Half Year Review: Insurance Coverage Litigation, H1 2024

This half-yearly update summarises significant insurance coverage cases in the English courts in the first half of 2024 concerning: the enforcement of exclusive jurisdiction clauses; Covid-19 Business Interruption (“BI”) insurance; the damage to existing property exclusion under a construction all risks policy; guidance on provisions in the 2015 Insurance Act; the application of a dishonesty exclusion clause and the aggregation of claims in a solicitors’ professional indemnity insurance policy; a finely balanced case involving an alleged drafting mistake in a warranty and indemnity insurance policy; and a favourable policyholder decision on insured recoveries in excess of loss insurance.

Russia’s invasion of Ukraine in February 2022 resulted in hundreds of aircraft and related engines and parts being left stranded in Russia and Ukraine. This has sparked a flurry of litigation brought by aircraft owners and lessors against insurers.

In two separate sets of aviation claims commenced in the English Commercial Court, the Defendants challenged the English court’s jurisdiction on the basis that the relevant policies contain exclusive jurisdiction clauses (“EJCs”) in favour of the Russian and Ukrainian courts. Mr Justice Henshaw – the Commercial Court judge hearing both cases – considered whether there were strong reasons not to give effect to the ECJs and refuse to stay the English court proceedings. Henshaw J reached contrasting outcomes in the two judgments, providing guidance on the circumstances in which the English courts will – and will not – give effect to ECJs.

Zephyrus Capital Aviation Partners 1D Ltd & Ors v Fidelis Underwriting Ltd & Ors (Re Russian Aircraft Operator Policy Claims (Re Russian Aircraft Operator Policy Claims (Jurisdiction Applications)) [2024] EWHC 734 (Comm)

The Commercial Court dismissed jurisdictional challenges brought by the Defendant reinsurers relying on EJCs in favour of the Russian courts.

Background

The Claimants are parties with an interest in aircraft and/or aircraft engines that were leased to Russian airlines under leases governed by English, California or New York law (the “Leases”). As required under the Leases, the Russian airlines insured the aircraft hull against all risks, including war risks, and did so with Russian insurance companies. The Russian insurance companies reinsured the vast majority of their risk with various London and international market reinsurers, including the Defendants and Russian reinsurers.

Following Russia’s invasion of Ukraine in February 2022, the Claimants issued default and termination notices under the Leases. The Russian airlines failed to return the aircraft to the Claimants, and they remain in Russia. The Claimants commenced English court proceedings against the Defendants in respect of the loss of the aircraft, under the all risks cover and/or the war risks cover. This case is one example of market-wide litigation in various jurisdictions which concerns, after settlements, 208 aircraft and 31 engines, for which owners and lessors are claiming around $9.7 billion.

The Defendants challenged the jurisdiction of the English courts, relying upon Russian governing law and Russian EJCs contained in certain reinsurance policies. For the present jurisdictional challenge applications, it was common ground between the parties that: (a) there were no formal restrictions on the Claimants bringing their claims in Russia; and (b) the Russian EJCs should be enforced, unless the Claimants could satisfy the burden of proving that “strong reasons” exist for not doing so, which was the central issue in the applications.

Judgment

The English courts will grant a stay in order to give effect to an EJC, unless there are strong policy reasons not to do so. The test is set out in the leading case Donohue v Armco Inc [2001] UKHL 64, [2002] 1 All ER 749.

Henshaw J concluded that, having considered all of the circumstances – including comity and the general importance of giving effect to EJCs – the Claimants had successfully demonstrated that there were strong reasons to refuse a stay of the English court proceedings.

The main reason for reaching this conclusion was that the Claimants are very unlikely to obtain a fair trial in Russia, which in itself is a strong reason to decline a stay. The key considerations were:

1. Informal influence and pressure by the Russian state: The Claimant’s expert evidence showed that Russian judges relying on war risks perils clauses in the relevant policies (which insure against, for example, war, invasion, or hostilities) would be subject to informal influence and pressure from the Russian state. The evidence suggested that Russian judges would not be prepared to issue a judgment indicating that Russia has declared war, and lawyers who argued in this vein in a Russian court could be subject to criminal and administrative penalties.

2. The Russian state had a direct interest in the outcome of the litigation: The civil aviation sector in Russia is of strategic importance to the Russian state, and the Russian authorities themselves could be exposed to liability were it held that they took or wrongly retained the Claimants’ aircraft. Further, Russian law provides for the possibility of subrogated claims against the Russian state in the event that the claims against the Defendant reinsurers were successful, which Henshaw J determined would likely not be dealt with fairly in Russia.

3. Several Claimants are from “Unfriendly Foreign States” (“UFS”): Several of the Claimants are from the UK and the EU, which the Russian state has designated as UFS. The Russian courts have historically treated UFS status as a reason, or sometimes the only reason, for making a decision adverse to a party. Henshaw J considered this to be further evidence that the Claimants would be unlikely to obtain a fair trial in Russia.

In addition, the following factors added further support to the view that strong reasons existed to refuse a stay: the inevitability of increased multiplicity of proceedings and far greater risk of inconsistent findings on fundamental issues were these claims to proceed in Russia; and an element of risk of personal attacks on individuals who would likely attend trial.

Comment

This decision is a rare example of claimants successfully arguing that there are “strong reasons” not to apply an EJC. Crucially, Henshaw J’s reasoning in this judgment turned on specific expert evidence suggesting that the Claimants were unlikely to obtain a fair trial in Russia.

We do not anticipate that this judgment will alter the general rule that EJCs will bind the parties who enter into them. The bar for proving “strong reasons” remains high, as demonstrated by the subsequent judgment handed down by Henshaw J in Aercap Ireland v PJSC Insurance Company Universalna & Ors [2024] EWHC 1365 (Comm) (covered below).

EJCs Case 2: Commercial Court Upholds EJC in Favour of Ukrainian Courts

AerCap Ireland Capital Designated Activity Company & Ors v PJSC Insurance Company Universalna & Ors (Re Ukrainian Aircraft Operator Policy Claims (Jurisdiction Applications)) [2024] EWHC 1365 (Comm)

The Commercial Court found for the Defendant reinsurers that EJCs in favour of the Ukrainian courts were binding on the Claimant owners and lessors.

Background

The Claimants in this case were parties with an interest in aircraft and/or aircraft engines that were leased to Ukrainian airlines and have been stranded in Ukraine following Russia’s invasion of Ukraine in February 2022. The Defendants were a group of reinsurers who reinsured a substantial amount of the risk under the Claimants’ policies containing all risk and war risk coverage.

The Defendants challenged the jurisdiction of the Commercial Court on the basis that all of the relevant insurance policies contained EJCs in favour of the Courts of Ukraine, noting the usual rule that the Court will grant a stay where an EJC applies, unless there are “strong reasons” not to do so. The Claimants contested the Defendants’ applications to set aside their claims on three main grounds:

1. Not binding: The EJCs were not binding on the Claimants and/or applicable to the claims which they advance;

2. Unenforceable: The EJCs were unenforceable because they failed to provide for a specific Ukrainian Court; and

3. Strong reasons not to enforce: Even if the EJCs were binding and enforceable, the on-going conflict provided strong reasons not to enforce the EJCs and hear the claims in England.

Judgment

Henshaw J granted the Defendants’ applications to stay the English court proceedings in favour of the Ukrainian courts. Addressing the Claimants’ arguments in turn:

1. The ECJs were binding and effective: Where there is a dispute between the parties about whether there is a valid and binding EJC; the party relying on the existence of the clause bears the burden of proof. The Defendants produced detailed expert reports on Ukrainian law and procedure, which guided Henshaw J in his decision. Based on these expert reports, Henshaw J determined that the requirements in Ukrainian law for jurisdiction clauses had been satisfied by the insurance policies, and the EJCs were binding and effective.

2. The EJCs were enforceable: Henshaw J found that the relevant provision of Ukrainian international law dealing with jurisdiction of cases, “with a foreign element”, does not require an EJC to identify a specific Ukrainian Court. Several Ukrainian judgments have affirmed the enforceability of EJCs of this kind.

3. No strong reasons to hear the claims in England: Henshaw J considered the impact of ongoing Russian strikes and air raids on the ability of the Ukrainian Courts to progress the case. He concluded that Russian activity towards Ukraine was not likely to result in substantial delays, or other issues in litigating these claims in the Ukrainian Courts.

Comment

This decision illustrates why policyholders may wish to exercise caution when entering into EJCs, especially if those clauses are in favour of courts in high-risk jurisdictions.

Bellini v Brit and Others [2024] EWCA 435

The Court of Appeal has upheld the first instance High Court decision that the BI disease clause in this case, which required physical loss or damage, did not cover Covid-19 losses in the absence of such physical loss or damage. The Court of Appeal’s judgment is a reminder of the test for what is required for a court to re-write a provision in an insurance policy where there has been a mistake. We reported on the first instance judgment in our Half Year Review of Insurance Coverage Litigation H1, 2023 available here; we summarise the background and High Court judgment before considering the Court of Appeal’s judgment below.

Background

The relevant insuring clause, which was an extension to the main cover, indemnified the policyholder for “interruption of or interference with the business caused by damage, as defined in clause 8.1 [which was the main BI insuring clause], arising from… any human infectious or human contagious disease (excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS related condition), an outbreak of which the local authority has stipulated shall be notified to them, manifested by any person whilst in the premises or within a twenty five (25) mile radius of it”. Damage was defined elsewhere in the policy as “physical loss, physical damage, physical destruction” and, on a plain reading of the policy, applied to both the main insuring clauses and extensions to cover. The preliminary issue considered by the High Court was whether, on a true construction of this insuring clause, there can be cover in the absence of damage as defined in the Policy.

The policyholder (a restaurant) argued that the reasonable intention of the parties when using the language “caused by damage, as defined in clause 8.1” in the disease extension was to make reference to the contractual machinery in clause 8.1 (the main BI insuring clause) for the standard cover as a whole, and not specifically limiting the extension to physical damage. The policyholder drew on the fact that clause 8.1 was not concerned with defining the word damage, but was more widely providing the machinery for the standard type of business interruption cover, including the method of calculating the amount of cover. The policyholder argued that when the disease insuring clause referred back to clause 8.1; it referred back to damage in its entirety and not to whether the damage was physical in nature. To hold otherwise, the policyholder argued, would be to render the disease insuring clause illusory.

The policyholder argued that the pro-policyholder FCA test case decision of the Supreme Court, which contained similarly worded disease clauses, should apply in favor of the policyholder.

High Court Judgment

The Court held in favor of the insurer that there was no inconsistency or ambiguity in the wording and the plain language of the policy did not permit the policyholder’s interpretation. Moreover, the disease clauses ruled on by the Supreme Court in the FCA test case did not require physical loss or physical damage, unlike the disease clause in this case, and so the FCA test case could be distinguished on that basis.

The Court gave limited weight to decisions of the Financial Ombudsman Service, addressing a similar question based on identical wording, and declining to treat it as a non-damage clause on the basis that FOS decisions: (i) go to what is fair and reasonable rather than to legal entitlement; and (ii) show that the disease insuring clause in this case was not anomalous, erroneous or outlier wording. As such, physical loss or damage was required to be proven to claim for Covid losses, which had not occurred.

Court of Appeal Judgment

The policyholder appealed on the basis that there was a clear mistake in the insurance policy. The Court of Appeal unanimously upheld the High Court’s judgment and dismissed the policyholder’s appeal. In order to re-write the language of the disease clause (clause 8.2.6), it first had to be obvious “something had gone wrong with the language”.[1] The Court of Appeal held that this requirement was not met for three reasons: (i) the other (non-disease) extensions which referred to damage all required physical damage – indeed the disease extension itself provided limited coverage when interpreted as requiring physical damage such that it was held not illusory; (ii) reference to clause 8.1 was not a mistake – it is making clear that the damage-based BI coverage in clause 8.1 is being extended in the extensions including the disease coverage extension; and (iii) the policy must be interpreted as at October 2019 when it incepted. Covid-19 was unheard of in October 2019, and the Court of Appeal held that the disease extension cannot be interpreted through the telescope of Covid-19. The second limb of the test – that it must be clear what correction ought to be made in order to cure the mistake – was not considered in this case given the policyholder failed on the first limb of the test.

Comment

The judgment is a reminder of the principles of interpretation of insurance contracts, and particularly the requirements for corrections of a mistake in an insurance policy. It is important to note that the parties agreed here that there had been no physical loss of, or damage to, the policyholder’s premises or property used by it at those premises, and so there was no assessment in this case as to whether Covid-19 causes physical loss or damage.

Technip Saudi Arabia Ltd v The Mediterranean & Gulf Insurance and Reinsurance Co. [2024] EWCA Civ 481

The Court of Appeal upheld the High Court’s interpretation of the Damage to Existing Property exclusion in an existing property endorsement in a composite offshore construction all risks insurance policy. In doing so, the Court confirmed that the endorsement applied to property owned by any of the insured, not just the insured that was bringing a claim against the insurer.

Background

Technip contracted with an unincorporated joint venture, the Al-Khafji Joint Operation (KJO), to perform construction works to offshore assets in the Khafji Field in Saudi Arabia owned by KJO. Technip was one of the insureds under a composite offshore construction insurance policy underwritten by the insurer on an amended WELCAR 2001 Offshore Construction Project Policy wording (the “Policy”).

Technip chartered a vessel to perform work under the contract. In 2015, the vessel collided with an unmanned platform in the field, causing significant damage to the platform. Technip paid US$25 million (plus other sums) to KJO in respect of that damage. In the present English High Court proceedings, Technip claimed an indemnity from the insurer in respect of those sums under the liability section II of the Policy. Both Technip and KJO were named under the Policy as ‘Principal Insureds’ (not ‘Principal Assureds’, although the words Insured and Assured were used interchangeably in the Policy).

The insurer denied liability under the Policy on several grounds, most of which were rejected by the High Court. However, the High Court upheld the insurer’s denial of liability on the basis that the Existing Property Endorsement (the “Endorsement”) – which is regularly incorporated into the section II liability cover in WELCAR policies – excluded the insurer’s liability for damage to existing property which was owned by any of the ‘Principal Assureds’. The High Court held that the platform was covered as existing property under this definition because it was owned by KJO. The High Court’s judgment ([2023] EWHC 1859 (Comm)) was covered in our Half Year Review of Insurance Coverage Litigation for H2 2023, available here.

Technip appealed the High Court’s decision. It argued that, reading the Policy as a separate insurance for Technip, the reference in the Endorsement to property owned by the ‘Principal Assured’ was limited to the particular ‘Principal Insured’ claiming under the Policy. The composite policy should be split, and the Damage to Existing Property exclusion should not apply, as one Principal Insured (Technip) claiming under the Policy, while another Principal Insured (KJO) owned the property. In justifying this interpretation Technip relied on the language in the Endorsement and the fact that the Policy was composite. 

Judgment

The Court of Appeal unanimously dismissed Technip’s appeal. The High Court’s interpretation of the Endorsement was correct and in accordance with its natural and ordinary meaning. Technip’s interpretation, on the other hand, “does far more violence to the natural meaning of the words used [in the Endorsement]”. Technip’s argument involved reading the Endorsement as if it included the words highlighted in bold, as follows: "any claim for damage to … any property [for] which the Principal Assured [which is making the particular claim concerned]: 1) owns that is not otherwise provided for in this policy". Those words are entirely absent from the Endorsement.

The Court of Appeal determined that the composite nature of the Policy had no bearing on its interpretation. Each insured under the Policy was deemed to have separate insurance with the insurer, but the term ‘Principal Assured’ had the same meaning in each nominal separate contract.

Comment

The Court of Appeal’s instructive application of contractual interpretation principles to a form of construction all risks policy that is widely used in the offshore industry provides valuable guidance for policyholders, especially as a development to the large number of construction-related insurance judgments released earlier this year.

Both the High Court and Court of Appeal judgments in this case are a reminder to insureds to review policy exclusion wording carefully, particularly given Sir Geoffrey Vos MR’s comment that the Policy was “not a model of clear drafting” in light of the inconsistent terminology used for those insured (‘Principal Insured’ vs. ‘Principal Assured’). The Court of Appeal has usefully highlighted that when reviewing policy exclusions, the English courts will take a plain view of the relevant wording without seeking to do any “violence” to the natural meaning of the words used.

Scotbeef Ltd v D&S Storage Ltd & Anor [2024] EWHC 341 (TCC)

The High Court, determining a preliminary issue, required a defendant insurer to indemnify the insured in respect of the Claimant’s damages claim, and allowed the Claimant to enforce a right to an indemnity against the insurer following the insured’s insolvency. The judgment is of interest for its consideration of provisions in the Insurance Act 2015 (the “2015 Act”).

Background

D&S Storage Limited (the “First Defendant”) was a food storage company. In 2016, the First Defendant entered into an insurance policy with Lonham Group Limited (the “Insurer”).

The insurance policy included a Duty of Assured Clause, which put the First Defendant under a duty to: (i) make a full declaration of trading conditions at the outset of the policy period; (ii) continue to trade under those conditions; and (iii) take all reasonable steps to incorporate those conditions in contracts that the First Defendant enters into. Compliance with the Duty of Assured Clause was a condition precedent. The policy referred to the UK Warehousing Association (the “UKWA") terms and conditions as being in use by the First Defendant.

In 2017, the First Defendant entered into an arrangement to store meat owned by Scotbeef (the “Claimant”). The relationship was arranged via a third party and there was no written contract between the Claimant and First Defendant. Between May 2017 and February 2019, the First Defendant’s weekly invoices to the Claimant referred to the UKWA terms and later to the Food Storage and Distribution Federation (the “FSDF”) terms. Between February 2019 and November 2019, the First Defendant’s invoices did not mention either the FSDF or UKWA terms, with one exception in September 2019.

When the First Defendant renewed its insurance policy in June 2019, the FSDF terms were referred to as being in use by the First Defendant.

In October 2019, six pallets of meat that had been transferred from the First Defendant to the Claimant were found to contain mold. The Claimant brought a damages claim against the First Defendant for the cost of the spoiled meat. The First Defendant argued that the FSDF terms were incorporated into the contract, which would have limited its liability to the Claimant. In 2022, the High Court held that the FSDF terms were not, and never were, incorporated into the contractual relationship between the Claimant and the First Defendant.

After the First Defendant became insolvent, the Insurer was added to the proceedings as the second defendant. The Claimant argued that it could enforce the First Defendant’s right of indemnity under the 2015 Act against the Insurer in relation to the loss claimed by the Claimant, pursuant to the Third Parties (Rights Against Insurers) Act 2010 (the “2010 Act”).

The Insurer relied on the "Duty of Assured Clause" to deny liability on the grounds that the First Defendant had failed to take all reasonable steps to incorporate the FSDF terms, as required by the clause. As this was a condition precedent to the Insurer’s liability under the policy, the First Defendant’s failure to comply with the clause meant that cover was denied.

Judgment

The High Court determined, as a preliminary issue, that the Insurer was liable to indemnify the First Defendant in respect of the Claimant’s claim. As a result, the Claimant was entitled to enforce its right of indemnity against the Insurer pursuant to the 2010 Act.

The Court made the following key findings, among other points:

1. The ‘Duty of Assured Clause’ was ambiguous. The Court applied the contra proferentum rule, meaning that any ambiguity would be resolved in favour of the insured. Reading all three sub-clauses (i)-(iii) of the Duty of Assured Clause together, if the First Defendant took all reasonable and practicable steps to incorporate the relevant FSDF terms into its contracts, the Insurer would still indemnify the First Defendant.

2. The sub-clauses did not satisfy the transparency requirements in section 17 of the 2015 Act. The Insurer did not take any steps to draw the disadvantageous sub-clauses to the First Defendant’s attention before entering into the contract. It was also not clear what effect breaching sub-clause (iii) had. Immediately after sub-clause (iii), the policy said that if an assured had taken all reasonable and practicable steps, the right to be indemnified in respect of that claim would not be prejudiced. But two pages later, the policy stated that breaching a condition precedent entitled the Insurer to avoid a claim in its entirety. It was impossible to reconcile these two clauses.

3. Any breach of the sub-clauses by the First Defendant had to be viewed in the context of the duty of fair presentation set out in section 3 of the 2015 Act. The First Defendant had misrepresented its trading terms to the Insurer, because the FSDF terms were not incorporated into its contract with the Claimant. However, its failure was not deliberate or reckless. The First Defendant believed that the FSDF terms were incorporated into its contract with the Claimant.

4. As the First Defendant’s breach was not deliberate or reckless, in order to avoid the insurance contract and refuse the claim, the Insurer needed to show that it would not have entered the contract with the First Defendant on any terms. On the evidence, the Insurer failed to prove that this was the case. If individual terms had been important to the Insurer, they could have been specifically incorporated into the policy.

Comment

This judgment contributes to the currently limited body of case law interpreting the provisions of the 2015 Act. Of particular note are the Court’s interpretation of section 9 of the 2015 Act, and the 2015 Act’s transparency requirements, providing a reminder about the potential consequences of an insurer failing to draw disadvantageous terms to an insured’s attention.

Axis Specialty Europe SE v Discovery Land Company LLC & Ors [2024] EWCA Civ 7

The Court of Appeal rejected an insurer’s appeal on two grounds: (1) the insurer was not entitled to rely on a dishonesty exclusion clause in a solicitors’ professional indemnity insurance policy to deny liability to indemnify the claimants for losses arising out of the dishonest behaviour committed by one of the law firm’s partners; and (2) the insurer was not entitled to rely on the policy’s aggregation clause.

Background

The appeal concerned a dispute between Axis (the “Insurer”) and the Claimants, who were clients of a dishonest solicitor, Mr Stephen Jones. The Insurer provided professional indemnity insurance (the “Policy”) to Jirehouse Partners LLP (“Jirehouse”), the law firm in which Mr Jones was a partner (and to two associated companies of which he was a director, collectively referred to as the “Jirehouse Entities”).

The claims under the Policy arose from two judgments entered against Jirehouse for dishonest and fraudulent acts, errors and omissions. Both claims arose in respect of client money provided in connection with the purchase of the same property, Taymouth Castle. One claim concerned a purchase transaction; the other claim concerned a lending transaction.

The Court of Appeal was required to determine two issues:

1. The condonation issue:

• The Policy contained a dishonesty exclusion clause, which excluded the Insurer from liability to indemnify the Jirehouse Entities in respect of claims arising out of dishonest or fraudulent acts, errors or omissions committed or condoned by the Jirehouse Entities.
• Mr Jones' dishonest acts (for which the Jirehouse Entities were vicariously liable) could not be imputed to the Jirehouse Entities for the purposes of the dishonesty exclusion clause, unless the only other member and director of the Jirehouse Entities, Mr Vieoence Prentice, was either party to them (which was not alleged), or condoned them, i.e. that he had “blind-eye” knowledge of Mr Jones’ wrongdoing.
• The condonation issue concerned whether the Insurer could rely upon the dishonesty exclusion clause in the Policy to exclude it from any liability to indemnify the Claimants that would otherwise arise under section 1 of the Third Party (Rights Against Insurers) Act 2010 (as the insured entities were all insolvent).
• The High Court, at first instance, concluded that Mr Prentice did not condone Mr Jones’ behaviour. This finding was challenged by the Insurer on appeal. The Insurer argued that the High Court’s conclusion on the condonation issue was unsustainable given the trial judge’s adverse findings about Mr Prentice, such as that he had lied on oath and was “dishonest, deeply unprofessional, and lacking in integrity in a number of respects”.

2. The aggregation issue:

• If the Insurer could not rely on the dishonesty exclusion clause; the second issue concerned whether the Insurer was entitled to rely on the aggregation clause in the Policy and treat the claims made against it as a single claim.
• The answer to the aggregation issue depended on whether the claims arose from "similar acts or omissions in a series of related matters or transactions”. This question turns on the facts of each case.
• The High Court held that the claims were not caused by the same series of acts and refused to aggregate the claims. This was challenged by the Insurer on appeal. We covered the High Court’s consideration of the aggregation issue in our Half Year Review of Insurance Coverage Litigation for H1 2023, available here.

Judgment

The Court of Appeal dismissed the Insurer’s appeal on both grounds:

1. The condonation issue:

• The trial judge’s conclusions on the condonation issue, which he reached after hearing two and a half days of oral evidence from Mr Prentice, were not “plainly wrong”. The judge undertook a “perfectly proper evaluation of all the relevant evidence” and he gave a “lengthy, nuanced judgment which addressed the evidence in painstaking detail”.
• The Court of Appeal held that, ultimately, the trial judge was entitled to reject the Insurer’s case on the condonation issue for the reasons that he gave, and declined to interfere with the High Court’s decision. The Insurers were not entitled to rely upon the Policy’s dishonesty exclusion clause.

2. The aggregation issue:

• The trial judge’s approach to the aggregation issue was “plainly correct”, and he had reached his conclusion after making a careful and holistic assessment of the facts.
• The Court of Appeal dismissed the Insurer’s appeal, upholding the High Court’s decision that the aggregation clause in the Policy did not apply to the claims, and the Insurer was not permitted to aggregate them for the purpose of limiting their liability.

Comment

The Court of Appeal’s evaluation of the condonation issue in this case will be of particular interest to policyholders and insurers alike, notably on what can constitute “blind-eye knowledge” by other members or directors of the insured entity, who may themselves have behaved improperly or unprofessionally. The Court of Appeal’s refusal to interfere in the trial judge’s careful and nuanced findings of fact underscores the importance of how parties present their factual evidence at trial. The judgment will also be of interest for its guidance on the aggregation of claims arising out of related matters or transactions, particularly concerning solicitors’ professional indemnity insurance.

Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd [2024] EWCA Civ 446

The Court of Appeal, by a majority, dismissed an insured’s appeal in a coverage dispute under a Warranty & Indemnity (“W&I”) Insurance Policy. The insured failed to show that an apparent inconsistency in the Policy wording was due to a clear drafting error. The insurer’s explanation about why specifically negotiated clauses were written as they were strongly pointed against the existence of an obvious mistake.

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, principally to Liverpool City Council (“LCC”). In connection with the Insured’s acquisition of the Target, a Buyer Side W&I Insurance Policy (the “Policy”) was underwritten on behalf of the Insured and issued shortly after the SPA was exchanged, but before completion. The purpose of the Policy was to insure against the risk that the Target was not in the state warranted by the sellers, and so was worth less than the purchase price at the date of the sale.

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 its key client, LCC. The Insured alleged that these events caused the Target to be placed into liquidation and the Insured to enter administration.

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

The insurers denied coverage on the basis of the Policy’s anti-bribery and corruption exclusion (the “ABC Exclusion”), which provided that: "The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…any ABC Liability". “ABC Liability” was 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” (emphasis added).

The Insured argued that there was a contradiction between the extent of cover provided by the Policy’s insuring clauses and the ABC Exclusion. In particular, the Insured relied on a cover spreadsheet contained in an appendix to the Policy (the “Cover Spreadsheet”), which listed the ABC Warranties as insured obligations that were covered by the Policy. There was a contradiction between the scope of the insured obligations in the Cover Spreadsheet on the one hand, and the exclusion of liability for loss arising out of an ABC Liability on the other.

The Insured argued that the court should correct the definition of “ABC Liability” to read “any liability for actual or alleged non-compliance… in respect of Anti-Bribery and Anti-Corruption Laws” (emphasis added). Unless the definition of ABC Liability was corrected in this way, all the alleged breaches of the ABC Warranties fell within the scope of the ABC Exclusion.

The High Court rejected the insured’s argument, agreeing with the insurers that there was no contradiction in the Policy, and so the need for a corrective interpretation did not arise. We covered the High Court’s judgment ([2023] EWHC 2649 (Comm)) in our Half Year Review of Insurance Coverage Litigation for H2 2023, available here. The Insured appealed.

Judgment

Lord Justice Lewison, giving the Court of Appeal’s lead judgment, dismissed the Insured’s appeal.

After reviewing the relevant legal authorities, Lewison LJ concluded that, on the face of it, there was an apparent conflict (at least in part) between the Cover Spreadsheet on the one hand, and the width of the ABC Liability exclusion on the other. The Policy “appears to give with one hand and take away with the other”. However, despite the apparent contradiction, Lewison LJ was not persuaded that there had been a clear drafting error.

To establish whether there was an obvious mistake in the ABC Exclusion, the mistake needed to be common to both parties. The insurers had a coherent and rational explanation for wanting to avoid liability for loss arising out of the ABC Liability. The Policy excluded the insurers’ right of recourse against the sellers, apart from if the relevant loss arose in whole or in part out of the seller’s fraud or fraudulent misrepresentation. It was natural that the insurers would want to limit their liability under the Policy in circumstances where they had no right of recovery against the sellers, and no opportunity to conduct due diligence on the Target themselves. The insurers’ explanation for why the ABC Exclusion took the form that it did was a “strong pointer against the conclusion that there is an obvious drafting mistake”. When considering this issue, Lewison LJ found it significant that the ABC Exclusion was a specifically negotiated clause, and the definition of ABC Liability was the subject of detailed negotiations (albeit recognising that the definition was “not a masterpiece of drafting”).

To correct a drafting mistake by interpretation, it is necessary not only that the mistake must be clear, but also that the cure must be clear. If there are several different ways to cure the alleged mistake; this will act as a bar to obtaining a corrective interpretation. Lewison LJ found that there was no clear answer to the question of “what is the cure?” in the present case. While the Insured’s proposed correction to the ABC Liability would use less red ink than changing the Cover Spreadsheet, “the quantity of red ink does not matter”. As it was unclear if the error (if, indeed, there was one) lay in the drafting of the ABC Liability or in the Cover Spreadsheet, this acted as a bar to the corrective interpretation sought by the Insured.

Arnold LJ, agreeing with Lewison LJ, noted that he had not found this case easy to decide, as both sides’ arguments had force. Ultimately agreeing with Lewison LJ’s reasoning, Arnold LJ added that if it was not possible to conclude that there is an obvious typographical error in the definition of ABC Liability, then it was difficult to conclude that there was an obvious mistake in the Policy with an obvious correction.

Phillips LJ preferred the Insured’s argument and would have allowed their appeal. His dissenting judgment emphasised that the Policy should be interpreted together with the SPA. In his view, the commercial purpose and intended effect of the Policy needed to be understood in the overall context of the SPA and the extent to which the sellers were being released from their personal liability to the Insured.

Comment

As recognised by Lord Justices Arnold and Phillips, the parties in this case presented forceful and finely balanced arguments as to how the Policy should be read. It is a useful reminder of best practice when amending a W&I insurance policy during intense negotiations, clearly illustrating why parties should take care to avoid introducing conflicting wording that could lead to an argument over whether this drafting was a mistake. There is a high bar for demonstrating that there is an obvious mistake that the courts need to correct. This judgment helpfully sets out the position for seeking a corrective interpretation under English law and demonstrates how the courts will apply it to a conventionally structured W&I insurance policy.

Royal & Sun Alliance Insurance PLC & Ors v Textainer Group Holdings Ltd & Ors [2024] EWCA Civ 547

The Court of Appeal has extended the “top down” approach to subsequent recoveries made by an insured where insurers have paid out on a claim (i.e. that recoveries are to be applied first to uninsured losses rather than proportionately between insurers) to excess of loss insurance.

Background

The policyholder had the benefit of a container lessee default insurance programme, with various insurers consisting of a primary policy, and five excess of loss policies providing coverage up to $80million above the self-insured retention of $5million (collectively the “Insurers”).

One of the policyholder's lessees, Hanjin Shipping Co. Ltd ("Hanjin"), applied to the Seoul Central District Court for receivership, an event entitling the policyholder to an indemnity under the policies against the loss of containers on-hire to Hanjin and not recovered within 183 days, uncollected rental during that period, and the costs of retrieving and/or repairing recovered containers. At that time, Hanjin was in possession of about 113,000 of the policyholder's containers, held on a mixture of operating leases and finance leases. Hanjin was then declared bankrupt. The policyholder’s total losses were agreed to have been c.$102million, of which the net sum of c.$478,000 was later received from Hanjin Bankruptcy Trustee in respect of container rentals, paid in order to release a vessel arrested by the policyholder.

The policyholder received a c.$75 million insurance payout. The primary policy and the first to fourth excess policies paid out in full and the claim under the fifth excess policy was settled for c.$25million (the limit under that policy being $30m), leaving uninsured losses in the region of c.$21million (in addition to the retention of US$5m). As part of the settlement, the rights of subrogation under the fifth excess policy were transferred to the policyholder. Pursuant to a settlement agreement, the fourth excess policy insurer’s rights of subrogation (providing cover for US$10m) were also transferred to the policyholder.

The policyholder then made a claim against Hanjin. Hanjin agreed to pay c.$26million to the policyholder in respect of its claim relating to operating leases only ("the Hanjin Settlement"). Hanjin's Bankruptcy Trustee paid the policyholder c.$15million of that agreed sum. The recoveries had the effect of reducing the policyholder's total losses, but those losses nevertheless remained well above the upper limit of the cover provided by the Insurers.

The Recoveries clause in the primary policy (and incorporated into the excess of loss policies) stated:

“RECOVERIES

Following the payment of a claim under this policy and in the absence of an indemnity from any other Policy specified herein any sums recovered from any other source whatsoever as or towards payment of the amount indemnified shall be shared between the Insurers and the Assured as follows:

i) all sums shall be allocated to the Insurers until the amount paid under this policy (including costs) has been recovered and

ii) all further sums shall inure to the benefit of the Assured.

When sums are received as recoveries in respect of amounts indemnified both under this policy and the other policy(ies) specified herein and the recovered sums cannot be clearly assigned to losses indemnified by any specific policy then the recovered sums shall be allocated to the Insurers and such other insurers in the same proportions as each has borne of the total loss.

Once all the insurers' claims payments (including costs) have been [recovered] any further sums recovered shall [inure] to the benefit of the Assured.

This Condition shall not apply when recovered sums have been assigned to losses sustained and indemnified by a specific policy …”

The principal issue on this appeal is whether insurers were entitled to a proportionate share of relevant recoveries subsequently made by the policyholder, or whether those recoveries are to be applied first to uninsured losses, applying the "top down" approach adopted by the House of Lords in Lord Napier and Ettrick v Hunter [1993] AC 713.

The insurers argued that they were entitled to c.39.3% of the sums received by the policyholder pursuant to the Hanjin Settlement (having insured $40million of the policyholder’s total loss of $102 million). They also argued that the policies in Napier (the Stop Loss policies) were distinguishable from the present policies because they applied to a single or unitary financial loss whereas here the policies did not insure a unitary loss, but covered the physical loss or damage to individual containers and related costs/loss of earnings as and when those losses were incurred, eroding first the retention, then the layers of cover in turn. Thus, recoveries by the policyholder under the Hanjin Settlement were not to be regarded simply as a reduction in the total loss it had sustained, but should be applied to the specific losses suffered by the policyholder. As the Hanjin Settlement was a pro rata settlement of the policyholder's losses in respect of operating leases (being 40% of the policyholder's claim in respect of those leases), the Insurer’s argued that this meant losses in respect of operating leases and finance leases were suffered evenly and regularly over time. It followed that the Hanjin Settlement recoveries should be applied proportionately across the layers, so that 39.3% is payable to them.

Alternatively, the insurers argued that the Napier case could be distinguished on the basis the policies here are marine container insurance engaging s. 81 of the 1906 Act. The Insurers argued that the policyholder had underinsured its containers, demonstrated by the fact that its losses exceeded the upper limit of the Policies, with the result that the policyholder was deemed to be its own insurer in respect of the uninsured losses. It followed that the principle of averaging applied, and the losses fell to be shared proportionately between the Insurers and the policyholder.

The policyholder’s position was that it was entitled to retain all recoveries up to a total of $56.4million (being its net loss of $102million less the US$40m covered by the Insurers and the US$5m retention) based on the Napier principle. In respect of the Insurers’ alternative case, the policyholder contended that there had been no underinsurance and the principle of average did not apply.

High Court Judgment

The High Court dismissed the claim on the basis that:

(i) as a matter of principle, any recoveries made pursuant to the Hanjin Settlement were to be applied on a top down basis, and not on a proportionate basis (applying the Napier case);

(ii) in any event, the Insurers had failed to prove, as a matter of fact, that the recoveries made in respect of losses relating to operating leases had been indemnified proportionately or at all by the primary policy and/or the first three excess policies; and

(iii) this was not a case of under-insurance within section 81 of the Marine Insurance Act, 1906 ("the 1906 Act"), so recoveries were not to be shared pro rata, the principle of "averaging" not being applicable.

The insurers appealed the decision on the basis the High Court had failed to recognise the distinction between the case of a single or unitary loss (such as in Napier) where there could be a “top down” approach to reduce a single loss, versus multiple losses (such as here), where there were multiple losses of different items of property at different times which ought to be allocated to the insurer who had indemnified against their loss.

Court of Appeal Judgment

The Court of Appeal upheld the High Court’s judgment. It held that the High Court was right to identify that the true nature of the coverage being provided by the policies was against particular layers of loss, and that the manner in which losses were determined and aggregated in that context was not an important factor. The nature of the cover required that the policies "pay up and recover down". Otherwise, by applying a pro rata approach to the insured layers as well as to the uninsured losses above the limit of cover, the result would be contrary to the following two fundamental principles: (i) the policyholder would not be fully indemnified in the amounts for which it was covered under the policies; and (ii) the policyholder would be in a worse position than if the recoveries had been made before the policies had paid up.

As for underinsurance, the Court of Appeal held that it was “simply not engaged in relation to layers of insurance” because “where cover is in relation to a defined portion of loss, the insurance cover by definition matches precisely the value of that which is insured and the insurer is not exposed to a risk greater than the cover provided”. Moreover, the policyholder’s risk was undefined and indefinite, contrary to the insurable value of a ship, for example, where the whole vessel is insured (including the costs of recovery and repair of containers and loss of rental).

Comment

This is a welcome decision for policyholders which extends the “top down” recoveries principle to excess of loss insurance and confirms that underinsurance and average does not apply to excess of loss insurance.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Insurance Recovery practice.