judge had added that "the point which most troubled me in reaching these conclusions was the submission that the wrongful acts of [the employee] were deliberately aimed at the party whom the claimants seek to hold responsible, such that to reach the conclusion I have may seem to render the court an accessory in furthering his criminal aims". The Court of Appeal dismissed those concerns. Prior cases have held that the motive of the employee in a vicarious liability case is irrelevant and there was no exception where the motive was to cause financial or reputational damage to the employer.

Nor did it matter that the potential scale of litigation against employers for data breaches could be ruinous for some employers. The Court of Appeal believed that insurance was the answer: "The solution is to insure against such catastrophes; and employers can likewise insure against losses caused by dishonest or malicious employees. We have not been told what the insurance position is in the present case, and of course it cannot affect the result. The fact of a defendant being insured is not a reason for imposing liability, but the availability of insurance is a valid answer to the Doomsday or Armageddon arguments".

Lyons v Fox Williams: Court of Appeal rejects argument that a solicitor had a duty to warn


The first instance decision in this case was reported in Weekly Update 39/16. The claimant was injured in a road accident in Russia. He sought to claim under two insurance policies taken out by his employer for the benefit of its employees: (1) an Accidental Death and Dismemberment ("AD&D") policy and (2) a Long Term Disability ("LTD") policy. The claimant alleged that his solicitor's advice regarding the AD&D policy was negligent, but that claim settled. He also alleged that the solicitor's handling of his LTD policy claim had been negligent but at first instance it was held that, on the facts of the case, the LTD claim had fallen outside of the scope of the solicitor's retainer and nor was the solicitor under a duty to warn the claimant of the scope and validity of the LTD policy. The claimant was given permission to appeal the duty to warn point.
The Court of Appeal has now dismissed that appeal. The solicitor did not have a duty to warn in substantive terms about the claimant's rights under the policy and what needed to be done to prevent them from becoming time-barred. The Court of Appeal confirmed that a solicitor is not required "to carry out investigative tasks in areas he had not been asked to deal with however beneficial to the client that might in fact have turned out to be". The solicitor would have had to carry out a thorough examination of the policies and a certain amount of legal research to advise about rights under the policy, and he was never instructed to advise on the policy.

Nor did the solicitor have any duty to warn the claimant that he needed to obtain legal advice about the LTD claim. On the facts, it was held that, had the solicitor offered to give advice about the LTD policy, the claimant would not have agreed to his giving it or being paid for it.

Bentley Design Consultants v Sansom: Whether Part 36 offer to settle the whole claim settled further claim added later on


The claimant engaged the services of the defendant to help construct two properties. He commenced proceedings against the defendant in respect of one of the properties, and subsequently made a Part 36 offer to settle that claim. The offer was expressed to be intended to settle "the whole of this claim". The offer was not accepted at that time. Amended Particulars of Claim were subsequently filed to add the claim in respect of the other property. Later on, the defendant accepted the Part 36 offer and argued that the claim in respect of both properties had been settled because, it argued, "if the nature and extent of the claim varies in the course of proceedings, the offer remains an offer to settle the whole of the claim (whatever it may now be)". The claimant countered that only the claim in respect of the first property had been settled.
The judge agreed with the claimant.

She accepted that where an offer in respect of the whole of the claim is made and the scope or value of the claim subsequently increases, and the offer is not withdrawn or varied, "the offer relates to the whole of the claim made at any time the offer remains open for acceptance". However, this case was different because the offer was clearly only intended to settle the claim in respect of the first property, and that did not change when the second property was added to the extant proceedings: that was a distinct and separate "claim": "That puts this case into a very different picture from the one in which a further cause of action in respect of the same subject matter is added to the claim or a fresh allegation or further head of damage is added in relation to an already pleaded claim".

Hosking v Apax Partners: Judge holds defendant entitled to indemnity costs following discontinuance


Where a claim is discontinued, unless the parties have agreed otherwise, or the court orders otherwise, the normal position will be that the claimant will be liable for the costs incurred by the defendant up to the date on which the notice of discontinuance was served (see CPR r.38.6(1)). The defendant's costs will usually be assessed on the standard basis, if not agreed. However, indemnity costs can sometimes be ordered. In prior caselaw, it has generally been ordered either where it was clear beyond doubt that the claimant had no case or where a claimant made serious allegations of fraud the defendant has been deprived of any opportunity to vindicate his reputation (see eg PJSC Aeroflot v Russian Airlines (Weekly Update 25/18)).

In this case, Hildyard J accepted that indemnity costs will be ordered only if the case is "out of the norm". The hallmark of such a case is where the proceedings have "been high risk, and apparently pursued, and usually publicised, to exert pressure in the hope of extracting a settlement, with frail evidential support and little regard to their prospects of success at trial or any real and realistic objective of securing vindication by adjudication". In such a case, the court is intentionally "being used as an anvil for settlement rather than as an adjudicator".

The judge awarded indemnity costs in this case, which was one in which litigation was aggressively pursued in multiple jurisdictions, with a view to obtaining a settlement. Relevant factors included "The pursuit to the doors of the Court, and four days beyond, of serious allegations of commercial impropriety, which were suddenly abandoned only when settlement talks failed, and then without explanation and without visible change in the forensic landscape", as well as the publicity attending the case.