(re)insurance_annual review 2009

7/31/2019 (Re)Insurance_Annual Review 2009

1/24

Insurance and ReinsuranceReview of 2009

www.clydeco.com 1

CONTENTS

Avoidance 2 - 3Laker Vent Engineering Ltd v Templeton Insurance Company Ltd [2009] EWCA Civ 62R&R Developments Ltd v Axa Insurance UK Plc [2009] EWHC 2429(Ch)

General Conditions/Notification 4 - 5Ansari v New India Assurance Ltd [2009] EWCA Civ 93Porter v Zurich Insurance Company [2009] EWHC 376(QB)Tann v Herrington [2009] EWHC 445(Ch)

Warranties 6 - 7A C Ward & Son v Catl in (Five) Ltd & Ors [2009] EWCA Civ 1098A C Ward & Son v Catlin (Five) Ltd & Ors [2009] EWHC 3122 (Comm)

Exclusions 8 - 10

Reilly v National Insurance & Guarantee Corporation Ltd [2008] EWCA Civ 1460Ward v Norwich Union [2009] ScotCS CSOH 27Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad [2009] EWHC 637 (Comm)Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad [2009] EWCA Civ 1398

Interpretation 11 - 12Flexsys America LP v XL Insurance Company Ltd [2009] EWHC 1115 (Comm)Chartbrook Ltd v Persimmon Homes Ltd & Ors [2009] UKHL 38Excelsior Group Productions Ltd v Yorkshire Television Ltd [2009] EWHC 1751 (Comm)

Rectification 13Dunlop Haywards (DHL) v Erinaceous Insurance Services Ltd & Ors [2009] EWCA Civ 354

Reinsurance 14 - 16Lexington Insurance Company v AGF Insurance Ltd [2009] UKHL 2009Equitas Ltd v R&Q Reinsurance Company (UK) Ltd [2009] EWHC 2787 (Comm)

Disclosure 16 - 18Barr & Ors v Biffa Waste Services Ltd [2009] EWHC 1033 (TCC)Quinn Direct Insurance Ltd v The Law Society of England and Wales [2009] EWHC 2588 (Ch)Quantum Processing Service Company v Axa Insurance UK Plc [2008] EWCA Civ 1640

Jurisdiction 18 - 19Gard Marine & Energy Ltd v Lloyd Tunnicliffe & Ors [2009] EWHC 2388 (Comm)

Duty of Brokers 19 - 20Dunlop Haywards (DHL) Ltd & Ors v Barbon Insurance Group & Ors [2009] EWHC 2900 (Comm)

Limitation 20 - 21

Axa Insurance v Akther & Darby [2009] EWCA Civ 1166

Anti-suit Injunctions 21 - 24Allianz & Anor v West Tankers Inc [2009] EUECJ C-185/07DHL GBS (UK) Ltd v Fallimento Finmatica SPA [2009] EWHC 291 (Comm)National Navigation Co v Endesa Generacion Sa [2009] EWHC 196 (Comm)


2/24

Avoidance

Laker Vent Engineering Ltd v Templeton Insurance Company Ltd [2009]

EWCA Civ 62

Court of Appeal ruling on avoidance/late notification

At first instance, the judge rejected the claim by a legal expenses insurer that it was

entitled to avoid its policy for non-disclosure and that the insured had breached a condition

precedent to liability by failing to comply with the claims notification procedure required by

the policy. The insurer appealed.

The Court of Appeal summarised the test to be applied as follows: an appellate court must

take particular care where, as here, the judge at first instance has to make an assessment

of a legal concept based on findings of fact, the evaluation of other facts, opinions,

impressions and nuances.

1) Avoidance: At first instance, the judge had said that it was hard to identify a pointprior to inception when the relationship between the insured and other parties to the

construction contract was a "material circumstance" which ought to be disclosed.

The Court of Appeal agreed that the judge's findings that, despite differences, the

relationship had remained "fairly amicable" could not be successfully challenged.

Furthermore, the judge's conclusion that "there must be features of the relationship

which, viewed objectively, show a real risk of escalation to the point of formal

dispute resolution procedures beyond the risk ordinarily inherent in any complex

construction contract" was "rational and sound", even though another judge might

have reached a different conclusion.

Furthermore, there had been no evidence at trial from the underwriter who had

written the policy (he had subsequently left the insurer on bad terms). Although thejudge accepted that a court can infer that an insurer had been induced even

without direct evidence, in this case he was not prepared to speculate on how the

insurer's underwriters might have responded. The Court of Appeal upheld the

judge's finding that inducement had not been proven on a balance of probabilities,

and added that the underwriter's clerk could have been called to explain the

principles on which the underwriter worked. The insurer's underwriting agents

could also have given evidence as they were involved in the process of renewing

and settling policy terms, particularly the premium.

2) Notification: The policy contained the following clause: "It is a condition precedent

to the Insurers' liability hereunder that We are notified in writing, immediately the

Insured is aware of any cause, event or circumstance which has given or is likely to

give rise to a Construction Claim". It was undisputed that "likely" meant more

probable than not. The Court of Appeal agreed with the judge that a claim was

likely only if it had reached the stage where adjudication, arbitration or litigation was

likely to be required to resolve the differences between the parties.

The Court of Appeal also went on to consider the effect of the recent Court of

Appeal decision in HLB Kidsons v Lloyd's Underwriters, which was handed down

after the judgment in this case. Aikens LJ concluded that the correct approach to

the construction of the wording "has given or is likely to give rise to a Construction

Claim" was to apply an objective test (despite the clause in this case being slightly

different from that in the Kidsons case, where notification had to be given of a

circumstance which "may" give rise to a claim).

www.clydeco.com 2

"There must be features of

the relationship which,

viewed objectively, show a

real risk of escalation to the

point of formal dispute

resolution procedures

beyond the risk ordinarily

inherent in any complex

construction contract"


3/24

R&R Developments Ltd v Axa Insurance UK Plc [2009] EWHC 2429(Ch)

Whether there had been a misrepresentation in a proposal form/waiver of disclosure

The insured applied for a policy to insure it against theft and damage to certain contract

works. One of the questions in the proposal form was worded as follows: "Have you orany...Directors either personally or in connection with any business in which they have

been involved...ever been declared bankrupt or are the subject of any bankruptcy

proceedings or any voluntary or mandatory insolvency?" The insured responded "No".

The policy issued by the insurer contained a general condition that the policy was voidable

for misrepresentation or non-disclosure of a material fact. After inception the insurer

discovered that one of the directors had been the director of another company ("R & W")

which was in administrative receivership at the time the policy started. The insured sought

a declaration that the insurer could not avoid the policy.

The judge, Nicholas Strauss QC, held that there was no ambiguity in the question in the

proposal form and that the grammar and syntax were clear. The question related to only

the insured company and its directors (whether arising from their private affairs or from anybusinesses in which they have been involved). The judge said that it was not surprising

that the insurer had not asked about the claims and insurance history of the companies

with which the directors were involved, since insolvency was not a risk being insured

against. Accordingly, the insured's reply had been correct.

The judge also said, obiter, that if he had been wrong about the question being

unambiguous, the contra proferentem principle would have applied (ie any ambiguity

should be construed against the insurer). Where there is a genuine ambiguity, then (apart

from where there is fraud) "objective construction reigns supreme and subjective

understanding is irrelevant". Disagreeing with certain textbooks on this point, he held that

it was not necessary to consider how the insured actually understood the question put to

him (so it was not possible to say that if the insured misunderstood the question but gave

what he believed was a truthful answer, he would be exonerated). Instead, the issue is

whether the answer was true on the basis of a reasonably available (ie objective) meaning

of the question. In this case, even if the question had been ambiguous, the judge would

still have held that the meaning contended for by the insured was a fair and reasonable

one and so the answer was correct.

The insurer also sought to argue that, regardless of the question in the proposal form, the

director's connection with R&W was still a material fact which ought to have been

disclosed. The judge agreed with the tentative (and obiter) view of the Court of Appeal in

Doheny v New India that a question in the proposal form relating to personal insolvency

only would probably have been a waiver of any obligation to disclose corporate insolvency.

He held that "it is clear from the question that the [insurer] had the concept of businesses

with which the directors...of the insured were involved in their minds, but chose not to ask

questions about the position of such businesses." Accordingly, the insured could infer that

the insurer had waived disclosure of insolvency of any party other than the insured and its

directors.

The Statement of Fact in the proposal form had contained the declaration that the insured

had not withheld any material information (ie information which may influence the insurer).

In the case ofNoblebright v Sirius International[2007], it was held that an express clause

which made it clear that the proposer had a duty to disclose any fact which was likely to

influence acceptance or assessment of the proposal meant that there was no waiver by

the insurer of information which did not fall within a specific question in the proposal form.

In this case (which did not refer to Noblebright) the judge held that the wording of the

specific question in the proposal form implied a lack of interest on the part of the insurer ina particular subject matter and so that information was not information which "may

influence" the insurer.

www.clydeco.com 3

"Objective construction

reigns supreme and

subjective understanding is

irrelevant"


4/24www.clydeco.com 4

Changes were material ifof a kind that take the risk

outside that which was in

the reasonable

contemplation of the parties

at the time the policy was

issued

General Conditions/Notification

Ansari v New India Assurance Ltd [2009] EWCA Civ 93

Material change in facts stated in the proposal form

General Condition 2 of a Commercial Property Owners' policy provided that "this insurance

shall cease to be in force if there is....any material change in the facts stated in the

Proposal Form...unless the Insurer agrees in writing to continue the insurance". The

insured, when completing the proposal form, had described his tenant's business as

"wholesaling kitchenware" and had confirmed that the premises were protected by an

automatic sprinkler installation. After a fire damaged the insured premises, it was

discovered that only half of the products sold by the tenant on the premises were kitchen

items and that the sprinkler system had been turned off (without the insurer having been

informed). At first instance, the judge found that there had been a "material change" and

so the insurers were entitled to refuse indemnity. The insured appealed.

The Court of Appeal rejected the insured's argument that a distinction should be drawnbetween the existence of a sprinkler system and its proper functioning - as the premises

were to be occupied, the insured's construction would be contrary to common sense and it

would give little or no effect to the word "protected" in the proposal form. Furthermore,

there had been a change of facts. If the sprinkler had been turned off for a brief period for

routine maintenance work, that would not have constituted a change, but in this case, the

sprinkler was turned off for a longer period of time and would have remained off for an

indefinite period.

The Court of Appeal then considered whether the fact that the sprinkler had been turned

off, and the change in the facts relating to the nature of the tenant's business stated in the

proposal form, were "material". The Court of Appeal accepted that the judge had been

wrong to apply a test of materiality derived from Pan Atlantic v Pine Top, both because itwas not apt to form the basis of a condition of this kind and because its potential effect

would be to deprive the insured of the whole benefit of the policy on the slenderest of

grounds. The Court of Appeal instead found that changes were material under this policy

if such changes were "of a kind that take the risk outside that which was in the reasonable

contemplation of the parties at the time the policy was issued" (ie applying the test in

Kausar v Eagle Star(1996), which in turn restates the common law position). However,

the Court of Appeal also found that, on the facts, the changes had been material -

"A system of this kind is intended to provide constant protection against fire and I do not

think that any insurer would regard a building fitted with a functioning automatic sprinkler

system as presenting the same risk as one that was not. If a protection system of that

kind is turned off for an indefinite period the nature of the subject matter of the insurance,

as the judge said, is altered. The insured must then inform the insurer if he wishes to

retain his cover."

Porter v Zurich Insurance Company [2009] EWHC 376(QB)

Fire claim and wilfulness and insanity/effect of breach of cooperation condition

The insured, after drinking heavily and while suffering from a persistent delusional disorder,

set fire to his home. He thereafter sought to claim under his property insurance policy. It

was undisputed that, unless insanity could be proven, his claim would be contrary to public

policy and general principles of insurance law, and would be excluded by an exclusion in

the policy for "any wilful or malicious act by a member of the family" - wilful having the

meaning of deliberate (see Patrick v Royal London Insurance Society[2007]). The test for

insanity was that laid down in the M'Naghten case: he did not know the nature and quality

of the act he was doing, or, if he did know it, he did not know that he was doing what was

wrong.


5/24

Coulson J held that, on the facts, the insured's mental illness fell short of this test. He had

intended to kill himself and had taken clear and deliberate action to bring about that result.

During the process he had changed his mind and was ashamed of what he had done - that

was because he knew it was wrong.

After the fire, three separate thefts took place from the property. (One particular issue inthis case was whether any of the items stolen from the property had already been included

in the fire damage claim). However, the loss adjusters appointed by the insurer were

unable to progress their investigations because of a lack of cooperation from the insured.

Coulson J found that the insured was therefore in breach of the condition in the policy

which required him to cooperate with the insurer. This was not expressed to be a condition

precedent and therefore the only potential remedy available to the insurer was damages for

breach of contract. Coulson J said there was not sufficient evidence at this stage to

demonstrate that the breach caused the insurer a loss. The insurer would need to

demonstrate that if they had have carried out investigations at the time of the thefts, it

would have been shown that the theft claims should be rejected and that any claims which

might be sustainable now (8 years later) "only get off the ground because of the absence

of proper investigations at the time". Alternatively the insurer must be able to show that theclaims are now impossible to investigate at all. The sort of evidence which would be

required to demonstrate this would be, for example, a key witness has subsequently died

or the existence of documents which could determine the validity of the claims has been

destroyed because of the passage of time. The passage of time in itself was not enough.

This case therefore demonstrates once again the difficulty which insurers face when trying

to establish a claim for damages for the breach of a condition - how, after all, can insurers

demonstrate what the results would have been of an investigation which they were unable

to carry out?

Finally, although the judge accepted that it "may be right" to say that the insurer has

incurred costs in these proceedings which they would not otherwise have had to incur, that

was a costs matter to be decided at the end of the case.

Tann v Herrington [2009] EWHC 445(Ch)

Consequence of partner's failure to notify claim in time

In this case, a partner failed to notify the firm's professional indemnity insurers that a claim

had been made by a client and the insurers refused to indemnify. The issue was whether

the partner or the firm were liable for the damages owed to the client. This issue has

apparently not been considered before. The general rule under section 24 of the

Partnership Act 1980 is that the firm must indemnify a partner for personal liabilities

incurred by him. In order to depart from this rule, some element of culpability must be

shown on the part of the partner responsible. There was some dispute as to the standardrequired where the partner's default occurred in the management of the firm's

administrative affairs (and did not result in incurring liability to a client or other third party).

The judge held that the countervailing duty on the partner administering the professional

indemnity scheme was to ensure that he did so with a requisite degree of skill and care -

and a partner can be expected to use that degree of skill that he either had or held himself

out to have. It was found that the partner in this case had breached that duty (and, even if

that was wrong, he had also breached the duty on the test advanced by his lawyer -

namely to do his best, or to act to the standard which he would apply in looking after his

own affairs).

On the facts, the partner could not establish a convention that the insurers would accept

late claims (because they had done so on one previous occasion). Instead, the partnerhad delayed notification only because he thought the claim might well go away.

www.clydeco.com 5

The insurer would need to

demonstrate that if they had

have carried out

investigations at the time of

the thefts, it would have

been shown that the theft

claims should be rejected

A partner failed to notify the

firm's professional indemnity

insurers and the issue was

whether the partner or the

firm were liable for the

damages owed to the client


6/24

Warranties

A C Ward & Son v Catlin (Five) Ltd & Ors [2009] EWCA Civ 1098

Interpretation of a warranty in an application for summary judgment

This case involved an appeal from a judge's order dismissing the insurers' application for

summary judgment on the ground that the insured claimant had no real prospect in

succeeding in its claim for an indemnity. The claimant suffered a loss following a burglary

at its warehouse during the early hours of the day. The burglars had cut through at the first

floor level of the warehouse and stolen cigarettes and tobacco stored in a caged area on

the mezzanine floor of the warehouse. At the time of the burglary, a vibration detection

wire was not in working order and the CCTV relay at the premises was suffering from an

intermittent fault which interrupted transmission of pictures. The claimant alleges that it

was not aware of these defects at the time of the burglary.

The claimant (and the premises) were not insured at the beginning of the "Multiline

Commercial Combined Policy", but after the claimant was acquired by the named insured,cover for the warehouse was provided by the policy (and it is alleged that the insurers did

not at that time require or receive any information about security protections at the

warehouse). The policy contained two warranties:

1) A Protection Maintenance Warranty, whereby it was warranted that "the whole of the

protections provided for the safety of the insured property shall be maintained in

good order...and that they shall be in full and effective operation at all times when

the Insured's premises are closed for business and at all other appropriate

times...."; and

2) A Burglar Alarm Maintenance Warranty, whereby it was warranted that "the

premises ....are fitted with the burglar alarm system stated in the Schedule...(b) theburglar alarm system shall have been put into full and effective operation at all

times when the insured's premises are closed...and at all other appropriate

times...All defects occurring in any protections must be promptly remedied" In

relation to this warranty, the Schedule stated: "Make & type of Burglar Alarm

System: Not provided".

At first instance, the judge made a final determination that both provisions were indeed

warranties, and not just suspensive conditions. However, both the judge and the Court of

Appeal held that the claimant has "a real prospect" of succeeding in its claim (although the

court made no determination of preliminary issues in this case). Etherton LJ (giving the

leading judgment) said that it would be "Draconian" to interpret the warranties as covering

the situation where the insured could not reasonably have known about the defects and

even if the defective operation was not due to any inaction or action of the insured or its

agents. Adopting the principle of contractual interpretation that the more unreasonable the

result, the more unlikely it is that the parties can have intended it, the Court of Appeal held

that the insured's interpretation gives the policy a "more reasonable commercial meaning".

The insured had a "fair argument" that the Protection Maintenance Warranty applied only to

the security and other protections mentioned in the proposal form. Furthermore, the

Burglar Alarm Maintenance Warranty referred to the Schedule which in turn did not refer to

any particular burglar alarm relating to the warehouse. Also, "the vagueness of the

reference in both Warranties to "all other appropriate times" may be said to sit

uncomfortably with the Draconian nature of the Warranties on the Defendants'

interpretation".

www.clydeco.com 6

It would be "Draconian" to

interpret the warranties as

covering the situation where

the insured could not

reasonably have known

about the defects


7/24

However, given the court's recognition that warranties such as "be in full and effective

operation at all times" are standard terms with wide currency in the insurance market (and

that further evidence relevant to interpretation may become available at trial), Etherton LJ

said he could understand why the judge considered it would be appropriate to give the

insured the opportunity to adduce further material by the time of the trial. A decision on the

case was handed down in the following judgment:

A C Ward & Son v Catlin (Five) Ltd & Ors [2009] EWHC 3122 (Comm)

Breach of warranty/avoidance arguments

After the policy incepted, a variation was made removing Endorsement 6, which had

contained an exclusion of cover for theft of cigarettes and tobacco outside business hours

unless they were stored in a secure store on the ground floor of the warehouse. The

insurers resisted liability on the grounds that the warranties had been breached and it was

entitled to avoid the variation for material non-disclosure (and so Endorsement 6 remained

in place).

In this case, which largely turns on its particular facts, Flaux J held:

1) In relation to the PMW, the phrase "the protections provided for the safety of the

insured property" was not tied to protections identified in the proposal form. As a

matter of commercial common sense, it referred to whatever security devices or

protections the insured has in place at the insured property at the time of inception

of the insurance (although it would not apply to any future protections installed by

the insured after inception).

In relation to the BAM, although the policy schedule stated "Make & type of Burglar Alarm

System: Not provided", that was sufficient to amount to a "burglar alarm system stated in

the Schedule". The fact that it had not been approved by the insurers should not prevent

the warranty applying. Even if that was wrong, the judge considered that the warranty

should be construed so as to apply to the burglar alarm system which was in place at the

warehouse at the time of inception and that any other construction would be commercially

absurd. (It should also be noted that the insured had failed repeatedly to provide the

specification of the burglar alarm systems on its premises).

However, the judge also went on to find that both warranties were qualified, in the sense

that the insured was only in breach of warranty if there was some defect in the particular

protection or the burglar alarm system, "of which the insured becomes aware or should

reasonably have become aware and the insured has then failed to remedy the defect

promptly". That interpretation gave effect to the important closing words of each warranty:

"All defects occurring in any protections must be promptly remedied". The judgeconcluded that, on the facts, there had not been a breach of warranty by the insured.

2) The judge concluded that certain representations made by the insured regarding

compliance with a Risk Improvement Requirement amounted to material

misrepresentations. The judge also accepted that the underwriter in question had

been induced. The insured had sought to rely on a passage from North Star

Shipping v Sphere Drake Insurance [2005] to the effect that an underwriter's

evidence will be self-serving and so should "be rigorously tested by reference to

logical self-consistency". Flaux J held that in this case the underwriter's evidence

did have logical self-consistency and that, in any event, the evidence from the

insured's broker might be equally self-serving.

Accordingly, Endorsement 6 remained in place and since the cigarettes and tobacco were

stolen from the mezzanine floor, there was no theft cover in place in respect of them.

www.clydeco.com 7

The judge also went on to

find that both warranties

were qualified


8/24

Exclusions

Reilly v National Insurance & Guarantee Corporation Ltd [2008] EWCA Civ

1460

Interpretation of policy exclusion/meaning of "machinery"

The appellant insured's business was the supply and installation of fire protection and

detection systems. Following a fire at a client's premises, the carbon dioxide system failed,

either because of insufficient pressure in the master cylinder or because of the failure of

the actuator piston (with carbon dioxide leaking). The relevant insurance policy (a

"Tradesmen Insurance Policy") contained the following exclusion: "This section does not

indemnify the Insured in respect of any claim arising out of....(ii) the failure of any fire or

intruder alarm switchgear control panel or machinery to perform its intended function".

At first instance, Burton J held that the policy exclusion applied to the circumstances of this

case. The insured appealed. Moore-Bick LJ (giving the leading judgment) agreed with

Burton J that the exclusion could not be read so that the words "fire or intruder alarms"governed everything that follows in that sentence. Machinery was to be treated as a

separate item of equipment and the clause was not limited to the failure of fire or intruder

alarm systems to perform their intended function. Moore-Bick LJ rejected the argument

that such an interpretation created a "trap for the unwary" - the insured was still being

covered for, for example, liability where the equipment disintegrated and damaged a

client's property. So the insurer's construction was not at odds with the statement in the

policy prospectus that the policy was "wide-ranging" and provided "protection against the

common risks faced by most contractors". Although the nature of the insured's business

should be taken into account when construing a policy, it was held that that did not shed

much light in this case.

The Court of Appeal therefore went on to consider whether there had been a failure of"machinery" on the facts of the case. The word "machinery" was said to be "capable of

encompassing a wide range of devices which operate by means of physical movement to

perform a particular function". Moore-Bick LJ concluded that the master cylinder valves

and actuators were "machinery" (because of their complexity and reliance on moving parts)

but the cylinders themselves, or the pipework, although physically connected, were not

"machinery" because they were separate components.

Accordingly:

if the failure of the system to work properly was caused by the failure of the actuator

piston, the claim would be excluded from cover; but

if the failure of the system to work properly was caused by insufficient pressure in

the master cylinder, the claim would not be excluded from cover.

Ward v Norwich Union [2009] ScotCS CSOH 27

Scottish case on accidental death policy and intoxication exclusion

The widow of W claimed under an Accidental Death Benefit insurance policy. W, a crew

member of a fishing vessel, had consumed large quantities of alcohol at a pub on the

evening of his death. He had then returned to the quayside, where he fell into the water

and, tragically, drowned. He was a non-swimmer and his fellow crew members were

unable to rescue him. The policy covered death caused by "accidental outward violent and

visible means" and also contained an exclusion for "accidental bodily injury caused by or

resulting from...intoxicating liquor...taken by the Insured Person".

www.clydeco.com 8

The word machinery was

said to be capable of

encompassing a wide range

of devices which operate by

means of physical

movement to perform a

particular function"


9/24

The Scottish Court of Session (outer house - i.e. first instance) held that the death had

been accidental. It did not matter whether W's acts were deliberate, only if they were

intended. Although he intended to get drunk, he did not intend to fall into the water and

that could not be said to be the natural and probable result of an evening of heavy drinking.

Death caused by drowning was a death caused by violent, accidental, external and visible

means.

However, the court went on to hold that the policy exclusion applied. The alcohol

consumed by W must have impaired his judgment, balance and other faculties. Had he

been in full control of his faculties, he would not have fallen into the water. It must

therefore be presumed or inferred that the cause of W's fall into the water which led to his

death was the effect on him of the excessive quantity of alcohol taken by him. There was

no evidence in this case to rebut the presumption that W's death was cause by his

consumption of intoxicating liquor. Nor should the policy exclusion be read as covering

only death by alcohol poisoning or choking.

Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad[2009] EWHC 637 (Comm)

Marine insurance policy: fortuity and "inherent vice"

Three legs of an oil rig were lost at sea whilst it was being towed on a barge. The experts

agreed that the loss occurred because of fatigue cracking caused by repeated bending of

the legs under the influence of motions of the barge as it was being towed. The parties

disagreed, however, as to whether the proximate cause of the loss was an earlier

inadequate repair or inherent vice. The policy was an "all risks" policy excluding (amongst

other things) "inherent vice".

1) Fortuity argument. The defendants sought to argue that the loss of the legs was

inevitable - i.e. that the loss was certain to happen. Probability, however high, does

not bring a case within the ambit of inevitability and in this case Blair J concluded

that the failure of the legs as the rig was being towed around the Cape was very

probable but not inevitable. Accordingly, the judge did not need to decide the

further argument by the claimants that a policy will respond to an inevitable loss

unless it can also be shown that the insured knew the loss would be inevitable

when the policy was concluded. Blair J appeared to reject that argument, relying on

Arnould's Law of Marine Insurance which states that inevitability can probably be a

defence even where the fact that the loss was certain to occur was wholly unknown

to the parties.

2) Inherent vice argument. It was not in dispute that damage can be caused by

inherent vice without it being inevitable. The burden is on the insurer to make outthe exclusion. The exception against inherent vice is the same in the context both

of carriage by sea and marine insurance. Both the claimants and the defendant

accepted that inherent vice means the natural behaviour of the insured cargo

"without external intervention". However, Blair J said the test was not "without

external intervention" but rather "without the intervention of any fortuitous external

accident or casualty" - see Lord Diplock in Soya GmbH v White [1982]. So,

whereas the "vice" must be internal, the damage (being a consequence of that vice)

can and often will develop with the assistance of an external circumstance, typically

the weather. Furthermore, the court can consider the causal effect of a predictable

and reasonable change of plan (although in this case an alternative route would not

have made any practical difference).

www.clydeco.com 9

The death had been

accidental. It did not matter

whether W's acts were

deliberate, only if they were

intended

The failure of the legs as

the rig was being towed

around the Cape was very

probable but not inevitable


10/24

In applying the law to the facts of the case, Blair J concluded that the legs failed not

because of the earlier repairs, but despite them: The real problem lay with the inherent

inability of the legs to withstand the normal incidents of the voyage (including the weather

reasonably to be expected), or, as the defendant's expert put it: "I don't think that these

legs were ever going to make it round the Cape". Accordingly, the proximate cause was

inherent vice. The appeal in this case was then handed down in the following case:

Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad

[2009] EWCA Civ 1398

Meaning of "inherent vice"

The critical issue raised in the appeal was whether the judge had been correct in ruling

that, since it was common ground that the action of the waves was no greater than was

"reasonably to be expected" in November around the Cape of Good Hope, the loss was

not due to perils of the sea. The Court of Appeal allowed the appeal.

There is no definition of "inherent vice" in the Marine Insurance Act 1906, but both parties

accepted that it meant the risk of deterioration of goods shipped as a result of their natural

behaviour "without the intervention of any fortuitous external accident or casualty". Under

the 1906 Act, an insurer is not liable for any loss not proximately caused by a peril insured

against (but conversely is liable for any loss which is proximately caused by a peril insured

against).

Following an extensive review of the relevant caselaw authority, Waller LJ concluded that:

1) Inherent vice can be a cause even though some outside agency, such as the

motion of the waves, has contributed causally to the loss;

2) Inherent vice may not be a proximate cause if there is an eventuality or accident

from without that causes the loss. It would be difficult to have concurrent causes

where one candidate is inherent vice (even if the Court of Appeal decision in the

Miss Jay Jay case appears to suggest otherwise). It is only if the peril insured

against is not a proximate cause that inherent vice can be the sole and proximate

cause; and

3) The burden is on the insurer to establish inherent vice as the proximate cause. If

cargo is damaged by the motion of a vessel in favourable or "perfect" weather, the

obvious inference in most cases is that any damage was caused by inherent vice.

In order to determine whether damage has been caused by inherent vice ,

reference must be had to wind or wave which would be bound to occur as the

ordinary incidents on any normal voyage. In this case, metal fatigue was not thesole cause of the loss of the legs: "A leg breaking wave, not bound to occur in the

way it did on any normal voyage round the Cape of Good Hope, caused the

starboard leg to break off. That led to the others being at greater risk and then

breaking off. It was not certain that that would happen and although with the benefit

of hindsight we know that it was highly probable, that high probability was unknown

to the insured and that was a risk against which the appellants insured".

In reaching this conclusion, the Court of Appeal disagreed with the test laid down by

Moore-Bick J in the Mayban case (in which he held that if the conditions encountered by a

vessel were no more severe than could reasonably have been expected, the conclusion

must be that the real cause of the loss was the inherent inability of the goods to withstand

the ordinary incidents of the voyage).

www.clydeco.com 10

A leg breaking wave, not

bound to occur in the way it

did on any normal voyage

round the Cape of Good

Hope, caused the starboard

leg to break off


11/24

Interpretation

Flexsys America LP v XL Insurance Company Ltd [2009] EWHC 1115 (Comm)

"Umbrella" policies and drop down clauses/duty to defend

The claimant is an American subsidiary of a worldwide concern based in Belgium. As part

of a global insurance programme, a global master policy was issued providing cover (to,

inter alia, subsidiaries) in excess of any local policies issued to such subsidiaries. In this

case, the claimant was insured under a local Commercial and General Liability policy.

Following a claim against it by a Korean company in the US, the claimant incurred legal

costs of over US$2 million. Under a settlement with the local policy insurers (who

expressly denied any liability), the claimant recovered US$1 million (the limit of the local

policy). The claimant then sought to recover the balance of its legal costs from the master

policy insurers. However, under the master policy, the relevant cover for "advertising

injury" was written on far more narrow terms than under the local policy.

Memorandum E (Drop Down Clause) of the master policy provided that: "In the event ofpartial exhaustion of a local policy this Policy will pay in excess of the reduced underlying

Limit of Indemnity. In the event of total exhaustion of a local policy this Policy will continue

in force as the underlying insurance subject to the terms Exceptions and Conditions of the

particular local Policy". The claimant argued that the local policy was exhausted and so,

under the second sentence, the master policy drops down to provide further cover on the

terms of the local policy (apart from the policy limits).

Tomlinson J rejected that argument, holding that it did not apply where a claim was

recoverable under the terms of the local policy but irrecoverable under the terms of the

master policy. He looked at the background to drop down clauses and found that there

was no universally applied form of words - each clause had to be looked at on its own

merits. When the master policy here was looked at as a whole, he said that he would haveexpected some express wording to enable recovery under the master policy even where its

terms were more narrow than those of the local policy.

The second sentence of Memorandum E was instead designed to fill a gap: "it provides a

reinstatement of the local policy to be available to meet subsequent claims i.e. claims

subsequent to that or those which achieve total exhaustion of the local policy....It means

that in the case of either partial or total exhaustion there is cover available from the ground

up for the next claim". He also rejected the claimant's argument that it made no

commercial sense for it to choose to have only US$1 million worth of cover in certain

limited circumstances. Tomlinson J said that such an argument was "meaningless" without

a consideration of the cost of it buying further cover and a balancing of that additional cost

against the perception of the risk involved. Accordingly, the claimant was not covered

under the master policy.

In case an appeal is brought, the judge also went on to consider whether the terms of the

local policy in any event afforded the claimant cover in respect of the legal expenses which

it had incurred. He held that it did not. Cover was provided in respect of (inter alia)

"product disparagement", which in turn was qualified by exclusions where the insured acted

with the knowledge that its act would violate the rights of a third party, or that material was

false. The claims by the Korean company were, in essence, that the claimant had

intimidated customers into boycotting the Korean company. Tomlinson J said that it was

plain that the duty to defend had not been made out. He rejected the suggestion that it

would be enough to demonstrate that the allegations made did not preclude an innocent

mindset. The whole thrust of the Korean company's claims was that the claimant had

pursued a deliberate and concerted course of conduct designed to keep the Korean

company out of the market: "the notion that such conduct could be characterised as simply

negligent or reckless is in my view absurd".

www.clydeco.com 11

It means that in the case of

either partial or total

exhaustion there is cover

available from the ground

up for the next claim


12/24

Chartbrook Ltd v Persimmon Homes Ltd & Ors [2009] UKHL 38

House of Lords decision on admissibility of pre-contractual negotiations

This case concerned the interpretation of a contract term. The House of Lords held that to

interpret the term in question in accordance with ordinary rules of syntax made nocommercial sense - something had gone wrong with the language used in this contract, not

with the meaning of the words but with the syntactical arrangement of those words. That

conclusion was enough to dispose of the appeal but Lord Hoffmann went on to consider

two further (now academic) arguments raised in the appeal:

1) Whether the court should take into account pre-contractual negotiations. There is a

long-standing rule that pre-contractual negotiations are inadmissible (Prenn v

Simmonds [1971]), on the basis that it is only the final document which records a

consensus. However Lord Hoffmann noted that: "among the dirt of aspirations,

proposals and counter-proposals there may gleam the gold of a genuine consensus

on some aspect of the transaction which would influence an objective observer in

construing the language used by the parties in their final agreement". He thereforeaccepted that it may be possible to admit evidence of previous communications

between the parties as part of the background which may throw light on what they

meant by the language they used. Negotiations are potentially relevant background

in exceptional cases. However, there was no clearly established case for departing

from the long-standing rule altogether.

Lord Hoffmann also referred to the "private dictionary" principle (whereby evidence

may be adduced that the parties habitually used words in an unconventional sense

in order to support an argument that the words in the contract should have the

same unconventional meaning). He said that the case of the Karen Oltmann [1976]

had illegitimately extended this principle because the communications looked at by

the judge did not evidence any unconventional usage (the case had merely involved

a choice between two conventional meanings of a word).

(2) Whether, if the appellants had failed on construction, the agreement should have

been rectified. Lord Hoffmann confirmed that rectification requires a mistake about

whether the written instrument correctly reflected the prior consensus, not whether it

accorded with what the party in question believed that consensus to be. An

objective, not subjective, ascertainment of the terms of the prior consensus is

needed. In this case, both parties were mistaken in thinking that the contract

reflected their prior consensus and so the appellants were entitled to rectification.

Excelsior Group Productions Ltd v Yorkshire Television Ltd [2009] EWHC

1751 (Comm)

Interpretation of contracts and private dictionary principle

This case involved the interpretation of a contract. Flaux J doubted whether prior

caselaw - that pre-contractual negotiations are admissible to show that the parties have

negotiated on an agreed basis as regards the meaning of certain words in their

contract - remained good law following the recent House of Lords decision in Chartbrook v

Persimmon. However, he was not required to reach a conclusion on that point since the

parties in this case had not negotiated on an agreed basis. He said that there was also a

very fine line between looking at negotiations to see if the parties have agreed on the

general objective of a provision (as part of the task of interpreting the provision) and

looking at the negotiations to draw an inference about what the contract meant (which isnot permissible): "a line so fine it almost vanishes".

www.clydeco.com 12

Among the dirt of

aspirations, proposals andcounter-proposals there

may gleam the gold of a

genuine consensus on

some aspect of the

transaction which would

influence an objective

observer in construing the

language used by the

parties in their final

agreement


13/24www.clydeco.com 13

Rectification

Dunlop Haywards (DHL) v Erinaceous Insurance Services Ltd & Ors [2009]

EWCA Civ 354

Joinder of excess insurers to proceedings/rectification of insurance policy

The defendant, a producing insurance broker, was being sued by its client for allegedly

failing to obtain the insurance policy which it was (allegedly) instructed to obtain. The

defendant sought to join the excess insurers (who had denied liability after the insured (the

claimant) received various claims against it) to the proceedings. The defendant was

claiming that either the insurance which it obtained provided the claimant with what it

required (on its true construction) or would do so if it was rectified to accord with the

parties' common intentions. The excess insurers argued that the defendant's arguments

regarding construction and rectification were not seriously arguable and so it would not be

"desirable" for them to be joined to the proceedings (as required by CPR r19.2(2)). That

argument was accepted by the judge and the defendant appealed. Accordingly, the Court

of Appeal was called upon to examine the strength of the defendant's rectification case.

In this case, after the excess insurers were informed that their quotes had been accepted,

a FON ("firm order noted") endorsement was produced by the placing broker (the only

expert evidence before the court (although it was disputed by the excess insurers) was that

a FON endorsement was contractually binding). The slip which was then produced

contained a limiting condition which was not present in the FON endorsement. At first

instance, the judge held that given this difference, the slip constituted a fresh contract and

so there was no ground for rectification based on the FON endorsement.

The Court of Appeal said that the difficulty in this case was not showing a prior common

intention, but rather whether that intention survived into the instrument to be rectified (i.e.

the policy, although it was said that there was a valid argument that, once the slip was inthe form which it took, the drawing up of the policy was largely a matter of administration,

and so the critical stage was the transformation from the FON endorsement to the slip).

Rix LJ, delivering the leading judgment, said that even when one contract is superseded by

another contract, the later contract can still be rectified. Where many terms are new to the

superseding contract (and not just the term for which rectification is sought) it may be

difficult to prove that the prior common intention survived into the later contract. In this

case, though, it was submitted with some plausibility that all the essential terms of the

excess cover were already in place at the time of the FON and the drawing up of the slip

was largely an administrative process. On examining the facts of the case, it was

concluded that this issue should not have been dealt with summarily (i.e. without the need

for a trial) by the judge. Accordingly, the appeal was allowed and the excess insurers

joined to the proceedings for the purpose of participating in the issues of rectification and

construction.

Even when one contract is

superseded by another

contract, the later contract

can still be rectified


14/24

Reinsurance

Lexington Insurance Company v AGF Insurance Ltd [2009] UKHL 2009

House of Lords unanimously allows reinsurers' appeal

Lexington insured an American company, Alcoa, under a policy which covered loss or

damage to property. The policy period ran for three years from noon 1 July 1977.

Lexington entered into a reinsurance contract with Wasa and AGF and the policy period

was identical to that of the underlying direct policy. The reinsurance policy contained a

clause which stated: "Being a reinsurance of and warranted same gross rate, terms and

conditions as and to follow the settlements of the [reinsured]" and was governed by English

law.

Environmental damage was sustained at Alcoa sites from 1942 until 1986 (and therefore

damage was sustained during the policy period). Alcoa brought proceedings against

Lexington in America and in 2002 the Washington Supreme Court held, as a matter of

Pennsylvanian law, that the direct insurance policy was to be construed as renderingLexington jointly and severally liable for the clean-up costs at the various sites, irrespective

of whether the damage was sustained before, during or after the policy period. Lexington

then settled with Alcoa and sought an indemnity from its reinsurer (Wasa). The reinsurer

sought a declaration from the English courts that it was not liable and won at first instance

but lost in the Court of Appeal. The House of Lords has now unanimously allowed the

reinsurer's appeal.

The House of Lords accepted that in proportional facultative reinsurance, there is a

presumption of back-to-back cover. However, there was no rule of law that reinsurers must

respond to every valid claim under the insurance irrespective of the terms of the

reinsurance. A reinsurance policy "is not simply a contract under which the reinsurers

agree to indemnify the insurers in relation to any liability that they may incur under theprimary insurance".

The parties had agreed that the American judgment had not been perverse, and the court

agreed that reinsurers cannot take technical points or refuse to provide an indemnity just

because a loss is not anticipated.

However, given the "fundamental" importance under English law of the temporal scope of a

time policy (especially in a losses occurring policy), the reinsured's argument failed. The

House of Lords also noted that in 1977, when both the contracts in this case were written,

there was not "any identifiable system of law applicable to the insurance contract which

could have provided a basis for construing the contract of reinsurance in a manner different

from its ordinary meaning in the London insurance market". In other words, the original

policy did not specify which system of law applied to it and reinsurers could not have

predicted that Pennsylvanian law would be applied.

In reaching their decision, the judges did take into account commercial practicalities - for

example, the Court of Appeal's interpretation would have left reinsurers with an

unpredictable exposure, to which their own protections (ie outwards cover) might not

necessarily respond. Lord Mance suggested that if reinsureds wanted to protect

themselves in future, they ought to ensure that the insurance and reinsurance policies are

subject to the same "identifiable and predictable" governing law.

(One further point in the judgment: the retention was expressed to be $1,675,000, the

policy limit was $20m "each occurrence". In the Court of Appeal, Longmore LJ confirmed

that that meant a single retention, not a retention per occurrence and Lord Mance agreed

with that view).

www.clydeco.com 14

A reinsurance policy is not

simply a contract under

which the reinsurers agree

to indemnify the insurers in

relation to any liability that

they may incur under the

primary insurance


15/24

Equitas Ltd v R&Q Reinsurance Company (UK) Ltd [2009] EWHC 2787

(Comm)

What a reinsured must prove in order to recover under its follow the settlements

clause

Various Lloyd's syndicates (later reinsured into Equitas) paid claims under various

retrocession contracts in respect of two market losses: the Iraqi invasion of Kuwait in 1990

and the grounding of the Exxon Valdez in 1989. These retrocession contracts formed part

of the "LMX spiral", in which a large loss would be magnified as it was passed on among

companies and syndicates that reinsured each other. Years later it was determined in

court that certain parts of these two market losses could not be aggregated with the rest

and treated as part of a single "event" for retrocession purposes. Because of the opacity of

the LMX spiral it was not possible for Equitas to work out, with any precision, which parts

of its total payment could legitimately be aggregated together, and its retrocessionaires

therefore declined to pay anything in respect of these losses.

It was common ground that Equitas could not replicate the spiral at each level leaving outthe wrongly aggregated and irrecoverable elements. Instead, Equitas sought to use

actuarial modelling to put a figure on the "tainted" elements, leaving a minimum

recoverable amount properly due under its retrocession contracts. R&Q countered that

Equitas must prove the sums claimed are properly due under each and every underlying

contract (from the bottom of the spiral all the way up to the Equitas level) and that if it could

not do that, that would be an end to the matter and Equitas could not recover at all.

All the reinsurance contracts incorporated the JELC clauses which provided (in relevant

part) that "It is a condition precedent to liability under this contract that settlement by the

reassured shall be in accordance with the terms and conditions of the original policies".

Many of the reinsurance contracts also provided that the loss settlements of the reinsured

would be binding on the reinsurers provided those settlements were within the terms and

conditions of both the original policies and the reinsurance contracts.

The follow the settlements clause in the reinsurance contracts therefore differed from the

"strong" follow clause considered in the Insurance Company ofAfrica v Scor[1984] case

(there, the reinsurers were held to be bound to indemnify the reinsured for all settlements

provided only that the claim, as recognised by the reinsured, fell within the risks covered by

the reinsurance contract as a matter of law, and that in settling the underlying claim, the

reinsured had acted honestly and in a business-like fashion). Instead, the clause in issue

in this case resembled that considered in Hill v Mercantile & General Reinsurance [1996],

in that it had to be proven that the settlements made by the reinsured were also within the

terms of the underlying policy. Gross J found that Hill v Mercantile was authority for the

proposition that the (re)insured must prove, on a balance of probabilities, and as a matter

of law (not fact) that a settlement fell within the underlying policy.

However, this did not require Equitas to re-present correctly aggregated losses: "It is one

thing to posit that the loss must fall within the cover of the inwards policy, but quite another

to require proof of liability under each and every underlying contract. As a matter of logic, it

does not follow that because at some much lower level in the spiral a claim may have been

paid outwith the cover furnished at that level, therefore a settlement at a higher level

cannot satisfy" the requirement that the reinsured prove that the settlement fell within the

scope of the underlying policy. Equitas was entitled to discharge the legal burden resting

on it by use of the best evidence which it has available.

www.clydeco.com 15

It is one thing to posit that

the loss must fall within the

cover of the inwards policy,

but quite another to require

proof of liability under each

and every underlying

contract


16/24

The judge concluded that if Equitas' liability did fall within the cover of the contract

reinsured (eg because a claim fell within the risks covered by that contract and/or the

underlying limits had been exhausted), liability would be established as a matter of law, and

what remained were "questions of quantum". At this stage "there can be no objection in

principle to Equitas seeking a recovery in a minimum amount...the effect is simply that

Equitas foregoes any attempt to recover additional sums. The extent of losses, onceliability has been established, need not be proved with scientific exactitude". However,

there might be factual situations where it might be possible and appropriate to re-construct

layers of the LMX spiral.

The judge also found that the factual matrix and market practice in this case did not affect

his conclusion. He then went on to consider whether actuarial modelling should be used to

establish Equitas' loss. He concluded as follows: "I accept that actuarial modelling is

complex, expensive, imperfect and, for my part, not ideal in the context of this litigation. It

is plainly necessary to proceed with caution. However...I am persuaded that the models

are both capable of making the transition from the general to the particular and do go on to

provide a reasonable representation of reality". The models were "emphatically preferable

to leaving the losses to lie crudely where they fall".

Disclosure

Barr & Ors v Biffa Waste Services Ltd [2009] EWHC 1033 (TCC)

Disclosability of ATE insurance policies

The claimants applied for a Group Litigation Order ("GLO") in respect of their claims in

negligence and nuisance against the defendant arising out of odour emissions from the

defendant's landfill site. Whilst the defendant did not necessarily object to the making of

the GLO, it sought, as a condition of such an order, disclosure of the claimants' after the

event ("ATE") insurance policy. Disclosure was sought on two grounds:

1) The ATE policy had been mentioned in two witness statements relied on by the

claimants ("The CFA is supported by a policy of insurance"). CPR r31.14 provides

that a document mentioned in a witness statement is disclosable. Coulson J was

satisfied that the policy was not merely mentioned in passing in this case.

Accordingly, the policy should be disclosed unless it was either irrelevant or covered

by litigation privilege. Coulson J concluded that the ATE policy was relevant - the

parties were agreed that, if there was no GLO, this litigation would not be pursued

because the value of each individual claim was modest, whilst the costs would likely

be very significant. There would be no GLO without the existence of the ATE policy.

Furthermore, the policy should be disclosed so that the defendant could form its

own view as to its limits and exclusion clauses.

Coulson J also referred to the recent decision in West London Pipe Line Storage v Total

[2008], which doubted the decision in Harcourt v Griffin [2007], and which held that there

was no jurisdiction to order disclosure of a liability policy. Coulson J said that there was a

difference between liability insurance (which may well have been in place years before the

events giving rise to the litigation and have absolutely nothing to do with those events) and

ATE insurance, the inception of which may be a critical factor in the existence of the

proceedings themselves. In this type of case, where the GLO depended on the ATE

insurance policy, the courts' traditional approach to disclosure of liability policies was not

relevant.

The judge also rejected an argument that the policy was covered by litigation privilege.However, he accepted that the amounts of the premiums should be redacted because,

although a little far-fetched on the facts, he could see circumstances in which it might be

arguable that disclosure of the premiums would allow the reader to work out what legal

advice had been given.

www.clydeco.com 16

The policy should be

disclosed so that the

defendant could form its

own view as to its limits and

exclusion clauses


17/24

2) Disclosure should be granted pursuant to the court's general case management

powers. Although it was not strictly necessary for Coulson J to consider this

argument, he concluded that it would be unjust to require the defendant to

participate in this group litigation knowing that it would have to pay the claimants'

costs if it lost, but not knowing if it could recover its costs if it won (because of some

exclusion or limit in the ATE policy). The risk of the defendant exploiting itsknowledge of the level of cover by running up huge costs bills could be controlled

by the judge using his wide case management powers.

Quinn Direct Insurance Ltd v The Law Society of England and Wales [2009]

EWHC 2588 (Ch)

Request for disclosure of documents to solicitors' insurer following Law Society

intervention

"O" and "I" were joint partners of a firm of solicitors. Following the intervention of the Law

Society in their practice, the solicitors' insurer refused to indemnify "O" on the ground of hisalleged dishonesty. The insurer then sought disclosure of all documents of the firm in the

Law Society's possession "to consider whether under the policy the [insurer] is obliged to

indemnify or obliged not to indemnify ["I"]". No allegation of dishonesty had been made

against "I" at that stage. The Law Society agreed to provide certain documentation (where

specific claims had been made by clients and there were no privilege or confidentiality

objections) but refused a blanket request for access. Smith J refused the application on

the following grounds:

Merely because solicitors must be insured (under the provisions of the Solicitors Act

1974) does not imply that clients will expect insurers to be able to see privileged or

confidential documents when the clients are not involved in any aspect of a claim or

dishonesty: "There is not in my view a sufficient linkage between the clearly

regulatory role of the Law Society to that of insurers to confer on insurers an

unfettered right of access to the solicitors' documents". The whole purpose of the

insurer's application in this case was not to exercise any supervisory role in the

conduct of the firm - it was just to attempt to gather evidence to enable it to refuse

an indemnity;

The Law Society is not a party to the insurance policy and so is not bound by a

provision in the policy requiring the insured to give "all such information and

assistance as [the insurer] may require". Furthermore, the documents belong to the

relevant client and the Law Society is under an obligation to preserve them and

hand them over to the client. Any residual documents (ie the firm's own working

papers and records) will generally be passed to the client's new firm and the Law

Society can only respond to specific requests for disclosure;

In any event, Smith J held that the requested documents would not have been

recoverable from the insured solicitors either. The solicitors were not obliged to

provide information and assistance whenever the insurer asked for it. Instead, the

obligation arises only "in the event of any occurrence which may give rise to liability"

under the policy. Smith J interpreted Gan Insurance v Tai Ping(No 3) [2002] as

meaning that "the insured is only required to provide information to assist in a claim

that is already made. An insured is not required to provide information solely for

investigating whether or not a breach of the insured obligations can be established";

It cannot be said that the insurer could have obtained the documents anyway by

way of an application under CPR r31.17 (non-party disclosure). The insurer wouldneed to first have a clearly formulated proper claim against "I" and the claimant was

not in position to make such a claim at present. Furthermore, the insurer was

seeking "to override the privilege of every client of the firm. I cannot see realistically

that the Court can do that under CPR r31.17".

www.clydeco.com 17

An insured is not required

to provide information solely

for investigating whether or

not a breach of the insured

obligations can be

established"


18/24

Quantum Processing Service Company v Axa Insurance UK Plc [2008]

EWCA Civ 1640

Whether policy excluded cave diving

The insured, an experienced scuba diver, claimed under his travel insurance policy formedical treatment which he required after he went cave diving on holiday. The policy did

not expressly exclude scuba diving, but the general conditions excluded hazardous

activities and claims arising out of wilful exposure to needless danger. The policy also

contained a provision stating that if the insured was going to take part in hazardous or

sporting activities, he/she should check whether the policy covered such activity

beforehand. In this case, the insured had disclosed that he intended to go scuba diving to

the insurers.

At first instance, the judge held that the insured had not expressly said that he was going

cave diving and, as this was more dangerous than open water diving, he was not covered

under the policy. In this case, the Court of Appeal overturned that decision. The insured

had complied with the policy conditions by disclosing that he would be scuba diving whilston holiday. Since the insurers had not imposed any limitations after being told of the

insured's intentions, the policy should be read as excluding hazardous activities "save for

scuba diving". Since cave diving was a form of scuba diving, and the insured had not been

told that he would not be covered for such activity; scuba diving in caves had not been

excluded under the policy.

Jurisdiction

Gard Marine & Energy Ltd v Lloyd Tunnicliffe & Ors [2009] EWHC 2388

(Comm)

Reinsurance claim and applicable law/jurisdiction issues

The claimant, Gard (a Bermudian company), reinsured a risk under two excess of loss

reinsurance slips made with: 1) London market underwriters (one of which was Advent)

and 2) Glacier Re (a Swiss reinsurer). The London market slip was subject to English law

and jurisdiction but there was no such express choice in the Glacier Re slip. The two

placements were made by a Lloyd's broker ("AHP"). Following a dispute regarding the

amount of the deductible to be applied following a loss, Gard commenced proceedings

against Advent and Glacier Re (and another reinsurer). Glacier Re objected to the

jurisdiction of the English court. In this case, Hamblen J decided the following issues:

1) Applicable law. The judge held that he was satisfied that Gard had established at

least a good arguable case that English law is the applicable law. The

circumstances of the placement were said to point towards a choice of English law.

Glacier Re was being asked to participate in a London market placement. A Lloyd's

policy form (the J (A) form, which is a mere policy jacket) was used and the slip was

a Lloyd's brokers slip structured in a manner common to Lloyd's. Furthermore, the

slip incorporated a number of London market wordings and certain clauses used

had particular relevance to English law.

2) Jurisdiction. The Lugano Convention is the applicable jurisdiction regime as

between the UK and Switzerland. Article 2 of the Convention provides that a

defendant should be sued in its country of domicile. However, Article 5(1) of the

Convention provides that a defendant may be sued in another Contracting State in

matters relating to a contract "in the courts for the place of performance of theobligation in question". Under English law, the general rule is that the place of

performance is where the creditor resides. Gard resides in Bermuda. It therefore

sought to argue that there was a common intention that claims payments would be

made to AHP in London.

www.clydeco.com 18

It was necessary to show

that there was an obligation

(and not just a practice) to

pay claims to the brokers in

London


19/24

The judge rejected that argument. It was necessary to show that there was an obligation

(and not just a practice) to pay claims to the brokers in London, and Gard could not do

this. Even if a broker owes a (re)insured a duty to collect claims, it does not necessarily

follow that the (re)insurer is contractually bound to pay all claims to the broker. Nor was

there sufficient evidence of a practice or custom to pay claims to the broker.

Gard also sought to rely on Article 6(1) of the Convention, which provides that a person

domiciled in a Contracting State may also be sued "where he is one of a number of

defendants, in the courts for the place where any one of them is domiciled". The judge

was satisfied that Gard had at least a good arguable case on this ground. Gard's claims

against Advent and Glacier Re turned on the proper construction of a clause which was

exactly the same in both contracts. That clause fell to be construed under English law. It

was unlikely that issues of fact would have a major bearing on the resolution of that issue.

There was therefore a "real risk of divergence of outcome in the context of the same

situation in fact and law". It was overwhelmingly just, convenient and expedient that

Gard's claims against Advent and Glacier Re be determined in one jurisdiction.

Duty of Brokers

Dunlop Haywards (DHL) Ltd & Ors v Barbon Insurance Group & Ors [2009]

EWHC 2900 (Comm)

Alleged negligence of producing and placing brokers

The claimants received a number of claims from various lenders as a result of allegedly

negligent or fraudulent valuations by one of its directors. The claimants had taken out a

professional indemnity policy covering its "commercial Property Management activities

only" and insurers declined an indemnity on the basis that the policy did not cover liabilities

arising from valuations. The claimants sued their (producing) broker for failing to obtain the

insurance policy which it was allegedly instructed to obtain. The broker joined the insurers

and the placing broker to the proceedings. Hamblen J reached the following conclusions:

1) The policy did not respond to the third party claims, either on its true construction or

as a result of rectification. The judge found, as an issue of fact, that there had been

no contract at the FON ("Firm Order Noted") stage, and in any event, the FON

contract was always intended to be superseded by the slip and, later, the policy.

Accordingly, the slip and the policy should not be construed by reference to it.

There was a strong inference on the facts that the parties had deliberately departed

from the earlier wording. From the insurers' point of view, there was nothing

strikingly illogical or obviously uncommercial about the claimants (who were under

new management) deciding to purchase the sort of cover that they did (especially

as this was an excess policy). Nor was there sufficient evidence to establish thenecessary prior agreement between the parties required for rectification. The judge

held that the policy did reflect the terms of the parties' agreement;

2) The claimants were not at fault for failing to check the policy terms. The judge

appeared to accept that, as a relatively sophisticated purchaser of insurance, the

finance director of the claimants may have been at fault for failing to even read the

terms of the policy. However, on the facts, he had been assured by the broker that

the policy "covers all bases" and so the finance director's blameworthiness "pales

into insignificance"; and

www.clydeco.com 19

There was nothing

strikingly illogical or

obviously uncommercial

about the claimants

deciding to purchase the

sort of cover that they did


20/24

3) It was just and equitable to apportion damages between the producing and the

placing brokers on a 80%/20% basis. Although it is essentially the producing

broker's duty to ascertain an insured's insurance needs, the placing broker must

take care to ensure that the instructions are understood. In certain cases, a placing

broker should request clarification or query the instructions if, for example, they

appear to be illogical or absurd. In this case, the placing broker had been told notto take away cover without an express request to do so.

The judge concluded that on the facts of the case, the potential detriment to the claimants

was so significant that a reasonably competent broker would have sought to query or

clarify the instruction, all the more so since it was a changed instruction. However, the

judge also found that this was a case of "a mistaken instruction being given and

maintained negligently rather than knowingly or recklessly". In essence, the broker's

complaint had been that the placing broker should have saved Mr Hart (of the producing

broker) from himself.

LimitationAxa Insurance v Akther & Darby [2009] EWCA Civ 1166

Court of Appeal decision on limitation issue in claim brought by ATE insurer against

panel solicitors

Axa was the assignee of NIG, which issued ATE insurance to the clients of certain panel

solicitors. It is alleged that the panel solicitors negligently failed to ensure that their clients

had a greater than 50% prospect of success when the policies were written (the "vetting"

claims) and (when they were conducting litigation on their clients' behalf) that they

negligently failed to notify the insurer when the prospects of success fell below 50% (the

"conduct" claims).

Any contractual claim against the solicitors would have been time-barred so the insurer

brought a claim in tort. Claims in tort are time-barred six years after the cause of action

accrued. For negligence claims, damage must be suffered before the limitation period will

start to run. Of issue in this case, therefore, was when the damage to the insurer could be

said to have accrued. At first instance, Flaux J held that damage had accrued when the

ATE policy was issued and so the insurer's claim was time-barred. The insurer sought to

argue on appeal that time only began to run when a claim could have been made under

the ATE policy and until then liability was an unsecured contingent liability.

By a 2:1 majority (Lloyd LJ dissenting), the Court of Appeal has rejected the appeal.

The case turned on the interpretation of the House of Lords decision in Law Society vSephton [2006]. In that case, a firm of accountants had negligently certified a solicitor's

accounts and it was later discovered that the solicitor had misappropriated money. It was

held that the Law Society suffered damage only when a claim was made against its

compensation fund and not when the solicitor misappropriated the money.

Arden LJ and Longmore LJ held that this was not a case like Sephton, which had involved

a "pure contingent liability". In Sephton, the Law Society had not entered into any kind of

transaction. Instead, its liability arose because it has a statutory duty to maintain a

compensation fund. It was said that Sephton had established that there must be

measurable loss before time starts to run "that is to say, loss which is additional to the

incurring of a purely contingent liability". In the present case, the insurer had entered into a

transaction by issuing the ATE policy: "The principle that incurring a purely contingentliability is not itself damage does not apply where the claimant acquires a contingent

liability as part of a package of rights under a bilateral transaction and the value of that

package has been diminished by the negligence of the defendant".

www.clydeco.com 20

The loss to insurers was

therefore in the natural

order of things bound to

occur"


21/24

This case therefore reflected the "flawed transaction" scenario, where the claimant should

have received certain benefits but, because of the negligence of the defendant, it did not

do so. (Longmore LJ held that "if such a flawed transaction has come into existence that

will, in my view, usually be the damage which the recipient of the advice has suffered and

that is more than the existence of a mere contingent liability".)

Arden LJ noted that in this case, the ATE policies were issued as part of the conduct of an

insurance business. The premiums were not just ordinary trading receipts. Instead, they

facilitated the creation of a reserve to meet claims. It was not appropriate to separate out

the premiums and argue that they were not "harmed": "The ability of [NIG] to use the sums

representing premiums to meet claims was certainly affected by the vetting breaches

because the matching liabilities were greater than they should have been. This applies

even though the premiums themselves are not appropriated in law to the payment of

claims". The insurer therefore suffered damage as soon as the policy was issued. As

Longmore LJ put it: "the loss to insurers was therefore in the natural order of things bound

to occur".

(Lloyd LJ, dissenting, held that until a claim arose under the policy, the insurer's liabilitywas only contingent. Although it was true to say that the insurer's position was worse upon

entering into the policy, it was only worse because of the contingent liability which it had

incurred).

Anti-suit Injunctions

Allianz & Anor v West Tankers Inc [2009] EUECJ C-185/07

Anti-suit injunctions and arbitration - ECJ judgment

Following a collision in 2000, charterers commenced arbitration proceedings against the

shipowners in London (the charterparty being expressly governed by English law and

containing a clause providing for arbitration in London). The charterers had also claimed

under their insurance policy and, following payment, insurers exercised their rights of

subrogation to commence proceedings in July 2003 in Italy against the shipowners, to

recover the amounts which they had paid to the charterers (the shipowners objecting to the

Italian courts' jurisdiction because of the existence of the arbitration agreement).

In September 2004, the shipowners commenced proceedings in England to obtain an

anti-suit injunction restraining the Italian proceedings. Under EU Regulation 44/2001 ("the

Regulation"), the court of a Member State may not issue an anti-suit injunction to restrain

proceedings which have already been brought in another Member State (that other

Member State being "first seised"). The European Court of Justice ("ECJ") cases ofTurner

v Grovit(2004) and Gasser v MISAT(2003) confirmed that that is the position even wherethe proceedings in the other Member State have been brought in breach of an exclusive

jurisdiction clause.

However, arbitration is excluded from the scope of the Regulation and the House of Lords

in this case took the view that the shipowners were entitled to an anti-suit injunction to

protect their contractual right to arbitration. Nevertheless, the House of Lords felt the

answer was far from obvious and so referred the question to the ECJ. Last year,

Advocate-General Kokott concluded that the Regulation precluded the court of a Member

State from granting an anti-suit injunction to restrain the breach of an arbitration

agreement. The ECJ has now handed down its decision, upholding the

Advocate-General's conclusion.

www.clydeco.com 21

Member State courts must

not grant anti-suit

injunctions on the grounds

that the proceedings have

been brought in breach of

an arbitration agreement


22/24

The ECJ agreed that the application for an anti-suit injunction from the English courts in

this case did not fall within the scope of the Regulation. However, it was said that such an

injunction would undermine the effectiveness of the Regulation, especially since the Italian

court would be prevented from exercising the jurisdiction conferred on it by the Regulation.

In this case, it was for the Italian courts alone to rule on its own jurisdiction. Member State

courts must not grant anti-suit injunctions on the grounds that the proceedings have beenbrought in breach of an arbitration agreement.

Whilst this is not a surprising decision (given the earlier decisions in Grovitand Gasserand

the Advocate-General's opinion), it will put London (and European) arbitration at a

considerable disadvantage to other leading arbitration centres such as New York and

Bermuda, where the national courts retain the right to restrain parties from acting in breach

of arbitration agreements.

DHL GBS (UK) Ltd v Fallimento Finmatica SPA [2009] EWHC 291 (Comm)

Enforcement of a foreign judgment obtained in breach of an arbitration clause

An English company and an Italian company entered into an agreement which contained

an English choice of law clause and a London arbitration clause. However, the Italian

company brought a claim in Italy to recover its unpaid invoices. The English company did

not participate in that litigation and the Italian court went on to hold that it had jurisdiction to

hear the case (because of (inter alia) a "consolidated trend" to be found in decisions of the

Italian courts) and that the question of whether the Italian company was bound by the

arbitration clause was governed by Italian law (by virtue of Article 4.2(e) of Council

Regulation 44/2001("the Regulation")). It was held that the Italian company was not bound

by the arbitration clause and judgment was given against the English company.

The Italian company then successfully applied for registration of the judgment in England

and the English company appealed against registration on the grounds that: (1) the

judgmen

(re)insurance_annual review 2009

Documents