Half Year Review: Insurance Coverage Litigation H2, 2023

Half Year Review: Insurance Coverage Litigation H2, 2023

February 29, 2024, Covington Alert

This half-yearly update summarises significant insurance coverage cases in the English courts in the second half of 2023 concerning: Covid-19 Business Interruption (“BI”) insurance; insurers’ deemed knowledge; rectification and estoppel; Warranty & Indemnity insurance; proximate cause of loss in Property Insurance; the recoverability of a Solicitor’s fee as Loss under a Professional Indemnity Policy; and damage to existing property exclusion under a Construction All Risk (“CAR”) Policy.

Significant Insurance Coverage Cases in H2 2022

Covid-19 BI Cases (1 of 2):

• Various Eateries Trading Limited v Allianz Insurance Plc [2024] EWCA Civ 10

The Court of Appeal unanimously upheld the pro-policyholder judgment of the Commercial Court (which we reported on in our Half Year Review: Insurance Coverage Litigation H2, 2022)[1].

Background

This case was one of three preliminary trials concerning policies on the Marsh Resilience Form (an “off the peg” wording offered to the market by at least 11 insurers) which were heard in sequence and had one judgment handed down. While the judge granted appeals in the other two cases (Stonegate Pub Co Ltd v MS Amlin Corporate Member [2022] EWHC 2548 (Comm) and Greggs Plc v Zurich Insurance Plc [2022] EWHC 2545 (Comm)), those cases have now settled.

Various Eateries (“VE”) (which operates 10 relevant insured venues and trades as Coppa Club and Tavolino, amongst others, in England) made claims in excess of £16 million for Covid-19-related loss under its policy. The policy wording at issue in the case concerned three insuring clauses, for Notifiable Disease, Enforced Closure, and Prevention of Access (non-damage), under the Marsh Resilience wording.[2]

• Notifiable Disease coverage insured against disease identified under the Health Protection (Notification) Regulations 2010 which is discovered within the Vicinity of an Insured Location during the Period of Insurance (Covid-19 fell within this category).
• Enforced Closure coverage insured against the enforced closure of an Insured Location by any governmental authority or a competent local authority for health reasons.
• Prevention of Access (non-damage) coverage insured against business interruption loss resulting from the actions or advice of a governmental authority in the Vicinity of the Insured Locations.

VE’s policy period was 29 September 2019 to 28 September 2020 and it had a 12 month indemnity period in its policy for the relevant insuring clauses.

The insurer’s primary case was that all losses were attributable to or in connection with a single occurrence and the losses should therefore be aggregated as a Single Business Interruption Loss, namely the initial outbreak of Covid-19 in Wuhan, China, with the consequence that its liability was subject to a Limit of Liability of £2.5 million that the insurer had already paid. The Commercial Court judge held that this was too remote from VE’s losses to be regarded as a relevant single occurrence for a number of reasons:

• Geographically remote: the occurrence in China was “very distant” from the Territorial Limits of the Policy;
• Temporarily remote: the relevant losses only started to be incurred some months after the occurrence; and
• Causally remote: it depended on a very large number of intermediate events and occurrences, involving: first, the establishment of the disease in the human population in China; second, the spread of the virus to the UK; and third, the governmental and public response to the virus.

The insurer’s alternative case was that there were a limited number of Single Business Interruption Losses applicable and that the introduction of Covid-19 into England or the UK amounted to a relevant single occurrence. The Commercial Court disagreed, holding that each case of Covid-19 was an occurrence and there were multiple introductions of Covid-19.

The Commercial Court accepted that the UK Government’s decision, made on 16th March 2020, to instruct people to avoid social venues amounted to a relevant single occurrence, as did the enforced closure of restaurants from 20 March 2020. So too did the implementation from 24 September 2020 of early closing and other restrictions on restaurants. The judge did not accept that there were separate occurrences when measures were renewed, immaterially changed or relaxed. VE contended that if there was any aggregation, it should be applied separately to each insured location, but the judge did not agree.

The aggregation issue (summarised above) was the principal issue considered by the Court of Appeal.

A further principal issue was the scope of the insuring clauses for Notifiable Disease and Prevention of Access (Non-Damage). Specifically, whether each insuring clause, being subject to coverage “during the Policy Period” (29 September 2019 to 28 September 2020), meant that VE could recover losses up to and including 28 September 2020 only, such that 28 September 2020 was a cut off (as the insurer contended) or whether loss was recoverable beyond 28 September 2020 if proximately caused by a Covered Event occurring during the Policy Period (as held by the Commercial Court).

Court of Appeal Judgment

Having considered the law on aggregation and enshrined principles of remoteness under English law, the Court of Appeal agreed with the Commercial Court’s reasoning and dismissed the insurer’s appeal on its primary aggregation case. The Court commented that if the informed observer had asked the question why VE was suffering losses at any material time after 16 March 2020, the answer would have been that the Government had required all of its restaurants to close and remain closed.

On the insurer’s alternative aggregation case, the Court of Appeal also dismissed this, but in part for different reasons than the Commercial Court. The Court of Appeal considered that the first introduction of Covid-19 into England or the UK was highly likely to have occurred between 1 January and 23 January 2020 and should be considered as a single occurrence, contrary to the Commercial Court, but that the introduction into the UK was still too remote because, although geographically more proximate, the first introduction of the disease into the UK was still temporally remote from the losses. The losses also depended on the spread of the disease within the UK to the extent that the Government intervened in the way it did, which (even looking at the position as it stood in late March) was by no means certain to have happened.

The Court of Appeal also dismissed VE’s appeal that the limits for the relevant insuring clauses were applicable on a “per premises” basis. It did not agree with VE’s arguments that prevention of access is a premises-specific peril and that elements of the factual matrix supported this (as well as Corbin & King v Axa, where it was held that the limits in that case applied on a “per premises” basis[3]). The Court of Appeal agreed with the insurer and the Commercial Court that there was no justification for limits to apply on a “per premises” basis in VE’s policy wording. The Court of Appeal held that Corbin & King did not assist as the policy there was a composite policy insuring the business of multiple insureds, where each restaurant was separately owned by a separate company, which was distinct from the present case.

The Court of Appeal also rejected VE’s challenge to the Commercial Court’s reasoning that a decision to renew, change or relax a Government measure should also not count as a single occurrence, namely, the July 2020 restrictions which relaxed the first lockdown measures but after which VE continued to suffer losses throughout the summer. The effect was that VE could not claim £2.5 million for losses arising from the first lockdown in March 2020 and a further £2.5 million for losses between the July 2020 easing of restrictions and the September restrictions. Permission to Appeal was refused on this point. 

As for the further issue of the scope of the insuring clauses, the Court of Appeal agreed with the Commercial Court based on principles of interpretation of the policy, in particular the definition of the “Indemnity Period” and “Reduction in Turnover”. The Court of Appeal held that as these definitions referred to a maximum of 12 or 24 months, it followed that the losses that VE was entitled to recover could continue beyond the end of the Period of Insurance. This meant that VE could recover beyond the 28 September 2020 end date for losses resulting from the 24 September 2020 Government order, as long as those losses were proximately caused by that order. So, for example, by the date the 5 November 2020 second lockdown occurred, that would constitute an intervening event and VE would not be able to recover losses beyond 4 November 2020.

Comment

The judgment is a useful summary of the law of aggregation and remoteness and its application to Covid-19 related loss.

While some limited aspects of the judgment are not subject to appeal, the remainder are subject to appeal.

Relatedly, there are further cases dealing with similar issues working their way through the Courts. We expect further decisions on these issues, which are subject to different BI policy wording, in the first half of 2024 and beyond.

Covid-19 BI Cases (2 of 2):

• Gatwick Investment Limited & others v Liberty Mutual Insurance & others [2024] EWHC 124 (Comm) comprising:
  • Gatwick Investment Ltd t/a Crowne Plaza London Gatwick Airport and others v. Liberty Mutual Insurance Europe SE;
  • Liberty Retail Ltd. and others v. Liberty Mutual Insurance Europe SE and another;
  • Hollywood Bowl Group PLC v. Liberty Mutual Insurance Europe SE;
  • Starboard Hotels Ltd. and others v. Liberty Mutual Insurance Europe SE;
  • Bath Racecourse Co. Ltd. and others v. Liberty Mutual Insurance Europe SE and others; and
  • International Entertainment Holdings Ltd. and others v. Allianz Insurance PLC.

In another welcome pro-policyholder Covid-19 test case, the Court has found that certain prevention of access (non-damage) clauses, including those that require a “Statutory Authority” action, do respond to regulations imposed in response to a pandemic. However, the positions that furlough is deductible from BI sums payable to the policyholder (per Stonegate) and that composite policies permit multiple claims on a ‘per premises’ basis (per Corbin & King) but single insured entities operating multiple premises may not, remain unchanged by this judgment.

Background

This 160-page judgment concerns a number of preliminary issues in claims under business interruption insurance policies predominantly against Liberty Mutual Insurance Europe. In each case, the Claimants are claiming an indemnity pursuant to similar clauses which provide coverage where the use of premises is prevented or hindered as a consequence of action by a relevant authority. The Claimants claim an indemnity for loss resulting from the interruption to their businesses caused by the closure of and/or restrictions on the use of their premises in England, Wales and Scotland mandated by various regulations from March 2020 to September 2020.

The preliminary issues broadly covered the following categories: (1) trigger and causation; (2) policy limits; and (3) the question of whether receipts of “furlough” payments under the Coronavirus Job Retention Scheme or “CJRS” needed to be brought into account. In respect of Hollywood Bowl only, there were two further issues: issue (iv) as to whether the regulations made on 4 July 2020, that specifically applied to indoor sports and leisure facilities including bowling alleys, formed an additional interference separate from previous restrictions claimed by the other insured parties; and issue (v) as to the practical effect of the 4 July 2020 Regulations (the “4 July Regulations”).

On the first issue, various Claimants argued that the alleged interferences with each of their businesses arose in consequence of “action by the Police or any other Statutory Authority” which prevented or hindered use of their Premises or access to it on the basis that the issue was already decided on in prior proceedings and in any event “Statutory Authority” would ordinarily be understood by a reasonable policyholder as meaning any person, body or entity which has a lawful right or power to do something. Liberty Mutual argued that the Corbin & King decision was wrong to decide that the UK government was a relevant “Statutory Authority” because the law was made by central Government and not statute.  The Police obtain their authority from statute and the words “or any other Statutory Authority”, Liberty Mutual argued, would embrace a statutory authority of substantially the same character as the police (such as the fire brigade). Liberty Mutual also argued that concurrent causation did not apply to prevention of access clauses, but ultimately accepted these arguments were not available at first instance and sought permission to appeal.

On the second issue, the Claimants were each in different positions based on their policy wording but all were affected by multiple government orders to close, and each of their total losses exceeded the limit of indemnity. Specifically:

• The Gatwick claimants were separate corporate entities each insured under their own policy;
• Fuller and Hollywood Bowl were single insured entities operating multiple insured premises; and
• Starboard Hotel, Liberty Retail and Arena Group cases were also separate corporate entities but were insured under a single composite policy.

The Gatwick Claimants argued that their £1 million limit should operate as a sub-limit (rather than the Limit of Indemnity). As there were five relevant restrictions, Gatwick argued that each would qualify as a separate interference, attracting a £1 million limit for each of the premises (even though the ‘per premises’ argument did not have any real significance to Gatwick as each had one premise, though this was significant to other claimants). Hollywood Bowl and Fullers argued that the limit applied ‘per premises’, ‘per government action’. Starboard Hotel, Liberty Retail and Arena Group cases argued the limit should apply not only ‘per premises’, ‘per government action’ but also ‘per entity’.

Liberty Mutual argued that the limit was an aggregate limit applicable to all claims and the Claimants could not recover more than the limit under the Prevention of Access Non-Damage coverage, irrespective of how many separate restrictions there were.

On the third issue, Liberty Retail and Bath Racecourse Claimants argued that the Stonegate judgment, on the question of the treatment of furlough payment in the BI calculation, was wrong and should not be followed.

On the fourth and fifth issue, Hollywood Bowl argued that the 4 July Regulations introduced new restrictions to its business because its business was one of those listed in Schedule 2 (alongside indoor play areas, indoor gyms etc.) as being required to cease to carry on by the 4 July Regulations. The arguments made in Various Eateries above in respect of a Part 1, Schedule 2 business (a restaurant and other similar businesses) were distinguished. This issue was relevant because each new restriction qualified as a separate interruption or interference for the purposes of making claims under the policies and attracted a new sub-limit and indemnity period. Liberty Mutual contended that there was no material change: Hollywood Bowl’s premises simply remained closed, as they had done since March 2020.

Judgment

On the first issue, the Court was not persuaded that the Corbin & King judgment, where the meaning of a “Statutory Authority” was held to include the UK government, was wrong. The Court found that “Statutory Authority” was “obviously wide” and it was sufficient that the person or body was exercising authority which was derived from statute. The Court also held that the Supreme Court ruling on concurrent causes of loss applied to prevention of access clauses in the same way they applied to disease clauses and therefore the prevention of access clauses respond to Covid-19 losses arising from government measures. Permission to appeal was granted.

On the second issue, the limit of indemnity would not apply per premises where it is owned/operated by a single insured (i.e. Fuller and Hollywood Bowl); the Court held that a reasonable policyholder reader would not draw any distinction between “Limit” and “Limit of Indemnity”. However, the Court found that the limit did apply separately to multiple insureds under a composite policy (i.e. Starboard Hotel, Liberty Retail and Arena Group). The Court upheld the Corbin & King judgment in this regard which involved composite policies.

On the third issue, the Court upheld the Stonegate judgment that furlough was to be taken into account under a “savings” clause, to the benefit of insurers.

On the fourth and fifth issues, the Court held that the 4 July Restrictions could not sensibly be said to constitute new restrictions as nothing changed for Hollywood Bowl in July and it remained shut.

Comment

Policyholders who might have been refused Covid-19-related claims in the past and have similar wordings to those of the Claimants in this test case may now be able to recover from their insurers. Permission to appeal was granted on some issues relating to causation and furlough. 

Insurers’ Deemed Knowledge, Rectification and Estoppel

• George on High Ltd & Anor v Alan Boswell Insurance Brokers Ltd & Anor [2023] EWHC 1963 (Comm)

An insurer was held liable to indemnify a company that was not expressly named on an insurance policy schedule for losses caused by a fire at a hotel premises. The insurer’s – and its third-party claims handlers’ – conduct and knowledge when handling historic claims was crucial when determining the correct construction of the insurance policy, as well as alternative arguments concerning rectification and estoppel.

Background

This case concerns a 16^th century hotel called The George, located in Rye, Sussex. The George was largely destroyed by a fire in 2019. The freehold to the hotel was owned by the first Claimant, George on High Ltd (“GOH”). The business of the hotel and restaurant was operated by the second Claimant, George on Rye Ltd (“GOR”). GOH and GOR (collectively, the “Claimants”) were both ultimately under the common ownership of Mr and Mrs Clarke.

The first Defendant, insurance broker Alan Boswell Insurance Brokers Ltd, arranged insurance coverage for the Claimants. The second Defendant, New India Assurance Company Ltd (“NIAC”), was the insurer of the insurance policy arranged by the broker. The relevant insurance policy (the “Policy”) named the “Insured” as “The George on High Ltd t/a The George in Rye”.

The Claimants sought indemnification from NIAC for losses caused by the fire. NIAC accepted liability for GOH’s claims but declined to make any payment to GOR for the significant business interruption and material damage losses it suffered. NIAC said that GOR was not insured under the Policy because “George on High Ltd t/a The George in Rye” did not cover GOR.

The Claimants claimed against the broker for losses caused by the non-payment by NIAC, on the basis that the broker had negligently failed to organise insurance for GOR. The broker argued that NIAC should have accepted liability in full. NIAC was therefore joined to the proceedings as a defendant. The broker accepted that it was liable to the Claimants to the extent that NIAC was not found to be liable. The dispute before the Court was to determine which of the Defendants was liable to the Claimants for the claims.

An important element of the factual background concerned the way in which NIAC and its third-party claims handlers, Garwyn, had handled a number of historic claims involving GOR. The Claimants and the broker argued that GOR should be treated as insured under the Policy, as NIAC had been notified by Garwyn of GOR’s involvement in these historic claims. NIAC denied any knowledge of GOR’s involvement in the historic claims and argued that Garwyn’s knowledge should not be imputed to NIAC. In the Court’s judgment, each historic claim provided some evidence to show that NIAC and Garwyn had knowledge that GOR was the operator of the business and employed the staff. Neither NIAC nor Garwyn had denied liability under any insurance policy in relation to any historic claim on the basis that GOR was not insured.

Against that background, the Court was asked to consider the extent of NIAC’s liability. The Claimants and the broker advanced several arguments including the correct construction of the Policy, rectification, estoppel, and agency.

Judgment

The Court found against NIAC in relation to each of the arguments below:

• Construction: Pursuant to s5(2)(a) of the Insurance Act 2015, information may be something an insurer ought to know if it is known to an agent. The Court held that NIAC knew that GOR operated the business at the time the Policy was made, and that GOR employed the staff working in the business, as this information was known by Garwyn from their handling of the historic claims and from a meeting with Mr Clarke. A reasonable person with all of the necessary background knowledge would construe the meaning of the “Insured” as “George on High Limited and the business operated by GOR t/a The George in Rye”. On the objective construction of the meaning of the Policy, GOR was insured, and NIAC was liable to indemnify GOR.
• Rectification: All of the requirements for rectification – summarised in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71 – were satisfied. If the judge’s conclusion about the construction of the Policy was incorrect, and the Policy’s actual meaning was that the business operated by GOR was not insured, then the Policy did not reflect the parties’ common intention to insure the business. Accordingly, the judge would have ordered that the Policy be rectified to say, “George on High Limited and the business operated by GOR t/a The George in Rye”, so that NIAC should indemnify GOR under the Policy.
• Estoppel: The five requirements for estoppel by convention, most recently summarised in HMRC v Benchdollar Limited & Ors [2009] EWHC 1310 (Ch), were satisfied. NIAC had accepted and made payment on claims over multiple years relating to the hotel business, which explicitly identified GOR as the operator of the business. During a meeting, Mr Clarke had explained to Garwyn that GOR operated the business. NIAC had accepted, and GOR had paid, insurance premiums over multiple years on that basis. These actions made it unconscionable for NIAC to deny liability to GOR in relation to its claims for the 2019 fire. Under the doctrine of estoppel by convention, NIAC was prevented from denying liability to GOR under the Policy.
• Agency: Since GOR succeeded on all three primary arguments, it was unnecessary for the judge to consider the alternative agency argument (that GOH was acting as agent for GOR in relation to the Policy and therefore NIAC should indemnify GOR under the Policy).

The Court held that NIAC was liable under the Policy to indemnify GOR for its losses for business interruption, the value of the stock and contents. In addition, GOR had paid rent to GOH for the use of the premises. The Court held that no rent was payable by GOR to GOH during the period the hotel was closed. The broker was liable to GOH for the uninsured loss of rental income.

Comment

This judgment increases the burden on underwriters to ensure relevant claims information is reflected in the underwriting process. It reminds insurers that the knowledge of third-party claims handlers acting as their agents may well be imputed to insurers for the purposes of the construction and/or rectification of a policy. This is consistent with the decision in World Challenge Expeditions Ltd v Zurich Insurance Company Plc [2013] EWHC 1696 (Comm) (reported in our Half Year Review: Insurance Coverage Litigation, H1 2023).

Warranty & Indemnity Insurance

• Project Angel Bidco Limited (in administration) v Axis Managing Agency Limited & Ors (2023) EWHC 2649.

This judgment is the second to consider a coverage dispute under a Warranty & Indemnity (“W&I”) Insurance Policy in the Commercial Court.[4]  The Court upheld the insurers’ construction of an anti-bribery and corruption exclusion (the “ABC Exclusion”) in a Buyer-Side W&I Policy. This is despite the Cover Spreadsheet appendix to the W&I Policy identifying the warranties that were covered, on the basis that the Cover Spreadsheet remained subject to the wider terms of the W&I Policy, including the exclusions. The Court’s comments on how the principles of interpretation of contracts apply to W&I Policies in this case will be valuable as W&I Policies continue to form an integral part of M&A transactions. 

Background

Project Angel Bidco Limited (“the Insured”) acquired the entire issued share capital of Knowsley Contractors Limited (trading as King Construction) (“the Target”) under a share purchase agreement (“the SPA”). The Target provided engineering and construction services to Liverpool City Council (“LCC”). After the transaction was completed, the Target became the subject of allegations and police investigations relating to its compliance with anti-corruption and bribery legislation (“ABC Legislation”). As a result of the allegations, the Target lost the key client, LCC, which the Insured alleged caused the Target to be placed into liquidation and the Insured to enter into administration.

The SPA contained warranties related to the Target’s compliance with ABC Legislation (“ABC Warranties”). The Insured alleged that the sellers were in breach of the ABC Warranties and claimed for losses under the W&I Policy.

The insurers denied coverage on the basis of the ABC Exclusion, which provides that: "The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…any ABC Liability". “ABC Liability” being defined as: “any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.

The Insured argued that the definition of “ABC Liability” contained an obvious error and should be corrected, as a matter of construction, to read “any liability for actual or alleged non-compliance… in respect of Anti-Bribery and Anti-Corruption Laws” (emphasis added). Under this construction, the ABC Exclusion would only apply to liability for actual or alleged non-compliance of ABC Legislation. In this case, no liability arose in respect of the allegations made against the Target – there was only an alleged non-compliance with ABC Legislation, as the police investigation was ongoing at the time; therefore, under this construction the ABC Exclusion would not apply. The Insured also pointed to a Cover Spreadsheet appendix in the W&I Policy (which listed the SPA warranties that were covered) and which included a reference to the ABC Warranties as being covered. In doing so, it contended that the insurer’s arguments on the wider interpretation of the Exclusion would result in a conflict with the Cover Spreadsheet and that the ABC Exclusion should be read in the manner it contends to avoid such conflict.

However, the insurers posited that there was no obvious error in the “ABC Liability” definition, as it reflected the parties’ agreement that the ABC Exclusion should cover three different situations which are all excluded: (1) a liability; (2) actual non-compliance; and (3) alleged non-compliance.

Judgment

The Court held that the W&I Policy should be construed by determining what a reasonable person would have understood the parties to have meant. The reasonable person in this case was taken to be an “ordinary policyholder who is taken to have read through the policy conscientiously in order to understand what cover they were getting”.

The Court held that the reasonable policyholder would have read the word “or” as having “the same meaning throughout the definition” such that the definition refers to the three different situations which are all excluded. It also mirrored the ABC Warranties and the insuring clause. Therefore, the exclusion clause applied, and the Insured could not claim for losses arising from the Target’s actual or alleged non-compliance with ABC Legislation.

The Court found that an ordinary policyholder would consider the ABC Warranty to have been excluded, for example, noting that the appendix stated that: “Notwithstanding that a particular Insured Obligation is marked as "Covered" or "Partially Covered", certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to [the exclusions] of the Policy".

Comment

This decision highlights the challenges presented by an argument that there was a mistake in the plain language of a W&I policy. This decision also highlights the importance of considering W&I policies as a whole and serves as a reminder of the importance of reviewing W&I policy wordings carefully before inception.

Proximate Cause of Loss in Property Insurance

• The University of Exeter v Allianz Insurance Plc [2023] EWCA Civ 1484

The Court of Appeal unanimously dismissed the University of Exeter’s appeal against a High Court judgment, which held that property damage and business interruption losses caused by the controlled detonation of an unexploded World War II bomb were excluded under the applicable insurance policy’s War Exclusion clause. This is an important reminder of the principles that the Court will apply in cases where there are two concurrent proximate causes of a loss.

Background

In 1942, a German bomb was dropped in Exeter. It lay unexploded until 2021, when it was unearthed during construction works adjacent to the University of Exeter’s campus. Nearby student halls of residence fell within the safety cordon and were evacuated. Bomb disposal experts conducted a controlled detonation of the bomb, during which the halls of residence were damaged.

Allianz (the “Insurer”) issued a policy of insurance (the “Policy”) to the University of Exeter (the “Policyholder”). The Policyholder notified a claim under the Policy in respect of physical damage to the halls of residence and business interruption in connection with the temporary re-housing of students.

The Insurer declined the Policyholder’s claim on the basis that any loss or damage suffered by the Policyholder was “occasioned by war” and therefore was excluded by the Policy’s War Exclusion clause.

The High Court Judgment

The High Court’s decision is reported in our Half Year Review, H1 2023.

The High Court judge held that the proximate cause of the loss was the dropping of the bomb during World War II. As the dropping of the bomb was an act of war, the loss suffered by the Policyholder was excluded from cover. If he was wrong, and the dropping of the bomb was not the proximate cause of the damage, then alternatively it was a proximate cause. By operation of the rule in Wayne Tank & Pump Co. Ltd v Employers Liability Incorporation Ltd [1974] QB 57 (“Wayne Tank”) (i.e., where there are two proximate causes of loss, one of which is insured against and the other is excluded by the policy, the exclusion will generally prevail), the War Exclusion applied. The Insurer was therefore entitled to decline the Policyholder’s claim. The Policyholder appealed the High Court’s decision.

The Court of Appeal Judgment

The Court of Appeal (the “Court”) unanimously dismissed the Policyholder’s appeal.

The Court agreed with the High Court judge’s alternative analysis that there were two concurrent causes of the loss and damage: (1) the dropping of the bomb in 1942; and (2) the controlled detonation of the bomb in 2021.

It was the combination of these two causes that made the loss inevitable; neither would have caused the loss without the other. The bomb contained the explosive that caused the damage; its potency did not reduce over time. However, the dropping of the bomb alone did not lead “inexorably” to the damage, as it had not exploded on impact, as it was designed to do. The discovery of the unexploded bomb inevitably led to a number of individual decisions about how best to neutralise it, ultimately resulting in the controlled detonation. From a causation perspective, that network of individual decisions cannot have any relevance to causation unless something was done which broke the chain of causation, such as an act of negligence, which was not the case here.

The Court concluded that the two causes were of approximately equal efficacy. The former cause was excluded under the Policy; the latter was not. The rule in Wayne Tank provides that the exclusion will generally prevail in these circumstances, and so the Policyholder’s claim failed.

The Court also rejected the Policyholder’s argument that the decision to detonate the bomb in 2021 was the “agent of change”, altering a status quo that existed for almost 80 years while the unexploded bomb remained in the ground. The Court held that, as a matter of generality, the “agency of change” comment – a phrase derived from FCA v Arch Insurance (UK) Limited [2021] UKSC 1 – should not be “elevated into a principle or slavishly followed as a freestanding causation test”. While it may be a useful way to look at causation, it is important to first identify the status quo ante. In this case, the dropping of the bomb in 1942 was the first change to the status quo, as it introduced a high explosive into the ground, which did not dissipate over the years.

Comment

The Court described this as a “classic case” where there were two concurrent causes of the loss and damage. While each case will turn on its own facts, the Court’s unanimous judgment provides helpful guidance on the nuanced principles on proximate causation in the context of cover for property damage and business interruption losses, especially where two concurrent causes exist.

Recoverability of a Solicitor’s Fee as “Loss” under a Professional Indemnity Policy

• Royal and Sun Alliance Insurance Ltd & Ors v Tughans [2023] EWCA Civ 999

This pro-policyholder case offers helpful guidance on whether and when a fee earned by a solicitor, which is subject to a damages claim, counts as a “loss” that is recoverable under a professional indemnity insurance policy. The Court of Appeal dismissed the appeal of Royal and Sun Alliance Insurance Ltd & Others (the “Insurers”) against the Commercial Court’s decision which had held that the Insurers did have to indemnify Tughans law firm for a loss of fees, under their professional indemnity insurance policy (the “PI Policy”).

Background

Brown Rudnick LLP (a law firm) engaged Ian Coulter (then managing partner of Tughans) to perform professional services relating to the sale of loans.

When a buyer was found for the loan book in 2014, Brown Rudnick sent them an engagement letter which entitled Brown Rudnick to a £15 million success fee. It later agreed to share that fee equally with Tughans (the “Tughans Fee”) in a separate letter of engagement (between Brown Rudnick and Tughans) on the same terms.

Shortly after completion of the sale, the £7.5M Tughans Fee, plus VAT (£9M total) was transferred into a bank account belonging to Tughans. Until this point, none of the other partners at Tughans knew about Coulter’s involvement in the sale. Coulter then falsely claimed to the Tughans partners that he had only generated a £1.5M fee for his work and transferred most of the remaining money into an account belonging to a company that he owned. He later revealed the truth and transferred the money back to Tughans.

Tughans notified the Insurers of its involvement in the sale, after which Brown Rudnick commenced civil proceedings against Tughans for, amongst other things: misrepresentation; negligence; contractual breaches; and a breach of fiduciary duty.

The Insurers refused coverage under the PI Policy, leading to arbitral proceedings between the Insurers and Tughans, in which the arbitrator found in favour of Tughans. The Insurers were appealing this finding on a point of law (initially to the Commercial Court, where they lost).

The Insurers argued that if Brown Rudnick could successfully establish Tughans’ liability at trial, Tughans would never have been entitled to the Tughans Fee and so would suffer no loss in having to return it to Brown Rudnick, and therefore: (1) any requirement to grant Tughans coverage for the Tughans Fee would violate the principle of indemnity; and (2) that it was not the purpose of the PI Policy to indemnify solicitors for profit costs to which they were never entitled.

Judgment

The Court of Appeal concurred with the Commercial Court’s finding that any damages award that included the Tughans Fee would constitute a “loss” that would be recoverable under their PI Policy. It also held that the indemnity principle would not assist the Insurers since:

1. Loss: Any solicitor who has earned a fee (like Coulter had, by performing legal services) does suffer a loss if deprived of that fee by a damages claim, as their services will remain unremunerated. This loss continued since the contract of engagement under which Tughans became entitled to the Tughans Fee had not been rescinded by Brown Rudnick;
2. Public Policy: The application of the indemnity principle here would be contrary to the policy motivations of compulsory professional indemnity insurance, as articulated in Swain v The Law Society (i.e. to protect the public and fellow partners/employees from the negligent mistakes of solicitors). The Court gave the following example: if the Tughans partnership and partners were all insolvent, a client would have no way of seeking to recover damages that included solicitors’ fees; and
3. Composite Policies: The indemnity principle would also be contrary to the protections intended by “composite” policies like the PI Policy (where claims are made under the policy by individual insureds). The Court gave an example where, if coverage were denied, innocent individual partners at Tughans would be liable for the entire partnerships’ liability to Brown Rudnick, potentially without any opportunity to recoup this from the other partners. This would be disproportionate to any individual benefit a partner may have derived from the apportioned Tughans Fee.

The Court also emphasised that the insuring clause here was “very wide”, in that it provided cover for “any civil liability”, without differentiating between liability for damages in respect of fees and other forms of liability.

Since this was a damages claim, the Court did not have to rule on whether the indemnity principle precludes coverage for restitution claims for solicitors’ fees – however, it noted that the indemnity principle did not necessarily preclude coverage in such circumstances, subject to what the terms of the relevant policy say.

Comment

The Court of Appeal’s judgment clarifies that damages claims which include solicitors’ fees that have been earned and paid under a contract which has not been avoided, are recoverable losses under PI policies (subject always to the particular wording of the policy).

Damage to Existing Property Exclusion under a CAR Policy

• Technip Saudi Arabia Limited v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm)

This judgment is notable for the Court’s interpretation of the Damage to Existing Property exclusion in an offshore construction all risks insurance policy. The judgment also provides some important insights into the Court's interpretation of insurance claims under settlement agreements.

Background

The Claimant (“Technip”), a contractor, was hired by an unincorporated joint venture, Al-Khafji Joint Operation (“KJO”), to undertake improvement works in an oil and gas field, the Khafji Field, offshore Saudi Arabia, for the Khafji Crude Related Offshore Projects (the “KCROP Works”).

Technip chartered a tug from Maridive & Oil Services SAE (“Maridive”) to use during the works. On 16 August 2015, the tug struck an unmanned platform located in the Khafji Field, causing significant damage. (The incident was referred to as an “allision” – involving a moving vessel and a stationary object – rather than a “collision”.) The platform was not part of the KCROP Works or of the project itself.

In 2016, Technip claimed an indemnity for its liability for the costs of repairing the platform plus additional costs, for a total of USD 30,038,265 and EUR 458,052, from the Defendant insurer (“Medgulf”) under an offshore construction all risks insurance policy written on an amended WELCAR 2001 Offshore Construction Project Policy wording (the “Policy”).

Medgulf declined to cover Technip’s claim, relying on an Existing Property Endorsement exclusion incorporated in Section II of the Policy (the “Existing Property Endorsement”). The first limb of the Existing Property Endorsement excluded coverage from any claim for damage to any property which the Principal Assured owned and which was not part of the Policy (referred to in the judgment as the “limb (1)” exclusion). Crucially, both Technip and KJO were included in the definition of “Principal Assured”. 

In 2019, Technip and KJO entered into a settlement agreement (the “Settlement Agreement”), pursuant to which Technip paid KJO USD 25,000,000 for the damage caused to the platform, without Technip seeking Medgulf’s consent.

Medgulf declined to indemnify Technip, so Technip commenced English Court proceedings, during which Medgulf advanced three principal arguments in its defence:

• First, Technip was not liable to KJO for the consequences of the allision;
• Second, as Technip did not obtain Medgulf’s consent to enter into the Settlement Agreement, Medgulf was not liable to indemnify Technip for the sums payable to KJO under it; and
• Third, cover was excluded by the limb (1) exclusion of the Existing Property Endorsement. Medgulf also advanced arguments based on other exclusions in the Policy, which did not succeed.

Judgment

The Court dismissed Technip’s claim because limb (1) of the exclusion contained in the Existing Property Endorsement applied. The Court rejected Medgulf’s arguments on the other two grounds listed above and, had the limb (1) exclusion not applied, Technip’s claim would have succeeded in the amount of USD 10,000,000.

A. Technip’s Liability to KJO

The parties agreed that the allision had been caused by the negligence of Maridive’s crew. Medgulf argued that, under the strict terms of the KCROP Works contract, Maridive was not a subcontractor of Technip and Technip did not assume responsibility for Maridive’s negligence. Also, the KCROP Works contract did not create a freestanding basis of liability for Technip, and there was no other contractual term providing for Technip’s liability for reasons of Maridive’s negligence. The damaged platform was not near the KCROP Works site and the allision did not occur while carrying out the KCROP Works.

The Court rejected Medgulf’s arguments, concluding that KJO would have wanted the most protection on the structures in and around the project. The KCROP Works contract was widely drafted specifically for this purpose, which was at odds with Medgulf’s narrow construction of the contract.

B. Consent to Settlement Agreement

The definition of Damages in the Policy provided that: “Damages shall mean compensatory damages […] entered into with [Medgulf’s] consent […]”. Medgulf argued that as Technip had not sought its consent to the Settlement Agreement, the sums payable under it were not “Damages” that Technip could claim under the Policy. Technip disputed this. Technip also argued that since Medgulf had instructed it to act as a “prudent uninsured” before the Settlement Agreement was entered into, the consent requirement was not applicable.

The Court concluded that the sums paid under the Settlement Agreement could constitute “compensatory damages” within the ordinary meaning of that term. They were sums to be paid as compensation for the damage caused to KJO’s platform, for which Technip was contractually responsible. There is no reason why “compensatory damages” must be sums awarded by a court or tribunal.

C. Existing Property Endorsement Exclusion

Medgulf argued that the damaged platform was property owned by a Principal Assured, KJO, so it was excluded by limb (1) of the Existing Property Endorsement exclusion. Technip argued that the exclusion denied coverage for a policyholder’s claim of damages to its own property, but did not apply to damage caused by one insured party to another Principal Assured’s property. Technip proposed that the correct interpretation was that only the property of the Principal Assured making the claim was excluded. Accordingly, the exclusion did not apply to this claim as the platform was the property of KJO, not Technip.

The Court agreed with Medgulf that the reason for the exclusion is to identify specific categories of property that are excluded from cover, save to the extent that cover is bought back according to the Policy’s procedure, which allows the insurer to assess and price risk accordingly. In the Court’s view, Technip’s argument made no commercial sense. The Existing Property Endorsement was widely drafted to include all property owned by all insureds. The Court concluded that a reasonable person with the necessary background knowledge would see that the exclusion applied to any Principal Assured and not just Technip.

Consequently, liability under the Policy was excluded, and Technip's claim failed. Importantly, however, the Court granted Technip permission to appeal on this point, and the appeal is currently outstanding.

Comment

Although subject to an appeal, the outcome of this case is notable for policyholders in composite policies where the limits of ownership of property by other assured parties is unknown or encompasses a large number of properties.

The judgment also includes obiter (non-binding) comments made by Mr Justice Jacobs on the role of settlement agreements with third parties in policy claims, that will be of interest to policyholders:

• If an insurer had made it clear to an insured that there could be no cover under a policy and therefore instructed it to act as a “prudent uninsured”, it would be surprising if the insurer could then successfully defend an insurance claim on the basis of a lack of consent to a settlement. Such behaviour could amount to a waiver of the insurer’s consent rights with regards to settlement; and
• Regardless of whether the insurer consented to the policyholder’s settlement, a policy will likely cover a settlement amount that is proved to be within the policyholder’s legal liability to a third party. The settlement amount being reasonable will not suffice to provide cover and the policyholder has to prove that the amounts that comprise the settlement are within its legal liability for that specific claim.