Insurance and Reinsurance Review of 2009

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

2-3

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

4-5

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

6-7

Exclusions

8 - 10

Reilly v National Insurance & Guarantee Corporation Ltd [2008] EWCA Civ 1460 Ward v Norwich Union [2009] ScotCS CSOH 27 Global 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
Flexsys America LP v XL Insurance Company Ltd [2009] EWHC 1115 (Comm) Chartbrook Ltd v Persimmon Homes Ltd & Ors [2009] UKHL 38 Excelsior Group Productions Ltd v Yorkshire Television Ltd [2009] EWHC 1751 (Comm)

11 - 12

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

13 14 - 16

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

Disclosure 16 - 18 Barr & 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
Gard Marine & Energy Ltd v Lloyd Tunnicliffe & Ors [2009] EWHC 2388 (Comm)

18 - 19 19 - 20 20 - 21 21 - 24

Duty of Brokers Limitation

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

Dunlop Haywards (DHL) Ltd & Ors v Barbon Insurance Group & Ors [2009] EWHC 2900 (Comm)

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

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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.

"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"

1)

Avoidance: At first instance, the judge had said that it was hard to identify a point prior 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 the judge 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).

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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 or any...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 any businesses 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 of Noblebright 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 in a particular subject matter and so that information was not information which "may influence" the insurer.

"Objective construction reigns supreme and subjective understanding is irrelevant"

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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 drawn between 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 it was 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."

Changes were material if 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

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.

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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 in this 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 the claims 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.

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

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 standard required 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 partner had delayed notification only because he thought the claim might well go away.

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

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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 A Burglar Alarm Maintenance Warranty, whereby it was warranted that "the premises ....are fitted with the burglar alarm system stated in the Schedule...(b) the burglar 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".

2)

It would be "Draconian" to interpret the warranties as covering the situation where the insured could not reasonably have known about the defects

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".

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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 judge concluded 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.

The judge also went on to find that both warranties were qualified

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.

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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:

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"

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".

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

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. 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 out the 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).

The failure of the legs as the rig was being towed around the Cape was very probable but not inevitable

2)

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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; 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 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 the sole 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".

2)

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
3)

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).

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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 of partial 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 have expected 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".

It means that in the case of either partial or total exhaustion there is cover available from the ground up for the next claim

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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 no commercial 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 therefore accepted 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.

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

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 is not permissible): "a line so fine it almost vanishes".

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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 in the 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).

Even when one contract is superseded by another contract, the later contract can still be rectified

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.

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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 rendering Lexington 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.

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

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 the primary 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).

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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 out the 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 of Africa 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.

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

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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, once liability 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.

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

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 its knowledge 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 his alleged 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 would need 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"

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 for medical 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 whilst on 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:

It was necessary to show that there was an obligation (and not just a practice) to pay claims to the brokers in London

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. 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 the obligation 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

2)

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 the necessary prior agreement between the parties required for rectification. The judge held that the policy did reflect the terms of the parties' agreement; 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

There was nothing strikingly illogical or obviously uncommercial about the claimants deciding to purchase the sort of cover that they did
2)

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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 not to 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.

Limitation
Axa 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 loss to insurers was therefore in the natural order of things bound to occur"

The case turned on the interpretation of the House of Lords decision in Law Society v Sephton [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 contingent liability 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".

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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 liability was 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).

Member State courts must not grant anti-suit injunctions on the grounds that the proceedings have been brought in breach of an 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 of Turner v Grovit (2004) and Gasser v MISAT (2003) confirmed that that is the position even where the 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.

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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 been brought in breach of an arbitration agreement. Whilst this is not a surprising decision (given the earlier decisions in Grovit and Gasser and 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 judgment fell within the exception for arbitration in the Regulation and (2) it would be manifestly contrary to English public policy to register a judgment obtained in breach of an arbitration clause. The English company also applied for a stay on the ground that it was appealing against the Italian judgment in Italy (and that appeal was expected to take 2-3 years to be heard).

Little scope for an appeal in England based on the issue of whether the Italian court had correctly applied its own law when determining whether the Italian company was bound by the arbitration clause

Tomlinson J referred to the West Tankers decision (see above) and commented that this had undermined not only the first ground of appeal but also the second. In West Tankers, the ECJ had said that "in no case is a court of one Member State in a better position to determine whether the court of another Member State has jurisdiction". Tomlinson J said that this reflected Article 35 of the Regulation, which prevented a review of a decision by a Member State court as to the applicability of an exclusive jurisdiction agreement. The judge added "this may have implications for the court's approach to the review of a decision of the court of a member state on the applicability of an arbitration agreement". Accordingly, he saw little scope for an appeal in England based on the issue of whether the Italian court had correctly applied its own law when determining whether it had jurisdiction or whether the Italian company was bound by the arbitration clause. Whether or not an English court will recognise the Italian judgment should be addressed firstly on the assumption that the Italian court was correct in its conclusions of Italian law. If that does not dispose of the matter, the English court can then examine the substance of the conclusions of the Italian court: "If the point arises, the court can consider whether the ambit of English public policy on these matters is or is not informed by the court's conclusion as to the correctness or otherwise of the Italian court's application of Italian law". Tomlinson J concluded that (assuming he had a discretion to stay the English company's appeal against the registration order) it would be inappropriate to order a stay. Accordingly, the appeal against the registration would be heard expeditiously.

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National Navigation Co v Endesa Generacion Sa [2009] EWHC 196 (Comm)

Enforcement of foreign judgment obtained in breach of an arbitration agreement In this case, Gloster J did conclude, "with some hesitation" that to recognise judgments brought in breach of an arbitration agreement governed by English law would be contrary to UK public policy. The defendant had commenced proceedings in Spain and so Spain was "first seised" for the purposes of EC Regulation 44/2001. The claimant then commenced proceedings in England. Gloster J found that English law was the proper law to apply to the question whether an arbitration agreement had been incorporated into the relevant bill of lading. She also found that the arbitration clause in the voyage charter (rather than that in the head charter) had been incorporated into the bill of lading, but in any event, the bill of lading was subject to a London arbitration clause. The defendant had obtained judgments in Spain to the effect (broadly) that the arbitration clause had not been incorporated into the bill of lading. However, Gloster J refused to recognise these judgments for two reasons: 1) Section 32 of the Civil Jurisdiction and Judgments Act 1982 (broadly) prevents recognition of foreign judgments obtained (inter alia) in breach of an agreement to settle the dispute otherwise than by proceedings brought in that foreign country. However, section 32(4) provides that judgments which are required to be recognised under Regulation 44/2001 are not affected. Gloster J accepted that the Spanish judgments in this case were judgments within Regulation 44/2001. However, she held that that did not mean that they were prima facie required to be recognised in proceedings in another Member State, which are not themselves proceedings within the Regulation (because of the arbitration exception in Article 1(2) (d) of the Regulation). By refusing to recognise the Spanish judgments, the English court would not be stripping the Spanish courts of their power to rule on their own jurisdiction under the Regulation and, Gloster J concluded with some hesitation, the English court would not be acting "counter to the trust which the Member States accord to one another's legal systems". Even if she was wrong on the above point, Gloster J also concluded (again with some degree of hesitation) that it would be manifestly contrary to the public policy of the UK to recognise the Spanish court's judgments in relation to the non-incorporation of the arbitration agreement and the alleged waiver of any agreement. The arbitration agreement here was valid by its proper law (English law) and there is "clear statutory and conventional obligation under English law for an English court to give effect to an arbitration agreement that is valid in accordance with its proper law". (As an aside though, Gloster J held that the defendant's non-disclosure of the voyage charter before the Spanish courts would not in itself have formed the basis for any public policy considerations).

To recognise judgments brought in breach of an arbitration agreement governed by English law would be contrary to UK public policy

2)

However, the Court of Appeal has now overturned this decision in the following judgment:

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National Navigation v Endesa [2009] EWCA Civ 1397

Enforcement of foreign judgment obtained in breach of an arbitration agreement

It would not be contrary to public policy to recognise a judgment even where an English court would have decided that the parties had agreed to refer the dispute to arbitration

The Court of Appeal found as follows: 1) Although under English law the arbitration clause in question would have been held to have been validly incorporated, the Spanish court had decided (as a preliminary issue) that the clause had not been incorporated and so no enforceable arbitration agreement existed between the parties; Applying the Advocate General's opinion in West Tankers, the Court of Appeal held that a judgment on a preliminary issue in proceedings within the Regulation will be a judgment within the Regulation, even if (when looked at in isolation), the subject of that preliminary issue fell within the ambit of arbitration (arbitration being excluded from the Regulation). Moore-Bick LJ added that proceedings involving the determination of a dispute about whether or not an arbitration clause exists will fall either outside or within the Regulation depending on whether that dispute represents the principal subject matter of the proceedings or is an issue that is merely ancillary to the determination of the substantive dispute itself; There was some debate as to whether the arbitrators would be bound by the Spanish judgment. The opinion of the Court of Appeal was that if the arbitrators were applying English law, they would not be able to disregard the Spanish judgment. In any event, the English court could not disregard the Spanish judgment, since Article 33(1) of the Regulation imposes a legal duty on Member States to recognise judgments given by the courts of other Member States (subject only to the terms of the Regulation itself); and As the English court was bound to recognise the decision of the Spanish court, there was "simply no room for any argument that in some way public policy is being infringed". The respondent had sought to argue that at common law it is contrary to public policy to recognise a foreign judgment given in proceedings which, in the eyes of English law, have been pursued in contravention of an arbitration agreement. However, Moore-Bick LJ said "important though arbitration agreements undoubtedly are, I think that puts the matter too high". It would not be contrary to public policy to recognise a judgment even where an English court would have decided that the parties had agreed to refer the dispute to arbitration (although different considerations might arise if the judgment was obtained through conscious wrongdoing). Public policy considerations would arise only if the foreign judgment was inconsistent with a "fundamental principle of the legal order" of England, and that was not the case here.

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Further information
If you would like further information on any issue raised in this update please contact: Nigel Brook nigel.brook@clydeco.com Clyde & Co 51 Eastcheap London EC3M 1JP Tel: +44 (0) 20 7623 1244 Fax: +44 (0) 20 7623 5427
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