Insurance Law: An Introduction 9781843116776

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I N S U R A N C E L AW AN INTRODUCTION

Related titles A Guide to Reinsurance Law by Robert Merkin (2007) Private International Law of Reinsurance and Insurance by Raymond Cox QC, Louise Merrett and Marcus Smith (2006) The Law of Insurance Contracts, 5th Edition by Professor Malcolm A. Clarke (2006) Insurance Disputes, 2nd Edition by Rt. Hon Lord Justice Mance, Iain Goldrein QC and Robert Merkin (2004) Good Faith and Insurance Contracts, 2nd Edition by Peter MacDonald Eggers, Patrick Foss and Simon Picken (2004)

INSURANCE LAW AN INTRODUCTION EDITED BY PROFESSOR ROBERT MERKIN

First published 2007 by Informa Law Published 2013 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business © Informa Law ISBN 978 1 84311 6776 ISBN 978-1-843-11677-6 (hbk) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of Informa Law Whilst every effort has been made to ensure that the information contained within this book is correct neither the authors nor Informa Law can accept any responsibility for any errors or omissions or for any consequences resulting therefrom.

Typeset by Interactive Sciences Ltd, Gloucester

GENERAL EDITOR’S PREFACE This book is intended to be a practical guide for lawyers and professionals working in and with the insurance market. The publishers have assembled a distinguished team of lawyers and insurance practitioners, each of whom has been asked to prepare a practical yet comprehensive guide to the most significant issues affecting insurance law and practice. Fully up to date, each chapter sets out the framework of the law, and incorporates commentary on the most important and recent judicial decisions. It is hoped that the structure that has been adopted highlights the key matters which typically arise in insurance disputes, and does so in a manner more readily accessible than is often the case where the material is presented in traditional textbook form. Rob Merkin Sidmouth July 2007

PUBLISHER’S NOTE There are numerous case report studies throughout this book. Take time to understand the judgment in the case, and the reasons for it. Where important points of law are presented you will see this symbol:

This will remind you that particular attention should be paid to that passage. Cases reported in Lloyd’s Insurance and Reinsurance Law Reports can be viewed online at www.insurancelawreports.com. Look for this symbol:

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AUTHORS’ BIOGRAPHIES Professor Robert Merkin Professor Robert Merkin is Professor of Commercial Law at Southampton University. He is the author of a number of texts on insurance, reinsurance and arbitration law, and edits Lloyd’s Law Reports: Insurance and Reinsurance, and Insurance Law Monthly. His works have been cited in several High Court decisions in England together with a number of other jurisdictions including the High Court of Australia and the U.S. Supreme Court. Professor Merkin is a member of the Presidential Council of AIDA, Secretary to the AIDA Reinsurance Working Party, a member of the Law Society’s Insurance Law SubCommittee and a past member of the Executive Committee of the British Insurance Law Association. Angus Rodger Angus Rodger is a partner in the London office of U.S. law firm Steptoe & Johnson. This practice is focused on insurance and reinsurance, and covers dispute resolution, regulatory advice, ART and complex transactions involving insurance and policy drafting. He is the author of a book on EC insurance law, a contributing author to a book on reinsurance claims handling, and a frequent contributor to industry journals and conferences. John Lowry John Lowry teaches Insurance law at University College London, where he is a Professor of Law. He has also taught in the U.S.A. and practised in Canada. He is the author of a number of works including Insurance Law: Doctrines and Principles (2005), cited by the Supreme Court of Canada in Oldfield v. Transamerica Life Insurance Corp of Canada 2002 SCC 22, and Insurance Law: Cases and Materials (2004). In 2001 he was appointed a Visiting Fellow at the University of Connecticut’s Center for Insurance Law Research. Alison Green Alison Green is a barrister and joint leader of the Insurance and Reinsurance Group at Two Temple Gardens. She has extensive experience of insurance and reinsurance litigation both before the courts and in arbitrations. She has represented major insurance and reinsurance companies, Lloyd’s underwriters, the Corporation of Lloyd’s, insurance brokers and insureds. She has also acted for and against insureds and insurers in professional negligence cases, including insurance brokers. She is a Vice-President of the British Insurance Law Association, having been its chairman from 1994 to 1996. She is a trained mediator and sits as an arbitrator. She is on the panel of arbitrators of AIDA vii

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Reinsurance and Insurance Arbitration (UK) (ARIAS). She chairs and speaks at conferences on insurance and reinsurance law and has written widely in those areas. Alison is recognised by the forthcoming edition of Chambers Directory of the Legal Profession as a leader at the Bar in the field of insurance law. Alison Padfield Alison Padfield is a barrister at Devereux Chambers specialising in commercial law, insurance and reinsurance and professional negligence. She studied law at Oxford University and holds Master’s degrees from both Oxford University and the University of Brussels. She is the author of Insurance Claims (2nd edition, 2007). Christopher Henley Christopher Henley, a Fellow of the Chartered Insurance Institute, is a Counsel specialising in insurance and reinsurance at the London office of Debevoise & Plimpton LLP. His publications include The Law of Insurance Broking and All Risks Property Insurance (co-author, which won the British Insurance Law Association prize in 1996). He is a Contributing Editor of The Encyclopedia of Insurance Law and Astor’s Law of Lloyd’s, and has contributed chapters to Reinsurance Practice and the Law, Insurance Disputes and Privity of Contract. He is a member of the Accident Committee and the Advanced Study Groups Committee of the Insurance Institute of London, and the British Insurance Law Association committee on Insurance Contract Law Reform. He has also been elected a Vice President of the Insurance Institute of London. Dr Baris Soyer Dr Baris Soyer is a reader in commercial and maritime law at the University of Wales, Swansea and has previously lectured at the Universities of Southampton and Exeter. He is currently a member of the Institute of International Shipping and Trade Law, British Insurance Law Association, British Maritime Law Association, Society of Legal Scholars, and the Higher Education Academy. He is the editor of the Journal of International Maritime Law and is also on the editorial board of Shipping and Trade Law and Baltic Maritime Law Quarterly. His first book, Warranties in Marine Insurance, was the joint winner of the Cavendish Book Prize 2001. This book has also been awarded by the British Insurance Law Association Charitable Trust for its contribution to insurance literature during 2001–2002. Dr Soyer is currently involved in the teaching of marine insurance law and admiralty law at LLM level.

CONTENTS Preface Authors’ Biographies Table of Cases Table of Legislation, Conventions and Rules 1. AN INTRODUCTION TO INSURANCE AND I N S U R A N C E L AW Introduction to insurance Formation of an insurance contract Premium Privity and third-party rights Insurable interest Insurance intermediaries Regulation of insurance in the U.K. Test your understanding 2 . U T M O S T G O O D FA I T H Elements of the duty of utmost good faith Non-disclosure: materiality of facts and inducement Facts material to insurance contracts Misrepresentation A post-contractual duty of good faith? Agents and the proposal form Remedies for breach of duty The insurer’s duty of utmost good faith Practice and reform Appendix: The relevant provisions of the Marine Insurance Act 1906 Test your understanding 3. TERMS OF INSURANCE AGREEMENTS Construing insurance terms Warranties Conditions precedent Innominate terms Exclusion clauses Test your understanding ix

v vii xiii xxvii

1 1 6 11 16 20 23 30 34 37 37 39 45 55 59 63 67 70 71 74 75 79 79 85 95 100 102 104

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4. MEASURE OF INDEMNITY The meaning of loss Valued and unvalued policies Amount recoverable under valued policies and unvalued policies Consequential loss Interest Policy terms restricting recovery Costs of mitigation Test your understanding

107 107 110 113 118 120 123 128 131

5. CLAIMS Introduction Presentation of claims Implied term to act with reasonable speed and efficiency Interim payments Investigation of claims Fraudulent claims and ‘‘fraudulent devices’’ Repudiation of liability Agreements with third parties for repair or reinstatement Settlement agreements Issues arising in relation to liability policies Test your understanding Bibliography

133 133 133 143 148 149 158 164 165 167 169 170 173

6 . S U B R O G AT I O N , C O N T R I B U T I O N A N D R E I N S TAT E M E N T Subrogation The doctrine The parties’ rights prior to indemnification by the insurer Running a subrogated recovery action The third party claim Subrogation waiver clauses Miscellaneous Assignment or subrogration? Allocation of sums received Payments to which subrogation does not attach Contribution and reinstatement Introduction Criteria for contribution Rights of the insured Modification of the insured’s rights The rights of co-insurers Reinstatement

175 175 175 176 178 182 187 188 189 191 193 194 194 194 198 198 201 204

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7. MARINE INSURANCE Nature of marine insurance Insurable interest in marine insurance Warranties in marine insurance Marine risks Perils excluded Losses in marine insurance Measure of indemnity Test your understanding

213 213 215 219 225 229 233 238 242

8 . P RO P E RT Y A N D F I N A N C I A L I N S U R A N C E Insurance on property Fidelity policies Mortgagees’ interest insurance Credit insurance Legal expenses insurance Exclusion from property and financial policies Test your understanding

245 245 250 252 254 257 262 272

9. MOTOR AND OTHER LIABILITY INSURANCE Principles governing liability policies Compulsory motor insurance Compulsory employers’ liability insurance Direct actions against liability insurers Test your understanding

275 275 286 302 305 313

1 0 . C H O I C E O F L AW A N D J U R I S D I C T I O N A L I S S U E S Introduction Why does jurisdiction matter? The four sets of rules on jurisdiction General observations regarding the Regulation The common law rules on jurisdiction The Regulation’s rules on jurisdiction if the contract contains no jurisdiction clause The Regulation’s rules on jurisdiction if the contract contains a jurisdiction clause Concurrent proceedings—introduction Concurrent proceedings—the common law rules Concurrent proceedings—the Regulation’s rules Applicable law—introduction The Non-Life Directive’s rules on applicable law The Life Directive’s rules on applicable law

317 317 317 319 320 322 325 329 331 332 334 335 337 342

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The Rome Convention’s rules on applicable law Mandatory rules Test your understanding

342 346 347

Answers to test your understanding questions

351

TABLE OF CASES

ACE Insurance SA-NV (formerly Cigna Insurance Co. of Europe SA NV) v. Zurich Insurance Co. [2000] 2 Lloyd’s Rep. 423; affirmed [2001] Lloyd’s Rep. I.R. 504; [2001] 1 Lloyd’s Rep. 618 (C.A.) ..................................................................................... 324, 325 Acey v. Fernie (1840) 7 M. & W. 153 ............................................................................. 24 Adcock v. Cooperative Insurance Society Ltd [2000] Lloyd’s Rep. I.R. 657 (C.A.) .... 121, 122 Adie & Sons v. Insurance Corp (1898) 14 T.L.R. 544 ..................................................... 8 Agapitos v. Agnew (The Aegeon) [2002] EWCA Civ 247; [2002] Lloyd’s Rep. I.R. 573; [2002] 2 Lloyd’s Rep. 42 ..................................................................... 61, 161, 162, 163 Agapitos v. Agnew (No. 2) (The Aegeon) [2003] Lloyd’s Rep. I.R. 54 ............................. 221 Agra Trading Ltd v. McAuslin (The Frio Chile) [1995] 1 Lloyd’s Rep. 182 ..................... 108 Alcoa Minerals of Jamaica Inc v. Broderick [2002] 1 A.C. 371; [2000] 3 W.L.R. 23 (P.C.) .... 146 Alexion Hope, The [1987] 1 Lloyd’s Rep. 60; affirmed [1988] 1 Lloyd’s Rep. 311 (C.A.) .....227, 246–247 Alfred McAlpine plc v. BAI (Run-Off) Ltd [1998] 2 Lloyd’s Rep. 694; affirmed [2000] 1 Lloyd’s Rep. 437 (C.A.) ............................................................... 96, 100, 136, 137, 139 Allen v. Robles [1969] 1 W.L.R. 1193; [1969] 2 Lloyd’s Rep. 61 (C.A.) .......................... 150 American Surety Co. of New York v. Wrightson (1910) 103 L.T. 663 .............................. 204 Amey Properties Ltd v. Cornhill Insurance plc [1996] L.R.L.R. 259 ............................... 265 Anderson v. Commercial Union Assurance Co. plc 1998 S.L.T. 826 ................................ 148 Anderson v. Norwich Union Fire Insurance Society [1977] 1 Lloyd’s Rep. 253 (C.A.) ..... 245 Andrews v. H. E. Kershaw Ltd [1951] 2 All E.R. 764 ..................................................... 288 Andrews v. The Patriotic Co. of Ireland (1886) 18 L.R. Ir. 355 ................................ 177, 178 Anglo African Merchants Ltd v. Bayley [1970] 1 Q.B. 311; [1969] 1 Lloyd’s Rep. 268 .... 25 Arab Bank plc v. Zurich Insurance Co. [1999] 1 Lloyd’s Rep. 262 .......................... 58, 63, 66 Arbuthnott v. Fagan [1996] L.R.L.R. 135 (C.A.) ............................................................ 135 Asfar & Co. v. Blundell [1896] 1 Q.B. 123 (C.A.) ........................................................... 234 Ashton v. Turner [1981] Q.B. 137; [1980] 3 W.L.R. 736 ................................................ 291 Ashworth v. Peterborough United Football Club, 2002, unreported ................................. 262 Assicurazioni Generali SpA v. Arab Insurance Group (BSC) [2002] 1 W.L.R. 577 (C.A.) .. 43, 44 Atlantic Emperor, The; Marc Rich & Co. AG v. Societa Italiana Impianti pA (Case C–190/89) [1992] 1 Lloyd’s Rep. 342; [1991] E.C.R. I–3855 (E.C.J.) ...................... 321 Athens Maritime Enterprises Corp v. Hellenic Mutual War Risks Association (Bermuda) (The Andreas Lemos) [1983] Q.B. 647; [1982] 2 Lloyd’s Rep. 483; [1983] 1 All E.R. 591 .................................................................................................................... 228, 270 Attaleia Marine Co. Ltd v. Bimeh Iran (Iran Insurance Co.) (The Zeus) [1993] 2 Lloyd’s Rep. 497 ............................................................................................................ 148, 164 Austin v. Zurich General Accident and Liability Insurance Co. Ltd (1944) 77 Ll. L. Rep. 409 .......................................................................................................................... 189 Australia & New Zealand Bank Ltd v. Colonial & Eagle Wharves Ltd [1960] 2 Lloyd’s Rep. 241 ...................................................................................................................... 40, 140 Australian Agricultural Co. v. Saunders (1875) L.R. 10 C.P. 668 ..................................... 195 Axa General Insurance Ltd v. Gottlieb [2005] EWCA Civ 112; [2005] Lloyd’s Rep. I.R. 369 (C.A.) ................................................................................................ 148, 161, 164, 165 Axa Insurance UK plc v. Norwich Union Insurance Ltd [2007] EWHC 1046 (Comm) ... 292 Axa Reinsurance (UK) Ltd v. Field [1996] 2 Lloyd’s Rep. 233 (H.L.) ............................. 125

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BAS Capital Funding Corp Ltd v. Medfinco Ltd [2003] EWHC (Ch) 1798 .................... 325 Baker v. Black Sea & Baltic General Insurance Co. Ltd [1998] Lloyd’s Rep. I.R. 327 (H.L.) ...................................................................................................................... 85 Bamburi, The. Owners of the Bamburi v. Compton (The Bamburi) [1982] 1 Lloyd’s Rep. 312 .......................................................................................................................... 236 Bank of Baroda v. Vysya Bank Ltd [1994] 2 Lloyd’s Rep. 87 ........................................... 345 Bank of Credit and Commerce International SA (In Liquidation) v. Ali (No. 1) [2001] UKHL 8; [2002] 1 A.C. 251; [2001] 2 W.L.R. 735 (H.L.) ....................................... 168 Bank of Nova Scotia v. Hellenic Mutual War Risk Association (Bermuda) Ltd (The Good Luck) (No. 2) [1992] 2 Lloyd’s Rep. 540 (Note) (Q.B.D.); [1992] 1 A.C. 233; [1991] 2 Lloyd’s Rep. 191 (H.L.) .......................................................88, 93, 156, 169, 213, 224 Bankers Insurance Co. Ltd v. South [2003] EWHC 380 (QB); [2004] Lloyd’s Rep. I.R. 1 ....103, 138, 139, 140 Banque Financiere de la Cite SA (formerly Banque Keyser Ullmann SA) v. Westgate Insurance Co. (formerly Hodge General & Mercantile Co. Ltd) [1988] 2 Lloyd’s Rep. 513 (C.A.); affirmed [1991] 2 A.C. 249; [1990] 2 Lloyd’s Rep. 377 (H.L.) ....... 70, 160, 162 Banque Monetaca & Carystuiaki v. Motor Union Insurance Co. Ltd (1923) 14 Ll. L. Rep. 48 ............................................................................................................................ 228 Barber v. Imperio Reinsurance Co. Ltd (C.A.), 15 July 1993, unreported ........................ 151 Barker v. Janson (1868) L.R. 3 C.P. 303 ......................................................................... 239 Barrett Bros (Taxis) Ltd v. Davies [1966] 1 W.L.R. 1334; [1966] 2 Lloyd’s Rep. 1 (C.A.) .....100, 135, 140, 141, 142, 149 Baugh v. Crago [1976] 1 Lloyd’s Rep. 563; [1975] R.T.R. 453 ........................................ 289 Bawden v. London, Edinburgh and Glasgow Assurance Co. [1892] 2 Q.B. 534 (C.A.) .... 64 Bayview Motors Ltd v. Mitsui Marine & Fire Insurance Co. Ltd [2002] 1 Lloyd’s Rep. 652 ..236, 237 Bean v. Stupart (1788) 1 Dougl. 11 ................................................................................ 220 Bell v. Lever Bros Ltd [1932] A.C. 161 (H.L.) ................................................................ 168 Berk and Co. v. Style [1956] 1 Q.B. 180; [1955] 2 Lloyd’s Rep. 382 ............................... 232 Black King Shipping Corp v. Massie (The Litsion Pride) [1985] 1 Lloyd’s Rep. 437 ... 60, 159 Blackburn Low & Co. v. Vigors (1887) L.R. 12 App. Cas. 531 (H.L.) ............................. 65 Boag v. Economic Insurance Co. Ltd [1954] 2 Lloyd’s Rep. 581 ..................................... 195 Boag v. Standard Marine Insurance Co. Ltd [1937] 2 K.B. 113; (1937) 57 Ll. L. Rep. 83 (C.A.) ...................................................................................................................... 176 Bolton Metropolitan Borough Council v. Municpal Mutual Insurance [2006] EWCA Civ 50 ............................................................................................................................ 276 Bonner-Williams v. Peter Lindsay Leisure Ltd, 2003, unreported ..................................... 265 Boyd v. Dubois (1811) 3 Camp. 133 ............................................................................... 232 Bradley v. Eagle Star Insurance Co. Ltd [1989] A.C. 957; [1989] 1 Lloyd’s Rep. 465; [1989] 2 W.L.R. 568 (H.L.) .......................................................................................... 170, 308 Bradley and Essex and Suffolk Accident Indemnity Society, Re [1912] 1 K.B. 415 (C.A.) .......95, 304 Brennan v. Bolt Burdon [2004] EWCA Civ 1017; [2005] 2 Q.B. 303 (C.A.) ................... 168 Bretton v. Hancock [2005] Lloyd’s Rep. I.R. 454 ............................................................ 290 Bristol and West plc v. Bahdresa [1999] 1 Lloyd’s Rep. I.R. 138 ..................................... 285 British Credit Trust Holdings v. UK Insurance Ltd [2004] 1 All E.R. (Comm) 444 .. 254, 256 British & Foreign Marine Insurance Co. Ltd v. Gaunt (No. 2) (Costs) [1921] 2 A.C. 41; (1921) 7 Ll. L. Rep. 62 (H.L.) ................................................................................. 245 British Telecommunications plc v. James Thomson & Sons (Engineers) Ltd (H.L.) December 1998, unreported ............................................................................................... 185 Britton v. Royal Insurance Co. (1866) 4 F. & F. 905 ......................................... 159, 163, 165 Brook v. Trafalgar Insurance Co. Ltd (1946) 79 Ll. L. Rep. 365 (C.A.) ...................... 25, 141 Brotherton v. Asegradoa Colseguroc SA [2003] Lloyd’s Rep I.R. 758 ............................50, 68 Browing v. Amsterdam (1930) 36 Ll. L. Rep. 309 ........................................................... 232 Brown v. Roberts [1965] 1 Q.B. 1; [1963] 1 Lloyd’s Rep. 314 ........................................ 288 Brown v. Royal Insurance Co. (1859) 1 El. & El. 853 ...................................................... 206 Brown & Davis Ltd v. Galbraith [1972] 1 W.L.R. 997; [1972] 2 Lloyd’s Rep. 1 (C.A.) ... 166, 167 Brownsville Holdings Ltd v. Adamjee Insurance Co Ltd (The Milasan) [2000] 2 Lloyd’s Rep. 458 ............................................................................................ 221, 226, 231, 245

Table of Cases

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Buckeye State, The (1941) 39 F. Supp. 344 .................................................................... 226 Buckland v. Palmer [1984] 3 All E.R. 554; [1984] 1 W.L.R. 1109 (C.A.) ........................ 179 Burns v. Currell [1963] 2 Q.B. 433; [1963] 2 W.L.R. 1106 ............................................. 288 Busk v. Royal Exchange Assurance (1818) 2 B. & Ald. 73 ............................................... 247 CVG Siderurgicia del Orinoco SA v. London Steamship Owners Mutual Insurance Association Ltd (The Vainqueur Jose) [1979] 1 Lloyd’s Rep. 557 .................................. 141, 142 Calf v. Sun Insurance Office [1920] 2 K.B. 366; (1920) 2 Ll. L. Rep. 304 (C.A.) ........... 248 Callery v. Gray [2003] Lloyd’s Rep. I.R. 203 (H.L.) ................................................. 260, 262 Campbell v. MGN Ltd [2002] UKHL 22; [2004] 2 W.L.R. 1232 (H.L.) ........................ 156 Canadian Pacific Ltd v. Base-Fort Security Services (BC) 77 D.L.R. (4th) 178 ................ 186 Canelhas Comercio Importacao Ltd v. Wooldridge [2004] Lloyd’s Rep. I.R. 915 ............. 249 Captain Panagos DP, The [1985] 1 Lloyd’s Rep. 625 ...................................................... 214 Carlill v. Carbolic Smoke Ball Co. [1893] 1 Q.B. 256 (C.A.) ........................................... 3 Carter v. Boehm (1766) 3 Burr. 1905 ...........................................................................37, 52 Castellain v. Preston (1883) L.R. 11 Q.B.D. 380 (C.A.) ........................................ 3, 175, 193 Caudle v. Sharp [1995] L.R.L.R. 433 (C.A.) .........................123 ......................... 125, 126 Centre Reinsurance International Co. v. Freakley [2005] Lloyd’s Rep. I.R. 284 ......... 308, 310 Chapman v. Fraser, BR Trin. 33 Geo. III ........................................................................ 67 Charlton v. Fisher [2001] Lloyd’s Rep. I.R. 387 (C.A.) ............................................. 282, 297 Charman v. WOC Offshore BV [1993] 2 Lloyd’s Rep. 551 (C.A.) ................................... 330 Charnock v. Liverpool Corp [1968] 1 W.L.R. 1498; [1968] 2 Lloyd’s Rep. 113 (C.A.) .... 166 Charter Reinsurance Co. Ltd (In Liquidation) v. Fagan [1996] 2 Lloyd’s Rep. 113 (H.L.) ......79, 80, 82, 103 Cherry Ltd v. Allied Insurance Brokers Ltd [1978] 1 Lloyd’s Rep. 274 ............................ 28 Chief Constable of North Yorkshire v. Saddington [2001] R.T.R. 227 ............................. 288 Citibank NA v. Excess Insurance Co. Ltd (t/a ITT London and Edinburgh) [1999] Lloyd’s Rep. I.R. 122 ........................................................................................................... 285 Citi-March Ltd v. Neptune Orient Lines Ltd [1997] 1 Lloyd’s Rep. 72 ........................... 325 Claims Direct Test Cases, Re [2003] Lloyd’s Rep. I.R. 73; affirmed [2003] Lloyd’s Rep. I.R. 677 .......................................................................................................................... 262 College Credit Ltd v. The National Guarantee Corp Ltd [2005] Lloyd’s Rep. I.R. 5 ....... 255 Colonia Versicherung AG v. Amoco Oil Co. (The Wind Star) [1995] 1 Lloyd’s Rep. 570 ...... 190 Commercial Union Assurance Co. v. Lister (1874) L.R. 9 Ch. App. 483 ................... 178, 179 Commercial Union Assurance Co. Ltd v. Hayden [1977] Q.B. 804; [1977] 1 Lloyd’s Rep. 1 (C.A.) ................................................................................................................... 202 Commercial Union Assurance Co. plc v. NRG Victory Reinsurance Ltd [1998] 1 Lloyd’s Rep. 80 .................................................................................................................... 279 Commonwealth Smelting Ltd v. Guardian Royal Exchange Assurance Ltd [1984] 2 Lloyd’s Rep. 608 .................................................................................................................. 247 Commonwealth Construction Co. Ltd v. Imperial Oil Ltd (1976) 69 D.L.R. (3d) 558 (Sup Ct (Can)) ................................................................................................................. 186 Compania Martiartu v. Royal Exchange Assurance Corp (The Arnus) [1923] 1 K.B. 650; (1922) 13 Ll. L. Rep. 298 (C.A.) ............................................................................. 226 Compania Maritima San Basilio SA v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1977] Q.B. 49; [1976] 2 Lloyd’s Rep. 171 (C.A.) .................................. 222 Computer & Systems Engineering plc v. John Lelliott (Ilford) (1990) 54 B.L.R. 1 (C.A.) ..... 246 Container Transport International Inc v. Oceanus Mutual Underwriting Association (Bermuda) Ltd (No. 1) [1984] 1 Lloyd’s Rep. 476 (C.A.) ....................................... 40, 41, 54 Continental Illinois National Bank & Trust Co. of Chicago and Xenofon Maritime SA v. Alliance Assurance Co Ltd (The Captain Panagos DP) [1989] 1 Lloyd’s Rep. 33 (C.A.) ...................................................................................................................... 231 Cook v. Financial Insurance Co. Ltd [1998] 1 W.L.R. 1765; [1999] Lloyd’s Rep. I.R. 1 (H.L.) .................................................................................................................. 46, 102 Cooper v. Motor Insurers Bureau [1985] 1 All E.R. 449; [1985] R.T.R. 273 (C.A.) ........ 291 Cooter & Green v. Tyrrell [1962] 2 Lloyd’s Rep. 377 (C.A.) ........................................... 166 Cormack & Cormack v. Excess Insurance Co. Ltd [2002] Lloyd’s Rep. I.R. 938 ............. 285 Cornhill Insurance Co. Ltd v. L&B Assenheim (1937) 58 Ll. L. Rep. 27 ......................... 164 Cornhill Insurance plc v. D E Stamp Felt Roofing Contractors Ltd [2002] Lloyd’s Rep. I.R. 648 .......................................................................................................................... 98

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Countrywide Assured Group plc v. Marshall [2003] Lloyd’s Rep. I.R. 195 ...................... 125 Coven SpA v. Hong Kong Chinese Insurance Co. [1999] Lloyd’s Rep. I.R. 565 (C.A.) ... 108 Cox v. Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep. 437 (C.A.) ............ 96, 125, 308 Crédit Lyonnais v. New Hampshire Insurance Co. Ltd [1997] 1 Lloyd’s Rep. 191; affirmed [1997] 2 Lloyd’s Rep. 1 (C.A.) ................................................................................. 341 Curtis & Sons v. Mathews [1919] 1 K.B. 425 (C.A.) ....................................................... 267 Cutter v. Eagle Star Insurance Co. Ltd; Clarke v. Kato [1998] 1 W.L.R. 1647; [1998] 4 All E.R. 417 (H.L.) ....................................................................................................... 288 DPP v. Vivier [1991] 4 All E.R. 18; [1991] R.T.R. 205 ................................................... 288 Davidson v. Guardian Royal Exchange Assurance [1979] 1 Lloyd’s Rep. 406 ................... 205 Davies v. National Fire & Marine Insurance Co. of New Zealand [1891] A.C. 485 (P.C.) ..... 141 Davy Offshore Ltd v. National Oilwell (UK) Ltd [1993] 2 Lloyd’s Rep. 582 ....177, 183, 185, 187 Dawsons Ltd v. Bonnin [1922] 2 A.C. 413; (1922) 12 Ll. L. Rep. 237 (H.L.) ................. 87 De Hahn v. Hartley (1786) 1 T.R. 343 ..................................................................... 223, 224 De Monchy v. Phoenix Insurance Co. of Hartford (1929) 34 Ll. L. Rep. 201 (H.L.) ....... 233 Decorum Investments Ltd v. Atkin, The Elena G [2002] Lloyd’s Rep. I.R. 450; [2001] 2 Lloyd’s Rep. 378 ...................................................................................................... 52 Deep Vein Thrombosis and Air Travel Group Litigation, Re [2005] UKHL 72 (H.L.) ..... 125 Deepak Fertilisers & Petrochemical Corp v. Davy McKee (London) Ltd [1999] 1 Lloyd’s Rep. 387 (C.A.) ....................................................................................................... 185 Derry v. Peek (1889) L.R. 14 App. Cas. 337 (H.L.) .............................................. 29, 69, 159 Deutsche Genossenschaftsbank v. Burnhope [1993] 2 Lloyd’s Rep. 518 (Q.B.D.); [1995] 4 All E.R. 717; [1996] 1 Lloyd’s Rep. 113 (H.L.) ....................................................... 83 Deutsche Morgan Grenfell Group plc v. IRC [2006] UKHL 49; [2006] 3 W.L.R. 781 (H.L.) ...................................................................................................................... 168 Deutsche Ruckversichering AG v. Walbrook Insurance Co. Ltd [1996] 1 W.L.R. 1152; [1996] 1 Lloyd’s Rep. 345 (C.A.) ............................................................................. 57 Devco Holder and Burrows & Paine v. Legal & General Assurance Society [1993] 2 Lloyd’s Rep. 567 (C.A.) ....................................................................................................... 264 Diamond, The [1906] P. 282 .......................................................................................... 226 Direct Line Insurance plc v. Khan [2001] Lloyd’s Rep. I.R. 364 (C.A.) ...................... 62, 163 Dobson v. General Accident Fire and Life Assurance Corp [1990] 1 Q.B. 274; [1989] 3 All E.R. 927; [1989] 2 Lloyd’s Rep. 549 (C.A.) ......................................................... 81, 248 Donohue v. Armco Inc [2000] 1 Lloyd’s Rep. 579 (C.A.); reversed [2002] 1 Lloyd’s Rep. 425 (H.L.) ............................................................................................................... 333 Drake Insurance Plc, Re [2001] Lloyd’s Rep. I.R. 643 .................................................... 287 Drake Insurance plc v. Provident Insurance plc [2003] EWCA Civ 1834; [2004] Lloyd’s Rep. I.R. 277 (C.A.) .......................................................................... 44, 68, 69, 71, 199 Dunthorne v. Bentley [1999] Lloyd’s Rep. I.R. 560 (C.A.) .............................................. 292 Eagle Star Insurance Co. Ltd v. Cresswell [2004] EWCA Civ 602; [2004] Lloyd’s Rep. I.R. 537 (C.A.) ......................................................................................................... 135, 283 Eagle Star Insurance Co. Ltd v. Games Video Co. (GVC) SA (The Game Boy) [2004] EWHC 15 (Comm); [2004] Lloyd’s Rep. I.R. 867; [2004] 1 Lloyd’s Rep. 238 ...... 111, 162, 163, 221 Eagle Star Insurance Co. Ltd v. National Westminster Finance Australia Ltd (1985) 58 A.L.R. 165 ............................................................................................................... 164 Eagle Star Insurance Co. Ltd v. Provincial Insurance [1993] 3 All E.R. 1; [1993] 2 Lloyd’s Rep. 143 (P.C.) .................................................................................................. 196, 197 Economides v. Commercial Union Assurance Co. plc [1998] Lloyd’s Rep. I.R. 9; [1998] Q.B. 587 (C.A.) ............................................................................................... 40, 55–58 Egon Oldendorff v. Libera Corp (No. 2) [1996] 1 Lloyd’s Rep. 38 .................................. 344 Eisinger v. General Accident, Fire and Life Assurance Corp [1955] 2 All E.R. 897; [1955] 2 Lloyd’s Rep. 95 ................................................................................................ 109,110 Elcock v. Thomson [1949] 2 K.B. 755; (1948–49) 82 Ll. L. Rep. 892 ............................. 113 Elizabeth v. Motor Insurers Bureau [1981] R.T.R. 405 (C.A.) ......................................... 299 English v. Western [1940] 2 K.B. 156; (1940) 67 Ll. L. Rep. 45 (C.A.) .......................... 102 Enterprise Oil Ltd v. Strand Insurance Co. Ltd [2006] EWHC 58 (Comm) .................... 278 Eurodale Manufacturing Ltd (t/a Connekt Cellular Communications) v. Ecclesiastical Insurance Office plc [2002] Lloyd’s Rep I.R. 444 ..................................................... 84

Table of Cases

xvii

Europe Mortgage Co. v. Halifax Estate Agencies [1996] E.G.C.S. 84; [1996] N.P.C. 68; The Times, 23 May 1996 ................................................................................................. 189 Evans v. Employers Mutual Insurance Association Ltd [1935] All E.R. 659; (1935) 52 Ll. L. Rep. 51 (C.A.) ......................................................................................................... 25 Evans v. Lewis [1964] 1 Lloyd’s Rep. 258 ....................................................................... 286 Evans v. Secretary of State for the Environment, Transport and the Regions, Case C–63/01 [2004] Lloyd’s Rep. I.R. 391 (E.C.J.) ....................................................................... 297 Exchange Theatre Ltd v. Iron Trades Mutual Insurance Co. Ltd [1983] 1 Lloyd’s Rep. 674 .......................................................................................................................... 117 FNCB Ltd (formerly First National Commercial Bank plc) v. Barnet Devanney (Harrow) Ltd (formerly Barnet Devanney & Co. Ltd) [1999] Lloyd’s Rep. I.R. 459; [1999] Lloyd’s Rep. P.N. 908 (C.A.) ............................................................................... 59, 252 Faircharm Investments Ltd v. Citibank International plc [1998] Lloyd’s Rep. Bank. 127 (C.A.) ...................................................................................................................... 177 Fairchild v. Glenhaven Funeral Services Ltd (t/a GH Dovener & Son) [2002] 3 W.L.R. 89 (H.L.) ...................................................................................................................... 201 Fanti, The and the Padre Island) (No. 2) [1990] 2 All E.R. 705; [1990] 2 Lloyd’s Rep. 191 (H.L.) ................................................................................................................ 309, 310 Farnworth v. Hyde (1866) L.R. 2 C.P. 204 ..................................................................... 237 Farrell v. Federated Employers’ Insurance Association [1970] 1 W.L.R. 498; [1970] 1 Lloyd’s Rep. 129; affirmed [1970] 1 W.L.R. 1400; [1970] 2 Lloyd’s Rep. 170 (C.A.) .... 136 Feasey v. Sun Life Insurance of Canada [2003] Lloyd’s Rep. I.R. 637 (C.A.) ................21, 22 Fenton Insurance Co. v. Gothaer Versicherungsbank VVaG [1991] 1 Lloyd’s Rep. 172 .... 14 Ferrymasters Ltd v. Adams [1980] R.T.R. 139 ................................................................ 289 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32; (1942) 73 Ll. L. Rep. 45 (H.L.) ............................................................................................... 16 FIG Re Ltd v. Mander [1999] Lloyd’s Rep. I.R. 193 ....................................................... 14 Francis v. Boulton [1895] 1 Com. Cas. 217 .............................................................. 234, 240 Frans Maas (UK) Ltd v. Sun Alliance and London Insurance plc [2004] Lloyd’s Rep. I.R. 649 .......................................................................................................................... 265 Fraser v. B N Furman (Productions) Ltd [1967] 1 W.L.R. 898; [1967] 2 Lloyd’s Rep. 1; [1967] 3 All E.R. 57 (C.A.) ................................................................................. 81, 263 Frewin v. Poland [1968] 1 Lloyd’s Rep. 100 .................................................................... 114 Friends Provident Life and Pensions Ltd v. Sirius International Insurance Corp [2005] EWCA Civ 601; [2006] Lloyd’s Rep. I.R. 45 (C.A.) ................................................. 279 Froom v. Butcher [1976] Q.B. 786; [1975] 2 Lloyd’s Rep. 478 (C.A.) ............................ 291 Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep. I.R. 209 (C.A.) .. 160, 161, 163 Gan Insurance Co. Ltd v. Tai Ping Insurance Co. Ltd (Nos 2 and 3) [2001] Lloyd’s Rep. I.R. 667 (C.A.) ............................................................................................................... 283 Gardner v. Moore [1984] 1 All E.R. 1100; [1984] 2 Lloyd’s Rep. 135 (H.L.) .................. 297 General Accident Fire and Life Assurance Corp Ltd v. Midland Bank Ltd [1940] 2 K.B. 388; (1940) 67 Ll. L. Rep. 218 (C.A.) ............................................................... 162, 163 George and Goldsmiths & General Burglary Insurance Association Ltd’s Arbitration, Re [1899] 1 Q.B. 595 (C.A.) .................................................................................. 248–249 George Cohen Sons & Co. v. Standard Marine Insurance Co. Ltd (1925) 21 Ll. L. Rep. 30 ............................................................................................................................ 234 George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2001] EWCA Civ 1964; [2002] Lloyd’s Rep. I.R. 178 (C.A.) ....................................... 81, 96, 97, 135, 137 Glasgow Training Group (Motor Trade) Ltd v. Lombard Continental plc 1989 S.C. 30; 1989 S.L.T. 375 ....................................................................................................... 246 Glencore International AG v. Alpina Insurance Co. Ltd [2004] 1 Lloyd’s Rep. 111 ....53, 71, 109, 110, 126 Glenmuir Ltd v. Norwich Fire Insurance Society Ltd, 1995, unreported .......................... 264 Glicksman v. Lancashire & General Assurance Co. Ltd [1927] A.C. 139; (1926) 26 Ll. L. Rep. 69 (H.L.) ......................................................................................................... 51 Gloucestershire Health Authority v. MA Torpy & Partners Ltd (t/a Torpy & Partners) (No. 2) [1999] Lloyd’s Rep. I.R. 203 ............................................................................... 285 Godfrey Davis Ltd v. Culling [1962] 2 Lloyd’s Rep. 349 (C.A.) ................................ 166, 167

xviii

Table of Cases

Gold v. Patman & Fotheringham [1957] 2 Lloyd’s Rep. 319 ............................................ 16 Good Luck (No 2), The. See Bank of Nova Scotia v. Hellenic Mutual War Risk Association (Bermuda) Ltd Goodbarne v. Buck [1940] 1 K.B. 771; (1940) 66 Ll. L. Rep. 129 (C.A.) ....................... 286 Goshawk Dedicated Ltd v. Tyser & Co. Ltd [2006] All E.R. (Comm) 501 (C.A.) ............ 28 Gray v. Barr [1971] 2 Q.B. 554; [1971] 2 Lloyd’s Rep. 1 (C.A.) ..................................... 282 Gray v. Blackmore [1934] 1 K.B. 95; (1933) 47 Ll. L. Rep. 69 ....................................... 287 Great Peace Shipping Ltd v. Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407; [2003] Q.B. 679; [2002] 2 Lloyd’s Rep. 653; [2002] 4 All E.R. 689 (C.A.) .............. 168 Great Western Assurance Co. SA, Re1999] Lloyd’s Rep. I.R. 377 (C.A.) ......................... 31 Grecia Express, The. See Strive Shipping Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd Groom v. Crocker [1939] 1 K.B. 194; (1938) 60 Ll. L. Rep. 393 (C.A.) ......................... 283 Guinness Peat Properties Ltd v. Fitzroy Robinson Partnership [1987] 1 W.L.R. 1027; [1987] 2 All E.R. 716 ........................................................................................ 154, 155 Gunns v. Par Insurance Brokers [1997] 1 Lloyd’s Rep. 173 ............................................. 265 H. Cousins & Co. v. D & C Carriers [1971] 2 Q.B. 230; [1970] 2 Lloyd’s Rep. 397 (C.A.) ... 192 HIH Casualty & General Insurance Ltd v. Axa Corporate Solutions [2003] Lloyd’s Rep. I.R. 1 .............................................................................................................................. 94 HIH Casualty & General Insurance Ltd v. Chase Manhattan Bank [2001] Lloyd’s Rep. I.R. 703 (C.A.); [2003] UKHL 6; [2001] 1 Lloyd’s Rep. 61; [2003] Lloyd’s Rep. I.R. 230 (H.L) ..................................................................................... 24, 37, 55, 65, 66, 68, 165 HIH Casualty & General Insurance Ltd v. New Hampshire Insurance Co. [2001] Lloyd’s Rep. I.R. 596; [2001] 2 Lloyd’s Rep. 161 (C.A.) ................................ 82, 86, 87, 88, 220 Hair v. Prudential Assurance Co. [1983] 2 Lloyd’s Rep. 667 ........................................... 45 Halloran v. Delaney [2003] 1 W.L.R. 28 ......................................................................... 260 Hamilton Fraser & Co. v. Pandorf & Co. (1887) L.R. 12 App. Cas. 518 .......................... 233 Hamptons Residential Ltd v. Field [1998] 2 Lloyd’s Rep. 248 (C.A.) .............................. 280 Hardy v. Motor Insurers Bureau [1964] 2 Q.B. 745; [1964] 1 Lloyd’s Rep. 397 (C.A.) ... 297 Harrington Motor Co. Ltd ex parte Chaplin, Re [1928] Ch. 105; (1927–28) 29 Ll. L. Rep. 102 (C.A.) ............................................................................................................... 305 Harrington v. Link Motor Policies at Lloyd’s [1989] Lloyd’s Rep. I.R. 467 (C.A.) ........... 295 Harris v. Poland [1941] 1 K.B. 462; (1941) 69 Ll. L. Rep. 35 .................................. 247, 263 Harrods (Buenos Aires) Ltd (No. 2), Re [1992] Ch. 72; [1991] 3 W.L.R. 397 (C.A.) ...... 332 Hart v. Standard Marine Insurance Co. Ltd (1889) L.R. 22 Q.B.D. 499 (C.A.) .............. 220 Harvest Trucking Co. Ltd v. Davis (t/a PB Davis Insurance Services) [1991] 2 Lloyd’s Rep. 638 .......................................................................................................................... 23 Hassett v. Legal & General Assurance Society Ltd (1939) 63 Ll. L. Rep. 278 .................. 135 Haydon v. Lo & Lo [1997] 1 W.L.R. 198; [1997] 1 Lloyd’s Rep. 336 (P.C.) ................... 140 Hayler v. Chapman [1989] 1 Lloyd’s Rep. 490; The Times, 11 November 1988 (C.A.) ... 188–189 Hayward v. Norwich Union Insurance Ltd [2000] Lloyd’s Rep. I.R. 382 ................... 264, 265 Haywood v. Rodgers (1804) 4 East. 590 ......................................................................... 55 Hearts of Oak Permanent Building Society v. Law Union & Rock Insurance Co. Ltd [1936] 2 All E.R. 619; (1936) 55 Ll. L. Rep. 153 ................................................................ 60 Hedley Byrne & Co. Ltd v. Heller & Partners Ltd [1964] A.C. 465; [1963] 1 Lloyd’s Rep. 485 (H.L.) ....................................................................................................... 28, 66, 69 Hellenic Industrial Development Bank SA v. Atkin (The Julia), 2002, unreported ..... 121, 122 Hellenic Mutual War Risks Association (Bermuda) Ltd v. Harrison (The Sagheera) [1997] 1 Lloyd’s Rep. 160 ................................................................................................... 156 Hibbert v. Pigou (1783) 3 Doug. K.B. 213 ..................................................................... 224 Highlands Insurance Co. v. Continental Insurance Co. [1987] 1 Lloyd’s Rep. 109 (Note) ..56, 68, 70 Hood’s Trustees v. Southern Union General Insurance Co. of Australasia Ltd [1928] Ch. 793; (1928) 31 Ll. L. Rep. 237 (C.A.) ..................................................................... 305 Hopewell Project Management Ltd v. Ewbank Preece Ltd [1998] 1 Lloyd’s Rep. 448 ...... 186 Horse, Carriage & General Insurance Co. Ltd v. Petch [1916] 33 T.L.R. 131 .................. 193 Hussain v. Brown [1996] 1 Lloyd’s Rep. 627 (C.A.) .....................................................89, 91 If P&C Insurance Ltd v. Silversea Cruises Ltd [2004] Lloyd’s Rep. I.R. 696 ....118, 128, 269, 271

Table of Cases

xix

Insurance Corp of the Channel Islands Ltd v. McHugh [1997] L.R.L.R. 94 ...144, 145, 146, 149, 151, 152 Insurance Corp of the Channel Islands Ltd v. Royal Hotel Ltd [1998] Lloyd’s Rep. I.R. 151 ...43, 47, 148, 152 Integrated Container Service v. British Traders Insurance Co. [1984] 1 Lloyd’s Rep. 154 (C.A.) ...................................................................................................................... 131 Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd [1989] Q.B. 433; [1988] 2 W.L.R. 615 (C.A.) ................................................................................................... 8 Investors Compensation Scheme Ltd v. West Bromwich Building Society (No. 1) [1998] 1 W.L.R. 896; [1998] 1 All E.R. 98 (H.L.) ..................................................... 82, 135, 220 Ionides v. Pender (1874) L.R. 9 Q.B. 531 ....................................................................... 111 Iron Trades Mutual Insurance Co. Ltd v. Imperio [1991] 1 Re L.R. 213 ......................... 95 Irvin v. Hine [1950] 1 K.B. 555; (1949–50) 83 Ll. L. Rep. 162 ........................ 235, 236, 241 Italia Express (No. 2), The. See Ventouris v Mountain J.A. Chapman & Co. Ltd (In Liquidation) v. Kadirga Denizcilik ve Ticaret AS [1997] L.R.L.R. 65; [1998] Lloyd’s Rep. I.R. 377 (C.A.) .................................................... 13 James v. British General Insurance Co. Ltd [1927] 2 K.B. 311; (1927) 27 Ll. L. Rep. 328 .... 297 James v. CGU Insurance plc [2002] Lloyd’s Rep. I.R. 206 .......................................... 48, 247 James Yachts v. Thames & Mersey Marine Insurance Co. [1977] 1 Lloyd’s Rep. 206 (Sup Ct (BC)) .................................................................................................................. 214 Jaura v. Ahmed [2002] EWCA Civ 210; The Times, 18 March 2002 (C.A.) ..................... 145 Joel v. Law Union and Crown Insurance Co. [1908] 2 K.B. 863; (1908) 99 L.T. 712 (C.A.) ....40, 46 John Edwards & Co. v. Motor Union Insurance Co. Ltd [1922] 2 K.B. 249; (1922) 11 Ll. L. Rep. 170 .............................................................................................................. 193 John T. Ellis Ltd v. Hinds [1947] K.B. 475; (1947) 80 Ll. L. Rep. 231 ........................... 288 John Wyeth & Bros Ltd v. Cigna Insurance Co. of Europe SA NV (No. 1) [2001] Lloyd’s Rep. I.R. 420 (C.A.) ................................................................................................ 284 Jones v. University of Warwick [2003] EWCA Civ 151; [2003] 1 W.L.R. 954; [2003] 3 All E.R. 760 (C.A.) ................................................................................................. 157, 158 K/S Merc-Scandia XXXXII v. Certain Underwriters of Lloyd’s Policy 25T 105487 and Ocean Marine Insurance Co. Ltd (The Mercandian Continent) [2000] Lloyd’s Rep. I.R. 694; affirmed [2001] EWCA Civ 1275; [2001] 2 Lloyd’s Rep. 563; [2001] Lloyd’s Rep. I.R. 802 (C.A.) .............................................................61, 101, 137, 161, 163, 283 Kastor Navigation Co. Ltd v. Axa Global Risks (UK) Ltd [2004] 2 Lloyd’s Rep. 119 .... 226, 233, 237 Kausar v. Eagle Star Insurance Co. Ltd [2000] Lloyd’s Rep. I.R. 154 (C.A.) ................... 60 Kazakhstan Wool Processors (Europe) Ltd v. Nederlandsche Credietverzekering Maatschappij NV [2000] Lloyd’s Rep. I.R. 371 (C.A.) ................................................. 99, 256 King v. Brandywine Co. (UK) Ltd [2005] Lloyd’s Rep. 509; upheld on othger grounds [2005] EWCA Civ 35 (C.A.) ................................................................................... 280 King v. Victoria Insurance Co. Ltd [1896] A.C. 250 (P.C.) ............................................. 189 Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 A.C. 349; [1998] Lloyd’s Rep. Bank. 387 (H.L.) ..................................................................................................... 168 Kler Knitwear Ltd v. Lombard General Insurance Co. Ltd [2000] Lloyd’s Rep. I.R. 47 ..... 86, 90 Kruger Tissue (Industrial) Ltd (formerly Industrial Cleaning Papers Ltd) v. Frank Galliers Ltd 57 Con. L.R. 1; (1998) 14 Const. L.J. 437 ........................................................ 186 Kusel v. Atkin (The Cantariba) [1997] 2 Lloyd’s Rep. 749 .............................................. 241 Kuwait Airways Corp v. Kuwait Insurance Co. SAK (No. 1) [1996] 1 Lloyd’s Rep. 664 ...127, 191 Kuwait Airways Corp v. Kuwait Insurance Co. SAK (No. 3) [2000] Lloyd’s Rep. I.R. 678 .... 122 Kyzuna Investments Ltd v. Ocean Marine Mutual Insurance Association (Europe) (The Solveig) [2000] Lloyd’s Rep. I.R. 513 ............................................................... 112, 238 LEC (Liverpool) Ltd v. Glover (t/a Rainhill Forge) [2001] Lloyd’s Rep. I.R. 315 (C.A.) ....... 265 La Positiva Seguros y Reaseguros SA v. Jessel, 2000, unreported ..................................... 251 Lagden v. O’Connor [2003] UKHL 64; [2004] 1 A.C. 1067 (H.L.) ................................ 147 Lamb Head Shipping Co. Ltd v. Jennings (The Marel) [1994] 1 Lloyd’s Rep. 624 (C.A.) ..... 226 Lambert v. Cooperative Insurance Society Ltd [1975] 2 Lloyd’s Rep. 465 (C.A.) ..........49, 60 Lambert v. Keymood Ltd [1999] Lloyd’s Rep. I.R. 80 .............................................. 247, 265

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Lancashire County Council v. Municipal Mutual Insurance Ltd [1996] 3 All E.R. 545 (C.A.) .................................................................................................................. 82, 282 Langdale v. Mason (1780) 2 Park 965 ............................................................................. 269 Le Fabrique de Produits Chimiques Societe Anonyme v. Large [1923] 1 K.B. 203; (1922) 13 Ll. L. Rep. 269 ................................................................................................... 228 Legal & General Assurance Society Ltd v. Drake Insurance Co (t/a Drake Motor Policies at Lloyd’s) [1992] 1 All E.R. 283; [1991] 2 Lloyd’s Rep. 36 (C.A.) ...... 196, 197, 198, 199, 200 Lek v. Mathews (1927) 29 Ll. L. Rep. 141 (H.L.) ........................................................... 159 Leonita, The (1922) 13 Ll. L. Rep. 231 (C.A.) ............................................................... 231 Leppard v. Excess Insurance Co. Ltd [1979] 2 Lloyd’s Rep. 91 (C.A.) ............................ 115 Lefevre v. White [1990] 1 Lloyd’s Rep. 569 .............................................................. 310, 313 Levy v. Assicurazione Generali [1940] A.C. 791; (1940) 67 Ll. L. Rep. 17 (P.C.) ............ 269 Lewis Ltd v. Norwich Union Fire Insurance Co. [1916] A.C. 509 ................................... 12 Liesbosch, The; sub nom. Owners of Dredger Liesbosch v. Owners of SS Edison [1933] A.C. 449; (1933) 45 Ll. L. Rep. 123 (H.L.) ..................................................................... 146 Limbrick v. French and Farley [1990] 11 C.L. para. 329 ................................................. 291 Lind v. Mitchell (1928) 32 Ll. L. Rep. 70 (C.A.) ............................................................ 235 Lishman v. Northern Maritime Insurance Co. (1875) L.R. 10 C.P. 179 ........................... 39 Lister v. Romford Ice and Cold Storage Co. Ltd [1957] 2 W.L.R. 158; [1956] 2 Lloyd’s Rep. 505 (H.L.) ............................................................................................................... 187 Lloyds TSB General Insurance Holdings Ltd v. Lloyds Bank Group Insurance Co. Ltd [2002] Lloyd’s Rep. I.R. 623 (H.L.) ......................................................................... 126 Lloyd-Wolper v. Moore [2004] Lloyd’s Rep. I.R. 730 ................................................ 289, 295 Locker & Woolf Ltd v. Western Australian Insurance Co. Ltd [1936] 1 K.B. 408; (1936) 54 Ll. L. Rep. 211 (C.A.) ............................................................................................. 51 London Assurance v. Clare (1937) 57 Ll. L. Rep. 254 .............................................. 162, 164 London Assurance Co. v. Mansel (1879) 41 L.T. 225 ...................................................... 51 London Assurance Co. v. Sainsbury [1783] 3 K.B. 245 ................................................... 189 London and Lancashire Fire Insurance Co. Ltd v. Bolands Ltd [1924] A.C. 836; (1924) 19 Ll. L. Rep. 1 (H.L.) ................................................................................................. 270 London and Manchester Plate Glass Co. Ltd v. Heath [1913] 3 K.B. 411 (C.A.) ...... 269, 270 Lonrho Exports Ltd v. Export Credits Guarantee Department [1996] 2 Lloyd’s Rep. 649; [1996] 4 All E.R. 673 ........................................................................................ 192, 257 Looker v. Law Union & Rock Insurance Co. Ltd [1928] 1 K.B. 554 ...............................7, 59 Lucas (L.) v. Export Credits Guarantee Department [1973] 1 W.L.R. 914; [1973] 1 Lloyd’s Rep. 549 (C.A.); reversed [1974] 1 W.L.R. 909; [1974] 2 Lloyd’s Rep. 69 (H.L.) ... 192, 257 Lucena v. Craufurd (1806) 2 Bos. & P.N.R. 269 ................................................. 21, 215, 216 Lumbermen’s Mutual Casualty Co. v. Bovis Lend Lease Ltd [2005] Lloyd’s Rep. I.R. 74; [2005] 1 Lloyd’s Rep. 494 ................................................................................. 279, 282 MDIS Ltd (formerly McDonnell Information Systems Ltd) v. Swinbank [1999] 1 Lloyd’s Rep. I.R. 516 (C.A.) ................................................................................................ 281 M. H. Smith (Plant Hire) v. DL Mainwaring (t/a Inshore) [1986] 2 Lloyd’s Rep. 244 (C.A.) ...................................................................................................................... 190 Macaura v. Northern Assurance Co. Ltd [1925] A.C. 619 (H.L.) .................................... 216 McClean Enterprises Ltd v. Ecclesiastical Insurance Office plc [1986] 2 Lloyd’s Rep. 416 .... 116 MacDonald v. Carmichael 1941 S.C. 27 ......................................................................... 288 Maciej Rataj, The. Owners of Cargo Lately Laden on Board the Tatry v. Owners of the Maciej Rataj (Case C–406/92) [1991] 2 Lloyd’s Rep. 458 (Q.B.D.); affirmed [1992] 2 Lloyd’s Rep. 552 (C.A.); [1995] 1 Lloyd’s Rep. 302; [1995] I.L.Pr. 81 (E.C.J.) ........ 335 Mander v. Equitas Ltd [2000] Lloyd’s Rep. I.R. 520 ....................................................... 83 Mandrake Holdings Ltd v. Countrywide Assured Group plc [2005] EWCA Civ 840 ........ 146 Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd (The Star Sea) [2001] UKHL 1; [2001] Lloyd’s Rep. I.R. 247; [2001] 1 Lloyd’s Rep. 389 (H.L.) ... 60, 158, 160, 164, 165, 223 Mann v. Lexington Insurance Co. [2001] Lloyd’s Rep. I.R. 179 (C.A.) ........................... 127 Marc Rich & Co. AG v. Portman [1996] 1 Lloyd’s Rep. 430 ........................................... 43 March Cabaret Club & Casino v. London Assurance [1975] 1 Lloyd’s Rep. 169 .............. 49 Mason v. Sainsbury (1782) 3 Doug. K.B. 61 ................................................................... 179

Table of Cases Mayban General Assurance BHD v. Alstom Power Plants Ltd [2004] EWHC 1038 (Comm) ................................................................................................................... Midland Mainline Ltd (2) Central Trains Ltd (3) Gatwick Express Ltd (4) Scotrail Railways Ltd (5) Silverlink Train Services Ltd v. Commercial Union Assurance Co. Ltd (2) St Paul International Inc [2004] 1 Lloyd’s Rep. 22; reversed in part on other grounds [2004] Lloyd’s Rep. I.R. 239 (C.A.) ................................................................... 128, Midland Silicones Ltd v. Scruttons Ltd [1962] A.C. 446; [1961] 2 Lloyd’s Rep. 365 (H.L.) ...................................................................................................................... Milasan, The. See Brownsville Holdings Ltd v. Adamjee Insurance Co Ltd Mills (John) v. Smith (Robert) [1964] 1 Q.B. 30; [1963] 1 Lloyd’s Rep. 168 ............ Mitsubishi Electric (U.K.) Ltd v. Royal London Insurance (UK) Ltd [1994] 2 Lloyd’s Rep. 249 (C.A.) ............................................................................................................... Monk v. Warbey [1935] 1 K.B. 75; (1934) 50 Ll. L. Rep. 33 (C.A.) ......................... 287, Monkton Court Ltd (t/a CATS) v. Perry Prowse (Insurance Services) Ltd [2002] Lloyd’s Rep. I.R. 408 ........................................................................................................... Moore v. Evans [1918] A.C. 185 (H.L.) .......................................................................... Moore Large & Co. Ltd v. Hermes Credit & Guarantee plc [2003] EWHC 26; [2003] Lloyd’s Rep. I.R. 315 ................................................................................... 69, 153, Moran Galloway & Co. v. Uzielli [1905] 2 K.B. 555 ........................................................ Morris v. Ford Motor Co. [1973] 2 All E.R. 1084; [1973] 2 Lloyd’s Rep. 27 (C.A.) ........ Mostcash plc (formerly k/a UK Paper plc) v. Fluor Ltd [2002] EWCA Civ 975; [2002] B.L.R. 411; 83 Con. L.R. 1 (C.A.) ........................................................................... Motor and General Insurance Co. v. Cox [1990] 1 W.L.R. 1443; [1991] R.T.R. 67 (P.C.) .... Motor and General Insurance Co. v. Pavey [1994] 1 W.L.R. 462; [1994] 1 Lloyd’s Rep. 607 (P.C.) ....................................................................................................................... Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep. 391 (H.L.) ............................................................................. Murphy v. Young & Co’s Brewery plc [1996] L.R.L.R. 60 .............................................. Napier and Ettrick v. RF Kershaw Ltd (No. 1); Napier and Ettrick v. Hunter [1993] 1 All E.R. 385; [1993] 1 Lloyd’s Rep. 197 (H.L.) ....................................... 123, 179, 191, Nash (t/a Dino Services Ltd) v. Prudential Assurance Co. Ltd [1989] 1 Lloyd’s Rep. 379 (C.A.) ...................................................................................................................... National Oil Co. of Zimbabwe (Private) v. Sturge [1991] 2 Lloyd’s Rep. 281 ................... National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep. 582 .................... National Trust for Places of Historic Interest or Natural Beauty v. Haden Young Ltd, The Times, 11 August 1994; 41 Con. L.R. 112; 72 B.L.R. 1 (C.A.) ................................. Naumann v. Ford [1985] 2 E.G.L.R. 70; (1985) 275 E.G. 542 ....................................... Nawaz v. Crowe Insurance Group [2003] EWCA Civ 316 (C.A.) .................................... New Hampshire Insurance Co. Ltd v. Philips Electronics North America Corp (No. 1) [1999] Lloyd’s Rep. I.R. 58 (C.A.) ........................................................................... New Hampshire Insurance Co. Ltd v. Philips Electronics North America Corp (No. 2) [1999] Lloyd’s Rep. I.R. 66 ...................................................................................... New Zealand Forest Products Ltd v. New Zealand Insurance Co. Ltd [1997] 1 W.L.R. 1237 (P.C.) ....................................................................................................................... Newbury v. Davis [1974] R.T.R. 367 .............................................................................. Newsholme Bros v. Road Transport & General Insurance Co. Ltd [1929] 2 K.B. 356; (1929) 34 Ll. L. Rep. 247 (C.A.) ............................................................................. Nigel Upchurch Associates v. Aldridge Estates Investment Co. [1993] 1 Lloyd’s Rep. 535 .... Noble Resources and Unirise Development v. George Albert Greenwood (The Vasso) [1993] 2 Lloyd’s Rep. 309 ........................................................................................ Norman v. Aziz [2000] Lloyd’s Rep. I.R. 52 .................................................................... Normhurst Ltd v. Dornoch [2004] Lloyd’s Rep. I.R. 27 .................................................. Normid Housing Association Ltd v. Ralphs & Mansell (Third Party Rights: Mareva Injuction) [1989] 1 Lloyd’s Rep. 265 (C.A.) .................................................................... North British and Mercantile Insurance Co. v. London Liverpool and Globe Insurance Co. (1875) L.R. 5 Ch. D. 569 ........................................................................................ Norwich City Council v. Harvey (Paul Clarke) [1989] 1 All E.R. 1180; 45 B.L.R. 14 (C.A.) ......................................................................................................................

xxi 232

266 183 266 126 289 285 108 256 217 187 168 294 136 149 259 192 249 269 231 185 188 295 332 250 284 288 64 312 176 290 120 311 195 182

xxii

Table of Cases

Norwich Union Fire Insurance Society Ltd v. William H Price Ltd [1934] A.C. 455; (1934) 49 Ll. L. Rep. 55 (P.C.) ........................................................................................... 168 Noten BV v. Paul Charles Harding [1990] 2 Lloyd’s Rep. 283 (C.A.) .............................. 232 OT Computers Ltd, Re [2004] EWCA Civ 653; [2004] Lloyd’s Rep. I.R. 669 (C.A.) ..... 18, 260, 307, 312, 313 O’Brien v. Anderton [1979] R.T.R. 388 .......................................................................... 288 O’Connor v. BDB Kirby & Co. [1972] 1 Q.B. 90; [1971] 1 Lloyd’s Rep. 454 (C.A.) ...... 27 O’Kane v. Jones (The Martin P) [2003] EWHC 2158; [2004] Lloyd’s Rep. I.R. 389 ...... 47, 197, 217 O’Mahoney v. Jolliffe [1999] Lloyd’s Rep. I.R. 321 (C.A.) .............................................. 289 Olimpia, The (1924) 19 Ll. L. Rep. 255 (H.L.) .............................................................. 231 Orakpo v. Barclays Insurance Services Ltd [1995] L.R.L.R. 443 (C.A.) ..................... 159, 160 Overseas Commodities Ltd v. Style [1958] 1 Lloyd’s Rep. 546 .................................... 87, 220 P Samuel & Co. Ltd v. Dumas [1924] A.C. 431; (1924) 18 Ll. L. Rep. 211 (H.L.) .. 162, 164 PCW Syndicates v. PCW Reinsurers [1996] 1 Lloyd’s Rep. 241 (C.A.) ........................... 65 Paine v. Catlin [2004] EWHC 3054 (TCC) .................................................................... 247 Pan American World Airways Inc v. Aetna Casualty and Surety Co., The [1975] 1 Lloyd’s Rep. 77 (US Ct) ................................................................................................ 267, 268 Pan Atlantic Insurance Co. Ltd v. Pine Top Insurance Co. Ltd [1995] 1 A.C. 501; [1994] 2 Lloyd’s Rep. 427 (H.L.) .................................................................... 42, 43, 44, 71, 73 Panamanian Oriental Steamship Corp v. Wright (The Anita) [1970] 2 Lloyd’s Rep. 365 ...... 234 Papadimitriou v. Henderson [1939] 3 All E.R. 908; (1939) 64 Ll. L. Rep. 345 ................ 230 Payton v. Brooks [1974] 1 Lloyd’s Rep. 241 (C.A.) ......................................................... 114 Pendennis Shipyard Ltd v. Magrathea (Pendennis) Ltd [1998] 1 Lloyd’s Rep. 315 .......... 285 Pesquerias y Secaderos de Bacalao de Espana SA v. Beer [1949] 1 All E.R. 845 (Note); (1948–49) 82 Ll. L. Rep. 501 (H.L.) ........................................................................ 267 Petrofina (UK) Ltd v. Magnaload Ltd [1984] Q.B. 127; [1983] 2 Lloyd’s Rep. 91 .......... 182 Philadelphia National Bank v. Poole [1938] 2 All E.R. 199 .............................................. 251 Phillips v. Sydicate 992 [2003] EWHC 1084 (QB) .......................................................... 201 Phoenix General Insurance Co. of Greece SA v. Administratia Asigurarilor de Stat; Phoenix General Insurance Co. of Greece SA v. Halvanon Insurance [1988] Q.B. 216; [1986] 2 Lloyd’s Rep. 552 .................................................................................................. 31, 136 Pickett v. Motor Insurers Bureau [2004] Lloyd’s Rep. I.R. 513 (C.A.) ...................... 288–289 Pike, John A. (Butchers) Ltd v. Independent Insurance Co. Ltd [1998] Lloyd’s Rep. I.R. 410 (C.A.) ...................................................................................................................... 248 Pilkington United Kingdom Ltd v. CGU Insurance plc [2004] Lloyd’s Rep. I.R. 891 (C.A.) ...97, 130 Pim v. Reid (1843) 6 Man. & G. 1 ...............................................................................39, 59 Pioneer Concrete (UK) Ltd v. National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd’s Rep. 274 ................................................................... 136, 140, 142 Piper v. Royal Exchange Assurance (1932) 44 Ll. L. Rep. 103 ......................................... 216 Pitts v. Hunt [1991] 1 Q.B. 24; [1990] 3 W.L.R. 542 (C.A.) ........................................... 292 Polurrian Steamship Co. Ltd v. Young [1915] 1 K.B. 922 (C.A.) .................................... 236 Post Office v. Norwich Union Fire Insurance Society Ltd [1967] 1 All E.R. 577; [1967] 1 Lloyd’s Rep. 216 (C.A.) ........................................................................................... 308 Prenn v. Simmonds [1971] 1 W.L.R. 1381; [1971] 3 All E.R. 237 (H.L.) ........................ 135 President of India v. Lips Maritime Corp (The Lips) [1988] A.C. 395; [1987] 2 Lloyd’s Rep. 311 (H.L.) ............................................................................................................... 119 Pride Valley Foods Ltd v. Independent Insurance Co. Ltd [1999] 1 Lloyd’s Rep. I.R. 120 (C.A.) ...................................................................................................................... 146 Printpak v. AGF Insurance Ltd [1999] 1 Lloyd’s Rep. I.R. 542 (C.A.) ............................ 89 Promet Engineering (Singapore) Pte Ltd v. Sturge (The Nukila) [1997] 2 Lloyd’s Rep. 146 (C.A.) ...................................................................................................................... 109 Proudfoot plc v. Federal Insurance Co. [1997] I.R.L.R. 659 ............................................ 251 Prudential Insurance C. v. Inland Revenue Commissioners [1904] 2 K.B. 658 ................ 2 Quorum A/S v. Schramm (Damage) [2002] Lloyd’s Rep. I.R. 292 ............ 109, 112, 115, 122 Quorum A/S v. Schramm (Costs) (No. 2) [2002] Lloyd’s Rep. I.R. 315 .......................... 122 R v. Secretary of State for Transport, ex parte National Insurance Guarantee Corp plc [1996] C.O.D. 425; The Times, 3 June 1996 ............................................................. 292

Table of Cases

xxiii

Rall v. Hume [2001] EWCA Civ 146; [2001] 3 All E.R. 248 (C.A.) ................................ 156 Randall v. Motor Insurers Bureau [1969] 1 All E.R. 21; [1968] 2 Lloyd’s Rep. 55 ........... 288 Reardon Smith Line Ltd v. Yngvar Hansen-Tangen (The Diana Prosperity) [1976] 1 W.L.R. 989; [1976] 2 Lloyd’s Rep. 621 (H.L.) ..................................................................... 135 Reid v. Rush & Tompkins Group [1989] 3 All E.R. 228; [1989] 2 Lloyd’s Rep. 167 (C.A.) ... 304 Rendall v. Combined Insurance Co. of America [2005] EWHC 678 (Comm) ...............55, 57 Republic of Bolivia v. Indemnity Mutual Marine Assurance Co. Ltd [1909] 1 K.B. 785 (C.A.) ...................................................................................................................... 228 Revell v. London General Insurance Co. Ltd (1934) 50 Ll. L. Rep. 114 .......................... 53 Reynolds & Anderson v. Phoenix Assurance Co. Ltd [1978] 2 Lloyd’s Rep. 440 ... 41, 49, 116, 210 Richardson v. Pitt-Stanley [1995] 1 All E.R. 460 (C.A.) .................................................. 304 Rickards v. Forestal Land Timber & Railways Co. Ltd (The Minden) [1942] A.C. 50; (1941) 70 Ll. L. Rep. 173 (H.L.) ............................................................................. 235 Rivaz v. Gerussi Bros & Co. (1880) L.R. 6 Q.B.D. 222 (C.A.) ........................................ 165 Robert Irving & Burns v. Stone [1998] Lloyd’s Rep. I.R. 258 (C.A.) ......................... 140, 281 Roberts v. Plaisted [1989] 2 Lloyd’s Rep. 341 (C.A.) ...................................................... 63 Robertson v. Petros M. Nomikos Ltd [1939] A.C. 371; (1939) 64 Ll. L. Rep. 45 ............ 235 Rohan Investments Ltd v. Cunningham [1999] Lloyd’s Rep. I.R. 190 (C.A.) ................... 246 Rohl v. Parr (1796) 1 Esp. 445 ........................................................................................ 233 Roselodge Ltd (formerly Rose Diamond Products Ltd) v. Castle [1966] 2 Lloyd’s Rep. 113 ....41, 48 Rosetto v. Gurney (1851) 11 C.B.176 ............................................................................. 237 Rothschild Assurance Ltd v. Collyear [1999] Lloyd’s Rep. I.R. 6 ..................................... 280 S & M Hotels Ltd v. Legal and General Assurance Society Ltd [1972] 1 Lloyd’s Rep. 157 .... 245 St Paul Fire & Marine Insurance Co. (UK) Ltd v. McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep. 116 (C.A.) ............................................................................. 43 Samuel & Co. Ltd v. Dumas [1924] A.C. 431; (1924) 18 Ll. L. Rep. 211 (H.L.) ...... 226, 253 Sarwar v. Alam, 2003, unreported ............................................................................. 261, 262 Schoolman v. Hall [1951] 1 Lloyd’s Rep. 139 (C.A.) ....................................................... 48 Scott v. Copenhagen Reinsurance Co. (UK) Ltd [2001] Lloyd’s Rep. I.R. 179; [2003] Lloyd’s Rep. I.R. 696 (C.A.) .............................................................................. 108, 127 Scragg v. United Kingdom Temperance & General Provident Institution [1976] 2 Lloyd’s Rep. 227 .................................................................................................................. 81 Screen Partners London Ltd v. VIF Film Production GmbH & Co. [2002] Lloyd’s Rep. I.R. 283 (C.A.) ............................................................................................................... 254 Sharp v. Sphere Drake Insurance (The Moonacre) [1992] 2 Lloyd’s Rep. 501 ................. 218 Shaw v. Roberts (1837) 6 Ad. & E. 75 ............................................................................ 39 Shell UK Ltd (t/a Shell (UK) Exploration & Production) v. CLM Engineering Ltd (formerly Land & Marine Engineering Ltd) [2000] 1 Lloyd’s Rep. 612 .................................... 109 Simner v. New India Assurance Co. Ltd [1995] L.R.L.R. 240 ......................................... 153 Sirius International Insurance v. Friends Provident Life & Pensions Ltd [2005] EWCA Civ 601; [2005] 2 Lloyd’s Rep. 517 (C.A.) ..................................................................... 137 Slater v. Buckinghamshire County Council [2004] Lloyd’s Rep. I.R. 432 ................... 289, 292 Smart v. Allen [1963] 1 Q.B. 291; [1962] 3 W.L.R. 1325 ................................................ 288 Smit Tak Offshore Services Ltd v. Youell [1992] 1 Lloyd’s Rep. 154 (C.A.) ..................... 275 Smith v. Ralph [1963] 2 Lloyd’s Rep. 439 ....................................................................... 289 Sofi v. Prudential Assurance Co. Ltd [1993] 2 Lloyd’s Rep. 559 (C.A.) ....................... 82, 264 South Staffordshire Tramways Co Ltd v. Sickness and Accident Assurance Association Ltd [1891] 1 Q.B. 402 (C.A.) ......................................................................................... 125 Soya GmbH Mainz KG v. White [1983] 1 Lloyd’s Rep. 122 (H.L.) ................................ 232 Spiliada Maritime Corp v. Cansulex Ltd (The Spiliada) [1987] A.C. 460; [1987] 1 Lloyd’s Rep. 1 (H.L.) ..................................................................................................... 323, 332 Spinney’s (1948) Ltd v. Royal Insurance Co. Ltd [1980] 1 Lloyd’s Rep. 406 ............. 267, 268 Spriggs v. Wessington Court School Ltd [2005] Lloyd’s Rep. I.R. 474 ............................. 309 Sprung v. Royal Insurance (UK) Ltd [1999] Lloyd’s Rep. I.R. 111 (C.A.) ................ 120, 145 Stanley v. Western Insurance Co. (1868) L.R. 3 Ex. 71 ................................................... 226 Starfire Diamond Rings Ltd v. Angel [1962] 2 Lloyd’s Rep. 217 (C.A.) ........................... 80 State of Netherlands v. Youell [1998] 1 Lloyd’s Rep. 236 (C.A.) ..................................... 130

xxiv

Table of Cases

Stearns v. Village Main Reef Gold Mining Co. Ltd [1905] 21 T.L.R. 236 ........................ 193 Stockton v. Mason and Vehicle & General Insurance Co. Ltd [1978] 2 Lloyd’s Rep. 430 (C.A.) ...................................................................................................................... 24 Stone Vickers Ltd v. Appledore Ferguson Shipbuilders Ltd [1992] 2 Lloyd’s Rep. 578 (C.A.) ...................................................................................................................... 183 Stoneham v. Ocean, Railway and General Accident Insurance Co. (1887) L.R. 19 Q.B.D. 237 ...................................................................................................................... 96, 134 Stringer v. English and Scottish Marine Insurance Co. Ltd (1869) L.R. 4 Q.B. 676 ........ 234 Strive Shipping Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2002] 2 Lloyd’s Rep. 88 .........................................................................45, 68 Stuart Olson Construction Ltd v. Allan Forrest Sales Ltd (1994) 161 A.R. 6 ................... 186 Surf City, The [1995] 2 Lloyd’s Rep. 242 ....................................................................... 187 Sutherland v. Sun Fire Office (1852) 14 D (Ct. Sess.) 775 .............................................. 205 Svenska Handelsbanken v. Sun Alliance and London Insurance plc (No. 2) [1996] 1 Lloyd’s Rep. 519 ............................................................................................................ 151, 256 Symington & Co. v. Union Insurance Society of Canton Ltd (1928) 44 T.L.R. 635 ......... 129 T&N Ltd v. Royal and Sun Alliance plc [204] Lloyd’s Rep I.R. 144 ................................ 307 TGA Chapman Ltd v. Christopher [1998] 2 All E.R. 873; [1998] Lloyd’s Rep. I.R. 1 (C.A.) ................................................................................................................ 259, 285 TSB Bank plc v. Robert Irving & Burns [1999] Lloyd’s Rep. I.R. 528; [2000] 2 All E.R. 826 (C.A.) ................................................................................................................ 169, 170 Tarbuck v. Avon Insurance plc [2002] Lloyd’s Rep. I.R. 393 ..................................... 260, 307 Tate & Sons v. Hyslop (1885) L.R. 15 Q.B.D. 368 (C.A.) ............................................... 176 Taylor v. Dunbar (1869) L.R. 4 C.P. 206 ........................................................................ 231 Tektrol Ltd v. International Insurance Co. Hanover Ltd [2006] Lloyd’s Rep. I.R. 38 ....... 262 Tempus Shipping Co. Ltd v. Louis Dreyfus & Co. [1930] 1 K.B. 699; (1930) 36 Ll. L. Rep. 159 .......................................................................................................................... 226 Thames and Mersey Marine Insurance Co. Ltd v. Hamilton Fraser & Co. (The Inchmaree) (1887) L.R. 12 App. Cas. 484 (H.L.) ....................................................................... 226 Thomas & Co. v. Brown (1899) 4 Com. Cas. 186 ........................................................... 189 Thor Navigation Inc v. Ingosstrakh Insurance [2005] Lloyd’s Rep. I.R. 490 .............. 112, 117 Thorman v. New Hampshire Insurance Co. (UK) Ltd [1988] 1 Lloyd’s Rep. 7 (C.A.) .... 281 Thornton Springer v. NEM Insurance Co. Ltd [2000] Lloyd’s Rep. I.R. 590; [2000] 2 All E.R. 489 .................................................................................................... 170, 283, 284 Tinline v. White Cross Insurance Association Ltd [1921] 3 K.B. 327 ............................... 297 Toomey of Syndicate 2021 v. Banco Vitalicio de Espana SA de Seguros y Reaseguros [2004] EWCA Civ 622 (C.A.) ............................................................................................. 86 Toronto Railway Co. v. National British and Irish Millers Insurance Co. Ltd (1914) 111 L.T. 555 (C.A.) ............................................................................................................... 149 Total Graphics Ltd v. AGF Insurance Ltd [1997] 1 Lloyd’s Rep. 599 .............................. 310 Tyrie v. Fletcher (1761) 3 Burr. 1237 .............................................................................. 15 Universities Superannuation Scheme Ltd v. Royal Insurance (UK) Ltd [2000] Lloyd’s Rep. I.R. 525 ................................................................................................................... 252 Vasso, The. See Noble Resources and Unirise Development v. George Albert Greenwood Ventouris v. Mountain (The Italia Express) (No. 2) [1992] 2 Lloyd’s Rep. 281 .......... 119, 146 Victor Melik & Co. v. Norwich Union Fire Insurance Society and Kemp [1980] 1 Lloyd’s Rep. 523 ............................................................................................................ 153, 155 Virk v. Gan Life Holdings plc [2000] Lloyd’s Rep. I.R. 159 (C.A.) .................................. 136 Voaden v. Champion (The Baltic Surveyor and the Timbuktu) [2002] EWCA Civ 89; [2002] 1 Lloyd’s Rep. 623 (C.A.) ............................................................................. 118 WISE Underwriting Agency Ltd v. Grupo Nacional Provincial SA [2004] Lloyd’s Rep. I.R. 764 (C.A.) ....................................................................................................... 53, 54, 70 Watchorn v. Langford (1813) 3 Camp. 422 ..................................................................... 80 Waugh v. British Railways Board [1980] A.C. 521; [1979] 3 W.L.R. 150 (H.L.) .............. 154 Webster v. General Accident, Fire and Life Assurance Corp [1953] 1 Lloyd’s Rep. 123; [1953] 1 Q.B. 520 ............................................................................................. 109, 149 Weddell v. Road Transport & General Insurance Co. Ltd [1932] 2 K.B. 563; (1931) 41 Ll. L. Rep. 69 ................................................................................................................ 198 Welch v. Royal Exchange Assurance [1939] 1 K.B. 294; (1938) 62 Ll. L. Rep. 83 (C.A.) ...... 97

Table of Cases Weldon v. GRE Linked Life Assurance Ltd [2000] 2 All E.R. (Comm) 914 ..................... West of England Fire Insurance Co. v. Isaacs [1897] 1 Q.B. 226 (C.A.) .......................... West Wake Price & Co. v. Ching [1957] 1 W.L.R. 45; [1956] 2 Lloyd’s Rep. 618 ............ White v. White [2001] Lloyd’s Rep. I.R. 493 (H.L.) ........................................................ Windus v. Tredegar (1866) 15 L.T. 108 .......................................................................... Winter v. Director of Public Prosecutions [2002] EWHC 1524 (Admin) ......................... Wood v. Associated National Insurance Co. Ltd [1985] 1 Qd. R. 297 .............................. Woodward v. James Young (Contractors) Ltd 1958 S.L.T. 289 ........................................ Woolfall & Rimmer Ltd v. Moyle [1942] 1 K.B. 66; (1941) 71 Ll. L. Rep. 15 (C.A.) ...... Woolwich Building Society v. Taylor [1995] 1 B.C.L.C. 132 ............................................ Worsley v. Tambrands Ltd [2002] 1 Lloyd’s Rep. 282 ..................................................... Wylie v. Wake [2001] R.T.R. 20 (C.A.) ........................................................................... Yager Re (1912) 108 L.T 28 ........................................................................................... Yorke v. Yorkshire Insurance Co Ltd [1918–19] All E.R. Rep. 877; [1918] 1 K.B. 662 .... Yorkshire Insurance Co. Ltd v. Campbell [1917] A.C. 218 (P.C.) .................................... Yorkshire Insurance Co. Ltd v. Nisbet Shipping Co. Ltd [1962] 2 Q.B. 330; [1961] 1 Lloyd’s Rep. 479 .................................................................................................................. Yorkshire Water Services Ltd v. Sun Alliance and London Insurance plc (No. 1) [1997] 2 Lloyd’s Rep. 21 (C.A.) ............................................................................... 129, 130, Youell v. Bland Welch & Co. Ltd (No. 2) [1990] 2 Lloyd’s Rep. 431 ............................... Young v. Sun Alliance and London Insurance Ltd [1976] 2 Lloyd’s Rep. 189 (C.A.) ....... Young v. Turing (1841) 2 M. & G. 593 ........................................................................... Zeus Tradition Marine Ltd v. Bell (The Zeus V) [2000] 2 Lloyd’s Rep. 587 (C.A.) .........

xxv 13 188 170 298 13 288 230 288 303 312 259 295 37 41 223 192 275 29 246 235 95

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TABLE OF LEGISLATION, CONVENTIONS AND RULES

Access to Justice Act ............................. 260 s. 29 ........................................... 260, 261 Administration of Justice Act 1970— s. 44 .................................................. 121 s. 44A ............................................... 121 Arbitration Act 1996— s. 49 .................................................. 121 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968 ..................................... 319 et seq. Civil Code (Germany)— s. 242 ................................................ 138 Civil Jurisdiction and Judgments Act 1982 .............................................. 319 Civil Jurisdiction and Judgments Act 1991 .............................................. 319 Civil Jurisdiction and Judgments Order 2001, S.I. 2001 No. 3929 .............. 319 Civil Procedure Rules 1998, S.I. 1998 No. 3132— r. 19 .................................................. 299 r. 25.7 ............................................... 298 r. 43.2(1)(m) ..................................... 261 Part 48 .............................................. 164 Companies Act 1985 ............................ 308 s. 651 ................................................ 308 Companies Act 1989 ............................ 308 Conditional Fee Agreements Regulations 2000, S.I. 2000 No. 692— Contracts (Applicable Law) Act 1990 ... 336 Contracts (Rights of Third Parties) Act 1999 ................................... 17, 19, 253 s. 1(5) ............................................... 19 s. 5 ................................................... 19 Council Directive 87/344/ECC on Legal Expenses ....................................... 258 Council Directive 93/13/EC on Unfair Terms in Consumer Contracts ....82, 93, 137 Council Directive 2001/97/EC Second Life Insurance ....................... 336 et seq. Art. 4 ................................................ 342

Council Directive First Non-Life Insurance— Art. 5(d) ........................................... 338 Council Directive Second Non-Life Insurance .............................. 336 et seq. Art. 2(d) ........................................... 340 Art. 7(1) ........................................... 339 (a) ......................... 338, 340, 346 (b), (c), (d) ................... 339, 340 (e) ....................................... 340 Council Regulation 44/2001/EC of 22 December 2000 ..................... 319 et seq. Title II Section 3 Section 7 ........................................... 346 Art. 5(5) ........................................... 326 Art. 6(3) ........................................... 326 Arts 8–14 .......................................... 325 Art. 8(1) ........................................... 327 Art. 9(1)(a)(2) .................................. 327 (c) ....................................... 327 Art. 10 .............................................. 328 Art. 11 .............................................. 328 (3) ......................................... 327 Art. 12(1), (2) ................................... 326 Art. 13(5) ......................................... 329 Art. 27 .............................................. 334 Art. 28 .............................................. 335 Art. 30 .............................................. 334 County Courts Act 1984— s. 69 .................................................. 145 Courts and Legal Services Act 1990— s. 58 .................................................. 260 Employers’ Liability (Compulsory Insurance) Act 1969 .............................. 302 s. 1(1) ............................................... 302 s. 2(1), (2) ........................................ 304 s. 3 ................................................... 302 s. 5 ................................................... 305 Employers’ Liability (Compulsory Insurance) Regulations 1998, S.I. 1998 No. 2573 ....................................... 302 reg. 2 ................................................ 303 reg. 3 ................................................ 303 reg. 4 ................................................ 305 reg. 5 ................................................ 305

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xxviii

Table of Legislation, Conventions and Rules

Employers’ Liability (Compulsory Insurance) Regulations 1998, S.I. 1998 No. 2573—cont. regs 6–8 ............................................ 305 reg. 9 ................................................ 302 European Communities (Rights against Insurers) Regulations 2002, S.I. 2002 No. 3061 ........................ 294, 296 European Convention on Human Rights ............................................ 156 Art. 8 ................................. 156, 157, 158 Export and Investment Guarantees Act 1991 .............................................. 256 ss. 1, 13 ............................................ 256 ss. 2, 4, 6 .......................................... 257 Export and Investment Guarantees (Limit on Foreign Currency Commitments) Order 2000, S.I. 2000 No. 2087 ....................................... 257 Financial Services Act 1986— s. 132 .............................................31, 32 Financial Services and Markets Act 2000 ...6, 28, 30, 142, 258, 286, 304 s. 5 ................................................... 305 s. 9 ................................................... 304 s. 19 ...............................................30, 32 s. 20 .................................................. 32 s. 22 .................................................. 30 ss. 26–28 ........................................... 32 s. 26 .................................................. 32 s. 27 .................................................. 32 s. 138 ......................................... 146, 167 s. 150 ................................. 142, 147, 167 s. 397 ................................................ 26 Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2001, S.I. 2001 No. 2635 ....................................... 336 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, S.I. 2001 No. 544 .......................... 30 Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2001, S.I. 2001 No. 3544 .... 30 Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, S.I. 2001 No. 2256 ........................ 142 Fires Prevention (Metropolis) Act 1774 ...17, 210 Gambling Act 2005— s. 334 ................................................ 21 s. 335(1) ........................................... 21 Gaming Act 1845— s. 18 .................................................. 21 Human Rights Act 1998 ................. 156, 157 ICOB (Insurance Conduct of Business) Rules ................139, 140, 142, 146, 167

ICOB (Insurance Conduct of Business) Rules—cont. r. 4.3 ................................................. 72 r. 4.3.2(3) ......................................... 72 r. 7.3.2 .............................................. 147 r. 7.3.6 .............................................. 72 (1), (2)(c) .............................. 143 r. 7.5.1 .............................................. 147 r. 7.5.3 .............................................. 147 r. 7.5.5 .............................................. 147 r. 7.5.4.3 ........................................... 147 r. 7.5.8 .............................................. 147 r. 7.5.10 ............................................ 147 r. 7.5.17 ............................................ 147 r. 7.5.18.2 ......................................... 147 r. 7.5.15 ............................................ 167 r. 7.6 ................................................. 147 Insolvency Act 1986 ............................. 312 Insurance Companies Act 1973— s. 50 .................................................. 20 Insurance Companies Act 1982 ............. 31 Insurance Companies (Legal Expenses Insurance) Regulations 1990, S.I. 1990 No. 1159 .............................. 258 Insurers (Winding Up) Rules 2001, S.I. 2001 No. 3635 .............................. 287 Judgments Act 1838 ............................. 121 Law Reform (Frustrated Contracts) Act 1943 .............................................. 209 Life Assurance Act 1774 .......................6, 20 ss. 1, 2, 3 .......................................... 20 Lugano Convention 1988 ............. 319 et seq. Marine Insurance Act 1745 .................. 20 Marine Insurance Act 1906 ..... 4, 55, 74, 84, 85, 213, 226 s. 1 ................................................... 213 s. 2 ................................................... 214 s. 3(2) ............................................... 213 s. 4 ................................................... 20 (2)(a) .................................... 215, 218 s. 5(2) ........................................... 21, 215 s. 6 .................................................20, 21 (1) ......................................... 218, 219 s. 9 ................................................... 218 s. 10 .................................................. 218 s. 11 .................................................. 218 s. 12 .................................................. 218 s. 13 .................................................. 218 s. 14(1) ............................................. 218 s. 16 ........................................... 117, 241 (1) ....................................... 241, 242 (3) ............................................. 242 s. 17 ................42, 60–62, 67, 70, 74, 111 s. 18 ......................................... 41, 42, 74 (1) ............................... 40, 42, 43, 57 (2) ...........................................40, 41 (b) ........................................ 54 (3) ..................................... 38, 51, 54 (c) ......................................... 45

Table of Legislation, Conventions and Rules Marine Insurance Act 1906—cont. s. 19 ................................... 38, 65, 67, 74 (a) ............................................. 65 s. 20 ...............................................42, 75 (1) ...........................................42, 55 (5) ............................................. 57 s. 22 .................................................9, 12 s. 27(1), (2) ................................ 110, 238 (3) ....4, 110, 111, 112, 238, 239, 241 s. 28 .................................................. 241 s. 33(1) ............................................. 219 (3) ............................... 213, 223, 224 s. 34(2), (3) ...................................... 224 s. 35(1) ............................................. 219 (2) ............................................. 220 s. 39(1)–(5) ....................................... 222 s. 40(2) ....................................... 222, 223 s. 41 ........................................... 222, 223 s. 53(1) ............................................. 13 s. 55(2) ............................................. 229 (a) ......................................... 229 (b) .................................. 229, 231 (c) .................................. 229, 233 s. 56(1) ....................................... 233, 238 (2) ............................................. 233 s. 57(1) ....................................... 107, 233 (2) ............................................. 107 s. 60 .................................................. 234 (1) ....................................... 107, 235 (2)(i)(a) ..................................... 235 (b) ........................................ 236 (ii) ..............................236, 237 (iii) ................................... 237 s. 61 ........................................... 107, 237 s. 62 ........................................... 107, 238 (6) ............................................. 238 (7) ............................................. 237 s. 68 .................................................. 239 (2) ............................................. 242 s. 69 ........................................... 113, 240 (1), (2) ................................ 240, 242 (3) ....................................... 241, 242 s. 70(2) ............................................. 242 s. 71 .................................................. 239 (3) ............................................. 242 s. 78(1) ....................................... 130, 131 (3) ....................................... 130, 131 (4) ....................................... 130, 177 s. 79 .................................................. 175 s. 80 .................................................. 201 (1) ............................................. 198 s. 81 .................................................. 124 s. 84 .................................................. 67 (1), (2) ...................................... 15 (3)(a) .................................... 67, 165 s. 91(2) ............................................. 213 Married Women’s Property Act 1882 .... 17 Misrepresentation Act 1967— s. 2(1) ............................................... 66

xxix

Misrepresentation Act 1967—cont. s. 2(2) ....................................... 56, 69, 70 Motor Vehicles (Compulsory Insurance) (Information Centre and Compensation Body) Regulations 2003, S.I. 2003 No. 37 .................................. 301 Motor Vehicles (Compulsory Insurance) Regulations 2000, S.I. 2000 No. 726 ................................................ 288 Motor Vehicles (International Motor Insurance Card) Regulations 1971, S.I. 1971 No. 792 ................................ 301 Motor Vehicles (Third Party Risks) Regulations 1972, S.I. 1972 No. 1217 ... 287 Offshore Installations and Pipeline Works (Management and Administration) Regulations 1995, S.I. 1995 No. 738 ................................................ 303 Private International Law (Miscellaneous Provisions) Act 1995 ...................... 121 Public Order Act 1986— s. 1 ................................................... 269 Rehabilitation of Offenders Act 1974 .... 49 s. 4(2), (3) ........................................ 49 s. 7(3) ............................................... 49 Reinsurance (Acts of Terrorism) Act 1993 ..............................................2671 s. 3(2) ............................................... 271 Riot (Damages) Act 1886 ..................... 270 Road Traffic Act 1930 ............ 286, 290, 305 Road Traffic Act 1934 .......................... 305 Road Traffic Act 1988 ... 282, 286, 298, 300, 303, 304 Pt VI ................................................. 298 s. 97 .................................................. 286 s. 143 ................................................ 289 (1) ..................................... 286, 289 (2) ........................................... 286 (3) ..................................... 286, 290 s. 144 ................................................ 286 s. 145(2) ........................................... 286 (3) ........................................... 290 (a) ................................. 290, 292 (aa), (b) .............................. 292 (d) ...................................... 293 (4)(a) ....................................... 291 (5) ........................................... 286 s. 148 ................................................ 293 (2) ........................................... 293 (4), (5) .................................... 294 (b) ....................................... 291 (c), (d)–(f) ........................... 290 (7) ........................................... 291 s. 149(2), (3) .................................... 291 s. 151 ................................. 294, 297, 305 (1) ........................................... 292 (a) ....................................... 294 (c) ....................................... 295 (2)–(4), (5), (6), (8) ................. 295

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Road Traffic Act 1988—cont. s. 152 ......................................... 294, 295 (1)(b) ....................................... 293 (c), (2), (3) ........................ 294, 296 s. 156 ................................................ 287 s. 157 ................................................ 293 s. 158 ................................................ 293 s. 161(1) ........................................... 287 s. 165 ................................................ 287 s. 170 ................................................ 287 s. 185(1) ........................................... 287 s. 189 ................................................ 288 s. 192(1) ........................................... 288 Road Traffic (NHS Charges) Act 1999 ... 293 Rome Convention (on the Law Applicable to Contractual Obligations) 1980 ..................................... 336 et seq. Art. 4(5) ........................................... 345 Art. 5 ................................................ 345 Supreme Court Act 1981— s. 34A ............................................... 145 s. 35A ............................................... 120 (1) ........................................... 120 (6) ........................................... 121 s. 51 ................................... 258, 259, 285 Terrorism Act 2000 .............................. 271 Theft Act 1968 ..................................... 250 s. 2 ................................................... 248 s. 8 ................................................... 249 s. 9 ................................................... 248

Third Parties (Rights against Insurers) Act 1930 ....... 17–19, 58, 259, 282, 303, 305, 307, 312 s. 1 ............................................. 305, 312 (1) ......................................... 307, 309 (3) ......................................... 310, 311 (4) ............................................... 309 (5) ............................................... 307 s. 2 ....................................... 18, 311, 312 (1) ............................................... 311 (2) ............................................... 312 s. 3 ................................................... 311 s. 3A ................................................. 307 Unfair Contract Terms Act 1977 .... 102, 159 Unfair Terms in Consumer Contracts Regulations 1994, S.I. 1994 No. 3159 .............................................. 137 Unfair Terms in Consumer Contracts Regulations 1999, S.I. 1999 No. 2083 ...82, 93, 100, 102, 137, 140, 159, 346 regs 3(1), 5(1), (2) ............................ 138 reg. 6 ................................................ 82 (2) ............................................ 138 regs 7(1), (2), 8(1), (2) ..................... 138 Vehicles Excise and Registration Act 1994 .............................................. 293 York-Antwerp Rules 2004 r. 1 ................................................... 227

CHAPTER 1

AN INTRODUCTION TO INSURANCE AND INSURANCE LAW Angus Rodger

This chapter begins with an introduction to insurance (including what it is and how it differs from wagering) before discussing some key aspects of English insurance law (contract formation, premium, privity, insurable interest, and rules relating to insurance intermediaries). Finally, it briefly describes the regulation of insurers in the U.K.

INTRODUCTION TO INSURANCE The purpose of insurance Insurance replaces the possibility that the insured will have to bear an occasional and uncertain loss itself with the certainty that the insured will pay a known amount (which may be much less than the potential loss) to the insurer. This reduces uncertainty, and may enable the insured to avoid severe losses which could be very worrying or even catastrophic. For example, homeowners take out insurance to protect themselves against the serious (but remote) risk that their home might be destroyed or seriously damaged by fire, flood or other perils. By purchasing insurance cover, homeowners transfer the economic risk of such an event to an insurance company. The insurance company will have many other homeowners who also buy insurance cover against such risks. The insurer will pool the premiums received, and will use them to pay the claims of the few insureds whose homes actually do suffer damage. In this way, all of the insureds in effect contribute to bearing the losses of the few who would (in the absence of insurance) have been in the extremely difficult situation of bearing the loss themselves. Thus, insureds are replacing the (probably) small possibility of having to bear a large loss with the certainty of paying a relatively small sum to their insurers: in essence, they are buying ‘‘peace of mind’’. The insurer may wish, in turn, to transfer some or all of the risks which it has assumed from itself to other insurers by buying insurance for itself, known 1

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An Introduction to Insurance and Insurance Law

as ‘‘reinsurance’’. For example, an insurer which specialises in covering homes in the Caribbean might wish to take out reinsurance specifically to cover the exceptionally high losses which it would incur in the event of a large hurricane devastating the whole territory in which it carries on business. Classification of insurance business Insurance can cover a huge range of risks. By way of example, a few common types of insurance are: (i) political risks (for example, the risk that an insured’s property will be confiscated, expropriated or nationalised by a foreign government); (ii) kidnap and ransom; (iii) fine art insurance; (iv) fidelity (insurance taken out by a business against the risk of loss from dishonesty of its employees); (v) directors & officers (‘‘D&O’’) insurance, where company directors are insured against the risk of being sued by shareholders and others for breach of their duties as directors; and (vi) errors & omissions (‘‘E&O’’) insurance, where professionals are insured against the risk of being held liable for negligence. Insurance business is often categorised into either ‘‘casualty’’ or ‘‘property’’. Casualty insurance (also known as liability insurance) reimburses an insured for amounts which it becomes liable to pay to third parties, for example because a judgment has been given to the third party finding that the insured was negligent. Property insurance covers an insured for loss of, or damage to, property in which the insured has an interest (for example, buildings owned by the insured). Another way of classifying insurance contracts is into ‘‘life’’ and ‘‘non-life’’. Life contracts include those which provide for the payout upon the occurrence of the insured’s death or after a certain amount of time (and in many ways resemble investment contracts more than normal indemnity insurance contracts). A further classification is into ‘‘marine’’ and ‘‘non-marine’’ insurance. Historically, a large part of the London insurance market has related to marine insurance, which focuses on the insurance of ships and their cargo. Definition of an insurance contract In English law there is no comprehensive definition of an insurance contract, but the leading definition is usually said to be that of Channell J. in Prudential Insurance Co. v. Commissioners of Inland Revenue [1904] 2 K.B. 658: ‘‘for some consideration, usually but not necessarily in periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment

Introduction to Insurance

3

of a sum of money, upon the happening of some event. Then the next thing that is necessary is that the event be one that involves some amount of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen. The remaining essential is that . . . the insurance must be against something. A contract which would otherwise be a mere wager may become an insurance by reason of the insured having an interest in the subject matter—that is to say, the uncertain event which is necessary to make the insurance amount to an insurance must be an event which is prima facie adverse to the interest of the insured. The insurance is to provide for the payment of a sum of money to meet the loss or detriment which will or may be suffered upon the happening of the event.’’

Accordingly, a contract of insurance may be said to be a contract under which one person (the insurer) is legally bound to pay a sum of money or its equivalent to another person (the insured), upon the happening of a specified event involving some element of uncertainty as to whether it will occur (or, if it is certain to occur, as to when it will occur), and which event adversely affects the insured’s interest in the subject matter of the insurance. Insurance distinguished from wagering The English courts do not enforce wagering contracts.1 The classic definition of a wagering contract is as follows: ‘‘A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall win from the other . . . a sum of money or other stake; neither of the contracting parties having any other interest in that contract other than the sum or stake he will so win or lose.’’ Hawkins J. in Carlill v. Carbolic Smoke Ball Company [1893] 1 Q.B. 256 (C.A.)

In insurance, the insured takes out a policy because of the risk of loss. By contrast, in a wager, the only risk of loss is the risk that the insured will lose the payment which it has made under the contract: without the contract the party would have had no risk. Put another way, an insured has an interest in something (for example, property) and it buys insurance to protect that interest. The indemnity principle A further feature of an insurance contract is that the insurer’s payment is intended to compensate the insured to the extent of his loss, and not to enable the insured to make a profit. This is sometimes called the ‘‘indemnity principle’’. In Castellain v. Preston (1883) 11 Q.B.D. 380, 386, Brett L.J. said that ‘‘Indemnity is the controlling principle in insurance law’’. Thus, the insurer usually contracts to indemnify the insured only for his actual loss. However, in practice the sum recovered by an insured from its insurer is often not a perfect indemnity. In particular: 1. S. 18 Gaming Act 1845. However, this section will be repealed on 1 September 2007 by the Gambling Act 2005. Although this will apply retrospectively, the Gambling Act 2005 provides that the fact that a contract relates to gambling shall not prevent its enforcement (s. 335).

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An Introduction to Insurance and Insurance Law

(i) Excess/deductible/retention Under most insurance policies, the insurer does not cover the first part of the loss. For example, a travel insurance policy may require the insured to bear the first £50 of any loss before the policy coverage cuts in. This sum is described variously as an ‘‘excess’’, ‘‘deductible’’, or ‘‘self-insured retention’’. Insurers usually require there to be an excess because if the insured has some stake in preserving the subject matter of the insurance it may encourage the insured to take care of that subject matter and reduces the likelihood of loss. (ii) Limit of liability The coverage provided by the insurer under the contract will be subject to financial limits. Sometimes there will be a per claim limit as well as an overall limit applicable to all payments under the contract as a whole. For example, a travel policy might limit cover for stolen cash to £200, or a commercial liability policy might cover liabilities of an insured up to US$250 million per insured event and a maximum of US$500 million for all losses under the policy. (iii) Valued policies Under a valued policy, the insured and the insurer agree upon the value of the insured subject matter. When a loss occurs, the insurer then pays out the agreed sum without the need for the insured to quantify his actual loss. For example, if an insurance policy in respect of a ship states that it is a valued insurance policy and that the value of the ship is £10 million, then if the ship is destroyed the insurer would be required to pay £10 million: it would not be open to the insurer to argue that, because of a drop in value, the ship was now worth only £9 million. The conclusiveness of the agreed valuation in a valued policy is confirmed by s. 27(3) of the Marine Insurance Act 1906, which provides: ‘‘Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and insured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.’’

However, most policies are not valued policies. (iv) ‘‘New for old’’ policies Another situation in which the insured receives more than a true indemnity for his loss is where the policy provides ‘‘new for old’’ coverage. Under such a policy, the insured may, for example, lose an old camera (the market value of which would be low, owing to wear and tear), yet be entitled to the value of a new camera (the value of which would be higher).

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(v) Contingency policies Some insurance policies do not work on an indemnity basis, but instead provide for the payment of a fixed sum upon the occurrence of the insured event. The main example of such a policy is a life assurance policy. Under a classic life assurance policy the insurer pays a fixed sum upon the death of the life assured. As this is not an indemnity agreement, the insured can insure for an unlimited amount. Similarly, personal accident policies typically provide for payment of fixed sums upon particular types of injury being sustained by the insured (for example, payment of £1 million upon permanent total disability). A further feature of insurance contracts, which ties in with the indemnity principle, is the concept of subrogation. Put simply, once an insurer has paid the insured’s claim the insurer has the right (subject to various limitations) to receive recoveries made by the insured from third parties. For example, if an insured’s car is destroyed in an accident and the insurer pays the insured’s claim, then if the insured subsequently recovers the value of the car from the party who caused the accident the insured is likely to be required to reimburse the insurer’s claim, otherwise the insured would have received a double recovery. This, and other principles relating to claims, is considered in Chapter 6.

The London insurance market and the relevance of English law London is one of the world’s centres for large insurance and reinsurance transactions. When large businesses are seeking insurance cover for their worldwide operations, or when insurance companies are seeking reinsurance cover to protect themselves against potential exceptionally large losses such as hurricanes, it is very common for that insurance or reinsurance to be arranged in London. Around 800 companies are authorised to provide insurance in the UK, and these employ around 200,000 people. Collectively, the London market accounts for around 10% of the world’s insurance, and around 30% of the world’s aviation and marine insurance. The export of insurance services forms around 1.4% of the United Kingdom’s gross domestic product. One unique feature of the London insurance market is Lloyd’s of London. This is not an insurance company. Rather, it is a venue where several ‘‘syndicates’’ (insurance companies or, in some cases, collections of individuals who have agreed to go into commercial business together) offer insurance, much like traders in a high-street market. Each syndicate makes its own business decisions, but Lloyd’s provides both a physical location in which to carry out this business and a regulatory framework of rules which the syndicates must comply with. Lloyd’s (or more accurately, all of the syndicates at Lloyd’s taken as a whole) insures 96% of the FTSE 100 companies, brings in business from over 180 countries, and provides a large proportion of the world’s reinsurance. In 2004, the Lloyd’s market had capacity to take up to £14.9 billion in

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An Introduction to Insurance and Insurance Law

premiums. It is counted as the world’s second largest commercial insurer and seventh largest reinsurer. It is common for insurance contracts which are arranged in the London market to be governed by English law and for disputes relating to such contracts to be heard by the English courts or by arbitration in London. Indeed, one of the striking features of the Commercial Court in London is that a large proportion of its cases are disputes over insurance contracts concluded between overseas entities. (Chapter 10 discusses the extent to which the parties to an insurance contract are free to choose English law to govern their contracts and England as the forum for dispute resolution.) Sources of English insurance law To a large extent, English insurance law merely reflects ordinary principles of English contract law. However, there are certain peculiarities which apply to insurance contracts: for example, the concept of utmost good faith, the rules applicable to warranties, and the principle of subrogation, which you will encounter in this book. Much insurance law derives from case law, although there is a small amount of important legislation. Most significant is the Marine Insurance Act 1906, which codified the case law as it existed at that time (and which, despite its name, is in many regards applicable to insurance contracts which are not marine in nature). Other relevant legislation includes the Life Assurance Act 1774, which lays down formal requirements for life assurance contracts, and the Financial Services and Markets Act 2000, which deals with the regulation of insurance and other financial services in the United Kingdom. This legislation will be encountered throughout the book. FORMATION OF AN INSURANCE CONTRACT Introduction This section describes the legal rules which apply to the formation of an insurance contract. The usual rules of English contract law apply, so for a valid contract to come into being, there needs to be (i) an offer, (ii) an acceptance of that offer, (iii) valuable consideration, and (iv) certainty as to the material terms of the contract so that the courts are able to enforce the contract. We explain each of these below. We also describe the special ‘‘duty of utmost good faith’’ which applies in the formation of insurance contracts. We then consider the form of the contract, at what stage the insurer becomes ‘‘on risk’’, and the provision of temporary cover in the interim. Offer The normal method of obtaining insurance is for the party seeking insurance to complete a proposal form, and sometimes to provide further information

Formation of an Insurance Contract

7

known as an underwriting submission. This is usually provided to the insurer through an intermediary (an insurance broker). The insurer will decide whether or not it is willing to offer the insurance sought, and on what terms. For example, the insurer may insist that the insurance has exclusions for risks which it considers to be unacceptably high. The insurer will also set a price, which is likely to depend on the degree of risk and the amount of cover required. Acceptance A binding contract will be deemed to arise when the insured and the insurer have agreed the key terms of the insurance. The normal analysis is that the insurer makes the offer of coverage to the insured, and that the offer is accepted by the insured showing consent to those terms by paying the premium or some other act. Insurers frequently stipulate that coverage incepts only once the insured pays the first premium. The effect of such a stipulation is that until the applicant fulfils this requirement there is no binding contract between the parties: Looker v. Law Union and Rock Insurance Co. Ltd [1928] 1 K.B. 554 The insurers had accepted a proposal for life assurance on the basis of the applicant’s warranty that he was free from disease. The insurers qualified the acceptance by stating on the cover that the policy was conditional upon the first premium being paid. The applicant received this notification but before he could settle payment of the first premium, he was diagnosed as suffering from an illness. He died from the illness four days later but paid the premium the day before he died. The insurers had not been informed of his illness and sent him the policy. The insurers were held to be not liable as, even though the general rule is that cover commences once the contract has been made, the insurers had stipulated otherwise.

Valuable consideration To be valid in English law, a contract requires ‘‘consideration’’ (i.e. something valuable) to be given by both sides. In the case of an insurance contract, the consideration given by the insurer is the promise to pay claims in the event of a loss, and the consideration given by the insured is the promise to pay premium (or, depending on the wording of the policy, the actual payment of premium). Certainty of material terms We have mentioned above that a contract does not arise until the key terms have been agreed. In the context of insurance, those terms are likely to be: (i) the definition of the risk/subject matter to be covered; (ii) the duration of the insurance cover; and (iii) the amount of insurance payable in the event of a loss.

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An Introduction to Insurance and Insurance Law

The parties do not have to reach a more detailed agreement on all of the other terms of the insurance. A court will readily assume that when an applicant seeks insurance cover from a particular insurer, the applicant impliedly offers to incorporate the insurer’s usual or standard terms of cover (see Adie v. The Insurance Corporation [1898] 14 T.L.R. 544). The insurer’s terms are binding on the insured even if they have not been brought to the insured’s attention prior to the making of the contract, as long as these terms are incorporated by some form of wording on the proposal form. However, if the terms are particularly harsh or unusual, they must be drawn specifically to the attention of the other party in order to be binding (see Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd [1989] 1 Q.B. 433). The duty of ‘‘utmost good faith’’ One of the key differences between contracts of insurance and other contracts is that the former are contracts of ‘‘utmost good faith’’ (or, to use the Latin expression, contracts uberrimae fidei). In most contracts, the parties have no duty to provide any information to the other side: each side must look out for its own interests, and the principle of ‘‘let the buyer beware’’ (or caveat emptor) applies. By contrast, an insured is required to disclose to its insurer all facts known to the insured which are material to the risks which are to be insured. In this context, the term ‘‘material’’ means any fact which would influence a prudent insurer’s decision in accepting the risk or the terms of the acceptance (such as the amount of premium and the exclusions to be imposed). This requirement is usually described as a ‘‘duty of utmost good faith’’. If the insured fails to give such disclosure, or the insured makes a material misrepresentation, then the insurer has an extremely powerful remedy, namely the right to declare that the contract is ‘‘avoided’’. In this case, the contract is effectively completely unwound: the insured must repay to the insurer any claims which have already been paid, and the insurer must repay to the insured any premium which it has received. Many insurance disputes centre upon whether insurers are entitled to avoid a particular insurance contract for nondisclosure and/or misrepresentation. The remedy for non-disclosure and misrepresentation under English law is much harsher on the insured than under many other legal systems, some of which instead entitle the insurer only (for example) to reduce the amount of any claim or to require the insured to pay extra premium to reflect the extra risk which the insurer has unknowingly accepted. Non-disclosure and misrepresentation are considered further in Chapter 2. The form of the contract In English law, there are usually no rules as to the form which an insurance contract must take, or indeed any requirement that the contract must be

Formation of an Insurance Contract

9

reduced to writing at all. In practice, however, insurance contracts are usually evidenced in written form, in a document known as a policy. Section 22 of the Marine Insurance Act 1906 requires that marine insurance contracts, to be enforced, must be in the form of a written policy: ‘‘Subject to the provision of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodied in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract was concluded or afterwards.’’

Another instance in which a written policy appears to be required is life assurance. Section 2 of the Life Assurance Act 1774 provides as follows: ‘‘It shall not be lawful to make any policy or policies on the life or lives of any person or persons, or other event or events, without inserting in such policy or policies the person or persons’ name or names interested therein, or for whose use, benefit, or on whose account such policy is so made or underwrote.’’

Although this does not explicitly state that a life assurance contract must be in writing, the requirement that the interested party’s name be inserted into the policy implies that this is so. Commencement of the insurer’s liability The period of coverage will usually commence immediately upon the insurance being purchased. However, the contract may specify a date upon which the cover commences. This may be an earlier date, for example the date of submission of the proposal form. Alternatively, the contract may provide that no cover commences until the insured has paid the premium (or the first instalment of premium, if the premium is payable in instalments). If a loss occurs before the insurer has agreed to enter into the contract, the duty of utmost good faith would require the insured to disclose that the loss has occurred, and the insurer may then decide not to enter into the contract. Once the contract has ‘‘incepted’’, the insurer is ‘‘on risk’’ for losses which occur during the period of coverage. Cover notes In the interim period between submission of the proposal and the insurer’s decision as to whether to enter into the insurance contract, it is common practice for a short-term interim contract to be issued on behalf of the insurers by a broker. This protects the insured for a short period of time while the insurer is considering the insurance application. Such an interim contract is known as a cover note. The practice of issuing temporary cover is particularly common for fire, motor, burglary and accident insurance, and it is also established practice for Lloyd’s insurers. In such cases the agent is deemed to have the insurer’s implied authority to issue the cover note, and the issuance is subject to appropriate monetary limits.

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An Introduction to Insurance and Insurance Law

The offer of temporary cover may be subject to conditions—e.g. that the insurer is not to be bound until a satisfactory proposal has been received by the insurer. Thus, it will be a matter of construction whether the temporary cover commences when the proposal is received or whether the agreement is retroactive and operates from the date at which the proposal was completed. Cover notes are often in a shorter form than a full policy (perhaps one or two pages long), and the precise terms on which the coverage is granted are often less than entirely clear. The object of a cover note is to provide immediate protection pending the decision of the insurer on the request for issue of a policy. The cover note therefore provides coverage which incepts immediately and provides binding insurance cover for the period specified in it. The cover note will usually provide that it will expire (i) after a fixed period, (ii) when the insurer decides to issue a full policy or rejects the application for full coverage, or (iii) when the insurer revokes the cover note. As the underlying principle of insurance contracts is the principle of ‘‘utmost good faith’’, the insured must disclose any material changes in the proposed risk (or any representations of fact which may no longer be true) before the full insurance contract is agreed. At that stage, the original offer is revoked and replaced with a new proposal which the insurer is free to accept or reject. If the insured fails in his obligation to notify the insurer, the latter will probably be entitled to avoid the contract upon discovering the truth. However, if a binding agreement has already been concluded, any subsequent increase in the risk has no legal effect on the contract and the insured is not obliged by any duty to disclose it. The function of the cover note is to provide the insurers with an opportunity to consider whether to undertake the risk for the full period desired while concurrently providing the insured with cover. If the application is declined during the duration of the cover note, the cover note simply expires upon the insured receiving notification from the insurers of the decision taken. In the event that a claim arises out of an occurrence before the policy is issued, the insured will have coverage in accordance with the terms of the cover note. Slips A method which is sometimes used in placing large insurance business in the London market is by means of subscription to a ‘‘slip’’. The broker will prepare a slip which is a short document (typically one or two sides long) which summarises the risk, and then presents the slip to several Lloyd’s syndicates and/or insurance companies. If the insurer is satisfied that the risk is acceptable, it will place its syndicate or company stamp on the slip and sign the slip, stating what percentage of the total risk the underwriter is prepared to insure. This process is known as ‘‘scratching’’. The broker must then take the slip round the market to achieve further subscriptions.

Premium

11

Once the process has been completed, the broker may issue a cover note to the insured, setting out the terms upon which subscription has been achieved and the identity of the insurers. Such a cover note is merely a notification by the broker to the insured as to what has been done, and the insurers are not party to the cover note. In due course, the slip may be replaced by a formal policy wording. It is now settled law that a binding contract of insurance usually comes into existence as soon as a slip is scratched by an underwriter. The slip is regarded as the offer, and the scratching by the underwriter is regarded as the acceptance. In principle it is possible for a contract to come into existence as soon as the insurer and the insured have reached agreement, and this may be in advance of the slip being scratched, although a court is unlikely to find that a contract has been brought into existence prior to the scratching of a slip. Effect of scratching a slip Once an unconditional insurance slip has been scratched, a contract arises as between the insurers and the insured for the proportion of the risk accepted by the subscribing underwriter. The making of the contract brings to an end the insured’s duty of disclosure, so that disclosure is not required of material facts which have arisen after the scratching. The following consequences flow from the principles that the scratching of a slip creates a contract of insurance, and that each subsequent scratching will bring a fresh contract of insurance into effect as from the date of a scratching so that there are as many contracts as there are participating subscribers and made at different times: u Neither party may unilaterally withdraw from the slip after it has been scratched, even if the broker is unable to obtain sufficient subsequent subscriptions to cover 100% of the risk. It is not uncommon for the broker to fail to achieve 100% subscription. u The insured’s duty of good faith is owed to each underwriter in turn, and each may separately rely upon misrepresentations or failures to disclose to him/her. u If changes are made to the slip by subsequent underwriters those changes cannot be relied upon by underwriters who previously subscribed to the slip unless the insured agrees to any of the forms applicable to the earlier signer.

PREMIUM Introduction This section considers the rules regarding payment of premium under insurance contracts.

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An Introduction to Insurance and Insurance Law

A ‘‘premium’’ has been described judicially as: ‘‘the consideration required of the insured in return for which the insurer undertook his obligation under the contract of insurance.’’ Lewis Ltd v. Norwich Union Fire Insurance Co. [1916] A.C. 509, 519

Usually the premium is a sum of money payable by the insured, either as a single lump sum or in instalments. Although the premium is ordinarily specified in the insurance contract, it is possible for an insurance contract to be concluded without agreement as to the amount of premium payable. In this case, s. 31(1) of the Marine Insurance Act 1906 provides that: ‘‘Where insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable premium is payable.’’

It is not uncommon for large commercial policies to provide for the premium to be increased if the size of the insured risk increases substantially during the course of the contract (for example, if an oil company acquires additional refineries). In such cases, if the policy is silent as to how the extra premium is to be assessed, it will be commensurate with the additional degree of risk borne by the insurer.

Payment of premium and issuance of the policy In non-marine insurance, the payment of the premium and the issuance of the policy are not necessarily concurrent conditions, in other words a policy may be issued regardless of whether the insured has paid the premium. In marine insurance the position is different. According to s. 52 of the Marine Insurance Act 1906, the insured is not entitled to delivery of the policy until the premium has been paid: ‘‘Unless otherwise agreed, the duty of the insured or his agent to pay the premium, and the duty of the insurer to issue the policy to the insured or his agent, are concurrent conditions, and the insurer is not bound to issue the policy until payment or tender of the premium.’’

It will be recalled that, under s. 22 of the Marine Insurance Act 1906, a marine insurance contract is not admissible in evidence (and so cannot be enforced in court) until the policy has been issued.

Payment through an agent The payment of the premium does not have to be made to the insurer directly, as an intermediary can be authorised to accept payment on behalf of the insurer. In such an arrangement, the intermediary is for this purpose the agent

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of the insurer, and so any payment received by the agent will (as far as the insured is concerned) be deemed paid to the insurer, and the insured’s obligation will be regarded as fulfilled. One peculiarity of the marine insurance market, and possibly the Lloyd’s market, is that the broker is personally liable to the insurer for payment of premium, regardless of whether the insured has actually paid the premium to the broker. Section 53(1) of the Marine Insurance Act 1906 provides that: ‘‘Unless otherwise agreed, where a marine policy is effected on behalf of the insured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the insured for the amount which may be payable in respect of losses, or in respect of returnable premium.’’

As a result, the insurer can look only to the broker (and not to the insured) for the premium, and the broker must attempt to recover the premium from the insured—a good reason for the broker to insist on obtaining the premium up front! (See J.A. Chapman & Co. Ltd v. Kadirga Denizcilik Ve Ticaret [1997] L.R.L.R. 65.)

Renewal premiums An insurance contract will usually cover the specified risks for an initial definite period, for example one year. Thereafter, coverage will usually in practice continue as long as the premium continues to be paid in accordance with the stipulations of the policy. In circumstances in which the premium is due periodically, or the policy is deemed renewable by subsequent payment of a further premium, insurance companies normally send the insured a reminder shortly before a premium falls due. They are not bound by a legal obligation to observe this custom unless they have expressly or impliedly undertaken to do so (see Windus v. Tredegar [1866] 15 L.T. 108). The option to renew an insurance contract (other than a life policy) is not an absolute right: the extension of the policy is conditional upon the acceptance of such an extension by the insurers (see Weldon v. GRE [2000] 2 All E.R. (Comm) 914). As long as the insurers have reserved the right to terminate the coverage at each renewal, they may do so by simply notifying the insured that the premium offered is being declined.

‘‘Days of grace’’ Where the insured has an opportunity to renew by paying a renewal premium, the policy will usually contain a ‘‘days of grace’’ provision, which grants the insured a short additional time for payment. If the renewal premium is not paid, the policy will lapse.

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The rationale behind the concept of ‘‘days of grace’’ is to provide an adequate window in order for the insured to renew a policy upon its expiration. If the continuance of cover under the policy were strictly tied to the payment of the premium due on a specified date in each year, without any consideration for overdue payment, the delay of a single day would immediately result in the termination of all cover under the policy. This would leave the insured in a precarious situation, as he would be without any cover and a new policy would have to be sought once again. The concept of ‘‘days of grace’’ serves both parties, as it minimises possible hardship to the insured and obviates the expense and inconvenience to the insurers. This practice is prevalent in various classes of insurance. Late payment and non-payment of premium The settlement of accounts may frequently involve delays. Delay by an insured in paying the premium is unlikely to be regarded as a repudiatory breach of contract by the insured, in other words a breach which entitles the insurer to terminate the contract. However, there are some instances where the failure to pay premium on a due date amounts to a repudiatory breach: (i) where the date for payment is stipulated to be of the essence; (ii) where the circumstances of the contract or nature of the subject matter show that time is impliedly of the essence; (iii) where time is neither expressly nor impliedly of the essence, but the insured has been guilty of unreasonable delay, and the insurer has already served notice requiring the premium to be paid within a reasonable time. Cresswell J. in FIG Re Ltd v. Mander [1999] Lloyd’s Rep. IR 193 In addition, where the insurer has failed to take step (iii) above to secure payment, the insurer may attempt to persuade the court that the insured’s delay amounts to a repudiation of contract which has been accepted by the insurer (see Fenton Insurance Co. Ltd v. Gothaer Versicherungsbank VVag [1991] 1 Lloyd’s Rep. 172). Regardless of the specific provisions in the policy, an insurer may extend the time for payment of the premium. In fact, even if the policy has lapsed, the insurer can still be held to have revived the insurance upon the same terms by any word or act which leads the insured to believe that the insurer had reassumed the risk pursuant to the original policy. The insurer’s waiver can be in the form of: (i) an election in clear and unequivocal terms, where the insurer abandons a contractual right to treat the contract at its end due to nonpayment; or (ii) promissory estoppel, where the insurer unequivocally represents to

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the insured that there is no intention to rely upon any rights arising out of non-payment.

Principles governing return of premium Apportionment Pursuant to s. 84(1) of the Marine Insurance Act 1906, premium is not normally apportionable, and if any part of the risk has been run by the insurer then the insurer is entitled to retain the full premium (see Tyrie v. Fletcher [1761] 3 Burr. 1237). This applies to both marine and non-marine insurance. So, for example, if an insured takes out a policy on a vessel for one year, with an annual premium payable at the start of the policy, and then decides to exercise a contractual right to cancel the policy after only a month, none of the premium would be repayable. Sometimes, however, policies provide for premium to be deemed to be ‘‘earned’’ by the insurer on a periodic basis, for example daily. In that instance, if the insured has a contractual right to cancel the policy, the premium would be deemed earned until the date of cancellation, and any premium relating to the remainder of the policy period would not be ‘‘earned’’ and would be repayable to the insured.

Total failure of consideration Where the insurer avoids the policy from inception for non-disclosure or misrepresentation, the analysis is that, in effect, the contract was never in place and the premium must be returned to the insured. However, if the insurance is apportionable, only the relevant part must be returned (for example, if the insurer has granted coverage over three successive policy periods, and avoids only the last policy year then only the last year’s premium is returnable). The premium need not be returned if the insured behaved fraudulently, for example, by making deliberate misrepresentations in breach of the duty of utmost good faith. These basic principles are found in s. 84(1) and (2) of the Marine Insurance Act 1906: ‘‘1. Where the consideration for the payment of the premium totally fails, and there has been no fraud or illegality on the part of the insured or his agents, the premium is thereupon returnable to the insured. 2. Where the consideration for the payment of the premium is apportionable and there is a total failure of any apportionable part of the consideration, a proportionate part of the premium is, under the like conditions, thereupon returnable to the insured.’’

It is quite common for insurers to reinforce the legal position in the policy by stipulating that the premium is not returnable where the insured is in breach

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of his duty of utmost good faith (see Fibrosa Spolka Akyjnia v. Fairbairn, Lawson, Combe, Barbour Ltd [1943] A.C. 32).

PRIVITY AND THIRD-PARTY RIGHTS The doctrine of privity of contract Under English contract law, usually only the parties to the contract can enforce rights under that contract. Where a policy has been procured by the insured solely for his own interest and benefit, no other party with an interest in the insured subject matter can claim on the proceeds or dictate how the proceeds should be dealt with. Gold v. Patman & Fotheringham Ltd [1957] 2 Lloyd’s Rep. 319 (Q.B.D.) The plaintiff entered into a contract with the defendant, demolition and building contractors, in relation to work to be done on the plaintiff ’s property. The contract required the defendant to obtain insurance against liability of the plaintiff to third parties, and the defendant was to insure properties adjoining the plaintiff ’s property. Whilst the defendants were conducting their work, they were responsible for the subsidence and/or collapse of the walls between the plaintiff ’s property and adjoining properties. The plaintiff became liable to remedy the damage to the adjoining properties and to compensate the owners and occupiers for such inconvenience, loss or damage. The defendants’ sub-contractors did not obtain the required insurance against any liability of the plaintiff to third parties, and the only policy in effect by the defendants did not provide effective insurance against any liability of the plaintiff. The issue was whether it was possible for the plaintiff to enforce this policy in relation to its obligations to third parties. The court ruled in the negative, on the basis that there was no authority which was contrary to the general principle of law that only a person who is a party to the contract can sue upon it. Therefore, the doctrine of privity precluded the plaintiff from benefitting under the contract.

Exceptions to the doctrine of privity The principle of privity of contract is subject to certain exceptions which allow an individual who is not a party to the policy to prescribe how the proceeds of a policy are to be applied, notably: Duty to hold for third parties Where the insured is under a statutory duty to reinstate or to hold the proceeds on behalf of another person interested in the insured subject matter (e.g. a trustee, or a bailee of goods); Policies assigned to a third party Where the proceeds of the policy have been assigned to another person;

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Policies for the benefit of a third party Where the policy has been made for the benefit of a third party (for example, where a company arranges directors and officers insurance for the benefit of its directors). This is discussed further below (see the Contracts (Rights of Third Parties) Act 1999); Married Women’s Property Act 1882 This statute allows for the creation of a statutory family trust, which ensures that upon the death of the spouse, life policy monies will be paid directly to the surviving spouse (and/or children) and will not form part of the decedent’s estate (thereby avoiding life assurance proceeds being subsumed by the debts of a deceased spouse’s estate). Where the policy document specifically identifies the spouse or children, the named beneficiaries acquire an immediate vested interest in the policy; Fires Prevention (Metropolis) Act 1774 Under this Act, any ‘‘person interested’’ can require the insurer to reinstate, irrespective of whether such a person is a party to the contract of insurance; Third Parties (Rights Against Insurers) Act 1930 Third parties have the right to claim directly against insurers of third party risks where the insured is insolvent. This is discussed further below.

The 1930 Act The Third Parties (Rights Against Insurers) Act 1930 (the ‘‘1930 Act’’) confers on third parties rights against insurers when certain events regarding the solvency of the insured occur. Where an insured defendant becomes insolvent, the 1930 Act is designed to enable the claimant to proceed directly against the insurer. In that event, if it were not for the 1930 Act, the essential purpose of conventional liability insurance—the provision of effective indemnity to an injured third party —would be defeated as it would be unlikely that a third party would recover all its losses if it merely ranked as an ordinary creditor in the insured’s insolvency. Moreover, the other creditors would be unjustly enriched at the third party’s expense by being able to share in the proceeds of insurance intended to benefit no-one other than that third party. This perceived injustice is particularly marked where the relevant liability insurance is compulsory, e.g. third party motor liability insurance. The intention of the 1930 Act is to ensure that the claimant receives the full benefit of the insurance payments, which might otherwise become part of the funds available to general creditors

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in any insolvency. The 1930 Act extends to all forms of monetary claims, for example ranging from damages for personal injuries or professional negligence, to losses of high-value commercial property and shipping claims. For example, if a person is injured at work because of unsafe working systems or in a shop because the floor has been allowed to become slippery, then the victim may have the right to claim compensation from the employer or the shopkeeper. In the event that the wrongdoer is bankrupt or insolvent but has insurance to cover these types of liability, then the 1930 Act allows the victim to step into the shoes of the insured wrongdoer and make a direct claim against the relevant insurer for the insurance money. In the case of a company, the 1930 Act applies when a winding-up order is made, the company enters administration, a resolution for voluntary winding up is passed, a receiver or manager of the company’s business or undertaking is appointed, the holder of a debenture secured by a floating charge either personally takes possession of property subject to that charge or appoints an administrative receiver to do so, or where a voluntary arrangement is approved. In the case of an individual, it applies where a bankruptcy order or insolvency administration order is made or a composition or arrangement is entered into with creditors. The 1930 Act covers third party liabilities which are incurred either before or after the event, for example where a vehicle belonging to the insolvent wrongdoer was involved in an accident and an insurance claim arising from the accident was unresolved at the date of the bankruptcy or winding-up order. It has long been recognised that the 1930 Act is seriously flawed, and it has been criticised for failing to recognise many legal and practical realities of modern life which ultimately has precluded its effective operation in specific situations. A central problem is that the third party has to establish and quantify the defendant insured’s liability to him before obtaining any rights to proceedings against the insurer. It does not mean that the third party has no rights against the insurers prior to having established and quantified liability. This can lead to wasteful duplication and delay. Until recently, third parties were hampered by the fact that the 1930 Act did not entitle them to details of the insurance position before proceedings were issued against the insurer. That position changed in the Court of Appeal’s ruling in In re OT Computers Limited [2004] EWCA Civ 653 (C.A.). In that decision, the Court interpreted s. 2 of the 1930 Act as enabling a third party claimant to obtain disclosure of documentation before the establishment of the insured’s liability to that third party, such as whether the person against whom he is making a claim is insured and, if so, under what terms. A number of other problems, arising from developments in insolvency law and insurance practice, have also been revealed. Therefore, the 1930 Act has been the subject of a lengthy joint review by the Law Commission and the Scottish Law Commission. A consultation paper

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with provisional recommendations was issued in 1998 and then followed by a further consultation. The final report was published as Law Com. No. 272 in July 2001 together with a draft Third Parties (Rights against Insurers) Bill (the ‘‘Bill’’). If passed, the Bill will cause the 1930 Act to be wholly repealed. The Bill is intended to achieve the same fundamental purpose as the 1930 Act but its machinery, although re-using most of the existing components, has been modernised and is intended to work in a more efficient manner in a slightly wider range of situations. Contracts (Rights of Third Parties) Act 1999 The Contracts (Rights of Third Parties) Act 1999 (the ‘‘1999 Act’’) became law on 11 November 1999 and gave new rights to third parties to a contract. Under the old law, only a party to a contract could enforce rights under it, even if the contract conferred a benefit on a non-party (the third party). With full effect from 11 May 1999, the 1999 Act applies to all contracts (except for certain excluded contracts, e.g. contracts for the carriage of goods at sea). The 1999 Act introduced a two-limb test for circumstances in which a third party may, in his own right, enforce a term of a contract. Section 1 provides that a third party may enforce a contractual term where, under the first limb, the contract expressly states that he can, or, under the second limb, if the term of the contract purports to confer a benefit on the third party (unless it appears on a proper construction of the contract that the contracting parties did not intend the term to be enforceable by the third party). Where the intentions of the contracting parties are unclear as to whether the third party can enforce the contract, this will ultimately be for the courts to decide. There are many situations in which someone other than the party to a contract may be said to have been conferred a benefit by a contract of insurance, e.g. employees in respect of group disability policies and the ultimate beneficiary under a life assurance contract. Under the 1999 Act, as the third party has the benefit of all the remedies which would have been available if he had been a contracting party (s. 1(5)), it is necessary for the third party to be expressly identified in the contract. However, identification need only be by name, by description or as a member of a class. As a result, an insurer could potentially be exposed to separate claims from both the insured and the third parties. Section 5 provides protection against double liability where there is a subsequent claim by the third party, whereby the sum already paid can be taken into account to such extent as the court or arbitral tribunal thinks appropriate. It is open to insurers who do not want claims to be brought directly by third parties (such as employees of corporate insureds) to amend their policies so as to exclude the application of the 1999 Act. Alternatively, the insurers may set out clearly the only circumstances in which the contracting parties intend the third party to enforce rights under the 1999 Act, and include a clause entitling

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An Introduction to Insurance and Insurance Law

the contracting parties to rescind or vary the contract without the consent of any third party.

INSURABLE INTEREST The requirement for insurable interest The requirement for a contract of insurance to be supported by an insurable interest has been a feature of English law since the eighteenth century, and was originally devised to limit the use of insurance policies as a form of wagering on property or lives and to remove the danger that persons holding policies would attempt the deliberate destruction of the insured subject-matter. The earliest legislation was the Marine Insurance Act 1745 which banned the making of marine insurance policies unless the insured had an interest in the subject-matter, and the prohibition was extended to life and related policies by the Life Assurance Act 1774. The modern law on insurable interest is found in a complex combination of common law and statutory principles, which may be outlined in the following way. Life policies are governed by the Life Assurance Act 1774. The legislation, as construed by the courts, provides that: (a) the insured must have an insurable interest in the life of the insured person at the date the policy is taken out, failing which the policy is illegal (s. 1), although there is no need for the insured to possess an insurable interest at the date of the death of the insured person as the contract is not one of indemnity; (b) the insured can recover under the policy only the amount of his interest as measured at the inception of the policy (s. 3); (c) the names of all persons interested in the policy must be inserted at the outset (s. 2), although this requirement was relaxed by s. 50 of the Insurance Companies Act 1973, which deems this requirement to be satisfied where a beneficiary belongs to a class of persons identified in the policy. Marine policies are governed by the Marine Insurance Act 1906. This provides that: (a) the insured must have either an actual insurable interest, or the reasonable expectation of obtaining an insurable interest, when the policy is taken out, failing which the policy is deemed to be made by way of gaming or wagering and is void (s. 4); (b) the insured must be interested in the subject-matter insured at the time of the occurrence of the insured peril (s. 6)—if he has no interest

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at the date of the loss, then the common law principle of indemnity reflected in s. 6 means that he has no right of recovery. Other policies, including property and liability covers are not governed by any specific statute, but the principles are much the same as for marine insurance: (a) s. 18 of the Gaming Act 1845 renders unenforceable contracts made by way of gaming or wagering, and an insurance policy taken out by a person who has no actual insurable interest and no reasonable expectation of obtaining such an interest will contravene this legislation (when s. 334 of the Gambling Act 2005 comes into force it will repeal this provision. Section 335(1) will further provide that ‘‘the fact that a contract relates to gambling shall not prevent its enforcement’’); (b) the insured must be interested in the subject-matter insured at the time of the occurrence of the insured peril, as the common law principle of indemnity permits the insured to recover only the amount of his actual loss.

Definition of insurable interest Section 5(2) of the Marine Insurance Act 1906, which is based on the judgment of Lawrence J. in Lucena v. Craufurd (1806) 2 Bos. & P.N.R. 269, defines insurable interest as: ‘‘any legal or equitable relation to . . . any insurable property at risk . . . in consequence of which [the insured] may benefit by the safety or due arrival of the insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.’’

The most recent authorities have recognised that modern market developments in the forms of insurance agreements have required a wider approach to the definition of insurable interest than was at one time thought necessary. The modern approach is set out by the Court of Appeal in Feasey v. Sun Life Insurance of Canada [2003] Lloyd’s Rep. IR 637, where it was emphasised that if the parties have entered into a commercial arrangement there is every reason to seek to support that arrangement and not to strike it down on technical grounds. The judgment of Waller L.J. in Feasey indicates that three questions have to be asked where an insurable interest issue is raised: (1) What is the subject-matter of the insurance policy? This question involves interpreting the policy to see exactly what has been insured. (2) What is the interest of the insured in this subject-matter of the policy? This question is a matter of law, and involves the court

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considering the range of possible interests that the insured may have in the insured subject-matter. (3) Does the policy encompass the insured’s insurable interest? This question again involves the proper construction of the policy, the issue being whether the policy by its terms actually covers the insurable interest of the insured in the insured subject-matter or whether it refers to some other interest. There are numerous illustrations of insurable interest in the cases. The mere fact that the insured is not wagering is not determinative of the question, although it is an important consideration in determining the existence of an insurable interest. As far as property is concerned, any interest in that property will give rise to an insurable interest. Such interests may include ownership, possession or security. A person who has agreed to purchase property also has an insurable interest in that property. It follows, therefore, that a limited interest is insurable, and that there may be a variety of different interests in the same property. Feasey itself recognised that a person may have an insurable interest in the property if he stands to suffer a loss in the event that the property is destroyed (e.g. where the insured is a contractor who has been engaged to carry out work on that property). A person who faces liability in the event that that property is lost or damaged as a result of his negligence plainly has an insurable interest for the purposes of a liability policy, and he may also have a sufficient insurable interest to support a policy on the property itself, although under the third principle in Feasey it is a matter of a construction of the policy to determine whether it covers liability for property. As far as lives are concerned, it is presumed that a person has an unlimited insurable interest in his or her own life and that of his or her spouse, although other family relationships and friendships do not give rise to an insurable interest unless the policyholder can demonstrate some actual financial interest in the life of the person insured. Commercial relationships can give rise to an insurable interest in lives, e.g. a creditor has an insurable interest in the life of his debtor, an employee has an interest in the life of his employer and an employer has an insurable interest in the life of his employee. A person who faces liability for the death or personal injury of an individual can insure his liability under an ordinary liability policy, but in some circumstances it may be possible for that person to insure the life of the individual in question: this matter was considered in Feasey. Where different interests are insured under a single policy, that policy is usually regarded as composite, with the result that each insured has a separate contract with the insurers in respect of his own interest. The separability of interests means that in the event of a loss, each insured has a separate claim against the insurers. The separability principle means that insurers may have defences against some insureds (e.g. for breach of policy terms) but not others.

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INSURANCE INTERMEDIARIES Introduction Insurance transactions are usually conducted through the medium of intermediaries who perform a pivotal role in the creation of insurance contracts. Here we will discuss the general law of agency, and examine how it corresponds with the role and practices of insurance agents. The concept of agency There is no statutory definition of agency but the concept refers to the relationship in which one person (the agent) acts for another (the principal) in effecting a transaction with a third party. In Harvest Trucking Co. Ltd v. Davis [1991] 2 Lloyd’s Rep. 638, it was stated that: ‘‘[a] broker or other insurance intermediary is employed to act as a middle man between the person employing him—normally the person requiring insurance—on the one hand, and the insurer on the other.’’

Types of insurance intermediaries The term ‘‘insurance intermediary’’ is wide-ranging as it includes brokers, independent agents, employees of insurance companies and their ‘‘tied’’ agents. In the context of English law and practice, insurance intermediaries are either agents or employees of insurers, or independent persons who act on behalf of insureds. The capacity of the intermediary is an important consideration for the insured as it will affect the independence of the advice received and determine which parties to the contract are bound by the intermediary’s conduct. Generally, the following types of agents act on behalf of insurance companies: (i) Administrative agents Agents who receive insurance applications, issue policies and settle claims. (ii) Selling agents Agents who procure proposals for the insurance company and are remunerated by way of commission. (iii) Underwriting agents Agents authorised to accept risks on behalf of the insurers. (iv) Others Agents who may accept risks on behalf of the insurers (includes brokers acting under binding authority). (v) Loss adjusters Agents who determine the circumstances and amount of the claim.

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Insurance brokers are for most purposes agents of the insured, despite the fact that they receive their fees (‘‘brokerage’’) from the insurers to whom they refer business. The scope of an agent’s authority In accordance with the principles of agency law, an agent will bind his principal by acts which are performed within the scope of the authority conferred upon him. This is a significant consideration as the agent is the conduit between the insurer and the insured at every stage of the formation and operation of an insurance contract. Therefore, where the principal limits the usual authority of the agent, notice of any such restriction must be expressed in clear terms to any third party (see HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank [2001] Lloyd’s Rep. IR 703). An agent’s authority may take one of four forms: (a) Actual authority The agent’s authority is derived primarily from the specific instructions of his principal. However, as a matter of law, it is supplemented by an implied authority to do what is reasonably incidental to the execution of his authorised mandate: Stockton v. Mason and the Vehicle and General Insurance Co. Ltd [1978] 2 Lloyd’s Rep. 430 (C.A.) In this case, 10 days before an accident occurred the insured contacted his brokers by telephone and applied for the transfer of his existing comprehensive insurance cover from his current vehicle to a different one. The fact of the transfer was acknowledged and orally accepted by the brokers. On the day of the accident, after the accident had taken place, the insured received a letter from the brokers impliedly acknowledging that the transfer of insurance had been accepted. The issue here was whether a contract of interim insurance had been established as a result of the conversation with the brokers. The Court of Appeal considered the circumstances of the case and decided that it is a principle of law that brokers are vested with an implied authority to enter into temporary insurance contracts on behalf of insurers, and therefore an interim insurance contract had been entered into by the parties following the telephone conversation.

(b) Usual authority A third party is entitled to assume that an agent has the usual authority of someone in his position unless the principal imposes restrictions on this authority and such restrictions are brought to the attention of any third party (see Acey v. Fernie [1840] 7 M. & W. 153). (c) Apparent authority The agent is authorised by the principal to exercise power outside the scope of his actual or usual authority:

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Brook v. Trafalgar Insurance Co. [1946] 79 Ll. L. Rep. 365 (C.A.) The issue here was whether an agent possessed the requisite authority from the insurers to waive a condition of the policy dealing with notification of claims. The Court of Appeal held that merely being described as an agent in a policy was insufficient in itself to establish that authority to waive an express condition of the policy had been conferred upon the agent.

This category is referred to as ‘‘ostensible’’ authority. (d) Customary authority Unless it has been agreed otherwise, it is implied that an agent can exercise authority which is customarily recognised in a particular market as long as the alleged custom is lawful, reasonable, certain and generally recognised (see Anglo-African Merchants Ltd v. Bayley [1970] 1 Q.B. 311). It is common for an agent to have the implied authority to enter into an interim insurance contract by issuing cover notes on behalf of the insurer. As the insured tends to be unaware of the agent’s actual or implied authority, the insured has to place reliance on the appearance of the agent’s apparent or ostensible authority. Imputation of knowledge An agent’s knowledge is deemed to be known by the principal. So if a material fact is disclosed by an insured to the agent, and the agent does not pass this information to the insurer, the insurer will not be able to avoid the policy for non-disclosure if he is found to be the agent’s principal. Evans v. Employers Mutual Insurance Association Ltd [1935] All E.R. 659 (C.A.) The insured signed an application for insurance which contained answers to several questions, one of which was that the insured had practical experience of motor car driving for five years. After the policy had incepted, the insured became involved in an accident which resulted in damage and injuries to the insured and others. Subsequent to the accident, one of the insurer’s claims inspectors received a claim form from the insured. In response to the question of how long the insured had been driving motors, the insured gave the answer of ‘‘six weeks’’. This discrepancy in the insured’s driving experience had been overlooked by agents of the insurer, and a claim was subsequently paid under the policy. Upon the insurer’s realisation that the insurance had been issued pursuant to a misrepresentation, it sought to avoid the policy. The court held that the insurers could not repudiate their liability under the policy after having received the information they received and paid the insured. The court noted that the knowledge of the agent was to be imputed to the insurance company and that the insurance company could not escape its liability merely because the agent was negligent by not passing along his knowledge of the untruth to the insurers.

Broker’s responsibilities A broker’s responsibilities typically include the following:

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An Introduction to Insurance and Insurance Law

(a) Explaining the scope of a policy to the insured Under s. 397 of the Financial Services and Markets Act 2000, an agent who falsely states the scope of a policy to a prospective insured may face criminal liability if his conduct was intentional or reckless. If the agent is acting in respect of a policy within the Financial Services and Markets Act 2000, false statements as to coverage may also render the insurer susceptible to criminal liability.

(b) Collecting premiums An agent may be expressly authorised by the insurer to collect the premium from the insured. If the agent fails to pass the premium on to the insurer, then (from the perspective of the insured) payment is nevertheless deemed to have been received by the insurer.

(c) Issuing cover notes Normally, an agent’s duties are limited to receiving and submitting insurance proposals. Although it is unlikely for an agent to have the authority to bind the insurer to the issue of a policy on any terms, it is not uncommon for the agent to have ostensible authority to provide temporary cover pending the insurer’s decision on a proposal.

(d) Receiving information An agent may be authorised to receive or transmit information on the insurer’s behalf.

(e) Completing proposal forms It is commonplace for insurers to instruct and authorise their brokers to assist the insured in the completion of any proposal form. The process usually entails the broker asking the insured appropriate questions, transcribing his oral answers on the form, and subsequently obtaining the insured’s signature on the form. Although brokers are deemed independent, it is well established that in all matters relating to the placing of insurance, the broker acts as the agent of the insured. If the broker is aware of material facts but does not disclose them to the insurer, the insurer has the right to avoid the policy and the insured might therefore look to the broker for compensation if a loss arises but the policy is avoided.

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In order to recover against the broker, the insured would have to prove that the loss resulting from the insurer’s avoidance of the policy was the result of the broker’s breach of duty: O’Connor v. BDB Kirby & Co. [1972] 1 Q.B. 90 (C.A.) The defendant broker had been instructed to arrange vehicle insurance for the claimant’s new car. The completion of the proposal form by the broker was based on the information supplied by the claimant but the broker wrongfully stated that the vehicle was garaged whereas, in fact, it was parked on the street. The insurers repudiated liability and the insured sued the broker. The Court of Appeal held that the sole and effective cause of the loss was the insured’s failure to check the entire contents of the proposal form and not the broker’s failure to pass on the material information correctly to the insurers.

(f) Advising on choice of insurers Brokers’ duties include advising the insured on potential insurers and any doubts about the proposed insurer’s ability to pay claims.

(g) Submission of claims Brokers also assist the insured in submitting and obtaining payment of claims. To this end, the broker is required to retain the contract documentation.

Broker’s rights and duties An insurance intermediary is subject to certain minimum legal obligations: (i) to obey his instructions precisely; (ii) to exercise the degree and skill reasonably expected of an agent with the qualifications he possesses (discussed further below); and (iii) as a fiduciary, to ensure there is no conflict between the duty to his principal and any other interest.

Rights As long as an insurance intermediary does not breach his primary duties and obligations, there are a number of basic rights which he can enforce against his principal (subject to contract): (i) the right to remuneration (normally in the form of commission on policies which he has arranged); (ii) the right to indemnification for any expenditure reasonably incurred on the principal’s behalf; (iii) the right to a lien on his principal’s property to recover the sums owing to him.

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Liabilities To the principal An insurance intermediary is subject to certain liabilities to the principal: (i) where a contract exists between the agent and the principal, any misconduct is likely to be deemed a breach of contract; (ii) any fraudulent or negligent conduct will give rise to a claim in tort for the breach of the parallel duty owed to the principal. As a consequence, the agent may be dismissed and sued for any loss caused to the principal. To the insured In addition to the duties imposed by the Financial Services and Markets Act 2000, an agent is subject to the duties imposed by the general law of tort, contract and in equity (as a person occupying a fiduciary position). The duty of care and skill As a professional, an agent acting on behalf of an insured must exercise reasonable care and skill in his duties, and he will be liable for any reasonably foreseeable losses arising from any breach of that duty. In Cherry Ltd v. Allied Insurance Brokers Ltd [1978] 1 Lloyd’s Rep. 274, Cantley J. said that: ‘‘It is contended (by the brokers) that they had no duty to be careful. I think in the circumstances of this case they had . . . . They were giving information within their specialised knowledge and they knew or ought to have known that it would be taken seriously and acted upon in a transaction of importance. Whatever may have been the position in contract, the situation seems to me to have been covered by the principles stated by Lord Morris of Borth-y-Gest in the well-known case of Hedley Byrne & Co. Ltd v. Heller & Partners Ltd (1964) A.C. 464 at pp. 501 and 502, where he said ‘I consider that it follows and it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.’ ’’

Disclosure of documents In Goshawk Dedicated Ltd v. Tyser & Co. Ltd [2006] All E.R. (Comm) 501, the Court of Appeal held that a broker was required to disclose to insurers

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documents which the broker has previously disclosed when placing the risk. This was despite the fact that the broker held the documents as agent to the insured and had no instructions from the insured to release the documents. The Court of Appeal reasoned that there was an implied term that the documents, once disclosed, could be disclosed again, subject to a requirement of reasonableness.

Agent’s liability in tort In tort, the insured can pursue an action against the agent where there has been either deceit (i.e. fraudulent misstatement) or negligence:

(a) Action in deceit To pursue an action in deceit, the insured must prove that the agent made a fraudulent statement which caused loss to him. It must be shown that the agent either knew or had known his statement to be false or that he was reckless, i.e. he was consciously indifferent as to the veracity of the statement (see Derry v. Peek [1889] 14 App. Cas. 337).

(b) Action in negligence To pursue an action in negligence, the insured must prove that: u u u u

the agent owed him a legal duty of care; that duty was broken; that the loss suffered was caused by the breach; and the consequent damage was reasonably foreseeable.

Agent’s liability in contract An agent has a legal duty to exercise reasonable care and skill in the conduct of his contractual obligations. The scope of this liability will be determined by the construction of the express or implied agreement entered into with the principal. In Youell v. Bland Welch & Co. Ltd (No. 2) [1990] 2 Lloyd’s Rep. 431, the following propositions were noted regarding an agent’s duties: (i) he must ascertain his client’s needs by instruction; (ii) he must use reasonable skill and care to procure the cover which his client has asked for either expressly or by necessary implication; and (iii) if he cannot obtain what is required, he must report in what respects he has failed and seek his client’s alternative instructions.

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Agent’s fiduciary duties The insurance agent is subject to the full rigour of fiduciary duties. These can be distilled in two propositions: (i) an agent must act in good faith (bona fides) in the interests of the principal; and (ii) an agent must avoid a conflict of interests. The fact that the broker receives his payment from the insurer appears to be an exception to this rule.

REGULATION OF INSURANCE IN THE U.K. The requirement of authorisation The Financial Services and Markets Act 2000 (‘‘FSMA’’) regulates the provision of financial services in the United Kingdom, and provides a regime whereby persons (both individuals and companies) who provide such services must be approved as suitable by a regulator, the Financial Services Authority (the ‘‘FSA’’). Section 19 of FSMA provides that only persons authorised by the FSA may carry on a regulated activity. Breach of this ‘‘general prohibition’’ is a criminal offence. ‘‘Effecting and carrying out of contracts of insurance’’ is a regulated activity where this is done ‘‘by way of business’’ (FSMA, s. 22, and Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, as amended). The ‘‘by way of business’’ requirement narrows the scope of regulation to those who: (a) take or pursue that activity (b) for remuneration. Contracts of insurance are effected or carried out in the U.K. if risks are accepted or claims are paid in the U.K., and it is immaterial that the risks in question are located in some other jurisdiction or that the contracts are governed by a law other than English law. For regulatory purposes, insurance business is divided into ten classes of long-term (life and related) business and 18 classes of general (property, liability, guarantee, etc.) business, and a prospective insurer must obtain permission from the FSA for each individual class of business which it wishes to insure. As a result of EU rules, it is not possible for a new insurer to be authorised to carry on both long-term and general business. Insurers which are established and authorised elsewhere in the European Economic Area (EEA) are exempt from the requirement of authorisation by the FSA. Such insurers may take advantage of EEA ‘‘passport’’ rights by either forming an establishment in the U.K. or supplying insurance directly to customers in the U.K. from establishments elsewhere in the EEA. Equally, any insurer which is authorised and established in the U.K. has equivalent ‘‘passport’’ rights to establish, or to sell insurance directly, in any other EEA country

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without having to seek authorisation from that country’s regulatory authorities. Accordingly, if an insurer (not being an insurer with an EEA ‘‘passport’’) pays claims in the U.K. and is not an authorised person, then that insurer is likely to be in contravention of the general prohibition and may be liable to criminal sanctions. Re Great Western Insurance Co. SA [1999] Lloyd’s Rep. IR 377 This case concerned four insurance companies—Offshore 1 (incorporated in Barbados), Offshore 2 (incorporated in Belgium) and Cyprus 1 and 2 (incorporated in Cyprus), none of which was authorised to carry on insurance business in the UK. Business was obtained in the UK by two sets of brokers, and this was directed to Offshore 1 and 2 through Cyprus 1 and 2. Underwriting decisions were made offshore by Cyprus 1 and 2. The Secretary of State sought winding-up orders against all six companies on the basis that they were carrying on unauthorised insurance business in the UK. Held (C.A.): (1) Offshore 1 and 2 were carrying on insurance business in the UK. The mere fact that underwriting decisions were made offshore did not prevent the operation of the UK legislation, as the activity regulated was the ‘‘effecting and carrying out’’ of insurance contracts, and this included negotiation of such contracts; (2) the brokers operating in the UK were in practice performing functions on behalf of Offshore 1 and 2, including applying underwriting criteria, advising premium rates and terms, receiving notification of claims and settling claims within agreed financial limits—these activities constituted the carrying on of insurance business by Offshore 1 and 2 through the brokers, although the brokers themselves were not carrying on insurance business as they were merely agents; (3) it was not appropriate to wind up the companies, as Offshore 1 and 2 were acting lawfully as regards non-UK business and there was no evidence that UK policyholders had been harmed by the carrying on of unauthorised UK business.

Contracts made by unauthorised persons The Court of Appeal, in Phoenix General Assurance of Greece v. Administratia Asigurarilor de Stat [1986] 2 Lloyd’s Rep. 552, inclined to the view that contracts made by an insurer who failed to obtain the authorisation required by the Insurance Companies Act 1982 were illegal and that no claim could be made by the insured for any loss. It followed that an unauthorised insurer who had reinsured its liability was unable to recover from its reinsurers in the event that payment was made under an unauthorised insurance contract, as (a) the insurer’s payment would have been ex gratia and did not give rise to a legal liability within the meaning of the reinsurance; and (b) a claim against reinsurers would be in reliance on the insurer’s own illegal act. This decision was reversed by s. 132 of the Financial Services Act 1986 (the ‘‘1986 Act’’), which removed the illegality from contracts made by unauthorised insurers and allowed direct policyholders to recover under their contracts, although authorised insurers were entitled to enforce their contracts only with a court order. This section also provided that an authorised insurer could recover under its reinsurances where it was required to pay a claim to a direct policyholder.

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Section 132 of the 1986 Act was held to be retroactive by the Court of Appeal in Bates v. Robert Barrow Ltd [1995] 1 Lloyd’s Rep. 680. Section 132 was superseded by ss. 26 to 28 of the FSMA, which reproduce that section in an amplified form. The broad effects of the sections are that: (a) an unauthorised insurer cannot enforce its insurance contracts against policyholders, who are able to recover payments made by them and compensation; (b) the court may make an order permitting enforcement by the insurer; and (c) the policyholder may enforce the contract against the unauthorised insurer. There is no mention of the enforceability of an unauthorised insurer’s reinsurance contracts, although it is thought that such contracts are enforceable as any payment by the insurer cannot be regarded as ex gratia and there is no illegality involved in making payments under direct policies so that the insurer does not have to plead its own illegality to claim against its reinsurers. It should be noted that a person who is authorised to carry on regulated activities, but who carries on activities beyond the scope of the authorisation contrary to s. 20 of the FSMA, suffers no civil consequences as regards its contracts. Thus an authorised insurer who carries on insurance business of a class for which it is not authorised is entitled to enforce its contracts. The statutory rules on the enforcement of contracts applies only to persons carrying on insurance business who have no authorisation at all, in contravention of the ‘‘general prohibition’’ in s. 19 of the FSMA. Extracts from the Financial Services and Markets Act 2000 ‘‘Agreements made by unauthorised persons 26.—(1) An agreement made by a person in the course of carrying on a regulated activity in contra vention of the general prohibition is unenforceable against the other party. (2) The other party is entitled to recover— (a) any money or other property paid or transferred by him under the agreement; and (b) compensation for any loss sustained by him as a result of having parted with it.

Agreements made unenforceable by section 26 . . . 27.—(1) This section applies to an agreement which is unenforceable because of section 26 . . . (2) The amount of compensation recoverable as a result of that section is— (a) the amount agreed by the parties; or (b) on the application of either party, the amount determined by the court. (3) If the court is satisfied that it is just and equitable in the circumstances of the case it may allow (a) the agreement to be enforced; or

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(b) money and property paid or transferred under the agreement to be retained. (4) In considering whether to allow the agreement to be enforced or (as the case may be) the money or property paid or transferred under the agreement to be retained the court must (a) if the case arises as a result of section 26, have regard to the issue mentioned in subsection (5) . . . (5) The issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement. ... (7) If the person against whom the agreement is unenforceable (a) elects not to perform the agreement; or (b) as a result of this section, recovers money paid or other property transferred by him under the agreement, he must repay any money and return any other property received by him under the agreement. ... (9) The commission of an authorisation offence does not make the agreement concerned illegal or invalid to any greater extent than is provided by section 26 . . . ’’

Summary u Insurers must be authorised to carry on insurance business in the United Kingdom unless they are authorised elsewhere in the EEA in which case they may ‘‘passport’’ into the U.K. u Criminal sanctions may be imposed upon persons who carry on insurance business in the U.K. without the required authorisation or passport rights. u The definition of ‘‘carrying on insurance business’’ is a wide one, and business may be found to be carried on in the United Kingdom by insurers who are situated abroad but who use United Kingdom agents. u The policyholders of unauthorised insurers are able to enforce their policies, but unauthorised insurers do not have the right to enforce policies against their policyholders.

Authorisation of insurance intermediaries Until recently, insurance intermediaries were not required to be authorised by the FSA. However, from 14 January 2005, the list of regulated activities covered by FSMA has been extended to include advising on, dealing as agent in, arranging deals in, and making arrangements with a view to trans actions in general insurance contracts. This covers most of the work of insurance intermediaries and they are required to be authorised by the FSA. Any person

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carrying on these activities without authorisation (or without being exempt) is committing a criminal offence.

TEST YOUR UNDERSTANDING 1. Which one of the following statements is false? (a) insurance contracts transfer and distribute risk; (b) an insurance contract usually indemnifies the insured only to the extent of his actual loss; (c) wagers are not legally enforceable; (d) all insurance contracts must be in writing in order to be enforceable.

2. Which one of the following statements describes the effect of s. 53 of the Marine Insurance Act 1906? (a) it provides a window period for renewal of an expired policy; (b) it entitles the agent to bind the insurer to the issue of a policy on any terms; (c) it renders the broker personally liable to the insurer for payment of the premium in marine policies; (d) it requires all contracts to be in writing in order to be enforceable.

3. Which one of the following statements describes an insurable interest? (a) an insured’s duty of utmost good faith; (b) a cover note issued by the broker; (c) a legal or equitable right of the insured person in the subject matter of the insurance; (d) an agent’s fiduciary duty.

4. Which one of the following statements describes the effect of ‘‘scratching the slip’’ most accurately? (a) it represents the insurer’s rejection of the proposal; (b) it symbolises the unilateral withdrawal of the insured from the contract; (c) it indicates the receipt of the premium; (d) it creates a contract of insurance between that insurer and the insured.

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5. Which one of the following is not a function usually performed by a broker? (a) (b) (c) (d)

the collection of premiums; the issue of cover notes; the completion of proposal forms; finding how risky the contract is and setting the level of premium accordingly.

6. Which one of the following statements best describes the effect of the Third Parties (Rights Against Insurers) Act 1930? (a) it gives third parties the right to claim directly against an insured’s insurers where the insured is insolvent; (b) it gives a third party a statutory right to avoid the policy for nondisclosure or misrepresentation; (c) it establishes intermediaries’ duties in contract and tort.

7. Which one of the following statements is true? (a) an insurer is always liable for any loss which occurs prior to the inception of the insurance policy; (b) the issue of a cover note usually provides immediate insurance cover; (c) a life policy is a contract of indemnity, so the assured cannot insure for an unlimited amount.

8. Which one of the following statements is false? (a) only persons authorised by the FSA (or exempt from authorisation) may carry on a regulated activity in the U.K.; (b) insurers established and authorised elsewhere in the EEA have ‘‘passport’’ rights and are exempt from the requirement of authorisation in the U.K.; (c) an unauthorised insurer may underwrite in the U.K. without committing a criminal offence; (d) an insurer should obtain permission from the FSA for each individual class of business it wishes to insure.

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CHAPTER 2

UTMOST GOOD FAITH John Lowry ELEMENTS OF THE DUTY OF UTMOST GOOD FAITH Nature of the duty Insurance is a rare species of contract where both parties, the insured and the insurer, are under a mutual duty of utmost good faith. The general duty borne by contracting parties to avoid misrepresentation is extended and reinforced in insurance contracts by the additional obligation to disclose all facts material to the risk. Breach of this duty renders the insurance contract voidable. Consequently, non-disclosure on the part of the insured will entitle the insurer to avoid the contract ab initio notwithstanding the absence of any fraudulent intent. The duty, which has been described as an ‘‘incident’’ of the insurance contract, was formulated by Lord Mansfield in Carter v. Boehm (1766) 3 Burr. 1905 and is codified in ss. 17 to 20 of the Marine Insurance Act 1906 (hereafter referred to as the MIA 1906: see Appendix). These provisions are of general application and, therefore, apply to non-marine insurance. In HIH Casualty and General Insurance Co. v. Chase Manhattan Bank [2003] Lloyd’s Rep. 61 (H.L.), Lord Hobhouse summarized the effect of the duty of utmost good faith in the following terms: ‘‘it means that if an assured or his agent has failed to make full disclosure to the underwriter of all facts, which he knows or ought in the ordinary course of business to know, material to the risk, the underwriter can avoid the policy. In other words the policy becomes valueless to the assured. This negates the purpose of insurance which is to provide a secure and certain financial safeguard against losses caused by the insured risks. It makes the safeguard insecure.’’

Lord Hobhouse also noted that the rationale underlying this special treatment of insurance contracts is the disparity between the knowledge of the insured (and his or her agent) and the underwriter. Indeed, in Re Yager (1912) 108 L.T. 28, Channell J. explained that such a wide ranging duty is necessary because insurers are entirely dependent upon the proposer providing full disclosure of all circumstances relevant to the calculation of the risk to be underwritten and the appropriate premium to be charged. Thus, the policy behind the duty is not the need to prevent harm to the insurer as such, but the need for a true and fair agreement whereby risk is transferred and this, therefore, depends upon equality of information. There is a fine line between non-disclosure and misrepresentation and they are frequently treated as one and the same thing by the judges due, no doubt, 37

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to the practice of insurers of raising both by way of defence to a claim. However, there are significant distinctions: u non-disclosure is concerned with the insured’s duty to volunteer material facts; u misrepresentation concerns the insured’s duty to accurately answer questions raised by the insurer which are generally contained in proposal forms (if the insured’s answers are made the ‘‘basis of the contract’’ they are converted into warranties in which case the issue of misrepresentation does not arise (see Chapter 3)); u for non-disclosure the law does not distinguish between innocent, negligent and fraudulent intent whereas, as we shall see, for misrepresentation the categorization can be crucial in terms of the remedies available. The difficulty of drawing a bright line between non-disclosure and misrepresentation in insurance contracts can be seen in relation to an insured’s failure to answer a specific question raised by the insurer (generally in the proposal form). Such failure will be deemed to be a negative answer, i.e. a misrepresentation (see also the general law of contract where misrepresentation must take a positive form so that mere silence will not constitute misrepresentation). Insurance intermediaries (agents or brokers) have a separate duty of disclosure to the insurer (see s. 19, MIA 1906, Appendix). The agent’s duty has two limbs. First, the agent must disclose every material circumstance actually known to them or which in the ordinary course of business ought to be known by, or to have been communicated to, them. Secondly, the agent must disclose every material circumstance which the assured is bound to disclose (unless it comes to the knowledge of the insured too late). However, it should be noted that the duty of disclosure, whether by the insured or the broker, does not apply to any circumstance as to which information is waived by the insurer: s. 18(3) and s. 19 of the MIA 1906 (Appendix). It is worth noting from the outset that, for the reasons explained by Channell J. (above), the duty of disclosure places a heavy burden on insureds. Unsurprisingly, there have long been calls for reform principally on the basis that the law is tilted too strongly in favour of insurers. Suffice it to say at this juncture, that for the private (i.e. consumer) insured the duty has been diluted by the Statements of Practice issued by the Association of British Insurers and also by the ‘‘jurisprudence’’ of the Insurance Ombudsman who has done much to mitigate its force by adopting the principle of proportionality (see ‘‘Practice and reform’’, below). However, for the commercial insured the full rigour of the duty of utmost good faith applies. Time when the duty triggers The duty of disclosure has to be discharged whenever the insurer has to decide whether or not to accept the risk and, if so, on what terms. You should note,

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therefore, that the duty applies before any contractual relationship exists between the parties. Needless to say, the duty arises when new insurance is proposed, but it also triggers when a policy is renewed (because a new contract is entered into) or when an existing policy is substantially changed or modified so that, in effect, a new contract is being entered into. If the agreed change is such that it does not substantially alter the existing contract, this is termed modification or extension or variation of contract. The existing contract will continue as modified, and, if the modification affects the risk, a limited duty of disclosure arises with respect to the change in the risk. Only facts that are material to the modification need be disclosed. In Lishman v. Northern Maritime (1875) L.R. 10 C.P. 179, Blackburn J. stated that if: ‘‘the alteration were such as to make the contract more burdensome to the underwriters, and a fact known at that time to the insured were concealed which was material to the alteration, I should say the policy would be vitiated. But if the fact were quite immaterial to the alteration, and only material to the underwriter as being a fact which showed that he made a bad bargain originally, and such as might tempt him, if it were possible, to get out of it, I should say there would be no obligation to disclose it.’’

With respect to new insurance, subject to any agreement to the contrary, the duty comes to an end when the contract is concluded (Pim v. Reid (1843) 6 Man. & G. 1). Whether or not the duty of disclosure has been discharged will, therefore, be assessed as at that time. However, as already indicated, it should be borne in mind that the contract may extend the duty so as to require the insured to disclose material circumstances that increase the risk but which occur during the currency of the agreement (Shaw v. Roberts (1837) 6 Ad. & E. 75). Whether or not there is a post-contractual duty of good faith is considered below. Basis of contract clauses As will be seen from the cases discussed below, insurers frequently insert a so-called ‘‘basis of the contract clause’’ in proposal forms the effect of which is to make the truth and accuracy of the insured’s answers conditions precedent to the validity of the contract (for consumer insurance the ABI Statements of Practice have diluted the effect of such clauses (see further, Chapter 3, Terms). In the context of non-disclosure the effect of such a clause is to make it impossible for the insured to say that the particular fact that the question was directed to was not material. NON-DISCLOSURE: MATERIALITY OF FACTS AND INDUCEMENT Materiality In essence, the duty of utmost good faith requires the insured to disclose to the insurer every material fact relating to the risk before the contract is concluded.

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It is a question of fact whether the duty has been discharged. Section 18(1) of the MIA 1906 also states that the insured ‘‘is deemed to know every circumstances which, in the ordinary course of business, ought to be known to him’’ and s. 18(2) adds that ‘‘every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk’’ (emphasis supplied). The reference to the prudent insurer means that the test is objective. Whether or not a fact is one that should be known to the insured in the ordinary course of business is itself a question of fact (see Economides v. v ). The Commercial Union Insurance plc [1998] Lloyd’s Rep. IR 9, below k purely innocent insured who fails to disclose a fact he has no reason to believe exists, and it is not one which ought to be known to him or her in the ordinary course of business, is not placed under a duty to investigate whether there are, indeed, any material facts in existence. The judges have long recognised that ‘‘you cannot disclose what you do not know’’ (Joel v. Law Union and Crown Insurance [1908] 2 K.B. 863, per Fletcher-Moulton L.J.). Further, rejecting the argument that insureds should be under a duty to make extensive inquiries prior to concluding a contract of insurance, McNair J. observed in Australia and New Zealand Bank Ltd v. Colonial and Eagle Wharves Ltd [1960] 2 Lloyd’s Rep. 241 that: www

‘‘To impose such an obligation upon the proposer is tantamount to holding that insurers only insure persons who conduct their business prudently, whereas it is commonplace that one of the purposes of insurance is to cover yourself against your own negligence or the negligence of your servant.’’

As we will see, the issues of materiality together with the test of the prudent insurer (do note that the test is not the prudent insured) have generated a considerable body of case law in which the scope of the duty has been subjected to extensive judicial scrutiny: Container Transport International Inc v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep. 476 (C.A.) Kerr L.J.: ‘‘[s. 18(2)] is directed to what would have been the impact of the disclosure on the judgment of the risk formed by a hypothetical prudent insurer in the ordinary course of business . . . He is in a hypothetical position, and evidence to support the materiality of the undisclosed circumstance, from this point of view, is therefore often given by an independent expert witness whose evidence has to be assessed by the Court long after the event . . . The weight which the Court would give to such evidence is then a matter for the Court . . . . . . It follows that when [the relevant provisions of the 1906 Act] are read together, one way of formulating the test as to the duty of disclosure and representation to cases such as the present . . . is simply to ask oneself: ‘Having regard to all the circumstances known or deemed to be known to the insured and to his broker, and ignoring those which are expressly excepted from the duty of disclosure, was the presentation in summary form to the underwriter a fair and substantially accurate presentation of the risk proposed for insurance, so that a prudent insurer could form a proper judgment —either on the presentation alone or by asking questions if he was sufficiently put on

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enquiry and wanted to know further details—whether or not to accept the proposal, and, if so, on what terms?’ This is not an onerous duty for brokers to discharge in practice. Nor was it at all difficult in the present case.’’

In the CTI decision (above) Kerr L.J. stressed that the word ‘‘judgment’’ as used in s. 18(2) of the MIA 1906 should be given its Oxford English Dictionary definition so as to be construed as meaning ‘‘the formation of an opinion’’. Thus, to prove the materiality of an undisclosed circumstance, the particular insurer must satisfy the court on a balance of probability that the judgment of a prudent insurer would have been influenced if the circumstance in question had been disclosed. Kerr L.J. added that the word ‘‘influenced’’ means that the disclosure is one which would have had an impact on the formation of his opinion and on his decision-making process in relation to the matters covered by s. 18(2). The effect of the Court of Appeal’s construction of s. 18 of the MIA 1906 is that materiality is to be determined by whether the fact in question was one which might influence the judgement of the prudent insurer in deciding whether or not to accept the risk or in setting the premium. You should note that the court did not limit the duty of disclosure to those facts that would decisively influence the prudent insurer’s judgment. For this reason, the decision was severely criticised for perpetrating such an onerous duty on insureds.

Proving materiality In seeking to prove materiality insurers will have recourse to expert evidence to assist the court in its determination of whether or not a non-disclosed fact is material (Yorke v. Yorkshire Insurance Co. Ltd [1918–19] All E.R. Rep. 877, per McCardie J.; and Roselodge Ltd v. Castle [1966] 2 Lloyd’s Rep. 113). Reynolds v. Phoenix Assurance Co. [1978] 2 Lloyd’s Rep. 440 Forbes J.: ‘‘Before coming on to the evidence itself I should consider one further preliminary point. In this branch of the law it is permissible for either side to adduce evidence relating to what would be regarded as material. The question at once arises, what is the nature of such evidence and what are the powers and duties of the Court in relation to it? . . . In the first place the evidence of insurers called in this way is expert evidence in the sense that such witnesses are assisting the Court in deciding what a reasonable and prudent underwriter would or would not do. They are not to give evidence of what they themselves would do, because their evidence is expert, that is opinion evidence and not factual. They are to give evidence of what, in their opinion, having regard to the general practice of underwriters, a reasonable underwriter would do. There is a world of difference between saying ‘A reasonable underwriter, in my opinion, would do so and so: I would do so myself ’; and saying ‘I would do so and so, and because I am a reasonable underwriter, it must follow that that is what a reasonable underwriter would do’. The former is unobjectionable expert evidence; the latter is not only logically fallacious but also not really acceptable evidence at all . . . The test of such a witness is not whether he is telling the truth, but whether he is giving an honest opinion. Further, in giving expert evidence such witnesses are only assisting the Court not deciding the matter.

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It seems to me therefore that although I may derive assistance from such expert testimony as has been put before me, I am not bound to regard it as conclusive of what a reasonable and prudent underwriter would do.’’

Inducement Kerr L.J.’s rejection of the decisive influence test was endorsed by the House of Lords in Pan Atlantic Insurance Co. Ltd v. Pine Top Insurance Co. [1995] 1 A.C. 501, where the majority took the view that the harshness of the disclosure duty could be addressed by assimilating non-disclosure with misrepresentation. This was achieved by introducing a subjective test whereby the nondisclosed fact must have induced the underwriter to enter into the insurance contract. It is, however, noteworthy that Lord Lloyd, dissenting, thought that the requirement of ‘‘influence’’ should be determined by reference to whether or not such influence had a decisive effect in moving the underwriter to accept the risk. Pan Atlantic Insurance Co. Ltd v. Pine Top Insurance Co. [1995] 1 A.C. 501 [The facts are immaterial.] Lord Mustill: ‘‘MATERIALITY . . . treating the matter simply as one of statutory interpretation I would feel little hesitation in rejecting the test of decisive influence . . . INDUCEMENT I turn to the second question which concerns the need, or otherwise, for a causal connection between the misrepresentation or non-disclosure and the making of the contract of insurance. According to sections 17, 18(1) and 20(1) if good faith is not observed, proper disclosure is not made or material facts are misrepresented, the other party, or in the case of sections 18 and 20 the insurer, ‘may avoid the contract’. There is no mention of a connection between the wrongful dealing and the writing of the risk. But for this feature I doubt whether it would nowadays occur to anyone that it would be possible for the underwriter to escape liability even if the matter complained of had no effect on his processes of thought . . . I conclude that there is to be implied in the Act of 1906 a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using ‘induced’ in the sense in which it is used in the general law of contract. This proposition is concerned only with material misrepresentations. On the view which I have formed of the present facts the effect of an immaterial misrepresentation does not arise and I say nothing about it. There remain two problems of real substance. The first is whether the conclusion just expressed can be transferred to the case of wrongful non-disclosure. It must be accepted at once that the route via . . . the general common law which leads to a solution for misrepresentation is not available here, since there was and is no general common law of non-disclosure. Nor does the complex interaction between fraud and materiality, which makes the old insurance law on misrepresentation so hard to decipher, exist in respect of non-disclosure. Nevertheless if one looks at the problem in the round, and asks whether it is a tolerable result that the Act accommodates in section 20(1) a requirement that the misrepresentation

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shall have induced the contract, and yet no such requirement can be accommodated in section 18(1), the answer must surely be that it is not—the more so since in practice the line between misrepresentation and non-disclosure is often imperceptible. If the Act, which did not set out to be a complete codification of existing law, will yield to qualification in one case surely it must in common sense do so in the other. If this requires the making of new law, so be it. There is no subversion here of established precedent. It is only in recent years that the problem has been squarely faced. Facing it now, I believe that to do justice a need for inducement can and should be implied into the Act . . . I believe that both principle and justice require the conclusion which I have expressed . . . ’’

A presumption of inducement It should be noted from the above passage that Lord Mustill thought there should be a ‘‘presumption of inducement’’. Thus, an insurer who demonstrates materiality (it will be recalled that this is done by reference to the objective test of the prudent insurer) will have the evidential benefit of a presumption that he was, in fact, actually induced to conclude the contract of insurance. A line of cases since Pan Atlantic suggests that the judges do not share a universal view on the inducement requirement. For example, in Marc Rich & Co. AG v. Portman [1996] 1 Lloyd’s Rep. 430, Longmore J. narrowed the scope of inducement so that it would only trigger where the insurers were v Insurance Corporation of the unable, with good reason, to give evidence. In k Channel Islands v. Royal Hotel Ltd [1998] Lloyd’s Rep. IR 151, however, the presumption operated in favour of the insurers notwithstanding that they did not give direct evidence to substantiate inducement. But in Assicurazioni Generali SpA v. Arab Insurance Group (BSC) [2003] 1 W.L.R. 577, the Court of Appeal took the view that although the non-disclosed or misrepresented fact need not be the sole inducement operating on the insurer (following St Paul’s Fire and Marine Insurance Co. v. McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep. 116), it must be effective in causing the actual insurer to enter into the contract. Significantly, the majority of the court followed earlier decisions to the effect that the insurer must give evidence as to his state of mind. This, therefore, gives the insured the opportunity to cross-examine the insurer with the view to demonstrating that he was not induced by the nondisclosed fact but would have entered into the contract on the same terms had there had been full disclosure of all material facts. Clarke L.J. summarised the position thus: www

‘‘1. In order to be entitled to avoid a contract of insurance or reinsurance, an insurer . . . must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation. 2. There is no presumption of law that an insurer . . . is induced to enter in the contract by a material non-disclosure or misrepresentation. 3. The facts may, however, be such that it is to be inferred that the particular insurer . . . was so induced even in the absence of evidence from him. 4. In order to prove inducement the insurer or reinsurer must show that the nondisclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant

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non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.’’

Proof of inducement As seen above, Clarke L.J. in Assicurazioni stated that the insurer must establish that the non-disclosed or misrepresented fact must be an effective cause, although not necessarily the only cause, of his agreeing to underwrite the risk. v Drake Insurance plc v. Inducement is, therefore, a question of fact. In k Provident Insurance plc [2004] Lloyd’s Rep. IR 277, a motor insurance case, the insured had failed to disclose a speeding conviction and the insurer sought to avoid the policy on the basis that, taking an earlier accident that had been disclosed together with the non-disclosed conviction, it would have charged a higher premium. The majority of the Court of Appeal held that even if the conviction had been disclosed and the insurer sought to charge a higher premium, information would have come to light that the earlier accident had not been the insured’s fault and this would have resulted in the premium being reduced to the normal level. Rix and Clarke L.JJ. thus took the view that in deciding whether the non-disclosed fact had induced the insurer to enter the contract, it is necessary to examine what would have happened had full disclosure been made. This decision is also of interest because of various comments made by the majority of the court, by way of dicta, in relation to the rigours of the duty of good faith. For example, Rix L.J. observed that the doctrine of good faith should be capable of limiting the insurer’s right to avoid in circumstances where that remedy, which has been described in recent years as draconian, would operate unfairly. He went on to note that in recent years there appears to have been a realization that in certain respects English insurance law has developed too stringently. Citing Pan Atlantic (above), in which, it will be recalled, the House of Lords held that the requirement of inducement was implicit in the wording of the MIA 1906, he stated that leading modern cases show that the courts are willing to find means to introduce safeguards and flexibilities which had not been appreciated before. By way of conclusion, he remarked that nowadays not all insurance contracts are made by those who engage in commerce and that the existence of widespread consumer insurance presents new problems: ‘‘It may be necessary to give wider effect to the doctrine of good faith and recognize that its impact may demand that ultimately regard must be had to a concept of proportionality implicit in fair dealing.’’ www

Non-disclosure in the proposal form and waiver Insurance is generally effected by the insured answering questions contained in a proposal form. But merely because the insurer has asked particular questions does not relieve the insured of his general obligation at common law

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to disclose any material fact which might affect the risk, or which might affect the mind of the insurer as to whether or not he should issue a policy. An important issue that arises is whether an insurer can be taken to have waived (see s. 18(3)(c) of the MIA 1906, Appendix A) the right to information by virtue of the way in which questions are framed in the proposal form. For example, a question may stipulate a time period: ‘‘Have you made an insurance claim during the last five years.’’ Here the insurer would be taken to have waived disclosure of claims outside the specified time notwithstanding that such claims would satisfy the test of materiality. Whether or not there is waiver is a question of construction and in cases of ambiguity the particular question asked will be construed contra proferentum. The position was stated by Woolf J. in Hair v. Prudential Assurance Co. [1983] 2 Lloyd’s Rep. 667: ‘‘It is more likely . . . that questions asked will limit the duty of disclosure, in that, if questions are asked on particular subjects and the answers to them are warranted, it may be inferred that the insurer has waived his right to information either on the same matters but outside the scope of the questions or on kindred matters to the subjectmatter of the question. Thus, if an insurer asks ‘How many accidents have you had in the last three years?’ it may well be implied that he does not want to know of accidents before that time, though these would still be material. If he were to ask whether any of the proposer’s brothers or sisters had died of consumption or had been inflicted with insanity it might well be inferred that the insurer had waived similar information concerning more remote relatives, so that he could not void the policy for nondisclosure of an aunt’s death of consumption or an uncle’s insanity. Whether or not such waiver is present depends on a true construction of the proposal form, the test being: Would a reasonable man reading a proposal form be justified in thinking that the insurer had restricted his right to receive all material information and consented to the omission of the particular information in issue?’’

Summary u A fact may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on the prudent underwriter’s decision whether to accept the risk and if so at what premium (in short, the ‘‘wanted to know’’ test). u But if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract. u The burden of proof is on the insurer to prove that the non-disclosed or misrepresented fact was an effective cause, although not necessarily the only cause, of his agreeing to underwrite the risk.

FACTS MATERIAL TO INSURANCE CONTRACTS In Strive Shipping Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2002] 2 Lloyd’s Rep. 88, Colman J. reasoned, on the

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basis of the wording of the MIA 1906, that ‘‘the attribute of materiality of a given circumstance has to be tested at the time of the placing of the risk and by reference to the impact which it would then have on the mind of a prudent insurer’’. He went on to summarise the case law: ‘‘In this connection it is for present purposes necessary to distinguish between three types of circumstances: (1) allegations of criminality or misconduct going to moral hazard which had been made by the authorities or third persons against the proposer and are known to him to be groundless; (2) circumstances involving the proposer or his property or affairs which may to all outward appearances raise a suspicion that he has been involved in criminal activity or misconduct going to moral hazard but which he knows not to be the case; (3) circumstances involving him or his business or his property which reasonably suggest that the magnitude of the proposed risk may be greater than what it would have been without such circumstances.’’

Physical hazard Any fact which increases the risk of loss of the insured subject matter is said to relate to its physical hazard. For example, in life insurance material facts will include the age, health, occupation and hobbies of the life insured. Needless to say, if the insured engages in dangerous pastimes such as sky-diving this may be taken to increase the likelihood of accidental death and will need to be disclosed. With respect to property insurance, material facts will include the age and condition of the subject matter; how it will be used, its location and security arrangements. Thus, in motor insurance, for example, insurers will typically want to know whether the vehicle is kept in a locked garage or parked in the road. Whatever the nature of the subject matter to be insured, insurers will want to know about measures taken to prevent loss and whether it is substantially over-insured. Physical hazard can pose problems especially in life or health insurance because an insured may not be aware that a particular condition is symptomatic of a more serious health risk. In Joel v. Law Union and Crown Insurance Co. (1908) 99 L.T. 712, Fletcher-Moulton L.J. gave the following example: ‘‘I will suppose that a man has, as is the case with almost all of us, occasionally had a headache. It may be that a particular one of these headaches would have told a brain specialist of hidden mischief, but to the man it was an ordinary headache indistinguishable from the rest. Now, no reasonable man would deem it material to tell an insurance company of all the casual headaches he had had in his life, and if he knew no more as to this particular headache, there would be no breach of his duty towards the insurance company in not disclosing it.’’ Cook v. Financial Insurance Co. Ltd [1998] 1 W.L.R. 1765 The insured, Cook, effected disability insurance commencing on 15 October 1992. The policy contained an exclusion clause which provided that: ‘‘No benefit will be payable for disability resulting from (a) any sickness, disease, condition or injury for which an insured person received advice, treatment or counselling from any registered medical practitioner during the 12 months preceding the commencement date . . . ’’

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The insured, who regularly went running, collapsed in July 1992 while on a training run. He saw his GP but she could find nothing untoward. On 4 September he again visited her complaining of pain and breathlessness while running. She thought he may be suffering from a viral infection but referred him by letter dated 7 September to a cardiologist to exclude the possibility of angina. On 16 October the insured was examined by the cardiologist who diagnosed angina. In December he was advised to give up work and he claimed under the policy on the ground that he was unable to work due to angina. The insurers refused payment relying on the exclusion clause. The House of Lords found in favour of the insured. Lord Lloyd: ‘‘The questions which arise on these facts may be stated as follows. (1) Did the plaintiff receive advice, treatment or counselling for angina prior to 15 October? If not, (2) is it enough to bring the case within the exclusion that he received advice, treatment or counselling for symptoms which later turned out to be those of angina? I turn to the second question. Is it enough that the plaintiff received advice for symptoms which turned out to be those of angina? In my opinion the answer must also be ‘No’, unless the insurers can read the word ‘condition’ as including symptoms of a generalised kind which might indicate any number of different diseases, or none . . . The point is a narrow one, and made to seem all the narrower because the contract of insurance was concluded on the day before the plaintiff saw the consultant. But one can imagine cases where the timescale is much longer. Take a man who complains to his doctor that he is suffering from headaches. The doctor can find nothing wrong, and recommends a strong painkiller. Eventually it transpires that the man has a brain tumour. Can it really be said that he received advice for his brain tumour when he first went to see his doctor? Clearly not. Nor, I think, can it be said that he received advice for his condition. At the other end of the scale one might take the case of a man with a very high temperature who is taken to an isolation hospital suffering from Cape Congo Fever or some other rare disease. Obviously he is receiving treatment within the meaning of the exclusion clause from the moment of his arrival in hospital, even though the disease cannot at first be diagnosed . . . In the present case the plaintiff signed a declaration that he had not consulted a doctor other than for minor illnesses. When he came to read the exclusion clause he was entitled to assume that it related only to major illnesses for which he had consulted a doctor. It could not relate to minor illnesses with which, as the insurers had made clear from the form of the declaration, they were not concerned . . . I would allow the appeal.’’

Moral hazard This category of material facts relates to the character of the insured. It includes matter such as claims history, previous refusals of cover and criminal record. However, the fact that the insured was in arrears with his premiums on some other policy has been held, on the particular facts of the case, not to be a material fact. Late payment could be due to a number of reasons and was not sufficient to substantiate an allegation that he might lack the financial resources to maintain the subject-matter of the policy (a vessel) in a satisfactory condition (O’Kane v. Jones [2004] Lloyd’s Rep. IR 389). On the v Insurother hand, the overall integrity of the insured is a material fact. In k ance Corporation of the Channel Islands v. Royal Hotel Ltd [1998] Lloyd’s Rep. IR 151 it was held that the intention of the insured’s director, who was also its www

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company secretary, to defraud its bankers by securing a loan on the basis of misleading accounts showing false occupancy rates was a material fact which should have been disclosed to the material damage insurers. On the issue of inducement, Mance J. stated: ‘‘Looking at all the material before me, I am satisfied that all the underwriting personnel within ICCI and Mr Walpole as its managing director would have taken a serious view of Royal Hotel’s conduct, and that ICCI would have been unlikely to offer renewal if it had known of such conduct before renewal . . . I also consider that this is the attitude which any reputable and experienced insurer (like the present insurers) would have been likely to adopt in the face of dishonest conduct such as Royal Hotel’s here.’’

v James v. CGU General Insurance plc [2002] Lloyd’s Rep. IR 206 Similarly, in k the fact that the insured, a garage owner, had defrauded customers and was in dispute with the Inland Revenue and the Customs and Excise Commissioners was held to be material to the insurers. www

(i) Previous convictions of the insured and connected persons Roselodge Ltd v. Castle [1966] 2 Lloyd’s Rep. 113 The insureds who were diamond merchants effected an all risks policy with the insurers. The proposal form did not ask, and the insureds did not disclose, whether any of their employees had previous convictions. When the insureds sought to recover under the policy on the ground that R, their principal director, had been robbed of diamonds valued at some £304,590, the insurers repudiated liability on the basis of non-disclosure in respect of two material facts. First, R had been convicted of bribing a police officer in 1946 and was fined £75. Second, M, the insureds’ sales manager, had been convicted of smuggling diamonds into the US in 1956, and had been employed by the insureds within a year of his release from prison. McNair J. held that while the 1946 conviction was not a material fact, it having ‘‘no direct relation to trading as a diamond merchant’’, the 1956 conviction was material because M ‘‘remained or might remain a security risk and that underwriters should have been given the opportunity to decide for themselves whether the story as a whole was one which would have influenced them in accepting the risk as offered for fixing the premium . . . ’’. Schoolman v. Hall [1951] 1 Lloyd’s Rep. 139 The insured had effected a jewellers’ block policy in connection with his jeweller’s shop in Oxford Street, London. The underwriters successfully repudiated liability for a loss on the basis that he had failed to disclose a conviction for larceny, shopbreaking and receiving 15 years prior to taking out the policy. (For the effect of the Rehabilitation of Offenders Act 1974, s. 1, see below.) Cohen L.J.: ‘‘while the insurers have stipulated that the answers to the fifteen questions [in the proposal form] ‘shall be the basis of the contract’, that only has the effect of preventing any argument as to the materiality of those questions should dispute arise, but it does not relieve the proposer of his general obligation at common law to disclose any material which might affect the risk which was being run, or which might affect the mind of the insurer as to whether or not he should issue a policy . . . ’’

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March Cabaret Club & Casino Ltd v. London Assurance [1975] 1 Lloyd’s Rep. 169 The insureds, a husband and wife, had effected a fire policy covering the premises of a club and restaurant owned by them. Upon renewal of the policy in April 1970, the husband failed to disclose that he had committed the offence of dishonestly handling stolen goods in June 1969 for which he was convicted at the Old Bailey in June 1970. He was fined £2,000. A fire occurred at the premises and the insurers successfully repudiated liability on the ground of non-disclosure of a material fact. May J.: ‘‘Be it noted also that whereas there is a presumption that matters dealt with in a proposal form are material, there is no corresponding presumption that matters not so dealt with are not material. If any authority were required for that proposition one can find it in the case of Schoolman v. Hall [above] . . . ’’ Lambert v. Co-operative Insurance Society [1975] 2 Lloyd’s Rep. 465 In April 1963 the insured effected an ‘‘All Risks’’ policy covering her own and her husband’s jewellery. At this time she was not asked and did not disclose her husband’s conviction some years earlier for receiving stolen cigarettes for which he was fined £25. The policy contained a condition which provided that it would be ipso facto void if there was non-disclosure of a material fact. The policy was renewed each year. In December 1971 the insured’s husband was again convicted for offences involving dishonesty and sentenced to a prison term. This was not disclosed at the next renewal. In April 1972 the insured claimed for lost or stolen items of jewellery. The insurers successfully repudiated liability on the ground that the insured had failed to disclose a material fact relating to moral hazard at the time of first applying for the policy and its subsequent renewals.

Spent convictions By virtue of s. 4(3) of the Rehabilitation of Offenders Act 1974 an insured is under no duty to disclose a ‘‘spent’’ conviction. A conviction which carries a sentence of two-and-a-half years imprisonment or more can never become spent. Convictions that carry custodial sentences of less than six months become spent after seven years and those that carry sentences of between six months and two-and-a-half years become spent after 10 years. Where a conviction is ‘‘spent’’, s. 4(2) of the Act provides that any question in a proposal form regarding previous convictions is to be treated as not referring to such a conviction. However, s. 7(3) of the Act confers discretion on the court to admit evidence as to spent convictions if the court is satisfied that ‘‘justice cannot be done in the case except by admitting it’’. In Reynolds v. Phoenix Assurance Co. [1978] 2 Lloyd’s Rep. 440, Forbes J. admitted evidence of the insured’s conviction in 1961 for receiving stolen goods that had merely resulted in a fine. However, the judge held that the conviction was not a material fact that should have been disclosed when effecting the fire policy in 1972. Rumours and intelligence The insured must disclose any material information in his possession that relates to the honesty of an employee given that this may increase the risk to

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v be underwritten. However, ‘‘idle rumours’’ need not be disclosed. In k Brotherton v. Aseguradoa Colseguros SA [2003] Lloyd’s Rep. IR 758 Colombian media reports carried allegations of serious misconduct and related investigations involving the business activities of the Colombian reinsureds that had not been disclosed by them. The issue in this appeal by the reinsureds from the decision of Moore-Bick J., concerned the question of whether the materiality of the media reports and the validity of the avoidance by the reinsurers on the basis of non-disclosure depended upon the correctness of the allegations. The appeal was heard before the trial set for determining whether there was in fact misconduct. Mance L.J. drew the distinction between material intelligence that might ultimately be demonstrated as unfounded but which should nevertheless be disclosed and immaterial idle rumours which need not be disclosed by an insured or his or her agent: www

‘‘ . . . I cannot see that the decision in Pan Atlantic that avoidance depends on inducement as well as materiality lends support to a conclusion that avoidance for nondisclosure of otherwise material information should depend upon the correctness of such information, to be ascertained if in issue by trial . . . In summary, it would be an unsound step to introduce into English law a principle of law which would enable an insured either not to disclose intelligence which a prudent insurer would regard as material or subsequently to resist avoidance by insisting on a trial, in circumstances where: (i) if insurers never found out about the intelligence, the insured would face no problem in recovering for any losses which arose—however directly relevant the intelligence was to the perils insured and (quite possibly) to the losses actually occurring; and (ii) if insurers found out about the intelligence, then (a) they would in the interests of their syndicate members or shareholders have normally to investigate its correctness, and (b) the insured would be entitled to put its insurers to the trouble, expense and (using the word deliberately) risk of expensive litigation, and perhaps force a settlement, in circumstances when insurers would never have been exposed to any of this, had the insured performed its prima facie duty to make timely disclosure . . . ’’

Outstanding criminal charges Where criminal charges remain outstanding at the time of the proposal these must be disclosed. The position here was summarised by Mance L.J. in Brotherton: u If, at the time of the proposal, a criminal charge had been brought against the insured that he knew he had not committed, he was nevertheless bound to disclose the charge but he was also entitled to adduce evidence showing his innocence. u If, at the time of the proposal, the insured had been charged with but acquitted of a criminal offence, but he was in reality guilty, that guilt nevertheless remained a material fact. u If, at the time of the proposal, the insured had been charged with and convicted of a criminal offence, but he was in actual fact innocent, it

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nevertheless remained necessary for him to disclose the conviction although he could attempt to prove his innocence to the insurers. (ii) Insurance history: prior refusals and claims record The fact that an insured has been declined cover by another insurer is a material fact that must be disclosed. For example, in Glicksman v. Lancashire and General Assurance Co. Ltd [1927] A.C. 139 a small ladies’ tailor insured against burglary his stock in trade. A burglary occurred and the insurers repudiated his claim, inter alia, on the ground that when asked in the proposal form if he had been previously declined cover he had answered in the negative whereas, in fact, a written proposal had previously been declined by the Sun Insurance Office. The House of Lords found in favour of the insurers. Locker and Woolf Ltd v. Western Australian Insurance Co. Ltd [1936] 1 K.B. 408 In a proposal for fire insurance, the insured, in answer to the question: ‘‘Has this or any other insurance of yours been declined by any other company?’’ answered ‘‘No’’. A fire occurred at the premises and the insurers repudiated liability. Two years prior to effecting the fire policy, the insured had been declined motor insurance on the ground of mis representation and non-disclosure. The Court of Appeal held that this was a material fact entitling the insurer to avoid liability for non-disclosure. London Assurance v. Mansel (1879) 41 L.T. 225 In a proposal for life assurance the insured, in answer to the question, ‘‘Has a proposal ever been made on your life at any other office or offices? If so, where? Was it accepted at the ordinary premium, or at an increased premium, or declined?’’ answered ‘‘Insured now in two offices for £16,000 at ordinary rates. Policies effected last year.’’ At the foot of the proposal the insured signed the following declaration: ‘‘I declare that the above written particulars are true, and I agree that this proposal and declaration shall be the basis of the contract between me and the London Assurance.’’ In fact five life companies had declined him cover notwithstanding that he had passed the medical examinations. It was held that the insurers were entitled to repudiate liability on the basis of non-disclosure. Jessel M.R.: ‘‘The question is whether this is a material fact? I should say, no human being acquainted with the practice of companies or of insurance societies or underwriters could doubt for a moment that it is a fact of great materiality, a fact upon which the offices place great reliance. They always want to know what other offices have done with respect to the lives . . . We have an admission by the Defendant that no less than five insurance offices had declined to accept his life . . . So here we have the proposal as the basis of the contract. It is impossible for the assured to say that the question asked is not a material question to be answered, and that the fact which the answer would bring out is not a material fact.’’

Facts that need not be disclosed Section 18(3) of the MIA 1906 provides that: In the absence of inquiry the following circumstances need not be disclosed, namely:— (a) any circumstance which diminishes the risk;

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Utmost Good Faith (b) any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business as such, ought to know; (c) any circumstance as to which information is waived by the insurer; (d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

(a) Any circumstance which diminishes the risk Such facts are clearly material in that they would influence the prudent insurer and would impact upon the premium charged. However, the vulnerability of the insurer is not adversely affected where such facts are not disclosed. For example, in fire insurance it is not necessary to disclose that an extensive sprinkler system has been installed. Similarly, an insured need not disclose that comprehensive security measures have been installed to protect the subject-matter of the insurance. The court will pay no heed to the argument that such measures suggest that the insured thought the insured vessel was at risk: Decorum Investments Ltd v. Atkin, The Elena G [2002] Lloyd’s Rep. IR v 450. k www

(b) Facts within the actual or presumed knowledge of the insurers As commented above, the MIA 1906 is a codifying statute and Lord Mansfield in his original formulation of the duty of disclosure in Carter v. Boehm (1766) 3 Burr. 1905 had expressed this qualification. The facts of Carter v. Boehm were that the insured, George Carter, who was the Governor of Sumatra, effected a policy in 1759 against the risk of a French attack on Fort Marlborough. When, in fact, the fort was attacked and taken by the French the insurers rejected the insured’s claim arguing that he had failed to disclose the vulnerability of the fort and the likelihood of enemy attack. A special jury found in favour of the insured. Lord Mansfield stated: ‘‘The question therefore must always be whether there was, under all the circumstances at the time the policy was underwritten, a fair representation; or a concealment; fraudulent, if designed; or, though not designed, varying materially the object of the policy, and changing the risk understood to be run. The underwriter at London, in May 1760, could judge much better at the probability of the contingency, than Governor Carter could at Fort Marlborough, in September 1759. He knew the success of the operations of the war in Europe. He knew what naval force the English and French had sent to the East Indies. He knew, from a comparison of that force, whether the sea was open to any such attempt by the French. He knew, or might know everything which was known at Fort Marlborough in September 1759, of the general state of affairs in the East Indies, or the particular conditions of Fort Marlborough, by the ship which brought the orders for the insurance. He knew that ship must have brought many letters to the East India Company; and, particularly, from the governor. He knew what probability there was of the Dutch committing or having committed hostilities . . . ’’

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Glencore International AG v. Alpina Insurance Co. Ltd [2004] 1 Lloyd’s Rep. 111 The insured, G, claimed against its insurers for the loss of stored crude oil. The policy covered all risks of loss, damage and transit, wherever the oil was located. G had provided the insurers with details of expected throughput of stored oil, but had omitted to do so for the policy year 1996–97. During late 1997 and early 1998, a storage operative mis appropriated large quantities of G’s oil and G’s claim under the policy for US$250 million was rejected on the ground of non-disclosure and misrepresentation. It was held that an insurer who covers a commodity trader must be taken to know the whole range of circumstances affecting the business of the insured. Thus, the insurer must appreciate that market prices are volatile, that commodities are transported, placed in storage, subject to the forces of nature and can be dangerous. The insured’s failure to give a throughput estimate for 1996–97 was a misrepresentation, but it had not induced the insurers to accept the risk because the quantity covered by the estimate was a very percentage of the total risk. Moore-Bick J.: ‘‘When an insurer is asked to write an open cover in favour of a commodity trader he must be taken to be aware of the whole range of circumstances that may arise in the course of carrying on a business of that kind. In the context of worldwide trading the range of circumstances likely to be encountered is inevitably very wide. That does not mean that the insured is under no duty of disclosure, of course, but it does mean that the range of circumstances that the prudent underwriter can be presumed to have in mind is very broad and that the insured’s duty of disclosure, which extends only to matters which are unusual in the sense that they fall outside the contemplation of the reasonable underwriter familiar with the business of oil trading, is correspondingly limited.’’

(c) Any circumstance the disclosure of which is waived by the insurers As commented above, the insurer may waive the right to information by the way in which questions contained in the proposal form are framed. For example, in Revell v. London General Insurance Co. Ltd (1934) 50 Ll. L. Rep. 114 it was held that where questions are directed towards specific motoring convictions the insurer can be taken to have waived disclosure of other convictions. Such questions may, therefore, be construed contra proferentum. WISE Underwriting Ltd Agency Ltd v. Grupo Nacional Provincial SA [2004] Lloyd’s Rep. IR 764 is a significant decision insofar as the Court of Appeal subjected the notion of waiver to detailed scrutiny. Briefly, the facts were that P, a retailer of luxury goods in Cancun, Mexico, imported quality merchandise from Miami. The consignment in question was delivered to P’s warehouse where it was left outside overnight. The container was broken into and a number of cartons containing watches were stolen. The total value of the loss was U.S.$817,797.00 of which U.S.$700,390.00 represented the value of Rolex watches which made up part of the consignment. P had effected a goods in transit policy with GNP which, in turn, reinsured the risk ultimately through WISE. The slip presentation which was in Spanish referred to Rolex watches. However, the English translation which was prepared for the reinsurers referred, by mistake, to clocks. When GNP claimed under the reinsurance policy the reinsurers sought to avoid it arguing that the nature of the

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goods to be covered was misrepresented and that the presence of high-value brands of watches together with the fact that regular shipments would be made was not disclosed to them. GNP claimed that the reinsurers had impliedly waived the non-disclosure and, in the alternative, had affirmed the policy by giving 60 days notice of its cancellation knowing of their right to avoid for nondisclosure. In terms of waiver, GNP argued that WISE knew that Cancun was a high class resort; that the slip had originally been prepared in Spanish with the consequent risk of imprecision in translation; that the shipment of goods from the USA to Mexico ought to have caused them to examine the risk closely; and they knew that the goods included jewellery but failed to investigate its nature or the security arrangements for its shipment. GNP also argued that WISE had not been induced by the non-disclosure or misrepresentation. The Court of Appeal, by a majority, held that GNP were entitled to recover. Although it was unanimously held that WISE had been induced by the presentation of the risk, Rix L.J. and Peter Gibson L.JJ. held that the reinsurers had affirmed the policy, notwithstanding the breach of the duty of disclosure, by giving notice of its cancellation. Such notice was inconsistent with any claim to avoid the policy ab initio. Both judges took the view that the trial judge had overlooked a vital email that showed that WISE were unequivocal in cancelling the policy. With respect to the issue of waiver under s. 18(3) of the 1906 Act, Longmore L.J., with whom Peter Gibson L.J. agreed, held that there was no waiver of the duty of disclosure. Reviewing the case law, in particular Container Transport International Inc v. Oceanus (above), Longmore L.J. thought that: ‘‘The doctrine of waiver . . . has therefore come to be invoked in cases where it can be said that, if an insurer does not ask an obvious question, he will have waived disclosure of any material fact which would have been revealed by the answer. That in turn lets in the concept of a prudent insurer since, if such a question would have been obvious to such insurer, the actual insurer cannot be heard to say that such question would not have been obvious to him.’’

Longmore L.J. therefore took the view that deciding whether or not there was waiver involved a two-fold process. First, it had to be determined whether a material fact had not been disclosed. Secondly, it had to be established whether the insurer ‘‘was put on inquiry by the disclosure of facts which would raise in the mind of the reasonable insurer at least the suspicion that there were other circumstances which would or might vitiate the presentation.’’ On the facts he held that while there had been a material non-disclosure there was nothing in the presentation of the risk that could be said to have raised the suspicion that Rolex watches were to be included in the consignment. Rix L.J., dissenting on this issue, placed particular emphasis on the mutuality of the duty of utmost good faith, and stated that the only relevant question was whether the presentation was fair. Rix L.J. therefore concluded that a reasonably careful insurer would have been fairly put on inquiry, given what he knew from GNP’s presentation and his general s. 18(2)(b) knowledge.

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‘‘If the question is instead the overriding question: Is the ultimate assessment of GNP’s presentation that it is unfair, or would it be unfair to allow the reinsurers a remedy of avoidance in such a case? I would answer that the presentation was fair, and that it would be unfair to allow reinsurers to take advantage of an error of translation in a case where, on the evidence, an exclusion of watches would seem to have been the obvious solution.’’

An important matter that has come before the courts is the extent to which the parties can exclude or vary the duty of utmost good faith by a contract term. (See the ‘‘Truth of Statement’’ clause in HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank [2003] Lloyd’s Rep. 61, discussed below, in the context of remedies/brokers.)

(d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty Any circumstance, whether material or not, that is incorporated into the policy by way of an express or implied warranty need not be disclosed by the insured (see Chapter 3, Terms). The reason for this is simple: if the underwriter has protected him or herself by way of warranty he or she does not need the protection of the duty of disclosure. Of course, in addition to the warranty, it is open to the insurer to specifically raise a question about the matter in which case the insured is bound by the duty of good faith to answer truthfully (Haywood v. Rodgers (1804) 4 East. 590).

MISREPRESENTATION It was commented above that non-disclosure and misrepresentation are generally treated as one and the same thing by the judges most probably because, as a matter of practice, insurers frequently raise both by way of defence. Yet, as we saw, there are significant distinctions. A significant point to bear in mind at this juncture is that in relation to nondisclosure the law does not distinguish between innocent, negligent and fraudulent intent whereas for misrepresentation the categorization can be crucial. Although s. 20(1) of the Marine Insurance Act 1906 (see Appendix A) provides that the insurer can avoid the policy in the event of a material misrepresentation, it should also be borne in mind that a fraudulent misrepresentation entitles the innocent party to bring an action for damages in the tort of deceit. Further, although the general law of contract (and, of course, tort law) recognizes negligent misrepresentation as distinct, it is now doubtful whether this survives in insurance law following the decision of the Court of Appeal in Economides v. Commercial Union [1998] Q.B. 587 (considered below; see also, Rendall v. Combined Insurance Co. of America [2005] EWHC 678 (Comm), below).

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Because misrepresentation is generally subsumed under non-disclosure there has been little judicial consideration of s. 2(2) of the Misrepresentation Act 1967. This provision holds the potential to prevent insurers avoiding the contract by granting the court the discretion to award damages in lieu of recission or avoidance. Although this power is unlikely to be exercised in commercial insurance (Highlands Insurance Co. v. Continental Insurance Co. [1987] 1 Lloyd’s Rep. 109, see below in the context of remedies), it may assume greater significance in consumer insurance in the light of Economides. Further, in his Annual Report for 1990, para. 2.3, the Insurance Ombudsman noted that in consumer insurance most so-called non-disclosures arise via inaccurate answers to questions in proposal forms (in reality, misrepresentations) and that in such cases (by analogy with s. 2(2) of the 1967 Act) he would not allow insurers to avoid the policy but restrict them to partially or wholly avoiding a claim. Economides v. Commercial Union Assurance Co. plc [1998] Q.B. 587 The insured, an 18-year-old student, effected a household contents policy with the defendants in 1998. The total sum insured was £12,000 (index linked) and the maximum recoverable for valuables (as defined in the policy) was one-third of that amount. The proposal form which was completed and signed by him stated that the answers given were true to the best of his knowledge and (notwithstanding the Statements of Practice) that it formed the basis of the contract between him and the insurers. At that time the answers given by the insured were true. In 1990 the insured’s parents left Cyprus and came to live permanently in England. They moved in with him bringing with them a considerable quantity of valuables including jewellery worth some £30,000. The insured, now aged 21, saw some of the jewellery as and when his mother wore it but showed little interest. However, his father, a retired police divisional commander, advised him to increase his contents policy by approximately £3,000. The insured contacted the insurers and instructed them to increase cover to £16,000. The next renewal invitation, which contained a disclosure warning modeled on the Statements of Practice (see Practice and Reform, below) stated that this was the sum insured. In 1991 the insured’s flat was burgled and property worth some £31,000 was stolen, the bulk of which being the parents’ valuables. When the insured claimed under the policy it became clear that the value of his parents property was £30,970, which exceeded the sum insured. Further, the valuables in question exceeded one-third of the total sum insured or the total value of the contents which was now estimated to be £40,000. The insurers avoided liability on grounds of misrepresentation and nondisclosure of material facts. It was held by the Court of Appeal that a statement of belief, if given in good faith, does not need to be supported by reasonable grounds of that belief, but the existence or lack of reasonable grounds for such belief may be taken into account by the court in determining whether the representor has acted in good faith. Further, the duty on the insured, when representing the full contents value to be £16,000 was solely one of honesty. Simon Brown L.J.: ‘‘I accept, of course, that . . . what may at first blush appear to be a representation merely of expectation or belief can on analysis be seen in certain cases to be an assertion of a specific fact. In that event the case is governed by subsections (3) and (4) rather than (5) of s. 20 and I accept too, as already indicated, that there must be some basis for a representation of belief before it can be said to be made in good faith . . . In my judgment the requirement is rather, as s. 20(5) states, solely one of honesty.

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There are practical and policy considerations too. What would amount to reasonable grounds for belief in this sort of situation? What must a householder seeking contents insurance do? Must he obtain professional valuations of all his goods and chattels? The judge below held that: ‘it would have been necessary for him to make substantially more inquiries than he did make before he could be said to have reasonable grounds for his belief. It is not necessary to specify what those inquiries might have involved.’ The problem with not specifying them, however, is that householders are left entirely uncertain of the obligations put upon them and at risk of having insurers seek to avoid liability under the policies. There would be endless scope for dispute. In my judgment, if insurers wish to place upon their assured an obligation to carry out specific inquiries or otherwise take steps to provide objective justification for their valuations, they must spell out these requirements in the proposal form. I would hold, therefore, that the sole obligation upon the plaintiff when he represented to the defendants on renewal that he believed the full contents value to be £16,000 was that of honesty. That obligation the judge apparently found him to have satisfied. Certainly, given that the plaintiff was at the time aged 21, given that the figure for the increase in cover was put forward by his father, and given that father was a retired senior police officer, inevitably better able than the plaintiff himself to put a valuation on the additional contents, there would seem to me every reason to accept the plaintiff ’s honesty . . . ’’

On the issue of non-disclosure, the Court of Appeal agreed that the governing principle is to be found in s. 18(1) of the MIA 1906. The true scope of the words in the section ‘‘deemed to know’’ has in fact long been settled. Simon Brown L.J. stressed that where the insured is a private individual not acting (in the words of the s. 18(1) (see Appendix A)) ‘‘in the ordinary course of business’’, he ‘‘must disclose only material facts known to him; he is not to have ascribed to him any form of deemed or constructive knowledge’’. In support of this proposition he cited Saville L.J.’s summary of the legal position in Deutsche Ruckversicherung AG v. Walbrook Insurance Co. [1996] 1 W.L.R. 1152. ‘‘The distinction is expressly drawn between knowledge and deemed knowledge. The latter type of knowledge is then carefully circumscribed. To suggest that there is to be found in the section another and unexpressed type of deemed knowledge which is not so circumscribed seems to me simply to contradict the words used, and to destroy the very distinction that has been expressly drawn . . . ’’

In Rendall v. Combined Insurance Co. of America [2005] EWHC 678, in which Cresswell J. held, applying Economides, that in insurance contracts a representation of expectation or belief could not, consistently with s. 20(5) MIA 1906, carry with it an implicit representation that it was based on reasonable grounds. Summary The Court of Appeal held that the test for non-disclosure was the same as that for misrepresentation, namely that of honesty. Just as there was no duty on the insured in Economides to make further inquiries to establish reasonable

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grounds for his belief in the accuracy of his representation concerning valuation, so too he was not under a duty to inquire into the facts in order to discharge the obligation of disclosure of all material facts known to him. The decision of the Court of Appeal on the issue of misrepresentation does, however, seem to inject an element of inconsistency in the way misrepresentation operates in insurance contracts as compared to general contract law. Limiting the duty on the proposer/insured to one of ‘‘honesty’’ would appear to eliminate innocent misrepresentation from insurance law. If the insured is dishonest then quite clearly this will amount to fraudulent misrepresentation. Where, on the other hand, the insured is honest this will not amount to misrepresentation at all because there is no implied requirement for the insured to show ‘‘objectively reasonable grounds’’ for his or her belief. As Simon Brown L.J. explained, the ‘‘sole obligation’’ borne by the insured is that of honesty. Non-disclosure and misrepresentation in composite insurance In construction insurance, it is not uncommon for one policy to cover the separate interests of a head contractor and all the sub-contractors involved in a building project. Similarly, one policy will often cover the separate interests of a mortgagor and mortgagee in the same property. The issue that arises in such co-insurance situations is whether the non-disclosure or misrepresentation on the part of one co-insured will entitle the insurer to avoid the contract as against all parties (i.e. including the innocent co-insureds) or merely against the guilty co-insured. The solution depends upon whether the policy is construed as separate contracts or as a single contract. Arab Bank plc v. Zurich Insurance Co. [1999] 1 Lloyd’s Rep. 262 Browne (B) was the managing director of John D Wood Commercial Ltd (JDW), an incorporated firm of professional estate agents and valuers. He was at all material times a substantial shareholder in the company. B prepared valuations for banks which were fraudulently high in that the valuation figures were deliberately or recklessly provided and did not represent the open market value of the properties: the figures were in each case grossly in excess of the true open market value and/or recent sale price. On occasions B was assisted by another director and (relatively minor) shareholder, Pitts (P). The company received the fees. The other directors of JDW were innocent and free of any fraudulent conduct or intent to deceive. The claimants, Arab Bank and Banque Bruxelles Lambert SA, obtained judgments against JDW in negligence but when the company went into liquidation they sought to enforce those judgments directly against the company’s underwriters, Zurich, under the Third Parties (Rights against Insurers) Act 1930. Zurich argued that B’s fraud relieved them from liability. The indemnity insurance in question had been effected in August 1990. B had completed the proposal form. Question 14(a) of the proposal asked: Is any Partner, Director, Principal, Consultant or employee, AFTER ENQUIRY, aware of any circumstances/incidents which might: (i) give rise to a claim against the Proposer or his predecessors in business or any of the present or former Partners, Directors, Principals? . . .

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(iii) otherwise affect the consideration of this proposal for Professional Indemnity insurance? B answered yes to question (i), but no to question (iii), and in explanation of his answer to question (i) merely referred to a minor issue concerning a possible loss of rent and a possible claim under £10,000. This was irrelevant to the present disputes. The proposal concluded as follows: I/We warrant that the above statements made by me/us or on my/our behalf are to the best of my/our knowledge true and complete and I/we agree that this proposal shall be the basis of the contract between me/us and the Insurer. I/We further warrant that no higher limit(s) Insurance have been, or will be, effected by me/us unless agreed. The insurers contended that B had failed to disclose material facts and that his answers constituted a breach of warranty. It was material that the proviso in the ‘basis of the contract clause’ is that the answers were true to the best of B’s knowledge and meant that they were warranties of opinion not absolute guarantees as to their accuracy. Part I of the policy defined ‘‘the insured’’ as the ‘‘firm’’, including its directors and employees with the proviso that ‘‘such definition of the term ‘Insured’ shall NOT be construed to mean that the Company shall indemnify any person knowingly committing, making or condoning any dishonest, fraudulent or malicious act or omission’’. Other conditions in the policy included, among others, a fraudulent claim clause (condition 1), a waiver of the insurers’ rights in the event of innocent non-disclosure (condition 2), a waiver of subrogation (condition 5) and a term requiring notification of any circumstance arising during the currency of the policy which might give rise to a claim (condition 6). The primary issue was whether JDW, the principal insured, could recover under its professional indemnity policy on the basis that the dishonest mind and knowledge of its managing director could not be attributed to it. It was held by Rix J. that composite policies should be viewed prima facie as ‘‘a bundle of separate contracts’’ between the insurers and the co-insureds so that, therefore, dishonesty by one co-insured did not permit the insurers to avoid the policy against all the other parties.

Although this approach has been criticised by commentators as going too far, it has been tacitly endorsed by the Court of Appeal in FNCB Ltd v. Barnet v Devanney (Harrow) Ltd [1999] Lloyd’s Rep. IR 459. k www

A POST-CONTRACTUAL DUTY OF GOOD FAITH? We have seen that the duty of disclosure continues up until the insurance contract is concluded. Thus, if a change of circumstance occurs which is material to the risk before the insurers accept the proposal, the insured must disclose it (Looker v. Law Union and Rock Insurance Co. Ltd [1928] 1 K.B. 554). The duty also applies to interim insurance (see Chapter 1, ‘‘Formation —cover notes’’). The materiality test relates to circumstances that are premium sensitive; once the contract is concluded and the premium has been fixed the duty comes to an end. As noted above, in the absence of an express term to the contrary, there is no corresponding duty during the currency of the policy: Pim v. Reid (1843)

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6 M. & G. 1. In Kausar v. Eagle Star Insurance Co. Ltd [2000] Lloyd’s Rep. 154, a clause in the policy which stated: ‘‘You must tell us of any change of circumstances after the start of the insurance which increases the risk of injury or damage . . . ’’ was restrictively construed by Saville L.J. so as not to impose a continuing duty of disclosure on the insured: ‘‘[A]ll that this Condition does is to state the position as it would exist anyway as a matter of common law, namely that without the further agreement of the insurer, there would be no cover where the circumstances had so changed that it could properly be said by the insurers that the new situation was something which, on the true construction of the policy, they had not agreed to cover. The mere fact that the chances of an insured peril operating increase during the period of the cover would not, save possibly in most extreme of circumstances, enable the insurers properly to say this, since the insurance bargain is one where, in return for the premium, they take upon themselves the risk that an insured peril will operate.’’

The duty of disclosure operates more harshly in general insurance than in life insurance. General insurance policies, such as motor or household insurance, are normally short-term contracts that are typically renewed annually—at which time a new contract is entered into. The duty, as we have seen, therefore, bites at each renewal: Hearts of Oak Building Society v. Law Union & Rock Insurance Co. [1936] 2 All E.R. 619; see also Lambert v. Co-operative Insurance Society (above). The duty of good faith and claims While it is settled that the doctrine of utmost good faith applies to the formation of the insurance contract (including renewals), there has been considerable debate over whether the doctrine applies during the claims process and, if so, whether a fraudulent claim entitles the insurer to avoid the contract ab initio. In a controversial decision, Hirst J. held in Black King Shipping Corp v. Massie (The Litsion Pride) [1985] 2 Lloyd’s Rep. 437 (marine insurance), that a fraudulent claim could amount to breach of the duty of utmost good faith (see s. 17 of the MIA 1906, Appendix A) thereby entitling the insurer to avoid the contract ab initio. Subsequent decisions have, however, taken a more restrictive view of the continuing duty of good faith. The issue is of significance for the following reasons: are insurers entitled to avoid the whole contract ab initio where there is a fraudulent claim? Or, can they only repudiate as from the date of the breach of duty? Or, are insurers restricted to merely repudiating the particular claim? In Manifest Shipping Co. Ltd v. Uni-Polaris Shipping Co. Ltd (The Star Sea) [2001] Lloyd’s Rep. IR 247, a marine insurance case involving an alleged fraudulent claim, the House of Lords held that as far as claims are concerned the duty of the insured is one of honesty only. Thus, s. 17 of the MIA 1906 was restricted to the pre-contractual stage of insurance so that there is no general continuing duty of utmost good faith. Lord Hobhouse also overruled the decision of Hirst J. in The Litsion Pride (above).

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Lord Hobhouse: ‘‘ . . . The right to avoid referred to in s. 17 . . . applies retrospectively. It enables the aggrieved party to rescind the contract ab initio. Thus he totally nullifies the contract. Everything done under the contract is liable to be undone. If any adjustment of the parties’ financial positions is to take place, it is done under the law of restitution not under the law of contract. This is appropriate where the cause, the want of good faith, has preceded and been material to the making of the contract. But, where the want of good faith first occurs later, it becomes anomalous and disproportionate that it should be so categorized and entitle the aggrieved party to such an outcome. But this will be the effect of accepting the defendants’ argument. The result is effectively penal. Where a fully enforceable contract has been entered into insuring the assured, say, for a period of a year, the premium has been paid, a claim for a loss covered by the insurance has arisen and been paid, but later, towards the end of the period, the assured fails in some respect fully to discharge his duty of complete good faith, the insurer is able not only to treat himself as discharged from further liability but can also undo all that has perfectly properly gone before. This cannot be reconciled with principle . . . [The] authorities show that there is a clear distinction to be made between the precontract duty of disclosure and any duty of disclosure which may exist after the contract has been made. It is not right to reason, as the defendants submitted that your Lordships should, from the existence of an extensive duty pre-contract positively to disclose all material facts to the conclusion that post-contract there is a similarly extensive obligation to disclose all facts which the insurer has an interest in knowing and which might affect his conduct. The Courts have consistently set their face against allowing the assured’s duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith. An inevitable consequence in the postcontract situation is that the remedy of avoidance of the contract is in practical terms wholly one-sided. It is a remedy of value to the insurer and, if the defendants’ argument is accepted, of disproportionate benefit to him; it enables him to escape retrospectively the liability to indemnify which he has previously and (on this hypothesis) validly undertaken . . . ’’

Subsequent decisions have sought to put the issue beyond doubt although Mance L.J. in Agapitos v. Agnew called for legislative intervention to settle the v K/s Merc-Scandia XXXXII v. Certain Lloyd’s Underwriters Submatter. In k scribing to Lloyd’s Policy No. 25t 105487 and Ocean Marine Insurance Co. Ltd (The ‘‘Mercandian Continent’’) [2001] Lloyd’s Rep. IR 802, the insured submitted a forged letter to his liability insurers to assist them in defending a claim that had been brought against the insured by a third party. The Court of Appeal, holding the insurer liable, took the view that s. 17 of the MIA 1906 did not apply to fraudulent claims because these were governed by the common law principle preventing a person from benefiting from his or her own wrong. Thus, the fraud results in all benefits under the policy being forfeited by the insured. v Agapitos v. Agnew [2002] Lloyd’s Rep. IR 573 the insured’s claim was In k genuine but was made by the use of fraudulent devices and means. Mance L.J. explained that ‘‘a fraudulent claim exists where the insured claims, knowing that he has suffered no loss, or only a lesser loss than that which he claims (or is reckless as to whether this is the case)’’ whereas, ‘‘a fraudulent device is used if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim, by some lie’’. The issue www

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which Mance L.J. focused upon, therefore, was whether a genuine claim could become fraudulent because it was made fraudulently and whether, in consequence, the duty of utmost good faith was broken. Holding that the duty of utmost good faith did not apply to claims so that the policy could not be avoided ab initio where the insured makes a fraudulent claim, Mance L.J. went on to state: ‘‘What then is the appropriate approach for the law to adopt in relation to the use of a fraudulent device to promote a claim, which may (or may not) prove at trial to be otherwise good, but in relation to which the insured feels it expedient to tell lies to improve his prospects of a settlement or at trial? . . . In the present imperfect state of the law, fettered as it is by s. 17, my tentative view of an acceptable solution would be: (a) To recognize that the fraudulent claim rule applies as much to the fraudulent maintenance of an initially honest claim as to a claim which the insured knows from the outset to be exaggerated. (b) To treat the use of a fraudulent device as a sub-species of making a fraudulent claim—at least as regards forfeiture of the claim itself in relation to which the fraudulent device or means is used. (The fraudulent claim rule may have a prospective aspect in respect of future, and perhaps current, claims, but it is unnecessary to consider that aspect or its application to cases of use of fraudulent devices.) (c) To treat as relevant for this purpose any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured’s prospects of obtaining a settlement or winning the case, and which would, if believed, tend, objectively, prior to any final determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. (d) To treat the common law rules governing the making of a fraudulent claim (including the use of fraudulent device) as falling outside the scope of s. 17 . . . On this basis no question of avoidance ab initio would arise . . . ’’

A further issue that has recently arisen is what is the position with respect to co-insurance where a fraudulent claim is made by one insured but not the v Direct Line Insurance plc v. Khan [2002] Lloyd’s Rep. IR 364 the other? In k home of the co-insureds, Mr and Mrs Khan, was destroyed by fire. Mr Khan made a claim for rent, supported with forged documents, he allegedly paid for alternative accommodation. In fact no such rent was paid because he owned the alternative accommodation himself. The claim was held to be fraudulent and the insurers recovered all monies they had paid in respect of reinstating the damaged house, replacing its contents and the payment of rent. The trial judge rejected the argument that Mrs Khan was the sole policyholder and rejected the argument that she should be able to recover on the basis that the fraud had been committed by her husband without her knowledge. Arden L.J., dismissing her appeal, held that in joint insurance the effect of a fraudulent claim advanced by one co-insured is fatal to the claim of the other co-insureds even though they may be entirely innocent. www

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You should note, however, that in composite insurance each insured has a separate contract with the insurers and the fraud of one insured will not prejudice the claims of another in respect of the same loss (see Arab Bank plc v. Zurich Insurance Co. [1999] 1 Lloyd’s Rep. 262, above).

AGENTS AND THE PROPOSAL FORM In Chapter 1 the position of intermediaries in placing insurance was considered. It is particularly important to identify who is the principal of an intermediary where the issue of imputation of knowledge possessed by an agent arises (for example, if a material fact is disclosed by an insured to the agent, and the agent does not pass this information to the insurer, the insurer will not be able to avoid the policy for non-disclosure if it is found to be the agent’s principal). Broadly speaking it can be said that insurance agents and Lloyd’s brokers are presumed to be the agents of the insured. That this may run contrary to the perception of the typical applicant for insurance was recognised by both the trial judge and Purchas L.J. in Roberts v. Plaisted [1989] 2 Lloyd’s Rep. 341: ‘‘Full and frank disclosure to the Lloyd’s broker concerned in presenting on behalf of the proposed assured the proposal to the insurers as against an insurer who complains of non-disclosure and repudiates on that ground avails the proposed insured in no sense at all. To the person unacquainted with the insurance industry it may seem a remarkable state of the law that someone who describes himself as a Lloyd’s broker who is remunerated by the insurance industry and who presents proposals forms and suggested policies on their behalf should not be the safe recipient of full disclosure; but that is undoubtedly the position in law as it stands at the moment . . . Perhaps it is a matter which might attract the attention at an appropriate moment of the Law Commission.’’

Salaried representatives of insurance companies, on the other hand, are deemed to be the agents of the insurer even where part of their remuneration is made up of commission. That said, there are exceptions to these broad propositions. Typically an insured will seek to show that the insurer has constructive knowledge of a non-disclosed fact by virtue of the broker in question being in possession of the information in question. Whether or not such knowledge will be imputed to the principal will depend upon the agent’s actual or apparent authority. As indicated above, the issue of imputation of knowledge commonly arises in the situation where the agent completes the proposal form for the prospective insured. If in answer to a question contained in the form the insured tells the truth but the agent falsifies the answer, the question arises whether the insured is bound by the agent’s conduct. The solution will depend upon who is the principal. If it is the insured, then he or she is bound and the insurers will not be deemed to have constructive knowledge of the truth. If, however, the

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agent is a full-time employee of the insurer it might be tenable to argue that knowledge of the truth should be imputed to it as principal. Bawden v. London, Edinburgh & Glasgow Assurance Co. [1892] 2 QB 534 The insurer’s agent completed a proposal form for accidental injury insurance on behalf of a proposer who was illiterate and had lost an eye. The agent was aware of the proposer’s condition but did not communicate this to the insurers. The form contained a term warranting that the insured was free from physical infirmity. The insured was involved in an accident and lost his good eye. The insurers repudiated liability. The Court of Appeal found in favour of the insured. Note the reasoning of Lindley L.J.: ‘‘The case turns mainly upon the position of Quin [the agent]. What do we know about him? The company have given us no information about the terms of his agency. In the printed form of proposal he is described as the agent of the company for Whitehaven, and it is admitted that he was their agent for the purpose of obtaining proposals. What does that mean? It implies that he sees the person who makes the proposal. He was the person deputed by the company to receive the proposal, and to put it into shape. He obtains a proposal from a man who is obviously blind in one eye, and Quin sees this. This man cannot read or write, except that he can sign his name, and Quin knows this. Are we to be told that Quin’s knowledge is not the knowledge of the company? Are they to be allowed to throw over Quin? In my opinion, the company are bound by Quin’s knowledge, and they are really attempting to throw upon the assured the consequences of Quin’s breach of duty to them in not telling them that the assured had only one eye. The policy must, in my opinion, be treated as if it contained a recital that the assured was a one-eyed man. The £500 is to be payable in case of the ‘complete and irrecoverable loss of sight in both eyes’ by the assured. If the assured has only one eye to be injured, this must mean the total loss of sight. Within the true meaning of the policy, as applicable to a one-eyed man, I think the plaintiff is entitled to recover £500.’’

However, the decision in Bawden cannot be taken to represent the general rule and has been distinguished in a number of cases. Rather, the general position was laid down by the Court of Appeal in Newsholme Bros v. Road Transport and General Insurance Co. Ltd. Newsholme Bros v. Road Transport and General Insurance Co. Ltd [1929] 2 K.B. 356 The insurer’s agent who, although told the true facts, inserted false answers when completing a proposal form for the insurance of a bus. The form, which was signed by the insured, contained a basis of the contract clause. The agent was not authorised by the insurance company to complete proposal forms. His duties were to sell insurances and to check that proposal forms were duly completed. He was not authorised to give a cover note or to conclude contracts of insurance. A policy was issued. When the insured made a claim under it, the insurers repudiated liability on the ground of the untrue statements in the proposal form. The Court of Appeal held that the agent’s knowledge was not imputed to the insurer because the agent’s principal was the insured. Scrutton L.J.: ‘‘In my view the decision in Bawden’s case is not applicable to a case where the agent himself, at the request of the proposer, fills up the answers in purported conformity with information supplied by the proposer. If the answers are untrue and he knows it, he is committing a fraud which prevents his knowledge being the knowledge of the insurance company. If the answers are untrue, but he does not know it, I do not understand how he has any knowledge which can be imputed to the insurance company. In any case, I have great difficulty in understanding how a man

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who has signed, without reading it, a document which he knows to be a proposal for insurance, and which contains statements in fact untrue, and a promise that they are true, and the basis of the contract, can escape from the consequences of his negligence by saying that the person he asked to fill it up for him is the agent of the person to whom the proposal is addressed.’’

The agent’s duty of utmost good faith (i) Duty of disclosure A broker or agent has an independent duty of utmost good faith. Section 19 of the MIA 1906 provides: Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer— (a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) every material circumstance which the assured is bound to disclose, unless it came to his knowledge too late to communicate it to the agent.

In placing an independent and personal duty on the agent to disclose material facts known to him or her irrespective of whether they were known to the insured, s. 19 of the MIA 1906 gives due recog nition to the practical realities of the market place where facts which might not come to the attention of the insured (for example, refusals by other insurers to cover the risk), are known to the broker. Further, where the insured employs a broker to present a risk to the insurer, and the broker fails to disclose a material fact known to him alone, it is logical that the broker, being the wrongdoer, should incur liability. Further, in Blackburn Low & Co. v. Vigors (1887) 12 App. Cas. 531 the House of Lords, examining the scope of the duty, held that it was only the knowledge of the broker who effected the insurance that is relevant so that the knowledge of a broker who had previously been charged with effecting the policy is of no v HIH Casualty and General Insurance Ltd v. Chase Manconsequence (see k hattan Bank [2003] Lloyd’s Rep. IR 230, below). www

PCW Syndicates v. PCW Insurers [1996] 1 Lloyd’s Rep. 241 The claimants, who were members of Lloyd’s syndicates that had reinsured their liabilities with the defendants, had been defrauded by their underwriting agent. The reinsurance policies were placed by brokers acting on behalf of the fraudster. The reinsurers sought to avoid the policies on the basis that the fraud of the underwriting agent was a material fact that ought to have been disclosed by the underwriting agent. The Court of Appeal held that the reinsurers could not avoid the policy. Saville and Rose L.J.J. stated that the duty under s. 19(a) of the MIA 1906 only applied to an ‘‘agent to insure’’, i.e. on the facts, to the placing broker and not to any intermediate agent. Therefore, the duty did not apply to the claimants’ underwriting agent. Both Staughton and Rose L.J.J. agreed that it would be fanciful to believe that an agent would disclose his own fraud and, therefore, a reinsurer could not avoid a contract if an agent to insure failed to disclose that he had defrauded the insured.

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The consequence of a breach of the duty of disclosure by an agent is that the insurer may avoid the policy. (ii) Misrepresentation Where a broker or agent is guilty of misrepresentation the policy is voidable at the election of the insurers. If the insurers do not avoid, or are unable to do so, the broker or agent may be liable in damages. The general common law principles apply. Thus, there is no liability in damages for innocent misrepresentation. If the misrepresentation is negligent, s. 2(1) of the Misrepresentation Act 1967 applies; alternatively there may be liability under the principle laid down in Hedley Byrne & Co. v. Heller & Partners [1964] A.C. 465. Where the misrepresentation of a material fact is fraudulent liability can be founded on the tort of deceit. (iii) Exclusion of liability As with the general law of contract, it is possible for a contract of insurance to contain exemption clauses that seek to restrict the rights of a party. In the context of insurance, such clauses may dilute the insured’s strict duty of disclosure by, for example, restricting the insurer’s right to avoid the contract in the event of the insured breaching his or her duty of utmost good faith. It will be recalled that in Arab Bank Plc v. Zurich Insurance Co. (above), there was an ‘‘Innocent Non-disclosure’’ clause which excluded the insurer’s right to avoid for non-disclosure or misrepresentation where the assured could establish that ‘‘such alleged non-disclosure, misrepresentation or untrue statement was innocent and free of any fraudulent conduct or intent to deceive’’. The court held that in composite insurance this had the effect of excluding the right of the liability insurers to avoid the contract in respect of the innocent co-insureds. In practice such clauses appear because the particular policy may have been devised by the broker and so the contract seeks to shift the risk of nondisclosure or misrepresentation on the part of the broker to the insurers. As indicated above, this may be achieved by deeming the broker to be the agent of the insurers. Further, the term in question may be framed so as to eliminate the insurers’ right to avoid the policy following non-disclosure or misrepresentation by either the insured or the broker. Needless to say, the scope of such clauses is always a question of construction. HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank [2003] Lloyd’s Rep. IR 230 The policies in question (time variable cover policies, hereafter TVC) related to high risk film finance insurance and were issued to the bank by HIH. TVC insurance had been devised and sold by London brokers Heaths in order to facilitate such financing arrangements. The policies contained exclusion clauses (termed ‘‘truth of statement’’ clauses) which provided, inter alia, that ‘‘[3] . . . any misstatement . . . shall not be the responsibility of the insured or constitute a ground for avoidance of the insurers’

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obligations under the Policy’’ and that ‘‘[6] . . . [the insured] will not have any duty or obligation to make any representations, warranty of disclosure of any nature express or implied . . . [7] . . . and shall have no liability of any nature to the insurers for any information provided by any other parties and [8] . . . any such information provided by or non-disclosure by other parties . . . shall not be a ground or grounds for avoidance of the insurers’ obligations under the Policy . . . ’’ It was held by the House of Lords that Heaths’ duty of disclosure under s. 19 of the MIA 1906 was wholly independent from that imposed upon the Bank. Accordingly, where the Truth of Statement clause sought to relieve ‘‘the Insured’’ from its obligations the clause did not extend to Heaths’ own duty of disclosure. The Truth of Statement clause did not operate to remove from Heaths the authority to speak on behalf of the Bank. Paragraph 6 of the Clause merely recognised that Heaths alone would be negotiating with HIH, and purported to relieve the Bank from its own obligation to make disclosure. It did not relieve Heaths from its independent obligation to disclose material facts. Paragraph 7 of the Clause relieved the Bank from any claim for damages as a con sequence of negligent non-disclosure and misrepresentation by itself or by Heaths, and this was so even though the word ‘‘negligence’’ had not been used in the clause. It was not possible as a matter of public policy for the Clause to entitle the Bank to be granted relief from the consequences of its own fraud. Various opinions were expressed by their Lordships as to whether the Clause could as a matter of law protect the Bank against the fraud of Heaths. Lord Hobhouse was of the view that this was not possible while Lord Scott thought that it was possible and that the words used were sufficient to achieve that objective. Lords Bingham, Steyn and Hoffmann thought that even if it was possible to exclude liability for the fraud of a broker the Clause in question had not done so. Finally, it was held that paragraph 8 of the Clause prevented the insurers from avoiding the contract in the case of misrepresentation or non-disclosure by the Bank itself or by Heaths, whether innocent or negligent.

REMEDIES FOR BREACH OF DUTY Avoidance The issue of remedies together with waiver has been alluded to in much of the material covered in this Chapter. It is settled that the remedy for breach of the duty of utmost good faith is avoidance so that the contract is avoided ab initio (see s. 17 of the MIA 1906, Appendix). The effect of avoidance is that the contract is treated as if it never existed. Any premium paid is returnable to the insured except in cases of fraud (Chapman v. Fraser, BR Trin. 33 Geo. III; see s. 84 of the MIA 1906): ‘‘84 (3)(a) Where the policy is void, or is avoided by the insurer, as from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured . . . ’’

Avoidance can take place by either the unilateral decision of the insurers that is then notified to the insured; or by way of applying to the court for a declaration of the right to avoid. The latter method is the safest way to proceed because simply informing the insured that they have avoided the policy carries the risk that the insurers may be found to have repudiated the contract in the

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event of the court ruling, in subsequent proceedings between the parties, that the fact relied upon was either not material or that there had been no inducement. That said, the issue has in recent cases generated some controversy. As noted earlier in this chapter, if it is the case that the insured has failed to disclose or has misstated a material fact and the insurers were thereby induced to enter into the agreement, then the right to avoid accrues at the date of the making of the contract. Unless the insurers have waived their rights by their actions, subsequent events cannot affect the insurers’ accrued rights. In Brotherton v. Aseguradoa Colseguros SA (above), Mance L.J. disagreed with Colman J.’s analysis in The Grecia Express (above) that avoidance is an equitable remedy that is, therefore, discretionary. Colman J. had taken the view that where insurers who have avoided a policy subsequently learn, say at the trial, that the non-disclosed fact was not actually material they may be held to be in breach of their own duty of utmost good faith on the basis of their inequitable behaviour. The Court of Appeal in Brotherton rejected this reasoning on the basis that the right to avoid was a self-help remedy that could be exercised without the court’s authorisation. Thus, avoidance which can be justified at the time the remedy was exercised by the insurers cannot subsequently be challenged. v Drake Insurance plc v. Provident Insurance plc [2003] Lloyd’s However, in k Rep. IR 277 (for the facts, see above), the Court of Appeal took the view that insurers were subject to a good faith restriction on exercising the right to avoid. Thus, it would be a breach of the duty of good faith for an insurer to avoid a policy when it knew that the facts relied on, although material at the time, had changed. The Court of Appeal disagreed on the question of whether insurers owed a duty to make enquiries before avoiding a policy. www

Waiver by contract term The insurers’ right of avoidance may be waived by a term of the contract. We have already come across a form of such waiver in relation to brokers (see v HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank above, k [2003] Lloyd’s Rep. IR 230), although it is not permissible for insurers to waive their rights in the event of fraud by the insured. Further, in Highlands Insurance Co. v. Continental Insurance Co. [1987] 1 Lloyd’s Rep. 109 it was held that ‘‘errors and omissions’’ clause in a reinsurance agreement did not amount to a promise by the reinsurers to waive its rights of avoidance. The clause in the policy in question provided that: www

‘‘The insured hereunder is not to be prejudiced by an unintentional and/or inadvertent omission error incorrect valuation or incorrect description of the interest, risk or property, provided that notice is given to the Company as soon as practicable upon the discovery of any such error or omission.’’

In construing the clause Steyn J. held that it did not refer to a pre-contractual material misrepresentation, which otherwise would have entitled the reinsurers to avoid on the grounds of misrepresentation.

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Waiver by representation or conduct Insurers may lose their right to avoid the policy by reason of their conduct after the loss has occurred. This can occur either by: u affirmation, or by u estoppel. The two are very similar. Affirmation arises where the insurers with full knowledge of the non-disclosure or misrepresentation make it clear to the insured by word or conduct that they do not intend to avoid the contract. Estoppel arises where the insurers’ conduct induces the insured to believe that they do not intend to avoid the contract and the insured has acted accordingly. v Moore Large & Co. Ltd v. Hermes Credit & Guarantee plc [2003] In k Lloyd’s Rep. IR 315 it was held that affirmation can occur where insurers have defended legal proceedings on the basis of coverage or terms of the policy knowing that an utmost good faith defence might exist. On the facts, the insurers had sought to rely on the insured’s breach of the disclosure duty at a late stage in the proceedings. Further, the insurers had the benefit of legal advice and it is not open to them to argue that they are not bound by the tactical decisions of their legal advisers. It has been held by the Court of Appeal that where the insurer, having purported to avoid a motor policy, failed to cancel a direct debit mandate for the collection of premiums and generally acted inconsistently with the idea that the relationship had been terminated, the defence of waiver may be available to the insured (Drake Insurance plc v. v ). Provident Insurance plc [2004] Lloyd’s Rep. IR 277 k www

www

Damages It was commented above that damages may be available against an insured who has fraudulently misrepresented material facts. Here the action will lie in the tort of deceit (Derry v. Peek (1889) 14 App. Cas. 337). Damages may also be available where the insured has negligently misrepresented material facts: either under the principle in Hedley Byrne & Co. v. Heller & Partners [1964] A.C. 465 or under the Misrepresentation Act 1967. In either case damages would normally be awarded only where the insurers have elected not to avoid the policy or have waived their right to do so. Section 2(2) of the Misrepresentation Act 1967 also adds: ‘‘Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.’’

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It must be doubted that the discretion conferred by this provision has any role to play in commercial insurance in the light of the remarks made by Steyn J. in Highlands Insurance Co. v. Continental Ins urance Co. [1987] 1 Lloyd’s Rep. 109: ‘‘Where a contract of reinsurance has been validly avoided on the grounds of a material mis representation, it is difficult to conceive of circumstances in which it would be equitable within the meaning of s. 2(2) to grant relief from such avoidance. Avoidance is the appropriate remedy for material misrepresentation in relation to marine and nonmarine contracts of insurance . . . The rules governing material misrepresentation fulfil an important ‘‘policing’’ function in ensuring that the brokers make a fair representation to underwriters. If s. 2(2) were to be regarded as conferring a discretion to grant relief from avoidance on the grounds of material misrepresentation the efficacy of those rules will be eroded. This policy consideration must militate against granting relief under s. 2(2) from an avoidance on the grounds of material misrepresentation in the case of commercial contracts of insurance.’’

THE INSURER’S DUTY OF UTMOST GOOD FAITH The duty of utmost good faith contained in s. 17 of the MIA 1906 is mutual so that the insurer owes a duty of good faith to the insured. Although in practice it is rare for the issue of the insurers’ duty to arise in litigation, nevertheless in Banque Financie`re de la Cité SA v. Westgate Insurance Co. Ltd [1990] 2 Lloyd’s Rep. 377 the courts were afforded the opportunity to consider the scope of the insurers’ duty. At first instance Steyn J. re-affirmed the mutuality of the disclosure duty by holding that the insurers owed a duty of disclosure to the insured. The Court of Appeal and the House of Lords affirmed this element of the trial judge’s decision, but reversed his finding that the remedy against the insurer for breach was damages, confining it to avoidance of the contract and return of the premiums only on the basis that the court’s power to grant relief arose from its equitable jurisdiction. The test to be applied in determining materiality from the insurers’ perspective was, in Steyn J’s opinion, whether ‘‘good faith and fair dealing require disclosure’’ to the insured. However, the Court of Appeal, notably Slade L.J., criticised this formulation as being far too broad and vague as a test for determining the existence of the duty which might arise ‘‘even in the absence of any dishonest or unfair intent’’. For Slade L.J. the insurers’ duty of disclosure should ‘‘extend to disclosing facts known to them which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether to place the risk for which he seeks cover with that insurer’’. The House of Lords approved of Slade L.J.’s reasoning that the insurer’s duty was to disclose facts material to the risk and to the recoverability of a claim by the insured. It will be recalled that in WISE Underwriting Ltd Agency Ltd v. Grupo Nacional Provincial SA (above), the Court of Appeal subjected the issues of

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affirmation and waiver to detailed scrutiny. Rix L.J.’s dissenting judgment is significant because, as has been noted by Professor Merkin, he took the view that the duty of utmost good faith and, more particularly, its content insofar as it applies to insurers, requires them to play a proactive role in the disclosure process rather than relying solely upon the insured’s presentation. In a similar vein Moore-Bick J. in Glencore International AG v. Alpina Insurance Co. Ltd [2004] 1 Lloyd’s Rep. 111, stated that: ‘‘The duty of disclosure requires the insured to place all material information fairly before the underwriter, but the underwriter must also play his part by listening carefully to what is said to him and cannot hold the insured responsible if by failing to do so he does not grasp the full implications of what he has been told.’’

An insured-friendly approach towards the insurer’s right of avoidance for nondisclosure was adopted by the majority of the Court of Appeal in Drake Insurance plc v. Provident Insurance plc (above). It will be recalled that it was held that the non-disclosure did not induce the insurers to accept the risk and therefore they were not entitled to avoid the policy. Rix L.J., delivering the leading judgment, observed that the doctrine of good faith should be capable of limiting the insurer’s right to avoid in cir cumstances where that remedy, which has been described in recent years as draconian, would operate unfairly. He went on to note that in recent years there appears to have been a realisation that in certain respects English insurance law has developed too stringently. Citing Pan Atlantic, in which the House of Lords held that the requirement of inducement was implicit in the wording of the MIA 1906, Rix L.J. stated that leading modern cases show that the courts are willing to find means to introduce safeguards and flexibilities which had not been appreciated before. Significantly, the judge felt inclined to say that it would not be in good faith to avoid a policy without first giving the insured an opportunity to address the reason for the avoidance. By way of conclusion, he remarked that nowadays not all insurance contracts are made by those who engage in commerce and that the existence of widespread consumer insurance presents new problems: ‘‘It may be necessary to give wider effect to the doctrine of good faith and recognize that its impact may demand that ultimately regard must be had to a concept of proportionality implicit in fair dealing.’’

PRACTICE AND REFORM In an attempt to counter the argument that the prudent insurer test works injustice where the proposer is contracting in a non-business capacity (i.e. as a consumer), those insurers who were members of Lloyd’s or the Association of British Insurers undertook to observe the 1986 Statement of General Insurance Practice. Paragraph 2(b) of the Statement provides that an insurer will not repudiate a contract if the non-disclosed fact is one which ‘‘a policyholder could not reasonably be expected to have disclosed’’; or where any

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misrepresentation by the insured is innocent. However, paragraph 3(a) of the Long-Term Statement stated somewhat obtusely that: An insurer will not unreasonably reject a claim. In particular, an insurer will not reject a claim or invalidate a policy on grounds of non-disclosure or misrepresentation of a fact unless: (i) it is a material fact; and (ii) it is a fact within the knowledge of the proposer; and (iii) it is a fact which the proposer could reasonably be expected to disclose. (It should be noted that fraud or deception will, and reckless or negligent nondisclosure or misrepresentation of a material fact may, constitute grounds for rejection of a claim.)

The honest or innocent proposer therefore has nothing to fear. It should be noted that parts of the Statements have been incorporated into the Code of Business Conduct Rules by the Financial Services Authority (FSA). This entered into force on 14 January 2005 when the FSA assumed responsibility for regulating the marketing of general insurance. In its Newsletter for June 2005 the Financial Ombudsman Service stated that the principles found in the ABI statements remain useful examples of good industry practice, and as such it will take them into account. The Insurance Conduct of Business Rules (ICOB) also outlines some of those principles. For example, ICOB Rule 7.3.6 provides that: An insurer must not: 1. unreasonably reject a claim made by a customer; 2. except where there is evidence of fraud, refuse to meet a claim made by a retail customer on the grounds: (a) of non-disclosure of a fact material to the risk that the retail customer could not reasonably be expected to have disclosed; (b) of misrepresentation of a fact material to the risk, unless the misrepresentation is negligent . . .

ICOB Rule 4.3.2(3) deals with advising and selling standards and states that: In assessing the customer’s demands and needs, the insurance intermediary must . . . explain to the customer his duty to disclose all circumstances material to the insurance and the consequences of any failure to make such a disclosure, both before the . . . insurance contract commences and throughout the duration of the contract; and take account of the information that the customer discloses.

ICOB Rule 4.3 states that: In relation to ICOB 4.3.2(3), an insurance intermediary should make clear to the customer what the customer needs to disclose. For example, in relation to private medical insurance, this could include any existing medical condition where relevant, or in relation to motor insurance, any modifications carried out to the vehicle.

In the Newsletter, the Financial Ombudsman Service announced that its approach towards non-disclosure and misrepresentation cases will take

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account of the law and good industry practice. Such cases will be dealt with in three stages: 1. When the customer sought insurance, did the insurer ask a clear question about the matter which is now under dispute? 2. Did the answer to that clear question induce the insurer; that is, did it influence the insurer’s decision to enter into the contract at all, or to do so under terms and conditions that it otherwise would not have accepted? 3. Only if the answers to both (1) and (2) are ‘‘yes’’, do we go on to consider whether the customer’s misrepresentation was an honest mistake, a dishonest attempt to mislead or due to some degree of negligence. Further, it should be noted, that in non-business insurance contracts the reasonable insured’s opinion is now viewed by the Ombudsman as the decisive factor (see the Insurance Ombudsman’s Annual Report 1989, para. 2.16). Given the all or nothing consequences of non-disclosure, the Insurance Ombudsman may require the insurers in consumer insurance to pay a proportion of a claim based on the difference between the actual premium charged and the premium which would have been charged had the material fact been disclosed. IOB Annual Report 1994 ‘‘(vii) Where the insurer’s underwriting guide or other evidence satisfies me that the facts withheld or misrepresented would have had a bearing on the premium or acceptance of risk, I may apply the principle of proportionality. This involves my requiring the same proportion of the claim to be met as the premium paid . . . if the premium would have been loaded by 50%, my award will be two thirds of the amount otherwise payable. The House of Lords confirmed that so far as the common law is concerned the principle of proportionality has no application in these cases, but dicta suggest that it may not be inappropriate in the field of consumer insurance. The observations on this point of Sir Donald Nicholls VC in the Court of Appeal in Pan Atlantic were not disapproved of in the House of Lords [above]. He made a strong indictment of the harshness of the ‘all or nothing’ result of the English common law rules, and provided an affirmation of the essential fairness of the principle of proportionality in appropriate cases.’’

On 14 October 2005 the Law Commission announced that it was undertaking another review of insurance law (see http://www.lawcom.gov.uk/insurance_ contract.htm). It identifies non-disclosure as a key issue and a scoping paper was published in January 2006.

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APPENDIX The relevant provisions of the Marine Insurance Act 1906 Insurance is a contract uberrimae fidei 17.—A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party. Disclosure by the assured 18.—(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstances which, in the ordinary course of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract. (2) Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk. (3) In the absence of inquiry the following circumstances need not be disclosed, namely: (a) any circumstance which diminishes the risk; (b) any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business as such, ought to know; (c) any circumstance as to which information is waived by the insurer; (d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. (5) The term ‘‘circumstance’’ includes any communication made to, or information received by, the assured. Disclosure by agent effecting insurance 19.—Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer— (a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary

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course of business ought to be known by, or to have been communicated to, him; and (b) every material circumstance which the assured is bound to disclose, unless it came to his knowledge too late to communicate it to the agent. Representations pending negotiation of contract 20.—(1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract. (2) A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. (3) A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief. (4) A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer. (5) A representation as to a matter of expectation of belief is true if it be made in good faith. (6) A representation may be withdrawn or corrected before the contract is concluded. (7) Whether a particular representation be material or not is, in each case, a question of fact.

TEST YOUR UNDERSTANDING

1. Which of the following statements are correct? (a) the insured must disclose all material facts whether or not he is aware of them; (b) the insured must disclose all material facts which he ought to have discovered by making inquiries; (c) the insured must disclose all material facts which he knew or which he turned a blind eye to; (d) the insured must disclose all material facts known to his agents. 2. Which of the following statements are correct? (a) any material false statement made by the insured is a breach of the duty of utmost good faith;

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(b) a material false statement made by the insured is a breach of the duty of utmost good faith only if the insured acted fraudulently or negligently in misstating the fact; (c) a material false statement made by the insured is a breach of the duty of utmost good faith only if the insured was aware that the fact was material; (d) non-disclosure of a material fact by the insured is a breach of the duty of utmost good faith only if the insured was aware that the fact withheld was material.

3. In which of the following circumstances is a fact material? (a) (b) (c) (d)

it it it it

was regarded as material by the insurers involved; would have been regarded as material by a prudent insurer; was regarded as material by the insured involved; would have been regarded as material by a prudent insured.

4. Which of the following must be shown to give rise to inducement? (a) the insurers must show that they would have wanted further information before writing the risk; (b) the insurers must show that the risk would on the balance of probabilities have been written on different terms, or not at all, had full disclosure been made; (c) the insurers are, by reason of a presumption of inducement, always entitled to rely upon proof of materiality as evidencing inducement; (d) the insurers can rely upon the presumption of inducement only if they are unable to give their own evidence on inducement.

5. Which of the following facts are material for insurance purposes? (a) the insured’s claims experience; (b) rumours that events giving rise to possible losses have occurred; (c) the dishonesty of the insured.

6. Which of the following statements are true? (a) a fact need not be disclosed if it was known to the insurers; (b) a fact need not be disclosed if it ought to have been known to the insurers in the ordinary course of their business;

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(c) a fact need not be disclosed if the insurers could have discovered it on making reasonable inquiries; (d) a fact need not be disclosed if the insurers have failed to ask any questions relating to it.

7. Which of the following statements describes the insured’s postcontractual duty of utmost good faith? (a) the insured is never required to disclose facts after the contract has been entered into; (b) the insured is required to disclose facts after the contract has been entered into only if there is a contractual obligation to provide information; (c) the insurers may avoid the policy if there is a breach of the continuing duty; (d) the obligation not to make fraudulent claims forms a part of the continuing duty.

8. Which of the following statements concerning the insurers’ remedies for breach of the duty of utmost good faith are correct? (a) the insurers can avoid the policy; (b) the insurers can claim damages; (c) the insurers are entitled to rely upon breach of duty even though at the time of avoidance they are aware that the facts have proved to be immaterial; (d) the right to avoid will be lost if the insurers insist upon the insured adhering to the claims procedure without reserving their rights.

9. The insurers are entitled to avoid the contract for nondisclosure by the insured’s brokers in which of the following circumstances? (a) the facts were not known to the broker but were known to the insured; (b) the facts were known to the insured’s producing broker but not to the insured’s placing broker; (c) the facts were known to the insured’s placing broker and were derived from his relationship with the insured; (d) the facts were known to the insured’s placing broker but were derived from general market knowledge.

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10. The insurers are free by contract term to waive their rights under the duty of utmost good faith in which of the following circumstances? (a) innocent or negligent by the insured to disclose material facts; (b) innocent or negligent failure by the insured’s broker to disclose material facts; (c) fraudulent failure by the insured to disclose material facts; (d) fraudulent failure by the insured’s broker to disclose material facts.

CHAPTER 3

TERMS OF INSURANCE AGREEMENTS Alison Green

CONSTRUING INSURANCE TERMS As an insurance policy is a type of contract, principles which are invoked when construing contracts also apply when courts seek to interpret insurance terms. The purpose of such construction is to seek to establish what the parties must have intended. The courts have developed various principles or ‘‘rules’’, but exceptions to those principles regularly occur. Some principles of construction have been more popular in certain periods and with certain judges. Some judges favour interpreting terms fairly narrowly, paying close attention to the words employed. Other judges, particularly in recent times, are prepared to place more weight on the factual matrix or surrounding circumstances and the purpose behind the policy. This is particularly apparent in cases where some judges regard particular terms as harsh on the insured or particularly onerous, for example, clauses which on the face of them might appear to be continuing warranties, or where the wording seeks to restrict unduly the circumstances when insurers might be liable, for example, in particular exclusion clauses. Set out below are certain general principles that apply in interpreting the terms of insurance policies: 1. Presumption—ordinary meaning There is a presumption in favour of giving words their ordinary and natural meaning. The meaning of a word in a policy is that which an ordinary person of normal intelligence would place upon it. This is stated by judges time and time again, although there are some notable exceptions where judges have not necessarily construed ordinary words in the way that the man in the street might do. An illustration of this is Charter Re Co. Ltd v. Fagan [1996] 2 Lloyd’s Rep. 113, where Lord Mustill stated, at p. 116, that the primary meaning is that in ordinary speech, and construed sum ‘‘actually paid’’ by the reinsured as sum ‘‘liable to be paid’’ by the reinsured. As we shall see that did make sense in the context of that reinsurance contract, but scarcely amounted to how the ordinary person would have interpreted those words if he or she had been asked. An example of a court interpreting words according to their ordinary or popular meaning is the following: 79

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Starfire Diamond Rings Ltd v. Angel [1962] 2 Lloyd’s Rep. 217 A jeweller had a jewellers’ Block policy which had an exclusion clause which excepted liability for theft when the jeweller’s car was ‘‘left unattended’’. The jeweller left a suitcase containing jewellery in the car whilst he went some 37 yards behind some bushes to relieve himself. Whilst he was away from the car, a thief stole the suitcase with the jewellery. Held (C.A.): the car had been left unattended and insurers were not liable to pay the claim. Upjohn L.J. stated at p. 219: ‘‘I deprecate any attempt to expound the meaning or further to define words such as these which are common words in everyday use, having a perfectly ordinary and clear meaning.’’ Thus, where words have a plain meaning, the Courts should apply that meaning to the term in question.

2. Contextual meaning The word or phrase being construed has to be read in the context not only of the clauses in which it appears but also in the context of the policy as a whole, having regard to any other clauses which may shed light on its intended meaning. This was recently reiterated by Cresswell J. in Encia Remediation Ltd v. Canopius Managing Agents Ltd [2007] EWHC 916 (Comm), para. 175. When looking at the context of the whole policy courts presume that the parties intended internal consistency in the use of language. The following rules of construction are commonly used even though their latin tags may have fallen into disuse before the courts: (i) Ejusdem generis—construing a word by reference to the meaning of words used with it and interpreting it as being ‘‘of the same kind’’ e.g. ‘‘linen’’ in the phrase ‘‘stock in trade, household furniture, linen, wearing apparel and plate’’ meant household linen (see Watchorn v. Langford (1813) 3 Camp. 422). (ii) Expressio unius est exclusio alterius—if you expressly identify one situation in a document it can be inferred that the matters which are not referred to in the document are not intended to be included in the reference. Thus, if you place various terms under a section of the policy headed ‘‘warranties’’, it is likely to be inferred that other terms in the policy are not to be construed as warranties. The contextual meaning was applied by the House of Lords in Charter Re v. Fagan (see above) so that the words ‘‘actually paid’’ in a reinsurance context referred not to physical payment by the reinsured, but rather to the reinsured incurring a liability to pay. The majority of their Lordships agreed with Lord Mustill’s view that one starts by construing the words according to their ordinary and natural meaning, but they agreed that an exception should be made bearing in mind the reinsurance context and the purpose of the policy (see purposive approach below). One may see in that case that the majority of their Lordships were concerned to interpret words so that the fact that a company had not actually paid monies due, could not be used as a justification for reinsurers not to pay.

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3. Technical meaning—precedent If the meaning of the words used has been settled by the courts, it is usually inferred that the parties intended the words to bear that meaning. This is so where the courts regard the words as substantially the same (see George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2002] Lloyd’s Rep. IR 178 in the section on warranties below). 4. Technical meaning—trade, legal or scientific If a word has a technical meaning, there is a presumption that it was intended in its technical meaning. The technical meaning does not always prevail over the ordinary meaning. The technical meaning usually prevails in the following instances: (i) Cases concerning terminology of the criminal law, e.g. burglary, riot, theft (Dobson v. General Accident Fire and Life Assurance Corporation [1990] 1 Q.B. 274). (ii) Cases where the policy makes it very clear that a technical sense is intended. (iii) Cases in which both parties were familiar with the trade or context where the technical sense of the word is used (Scragg v. UK Temperance & General Provident Institution [1976] 2 Lloyd’s Rep. 227—in the sport the term ‘‘motor racing’’ did not include a motor sprint event). 5. Construction outside the policy As insurance policies are contracts, the general rule is that once the terms have been reduced to writing, one is confined to construing the actual document containing the terms of contract. There are various ways of getting round this ‘‘parol evidence’’ rule. (a) Purpose of the insurance Sometimes the courts construe the policy in the light of the objects which the cover was intended to achieve and interpret the term in a purposive way. Fraser v. Furman (Productions) Ltd [1967] 1 W.L.R. 898 The employers’ liability cover of a manufacturing company turned on the meaning of a condition in the insurance contract that ‘‘the insured shall take reasonable precautions to prevent accidents and diseases’’. Held (C.A.): the condition was construed in the light of the purpose of the contract which was to provide liability cover. Interpreted in isolation a duty to take reasonable precautions might be seen as one breached by ordinary negligence on the part of the employer, but this interpretation would defeat the purpose of the contract. Lord Diplock stated that: ‘‘ ‘Reasonable’ . . . means reasonable as between the insured and the insurer having regard to the commercial purpose of the contract which

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is inter alia to indemnify the insured against liability for his (the insured’s) personal negligence. What, in my view, is ‘reasonable’ . . . is that the insured should not deliberately court a danger, the existence of which he recognises . . . In other words, it is not enough that the employer’s omission to take any particular precautions to avoid accidents should be negligent; it must at least be reckless.’’ (See also Sofi v. Prudential Assurance Co. Ltd [1993] 2 Lloyd’s Rep. 559.)

(b) Absurdity The more bizarre the result of a literal construction, the readier are courts to try and avoid an absurd construction. They then tend to look outside the words of the policy to the objects of the policy or to business common sense (see Simon Brown L.J. in Lancashire County Council v. Municipal Mutual Ins. Ltd [1996] 3 All E.R. 545 at 522, see also Charter Re (supra), though Lord Mustill warned against taking the rule against absurdity too far). (c) Ambiguity Ambiguity is objectively assessed by the Courts. Some Courts are readier to find ambiguity in policies in order to apply the canon of contra proferentem and, thus, construe the ambiguity against the party who drafted it. If, for example, the language of a warranty is ambiguous, it is construed against the insurers who inserted the warranty for their own protection. In commercial cases the courts generally need to be convinced that there is some genuine ambiguity. So far as ‘‘consumers’’ are concerned, the courts are usually readier to find ambiguity in some of the terms used in insurance policies. In addition the Unfair Terms in Consumer Contracts Regulations 1999 (implementing the European Community’s Council Directive on Unfair Terms in Consumer Contracts 93/13) apply. Unless a term is ‘‘plain and intelligible’’, it will be given the interpretation ‘‘most favourable to the consumer’’ (see Reg. 6). Where a policy contains recitals recourse may be had to them in construing an ambiguous clause in a policy. (d) Factual matrix Looking at the factual matrix or surrounding circumstances against which the parties entered into the insurance contract has seen a marked revival following Lord Hoffmann’s speech in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 at pp. 912–913 (see also Rix L.J. in HIH v. New Hampshire Insurance Co. [2001] Lloyd’s Rep. IR 596 at p. 619, who considered the slip as part of the factual matrix which preceded the policy, and see Cresswell J. in Encia Remediation Ltd (supra)). Lord Hoffmann suggested that the meaning of a document was simply ‘‘what the parties using those words against the relevant background would reasonably have understood it to mean’’. The factual matrix will include the market in which the parties were operating, but will exclude previous negotiations between the

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parties. Consideration of the factual matrix gives greater latitude to a judge to look at the surrounding circumstances in reaching a decision about what would be the construction intended by the parties. It is invariably invoked by litigants who would prefer a judge not to take a narrow construction based simply on the words actually used in the relevant insurance term or terms.

(e) Technical meaning (see above) Though the words seem clear they have a technical meaning that is not apparent without obtaining extrinsic evidence. Courts may look at past trade dealings between the parties or the wider trade context and adopt an interpretation which is commercially sensible in the particular trade context, e.g. Deutsche Genossenschaftsbank v. Burnhope [1995] 4 All E.R. 717 (a bankers’ policy).

(f) Custom The general custom of the market may be admissible as an aid to construction, but it may not contradict the express words of the agreement nor the natural meaning of a term of the policy (see Mander v. Equitas Ltd [2000] Lloyd’s Rep. IR 520).

6. Inconsistency Where different words or provisions in the insurance policy appear to have conflicting meanings the courts will try wherever possible to reconcile the inconsistencies in order to give effect to the whole insurance contract. Where this is impossible, there are certain principles, which have been developed in an attempt to settle the problem of contradiction:

(a) Precedence to clauses of specific application Clauses of specific application may contradict clauses of general application. In these circumstances the clauses of specific application are usually taken to prevail.

(b) Policy terms prevail over terms in a proposal form Where terms in a proposal form conflict with terms in the policy, the usual rule is that the policy prevails as it is the later document and represents the formal reduction of the contract into writing. The exception to this rule is if the parties are able to invoke the equitable remedy of rectification and show

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that the terms in the proposal form represented the real intention of the parties. (c) Written or typed amendments prevail over printed terms There are a lot of standard form insurance policies. Sometimes the standard form does not suit a risk that is being insured and written or typed amendments are added which may introduce inconsistencies. Where a policy contains printed terms and others either typed or handwritten, the courts will try to give effect to both. However, if it is obvious that the typed or written clause cannot be reconciled with the printed terms, the written or typed clause is taken to override the printed words. This is done on the basis that the written or typed words have been chosen by the parties themselves in relation to a particular risk, whilst the printed words were part of a general form. Eurodale Manufacturing Ltd v. Ecclesiastical Insurance Office Plc [2003] Lloyd’s Rep. IR 444 A typed transit clause was inconsistent with the standard wording of the warehouse to warehouse clause in the Institute Cargo Clauses. Held (Andrew Smith J.): the typed transit clauses should be given priority in preference to the standard wording of the warehouse to warehouse clause. Thus, the insured could recover in respect of the theft of goods from a warehouse even though under the warehouse to warehouse clause it was probably the case that the transit had come to an end.

Express and implied insurance terms Insurance contracts may have implied terms as well as express terms. In practice disputes are largely about the express terms in an insurance policy and, particularly about their meaning or effect. Generally, the courts are reluctant to find implied terms in insurance contracts as usually such contracts have been reduced to express written terms in an insurance policy. Courts are particularly loathe to find implied terms in a commercial insurance context on the basis that business people should be taken to have stipulated the terms they required when they made the insurance contract. However, implied terms may arise as follows: (1) Terms may be implied by Statute; the leading example of this is the Marine Insurance Act 1906. (2) Terms may be implied by the courts if they are necessary to give business efficacy to the contract; this is rarely done in the case of insurance contracts. (3) Terms may be implied from previous dealings between the parties. (4) Terms may be implied by the custom of the insurance industry. Generally such terms must be certain, reasonable, universal in the trade context and contrary neither to the law nor to the express terms of the contract.

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Baker v. Black Sea and Baltic General Insurance Co. Ltd [1998] Lloyd’s Rep. IR 327 The defendant was the reinsurer of Lloyd’s underwriters represented by the claimant under a reinsurance policy covering the claimant’s liability for various U.S. risks, including asbestos and ‘‘agent orange’’. A dispute arose as to whether the defendant was liable to indemnify the claimant on a proportionate basis for costs incurred in investigating or defending claims by policy holders. The issue as to whether there could be implied terms to such effect went as far as the House of Lords. Held (H.L.): (1) There was no implied term based on business efficacy, as the weight of authority was against the implication of such a term; (2) It might be possible to imply a term based on custom in the Lloyd’s market but the case would have to be remitted to a High Court Judge to enable market evidence to be adduced as to the possible existence of such a term.

This chapter will concentrate on the express terms of insurance contracts. Types of insurance terms There are three main categories of insurance terms, namely: (1) Warranties (2) Conditions precedent (3) Innominate terms. There are different legal consequences depending on whether clauses in a policy are construed as warranties, conditions precedents or innominate terms. WARRANTIES Introduction Traditionally a warranty has been one of the most powerful weapons in an insurer’s armoury. Unfortunately, there sometimes is some confusion about what is a warranty, as its meaning in insurance law is different from that in general contract law. A warranty may be express or implied, but in practice implied warranties rarely occur outside the area of marine insurance (see warranties implied by the Marine Insurance Act 1906). Definition In insurance law a warranty is usually described as a promissory term of the insurance contract whereby an insured promises the insurer either that: (a) a given state of affairs does or does not exist at the time the policy is taken out; or (b) a certain state of affairs will continue to exist or will not come into being during the course of the policy; or (c) the insured has or has not acted in a stated way; or

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(d) the insured will or will not act in a stated way; or (e) the insured intends to act or to refrain from acting in a particular way. Construing a clause as a warranty A term should not be construed as a warranty unless there are very clear indications that it was the intention of the contracting parties that it should have that effect. Use of the word ‘‘warranty’’ is indicative, but not decisive. In Kler Knitwear Ltd v. Lombard General Insurance Co. Ltd [2000] Lloyd’s Rep. IR 47 the policy contained a term headed ‘‘sprinkler installations warranty’’; the court held that it was not a warranty but a suspensive condition (see below). No particular form of words are required to create a warranty. In HIH Casualty and General Insurance Ltd v. New Hampshire Insurance Co. [2001] Lloyd’s Rep. IR 596 the Court of Appeal held that the clause, which stated that six films would be made, constituted a warranty. Rix L.J. at p. 622 suggested three alternative tests for deciding whether a term was a warranty: (a) is it a term which goes to the root of the transaction? (b) is it descriptive of or bears materially on the risk? (c) would damages be an unsatisfactory or inadequate remedy? The six film term met all three tests. In the recent case of Toomey of Syndicate 2021 v. Banco Vitalicio de Espana SA de Seguros y Reaseguros Lord Justice Thomas applied those tests. Toomey of Syndicate 2021 v. Banco Vitalicio de Espana SA de Seguros y Reaseguros [2004] EWCA Civ In 1999 Spanish insurers agreed to insure a Spanish football club in respect of the economic loss which might arise from the club’s first team being relegated from the first division of the Spanish football league. The club had been required to take out such insurance by a television company (AV) which had paid the club advances against payments which would become due for television rights. The policy provided security to AV for its exposure under promissory notes for Pts 2.9 billion issued in July 1999. Spanish insurers reinsured with a number of reinsurers in London led by Toomey. The club’s first team was relegated and the club claimed on the insurance. The Spanish insurers settled the claim and made payment to AV. Toomey refused to pay on the reinsurance. The judge decided that reinsurers were not liable because the insurers had made a material misrepresentation in the draft reinsurance slip policy shown to Toomey as to the nature of the underlying insurance in that it was in fact a valued policy and not, as represented in the description of the interest, an unvalued policy indemnifying the club for the net ascertained loss of contracted television rights arising from relegation. The judge also held that the description in the slip of the underlying policy was a warranty and that there was a breach. Held (C.A.): (1) Toomey was entitled to avoid the reinsurance for misrepresentation; (2) The description of the underlying insurance in the slip was a warranty. Thomas L.J.

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followed Rix L.J.’s approach in HIH v. New Hampshire (above) and considered whether any of the suggested tests were met (see also G.E. Reinsurance Corp. v. New Hampshire Insurance Co. [2004] Lloyd’s Rep. IR 404 which also applied those tests).

Basis of contract clause A proposal form may contain a declaration to be signed by the proposer, to the effect that all or any of the answers to the questions on the proposal shall form the basis of the subsequent contract of insurance. The insured warrants the truth of his answers so converting his answers into warranties, thus enabling an insurer to repudiate the policy should any of these answers prove to be untrue. The following is a typical example of a basis of contract clause: ‘‘I/We the Proposer warrant that the above statements are true and that they shall be the basis of the contract between me/us and the Underwriters and will be incorporated into such contract.’’

Usually such a clause appears just above the point where the proposer signs the proposal form. These clauses are not confined to consumer or general lines insurance. Similar clauses may also appear in the more detailed questionnaires that businesses may complete for their commercial insurance. Advantages for insurers in repudiation for breach of warranty There are distinct advantages for insurers in relying on the defence of breach of warranty: (1) Strict compliance with a warranty is required Minor breaches, which do not affect the risk and even temporary breaches which are remedied prior to loss, provide the insurers with a defence. Overseas Commodities Ltd v. Style [1958] 1 Lloyd’s Rep. 546 The insured warranted that every tin in the cargo of canned pork had been datestamped by the manufacturer. A number of tins had not been date-stamped. A quantity of the cargo was swept overboard in the storm and the insured claimed for their loss. The insurer relied on breach of warranty as not all the tin cans had been date stamped. Held, insurer entitled to rely on breach of warranty and not pay the claim.

(2) The insurer is not required to show that the warranty was in any way material to the risk, or that its breach in any way contributed to the insured’s loss Dawsons Ltd v. Bonnin [1922] 2 A.C. 413 Insured took out insurance on a lorry which he used for his business. In answer to a question about where the lorry would be garaged he stated that it would be kept at an address in central Glasgow—a high risk area for the purposes of theft. In fact the

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lorry was garaged on the outskirts of the city where risk of theft was rather less. There was a ‘‘basis of the contract’’ clause. Held, breach of warranty entitled insurer not to pay the claim.

(3) Breach of warranty puts an end to future liabilities If a breach occurs during the insurance period, duties, e.g. duties of payment, which had fallen due before breach, remain due; and procedural conditions for the settlement of earlier claims must still be performed. Bank of Nova Scotia v. Hellenic Mutual War Risks Association, The Good Luck [1992] 1 A.C. 233 The insured had given a bank, as assignee of the policy proceeds, a letter of undertaking under which the marine insurer agreed to inform the bank promptly if the insurer ‘‘ceased to insure’’. The insured suffered a loss occasioned by a breach of warranty. The bank, aware of the loss but not of the breach of warranty, agreed to restructure the insured’s indebtedness and made further advances to the insured on the assumption that the policy proceeds would be paid. The insurer relied on the insured’s breach of warranty and refused to pay anything. The bank, relying on the argument that the insured’s breach of warranty had brought the risk to an end automatically, claimed that the insurer had been in breach of the letter of undertaking as from the date of the insured’s breach of warranty. Held (H.L.), the insured’s breach of warranty had brought the insurance to an end auto matically and the insurer had been in breach of the letter of undertaking as from the date of the insured’s breach of warranty. Their Lordships did not expressly state whether this analysis applied in the case of non-marine insurance; prior to the decision in that case it was thought that breach of warranty gave the insurers the option to terminate the policy for breach of warranty. Following the decision in The Good Luck the balance of legal opinion was of the view that breach of warranty would also result in automatic termination of the insurance so far as non-marine insurance was concerned. This view was confirmed in HIH General and Casualty Co. v. New Hampshire Insurance [2001] Lloyd’s Rep. IR 596 which was a case involving pecuniary insurance. In that case a clause which purported to exclude the rights of insurers following breach of duty by the insured stated that ‘‘the insurer hereby agrees that it will not seek to be entitled to avoid or rescind this policy’’. Held (C.A.), the wording of this clause was not appropriate to extend to a warranty: the remedy for breach of warranty was not any action taken by the insurer but rather automatic termination of the risk, as by such breach the insured took himself outside the cover granted by the policy (see Rix L.J. at p. 625).

Thus, breach of warranty results in automatic termination of the policy from the date of the breach. It does not make the insurance contract void ab initio. It leaves intact obligations which had arisen prior to breach of the warranty. Erosion of the power of warranties Due to the severity of the impact of breach of warranty, there are various cases where judges have managed to construe the policies so as to limit a warranty’s application or even to find that, despite appearances, a clause is not a warranty at all:

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(a) Restricting the operation of a warranty to a section of a policy Traditionally insurers have argued that where there is a single policy, any breach of warranty discharges insurers’ liability. However, this approach was not countenanced by the Court of Appeal in the case of a ‘‘commercial inclusive policy’’. This type of policy with different sections containing different types of insurance cover are commonly sold to small- and medium-sized businesses. Printpak v. AGF Insurance Ltd [1999] 1 Lloyd’s Rep. IR 542 Printpak took out a commercial inclusive policy for its factory. It made a claim under the policy in respect of fire damage. Amongst the endorsements to the policy was a warranty stating that the burglar alarm was to be fully operational at all times. The alarm was not working at the time of the fire. The section of the policy providing cover against theft incorporated reference to the warranty. Court of Appeal held that the burglar alarm warranty was operative only in relation to a claim under the theft section. Thus, insurers were liable in respect of the fire claim. Hirst L.J. stated at p. 546: ‘‘ . . . it does not follow from the fact that the policy is a single contract that it is to be treated as a seamless contractual instrument. On the contrary, in the present case, its whole structure is based on its division into sections. It was up to the assured to decide which sections he wished to adopt in his particular case as the ones that would be covered by the policy. The commercial inclusive endorsements are all stated in terms to be ‘operative only as stated in the policy schedules’. In my judgment those words explicitly write the warranty into the relevant section in which it appears and not into the others . . . ’’.

Thus, insurers should make it clear to which sections of a policy a warranty is intended to apply, if they want it to operate widely. (b) Construing a warranty’s wording as applying to the position at the time the insurance was agreed rather than as a continuing warranty Hussain v. Brown [1996] 1 Lloyd’s Law Rep. 627 Mr Hussain (H) signed a proposal form which asked ‘‘Are the premises fitted with any system of intruder alarm?’’, to which he answered ‘‘yes’’. The form contained a basis of contract clause and the policy incepted in July 1992. In August 1992 the alarm was on suspended service due to a failure to pay the suppliers of the alarm. In November 1992 there was a fire at the premises and H claimed under the policy. Insurer relied on breach of warranty. Held, the answer and warranty as to truthfulness related to the state of affairs when the proposal form was signed and did not import any warranty as to the future. There was no breach of warranty at that time. Saville L.J. stated at p. 630 that: ‘‘ . . . it must be remembered that a continuing warranty is the draconian term . . . the breach of such a warranty produces an automatic cancellation of the cover, and the fact that a loss may have no connection at all with the breach is simply irrelevant . . . if underwriters want such a protection, then it is up to them to stipulate for it in clear terms.’’

No doubt insurers were not simply interested in there being an alarm system at the time of the proposal form, but in there being a system for the duration

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of the policy. The rationale behind the decision is that it is up to insurers to make this clear and phrase their questions or warranties so they clearly refer to the future. (c) Construing a warranty no further than necessary to achieve its purpose, particularly its commercial purpose Another approach that is taken by judges is to consider the main purpose of the insurance contract and construe the warranty no further than is necessary to achieve that purpose, for example, in certain policies covering theft or burglary, there may be a warranty stating that the premises would be ‘‘always occupied’’. This has not been construed literally as meaning that the property should never be left unattended, but as meaning that the property should be continuously occupied as a residence (see Simmonds v. Cockell [1920] 1 K.B. 843 and Winicofsky v. Army and Navy (1919) 35 T.L.R. 283). This is regarded as sufficient to satisfy the purpose of deterring thieves. A recent example of this approach is the following: G.E. Francona Reinsurance Ltd v. CMM Trust No. 1400 (The Newfoundland Explorer) [2006] 1 Lloyd’s Rep. IR 704 Warranty in marine insurance for a yacht valued at $3 million stated ‘‘Warrantied fully crewed at all times’’. Held (Gross J.): the warranty obliged the owner to keep at least one crew member on board the yacht 24 hours a day subject to (i) emergencies rendering his departure necessary or (ii) necessary temporary departures for performing his crewing duties or other related activities, e.g. purchase of food or other supplies. Gross J. stated at p. 708: ‘‘Considerations of commercial commonsense also point to the need for some qualification of the literal meaning of the wording ‘at all times’ ’’.

(d) Construing a clause clearly labelled ‘‘warranty’’ as a suspensive condition Kler Knitwear Ltd v. Lombard General Insurance Co. Ltd [2000] Lloyd’s Rep. IR 47 The claimant company (K) renewed its insurance in May 1998 for a year subject to an endorsement which contained, inter alia, the following two clauses: ‘‘SPRINKLER INSTALLATIONS WARRANTY It is warranted that within 30 days of renewal 1998 the sprinkler systems at the Jellicoe Road/Gough Road/Spalding Road locations must be inspected by a LPC approved sprinkler engineer with all necessary rectification work commissioned within 14 days of the inspection report being received.’’ ‘‘WARRANTIES: every Warranty to which this insurance or any Section thereof is or may be made subject shall from the time the Warranty attaches apply and continue to be in force during the whole currency of this Insurance and noncompliance with any such Warranty, whether it increases the risk or not, or whether it be material or not to a claim, shall be a bar to any claim . . . .’’ The sprinkler installations were not inspected within the prescribed 30 days from renewal, although they were inspected in August 1998. In October 1998 K’s factory in

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Jellicoe Road suffered storm damage and K claimed under the policy. Insurers contended that they were not liable as there had been a breach of the sprinkler warranty. Held (Morland J.): the sprinkler installation clause was to be construed as a ‘‘suspensive condition’’ rather than a warranty. If insurers had wished there to be a continuing warranty which was a draconian term, they had to stipulate for it in clear words. He did not regard the parties as intending such a warranty despite the wording that had been used.

Thus, even though the sprinkler installation clause was labelled a ‘‘warranty’’ and there was another clear clause in the policy spelling out the consequences of non-compliance with a warranty, the judge was not prepared to construe the relevant clause as a warranty. The judge repeated the dictum of Saville L.J. in Hussain v. Brown cited above. The concept of a suspensive condition is a judicial creation. The principle underlying a suspensive condition is that it describes or delimits the circumstances in which the insurer is on risk so that if a loss occurs when the condition is being complied with the insurer faces liability, whereas if the condition is not being complied with at the date of the loss the insurer is off risk. Erosion of the power of warranties in consumer insurance In the context of consumer insurance the power of warranties has been further weakened by the following: (a) Statement of General Insurance Practice and Statement of Long-Term Insurance Practice issued by ABI The Association of British Insurers issued statements (‘‘ABI’’) which provided that insurers who were members of the ABI were not to repudiate liability towards an insured on the grounds of a breach of warranty where the circumstances of the loss were unconnected with the breach unless fraud was involved. The last edition of these statements was issued in 1986. They were: (b) Regulation by the Financial Services Authority (‘‘FSA’’) The FSA has been concerned about the impact of warranties. The FSA Handbook, which contains the Insurance Conduct of Business Rules (‘‘ICOB’’), has incorporated a modified version of the ABI Statements in its rules, which applies to retail customers rather than to commercial customers. The relevant rule is ICOB 7.3.6 which provides that an insurer must not: ‘‘(1) unreasonably reject a claim made by a customer; (2) except where there is evidence of fraud, refuse to meet a claim made by a retail customer on the grounds:

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There is a similar provision for long-term insurance, such as life policies in ICOB 8a.2.6. However, the effectiveness of these provisions is limited as they only apply to retail (in effect consumer) insurance and they still enable insurers to repudiate where there is some evidence of fraud (this does not have to be conclusive evidence). The FSA can enforce these rules against recalcitrant insurers. The Chief Financial Services Ombudsman has stated that he takes account of these rules when deciding cases. However, the ICOB provisions fail to give an insured a normal legal remedy if the insurer does not act in accordance with the rules. If there is a widespread breach, the FSA may bring disciplinary action against the insurer, leading to fines or (ultimately) withdrawal of authorisation. However, the issue is more likely to arise in the context of an individual claim. Since 2001 the FSA has been a qualifying body under the 1999 Regulations to apply for an injunction against any person using (or recommending use of) an unfair term drawn up for general use in contracts concluded with consumers (see the Unfair Terms in Consumer Contracts (Amendment) Regulations 2001). There does not appear to be a reported case of an injunction sought against an insurer under these Regulations in relation to warranties. Interestingly, unlike the ABI’s Statement of General Insurance Practice (‘‘SGIP’’), nothing is stated about basis of contract clauses. (SGIP stated in clause 1(b) that ‘‘Neither the proposal form nor the policy shall contain any provision converting the statement as to past or present fact in the proposal form into warranties. But insurers may require specific warranties about matters which are material to the risk.)

(c) Ombudsman Service The Insurance Ombudsman is now part of the Financial Services Ombudsman service and can deal with complaints about insurance from individuals and businesses with a turnover below £1 million per year. Generally the Ombudsman will not allow repudiation of insurance in cases where the loss is unconnected with the breach of warranty or the breach is minor. In reaching decisions the Ombudsman is not confined to the strict letter of the law, but can apply principles of fairness and reasonableness. He takes into account the ABI’s Statements referred to above and now expects insurers to abide by the ICOB Rules (supra). The financial ceiling on the Ombudsman’s award is still £100,000 (see Roger Bunney v. Burns Anderson Plc and Financial Ombudsman Service [2007] EWHC 2340).

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(d) The Unfair Terms in Consumer Contracts Regulations 1999 (S.I. 1999 No. 2083) It is beyond the scope of this chapter to look at these Regulations in detail. They implement the European Council Directive on Unfair Terms in Consumer Contracts and apply: ‘‘to any term in a contract concluded between a seller or supplier and a consumer where the said term has not been individually negotiated’’.

Standard terms of an insurance policy, including warranties, come within the scope of the Regulations. All written terms have to be in plain intelligible language, and if there is any doubt about their meaning, the interpretation most favourable to the consumer should prevail. It remains to be seen how certain warranties will measure up to the test of ‘‘unfairness’’ in the Regulations. An unfair term is defined as one which: ‘‘contrary to the requirement of good faith causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.’’

‘‘Good faith’’ does not mean ‘‘uberimma fides’’, but is directed at requiring fair dealing in the light of the competing interests of both parties. These terms which are regarded as ‘‘non-core’’ terms (cf. core terms which define the main subject matter of the contract or relate to the adequacy of the remuneration) will not be enforceable against a consumer if they are unfair terms. Waiver of breach of warranty A breach of warranty may be waived by insurers. There are two forms of waiver: (1) Waiver of breach of warranty by affirmation (2) Waiver of breach of warranty by estoppel Waiver by affirmation—this may arise where, with knowledge that there has been a breach of warranty insurers conduct themselves in a way that is only consistent with the contract continuing. In that situation insurers can be said to have elected to affirm. The traditional thinking behind waiver by affirmation is that it presupposes that an innocent party has a choice between affirming the contract or treating it as terminated. Since the decision in The Good Luck (see above) and general acceptance that the effect of a breach of warranty is to terminate the insurance contract automatically, this reasoning does not seem logical. The preferred view is that the principle of waiver by affirmation or election should play no part where a breach of warranty occurs, and that waiver in the context of breach of warranty should be confined to waiver by estoppel (see Longmore J. in Kirkaldy & Sons Ltd v. Walker [1999] Lloyd’s Rep. IR 410 and see Colinvaux & Merkin’s Insurance Contract Law, vol. 2, para. B-0179).

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Waiver by estoppel—an estoppel can arise against insurers if (i) there is a clear and unequivocal representation, actual or implied, that the insurer will not stand on its right to treat the cover as having been discharged; (ii) an insured relies on such representation in circumstances in which it would be inequitable to allow the insurer to resile from its representation. Estoppel works to prevent the other party to a dispute from raising a particular defence. The essence of an estoppel plea is, that, because one party has relied to his own detriment on some previous statement, act or conduct of the other party, the other party should not thereafter be allowed to proceed inconsistently with that prior statement, act or conduct. HIH v. Axa [2003] Lloyd’s Rep. IR 1 This was a reinsurance case. The alleged waiver by estoppel arose from the fact that the reinsurers had, prior to HIH making payment to its assureds, become aware of the fact that an inadequate number of films had been made. However, it was not until after payment had been made by HIH that the C.A. decided in the case of HIH v. New Hampshire (see above) that there was a warranty that a certain number of films would be made and then the re insurers appreciated that they had a defence based on breach of warranty, that there was a warranty as to the number of films. Held (Deputy High Court Judge Sher Q.C.): that there could be no waiver as (a) there had not been a clear and unequivocal representation by reinsurers that they were aware of the breach of warranty and of their right to treat the risk as terminated, and that they had chosen not to rely upon that right. In the absence of such a representation, it could not be said that reliance on breach of warranty would be inequitable, given that rights should not be lost before any awareness that they had arisen; and (b) it was not enough for waiver that the reinsurers were aware of the facts which constituted a breach of warranty—it was also necessary for them to know of the legal consequences which flowed from that knowledge. The Court of Appeal upheld that decision and commented that if neither party had been aware of the breach of warranty it would have been almost impossible to establish waiver by estoppel: if the reinsurers had not been aware of such breach then they could hardly have made a representation that they did not intend to rely upon it; and if the reinsured had not been aware that the reinsurers had the right to refuse to pay then the reinsured could hardly regard any communication by the reinsurers as meaning that the right to refuse to pay would not be relied upon.

What should be done to avoid losing insurance points for insurers when dealing with claims? (1) Importance of reserving rights Where the situation is that there may or may not have been a breach of warranty/condition, a letter should be sent in terms of a general reservation of rights whilst matters are investigated. As specific issues come to light these should be highlighted by further reservations as soon as they are identified.

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(2) Caution when exercising contractual rights Insurers should be cautious when exercising contractual rights, so they are not taken to be ‘‘affirming’’ (see Iron Trades Mutual Insurance Co. v. Imperio [1991] 1 Re L.R. 213, a reinsurance case). Possible reform of warranties The Law Commission of England and Wales and the Law Commission of Scotland are considering possible reform of the law relating to insurance warranties. The Consultation Paper due to be published in July 2007 will outline their approach to reform. In November 2006, as part of their review of Insurance Contract Law, the Law Commissions published Paper 2 on Warranties. On the basis of that paper, it appears that the Commissions are likely to favour the abolition of basis of contract clauses in consumer contracts and recommend that an insured should be entitled to payment of a claim if he can prove that the events or circumstances constituting the breach of warranty did not contribute to the loss. They are also likely to recommend that insurance policies should not be discharged automatically as a result of a breach of warranty.

CONDITIONS PRECEDENT Types of conditions precedent There are two main types of conditions precedent: (1) conditions precedent to enforceability; (2) conditions precedent to recovery. (1) Conditions precedent to enforceability These may prevent the initial attachment of the risk or even the creation of the contract itself, e.g. where prepayment of the premium is required. Thus, when such a condition precedent is not met, there can be no liability on the part of insurers. It does not matter whether the condition precedent relates to the making of the contract or the attachment of the risk under a valid contract, as in either case the insurers do not have to meet any loss which occurs before the requirements of the condition precedent have been fulfilled. In Zeus Tradition Marine Ltd v. Bell, The Zeus V [2000] 2 Lloyd’s Rep. 587 the renewal of a builders’ risk policy on a yacht was ‘‘subject to survey and to valuation prior to navigation’’. The Court of Appeal held that the survey requirement was a condition precedent to the attachment of the risk. There was no breach as there had been two surveys which met the requirements of the clause.

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(2) Conditions precedent to recovery These are generally not of a continuing nature, e.g. where one is required to give notice of a claim or particulars of loss within a set period. Noncompliance with such a condition precedent enables an insurer to decline a claim under a policy. Construing a clause as a condition precedent The basic principle is that if insurers wish a clause to be a condition precedent, they must say so quite clearly, e.g. in Stoneham v. Ocean, Railway and General [1887] 19 Q.B.D. 237 it was held that a stipulation that ‘‘in case of fatal accident notice must be given to the company within 7 days’’ was not a condition precedent to recovery. Conditions precedent are regarded as draconian and there is a strong presumption that a condition is not to be construed as a condition precedent. Cox v. Bankside Members Agency [1995] 2 Lloyd’s Rep. 437 A clause required the insured to give insurers immediate written notice of any claim made against the insured, any loss discovered by the insured or the discovery by the insured of reasonable cause for suspicion of dishonesty or fraud or negligence such as might give rise to a claim. Held (Phillips J.; the point not being appealed): this was not a condition precedent. The clause was not labelled a condition precedent and there was no reason based on business efficacy why it should be so construed as in most cases a limited delay in notifying a claim would not have an adverse effect on insurers. Treating the clause as a condition precedent would be harsh.

In deciding whether a clause is a condition precedent, one has to construe the policy as a whole and consider the way in which the particular clause has been expressed. Labelling a clause a ‘‘condition precedent’’ does not necessarily mean that it will be treated as one. Both Colman J. in Alfred McAlpine v. BAI (Run Off) [1998] 2 Lloyd’s Rep. 694 and Potter L.J. in George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2002] Lloyd’s Rep. IR 178 give useful guidance on how the judiciary come to construe certain clauses as conditions precedent or not, for example, where some clauses in a policy are identified as conditions precedent, while others are not, the label is more likely to be respected in relation to a clause expressly so identified. Where there is a long list of clauses labelled conditions precedent, the courts will be wary of construing them as such. A court is entitled to examine each item in such a list to determine whether it is appropriate to be treated as a condition precedent (see Re Bradley and Essex and Suffolk Accident Indemnity Society [1912] 1 K.B. 415). George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2002] Lloyd’s Rep. IR 178 The claims provisions in the insurance policy were divided into a number of paragraphs, each of which was differently expressed. The obligation in paragraphs (a), (d)

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and (e) to give immediate notice of loss, to send documents to insurers and not to settle without insurers’ consent were not described as conditions precedent. Paragraph (b) provided that in respect of loss or damage caused by malicious people or by theft it was a ‘‘condition precedent’’ to any claim to give notice to the police. Paragraph (c) stated that if the insured failed to make a claim and provide the prescribed information within 30 days ‘‘no claim under this policy shall be payable’’. That paragraph ended by saying that ‘‘No claim under this policy shall be payable unless the terms of this condition have been complied with’’. The claimant company had failed to make its claim within 30 days as required by (c) and insurers relied on this as a breach of a condition precedent. Held (C.A.): clause (c) was a condition precedent. The C.A. construed the policy as a whole and stressed the following factors in construing (c) as a condition precedent, namely: (1) the wording of (c) made its intention abundantly clear and the absence of the rubric ‘‘condition precedent’’ was not fatal to it being construed as a condition precedent; (2) if one considered the purpose behind (c) there were more compelling reasons for regarding (c) as a condition precedent rather than (b). The purpose behind clauses of the (c) type was that liability insurers should be properly placed in possession of a notification, with accompanying information, in sufficient time for them to make a reasoned decision, (i) in relation to the existence of cover under the terms of the policy; (ii) as to the prima facie amount of the loss and (iii) most importantly, as to the investigations required while the incident is fresh and evidence is available; (3) the obligations in (c) were plainly of greater importance than those in (a), (d) or (e); (4) the earlier decision in Welch v. Royal Exchange Assurance [1939] 1 K.B. 294 had given condition precedent status to similar wording.

In view of the general reluctance of the courts to construe conditions as conditions precedent, insurers should be cautious about putting in a clause near the start of their policy which recites that compliance with the following clauses are conditions precedent to insurers’ liability. Better practice would be for insurers to identify those obligations that are central to their requirements and place them in a separate section of the policy clearly marked conditions precedent. If insurers wish to have a general clause which is more likely to result in courts construing other clauses as conditions precedents, it may be desirable to use a clause such as the general condition headed ‘‘Observance of Conditions’’ in the global liability policy considered by the Court of Appeal in Pilkington UK Ltd v. CGU Insurance Plc [2004] Lloyd’s Rep. IR 891. This stated: ‘‘The due observance and fulfilment of the terms and provisions and conditions insofar as they relate to anything to be done or complied with by the Insured . . . shall be conditions precedent to any liability of the Company.’’

The Notice of Claims clause required, amongst other matters, that: (i) any occurrence which might give rise to a claim shall be reported in writing ‘‘as soon as possible’’;

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(ii) the insured shall give ‘‘immediate notice’’ of any ‘‘impending’’ civil proceeding. P was in breach of the claims clause as P delayed seven months in notifying claim relating to defective glass panels in Waterloo’s Eurostar terminal and there was a delay of at least six weeks in informing insurers of proceedings. Held (C.A.): in the light of the general condition, terms (i) and (ii) were conditions precedent to the liability of CGU. There was no ambiguity here. In cases where courts are prepared to find that a clause is a condition precedent, they will interpret it strictly and, if there is any ambiguity, this will be construed in favour of the insured. The following case is a recent illustration of the courts adopting a narrow construction to clauses containing a condition precedent: Cornhill Insurance v. D E Stamp Felt Roofing [2002] Lloyd’s Rep. IR 648 The insured subcontractors carried out roofing work on a school. Fire damage occurred to the roof due to a naked flame from a propane blow torch which had ignited work materials in the roofspace at a time when the insured’s employees were absent collecting stuff from their van. Condition 3 of the insured’s liability policy stated: ‘‘It is a condition precedent to any liability . . . . that the Insured shall have arranged for the following precautions to be taken whenever carrying out any work involving the application of heat.’’ Various precautions were then listed including the following: ‘‘3Aii When blow torches blow lamps . . . or other flame cutting equipment are to be used all combustible materials which cannot be moved shall be covered and fully protected by overlapping sheets or screens of non-combustible material .... 3F For one hour after completion of each period of work involving the application of heat the site shall not be left unattended and a thorough inspection of the area surrounding the work . . . shall be made at frequent intervals up to the end of the period of one hour to ensure that nothing is smouldering and that there is no risk of fire.’’ Held (C.A.): the subcontractors were not in breach of condition precedent. The necessary arrangements had been put into place even if they had been disregarded by the workmen; the wording of the condition precedent only required that such matters ‘‘shall have been arranged’’, not ‘‘ensuring’’ that such arrangement be put into effect. Further, the subcontractors were not in breach of the individual clauses as (a) the words ‘‘combustible materials’’ in 3Aii applied only to materials not being worked on at the time; and (b) the words ‘‘period of work’’ in 3F applied to times rather than to stages of work, so the fact that employees were doing a different task did not mean that a period of work had ended.

Effect of failure to comply with a condition precedent Insurers are under no liability if a condition precedent has not been met. A failure to comply with a condition precedent prevents an insured from making a claim. Insurers do not have to show that failure to comply with a condition

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precedent contributed to the loss or prejudiced insurers’ ability to investigate the claim. The consequences of a breach of a condition precedent depend upon the type of condition precedent involved: (a) If the condition precedent requires a claim to be made within a certain period and the insured fails to make the claim in time, then that claim is lost. Such a failure does not affect other claims by the insured, which he made within time, nor future claims. (b) If the condition precedent requires an insured to use reasonable care, e.g. to maintain his vehicle to a certain standard, such a failure in relation to one vehicle may affect a particular claim on that vehicle. However, such a failure does not affect his position if he does meet that standard in relation to another vehicle. (c) If the condition precedent is of general application, such as an obligation to pay the premium prior to making any claim, then the effect of such a failure is suspensory. This means that an insured cannot claim until he has paid the premium, but pending payment, his right to make a claim remains contingent and cannot crystallise until the premium has been paid. Certain policies have clauses which seek to make any breach of any condition precedent suspensory of the insured’s right to make any claim under the policy, even if the breach relates to a specific claim. The courts’ approach to these types of clauses is to try and construe them in such a way as to allocate any breach to the affected claim rather than to other claims. Kazakhstan Wool Processors (Europe) Ltd v. Nederlandsche Credietverzekering Maatschappij NV [2000] Lloyd’s Rep. IR 371 The claimant company (K) had a credit insurance policy which required the submission of monthly trading returns (including, if appropriate, a nil return) with premium being calculated on the invoiced value and payable in the following month. K ceased trading and failed to submit a nil return. Claims were later made which related to losses which occurred some months before this breach. Insurers denied liability relying on the following provisions: ‘‘Due payment of all premiums (and other charges) specified in Schedule 1, and the due performance and observation of every stipulation in the policy or the proposal shall be conditions precedent to any liability on our part. In the event of any breach of any condition precedent we also have the right to retain any premium paid and give written notice terminating the policy and all liability under it.’’ Held (C.A.): the effect of the first part of the clause was to suspend insurers’ liability where K was in breach of a policy condition, but only in relation to the claim to which the breach related; other claims, including paid claims were not affected. However, once there had been breach of condition precedent suspending insurers’ claims under the policy, the final part of the clause enabled insurers to terminate the policy as from the date they gave written notice. Thus, bringing an end to all liability which had not at the date of the termination fallen due for payment by them.

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Conditions precedent in consumer contracts are subject to the Unfair Terms in Consumer Contracts Regulations 1999 (see above).

Waiver Waiver of breach of a condition precedent can occur by waiver by affirmation or by waiver by estoppel (see an outline of these forms of waiver in the section dealing with warranties above). The following is an illustration of a successful plea of waiver by equitable estoppel to a breach of a condition precedent: Barrett Bros (Taxis) Ltd v. Davies [1966] 1 W.L.R. 1334 The insured was required by a condition precedent in his motor policy to forward immediately to his insurers any letter, notice of intended prosecution, writ, summons, or process relating to an accident in which he was involved. He failed to send insurers the notice of prosecutions and summons which he received after an accident in which he was involved, and pleaded guilty to the charges brought against him. Insurers sought to rely on this breach of condition precedent as a defence to payment of his loss. Insurers had received clear and reliable information regarding the pending proceedings from the policy, and had written to the insured before the trial of his liability towards the claimant asking him why he had not forwarded the relevant documents to them, but without requesting that they be sent on to them. Held (C.A.): the insurers’ failure to request the documents in their letter to the insured was a waiver of the requirement to forward them.

INNOMINATE TERMS Innominate terms or ordinary ‘‘bare’’ conditions An ordinary or ‘‘bare’’ condition is a condition which is not expressed as a condition precedent to insurers’ liability. The modern tendency is to call terms or conditions which do not fall into the category of conditions precedent or warranties as innominate terms. The Court of Appeal gave guidance on how to approach such terms in Alfred McAlpine Plc v. BAI (Run-off) Ltd. Alfred McAlpine Plc v. BAI (Run-off) Ltd [2000] Lloyd’s Rep. IR 352 A contractors’ liability policy contained a term requiring the insured to give notice to insurers as soon as possible after the occurrence of any event which might give rise to a claim against the insured. In May 1991, a workman was injured when he fell off some scaffolding, but insurers were not notified by the insured company. When insurers became aware of the accident in June 1992, they denied liability. Held, the term was not a condition precedent, but an innominate term. Waller L.J. outlined the approach to such a term as follows: u Failure to meet that type of claims condition was not generally to be regarded as a repudiation of the policy. u Breach of such a claims condition could be treated as a repudiation of the claim itself, but for this to be the case, insurers would have to show either that:

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(a) there was a breach which demonstrated an intention not to proceed with a claim; or (b) the breach had serious consequences for insurers. On the facts in this case insurers could not demonstrate any repudiation of the whole insurance contract, nor could they show any serious breach of the term as to notice, nor any serious consequences for insurers so as to entitle them to reject the claim. Insurers had sufficient information to investigate the facts and they had not suffered any serious prejudice. Insurers’ remedy for breach of the term lay in damages and that claim had been abandoned.

Usually there is little point in insurers pursuing a claim for damages for breach of a notice period in cases where there has not been a serious breach or serious prejudice to insurers, as such damages are likely to be low or nominal. McAlpine was followed in the case of The Mercandian Continent [2000] Lloyd’s Rep. IR 694 and The Berusgracht [2002] Lloyd’s Rep. IR 1. Waller L.J.’s approach in McAlpine was rejected by the majority of the Court of Appeal in Friends Provident Life & Pensions Ltd v. Sirius International Insurance [2005] EWCA Civ 601. This case concerned notification of pension mis-selling under professional indemnity covers. One issue was the effect of breach of a clause in the leading excess layer, which was regarded as an innominate term. This clause stated: ‘‘Any claim(s) made against the Assured or the discovery by the Assured of any loss(es), or any circumstances of which the Assured becomes aware . . . which are likely to give rise to such a claim or loss, shall, if it appears likely that such claim(s) or loss(es) may exceed the indemnity available under the Policy/ies of the primary and Underlying excess Insurers, be notified immediately by the Assured in writing to the Underwriters hereon.’’

Moore-Bick J held that this was an innominate term and any breach of it, if sufficiently serious, would entitle the defendants to reject liability. The Court of Appeal overturned the decision as to the consequences of a ‘‘serious’’ breach of that clause. Breach of that clause would not amount to repudiation. The majority regarded Waller L.J.’s judgment in McAlpine as obiter and emphatically rejected the concept of repudiation of a claim. Mance L.J. stated that he saw no basis for such a new doctrine of partial repudiatory breach and no justification for such a novel form of protection for insurers. Insurers are left with the usual contractual position of establishing that breach went to the root of the contract and allowed them to repudiate the contract or be left with a remedy in damages. In Ronson International Ltd v. Patrick, 6 July 2005, H.H.J. Seymour regarded the claims condition as not being a condition precedent and held that the concept of repudiation of the claim as expounded by Waller L.J. in McAlpine had not survived Friends Provident. It is clear that the position regarding breach of an innominate term in an insurance policy is to be treated in law in the same way as breach of an ordinary term in other contracts.

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EXCLUSION CLAUSES The effect of successful reliance on an exclusion clause is to defeat (or reduce the amount of) the claim leaving the insurance in force in respect of any other or later loss within the scope of the cover. Courts tend to construe exclusion clauses strictly and against insurers. Cook v. Financial Insurance Co. Ltd [1999] Lloyd’s Rep. IR 1 Mr Cook (C) took out a disability insurance commencing on 15 October 1992. The policy had an exclusion stating: ‘‘no benefit will be payable for disability resulting from any sickness, disease, condition or injury for which an insured person received advice, treatment or counselling from any registered medical practitioner during 12 months preceding the commencement date.’’ C ran regularly. In July 1992 C collapsed after running 9 miles. A few days later C saw his GP who could find nothing wrong and thought he must have fainted. In September 1992 he suffered pain in his neck, chest and jaw and breathlessness whilst running and consulted his GP. The GP thought he might be suffering from a viral infection, but wrote to a cardiologist for a second opinion, recounting his recent complaints and stating ‘‘Obviously with the history I would like to exclude angina and would appreciate your help, although I do acknowledge it might be a mild infection’’. On 16 October C attended the cardiologist. The latter diagnosed him as suffering from angina. C continued working as a builder until December 1992, when he was advised by his GP to give up work. In January 1993 C claimed under the policy. Insurers declined the claim relying on the exclusion clause. Held (House of Lords): the exclusion clause did not apply. (1) In order to escape liability insurers had to show that C received advice, treatment or counselling for angina (‘‘the disease’’) prior to 15 October; when C saw his GP he did not receive counselling nor advice for angina, nor did he receive treatment for it. He received advice in respect of symptoms, which turned out to be those of angina, but he did not receive advice for angina. (2) If there were any doubt as to the meaning of the exclusion clause, which on the majority’s view there was not, it would be construed against the insurers, particularly because of the terms of the declaration in the proposal form.

If there is any ambiguity in an exclusion clause, it is construed against insurers in accordance with the principle of contra proferentem (see above). English v. Western [1940] 2 K.B. 156 The claimant was a youth who had a motor policy covering death or injury to any except in respect of ‘‘death or injury to a member of the assured’s household’’. The claimant drove negligently and injured his sister. Held, that the exception was ambiguous as ‘‘the assured’s household’’ could mean either the household of which he was a member or the household of which he was head. The latter construction was accepted as that was more favourable to the insured.

Exclusions in insurance policies were expressly not covered by the Unfair Contract Terms Act when it was introduced in 1977. However, exclusions in consumer insurance policies are subject to the Unfair Terms in Consumer Contract Regulations 1999 (see above).

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There has been little litigation on the operation of these regulations to insurance policies, as the bulk of consumer claims are dealt with by the Ombudsman or resolved by insurers without litigation. However, the following is a recent case which was decided in favour of insurers: Bankers Insurance Co. Ltd v. South [2004] Lloyd’s Rep. IR 1 A holiday insurance policy was taken out by a friend of the assured. The assured was one of a number of insured persons under the policy. The policy excluded cover for the assured’s liability incurred ‘‘involving your ownership or possession of any . . . motorised waterborne craft’’. The assured injured a third party in a jet ski collision. Held (Buckley J.): (1) that an exclusion in a holiday insurance policy in respect of ‘‘waterborne craft’’ was plain and intelligible within the meaning of the Unfair Terms in Consumer Regulations 1994 (the predecessor regulations to those of 1999) and that, according to its ordinary and natural meaning this excluded insurers’ liability for a jet ski accident. Even if that were wrong, the judge considered that the term was not unfair as the assured had had the opportunity to read the policy and in any event the policy was a cheap one; (2) the Regulations did have an effect on the obligations to notify insurers as soon as reasonably possible which were expressed as conditions precedent and which the assured had breached. As to these clauses, he regarded them as ‘‘unfair’’ pursuant to the Regulations but held it was only that part of the clauses denying recovery, whatever the consequences of the breach, which was not binding on the insured. Thus, he found that the Regulations did not strike them down, but prevented insurers from treating them as conditions precedent to liability unless the breach was one that caused serious prejudice to the insurers. He decided on the facts before him that the breaches were manifestly serious as notice of the accident had not been given to insurers till over 3 years had passed. This delay had serious consequences for insurers.

In the wake of the criticisms of the restrictive wordings of travel policies and the fact that the general public rarely read their terms until they have a claim, it was perhaps a pity that the judge stated, albeit obiter, that the assured had had the opportunity to read the policy and that the premium was ‘‘cheap’’. It would have been of assistance if this case had been appealed so that the Court of Appeal might have been able to give more guidance as to how the Regulations should be applied. Conclusion Due to the different principles that may be deployed when seeking to construe insurance terms and some of the judiciary’ s hostility to certain types of terms and certain types of wording, there has been an increasing trend in recent years for parties to contest the meaning to be given to insurance terms and also to challenge whether a term is really a warranty or a condition precedent. One can see why such litigation has increased particularly where even judges in the higher courts disagree about the construction of words (see, for example, Charter Re v. Fagan) and large sums may turn on the way a term may be construed.

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TEST YOUR UNDERSTANDING 1. Which of the following statements accurately reflect the approach of the courts to the construction of insurance terms? (a) the courts will interpret words according to their ordinary and natural meaning; (b) the courts will resolve any ambiguities in the terms in favour of the insured; (c) the proposal form may be taken into account in construing the words of the policy; (d) the courts must take account of the surrounding circumstances against which the policy was written.

2. Which of the following statements is accurate in relation to warranties? (a) minor breaches of a warranty do not provide insurers with a defence; (b) it is not necessary to show that breach of warranty contributed to the insured’s loss; (c) the warranty that was breached need not be material to the risk in order to provide insurers with a defence.

3. What is a continuing warranty? 4. What is a suspensive condition? 5. Which of the following statements are accurate in relation to warranties? (a) breach of warranty results in automatic termination of the policy; (b) breach of warranty results in a claim for damages; (c) breach of warranty renders the policy void ab initio.

6. What is the difference between a condition precedent as to enforceability and a condition precedent as to recovery? 7. Which of the following are true statements regarding The Unfair Terms in Consumer Contracts Regulations 1999? (a) they only apply to terms in insurance contracts with consumers; (b) they apply to warranties and conditions precedent; (c) they do not apply to exclusion clauses in policies.

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8. Which of the following statements are accurate in relation to breaches of innominate terms? (a) breach of an innominate term never results in repudiation of the policy; (b) breach of an innominate term may result in repudiation of a claim if the breach has serious consequences for insurers; (c) breach of an innominate term may result in insurers only having a claim in damages against the insured.

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CHAPTER 4

MEASURE OF INDEMNITY Rob Merkin

THE MEANING OF LOSS Forms of loss English law recognises three forms of loss for the purposes of insurance on property: (1) Actual total loss, when ‘‘the subject matter insured is destroyed or is so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived of the insured subject matter’’. This is the definition in s. 57(1) of the Marine Insurance Act 1906 (MIA 1906) but it applies to all forms of property insurance. (2) Partial loss, when the insured subject matter is damaged and is capable of repair. (3) Constructive total loss. This is purely a marine insurance concept. A constructive total loss is a loss which is somewhere between an actual total loss and a partial loss, and involves an occurrence either which renders a total loss inevitable or which necessitates expenditure to reinstate damaged property which would be greater than the value of the property once reinstated, or which involves a temporary seizure of the vessel (MIA 1906, s. 60(1)). The 1906 Act gives the assured the option, for the purposes of the measure of indemnity, of treating a constructive total loss either as a total loss or as a partial loss; if the assured wishes to claim for a total loss, a notice of abandonment must be served upon the insurer as, unless such a notice is given, the loss can be treated as a partial loss only (MIA 1906, ss. 61 to 62). The requirement that a notice of abandonment is to be served to allow a constructive total loss to be treated as a total loss, which is not present for actual total losses (MIA 1906, s. 57(2)), makes the distinction between actual and constructive total losses of some significance. These matters are considered in more detail in Chapter 7. Liability insurance operates on different principles, as the event insured against is the assured’s liability to a third party being established. The special rules applicable to liability cover are discussed in Chapter 9. 107

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The need for ‘‘physical loss’’ Most policies on property cover only the physical loss of the insured subject matter. This has a number of consequences, which turn on the distinction between physical loss of insured subject matter (insured) and economic losses which result from defects in the subject matter or in the assured’s rights over it. First, mere paper losses are excluded: something must be damaged, destroyed or seized. Thus, if a seller of goods defrauds the buyer, and fails to supply what he has promised, the buyer cannot assert as against his insurers that the goods have been lost. In Coven Spa v. Hong Kong Chinese Insurance Co. v the seller of a cargo overstated the quantity [1999] Lloyd’s Rep. IR 565 k shipped. The purchaser was insured against loss of the cargo, including ‘‘shortage in weight’’. The Court of Appeal held that there had been no loss, and that the insuring words referred to events occurring during the currency of the policy which caused the original weight to be diminished: were it otherwise, the policy would have been some form of guarantee that the seller would comply with the contract rather than a contract providing indemnity against an unexpected event causing damage to the cargo. Even in the case of a policy which insures against the loss of an official subsidy on exported cargo, should the export contract not be carried out, the assured is required to show not simply that the contract has failed but rather that it has failed because of the occurrence of a peril affecting the cargo which would have been insured against under a marine policy (Agra Trading Ltd v. McAuslin, The Frio Chile [1995] 1 Lloyd’s Rep. 182). Secondly, the mere fact that the assured is temporarily unable to use the insured subject matter does not mean that it has been lost. Losses of this type may be covered by a business interruption policy rather than by a policy on physical loss, and it is also the case that temporary seizure may amount to ‘‘constructive total loss’’ for marine insurance purposes. There is no cover, however, in the non-marine market. The leading authority is Moore v. Evans [1918] A.C. 185, in which pearls belonging to the assured trader and sent to a customer in Germany were deposited with a German bank on the outbreak of hostilities: the House of Lords held that the pearls had not been ‘‘lost’’, and it was merely the case that the assured no longer had possession or control of them. In Scott v. Copenhagen Reinsurance Co. (UK) Ltd [2003] Lloyd’s Rep. IR 696 k v Kuwait International Airport was seized by invading Iraqi forces in 1990. 15 Kuwaiti aircraft were seized and were soon afterwards flown out of the country by the invaders, but a BA aircraft which happened to be on the ground was simply left there and was sub sequently destroyed in bombing by Allied forces in the retaking of Kuwait. The Court of Appeal held that the 15 Kuwaiti aircraft were lost by seizure as soon as the airport was taken because it was clear from the outset that there was no likelihood of them being recovered, but that there had been no loss of the BA aircraft until it had been physically destroyed: in a case where property is taken but its whereabouts are www

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known, it cannot be said to have been ‘‘lost’’ until its fate has actually been determined. In the words of Rix L.J., the assured must in this type of case ‘‘wait and see’’. These cases may be contrasted with Webster v. General Accident Fire and Life Assurance Corporation [1953] 1 Q.B. 520, in which the assured gave his vehicle to an agent to sell, but the agent misappropriated the vehicle and it came into the hands of a third party: the Court of Appeal held that the vehicle had been lost in that the assured had taken all reasonable steps to recover the vehicle but recovery remained uncertain. In Glencore International AG v. Alpina Insurance Co. Ltd [2004] 1 Lloyd’s Rep. 111 the facts were similar to those in Webster, and Moore-Bick J similarly held that there had been a loss of the goods. Thirdly, the mere fact that a hidden defect in the insured subject matter manifests itself does not give rise to an insured loss unless additional damage to property is caused or unless the policy specifically covers consequential financial loss caused by the need to replace the defective property. The general rule is illustrated by Promet Engineering v. Sturge, The Nukila [1997] 2 Lloyd’s Rep. 146, in which the bases (‘‘spud cans’’) of an oil platform were defective and became cracked, in turn causing the legs of the oil platform to become damaged. The Court of Appeal ruled that the defects in the spud cans themselves were not covered, but that the damage caused by the defective spud cans to other parts of the oil platform was an insured loss. Similarly, in Shell UK Ltd v. CLM Engineering Ltd [2000] 1 Lloyd’s Rep. 612 an all risks policy against loss of or physical damage to an oil pipeline was held not to extend to the cost of repairing defective parts of the pipeline: such loss was not physical loss at all, but rather was economic loss representing the cost of making good a product which was not as valuable as it had at first sight appeared. Fourthly, a market perception of physical damage is not enough to allow recovery: there has to be physical degradation of the subject matter. The distinction is illustrated by Quorum AS v. Schramm (No. 1) [2002] Lloyd’s Rep. IR 292 k v in which a pastel by Degas, La Danse Greque, was stored in a strong room in a warehouse. There was a fire at the warehouse, and although the fire did not penetrate the strong room there was nevertheless a sudden and severe change in humidity and temperature leading to actual (albeit imperceptible) physical damage to the pastel in that its life had been shortened and the risk of future deterioration had increased. Thomas J. held that what had happened crossed the line between actual damage and perceived damage, and that this was not a case in which the market value of La Danse Greque had diminished simply because of a fear of damage. Finally, it is necessary to draw a distinction between the loss of the insured subject matter and the loss of its proceeds. In Eisinger v. General Accident Fire and Life Assurance Corporation [1955] 2 All E.R. 897 the assured sold his vehicle, but the cheque with which he had been paid was dishonoured: the court’s view was that the vehicle itself had not been lost. A similar situation may arise where the assured buys goods which are later found to have been www

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stolen and which are repossessed by the true owner: it is unlikely in such a case that the assured can recover under a property policy as his loss is of the price rather than the goods themselves. The Eisinger case is nevertheless of narrow ambit. In Dobson v. General Accident Fire and Life Assurance Corporation [1989] 3 All E.R. 927 the same facts, this time involving jewellery, were regarded by the Court of Appeal as amounting to ‘‘loss by theft’’, the elements of theft (misappropriation of property with the intention of permanently depriving the owner of it). Further, as seen above from the Webster and Glencore cases, an assured who hands the insured subject matter to an agent for resale, and it is then misappropriated, is entitled to claim for the loss of the subject matter rather than the proceeds.

VALUED AND UNVALUED POLICIES The distinction between a valued and an unvalued policy is drawn by s. 27 of the MIA 1906: (1) A policy may be valued or unvalued. (2) A valued policy is a policy which specifies the agreed value of the subject matter insured.

Most property policies are written on an unvalued, or indemnity, basis, so that in the event of loss of or damage to the insured subject matter the assured is entitled to recover the amount of his actual loss from the insurers. The policy will fix a maximum sum recoverable, and the premium will be calculated on the basis of that maximum sum, but if the assured’s actual loss is a lesser sum, e.g., because the insured subject matter has depreciated in value by the time of the loss, then the amount recoverable is that lesser sum. This type of approach is not appropriate where the amount of the loss cannot be ascertained easily or at all. It is almost impossible to quantify the amount of the assured’s loss when a unique item, such as jewellery, a work of art or a satellite, is damaged or destroyed. Insured subject matter may also have a sentimental value way beyond its market value. In such cases it is the practice for the subject matter to be insured on an agreed value basis under a valued policy: the parties fix in advance the amount which is to be paid by the insurers on the happening of an insured peril, and that sum is to be paid on proof of the happening of an insured event. The difference between the sum insured under a valued policy and under an indemnity policy is in the former case the sum insured is the sum which is to be recovered, whereas in the latter case the sum insured is the maximum amount which may be recovered. In the marine market, and particularly as regards vessels, policies are nearly always written on a valued basis. The essence of a valued policy is, therefore, the notion that there is no room for debate as to the amount recoverable in the event of loss. This concept is enshrined in s. 27(3) of the MIA 1906:

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(3) Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and the assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.

The qualification that the conclusiveness of the valuation is ‘‘subject to the provisions of this Act’’ is a reference in particular to s. 17 of the MIA 1906, under which the assured is under a duty of utmost good faith in presenting the risk to the insurers. The cases establish that if the assured has put forward a grossly exaggerated valuation of the insured subject matter then the insurers are entitled to avoid the policy. There are numerous authorities on the point, and these make it clear that overvaluation is only a problem if it is gross and indicates a want of honesty on the part of the assured. Ionides v. Pender (1874) LR 9 Q.B. 531 A vessel, freight and cargo, 222 casks of spirits, had been insured under three valued policies. There was a total loss. The underwriters did not dispute the valuations of the vessel and freight, but it was alleged that the goods had been valued considerably above their cost price. The stated and insured value was £2,800, although their actual value was shown to be £973. The jury’s verdict that there had been material misrepresentation was held by the court to be one which could not be overturned, by reason of the excessive overvaluation concerned. Eagle Star Insurance Co. Ltd v. Games Video Co. (GVC) SA, The Game Boy [2004] Lloyd’s Rep. IR 867 The vessel The Game Boy was insured under a valued policy for the sum of U.S.$1,800,000. She was lost in an explosion, and the insurers contended that the true value of the vessel was no more than U.S.$100,000, scrap value. The assured submitted numerous documents to the insurers in support of the claim. These showed that the vessel had been purchased for U.S.$1,800,000 and had been chartered under a bareboat charter to a third party for use as a floating casino. There was also a surveyor’s report showing a valuation of U.S.$2,000,000, and evidence from a repair yard that the vessel had undergone conversion work. Held (Simon J.): that the insurers were not liable. The evidence satisfied the court that the documents were false and had been prepared for the purposes of making the claim. The true value of the vessel was nowhere near U.S.$1,800,000, and the insurers were entitled to avoid the policy for misrepresentation as to the value of the vessel. The amount of the overvaluation was so great as to give rise to moral hazard, in that insurers were entitled to expect that their assureds would act honestly. Simon J. further held that, independently of the insurers’ right to avoid, the assured was prevented from recovering under the policy by reason of having made a fraudulent claim in the form of the use of fraudulent means and devices to further the claim.

Given the significance of the distinction between valued and unvalued policies, it remains to consider exactly how the courts go about deciding whether a contract is valued or based on indemnity. The problem, as noted earlier, is that both types of policy will refer to a figure for the sum insured, but that figure serves a different purpose depending upon the type of policy. The point may be put beyond doubt by the use of words such as ‘‘valued at’’, but this wording is not essential as long as the classi fication is otherwise clear. There is nevertheless consistent authority for the proposition that the use of the phrase

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‘‘sum insured’’ denotes an unvalued rather than a valued policy whereas the phrase ‘‘insured value’’ denotes a valued policy. Kyzuna Investments Ltd v. Ocean Marine Mutual Insurance (Europe) Ltd, The Solveig [2000] Lloyd’s Rep. IR 513 The assured completed a proposal form for the vessel, a yacht. The form asked the assured to state the ‘‘value to be insured’’, to which the assured answered ‘‘£106,500’’, a figure derived from an independent valuation required by the underwriters. The policy itself provided that the ‘‘sum insured’’ was £106,500. Following the occurrence of a casualty, the insurers contended that the true value of the vessel was no more than £65,000 and that this was the limit of their liability. Held (Thomas J.): that the underwriters were correct that the policy was an indemnity policy. The policy did not state that it was valued, and the use of the well-known phrase ‘‘valued at’’ showed that the parties did not intend the policy to be valued. The insistence of the underwriters of an independent survey was not inconsistent with the policy being an indemnity policy, as such a valuation was necessary in order for the insurers to determine their maximum liability. Quorum AS v. Schramm [2002] Lloyd’s Rep. IR 292 The question in this case was the amount which could be recovered by the owners of the Degas pastel La Danse Greque, which had been damaged by temperature changes while stored in a warehouse which suffered a fire. The original policy wording stated that the sum insured was U.S.$5.3 million. After the fire the assured and the underwriters entered into an agreement which was designed to remove any disputes as to the sum recoverable. This provided that ‘‘the amount of loss shall be the cost and expense of restoration plus any resulting depreciation in value. Underwriters’ liability shall be limited to that proportion of such Loss or Damage which the Sum Insured bears to the market value of the item immediately prior to the Loss and in no event shall Underwriters be liable for more than the Insured Value of the Item.’’ The parties could not agree on the measure of indemnity. Held (Thomas J.): that the policy was unvalued and that actual proof of loss was required. Looking at the position prior to the endorsement, it was clear from the use of the words ‘‘sum insured’’ that the policy was not valued. The endorsement, the wording of which was somewhat opaque, did not alter the position. The opening statement that the measure of indemnity was to be based on depreciation did not resolve the matter either way, as this was consistent both with an indemnity policy and also with a valued policy where there had been only a partial loss (the amount recoverable being reduced in proportion to the degree of damage). The second part of the endorsement, by contrast, used the phrase ‘‘sum insured’’, which was designed to incorporate the original basis of the policy. The result was that the endorsement allowed the assured to recover the actual loss suffered measured by diminution in actual market value.

These cases were applied by Gloster J. in Thor Navigation Inc v. Ingosstrakh Insurance [2005] Lloyd’s Rep. IR 490. The policy here stated that the ‘‘sum insured’’ in respect of the insured vessel was U.S.$1.5m. Gloster J. held that these words were generally recognised as referring to a policy ceiling and not a valuation. The learned judge regarded the Kyzuna decision as of general application in the marine market, and applied to policies which (as in the present case) incorporated the Institute Hulls Clauses (Kyzuna involved the Institute Yacht Clauses). Gloster J. further held that the terms of the policy

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reflected what had been agreed between the parties, and there was no basis for rectifying the wording and to treat the policy as valued.

AMOUNT RECOVERABLE UNDER VALUED AND UNVALUED POLICIES Valued policies Under a valued policy the amount of recovery is determined by the agreed valuation. In the event of a total loss of the insured subject matter, the assured is entitled to recover the full agreed sum, and it is not open to the insurers to argue that the assured’s actual loss was a lower figure: this point is confirmed by the conclusiveness of the valuation principle set out in s. 27(3) of the MIA 1906. In the case of a partial loss, the amount recoverable is that proportion of the agreed value which is represented by the degree of damage suffered by the insured subject matter. In Elcock v. Thomson [1949] 2 K.B. 755 a mansion was insured for an agreed value of £106,850. There was a fire which caused a reduction in its worth of some 30%. It was held by Morris J. that the assured was entitled to recover 30% of the agreed value, namely £32,055. The insurers put forward evidence that the true value of the mansion was £18,000, and that after a 30% diminution in value its worth was only £12,600. The court held that this calculation was irrelevant, and that the insurers were bound to pay on the basis of the agreed valuation. The insurers in this case did not rely upon any allegation of misrepresentation, and it may be noted that the result may be avoided where the policy confers upon the insurers the right to rebuild or repair (reinstate) the insured subject matter as an alternative to making direct payment to the assured: in that situation the insurers can limit their liability to the actual costs of reinstatement (subject to the ceiling laid down by the policy itself). These principles apply also to marine policies, although there are special rules applicable to partially damaged vessels, the assured being entitled to recover no more than the reasonable cost of repairs (MIA 1906, s. 69). Life policies are by their nature valued policies, the assured being entitled to recover the agreed sum on the death of the person covered. Liability policies, by contrast, are by their nature unvalued policies, as recovery is based on the amount of liability incurred by the assured to a third party. Unvalued policies The assured is entitled under an unvalued policy, and subject to policy restrictions, to recover the actual amount of his loss. This measure may vary depending upon whether the insured subject matter is goods or land. In general terms, the appropriate measure may be the diminution of the market value of

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the insured subject matter resulting from the occurrence of the insured peril, or the costs of reinstating or repairing the insured subject matter. In practice most policies confer upon the insurers the option of repair or reinstatement, so that they may take advantage of the most favourable of these measures. In the absence of any such provision, in the event that the assured is entitled to the repair or reinstatement cost there is no obligation on the assured to apply the insurance moneys to a rebuilding project: he is perfectly free to take the money and then to resell the property in its damaged state. This was decided in Frewin v. Poland [1968] 1 Lloyd’s Rep. 100, in which the assured insured two manuscripts, with the maximum sum of £1,000 being payable ‘‘in the event of loss resulting in the necessity for the assured to rewrite’’. It was held that the assured was entitled to recover the rewriting costs of the manuscripts, about £860, following their loss and that there was no obligation on the assured to have them rewritten. Goods In the case of goods which have been totally destroyed, the assured is entitled to recover the full market value of those goods. There is some ambiguity in this concept, because the market price which could have been obtained by the assured selling the goods may be significantly lower than the market price to the assured of buying replacement goods. As far as the assured’s personal possessions are concerned, it would seem that the purchase price to be incurred by the assured rather than the selling price which could have been obtained by the assured provides the proper measure of indemnity, and many consumer policies now provide for cover on a replacement, or ‘‘new for old’’ basis. By contrast, if the assured is a trader in the goods in question, then the selling price of the goods destroyed may be appropriate. In the latter case it will be necessary to identify a market price for the goods. The market price is generally the price which would have been paid by a reasonable purchaser in the market at the relevant time. Where goods have been damaged, the basic rule is that the assured is able to recover the difference between the value of the goods immediately before the occurrence of the insured peril and the value of the goods immediately after the insured peril. A policy on goods which have been earmarked for resale will pay the diminution in the market price for resale. A policy on goods which are for the assured’s use will pay the cost of restoring the goods to their undamaged state, although it is settled in the law of tort that damages in such circumstances must include an element reflecting depreciation in the event of any attempted resale by the assured (see Payton v. Brooks [1974] 1 Lloyd’s Rep. 241). Thus if the assured’s car is damaged and is subsequently repaired, in principle he has a legitimate claim for the fact that any future attempt to resell the car may be blighted by the fact that it has been repaired. It may equally be argued, however, that this form of loss is pure consequential loss

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which arises from a separate decision of the assured to sell the repaired car (see below). In those cases where the goods destroyed or damaged are unique, fixing the market price may give rise to some difficulty (hence the use of valued policies), as is shown by Quorum AS v. Schramm [2002] Lloyd’s Rep. IR 292 v , the basic facts in which were given earlier. In that case Thomas J. sought k to place a market value on the damaged pastel La Danse Greque, and held that: (a) it was to be assumed that the assured would seek to resell in the most profitable market, so that the market to be looked at was the private dealers’ market rather than the auction market; and (b) in ascertaining the market value, relevant factors included the prices obtained for similar works, the quality of the work and its provenance. www

Buildings The proper measure of indemnity for a building which has been destroyed or damaged depends upon the assured’s actual loss. That loss may depend upon whether the value of the building to the assured (a) was its market price or (b) the ability to use the building. An assured who has agreed to sell, or who was seeking to sell, the building, may be indemnified by being paid the market value of the building even though the costs of rebuilding or repair are greater. A policy which is written on a ‘‘reinstatement basis’’ for stated sum does not confer upon the assured the automatic right to recover the costs of re instatement up to that sum: such a policy has been construed as one which provides an indemnity, with the reinstatement sum simply operating as the maximum amount of recovery in the event that the proper measure of indemnity is based on reinstatement. Leppard v. Excess Insurance Co. [1979] 2 Lloyd’s Rep. 91 The assured’s cottage, which was insured for £14,000, was damaged by fire. The cost of rebuilding the cottage amounted to £8,000, but the assured had before the fire sought to sell the cottage at a price of £4,500. It was held that the proper measure of indemnity was £4,500. Per Megaw L.J.: ‘‘What the insurers have agreed to do is to indemnify the insured in respect of loss or damage caused by fire. The ‘full loss’ is the cost of replacement. That defines the maximum amount recoverable under the policy. The amount recoverable cannot exceed the cost of replacement. But it does not say that that maximum is recoverable if it exceeds the actual loss. There is nothing in the wording of the policy, including the declaration which is incorporated therein, which expressly or by any legitimate inference provides that the loss which is to be indemnified is agreed to be, or is to be deemed to be, the cost of reinstatement, ‘the full loss’, even though the cost of reinstatement is greater than the actual loss. The plaintiff is entitled to recover his real loss, his actual loss, not exceeding the cost of replacement. Was the plaintiff ’s actual loss the cost of the reinstatement of the cottage? Or was it . . . the market value of the property as it was at the time of the fire? The [insurers] do not rely upon any general principle . . . They say, rightly in my judgment, that this is a question of fact, and that one must look at all the relevant facts of the particular case, to ascertain the actual value of the loss at the relevant date. Of course, one is entitled to look to the

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future so as to bring in relevant factors which would have been foreseen at the relevant date as being likely to affect the value of the thing insured in one way or the other, if the loss of it had not occurred on that date. But on the evidence in this case, and the learned Judge’s statement of the relevant facts in the passages from his judgment which I have read earlier, it is beyond dispute that the plaintiff himself, at the relevant date, wished to sell the house, and was ready and willing to sell it for £4,500—indeed, on his own evidence, for less. [The plaintiff] submits that he was not bound to sell it. Of course not. He might thereafter, if the loss had not occurred, have changed his mind. The value of the property might have increased or it might have decreased. But there is no getting away from the reality of the case.’’ McClean Enterprises Ltd v. Ecclesiastical Insurance Office plc [1986] 2 Lloyd’s Rep. 416 The assured’s inn was damaged in a fire. The policy was written on a reinstatement basis, the sum payable being £375,000. Shortly before the fire the assured agreed to sell the inn to a third party, for the sum of £290,000. Staughton J. ruled that the measure of indemnity was to be based on the selling price rather than the full reinstatement price, as that was how the assured’s loss had been felt. The assured was thus held to be entitled to recover only the difference between the selling price and the value of the inn in its damaged state.

Assuming, however, that the assured had no intention of selling the building, the measure of indemnity is based on the costs of repairing or reinstating the building. The amount of the rebuilding costs depends upon the assured’s own use of the building. In most cases the assured will be indemnified by the provision of a ‘‘modern equivalent’’ building. Thus if a Victorian dwelling is destroyed by fire, the assured will not—unless the policy otherwise provides —be able to demand the use of building techniques and materials which were appropriate to the Victorian era if cheaper modern equivalents can produce the same result. The assured can, however, insist upon reinstatement of his building in something approaching its original form if the building was obtained and used for its special qualities. Reynolds v. Phoenix Assurance Co. Ltd [1978] 2 Lloyd’s Rep. 440 The assured purchased an old maltings for the sum of around £16,000, and insured the building for a maximum sum of £628,000. The maltings were destroyed by fire, and the insurers asserted that they were liable only for the cost of reinstating the building in a modern equivalent form, some £50,000. Forbes J. held that the condition of the building was crucial to the assured, so that the correct measure of indemnity was the cost of reinstatement in its original form, £250,000. Per Forbes J.: ‘‘I am satisfied that the [plaintiffs] fully intended to use the maltings as a grain store and for the production of cattle feed. They were going to start in a small way and hoped to build up a business in time, because, in my view, the capital sunk in it was so small . . . They had bought an outstanding bargain when they secured the maltings for £16,000. I am quite satisfied that had they been faced with paying something over £50,000 for the maltings they would in all probability not have bought them . . . At the same time I am quite satisfied that having bought them they not only intended using them for the purposes I have just described; they still so intend if the maltings are reconstructed. Further I feel satisfied that they genuinely intend to reconstruct the maltings if they receive a sum adequate to cover the cost of reasonable reconstruction . . . [T]his is not a mere eccentricity but arises from the fact . . . that

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they will not be properly indemnified unless they are given the means to reinstate the building substantially as it was before the fire but with appropriate economies in the use of materials. Exchange Theatre Ltd v. Iron Trades Mutual Insurance Co. Ltd [1983] 1 Lloyd’s Rep. 674 The assured used the insured building, an old Victorian hall, as a bingo hall, club and discotheque. Following a fire in which the building was damaged, Lawson J. held that a modern equivalent building was suited to the assured’s needs, and found that the insurers were liable for the cost of building a modern equivalent rather than for the greater cost of reinstating the building in its original form.

Marine policies The MIA 1906 contains its own regime on the measure of indemnity, setting out rules for ships, cargo and freight. The most important difference between marine and non-marine principles is that the assured is entitled to recover the difference between the market value of a vessel or cargo at the inception of the risk and the market value immediately after the casualty (MIA 1906, s. 16). In non-marine insurance, where market value is the correct test, the time at which the undamaged value is assessed is immediately before the occurrence of the insured peril, so that the assured must bear the risk of any fall in the market between inception and peril. In practice s. 16 rarely applies, because most marine policies are valued. In any event, s. 16 may be ousted by agreement, and it is the modern trend to regard s. 16 as outmoded and archaic and to allow its ouster on relatively light evidence. In Thor Navigation Inc v. Ingosstrakh Insurance [2005] Lloyd’s Rep. IR 490 Gloster J., having found that a policy on a vessel was unvalued (see above) went on to decide that s. 16 had no application to a policy which was expressed to provide an indemnity to the assured, given that s. 16 adopted a measure of loss which did not necessarily amount to an indemnity. The policy was thus construed as one which provided the assured with a measure of indemnity calculated by reference to the value of the vessel and the time and place of the loss.

Betterment One of the consequences of the above rules is that the assured stands to make a profit in the event that the insured subject matter is replaced. Thus, if old machinery is destroyed, and machinery of equivalent vintage is unavailable in the market, the assured can be indemnified only by the provision of new equipment. In this situation, unless (which is now common at least in the domestic market) the policy is written on a ‘‘new for old’’ basis, the assured is required to give some allowance for ‘‘betterment’’. There are very few recent cases on betterment, although the principle may be illustrated by the law of tort, where it is equally applicable.

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Voaden v. Champion, The Baltic Surveyor [2002] EWCA Civ 89 A pontoon belonging to the claimant was lost as a result of the defendant’s negligence. The average life expectancy of a pontoon was some 30 years, and the claimant’s pontoon was 22 years old. The cost of a new pontoon was £60,000. Colman J., applying the principle of betterment, awarded the assured 8/30 of £60,000, namely £16,000.

CONSEQUENTIAL LOSS Insurance of consequential loss An insurance policy on property covers the costs of making good the property. It does not cover any other loss which may be incurred by the assured as an indirect result of the occurrence of the peril. Commercial premises may be shut down, and plant may be put out of operation, resulting in loss of production for the assured and possibly loss of long-term goodwill. These losses, which may be characterised in general as consequential loss or loss of profit, are not, however, recoverable under an ordinary policy on property. It is common for businesses to insure against a peril which both damages property and results in a loss of production—business interruption—but if the policy is not extended in this way then the assured must carry his own loss. Consequential loss may arise in the domestic context, e.g., when the assured loses his house keys and decides to change his locks, or where part of a matching set is damaged and the assured chooses to replace the entire set: there is no authority on these matters, but it is unlikely that an ordinary policy would cover such additional losses. There is no legal objection to the assured insuring against possible loss of profits, even though such profits may be speculative. The commonest type of cover, business interruption insurance, lays down an ‘‘indemnity period’’ (often 12 months) running from the date of the occurrence of the peril, and the assured is able to recover for loss—e.g., from the inability to fulfil contracts—suffered in that period. Business interruption insurance may be purchased as an add-on to property cover, or it may be purchased independently of insurance against physical loss. In either case the assured must, in order to recover, show that the consequential loss was proximately caused by the insured peril and not by some independent cause, including the assured’s own reaction to the peril. In If P&C Insurance Ltd v. Silversea Cruises Ltd [2004] v the assured, a cruise company whose main business Lloyd’s Rep. IR 696 k was in the U.S. market, was insured against losses to its business in the form of interference with scheduled sailings caused by government action in response to war and terrorism risks. Following the events of 11 September 2001, the U.S. government advised U.S. citizens to keep a low profile while abroad, and this led to many of them cancelling or postponing their bookings. The assured found it uneconomic to operate all of its vessels, and two were laid up. It was held that these losses were not covered: the peril insured against www

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was interference with schedules, but the U.S. Government’s action had not interfered with schedules and had merely rendered those schedules uneconomic.

Delay by insurers causing consequential loss Small businesses which suffer property damage and which are not insured against business interruption will in many cases suffer some financial loss pending the reinstatement or restoration of their premises or means of production. Those losses may be exacerbated by a failure on the part of the insurers to make prompt payment. English law does not in these circumstances impose any additional liabilities—other than in the form of payment of interest—upon dilatory insurers. The reasoning here is that as soon as the insured peril has occurred the insurers are under an immediate contractual duty to make good the assured’s loss, so that the assured is regarded as having an action for breach of contract from the outset. That means that damages are payable by the insurer immediately, and if they fail to pay damages the law is clear that they cannot be liable in damages for failing to pay damages (President of India v. Lips Maritime Corporation [1988] A.C. 395). There are some indications that insurers do owe a continuing duty of utmost good faith to the assured in the claims-handling process, but it has consistently been denied that breach of that duty can give rise to damages. Accordingly, the only real possibility for the recovery of damages by an assured who has suffered loss by late payment is to establish an implied term in the insurance that payment will be made by the insurers within a reasonable time. To date, however, whenever this argument has been raised, it has been rejected, albeit often with statements of regret by the courts. Ventouris v. Mountain, The Italia Express (No. 2) [1992] 2 Lloyd’s Rep. 281 The claimant’s vessel was insured against war risks, and was sunk by explosives attached to her hull while she was undergoing repairs. The underwriters initially denied liability on the ground that the assured had been guilty of wilful misconduct, but subsequently submitted to judgment in the sum of U.S.$4 million plus interest. In the present action the claimant sought additional damages representing loss of income which would have been earned by a replacement vessel, loss of increase in the capital value of a replacement vessel, and damages for hardship, inconvenience and mental distress. Held (Hirst J.): that the claim would be dismissed. (1) The statutory rules on the measure of indemnity under valued policies precluded the possibility of damages. (2) The cause of action against the underwriters arose on the date of the casualty, and the award of damages on damages contravened the principle in The Lips. (3) Damages for hardship, inconvenience and mental distress were only recoverable for breach of contract where the contract which was broken was itself one to provide peace of mind or freedom from distress. A contract of marine insurance covering commercial loss was not a contract of this nature.

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Sprung v. Royal Insurance [1999] Lloyd’s Rep. IR 111 Machinery on the claimant’s business premises was insured by the defendants against theft and sudden and unforeseen damage. On 5–6 April 1986 thieves or vandals broke into the premises and wrecked the machinery. The defendants were notified the following day, and a small payment of £3,500 was made in May 1986 for damage to a weighbridge. The main claim of some £30,000 was not, however, paid, and the defendants denied liability for wilful damage. The claimant’s business was under severe threat and required the insurance payment to continue. Proceedings were issued in October 1988 and judgment for the insured loss plus interest was given for the claimant in March 1990. Subsequently the claimant argued that the closure of the business had resulted in a loss of £75,000 and sought to recover this sum from the defendants by way of consequential loss. Held (C.A.): that no cause of action lay. It was settled law on the basis of The Lips that damages could not be awarded for a failure to pay damages. It was arguable that a term should be implied into the policy—particularly where it provided for immediate reinstatement—that insurers should respond promptly to a claim and to investigate it thoroughly. However, even if that was the case, and even if the defendants were in breach of any such implied obligation, substantial damages were unavailable as the cause of the claimant’s loss was his own failure to reinstate the premises rather than late payment by the insurers. Normhurst Ltd v. Dornoch [2004] Lloyd’s Rep. IR 27 The claimants’ business premises were damaged by fire in July 2000. The defendants were the claimants’ fire and business interruption insurers. In October 2000 the insurers purported to avoid the policy for material non-disclosure. The claimants brought an action on the policy and sought additional damages for breach of contract representing the consequential losses which flowed from the defendants’ failure to pay on time. Held (H.H.J. Chambers): that the claim would be dismissed. There was no such thing as a cause of action in damages for the late payment of damages. The position might be different if the policy was not one to pay damages on the happening of the insured event and rather involved the making of a contractual payment, but the present policy was an ordinary indemnity contract and contained no special features.

INTEREST Interest on insurance claims The power of the courts to award interest is contained in section 35A of the Supreme Court Act 1981. Subsection (1) provides that: Subject to rules of court, in proceedings (whenever instituted) before the High Court for recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and: (a) in the case of any sum paid before judgment, the date of payment; and (b) in the case of the sum for which judgment is given, the date of the judgment.

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Interest may be calculated at different rates and for different periods (s. 35A(6) of the 1981 Act). The judgment debt itself will carry interest at 4% under the Judgments Act 1838 and s. 44 of the Admin istration of Justice Act 1970, and interest may be awarded in any currency (s. 44A of the Administration of Justice Act 1970, inserted by the Private International Law (Miscellaneous Provisions) Act 1995. Arbitrators have, under s. 49 of the Arbitration Act 1996, an equivalent power to award interest. This differs from the court’s power in three respects. First, the parties may by agreement remove from the arbitrators the power to award interest. Secondly, arbitrators may award compound interest. Thirdly, although arbitrators are required to act judicially in deciding on the award of interest in any one case, their decision on the matter is one of law which can only be appealed against if the court gives permission to do so on the basis that the award was obviously wrong. The rate and timing of interest As far as interest on the proceeds of an insurance policy is concerned, the practice of the Commercial Court is to award interest at 1% above the U.K. base lending rate, although some other index may be used in relation to a contract with an international flavour (e.g., the U.S. prime rate where the sum is payable in the U.S.). It was held in Adcock v. Co-operative Insurance Society v that the same approach is normally to be Ltd [2000] Lloyd’s Rep. IR 657 k adopted in all disputes involving commercial insurance contracts. The trigger date for interest is the date on which the sum fell due. In insurance cases, the effect of the occurrence of an insured peril is to put the insurers under an immediate obligation to indemnify the assured, so that the insurers are liable to pay damages right from the start. Accordingly, strict principle dictates that interest on the proceeds starts to run as of the date of the peril. However, it was noted by Tomlinson J. in Hellenic Industrial Development Bank SA v. Atkin, The Julia, 2002, unreported, that it is customary in the marine market to allow underwriters the period of about a month to consider whether payment is to be made, so that interest will generally be regarded as running at the earliest from a month after the date of the casualty, although if the case is a particularly complex one a lengthier period may be granted to the underwriters. These principles recognise that the purpose of interest is to reflect the fact that the assured has been kept out of his money and that the insurers have benefited from a windfall by not making payment: it follows that interest will normally be awarded for the full period and at the usual rate. However, as noted above, s. 35A(6) of the Supreme Court Act 1981 allows the court to vary the rate and duration of interest. Such variation will be relevant where the court is of the view that the reason for the assured being kept out of his money is his own dilatory conduct. The test is, therefore, one of causation. There are numerous illustrations of the courts’ approach to interest. www

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Adcock v. Co-operative Insurance Society Ltd [2000] Lloyd’s Rep. IR 657 The assured’s house was damaged by fire in January 1990, but proceedings against the insurers were not commenced until January 1995. In the intervening period there had been some negotiations between the parties. The assured obtained judgment in May 1999. The Court of Appeal held that interest should run only from February 1993, as up to that point the assured had not progressed his claim against the insurers and was the cause of his own loss up to that point. Hellenic Industrial Development Bank SA v. Atkin, The Julia, 2002, unreported The insured vessel was lost on 15 May 1994, and a claim was made against the underwriters in August 1994. The underwriters attempted to investigate the circumstances of the loss, but faced difficulties in locating the crew, although they ultimately avoided the policy in December 1994 for alleged material misrepresentation. The assured commenced proceedings in Greece shortly afterwards, but the action was dismissed in September 1995 as the Greek court ruled that the insurance contract contained an exclusive jurisdiction clause in favour of England. This led to negotiations between the parties, and the action was finally commenced in September 1999. Judgment was obtained by the assured in August 2002. Tomlinson J. held that, in respect of the eight-year period between the loss and judgment, it was appropriate to award interest only for four years of that period. The assured had caused a substantial part of his own loss by commencing proceedings in the wrong jurisdiction and then by delaying the bringing of an action in England. Interest rates had varied during the eight-year period, and Tomlinson J. held that the fairest outcome for the assured was to award interest at the rate prevailing in the four years immediately before the judgment, as that period best reflected the actual loss. Kuwait Airways Corporation v. Kuwait Insurance Co. SAK (No. 3) [2000] Lloyd’s Rep. IR 678 Iraqi forces invaded Kuwait on 2 August 1990, and within hours had seized the Inter national Airport. On the ground at the time were 15 aircraft belonging to the claimant, along with valuable aircraft spares. A claim was made for the aircraft on 12 September 1990, but the loss of the spares was not notified to the insurers until 12 November 1990. The insurers denied liability for the loss of the spares on 5 December 1990, and the assured commenced proceedings on 30 July 1991. It was held by Langley J. that interest should run as from 5 December 1990. Interest could not run until a claim had been made, and this had not occurred until November 1990. The insurers were then entitled to the benefit of a short period to consider the claim, which took the time to the early part of December 1990. Langley J. specifically rejected the arguments that interest should run only from a date on which it was reasonable for the assured to expect to be paid or at the earliest from the date on which the insurers had had time to undertake a thorough investigation into the circumstances of the loss. Quorum AS v. Schramm (No. 2) [2002] Lloyd’s Rep. IR 315 The insured subject matter, a valuable pastel, La Danse Greque, was damaged as the result of a fire on 7 October 1991. The underwriters were notified immediately, and repairs were effected early in 1992, a formal claim being made in March 1992. Payment was refused in June 1995. The assured commenced proceedings in September 1997. The issue before Thomas J. was the amount of interest to be awarded. The court ruled that interest should run from the end of March 1992, shortly after the claim was made, but that the rate of interest should be reduced by 50% for the period September 1995 to September 1997, as there was no excuse for proceedings not being commenced in this period. Thomas J. further held that the rate of interest was

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not to be reduced for the period of the action, as there was no evidence that the assured had pursued the action in a dilatory fashion.

POLICY TERMS RESTRICTING RECOVERY Excess clauses (deductibles) Most insurance policies contain a provision—referred to as an excess or deductible, under which the assured has to pay the first part of his own loss. The assured is regarded as his own insurer for that sum, and the position is regarded in law as creating a primary layer of cover consisting the excess and a second layer of cover consisting the insurance itself. This point is significant for subrogation purposes, because if there is any sum recovered by the insurers from the third party responsible for the assured’s loss, the sums are to be applied to the higher layer of insurance first, so it is likely that the deductible will be recouped (see Napier and Ettrick v. Hunter [1993] 1 All E.R. 385). It may be possible for the insurers to be persuaded to remove the excess either by the assured paying a higher premium or by the insurers issuing an extension to the cover (known as ‘‘deductible buy-back’’) and it is also open to the assured to insure the deductible with other insurers. The excess has two main functions. First, by excluding the most common forms of loss, small losses, the premium can be kept down. Secondly, by requiring the assured to maintain an excess, the insurers can impose some incentive on the assured to act prudently and to take steps to avoid suffering loss. A clause similar to an excess clause is a franchise clause. Under this type of provision, the insurers are not liable if the loss does not exceed the stated franchise figure, but if the loss is greater than the franchise figure then the insurers are liable for the full amount. Average Average clauses are widely used in insurances on buildings and in marine policies. An average clause operates when the assured has taken out a policy which is for a sum less than the full value of the subject matter. The broad effect of an average clause is to deem the assured to be his own insurer in respect of the uninsured proportion. Thus, if the assured’s vessel is worth £500,000, and he insures it for the sum of £300,000, any loss will be borne 3/5 by the insurers and 2/5 by the assured. If there is a total loss of the vessel, the principle of average works automatically, because the insurers can only ever be liable for £300,000: average has its real impact where the loss is merely a partial loss, e.g., £100,000, as in that situation the insurers would face liability for only £60,000 with the assured being treated as his own insurer for the remaining £40,000. Average operates whether the policy is a valued policy or an indemnity policy: in the former case average will apply where the insured

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sum is less than the agreed value, and in the latter case average will apply when the maximum sum recoverable is less than the actual value. The average principle is set out in s. 81 of the MIA 1906: Where the assured is insured for an amount less than the insurable value, or in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance.

Aggregation of losses Significance of aggregation The purpose of aggregation, expressed in the form of an ‘‘event limit’’, is to determine the amount of the insurers’ liability where the assured has suffered a number of related losses. There has in recent years been a substantial amount of litigation on the meaning of aggregation clauses. A simple example may suffice to illustrate the problem. Let it be supposed that the assured operates a factory, and is insured against the risk of liability to third parties. The policy states that the assured bears an excess of £50,000 per event and is entitled to recover a maximum of £500,000 per event. Further suppose that there is an explosion at the factory which damages 10 neighbouring houses, the damage to houses costing £60,000 each to repair. The key issue here is to identify the ‘‘event’’. If the event is regarded as the explosion, then the assured is entitled to recover a total of £450,000, the amount of the assured’s liability for damage to the 10 houses (£600,000), reduced to £500,000 by the per event limit of indemnity and minus the £50,000 per event deductible. By contrast, if the event is regarded as the damage to each house, then there are 10 events of £60,000 and the assured has to bear a £50,000 deductible for each of those events, giving a total recovery of £100,000. The event limit thus has a twofold function in calculating the measure of indemnity: it determines the maximum sum recoverable when a series of losses are added together, and it determines the number of deductibles which the assured has to bear. What will also be appreciated is that the insurers and the assured may wish to argue different things at different times. If the issue is the maximum amount recoverable under the policy, the assured will wish to argue for many events (because he can recover up to the limit of indemnity for each one) whereas the insurers will seek to argue that each of the losses is to be treated as one event so that there is only one recovery. By contrast, if the issue arises in the context of a deductible, the insurers will want to demonstrate as many events as possible, because each bears its own deductible, whereas the assured’s argument will be that there is only one event and therefore only one deductible has to be borne. Typical wordings and their meanings A number of different forms of wording may be used as terms of aggregation.

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The most common terms are ‘‘event’’ and ‘‘occurrence’’. It is established that these words are interchangeable, and that they refer to a happening which has given rise to a series of closely connected losses. The elements of an event or occurrence are that: (1) what has happened is capable of being described as an event or occurrence, in that it is sudden or unexpected rather than a gradual state of affairs which has happened ‘‘at a particular time, at a particular place and in a particular way’’ (per Lord Mustill in Axa Reinsurance (U.K.) plc v. Field [1996] 2 Lloyd’s Rep. 233); (2) the losses which have resulted from the event are closely connected, by time, place, motive and cause (the ‘‘unities’’); and (3) the losses are causally connected to the event which has given rise to them and are not too remote from that event. If these conditions are satisfied, then the individual losses may be regarded as arising from one event or occurrence. Illustrations of events and occurrences are given below. The phrase which gives the most extensive possibility for aggregation is ‘‘originating cause’’. In Axa v. Field Lord Mustill described the phrase as ‘‘[opening] up the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate’’, and in Countrywide Assured Group plc v. Marshall [2003] Lloyd’s Rep. IR 195 k v Morison J. stated that ‘‘The word event or occurrence describes what has happened; the word cause describes why something has happened’’. In Cox v. Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep. 43 three underwriters for Lloyd’s Syndicates negligently underwrote loss-making business on a number of occasions. Claims were made by the underwriters against their liability insurers. Phillips J. held that the ‘‘originating cause’’ of the losses was the ‘‘blind spot’’ of the underwriters in writing the business, so that there were three originating causes, namely the activities of each of the underwriters (contrast Caudle v. Sharp [1995] L.R.L.R. 433, discussed below, where the aggregating term was ‘‘event’’). The term ‘‘accident’’ similarly requires that something sudden or unexpected has happened, rather than a general state of affairs: thus the failure of an airline to warn passengers of the dangers of deep vein thrombosis on longhaul flights is not of itself an accident, but merely the state of affairs which may lead to bodily injury (see Re Deep Vein Thrombosis and Air Travel Group Litigation [2005] UKHL 72). An accident is, however, generally to be regarded as individual losses resulting from a happening, whereas an event or occurrence generally refers to the happening itself. The leading authority is South Staffordshire Tramways Co. Ltd v. Sickness and Accident Assurance Ltd [1891] 1 Q.B. 402. In this case a tramcar overturned, injuring some 40 people. The assured operator was insured up to a maximum sum of £250 per accident, and it was held that the injuries to each individual constituted an accident rather than the overturning of the tramcar, so that the insurers were liable for up to £250 in respect of each injured person. The word ‘‘loss’’ may, depending upon its context, refer to an individual incident of loss or to a wider event which gives rise to a series of losses. In www

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Mitsubishi Electric (U.K.) Ltd v. Royal London Insurance (U.K.) Ltd [1994] 2 Lloyd’s Rep. 249 the assured manufactured and installed 94 identical ‘‘toilet modules’’ in a building. The assured’s liability policy provided that it was to bear a £250,000 deductible for each loss in respect of any defective component part. The modules were found to have been manufactured using defective cement particle board, and the Court of Appeal held that there was only one loss (and thus only one deductible) as there was only one defective component even though it had been applied 94 times. By contrast, in Glencore International AG v. Alpina Insurance Co. Ltd [2004] 1 Lloyd’s Rep. 111 MooreBick J. held that, for the purposes of a theft policy which imposed a maximum sum recoverable per loss, each act of theft of the assured’s oil was a loss in its own right even though the same form of misappropriation had been used on each occasion. The word ‘‘claim’’ is widely used in insurance policies, often for different purposes, and its meaning will depend upon the context in which it is used. The leading authority on the meaning of ‘‘claim’’ in the context of aggregations is Lloyds TSB General Insurance Holdings v. Lloyds Bank Insurance Co. Ltd [2003] Lloyd’s Rep. IR 623. k v This case concerned a large number of small claims against the assured for pensions mis-selling. The assured’s liability policy imposed a deductible of £1 million on each third party claim, and further provided that if a series of third party claims resulted ‘‘from any single act or omission (or a related series of acts or omissions)’’ then all of those claims were to be regarded as a single claim so that only one deductible was to be borne. The House of Lords ruled that these words did not allow the assured to add together all of the individual claims in a manner which meant that only one deductible was applicable. Their Lordships ruled that the phrase ‘‘act or omission’’ referred to each act of pensions mis-selling by the assured’s agents, and not to the underlying problem that the agents had not been properly trained by the assured. The words in brackets were held not to alter this conclusion, as they were designed to amplify rather than reverse the basic coverage laid down by the policy. Their Lordships were not, however, clear as to exactly what the bracketed words were referring to. www

Illustrations of ‘‘event’’ and ‘‘occurrence’’ Caudle v. Sharp [1995] L.R.L.R. 433 A Lloyd’s underwriter, O, committed his Syndicates to 32 reinsurance contracts, all of which gave rise to substantial losses. The Syndicate members brought proceedings against O, which were settled. O’s liability insurers indemnified him, and then sought indemnification from their reinsurers. The reinsurance laid down a deductible in respect of all losses arising from any one event. The reinsurers argued that each of the 32 acts of negligence was a relevant event so that the deductible applied to each (giving a nil recovery as the losses for each act were below the deductible level), whereas the reinsured argued that the relevant event was O’s blind spot in writing business in a negligent fashion.

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Held (C.A.): that there were 32 events and not one event. A blind spot could not be an ‘‘event’’ because it had not of itself given rise to any loss: those losses only began to arise once O had started to issue policies. Further, the policies were too remote from O’s blind spot to be treated as arising from it, in much the same way that losses arising from an individual battle would be regarded as too remote to be regarded as arising from a war. An event is not, therefore, a state of affairs. Kuwait Airways Corporation v. Kuwait Insurance Co. SAK [1996] 1 Lloyd’s Rep. 664 Fifteen aircraft and numerous spare parts for them belonging to the claimant were seized by invading Iraqi forces on 2 August 1990. The aircraft were flown out of Kuwait, some going to Iraq and some going for safekeeping to Iran. Seven of the aircraft were destroyed in allied bombing in the operation to free Kuwait, and the remaining eight aircraft were returned to the assured. The insurance covered the claimant for the sum of U.S.$300 million in respect of all losses arising from one occurrence. Held (Rix J.): that there had been only one occurrence and not 15 occurrences, so that the policy limit was applicable to the totality of the claimant’s loss. The relevant occurrence was the seizure of the airport or the seizure of the aircraft, that being the point at which the aircraft were lost to the assured. There was, as between the losses of the individual aircraft, unity of time and place, and also the evidence showed that the intention of the Iraqi invaders had been to take the aircraft, so there was unity of intention.

Note that in Scott v. Copenhagen Reinsurance Co. (U.K.) Ltd [2003] Lloyd’s v much the same issue came before the Court of Appeal, Rep. IR 696 k although the policies under consideration were different and required losses to be aggregated if they arose ‘‘from one event’’. At first instance ([2001] Lloyd’s v ) Langley J. reached the same conclusion as Rix J. in the Kuwait Rep. IR 179 k case. On appeal the only question was whether a British Airways aircraft, which had been on the ground at the time of the invasion and which had not been seized by the Iraqis but which had been destroyed later by allied bombing, was to be included in the same ‘‘event’’ which had given rise to the loss of the 15 Kuwaiti aircraft. The Court of Appeal held that the loss of the BA aircraft constituted a separate event: the Iraqis were unaware of its presence until they took the airport, and unlike the Kuwaiti aircraft it had not been lost when the airport was seized but only when it was destroyed, so there was no unity of time or intention. Further, the loss of the Kuwaiti aircraft and the BA aircraft had different causes. www

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Mann v. Lexington Insurance Co. [2001] Lloyd’s Rep. IR 179 The claimants were the reinsurers of an Indonesian insurance company which had insured a number of Indonesian supermarkets belonging to the assured. The claimants had retroceded their liability to the defendants under a contract which provided an indemnity in the sum of ‘‘$U.S.5,000,000 per occurrence’’. As the result of rioting over a single weekend, 22 of the supermarkets suffered damage. The issue was whether there was one occurrence in the form of the rioting itself, or whether there were 22 separate occurrences. Held (C.A.): that there were 22 separate occurrences. There was no unity of time or place between the individual losses, and it could not be said that there was unity of place even if damaged buildings were in the same neighbourhood. The only possible

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unity was intention, in that it was asserted that the riots had been instigated by the then government, but even if that had been established it would not have been enough to satisfy the requirement of unity between the losses. Midland Mainline Ltd v. Commercial Union Assurance Co. Ltd [2004] 1 Lloyd’s Rep. 22 (reversed in part on other grounds [2004] Lloyd’s Rep. IR 239) As a result of the Hatfield rail disaster on 17 October 2000, Railtrack—the railway track operator—imposed numerous emergency speed restrictions on various parts of the track which were worn or cracked. Train operators were forced to cancel or delay many of their services, and claimed against their business interruption insurers whose policy provided cover in respect of occurrences. David Steel J. ruled that each individual emergency speed restriction was an occurrence in its own right, and that the relevant occurrence could not be regarded as the policy of Railtrack to impose such restrictions. The court was not persuaded that there was any co-ordinated policy capable of being described as an occurrence, and that in any event there were no unities of time or place between the emergency speed restrictions so that they could not be aggregated. If P & C Insurance Ltd v. Silversea Cruises Ltd [2004] Lloyd’s Rep. IR 696 The assured, the operator of luxury cruises mainly for the U.S. market, was insured against loss of business caused by government warnings as to terrorism. Following the events of 11 September 2001, the U.S. government issued numerous warnings to its citizens not to travel and to keep a low profile abroad, with the result that the assured lost a good deal of income through cancellations and postponements. The policy incorporated a per occurrence deductible of U.S.$250,000. The insurers argued that each warning issued by the U.S. Government constituted an occurrence, so that the deductible applied on each of those occasions. Tomlinson J, whose judgment was upheld on appeal in respect of other issues, held that the relevant ‘‘occurrence’’ was what had taken place on 11 September, as construing each warning as an occurrence would have given rise to absurd results as far as the assured was concerned.

COSTS OF MITIGATION The mitigation problem The assured may be faced with the situation in which an insured peril has occurred or is imminent, and he regards it as prudent to take steps to reduce the impact of the peril or to prevent the peril from occurring in the first place. Those steps may give rise to expenditure on the part of the assured, and the question which here arises is whether the costs incurred by the assured are recoverable from the insurers in place of indemnification for loss caused by an insured peril. It may also be the case that the measures taken by the assured are unsuccessful, in which case the assured may seek to recover not just for his insured loss but also for the costs of his abortive attempts to prevent or mitigate that loss. English law does not grant any remedy to a person who voluntarily undertakes a task for the benefit of another. In accordance with this principle, an assured who incurs expenditure in preventing or mitigating a loss, for the benefit of insurers, has no right to recover that expenditure from the insurers

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unless he was under an obligation imposed by the policy to attempt to prevent or mitigate the loss. It is therefore necessary to consider, first, whether any such duty exists and, if so, secondly, how much the assured is entitled to recover from the insurers. The problem discussed here should be distinguished from a quite separate causation issue, which arises where the assured, in an attempt to prevent a particular form of loss, by his actions causes a loss to occur in a quite different way. One example may be where an assured whose goods are insured against fire throws them into a river to stop them burning, water damage being an uninsured peril. The question here is one of causation, namely whether the assured’s actions have given rise to a loss which would not otherwise have occurred: if loss was in any event inevitable, the chain of causation will not be regarded as having been broken (see Symington & Co. v. Union Insurance of Canton (1928) 44 T.L.R. 635, of which these were the facts). The obligation to mitigate Non-marine cases The limited authority on the point indicates that, in the absence of any express obligation on the assured to take steps to prevent or mitigate loss, there is no implied duty on the assured to do so and accordingly there is no right to recover any costs incurred. It also follows that the assured is entitled to recover the policy moneys from the insurers in the event of loss caused by an insured peril even though no steps have been taken by the assured to prevent or mitigate a loss. The cases are, however, confined to liability insurance: there is no authority in respect of property policies. Yorkshire Water v. Sun Alliance & London Assurance [1997] 2 Lloyd’s Rep. 21 The claimants operated a sewage works on the banks of the River Colne. The bank collapsed, and sludge stored at the works slipped into the river. The claimants immediately took steps to prevent the polluting sludge from spreading, and undertook works which cost some £4.5 million. A claim was made against liability insurers for this expenditure. Held (by C.A.): that the claim would be dismissed. There was no express duty in the policy on the claimants to take steps to mitigate or prevent loss, and such a duty could not be implied by the common law. Pilkington United Kingdom Ltd v. CGU Insurance plc [2004] Lloyd’s Rep. IR 891 The assured supplied a large number of glass panels which were installed in the roof of the Eurostar terminal at Waterloo Station. About 13 of the panels cracked after installation, and the owners of the terminal incurred expenditure the purpose of which was to prevent bits of shattered glass falling into the terminal and causing injury. The assured was insured under a product liability policy in respect of personal injury and physical damage to property. The assured sought to recover the cost of any liability that it might face to indemnify the owners of the terminal for their expenditure. There was no obligation on the assured to take any steps to prevent or mitigate loss.

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Held (by C.A.): that the claim would be dismissed. The policy covered only liability for personal injury or property damage, and no such liability had been incurred. The claim was for the costs of preventing liability from arising, and permitting recovery would have been to convert the policy from one against specific forms of liability to one which covered liability in general.

Marine policies By contrast, marine policies have traditionally incorporated express mitigation provisions, in the form of ‘‘suing and labouring’’ clauses, and such provisions are now all but universal in marine policies underwritten in the English market. Section 78(4) of the MIA 1906 provides as follows: (4) It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss.

It is uncertain whether the subsection operates only where there is an express suing and labouring clause, but it would seem that the subsection applies, in its own words, ‘‘in all cases’’ and in any event the point is in the light of market practice purely theoretical. There has been much dispute over the years as to the nature of the duty imposed by s. 78(4), but the most recent cases indicate that it is a rule of causation, namely that the assured’s only duty is the negative one of not taking steps which break the chain of causation between the insured peril and the actual loss. Thus, unless the assured has caused his own loss, the assured is entitled to recover. This test was laid down by the Court of Appeal in State of Netherlands v. Youell [1998] 1 Lloyd’s Rep. 236. Section 78(4) thus reflects the ordinary common law on causation. Recovering expenditure incurred in preventing or mitigating loss Non-marine cases As noted above, other than in the marine market there is no obligation on the assured implied by law to take steps to prevent or mitigate loss. The Yorkshire Water case shows that if such steps are taken, the costs incurred are irrecoverable. The Court of Appeal in Yorkshire Water also rejected the need for any implied term requiring the insurers to indemnify the assured for the reasonable cost of any measures undertaken to prevent or mitigate a loss even in the absence of an express duty to take such steps: such a term would not fulfil the principle of mutuality; and it would be extremely difficult for a court to determine whether the expenditure was reasonable. Marine cases In those very rare cases where there is no express sue and labour clause, the assured is unable to recover from the insurers any expenditure which he has incurred in an attempt to mitigate or prevent a loss. Generally, however, there will be an express sue and labour clause, in which case the position is governed by s. 78(1) and 78(3) of the 1906 Act:

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(1) Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss . . . (3) Expenses incurred for the purpose of averting or diminishing any loss not covered by the policy are not recoverable under the suing and labouring clause.

Subsection (1) allows recovery as long as the expenses are ‘‘properly incurred’’. The test is whether the expenditure was reasonable in all the circumstances (Integrated Container Service Inc v. British Traders Insurance Co. [1984] 1 Lloyd’s Rep. 154). Subsection (1) further makes it clear that the costs of mitigation are recoverable in addition to any sums payable under the policy. Thus if the assured reasonably incurs expenditure in an attempt to mitigate the loss, but his efforts are unsuccessful, he may recover both the sums due under the policy for the insured loss and also his reasonable expenditure under the suing and labouring clause. Subsection (3) makes the obvious point that if the peril faced by the assured is not one insured against under the policy, the assured is unable to recover any suing and labouring costs which he may have incurred.

TEST YOUR UNDERSTANDING

1. Which of the following statements correctly describe constructive total loss? (a) it applies to all forms of insurance; (b) it applies to damage which cannot be repaired other than at a cost greater than the value of the subject matter; (c) it applies whenever the subject matter is seized by a third party. 2. In which of the following circumstances can goods be said to have been lost? (a) they have been manufactured with a defect and do not function properly; (b) they have been seized by a third party; (c) they have been sold to a third party who has refused to pay for them. 3. Which of the following statements accurately describes a valued policy? (a) the assured is entitled to recover the agreed value in the event of the subject matter being lost or destroyed;

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(b) a valued policy is created where the policy fixes the maximum sum recoverable; (c) a false statement by the assured as to the actual value of the insured subject matter will always render the policy voidable. 4. Which of the following statements is accurate? (a) the sum recoverable for partial loss under an unvalued policy is the diminution in value of the subject matter; (b) the value of the insured subject matter may vary depending upon whether it is for resale or for use; (c) insurers who replace or repair the subject matter are entitled to deduct a sum representing any additional benefit obtained by the assured in receiving new or better subject matter. 5. Which of the following forms of consequential loss are recoverable under a policy on property? (a) loss of use of the property pending its repair; (b) interest on the sum payable by the insurers; (c) damages for breach of contract by insurers who have refused to pay a valid claim within a reasonable time. 6. Which of the following statements accurately describes the term ‘‘event’’ in an aggregation clause? (a) it means the same as ‘‘occurrence’’; (b) an event is something which happens at a particular time, at a particular place and in a particular way; (c) a propensity to negligence is an event; (d) it means the same as ‘‘originating cause’’. 7. Which of the following statements is true? (a) the assured under a non-marine policy can recover for the costs of averting loss from a threatened insured peril; (b) the assured under a marine policy can recover for the costs of averting loss from a threatened insured peril; (c) the assured under a non-marine policy is under a duty to the insurers to take steps to avoid loss from a threatened insured peril; (d) the assured under a marine policy is under a duty to the insurers to take steps to avoid loss from a threatened insured peril.

CHAPTER 5

CLAIMS Alison Padfield

INTRODUCTION Typically, straightforward claims are handled by the insurer’s claims department. More complex claims may be handled by experienced claims handlers within the insurer, or loss adjusters or solicitors may be instructed to deal with some or all aspects of the claims. This Chapter considers some of the more important legal issues which arise in connection with the insurance claims process, from the initial presentation of a claim through to payment by the insurer.

PRESENTATION OF CLAIMS All modern policies of insurance include terms and conditions requiring the insured to give the insurer notice of claims or losses, or of circumstances which may give rise to a claim or loss, in a particular manner (usually in writing) and within a particular period (sometimes specified, and sometimes described —for example, ‘‘as soon as reasonably practicable’’). Terms and conditions of this nature are often referred to as notification clauses, and, more generally, as procedural conditions.

Terminology The terminology used for different types of contractual terms in insurance law is potentially confusing, as the same labels are used as in ordinary contract law but with different (and sometimes opposite) meanings. A condition precedent in both insurance law and ordinary contract law is a term which must be fulfilled before the other party to the contract comes under any liability whatsoever. A ‘‘warranty’’ in insurance law is the equivalent of a ‘‘condition’’ in ordinary contract law; a ‘‘condition’’ in insurance law is any term of a contract; a ‘‘warranty’’ in ordinary contract law is a term the breach of which only ever entitles the innocent party to damages, never to terminate the contract, and for which there is no equivalent label in insurance law. The consequences of breach of the different types of term are summarised in the following table: 133

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Type of term (Insurance terminology)

Equivalent in ordinary contract law

Consequence of breach

Warranty

Condition

Termination of contract from date of breach

Innominate or intermediate term

Innominate or intermediate term

Either: Termination of contract from date of breach Or: Damages

New type of innominate or intermediate term1

No equivalent

Either: Insurer not liable to pay claim Or: Damages

‘‘Ordinary’’ term (i.e. all the rest)

Warranty

Damages

Condition precedent

Condition precedent

Insurer not liable to pay claim

Using the insurance law terminology, then, it is important to distinguish ‘‘conditions precedent’’ from ‘‘warranties’’: u breach of a condition precedent relieves the insurer of liability to pay the particular claim—its observance by the insured is a condition precedent to the insurer’s liability to pay the claim—but does not relieve the insurer from liability to pay any subsequent claim notified in accordance with the condition precedent; u breach of a warranty not only relieves the insurer from liability to pay the claim, but also discharges the insurer from any further primary liability under the policy. Construction of notification clauses Insurers usually try to give notification clauses the character of conditions precedent, so that any breach, however trivial, relieves the insurer of liability to pay the claim. Whether a notification clause has this effect is a question of ‘‘pure construction’’.2 A notification clause may be a condition precedent whether or not it is labelled as such, and the use of the label is not always determinative of the question, particularly where the wording applies the label 1. Whether there is any such terms is doubtful following Friends Provident v. Sirius. 2. Stoneham v. Ocean, Railway, and General Accident Insurance Co. (1887) 19 Q.B.D. 237, 240 (Mathew J.).

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indiscriminately to all policy terms and conditions, or the clause makes its intentions plain without the use of the label.3 In construing the clause, the court is concerned, as with all construction exercises, to determine the intention of a reasonable man in the position of the parties at the time of contracting, having all the background knowledge available to both of them at the time, or which each might reasonably have expected the other to know (the so-called ‘‘factual matrix’’).4 The courts have long recognised the importance to insurers of being able to investigate events surrounding claims and losses as soon as they occur,5 and have also recognised that a remedy in damages is of little use to an insurer in these circumstances, because if the events can no longer be investigated, the insurer will similarly be unable to prove the quantum of its loss. For these reasons, a notification clause which is expressly labelled as a ‘‘condition precedent’’ to liability will usually be construed as such, particularly if the label is attached only to some of the policy terms and conditions; and a notification clause which the policy specifies must be complied with or insurers will not be liable to indemnify the insured in respect of a claim, although it does not use the label ‘‘condition precedent’’, will also be construed as such.6 The same result may be achieved by merging the insuring clause and the requirement as to notification. For example, an insurer might agree to indemnify an insured in respect of all losses occurring and notified to the insurer in writing during the policy period. Two decisions of the Court of Appeal require particular consideration here. The first is Barrett Bros (Taxis) Ltd v. Davies,7 in which a majority of the Court of Appeal decided that an insurer could not rely on a breach of a notification requirement which was a condition precedent unless the breach had caused it some prejudice. The insured was a motorcyclist who was involved in a collision with a taxi driver. A notification requirement in the policy required the insured to give insurers full particulars in writing as soon as possible after the occurrence of any accident, loss or damage, and to forward immediately any letter, notice of intended prosecution, writ, summons or related process; and a condition in the policy provided that compliance with policy terms was a condition precedent to insurers’ liability to make any payment.8 The insured failed to forward to insurers a notice of intended prosecution he received from 3. George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2001] EWCA Civ 1964, [2002] 1 Lloyd’s Rep. IR 178, C.A. 4. See, e.g., Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1383–1385, H.L. (Lord Wilberforce); Reardon Smith Line Ltd v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, 995–997, H.L. (Lord Wilberforce); Arbuthnott v. Fagan [1996] L.R.L.R. 135, C.A., 139 (Sir Thomas Bingham M.R.), 140–141 (Steyn L.J.), 141 (Hoffmann L.J.); Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896, 913, H.L. (Lord Hoffmann); and see further, Chapter 3. 5. See, e.g., Hassett v. Legal & General Assurance Society Ltd (1939) 63 Ll. L. Rep. 278, 281 (Atkinson J.). 6. See George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2001] EWCA Civ 1964, [2002] 1 Lloyd’s Rep. IR 178, C.A.; Eagle Star Insurance Co. Ltd v. Cresswell [2004] EWCA Civ 602, [2004] 1 Lloyd’s Rep. IR 537, C.A. 7. [1966] 1 W.L.R. 1334, C.A. 8. See further Padfield, Insurance Claims (2nd edition, 2007), Chapters 3 and 7.

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the police, and a subsequent court summons. The Court of Appeal held (Salmon L.J. dissenting, but concurring in the result on grounds of waiver) that there was no prejudice to insurers because the police wrote to insurers informing them that proceedings were pending against the insured, and giving them the date of the hearing. Objection may be made to this as a finding of fact, as there are obvious reasons why an insurer might wish to receive information directly from the insured rather than from a third party, even in a case such as this where, as the Court of Appeal pointed out, the third party was a reliable source. Although the decision has never been overruled, it has not been applied in subsequent cases, whether at first instance or at the appellate level9; and in Virk v. Gan Life Holdings plc,10 a recent decision of the Court of Appeal, Potter L.J. reaffirmed the principle that an insurer is entitled to rely on an insured’s breach of a condition precedent whether or not any prejudice has been suffered. This is subject to an important qualification where the insured is a ‘‘private person’’ and the Insurance Conduct of Business Rules (‘‘ICOB’’) apply.11 The second Court of Appeal decision of particular interest here is Alfred McAlpine plc v. BAI (Run-Off) Ltd.12 This concerned a notification requirement which was not described as a condition precedent, in contrast to other policy terms, and which was, accordingly, construed as not being a condition precedent. In subsequently construing the clause, Waller L.J. held that it lacked the quality of ‘‘essentiality’’ which is required for a warranty (in insurance law terminology), and was an innominate (or intermediate) term. This is the third class of term, between a warranty and an ordinary term (again, using the insurance law terminology), and whether breach of an innominate term entitles the innocent party to terminate the contract and treat itself as discharged from future performance depends on the seriousness of the consequences.13 But Waller L.J. went further than the conventional analysis, and decided that the notification requirement might be an innominate term, the consequences of which were not so serious as to entitle the insurer to terminate the contract and treat itself as discharged from future performance, but might be sufficiently serious as to entitle the insurer to reject the claim. This potential variation on the consequences of breach of an innominate term (which we may call, for convenience, a new-type innominate term) was foreshadowed in an earlier decision of Hobhouse J.14 Alfred McAlpine plc v. BAI (Run-Off) Ltd exemplifies a trend in recent appellate decisions to mitigate the 9. See, e.g., Farrell v. Federated Employers Insurance Ltd [1970] 1 W.L.R. 498, affirmed [1970] 1 W.L.R. 1400, C.A.; Pioneer Concrete (UK) Ltd v. National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd’s Rep. 274; Motor and General Insurance Co. Ltd v. Pavey [1994] 1 W.L.R. 462, P.C. 10. [2000] Lloyd’s Rep. IR 159, 162–163, para. 13, C.A. 11. See Insurance Conduct of Business Rules (‘‘ICOB’’) below. 12. [2000] 1 Lloyd’s Rep. 437, C.A. 13. See further Padfield, Insurance Claims (2nd edition, 2007), Chapter 3. 14. Phoenix General Insurance Co. of Greece SA v. Halvanon Insurance Co. Ltd [1988] Q.B. 216, 241.

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harshness of some of the traditional insurance law concepts, and was swiftly repeated, with implicit approval, by a differently-constituted Court of Appeal in K/S Merc-Scandia XXXXII v. Certain Lloyd’s Underwriters, The ‘‘Mercandian Continent’’.15 However, Alfred McAlpine plc v. BAI (Run-Off) Ltd needs to be treated with caution following another recent decision of the Court of Appeal. In Sirius International Insurance v. Friends Provident Life & Pensions Ltd,16 the Court of Appeal, by a majority (Sir Charles Aldous agreeing with the judgment of Mance L.J., Waller L.J. dissenting) rejected Waller L.J.’s analysis in Alfred McAlpine plc v. BAI (Run-Off) Ltd (the new-type innominate term) in favour of the classical analysis. According to the classical analysis,17 a notification clause which is not a condition precedent is likely to be held to be an ordinary term of the contract, breach of which sounds only in damages. In order to avoid following Alfred McAlpine plc v. BAI (Run-Off) Ltd and/or K/S MercScandia XXXXII v. Certain Lloyd’s Underwriters, The ‘‘Mercandian Continent’’, the majority of the Court of Appeal in Sirius v. Friends Provident had first to conclude that in both of the earlier decisions this point was obiter (which means not necessary for the court to decide in order to determine the issues before it), and accordingly not binding on a later Court of Appeal. Although a strict application of the doctrine of precedent would mean that Sirius v. Friends Provident should be applied by judges at first instance and by the Court of Appeal itself, there is nonetheless a degree of uncertainty in this area of the law. The smart money is probably on a return to the classical analysis, but there may yet be further consideration by the Court of Appeal, if not by the House of Lords, before the issue is finally resolved. In any event, it should be remembered that where, on its true construction, a notification clause is a condition precedent, the usual principles apply, and the analysis of the notification clause as a new-type innominate term in Alfred McAlpine plc v. BAI (Run-Off) Ltd18 has no application.19 Unfair Terms in Consumer Contracts Regulations The Unfair Terms in Consumer Contracts Regulations 199920 apply to unfair terms in insurance contracts where the insured is a consumer. A consumer is any natural person who, in contracts covered by the Regulations, is acting for purposes outside his trade, business or profession; and a seller or supplier is any natural or legal person who, in contracts covered by the Regulations, is 15. [2001] EWCA Civ 1275, [2001] 2 Lloyd’s Rep. 563, C.A. 16. [2005] EWCA Civ 601, [2005] 2 Lloyd’s Rep. 517, C.A. 17. See further Padfield, Insurance Claims (2nd edition, 2007), Chapters 3 and 7. 18. [2000] 1 Lloyd’s Rep. 437, C.A. 19. See, e.g., George Hunt Cranes Ltd v. Scottish Boiler & General Insurance Co. Ltd [2001] EWCA Civ 1964, [2002] 1 Lloyd’s Rep. IR 178, C.A. 20. S.I. 1999 No. 2083. The Regulations came into force on 1 October 1999, revoking the 1994 Regulations of the same name (S.I. 1994 No. 3159). The Regulations implement Council Directive (EC) 93/13 on Unfair Terms in Consumer Contracts (O.J. No. L. 95, 21.4.93, p. 29).

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acting for purposes related to his trade, business or profession.21 The wording of the Regulations is taken fairly literally from the Directive which they implement, in keeping with the usual practice of the United Kingdom Government. This results in some fairly inelegant language and, worse, the introduction, without explanation, of concepts which are not easily understood in the context of the common law. The provisions which govern the identification of unfair terms suffer particularly from this defect. The Regulations state that a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.22 It is important to note here that the requirement of good faith is not the English insurance law concept of utmost good faith, but an autonomous concept familiar to lawyers on the continent.23 An unfair term in a contract between a consumer and a seller or supplier is not binding on the consumer.24 The contract continues to bind the parties if it is capable of continuing in existence without the unfair term.25 The Regulations also provide that a term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has not therefore been able to influence the substance of the term26; that written terms of contracts must be expressed in plain, intelligible language27; and that if there is any doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail28; and that, provided that a term is written in plain, intelligible language, the fairness of a term shall not be assessed by reference to the definition of the main subject matter of the contract or to the adequacy of the price or remuneration, as against the goods or services provided in exchange.29 The impact of the Regulations on procedural requirements in insurance policies was considered recently by Buckley J. in Bankers Trust v. South.30 Insurers brought proceedings seeking a declaration that they were not liable under a policy of travel insurance. The claim arose out of a collision between two jet skis in Ayia Napa in Cyprus in which the rider of one of the jet skis was seriously injured. Buckley J. held that the policy wording clearly excluded 21. Regulation 3(1). 22. Regulation 5(1). 23. See, for example, §242 of the German Civil Code, which provides that contracts are to be performed in accordance with ‘‘good faith’’; and see, further, the comparative discussion of national and EU laws regulating standard contractual terms in Zweigert and Kotz, ¨ An Introduction to Comparative Law (3rd edition, 1998), pp. 333–347. Much of the content of the Directive, and therefore the Regulations, derives from the European civil law systems. 24. Regulation 8(1). 25. Regulation 8(2). 26. Regulation 5(2). 27. Regulation 7(1). 28. Regulation 7(2). This will in most cases yield the same result as an application of the contra proferentem principle of construction. 29. Regulation 6(2). 30. [2003] EWHC 380 (Q.B.), [2004] Lloyd’s Rep. IR 1.

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liability arising out of the use of jet skis, so that the insurers were not liable, but went on to consider the arguments which had been addressed to him regarding the fairness of the notification provisions in the policy. The judge construed the notification provisions as conditions precedent, and accepted the submission that any condition precedent which sought to exclude insurers’ liability to meet a claim notwithstanding that no prejudice had been caused by a breach was unfair. He declined to delete the notification provisions, saying that they were obviously important provisions and that to do so would be unfair to insurers; and declined to adopt a strained construction of a term which was clearly a condition precedent by construing it as an innominate term; and decided instead to ‘‘hold that it is only that part of the clause denying recovery whatever the consequences of the breach, which is not binding on the insured’’. The obvious difficulty with this approach is that it involves rewriting the clause rather than simply deleting it, which is not permitted by the Regulations. In rewriting the clause, the judge applied Alfred McAlpine plc v. BAI (Run-Off) Ltd,31 in which Waller L.J. construed a notification clause as an innominate term, and held that a breach which demonstrated an intention not to continue to make a claim, or which had very serious consequences for the insurer, would entitle the insurer to defeat the claim. The approach to the application of the Regulations to notification clauses in insurance contracts adopted in the Bankers Trust case is unsatisfactory. Although obiter (as it was not necessary to the decision in the case, which as we have seen the judge decided on the basis of an exclusion clause in the policy wording), and therefore not binding on lower courts, it is the only reported decision so far on the application of the Regulations to procedural conditions, and is therefore likely to be relied on by insureds in cases to which the Regulations apply, and in which an insurer has rejected a claim on the basis of failure to comply with a notification clause in the absence of any prejudice simply on the grounds that it is a condition precedent. However, its importance has been significantly diminished in practice following the entry into force of the Insurance Conduct of Business Rules (‘‘ICOB’’). Several interesting points arise here: u where the notification requirement is construed as a new-type innominate term, and the consequences of the breach are sufficiently serious as to entitle the insurer to reject the claim, this is exactly the result which would be reached if the notification requirement had been a condition precedent; u a different result might, however, be reached if the consequences for the insurer were not so serious; u unlike a condition precedent which, once it has been construed as such, always has the same result, the same clause may have different consequences in relation to different claims if it is construed as a new-type innominate term; 31. [2000] 1 Lloyd’s Rep. 437, C.A.; see further above.

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u this is the result which would be achieved if prejudice were required in order for an insurer to rely upon a condition precedent32; u the same result would be reached by means of the Unfair Terms in Consumer Contracts Regulations 1999 as applied in Bankers Trust v. South; u the recognised significance and purpose of notification requirements means that the construction exercise will almost always yield the result that a notification requirement which is not a condition precedent is a new-type innominate term. Fulfilling the notification requirements What the insured needs to do in order to fulfil the notification requirements depends on the wording of the notification clause.33 Notification clauses feature in all modern policies of insurance, and usually require notice to be given to the insurer within a certain (or reasonable) period of a specified event, such as an accident, or a loss, or a claim. These terms themselves need to be construed; ‘‘claim’’ in particular may give rise to difficulties, as it is ambiguous: does it denote a claim by the insured against the insurer, or a claim by a third party against the insured? Often, the word bears different meanings in different places in the same policy document. In the case of a claim by a third party against the insured, ‘‘claim’’ has been said to mean ‘‘the occurrence of a state of facts which justifies a claim on under-writers’’.34 In a liability policy, a claim by a third party against the insured is not made until it has been communicated to the insured; where no letter of action has been sent, a claim form has been issued but not served on the insured and the insured is unaware of the existence of the writ, no ‘‘claim’’ has been made.35 Notification clauses which appear to be disjunctive are likely to be construed as being conjunctive. For example, in Pioneer Concrete (UK) Ltd v. National Employers Mutual General Insurance Association Ltd36 Bingham J. construed a provision which required notice to be given to the insurer of ‘‘any accident or claim or proceedings’’ as requiring notice to be given not only of an accident or of a claim or of proceedings (a disjunctive construction) but, if more than one of these arose out of a single event, to give the insurer notice of all of them (a conjunctive construction). Bingham J. held that the obvious commercial purpose of the clause was to enable the insurer to perform his role 32. See the discussion of Barrett Bros (Taxis) Ltd v. Davies [1966] 1 W.L.R. 1334, C.A., above. 33. The General Statement of Insurance Practice issued by the Association of British Insurers, which included provisions governing notification requirements, was replaced by statutory regulation of general insurance business by the Financial Services Authority with effect from 14 January 2005 (see Insurance Conduct of Business Rules (‘‘ICOB’’)). 34. Australia and New Zealand Bank Ltd v. Colonial and Eagle Wharves Ltd [1960] 2 Lloyd’s Rep. 241, 255 (McNair J.); considered: Haydon v. Lo & Lo [1997] 1 W.L.R. 198, P.C. 35. Robert Irving & Burns v. Stone [1998] Lloyd’s Rep. IR 258, C.A. 36. [1985] 1 Lloyd’s Rep. 274.

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as dominus litis (master, or person in charge, of the litigation), and that this purpose would clearly be frustrated by a disjunctive construction. The policy usually requires that notice be given to insurers. In these circumstances, notice to the insured’s broker is not sufficient, unless the broker itself gives notice to insurers within the notification period.37 This is because, typically, the broker is the agent of the insured, not of insurers.38 Similarly, notice given to an agent of the insurer is sufficient only where the agent is an agent to receive claims.39 The fact that the insurer may, in a loose sense, be said to ‘‘know’’ of a matter, for instance where the matter has been discussed with an agent of the insurer whose function is to give advice and assistance in particular circumstances, may be insufficient. For example, in The Vainqueur Jos´e,40 insurers (a P&I club) learnt of a claim made against the insured by a third party not from the insured, but from a firm of U.S. attorneys who were not instructed by the insured, and had no authority to act for them. The U.S. attorneys had once acted for the insured, and for that reason the third party sent a copy of their letter of claim to them as well as to the insured; and the attorneys passed the letter to insurers. Mocatta J. held that the U.S. attorneys were not authorised to give notice of a claim to the insurers on behalf of the insured. The insurers also received a copy of the letter of claim from their insurers’ representatives in New York, who had been sent it by the U.S. attorneys. Mocatta J. held that the representatives’ functions were limited to the giving of advice and assistance to masters of vessels entered in the P&I club, and were not agents to receive notice of claims by or on behalf of the insured. The judge also held that, as a matter of construction of the relevant rules of the P&I club (equivalent for these purposes to the terms and conditions of a policy of insurance), notification of a claim had to be given by the insured or his duly authorised agent, and could not be given by third parties or anyone else with an interest in doing so. This also illustrates a further point, which is that where the notification provisions in the policy, on their true construction, require notification by ‘‘the insured’’, the requirement is satisfied by notice being given by the insured itself or by an agent.41 But might there be circumstances in which notification requirements may be satisfied if insurers receive information relevant to the claim from a third party? It seems that the answer to this question is a qualified ‘‘yes’’. As we have seen, in Barrett Bros (Taxis) Ltd v. Davies,42 the insured motorcyclist failed to forward to 37. See, e.g., Brook v. Trafalgar Insurance Co. Ltd (1946) 79 Ll. L. Rep. 365, 368, C.A. (Scott L.J.). 38. There are exceptions: see Padfield, Insurance Claims (2nd edition, 2007), paras 16.2–16.5. 39. CVG Siderurgicia Del Orinoco SA v. London Steamship Owners’ Mutual Insurance Association Ltd, The ‘‘Vainqueur Jos´e’’ [1979] 1 Lloyd’s Rep. 557. 40. CVG Siderurgicia Del Orinoco SA v. London Steamship Owners’ Mutual Insurance Association Ltd, The ‘‘Vainqueur Jos´e’’ [1979] 1 Lloyd’s Rep. 557. 41. Davies v. National Fire and Marine Insurance Co. of New Zealand [1891] A.C. 485, P.C.; CVG Siderurgicia Del Orinoco SA v. London Steamship Owners’ Mutual Insurance Association Ltd, The ‘‘Vainqueur Jos´e’’ [1979] 1 Lloyd’s Rep. 557. 42. [1966] 1 W.L.R. 1334, C.A.

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insurers a notice of intended prosecution and summons received from the police in connection with an accident in which he had been involved, but the insurers were informed by the insurers of the prosecution and of the date of the hearing. The Court of Appeal held that as the insurers had received ‘‘reliable information’’ from the police, the notification requirements had been fulfilled and insurers were liable under the policy.43 However, when this situation has arisen in subsequent cases, including The Vainqueur Jos´e44 and Pioneer Concrete (UK) Ltd v. National Employers Mutual General Insurance Association Ltd,45 the courts have been reluctant to follow Barrett Bros (Taxis) Ltd v. Davies in introducing a requirement of prejudice into a clear provision requiring notification by the insured itself.46 As Mocatta J. pointed out in The Vainqueur Jos´e, one reason for requiring notification by the insured is that only the insured can decide whether to make a claim under a policy of insurance, and that circumstances sometimes arise in which an insured decides not to make a claim even though he would be entitled to an indemnity under the policy. Typical situations might be where the insured has a large excess; or where the policy is subject to a ‘‘no claims’’ bonus where the insured is a ‘‘private person’’ and the Insurance Conduct of Business Rules (‘‘ICOB’’) apply the insurer may not be entitled to reject the claim for failure to comply with notification provisions if the insurer had suffered no prejudice.47 Insurance Conduct of Business Rules (‘‘ICOB’’) The common law position in relation to conditions precedent and the notification of claims is now subject to an important qualification where the insured is a ‘‘private person’’ and a ‘‘retail customer’’. This is because breach by an authorised person of a rule made by the Financial Services Authority (‘‘the FSA’’) under the Financial Services and Markets Act 2000 is actionable at the suit of a ‘‘private person’’ who suffers a loss as a result of the contravention.48 The rules made by the FSA under the 2000 Act include the Insurance Conduct of Business Rules (‘‘ICOB’’). 43. At 1338 (Lord Denning M.R.); Danckwerts L.J. agreed; Salmon L.J. dissented but concurred in the result on grounds of waiver. 44. CVG Siderurgicia Del Orinoco SA v. London Steamship Owners’ Mutual Insurance Association Ltd, The ‘‘Vainqueur Jos´e’’ [1979] 1 Lloyd’s Rep. 557. 45. [1985] 1 Lloyd’s Rep. 274. 46. For a detailed analysis of the relevant authorities, see the judgment of Bingham J. in Pioneer Concrete (UK) Ltd v. National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd’s Rep. 274, at 279–282. 47. See Insurance Conduct of Business Rules (‘‘ICOB’’) below. 48. Financial Services and Markets Act 2000, s. 150. ‘‘Retail customer’’ means ‘‘an individual who is acting for purposes which are outside his trade, business or profession’’ (ICOB glossary). ‘‘Private person’’ includes any individual, unless he suffers the loss in question in the course of carrying on any regulated activity, and any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind, but does not include a government, a local authority (in the United Kingdom or elsewhere) or an international organisation: Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (S.I. 2001 No. 2256), reg. 3(1).

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ICOB provide that an insurer must not unreasonably reject a claim made by a customer,49 and, in the case of a general insurance contract, must not refuse to meet a claim made by a retail customer on the grounds of breach of condition, except where there is evidence of fraud, unless the circumstances of the claim are connected with the breach.50 Where a failure to comply with a condition precedent has not caused prejudice to the insurer and the insured is both a ‘‘private person’’ and a ‘‘retail customer’’, the insurer should not reject the claim on this basis alone, as it would be unreasonable to reject the claim for failure to comply with the condition precedent, and the circumstances of the claim would not be connected with the breach of the condition. If the insurer did reject the claim in breach of ICOB, the loss caused to the insured by the insurer’s breach of ICOB in these circumstances would normally be the value of the claim, so the practical effect of ICOB is to prevent insurers from rejecting a claim under a contract of general insurance on the grounds of the insured’s failure to comply with a condition precedent where the insured is a private person and retail customer and insurers have suffered no prejudice as a result of the failure to comply.

IMPLIED TERM TO ACT WITH REASONABLE SPEED AND EFFICIENCY The speed with which an insurer deals with a claim may have a significant impact on an insured’s ability to recover from a loss. This may be illustrated by an example. Imagine that a shopkeeper insures his stock against all risks, and it is destroyed by fire. Unless the shopkeeper has unusually good cash flow, he will not be able to replace his stock until he has received a significant payment from the insurer. This may be an interim payment,51 or it may be a final payment. In either case, the speed with which the insurer sends a loss adjuster to investigate whether the claim is genuine and to assess the quantum of the claim, and the speed with which the insurer then makes a decision whether to accept the claim, is likely to have a serious impact on the shopkeeper’s profits, or even on his ability to continue to trade at all. In many cases, although the insured would prefer the insurer to pay the claim, even accepting liability would be sufficient for the insured to keep trading. The shopkeeper, for example, could perhaps agree further credit with his bank on the strength of a promise by insurers to pay once the quantum of the claim has been assessed. In Insurance Corporation of the Channel Islands Ltd v. McHugh,52 Mance J. considered whether there was room for implication of terms imposing claims handling obligations on insurers into policies of material damage and business 49. ICOB 7.3.6(1). 50. ICOB 7.3.6(2)(c). 51. Interim payments are considered below. 52. [1997] L.R.L.R. 94.

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interruption insurance. The insured was a company which owned the Royal Hotel at St Peter Port in Guernsey. In June 1992, the hotel was subject to three separate arson attacks and suffered major damage. By July 1996, the date of the trial, the hotel had still not reopened. The insured contended that the following term was to be implied into the policies to give them business efficacy: that insurers were obliged to conduct the negotiations after the occurrence of an insured event and/or assess the amount of and/or pay the sums due under the material damage and/or business interruption policy with reasonable diligence and due expedition.53

Mance J. rejected the argument that such a term was to be implied either on grounds of business efficacy (that it was necessary to give the contract business efficacy) or of obviousness (that it represented the obvious, though unexpressed, intention of the parties—often referred to as the ‘‘officious bystander’’ test). Any such term, he said, would have to be mutual, so that there would be a corresponding duty on the insured to present and progress the claim with reasonable speed and efficiency; and just as insurers would be obliged not unreasonably to refuse or delay indemnity, the insured would be under a duty not unreasonably to delay, misstate or overstate his case; and the reasonableness of each party’s conduct would be susceptible to review at each point. Mance J. said that in his view both parties would have hesitated before agreeing any such mutual obligations, and they were ‘‘certainly not’’ to be implied.54 He went on to consider the impact of the nature of the basic obligation of insurers under a policy of insurance. Insurance contracts are treated in law as contracts to hold the insured harmless against the liability or loss insured against, so that insurers are, in the absence of any provision to the contrary, in breach of contract as soon as the insured liability or loss occurs. A claim under a policy of insurance is therefore a claim for damages for the failure to hold the insured harmless against the relevant liability or loss. Mance J. therefore rejected the implication of the term for which the insured was contending on the additional ground that it would constitute an implied contractual obligation to assess, negotiate and pay damages for which the insurers were liable already, and that this would be an unusual obligation, which could not therefore be regarded as either necessary or obvious.55 Mance J.’s decision was reached after an extensive review of the facts and legal arguments in the case before him56; although technically not binding on other courts at the same level, it is of ‘‘persuasive’’ authority, so that other High Court judges are likely to adopt the same approach; and it is binding on the county courts. 53. At 135. 54. At 136. 55. At 137. 56. The trial lasted 23 days, and the judgment runs to 65 pages in the Lloyd’s Reinsurance Law Reports.

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Insureds typically find it difficult to accept that the insurer is under no obligation to act with reasonable speed and efficiency. The harshness of the position is offset to some extent by the court’s discretion to award interest at a rate which reflects the cost to the insured of borrowing money. In a recent decision involving a successful claim by an individual running a small business, the Court of Appeal awarded interest at 3% above base rate, saying that the courts should be prepared to recognise that those running small businesses were unable to borrow money at anything like the rate of 1% above base rate commonly applied in the Commercial Court.57 However, an award of interest will be cold comfort to the insured who feels that she has lost her business due to the insurer dragging its feet; and if the insurer pays the claim in full after a long delay but before proceedings are issued, no right to interest arises.58 The Law Commission has decided to include remedies for insurance delay in the forthcoming consultation papers on insurance contract law. Business interruption insurance: a possible exception? 59 Mance J.’s decision in Insurance Corporation of the Channel Islands Ltd v. McHugh60 is potentially open to criticism as far as the policy of business interruption insurance was concerned: there is a respectable argument that a term that insurers will act with reasonable speed and efficiency in relation to the negotiation, assessment and payment of claims is necessary for business efficacy where such a policy of insurance is concerned. Although the argument is as yet untested at appellate level, there are indications that the Court of Appeal would be prepared to consider it, should an appropriate case come before it. In Sprung v. Royal Insurance (UK) Ltd,61 in which the insured appeared in person and the point was not argued, Beldam L.J. made reference to the argument in the following terms62: ‘‘By long-standing decisions it is settled that the liability of insurers under a policy arises when the loss occurs and the liability is to pay money for that loss. That the insurers have the option themselves to reinstate or to pay for the reinstatement of the property damaged under the terms of the policy does not alter the essential nature of their liability, which is to pay the sum of money as damages. Thus the failure to pay is a failure to pay damages and, by decisions binding on this court, an assured has no cause of action for damages for non-payment of damages. To compensate a plaintiff in such circumstances Parliament has provided that the court should be able to award interest on the damages which the court eventually assesses. There will be many who share [the insured]’s view that in cases such as this such an award is inadequate to compensate him or any other assured who may have had to 57. Jaura v. Ahmed, The Times, 18 March 2002, C.A. 58. Section 34A of the Supreme Court Act and s. 69 of the County Courts Act 1984 provide that interest may be awarded ‘‘in proceedings’’. 59. Business interruption insurance provides cover against loss of future earnings. For a detailed analysis of the way the cover works, see Cloughton, Riley on Business Interruption Insurance (8th edition, 1999). 60. [1997] L.R.L.R. 94. 61. [1999] Lloyd’s Rep. IR 111, C.A. 62. At 119.

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abandon his business as a result of insurers’ failure to pay, and that early consideration should be given to reform of the law in similar cases. It may be, although it was not argued in this case, that an exception might be established where a policy is entered into whose whole purpose is to provide for the immediate repair of damaged plant and equipment. However, I find it difficult to distinguish between breach of a term of the policy which required expedition on the insurers’ part to inspect or give consent to the repairs and a requirement that they should meet their obligations under the policy promptly.’’

Similarly, in Pride Valley Foods Ltd v. Independent Insurance Co. Ltd,63 the insured claimed damages consequential on the insurers’ failure to accept liability and indemnify them under a policy of business interruption insurance. The Statement of Claim was struck out by a master on the grounds that there was no cause of action, and that decision was upheld by the judge. The Court of Appeal gave the insured leave to appeal on the grounds that the correctness of the decision of Hirst J. in The Italia Express (No. 2)64 (that there is no such thing as a cause of action in damages for late payment of damages) had been the subject of considerable debate, and that the issue should be considered by the Court of Appeal (and perhaps the House of Lords). The appeal was not heard, and so the issue remains unresolved. These decisions should also now be viewed in the light of the decisions of the Privy Council in Alcoa Minerals of Jamaica Inc v. Broderick,65 and of the House of Lords in Lagden v. O’Connor,66 that in contract and in tort there is no absolute rule that damages which result from the impecuniosity of the innocent party are too remote or that such impecuniosity is to be ignored when deciding the appropriate date for the assessment of damages, and that the correct test of remoteness is whether the loss was reasonably foreseeable. An insured wishing to take this point should be advised that on the present state of the authorities, the point is open for argument only in the House of Lords.67 Insurance Conduct of Business Rules (‘‘ICOB’’) The Insurance Conduct of Business Rules (‘‘ICOB’’) require insurers to carry out claims handling promptly and fairly.68 They apply to general insurance contracts (e.g. property insurance) and critical illness and income protection insurance.69 The guidance which accompanies the ICOB rules provides that 63. [1999] Lloyd’s Rep. IR 120. 64. [1992] 2 Lloyd’s Rep. 281. 65. [2002] 1 A.C. 371. 66. [2003] UKHL 64, [2004] 1 A.C. 1067, H.L., departing from the rule laid down in Owners of Liesbosch Dredger v. Owners of SS Edison (The ‘‘Liesbosch’’) [1933] A.C. 449, H.L. 67. See Mandrake Holdings Ltd v. Countrywide Assured Group plc [2005] EWCA Civ 840. 68. ICOB rule 7.3.1. 69. Made by the Financial Services Authority pursuant to s. 138 of the Financial Services and Markets Act 2000. The ICOB rules do not apply to reinsurance, or to life insurance or long-term care insurance (which are subject to the FSA’s investment business rules).

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when handling the claim of a commercial customer,70 an insurer should ensure that the insured is kept informed of how his claim is progressing, and that payment is made promptly once settlement terms have been agreed.71 Where a claim is made by a retail customer,72 the insurer must respond promptly to the insured’s notification of the claim.73 If the response is that the claim relates to a risk which is clearly outside the scope of the policy, no further information need be provided; otherwise, the response must indicate the action that will be taken by the insurer, and when that action will be taken, and, if the insurer is appointing any other party to contact the insured on its behalf, the name of that party, its function, and the work it will carry out in relation to the claim.74 The insurer must then keep the insured reasonably informed about the progress of the claim,75 notify him as soon as practicable whether it rejects all of his claim, rejects his claim but, without prejudice to the rejection, makes an offer in compromise, or accepts all or part of his claim,76 and the insurer must settle the claim promptly.77 Breach of the ICOB rules is actionable at the suit of a private person who suffers loss as a result of the breach.78 Conclusions The conclusions which may be drawn are as follows: u attempts to persuade the courts to imply a term that the insurer will act with reasonable speed and efficiency in the negotiation, assessment and payment of claims are likely to fail, for the reasons identified by Mance J. in Insurance Corporation of the Channel Islands v. McHugh79; u there may be an exception in relation to policies of business interruption insurance, one purpose of which is to protect the insured’s cash flow, as yet untested at appellate level;

70. A commercial customer is a customer who is not a retail customer; a retail customer is an individual who is acting for purposes which are outside his trade, business or profession. 71. ICOB guidance 7.3.2. 72. A retail customer is an individual who is acting for purposes which are outside his trade, business or profession. 73. ICOB rule 7.5.1. Generally, a ‘‘prompt’’ response will be within five working days, although the circumstances may require a swifter response (e.g., a roadside assistance policy); ICOB guidance 7.5.3. If the insurer requires a claim form to be completed, this must be included with the insurer’s response; ICOB rule 7.5.4.3. Separate provision is made for motor vehicle liability insurers: see ICOB 7.6. 74. ICOB rule 7.5.5., which also provides that the information as to another party appointed by the insurer need not be given if to give it would limit or prevent the effective investigation of the claim or any part of it. 75. ICOB rule 7.5.8. 76. ICOB rule 7.5.10. 77. ICOB rule 7.5.17. The insurer should aim to make payment within five working days after the settlement terms have been agreed: ICOB guidance 7.5.18.2. 78. Financial Services and Markets Act 2000, s. 150. 79. [1997] L.R.L.R. 94.

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u an award of interest at the rate at which the insured is able to borrow may be made, but only if the insured goes to court to obtain an award of damages; u where the insured is a private person and retail customer, the insurer has obligations under the ICOB rules in relation to the prompt handling and settlement of claims, and the insured may bring an action seeking damages in respect of loss suffered as a result of breach of the rules.

INTERIM PAYMENTS A policy of insurance may include a term entitling the insured to an interim payment, or payment on account, once an insurer has accepted liability for a claim. An express term of this nature is relatively unusual. An argument that such a term should be implied into a policy was rejected in Anderson v. Commercial Union Assurance Co.,80 a recent Scottish case, and the firm rejection of any duty to act with reasonable speed and efficiency81 tends to indicate that the result would be the same should the issue arise for determination in England and Wales. Notwithstanding the fact that they are under no obligation to do so, insurers often make interim payments on a voluntary basis. An agreement to make an interim payment would be enforceable as a collateral contract if the parties intended it to have contractual effect, and if there was consideration. There is little case law on this issue—perhaps because it is only in rare cases that insurers will offer to make an interim payment and then decide not to do so. Insurance Corpn of the Channel Islands v. Royal Hotel Ltd82 provides an example of an agreement to make an interim payment in the sum of £1 million, although it should be noted that insurers did not seek to argue lack of contractual intent or lack of consideration.83 Whether made pursuant to a term in the contract of insurance or voluntarily, an interim payment is (subject to any contrary agreement) a payment made on account of insurers’ liability to indemnify the insured under the contract of insurance, and if ultimately insurers are not liable to the insured, for whatever reason, any interim payments made are recoverable.84 This is so whether or not the payment was expressly stated to be made ‘‘on account’’.85

80. 1998 SLT 826 (Court of Session). 81. See above. 82. [1998] Lloyd’s Rep. IR 151. 83. See the judgment of Mance J. at 150. 84. Attaleia Marine Co. Ltd v. Bimeh Iran (Iran Insurance Co.) (The ‘‘Zeus’’) [1993] 2 Lloyd’s Rep. 497; Axa General Insurance Ltd v. Gottlieb [2005] EWCA Civ 112, [2005] Lloyd’s Rep. IR 369, C.A. 85. Attaleia Marine Co. Ltd v. Bimeh Iran (Iran Insurance Co.) (The ‘‘Zeus’’) [1993] 2 Lloyd’s Rep. 497, 501 (Phillips J.).

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INVESTIGATION OF CLAIMS Reservation of rights by insurer When a claim is received, the insurer may have a number of potential grounds on which to reject the claim. Typically, these might be a failure to comply with a notification requirement, or breach of a warranty (or, in an appropriate case, an innominate term), or fraud. In most cases, the insurer does not have sufficient information at the outset to be in a position to decide immediately whether or not to reject the claim. Further investigation may be necessary; or the insurer may be awaiting information from the insured which it anticipates will resolve the uncertainty one way or the other. In such a situation, if the insurer delays before rejecting the claim, there is a risk that the insurer will be held to have waived the right to reject the claim. It is in order to avoid running this risk that insurers ‘‘reserve’’ their rights in relation to a claim as soon as any uncertainty arises as to whether the claim will be accepted. Waiver/affirmation/election86 is often pleaded without sufficient attention being paid to what must be proved. Delay on its own is not sufficient to constitute a waiver of insurers’ rights; what must be pleaded and proved for a successful plea of waiver is that the insured was induced to act in a particular manner in reliance on insurers’ conduct, or, in the case of a particular requirement, for example that notice of the claim should be given in writing, that the insured was led to believe that it was unnecessary for him to comply with the requirement, with which he did not comply and cannot now comply87; although, unlike estoppel, there is no requirement of detrimental reliance88; the plea will succeed whether or not the insurer intends to waive the requirement, provided that the insured reasonably believes this to be the insurer’s intention89; and this objective intention must therefore also be pleaded and proved; and, again unlike estoppel, the effects are final, not merely suspensory.90 86. Affirmation, waiver and election are the same; the terms may be (and are, in this Chapter) used interchangeably. Estoppel is different, although it shares some characteristics with affirmation (or waiver, or estoppel), and the two are often pleaded as alternatives. 87. Webster v. General Accident Fire and Life Assurance Corpn Ltd [1953] 1 Q.B. 520, 532, (Parker J.); Barrett Bros (Taxis) Ltd v. Davies [1966] 1 W.L.R. 1334, C.A. 88. See, e.g., Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India, The ‘‘Kanchenjunga’’ [1990] 1 Lloyd’s Rep. 391, 399, H.L. (Lord Goff), applied in Insurance Corporation of the Channel Islands Ltd v. McHugh [1997] L.R.L.R. 94, 126 (Mance J.). 89. Toronto Railway Co. v. National British and Irish Millers Insurance Co. Ltd (1914) 111 L.T. 555, 563, C.A. (Scrutton L.J.); Webster v. General Accident Fire and Life Assurance Corpn Ltd [1953] 1 Q.B. 520, 532 (Parker J.). In Barrett Bros (Taxis) Ltd v. Davies [1966] 1 W.L.R. 1334, C.A., Lord Denning M.R.’s formulation (at 1339) merely required that the insured should be led to believe that the insurer would not require compliance, and was therefore purely subjective, whereas Salmon L.J.’s formulation (at 1340) was the conventional objective approach described in the text. 90. See, e.g., Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India, The ‘‘Kanchenjunga’’ [1990] 1 Lloyd’s Rep. 391, 399, H.L. (Lord Goff), applied in Insurance Corporation of the Channel Islands Ltd v. McHugh [1997] L.R.L.R. 94, 126 (Mance J.).

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The Court of Appeal had to consider a typical plea of waiver in Allen v. Robles.91 The claim was brought by a third party against insurers under the Road Traffic Act. The facts of the case were as follows. On 9 April 1967, the insured drove his car into the unfortunate third party’s house, injuring him and causing considerable damage to the house. The insured failed to notify insurers of the accident until July 1967, in breach of the policy conditions. On 10 August 1967, the insurers wrote to the insured’s solicitors and informed them that, in view of the delay in notification, they reserved their position under the policy. On 29 November 1967, the insurers repudiated liability under the policy except to the extent required under the Road Traffic Act. At first instance, Mocatta J. held that the insured was in breach of the condition in the policy; that the insurers had the right to elect whether to repudiate or accept liability to indemnify him; that they were bound to do so within a reasonable time; that their delay in doing so until 29 November 1967 had been more than a reasonable time, and that they had lost their right to elect to repudiate liability. This decision was overturned on appeal. Fenton Atkinson L.J., who gave the main judgment, rejected the plea of affirmation in the following terms92: ‘‘In my view, the position was this: that, when the [insurers] . . . discovered (a) that there was a claim and (b) that [the insured] was in breach of the condition, they were in a position then to elect either by refusing to indemnify or to accept a liability to indemnify, or it was open to them to delay their decision, particularly in view of their letter of 10 August 1967; mere lapse of time, in my view, on the facts of this case, would not lose them their right ultimately to decide to refuse to indemnify. The lapse of time would only operate against them if thereby there was prejudice to [the insured] or if in some way rights of third parties had intervened or if their delay was so long that the court felt able to say that the delay in itself was of such a length as to be evidence that they had in truth decided to accept liability; none of these possibilities arise here. In my view, the judge was wrong in deciding that, by 29 November 1967, the third party had lost their right to exercise their election by refusing to accept liability, and, for myself, I would allow this appeal on that short ground.’’

The utility of an express reservation of rights is clear from this passage: mere lapse of time was not sufficient to constitute a waiver, but ‘‘particularly in view of’’ the letter of 10 August 1967 in which insurers reserved their position. If insurers wish to reserve their right to reject a claim, they can do so simply by expressly stating at the outset, or at least as soon as any uncertainty arises as to whether the claim will be accepted, that all rights are reserved in relation to the claim; and by repeating this statement in every communication with the insured or his advisers. This will be effective to counter any argument by the insured that a reasonable person in his position would have thought that the insurer did not intend to rely on its rights. If, as is often the case, insurers are considering whether to avoid a policy but need time for investigations, they should expressly reserve their rights before taking any step in relation to a 91. [1969] 1 W.L.R. 1193, C.A. 92. At 1196.

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claim. This was the approach favoured by Rix J. in Svenska Handelsbanken v. Sun Alliance and London Insurance plc,93 where he said94: ‘‘I certainly would not want to encourage parties to snatch at the first opportunity to avoid policies of insurance without first making all proper enquiries . . . The difficulty in which the defendants find themselves in this case is that they did more, and much more, than merely make enquiries. They paid a sum due under the policy in issue pursuant to the agreement which they [had] made . . . As I have said, that is the clearest affirmatory conduct.’’

Rix J. went on to say that certain requests made by the insurers to the insured amounted to affirmation, but would not have done so if made under a reservation of rights, and to reject an argument that insurers indicating concern and that they were pursuing enquiries amounted to an implied reservation of rights, as ‘‘[e]very businessman knows how to reserve his rights’’.95 Even if the court ultimately decides the issue of waiver in favour of insurers, considerable costs may be incurred in the process, which could be avoided by a clear reservation of rights. This is illustrated by the detailed factual investigation which was undertaken in Insurance Corporation of the Channel Islands Ltd v. McHugh96 in order to decide whether insurers had affirmed a policy of insurance with knowledge of fraud by the insured. We have already considered this case in the context of the implication of terms imposing claims handling obligations on insurers. As far as the pleas of affirmation and estoppel were concerned, the factual background was as follows. The arson attacks on the hotel took place in June 1992. The insurers were notified after each fire, and immediately engaged loss adjusters. Extensive meetings and communications followed, and substantial interim payments were made in respect of both the material damage policy and the business interruption policy, but in particular in relation to the latter. In February and March 1993, the matter was referred to arbitration. Shortly after the conclusion of the arbitration, but before a decision had been given, the insurers alleged that there had been fraud in the presentation of the business interruption claim and purported to avoid the business interruption policy, in reliance on condition 5 of the policy, which provided: ‘‘Fraud—If the claim be in any respect fraudulent or if any fraudulent means or devices be used by the insured or anyone acting on his behalf to obtain any benefit under this Policy or if any destruction or damage be occasioned by the wilful act or connivance of the insured all benefit under this Policy shall be forfeited.’’

Mance J. heard evidence about the state of knowledge of insurers (including the knowledge of their agents, the loss adjusters engaged by insurers to assist in handling the claim), and found that the insurers had had suspicions but that 93. [1996] 1 Lloyd’s Rep. 519. 94. At 569. 95. At 569; the pithy sentence in quotation marks was taken from the judgment of Lloyd L.J. in Barber v. Imperio Reinsurance Co. (UK) Ltd, C.A. (15 July 1993, unreported). 96. [1997] L.R.L.R. 94.

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this was different from the knowledge of facts entitling them to rely on condition 5, without which they could not be said to have affirmed the business interruption insurance policy.97 He put the point in this way98: ‘‘I find that, although the plaintiffs had considerable suspicions, they did not have the relevant knowledge. Their attitude was the responsible attitude that, in the absence of material in their possession justifying a plea that there had been a fraudulent claim or the use of fraudulent means or devices, the claim must be handled on its merits and eventually submitted to arbitration without reliance on condition 5. That insurers did not have fuller information or documentation regarding the hotel’s occupancy was also not their fault. It was due to [the insured’s] determination that they should not have such material, despite many requests.’’

The purported avoidance of the policy was therefore effective. There was an interesting further twist to the litigation concerning the Royal Hotel in Guernsey. Mance J. gave judgment on 5 July 1996,99 and on 12 August 1996, the insurers’ solicitors wrote to the insured informing them that the insurers had decided to avoid the material damage policy (the purported avoidance of the business interruption insurance policy following the arbitration in 1993 having been the subject of the litigation which culminated in the July 1996 judgment). In a further judgment between the same parties, Mance J. held that the insurers’ solicitors had decided for tactical reasons in 1994 and 1995 not to advance the case on avoidance of the material damage policy until after the litigation which was already on foot had been brought to a successful conclusion, that they had internally formed the intention to avoid if possible any step which could be taken as unequivocal affirmation by insurers, and that they (and therefore insurers) had had the requisite knowledge for affirmation at this stage.100 The purported avoidance of the business interruption insurance policy had brought the arbitration in relation to that policy to an end, but the arbitration continued in relation to the material damage policy, and Mance J. held that by allowing further performance of the arbitration, amounted to an unequivocal recognition of the continuing applicability of the arbitration agreement and consequently of the continuing validity of the insurance policy from which the applicability of the arbitration agreement was derived101; and that the basis on which the earlier litigation had been conducted (which assumed the existence and validity of the material damage policy) was also capable of constituting an unequivocal representation as to the validity of the material damage policy.102 As we have seen, any failure expressly to reserve rights in this situation carries with it a risk that insurers may subsequently be found to have waived the right to avoid the policy or, to put the point in the alternative language 97. At 127–133. 98. At 129. 99. This is the judgment reported at [1997] L.R.L.R. 94. 100. Insurance Corporation of the Channel Islands v. Royal Hotel Ltd [1998] Lloyd’s Rep. IR 151, 171–172. 101. At 173. 102. At 173–174.

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sometimes found in the cases, a risk that insurers may subsequently be found to have affirmed the policy. This risk should not, however, be overstated: there can be no waiver unless insurers have knowledge of the facts giving rise to the right to avoid. Two points here should be noted. First, although knowledge not only of the facts, but also that the facts give rise to a right to avoid, is required for waiver, it will usually be inferred that, once they know of the relevant facts, insurers also know of their right to avoid,103 and this additional requirement therefore adds nothing. Secondly, where insurers have been represented by solicitors and counsel whose conduct is relied upon as amounting to an election or waiver, it will normally be inferred that their conduct has been specifically authorised by the client and has been the result of legal advice, although the inference may be displaced if privilege is waived and any legal advice given is disclosed.104 The case of Victor Melik & Co. Ltd v. Norwich Union Fire Insurance Society Ltd105 provides an interesting example of an effective reservation of rights by insurers. A loss adjuster instructed by insurers used the phrase ‘‘without prejudice’’ in discussions with the insured in the course of investigating the insured’s claim. This was at a very early stage, at which no dispute had arisen between the insurer and insured, and Woolf J. held that the phrase ‘‘without prejudice’’ was therefore not effective to protect the discussions and any written report recording the discussions, if otherwise within the scope of standard disclosure, from being disclosed or admitted in evidence.106 The case is a useful authority as to admissibility of discussions in evidence, but what is interesting in the present context is that Woolf J. also held that when used in this way, although ineffective for the purpose of cloaking the discussions with privilege, the phrase ‘‘without prejudice’’ might nevertheless amount to an effective reservation of rights on behalf of insurers.107 In giving his ruling as to whether the loss adjuster’s report should be disclosed, Woolf J. said: ‘‘[M]y interpretation of the evidence is that in this case ‘‘without prejudice’’ was not being used . . . with reference to negotiating of a settlement but was being used in the special sense which is applicable as far as insurers are concerned, because, they, naturally, are anxious to avoid it being thought that as they have sought to investigate a claim that they are not reserving their right to repudiate the claim.’’

Privilege Claims handling gives rise to particular issues in relation to privilege (the protection from disclosure in legal proceedings afforded to certain types of 103. Simner v. New India Assurance Co. Ltd [1995] 1 Lloyd’s Rep. 240, 258 (His Honour Judge Diamond Q.C.); Moore Large & Co. Ltd v. Hermes Credit & Guarantee plc [2003] EWHC 26, [2003] Lloyd’s Rep. IR 315, para. 101 (Colman J.). 104. Moore Large & Co. Ltd v. Hermes Credit & Guarantee plc [2003] EWHC 26, [2003] Lloyd’s Rep. IR 315, paras 100–101 (Colman J.). 105. [1980] 1 Lloyd’s Rep. 523. 106. At 525. 107. At 525. Privilege is considered further below.

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communications (both oral and written, although the emphasis is usually on the latter)). This is so both at an early stage, before lawyers are instructed, and after lawyers have become involved in a claim. Letters of notification. A letter of notification sent by an insured to its insurers may contain information about the claim which, if it were disclosed in subsequent proceedings between the insured and a third party, would be damaging to the insured’s defence. This is particularly so in cases of liability insurance, where the insured surveyor may indicate, say, that she is adamant that she was not negligent in valuing a residential property but that this was the first such valuation she had carried out since moving to a new position in a new geographical area, or make some other damaging or potentially embarrassing admission. Public policy would clearly favour a frank exchange of information between insurer and insured at this stage of a claim, and in Guinness Peat Properties Ltd v. Fitzroy Robinson Partnership,108 the Court of Appeal decided that a letter of notification written by an insured to its brokers, for onward transmission to its insurers, was privileged. The insured was a firm of architects. The insured received a letter of claim from a building developer for whom it had designed a building. The insured wrote to insurers to notify them of the claim, and expressed its views on the merits of the allegations contained in the developer’s letter, a copy of which it enclosed. The Court of Appeal, applying the decision of the House of Lords in Waugh v. British Railways Board,109 held that in order to decide whether the letter qualified for legal privilege the dominant purpose for which the letter came into existence had to be ascertained, that the dominant purpose did not necessarily fall to be ascertained by reference to the intention of the composer of the letter, and that the dominant purpose must be viewed objectively on the evidence, particularly by reference to the intentions of the insurers who procured its genesis. On the evidence, the Court of Appeal determined that the letter owed its genesis to the dominant purpose that it should be used for the purpose of obtaining legal advice and in any ensuing litigation, which was at the time of its production in reasonable prospect. This was so despite the fact that there was evidence before the court that although legal advice was sought by insurers in most cases after receipt of a notification letter, there was a small minority of straightforward and simple cases in which legal advice was not sought. The Court of Appeal was clearly influenced by the fact that the notification was of a claim made by a third party, and it is questionable whether the Court of Appeal’s analysis could be stretched to apply to a notification letter written in relation to a claim made by an insured under a property or other first party liability policy, which does not involve a claim by a third party. Similarly, liability policies typically require notification not only of claims but of any circumstance which may give rise to a claim, and again, although it is a question of fact in each case, it is not immediately obvious that the dominant 108. [1987] 1 W.L.R. 1027, C.A. 109. [1980] A.C. 521, H.L.

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purpose for which a letter notifying insurers of a circumstance comes into existence is the obtaining of legal advice (as in the Guinness Peat case) rather than fact-finding (as in Victor Melik & Co. Ltd v. Norwich Union Fire Insurance Society Ltd110). Communications between loss adjuster and insurer. Experienced loss adjusters instructed by insurers to investigate a claim often advise insurers on a wide range of issues, including whether the policy responds to the claim, whether there has been under-insurance, whether any defences are available to insurers in respect of the claim, and whether there are any suspicious circumstances which might require further investigation. Where the claim is large, loss adjusters are frequently instructed by insurers as a matter of course, and not because a dispute has arisen or legal proceedings are anticipated. Whether a loss adjuster’s report to insurers is privileged from disclosure depends on whether the dominant purpose for which the report comes into existence is to enable insurers to determine the facts so that they may decide whether to accept the claim, in which case the report is not privileged; or whether the dominant purpose is to enable insurers to take legal advice, in which case the report is privileged. It may be difficult to establish that the dominant purpose of such a report coming into existence is to enable insurers to obtain legal advice at a very early stage of insurers’ investigations, although the position may be different in relation to a liability policy. In Victor Melik & Co. Ltd v. Norwich Union Fire Insurance Society Ltd,111 Woolf J. rejected a claim of legal advice privilege for the loss adjuster’s report, on the grounds that the evidence before him established that the dominant purpose of the loss adjusters making their report was not the obtaining of legal advice, but was to enable insurers to ascertain the facts in order to come to a decision as to whether or not to repudiate liability under the policy.112 This decision may be compared with that of the Court of Appeal in Guinness Peat Properties Ltd v. Fitzroy Robinson Partnership,113 the facts of which are set out above. Guinness Peat involved the notification of a claim against the insured by a third party under a liability policy, and it was common ground that litigation was reasonably in prospect when the notification letter was written114; whereas in the Victor Melik & Co. case the claim was made by the insured itself under a theft policy, so that there were no grounds for saying that litigation (between insurer and insured) was in prospect at the date of the loss adjuster’s initial fact-finding visit. Internal documents repeating privileged information. Clients often need to circulate legal advice and other information subject to privilege within their

110. [1980] 1 Lloyd’s Rep. 523; see ‘‘Communications between loss adjuster and insurer’’, below, for discussion of this aspect of the case. 111. [1980] 1 Lloyd’s Rep. 523. 112. At 525. 113. [1987] 1 W.L.R. 1027, C.A. 114. At 1037 (Slade L.J.).

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organisations. For example, the advice given by a barrister in a conference with the client’s solicitor and a claims handler may need to be communicated to others within the claims department or to underwriters. This may be done by the solicitor, but frequently it will be done by means of internal communication, probably by email, within the insurer. Internal communications of this nature are privileged, whatever their purpose, provided that it is not fraudulent.115 The protection extends to the circulation of legal advice for the purpose of taking a business decision in the light of the advice.116

Human Rights Act 1998 Insurers often engage private investigators to gather evidence about third party claimants in personal injury cases brought against the insured, or about insureds claiming under accident or similar policies, typically by means of videorecording the individual over a period to see whether they engage in activities which are inconsistent with the account they have given of their incapacity. This is done with a view to presenting the evidence to the court. Where there is no breach of the Human Rights Act 1998, video evidence of this nature will usually be admissible evidence in a personal injury case.117 Video surveillance may, however, breach Article 8 of the European Convention on Human Rights. Article 8 provides: ‘‘Right to respect for private and family life (1) Everyone has the right to respect for his private and family life, his home and his correspondence. (2) There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.’’

Insurers are not public authorities for the purposes of the European Convention on Human Rights or the Human Rights Act 1998, and neither therefore imposes any obligations on them directly. However, it is now settled that Article 8 applies in disputes between individuals or between individuals and non-governmental bodies just as it applies in disputes between individuals and a public authority.118

115. Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The ‘‘Good Luck’’ [1992] 2 Lloyd’s Rep. 540 (Saville J.); Hellenic Mutual War Risks Association (Bermuda) Ltd v. Harrison (The ‘‘Sagheera’’) [1997] 1 Lloyd’s Rep. 160, 168–169 (Rix J.). 116. Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The ‘‘Good Luck’’ [1992] Lloyd’s Rep. 540 (Saville J.); Hellenic Mutual War Risks Association (Bermuda) Ltd v. Harrison (The ‘‘Sagheera’’) [1997] 1 Lloyd’s Rep. 160, 168–169 (Rix J.). 117. See Rall v. Hume [2001] EWCA Civ 146, [2001] 3 All E.R. 248, C.A. 118. Campbell v. MGN Ltd [2004] UKHL 22, [2004] 2 W.L.R. 1232, H.L.

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In Jones v. University of Warwick,119 the Court of Appeal considered the impact of Article 8 of the European Convention on Human Rights, and of the Human Rights Act 1998, on the admissibility of video evidence obtained by a private investigator retained by insurers in relation to a woman who was bringing personal injury proceedings against the insured. The claimant had injured her hand at work, and brought proceedings against her employer in which she was claiming damages in excess of £135,000. The employer admitted liability but disputed that the claimant had the continuing disability as she alleged. The employer’s insurers engaged an inquiry agent who gained access to the claimant’s house by posing as a market researcher, and secretly filmed the claimant. The claimant was also filmed on two subsequent occasions, although the video evidence obtained was less useful to the defendant. The question of admissibility of the video evidence came before the Court of Appeal, which applied the Strasbourg case law to the effect that the consequences of a breach of Article 8 are (at least initially) a matter for the domestic courts, so that it is for the court hearing the proceedings to decide whether to admit evidence obtained in breach of Article 8. The Court of Appeal recognised that the court is exercising a discretion in a difficult situation in which it is trying to give effect to two conflicting public interests: the right to privacy, and the right to a fair trial. Therefore, the weight to be attached to each interest will vary according to the circumstances: in particular, the significance of the evidence and the gravity of the breach of Article 8, depending on the facts of the case. The Court of Appeal emphasised that the court must, while doing justice between the parties, also deter improper conduct of a party while conducting litigation. The Court of Appeal then decided to admit the video evidence, but to express its disapproval of the conduct of the inquiry agent by ordering the defendant to pay the claimant’s costs of the appeal. The Court of Appeal also indicated to the trial judge that when he came to deal with the question of costs he should take into account the defendant’s conduct in obtaining the video evidence when deciding the appropriate order for costs; that he might consider that the costs of the inquiry agent should not be recovered; and that if he concluded, as the claimant was contending, that there was an innocent explanation for what was shown on the video, that that was a matter which should be reflected in costs, perhaps by ordering the defendant to pay the costs throughout on an indemnity basis. Overall, the effect of Jones v. University of Warwick120 appears to be that the greater the probative value of the evidence, the more likely the court will be to admit it; and the only real risk that insurers run is that they may be penalised in costs if the court disapproves of the methods utilised by the private investigator to obtain the video evidence in the particular case before it. The judgment should not deter insurers from instructing private investigators where they think surveillance might turn up useful evidence, particularly 119. [2003] EWCA Civ 151, [2003] 1 W.L.R. 954, [2003] 3 All E.R. 760, C.A. 120. Ibid.

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where large sums are at stake; but they should ensure that any private investigator they instruct understands the distinction between surveillance in public and in private, and its significance. Conclusions The following conclusions may be drawn: u Article 8 rights include a right to respect for private life and home which may be infringed by surveillance by private investigators, although surveillance in a public place is unlikely to breach Article 8; u the greater the probative value of video evidence obtained in breach of Article 8, the more likely the court will be to admit it: Jones v. University of Warwick121; u where video evidence obtained in breach of Article 8 is admitted in evidence, the court may express its disapproval by penalising the offending party in costs: Jones v. University of Warwick.122

FRAUDULENT CLAIMS AND ‘‘FRAUDULENT DEVICES’’ There has been a flurry of activity recently in the area of fraudulent claims, and as a result the law is developing rapidly. A particular development has been the introduction of a distinction between fraudulent claims and ‘‘fraudulent devices’’ used to promote or maintain an otherwise genuine claim. Overall, the tendency has been to attempt to mitigate the harshness of the common law, in line with the development by the Court of Appeal of the new-type innominate term.123 The Law Commission has decided to include fraud in the making of a claim, and the definition of fraud for this purpose, in the forthcoming consultation papers on the review of insurance contract law. What constitutes a fraudulent claim? The making of a fraudulent claim is a breach of the duty of good faith which, unlike non-disclosure or misrepresentation, takes place after the contract of insurance has been concluded. A fraudulent claim is one which is either fraudulent in its entirety (i.e. no circumstances have arisen justifying an honest claim), or some aspect of the claim, typically the quantum of the loss claimed, may be fraudulent. Fraud here means dishonesty124; it probably also includes recklessness as to the truth of statements made, which is the classic meaning 121. Ibid. 122. Ibid. 123. See Construction of notification clauses above. 124. Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd, The ‘‘Star Sea’’ [2001] UKHL 1, paras 102, 111, [2001] 1 Lloyd’s Rep. 389, 411, 413, H.L. (Lord Scott).

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of fraud in civil cases since the decision of the House of Lords in Derry v. Peek125 in the nineteenth century. Impact of small fraudulent element on otherwise genuine claim In Orakpo v. Barclays Insurance Services,126 Hoffmann L.J. referred to the nature of a contract of insurance as a contract of good faith, and said that the duty of good faith on the part of the insured did not expire when the contract had been made. Any fraud in the making of a claim therefore went to the root of the contract and entitled the insurer to be discharged. He said that fraud should not readily be inferred simply from the fact that a claim was doubtful or exaggerated, and that a legitimate reason for making an exaggerated claim might be that the insured was merely putting forward a starting figure for negotiation; but that where fraud in the making of a claim had been asserted and established, the insurer was discharged from all liability under the policy, whether or not there was a term to that effect in the policy.127 Staughton L.J. disagreed on this point: while he agreed that this should be the result where there was a term to this effect in the policy, subject to the application of the Unfair Contract Terms Act 1977 (or, presumably, the Unfair Terms in Consumer Contracts Regulations 1999), Staughton L.J. was reluctant to accept that this should be the result in the absence of any such term, saying128: ‘‘I do not know of any other corner of the law where the plaintiff who has made a fraudulent claim is deprived even of that which he is lawfully entitled to, be it a large or small amount . . . True, there is distinguished support for such a doctrine129 . . . But we were not told of any authority which binds U.S. to reach that conclusion. I would hesitate to do so, so I am not convinced that a claim which is knowingly exaggerated in some degree should, as a matter of law, disqualify the insured from any recovery.’’

Sir Roger Parker agreed with Hoffmann L.J., emphasising, similarly, the nature of the contract of insurance as a contract of the utmost good faith, and that the duty of good faith did not apply only at inception or renewal and not to matters subsequent thereto. The majority in Orakpo v. Barclays Insurance Services130 held that the effect of a fraudulent claim was to entitle the insurer to avoid the contract ab initio (unravelled retrospectively, so that the insurer and insured are restored to the positions they were in before the contract was made). As the reasoning was 125. (1889) 14 App. Cas. 337, H.L. See also Lek v. Mathews (1927) 29 Ll. L. Rep. 141, 145, H.L. (Viscount Sumner) (recklessness sufficient where policy term referred to ‘‘false claim’’). 126. [1995] L.R.L.R. 443, C.A. 127. At 451. 128. At 450, 451. 129. Staughton L.J. referred to Willes J.’s direction to the jury in Britton v. Royal Insurance Co. (1866) 4 F. & F. 905 (which is usually cited as the foundation of the doctrine), to the decision of Hirst J. in Black King Shipping Corpn v. Massie (The ‘‘Litsion Pride’’) [1985] 1 Lloyd’s Rep. 437, and to the fact that highly-regarded textbooks took the same view. 130. [1995] L.R.L.R. 443, C.A.

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based on a contractual analysis of the duty of good faith,131 the judgments on this point cannot be treated as fully authoritative.132 In Galloway v. Guardian Royal Exchange (UK) Ltd,133 the Court of Appeal considered Orakpo v. Barclays Insurance Services134 and preferred the approach of Hoffmann L.J. and Sir Roger Parker. Lord Woolf MR (Mummery L.J. agreeing) held that where the claim is not wholly fraudulent but only fraudulent in part, the insurer is liable for the honest part of the claim provided that the fraudulent element of the claim is ‘‘de minimis’’. The claim was for £16,000, and the fraudulent element was £2,000 for a computer, or about 10% of the value of the claim. Lord Woolf MR held that this was more than de minimis, so that the whole claim failed. Millett L.J. (with whom Mummery L.J. also agreed), agreed in the result, but was more cautious, preferring to decide the case on the basis of an assumption that a policy of insurance is avoided only by a claim which was fraudulent to a substantial degree, and rejecting the de minimis or proportionate approach in favour of a consideration of the seriousness of the insured’s fraud135: ‘‘I wish to add a few words of my own on what I take to be the meaning of the expression ‘substantially fraudulent’ which is found in the authorities. Assuming (without deciding) that a policy of insurance is avoided only by a claim which is ‘substantially fraudulent’ or ‘fraudulent to a substantial degree’, I reject the submission that this is to be tested by reference to the proportion of the entire claim which is represented by the fraudulent claim. That would lead to the absurd conclusion that the greater the genuine loss, the larger the fraudulent claim which may be made at the same time without penalty. In my judgment, the size of the genuine claim is irrelevant. The policy is avoided by breach of the duty of good faith which rests upon the insured in all his dealings with the insurer. The result of a breach of this duty leaves the insured without cover. In the present case the insured took advantage of the happening of an insured event to make a dishonest claim for the loss of goods worth £2,000 which to his knowledge had not occurred. In my view, the right approach in such a case is to consider the fraudulent claim as if it were the only claim and then to consider whether, taken in isolation, the making of that claim by the insured is sufficiently serious to justify stigmatising it as a breach of his duty of good faith so as to avoid the policy. The making of dishonest insurance claims has become all too common. There seems to be a widespread belief that insurance companies are fair game, and that defrauding them is not morally reprehensible. The rule which we are asked to enforce today may appear to some to be harsh, but it is in my opinion a necessary and salutary rule which

131. The contractual analysis of the duty of good faith (that its basis was an implied term) had already been discredited in Banque Financi`ere de la Cit´e SA v. Westgate Insurance Co. Ltd [1991] 2 A.C. 249, [1990] 2 Lloyd’s Rep. 377, H.L., which does not appear to have been cited to the Court of Appeal in Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep. IR 209, C.A., in which the plaintiff appeared in person and the point was of academic importance. 132. Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd, The ‘‘Star Sea’’ [2001] UKHL 1, [2001] 1 Lloyd’s Rep. 389, H.L., para. 66 (Lord Hobhouse). 133. [1999] Lloyd’s Rep. IR 209, C.A. The decision is discussed by Lord Hobhouse in Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd, The ‘‘Star Sea’’ [2001] UKHL 1, [2001] 1 Lloyd’s Rep. 389, H.L., para. 67. 134. [1995] L.R.L.R. 443, C.A. 135. At 214.

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deserves to be better known by the public. I for my part would be most unwilling to dilute it in any way.’’

It is clear from the Galloway case that the courts are keen to uphold the principle, based on public policy, that an insurer is not liable for a fraudulent or exaggerated claim, while at the same time allowing the courts to do justice in a case in which an insurer is able to prove that a claim has been deliberately exaggerated by an insured but only by the tiniest of amounts. Use of ‘‘fraudulent devices’’ In K/S Merc-Scandia XXXXII v. Certain Lloyd’s Underwriters, The ‘‘Mercandian Continent’’136 and Agapitos v. Agnew, The ‘‘Aegeon’’,137 the Court of Appeal distinguished between fraudulent claims (whether wholly fraudulent or exaggerated) and the use of fraudulent devices to promote a claim which may prove at trial to be in all other respects valid, while recognising that there may also be intermediate factual situations, in which the lies become so significant that they may be viewed as changing the nature of the claim being advanced.138 The approach to fraudulent devices adopted by the Court of Appeal in The ‘‘Mercandian Continent’’ was to align the remedy for the use of such a device to the remedy for breach of a new-type innominate term, so that whether the insurer was entitled to be discharged from liability under the contract of insurance depended upon the seriousness of the consequences for the insurer of the use by the insured of the fraudulent device.139 In The ‘‘Aegeon’’, the Court of Appeal gave more detailed guidance as to the application of these principles, saying that it was appropriate to treat fraudulent devices as a subspecies of making a fraudulent claim, and to treat as relevant for this purpose ‘‘any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured’s prospects of obtaining a settlement or winning the case, and which would, if believed, tend, objectively, prior to any determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial’’.140 Where this is the case, the insurer is discharged retrospectively from liability in respect of the claim, but the policy itself is not avoided retrospectively, so any other honest claims under the same policy, whether earlier or later, are unaffected.141 136. [2001] EWCA Civ 1275, [2001] 2 Lloyd’s Rep. 563, C.A. 137. [2002] EWCA Civ 247, [2002] 2 Lloyd’s Rep. 42, C.A. 138. Agapitos v. Agnew, The ‘‘Aegeon’’ [2002] EWCA Civ 247, [2002] 2 Lloyd’s Rep. 42, C.A., at para. 30, pp. 49–50. 139. K/S Merc-Scandia XXXXII v. Certain Lloyd’s Underwriters, The ‘‘Mercandian Continent’’ [2001] EWCA Civ 1275, [2001] 2 Lloyd’s Rep. 563, C.A. 140. At para. 45, p. 53 (Mance L.J.). 141. Axa General Insurance Ltd v. Gottlieb [2005] EWCA Civ 112, [2005] Lloyd’s Rep. IR 369, C.A.

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Once litigation has begun, the common law principles governing the consequences of making fraudulent claims or using fraudulent devices are superseded by the procedural rules governing the litigation.142 In Eagle Star Insurance Co. Ltd v. Games Video Co. (GVC) SA (The ‘‘Game Boy’’),143 Simon J. pointed out the anomalies to which this may give rise: ‘‘After litigation has commenced an insured may advance false documentation and lie without the drastic consequences which follow if the deployment of false documentation and lies are less well timed.’’144 Costs of investigating fraudulent claims In London Assurance v. Clare (1937) 57 Ll. L. R. 254, it was argued before Goddard J. that insurers were entitled to damages for breach of contract in respect of the costs (which were considerable) of investigating two fraudulent claims following fires at the insured’s property in 1931 and 1933. There was said to be an implied term that if a claim were put forward it would be an honest one, so that breach of the implied term gave rise to a right to damages. Goddard J. was sitting with a jury, which found that both claims were fraudulent, and the insurers were held to have validly avoided the contract of insurance. The judge expressed doubt as to the validity of the claim for damages for breach of contract, which was not supported by any authority, and held that even the insured’s conduct amounted to a breach of contract, the claim in the case before him would fail on grounds of causation and remoteness of damage: the claim would have had to have been investigated anyway, whether honest or fraudulent, and in any event the damages were far too remote. The rejection of the claim for damages for breach of contract on the grounds that insurers would have had to investigate any claim is not convincing in cases of wholly fraudulent, as opposed to merely exaggerated, claims. But the rejection of the implied term is consistent with the modern rejection of any right to damages consequent on breach of the duty of utmost good faith in a contract of insurance.145 Fraudulent claim made by one of multiple insureds Whether the fraud of one insured affects the claim of another depends on whether the interests insured are joint or composite. If the interests are joint, as is the case, for example, with joint owners of property, fraud by one insured will entitle the insurer to forfeit the policy against all insureds.146 But where 142. Agapitos v. Agnew, The ‘‘Aegeon’’ [2002] EWCA Civ 247, [2002] 2 Lloyd’s Rep. 42, C.A. 143. [2004] EWHC 15 (Comm), [2004] 1 Lloyd’s Rep. 238. 144. At para. 150, p. 258. 145. Banque Financi`ere de la Cit´e SA v. Westgate Insurance Co. Ltd [1991] 2 A.C. 249, [1990] 2 Lloyd’s Rep. 377, H.L. 146. P Samuel & Co. v. Dumas [1924] A.C. 431, H.L.; General Accident Fire and Life Assurance Corpn Ltd v. Midland Bank Ltd [1940] 2 K.B. 388, C.A.

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the policy is composite—where, for convenience, more than one interest is insured in a single policy, but the interests of each insured in the subject matter insured are different, as is the case with property insurance taken out by a borrower and a lender147—fraud by one insured will not affect the claim of any other.148 Even where the policy is composite in nature, where a fraudulent claim is made by one insured on behalf of others, the insured making the claim does so as agent for the others. As the insured making the fraudulent claim does so within the scope of his actual or ostensible authority, the other insureds are fixed with the consequences of his fraud.149 Consequences of making a fraudulent claim or using a ‘‘fraudulent device’’ The consequences of making a fraudulent claim or using a ‘‘fraudulent device’’ are as follows: u the insurer is not liable for the fraudulent claim150; u the insurer is not liable for any lesser claim which the insured could have made honestly,151 unless the dishonest element of the claim is very small152; u a clause referring to the making of a fraudulent claim encompasses the maintenance of a claim which was not originally fraudulent153; u the deliberate suppression by the insured of a known defence comes within the fraudulent claim rule154; u in contrast, the use of a ‘‘fraudulent device’’ in the making of an otherwise honest claim entitles the insurer to refuse to pay the claim only where the consequences for the insurer of the use of the fraudulent device by the insured are sufficiently serious155; 147. Or a contractors’ all risks policy, which may provide property and liability cover in respect of a construction project not only for the employer (the owner of the construction site), but also for the main contractor, and all the sub-contractors, whose interests are not only different but may also conflict. 148. P Samuel & Co. v. Dumas [1924] A.C. 431, H.L.; General Accident Fire and Life Assurance Corpn Ltd v. Midland Bank Ltd [1940] 2 K.B. 388, C.A. 149. Direct Line Insurance v. Khan [2002] Lloyd’s Rep. IR 364, C.A. 150. Britton v. Royal Insurance Co. (1866) 4 F. & F. 905; Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd, The ‘‘Star Sea’’ [2001] UKHL 1, paras 61–64, [2001] 1 Lloyd’s Rep. 389, 402–403, H.L. (Lord Hobhouse). 151. Britton v. Royal Insurance Co. (1866) 4 F. & F. 905; Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd, The ‘‘Star Sea’’ [2001] UKHL 1, paras 61–64, [2001] 1 Lloyd’s Rep. 389, 402–403, H.L. (Lord Hobhouse). 152. Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep. IR 209, C.A. 153. Agapitos v. Agnew, The ‘‘Aegeon’’ [2002] EWCA Civ 247, [2002] 2 Lloyd’s Rep. 42, C.A. 154. Ibid. 155. K/S Merc-Scandia XXXXII v. Certain Lloyd’s Underwriters, The ‘‘Mercandian Continent’’ [2001] EWCA Civ 1275, [2001] 2 Lloyd’s Rep. 563, C.A.; Agapitos v. Agnew, The ‘‘Aegeon’’ [2002] EWCA Civ 247, [2002] 2 Lloyd’s Rep. 42, C.A.; Eagle Star Insurance Co. Ltd v. Games Video Co. (GVC) SA (The ‘‘Game Boy’’) [2004] EWHC 15 (Comm), [2004] 1 Lloyd’s Rep. 238, para. 151 (Simon J.).

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u the contract of insurance is not avoided ab initio (unravelled retrospectively, so that the insurer and insured are restored to the positions they were in before the contract was made) but the cause of action is barred (retrospectively where a fraudulent device is used in connection with an otherwise honest claim)156; u the insurer is not entitled to recover the cost of investigating a fraudulent claim other than as part of costs to which it would be entitled pursuant to CPR Part 48 on an assessment of costs in the normal way.157 REPUDIATION OF LIABILITY Once insurers have been notified of a claim and completed their investigations, they may accept the claim, or they may decide to repudiate liability and reject the claim. The consequences of a repudiation of liability depend on the basis for the repudiation: If the policy is avoided for non-disclosure or misrepresentation,158 the avoidance has retrospective effect, so that the parties are returned to the position they would have been in had the contract of insurance not been entered into. This means: – –

–

–

the insurer is not liable for the claim; the insurer is entitled, subject to any express agreement to the contrary, to repayment of any interim payments or payments made on account in respect of the claim159; the insurer is entitled, subject to any agreement to the contrary made at the time the claims were settled160 and subject to any defences which may be applicable such as change of position, to the repayment of any monies paid to the insured in respect of previous claims under the same policy161; the insured is entitled to the return of the premium,162 and the insurer must tender (offer to return) the premium to the insured,

156. Axa General Insurance Ltd v. Gottlieb [2005] EWCA Civ 112, [2005] Lloyd’s Rep. IR 369, C.A. 157. London Assurance v. Clare (1937) 57 Ll. L. R. 254. 158. See Chapter 2. 159. This is so whether or not the payment was expressly stated to be made ‘‘on account’’: Ataleia Marine Co. Ltd v. Bimeh Iran (Iran Insurance Co.), The ‘‘Zeus’’ [1993] 2 Lloyd’s Rep. 497, 501 (Phillips J.). Interim payments are considered above. 160. See ‘‘Settlement agreements’’, below. 161. Although it is common to speak of a contract of insurance being ‘‘renewed’’ at the end of the policy period, a new contract is in fact entered into unless express provision is made to extend the policy period, so it is only claims paid in the period of indemnity under the policy in question which are affected. As to the potential applicability of defences such as change of position, see ‘‘Settlement agreements’’, below. 162. See, e.g., Cornhill Insurance Co. Ltd v. Assenheim (1937) 58 Ll. L. Rep. 27, 31 (MacKinnon J.); Eagle Star Insurance Co. Ltd v. National Westminster Finance Australia Ltd (1985) 58 A.L.R. 165, 173, P.C.

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except (possibly) where the non-disclosure or misrepresentation giving rise to the right to avoid is fraudulent. There is some authority for the proposition that, in these circumstances, the insurer is not obliged to tender the premium,163 and this is certainly the case in marine insurance.164 If the claim is rejected for fraud in the making of the claim165 (and, presumably, if it is rejected for use of a ‘‘fraudulent device’’), all benefit under the policy is forfeited.166 The cause of action is barred (retrospectively where a fraudulent device is used in connection with an otherwise honest claim) and any other (honest) claims under the policy, whether earlier or later, are unaffected.167 If the claim is rejected for breach of warranty,168 the insurer is discharged from its primary obligations under the policy for the future. This means: – –

–

the insurer is not liable for the claim; the insurer is not entitled to the repayment of any monies paid to the insured in respect of previous claims under the same policy; the insured is not entitled to repayment of the premium.

AGREEMENTS WITH THIRD PARTIES FOR REPAIR OR REINSTATEMENT It is increasingly common for insurers to arrange the repair or reinstatement of the insured’s property directly with a third party. The advantages to the insurer of doing so include the ability to negotiate favourable rates, and greater control over the extent and quality of the work carried out. The advantages to 163. See Rivaz v. Gerussi Bros & Co. (1880) 6 Q.B.D. 222, 229–230, C.A. (Brett L.J.). This is not the case in the general law of contract which requires restitution to be made on both sides even in a case of fraud; the explanation for the distinction (if indeed there is a distinction) may lie in the special character of contracts of insurance as contracts of utmost good faith. 164. MIA 1906, s. 84(3)(a). As we have seen, the 1906 Act was a partial codification of the common law, and although it applies directly only to cases of marine insurance, the courts sometimes apply it, or the principles which it summarises, in cases of non-marine insurance. Section 84(3)(a) was referred to in this way in HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank [2003] UKHL 6, [2003] Lloyd’s Rep. IR 230, H.L., which concerned nonmarine insurance, by Lord Hoffmann (at 244, para. 42), although the issues of return of premium in a case of fraudulent non-disclosure or misrepresentation, and of the application of s. 84(3)(a) in a case of non-marine insurance, were not discussed. 165. See ‘‘Fraudulent claims’’, above. 166. Britton v. Royal Insurance Co. (1866) 4 F. & F. 905; Manifest Shipping Co. Ltd v. Uni-Polaris Insurance Co. Ltd, The ‘‘Star Sea’’ [2001] UKHL 1, paras 61–64, [2001] 1 Lloyd’s Rep. 389, 402–403, H.L. (Lord Hobhouse). 167. Axa General Insurance Ltd v. Gottlieb [2005] EWCA Civ 112, [2005] Lloyd’s Rep. IR 369, C.A. 168. See further Padfield, Insurance Claims (2nd edition, 2007), Chapter 3.

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the insured include the convenience of having the insurer make the arrangements for the repair or reinstatement, and having the third party’s invoices paid directly by the insurer. Given the commonplace nature of such arrangements, the legal analysis is surprisingly complex. There are (at least) four possible analyses, identified by the Court of Appeal in a line of cases in the 1960s and early 1970s; which one is correct in any given case depends on an application of ordinary agency principles to the facts and documents of the particular case, including both the policy itself and the arrangements made with the third party carrying out the repairs.169 In most cases, these points are of no practical importance, as the arrangements are made, the repair or reinstatement carried out and paid for, without any dispute arising as to the quality of the work, the amount to be paid, or the identity of the party ultimately liable to make the payment. Sometimes, however, one of the parties may become insolvent before the work has been paid for; or the insured and the insurer may disagree as to whether the work has been done in a satisfactory manner. In these circumstances, it may become necessary to analyse the rights and obligations of each party to the arrangements. The four possible analyses identified by the Court of Appeal are as follows170: u the insured enters into a contract with the third party to have the repairs done, and claims an indemnity from the insurer; u the insurer enters into a contract with the third party to have the repairs done; u the insurer enters into a contract with the third party to have the repairs done but does so as agent for the insured171; u the insured enters into a contract with the third party to have the repairs done but on the basis that the third party will look to the insurer, and not to the insured, for payment. There is a further complication in cases in which the insured bears an excess, so that the insurer is not liable for the whole of the cost of the work done by the third party. In this situation, there may be two contracts: one between the insured and the third party to pay to the third party an amount up to the level of the excess, and a second contract between the insurer and the third party to 169. Godfrey Davis Ltd v. Culling [1962] 2 Lloyd’s Rep. 349, C.A.; Cooter & Green Ltd v. Tyrell [1962] 2 Lloyd’s Rep. 377, C.A.; Charnock v. Liverpool Corpn [1968] 1 W.L.R. 1498, C.A.; Brown & Davis Ltd v. Galbraith [1972] 1 W.L.R. 997, C.A. 170. Godfrey Davis Ltd v. Culling [1962] 2 Lloyd’s Rep. 349, C.A. (identifying the first three possible analyses); Charnock v. Liverpool Corpn [1968] 1 W.L.R. 1498, C.A. (adding the fourth). 171. In Brown & Davis Ltd v. Galbraith [1972] 1 W.L.R. 997, C.A., Sachs L.J. said (at 1008–1009) that this possible analysis had been ‘‘exploded’’ by the decisions of the Court of Appeal in Godfrey Davis Ltd v. Culling [1962] 2 Lloyd’s Rep. 349, C.A., Cooter & Green Ltd v. Tyrell [1962] 2 Lloyd’s Rep. 377, C.A. and Charnock v. Liverpool Corpn [1968] 1 W.L.R. 1498, C.A.

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pay the balance172; or there may be a single contract to which the insured, the insurer and the repairer are all parties, each undertaking different obligations.173 Where the insurer and the repairer have entered into an overarching (or ‘‘umbrella’’) agreement governing the carrying out of repairs on behalf of insureds as and when they arise, this (bipartite) agreement may be incorporated into the agreement between the insurer and the third party for the repairs in the particular case, and may supply some of the terms and conditions for that more specific agreement. The Insurance Conduct of Business Rules (‘‘ICOB’’), which apply to general insurance contracts (e.g. property insurance) and critical illness and income protection insurance,174 provide that where the insured is a retail customer,175 the insurer must, in respect of each part of the claim that it accepts, inform the insured whether the claim will be settled by the insurer paying him, or by paying another person to provide goods or services, or by providing those goods or services.176

SETTLEMENT AGREEMENTS A payment by an insurer to an insured pursuant to a policy of insurance may be made on the basis of a contract; or it may simply be made without any specific additional terms being agreed. In a simple, uncontroversial claim, a contract entered into in settlement of the claim might be unenforceable for lack of consideration; but in a more complex claim, the courts would be likely to find consideration in the giving up of the right to claim a larger sum, or to pay a smaller sum. Where a payment is made on the basis of a contract, questions of interpretation and enforceability are governed by ordinary principles of contract law. The parties are free to enter into an agreement which compromises only the claim itself; or, at the other extreme, an agreement which compromises all claims which the insured might have against the insurer, whether or not known, and in relation to any subject matter, although clear words will be required before the court will be persuaded that a party intended to surrender 172. This was the analysis preferred by Upjohn L.J. in Godfrey Davis Ltd v. Culling [1962] 2 Lloyd’s Rep. 349, C.A., at 354. 173. This analysis, and the description of the arrangement as a tripartite agreement, was preferred by Sachs L.J. in Brown & Davis Ltd v. Galbraith [1972] 1 W.L.R. 997, C.A., at 1007. Sachs L.J. acknowledged that in most cases the terminology would make no difference to the result. 174. The ICOB rules were made by the Financial Services Authority pursuant to s. 138 of the Financial Services and Markets Act 2000. The ICOB rules do not apply to reinsurance, or to life insurance or long-term care insurance (which are subject to the FSA’s investment business rules). They have effect from 15 January 2005 (subject to transitional provisions). 175. A retail customer is an individual who is acting for purposes which are outside his trade, business or profession. 176. ICOB rule 7.5.15. Breach of the ICOB rules is actionable at the suit of a private person who suffers loss as a result of the breach, subject to the deferences and other incidents applying to actions for breach of statutory duty: Financial Services and Markets Act 2000, s. 150.

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rights and claims of which he was unaware and could not have been aware.177 Agreements settling claims should therefore be worded carefully, in order to end the dispute, to encompass any future disputes which it is sought to compromise, and to minimise the prospect of there being a dispute about the scope of the settlement agreement itself. If the parties enter into a settlement agreement on the basis of a mutual mistake as to the insurers’ liability under the policy of insurance, the insurers will be entitled to recover the payment made pursuant to the agreement only where the mistake is fundamental.178 In Norwich Union Fire Insurance Society Ltd v. William H Price Ltd179 lemons were shipped from Messina to Sydney under a policy of marine insurance. Believing that the lemons had been damaged by an insured peril, the insurers paid the insured value to the insured, who agreed in return to transfer and abandon to the insurers the goods and their proceeds. It was subsequently ascertained that the lemons had been sold because they were found to be ripening, and had not been damaged by an insured peril. The Privy Council held that insurers were entitled to recover the payment as it had been made under a mistake of fact.180 If when the compromise was agreed there was doubt as to the insured and insurer’s respective rights and obligations, so that the settlement represented a ‘‘giveand-take’’ compromise of doubtful rights, the insurer will not be entitled to recover the payment subsequently on the basis of mistake of fact on law.181 If a claim is paid by an insurer without a settlement agreement being entered into, and the insurer subsequently validly avoids the policy for misrepresentation or non-disclosure, the insurer is in principle entitled to recover the payment made under the policy.182 It is unclear to what extent defences to claims for restitution under the general law, such as change of position, are applicable here. There would appear to be no reason why they should not be applicable in the insurance context, but there seems to be no authority on the point. This 177. See Bank of Credit and Commerce International SA v. Ali [2001] UKHL 8, [2002] 1 A.C. 251; Mostcash plc v. Fluor Ltd [2002] EWCA Civ 975, [2002] B.L.R. 411, 83 Con. L.R. 1, C.A. In the BCCI case, the claim for ‘‘stigma’’ damages against a former employer was unknown to the law at the date the settlement agreement was entered into, and the House of Lords held that the employee could not reasonably be regarded as having taken upon himself the risk of a retrospective change in the law. 178. See Bell v. Lever Brothers Ltd [1932] A.C. 161, H.L.; Great Peace Shipping Ltd v. Tsavliris (International) Ltd [2002] EWCA Civ 1407, [2003] Q.B. 679, [2002] 2 Lloyd’s Rep. 653, [2002] 4 All E.R. 689, C.A. 179. [1934] A.C. 455, P.C. 180. The significance of the mistake being one of fact was that, until the decision of the House of Lords in Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 A.C. 349, it was thought that payments made under a mistake of law were not recoverable. Although Kleinwort Benson was a case involving recovery of payments made under agreements which were unenforceable (as they were ultra vires the local authorities which had purported to make them), the principles on which the House of Lords based its decision that the rule precluding recovery of money paid under a mistake of law could no longer be maintained apply equally whether or not the contract is enforceable. 181. Brennan v. Bolt Burdon [2004] EWCA Civ 1017, [2005] 2 Q.B. 303; Deutsche Morgan Grenfell Group plc v. IRC [2006] UKHL 49, [2006] 3 W.L.R. 781. 182. See ‘‘Repudiation of liability’’, above.

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may be because the law applicable to insurance contracts tends to develop independently of the general law of contract even where the principles applicable are common to both.183

ISSUES ARISING IN RELATION TO LIABILITY POLICIES Policies of liability insurance, which provide an indemnity in relation to the insured’s liability to third parties, give rise to particular issues in the context of claims handling. Some of these issues have been considered above. Other issues which are particular to liability policies only are considered in this section. Joint retainer of solicitors by insured and insurer It is common practice in England and Wales for insurers to reserve to themselves the right to appoint solicitors to act on behalf of insureds to defend claims by third parties to which the policy responds, and to do this by appointing solicitors to act jointly for the insured and for insurers in investigating the third party’s claim against the insured. The insurers have a direct financial interest in the outcome of the claim against the insured. The insured will usually also have a direct financial interest in the outcome of the claim against it, either because the policy provides that any indemnity paid by the insurer is subject to an excess or deductible, or because the claim may exceed the limit of cover. The insured may be interested in the outcome of the claim for other reasons: the insurer may become insolvent, leaving the insured to pay all or part of the claim himself; and the insured may also be concerned about her professional or business reputation, which may be affected by the way the litigation is conducted, and ultimately by whether the defence succeeds. The interests of the insured and the insurer may coincide; or they may conflict. This potential conflict of interest is inherent in the joint retainer. Although other jurisdictions (notably Germany) take a tougher approach, and do not allow a joint retainer of lawyers acting for the insured and the insurer under a liability policy, the courts in England and Wales take a more pragmatic view: the potential conflict of interest inherent in a joint retainer is acceptable, as it is in the interests of both insurers and insureds that a single firm of solicitors should represent both, but as soon as an actual conflict of interest arises, the insured must be informed of the conflict and given time to decide whether he wishes to instruct separate solicitors.184 Solicitors acting under a joint retainer 183. Consider, for example, the belated recognition that the remedy for breach of warranty was discharge from liability (prospectively) rather than avoidance ab initio (retrospectively): see Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The ‘‘Good Luck’’) [1992] 1 A.C. 233, [1991] 2 Lloyd’s Rep. 191, H.L. 184. TSB Bank plc v. Robert Irving and Burns [1999] Lloyd’s Rep. IR 528, C.A. The decision of the Court of Appeal is also reported, without the first instance judgment, at [2000] 2 All E.R. 826, C.A.

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in defending a claim against an insured need to be familiar with the situations which typically give rise to actual (rather than merely potential) conflicts of interest, to be on the lookout for those situations developing, and to be ready to act swiftly when an actual conflict arises. Any solicitor acting under a joint retainer, and any claims handler who instructs solicitors to act under a joint retainer, should be familiar with the decision of the Court of Appeal in TSB Bank plc v. Robert Irving and Burns.185

Costs of defending claims against the insured A liability policy typically provides cover against legal liability for claims made by third parties (who may be defined) arising out of acts or omissions of the insured in the course of specified activities, such as the insured’s trade or profession. In addition, the policy usually includes other valuable benefits, such as the right to recover from the insurers the costs of defending any claims that may be brought against the insured within the scope of the policy. Subject to clear wording to the contrary, the insured’s right to payment under the insuring clause in a policy of liability insurance arises only in respect of legal liability to the third party (whether by agreement or judgment),186 and the issue therefore arises as to whether the costs of successfully defending claims —which, by definition, do not result in legal liability to the third party—may be recovered under the policy. The answer to this question lies in the policy wording and, in particular, depends on whether, on the true construction of the wording, the insurers’ liability to pay the costs of defending a claim is defined solely by reference to claims within the scope of the insuring clause (in which case they will not be liable for the costs of a successful defence) or is defined more broadly.187 As the costs of defending a claim frequently exceed the amount at stake, this is an important issue which needs to be considered before decisions are made about whether, or to what extent, the proceedings should be defended.

TEST YOUR UNDERSTANDING Choose one or more answers to complete the following statements correctly:

185. [1999] Lloyd’s Rep. IR 528, C.A. 186. West Wake Price & Co. v. Ching [1957] 1 W.L.R. 45, approved in Bradley v. Eagle Star Insurance Co. Ltd [1989] A.C. 957, 964–966, H.L. (Lord Brandon); Thornton Springer v. NEM Insurance Co. Ltd [2000] Lloyd’s Rep. IR 590, [2000] 2 All E.R. 459. 187. See, e.g., Thornton Springer v. NEM Insurance Co. Ltd [2000] Lloyd’s Rep. IR 590, [2000] 2 All E.R. 459, in which Colman J. held that the insured accountancy firm was entitled to recover the costs of a successful defence under a policy of professional indemnity insurance.

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1. On the current state of the authorities, a term that the insurer will act with reasonable efficiency in assessing and paying claims is implied: (a) on grounds of business efficacy; (b) on grounds of obviousness; (c) arguably, where the purpose of the policy is to provide for the immediate repair of damaged plant and equipment; (d) where the insured is not entitled to interest.

2. The insured is entitled to an interim payment: (a) in every case; (b) only where the policy expressly says so.

3. Notification clauses are: (a) (b) (c) (d)

always conditions precedent; sometimes conditions precedent; always innominate terms; sometimes innominate terms.

4. The Unfair Terms in Consumer Contracts Regulations 1999 apply: (a) where the insured is a natural person acting for purposes related to his trade, business or profession; (b) where the insurer is a natural person acting for purposes related to his trade, business or profession; (c) where the insured is a natural person acting for purposes outside his trade, business or profession; (d) where the insurer is a legal person acting for purposes related to its trade, business or profession.

5. Where a notification clause requires the insured to provide information to insurers and the insured wishes to be sure that it has fulfilled the notification requirements, the information should be provided by: (a) (b) (c) (d)

the insured; the insured’s agent; any reliable source; a third party with an interest in the claim.

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6. Insurers should reserve their rights in relation to a claim by an insured: (a) in every case; (b) as soon as a claim is made; (c) as soon as any uncertainty arises as to whether the claim will be accepted; (d) whenever they need time to pursue enquiries to decide whether to accept a claim or to avoid the policy. 7. A letter of notification written by an insured to insurers is likely to be privileged: (a) in every case; (b) where the policy of insurance is a liability policy; (c) where the policy of insurance is first party insurance (e.g. fire or theft); (d) where the letter contains a request that the insurer obtain legal advice on behalf of the insured. 8. Video evidence obtained by secret surveillance of an insured or a third party claimant in his or her own home is admissible in legal proceedings involving that person: (a) always; (b) never; (c) if the court exercises its discretion in favour of admitting the evidence. 9. An insured who is found to have exaggerated the amount of his loss is entitled to: (a) the amount he claimed; (b) the amount he could have claimed honestly; (c) the amount he could have claimed honestly unless the claim is substantially fraudulent. 10. Using a ‘‘fraudulent device’’ may discharge the insurer from liability to pay the claim (whether or not it also entitles the insurer to avoid the policy ab initio): (a) if it would, if believed, yield a not insignificant improvement in the insured’s prospects of recovering an indemnity from insurers; (b) if it is used before litigation is commenced; (c) if it is used after litigation is commenced.

Bibliography

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11. Solicitors acting jointly for insurer and insured in respect of a third party claim under a liability policy: (a) may do so if there is a potential conflict of interest; (b) may do so if there is an actual conflict of interest; (c) may do so only if the insured has been informed of the potential conflict and been given time to decide whether to instruct separate solicitors; (d) may do so only if the insured has been informed of the actual conflict and been given time to decide whether to instruct separate solicitors.

BIBLIOGRAPHY Clarke, The Law of Insurance Contracts (4th edition, 2002). Colinvaux and Merkin on Insurance Contract Law. Macgillivray on Insurance Law (10th edition, 2003). Padfield, Insurance Claims (2nd edition, 2007).

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CHAPTER 6

SUBROGATION, CONTRIBUTION AND REINSTATEMENT Christopher Henley

SUBROGATION THE DOCTRINE (a) Two limbs The doctrine of subrogation has two limbs. The first is that the insurer is entitled to ‘‘stand in the shoes’’ of its insured and to enforce any claims possessed by the insured against third parties which will have the effect of diminishing the loss insured, i.e. effectively standing in its shoes and acting as the insured. The second is that the insurer is entitled to recover from the insured any benefits received by him from a third party in diminution of the loss (but only strictly in accordance with and to the extent of the insurer’s interest). The classic common law definition of subrogation is that of Brett L.J. in Castellain v. Preston (1883) Q.B.D. 380: ‘‘ . . . as between the underwriter and the assured, the underwriter is entitled to the advantage of every right of the assured, whether such right consists of contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on and already insisted on, or in any other right whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such a right could or could not be enforced by the insurer in the name of the assured, by the exercise or acquiring of which right or condition the loss against which the assured is insured can be, or has been diminished.’’

The insurer’s right of subrogation was codified in s. 79 of the Marine Insurance Act 1906 (MIA 1906), which is applicable to non-marine insurance and provides as follows: ‘‘(1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subjectmatter as from the time of the casualty causing the loss. (2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of 175

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Subrogation, Contribution and Reinstatement the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.’’

(b) The insured’s duty of disclosure of limits on subrogation The possibility that the insurer may successfully pursue a subrogated recovery action does not usually influence him sufficiently to reduce the premium or agree contractual terms more beneficial to the insured, which ought to mean that anything impacting upon the insurer’s potential subrogated rights ought not to be material. In any class of risk where the insurers are known not to consider subrogated rights of recovery as an element in risk computation, then it is unlikely that a duty will be imposed the insured to disclose the fact that third parties are protected from liability. The information is simply not material. However in Tate v. Hyslop (1885) 15 Q.B.D. 368 the insured had contracted with the lightermen that they should only be liable for loss when they had been negligent. He took out a marine policy which included the risk of loading and unloading goods from lighters. It was held that the insured was aware that the insurers, when assessing the premium, would view as significant the existence of such contracts with the lightermen. As their existence had not been disclosed, the contract could be avoided by the insurers.

THE PARTIES’ RIGHTS PRIOR TO INDEMNIFICATION BY THE INSURER (a) The general rule is that the insurer cannot pursue any subrogated action until the insured has been indemnified. Nevertheless, the case of Boag v. Standard Marine Insurance Company Ltd (1937) 2 K.B. 113 made it clear that subrogation rights do exist prior to indemnification of the insured by the insurer. However, the extent of these rights prior to payment are still not clear. Certainly the insured would be liable to the insurer where he has taken positive action which prejudices his rights against a third party, but it is less clear whether the insured’s inactivity to preserve the position would lead to the same result. Would the insurer be entitled to a mandatory injunction forcing the insured to take positive steps? Could the insurer reduce any payment to the insured to the extent of any loss suffered by the insurer attributable to the insured’s failure to retain or utilise rights for the insurer? Or even insist upon repayment of any sum paid to the insured? (b) In Noble Resources Ltd v. Greenwood, The ‘‘Vasso’’ [1993] 2 Lloyd’s Rep 309 the contract of insurance incorporated clause 16 of the Institute Cargo Clauses (A), which read: ‘‘It is the duty of the Assured and their servants and agents in respect of loss recoverable here under:

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(a) to take such measures as may be reasonable for the purpose of averting or minimising such loss; and (b) to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised. and the Underwriters will in addition to any loss recoverable hereunder, reimburse the Assured for any charges properly and reasonably incurred in pursuance of these duties.’’

Part (a) of clause 16 reflects s. 78(4) of the MIA 1906, which itself restates the common law obligation of the assured to minimise his loss, but part (b) appears to extend this requirement to preserving rights against third parties. The insurers alleged that as a matter of construction the insured cargoowners should have applied for an injunction against a third party, even though they may only have had a slim chance of success, because the clause requires the insured to take every possible step. Mr Justice Hobhouse held that the mere failure to apply for an injunction did not of itself establish a breach of the duty, because the cargo-owners had acted reasonably, properly and conscientiously. The insurers were unable to prove that the application was a proper step which a reasonable insured, having regard to the interests of himself and the insurers and to the provisions of the policy, should have taken. The judgment is uncontroversial, so far as it goes. The duty of the insured to sue and labour, contained in s. 78(4) of the MIA 1906, was limited in Davy Offshore Ltd v. National Oilwell (UK) Ltd [1993] 2 Lloyd’s Rep. 582 to the insured taking ‘‘such obvious steps to avert or minimise the loss that any prudent assured could be expected to take’’. However, The ‘‘Vasso’’ deals specifically with a clause designed to clarify and perhaps extend insurers’ rights, and not with the potential common law obligation of the insured, in the absence of such a clause, to initiate proceedings prior to payment, and specifically to obtain a freezing order. One might therefore conclude that the insured must not prejudice any rights of the insurer by his behaviour, either before or after payment, even though all rights remain contingent and unenforceable until payment. If he does so the insured would be liable to compensate the insurer (Faircharm Investments Ltd v. Citibank International plc ([1998] Lloyd’s Rep. Bank. 127). However, all but one of the cases which substantiate this proposition consider sins of commission, so that this proposition can be refined to state that the insured must not actively deal with rights against third parties to the prejudice of the insurer. Andrews v. The Patriotic Insurance Company of Ireland (1886) 18 L.R. Ir. 355 is the only case which deals with an omission of the insured to sue the third party and was decided in favour of the insured on the basis that the insurers’ failure to pay the claim was a breach of contract which meant that they were unable to avail themselves of any right of subrogation, particularly in the absence of any request by the insurers to institute proceedings. There is something to be said for the proposition that the insured need not act unilaterally prior to payment. If insurers wish to protect their rights, or at

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least have them fully protected by the insured, it is easy to include a contractual term to this effect. Nevertheless, it remains arguable that there is an obligation upon the insured not to prejudice the insurers’ rights of subrogation in any way, whether by commission or omission, and that the insured should take whatever steps may be reasonable to protect these rights. This would not include applying for such draconian measures as a freezing order or search order without an express request from the insurers to do so, together with a full indemnity for all costs incurred by the insured. It might include instituting proceedings to protect any time bar to which the third party claim is subject, but this would always depend upon the facts. Thus if the insurer had not been promptly informed of the claim, and therefore had not been afforded an opportunity to investigate, the insured might be under a higher obligation to protect the claim. Where, however, the insurer has been informed that a time limit is about to expire, it is probably up to him to issue proceedings. The insured would be well advised to make the position clear to the insurer. Can the insurer avoid payment by pointing to the insured’s failure to preserve its rights of subrogated recovery in the clause of a specific clause to this effect? It is thought not. The purpose of subrogation is to provide the insurer with a method of setting off sums recovered from third parties against sums actually paid under the insurance contract. The clear quid pro quo for the acquisition of enforceable subrogated rights of recovery is payment under the policy, and Andrews (above) makes it clear that ‘‘no pay, no cure’’. If the insurer proceeds on the basis that it will not be paying the insured, then the insured should be entitled to proceed similarly, in which case it need not protect the contingent rights of the insurer, which do not vest until payment. RUNNING A SUBROGATED RECOVERY ACTION (a) The right to control proceedings: dominus litis One might feel that control of the proceedings does not really matter if the funding and methods of apportionment (see below) have been agreed. What happens, for example, if the defendant pays money into court? The insured and insurer may have very different views as to its acceptance, depending upon the amount of insured and uninsured loss. An insured is entitled to control any proceedings brought against a third party prior to payment by the insurer under the policy (subject to any express clause in the policy). This principle also applies where an insured is not fully indemnified by the insurer because the sum insured and paid is inadequate to cover his loss. In Commercial Union Assurance Co. v. Lister (1874) L.R. 9 Ch. App. 483 the owner of a building insured it against fire, but unfortunately not to its full value. Following a fire caused by the negligence of a third party, the court stated that

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the presence of any uninsured loss entitled the owner to conduct the action without any interference from insurers: ‘‘[the insurers] assert that in such a case the insured person, though entitled to bring an action for the loss he has sustained, is not entitled to be master of that action; and they assert that, though he is bringing it bona fide, and is acting bona fide, he is not entitled to compromise that action, or to do anything else, without their assent. I can find no ground whatever for such a suggestion. He is entitled to bring an action against the corporation for the injury to himself. He is entitled and is bound, and has agreed as there is one cause of action, to bring the action for the whole loss to himself, including that part of the loss against which he is indemnified by the insurance company.’’

However, where different types of loss are suffered by the insured, e.g. property damage and personal injury, which give rise to two separate causes of action, then two sets of proceedings could be instituted against the party responsible, with the insurer in charge of one and the insured in charge of the other. It should be said, however, that insurers in practice have the largest interest, and are usually prepared to pay costs up front or as litigation proceeds. It would also appear, following Napier & Ettrick v. Kershaw Ltd [1993] 1 Lloyd’s Rep. 197 (below), that the insured is not entitled to control proceedings where he is indemnified by insurers pursuant to the policy and the loss falls within the policy limits. The fact that he has not been fully indemnified in the sense that he has had to bear the cost of the deductible himself now seems to be irrelevant; there must be an uninsured loss to enable the insured to control the litigation i.e. one over and above the level of insurance, which is directly linked to the event causing the loss in respect of which the insurer has paid the insured, and which is recoverable at law. Whoever is entitled in any particular circumstance to control the litigation, the insured can be compelled by the insurer to institute proceedings against the party causing the loss (Mason v. Sainsbury (1782) 3 Doug. K.B. 61). He may also settle the claim without incurring liability to the insurer if effected bona fide, taking the insurer’s interest into consideration, e.g. where the claim is weak or the third party is likely to become insolvent (Commercial Union Assurance Co. v. Lister (1874) L.R. 9 Ch. App. 483). The dominant feature of the doctrine is that the insured must not prejudice any rights of the insurer by his behaviour. Thus issuing proceedings against a third party for uninsured losses only instead of the full potential liability of the third party will render the insured liable to the insurer for an amount equal to the insured loss, but only if judgment has been given and cannot be set aside, e.g. on the ground that the third party has purposefully submitted to judgment in default for uninsured losses only in the knowledge that a subrogated claim for the full potential liability was pending. An insurer may remedy the position against the third party only if he acts before judgment (Buckland v. Palmer [1984] 3 All E.R. 554), because the principle of res judicata (i.e. the fact that the matter has been judicially concluded) precludes the insurer from any

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recovery against the third party. The insured would be liable to the insurer for the consequential costs of any amendment of the pleadings in the third party action, e.g. attending a hearing to obtain leave to amend.

(b) Funding the recovery action The questions of who controls the recovery litigation and who pays for it are rarely addressed at all when the policy is drafted, and consequently can give rise to internal disputes between insurer and insured, which themselves cost money, create friction and dissipate energy which would be better directed at the guilty third party. It is important not only to minimise any internal dispute but also to ensure that no third party learns of it. Any dissent between insurer and insured is a bonus to a third party. Where the total value of the loss falls within the limits of the insurance policy, no problem should arise because all costs are incurred for the benefit of the insurer. Similarly, where the uninsured loss amounts only to a small proportion of the total claim against a third party, the insurer is unlikely to quibble with the insured because the majority of the costs will be incurred for the insurer’s benefit. However, there are situations where problems may occur, as follows: (i) Where the value of the claim considerably exceeds the policy limits and there is therefore a large uninsured loss. The insured is likely to be very interested in the mechanics and cost of recovery. (ii) Where the policy is subject to an agreed value but the actual loss to the insured again exceeds the policy limits. (iii) Where the property was underinsured and was thereby subject to average, which thereby gives rise to a large uninsured loss. This is similar to (ii) above, but the implications are different. (iv) Where there are two different types of loss, one of which is insured and one of which is not insured, e.g. material damage and business interruption. (v) Where one type of loss is insured by one insurer and another type of loss by another. The involvement of the insured will depend upon the interaction of the above factors and his interest (or lack of it) will give rise to differing attitudes as regards the funding of any action for recovery, the control of any action and the dissemination of proceeds. As indicated above, where the insured’s possible recovery is limited to his excess and perhaps a small sum on top, which in total amounts only to a small proportion of the sum claimed, he is unlikely to be interested in funding any action for recovery. Where the insurers’ interest is dominant, they will normally fund it and will simply accept the fact that they may have to pay

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something to the insured for which they have not received any payment from him. However, where the insured has a very real interest in the recovery, problems can occur. The simplest method of funding a recovery action is for the insured and insurer to agree that every fee incurred in litigation will be split proportionately between them, the proportions being determined by the ratio of insured to uninsured losses. Alternatively, the insured may feel that his section of the claim is merely the icing on the cake in that the majority of the costs will be incurred by the insurer proving the substantive element of the claim against the third party. This could happen, for example, where the bulk of the insured’s claim relates to business interruption, which is essentially a matter of quantum, together with arguments as to remoteness of damage. The insured could convincingly argue that costs should be apportioned on the basis of time spent on each section of the claim, although this may in some circumstances be difficult to calculate. It should be remembered that the insured is under no obligation to pay for anything himself and could simply allow the insurers to proceed. The strict rules governing allocation of claims might mean that if the insurer recovers less than anticipated at the outset of litigation, he could effectively fund litigation on behalf of the insured because the only sum recovered is in respect of the uninsured loss, payable to the insured. Unless the claim can actually be split into separate causes of action, capable of being pursued by the insured and insurer respectively, the insurer is not able to escape his obligations to the insured, and is probably subject to a continuing duty of good faith in the collection of recoveries. On the other hand, if insurers can persuade the insured that in the absence of some financial contribution to the litigation, they will not pursue the recovery at all, then he might agree at the outset either to accept a sum which is in fact less than his proportionate entitlement of any recovery, or alternatively that the insurer will be entitled to be indemnified first from any monies recovered for the sum paid out under the policy, together with interest and costs. The solution In the absence of a clause in the policy wording which sets out and attempts to deal with the problems that may arise, any dispute as to the funding or conduct of the litigation will fall to be determined in usual ways, i.e. in an adversarial manner, where the parties simply try to negotiate an agreement, or alternatively by ADR or arbitration. However, all of these are ex post facto solutions (i.e. they can only be sorted out after the problem has arisen, rather than prior to and in anticipation of it), which could have been avoided by the inclusion of an appropriate clause in the policy wording. Nevertheless, even where such a clause exists, it is often useful to enter into an agreement before

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proceedings are instituted, which should consider the proportions of legal costs which each party should bear, who will have control of the action, apportionment of recovered sums, questions of appeal, payment of costs in the event that the recovery action fails or of unreasonable costs, whether costs should be taken as a first bite out of any sum recovered before allocation between the parties, and the apportionment of windfall recoveries in excess of the losses of both parties.

THE THIRD PARTY CLAIM This claim will be subject to two qualifications. (a) The first qualification will be the effect of any exclusion or limitation clauses contained in the contract between the contractor and the tenant, which will always be a mixed question of fact and law in each case. In Norwich City Council v. Harvey (1989) 1 All E.R. 1180 the court considered whether the duty of care between the owner of a building and the sub-contractor was qualified or extinguished owing to contractual arrangements between the owner and the main contractor which touched upon the risk of loss or damage by fire. The sub-contracts did not contain specific provisions regarding loss or damage by fire, but the main contract contained a statement that as between the owner and main contractor, the risk of loss or damage by fire was on the owner. The courts have inferred from this and similar clauses that it was intended that the owner should bear the sole risk of fire even as regards the sub-contractor, thereby qualifying any duty of care at common law and precluding any subrogated action against the sub-contractor. (b) The second qualification will be the effect of any insurance conditions also contained in the contract. The defences of all potential defendants on this latter aspect will probably be based upon the premise that each party is an insured within the meaning of the policy, or upon an implied agreement between the insurer and defendant that the insurer would not pursue a subrogated recovery action. This type of defence is generically known as ‘‘circuity of action’’ and has become more prevalent following Petrofina UK Ltd v. Magnaload (1984) Q.B. 127, although as far back as 1878 the House of Lords in Simpson v. Thompson refused to allow an insurer of two ships, which were owned and insured by the same owner under one policy, to offset his right to proceed against the insured for the damage caused to one ship by the master of the other against the amount payable for the damage caused. In the Petrofina case referred to above, the defendant was a named insured on the same policy as the plaintiff and the court said that commercial convenience dictated that each of the named insureds should have an insurable interest extending to the whole contract, including property belonging to any other assureds which it might damage. This premise is frequently encountered

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in the context of any contractual programme which involves sub-contractors, and particularly in the construction industry. In Stone Vickers Ltd v. Appledore Ferguson Ship Builders Ltd (1992) 2 Lloyd’s Rep. 578 the main contractors sub-contracted the construction of a propeller which later failed to meet the noise criteria and resulted in expensive modifications. The main contractors’ insurance policy contained a wide definition of the ‘‘assured’’ and could cover sub-contractors, although declarations made by the contractor did not mention the sub-contractor in question by name or description. The contractors’ insurers alleged that the contractors had not intended to obtain insurance on behalf of the sub-contractor and the Court of Appeal therefore had to consider whether the sub-contractor were a co-assured under the policy. It looked not only at the main contractors’ policy documents but also at the main contract and sub-contract to ascertain the contractors’ intention. It applied the principles relating to privity of contract set out in Midland Silicones Ltd v. Scruttons [1962] A.C. 446, as follows: (a) the policy must make it clear that the sub-contractor was intended to benefit from the provisions in the policy; (b) the policy must make it clear that the primary insured, in addition to contracting for the insurance on his own behalf, is also contracting as agent for the sub-contractor and that the insurance would apply to the sub-contractor; (c) the principal insured must have authority from the sub-contractor to contract on its behalf, although ratification by the sub-contractor may remove this hurdle; (d) some consideration must move from the sub-contractor. The Court of Appeal commented that there had been no communication between the main contractors and sub-contractors concerning insurance and the sub-contract contained no provision whereby insurance would be obtained by the contractors on behalf of the sub-contractors. The sub-contractors therefore failed to show that there was any intention on the contractors’ part to insure on behalf of the sub-contractors. A more recent and very much more complicated case is that of Davy Offshore Ltd v. National Oilwell (UK) Ltd [1993] 2 Lloyd’s Rep. 582. The main contractors were indemnified under a builders’ all risks policy, and the subcontractors’ defence to subrogated recovery proceedings brought by the insurers in the name of the contractor was that they were co-insureds. The sub-contract made it clear that the main contractors had agreed to provide some insurance for the sub-contractor. The contractor argued that this obligation was limited specifically to the sub-contractors’ own contribution, rather than the whole project, and that it only applied up to the moment of delivery of the subsea system in question designed and supplied by the subcontractors. In fact, the contractors’ policy provided cover for the entire project works and entire contract period. The sub-contractors argued that these wider policy benefits were for their benefit.

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Colman J. held that a sub-contractor could only become a party to the contractors’ insurance contract if the contractors were authorised by the subcontractors, and intended to insure on the sub-contractors’ behalf, or if the sub-contractors were entitled to ratify and sue upon the contracts. In this case, the main contractors were obliged to obtain some insurance for the subcontractors and had their authority to do so, specifically for the pre-delivery period. The judge considered that the main contractors’ authority was limited only to pre-delivery insurance for the sub-contractors’ work. The sub-contractors then tried to argue that the main contractors had implied authority arising in the usual course of business in similar projects, but the judge felt that the implication of such authority was not necessary as a matter of business efficacy. The sub-contractors therefore failed to show that the main contractors had authority to bind the sub-contractors to a policy with wider insurance coverage than that specified in the sub-contract. The sub-contractors therefore had to show that the main contractors intended to include the sub-contractors in a class of co-assureds who were entitled to the full range of cover provided by the policy. The judge considered that the subjective intention of the main contractors was directly material and that he was therefore entitled to look beyond the words of the policy. He listened to the evidence of a number of personnel employed by the main contractors, together with their insurance brokers. Their evidence was that they had only intended to obtain insurance for sub-contractors only to the extent that they had provided for in the subcontract, and no wider. The structure of the deductible supported the broker’s evidence because there was no provision for the sub-contractors to bear the first part of any loss. The judge stated that if the main contractors had intended to procure coverage for the sub-contractors, then it also would have required the sub-contractors to bear the first part of any loss as a deductible. The judge also felt that it was not open to the sub-contractors to ratify the contract to obtain a wider scope of coverage. Colman J. also held that a sub-contractor has an insurable interest in the entire contract works, even if he is only responsible for a section of them, and that implied subrogated rights can only be exercised against a co-insured in respect of a loss caused by a peril insured for his own benefit when the co-insured has a narrower coverage under the policy than other co-insureds. It will therefore be clear that the intention of the party arranging the insurance coverage is an important factor in ascertaining whether or not any other party, such as a sub-contractor, is entitled to be considered as a co-insured, the burden of proof lying on that third party, or alternatively as to whether the existence of such insurance constitutes an implied agreement that the insurer will not pursue any subrogated recovery action. In fact the former proposition runs contrary to general contractual principles whereby the parties’ intent is divined from their written words, particularly given that the intentions of one party which are unknown to the other cannot be relevant to

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an interpretation of the latter’s rights and obligations. Nevertheless, this may not matter because there is a (rebuttable) presumption in cases involving unnamed or undisclosed principals that one principal is prepared to contract with the principal of the agent with whom he is dealing. The principles were refined in Deepak Fertilisers & Petrochemical Corporation v. Davy McKee (London) Ltd and ICI Chemicals and Polymers Ltd [1999] Lloyd’s Rep. 387 in which the Court of Appeal considered the extent of the sub-contractor’s liability and the apparent immunity from subrogated litigation arising out of the insurance clause. It confirmed that the sub-contractor had an insurable interest in the entire works and accepted that any damage caused by the sub-contractor during the construction process was covered, but that coverage did not extend beyond the expiry of the contract works involving the sub-contractor. Any damage occurring after that date was not covered for two reasons; first, because the nature of the all risks policy on plant is a property cover, not a liability cover. It is the plant which is insured, not the sub-contractor’s liability to the employer. Second, the sub-contractor would not have been covered even if the policy had (in terms of the property, and not liability) purported to cover him because he had no insurable interest after the expiry of his contract works. In British Telecommunications Plc v. James Thomson & Sons (Engineers) Ltd (unreported, December 1998) the House of Lords considered the proposition that an obligation to insure incorporates an acceptance of the risk. The contractor was contractually liable to indemnify the employer against loss or liability arising out of the carrying out of the contract works and due to the negligence of the contractor. The employer was obliged to insure for the full reinstatement value of the structures and contents. Any such insurance was to include a subrogation waiver against a nominated sub-contractor, but there was no such subrogation waiver against a domestic sub-contractor. The defendant was a domestic sub-contractor. Its case was that the obligation imposed on the employer to take out insurance was irreconcilable with one of the necessary factors to found a duty of care, namely that it must be fair, just and reasonable. Lord Mackay disagreed and held that the exclusion of domestic sub-contractors was of crucial significance. They were accordingly liable. The fact that such sub-contractors would then have to take out their own insurance covering the same risk as the employer was not a sustainable defence. Also of interest is Lord Mackay’s observation that the availability of subrogation recovery actions might play an important part in the rating of the risk by insurers. Of course the wording of any contracts will be critical. In National Trust v. Haden Young Ltd, The Times, 11 August 1994; 41 Con. L.R. 112, the contract between the employer and the contractor provided that the contractor would be liable for any damage and that he would obtain insurance. It also required the employer to insure specific property against specific risks, but did not refer to liability. The contractor was held liable for the loss caused by fire, the Court

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of Appeal stating that the parties had contemplated a potential overlap between the two provisions, with the employer’s recoverable damages being liable to be reduced by the amount recoverable under his insurance. In Kruger Tissue (Industrial) Ltd v. Frank Galliers Ltd (O. R. Business 24/2/98; 57 Con. L.R. 1) the property owner/employer was obliged under the contract with its contractor to insure existing structures and their contents ‘‘for the full cost of reinstatement, repair or replacement of loss and damage’’ and the contractor agreed (subject to this obligation) to be liable ‘‘for, and shall indemnify the employer against any expense, liability, loss, claim or proceedings . . . ’’. The issue was whether the damages for loss of profit, the increased cost of working and consultants’ fees were included in the owner’s insuring obligation. The court held that the owner’s obligation to insure did not include any obligation to insure against loss of profit or other similar risks. Finally, there may often be a dispute as to whether a party is a ‘‘contractor’’ or ‘‘sub-contractor’’ under a policy, particularly for the purpose of evaluating additional insureds under a contractor’s all risks policy. The Supreme Court of Canada has looked at the meaning of these categories in the context of the underlying purpose of the insurance itself: why is it there and what is it intended to achieve? The answer given in Commonwealth Construction Co. Ltd v. Imperial Oil Ltd (1976) 69 D.L.R. (3d) 558 is that such insurance is ‘‘to provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction’’. Thus the insurance is designed to protect against the consequences of the insolvency of any party, and it is the impact of any such insolvency which determines the importance of a party and whether he can be categorised as an insured. A security firm protecting a construction project is not a ‘‘contractor’’ (Canadian Pacific Ltd v. Base-Fort Security Services (BC) Ltd (1991) 77 D.L.R. (4th) 178; the supplier of a water cooler and drinking fountain which was so defective that it flooded a construction project was not a ‘‘sub-contractor’’ (Stuart Olson Construction Ltd v. Allan Forrest Sales Ltd (1994) 161 A.R. 6); and a firm of consulting engineers were neither under a contractor’s all risks policy (Hopewell Project Management Ltd v. Ewbank Preece Ltd [1998] 1 Lloyd’s Rep. 448). This last case stated that it was not normal practice to describe a firm providing professional services as a ‘‘contractor’’ or ‘‘sub-contractor’’, which in the context referred to parties whose activities included physical construction work. Who else can be sued? In summary, it will be apparent that the insurer should scrutinise all contractual arrangements of the party seeking insurance, if the insurer intends to preserve its potential rights of subrogated recovery. Any terms requiring this

Subrogation Waiver Clauses

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party to insure may give rise to the possibility that sub-contractors could be co-insureds under the policy, or that the insurer impliedly agrees not to pursue any subrogated recovery action. Quite how the insurer is able to ascertain the subjective intention of one contracting party is unclear. The answer may be expressly to specify that certain parties are not to be considered as co-insureds under the policy.

SUBROGATION WAIVER CLAUSES Insurance policies often contain subrogation waiver clauses, removing the insurers’ right to recover against a sub-contractor or employee. Of course if the sub-contractor were to be a co-insured or there were an implied term that the insurers would not pursue subrogated recovery actions, then the subrogation waiver clause has no impact because it does no more than confirm the position. However, the sub-contractor may not be a ‘‘full’’ co-insured, but instead may have restricted insurance under the main contractors’ insurance, as occurred in Davy v. National Oilwell (above). In this situation subrogated claims against a sub-contractor would only be excluded to the extent that the sub-contractor itself has brought a claim against insurers, i.e. a subrogation waiver clause could only operate in respect of those claims under the insurance of a narrower scope than the cover actually provided. Further, there could be no waiver of subrogation where a co-assured is guilty of wilful misconduct. A subrogation waiver clause is not, therefore, a blanket abandonment of all claims against a co-insured. Further, the courts appear to have a power of denying the insurer the right of subrogation in cases where it would not be ‘‘just and equitable’’. Lord Denning took this approach in Morris v. Ford Motor Co. [1973] 2 All E.R. 1084, in relation to an insurer’s argument that it could use its insured’s name to sue an employee of the insured, and another judge in the same case considered that there was an implied term in the contract of indemnity that the right of subrogation would be excluded because subrogated recoveries by an employer against employees was unacceptable and unrealistic. However, in Lister v. Romford Ice & Cold Storage Co. (1957) 2 W.L.R. 158 the House of Lords allowed an action by an employer against his employee but there was no argument about the rights of subrogation, merely about whether an employer was entitled to sue an employee. Now that the jurisistic basis of subrogation has been held by the House of Lords to be in equity, the courts applied Lord Denning’s approach where it would be unjust or inequitable to allow an insurer to pursue a subrogated recovery action. Thus in The Surf City [1995] 2 Lloyd’s Rep. 242 an open cover insurance contained a term stating that ‘‘no right of subrogation . . . shall lie against any vessel . . . belonging in part or in whole to a subsidiary and/or an affiliated company’’. A subsidiary of the insured owned the vessel carrying the cargo, for delivery on a c.i.f. basis to the order of the consignee. The vessel caught fire and the insurer indemnified the

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consignee for its loss, and then sought to recover by way of a subrogated action in the name of the consignee from the subsidiary of its original insured under the open cover on the basis that the waiver clause had no effect where the insurer had not indemnified the original insured or its subsidiary. The Commercial Court held that the clause was intended to benefit the subsidiary of the insured which contracted with the insurer, and that when the beneficial interest in the policy was assigned it did not also follow that the original insured lost the benefit of the clause. This conclusion was consistent with the wording used and the commercial purpose of the clause, as well as principles of equity. It also accords with common sense: it would be odd if the insured’s subsidiary would only be protected if it were actually indemnified, but not where the insurer paid another party.

MISCELLANEOUS (a) The effect of legal action taken by the insured While the insurers are quantifying the loss prior to any payment under the policy, they might discover that the insured has instituted legal proceedings against a third party. In the absence of any specific wording in the policy forbidding the insured from doing so, there is nothing that the insurer can do at this stage. However, if the insured were to settle the claim with the third party for a lower amount than the claim was actually worth, so that the settlement were not bona fide, then the insurer could refuse to pay any of the insurance monies and retain the difference as damages for its loss, which it would otherwise have obtained against the contractors (West of England Fire Insurance v. Isaacs [1897] 1 Q.B. 226, C.A.). Where the insured has instituted proceedings and obtained judgment against a third party in respect of an apparent liability for the loss, he will be estopped or barred from pursuing the correct tortfeasor (on behalf of the insurer as a subrogated recovery action) only if he had full knowledge of the facts when he entered judgment. Thus in Naumann v. Ford [1985] 2 E.G.L.R. 70 a leaseholder sued a company to whom the freehold had been assigned after the fire causing damage in the erroneous belief that the assignee company had acquired the freehold before the fire, a belief engendered by the assignee company itself. The court held that she was nevertheless entitled to sue the correct freeholder who was in breach of the covenant to insure at the date of loss. However, if the third party was aware of the position and that the insured’s claim against them was meritorious but was being settled at a low level because, for example, the insured felt that it was insured for the balance, or to achieve a quick and painless settlement, and in the knowledge that the insurer’s rights are clearly being compromised then the insurers would still have a claim against the contractors (Hayler v. Chapman, The Times, 11 November

Assignment or Subrogation?

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1988). Where the contractors did not realise that the settlement was not bona fide, then the insurer cannot pursue any claim against them. A proper compromise in good faith is good as far as the contract is concerned (London Assurance Co. v. Sainsbury [1783] 3 K.B. 245). The insurer’s remedy would in this case then be against the insured, not the third party. (b) Third party defences applicable only to the insurer Finally, the insurer may be confronted by a defence of a third party which does not apply to the insured but only to the insurer, such as the fact that the insurer is an enemy alien or has agreed with the insured that he will not pursue any subrogated claim against any third party. In Thomas & Co. v. Brown (1899) 4 Com. Cas. 186 the insurer tried to pursue a subrogated claim against a lighterman who had caused damage to the insured. The slip stated that ‘‘this policy is to pay any claim or loss irrespective of any other insurance, and without recourse to lightermen’’. The insurer argued that this clause did not protect the third party, owing to the absence of privity of contract between the insurer and the third party, but the third party successfully showed that his contract with the insured contained an implied term that he would not be liable for any risk which could have been insured, or unless he was negligent, and that the policy in question reflected this market practice. A third party certainly cannot claim (with any hope of success) that the insured who has brought the action has suffered no loss because he is insured (unless that third party can somehow show that the insurance was effected for his benefit (Europe Mortgage Company v. Halifax Estate Agencies, unreported, The Times, 23 May 1996)), and nor can the third party claim that the insurer has voluntarily assumed the liability in cases where he did not exercise any right to avoid the contract, as long as the insurer has provided the indemnity honestly (King v. Victoria Insurance Co. (1896) A.C. 250). The test applied in Austin v. Zurich (77 Lloyd’s Rep. 409) is whether the insurer believed and had reasonable grounds for believing that it was or might be liable under the policy.

ASSIGNMENT OR SUBROGATION? It is not possible for the insurer to take an assignment and pursue subrogated rights. The traditional view is that the two are mutually exclusive. What, then, are the comparative advantages and disadvantages of assignment and subrogation? (a) An assignment has the clear advantage of allowing the insurer to proceed without the cooperation of the insured. The action is taken in the insurer’s name and the money will go straight to the insurer. One of the main disadvantages of subrogation is that the action is in the name of the insured, which means that the insured must continue to exist at least until the issue of a writ

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in any subrogation litigation. In M.H. Smith (Plant Hire) Ltd v. DL Mainwaring [1986] 2 Lloyd’s Rep. 244, the insurers’ solicitors brought an action against a third party in the name of the insured. Certainly the insurer had the insured’s authority to commence proceedings, but by the time they commenced the action the insured had been wound up. The Court of Appeal determined that, as there had been no assignment, it could not substitute the name of the insurer as the plaintiff insured no longer existed. It struck out the claim and the insurers’ solicitors had to pay the costs. To pursue the claim the insurer would have had to reinstate the insured company back onto the register. (b) The insurer also has to take an assignment of the entire cause of action (because he cannot take a legal assignment of part), and it is therefore possible that on occasions an insurer may in fact have a surplus over and above the indemnity to the assured. The insured will not have any right to any surplus, in the absence of any agreement. (c) There is a downside in that by suing in its own name the insurer may receive adverse publicity from the litigation. Subrogation, however, operates automatically so there is no need to enter into any formal documentation— subrogation rights simply exist whether or not there is any requirement in the policy. (d) Finally, an assignment may be disadvantageous to the insurer because once the assignment has taken place, it is quite common for the insured to lose interest in the matter, particularly if the insured feels that his claim has been tardily processed or settled for less than he thought was fair. On the whole it is harder to enlist the cooperation of the insured in providing documentation and obtaining assistance from the factual witnesses. It is as if by providing the assignment the insured feels it has done all that it is required. When the insured’s name is part of the litigation there seems to be greater commitment in supporting the insurer in its recovery action. Problems can arise, however, unless great care is taken. Thus in Colonia Versicherung AG v. Amoco Oil Co. [1995] 1 Lloyd’s Rep. 570 a contaminated consignment of naphtha from Amoco was onsold twice to become the property of ICI. Amoco paid ICI U.S.$8 million in full settlement of the loss and took an assignment of ICI’s rights under its insurance policy with Colonia, who refused to pay on the basis that the payment from Amoco was an indemnity which they were entitled to deduct from any sum otherwise due to ICI (and therefore to Amoco under the assignment) under the policy. The Court of Appeal agreed, stating that the crucial question was whether it was the intention of the funding party to benefit the insured (or its assignee) to the exclusion of insurers. The settlement documentation contained an express reservation of insurer’s subrogation rights, and even though ICI might have had no discernible claim against Amoco, who could have reduced any liability by the restrictive clauses in the contractual chain, as a matter of construction it had not been Amoco’s intention to benefit ICI to the exclusion of insurers.

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Thus insurers were entitled to regard Amoco’s payment to ICI as diminishing (and in fact extinguishing) ICI’s loss, so that the rights assigned proved valueless.

ALLOCATION OF SUMS RECEIVED Any sums received by the insured from a third party are subject to allocation according to established principles, to the effect that: (a) It used to be thought that the insured was entitled to a full indemnity in respect of his loss before the insurer became entitled to receive any payment. Thus the insured could keep a sum equal to the deductible before handing over anything to the insurer. Napier Ettrick v. Kershaw Ltd ([1993] 1 Lloyd’s Rep. 197) changed this consumerist approach and greatly assisted insurers, particularly where the insureds are or may become insolvent, in that insurers will not have to compete with other unsecured creditors. The case concerned £116 million paid to a firm of solicitors in settlement of earlier litigation in which their clients, 246 members of the Outhwaite Syndicate 317/661 at Lloyd’s, had sued the managing agent of the Syndicate for negligence. The parties to the appeal were the Names and their stop-loss insurers who had made payments to the Names under various stop-loss policies. The monies paid in settlement were considerably less than the Names’ full underwriting losses. The two issues between the Names and their stop-loss insurers were: (i) the distribution of the settlement monies as between them; and (ii) the rights of the stop-loss insurers in the monies held by the solicitors on behalf of the Names. The stop-loss policies were silent as to what should be done with the settlement monies. Priority of recovery: ‘‘top-down’’ The uninsured portion of the loss was first paid out to the Names, and then set against the insurers’ payments. There was not enough to pay the Names’ uninsured loss above the insurers’ payment, and their deductible. The court stated that the deductible would be paid only after the insurers had been reimbursed. This approach was confirmed by Rix J. in Kuwait Airways Corporation v. Kuwait Insurance Co. SAK [1996] 1 Lloyd’s Rep. 664 in the face of an argument that the top-down principle did not apply to marine (and therefore aviation) insurance. He said that the top-down principle applied to aviation losses and recoveries because ‘‘it is the principle which most closely conforms to the underlying rationale of subrogation; or because any variation from that

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principle is confined to marine insurance’’. However, he did not conclusively decide whether the recoveries should be applied on a per aircraft basis, i.e. that because underwriters had paid 300/692 of the value of each aircraft, then the insured could only retain from the recovery of each aircraft sufficient to indemnify it in respect of that aircraft, rather than on any overall basis. This aspect was not considered by the two higher courts and is therefore technically still open in respect of marine and aviation insurance. (b) The House of Lords held that the right of subrogation implied into the contract of insurance gave the insurer an enforceable equitable interest in the damages payable by the wrongdoer. Furthermore, the insurer has an immediate interest in the monies recovered. He has an equitable lien or charge over them and an insured may not receive or deal with those monies insofar as they are required to be paid to the insurer. Insurers would be well advised to give notice of their equitable lien to a wrongdoer before payment of damages to the insured. The wrongdoer would then either have to pay the damages into court, if litigation exists, or decline to pay without the consent of both the insured and the insurer. (c) The insurer is only entitled to recover what it has paid the insured in respect of the insured loss or liability, together with interest (Yorkshire Insurance Co. v. Nisbet Shipping Co. [1962] 2 Q.B. 330). Thus any sum recovered by the insured in excess of the sum paid by the insurer may be retained by the insured, save for the amount of interest due to the insurer from the date of settlement. The insured can retain interest payable from the date of loss (or shortly afterwards) until the date of payment by the insurer (H. Cousins v. D & C Carriers [1971] 2 Q.B. 230). Equally, the insurer is obliged to pay interest on any surplus funds owed to the insured (Lonrho Exports Ltd v. ECGD [1996] 2 Lloyd’s Rep. 649). Thus reads the established case law. However, one must ask whether the decision in Yorkshire Insurance v. Nisbet Shipping can still be supported in the light of the House of Lords’ decision in Napier v. Kershaw. Lord Robert Goff in Napier v. Kershaw rejected the judgment of Diplock J. in Yorkshire v. Nisbet on the question of whether or not the basis for subrogation was equitable or under common law. Further, a relevant case was cited in Napier v. Kershaw but not in Yorkshire v. Nisbet, and the existence of an equitable proprietary lien was not in issue in Yorkshire v. Nisbet. It was suggested to the Court of Appeal in 1973 in L. Lucas Ltd v. ECGD [1973] 1 W.L.R. 914 that Yorkshire v. Nisbet was wrong. This was another devaluation windfall case, which was capable of resolution on the basis of the policy wording. However, following Napier & Ettrick v. Kershaw Ltd the insurer has a proprietary interest in any sum recovered which gives him strong arguments to the effect that he is also entitled to interest accrued in the hands of the insured, any profit made by the insured on trading with the money, and any form of appreciation following currency movements. It may be that Yorkshire v. Nisbet might now be decided on the basis that the insurer would be

Payments to which Subrogation does not Attach

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entitled to any windfall profit, because the insured has agreed with the insurer that he will be indemnified for his loss and for his loss only. Any sum in addition to his total loss is no more his than it is the insurers in moral terms, and the insurer may now be entitled to argue that it belongs to him. (d) Any policy subject to average will transform the insurer and insured into co-insurers where the policy limit is less than the loss, so that any subrogated recovery must be apportioned according to the proportion each bears to the loss. Thus where goods worth £100,000 are insured for £75,000, and a loss of £50,000 occurs, any payment by insurers for a partial loss will be subject to a reduction of 25%. Thus insurers will pay £37,500 to the insured, who will bear a shortfall of £12,500 in addition to his deductible. The 75/25% formula will also be applied to any recovered sum, so that a recovery of £30,000 will be split £22,500 and £7,500 in the insurer’s favour. (e) Where the subject matter of the policy has been valued prior to inception, then the insurer is entitled to payment first from any recovered sums because the insured is estopped from alleging that there has been an uninsured loss, as a matter of definition. Thus where goods worth £100,000 are insured for an agreed value for £75,000, and there is a total loss, then insurers will pay out £75,000. A subsequent recovery of £85,000 will be allocated, £75,000 to insurers and £10,000 to the insured, who will also bear the cost of the deductible. (f) Unless a court specifically allocates damages to each section of any claim, it will be very difficult to establish which part of the recovery applies to each type of damage. This is particularly true with regard to payments into court or offers made by the defendant on a global basis.

PAYMENTS TO WHICH SUBROGATION DOES NOT ATTACH These include damages payable to the insured for consequential loss since these do not diminish the loss insured, or payable for any claim which is additional to and independent from the loss insured, or for any sum paid to discharge a loss which is clearly not insured (Horse, Carriage & General Insurance Co. Ltd v. Petch [1916] 33 T.L.R. 131). Similarly an ex gratia payment by a third party to the insured will not be subject to subrogation if it was intended as personal compensation for the insured rather than in diminution of the loss. However, clear proof will be necessary to rebut the presumption that any payment is made to diminish the loss (Stearns v. Village Main Reef Gold Mining Co. Ltd [1905] 21 T.L.R. 236). The insurer has no right to such gifts (where they are intended to benefit the insured personally), and particularly where the insured has no right to demand compensation from the third party (Castellain v. Preston (1883) 11 Q.B.D. 380, 391). The courts will also refuse to uphold any insurance contrary to public policy, such as wagers or honour ‘‘contracts’’ (John Edwards & Co. v. Motor Union Insurance Co. Ltd [1922] 2 K.B. 249).

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CONTRIBUTION AND REINSTATEMENT INTRODUCTION One might think it unlikely that an insured would insure the same subjectmatter more than once. What would be the point? Premium would be wasted because no gain would be made; the insured could never obtain more than an indemnity for his loss. It is, nevertheless, perfectly lawful for any insured to insure any item or liability as many times as he wishes, despite the fact that the ability of the insured to over-insure may in some cases be an invitation to fraud. However, this possibility is balanced by the fact that the insured is considered to be perfectly entitled to take out insurance with as many insurers as he wishes in order to minimise any problems which he may have should any one insurer become insolvent or otherwise refuse or become unable to pay a valid claim. This right has arisen historically because the statutory provisions relating to over-insurance were formulated at a time when insurance companies were not properly regulated and the possibility not only of insolvency but also of fraud on the part of the insurers was a more common likelihood than should be the case today. It is also possible that an insured might want to insure against loss resulting from a peril excluded by the policy, and his additional policy might well also cover risks already covered by the first policy. If he then suffers a loss covered by both policies, who pays, and can the paying insurer recover anything from the other? Readers are warned that this is a complicated area which developed haphazardly and in some areas remains unclear and confused. CRITERIA FOR CONTRIBUTION Section 32 of the MIA 1906, which in many cases (including contribution) applies both to marine and non-marine insurance, provides that double insurance occurs: ‘‘where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act . . . ’’

This takes into account the distinction which must be made between co-insurance and double insurance. Co-insurance occurs when several insurers agree to take a specified percentage of the cover required by the insured, thereby spreading the risk more widely. Double or over-insurance arises where an insured has obtained two or more policies of insurance which, if paid in full by each insurer following a loss, would result in the insured recovering more than 100% of the loss or damage suffered.

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The criteria which must be satisfied before any claim for contribution can be made between insurers are as follows: (a) Same subject matter In Boag v. Economic Insurance Co. Ltd [1954] 2 Lloyd’s Rep. 581 a lorry load of cigarettes were destroyed by fire whilst temporarily stored at a factory. The question was whether the fire insurers of the factory were liable to contribute towards the payment made by the all risks insurers covering the cigarettes. It was held that the cigarettes did not form part of the insured’s stock in trade at the factory so that the fire insurers of the factory were not liable to contribute. Of course had the cigarettes been delivered to the factory rather than just being stored temp orarily, the fire insurers would have been liable in full, and the all risks insurers would not have been liable because the cigarettes had changed from being goods in transit to stock. Nevertheless, the policies need not be identical in scope or in limits for the principle of contribution to operate between insurers. (b) Same form of cover The peril or contingency causing the loss must be covered by all the policies in question. One would therefore think that any overlap between the policies would be sufficient to enable the insurers to insist upon their rights of contribution, provided that the insured can make a claim under any of the policies in question. In practice, the English courts have not accepted this logical proposition and take the view that any temporary or coincidental partial overlap of these policies does not necessarily constitute double insurance for the purposes of contribution (Australian Agricultural Co. v. Saunders (1875) L.R. 10 C.B. 668). The coverage in each policy must be substantially similar before any rights of contribution can exist. The degree of similarity is also important. If the coverage is identical, it is termed ‘‘concurrent’’. If similar but providing more or less coverage, it is termed ‘‘non-concurrent’’. The importance of this distinction is explored below. (c) Same rights and interest This requirement gives rise to few problems where the insured is the same entity throughout the policy period. However, concurrent interests may sometimes be held by different insured parties, such as landlord and tenant, mortgagee and mortgagor, and bailee and bailor. In North British & Mercantile Insurance Company v. London, Liverpool & Globe Insurance Co. [1875] 5 Ch.D. 569 some grain was insured by its owners whilst held by wharfingers, who in turn insured their possible liability as bailees. The grain was destroyed by fire whilst in the wharfingers’ possession and the Court of Appeal held that neither

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policy of insurance was concurrent on the same property because different interests had been insured. On the face of it an indemnity for the loss could be paid twice: once by each insurer to its insured. However, the payment by the wharfingers’ insurers would be in respect of the wharfingers’ liability to the owners, and would today be paid direct to the owners, who would therefore not suffer any loss and would not be paid by their insurers. (d) All policies must be in force at the time of the loss and the insured must be able to claim against any one of them It is axiomatic that the insurance policies under which any right of contribution is sought to be exercised must be valid at the relevant date. Thus where the insurance is subject to a suspensory clause which prevents the policy coming into force until all premium has been paid, no right of contribution against this policy can exist. Similarly, where a material fact has not been disclosed prior to the conclusion of the contract of insurance, the policy can be avoided ab initio and a claim for contribution under that policy cannot be made. The date at which the validity of the policies is to be determined is therefore of some significance. Whether it is the date at which one insurer seeks contribution from another insurer, or the date of loss has been discussed in two contradictory authorities. In Legal & General Insurance Society Ltd v. Drake Insurance Company Ltd [1992] 1 All E.R. 283 both insurance policies required immediate notice to be given of any event which might give rise to a claim. This condition in each case was precedent to the insurer’s liability to make payment under the policy and, although this case remains an authority on the position where rateable proportion clauses are involved, it is of less authority in respect of the doctrine of contribution. Nevertheless, the Court of Appeal in this matter drew a distinction between a breach which occurs prior to the loss and a breach which occurs subsequently. Lloyd L.J. felt that the co-insurer’s right to contribution crystallised at the date of loss. Therefore, if there is a breach of condition prior to the loss which would entitle the claim to be validly repudiated, such breach could be relied upon as a defence to any claim for contribution. However, if the breach of condition arose subsequently, which would be the case if an insured failed to give notice to the relevant entity within the specified time, then the claim for contribution would succeed. These propositions were not accepted by the Judicial Committee of the Privy Council in the case of Eagle Star Insurance Co. v. Provincial Insurance Plc [1993] 3 All E.R. 1. This case arose out of damage caused by Mr O’Reilly through his use of a vehicle which had been loaned to him. Mr O’Reilly had his own motor policy from Eagle Star whilst the owners of the car he was actually driving had cover from Provincial. However, Eagle Star had cancelled its contract of insurance prior to the accident but had failed to comply with all local requirements owing to an administrative error, and therefore remained

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potentially liable to third parties. The policy was therefore in force with regard to third parties. Notice of the claim was given to Eagle Star but not to Provincial, whose policy contained a specific notification provision. It was accepted that Provincial was entitled to repudiate liability as a result of the insured’s failure to give notification to them of any occurrence which might give rise to a claim. In this case, both insurers were in the same position because they would have been entitled to repudiate liability to the insured, but each were under a statutory liability in relation to any claims made by a third party. In the event the Privy Council felt that each should contribute equally to the third party claim, but the Privy Council laid down guidelines which overruled those established in Legal & General v. Drake Insurance Co. Ltd. The Council felt that there was no justification for creating, for the purposes of contribution between co-insurers, a special cut-off point which required the position to be judged at the date of the loss. If both insurers are not under any liability to the insured, then they should share the statutory liability for the loss equally, irrespective of the date upon which each repudiated liability. If each insurer were liable in part to the insured, then they should contribute proportionately to their statutory liability. This might have the result that the rights of contribution between the insurers could be affected because one insurer may be able to take advantage of any limitation on his contractual liabilities on the issue of contribution. An English court need not follow a decision of the Privy Council. However, the Privy Council in Eagle Star Co. v. Provincial Insurance was composed of five Law Lords and it therefore seemed likely that this decision would be applied. The rights of the paying insurer will therefore be dependent upon the conduct of the insured and his compliance with all relevant terms of his policy. The late notification of claims will probably defeat a significant proportion of contribution claims. Needless to say, of course, there has been some contretemps as to whether a lower court should follow either a decision of the Court of Appeal or the Privy Council. In O’Kane v. Jones [2003] EWHC 2158, [2004] 1 Lloyd’s Rep. IR 389 the Deputy Judge chose to follow the reasoning of the Court of Appeal in Legal & General on the basis that a first instance court must ‘‘loyally follow any decision of the Court of Appeal, even if the Privy Council has declined to follow that decision . . . I have no regrets in having to follow Legal & General, because I respectfully agree wholeheartedly with the reasoning and conclusion of the majority on the ‘accrual of equity point’.’’ What had happened in O’Kane v. Jones was that when the owners of a vessel failed to pay outstanding premiums, their brokers threatened to cancel the policy. The owners believed that the brokers had made good their threat after further non-payment, and they took out a further insurance policy. When the vessel became a constructive total loss it was discovered that there were still two policies in existence, one of which was then cancelled.

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The judge was faced with the usual fundamental questions concerning the operation of contribution and in particular at what date the right of contribution had to be assessed. He relied on the express wording of s. 80(1) of the MIA 1906 and took the view that this referred to the time of loss as being critical. In any event he then went on to follow the reasoning in Legal & General. RIGHTS OF THE INSURED Subject to the limitation that the insured cannot recover any more than a full indemnity, he is perfectly free to claim against any insurer in any order and for any proportion of the total loss. Where, however, the insured has both a valued and unvalued policy, and the value of the subject matter of the policies exceeds the agreed value so that the insured can recover more under the unvalued policy, then the insured would be advised to claim under the valued policy first. A ‘‘top up’’ claim could then be pursued against the unvalued policy for the balance. MODIFICATION OF THE INSURED’S RIGHTS (a) Prohibition on concurrent insurances without consent Policies often contain a term prohibiting the insured from obtaining concurrent insurance without the express consent of the insurer. (b) Prohibition of double insurance This is simply a more rigorous application of (a) above and usually takes the form of a term strictly prohibiting double insurance, or which withdraws coverage in the event that double insurance is effected. The intention behind these clauses is usually to move the burden of any loss onto the other policy. However, it is possible that each policy contains in effect the same provision, so that the loss rebounds between them. Should this happen, there is the obvious possibility that the policies negate themselves absolutely, so that there may be no coverage. However, in Weddell v. Road Traffic & General Assurance Company Ltd [1932] 2 K.B. 563 the court rejected the possibility that two policies containing prohibitions were self-cancelling and ruled instead that the double insurance prohibitions cancelled each other, so that each policy contributed 50%. (c) Rateable proportion clauses The insured is able to proceed against any of its insurers in any order for any proportion of the loss suffered, to a maximum of 100%. It is therefore perfectly acceptable for the insured to proceed against one insurer only for 100%

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of the loss, provided that the entire loss falls within that insurer’s policy limits. The insurer in question will then have to go to the trouble and expense of claiming a contribution from its co-insurers. The inclusion of a rateable proportion clause in the policy limits the right of the insured to proceed against any one party for more than that party would be liable if all other insurers were contributing to the insured at that time. Thus an insured loss of £100 will require the insured to claim £10 from each insurer, rather than £100 from one. Although the insured’s ability to claim a full indemnity is not affected, the burden of the contribution is placed upon the insured in that he is no longer capable of proceeding against one insurer only. It cancels the common law position whereby parties jointly causing damage are each liable for the entire loss. In order to obtain his 100% indemnity he must claim against all the participating insurers. There is, of course, a more serious disadvantage of a rateable proportion clause, namely that the insolvency of any of the co-insurers is effectively imposed upon the insured. Ironically, this may have been the very problem he originally intended to avoid by taking out more than one insurance. In Legal & General v. Drake Insurance Co. Ltd (above) both policies contained a rateable proportion clause providing: ‘‘If at any time any claim arises under the policy there is any other insurance covering the same loss, damage or liability, the insurer will not pay or contribute more than its rateable proportion if the person claiming to be indemnified is the policyholder, nor make any payment contribution if the policy claiming to be indemnified is not the policyholder.’’

The insured third party made a claim against the Legal & General who paid the full amount and them attempted to recover 50% of his payment from Drake Insurance Co. as their contribution. The Court of Appeal held that Drake need pay nothing because Legal & General’s obligation was limited to 50% of the loss, and the additional 50% was a voluntary payment which would not be recoverable under the rules of contribution. Legal & General had argued that the payment was not voluntary because the insured third party would have been able to enforce the claim against them in full. The Court of Appeal commented, however, that although Legal & General were obliged to pay the claim in full to the third party, they were entitled to recover the additional 50% from the insured himself. It was this 50% which Legal & General had paid which constituted a voluntary payment and could not be recovered from Drake. The Court of Appeal looked at the application of rateable proportion clauses to contribution claims again in Drake Insurance Plc v. Provident Insurance Plc [2003] EWCA Civ and expressed some difficulty in following the logic and reasoning of the Legal & General case set out above. In July 1996 Mrs Kaur was driving her husband’s car and caused injuries through her negligence to a third party. Her husband, Dr Singh, was insured by Provident and Mrs Kaur was a named driver under his Provident policy.

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She was also separately insured by Drake to drive any car. After the accident, Provident avoided the contract of insurance on the grounds of non-disclosure, namely that Dr Singh had failed to mention a speeding conviction that he had received prior to renewing his policy in February 1996. The problem arose out of a complicated set of facts, about which Lord Justice Rix said in the Court of Appeal: ‘‘The facts of this appeal might have been set by a committee of law professors with the express design of giving rise to points of interest and difficulty.’’ What had happened was that when Dr Singh first obtained car insurance from Provident in February 1995, he disclosed an earlier accident of his wife which had taken place in January 1994; in February 1995 her liability had not been resolved. The rigid and formulaic system operated by Provident would have designated this accident as being one of her fault, which counted for a specified number of points in the calculation of premium. A higher premium would have been charged if the fault accident had been combined with a speeding conviction. However, by the time the policy was renewed in February 1996, her ‘‘liability’’ had been resolved entirely in her favour, but Dr Singh failed to disclose this fact to Provident. Had Provident been properly informed they would have re-classified the accident from fault to no-fault which would have attracted a rating of zero points. The Court of Appeal took the view that it had not been proved that Provident had been induced to enter the February 1996 policy by Dr Singh’s nondisclosure of his speeding conviction, and that it had to consider what would have happened had it been disclosed. The court placed the burden of proof on Provident to demonstrate its inducement. The court said that if Dr Singh had disclosed the speeding conviction, Provident would have told him that the premium would be higher. He would have queried it and discovered the effect of Provident believing that his wife’s accident had been designated her fault. He would have persuaded Provident of its error and the result would have been no increase in premium. Provident had therefore not been entitled to avoid. The court then looked at the impact of the rateable proportion clause. The issues were substantially similar and following the Legal & General decision it was necessary for Drake as co-insurer first of all to show that Provident was a co-insurer, so that the rateable proportion clause could be triggered, but on the other hand it had to escape the logic of the Legal & General decision which required it to show that Drake itself was not a coinsurer. This conundrum was solved by two of the judges stating that Drake had paid the third party claim under protest, which apparently was sufficient to distinguish the Legal & General decision, although two judges expressed difficulty in understanding why the statutory right of an insurer to recover an excess payment from its insured rendered the payment of an equivalent sum to a third party a voluntary payment. The third judge of the Court of Appeal stated that there would only be co-insurance if Provident were actually liable to indemnify Mrs Kaur, but as

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Dr Singh had lost his claim against Provident in arbitration and that arbitration award was binding up on Mrs Kaur, there was no obligation to indemnify as between Mrs Kaur and Provident. Had Mrs Kaur brought the proceedings for an indemnity against Drake, then the rateable proportion clause could not have been used by Drake; nevertheless, as between Drake and Provident, the Provident policy was valid because Provident’s right to avoid had been disallowed by the court. Provident had to contribute its share to Drake. The law is clearly in a state of some confusion. Difficult cases always make bad law, and usually the court will find the answer that provides justice, even though judicial principles may have to be modified—perhaps adversely—along the way. Finally, there have also been instances of damage being suffered by an insured covered by several policies, but in linear sequence rather than concurrently. The problem that has arisen has been that it has been difficult, especially in diseases with long latency periods, to identify exactly when—and therefore during which policy period—the damage has been caused. The approach adopted in Fairchild v. Glenhaven Funeral Services Ltd [2002] 3 W.L.R. 89 has been that a continuing exposure to an indivisible disease trigger, such as the ingestion of asbestos fibres, enables an insured to sue one or all of his insurers whose policies have been in force at some time during the period of asbestos exposure. The presence of a rateable proportion clause did not entitle an insurer to pay only its share of the damages on the basis that it could only be liable for a proportion of the loss suffered, corresponding to the time it was on risk as a proportion of the total time that the insured was at risk. The rateable proportion clause applied to double insurance but not to successive policy periods (Phillips v. Syndicate 992 [2003] EWHC 1084 (Q.B.)).

THE RIGHTS OF CO-INSURERS The rights between two or more insurers who cover the insured are set out in principle in s. 80 of the MIA 1906, as follows: ‘‘(1) Where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract. (2) If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the debt.’’

Unfortunately, s. 80 does not state how the contribution is to be calculated and in practice there is a distinction between concurrent policies, which provide cover specifically for the same risk, interest and subject matter, and non-concurrent policies, which are different in scope but happen to cover the particular loss. The application of average clauses must also be taken into account. The following principles may be applicable:

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(a) The sums insured or maximum liability method of apportionment Where the policies contain the same limits, any loss will be apportioned equally between them. Matters only become complicated when policies capable of contributing have different limits. Provided there is no rateable proportion clause, the contributing proportions are determined by calculating the maximum liability of each policy as a proportion of the total maximum liability of all policies added together. The equation looks like this: Maximum liability of Insurer A Total liability of all insurers

× loss = liability of Insurer A

Thus where insurer A has a maximum liability under his policy of £100,000 and insurer B has a maximum liability of £200,000 under a concurrent policy, losses of £75,000 and £150,000 would be apportioned as follows: Loss (1) 75,000

Insurer A 100,000 300,000 × 75,000

Insurer B 200,000 = 25,000

100,000 (2) 150,000

300,000 × 150,000

300,000 × 75,000

= 50,000

200,000 = 50,000

300,000 × 150,000

= 100,000

This method is used for concurrent non-average policies.

(b) Independent liability method However, the presence of a rateable proportion clause alters the equation because each insurer need not pay any more than its ultimate liability. Where the loss falls within each policy limit, then each policy will pay the same amount to the insured. Where, however, the loss falls above one policy limit but within the other, this solution clearly cannot be applied. The ‘‘independent liability’’ test is therefore usually applied, in which the liability of each insurer is determined as if it were the only policy in existence. The ratio of the independent liabilities under these policies to each other is then determined to allocate the proportion of loss which each insurer will bear. Thus, using the above policy limits, insurer A and B would each pay £37,500 in respect of a loss of £75,000. However, a loss of £150,000 falls outside insurer A’s policy limit, but is within that of insurer B. Insurer A would pay £60,000 and insurer B £90,000. On balance, this is a fair way in which to proceed since it deals specifically with the liability which each insurer would be under in the absence of any other policy, which is the liability that each insurer originally anticipated. The only legal authority dealing with the application of the two methods of apportionment is that of the Court of Appeal in Commercial Union Insurance Company Ltd v. Hayden (1977) Q.B. 804. Commercial Union issued a public

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liability policy with a maximum limit of £100,000. Mr Hayden and his following underwriters at Lloyd’s issued a similar policy with a maximum limit of £10,000. The insured loss of £4,425.45 was paid in full by Commercial Union who then requested a contribution based upon the independent liability test. Lloyd’s Underwriters suggested that the maximum liability basis should be used. Under the former, each insurer would bear one half of the loss because each was independently liable for the full amount of the loss. However, under the maximum liability principle, Commercial Union would only have to pay 100/110ths of the loss, while Lloyd’s Underwriters would pay 10/110ths. The Court of Appeal concluded that the independent liability method was the correct way in which to calculate the proportions to be contributed by each insurer and suggested that the maximum liability figures in the policies were arbitrary in that they had not been incorporated in order to lessen the effect of any double insurance, but rather to limit the sum being paid under the policy. The court thought that they should not be used to provide a result which was both arbitrary and in their eyes unfair. Nevertheless, the Court of Appeal stated that this decision was limited to liability insurances. This may be important because the maximum liability principle would founder if one of the contributing liability policies failed to specify any financial limit. The Court of Appeal also noted that maximum financial limits could be imposed in respect of different areas of the policy, or indeed distinctions between ‘‘any one accident’’ in one policy and ‘‘any one event’’ in another, which could produce different permutations in respect of aggregation after an incident giving rise to ‘‘losses’’. These factors would mean that the only method applicable would be the independent liability method. It should be noted, however, that almost all ARPI policies are subject to financial limits so that the maximum liability principle would usually be capable of being applied. Nevertheless, there is some considerable likelihood that, despite the comments of the Court of Appeal, the independent liability method will be applied to all policies. The independent liability method is not used for concurrent non-average policies but could be applied to other policies involving average or nonconcurrent non-average policies. (c) Non-concurrent, non-average insurances Generally speaking, however, it is market practice to apportion losses on the basis of the maximum liability principle (i.e. as if the policies were concurrent), despite the dissatisfaction of those insurers providing the wider coverage, who are clearly at a greater risk by virtue of the breadth of their coverage. The fact that the obligations under each policy are not the same is not heeded, even though the policies may differ widely in scope and character. It does not really matter which method is used if the total loss is not within the policy limits of each contributing policy, provided that the total sums insured cover the loss, because each method will produce the same result. It is, of

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course, always open to the insurers to agree between themselves as to how they will contribute to the loss, but from a strict legal viewpoint the position is that the independent liability principle should be used. This is certainly the case where the loss only affects the subject matter common to both insurances. Thus in American Surety Co. of New York v. Wrightson ([1910] 103 L.T. 663) a New York insurer had agreed to indemnify the insured for losses caused by the dishonesty of the insured’s employees, up to a maximum of $2,500 (£500) per employee. Lloyd’s Underwriters’ policy covered burglary, fire and dishonesty by any one person up to a limit of £40,000. The fraudulent conduct of an employee left the bank with a loss of $2,680 which was met in full by Lloyd’s Underwriters, who then requested a contribution from the New York insurer. The New York insurer wanted to contribute on the maximum liability basis, using the ratio 40,000:500. Lloyd’s Underwriters argued that the independent liability calculation should be adopted, under which the ratio would be 2,500:2,680. The court preferred the view of Lloyd’s Underwriters because although the policies were different in nature, each covered the same loss and each policy contained the maximum liability figure. REINSTATEMENT (i) Introduction Reinstatement is a concept that arises in several places in insurance law, with a different meaning in each. The most common are firstly, the concept that an insurer can pay for the replacement (or provide a replacement) or repair of the subject matter of the insurance instead of paying money to the insured; and secondly, to top-up the amount of insurance to its pre-loss level, following its reduction by the amount of the loss. A typical reinstatement provision may provide: ‘‘In the event of these items suffering Damage the basis upon which the amount payable is to be calculated shall be the cost of Reinstatement subject to the provisions set out below. REINSTATEMENT means: (a) where property is destroyed the rebuilding of the property if a Building or in the case of other property its replacement by similar property in either case in a condition equal to but not better or more extensive than its condition when new (b) where property is damaged the repair of the damage and the restoration of the damaged portion of the property in a condition substantially the same as but not better or more extensive than its condition when new. PROVISIONS 1. No payment beyond the amount which would have been payable had this Endorsement not been operative shall be made (a) unless the work of Reinstatement is commenced and carried out with reasonable despatch

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(b) until Reinstatement has been effected (c) unless any other insurance covering the Insured’s interest in the property at the time of the Damage is upon the same basis of Reinstatement as this policy and if no such payment is made then the rights and liabilities of the Insurers and the Insured shall be those which would have applied had this Endorsement not been operative. 2. Reinstatement may be carried out at another site and in any manner suitable to the Insured subject to the liability of the Insurers not being increased as a result. 3. In the event of partial damage to any property insured under this Endorsement the Insurers’ liability for any loss shall not exceed the cost which would have been incurred had such property been totally destroyed. 4. Each item insured under this Endorsement is declared to be separately subject to the following Underinsurance Condition namely If the sum insured on any item at the time of Damage is less than 85% of the cost of reinstating the whole of the property covered by such item at the time of Reinstatement then the Insured shall be considered as being his own insurer for the difference between the sum insured and the cost of Reinstatement of the whole of the property and shall bear a rateable proportion of the loss accordingly.’’

(ii) The parties’ obligations A provision enabling an insurer to reinstate is often used when insurers believe that the insured’s claim is unreasonable in monetary terms, or where the fire or damage appears to be less than fortuitous, but the insurers are unable actually to prove fraud. It is also often used in respect of valuables such as jewellery, particularly where insurers are able to take advantage for discounts available to them in the purchase of replacements. The reinstatement provision does not usually bind the insurer to reinstate but rather enables him to elect between the payment of insurance money and reinstatement. He cannot elect to reinstate in the absence of such a provision. The doctrine of election requires a decision to be made within a reasonable time (despite the absence of any time limit in the clause) and it must be unequivocable and communicated to the insured. If the insured refuses to accept the insurer’s initial offer of payment, the insurer may still be able to elect to reinstate (Sutherland v. Sun Fire Office (1852) 14 D (Ct. Sess) 775). Following an election by the insurer to reinstate a building, the agreement between the parties is a contract for repair or rebuilding. The insurer’s obligation is to provide a fresh or repaired item which is substantially as good as that which was damaged. If the insurer replaces the damaged item with something inferior, the insured is entitled either to reject it or accept it and claim damages for the difference between the two values. (The insured is not entitled to obtain specific performance of the insurer’s decision to reinstate, merely damages for breach.) The insurer can also be liable to the insured for damages for loss of profit or consequential loss if he delays in reinstating the property (Davidson v. GRE [1979] 1 Lloyd’s Rep. 406). However, Provision 1 of the above reinstatement clause provides both insurers and insured with some flexibility. It may be, for example, that the insured does not want to have a

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factory rebuilt, perhaps until market conditions become more favourable. Nevertheless, if the reinstatement is not carried out within a reasonable time, then settlement will be made on an indemnity basis which will be related to the costs that would have been incurred if there had been no delay in the commencement of the rebuilding programme. Once a decision to reinstate has been made, the insurer cannot avoid this obligation simply because it has become more difficult or expensive to perform or provides the insured with considerable betterment (unless so provided in the contract or the insured agrees to contribute). Similarly, if the property is being reinstated but suffers further damage, e.g. as a result of a further fire, then the insurer must still complete the work as agreed (Brown v. Royal Insurance Co. (1859) 1 El. & El. 853). However, virtually all clauses limit the insurer’s expenditure to the sum insured in the policy. Provision 3 of the example relates to a partial loss. This provision prevents the insured from demanding that a repair be carried out which might exceed the cost of obtaining a new machine. Its equivalent in marine insurance is the concept of a total constructive loss. (iii) Reinstatement memorandum Provision 4 of the example is usually known as reinstatement average, and is unlike normal average in that it applies to the cost of reinstating the property at the time of reinstatement, rather than at the time of loss. It exists to take into account the prejudice caused to insurers by an increase in building costs during any delay between the time of loss and the commencement of rebuilding. It is therefore a method of protecting against inflation. In essence, the reinstatement memorandum means that average will apply if the sum insured is less than 85% of the total reinstatement cost, i.e. the sum insured is compared with the value of the property on a reinstatement basis at the time of reinstatement. The figures are calculated in two stages. The first is to assess the position at the time of loss. Where the sum insured is less than the value at risk, average will clearly apply. The resulting figure is effectively paid on account on an indemnity basis. If the insured decides not to reinstate the property, that is the end of the matter. Where he then goes on to reinstate, then the cost of reinstatement at the time of reinstatement is compared with the sum insured under the policy. Where the sum insured at the time of reinstatement is less than 85%, average will apply. Effectively average is projected forward from the time of loss to the time of reinstatement. The following example may serve to illustrate the working of the reinstatement memorandum. Sum insured True value at time of loss Loss

– indemnity basis – reinstatement basis

150,000 160,000 50,000 60,000

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The sum insured is less than the value at risk, so Average will apply on an indemnity basis. Sum Insured 150,000 Value at time of loss 160,000

× Loss 50,000 = 46,875

If the insured then rebuilds, the sum of £46,875 is treated as being made on account. When the property has been reinstated, the reinstatement memorandum is applied to ascertain whether average need be applied, i.e. whether the cost of reinstatement at the time of reinstatement exceeds 85% of the sum insured. Example (a) Cost of reinstatement: 175,000 @ 85% = 148,750 Sum insured is greater than 85% Therefore Pay 60,000 Less payment on account 46,875 ——— 13,125 Example (b) Cost of reinstatement: 185,000 @ 85% = 157,250 Sum Insured is less than 85%, so average will apply. Sum Insured 150,000 × Loss 60,000 = 48,648 Reinstatement Value 185,000 Less payment on account 46,875 ——– 1,773 (iv) ‘‘Day one basis’’ Another variation on the reinstatement memorandum is to use what is called a ‘‘day one basis’’. This formula is based on the value of the property on a reinstatement basis on the first day of the insurance year, rather than the insured hoping that he is fully insured for the purposes of reinstatement some time in the future, which might mean using figures widely different owing to inflation, differences in supply and demand, or the time needed to obtain planning or other permission. It is therefore critical to establish correctly the declared value of the property on day one. If this figure is adequate, then the amount payable by insurers is not reduced by the operation of average. The insured can elect before the contract is concluded whether to use an adjustable or non-adjustable basis. Adjustable basis The adjustable basis is suitable for all risks insurance relating to manufacturing or other areas where changes in the value at risk are expected to occur.

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Although the cover has been increased by the insurer by 50%, the premium is only increased by 7.5% but it is treated as a provisional premium and is therefore capable of later adjustment. The premium for the following year is then calculated in the same way and the additional premium for the first year calculated by charging 50% of the difference between the two provisional premiums. A typical clause may read: ‘‘1. The Insured having stated in writing the Declared Value incorporated in each item to which the Endorsement applies the premium has been calculated accordingly. ‘Declared Value’ shall mean the Insured’s assessment of the cost of Reinstatement of the property insured at the level of costs applying at inception of the period of insurance (ignoring inflationary factors which may operate subsequently) including, insofar as the insurance by the item provides, due allowance for (i) the additional cost of Reinstatement to comply with Local Authorities’ requirements (ii) professional fees (iii) debris removal costs. 2. At the inception of each period of insurance the Insured shall notify the Insurers of the Declared Value of the property by each of the said item(s). In the absence of such declaration the last amount declared by the Insured shall be taken as the Declared Value for the ensuing period of insurance. 3. The premium charged on the Declared Value is provisional. On expiry of each period of insurance the premium shall be adjusted by 50% of the difference between (i) the provisional premium at the commencement of the period and (ii) the premium calculated at the terms which have applied during the period under adjustment based on the Declared Value for the subsequent period of insurance. 4. For the purpose of paragraph 3 of this Endorsement only (i) if the policy (or any item thereof) is cancelled or not renewed the Insured shall provide the Declared Value of the property insured by each of the said item(s) calculated in accordance with paragraph 1 of this Endorsement but at the level of costs applying at the date of cancellation or non-renewal (ii) where property has not been reinstated following loss the Insured shall provide the Declared Value as though the property had not been damaged or destroyed (iii) where a declaration of the Declared Value is not submitted to the Insurers an additional premium of 75% of the provisional premium shall become payable. 5. Where, because of other Provisions, no payment is to be made beyond the amount which would have been payable had the Endorsement not been operative the sum insured shall be limited to 115% of the Declared Value shown against this Endorsement in the Schedule. 6. Provision 4 of is amended to read: ‘Each item insured under this Endorsement is declared to be separately subject to the following Underinsurance Condition namely If at the time of Damage the Declared Value of the property covered by any item is less than the cost of Reinstatement (as defined in paragraph 1 above) at the inception of the period of insurance then the Insurer’s liability for any Damage shall be limited to the proportion that the Declared Value bears to the cost of Reinstatement.’ ’’

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The wording may also contain a ‘‘Capital Additions’’ clause which takes into account any changes in value or additions to property (up to a pre-determined value, e.g. 10% of sum insured), and avoids the insured having to notify the insurer regularly of such changes which not only cut down administrative and other inconvenience but also take into account the possibility of overlooking notification to the insurer. A typical clause may read: ‘‘The insurance by each item in the Schedule on Buildings and Machinery shall extend to include any newly acquired property insofar as it is not otherwise insured and alterations, additions and improvements to the property but not in respect of any appreciation in value during the current period of insurance at the premises, provided that (a) at any one situation this cover shall not exceed 10% of the total sum insured on such property or £250,000, whichever is the less (b) the Insured undertake to give particulars of such property each 6 months and to effect specific insurance thereon retrospective to the date of the commencement of the Insurers’ liability.’’

The distinction between ‘‘day one adjustable basis’’ and the ‘‘reinstatement memorandum’’ is that in the former the comparison is made between the declared value and the actual value at risk on the first day of the policy year. If the cost of rebuilding the premises on day one is greater than the declared value as confirmed by the parties in the policy wording, then average applies to reduce the loss on a reinstatement basis. In the case of the ‘‘reinstatement memorandum’’, average applies if the cost of rebuilding is greater than the sum insured at the time of damage. Of course none of these formulae can be applied until reinstatement has been effected and all figures become available for the computations. Non-adjustable basis The alternative day one insurance is on a non-adjustable basis and this will apply to all risks property insurance involving relatively stable values at risk, such as an office block. In this case, the declared value is increased by 50% to obtain the sum insured and the premium is loaded by 15% (of the declared value) but has no provision for any adjustment, except for a reduction in value. However, where reinstatement is physically or legally impossible after the insurer’s election, then he is entitled to refuse to reinstate. Either reinstatement was impossible from the outset so that the insurer did not actually have an option to reinstate, or reinstatement may have become impossible once work has been done, e.g. where a statutory Order is made against the property preventing rebuilding. In this latter case the doctrine of frustration would discharge the insurer from his duty to reinstate. There may be some apportionment for lost expenditure by the insurer under the Law Reform (Frustrated Contracts) Act 1943, but this Act excludes any contract for insurance from its ambit, although of course once reinstatement has been agreed, the

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contract becomes one for repair and rebuilding rather than insurance. It may still be the case, therefore, that the insurer is obliged to meet the insurance claim in full.

(v) Statutory reinstatement Irrespective of any contractual provision relating to reinstatement, the insurer must reinstate if he is requested to do so by a person (other than the insured) who is interested in or otherwise entitled to the premises damaged by fire. This is the effect of the Fires Prevention (Metropolis) Act 1774, which was passed with a view to discouraging arson by insureds and providing a degree of protection to tenants. The Act does not apply to personal property and is effectively limited to reinstatement following fire. Despite its title, the Act is applicable to the entirety of England and Wales. The Act does not provide a definition of ‘‘person interested’’ but the courts have held that this includes mortgagees, parties to a lease and a purchaser of a building following exchange of contracts but prior to completion of the conveyancing process. It is most often used by tenants. The insured is not entitled to give notice under this Act. This is perceived as being unfair when he is an insured person under the landlord’s insurance, e.g. as a tenant, but is nevertheless the law (Reynolds & Anderson v. Phoenix Assurance Co. Ltd [1978] 2 Ll. L. Rep. 440). The insurer need not reinstate where the insured, within 60 days of the judgment of the loss, gives security for his undertaking to use the proceeds of the policy for the purposes of reinstatement, or where the destination of these proceeds has been agreed by the interested parties. Where the reinstatement is faulty or delays in reinstatement cause loss to the insured, then the interested party may be entitled to damages providing the courts agree—in the absence of privity of contract—that there is the necessary proximity between that of the party and the insurer. If the insurer fails to meet the requirements of the Act, the interested party may obtain a mandatory injunction compelling him to reinstate, or a prohibitive injunction preventing payment of insurance monies to the insured. However, the insurer need not expend more money than the sum insured in the policy, or any other limits, e.g. if average as applicable.

(vi) Reinstatement of sum insured Following a total loss, the sum insured is reduced to nil. Equally, following a partial loss, the amount of that loss is deducted from the sum insured, so that the insured is obliged to increase his coverage to obtain the coverage that he originally agreed. This is sometimes effected automatically, with the insured paying the ‘‘appropriate additional premium’’. The insurer also retains the option of refusing to reinstate the cover, provided he exercises this right within a specified period, usually 30 days.

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Generally, the insurer will charge the insured a pro rata premium based upon the amount of cover required and policy period. A typical clause may read as follows: ‘‘In consideration of the insurance not being reduced by the amount of any loss the Insured shall pay the appropriate extra premium on the amount of the loss from the date of such loss to the expiry of the period of insurance.’’

Insurers will often allow an insured to have one reinstatement to the full value at no extra premium, or alternatively will require premium pro rata as to amount and as to time, or alternatively pro rata as to amount and 100% as to time. In the former case, the amount of premium payable will be reduced every day the policy runs, so that a claim appearing on the first day will mean that the insured has to pay the full premium, but a claim payable on the last day means that he will only pay 1/365th. Using the latter method, however, the cost of reinstatement will be the full amount regardless of when the claim occurs, so that the insured will have to pay the full premium in respect of a claim occurring only hours before expiry of the policy.

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CHAPTER 7

MARINE INSURANCE Dr Baris Soyer

NATURE OF MARINE INSURANCE Sources of marine insurance law Most legal principles and rules relating to marine insurance are to be found in the Marine Insurance Act (MIA) 1906. The object of this Act was to codify the common law rules relating to marine insurance. The rules of the common law and the law merchant continue to apply to marine insurance, so far as they are consistent with the provisions of the Act (s. 91(2) of the MIA 1906). The MIA 1906 has been instrumental in the development of marine insurance statutes in other legal systems. For instance, Australia, Canada, India, Malaysia, New Zealand and Singapore incorporated the provisions of the MIA 1906 into their legal system word by word. The MIA 1906 is also important from the point of view of United States law where there has been no similar statute. The U.S. Supreme Court has been of the opinion that, in so far as federal law is concerned, U.S. courts should look to the MIA 1906 for applicable rules. Case law is another significant source of marine insurance law. Case law preceding the Act may be relevant for interpretative and historical reasons. Case law subsequent to the Act, on the other hand, is relevant as it might provide clarification of various provisions of the MIA 1906 (see, for example the interpretation adopted by the House of Lords as to the meaning of s. 33(3) of the MIA 1906 in Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) [1992] 1 A.C. 233). Subject-matter of marine insurance The MIA 1906 defines a contract of marine insurance as a contract whereby the insurer undertakes to indemnify the assured, in a manner and extent thereby agreed, against marine losses, that is to say losses incident to marine adventure (s. 1 of the Act). It is crystal clear that the scope and meaning of the term ‘‘marine adventure’’ plays a significant role in the definition of a marine insurance contract. By virtue of s. 3(2) of the MIA 1906, there is a marine adventure in particular where any insurable property, namely any ship, goods or other moveables, is exposed to maritime perils, or where the earning or acquisition of any freight, passage money, commission, profit or other pecuniary benefit, or the security for any advances, loan or disbursements is 213

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endangered by the exposure of insurable property to maritime perils, or where any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property by reason of maritime perils. ‘‘Maritime perils’’ means perils consequent on, or incidental to, the navigation of the sea, that is to say perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints, and detainments of princes and peoples, jettisons, barratry, any other perils, either of the like kind or which may be designated by the policy. In the light of these provisions, it can be concluded that there is a marine insurance contract not only when insurable property, such as any ship or cargo, is exposed to perils consequent on or incidental to the navigation of the sea but also when a mortgagor of a ship obtains an insurance policy to protect his interest (The Captain Panagos DP [1985] 1 Lloyd’s Rep. 625) and also when an undersea electric cable company obtains insurance cover against third party liability. It is possible to extend the coverage of a marine policy by express terms or by trade usage. According to s. 2 of the MIA 1906, a contract of marine insurance may be extended so as to protect the assured against losses on inland waters or against any land risk which may be incidental to a sea voyage. In marine insurance practice, coverage under cargo policies is usually extended to cover land risks. Clause 8.1 of the Institute Cargo Clauses (A, B and C) provides: ‘‘This insurance attaches from the time the goods leave the warehouse or place of storage at the place named herein for the commencement of the transit, continues during the ordinary course of transit and terminates either on delivery to the Consignees’ or other final warehouse or place of storage at the destination named herein, on delivery to any other warehouse or place of storage, whether prior to or at the destination named herein, which the Assured elected to use either for storage other than in the ordinary course of transit or for allocation or distribution or in the expiry of 60 days after completion of discharge overside of the goods hereby insured from the oversea vessel at the final port of discharge, whichever shall occur first . . . ’’

The same section also provides that a marine insurance policy may cover a ship in the course of building, or the launch of a ship, or any adventure analogous to a marine adventure. (See, for example, James Yachts Ltd v. Thames and Mersey Marine Insurance Co. Ltd [1977] 1 Lloyd’s Rep. 206, where the policy covered boat-builders’ risk.) Marine insurance markets and the role of London market The marine insurance markets are places where ships, cargoes and other marine risks are insured. The common features of all marine insurance mar-

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kets are that they are global and insurance is normally written on a co-insurance basis mainly due to the high value of vessels or cargoes involved. The London marine insurance market is one of the largest markets in the world. In terms of its structure, it may be divided into the Lloyd’s market and companies market. Marine business on the Lloyd’s market is underwritten by specialist syndicates. In the past these were exclusively made up of ‘‘names’’, but today the majority are backed by corporate providers with some having all their capital provided by a single large insurance company. Each syndicate writes its insurance business through an underwriting agent. The companies’ market has shrunk in size as a result of companies going into the Lloyd’s market or indeed giving up involvement in marine insurance business. It is made up of companies which underwrite marine business. The two markets are not separate and independent. They write marine insurance on similar terms and often share substantial risks and follow each other’s decisions. In both markets, generally speaking, marine insurance business is conducted by using standard clauses, i.e. Institute Cargo Clauses, Institute Hull Clauses and International Hull Clauses. Joint market committees, such as the Joint Hull Committee and Joint Cargo Committee, are involved in the drafting of these standard clauses. The main function of these clauses is to specify the scope of the cover, in some cases, by modifying the provisions of the MIA 1906.

INSURABLE INTEREST IN MARINE INSURANCE The fundamental and long-established principle that a contract of marine insurance is one of indemnity requires the assured to possess an insurable interest in the subject-matter of a marine insurance. It is obvious that the insurance can perform its function of affording the assured an indemnity against loss in the event of the subject-matter being lost or damaged by marine perils, only if he possesses an interest in the subject-matter. This principle has been underlined in s. 4(2)(a) of the MIA 1906 where it has been expressed that a marine insurance contract is null and void if the assured does not possess an insurable interest as defined by the Act. The concept of insurable interest has been defined in s. 5(2) of the MIA 1906: ‘‘In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.’’

There is no doubt that the judgment of the House of Lords in Lucena v. Craufurd has formed the basis of the statutory definition in s. 5(2).

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Lucena v. Craufurd (1806) 2 Bos. & Pul. (NR) 269 At that particular point in time, it was the policy of the British Government to retain good relations with the Dutch. To this effect, by orders in Council made in January 1795, the king offered to warehouse and secure Dutch property coming into British ports, whether from Dutch ports or on ships bound for the United Provinces, and to keep it for the benefit of its owners. On its being found that Dutch ships and cargoes were not coming voluntarily into U.K. ports, another Order in the Council was made in February 1795 directing the Royal Navy and other English privateers to seize Dutch property encountered at sea and bring it forcibly onto British ports to enjoy the royal offer of safe-keeping. Later in the same year, an Act of Parliament was passed empowering the Crown to appoint three or more Admiralty Commissioners to take into their possession of such Dutch ships and cargoes as ‘‘had been, or might be thereafter detained in, or brought into the ports of this Kingdom’’, and ‘‘to manage, sell, or otherwise dispose of the same to the best advantage’’ in accordance with instructions given by the Crown. A number of Dutch vessels and cargo was detained by the Royal Navy and was directed to British ports. On hearing this, the Admiralty Commissioners effected a marine policy in their names in relation to the vessels and cargo. Some of the vessels and cargo were lost as a result of marine perils and the rest was captured by an enemy navy. When the Commissioners made a claim under the marine policy, the insurers denied payment on the basis that the assured had no insurable interest in the properties. After years of litigation, the House of Lords concurred with the insurers. The court was of the opinion that the Act did not give any legal power or control over the ships to the Commissioners during their voyage to the U.K. In their view, an assured had an insurable interest only if he could demonstrate that he had a strict legal right or a right derived under a contract. Mere expectation or hope that a right would arise would not be sufficient to create an insurable interest.

The statutory definition identifies three characteristics which would normally be required for an insurable interest to be present, namely: (a) that the assured may benefit by the safety or due arrival of insurable property or be prejudiced by its loss or damage or detention or in respect of which he may incur liability; (b) that the assured stands in a legal or equitable relation to the adventure or to any insurable property at risk in such adventure; and (c) that the benefit, prejudice or incurring of liability referred to at (a) must arise in consequence of the legal or equitable relation referred to at (b). These parameters have been applied in a number of cases since the enactment of the Act. Piper v. Royal Exchange Assurance (1932) 44 Ll. L. Rep. 103 Having purchased a yacht located in Norway, the claimant obtained an insurance policy as the owner. The sale contract, however, provided that the yacht was to be the seller’s risk until she arrived in London. She sustained damage on the voyage from Norway to London, and the question was whether at that stage the claimant had an insurable risk as owner. It was held that he did not, as the reservation of risk impliedly amounted to a reservation of ownership. He did not, therefore, stand in a legal or equitable relation to the adventure or to any insurable property at risk in such adventure. Macaura v. Northern Assurance Co. Ltd [1925] A.C. 619 The owner of a large estate in Ireland agreed to sell the timber on his estate to a Canadian timber company for £27,000. The purchase price was paid by way of shares in the timber company. The estate owner then insured all the timber in his estate

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with the insurers. A few weeks later, the large part of the timber was destroyed by fire and the assured claimed under his policy. The House of Lords ruled that the assured, either as creditor or shareholder in the timber company, had no insurable interest in the timber and, therefore, could not recover under his policy.

It is clear that ownership or possession (or the right to possession) of the property insured is not a necessary requirement of an insurable interest therein. A person can stand in a legal or equitable relation to any insurable property at risk without being the owner of that property. Morgan, Galloway & Co. v. Uzielli [1905] 2 K.B. 555 The ship agents had advanced moneys over a number of years to the owners of the Prince Louis. The agents had also effected a policy of insurance on disbursements against total and constructive total loss caused by, amongst other things, perils of the sea. When the Prince Louis was loading cargo in Cardiff, she was found to have been severely damaged by bad weather, which she experienced in her previous journey, and deemed to be a constructive total loss. The agents claimed on their policy of insurance on disbursements. The question before the court was whether an agent of a ship had an insurable interest in her. It was held by Walton J. that insofar as the agents’ claim depended on the fact that they were ordinary unsecured creditors of the shipowners, it must fail; but that, insofar as the indebtedness gave rise to a right in rem against the ship itself, they had an insurable interest in the ship sufficient to support a claim on the policy. In the present case, the agents had the right, under the Admiralty Court Act 1840, to proceed in rem for the recovery of the amount owing to them. They, therefore, had an insurable interest in the ship.

In a similar vein, if a person is exposed to liability in respect of the property in his custody or care, he might have an insurable interest in that property. It was decided, as a side issue, in O’Kane v. Jones (The Martin P) [2004] 1 Lloyd’s Rep. 389 that ship managers had insurable interest in insuring the ship as the management contract put them at risk of incurring liabilities to the owner. It should be borne in mind that the concept of insurable interest has been developed as a means of distinguishing ‘‘legitimate’’ contracts of insurance from gaming and wagering contracts. Therefore, courts might interpret the concept of ‘‘legal and equitable relation’’ very broadly in cases where they are convinced that the assured has a genuine interest at stake. It has been ruled by British courts that a legal right to the use of goods, the benefit of which would be lost by their damage or destruction, may be sufficient to constitute an insurable interest therein. Sharp v. Sphere Drake Insurance (The Moonacre) [1992] 2 Lloyd’s Rep. 501 A motor yacht, the Moonacre, which, for all intents and purposes was owned by Mr Sharp, was insured against marine perils. For tax purposes, a company called Roar Investments was the registered owner of the yacht. Mr Sharp was then given power of attorney by the registered company to sail and manage the vessel and he was also named as the assured in the contract of insurance. During the policy, whilst the single crewman employed on board the Moonacre was away, she caught fire at her moorings and became a constructive total loss. When the assured, Mr Sharp, sought recovery under the policy, the insurers denied liability on the grounds, inter alia, that the assured did not possess any insurable interest in the Moonacre. It was held that the assured had

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an insurable interest in the vessel, because under powers of attorney granted by the owning company he had authority to use the vessel for his own exclusive purposes, a valuable benefit which would be lost if the vessel was lost. Colman J. also expressed the provisional view that the plaintiff owed a duty to the company to exercise reasonable care over the navigation and management of the vessel, and that on these grounds also he would have had an insurable interest.

By way of example, the MIA 1906 states that the following groups of people have insurable interest: u the insurer has an insurable interest to reinsure his liability (s. 9 of the MIA 1906); u a lender on bottomry or respondentia has an insurable interest for the amount of his loan (s. 10 of the MIA 1906) (It has to be stressed that the use of these forms of security over the hull of a vessel is very rare in modern practice); u the master and crew have an insurable interest in respect of their wages (s. 11 of the MIA 1906); u the person advancing the freight has an insurable interest in so far as such freight is not payable in case of loss (s. 12 of the MIA 1906); u an assured has an insurable interest in the charges for any insurance he may effect (s. 13 of the MIA 1906); u the mortgagee has an insurable interest on the amount of the mortgage debt (s. 14(1) of the MIA 1906). When interest must attach The assured must possess an insurable interest in the subject matter insured at the time of loss (s. 6(1) of the MIA 1906). It is, therefore, not vital that the assured has an insurable interest in the subject matter insured at the inception of the policy. The policy will, however, be deemed to be a gaming or wagering contract if the assured has no expectation of acquiring an insurable interest in the subject matter insured at the time the contract is entered into (s. 4(2)(a) of the MIA 1906). Clause 11.1 of the Institute Cargo Clauses (A, B and C) reiterates the general principle: In order to recover under this insurance the Assured must have an insurable interest in the subject matter insured at the time of the loss.

Lost or not lost Strict application of the general principle would mean that a person, who obtains a marine policy with an expectation that he would acquire an interest in the subject matter of insurance at a later stage, i.e. buyer of goods under certain international sale contracts, would not be able to be indemnified, if the subject matter of insurance is lost before he obtains such an interest. This was particularly a considerable problem in times past, when communications were

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poor. In order to avoid this problem, marine insurers were prepared to offer ‘‘lost or not lost’’ cover. The purpose of the clause was to protect the assured by permitting him to recover under the policy, even though he may have only acquired his interest after the loss. The position was acknowledged by s. 6(1) of the MIA 1906: . . . Provided that where the subject matter is insured ‘‘lost or not lost’’, the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.

Further clarification was provided by rule 1 of the Rules of Construction of the Act: Where the subject matter is insured ‘‘lost or not lost’’, and the loss has occurred before the contract is concluded, the risk attaches unless, at such time the assured was aware of the loss, and the insurer was not.

It has to be stressed that developments in communication have reduced the significance of ‘‘lost or not clauses’’ dramatically. They are now rarely used in practice.

WARRANTIES IN MARINE INSURANCE A marine warranty is defined by s. 33(1) of the MIA 1906 as a term of the contract by which the assured makes a ‘‘promise’’ to the insurer to the effect that: (a) either some particular thing shall or not shall be done; or (b) some condition shall be fulfilled; or (c) whereby the assured affirms or negatives the existence of a particular state of facts. It has to be stressed that the term warranty has a different meaning in marine insurance law than general contract law where it is generally understood as meaning a term of the contract, the breach of which entitles the aggrieved party to damages but not a right to treat the contract as repudiated. Warranties in marine insurance serve a very useful function as they assist insurers to determine the scope of the risk. According to the MIA 1906, a marine warranty may be either express or implied. Express warranties Section 35(1) of the MIA 1906 provides that no formal or technical wording is required for the creation of an express warranty. The words ‘‘warranted’’ or ‘‘warranty’’ are, therefore, not essential in order to create an express warranty. Courts will not hesitate in classifying a term as a warranty, if it can be inferred

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that the parties’ intention was to create a warranty status. In HIH Casualty and General Insurance Ltd v. New Hampshire Insurance Co. [2001] 2 Lloyd’s Rep. 161, Rix L.J. listed three possible tests which courts could use in deciding whether such intention exists: (i) did the term go to the root of the contract; (ii) was it descriptive of the risk or did it bear materially on the risk; and (iii) would damages be an inadequate or unsatisfactory remedy for breach? Although no specific form is necessary to create an express warranty, s. 35(2) of the MIA 1906 requires a warranty to be included in or written upon the policy or contained in some document incorporated by reference into the policy. Parties to a marine insurance contract have an absolute liberty in giving a warranty status to any variety of obligations. In Overseas Commodities Ltd v. Style [1958] 1 Lloyd’s Rep. 546, for example, where a cargo of canned port was insured, the assured warranted that all tins were marked by manufacturers with a code for verification of date of manufacture. Even if the words used are sufficient to allow an express warranty to be inferred, in some cases there remains the difficulty of interpretation of the actual words used. Such a situation arises either because the parties fail to make their intentions clear in the words which they adopt, or because the inherent ambiguities of language may make it impossible to state the parties’ intentions in such a way that no misinterpretation is possible. The starting point in construing express warranties is to consider the ordinary meaning of the word or phrase in question (literal construction). However, on certain occasions, the literal meaning of the words can be qualified due to commercial usage or custom. Bean v. Stupart (1788) 1 Dougl. 11 The marine policy on a vessel included a warranty requiring her to carry ‘‘30 seamen besides passengers’’. Only 26 mariners had signed the ship’s register and to make up the number 30, the assured reckoned the steward, cook, and some boys. It was held that boys were included under the term ‘‘seamen’’ by mercantile useage, and, therefore, the warranty was satisfied. Hart v. Standard Marine Insurance Co. Ltd (1889) 22 Q.B.D. 499 There was a warranty in a hull policy to the effect that the vessel was not going to carry iron or ore exceeding her net registered tonnage. It was held that the term iron would include steel in ordinary commercial useage, accordingly the warranty was breached when a quantity of steel in excess of such tonnage was shipped.

In Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 All E.R. 98 Lord Hoffmann suggested that courts should place weight upon the factual matrix surrounding the contract as opposed to the actual words used by the parties. Factual matrix should include anything which would have

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affected the way in which the language of the document would have been understood by a reasonable man. The new approach adopted by Lord Hoffmann allows courts to make use of the factual matrix not only in cases of ambiguity but also in appropriate cases. The factual matrix would certainly include commercial background behind the agreement and also the rationale behind the need to insert the warranty into the agreement. Agapitos v. Agnew (No. 2) (The Aegeon) [2003] Lloyd’s Rep. IR 54 The insured vessel, the Aegeon, became a total loss as a result of fire which commenced on 19 February 1996 while undergoing repairs with a view to be converted to a passenger cruise ship. The initial cover, which commenced on 9 August 1995, included the following warranty: Warranted London Salvage Association approval of location, fire-fighting and mooring arrangements and all recommendations complied with. There was evidence that the vessel’s current Salvage Association certificate expired on 30 August 1995. The assured argued that the warranty was to be construed as a warranty confined to the state of affairs existing at the date of the contract and not as requiring the assured to obtain the further approval of the Salvage Association after the current certificate expired on 30 August. Moore-Bick J. was of the opinion that such a construction failed to take into account of the commercial context in which the insurance was written. It is well known that the Salvage Association’s approval is given for a limited period and there is no obvious reason why insurers should impose a warranty of this kind at the date of inception but be willing to allow the protection it provides to lapse within a matter of weeks. Therefore, the warranty required the assured to keep the certificate in force during the currency of the policy and it was breached in the current case. The assured was also found to be in breach of other warranties. Brownsville Holdings Ltd v. Adamjee Insurance Co. Ltd (The Milasan) [2000] 2 Lloyd’s Rep. 458 In this case, construing the scope of an express warranty in a yacht policy, which required ‘‘professional skippers and crew’’ to be ‘‘in charge at all times’’, was one of the contentious issues. The insurers contended that the warranty required the assured employed at all times a person who was professionally qualified to be a skipper of this type of motor yacht. Taking the rationale for the warranty into account, i.e. ensuring that the vessel was properly looked after all the time, both winter and summer, and wherever she was, it was held that the words ‘‘professional skipper’’ referred to a person who had some professional experience that qualified him to be regarded as skipper and this did not necessarily mean that he had to pass formal examinations. Eagle Star Insurance Co. Ltd v. Games Video Co. SA (The Game Boy) [2004] EWHC 15 (Comm) The policy contained an express warranty which required the assured to keep on board (a) a VHF Radio (using battery power) and telephone, and (b) a security watchman at the entrance of the vessel at all times. It was established that at the time when the vessel was lost none of these requirements was complied with. The assured sought to argue that the warranty had to be complied only at the inception of the policy and not during its currency. According to the court, the objective of the warranty was to reduce the risk of loss or damage to the vessel. This being the case, it was not sufficient that the warranty was complied with at the inception; it had to be adhered to during the currency of the policy as well.

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Implied warranties Unlike express warranties, implied warranties do not appear in the policy; but are tacitly understood by the parties to be present. There are three warranties implied by the MIA 1906, namely warranty of seaworthiness (s. 39(1)–(4) of the MIA 1906), warranty of cargo-worthiness (s. 40(2) of the MIA 1906) and warranty of legality (s. 41 of the MIA 1906). The warranty of seaworthiness is implied in a voyage policy, whatever be the subject-matter insured. The warranty, therefore, applies whether the policy is on ship, goods, freight or any other property exposed to a maritime peril. According to s. 39(4) of the MIA 1906, the insured vessel is seaworthy ‘‘when she is reasonably fit in all aspects to encounter the ordinary perils of the seas of the adventure insured’’. Two points emerge from this definition. First, the implied warranty of seaworthiness is very far-reaching; it does not just cover the structure and meaning of the vessel but extends to the smallest details on board, such as the accuracy of charts. Second, the concept is relative in a number of aspects. For example, seaworthiness varies according to the voyage to be undertaken. Similarly, changes in international rules regulating the manner ships should run will have an impact on the scope of the obligation. It is, for instance, almost certain that the International Safety Management (ISM) Code and International Ship and Port Facility Security (ISPS) Code will be new yardsticks against which the seaworthiness of a ship will be judged. The implied warranty of seaworthiness needs to be satisfied at the commencement of the voyage (s. 39(1) of the MIA 1906). There is no warranty that a ship originally seaworthy for the voyage insured shall continue to be seaworthy or that the master and crew shall do their duty during the voyage. It should be noted that there is no implied warranty of seaworthiness in time policies. This does not, however, mean that the question of seaworthiness is irrelevant in time policies. There is somewhat lesser provision, in respect of seaworthiness, for time policies embodied in s. 39(5) of the MIA 1906: In a time policy, there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to seaworthiness.

One must bear in mind two points in relation to the extent of the unseaworthiness defence in time policies. First, in the application of s. 39(5) of the MIA 1906, the assured’s state of mind is a relevant factor as the vessel must have been sent to sea in an unseaworthy state with the privity of the assured. In the light of the case law, the assured is privy to unseaworthiness if it can be established that he had serious suspicion that the vessel was unseaworthy but decided to turn a blind eye to this fact (see San Basilio SA v. Oceanus Mutual Undertaking Association (Bermuda) Ltd (The Eurysthenes) [1977] 1 Q.B. 49 and

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Manifest Shipping & Co. Ltd v. Uni-Polaris Insurance Co. Ltd & Le R´eunion Europ´eenne (The Star Sea) [2001] 1 Lloyd’s Rep. 389). Second, the unseaworthiness could afford a defence to the insurer only if the loss is attributable to the unseaworthiness. Apart from seaworthiness warranty, s. 40(2) of the MIA 1906 implies a warranty of cargo-worthiness in voyage policies effected on goods and other movables. This sub-section defines ‘‘cargo-worthiness’’ as being fit to carry the goods or movables to their destination. The implied warranty of legality is laid down in s. 41 of the MIA 1906. Accordingly, there is an implied warranty that the adventure insured is a lawful one, and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner. No distinction has been made between voyage and time policies in respect of the application of the implied warranty of legality. Therefore, where the policy covers a ship for a period of time, the implied warranty is imposed for each voyage on which the ship embarks. Similarly, the implied warranty of legality is incorporated, by law, in the marine insurance policy covering each separate interest in a common maritime adventure. This means that s. 41 applies whether the subject matter of the insurance is ship, cargo, freight or anything else.

Nature of marine warranties One of the main features of the warranty regime is that the obligations undertaken by a marine warranty must be exactly complied with. No motive and no necessity will provide an excuse. De Hahn v. Hartley (1786) 1 T.R. 343 The hull policy contained a warranty which required the insured ship to sail with at least 50 hands or upwards. The vessel commenced her voyage with 46 crew members on board. Six more crewmen joined soon after the departure. It was held that the warranty was breached as exact compliance was required.

The other feature of the marine warranty regime, as expressed in s. 33(3) of the MIA 1906, is that the insurer is discharged from liability in case of breach of a marine warranty even though the warranty breached is not material to the risk. Yorkshire Insurance Co. Ltd v. Campbell [1917] A.C. 218 The insurance was on a horse against marine perils and risks of mortality during a sea voyage, and it was described in the proposal form as ‘‘Bay gelding by Soult X St Pail (mare) 5 years’’. The pedigree as stated was incorrect and the Privy Council held that since on its construction the description of the horse was a warranty, the inaccuracy provided the insurers with a defence to the owner’s claim when the horse died on the voyage. The pedigree of the insured horse could have a bearing on its temperament and thus its ability to withstand a marine voyage, but there was no evidence in the case that the horse’s actual pedigree adversely affected in this regard or had made no difference in the actual circumstances of the loss.

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One of the most controversial features of the warranty regime is the rule which provides the insurer with a defence even though the loss may not have been in the remotest degree connected with the breach of warranty. Hibbert v. Pigou (1783) 3 Doug. K.B. 213 In the policy there was a warranty to the effect that the insured vessel was going to sail with convoy. She, in fact, sailed without one and a few days later went down in a storm. Even though breach of warranty had no link with the loss, the insurer was held not liable for this loss.

At last but not least, by virtue of s. 34(2) of the MIA 1906, once the warranty has been breached, it is irrelevant that whether it is later complied with (see De Hahn v. Hartley, discussed above). The House of Lords in Bank of Nova Scotia v. Hellenic Mutual War Risks Association (The Good Luck) [1991] 2 Lloyd’s Rep. 191, by evaluating the meaning of s. 33(3) of the MIA 1906, concluded that breach of warranty discharges the insurer from further liability automatically as of the date of breach. It has to be emphasised that the policy itself does not come to an end: it is simply the case that insurers cannot be liable for any losses which incur after the breach of warranty. Naturally, obligations which became due prior to the breach, remain intact. The automatic termination principle normally applies to the entirety of the risk under the policy, including obligations which relate to the risk itself. Waiver of breach Section 34(3) of the MIA 1906 indicates that the insurer is at liberty to waive breach of warranty. Such a waiver may take place either before or after the occurrence of the breach. In marine insurance practice, there are two types of clause which are in use to waive breach of warranty defence before any breach arises: clauses waiving implied warranties of seaworthiness and cargo-worthiness in cargo policies and held-covered clauses. Clause 5.2 of Institute Cargo Clauses (A, B and C) reads: The Underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject matter insured to destination, unless the Assured or their servants are privy to such unseaworthiness or unfitness.

Clause 3 of the Institute Time Clauses (Hulls) (1995) is a typical held-covered clause, which states: Held-covered in case of any breach of warranty as to cargo, trade, locality, towage, salvage services or date of sailing provided notice be given to the Underwriters immediately after receipt of advices and any amended term of cover and any additional premium required by them be agreed.

As a consequence of the automatic termination principle, an assured who wishes to contend that the insurer has waived a breach of warranty defence ex post facto, must establish waiver by estoppel, which invariably means equitable

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estoppel. To this end, the assured must demonstrate an unequivocal presentation on the part of the insurer to the effect that he would not rely on breach of warranty defence, e.g. issuing or renewing the policy. However, silence or delay to act after a warranty is breached can not constitute a sufficiently unequivocal representation so as to found waiver on the part of the insurer. Also, in order to establish the existence of a promissory estoppel, it is essential to demonstrate that the assured has acted in reliance on the promise of the insurer that the legal rights arising from the breach of warranty would not be enforced.

MARINE RISKS Traditionally, insurable marine risks have included perils of the seas, fire, jettison, theft and piracy. These perils are provided for in standard Institute clauses which are in common use in the market, e.g. clause 2.1 of International Hull Clauses 2003. Perils of the sea The definition of the concept of perils of the sea can be found in rule 7 of the Rules of Construction of the Act which reads: The term . . . refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves.

It is clear that fortuity is an integral element in the definition of the perils of the sea and rule 7 itself excludes the ordinary action of the winds and waves precisely because such action lacks fortuity. Accordingly, a storm is always a peril of the sea provided that it is not certain to occur. Similarly, collision with an object, which has not been marked on charts, is likely to be regarded as a peril of the sea. For a peril to be ‘‘of the seas’’, there has to be an exclusive connection with the sea. The fact that the peril occurs on sea is not sufficient to convert it into a peril of the sea. Thames & Mersey v. Hamilton (The Inchmaree) (1887) 12 App. Cas. 484 The air chamber of a donkey engine used to pump water into the main boilers of the insured ship was broken when the water was forced into it because of a valve negligently closed by the crew. It was held by the House of Lords that the damage resulting on the air chamber of the donkey engine was not caused by a peril of the sea. The basis of the decision was that sea perils do not include ‘‘perils whose only motivation with the sea is that they arise from machinery which gives motive to ships’’. The same thing would have happened had the boilers and engines been on land, if the same mismanagement had taken place. The sea, waves and winds had nothing to do with it. (Modern hull policies cover loss of or damage to the subject-matter insured caused by negligence of master, officers, crew or pilots under the Inchmaree Clause provided that such loss or

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damage has not resulted from want of due diligence by the Assured, Owners or Managers.)

In cases where the assured wishes to rely on perils of the sea as the cause of a loss, he is under an obligation to demonstrate the existence of a causal link between perils of the sea and the loss. Since fortuitous incursion of seawater is not itself a peril of the sea, the assured cannot discharge the burden of proof which rests on him merely by demonstrating that the seawater is found in the ship (Samuel & Co. Ltd v. Dumas [1924] A.C. 431). He must show, on balance of probabilities, that the seawater has entered into the ship as a result of operation of perils of the sea; and, furthermore, it has to be shown that the incursion is accidental or fortuitous (See Brownsville Holdings v. Adamjee Insurance (The Milasan) [2000] 2 Lloyd’s Rep. 458 and more recently Kastor Navigation Co. Ltd v. Axa Global Risks (UK) Ltd [2004] 2 Lloyd’s Rep. 119). On certain occasions, it is extremely difficult to present direct evidence showing the precise nature or event of the cause of loss. This is usually the case when the insured vessel sinks and no crew survives to provide evidence or the crew which survived has no information regarding the sinking of the vessel. In those circumstances, the assured could seek the assistance of the court with the request that a presumption of loss by an ‘‘unascertainable peril of the sea’’ be drawn in his favour (Compania Martiartu v. Royal Exchange Assurance Corporation (The Arnus) [1923] 1 K.B. 650). The presumption of loss by an ‘‘unascertainable peril of the sea’’ is allowed only if the court is satisfied that an uninsured peril did not cause the loss and also that the circumstances of the loss were unknown (Lamb Head Shipping Co. Ltd v. Jennings (The Marel) [1994] 1 Lloyd’s Rep. 624). Fire As the term ‘‘fire’’ has not been defined in the MIA 1906, emphasis must be laid on case law to determine the exact meaning of this peril. It is crystal clear that recovery is possible for damage inflicted by flames (Tempus Shipping Co. Ltd v. Dreyfus & Co. Ltd [1930] 1 K.B. 699). Furthermore, loss caused by fire includes smoke damage; damage occasioned through fire fighting efforts (The Diamond [1906] P. 282); and damage caused while attempting to save the subject matter insured or preventing the spread of fire (Stanley v. Western Insurance Co. (1868) L.R. 3 Ex. 71). It is, however, not possible to recover for loss or damage caused by heating under the heading of fire. The Buckeye State (1941) 39 F. Supp. 344 A cargo of grain was damaged since the light bulbs in the hold were left on causing over-heating of the cargo. The owner of the cargo claimed indemnity on the basis that the loss was attributable to fire. The court ruled that the cause of loss was not fire. (Fire is caused by ignition or combustion, and it includes the idea of visible heat or light.)

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In terms of burden of proof, there is an essential difference between fire and other marine perils, i.e. perils of the sea. Once it has been shown by the assured that a fire has taken place, the insurer bears the burden of proving that the fire was not fortuitous, e.g. it resulted either from inherent vice or from the wilful misconduct of the assured (The Alexion Hope [1987] 1 Lloyd’s Rep. 60). Put another way, once the assured demonstrates a loss by fire, the loss is prima facie within the meaning of a marine policy whether the cause of the fire was some fortuitous event, inherent vice or even deliberate arson by the assured. The insurer is then under an obligation to demonstrate that the loss caused by fire is occasioned from a peril not insured against, i.e. wilful misconduct, if he wishes to deny liability. Jettison Jettison is a marine peril where cargo has been thrown over-board by way of sacrifice in time of peril to the vessel or other cargo. It is not an overstatement to suggest that the significance of this peril, even though appearing in most modern insurance policies, have diminished significantly. There are two reasons behind its demise. First, it is possible to recover loss or damage caused by cargo being thrown over-board by way of sacrifice at a time of peril under general average. York-Antwerp Rules 2004, Rule 1, reads: No jettison of cargo shall be made good as general average, unless such cargo is carried in accordance with the recognised custom of the trade.

Second, jettison is casting overboard for a reason. If jettison is prompted by adverse weather at sea, it is likely that perils of the sea will be one of the proximate causes of loss allowing the assured to make a claim under that heading. Similarly, as discussed in the earlier part, if goods are jettisoned in an attempt to prevent fire from spreading, the loss is likely to be recoverable under fire. Theft Rule 9 of the Rules of Construction of the Act provides: The term ‘‘thieves’’ does not cover clandestine theft or theft committed by any one of the ship’s company, whether crew or passengers.

Two points emerge from this definition. First, within the context of marine insurance law, the theft must be committed by one or more outsiders. Theft by members of the crew is covered if it amounts to barratry. (By virtue of rule 11 of the Rules of Construction the term ‘‘barratry’’ includes every wrongful act wilfully committed by the master or crew to the prejudice of the owner, or, as the case may be, the charterer.) Second, the theft must be of a ‘‘violent’’ nature. This violence may take the form of violence against the person or property.

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Le Fabriques de Produits Chimiques SA v. Large [1923] 1 K.B. 203 Three cases of chemicals were insured under a policy of marine insurance, warehouse to warehouse, from London to Bordeaux and thence to Switzerland. Whilst the goods were in the warehouse, awaiting shipment, two of the cases were stolen and the assured claimed under the policy. The insurers rejected the claim on the ground that theft had to include violence. The court ruled that the thieves, in breaking into the warehouse, had committed an act of violence and the violence did not have to be against the person.

In marine insurance practice, the assured can protect himself against clandestine theft by inserting the Institute Theft, Pilferage and Non-delivery Clause into the policy: In consideration of an additional premium, it is hereby agreed that this insurance covers loss or damage to the subject matter insured caused by theft or pilferage, or by non-delivery of an entire package, subject always to the exclusion contained in this insurance.

Piracy It is well-settled that for the purposes of marine insurance law, the term ‘‘pirate’’ receives a popular and business meaning. A pirate, therefore, is a person who is involved in robbery for his own ends rather than someone who is simply operating against the property of a particular state for a public end. Banque Moneteca & Carystuiaki v. Motor Union Insurance Co. Ltd (1923) 14 Ll. L. Rep. 48 The assured obtained insurance cover for his vessel, the Filia, against marine risks. Rather peculiarly, the policy afforded cover against seizure but not for piracy. At that time, there was a state of war between Greece and Turkey. Turkish nationalists were fighting in small groups against the armies of countries which occupied different parts of the Anatolia. Osman Agha, the leader of one of these small groups, and his men captured the Filia which was a Greek-owned vessel. The insurers denied to pay for the loss on the basis that the loss was attributable to piracy. The court held that the capture of the Filia was politically motivated. This was not an act of piracy as there was no attempt to acquire personal gain. Republic of Bolivia v. Indemnity Mutual Marine Assurance Co. Ltd [1909] 1 K.B. 785 A vessel, carrying provisions and stores for the Bolivian army was stopped by rebels fighting for the self-proclaimed Free Republic of El Acre. The rebels removed the provisions and stores. It was held that piracy constituted of the pursuit of private, as opposed to public ends, and that the above events could not amount to piracy.

It is also essential that pirates use force or threaten to use force in order to achieve their ends. Athens Maritime Enterprises Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The Andreas Lemos) [1983] Q.B. 647 A group of armed men boarded the vessel, anchored within port limits and within territorial waters of Bangladesh, in a clandestine fashion. They stole some equipment

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from the vessel by throwing it into the sea. When discovered by the crew, the thieves at first offered resistance by brandishing their knives but then fled. It was held that the act of appropriation had been completed before the force or a threat of force was used. Therefore, the events did not amount to piracy.

Finally, rule 8 of the Rules of Construction of the Act makes clear that piracy is an act which can be committed by two groups of people: by outsiders and passengers.

PERILS EXCLUDED Section 55(2) of the MIA 1906 specifies matters which have been excluded from coverage: (a) the insurer is not liable for any loss attributable to the wilful misconduct of the assured . . . (b) unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately caused by delay, although the delay be caused by a peril insured against; (c) unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice, or nature of the subject matter insured, or any loss proximately caused by rat or vermin, or for any injury to machinery not proximately caused by maritime perils. It is open to parties to incorporate perils expressed in s. 55(2)(b) and (c) into the contract, however, the same is not the case for the peril expressed in s. 55(2)(a). It is not possible to provide cover for wilful misconduct of the assured, even by express agreement, as an attempt of this nature would be against the notion of public policy. Apart from these perils, standard clauses used in the market exclude numerous perils from the coverage of marine policies. For instance, in standard hull clauses perils covered by Institute War and Strikes Clauses are excluded, e.g. clause 29 of the International Hull Clauses 2003 reads: ‘‘In no case shall this insurance cover loss, damage, liability or expense caused by 1. war, civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or any hostile act by or against belligerent power 2. capture, seizure, arrest, restraint or detainment (barratry and piracy excepted), and the consequences thereof or any attempt thereat 3. derelict mines, torpedoes, bombs or other derelict weapons of war 4. strikers, locked-out workmen, or persons taking part in labour disturbances, riots or civil commotions.’’

Similarly, standard cargo clauses exclude the risk of insolvency or financial default of the people in charge of the vessel carrying the cargo in addition to various war-related risks, i.e. clauses 4.6 and 4.8 of the Institute Cargo Clauses state:

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‘‘In no case shall this insurance cover . . . loss damage or expense arising from insolvency or financial default of the owners managers charterers or operators of the vessel . . . . . . loss damage or expense arising from the use of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.’’

Wilful misconduct of the assured In order to be able to define the extent of this exclusion, it is essential to identify which acts would amount to wilful misconduct. There is no doubt that deliberate acts committed with an intention to cause loss are examples of wilful misconduct. Papadimitriou v. Henderson [1939] 3 All E.R. 908 The insured vessel, the Ellinico Vouno, was insured against marine perils. Uncharacter istically, the policy provided cover against war and strikes risks. The Ellinico Vouno commenced a voyage to North Africa laden with lorries and spare parts belonging to the Spanish government. The owner of the vessel was aware of the danger that she might have been confiscated by rebels fighting against the Spanish government. In fact, en route to Africa, she was stopped by rebel forces and then confiscated. When the assured advanced a claim under the policy, the insurer denied to pay on the basis that the loss was attributable to wilful misconduct of the assured. The court holding in favour of the assured drew a distinction between the assured who ran the risk of seizure and the assured who acted with the expectation that his conduct would lead to seizure; only the later could be guilty of wilful misconduct.

It is not yet settled authoritatively by British courts whether ‘‘reckless disregard’’ or ‘‘reckless indifference’’ fall within the meaning of wilful misconduct. The Australian Court of Appeal, on the other hand, answered this question affirmatively. Wood v. Associated National Insurance Co. Ltd [1985] 1 Qd. R. 297 A fishing vessel, which was insured against marine risks, sailed on Sunday with one of the sons of the assured and three inexperienced crewmen on board. On Monday, two problems were encountered: the bilge pump was not working and the engine could not have been started. The assured, who was a trained mechanic, was informed and he came on board the same day. Within hours, he fixed both the bilge pump and the engine. The vessel was anchored at a location which was regarded, by general consent, unsafe when the wind blew from the north east. Both the assured and his son left the vessel leaving three inexperienced crewmen in charge. On Thursday, as a result of a north easterly gale, the vessel was wrecked and the crew saved their lives by swimming to the shore. The full Court of Appeal upheld the decision of the trial judge and ruled that the assured had acted with reckless disregard amounting to wilful misconduct and accordingly the insurers were not liable for the loss. According to the court, once it became predictable that as a matter of probability the insured vessel would encounter those perils (north easterly gale) and in her condition (with inexperienced crew) would not be able to survive them, the element of fortuity was eliminated or substantially reduced and her consequent loss became attributable to the owners’ wilful misconduct and not to a peril insured against.

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Similar sentiments were echoed, obiter dictum, by Colman J. in National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep. 582 at p. 622 where he identified the essential elements of wilful misconduct as follows: ‘‘the assured intended to achieve a loss or damage or that he was recklessly indifferent whether such loss or damage was caused and that his immediate purpose was to claim on his insurers or that he subsequently advanced a claim.’’

When the insurer raises the defence of wilful misconduct of the assured, the burden of proof on his shoulders is a very heavy one. The required standard of proof which must be satisfied remains that of the civil law but reflects the gravity of the allegation (Continental Illinois National Bank & Trust Co. of Chicago v. Alliance Assurance Co. Ltd (The Captain Panagos D.P.) (No. 2) [1989] 1 Lloyd’s Rep. 33). In most cases, courts will draw conclusions from surrounding facts and circumstances as direct evidence will be very limited. The following circumstances might provide an indication that the assured’s conduct amounts to wilful misconduct: u loss occurring in calm sea in good weather: The Leonita (1922) 13 Ll. L. Rep. 231; The Milasan [2000] 2 Lloyd’s Rep. 458; u loss of vessel’s log: The Olimpia (1924) 19 Ll. L. Rep. 255; u contradiction between the stories of the master and crew; u poor financial position of the assured; u conduct of the assured after the loss, i.e. making a claim without investigating the casualty: The Milasan [2000] 2 Lloyd’s Rep. 458. It has to be borne in mind that proving the wilful misconduct of the assured is not sufficient for the insurer to deny liability. He is also under a further obligation to demonstrate that the loss is attributable to the wilful misconduct of the assured. Delay Section 55(2)(b) of the MIA 1906, which excludes any loss proximately caused by delay, is confined to policies on ships and goods. It should be noted that by virtue of this subsection loss attributable to delay is excluded even though the delay is caused by a peril insured against. Taylor v. Dunbar (1869) L.R. 4 C.P. 206 The insurance policy was on a cargo of pig carcasses. When the vessel carrying the insured cargo was delayed due to bad weather, the cargo had to be jettisoned as it became putrid. The court ruled that the loss was proximately caused by delay and not by a peril of the sea and accordingly the cargo owner could not recover.

Inherent vice Inherent vice is not descriptive of the loss itself. It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary

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course of the contemplated voyage without the intervention of any fortuitous external accident or casualty (Soya GmbH Mainz Kommanditgesellschaft v. White [1983] 1 Lloyd’s Rep. 122, at 126, per Lord Diplock). Therefore, damage caused by natural sweating (Browing v. Amsterdam (1930) 36 Ll. L. Rep. 309), spontaneous combustion (Boyd v. Dubois (1811) 3 Camp. 133) and inadequate packing (Berk and Co. v. Style (1955) 1 Q.B. 180) of the cargo are examples of loss caused by inherent vice. In determining whether the loss is attributable to inherent vice of insured goods, the first step is to assess the impact of external factors. If the assessment indicates no involvement of any fortuitous external accident or casualty, it is more likely that damage to goods will be attributed to inherent vice of the goods. Noten BV v. Paul Charles Harding [1990] 2 Lloyd’s Rep. 283 A cargo of gloves, manufactured in Calcutta, was shipped to Rotterdam. The shipment was insured against all risks excluding cover for ‘‘inherent vice or nature of the subject matter insured’’. On arrival, the gloves were found to be wet, stained, mouldy and discoloured. It was identified that the gloves were wet when shipped. When the vessel reached the colder atmosphere of Rotterdam, the wet gloves emitted that moisture causing mould and stain. The Court of Appeal, therefore, held that the cause of loss was attributable to inherent vice of the goods and no external factors played any role. Mayban General Assurance BHD v. Alstom Power Plants Ltd [2004] EWHC 1038 (Comm) An electrical transformer for a new power station being built in Malaysia was shipped from Ellesmere Port to Rotterdam on the first stage of its journey by sea to Malaysia. The transformer was insured under an insurance policy covering equipment being supplied to the power station. During the first leg of the journey, between Ellesmere Port and Rotterdam, the vessel carrying the transformer encountered two periods of gale force conditions totalling 46 hours. When the transformer arrived at the construction site, it was found to be seriously damaged and repairs in excess of £1million were carried out by the assured. Convinced that the damage had been caused by some unusual event in the course of the voyage from the U.K. to Malaysia, the assured made a claim under the insurance policy which incorporated Institute Cargo Clauses (A) (1/1/82). The insurers rejected the claim on the ground that the loss was attributable to the inherent vice of the cargo, namely the transformer’s inability to withstand the ordinary incidents of carriage by sea from the U.K. to Malaysia during the winter months. Insurers commenced the present proceedings against the assured claiming a declaration that they were not liable. It was common ground that the damage to the transformer was caused by the prolonged working of some of its joints brought about by the motion of the vessel. However, since those weather conditions would not fall outside the range of what could reasonably have been expected at that time of the year, the Court held that the loss was attributable to the fact that the transformer was not fit for the voyage. In the light of this finding, the inherent vice defence succeeded and insurers were granted a declaration that they were not liable to indemnify the assured in respect of the damage suffered.

It should be noted that standard clauses commonly used in practice extends the definition of inherent vice expressly to cover insufficient packing. Clause 4.3 of the Institute Cargo Clauses (A, B and C) reads:

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In no case shall this insurance cover loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject matter insured . . .

Ordinary wear and tear The purpose of insurance is to provide indemnity against uncertain events. In cases where a loss, which is attributable to ordinary wear and tear of the subject matter insured, arises the element of uncertainty is, to a certain degree, removed. That is the main reason why this kind of risk has traditionally been excluded from marine insurance coverage. Loss arising as a result of the decay of vessels’ sheathing (Hamilton, Fraser & Co. v. Pandorf & Co. (1887) 12 App. Cas. 518) or actions of worms on their bottom (Rohl v. Parr (1796) 1 Esp. 445) are likely to be associated with the ordinary wear and tear. In a similar vein, s. 55(2)(c) of the MIA 1906 excludes loss attributable to ordinary leakage and breakage. Leakage has been defined as ‘‘any stealthy escape either through a small hole which might be discernible, or through the pores of the material of which the cask is composed’’ (De Monchy v. Phoenix Insurance Co. of Hartford (1929) 34 Ll. L. Rep. 201, at 204, per Viscount Dunedin).

LOSSES IN MARINE INSURANCE A marine loss may be partial or total (s. 56(1) of the MIA 1906). Identifying the type of loss is essential because the Act lays down different tests for the calculation of indemnity for total and partial losses, as will be examined in the following part. The MIA 1906 further divides total losses into actual and constructive total losses (s. 56(2) of the MIA 1906). Actual total loss By virtue of s. 57(1) of the MIA 1906, actual total loss might arise in one of the following manners: First, there is an actual total loss if the subject matter insured is destroyed. A typical example to this is when the insured vessel is totally consumed by fire (see Kastor Navigation Co. Ltd v. Axa Global Risks (UK) Ltd [2004] 2 Lloyd’s Rep. 119). Second, an actual loss arises in cases where the subject matter insured is so damaged as to cease to be a thing of the kind insured. It is well-settled that courts will consider the merchantable character of the subject matter of insurance in deciding whether it has ceased to be the thing of the kind insured. Accordingly, the subject matter insured is actually lost if it becomes an unmerchantable thing, even though it might exist in specie. Conversely, the loss can only be a partial one, if the subject-matter insured retains some of its merchantable quality.

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Asfar & Co. v. Blundell [1896] 1 Q.B. 123 The steamship, Govino, was on a voyage from the Persian Gulf to London when she sank in the river Thames as a result of a collision. At the time of the incident, she was carrying dates which were insured under a marine policy. When the vessel was subsequently raised and docked, the dates were found to be ‘‘a mass of pulpy matter impregnated with sewage and in a state of fermentation’’. Even though they were unfit for human consumption, they retained considerable value and were sold for £2,400 for distillation into spirit. The Court of Appeal held that there was a total loss of dates as they became something else for business purposes which no buyer would buy and no honest seller would sell. Francis v. Boulton [1895] 1 Com. Cas. 217 A lighter, which was loaded with bags of rice, during the course of her passage up the Thames came into collision with a steamer and was sunk. The lighter was re-floated and the owner of the rice, who held a marine policy, on the advice of the Salvage Association, had the rice kiln-dried at a cost of £68 and then sold for £111 (the declared value of rice was £450). It was held that the assured had sustained only a partial loss as the rice was still merchantable.

Finally, there is again an actual total loss if the assured is irretrievably deprived of the subject-matter of insurance. The question of what constitutes ‘‘irretrievable deprivation’’ of the subject-matter insured is not a straightforward one. No doubt, the prospect of recovery is very slim if the loss follows the seizure and confiscation of a vessel for smuggling (Panamanian Oriental Steamship Corp. v. Wright (The Antia) [1970] 2 Lloyd’s Rep. 365; see also Stringer v. English and Scottish Marine Insurance Co. Ltd (1869) L.R. 4 Q.B. 676). However, courts are not likely to hold that the subject matter of insurance has been irretrievably deprived unless there is evidence that recovery is either physically or legally impossible. George Cohen, Sons and Co. v. Standard Marine Insurance Co. Ltd (1925) 21 Ll. L. Rep. 30 The Prince George, an obsolete battleship, was wrecked on the Dutch coast when the tugs which were towing her sought shelter from bad weather in Yarmouth, leaving the battleship unattended and in danger of drifting. When claiming from the insurers, one of the pleas of the assured was that the owners had been ‘‘irretrievably deprived’’ of the battleship due to exorbitant cost of any salvage operation and also because the Dutch authorities would not sanction such an operation as there was a danger that sea defences might have been damaged as a result. The court ruled that the vessel did not become actual total loss as she was still physically intact and the edict by the Dutch authorities was not final.

Constructive total loss This type of loss is unique to marine insurance law and it can broadly be described as a type of loss, whereby the subject matter insured is effectively lost to the assured even though it might not be actually destroyed. Section 60 of the MIA 1906 provides for six distinct clauses of constructive total loss, which will be examined below. It has long been established that this section presents an exhaustive definition of the concept of constructive total loss

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(Robertson v. Petros M. Nomikos Ltd [1939] A.C. 371 and Irvin v. Hine [1950] 1 K.B. 555).

Types of constructive total loss (i) ‘‘Where the subject matter insured is reasonably abandoned on account of its actual loss appearing to be unavoidable’’ (s. 60(1) of the MIA 1906). This is likely to arise in a case where the master and crew decide to abandon the insured vessel after she was damaged by perils of the sea or any other factor. The reasonableness of the abandonment will be judged upon an objective analysis of the facts (Lind v. Mitchell (1928) 32 Ll. L. Rep. 70). (ii) ‘‘Where the subject matter insured is reasonably abandoned on account that it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred’’ (s. 60(1) of the MIA 1906). The court is presented with a formula by the Act, which can be used in judging whether the abandonment on economic grounds is reasonable or not. In this context, it is essential to compare the cost of repair with post-repair value of the subject matter insured. In calculating the cost of repairs, actual or estimated repair and re-floating costs at the place of the casualty are to be included (Young v. Turing (1841) 2 M. & G. 593). The post-repair value of the insured subject matter is taken to be its market value, unless otherwise is provided in the contract. As far as hull insurance is concerned, clause 21 of the International Hull Clauses 2003 provides that in ascertaining whether a vessel is a constructive total loss, 80% of the insured value of the vessel is to be taken as the repaired value. The clause further provides that no claim in respect of a single accident for constructive total loss of the vessel based on the cost of repair is recoverable unless that cost exceeds 80% of the insured value of the vessel. (iii) ‘‘Where the assured is deprived of the possession of his ship or goods by a peril insured against and it is unlikely that he can recover the ship or goods, as the case may be’’ (s. 60(2)(i)(a) of the MIA 1906). This category of constructive total loss is confined to hull and cargo insurance. In order to establish a constructive total loss under this category, the assured should demonstrate that the possibility of recovering the ship or goods is unlikely and not uncertain (Rickards v. Forestal Land, Timber and Railway Co. Ltd [1942] A.C. 50). Polurrian Steamship Co. Ltd v. Young [1915] 1 K.B. 922 The insured vessel, owned by a British company, was insured against the risk of capture, seizure and detention. At a time when a state of war existed between Greece and the Ottoman Empire, the insured vessel sailed to Constantinople carrying cargo which belonged to Welsh interest. On the route to Constantinople, the insured vessel was seized by Greek warships. The assured contended that the vessel had become a constructive total loss on the ground that the possibility of claiming her back was rather

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slim. The Court of Appeal did not agree. As the vessel was neutral and carrying cargo which belonged to a neutral party, there was every chance that she would have been released. The fact that the date of her release was uncertain was not sufficient to found constructive total loss. Bayview Motors Ltd v. Mitsui Marine and Fire Insurance Co. [2002] 1 Lloyd’s Rep. 652 The buyers, Bayview Motors, having purchased two consignments, each of six vehicles, from Toyota in Japan, obtained insurance cover on warehouse to warehouse basis. Under the carriage contract, the vehicles were going to be transhipped at Santa Domingo in the Dominican Republic. When the first consignment arrived at Santa Domingo on 11 August 1997, the customs did not release the cars for transhipment because documentation was not complete. The buyers, through their agents in the Dominican Republic, completed documentation within the next few weeks. They also made sure that documentation for the second consignment, which arrived on 14 September 1997, was in order. Despite several attempts made by the buyers during September and October, the customs refused to release the cars which were stored in a fenced-off parking area within the port. On 18 November, Bayview learned that the cars had been removed from the parking area about a month earlier and distributed to the custom officers and their friends and relatives. The Court of Appeal held that the cars became a constructive total loss from the moment the custom officers refused to release the cars even though at that stage all documentation was in order. This indicated that the possibility of recovery was very unlikely.

Furthermore, the assured should also demonstrate that he has been deprived of his ship or goods for a reasonable amount of time beyond which recovery is deemed to be unlikely. Problems could arise in identifying what a reasonable amount of time is in each case and from which point in time this span of time starts (see Irvin v. Hine [1950] 1 K.B. 555 and The Bamburi [1982] 1 Lloyd’s Rep. 312). An attempt to address these problems has been made by clause 3 of the Institute War and Strikes Clauses (Time) 1995, which reads: ‘‘In the event that the Vessel shall have been the subject of capture, seizure, arrest, restraint, detainment, confiscation or expropriation, and the Assured shall thereby have lost the free use and disposal of the Vessel for a continuous period of 12 months then for the purpose of ascertaining whether the Vessel is a constructive total loss the Assured shall be deemed to have been deprived of the possession of the Vessel without any likelihood of recovery.’’

(iv) ‘‘Where the assured is deprived of possession of his ship or goods by a peril insured against and the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered’’ (s. 60(2)(i)(b) of the MIA 1906). It has to be stressed that this category of constructive total loss is confined to hull and cargo insurance and the principles of valuation discussed under (ii) are also relevant here. (v) ‘‘In case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired’’ (s. 60(2)(ii) of the MIA 1906). Damage to a ship such that the cost of repair exceeds the repaired value constitutes the fifth category of constructive total loss. Two points must be borne in mind. First, the principles of valuation referred to under (ii) are still

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applicable here. Second, in estimating the cost of repairs, no deduction should be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired (s. 60(2)(ii) of the MIA 1906). For a recent example where a vessel has been declared constructive total loss on this basis, see Kastor Navigation Co. Ltd v. Axa Global Risks (UK) Ltd [2004] 2 Lloyd’s Rep. 119. (vi) ‘‘In the case of damage to goods where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival’’ (s. 60(2)(iii) of the MIA 1906). The value of goods on arrival is to be determined by the principles referred to above. It is not crystal clear whether the equation takes into account the whole cost of completing the voyage or merely that part of the cost which exceeds the original freight. There are a number of pre-statute cases which indicates that only the excess is included (see Rosetto v. Gurney (1851) 11 C.B. 176 and Farnworth v. Hyde (1866) L.R. 2 C.P. 204), but the statutory wording seems to contemplate the entire forwarding cost. Clause 13 of the Institute Cargo Clauses (A, B and C) does little to resolve the dispute as it reiterates the provision, which appears in the MIA 1906.

Notice of abandonment Where there is a constructive total loss, the assured has an option: he can either treat the loss as a partial loss or treat the loss as if it were an actual total loss by giving notice of abandonment (s. 61 of the MIA 1906). Therefore, notice of abandonment is a formal notification to the insurer by the assured that the subject matter insured has become a constructive total loss and that the assured intends to exercise his option under the MIA 1906 to seek indemnity for a total loss rather than a partial loss. The law requires such a notice in order to enable the insurer to obtain maximum benefit from what remains. Consequently, no notice of abandonment is required in respect of a constructive total loss where ‘‘at the time the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him’’ (s. 62(7) of the MIA 1906). Recently, the Court of Appeal in Kastor Navigation Co. Ltd v. Axa Global Risks (UK) Ltd [2004] 2 Lloyd’s Rep. 119 held that there was no conceivable benefit to insurers in receiving a notice of abandonment where an insured constructive total loss was followed almost immediately by an uninsured actual total loss, as in such a case there could be no possible salvage open to the insurers and abandonment would take place automatically on the settlement of the claim. (See also Bayview Motors Ltd v. Mitsui Marine and Fire Insurance Co. [2002] 1 Lloyd’s Rep. 65.)

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If the notice of abandonment is accepted, liability for the loss is conceded and sufficiency of the notice is approved (s. 62(6) of the MIA 1906). Rejection of the notice by the insurer is an indication that he will take the matter to trial to challenge the existence of a constructive total loss. Other formalities regarding the notice of abandonment have been summed up in s. 62 of the MIA 1906. Partial loss Any loss which does not satisfy the criteria for a total loss is partial (s. 56(1) of the MIA 1906). In marine insurance practice, policies might be drawn so as to cover only total losses, excluding partial losses. This is usually achieved by using the following wording: ‘‘warranted free from particular average’’.

MEASURE OF INDEMNITY The process of calculating the sum which the assured can recover in respect of a loss on a marine policy, by which he is insured, is known as ‘‘measure of indemnity’’. According to s. 27(1) of the MIA 1906, a marine policy can be either valued or unvalued. Most marine policies are valued but in marine insurance practice it is possible to come across unvalued policies occasionally. There is a significant difference between valued and unvalued policies in terms of the measure of indemnity. Measure of indemnity under valued policies By virtue of s. 27(2) of the MIA 1906 a policy is valued if it ‘‘specifies the agreed value of the subject-matter insured’’. A distinction should be drawn between a policy which contains an agreed value and one which specifies the sum insured. If a value is agreed, this is conclusive evidence of the insurable value of the insured property so valued (s. 27(3) of the MIA 1906) and, therefore, plays a significant role in determining the precise amount of the insurer’s liability under the policy. A sum insured, on the other hand, delimits the financial scope of cover by stating the maximum potential liability of the insurer under the policy. It does not play a role in determining the value of any insured property. Whether a particular sum of money represents an agreed value or an insured value is a question of fact which requires a careful construction of the policy in question: Kyzuna Investments Ltd v. Ocean Marine Mutual Insurance Association (Europe) (The Solveig) [2000] Lloyd’s Rep. IR 513 The schedule to a yacht policy, which provided cover against marine risks, contained a ‘‘sum insured’’ and the main insuring clause to the effect that the underwriters would indemnify ‘‘up to the amounts and/or limits contained herein’’. The policy itself

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provided that whether the yacht had become a constructive total loss should be calculated by reference to ‘‘the sum appearing in the schedule hereto as the value of the insured property’’. The policy also incorporated the Institute Yacht Clauses (1/11/85), which refer to ‘‘the insured value’’ in clauses dealing with unrepaired damage and constructive total loss. Thomas J. (as he then was), in view of established authority, held that the phrase ‘‘sum insured’’ generally denoted a ceiling on the indemnity recoverable and a clear expression of intention was required to transform a figure expressed as a sum insured into an agreed value, which did not exist in the present case. He was of the opinion that references in the Institute Yacht Clauses to the meaning of constructive total loss and unrepaired damage, in terms of ‘‘insured value’’, were of no assistance in the absence of any agreed value. Moreover, the wording of the main insuring clause strongly indicated an unvalued policy.

Total loss under valued policies Section 68 of the MIA 1906 stipulates: Subject to the provisions of this Act and to any express provision in the policy where there is a total loss of the subject matter insured— (1) If the policy be a valued policy, the measure of indemnity is the sum fixed by the policy . . . .

Furthermore, s. 27(3) of the Act reads: Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.

The combined effect of these provisions is that the measure of indemnity in the case of a total loss is a sum equal to the insurable value and it may well be possible that in some cases the assured receives a measure of indemnity which bears no relation to the scale of the actual loss. Therefore, the sum payable in case of total loss of the insured property under a valued policy can be regarded as an indemnity by reference to the terms of the contract. The following case is often cited to illustrate that the conclusiveness of the agreed value principle can lead to results which might not be at odds with the indemnity principle. Barker v. Janson (1868) L.R. 3 C.P. 303 The hull of the vessel was insured under a marine policy with an agreed value of £8,000. The policy also contained a clause indicating that the sum insured was £6,000. Unknown to the assured, at the time of the formation of the marine insurance contract the market value of the vessel was nil as she had already been so badly damaged by a storm that the cost of repairs would have exceeded the ship’s value once repaired. The vessel later became a total loss and the assured claimed indemnity under the policy. The insurers were held bound by the agreed value and, therefore, liable for £8,000 (insured value).

Partial loss of goods under valued policies The rules governing the measure of indemnity for partial loss of goods under valued policies are found in s. 71 of the MIA 1906:

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‘‘Where there is a partial loss of goods, merchandise, or other moveables, the measure of indemnity, subject to any express provision in the policy, is as follows— (1) Where part of the goods, merchandise or other moveables insured by a valued policy is totally lost, the measure of indemnity is such proportion of the sum fixed by the policy as the insurable value of the part lost bears to the insurable value of the whole, ascertained as in the case of an unvalued policy; . . . (3) Where the whole or any part of the goods or merchandise insured has been delivered damaged at its destination, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value; . . . (4) ‘Gross value’ means the wholesale price or, if there be no such price the estimated value, with, in either case, freight, landing charges, and duty paid beforehand; provided that, in the case of goods or merchandise customarily sold in bond, the bonded price is deemed to be the gross value. ‘Gross proceeds’ means the actual price obtained at a sale where all charges on sale are paid by the sellers.’’

The section makes a distinction in terms of measurement of indemnity between total loss of a part of the goods insured and damage to some or all of the goods. In case of a total loss of a part under a valued policy, the assured receives the proportion of the agreed value that the insurable value of the goods lost bears to the insurable value of the whole insured. If, on the other hand, insured goods are delivered damaged, the proportion of the value lost is determined by expressing the diminution in the wholesale value of the goods by reason of their damaged condition at the port of destination as a proportion of the wholesale value they would have if they had been undamaged. When calculating the gross value of goods at their destination, the costs, if any, of reconditioning the goods to make them fit for resale are excluded (Francis v. Boulton (1895) 1 Com. Cas. 217). Partial loss of a ship under valued policies An attempt to address the measure of indemnity in the case of damage to a ship under a valued policy has been made by s. 69 of the MIA 1906. First, where the damage has been fully repaired, the measure of indemnity is the reasonable cost of repairs, not exceeding the sum insured in respect of any one casualty (s. 69(1) of the MIA 1906). Second, where the damage has been partly repaired before the expiry of risk, the measure of indemnity for those repairs is again their reasonable cost. In that case, the assured is entitled to the reasonable depreciation in the value of the vessel arising from the unrepaired damage, provided that the aggregate amount does not exceed the indemnity payable had the damage been fully repaired (s. 69(2) of the MIA 1906). Third, where the ship has not been repaired and has not been sold in a wholly unrepaired state during the currency of the policy, the measure of indemnity

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is the reasonable depreciation arising from the damage, again not exceeding the amount payable in the case of full repair (s. 69(3) of the MIA 1906). Even though the measure of indemnity for damage to a ship might involve the calculation of reasonable depreciation, the Act is silent on how such calculation should be carried out. Insurers have always insisted that depreciation should be calculated by taking the actual sound value of the ship and subtracting the actual damaged value (Irvin v. Hine [1950] 1 K.B. 555). This approach seems not to take into account the agreed value of the ship, which is deemed to be conclusive between the parties by virtue of s. 27(3) of the MIA 1906. After much deliberation, it is now settled that in common law the measure of indemnity in the case of a valued policy has to be based upon the insured value represented by actual depreciation measured at the date of the termination of the policy (Kusel v. Atkin (The Cantariba) [1997] 2 Lloyd’s Rep. 749). It has to be borne in mind that most provisions of the MIA 1906 are default rules which apply only in the absence of contrary intention. Clause 20 of the International Hull Clauses 2003 provides the following on the issue of calculation of reasonable depreciation: Unrepaired Damage (1) The measure of indemnity in respect of claims for unrepaired damage shall be the reasonable depreciation in the market value of the vessel at the time this insurance terminates arising from such unrepaired damage, but not exceeding the reasonable cost of repairs . . . (3) The Underwriters shall not be liable in respect of unrepaired damage for more than the insured value of the vessel at the time this insurance terminates.

This clause enables the insurers to insist on the depreciation approach repeatedly argued un successfully before the courts. Where this clause applies, reasonable depreciation is to be taken to refer to the depreciation in the market value of the vessel at the determination of the risk capped at the reasonable cost of repairs. The maximum sum recoverable in respect of unrepaired damage at the end of the termination of the policy is capped at the insured value. Measure of indemnity under unvalued policies A policy which does not specify the value of the subject matter insured and leaves the insurable value to be subsequently ascertained in accordance with the provisions of the MIA 1906 is regarded as an unvalued policy (s. 28 of the MIA 1906). The relevant definitions of insurable value are found in s. 16 of the Act. For instance, by virtue of s. 16(1) of the MIA 1906 the insurable value of a ship is: ‘‘ . . . the value, at the commencement of the risk, of the ship, including her outfit, provisions and stores for the officers and crew, money advanced for seamen’s wages, and other disbursements (if any) incurred to make the ship fit for the voyage or adventure contemplated by the policy, plus charges for insurance upon the whole.’’

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Similarly, the insurable value of goods and merchandise is, by virtue of s. 16(3) of the MIA 1906 ‘‘the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole’’.

Total loss under unvalued policies According to s. 68(2) of the MIA 1906, in case of a total loss under an unvalued marine policy, the measure of indemnity is the insurable value of the subject matter as determined in accordance with s. 16(1) of the Act.

Partial loss of goods under unvalued policies In cases where part of the goods, merchandise, or other moveables insured by an unvalued policy is totally lost, the measure of indemnity is the insurable value of the subject matter as determined in accordance with s. 16(3) of the MIA 1906 (s. 70(2) of the MIA 1906). The measure of indemnity is rather different in cases where whole or part of the goods insured under an unvalued policy has been delivered damaged at its destination. This situation is governed by s. 71(3) of the MIA 1906 and accordingly the assured is entitled to recover the proportion of the insurable value which the difference between the gross sound and damaged value at the place of arrival bears to the gross sound value.

Partial loss of a ship under unvalued policies As discussed above, where the ship has been damaged but repaired the assured is, subject to contract, entitled to the reasonable cost of repairs, less the customary deductions, but not exceeding the sum insured in respect of any one casualty (s. 69(1) of the MIA 1906). The measure of indemnity for partial repair and non-repair is also very similar to the process conducted under valued policies (s. 69(2)(3) of the MIA 1906).

TEST YOUR UNDERSTANDING 1. The rules of common law including the law of merchant: (a) do not continue to apply to marine insurance contracts; (b) are outlawed by the MIA 1906; (c) continue to apply to marine insurance contracts in so far as they are consistent with the express provisions of the MIA 1906; (d) continue to apply to marine insurance contracts.

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2. According to the MIA 1906, a person has an insurable interest if: (a) the marine insurance contract expressly says so; (b) he stands in any legal or equitable relation to the adventure or to any insurable property at risk; (c) he has an economic expectation of loss; (d) he has a factual expectation of loss.

3. Which of the following statements are accurate in relation to marine warranties? (a) (b) (c) (d)

breach breach breach breach

of of of of

warranty warranty warranty warranty

renders the policy voidable ab initio; is a repudiation of the policy; automatically terminates the contract; automatically terminates the risk.

4. Which of the following statements is true? (a) there is no need to demonstrate the cause of ingress of water if the assured argues that the loss is attributable to ‘‘perils of the seas’’; (b) once it has been shown by the assured that a fire has taken place, the insurer bears the burden of proving that the fire was not fortuitous; (c) a person who is regarded as ‘‘pirate’’ in marine insurance can, in some cases, have a political motive; (d) the definition of ‘‘theft’’ in the MIA 1906 includes clandestine theft.

5. Which of the following is not a peril excluded from marine insurance coverage by the MIA 1906? (a) (b) (c) (d)

wilful misconduct of the assured; delay; inherent vice; war.

6. In which case is the assured not under an obligation to give notice of abandonment to be able to claim constructive total loss? (a) if he has doubts about the cause of the loss; (b) if he does not initially consider the loss as ‘‘serious’’; (c) if, at the time the assured receives information of the loss, there would be no possibility of benefit to the insurer; (d) if the loss is not attributable to a peril insured against.

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7. If the policy is a valued policy, the measure of indemnity in case of a total loss is: (a) the sum fixed by the policy; (b) the market value of the subject-matter insured at the time of loss; (c) the market value of the subject-matter insured at the inception of the policy; (d) the sum determined by the court.

CHAPTER 8

PROPERTY AND FINANCIAL INSURANCE Rob Merkin

INSURANCE ON PROPERTY Types of property insurance Policies on buildings are normally framed as covering specific risks. Policies on goods may be drafted in the same way, although it is common for insurance on marine cargoes and goods in transit to be written on an ‘‘all risks’’ basis. An all risks policy is one which covers all forms of fortuitous loss other than perils which are expressly excluded. The description ‘‘all risks’’ does not mean that the insurers are liable for all losses because exceptions are still permitted, but rather operates to reverse the burden of proof under the policy. Thus, if the assured is able to show that the insured subject matter has been lost or destroyed then he has established a claim without the need to identify the precise peril which caused the loss, and the burden then switches to the insurers to bring the loss within one or more of the excepted perils (so held by the House of Lords in British and Foreign Marine Insurance Co. v. Gaunt [1921] 2 A.C. 41). The distinction between an all risks policy and a policy against insured perils rests purely upon drafting: if the policy lists insured perils, then it is not an all risks policy and it is the duty of the assured to demonstrate which of the insured perils is the cause of his loss (Brownsville Holdings v. v Adamjee, The Milasan [2002] Lloyd’s Rep. IR 458). k www

Perils covered by property policies Storm, tempest and flood These three insured perils are commonly found in conjunction in the insuring clause of a property policy, whether on buildings or their contexts. A ‘‘storm’’ is generally regarded as a combination of high winds and heavy precipitation (rain or snow), and is so defined by the Oxford English Dictionary. There are comments in various cases that a storm is something more than an isolated gust of wind and that heavy rain of itself is not a storm (see S & M Hotels v. Legal and General Assurance [1972] 1 Lloyd’s Rep. 157 and Anderson v. Norwich Union [1977] 2 Lloyd’s Rep. 189). However, there is no direct authority on the point, and it has been held in Scotland that a heavy and 245

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constant fall of snow not coupled with high winds amounted to a storm, so that the assured could recover when the weight of the snow caused the roof on the assured’s building to collapse (Glasgow Training Group (Motor Trade) Ltd v. Lombard Continental plc, 1988, unreported), A ‘‘tempest’’ has not been defined authoritatively, although in Young v. Sun Alliance [1976] 2 Lloyd’s Rep. 189, Shaw L.J. expressed that a tempest was simply a more violent form of storm. This view is echoed in the Oxford English Dictionary. The word ‘‘flood’’ has, by contrast, been considered in a number of cases, although its precise meaning remains less than clear. The meaning of ‘‘flood’’ in the context of the phrase ‘‘storm, tempest, flood’’ was considered by the Court of Appeal in Young v. Sun Alliance [1976] 2 Lloyd’s Rep. 189. The assured’s house was built on a field, and after heavy rain water accumulated under the house and rose through the floor, causing an accumulation of water in the assured’s bathroom to a depth of about three inches. The Court of Appeal held that the assured could not recover, and that the word ‘‘flood’’ was coloured by the phrase ‘‘storm, tempest, flood’’, which contemplated a serious event rather than a gentle ingress of water. What was required was something ‘‘violent, sudden and abnormal’’. The case turns on the contextual approach, and does not consider whether the word ‘‘flood’’ taken alone has a wider meaning. Young was followed in Rohan Investments Ltd v. Cunningham [1999] v where it was held that prolonged heavy rain which Lloyd’s Rep. IR 190, k caused water to penetrate into the assured’s premises was a flood, as what had occurred was abnormal. Where there has been an abnormal ingress of water, the cause of the ingress need not be natural: in Computer & Systems Engineering plc v. John Lelliott (Ilford) Ltd (1990) 54 B.L.R. 1 the fracturing of a water pipe leading to a major escape of pressurised water was held to have given rise to a flood. It has more recently been held, in Tate Gallery Trustees v. Duffy Construction Ltd [2007] EWHC 361 (TCC) that in determining whether there has been flood it is necessary to consider: (a) whether the source of the water was natural; (b) whether the source of the water was external or internal; (c) the quantity of water; (d) the manner of its arrival; (e) the area and character of the property upon which the water was deposited; (f) whether the arrival of that water was an abnormal event. In that case there was held to be a flood where a coupling separated from a pipe and led to water accumulating to a depth of 1.7 metres. www

Fire Fire is a peril universally found in real and personal property policies. There is coverage for fire as long as the damage caused by the fire is fortuitous and not intended by the assured or the result of his recklessness. The principle laid down in the cases is that the assured must establish that there has been a fire, and that the insurers can then avoid liability only if they can prove that the assured had deliberately or recklessly caused his own loss (The Alexion Hope

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[1988] 1 Lloyd’s Rep. 311). Mere negligence on the part of the assured is not enough to enable the insurers to deny coverage. Thus if the assured has started a fire carelessly by tossing a lighted cigar butt into a waste paper basket then any loss is within the policy (see James v. CGU Insurance plc [2002] Lloyd’s v ) as long as the assured was unaware that he had started a Rep. IR 206 k conflagration and had deliberately decided not to extinguish it: the latter situation amounts to fraud (so suggested by Moore-Bick J. in the James case). Again, if the assured has deliberately started a fire without appreciating its dangers, and the fire then spreads causing loss, the assured is entitled to recover, this being so held in Harris v. Poland [1941] 1 K.B. 462 where the assured started a fire in her fireplace, having forgotten that she had hidden valuable personal property up the chimney (and see also Busk v. Royal Exchange Assurance (1818) 2 B. & Ald. 73). By contrast, if the assured has been warned that starting fires near to a building is dangerous, but he persists in doing so and a fire gets out of control, the assured cannot recover because he has acted recklessly in choosing to run a risk of which he was aware (see v ). Lambert v. Keymood [1999] Lloyd’s Rep. IR 80 k A fire involves a conflagration. This does not necessarily mean that the insured subject matter must actually have been burned. A typical policy will cover loss caused by fire, and damage caused to property by smoke or by scorching is presumably covered, as long as the smoke or scorching was produced by a fire. Policies may contain express conditions and warranties on fire precautions. Policies issued to restaurants, hotels and pubs will generally require the assured to empty all ashtrays, and to store all flammable materials safely, at the end of operations. Kitchens will also be subject to cleaning and other maintenance regimes in order to protect against the risk of fire. For an illustration of the latter, see Paine v. Catlins [2004] EWHC 3054 (TCC), where the court held that the assured had complied with its obligations to clean filters and flues in the cooking area, and had otherwise not been reckless in maintaining the cleanliness of the kitchen. www

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Explosion The word ‘‘explosion’’ has a narrower meaning in law than its ordinary colloquial meaning. This was decided by the Court of Appeal in Commonwealth Smelting Ltd v. Guardian Royal Exchange Assurance [1984] 2 Lloyd’s Rep. 608, in which the outer casing of an engine was pierced by a piece of fractured loose metal inside the casing, causing the casing to shatter and to fly in all directions. This was held not to be an explosion, as that word required a physical or chemical reaction or the result of gas being kept under pressure: what had occurred was merely the fracturing of metal. Burglary, robbery and theft The English courts have construed these words in accordance with their statutory definitions, although that approach has varied where the policy itself

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indicates that a different meaning is required or where the policy relates to an overseas risk and it can be assumed that the technicalities of English law are to give way to the understanding of ordinary commercial men. Under s. 9 of the Theft Act 1968, a person is guilty of burglary if: (a) he enters any building or part of a building as a trespasser and with intent to commit any of the offences of stealing anything in the building or part of a building in question, of inflicting on any person therein any grievous bodily harm, and of doing unlawful damage to the building or anything therein; or (b) having entered any building or part of a building as a trespasser he steals or attempts to steal anything in the building or that part of it or inflicts or attempts to inflict on any person therein any grievous bodily harm. Under s. 2 of the Theft Act 1968, a person is guilty of theft if: he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it.

It is possible for theft to be committed without any violence, and even by a simple act of fraud. Dobson v. General Accident Fire and Life Assurance Corporation [1990] 1 Q.B. 274 The assured advertised some items of jewellery for sale. The jewellery was sold to a purchaser, who paid by cheque and took the items with him. The cheque was dishonoured and the assured made a claim against the insurers on the basis that there had been a ‘‘loss by theft’’. Held (CA): that the policy covered the claim. The purchaser had acted dishonestly, and had intended to deprive the assured of the property permanently. There were only two contentious issues. The first was as to the word ‘‘appropriated’’, and the Court of Appeal held that there was an appropriation where the thief obtained possession of the assured’s property and usurped ownership rights, even though the assured had voluntarily handed over the property to the thief. The second was the requirement that the goods had to belong to the assured: here the Court of Appeal held that the assured had not intended that title should pass until full payment had been received, so that at the time of the appropriation the jewellery had indeed belonged to the assured. The elements of theft had thus been satisfied.

Given the width of the definition of fraud, it is common for property policies to exclude loss by fraud. Further, some property policies require any theft to be preceded by ‘‘violent and forcible entry’’ into the assured’s premises. In such a case there will be coverage only if the thief has obtained access by causing physical damage to some part of the building (Re Calf and Sun Insurance Office [1926] 2 K.B. 366) or yard in which the goods are stored (Pike (Butchers) Ltd v. Independent Insurance Co. Ltd [1998] Lloyd’s Rep. IR v ) although there is no coverage if the thief has entered the building 410 k without force or violence and has resorted to them only to remove the goods in question (Re George and Goldsmith and General Burglary Insurance Association www

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Ltd [1899] 1 Q.B. 595). Entry must be both violent and forcible: the requirement for force is satisfied if any physical effort is required on the part of the thief, such as the use of stolen keys to obtain access, although the requirement for violence is not met unless there is damage or injury to property or persons (Nash v. Prudential Assurance Co. Ltd [1989] 1 Lloyd’s Rep. 379). In Deutsche Geonssenschaftsbank v. Burnhope [1993] 2 Lloyd’s Rep. 518 a policy taken out by a bank provided that it provided cover where there was theft committed by persons present on the bank’s premises. A fraudster sent his agent to the bank to collect certain securities, and the agent then handed them to the fraudster. The agent was innocent of any involvement in the fraud. The House of Lords held that the policy did not cover the loss. What was required by the policy was a theft on the bank’s premises. However, the agent had not committed any theft when he collected the securities, because he had not been dishonest. The principal had been dishonest, but he had not committed any act on the bank’s premises. Under s. 8 of the Theft Act 1968, a person is guilty of robbery if: he steals, and immediately before or at the time of doing so, and in order to do so, he uses force on any person or puts or seeks to put any person in fear of being then and there subjected to force. Canelhas Comercio Importacao e Exportacao Ltd v. Wooldridge [2004] Lloyd’s Rep. IR 915 The claimant company was a wholesale jeweller carrying on business in Sao Paulo. The company was insured at Lloyd’s under an all risks policy for the sum of U.S.$3,000,000. The insurance contained a ‘‘Holdup or Robbery Limit’’ which removed cover where there was loss of or damage to property by robbery at any time when (a) the premises were open for business or (b) the assured or any of their employees were present. The proprietor of the company, Mr Canelhas, along with his wife, son and mother, were kidnapped while returning from an airport. The kidnappers ordered Mr Canelhas to go the premises and remove all of their emeralds, violence being threatened against the members of his family if he failed to do so. Mr Canelhas went to the premises and ordered his staff to load the emeralds into bags. He removed the emeralds and handed them to the kidnappers. A claim was made against the insurers, who relied upon the exclusion for holdup and robbery and argued that there had been a holdup or robbery and that at the time of the loss the premises were open and Mr Canelhas had been present. Held (C.A.): that the claimant company could recover. (1) In a policy such as the present, the term ‘‘robbery’’ had to be understood not in its technical legal sense but rather in the sense that ordinary commercial men would have understood it. (2) The aim of the clause was to exempt the insurers from the particular risk of loss when the premises were open for business and the merchandise was on display. (3) Robbery required a link between violence and the taking of goods. The clause was directed against the special risk that employees would be the object of a robbery at the premises. The risks of a director or employee being kidnapped or approached elsewhere, and being put elsewhere under some form of duress to take merchandise by a later visit to the premises were entirely different risks. In the present case no threats of violence were made against Mr Canelhas or anyone else who removed the emeralds from the premises.

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FIDELITY POLICIES Scope of cover A fidelity policy is first party policy taken out by an employing organisation, protecting itself against loss consequent upon the fraud of its employees. A fidelity policy does not protect the assured against the acts of an employee which cause loss to a third party for which the assured may face vicarious liability, as such cover is third party liability rather than first party fidelity. In New Hampshire Insurance Co. v. Philips Electronics North America Corporation v a senior employee of the assured for his own [1999] Lloyd’s Rep. IR 66 k profit caused the assured to supply to a third party goods which he knew did not conform to contractual requirements. The assured was required to replace the defective goods with conforming goods, and sought to recover the cost of doing so from its fidelity insurers: Clarke J. ruled that the claim was one in respect of third party liability for goods rather than first party loss of goods and that the policy did not cover the risk. Although there is no standard wording, a fidelity policy generally covers fraud or misappropriation of property on the part of an employee, director or trustee. Each of these concepts requires some explanation. The state of mind required of the wrongdoer depends upon the policy wording, although the common feature is that the wrongdoer must have in some way been dishonest. The phrase ‘‘manifest intent’’ on the part of the wrongdoer is often used in fidelity policies: its meaning has not been authoritatively defined, although in New Hampshire Insurance Co. v. Philips Electronics v Clarke J. expressed North America Corporation [1999] Lloyd’s Rep. IR 66 k the view that what was required was a ‘‘clear, obvious or apparent’’ intention to misappropriate the assured’s assets. The property insured depends upon the nature of the assured’s undertaking. Fidelity policies are of particular importance to financial institutions, and cover is often extended to loss of ‘‘money, securities and other property’’. The view of the English courts of this and equivalent phrases is that they extend to intangible property (choses in action) as well as tangible property: this accords with the wide definition of ‘‘property’’ in the Theft Act 1968. In New Hampshire Insurance Co. v. Philips Electronics North America Corporation v one of fraudulent courses of conduct of a senior [1999] Lloyd’s Rep. IR 66 k employee of the assured was to enter a series of fictional sales into the assured’s books, on which the employee received commission by way of bonus payments. The assured had paid the bonuses by means of credit transfer from its own account to that of the employee. Clarke J. held that the losses were covered by the policy, and that it could not have intended that the policy would provide cover only where the employee had been in paid in coins and notes rather than by the transfer of funds by means of choses in action. The persons whose fraudulent conduct is covered by the policy are generally employees, directors and trustees: there is normally an express exclusion for www

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independent contractors. The activities of a person who performs any of the tasks of an employee, director or trustee will fall within the scope of the coverage, although, if that person is an independent contractor then any exclusion for fraud by an independent contractor will take priority (see Proudfoot v. Federal Insurance Co. [1997] L.R.L.R. 659). The policy will generally apply only where the fraudulent conduct in question is carried out in the ordinary course of employment. Fidelity policies generally contain aggregation provisions whereby all fraudulent events of a similar nature are to be treated as a single fraudulent act for the purpose of deductibles to be borne by the assured or for the purposes of ascertaining whether the maximum sum insured per fraudulent event has been exceeded. In the absence of any express provision for aggregation, each individual loss suffered by the assured is to be treated as a single fraudulent event. This will prevent recovery where the assured has suffered a large number of losses which in total exceed the amount of any deductible but which individually all fall beneath the deductible level. By way of example, in Philadelphia National Bank v. Poole [1938] 2 All E.R. 199 the assured was unable to recover any sums at all under the policy as each of the losses was smaller than the £25,000 deductible even though their total was £300,000. Forms of policy A fidelity policy may be written on the basis that it responds to acts of fraud discovered during the currency of the policy even though they may have been carried out at some earlier date: a policy of this type is equivalent to a claims made liability policy in that it responds to the manifestation of a wrongful act rather than the act itself. In accordance with the provisions of claims made liability policies, acts of fraud discovered before the inception of a fidelity policy of this type will be excluded, and equally acts of fraud discovered after the policy has expired will not be recoverable (at least in the absence of some form of extension). The meaning of ‘‘discovered’’ thus becomes of critical importance. The point was considered in La Positiva Seguros y Reaseguros SA v. Jessel, 2000, unreported. In this case, in January 1992 the assured bank’s auditor discovered that a large sum of money had disappeared, but he was given an innocent explanation for this by an employee who had been engaged in fraudulent embezzlement of the money, and he accepted what he was told. The policy incepted at the end of February 1992, and it was not until May 1992 that it became apparent that there had been theft. H.H.J. Jack Q.C. held that the policy covered the loss: the word ‘‘discovered’’ required actual knowledge of fraud and not merely a suspicion that there had been fraud, and although the auditor may have been put on notice of a problem he was not actually aware of wrongdoing and thus it could not be said that the theft had been ‘‘discovered’’. A discovery policy is often subject to an ‘‘hours’’ clause under which the policy responds only to losses discovered within the period of the policy and also within a stated period: in

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Dornoch Ltd v. Mauritius Union Assurance Co. Ltd and Mauritius Commercial Bank Ltd (No. 2) [2007] EWHC 155 (Comm) it was held that a 72-hour clause restricted the assured to recovering a loss only if it was discovered within 72 hours, so that if there was a series of fraudulent acts the assured’s recovery was limited to those perpetrated no more than 24 hours before the discovery. Alternatively, the policy may be written on an ‘‘occurrences’’ basis, in that it responds not to the discovery of acts of fraud but rather to the acts of fraud themselves. Such a policy was considered in Universities Superannuation v in which Scheme v. Royal Insurance (UK) Ltd [2000] Lloyd’s Rep. IR 525, k the insuring clauses provided that the insurers would provide indemnification for: (a) fraudulent acts committed during the currency of the policy and discovered within 24 months of lapse; and (b) fraud ulent acts committed prior to inception which were discovered within 24 months of lapse. The Court of Appeal held that the policy was to be construed as one responding to acts of fraud and not to their discovery, so that the six year limitation period for the issue of proceedings against the insurers ran: with respect to acts committed within the currency of the policy, from the date of the acts; and with respect to fraudulent acts committed before inception, from the date of inception. www

MORTGAGEES’ INTEREST INSURANCE This type of cover is designed to protect banks and other lenders against the risk that the property which has been given by the borrower as security against loans made is rendered worthless by a peril and the borrower has no other assets from which the loan can be repaid. In many cases it is the practice of the market for lender to stipulate that the borrower must insure the mortgaged property for the joint benefit of the borrower and the lender. A policy in the name of the lender and borrower will be written on a composite basis, meaning that each of them is insured in his own right for the extent of his insurable interest, and any defences which the insurers may have against the borrower for breach of policy terms or other obligations will not affect any claim by the lender. There is no need for a policy of this type actually to state that the lender’s rights are independent, because this is the case automatically as a matter of law. For that reason, in FNCB v. Barnet Devanney [1999] Lloyd’s v brokers were held not to be in breach of duty to the lender for Rep. IR 459, k failing to insert into a composite policy a term under which it would have been specified that the rights of the lender were independent of those of the borrower, and the lender in principle had a perfectly valid claim against the insurers themselves. Alternatively, the lender may not be named as a co-assured under the policy, but as long as there is a provision in the policy which states the insurers will pay the lender in the event of a claim, the lender can enforce that www

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provision under the Contracts (Rights of Third Parties) Act 1999. Some ‘‘loss payee’’ clauses specifically say that the insurers will pay the lender irrespective of any defences that could have been raised in respect of a claim by the borrower, although the insurers normally reserve a right of recourse against the borrower in the event that payment is required in these circumstances. The lender is not, however, fully protected by arrangements of these types. In the case of a composite policy there may be circumstances in which the insurers do not face liability to either party, e.g. where the premium has not been paid or where a fraudulent claim has been submitted by the borrower acting as agent for himself and the lender. The dangers are even greater in the case of a policy where the lender is not a co-assured but is merely a named beneficiary and there has been no waiver of rights in favour of the lender in the loss payee clause: the lender will have no better rights than the borrower. The lender may, to perfect his protection, take out his own policy, generally known as a ‘‘mortgagee’s interest’’ policy. This type of insurance is particularly important for ship mortgagees, as it was held by the House of Lords in Samuel & Co. Ltd v. Dumas [1924] A.C. 431 that deliberate scuttling of the ship by the borrower prevents any claim by the lender because there is no loss by perils of the seas when this occurs, so that there is nothing in respect of which a claim can be made by the lender. The essence of this type of insurance is that the insurers will make payment if, for whatever reason, the assured lender is unable to recover an indemnity under the primary policy insuring the subject matter itself. This type of insurance is, therefore, a fallback cover and the primary insurers will have no right to seek contribution from mortgagees’ interest insurers in the event that the primary insurers do face liability. There are numerous wordings available in the market for this type of cover, although specific wording has been developed for marine risks. The marine wording provides indemnity to the mortgagee where the shipowner’s own insurers deny liability by reason of the avoidance of the policy, scuttling of the vessel by the owner, breach of warranty or condition or failure by the owner to prove that the loss was caused by an insured peril. The insolvency of the primary insurers is normally an excluded peril. The lender may claim against his insurers as long as he was not implicated in the circumstances under which the primary insurers have asserted the right to refuse payment, and the amount recoverable by the lender is the amount that would have been payable had the primary insurers been liable. There may of course be a dispute as to whether the primary insurers do have a valid defence under their policy, and in those circumstances the lender can recover if it can be shown that there is no reasonable prospect of recovery under the primary policy: in the event that the mortgagees’ interest insurers do make payment, they have the right to seek to recoup their payment from the primary insurers by means of a subrogation action, enforcing such rights as the lender may have against the primary insurers.

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CREDIT INSURANCE Nature of credit policies It is perfectly lawful for a creditor to insure against the non-payment of a debt. Under this type of policy, the risk of the debtor’s default is transferred to the insurers and they in turn receive subrogation rights under which they may seek to recover the amount of their payment from the debtor. The basic trigger for coverage is the failure of the debtor to make payment, whether by reason of insolvency, dispute or simple breach of contract. Some policies refer to acts of insolvency rather than to actual non-payment, as in Merrill Lynch International Bank Ltd v. Winterthur Swiss Insurance Co. [2007] EWHC 893 (Comm) where the issue (answered in favour of the assured) was whether a French insolvency procedure triggered the cover afforded by the policy. One specific type of policy which has been developed on the London market in recent years is ‘‘shortfall insurance’’ for the film industry. A policy of this type protects a bank or other lender which has loaned money to a film production company for the production of films, the loan to be repaid from the proceeds of the films: if on a specified day there is a shortfall of revenue measured against the loan, the policy coverage is triggered: the types of policy which operate in the market were examined by the Court of Appeal in Screen Partners London Ltd v. VIF v although in that case Film Production GmbH [2002] Lloyd’s Rep. IR 283, k the court was not called upon to reach a final decision on the nature of the various policies used. The insurers’ liability will come into operation on failure by the debtor to make payment on the due date or within some later specified period. What that date may be depends upon the nature of the assured’s business and how default is defined for the purposes of that business. www

British Credit Trust Holdings v. UK Insurance Ltd [2004] 1 All E.R. (Comm) 444 The assured provided cars on hire-purchase, and the policy was designed to protect the assured against defaults by its borrowers. The assured was empowered to repossess any car in the event of the termination of the hire-purchase agreement relating to it, and then to resell the car. The insurance covered any shortfall. Three situations were dealt with by the policy: (a) Where a vehicle was repossessed by BCH and sold within 90 days of the termination of the agreement, then the insurance covered any difference between the outstanding sum on the hire-purchase agreement and the amount obtained by BCH on resale. (b) Where a vehicle was repossessed by BCH but not sold within 90 days of the termination of the agreement, then BCH was entitled to recover from its insurers on day 91 the difference between the sum outstanding on the hirepurchase agreement and the value of the vehicle as set out in Glass’s Guide. (c) Where the vehicle could not be repossessed within 90 days of termination, the loss was the outstanding balance. The policy stated that losses were to be reported monthly, and stated that ‘‘No legal

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action may be brought under this insurance in respect of any Agreement unless the Insured has complied with all the provisions of the insurance in relation to such Agreement and any such legal action must be commenced within one year after any loss occurs in respect of such Agreement’’. This was not expressed to be a condition precedent. Following avoidance of the policy by the insurers, the assured sought a declaration as to the validity of the avoidance. Two issues arose. The first was whether the clause was a condition precedent even though it did not so provide. Morison J. held that it was a condition precedent, as it would have been of little use unless it operated as a condition precedent. Secondly, as far as limitation periods were concerned, Morison J. held that a separate claim arose under each hire-purchase agreement, as the loss was defined in terms of individual defaults. The one-year period thus applied on a contract-by-contract basis. The date on which time began to run was not, however, the date on which a customer of BCH defaulted, but rather on the date on which the loss was ascertained. Thus, in situation (a) above time would begin to run as of the date of resale, and in situations (b) and (c) time would start to run on the 91st day following termination.

It is also necessary to define with some care exactly which sums constitute the ‘‘debt’’ covered by the policy. College Credit Ltd v. The National Guarantee Corp Ltd [2005] Lloyd’s Rep. IR 5 CCL’s business was to provide finance to customers who wished to purchase motor vehicles, in the form of hire-purchase and conditional sale. The customers were ‘‘subprime’’, i.e. those whose credit-rating was impaired. The supply transactions took the usual form: a customer would select a vehicle from the dealer, who would then sell it to CCL so that CCL could in turn enter into a hire-purchase or conditional sale agreement with the customer. The enhanced risk of loss was covered by a credit default insurance policy issued by the defendant NIG in 1999 and renewed in subsequent years. Under the policy CCL was required to adhere to ‘‘Underwriting Criteria’’ in accepting business, and cover was granted in respect of the termination of an agreement following the default of a customer where there was a shortfall between the price paid to the dealer and the amount received by CCL from the customer and on the resale of the vehicle in the event of default. Disputes arose between CCL and NIG, but these were largely settled before trial, leaving open one question of construction. That question related to the ‘‘Maximum Advance’’ as set out in the Underwriting Criteria. In essence, a loan by CCL was not to exceed, in respect of any one vehicle, ‘‘110% Glass’s Guide Trade Value’’ for that vehicle. The difficulty was that, in addition to advancing a sum for the purchase of the vehicle, CCL also advanced sums representing the premiums for consumer insurances for ‘‘Accidental Death Benefit’’ and ‘‘Guaranteed Asset Protection’’. If the credit for these premiums was included in the ‘‘Advance’’, then the maximum advance would have been exceeded in many cases. Toulson J. gave judgment for CCL and held that the additional premiums did not form a part of the advances made to customers. There was nothing in the policy which indicated which of the interpretations was correct, but the answer was to be found in the commercial purpose of the policy. Defaults by customers in repaying the premium advances were not covered by the NIG policy: that was concerned only with defaults in repaying instalments due in respect of the vehicles themselves, and the court regarded it as ‘‘improbable that the parties intended to agree that compliance with the ‘Maximum Advance’ criterion should hinge on uninsured add-ons’’. Those additional sums were irrelevant to NIG, whose indemnity was based solely on a loss suffered by CCL, as measured against the price paid by CCL to the dealer, when the vehicle was resold.

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A credit policy may insure against bad debts in general (as was the case in British Credit Trust Holdings and in College Credit) or it may insure against default by identified debtors. The latter form of policy is more common and, as may be seen from British Credit Trust Holdings, the assured will have to comply with its own underwriting criteria in accepting loans. Failure to do so will preclude the application of the policy to the debts affected by the breach (see Svenska Handelsbanken v. Sun Alliance & London Insurance plc [1996] 1 Lloyd’s Rep. 519). The assured may also be under a duty to inform the insurers on a regular basis of its trading figures so that the premium can be calculated by reference to the last set of figures: in Kazakhstan Wool Processors (Europe) Ltd v. Nederlandsche Credietverzekering Maatschappij NV [2000] v the Court of Appeal construed this provision as Lloyd’s Rep. IR 371 k preventing recovery only for losses on those trading contracts which had not been duly notified. A policy which insures or which identifies individual customers of the assured may impose a maximum aggregate credit limit, the amount of which caps the liability of the insurers to make good the debts of that customer. Unless the wording of the policy clearly specifies otherwise, the relevant date for determining whether the credit limit has been exceeded is the date on which a debt falls to be paid to the assured, so that the insurer is liable only for outstanding debts up to the credit limit at that time. In Moore Large & Co. v. v it was argued Hermes Credit & Guarantee plc [2003] Lloyd’s Rep. IR 315 k that the relevant date was the date at which the assured issued an invoice to the debtor and not the date on which the debt fell due. Had that interpretation been correct, the insurers would have been discharged from meeting a debt if at the date of the invoice for that debt the aggregate credit limit had been exceeded, even if the aggregate credit limit had been reduced to policy levels at the time the debt fell due. Colman J. regarded this suggestion as uncommercial, as it would impose upon the assured the requirement to calculate the amount of outstanding debt at the date of the issue of every invoice. www

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Export credit guarantee insurance The Export and Guarantees Investment Act 1991 provides the statutory authority for the Government to provide credit insurance to exporters. The functions of the Secretary of State are exercised by the Export Credits Guarantees Department (ECGD), with advice from the Export Guarantees Advisory Council (s. 13). The functions of the ECGD, as set out in s. 1 of the 1991 Act, are to make arrangements: (1) with a view to facilitating, directly or indirectly, supplies by persons carrying on business in the United Kingdom of goods or services to persons carrying on business outside the United Kingdom; (2) for the purpose of rendering economic assistance to countries outside the United Kingdom;

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(3) with a view to facilitating the performance of insurance obligations. The insurance obligations are set out in s. 2, under which the ECGD may make arrangements for insuring any person carrying on business in the United Kingdom against risks of losses arising— (a) in connection with any investment of resources by the insured in enterprises carried on outside the United Kingdom, or (b) in connection with guarantees given by the insured in respect of any investment of resources by others in such enterprises, being enterprises in which the insured has any interest, being losses resulting directly or indirectly from war, expropriation, restrictions on remittances and other similar events. The ECGD may also provide reinsurance for market insurers offering coverage of this type. Transactions are required to be approved by the Treasury (s. 4). Under s. 6, the aggregate amount of the ECGD’s commitments at any one time are not to exceed: (a) in the case of commitments in sterling, £35,000 million, and (b) in the case of commitments in foreign currency, £30,000 million special drawing rights (this figure having been inserted by the Export and Investment Guarantees (Limit on Foreign Currency Commitments) Order 2000, S.I. 2000 No. 2087). The ECGD’s guarantees are regarded as ordinary insurance contracts, so that the ECGD has a right of subrogation against overseas debtors once the exporter has been paid (see Lucas v. Export Credit Guarantees Department [1974] 1 W.L.R. 909 and Lonrho Exports v. Export Credit Guarantees Department [1996] 4 All E.R. 673, concerning the allocation of subrogation recoveries between the exporter and the ECGD).

LEGAL EXPENSES INSURANCE ‘‘Before the event’’ insurance Nature of the cover A legal expenses policy covers the risk that the assured may become involved in legal proceedings with a third party, and provide an indemnity to the assured in respect of the costs that he may incur, both in respect of instructing his own lawyers or becoming liable to pay the legal costs of the third party, as a result of such proceedings. It is often the case that this form of cover is provided as an optional (and sometimes, automatic) extra in some other type of insurance, e.g. householder’s insurance. A legal expenses insurance is of particular significance where the assured commences his own action against a third party and thereby faces the risk of incurring costs: a liability policy, by contrast, is concerned only to indemnify the assured against the costs of

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unsuccessfully defending an action brought against him by the third party. The insurers will not be liable for costs incurred in frivolous actions: the policy will generally provide that legal proceedings will be funded only where the assured has reasonable prospects of success. Legal expenses insurance is the subject of specific regulatory requirements laid down in the Financial Services and Markets Act 2000 and in the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (S.I. 1990 No. 1159), measures which implement the European Community’s Legal Expenses Directive, Council Directive 87/344/EEC. The Directive and the implementing rules are designed to protect the assured under a legal expenses policy against a potential conflict of interest on the part of the insurers, as may arise in the case where the assured wishes to bring an action against a third party who has liability insurance cover from the same insurers. The effect of the 2000 Act is that legal expenses insurance is a form of general business in its own right, for which authorisation must be sought separately from other forms of general business. Further, legal expenses cover may be offered only in an independent policy or in an independent section of a wider policy. The insurers must, in the conduct of legal expenses business, adopt one of three measures to prevent any conflict of interest. The alternatives are: (a) a strict separation of responsibility within the insurers’ organisation, so that employees responsible for dealing with legal expenses claims are not concerned with other forms of business; (b) the formation of a subsidiary legal expenses insurance company whose activities are confined to that business; (c) conferring upon the assured the right to nominate his own solicitor in the event that a claim arises.

Liability to the third party for defence costs A legal expenses insurer which funds an action by the assured against the third party is plainly only liable to the assured up to the financial limits laid down by the policy. A problem may arise here if an assured who has unsuccessfully brought an action against a third party has been indemnified for his own costs, but there is a shortfall in the policy cover which means that the policy does not stretch to indemnifying the assured in respect of any costs order made against him in favour of the third party. In this situation it has been argued that the insurers may face a costs order made by the court in favour of the third party even though the effect of such an order is to impose liability on the insurers in excess of policy limits. The jurisdiction to make an order of this type is found in s. 51 of the Supreme Court Act 1981, which confers upon the court the discretion to make any costs order that it thinks fit, including a costs order against a third party. This section has been considered in some detail in the context of liability insurance, the courts having decided that a liability insurer who funds the unsuccessful defence of an action by a third party can be the

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subject of a costs order in favour of the third party only in exceptional circumstances (see TGA Chapman Ltd v. Christopher [1998] 2 All E.R. 873, discussed in Chapter 9 of this course), namely that: (1) (2) (3) (4)

The insurers must have taken the decision to fight the action. The action must have been funded by insurers. The insurers must have conducted the litigation. They must have fought the claim exclusively in their own interests. (5) The action must have failed in its entirety.

In a case decided shortly before the Chapman ruling, Murphy v. Young & Co.’s Brewery plc [1996] L.R.L.R. 60, the Court of Appeal made it clear that equivalent principles apply to a costs order sought against the legal expenses insurers of an unsuccessful claimant. In this case the policy limit was £25,000. The assured’s own costs were £17,000, and the costs order made against the assured amounted to nearly £43,000. The insurers paid the assured’s own costs, and also £8,000 of the third party’s costs, thereby exhausting policy limits. The third party’s attempt to recover the balance of its costs from the insurers by means of a costs order under s. 51 was rejected by the Court of Appeal, which held that the mere fact that the insurers had funded the claim was not enough to justify a costs order. As was subsequently made clear in Chapman and the cases following it, there can be liability only where the insurers’ actions have caused the third party to incur costs which would not otherwise have been incurred. The point is further illustrated by Worsley v. Tambrands Ltd [2002] 1 Lloyd’s Rep. 382. Here, the assured had legal expenses cover of up to £50,000 in respect of an action against the defendants for negligence. Her legal expenses insurers were informed that the defendant’s costs would greatly exceed the insured sum, and agreed on an ex gratia basis to extend cover to £100,000. The action proceeded but was dismissed, and the defendants sought to recover the unpaid balance of their costs from the insurers. H.H.J. Hegarty Q.C. rejected the application, holding that the decision to increase funding did not constitute exceptional circumstances of the type necessary to trigger s. 51 and that in any event there was no causal link between the funding of the action and the fact that the defendants had incurred costs. Claim by assured’s lawyers against legal expenses insurers The Third Parties (Rights Against Insurers) Act 1930 confers upon a claimant against the assured the right to bring a direct action against the assured’s liability insurers in the event of the assured’s insolvency (see Chapter 9). It is now established that the 1930 Act can be used against the assured’s legal expenses insurers by the assured’s legal advisers where the assured has become insolvent and has not paid their fees. It was at one time thought that the 1930 Act could not be used in these circumstances. This was the view adopted by

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Tuckey J., albeit with some regret, in Tarbuck v. Avon Insurance plc [2002] v In this case the assured unsuccessfully pursued an Lloyd’s Rep. IR 393. k action against a third party, and then became insolvent. She refused to authorise any payment by her legal expenses insurers to her own legal advisers, and this led to a direct action by them against the insurers. The court ruled that the 1930 Act did not apply to a liability voluntarily incurred by the assured, and accordingly no action could be brought against the insurers. However, in Re v , the Court of Appeal cast OT Computers Ltd [2004] Lloyd’s Rep. IR 669 k strong doubt on the Tarbuck ruling. In OT the Court of Appeal was concerned with the rather different question of whether an award of damages for breach of contract against an assured was one which amounted to ‘‘liability’’ under the 1930 Act. In holding that this was the case, the Court of Appeal also expressed the view that the 1930 Act applied equally to the case where—as in Tarbuck—the contractual claim made by the third party was not for damages for breach of contract but rather for a debt incurred under a contract. www

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‘‘After the event’’ insurance Legal aid was abolished for most forms of civil action at the end of the 1990s, and was replaced by new mechanisms for the funding of such actions, consisting of a combination of conditional fee arrangements covering the claimant’s own costs and after the event insurance covering any costs order made in favour of the defendant. Conditional fee arrangements Under s. 58 of the Courts and Legal Services Act 1990, which was brought into effect in July 1995 and subsequently amended by the Access to Justice Act 1999 with effect from 1 April 2000, a claimant may enter into a conditional fee arrangement (CFA) with his legal advisers, under which the claimant’s legal costs are agreed to be payable by the claimant only if the claim against the third party succeeds. The CFA may, however, in order to give some protection to the legal advisers against the risk of the action failing, provide for an uplift in fees in the event that the action succeeds. There are strict rules laid down for the operation of CFAs, and every CFA must comply with the rules laid down in the Conditional Fee Agreements Regulations 2000 (S.I. 2000 No. 692). The uplift must not exceed 100% in any one case, and the courts have begun to lay down guidelines as to the acceptable level of a conditional fee. The principle is that the amount of the success fee has to be reasonable and proportional, taking into account the complexity of the proceedings and of the legal arguments. Thus, in a personal injury claim where the issues are straightforward and the prospects of success are high, the maximum uplift permitted will be 5% (Halloran v. Delaney [2003] 1 W.L.R. 28, a case which reflected the concerns expressed by the House of Lords in Callery v. Gray [2003] Lloyd’s v on the acceptance of a 20% uplift in such cases), whereas if the Rep. IR 203 k www

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case is a complex one then the maximum uplift of 100% will be permitted (Sarwar v. Alam, 2003, unreported). A success fee will, in the case of a successful claim, be recoverable from the defendant by way of a costs order: this is provided for by the amended version of s. 58 of the Courts and Legal Services Act 1990. Recoverability of ‘‘after the event’’ insurance premiums CFAs are of course relevant only to the claimant’s own costs: they do not affect the possibility of a costs order in favour of the defendant against the claimant in the event that the claimant’s action fails. Potential liability for such costs may be countered by the claimant taking out ‘‘after the event’’ (ATE) insurance which is designed to indemnify the claimant for a costs order against him in the event that his action is dismissed. There will be a need for ATE insurance if the claimant does not have ‘‘before the event’’ insurance in place. ATE insurance will necessarily only be available in the market if the claimant has good prospects of succeeding in his action. The premium may nevertheless be a steep one, and provision has been made by legislation for the claimant to recover the amount of any ATE premium from the defendant by way of costs in the event that the action against the defendant succeeds. The relevant provision is s. 29 of the Access to Justice Act 1999: ‘‘Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring liability in these proceedings, the costs payable to him may, subject in the case of court proceedings to the Rules of Court, include costs in respect of the premium of the policy.’’

The Rules of Court here referred to, CPR r. 43.2(1)(m), defines ‘‘insurance premium’’ as ‘‘a sum of money paid or payable for insurance against the risk of incurring a costs liability in the proceedings, taken out after the event that is the subject matter of the claim’’. The word ‘‘payable’’ reflects the point that some policies do not require payment of the premium by the assured at the outset, and that the premium is payable only if the assured wins the action. The circumstances in which an ATE premium is recoverable by way of costs from the defendant by the successful claimant have been considered in a number of English cases. In general, the courts will disallow the ATE premium in full or in part if the policy was unnecessary or the premium was excessive. The following propositions may be put forward as a result of these authorities. u It must be reasonable for the claimant to procure ATE insurance. It will not be reasonable if the claimant has ‘‘before the event’’ insurance in place which covers any potential costs of the action to their full amount, although if the assured is unaware that he is entitled to legal expenses cover under some other policy then the fact that such cover exists will not be a bar to a costs order (e.g. where a negligent driver is, unknown

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to him, covered against legal expenses by a policy procured by his passenger, the position in Sarwar v. Alam, 2003, unreported). The amount of cover taken out by the claimant must be proportionate to his potential exposure for costs. If the defendant is not contesting liability, taking out an ATE policy may not be justified (see Re Claims Direct Test Cases [2003] Lloyd’s Rep. IR 73, affirmed [2003] Lloyd’s v ). However, if the defendant’s position is uncertain, Rep. IR 677 k then it may be reasonable to take out an ATE policy at the outset v ). (Callery v. Gray [2003] Lloyd’s Rep. IR 203 k It is permissible for the claimant to take out ATE insurance at a late stage in the proceedings, when it has become clear that there are live issues between the parties: see Ashworth v. Peterborough United Football Club, 2002, unreported. This case also decides that an ATE premium is recoverable even though it accounts for a substantial proportion of the overall award against the defendant: in Ashworth itself the claimant was awarded damages of £66,000, but was never theless able to recover an ATE premium in the sum of £75,000 incurred in pursuing the claim. It is legitimate to rate ATE premiums on a block-rating basis for all claims with a better than 50% prospect of success, rather than on an individual basis for each claim (Re Claims Direct Test Cases). The definition of ‘‘insurance premium’’ excludes payments made to the insurers which have no relation to the underwriting of the risk, so that such payments are irrecoverable by way of costs under s. 29 of the Access to Justice Act 1999. Sums which are part of the premium are those payable to underwriters in respect of the risk and to brokers for their services in the placing of the risk. Insurance premium tax is also recoverable. Excluded are sums relating to the costs of claims-handling services performed by a third party, and additional premium covering the possibility that the ATE premium may not be recoverable by way of costs (Re Claims Direct Test Cases). www

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EXCLUSIONS FROM PROPERTY AND FINANCIAL POLICIES Loss of software and data It is common for property insurers to exclude liability for loss of computer software and data held on computer, given the potential sums involved. The following case shows that clear wording is required for exclusions to be fully operative. Tektrol Ltd v. International Insurance Co. of Hanover Ltd [2006] Lloyd’s Rep. IR 38 The claimant manufactured energy saving control devices for industrial motors, the main product being a ‘‘PowerMiser’’ which relied on computer code. The code was stored on two computers and a paper printout at the claimant’s premises, on a laptop,

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and on a dataserver operated by CS. In December 2001, the claimant received an e-mail containing a virus. When opened it damaged computer files on the laptop and the dataserver. The claimant wrongly believed that the damage had been repaired. In January 2002, the claimant’s premises were burgled, and the two development computers and the paper print-out of the code were stolen. It then became apparent that the only two remaining copies had been damaged. The claimant had an all risks and business interruption policy. The policy excluded loss ‘‘directly or indirectly’’ resulting from, under cl. 7(b)(i), ‘‘erasure loss distortion or corruption of information on computer systems or other records programmes or software caused deliberately by rioters strikers locked-out workers persons taking part in labour disturbances or civil commotion or malicious persons’’. Clause 7(b)(ii) excluded loss caused by ‘‘other erasure loss distortion or corruption of information on computer systems or other records programmes or software.’’ The insurers relied on both of these exclusions. It was common ground that if either exclusion was operative, the insurers would not be liable, on the basis of the principle that if a loss has two proximate causes one of which is excluded, the words of exclusion prevail. Held (C.A.): that neither exclusion was operative. As to cl. 7(b)(i), the phrase ‘‘malicious persons’’ took its meaning from the context of the phrase, and while that phrase taken alone could apply to random and untargeted malicious acts, the wording in context (rioters, strikers, etc) indicated a targeted act against the assured. Random hacking was not, therefore, excluded. As to cl. 7(b)(ii), the Court of Appeal by a 2:1 majority (Carnwath L.J. dissenting) held that the word ‘‘loss’’ was also to be construed in its context, and was concerned with loss of software rather than loss of the equipment on which the software was stored.

Reasonable care provisions At common law the assured is not precluded from recovering under an insurance policy even though the loss has been caused by his negligence. The rule is that negligence is a neutral factor, and that the ability of the assured to recover depends upon the proximate cause of the loss being an insured peril. One of the numerous cases on the point is Harris v. Poland [1941] 1 K.B. 462, a fire case discussed above in that context. Insurers have sought by the use of express wording to reverse the common law rule and to require the assured to act as a ‘‘prudent uninsured’’ by imposing a reasonable care requirement. Typically the policy will state that the assured must exercise all reasonable care to avoid or mitigate any loss. These clauses have, however, proved to be ineffective. Reasonable care clauses were first tested in liability policies, but the courts consistently held that an assured who acted reasonably would only in exceptional circumstances face a liability in respect of which the insurers could be required to provide an indemnity, so the effect of a reasonable care clause if given full effect would undermine the coverage of the policy. For that reason it has been held that a contractual obligation to exercise reasonable care in a liability policy merely requires the assured to avoid causing his own loss by deliberate or reckless conduct (the most important of the early cases is Fraser v. Furman [1967] 3 All E.R. 57). In a series of recent important cases the courts have established that the same principle applies to first party insurances. There is perhaps less justification for refusing to give a reasonable care clause a restricted meaning, in that

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the scope for recovery where the loss is purely accidental or beyond the control of the assured is far greater in a property or financial policy than in a liability policy. Never theless, the cases are clear that a reasonable care obligation simply means that the assured must avoid recklessness. Sofi v. Prudential Assurance [1993] 2 Lloyd’s Rep. 559 The assured parked his car in a secure car park at Dover Castle, and left it unattended for about seven minutes. He left some jewellery out of sight in the glove compartment. The car was broken into and the jewellery was stolen. The assured’s evidence was that he had thought carefully about what he could safely leave in the car, and chose to leave the jewellery behind even though other valuables were taken with him. The assured’s policy covered both first and third party losses, and contained a reasonable care clause which covered both sections. The insurers refused to make payment, relying on the clause. Held (C.A.): that the insurers were liable. The test of reasonable care was whether the assured had been reckless in that he had been aware of the risk and had deliberately chosen to run the risk. On the facts the assured had not appreciated the risk and accordingly it could not be said that he was reasonable. It was settled that a reasonable care clause in a liability policy was limited in this way, and a clause which applied to both first and third party losses had to be construed consistently across the policy. However, the Court of Appeal specifically held that the result would have been the same even if the policy had been confined to first party losses. Devco Holder v. Legal and General Insurance Society [1993] 2 Lloyd’s Rep. 567 The assured left a Ferrari parked in a public car park at a railway station with the keys in the ignition. It had been his intention to leave the vehicle for a few minutes only while collecting some papers from his office, but he became distracted and the car was left for some while. It was stolen. The assured’s evidence was that he had deliberately left the keys in the ignition, but had not appreciated that there was any serious risk because the area was a safe one and he intended to be away for a few minutes only. The policy on the vehicle covered both first and third party losses and required the assured to take reasonable care to prevent a loss. Held (C.A.): that the insurers were liable. The assured had not been reckless, because he did not appreciate that he was running a serious risk. Further, the recklessness test was relevant to the third party part of the policy and accordingly was to be applied to the first party part of the policy.

In later cases it has been made clear that recklessness is primarily a subjective test, so that even if the court takes the view that a reasonable person would have appreciated that a serious risk was being run, there is no recklessness if the assured did not so appreciate. That said, there is an obvious limitation in cases where it is simply not credible that the assured could have failed to appreciate the nature of the risk. There was found to be no recklessness in the following cases: Glenmuir Ltd v. Norwich Fire Insurance Society Ltd, 1995, unreported, in which the assured allowed a person whom he did not know but who claimed to be an agent, to take possession of his vintage motor car so that it could be shown to a potential purchaser; and Hayward v. Norwich Union v in which the assured left his Insurance Ltd [2000] Lloyd’s Rep. IR 382, k ignition keys in his vehicle while he paid for petrol at a garage, believing that the car was adequately protected against theft by an immobiliser. By contrast, www

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the assured was held to be reckless in the following cases: Gunns v. Par Insurance Brokers [1997] 1 Lloyd’s Rep. 173, where the assured, a jeweller, believed that his house was under surveillance by potential thieves, but left the house unattended without having taken any security precautions; Lambert v. v where the assured deliberately lit Keymood Ltd [1999] Lloyd’s Rep. IR 80, k a bonfire in close proximity to his premises despite being warned by an insurance agent of the dangers of doing so; and Frans Maas (UK) Ltd v. Sun v , in which the Alliance and London Insurance plc [2004] Lloyd’s Rep. IR 649 k assured warehouseman released goods without having received documents of title in relation to them while fully aware of the risks of doing so. See also Tate Gallery (Trustees) v. Duffy Construction Ltd (No. 2) [2007] EWHC 912 (TCC) and C.A. Blackwell (Contracts) Ltd v. Gerling General Insurance Co., January 2007, unreported, in each of which allegations of poor workmanship by contractors was held not to amount to recklessness for the purposes of the reasonable care clauses used in the relevant policies. A reasonable care clause is only truly effective where it lays down specific requirements which have to be complied with by the assured as a condition precedent to recovery. In LEC (Liverpool) Ltd v. Glover [2001] Lloyd’s Rep. IR v , oxyacetylene cutting equipment was to be used on the assured’s 315 k premises only if there was one workman present who was able to protect against the outbreak of fire. It was held by the Court of Appeal that the clause required the presence of a workman who was not engaged in the use of the cutting equipment and who was able to devote his attentions to fire-watching. In Bonner-Williams v. Peter Lindsay Leisure Ltd, 2003, unreported, the assured was held to be in breach of a clause which required precautions to be taken with regard to the use of blow-lamps. Similarly, in the case of first party motor insurance cover, an obligation on the assured to maintain his vehicle in good and efficient condition is one which has to be strictly complied with, and the fact that the assured had innocently or negligently failed to service his vehicle or carry out basic checks will not prevent the full operation of the clause: see Amey Properties v. Cornhill Insurance [1996] L.R.L.R. 259. In Hayward v. v the assured was Norwich Union Insurance Ltd [2001] Lloyd’s Rep. IR 410 k held not to have been in breach of a reasonable care clause by leaving his car keys in the ignition (see above), although the claim was defeated by a specific policy provision which removed cover if the keys were left in the vehicle. www

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Depreciation Property policies are designed to cover loss caused by fortuitous events. Loss arising from wear and tear, or from loss of utility due to the age of the insured subject matter, are excluded as a matter of law, although there is normally an express policy provision to that effect. There is a distinction between wear and tear and gradual loss: to take an illustration, where tree roots extract water from the soil and cause the assured’s house to subside, there is an insured loss even though the peril has occurred gradually and over a period of time (see

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Mills v. Smith [1964] 1 Q.B. 30, holding such loss to be an ‘‘accident’’ for the purposes of policy coverage). It is often the case that the insured subject matter is affected both by wear and tear and by an insured peril, and whether or not the assured can recover is a matter of causation. If either the insured peril or wear and tear could not itself have caused any loss, then it is to be discounted in determining the proximate cause and the loss is to be regarded as caused by the other. However, there may be situations in which both the insured peril and wear and tear are capable of causing loss, and the loss has been the result of their interaction. Here, the two perils are regarded as concurrent, and if there is a specific exclusion for wear and tear then that exclusion prevails over the insured peril. (1) Midland Mainline Ltd (2) Central Trains Ltd (3) Gatwick Express Ltd (4) Scotrail Railways Ltd (5) Silverlink Train Services Ltd v. (1) Commercial Union Assurance Co. Ltd (2) St Paul International Inc [2005] Lloyd’s Rep. IR 239 Following the Hatfield rail crash, the then track operator, Railtrack, imposed a series of emergency speed restrictions on various stretches of the railway network, in particular those where it was known that there were cracked rails caused by frequent contact with trains (‘‘rolling contact fatigue’’). The assured train operators suffered business interruption losses, and claimed against their insurers. The covers excluded loss caused by wear and tear. Held (C.A.): that the imposition of the emergency speed restrictions and the defective state of the railway network were concurrent causes. Applying the rule that an express exclusion took priority over the insuring clause, the Court of Appeal held the insurers were not liable.

War risks War risks have long been treated separately for insurance purposes. The difficulty posed by war is that the potential for loss is virtually unquantifiable, so that underwriting on a sensible basis is far from easy. Marine policies have from the earliest times excluded war risks, although it has been possible to secure war risks cover under a separate policy, and in the twentieth century it became increasingly common to exclude war risks from other types of cover. Standard war risks exclusions have been developed in the marine market, although in recent times archaic language—e.g. restraint of princes—has been replaced with more modern concepts. That said, some of the terms used to describe war risks in insurance policies are legal terms of art which date back to the 18th century (e.g. riot, civil commotion). The general approach adopted by the courts in construing war risks provisions is to have some regard to the legal definition, but to draw attention to the fact that what is at stake is the construction of a commercial document so that legal definitions are by no means conclusive. The following paragraphs consider the most important of the war risks exclusions.

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The existence of a state of war or some other war risk does not necessarily mean that losses which occur at that time can be attributed to the war. In every case the loss must either be proximately caused by the war risk or, if there are specific causation terms (e.g. the need for the loss to be caused ‘‘solely’’ or ‘‘directly’’ by the war risk), the relevant causal link must be established. The point may be illustrated by the decision of the U.S. Court of Appeals in Pan American World Airways Inc v. Aetna Casualty & Surety Co. [1975] 1 Lloyd’s Rep. 77. Here, an aircraft en route from Brussels to New York was hijacked by terrorists on board, and was flown to Cairo where it was eventually destroyed. The hijackers, who represented the Popular Front for the Liberation of Palestine, claimed that their acts were in furtherance of the struggle between Israel and Palestine, and the owners of the aircraft sought to recover under a war risks policy, but the Court of Appeals’ view was that the destruction of the aircraft was not causally connected to any war. Rather, the events were an attempt to draw attention to the conflict and were not caused by it. In the same way, if a country is at war and the population engages in looting of damaged or evacuated premises, it is unlikely that the thefts involved can be classified as having been caused by war risks. War The meaning of the term ‘‘war’’ has given rise to much dispute between international lawyers. At one time it was thought that a formal declaration of war was necessary before it could be said that this country was at war with another, but such formalities are no longer relevant in practice and two countries may be regarded at war if in fact they are engaged in systematic hostilities. The courts have recognised four types of war as falling within the meaning of the term ‘‘war’’ for insurance purposes. First, a formal state of war between two sovereign nations is clearly a war. There are cases in which the English courts have sought the opinion of the Government, although the usual approach of the courts is to determine as a matter of fact where there is a war between two countries. Secondly, a civil war is regarded as a war for insurance purposes, although in practice a war risks exclusion clause will refer to both war and civil war. It has thus been held that the Easter Uprising in Dublin in 1916 was a civil war and thus a war (Curtis & Sons v. Matthews [1919] 1 K.B. 425) and that the seizure of a trawler by Basque militia in 1936 was part of the Spanish Civil War and accordingly a war (Pesqueras y Secaderos de Bacalao de Espana SA v. Beer [1949] 1 All E.R. 845). The circumstances in which a civil war may be said to exist were considered in detail by Mustill J. in Spinney’s (1948) Ltd v. Royal Insurance Co. Ltd [1980] 1 Lloyd’s Rep. 406. This case arose out of the events in Lebanon in the 1970s. At that time there were a variety of factions vying for supremacy, and there was regular fighting between them with various ad hoc alliances being formed for particular purposes. Mustill J. held that there were three requirements for a civil war:

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(a) the existence of opposing sides so that the warring factions were polarised, although it was to be recognised that within that polarisation there might be various factions fighting each other; (b) the opposing sides must have had the intention of achieving political advantage or concessions, not necessarily amounting to a desire to take over as the general government—if, as in Spinney’s, there was no threat to the institutions of state then there was no civil war; and (c) there must be a significant effect on the population by reference to the scale and intensity of the conflict, relevant factors including the number of casualties, the number of combatants, the geographical scope of the conflict, the impact on public order and the administration of justice, whether the opposing sides held their own territories and in general whether ordinary life had been disrupted—in Spinney’s Mustill J. thought that the dislocation in Lebanon did not satisfy these tests. Thirdly, a guerrilla war is a war for insurance purposes. This was accepted by the Court of Appeals in Pan American World Airways Inc v. Aetna Casualty & Surety Co. [1975] 1 Lloyd’s Rep. 77, discussed above. Finally, there is authority for the proposition that the so-called ‘‘war on terror’’ may in appropriate circumstances be regarded as a war for insurance purposes. In If P&C Insurance Ltd (Publ) v. Silversea Cruises Ltd [2004] Lloyd’s Rep. IR 696, discussed fully in the context of terrorism, below, Rix L.J. expressed the view the terms ‘‘terrorism’’ and ‘‘war’’ were not mutually exclusive, and that an attack such as that of 11 September 2001 could fall within both categories. However, Ward L.J. took a different view, and felt that random attacks could not constitute a war. Hostile acts Modern war risks clauses refer to hostile acts, superseding the earlier wording ‘‘hostilities and warlike operations’’, although the earlier formulation may still be found in some policies. A hostile act is likely to be one which has a hostile or belligerent intent. There is no authority on the modern formulation. Revolution, rebellion and insurrection There is no judicial definition of ‘‘revolution’’ for insurance purposes. As regards ‘‘rebellion’’, in Spinney’s Mustill J. adopted the definition in the Oxford English Dictionary, namely ‘‘organised resistance to the ruler of government of one’s country’’. The requirement of organisation, and the absence of any clear intention to overthrow the government, was enough to defeat the argument in Spinney’s that there was a rebellion. An insurrection was defined by Mustill J. in Spinney’s as a limited rebellion with political objectives: once again the events in Lebanon were thought not to cross this threshold as there had been no intent to overthrow the existing

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government. By contrast, an insurrection was found by Saville J. in National Oil Co. of Zimbabwe (Private) Ltd v. Sturge [1991] 2 Lloyd’s Rep. 281, to have existed in Mozambique in the 1980s. The governing party, Frelimo, was under military attack from the opposition party, Renamo, with the objective amongst the leadership of Renamo of overthrowing Frelimo. To that end an oil pipeline was blown up by Renamo. This was held to be an act of insurrection. Older policies, particularly those written in the marine market, referred to ‘‘military or usurped power’’. This wording is no longer standard. The cases on the phrase indicate that something less than a civil war was indicated, although there had to be some degree of coordination between those engaged in the activities in question. In Spinney’s Mustill J. held that it was enough that there was a warlike mob acting with a common intent and under some degree of leadership pursuing political objectives, and that there was no need to show that the conduct of the mob amounted to revolution or rebellion. Civil commotion The term ‘‘civil commotion’’ has featured in a large number of insurance cases over the years. It describes a stage which is something less than civil war or revolution, but nevertheless involving an uprising by members of the public. In Levy v. Assicurazioni Generali [1940] A.C. 791 it was said by Luxmoore L.J. that: ‘‘The element of turbulence or tumult is essential: an organised conspiracy to commit civil acts, where there is no tumult or disturbance until after the acts, does not amount to civil commotion’’. This definition may be traced back to the judgment of Lord Mansfield in Langdale v. Mason (1780) 2 Park 965, where the Gordon Riots were held to amount to a civil commotion even though there was no underlying objective to overthrow the government, and that it was enough that there was coordinated disorder. Coordinated civil unrest which does not give rise to tumult or disturbance is not enough: this was so held in London and Manchester Plate Glass Co. v. Heath [1913] 3 K.B. 411, in which the coordinated smashing of shop windows by suffragettes in different parts of London was held not to amount to civil commotion. Riot The term ‘‘riot’’ is defined by s. 1 of the Public Order Act 1986 in the following terms: (1) Where 12 or more persons who are present together use or threaten unlawful violence for a common purpose and the conduct of them (taken together) is such as would cause a person of reasonable firmness present at the scene to fear for his personal safety, each of the persons using unlawful violence for the common purpose is guilty of riot. (2) It is immaterial whether or not the 12 or more use or threaten unlawful violence simultaneously.

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(3) The common purpose may be inferred from conduct. (4) No person of reasonable firmness need actually be, or be likely to be, present at the scene. (5) Riot may be committed in private as well as in public places. The common law definition of riot was narrower, requiring only three persons rather than twelve. It may be assumed that this definition would be the starting point for the proper construction of the term ‘‘riot’’ in an insurance policy. In London and Lancashire Fire Insurance Co. v. Bolands [1924] A.C. 836 a number of armed men robbed a bakery at gunpoint. The assured’s policy was against theft and robbery, but excluded loss caused by riot, civil commotion and other war risks. The House of Lords held that what had happened fell squarely within the (then recognised) legal definition of riot and that the claim was excluded even though the circumstances amounted to theft and robbery. This case has received much criticism for applying a legal definition when in the circumstances a contextual war risks interpretation appeared to have been more appropriate. The cases have shown that there are two important limitations on the generality of the definition of riot. The first is that a riot must take place in a single place: coordinated acts of disorder or violence which occur at different locations, albeit at the same time, cannot be aggregated and treated as a single riot. This was so held in London and Manchester Plate Glass Co. v. Heath [1913] 3 K.B. 411, the facts of which were given above. Secondly, a theft conducted by stealth which then leads to violence is not a riot. In Athens Maritime Enterprises Corporation v. Hellenic Mutual War Risks Association (Bermuda) Ltd, The Andreas Lemos [1983] 1 All E.R. 591 thieves entered a vessel and effected a theft, but they were discovered while they were trying to leave the vessel and violence ensued. Staughton J. held that these facts did not give rise to riot. One curious historical anomaly remains in existence. Under the Riot (Damages) Act 1886 the local police authority is required to compensate the victims of a riot where any property has been stolen, destroyed or damaged in the course of the riot. Insurers who have paid claims under property policies for such losses have a statutory right of subrogation in these circumstances, and may thus seek to recoup their payments from the local police authority. The subrogation right is exercised from time to time, and whenever this occurs the issue of whether the legislation should remain on the statute book is raised. However, at present there is no serious move for its repeal. Terrorism The activities of the Irish Republican Army on the U.K. mainland from the end of the 1960s, and in particular the escalation of those activities culminating in major bomb attacks in the City of London at the end of the 1980s, led to the withdrawal by insurers of terrorism cover for commercial buildings.

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More recent terrorist activity has caused a further retrenchment, with terrorist damage exclusions being extended to domestic premises. Terrorism cover has also been withdrawn from marine and aviation policies. The problem of the loss of insurance of commercial buildings against bomb and other device damage was addressed by the U.K. Government in the Reinsurance (Acts of Terrorism) Act 1993. Under that Act, a company—Pool Re—was established to act as reinsurer for any insurers who agreed to offer terrorism cover in respect of property damage. The scheme of the 1993 Act is not to offer terrorism cover in the direct insurance market, nor to impose any obligation on underwriters to provide such cover: it merely gives reinsurance protection to those underwriters who choose to do so. The phrase ‘‘acts of terrorism’’ is defined in s. 3(2) as meaning: acts of persons acting on behalf of, or in connection with, any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government in the United Kingdom or any other government de jure or de facto.

This definition may be of some assistance in determining the meaning of a terrorism exclusion in a policy, as the word is generally not defined. The Terrorism Act 2000, which introduces a series of anti-terrorist measures, relating in particular to policing and detention, contains a rather different and somewhat wider definition of terrorism. Section 1 defines terrorism as the use or threat of action which: (a) involves serious violence against a person, involves serious damage to property, endangers a person’s life, other than that of the person committing the action, creates a serious risk to the health or safety of the public or a section of the public, or is designed seriously to interfere with or seriously to disrupt an electronic system; (b) is designed to influence any government (whether the U.K. or some other government) or to intimidate the public or a section of the public; and (c) is made for the purpose of advancing a political, religious or ideological cause. Any action involving the use of firearms or explosives is deemed to be terrorism whether or not it was designed to influence the government or to intimidate the public or a section of the public. There is little authority on the meaning of terrorism for insurance purposes, although the point was considered in the following case: If P&C Insurance Ltd (Publ) v. Silversea Cruises Ltd [2004] Lloyd’s Rep. IR 696 Silversea operated four ultra-luxury cruise ships primarily for the U.S. market. Following the events of 11 September 2001, the U.S. Department of State issued a series of cautions to US citizens advising them to keep a low profile while on foreign travel. Many of Silversea’s customers cancelled their bookings, and anticipated bookings did not materialise. Claims were made by Silversea against their insurers. The policy was

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divided into two main sections, A(i) and A(ii). Section A(i) covered ‘‘loss of income expected to be earned by the operation of the vessel’’ as a consequence of interference by reason of any of a series of perils, including action by terrorists, acts of war and armed conflict. The sum insured was expressed in terms of dollars per days lost. Section A(ii) of the policy covered ‘‘loss of anticipated income and extraordinary expenditure to prevent loss of anticipated income’’ as a result of ‘‘a State Department Advisory or similar warning by competent authority regarding acts of war, armed conflict, civil commotions, terrorist activities, whether actual or threatened, that negatively impacts the Assured’s bookings and/or necessitates a change to the scheduled cruise itinerary, subject to a maximum period per event of six months from date’’. The Section A(ii) limit of recovery was U.S.$5 million ‘‘in the annual aggregate and in all’’. The Court of Appeal held that Section A(i) was concerned with the immediate consequences of insured perils upon the operations of the insured vessels, and provided an indemnity based on loss of time where there had been interference with those operations. Section A(ii) by contrast was concerned with loss of profits on future cruises. This meant that claims for loss of profits caused by passenger cancellations were not recoverable under Section A(i) but only under Section A(ii). The claims in the present case thus fell within Section A(ii). The maximum sum recoverable was, however, U.S.$5 million, as the phrase ‘‘in the annual aggregate and in all’’ was a per fleet cap and not a per vessel cap. The Court of Appeal was also of the view that the limiting phrase ‘‘a maximum period per event of six months from date’’ referred to losses incurred in that six month period from all cruises then being marketed rather than merely to losses from cruises due to commence in that period. All of this was, however, largely irrelevant as a result of the per fleet cap of U.S.$5 million. Two issues relating to war coverage were also considered by the Court of Appeal. The first of these was whether, under Section A(ii) of the policy, the warnings were excluded perils. If this was the case, and the events of 11 September and the warnings were concurrent causes, then there could be no recovery. However, the Court of Appeal’s view was that the warnings were not excluded perils, but merely uninsured perils, so that there could be recovery even if the causes were concurrent. The second point concerned the meaning of the phrases ‘‘acts of war’’ and ‘‘armed conflict’’. Ward L.J. was of the opinion that the events of 11 September were not acts of war or armed conflict, but were to be classified as terrorist acts. War and armed conflict implied some form of continuity, as opposed to random attacks, and the subsequent declaration of a ‘‘war on terror’’ was a rhetorical response which emphasised that there was no ‘‘side’’ against which a war could be waged. Rix L.J. was more cautious. Rix L.J. noted that the phrase ‘‘acts of war’’ was a contractual provision and could be broader than what was generally accepted as ‘‘war’’ in other contexts: what mattered was the concern of business men and their insurers rather than the scale and ramifications of the conflict which underlay the public international law definition of war. Rix L.J. also pointed out that the mere fact that an attack was an act of terrorism did not automatically preclude it from amounting to an act of war.

TEST YOUR UNDERSTANDING 1. Which of the following statements accurately describes an all risks policy? (a) such policies are confined to marine cargoes; (b) the insurers are under an absolute liability to make payment;

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(c) the insurers are free to include specific exceptions to all risks cover; (d) the assured is required to identify the peril which has caused his loss. 2. Which of the following statements is accurate? (a) there can be a storm without any wind; (b) there can be a flood only where the ingress of water is the result of a violent, sudden and abnormal event; (c) there can be a fire even though there is no physical conflagration; (d) an explosion requires some physical or chemical reaction. 3. Which of the following statements are accurate? (a) there is theft if the assured is defrauded into voluntarily parting with his goods; (b) if the policy requires theft by violent and forcible entry, physical damage to the premises is required; (c) there can be robbery if goods are handed over by the assured in the face of threats of violence to someone not on the premises. 4. Which of the following statements accurately describes a fidelity policy? (a) it indemnifies the assured for liability to a third party where an employee steals property belonging to a third party; (b) it extends to all persons working for the assured, including independent contractors; (c) it applies only to the theft of tangible property; (d) it only covers thefts which occur during the currency of the policy. 5. Which of the following statements accurately describes a legal expenses policy? (a) it may be taken out before or after the assured becomes involved in legal proceedings; (b) insurers can never be liable for a sum in excess of their policy limits; (c) if the assured’s action succeeds, the amount of his premium can be awarded to him by way of costs against the other party. 6. Which of the following statements is correct? (a) a reasonable care clause in a policy of insurance prevents recovery where the assured has negligently caused his own loss;

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(b) a reasonable care clause is superfluous as it reflects the common law; (c) the assured cannot recover for damage to property proximately caused by wear and tear. 7. Which of the following statements is accurate in respect of war risks? (a) losses caused by terrorism always fall within the definition of ‘‘war’’; (b) the term ‘‘riot’’ implies a political objective on the part of the rioters; (c) the term ‘‘civil commotion’’ implies a political objective on the part of the participants.

CHAPTER 9

MOTOR AND OTHER LIABILITY INSURANCE Rob Merkin

PRINCIPLES GOVERNING LIABILITY POLICIES Forms of liability insurance Liability insurance protects the assured against claims by third parties. The indemnity provided will cover any judgment, arbitration award or binding settlement in respect of the assured’s liability, and will also cover any defence costs incurred by the assured in fighting a claim. Most forms of liability may be covered. Liability insurance is compulsory in some sectors, most importantly for road users and employers (see below), as these sectors account for about 90% of personal injury claims, but in practice such cover is taken out by occupiers of land, those engaged in the supply of goods or services, company directors, and contractors. The liability insured against is generally expressed as being liability at law or liability to pay by way of damages or compensation. The term ‘‘liability’’ encompasses both tortious and contractual liability, and it is usual for coverage to be extended to costs incurred in defending third party claims. The only real restriction on securing coverage is against liability arising from an illegal enterprise, although here it should be noted that the mere fact that the assured has committed an incidental criminal act in the course of a lawful enterprise as a result of which liability has been incurred is not necessarily a bar to recovery under a liability policy (see below). A liability policy will not cover a payment made by the assured which is not based on legal liability but which is made to secure the continuation of a commercial relationship following a dispute (see Smit Tak Offshore Services Ltd v. Youell, The Mare [1992] 1 Lloyd’s Rep. 154) or expenditure which is incurred to prevent liability arising at some future point (Yorkshire Water v. Sun Alliance & London Assurance [1997] 2 Lloyd’s Rep. 21—see Chapter 5). It has also been decided that expenditure incurred by an assured in order to meet statutory obligations to clean up pollution under the Water Resources Act 1991 is not within the scope of a standard liability policy, because the sum does not constitute ‘‘damages’’ (Bartoline Ltd v. Royal & Sun Alliance Insurance plc, November 2006, unreported). At one time liability policies were written on a ‘‘losses occurring’’ basis. A policy of this type applies to a loss which occurs during the currency of the policy. A loss for this purpose may be either the assured’s act of negligence or 275

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the damage suffered by the third party. In most cases there will be no timing difference between these two events, as where a person suffers immediate physical injury from a dangerous object on the assured’s premises. However, in the case of exposure to dangerous substances, there may be a substantial time-lag between the assured’s negligent act of exposure and the physical injury suffered by the victim: exposure to asbestos is the obvious illustration of the point. It will here become necessary to determine whether the loss insured against is the negligent act or the date on which the victim first begins to suffer substantial injuries. The general assumption is that the relevant event is the exposure so that the losses occurring insurers on risk at that date will face ultimate liability to the victim. However, not every policy can be construed in that fashion. Bolton Metropolitan Borough Council v. Municipal Mutual Insurance [2007] Lloyd’s Rep. IR 173 The claimant local authority held successive public liability policies. The first relevant policy was for the period 1960 to 1965, issued by Ocean (subsequently taken over by CU). It provided an indemnity to Bolton in respect of liability for ‘‘accidental bodily injury to or illness of any person’’. It was a condition precedent to Ocean’s liability that Bolton gave written notice of any accident, claim or proceedings immediately on it coming to the claimant’s knowledge. Bolton did not do so. The second relevant policy was for the period 1979 to 1991, issued by MMI. The policy indemnified Bolton against sums which it became legally liable to pay arising out of ‘‘accidental bodily injury or illness (fatal or otherwise) to any person [which] occurs during the currency of the policy and arises out of the exercise of the functions of a Local Authority’’. The MMI policy also stated that if there was any other insurance applicable to a claim, the policy would operate as excess policy only. Bolton carried out demolition and building work by engaging various subcontractors. G, an employee of one of those firms, worked on various sites and during the period of cover provided by Ocean was exposed to asbestos fibres. A malignancy developed in about 1980. He died of mesothelioma in 1991. Bolton settled the claim and commenced proceedings against MMI, which denied liability on the grounds that the MMI policy only covered a personal injury or illness which occurred between 1979 and 1991, but that as the exposure was earlier than that date there was no coverage. MMI also relied upon the condition postponing its liability, asserting that the Ocean policy covered the claim against the claimant. Bolton accordingly joined CU to the action as alternative defendant. CU denied liability to Bolton by reason of late notification. MMI itself made a claim against CU, seeking 50% contribution in the event that MMI was found to be liable to Bolton. The Court of Appeal held as follows. (1) The MMI policy applied to the claim. (a) The insuring clause in the MMI policy referred to the date of illness, i.e., 1980, and not to the date of exposure. The phrase ‘‘bodily injury or illness’’ meant something more than mere inhalation of asbestos fibres. Injury did not refer to something which happened in the future but rather to something which occurred at a particular time. (b) The phrase ‘‘occurs during the currency of the policy and arises out of the exercise of the functions of a Local Authority’’ could not mean that the policy only attached if both the injury occurred during the currency of the policy and arose from Bolton’s activities during the currency of the policy—that would leave Bolton uninsured in the event that the injury arose in a different year from that in which Bolton was exercising the functions which gave rise to its liability. (c) The word ‘‘accidental’’ did not exclude an injury which flowed naturally from an exposure. Further, the phrase ‘‘accidental bodily injury’’ did not mean that the accident which gave rise to the bodily injury and the bodily injury itself

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had to occur at the same time, i.e., exposure. An endorsement to the policy, which excluded persons outside Great Britain ‘‘if such injury or illness arises out of and in the course of the employment’’ did not indicate that the policy applied to exposure: the word ‘‘arises’’ was perfectly consistent with the onset of injury rather than exposure, and in any event the endorsement could not affect the meaning of the earlier wording of the policy. (2) The CU policy did not respond to the claim, as it was in force only during the period of exposure and not when the injury was suffered. The U.S. ‘‘triple trigger’’ theory, which imposed liability for any of exposure, disease and diagnosis, was not applicable to public liability policies. (3) Had CU’s policy attached, CU had not waived the condition precedent based on the notification obligation. A waiver arose only where there was a choice between two inconsistent courses of action. In the present case a denial of liability on coverage grounds did not mean that there was a waiver of the right to rely on the condition precedent. (4) As there was no double insurance, the question of contribution did not arise. However, had both policies covered the loss and had CU’s only defence been late notification, the better view was that CU could have relied upon late notification as a defence to the contribution claim. (5) Bolton was entitled to recover its costs in proceeding against MMI, but it was not entitled to recover from MMI its costs in proceeding against CU. MMI was entitled to recover a small proportion of CU’s costs from Bolton.

Losses occurring cover is prospective in nature, covering claims whenever made as long as the loss occurs in the policy year, and accurate premium assessment may be difficult because future liability trends cannot be accurately predicted. The point has proved to be of particular importance, for this reason, many classes of liability insurance—including most professional indemnity cover—are written on a ‘‘claims made’’ basis. The essence of a claims made policy is that it responds to claims first made against the assured during the currency of the policy. The cover is, therefore, retrospective, as the events to which the claims relate may have occurred years previously. Premium assessment is far easier, as the risk of claims arising from past events can more readily be ascertained.

Liability insurance claims Notification Claims made liability policies contain crucial notification provisions. Typically, there will be a condition (generally expressed as a condition precedent to liability) that the assured gives notice to the insurers as soon as possible during the period of coverage of any circumstances of which the assured has become aware which are likely to give rise to a claim. Thereafter the assured will be required to pass on to the insurers any notification from the third party stating an intention to make a claim against the assured. Finally, the assured will be under a duty to provide further information to the insurers as and when it becomes available. It is usual to provide that the notification of circumstances likely to give rise to a claim is enough to attract policy coverage even though

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no formal claim by the third party is itself made against the assured during the currency of the policy. Claims made policies exclude liability for claims arising from circumstances which could have been notified under any earlier policy, so the notification of circumstances to the current insurer is absolutely essential, as later insurers will not be liable if claims later come in relating to earlier notifiable circumstances. Notification to the insurers need not, unless the policy otherwise states, be in any particular form. It is enough that the insurers are made aware that there are in existence circumstances likely to give rise to a claim. However, in Enterprise Oil Ltd v. Strand Insurance Co. Ltd [2006] EWHC 58 (Comm) Aikens J. refused to follow Lumbermen’s and held that there is no need for the settlement to allocate notional sums to each of the claims and counterclaims comprised within a global settlement, and once the assured has entered into a settlement he may then recover from his insurers by establishing that the amount of the settlement represented at least the amount of his legal liability. Enterprise Oil Ltd v. Strand Insurance Co. Ltd [2007] Lloyd’s Rep. IR 186 EO was with Amoco party to a joint venture oil exploration and development arrangement. A drilling unit, RGV, was hired from BAO, a subsidiary of Rowan, and BAO delegated performance of the contract to Rowan under a service agreement. The RGV was delivered on 15 December 1998 but the contract was terminated by Amoco and EO a month later, on the ground of the unsatisfactory condition of the RGV. Amoco commenced proceedings in England for a declaration of its entitlement to terminate the contract, but the action was dismissed and instead BAO was awarded on its counterclaim a sum close to U.S.$90 million by way of damages, costs and interest. EO was required to contribute its proportionate share of the loss. Thereafter, Rowan commenced an action against EO and Amoco in Texas, alleging that the defendants had been guilty of a number of torts. The estimated liability (after a mock jury trial ordered by the judge) was around U.S.$85 million. EO and Amoco settled the claim for a total of around U.S.$84 million, and EO sought to recover its proportion of that sum from its liability insurers, Strand, a captive. The Strand policy covered ‘‘all sums which [EO] may be obligated to pay by reason of liability imposed on [EO] by law or assumed under Contract or Agreement (written or oral) or otherwise, on account of personal injury . . . arising out of an occurrence occurring during the period of this Policy.’’ The term ‘‘personal injury’’ extended to ‘‘infringement of contract rights’’. There was separate cover for costs and expenses incurred ‘‘in connection with any claim [the insurers] may require to be contested by [EO].’’ The policy also stated that ‘‘In the event of any conflict of interpretation between the various clauses and conditions contained in this Policy, the broadest and least restrictive wording to the benefit of the Insured shall always prevail.’’ Strand denied liability for both the sum insured and also for the defence costs of the Texas action. Aikens J. held that Strand was not liable. The following issues arose. (1) EO contended that the wording of the insuring clause meant that Strand was liable to provide an indemnity if EO could demonstrate potential rather than actual liability. Aikens J. disagreed and held that there was nothing in the wording which ousted the basic rule that the assured under a liability policy could recover only if its liability was established and quantified by judgment, award or settlement, and that in the case of a settlement the assured had to demonstrate that the amount of the

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settlement was no greater than its actual liability (see Commercial Union Assurance v. NRG Victory Reinsurance [1998] 1 Lloyd’s Rep. 80). EO sought to overcome this by relying on the phrase ‘‘assumed under Contract’’ and asserted that a settlement of a claim amounted to an assumption of liability under contract. Aikens J. held that the phrase was intended to deal with EO’s contractual liability, and operated only where the loss was ‘‘on account of ’’ infringement of contract rights and not on account of a settlement. Although it is relatively unusual for liability policies to cover pure contractual liability, the decision makes it clear that when they do, the liability referred to is that arising under the contracts entered into by the assured under which he may face liability, and not to the subsequent settlement of claims by the assured. In the light of this finding it was unnecessary to decide whether the settlement had been reasonable—the only question was whether there was legal liability. (2) Given that the policy responded to actual liability, EO contended that it had faced tortious liability in Texas by reason of its interference with the contract between Rowan and BAO. Aikens J. disagreed. The test to be applied was whether there was liability under the strict rules of the law of Texas, and not whether a judge and jury might reasonably have reached a finding of liability. Applying that test, there was no liability in tort. Accordingly, EO could not recover. Had that been wrong, Aikens J. accepted that the phrase ‘‘liability . . . on account of the infringement of contract rights’’ would have covered a claim against EO for deliberate breach of contract. The policy covered tortious liability for interference with contracts, and in most common law countries such liability would arise only where there was intentional and wilful interference on the part of the assured. A narrow construction would thus have defeated the cover. Public policy issues were not at stake in this reasoning. (3) In the event that EO had proved that it had faced some liability in Texas, so that there were both insured and uninsured claims encompassed in the global settlement figure, Aikens J. refused to follow Lumbermen’s Mutual Casualty Co. v. Bovis Lend Lease Ltd [2005] 1 Lloyd’s Rep. 494. Aikens J. ruled that it was not a precondition of recovery from liability insurers based on a settlement that the settlement allocated liability amongst individual claims: it was sufficient that the assured had to establish and quantify liability in order to bring a claim. Aikens J. also regarded the requirement as uncommercial and artificial. (4) Defence costs were irrecoverable. The clause permitted recovery only where Strand had required EO to incur defence costs. In the present case this had not happened, and if Strand itself did not take over the claim then there was no implication that EO had been required to defend itself. Friends Provident Life and Pensions Ltd v. Sirius International Insurance Corporation [2006] Lloyd’s Rep. IR 45 FPLP was the successor in title of LMA, a company engaged in the business of selling private pensions. LMA had professional liability insurance cover from the defendants for the period 1 February 1993 to 31 January 1994. The insurance was in the form of a primary layer in respect of losses up to £1 million, and an excess layer of £4 million in excess of £1 million. Both layers were written on a claims made basis, providing an indemnity against losses arising from claims made against LMA during the period of the policy. General Condition 2 of the primary layer policy stated that LMA was required to give to the Underwriters notice ‘‘as soon as possible during the period of this policy . . . of any circumstance of which [LMA] shall become aware which may give rise to a claim or loss against them or any of them’’, and subsequent claims from any circumstances so notified would be covered. The second layer policies incorporated the terms of the first layer policy. On 28 January 1994 in the context of negotiations for the renewal to take effect on 1 February 1994, LMA wrote to the primary layer underwriters and confirmed that it knew of no circumstances likely to give rise to

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a claim against it other than pensions mis-selling. The primary layer insurers accepted that they had by this means been given notice under the earlier policy of circumstances likely to give rise to claims, but certain of the second layer insurers contended that no valid notification had been made. Held (C.A.): valid notice had been given to all of the underwriters. Even though the letter was designed to be a declaration for renewal purposes, there was no reason why it could not double up as a notification of losses under General Condition 2. Further, the word ‘‘underwriters’’ in the notification requirements of General Condition 2 referred only to the primary layer underwriters, so that notice to them was to be regarded as notice to the second layer underwriters.

A notification of specific circumstances likely to give rise to a claim will encompass all claims arising out of those or similar circumstances. Hamptons Residential Ltd v. Field [1998] 2 Lloyd’s Rep. 248 A firm of surveyors notified its liability insurers that one of its employees had been involved in a mortgage fraud. Subsequently, after the policy had expired, the surveyors informed the insurers that it had discovered other instances of the same type of mortgage fraud. Held (by C.A.): the notice was to be construed as applying to all instances of mortgage fraud even though it was confined to one instance of such fraud. Rothschild Assurance Ltd v. Collyear [1999] Lloyd’s Rep. IR 6 The assured had been involved in selling private pensions. Following suggestions that there had been mis-selling of pensions, the assured undertook an inquiry and notified its liability insurers that there was a likelihood that compensation would be payable to some customers and that some 2,500 contracts were under review. Held (by Rix J.): that the notification was enough to trigger the coverage under the policy, and the fact that it had not been possible at the notification date to identify the precise contracts likely to give rise to compensation claims did not prevent the notice from being a valid one.

Similarly, in King v. Brandywine Reinsurance Co. (UK) Ltd [2005] Lloyd’s Rep. 509, a notification of circumstances likely to give rise to a claim given by the parent company was held to extend to subsequent claims made against another company in the same group which was a co-assured under the policy. A ‘‘claim’’ is made against the assured—and this has to be notified to the insurers—once there has been a demand for payment by the third party. An assured who undertakes an investigation of his dealings with the third party and concludes that compensation is payable is to be treated as having received a claim: this was so held in Rothschild Assurance Ltd v. Collyear [1999] Lloyd’s v (see above), where the assured was required by its regulator to Rep. IR 6 k review its selling of pensions. The issue of a claim form against the assured will not suffice unless the assured has been made aware that this has happened, either by a letter before action, by notification or by service. In such circumstances it cannot be said that a claim has been made against the assured, so that if the assured has not previously notified the insurers of circumstances likely to give rise to a claim then he cannot recover. www

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Robert Irving & Burns v. Stone [1998] Lloyd’s Rep. IR 258 A claim form was issued against the assured during the currency of a claims made policy, but this was preceded by a letter before action and the claim form was served on the assured until after the policy had expired. Held (by C.A.): that a claim had not been made against the assured in these cir cumstances, and accordingly that the coverage of the policy had not been triggered. The Court of Appeal distinguished Thorman v. New Hampshire Insurance Co. Ltd [1988] 1 Lloyd’s Rep. 7, in which case the claim form had been issued but not served, although there had been a letter before action: this was enough for a claim to have been made against the assured.

Coverage The claim made against the assured must be one which is covered by the terms of the policy, and for this purpose it is necessary to consider the substance of the claim rather than the manner in which the claim against the assured has been expressed. MDIS Ltd v. Swinbank [1999] Lloyd’s Rep. IR 516 The assured supplied a computer system to the third party. This proved not to operate in accordance with the specifications laid down by the third party, and proceedings alleging misrepresentation and breach of contract were commenced against the assured. No allegation of fraud was made, although it was implicit in the third party’s case that certain of the assured’s employees had been guilty of fraud. The assured’s policy covered liability for a claim ‘‘alleging’’ negligence but not fraud. The question was whether the insurers would be liable to meet any judgment against the assured. Held (by C.A.): that the insurers would not be liable. The general rule was that it was necessary to look to the substance of the claim rather than its form, and the substance of the claim in the present case was fraud. The general rule was not ousted by the word ‘‘alleging’’, and it was not enough that an allegation of negligence had been made when the real claim was based on fraud.

See also KR v. Royal & Sun Alliance plc [2006] EWCA Civ 1454, where insurers successfully denied liability by reason of the assured’s deliberate misconduct even though the claim against the assured alleged only negligence. Payment under a liability policy becomes due when the third party has established both the liability of the assured and the quantum of damages payable by the assured, and that is the point at which the limitation period for an action against the insurers is deemed to accrue. Liability will be established and quantified when the third party has obtained a judgment or arbitration award against the assured, or where there is a binding settlement between the assured and the third party. It has recently been held that if the assured enters into a settlement with the third party which includes various claims and counterclaims but which does not allocate a specific sum to each, the assured cannot be regarded as having established and quantified his liability and thus

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will be unable to recover even if he can prove his actual loss as a matter of law: see Lumbermen’s Mutual Casualty Co. v. Bovis Lend Lease Co. [2005] Lloyd’s Rep. IR 74.

Public policy restrictions Two separate public policy rules may preclude recovery by an assured under a liability policy. First an assured who deliberately brings about his own loss is unable to recover: in professional indemnity cases, fraud by the assured against the third party will operate in this way; in a product liability case the supply of goods known to be defective and dangerous will have the same effect, and a deliberate running-down will prevent the assured recovering under a motor policy. Secondly, if the assured has been guilty of criminal conduct, he will be unable to sue the insurers if he has to rely upon his own criminality as part of his cause of action. Gray v. Barr [1971] 2 Q.B. 554 B suspected his wife of having an affair with G, and B entered G’s premises with a loaded shotgun. In the course of a struggle the gun went off and G was killed. B was subsequently convicted of manslaughter, G’s widow obtained damages against B, and in third party proceedings B claimed indemnification from his liability insurers who had issued a householders policy to him. Held (C.A.): that B had no cause of action against his insurers. (1) The policy covered only ‘‘accidents’’ and what had occurred could not be described as accidental —although B had been convicted of manslaughter and not murder, his act was nevertheless deliberate and wilful. (2) The rules of public policy denied recovery for the same reasons. At the very least a man who carried a loaded shotgun and who subsequently fired it ought not to be permitted to benefit from his policy. Note: see also Charlton v. Fisher [2001] Lloyd’s Rep. IR 287, a deliberate runningdown case, discussed in the motor insurance section of this Chapter, below.

Punitive damages are rarely awarded in English law, but where this is the case then liability policies will as a matter of construction normally extend to such damages, it having been held in Lancashire County Council v. Municipal Mutual Insurance Co. [1996] 3 All E.R. 545 that the word ‘‘compensation’’ in the insuring clause of a liability policy includes punitive damages. It is doubtful whether public policy rules would allow recovery of punitive damages where the assured had been guilty of a deliberate wrongful act: Lancashire County Council was a case involving the council’s vicarious liability for punitive damages incurred by police officers, so public policy was not an obstacle to recovery. A public policy defence is merely a personal defence which can be raised by the insurers against the assured. If a third party claimant obtains a statutory right (under the Third Parties (Rights against Insurers) Act 1930 or the Road Traffic Act 1988) to sue the insurers following the failure of the assured to satisfy a judgment, it is arguable that the insurers will have to meet the claim

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anyway as the third party is unaffected by the nature of the assured’s conduct. Defending the claim The coverage of a liability policy extends to any first party and third party costs incurred by the assured in defending third party claims. Defence costs form an important part of the coverage as these may be greater than the amount of the ultimate liability. The total sum insured under the policy will normally be expressed to cover both damages awarded against the assured and the costs of the proceedings. The insurers will generally be empowered, but not obliged, to control any negotiations with the third party and, if necessary, to defend the proceedings against the assured. The policy may also provide that, if the insurers choose not to defend, they will indemnify the assured for defence costs if such costs are incurred with the consent of the insurers. Should the assured be permitted to negotiate with the third party, the insurers will normally reserve to themselves the right to approve or reject any settlement. In each of these situations the insurers have a discretion, either to defend, to grant consent from the incurring of costs and to approve any settlement. It would seem that the discretion is not unlimited, and it has variously been said that insurers owe a duty of care (Groom v. Crocker [1939] 1 K.B. 194), or are under a continuing duty of good faith (K/S Merc–Skandia XXXXII v. Certain Lloyd’s Underwriters v ) or are subject to an implied contractual duty [2001] Lloyd’s Rep. IR 802 k (Gan Insurance Co. v. Tai Ping Insurance Co. (Nos 2 and 3) [2001] Lloyd’s Rep. v ) to the assured in making decisions as to the defence of proceedings. IR 667 k In Eagle Star Insurance Co. v. Cresswell [2004] Lloyd’s Rep. IR 437 held that the implied term and continuing utmost good faith approaches led to much the same conclusion, and that regarded the implied term and continuing utmost good faith principles as alternatives leading to much the same result, preventing reinsurers from acting irrationally or in bad faith in making decisions concerning the claims process. In Gan the Court of Appeal held that a reinsurer was, in exercising its discretion under a claims condition as to the approval or otherwise of a settlement, not under any duty to act reasonably but under the more restricted duty not to act irrationally (in the form of taking into account considerations extraneous to the claim itself, e.g. other disputes between the reinsurer and the reinsured). That said, there are cases which have held that liability insurers must act reasonably in deciding whether or not to defend a claim (Thornton Springer v. NEM Insurance Co. Ltd [2000] Lloyd’s Rep. IR 590 k v ). Many claims conditions do in fact state that the insurers will not unreasonably withhold their consent to the assured’s requests, and professional indemnity liability policies often contain a ‘‘Q.C. Clause’’ under which the insurers are required to settle any claim against the assured unless a Q.C. is of the view that www

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the claim is on balance likely to fail. This type of clause is of particular significance to the assured where the third party is willing to settle the claim within the limits of the policy but the insurers wish to defend, thereby placing the assured at risk of a judgment which might exceed the sum insured under the policy for which he will be personally liable. The obligation of the insurers to defend or to pay defence costs arises when the claim made against the assured on the face of things falls within the scope of the policy. In John Wyeth v. Cigna Insurance [2001] Lloyd’s Rep. IR 420 (and see also Thornton Springer v. NEM Insurance Co. Ltd [2000] Lloyd’s Rep. v ) the Court of Appeal held that this rule was a starting point only, IR 590 k and that it was open to the insurers: (a) to specify that their obligation to incur defence costs would be suspended until the court had ruled in the third party’s action against the assured that the liability was of a type covered by the policy; or (b) at least to require repayment by the assured of sums expended in the event that the court should rule that liability arose from an uninsured event. In practice, any contractual right of insurers to refuse to pay defence costs provides adequate protection, for if they take the view that the claim arises from an uninsured peril they may refuse to defend or pay defence costs until the claim has been resolved. Cases may also arise in which a number of claims have been made, not all of which are insured under the policy. If under the policy the insurers are only liable for the costs of defending insured claims, it will be necessary to apportion the defence costs between the insured and uninsured claims, although it would seem that if an insured claim imposes 100% liability on the assured, the fact that other claims against him also succeeded would not deprive the assured of his right to recover full defence costs. This was so held in John Wyeth v. Cigna Insurance [2001] Lloyd’s Rep. IR 420 k v . A similar issue is found where the assured is sued as one of a number of co-defendants, the others not being insured under the same policy. The principle here is that if the expenditure incurred by the insurers in defending their assured has not been increased by the fact that there were co-defendants, then the insurers cannot seek any contribution from those co-defendants. www

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New Zealand Forest Products Ltd v. New Zealand Insurance Co. Ltd [1997] 1 W.L.R. 1237 The assured company and its directors were insured under a directors and officers liability policy. Proceedings were brought against the assured, one of its directors and other individuals in California, and each of the defendants used the same lawyers. The question was whether the defence costs had to be met in full by the insurers or whether they were entitled to a contribution from the co-defendants: Held (by P.C.): the costs were not to be allocated. In the absence of express policy wording to the contrary, insurers were not permitted to an apportionment of defence costs if the same costs would have been incurred in defending the insured parties. Note: the principle in this case was subsequently in Thornton Springer v. NEM Ins www : in this case it was held that insurers were v urance Co. Ltd [2000] Lloyd’s Rep. IR 590 k liable for the full amount of defence costs even though those costs had incidentally benefited other persons who were not co-insured under the policy.

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Insurers’ liability for defence costs Under s. 51 of the Supreme Court Act 1981 the court has an absolute discretion as to the award of costs, and it is settled law that in exceptional circumstances a costs order may be made against a person who was not party to the litigation but who was closely involved with it. The question has arisen as to whether liability insurers who have unsuccessfully defended its assured against a third party claim can be personally liable to the claimant for the costs of the proceedings in circumstances where policy limits have been exceeded so that there can be no direct recovery from the assured himself. The criteria which have to be satisfied before a costs order can be made against the insurers were laid down by Phillips L.J. in TGA Chapman Ltd v. Christopher [1998] 2 All E.R. 873: (1) The insurers must have taken the decision to defend the claim. (2) The defence of the claim must have been funded by insurers. (3) The insurers must have conducted the litigation (although the mere fact that the assured has provided assistance to the insurers does not prevent control from being found—Citibank NA v. Excess Insurance v Monkton Court Ltd v. Perry Co. Ltd [1999] Lloyd’s Rep. IR 122, k v ). Prowse (Insurance Services) Ltd [2002] Lloyd’s Rep. IR 408 k (4) They must have fought the claim exclusively in their own interests. (5) The defence must have failed in its entirety. www

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The criteria were held to have been satisfied in Chapman itself, a decision followed soon afterwards in Pendennis Shipyard Ltd v. Magrathea (Pendennis) Ltd [1998] 1 Lloyd’s Rep. 315, but later cases have demonstrated the exceptional nature of the jurisdiction. It has thus been held that: if the assured remains in business the defence of proceedings may be in the joint interests of the parties as the assured’s reputation is at stake (Gloucester Health Authority v. Torpy [1999] 1 Lloyd’s Rep. 203, Cormack and Cormack v. Excess Insurance v ); a joint decision by the assured and Co. Ltd [2002] Lloyd’s Rep. IR 398 k the insurers to defend the claim precludes a costs order (Citibank NA v. Excess v ); insurers who withdraw Insurance Co. Ltd [1999] Lloyd’s Rep. IR 122 k from the defence having discovered that the assured is guilty of fraud are not liable for costs (Bristol and West plc v. Bhadresa [1999] Lloyd’s Rep. IR 138 v ); the intervention of the insurers must be shown to have been a cause of the k claimant’s costs being incurred, e.g. because but for the insurers the claim would not otherwise have been defended (Cormack and Cormack v. Excess v ). However, in the most recent Insurance Co. Ltd [2002] Lloyd’s Rep. IR 398 k case, Plymouth & South West Co-operative Society Ltd v. Architecture, Structure & Management Ltd 2006, unreported, it was held that if the assured is insolvent and no longer has any reputation to protect, then any defence conducted by the insurers will be for their own interests and they may be exposed to a costs order. www

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COMPULSORY MOTOR INSURANCE Compulsory insurance under the Road Traffic Act 1988 Nature of the obligation to insure It has been compulsory in the U.K., since the passing of the Road Traffic Act 1930, for the users of motor vehicles to insure against third party liability. A series of four European Community Motor Insurance Directives adopted between 1972 and 2000 (with a draft fifth directive likely to be adopted by 2005), concerned primarily with ensuring that motorists are free to use their vehicles in all parts of the EU and that the victims of negligent motorists are properly protected by the motorists’ insurance, have resulted in major extensions to the original compulsory insurance context. U.K. law is now consolidated in the Road Traffic Act 1988, as amended by numerous statutory instruments to give effect to EC law. The basic duty is laid down by s143(1) of the 1988 Act, which provides that a person must not ‘‘use’’ or ‘‘cause or permit any other person to use’’ a ‘‘motor vehicle’’ on a ‘‘road or other public place’’ unless there is in force a policy which complies with the 1988 Act. There are limited exceptions from the obligation to insure, set out in s. 144, for various forms of public service vehicles. Contravention of s. 143(1) is a criminal offence (s. 143(2)) and, as will be seen below, a tort in its own right. The offence is one of strict liability and can be committed by a policyholder who genuinely believed that he was insured or who genuinely believed that a person given permission to use the vehicle was himself insured. The only defence is the ‘‘employment’’ defence set out in s. 143(3), which arises where the person using the vehicle can demonstrate that: (a) the vehicle did not belong to him and was not in his possession under a contract of hiring or loan; (b) he was using the vehicle in the course of his employment; and (c) he neither knew nor had reason to believe that there was not in force a policy of insurance as required by s. 143(1). The assured’s policy must be ‘‘in force’’ at any time that the vehicle is in use. If there was never a valid agreement between the assured and the insurers, or if the policy did not cover the use to which the vehicle was to be put (as in Evans v. Lewis [1964] 1 Lloyd’s Rep. 258 where the assured’s occupation as publican fell outside the scope of cover) then it cannot be said that the policy was in force. However, if the policy has been obtained by non-disclosure or misrepresentation, and it has not been avoided at the date of the use of the vehicle, then the policy is regarded as being in force at that date even though it is subsequently avoided ab initio by the insurers: this was so held in Goodbarne v. Buck [1940] 1 K.B. 771. A policy complies with the 1988 Act if the insurer is authorised to carry on motor insurance business in the U.K. (ss. 97, 145(2) and 145(5)). In the case of a U.K. insurer, authorisation must have been obtained from the Financial Services Authority, under the provisions of the Financial Services and Markets Act 2000, the insurer must be a member of the Motor Insurers Bureau (which

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is responsible for compensating the victims of uninsured or untraced drivers —see below) and the insurer must have appointed a claims representative in every EEA state to deal with claims in those states. In the case of an insurer with its head office elsewhere in the EEA, the insurer must have been authorised to carry on motor insurance business by its home state regulator on the same terms. The policy itself can be in the form of a temporary covering note (s. 161(1)). There is compliance with the 1988 Act only if a certificate of insurance has been delivered to the assured by the insurers (s. 147(1)). The certificate must comply with the Motor Vehicles (Third Party Risks) Regulations 1972 (S.I. 1972 No. 1217), as amended, and in particular must set out the registration mark of the vehicle, the name of the policy holder and the names or descriptions of persons entitled to use the vehicle, the dates of the commencement and expiry of the insurance; the date of the expiry of the insurance, and any restrictions on use. The insurers themselves are required by the 1972 Regulations to maintain for seven years from expiry relevant details of the policy and its coverage. The certificate is not the policy of insurance in its own right, but rather is a statutory document which must be issued by the insurers, so that the terms of the policy will prevail over those in the certificate (Gray v. Blackmore [1934] 1 K.B. 95). A certificate of insurance serves a number of regulatory functions in respect of which the assured is able to demonstrate that he is insured in accordance with the legislation: the assured must produce the certificate to the police if called upon to do so (Road Traffic Act 1988, s. 165), and there is a duty to do so in the event of an accident (s. 170), and the assured’s vehicle may be taxed only on production by him of the certificate of insurance (s. 156). The most important substantive feature of the certificate is, however, that the insurance cover only attaches once the certificate has been issued and remains in force in respect of third party claims against the assured for as long as the assured is in possession of the certificate even though the policy has been cancelled by either party or terminated by consent: for this reason there is a statutory procedure under the 1972 Regulations whereby the insurers have the right to seek the delivery up of the certificate once the policy has been cancelled. In the event that the policy is brought to a premature end, any proportionate return of premium provided for in the insurance (or, where the insurer has become insolvent, under the Insurance Companies (Winding Up) Rules 2001) is calculated from the date of the termination of the cover rather than from the date on which the certificate is surrendered even though the insurers remain liable for third party claims up to the latter date (so held v ). in Re Drake Insurance plc [2001] Lloyd’s Rep. IR 643 k www

Scope of the obligation to insure The compulsory insurance requirement is in respect of any ‘‘motor vehicle’’, defined as ‘‘a mechanically propelled vehicle intended or adapted for use on roads’’ (s. 185(1) of the 1988 Act), excluding invalid carriages, lawn mowers

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and electrically assisted pedal cycles (s. 189). The definition is satisfied by a vehicle of which it could be said by a reasonable man that one of its uses would be on a road. The cases all turn on their facts: a tractor (Woodward v. James Young (Contractors) Ltd, 1958 SLT 289), a 22cc motor cycle (O’Brien v. Anderton [1979] R.T.R. 388) and a ‘‘Go-Ped’’ (Chief Constable of the North Yorkshire Police v. Saddington [2001] R.T.R. 227) have all been held to be motor vehicles, whereas a go-kart (Burns v. Currell [1963] 2 Q.B. 433) and a diesel dumper (MacDonald v. Carmichael, 1941 S.C. 27) have been held not to meet this description. A vehicle which does not work remains a motor vehicle (Newbury v. Simmonds [1961] 2 Q.B. 345) unless its condition is such that it is better described as a heap of scrap metal rather than a motor vehicle (Smart v. Allen [1963] 1 Q.B. 291). In Winter v. Director of Public Prosecutions [2002] EWCA Civ 1524 (Admin) it was held that a ‘‘City Bug’’, a mechanical vehicle with pedals attached to the front wheels, was nevertheless a motor vehicle as it could not be driven safely by use of the pedals alone. Insurance has to be in place for the use of the vehicle on a ‘‘road or other public place’’. The legislation in its original form referred only to a ‘‘road’’, defined by s. 192(1) as ‘‘any highway and any other road to which the public has access, and includes a bridge’’. However, that term was given a narrow construction in a number of cases, and it was decided by the House of Lords in 1997 in two joined cases, Cutter v. Eagle Star Insurance Co. and Clarke v. Kato, that a pay and display car park was not a road because it was not a thoroughfare but rather was a destination in its own right. That led to amending legislation, the Motor Vehicles (Compulsory Insurance) Regulations 2000 (S.I. 2000 No. 726), which added the phrase ‘‘or public place’’. Insurance is now required for the use of a motor vehicle on any land other than purely private land to which the public at large is not permitted access (DPP v. Vivier [1991] 4 All E.R. 18). In Randall v. Motor Insurers Bureau [1969] 1 All E.R. 21 a lorry was being driven from a private site to a road, and the claimant was injured on the private land by the rear wheels of the lorry even though the front of the lorry had emerged onto the road. It was held that the vehicle was being used on the road because the injuries were inflicted while the driver was seeking to drive on the road. There are two separate prohibited acts: ‘‘using’’ an uninsured motor vehicle, or ‘‘causing or permitting the use’’ of an uninsured vehicle. The test for the use of a vehicle is control over it. In most cases the user will be the driver, although if the vehicle is parked then the user is regarded as the person in possession of it (Andrews v. Kershaw [1951] 2 All E.R. 764) and the employer of the driver is also its user as long as the vehicle is being driven in the course of employment (John T Ellis Ltd v. Hinds [1947] 1 K.B. 475). In the ordinary course of events a mere passenger in the vehicle is not a user (as in Brown v. Roberts [1965] 1 Q.B. 1 where a passenger who injured a pedestrian by negligently opening the vehicle’s door was held not to be under any obligation to insure), although there is also a series of cases in which a passenger has been held to

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be a co-user with the driver if the passenger is exercising some degree of control, management or operation of the vehicle to the extent that there can be said to be a ‘‘joint enterprise’’. The leading authority is O’Mahoney v. Jolliffe v in which the pillion passenger on a motor [1997] Lloyd’s Rep. IR 321, k cycle was held to be a joint user as she had assisted the driver in starting the engine and they had been engaged in an ‘‘amorous dalliance’’ while on it. By contrast, in Slater v. Buckinghamshire County Council [2004] Lloyd’s Rep. IR v , a minibus was used to convey passengers to and from a day care 432 k centre: an escort employed to assist people on and off the bus was held not to be a user. The phrase ‘‘cause or permit’’ use applies to any situation in which a person in control of a vehicle allows some other person to use it. A distinction is drawn between a person who facilitates the uninsured use of a vehicle and person who causes or permits uninsured use: the seller of a vehicle to an uninsured person plainly falls into the former category (see Smith v. Ralph [1963] 2 Lloyd’s Rep. 439). It is to be noted that the prohibition is on causing or permitting uninsured use, but that the strict liability imposed by s. 143(1) means that the section is contravened even though the controller of the vehicle genuinely believed that the person being given permission to use the vehicle was validly insured to do so. There are numerous decisions on this point, including: Baugh v. Crago [1975] RTR 453 (loan of car to uninsured friend); Ferrymasters Ltd v. Adams [1980] RTR 139 (employer not checking that employees authorised to drive vehicles had current licences); and Lloyd-Wolper v (loan of vehicle induced by misv. Moore [2004] Lloyd’s Rep. IR 730 k representation by the assured’s son that he was licensed to drive). If the controller of the vehicle wishes to protect himself, he must take the positive step of imposing on the user a condition that he will not drive without insurance. A case of this type was Newbury v. Davis [1974] R.T.R. 367, where the loan of a car by the assured to a friend was conditional on the friend not using it without insurance. www

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Civil liability for contravention of the legislation It was held in Monk v. Warbey [1935] 1 K.B. 75 that the prohibition on the uninsured use of a vehicle, or causing or permitting uninsured use, is not just a criminal offence but also constitutes a breach of statutory duty which is actionable by any person harmed by the breach. The tortious remedy is of no real significance against the person using the vehicle, for if the user has negligently caused an accident then he is liable in tort on that basis and the addition of an action for breach of statutory duty cannot improve the victim’s rights. Where the statutory tort is of significance is against the person who caused or permitted uninsured use: if the user is negligent and cannot meet any judgment against him, the victim may then turn to the person who caused or permitted uninsured use. Alternatively, as in Monk v. Warbey itself, the claim can be brought against the controller rather than the user. The case was

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decided under the Road Traffic Act 1930, the wording of which was slightly different to that of s. 143 of the 1988 Act, but it was held in the much more v that the revised recent case of Norman v. Aziz [2000] Lloyd’s Rep. IR 52 k wording has not changed the position. The Monk v. Warbey action has in practice all but fallen into disuse, because under the arrangements between the government and the motor insurance industry in the Motor Insurers Bureau Agreements, discussed below, the MIB is required to satisfy any judgment against an uninsured user. However, Norman v. Aziz has confirmed that the right of the victim to claim from the MIB has not been removed simply because the victim has an alternative source of compensation: accordingly, if the victim fails to satisfy the requirements laid down in the MIB Agree ments for a claim against the MIB, he may revert to a civil action against the person who caused or permitted uninsured use. The MIB may in any event use the Monk v. Warbey principle to recover by way of subrogation from the person causing or permitting uninsured use, sums paid by it to the victim of an uninsured user to the extent that the user himself is unable to repay the MIB. The Monk v. Warbey principle applies only claims for death, personal injury or property damage: it does not permit a claim for pure economic loss (Bretton v. Hancock [2005] Lloyd’s Rep. IR 454). www

Risks to be insured against The risks to be insured against under a compulsory policy are set out in s. 145(3) of the 1988 Act. Only liability insurance is required: there is no obligation on the controller of a vehicle to insure against any damage to the vehicle itself (s. 148(4)(c)), against liability arising only in contract (s. 148(4)(d)–(f)). Under s. 143(3) the policy: ‘‘(a) must insure such person, persons or classes of persons as may be specified in the policy in respect of any liability which may be incurred by him or them in respect of the death of or bodily injury to any person or damage to property caused by, or arising out of, the use of the vehicle on a road or other public place in Great Britain, and (aa) must, in the case of a vehicle normally based in the territory of another Member State, insure him or them in respect of any civil liability which may be incurred as a result of an event related to the use of the vehicle in Great Britain if:— (i) according to the law of that territory, the user would be required to be insured in respect of a civil liability which would arise under that law as a result of that event if the place where the vehicle was used when the event occurred were in that territory, and (ii) the cover required by that law would be higher than that required by the Road Traffic Act 1988 (b) must, in the case of a vehicle normally based in Great Britain, insure him or them in respect of any liability which may be incurred by him or them in respect of the use of the vehicle and of any trailer, whether or not coupled, in the territory other than Great Britain and Gibraltar of each of the Member States of the Communities according to

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(i) the law on compulsory insurance against civil liability in respect of the use of vehicles of the State in whose territory the event giving rise to the liability occurred; or (ii) if it would give higher cover, the law which would be applicable under this Part of this Act if the place where the vehicle was used when that event occurred were in Great Britain. (c) must also insure him or them in respect of any liability which may be incurred under the provisions of the Road Traffic Act 1988 relating to payment for emergency treatment.’’

Section 145(3)(a) is the most significant provision, and states that the policy must cover the liability of those persons specified in the policy. It is a matter for the policy whether coverage is limited to one or more named persons or persons of a given description, or whether it extends coverage to all persons using the vehicle with the assured’s consent. Whoever is covered will, however, have a direct cause of action against the insurers even though he is not a policyholder: this is provided for by s. 148(7) of the 1988 Act. The amount of insurance in respect of death or personal injury is unlimited, although in the case of property damage cover may be restricted to a maximum of £1,000,000 (raised from £250,000 with effect from 11 June 2007) in respect of liability caused by, or arising out of, any one accident involving the vehicle (s. 148(4)(b)). The policy is not required to cover any personal injury suffered by the assured or any permitted user while driving the vehicle: in Cooper v. Motor Insurers Bureau [1985] 1 All E.R. 449 the claimant was held not to be covered by the compulsory insurance requirement when he borrowed a motor cycle and was injured when it proved to be defective and the brakes failed. The policy must cover any passenger in the vehicle, including the policyholder if he is being driven as a passenger (Limbrick v. French and Farley [1990] 11 C.L. para. 329). Special protection is indeed extended to passengers by the 1988 Act, in that any agreement between the passenger and the user which limits or excludes the user’s liability is void (s. 149(2)) and the defence of voluntary assumption of risk cannot be pleaded against a passenger (s. 149(3)). It remains possible to plead the partial defence of contributory negligence against a passenger, and it is typical to reduce the damages payable to a passenger not wearing a seat belt or crash helmet by up to 30% (Froom v. Butcher [1976] Q.B. 786). A passenger will also not be entitled to claim damages if he falls foul of the rules of public policy, e.g. by participating in a deliberate criminal enterprise with the user of the vehicle (as in Ashton v. Turner [1981] Q.B. 137, robbery, and Pitts v. Hunt [1991] 1 Q.B. 24, dangerous driving of motor cycle with the passenger’s encouragement). Employees are in a special position, as there is a separate compulsory insurance regime for persons injured in the course of employment (see below), so that an employer is not required to take out motor liability cover under the 1988 Act (s. 145(4)(a)). Compulsory motor cover is required in respect of liability incurred by an employer to any employee being carried as a passenger (s. 145(4)(a)), although not in respect of an employee who is actually driving

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the vehicle and who is injured by the negligence of his employer or a fellow employee (R v. Secretary of State for Transport, Ex parte National Insurance Guarantee Corporation plc, 1996, unreported). An employee is not being carried on a vehicle for the purposes of his employment if he is injured after jumping on it to prevent its theft (Miller v. Hales [2007] Lloyd’s Rep. IR 54) or if the vehicle is parked and the injured employee is standing on it in order to reach lights which have been erected overhead (Axa Insurance UK plc v. Norwich Union Insurance Ltd [2007] EWHC 1046 (Comm)). In all cases under s. 145(3)(a) the policy need only cover those liabilities which have some connection with negligent driving: the liability must be one ‘‘caused by or arising out of the use of’’ a motor vehicle. The cases make it clear that the phrase ‘‘arising out of the use of’’ is somewhat wider than a strict causation test. Dunthorne v. Bentley [1999] Lloyd’s Rep. IR 560 The assured’s car ran out of petrol and stopped at the side of the road. A short while later the assured noticed a friend driving past on the other side of the road: she ran across the road in an attempt to catch her friend’s attention so that she could be given a lift to a garage, but was hit by a vehicle driven by the claimant and was killed. The claimant himself suffered injuries and sought to recover these in proceedings against the assured’s estate on the basis that her action in running across the road had been negligent. The question was whether the assured’s motor policy covered this claim. Held (by C.A.): that the assured’s liability arose out of the use of her motor vehicle. A vehicle could be in use even though it was not being driven at the time, and the assured’s actions were intended to allow her to resume the driving of the vehicle. Slater v. Buckinghamshire County Council [2004] Lloyd’s Rep. IR 432 The assured operated a minibus which was used to take disabled persons to and from a day centre. One of the residents, who suffered from Down’s Syndrome, was killed while running across a busy road in order to board the minibus, despite the best efforts of the staff on the bus to prevent him from doing so. Negligence against the assured was not made out, but the Court of Appeal held that if negligence had been found the liability was not one which was caused by or which arose out of the use of the minibus, so that the risk was not one which was required to be insured under the 1988 Act.

Section 145(3)(aa) implements the requirement of EU law that if a vehicle is normally based (which in most cases means registered) in a Member State other than Great Britain, but is used in Great Britain, the policy must comply with either the 1988 Act or the law of the Member State in which it is normally based, whichever demands the greater cover. Section 145(3)(b) deals with the situation in which a vehicle normally based in Great Britain is used elsewhere in the EU. The policy must provide the level of cover demanded by the Road Traffic Act 1988 or by the law of the Member State in which the vehicle is used, whichever is the higher. The effect of these provisions is that a policy issued in the Member State in which the vehicle is normally based must comply with the liability insurance requirements throughout the EU, so that the vehicle can be used freely in any Member State. It is to be noted that these

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rules apply only to liability insurance: the use of a vehicle insured in Great Britain under a comprehensive policy will be covered in respect of liability incurred elsewhere in the EU, but first party cover will only be applicable if the policy so provides. Section 145(3)(d) requires the cover to extend to the costs of emergency treatment. Under s. 157 of the 1988 Act insurers are required to pay to nonNHS hospitals, in respect of each injured person, up to £2,865.00 for inpatient treatment and up to £286.00 for out-patient treatment. Section 158 also requires payment for emergency roadside treatment, up to the sum of £70.65 in respect of each person treated, plus travel expenses. NHS hospitals are, by contrast, under the Health and Social Care (Community Health and Standards) Act 2003, replacing the Road Traffic (NHS Charges) Act 1999 with effect from 28 January 2007, entitled to charge the full cost of their services when treating the victim of a road traffic accident: the sums recoverable are £473 for out-patients and £582 per day (up to a maximum of £34,800) for in-patients.

Control of insurance contracts by the Road Traffic Act 1988 Section 148 of the 1988 Act imposes strict controls on the circumstances in which a motor insurer can, by the use of policy provisions, exclude liability to indemnify the assured for claims made against him. Without such controls, the compulsory insurance regime could be undermined by the use of exclusions and limitations which operated to deny coverage to the assured and thus compensation to the victim. Under s. 148(2) any policy term which excludes or restricts liability is of no effect as regards a third party claim insofar as to relates to any of the following matters: (a) the age or physical or mental condition of persons driving the vehicle, (b) the condition of the vehicle, (c) the number of persons that the vehicle carries, (d) the weight or physical characteristics of the goods that the vehicle carries, (e) the time at which or the areas within which the vehicle is used, (f) the horsepower or cylinder capacity of the vehicle, (g) the carrying on the vehicle of any particular apparatus, (h) the carrying on the vehicle of any particular means of identification other than any means of identification required to be carried by or under the Vehicles Excise and Registration Act 1994. These terms may be used and relied upon in respect of first party cover, and insurers who are required to meet a third party claim despite the existence of

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any of the above terms may recover from the assured the sum paid to the third party (s. 148(4)). Section 148(5) goes on to remove the ability of the insurers to deny liability for a third party claim by reliance on any policy term which removes or restricts liability ‘‘in the event of some specified thing being done or omitted to be done after the happening of the event giving rise to a claim under the policy’’. The conditions which are negatived by the subsection include prohibitions on admission of liability or settlement with the victim and obligations to inform the insurers of the accident or to commence proceedings against them within a fixed or other time period. The insurers may include a policy term which permits them to recover from the assured any sums paid to the third party in the event of any breach of the policy.

Liability of insurers to meet third party claims Two distinct mechanisms exist whereby the victim of a negligent driver can recover damages in respect of his loss or injury. The first, which dates back to the origins of the road traffic legislation in the 1930s and is now found in ss. 151 and 152 of the 1988 Act, allows the victim to call upon the assured’s liability insurers to satisfy any judgment against the assured. The second, which was introduced as a result of EU law with effect from 19 January 2003 and is contained in the European Communities (Rights against Insurers) Regulations 2002 (S.I. 2002 No. 3061), gives the victim a direct cause of action against the insurers, there being no need for the victim to obtain a judgment against the assured.

The insurers’ obligation to satisfy a judgment against the assured Section 151(1) of the 1988 Act allows the victim a direct action against the insurers if the following conditions are met. First, the victim must have obtained a judgment against the assured. Secondly, the insurers must have delivered a certificate of insurance to the assured. It was held by the Privy Council in Motor & General Insurance Co. Ltd v. Cox [1990] 1 W.L.R. 1443 that this condition is satisfied as long as the certificate is delivered to the assured by the date on which the judgment is given against him. As noted earlier, if the policy has been cancelled but the assured has been left in possession of the certificate of insurance, the insurers remain under an obligation to meet a judgment. For this reason, under s. 152(1)(c) the insurers have the right to bring proceedings for the return of the certificate following the cancellation of the policy as long as they do so within 14 days of the accident under which the assured’s liability has arisen. Thirdly, the liability incurred by the assured must be one in respect of which insurance was required by the Road Traffic Act 1988. Finally, the liability must be covered by the terms of

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the policy to which the certificate relates. There is, however, one significant extension of the insurers’ liability, brought about by EU law, and now contained in s. 151(2)–(4) of the Act. The broad effect of these provisions is to impose on the insurers the obligation to meet a judgment obtained by the victim against a person who was driving the insured vehicle but who was not covered by the policy, e.g. a thief or a person who has not been given permission to drive by the assured where the policy covers persons driving with permission. This extension does not apply to a victim who was a willing passenger in a stolen vehicle (see McMinn v. McMinn [2006] Lloyd’s Rep. IR 802). If insurers are required to make payment to the victim of an uninsured driver, they may recover that payment from the driver himself or from any person who caused or permitted him to drive the vehicle (s. 151(8)). Thus if the assured lends his vehicle to a person who is not insured under the policy, and that person is involved in an accident, the assured himself may be required to make good the insurers’ liability to the victim (the facts of Lloyd-Wolper v. Moore [2004] Lloyd’s Rep. IR 730 k v ). The liability of the insurers under s. 151 is to satisfy the full amount of any judgment for personal injury, plus interest and costs (s. 151(5)). In the case of property damage, the obligation of the insurers is to satisfy the judgment including interest, up to a maximum of £1,000,000 (s. 151(6), as amended, the figure prior to 11 June 2007 being £250,000) plus costs. Section 152 does give the insurers a limited number of defences to a direct action brought under s. 151. These are as follows. First, the insurers must have been given notice of the proceedings against the assured either before or within seven days of the bringing of the proceedings (s. 152(1)(a)). The courts have on a number of cases considered what amounts to the giving of notice to the insurers for this purpose. The leading authority is Wylie v. Wake, 2000, unreported, in which the Court of Appeal derived guidelines from the earlier cases. In essence, statutory notice requires a specific statement that proceedings are to be commenced, as opposed to a statement that proceedings may be commenced or that the victim has been advised to commence proceedings (the situation in Harrington v. Link Motor Policies at Lloyd’s [1989] Lloyd’s Rep. IR 467). No particular form of words is required: in Nawaz v. Crowe Insurance Group [2003] EWCA Civ 316, a request to the insurers’ solicitors for the assured’s address so that proceedings could be served against him was held to be enough. In Wylie itself notice was not given at the appropriate time, and was some two months late, but the insurers did not take the point and until late in the proceedings: the insurers were held to have waived their statutory rights. Secondly, there is no obligation to meet a judgment if execution has been stayed pending an appeal against it (s. 152(1)(b)). Thirdly, where the policy was cancelled before the happening of the event giving rise to liability but the assured was in possession of the certificate of insurance, the insurers may commence proceedings within 14 days to obtain www

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surrender of the certificate and thereby to relieve themselves of liability (s. 152(1)(c)). Finally, if the policy has been obtained by non-disclosure or misrepresentation, the insurers are entitled under ss. 152(2)–(3) to seek a declaration that they are not liable. The general principles of utmost good faith are applicable here, in that the fact relied upon must be material and the assured’s unfair presentation of the risk must have induced the insurers to enter into the contract.

Direct action against insurers The European Communities (Rights against Insurers) Regulations 2002, which are founded on EU law but which in fact go further than the Directives require as these are confined to visitors to the Member State in which they are injured, confer a direct action against the insurers of the negligent driver. The elements of the direct action are as follows: (1) There must have been an accident on a road or other public place in the United Kingdom caused by or arising out of the use of an insured motor vehicle, including a trailer. (2) The vehicle must be normally based in the United Kingdom: in most cases this means that it must be registered in the United Kingdom. (3) The victim is an ‘‘entitled party’’, defined as a resident of an EU Member State or a state which is a contracting party to the EEA agreement. (4) The entitled party has a cause of action against the ‘‘insured person’’, defined as a person whose liability is covered by a policy of insurance. If these conditions are satisfied, an action may be commenced by the victim against the insurers, and if the assured’s liability is established the insurers then become liable to pay the proceeds directly to the victim. The Regulations do not prevent the victim from bringing an action against the assured and then seeking to enforce that judgment against the insurers under s. 151 of the 1988 Act, and there may be cases in which it is necessary to rely upon the Act rather than the Regulations, e.g. where the driver was not an insured person or, possibly (see below) in deliberate running down cases.

Deliberate running down cases A driver who deliberately inflicts injuries on a third party, using a motor vehicle as a weapon, is undoubtedly liable to the third party in tort. This liability must be insured against under the 1988 Act as it is one which is caused by or arising out of the use of a motor vehicle. However, the public policy rule

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which precludes an assured from seeking an indemnity in respect of his own deliberate wrongdoing operates as a barrier to the assured making any claim against his insurers, thereby depriving the victim of a source of compensation. In two early cases, Tinline v. White Cross Insurance Association Ltd [1921] 3 K.B. 327 and James v. British General Insurance Co. Ltd [1927] 2 K.B. 311, both cases involving motor manslaughter (dangerous driving) the courts ruled that the injuries were not deliberately inflicted and that the indemnity remained v the injuries on available. In Charlton v. Fisher [2001] Lloyd’s Rep. IR 387 k the victim were clearly inflicted deliberately. The Court of Appeal unanimously ruled that the assured himself was not entitled to an indemnity, but by a 2:1 majority the Court of Appeal was of the view that the bar to recovery was personal to the assured and the victim was entitled to look to the insurers to satisfy the judgment against the assured under s. 151 of the 1988 Act. Until this case was decided, it was thought that the only possibility for recovery open to the victim was a claim against the MIB under the Uninsured Drivers Agreement on the basis that the driver is uninsured (Hardy v. Motor Insurers Bureau [1964] 2 Q.B. 745; Gardner v. Moore [1984] 1 All E.R. 1100). www

Victims of uninsured and untraced drivers The Motor Insurers Bureau The 1988 Act operates only where the victim of a negligent driver is able to establish that the driver is liable to him and where the driver is covered by an insurance policy. If the driver is uninsured (unless he is driving an insured vehicle in which case the insurers are liable under s. 151, discussed above) or if the driver cannot be traced, the victim will not be able to bring himself within the legislation. For these reasons, in 1946 the motor insurance industry formed the Motor Insurers Bureau. In that year the MIB entered into an agreement with the government under which the MIB accepted liability to indemnify the victim of an uninsured driver. That agreement has been revised on a number of occasions, the most recent version being 1999: the 1999 Uninsured Drivers Agreement applies to accidents occurring on or after 1 October 1999. The extension of the MIB’s jurisdiction to untraced drivers did not occur until 1969. That agreement has in turn been revised, the most recent version being 2003: the 2003 Untraced Drivers Agreement applies to accidents occurring on or after 14 February 2003. The MIB does not have a statutory basis, but nevertheless carries out—by means of the agreements with the government—duties imposed on the UK by the EU’s Motor Insurance Directives. In Evans v. Secretary of State for the Environment, Transport and the Regions, Case C-63/01, [2004] Lloyd’s Rep. IR 391 k v , the European Court of Justice ruled that the U.K.’s use of the MIB was nevertheless in compliance with the Directives. Victims who claim against the MIB are not parties to the Agreements, but the defence of privity of www

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contract has never been raised in the courts and the Untraced Drivers Agreement 2003 specifically recognises that the defence will not be taken. The Uninsured Drivers Agreement 1999 Under the Agreement, once the victim of a driver has obtained a judgment against the driver in respect of a liability to which compulsory insurance attaches under the Road Traffic Act 1988, and that judgment has not been satisfied within seven days, then the MIB is under a duty itself to satisfy the judgment. The amount payable by the MIB is that part of the judgment which has not been satisfied by the driver himself, plus interest and costs, and the MIB is also liable to meet the costs of medical treatment by both private and NHS hospitals. There is no financial limit on the MIB’s liability for death or personal injury, although its liability for property damage is subject to an excess of £300 which must be borne by the victim, and the maximum sum recoverable is £250,000 (plus interest and costs). The MIB also has the discretion to make interim payments pending a final decision on liability, and if it refuses to do so the victim may apply to the court under CPR r. 25.7 for an order of this type. The MIB’s liability is reduced by any sums which the victim can recover from other sources (other than gratuitous benefits provided by family and friends) and the MIB has the right to demand the assignment of the benefit of any judgment obtained by the victim so that the wrongdoer can be pursued. The Uninsured Drivers Agreement contains three exclusions worthy of note, all based on the victim’s own misconduct. First, the MIB is not liable for damage to the victim’s vehicle if at the relevant time the victim did not himself hold liability insurance in contravention of the 1998 Act. Secondly, the victim may not recover if he was at the time of the loss a voluntary passenger in a vehicle which was stolen, being used in the course of a crime or being used as a means of escaping from lawful apprehension. Thirdly, and of most significance, the MIB is not liable to a victim who ‘‘at the time of the use giving rise to the relevant liability was voluntarily allowing himself to be carried in the vehicle and, either before the commencement of his journey in the vehicle or after such commencement if he could reasonably be expected to have alighted from it, knew or ought to have known that . . . the vehicle was being used without there being in force in relation to its use such a contract of insurance as would comply with Part VI of the 1988 Act’’. In White v. White [2001] v the House of Lords held that the phrase ‘‘knew or Lloyd’s Rep. IR 493 k ought to have known’’ had, in order to comply with the EU’s Motor Insurance Directives, to be construed narrowly as meaning actual knowledge of the lack of insurance or at the very least deliberately ignoring facts which would inevitably have led to that conclusion (‘‘Nelsonian’’ or ‘‘blind eye’’ knowledge). A passenger who changes her mind during the course of a journey and wishes to alight from the vehicle, cannot be said to have been voluntarily allowing herself to be carried at the time of a later accident, although in Pickett www

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v the Court of Appeal v. Motor Insurers Bureau [2004] Lloyd’s Rep. IR 513 k held that the victim must have taken positive and unequivocal steps to have the vehicle stopped so that she can alight: in Pickett the majority view was that repeated requests, coupled with the plea ‘‘for God’s sake stop the car’’ was not enough. If the passenger has been killed while knowingly driving in an uninsured vehicle, the passenger’s dependants nevertheless have a claim against the MIB under the Fatal Accidents Act 1976 (see Phillips v. Rafiq [2007] EWCA Civ 74). The Uninsured Drivers Agreement 1999 lays down detailed procedural requirements which are framed as conditions precedent and accordingly which have to be satisfied by the victim in order to recover compensation from the MIB. In essence the victim must notify the MIB within 14 days of the commencement of the action against the driver, enclosing all relevant documents, and notice that the claim form has been served on the driver must be given within seven days. Thereafter the MIB must be kept informed of the progress of the action. The MIB may participate in the proceedings, either by taking over the driver’s defence or, if he does not agree to this, by application to the court to be joined as an additional defendant under CPR r. 19. The victim will normally be required to pursue the proceedings to judgment against the driver. The internal rules of the MIB, in particular Article 75, make provision for the allocation of liability within the MIB itself. The general effect of Article 75 is that where there was a policy in force at the date of the accident but the insurers in question are able to avail themselves of a defence to a claim under the policy, then those insurers will be nominated by the MIB as ‘‘Article 75 insurers’’ to handle and pay the claim on behalf of the MIB. www

The Untraced Drivers Agreement 2003 The 2003 Agreement replaced an earlier version of the Agreement made in 1996, with a number of substantive and procedural changes arising from doubts as to the compatibility of the 1996 Agreement with EU law. The Untraced Drivers Agreement 2003 comes into play when the victim has suffered personal injury or property damages at the hands of an unknown driver: this Agreement rests upon the ability of the victim to prove on the balance of probabilities that had the driver been traced he could have been successfully sued, and is, therefore, quite different to the Uninsured Drivers Agreement 1999 which is concerned with the MIB’s satisfaction of a judgment against an identified driver. It is clearly in many cases a matter of difficulty for the victim to show that there would have been a successful claim against the driver, given the confusion surrounding the events of a hit and run accident, and in Elizabeth v. Motor Insurers Bureau [1981] R.T.R. 405 it was held that the victim is entitled to the benefit of the res ipsa loquitor principle to establish negligence where there is no other explanation for the driver’s conduct (in that case, sudden braking).

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The Untraced Drivers Agreement applies to claims for both personal injury and property damage. The 2003 Agreement for the first time allows the payment of interest and legal costs. As far as personal injuries are concerned, there are no financial limits on the amount of the MIB’s liability and it must pay the amount which would have been awarded to the victim by a court: the only exception is for loss of earnings where some other source of compensation is open to the victim. As regards property damage, recoverable for the first time under the 2003 Agreement, strict limitations are imposed, arising from the serious risk that the victim may be acting fraudulently in alleging that there has been an accident involving a third party and thereby seeking to have his vehicle repaired (or paid for) at the expense of the MIB. Accordingly, the Agreement provides that property damage is recoverable only where the vehicle responsible for the damage can be identified even though its driver cannot be identified: what is contemplated, therefore, is an accident involving a stolen or unregistered vehicle. The victim must bear an excess of £300, and the maximum sum recoverable is £250,000 for all losses arising out of a single event. Compensation for a damaged vehicle is recoverable only if its use has been validly insured against liability under the Road Traffic Act 1988, and if there is first party cover then the victim must exhaust that cover first before claiming from the MIB. The MIB is not liable for losses which are the result of an act of terrorism. Further, there are provisions equivalent to those in the Uninsured Drivers Agreement for injuries suffered by a passenger of an unidentified driver where the passenger was voluntarily allowing himself to be carried in the responsible vehicle and before the commencement of his journey in the vehicle (or after such commencement if he could reasonably be expected to have alighted from the vehicle) he knew or ought to have known that the vehicle had been stolen or unlawfully taken, or was being used uninsured, or was being used in the course or furtherance of crime, or was being used as a means of escape from or avoidance of lawful apprehension. Procedures and time limits are laid down by the 2003 Agreement for the making of claims against the MIB, and for the most part these are framed as conditions precedent to liability so that compliance is mandatory. An application must be made in writing to the MIB within three years of the accident, and the victim must also have informed the police within 14 days (five days in the case of pure property damage). Thereafter the MIB will undertake a preliminary investigation of the claim, and if it concludes that the claim is one which falls within the Agreement it will then proceed to produce a full report (or an interim report if quantum cannot immediately be assessed) and to make an award (which may itself be final or provisional). As an alternative to the report and award procedure, the MIB may make an immediate offer of compensation, interest and costs to the victim which can be accepted within six weeks, failing which the full procedure is triggered. The victim may appeal to an arbitrator against any of the MIB’s rulings, including whether the claim

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falls within the Agreement, a decision to make or not make an interim report or award, and the amount of compensation, interest or costs awarded by the MIB. The arbitrator is to be appointed by the Secretary of State and proceedings are to be conducted on a documents-only basis with an oral hearing being available only after the arbitrator has issued a preliminary determination and either party has requested such a hearing. International claims There are complex international insurance arrangements in place which are designed to allow drivers to use their vehicles in other countries and to ensure that the victim of a visiting driver, or a visiting victim of a driver, have access to the driver’s insurers. As far as EU and EFTA countries are concerned, a policy must cover use of the vehicle in all of those countries. There is in existence a Multilateral Guarantee Agreement, revised in 2002, between the Motor Insurers Bureaux of EEA countries. The effect of this, so far as the U.K. is concerned, is that: (a) if a U.K. motorist incurs liability elsewhere in the EEA, the victim will be compensated by the local MIB and it will seek indemnification from the U.K.’s MIB; and (b) if an EEA motorist incurs liability in the U.K. the victim can seek payment from the U.K.’s MIB, and the MIB will then seek indemnification from the driver’s national MIB. Special rules apply where the victim is a visitor to the EEA country in question. Under the Fourth Motor Insurance Directive, implemented in the U.K. by the Motor Vehicles (Compulsory Insurance) (Information Centre and Compensation Body) Regulations 2003, S.I. 2003 No. 37, a visitor may, on returning to his own country, initially contact the insurers’ claims representative—it being a requirement that an insurer authorised in the EEA has a claims representative in every country—to seek compensation. If no payment is made, compensation may be sought from the MIB, which will thereafter seek indemnification from the driver’s local MIB. This procedure means that the victim does not have to bring legal proceedings against the negligent driver in the territory where the accident occurred, but instead can claim the insurance proceeds in the victim’s own territory. As regards non-EEA countries, there has since 1949 been in existence an international ‘‘Green Card’’ scheme under which a driver who wishes to take his vehicle outside his home country must obtain a Green Card from his insurers under which cover is extended to liabilities incurred by him in those jurisdictions which are party to the scheme. A Green Card is no longer needed for EEA countries, but remains necessary for non-EEA countries outside the EEA. Under the scheme, in the event that a claim arises the claim will be met by the local Motor Insurers Bureau, which will then seek indemnification from the driver’s own MIB. A non-EEA motorist wishing to use his vehicle in the U.K. must obtain a Green Card from his insurers in the form laid down by the Motor Vehicles (International Motor Insurance Card) Regulations 1971 (S.I. 1971 No. 792).

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COMPULSORY EMPLOYERS’ LIABILITY INSURANCE Comparison of the compulsory insurance regimes for motor liability and employers’ liability The purpose of the Employers’ Liability (Compulsory Insurance) Act 1969 is to ensure that persons injured at work due the fault or neglect of their employers will receive compensation. The scheme adopted is modelled on the Road Traffic legislation, in that the employer is required to take out a liability insurance policy, the terms of which are subject to statutory control, covering potential liabilities to employees. The 1969 Act is vastly inferior to the road traffic legislation, in that: u The 1969 Act applies only to personal injuries, so that there is no coverage for property damage, and the Act allows a financial cap to be put on the insurers’ liability. u In the event that an employer fails to take out insurance, there is no fallback source of compensation equivalent to the Motor Insurers Bureau. Further, if the employer is a company, the company’s controllers are not personally liable for any failure to insure. u Where the employer is insured and the employee obtains a judgment against the employer, that judgment cannot be enforced against the insurers. The employee will only have recourse to the employer’s liability insurers in the event that the employer has become insolvent, in which case a claim may be brought against the insurers under the far from satisfactory provisions of the Third Parties (Rights against Insurers) Act 1930 (see the final part of this Chapter). u The statutory control of policy terms is far less extensive under the 1969 Act than under the 1988 Act. Scope of the 1969 Act The 1969 Act sets out the basic principles relating to insurance, and is supplemented by the Employers’ Liability (Compulsory Insurance) Regulations 1998 (S.I. 1998 No. 2573), which amplify the framework provisions of the legislation. The obligation to insure is set out in s. 1(1) of the 1969 Act: ‘‘ . . . every employer carrying on any business in Great Britain shall insure, and maintain, insurance, under one or more approved policies with an authorised insurer or insurers against liability for bodily injury or diseases sustained by his employees, and arising out of and in the course of their employment in Great Britain in that business . . . ’’

Section 3 of the 1969 Act and regulation 9 of the 1998 Regulations exempt a number of employers from the insurance requirement: these are for the most part public service employers and local authorities, and there is no obligation

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to insure liability towards employees who are passengers in motor vehicles being used in the course of the employer’s business. Since 28 February 2005 it is no longer necessary for an individual carrying on business through a company of which he is the only employee to take out liability insurance. As noted earlier in this Chapter, such liability has to be covered by a motor policy under the Road Traffic Act 1988. Insurance is required only in respect of the employer’s business in Great Britain, although offshore installations are brought within the regime, albeit in a modified fashion, by the Offshore Installations and Pipeline Works (Management and Administration) Regulations 1995 (S.I. 1995 No. 743). Insurance is not required for property owned by an employee. The minimum sum insured, as laid down by regulation 3 of the 1998 Regulations, is £5 million for all claims arising out of any one occurrence. It is to be noted that the sum applies to all injuries arising from a single occurrence, so that the minimum sum insured may prove to be very small in the event of a major catastrophe. In practice policies are often written for a far greater sum, often £10 million. A policy must be ‘‘approved’’ and it must not contain prohibited terms. The 1998 Regulations set out the terms which are ineffective when included in a contract of employers’ liability insurance. These are set out in regulation 2 of the 1998 Regulations, and are as follows: u A term which limits or excludes liability if some specified thing is done or omitted to be done after the happening of the event giving rise to a claim under the policy. This is concerned with claims conditions and prohibitions on the admissions of liability. u A term which limits or excludes liability if the assured does not take reasonable care to protect his employees against the risk of bodily injury or disease in the course of employment. Reasonable care clauses are of limited impact, because the courts have construed them as meaning no more than that the employer must avoid reckless behaviour (as in Woolfall & Rimmer v. Moyle [1942] 1 K.B. 66). However, as recklessness is not an insurable risk in any event, then the prohibition of reasonable care clauses simply reflects the common law position. u A term which limits or excludes liability if the assured fails to comply with any enactment for the protection of employees against bodily injury or disease in the course of their employment. Again this is of little impact, as the mere fact that the assured has committed a criminal offence will not as a matter of common law be enough to deprive the assured of an indemnity (see the discussion of public policy earlier in this Chapter). u A term which limits or excludes liability if the assured does not keep specified records or fails to provide the insurer with or make available to him information from such records (for such a clause operating to

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prevent recovery at common law, see Re Bradley and Essex & Suffolk Accident Indemnity Society [1912] 1 K.B. 415). u Any clause which requires the first part of any claim to be borne by the assured. The prohibition on deductibles can to some extent be overcome by a policy which provides that the insurers are liable to pay the full amount of any loss but the assured must then repay a given amount (representing what would otherwise have been an excess) to the insurers: such an arrangement cannot prejudice the ability of an injured employee, as the burden of the employer’s insolvency falls not on him but on the insurers. It is in any event possible for the employer to purchase a separate policy from other insurers which covers his potential liability to repay part of the insured sum to the employers’ liability insurers. The Road Traffic Act 1988, by contrast, has a comprehensive list of prohibited exclusions, and also imposes limits on the exercise of the right of the insurers to avoid a policy for non-disclosure or misrepresentation. The list in the 1969 Act is far more limited, and does not seek to interfere with the utmost good faith defence. The coverage must be in respect of liability for bodily injury or diseases sustained by employees. An employee is defined by s. 2(1) as an individual who works under a contract of service or apprenticeship. There is no obligation to insure against liability to other persons who may be injured as a result of the employer’s activities, including independent contractors (who work under contracts for services) and other persons visiting the employer’s business premises. By virtue of s. 2(2), there is no need for an employer to insure against liability to employees who are close relatives or employees not ordinarily resident in Great Britain, and in Reid v. Rush and Tompkins Group plc [1989] 3 All E.R. 228 it was held that an employer is not under a duty of care to warn an employee not ordinarily resident in Great Britain that he is not protected by the 1969 Act. The policy must also be issued by authorised insurers. For this purpose an insurer with its head office in the UK must be authorised to carry on employers’ liability business by the Financial Services Authority under the Financial Services and Markets Act 2000. A policy may also be taken out with an insurer with its head office elsewhere in the European Union which has equivalent authorisation from its regulator. Various enforcement mechanisms are laid down. Failure to insure is, under s. 9, a criminal offence. Plainly there would be no point in imposing civil liability on an employer who failed to insure, as such a remedy would be superfluous for an employee who had the right to sue the employer for negligently inflicting personal injury. In Richardson v. Pitt-Stanley [1995] 1 All E.R. 460 the Court of Appeal ruled that the individual directors of an employer company were not civilly liable for failing to ensure that the company complied with the 1969 Act: accordingly, injured employees will have no source of

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compensation if the employer fails to insure. The primary enforcement mechanism is administrative. The insurers must, under s. 5 of the Act and regulation 4 of the Regulations, issue a certificate of insurance to the employer within 30 days of the inception of the risk. The employer for his part must under regulation 5 display the certificate of insurance for the information of his employees at each of his places of business, failure to do so amounting to a criminal offence, and he must retain copies for a period of 40 years thereby making it possible for employees to identify the insurers at any particular time in the event of a future claim being made against the employer which cannot be satisfied due to insolvency. Certificates, and the policy itself, are open to inspection by an inspector appointed by the Secretary of State (regulations 6 to 8).

DIRECT ACTIONS AGAINST LIABILITY INSURERS The Third Parties (Rights against Insurers) Act 1930 The Third Parties (Rights against Insurers) Act 1930 was originally passed to supplement the introduction of compulsory motor insurance by the Road Traffic Act 1930, and confers on a third party a right of action against the liability insurers of an assured who is unable to satisfy a judgment in favour of the third party. The intended scheme in 1930 was that the victim of a negligent driver could obtain a judgment against the motorist and then enforce it against the insurers following the driver’s insolvency. This measure was found to be necessary following two first instance decisions, Hood’s Trustees v. Southern Union General Insurance Co. of Australasia [1928] Ch. 793 and Re Harrington Motor Co. [1928] Ch. 105, in each of which it was held that the proceeds of an insurance policy payable to an insolvent assured in respect liability to a third party formed a part of the assured’s general assets for distribution to all unsecured creditors and not just to the third party. The Road Traffic Act 1934 subsequently conferred a direct cause of action in favour of the third party against the motor insurers of a negligent driver whether or not the driver was insolvent (this still exists, in s. 151 of the Road Traffic Act 1988, discussed above), and the Third Parties (Rights against Insurers) Act 1930 ceased to be relevant to motor claims. That Act was not, however, repealed, and is now widely used in all forms of liability insurance as a method of enforcing a judgment against an assured who does not have the assets to meet the judgment himself. Section 1 of the 1930 Act (as amended) provides as follows: ‘‘(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then— (a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or

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Motor and Other Liability Insurance (b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of the company entering administration, or of a receiver or manager of the company’s business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, of any property comprised in or subject to the charge or of a voluntary arrangement proposed for the purposes of Part I of the Insolvency Act 1986 being approved under that Part;

if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred. (2) Where the estate of any person falls to be administered in accordance with an order under section 421 of the Insolvency Act 1986, then, if any debt provable in bankruptcy (in Scotland, any claim accepted in the sequestration) is owing by the deceased in respect of a liability against which he was insured under a contract of insurance as being a liability to a third party, the deceased debtor’s rights against the insurer under the contract in respect of that liability shall, notwithstanding anything in any such order, be transferred to and vest in the person to whom the debt is owing. (3) In so far as any contract of insurance made after the commencement of this Act in respect of any liability of the insured to third parties purports, whether directly or indirectly, to avoid the contract or to alter the rights of the parties thereunder upon the happening to the insured of any of the events specified in paragraph (a) or paragraph (b) of subsection (1) of this section or upon the estate of any person falling to be administered in accordance with an order under section 421 of the Insolvency Act 1986 making of an order under section one hundred and thirty of the Bankruptcy Act 1914, in respect of his estate, the contract shall be of no effect. (4) Upon a transfer under subsection (1) or subsection (2) of this section, the insurer shall, subject to the provisions of section three of this Act, be under the same liability to the third party as he would have been under to the insured, but— (a) if the liability of the insurer to the insured exceeds the liability of the insured to the third party, nothing in this Act shall affect the rights of the insured against the insurer in respect of the excess; and (b) if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Act shall affect the rights of the third party against the insured in respect of the balance. (5) For the purposes of this Act, the expression ‘liabilities to third parties,’ in relation to a person insured under any contract of insurance, shall not include any liability of that person in the capacity of insurer under some other contract of insurance. (6) This Act shall not apply— (a) where a company is wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company; or (b) to any case to which subsections (1) and (2) of section seven of the Workmen’s Compensation Act 1925, applies.’’

The Act is silent on its territorial scope, and it is unclear whether its application is based on the contract of insurance being governed by English law or on the fact that the insolvency proceedings against the assured were initiated in

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England: the latter is probably the better view, as the 1930 Act is designed to form a part of insolvency law. Scope of the 1930 Act The 1930 Act confers a direct action on the third party against the assured’s insurers where the following conditions are met. First, the contract of insurance must be one under which the assured is insured against liabilities, although s. 1(5) expressly excludes reinsurance contracts. Accordingly the 1930 Act cannot be used by an assured to sue the reinsurers of an insolvent insurance company. A policy which covers negligence liabilities is plainly covered. In Tarbuck v. Avon Insurance Co. [2002] v it was held that the Act did not apply to a policy Lloyd’s Rep. IR 393 k covering a liability to pay a contractual debt: in that case the assured incurred liability to a solicitor for his costs, and it was ruled that the solicitor could not recover those costs from the assured’s legal expenses insurers. In T&N Ltd v. v it was held that the Royal and Sun Alliance plc [2004] Lloyd’s Rep. IR 144 k Act did not extend to a liability voluntarily undertaken under contract, in that case the liability of the assured to repay to employers’ liability insurers a part of the insurance proceeds in the event of a claim made against the assured which was paid by the insurers (a device which overcame the prohibition on policy excesses in employers’ liability cases, discussed above). These cases were, however, overruled by the Court of Appeal in Re OT Computers [2004] Lloyd’s Rep. IR 669. Here, the assured was a supplier of computers which offered extended warranty protection to its customers. A finance company which provided the finance for consumers to purchase computers was jointly and severally liable to honour the extended warranties. The supplier became insolvent, and claims were met by the finance company, which thereby became subrogated to the customers’ claims against the supplier. The finance company sought, invoking the 1930 Act, to recover its payments from the supplier’s liability insurers. The Court of Appeal ruled that the Act applied to the insurance even though it was designed to protect against contractual obligations rather than obligations in tort, and the Court of Appeal laid down the principle that the Act covered all forms of liability, including liabilities voluntarily incurred by the assured under contract, whether by way of damages or debt. Second, there must have been a relevant insolvency event involving the assured, as set out in s. 1(1). That section is extended to limited liability partnerships by s. 3A of the 1930 Act, which provides that references to a resolution for a voluntary winding-up being passed are references to a determination for a voluntary winding-up being made. The 1930 Act may be used if the assured has become insolvent before the third party has obtained a judgment against the assured, or if a previously solvent assured has failed to pay the judgment debt and insolvency proceedings have been taken against him by the third party. www

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Third, the third party must have established and quantified the assured’s liability by means of judgment, arbitration award or binding settlement. In the period between the assured’s insolvency and the establishment and quantification of the assured’s liability, the third party is regarded as having contingent rights against the insurers. Thus, even though a claim may not be made against the insurers in this period, the third party is not devoid of rights. In particular, in this period: (a) the third party may seek a declaration that the policy covers the loss; (b) the third party may seek insurance information from the assured and from the insurers (see below); and (c) the insurers cannot seek to alter the rights of the assured under the policy, as this prejudices the contingent rights of the third party (this was so held in Centre Reinsurance International Co. v. Freakley [2005] Lloyd’s Rep. IR 284). The right of the third party to make a claim against the insurers does not, however, accrue until the liability of the assured has been established and quantified. In Post Office v. Norwich Union Fire Insurance Society [1967] 1 All E.R. 577 employees of the assured negligently damaged the claimant’s property. The claimant brought immediate proceedings against the assured’s liability insurers for indemnification. The Court of Appeal held that the action was premature, and that it could not be brought until the liability of the assured had been established and quantified by the claimant. The Post Office principle means that it is necessary to sue the assured. In the case of an assured company which has been removed from the register of companies and which has therefore ceased to have a legal existence, it will be necessary for the third party to apply to the court under s. 651 of the Companies Act 1985 for the company to be restored to the register of companies so that proceedings can be brought against it, and the court will reinstate the company unless it is shown that any action against it is time-barred under the Limitation Act 1980. Section 651 was amended with retrospective effect by the Companies Act 1989 to modify the then rule in s. 651 that a company may be restored only within two years of its dissolution: under the section as amended there is now no time limit for restoration in the case of personal injury claims, although the two year period remains applicable in other cases. The amendments to s. 651 were the result of the decision of the House of Lords in Bradley v. Eagle Star Insurance Co. [1989] 2 W.L.R. 568, in which it was held that a dissolved company could not be sued and that unless it could be restored to the register the third party could not establish and quantify its liability so as to facilitate a claim under the 1930 Act against the company’s liability insurers. The principle that a claim may be made against the insurers under the 1930 Act as soon as the assured’s liability is established and quantified is also relevant to the prioritising of claims under the 1930 Act where there are a number of competing claims which are in the aggregate greater than the sums available under the policy. In Cox v. Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep. 437 Phillips J. held that the correct approach to prioritisation was ‘‘first past the post’’, so that the first person to obtain a quantified judgment

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against the assured had the first claim on the insurance proceeds under the 1930 Act. Phillips J. recognised the arbitrary nature of ‘‘first past the post’’, but he rejected the alternative approach based on apportionment which he regarded as both contrary to the principles of the 1930 Act and likely to give rise to serious delays as no sums could be paid out until all of the claims against the assured had been processed and resolved. In the event of a shortfall, s. 1(4) preserves the right of the third parties to pursue the assured in the relevant insolvency procedure. Rights of the third party Section 1(1) of the 1930 Act states that once the third party has satisfied the requirements of the 1930 Act the rights of the assured ‘‘against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred’’. The effect of the legislation is to place the third party in the shoes of the assured, a process variously described as assignment or subrogation. The key point is that the third party is to be treated as the assured for the purposes of the insurance claim. Any defences that the insurers have against the assured will, therefore, be available against the third party, including in particular: the right to avoid for breach of the duty of utmost good faith; the right to refuse to pay a claim for breach of policy conditions; and the right to demand payment of the premium from the third party if it has not been paid by the assured. It also follows that if the insurers have a valid defence to a claim and indicate to a potential third party claimant that they do not intend to take the defence against the assured, then there can be no waiver as far as the assured is concerned as the insurers’ conduct was not addressed to the assured. This was so held in Spriggs v. Wessington Court School Ltd [2005] v . The most that the third party can argue is that the Lloyd’s Rep. IR 474 k insurers are estopped from denying liability to him, but for this to occur there would have to be reliance by the third party on the insurers’ conduct. The extent of this principle can be seen by the decision of the House of Lords in The Fanti and the Padre Island [1990] 2 All E.R. 705. This case concerned a ‘‘pay to be paid’’ clause, under which it was a precondition to the insurers’ liability to indemnify the assured that the assured had made payment to the third party. Plainly, this type of clause operates to negative the 1930 Act: if the assured has paid, then there is no need for the third party to use the 1930 Act, but if the assured has not paid then the third party is precluded from using it. The House of Lords nevertheless maintained the principle that the third party cannot be in any better position than the assured and that the third party could not rely on the 1930 Act. It would seem that this type of clause is only used in marine liability policies issued by P&I Clubs, and in any event is not relied upon in practice in respect of personal injury liability claims but only in respect of cargo liability claims. www

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The only possible modification of the insurers’ rights arises where the assured has incurred liability in a manner which precludes recovery under the rules of public policy, e.g. because the assured’s act was deliberate or because the claim can only be made out by reliance on criminality. It was suggested by Mance J. in Total Graphics Ltd v. AGF Insurance Ltd [1997] 1 Lloyd’s Rep. 599 that a public policy defence is merely a personal bar to recovery on the part of the assured, and that the third party can still avail himself of the 1930 Act as long as he is not a party to the deliberate or illegal act. In bringing proceedings against the insurers, the third party is subject to the same limitation period as that applicable to claims by the assured, e.g. six years from the date on which the assured’s liability has been established and quantified. Time does not run from the date of the assured’s insolvency even though that date is the trigger for the actual or potential application of the 1930 Act. The main danger faced by the third party is that, having established and quantified the assured’s liability, he awaits the outcome of proceedings on the policy brought by the assured against the insurers. In the event that those proceedings drag on without conclusion for longer than six years after the judgment against the assured, and the assured then becomes insolvent, it will no longer be possible for the third party to make a claim against the insurers: the six-year time limit will have expired, and the third party is not entitled to take over the existing action brought by the assured against the insurers as he is not a party to it. This was so held in Lefevre v. White [1990] 1 Lloyd’s Rep. 569. This type of problem does not arise if the assured has become insolvent before or soon after his liability has been established and quantified, as the third party then has plenty of time to bring an action against the insurers. The solution for the third party is, having obtained his judgment, to seek to enforce it and to initiate immediate bankruptcy proceedings against the assured in the event that it is not satisfied, thereby triggering his right to sue the insurers under the 1930 Act. It is not possible for the insurers to rely upon policy terms which, in the words of s. 1(3) purport ‘‘whether directly or indirectly, to avoid the contract or to alter the rights of the parties’’ on the happening of an insolvency event. The prohibition applies only where the legal rights of the assured have been altered by reason of his insolvency: a policy term which applies whether or not the assured has become insolvent, but only has practical consequences in the event of insolvency, is not outlawed by s. 1(3). In The Fanti and the Padre Island [1990] 2 All E.R. 705 a ‘‘pay to be paid’’ clause was held not to contravene s. 1(3), because under the clause the assured was required to make payment to the third party as a condition of being indemnified in all cases: the fact that the clause was only of practical significance where the assured was insolvent and could not afford to pay the third party, so that he would lose his indemnity, was regarded not as a variation of his contractual rights. Not every term which applies only on insolvency can be regarded as producing a variation in the assured’s rights. In Centre Reinsurance International Co. v. Freakley [2005]

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Lloyd’s Rep. IR 284 an employers’ liability policy contained a claims control clause which stated that on the assured’s insolvency the insurers were to have the absolute right to control any claims against the assured. This was held by the Court of Appeal not to be a term falling within s. 1(3), because the right of the third party to make a claim against the assured could not be said to have been prejudiced by the transfer of control. In much the same way, there are restrictions on the ability of the assured and the insurers to enter into an agreement which prejudices the third party’s rights. Section 3 provides as follows: ‘‘Where the insured has become bankrupt or where in the case of the insured being a company a winding-up order or an administration order has been made or a resolution for a voluntary winding-up has been passed, with respect to the company, no agreement made between the insurer and the insured after liability has been incurred to a third party and after the commencement of the bankruptcy or winding-up or the day of the making of the administration order, as the case may be, nor any waiver, assignment, or other disposition made by, or payment made to the insured after the commencement or day aforesaid shall be effective to defeat or affect the rights transferred to the third party under this Act, but those rights shall be the same as if no such agreement, waiver, assignment, disposition or payment had been made.’’

Section 3 applies only to an agreement made after the assured’s insolvency: a settlement between the assured and the insurers prior to insolvency is not precluded (so held in Normid Housing Association Ltd v. Ralphs [1989] 1 Lloyd’s Rep. 265 even though it may have serious adverse consequences for the third party’s ultimate right to enforce any judgment obtained against the assured).

Provision of information Section 2 of the 1930 Act confers upon the third party the right to obtain information as to the assured’s insurance position. Armed with that information, the third party can make a decision as to whether or not it is likely that any judgment which may be obtained against the assured will be covered by a liability policy. Section 2 in its amended form is as follows: ‘‘(1) In the event of any person becoming bankrupt or making a composition or arrangement with his creditors, or in the event of the estate of any person falling to be administered in accordance with an order under section 421 of the Insolvency Act 1986, or in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to any company or of the company entering administration or of a receiver or manager of the company’s business or undertaking being duly appointed or of possession being taken by or on behalf of the holders of any debentures secured by a floating charge of any property comprised in or subject to the charge it shall be the duty of the bankrupt, debtor, personal representative of the deceased debtor or company, and, as the case may be, of the trustee in bankruptcy, trustee, liquidator, administrator, receiver, or manager, or person in possession of the property to give at the request of any person claiming that the bankrupt, debtor, deceased debtor, or company is under a liability to him such information as may reasonably be required by him for the purpose of ascertaining whether any rights have

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been transferred to and vested in him by this Act and for the purpose of enforcing such rights, if any, and any contract of insurance, in so far as it purports, whether directly or indirectly, to avoid the contract or to alter the rights of the parties thereunder upon the giving of any such information in the events aforesaid or otherwise to prohibit or prevent the giving thereof in the said events shall be of no effect. (1A) The reference in subsection (1) of this section to a trustee includes a reference to the supervisor of a voluntary arrangement proposed for the purposes of, and approved under, Part I or Part VIII of the Insolvency Act 1986. (2) If the information given to any person in pursuance of subsection (1) of this section discloses reasonable ground for supposing that there have or may have been transferred to him under this Act rights against any particular insurer, that insurer shall be subject to the same duty as is imposed by the said subsection on the persons therein mentioned. (3) The duty to give information imposed by this section shall include a duty to allow all contracts of insurance, receipts for premiums, and other relevant documents in the possession or power of the person on whom the duty is so imposed to be inspected and copies thereof to be taken.’’

The statutory scheme is that the third party may first request information from the assured or the person in charge of the insolvency procedure to which the assured is subject (subs. (1)). Thereafter, under subs. (2), the third party can approach the insurers themselves. The information which must be provided is sufficient to allow the third party to determine whether there is a policy, whether there is likely to be a defence open to the insurers and whether premiums have been paid. The first two cases to interpret s. 2, Nigel Upchurch Associates v. Aldridge Estates Investment Co. Ltd [1993] 1 Lloyd’s Rep. 535 and Woolwich Building Society v. Taylor [1995] 1 B.C.L.C. 132, rendered the section all but ineffective. In each of them, albeit for different reasons, it was held that s. 2 could only be used after the third party had obtained a judgment against the assured. These cases were overruled by the Court of Appeal in Re v . The Court of Appeal ruled that OT Computers [2004] Lloyd’s Rep. IR 669 k the third party’s rights under s. 2 arose on the assured’s insolvency, as that was the point at which the third party obtained contingent rights under s. 1 of the Act. The Court of Appeal recognised that any other interpretation would render legal proceedings against an insolvent defendant a complete lottery. www

Reform of the 1930 Act In July 2001 the Law Commission published proposals for reform of the 1930 Act, along with a draft bill. There is no sign of the bill being implemented in the near future, and some of the recommendations in the bill have been overtaken by subsequent decisions of the Courts which have construed the 1930 Act in a manner consistent with the Law Commission’s proposals. The most important aspects of the draft bill are as follows: u The list of situations in which the Act applies will be expanded, including winding-up for the purpose of reconstruction, individual voluntary arrangements under the Insolvency Act 1986 and the appointment of a provisional liquidator.

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u The Act should be extended to policies covering voluntarily incurred liabilities (achieved by the decision in Re OT Computers, discussed above). u The two-stage process whereby it is necessary for the third party to sue the assured in order to establish his liability and quantify the loss, and then to sue the insurers under the policy, will be abolished. Instead, the third party will proceed against the insurers, and it is for them to raise the issues of the liability of the assured and of the coverage of the policy. By this means policy disputes can be resolved as preliminary issues, thereby removing the need for a potentially lengthy trial on liability beforehand, and one side effect will be that a company which has been struck off the register of companies will no longer have to be restored to the register so that its liability can be established and quantified in preliminary proceedings. Limitation problems of the type encountered in Lefevre v. White (discussed above) are also removed, as the only relevant limitation period is that governing the third party’s action against the assured. u The third party will be able to obtain insurance information from the assured and from the insurers when proceedings are about to be commenced (in any event achieved by the decision in Re OT Computers, discussed above). u Policy terms which have to be complied with as a condition precedent to the liability of the insurers, e.g. the making of a claim, will be able to be satisfied by the third party, and pay to be paid clauses are not to be permitted other than in the case of maritime claims not involving death or personal injury. u In the event that there are multiple claims against a limited insurance fund, the first past the post solution should be retained. u Once the assured has become insolvent it will no longer be possible for the assured to enter into an agreement with the insurers compromising the amount of the insurers’ liability. u The legislation will be applicable where the insolvency of the assured is conducted under an English insolvency procedure: the law applicable to the insurance policy is of no consequence in determining the applicability of the Act.

TEST YOUR UNDERSTANDING 1. Which of the following statements are true in relation to notification under claims made liability policies? (a) if the assured notifies circumstances likely to give rise to a future claim then the insurers are liable to meet the claim even though it is made after the policy has expired;

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(b) the assured is required to inform the insurers once he is aware that proceedings have been commenced against him; (c) each individual claim made against the assured must be notified to the insurers. 2. In the absence of any specific policy terms on the point, which of the following will not be covered by a liability policy? (a) (b) (c) (d)

loss loss loss loss

caused caused caused caused

by by by by

a criminal act; an act which is fraudulent or reckless; a breach of contract; negligence.

3. In the absence of any specific policy terms on the point, which of the following types of defence costs are payable under a liability policy? (a) those incurred in defending a claim in respect of an uninsured peril; (b) those incurred concurrently with another defendant who is uninsured; (c) those which, when added to the sum payable by way of liability, exceed the sum insured under the policy. 4. Which of the following risks must be insured under the Road Traffic Act 1988? (a) (b) (c) (d)

use of a motor vehicle on private land; use of a motor vehicle by any other person; personal injuries suffered by the driver; property damage suffered by the driver.

5. Where the owner of a vehicle authorises another person to use his motor vehicle and that other is not insured, which of the following statements are true? (a) the owner is guilty of a criminal offence; (b) the owner may be sued in tort by any victim of the driver; (c) the owner may be required to indemnify the insurers for any payment that they made to a victim. 6. The passenger in a vehicle will be unable to claim from the driver’s insurers in which of the following circumstances? (a) the vehicle was stolen; (b) the driver was intoxicated;

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(c) the vehicle was being driven while unroadworthy; (d) the passenger has agreed that the driver is not to be liable for any negligence. 7. Which of the following statements are true in respect of the victim of a negligent driver to recover compensation? (a) the victim can sue the driver and then enforce the judgment against the insurers; (b) the victim can sue the insurers directly without proceeding against the driver; (c) the policy must cover all personal injury and property damage suffered by the victim; (d) the insurers are liable even though the vehicle is being driven by a thief. 8. The Motor Insurers Bureau is liable to compensate victims in which of the following circumstances? (a) (b) (c) (d)

the driver could not be traced; the driver was uninsured; the driver’s insurers have avoided liability under the policy; the victim was a passenger in a vehicle which he knew to be uninsured or stolen.

9. Which of the following statements in relation to compulsory employers’ liability insurance are true? (a) the policy must cover all personal injuries suffered by employees to an unlimited amount; (b) the insurers cannot avoid the policy for breach of the duty of utmost good faith; (c) the employers’ controllers are personally liable in tort if there is no insurance in place; (d) the insurance industry will pay compensation to the victim of an uninsured employer. 10. In the event that an assured defendant has become insolvent, which of the following statements are accurate in relation to the rights of a person wishing to claim against the assured under the Third Parties (Rights against Insurers) Act 1930? (a) the assured must provide details of his insurance; (b) a direct action may be brought against the insurers in order to establish the assured’s liability; (c) the insurers can rely on a policy term which reduces their liability in the event of insolvency; (d) the insurers can only be liable for claims in tort as opposed to claims in contract.

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CHAPTER 10

CHOICE OF LAW AND JURISDICTIONAL ISSUES Angus Rodger INTRODUCTION The first half of this chapter considers jurisdiction. When a dispute arises, the court which can adjudicate the dispute is said to have jurisdiction. Large insurance contracts are often international by their nature, and there is sometimes more than one court which may accept jurisdiction over the dispute. There is a (complicated and rather dry) body of rules which the English court applies to determine whether or not it has jurisdiction. An overview of these rules is given. Then it is considered what happens when proceedings are brought in more than one place: should the English court decline jurisdiction in favour of the other court? The second half of this chapter considers applicable law (sometimes also called governing law). When a dispute comes before a court, the court has to consider which law applies to the contract. In other words, which set of legal rules should it apply when interpreting and giving effect to the contract’s terms? If a contract is governed by, say, French law rather than English law, this may have a significant effect on the way in which the contract’s provisions work. It is important not to confuse the jurisdiction in which disputes relating to a contract are heard with the law applicable to the contract (although it is surprising how often even experienced lawyers make this slip). It is perfectly possible for an English court to have jurisdiction over a dispute even if the contract is governed by, say, Texan law: in this situation, the court will usually proceed on the assumption that Texan law is materially the same as English law, but if one of the parties contends that the law is different then expert evidence may be called on this point. The following sections consider why jurisdiction is an important issue, identify the four sources of rules which the English courts apply when deciding whether they have jurisdiction, and then outline the rules themselves. WHY DOES JURISDICTION MATTER? The place where the dispute is heard (sometimes called the ‘‘forum’’) can be important for several reasons. In the context of insurance, the most significant differences include the following: 317

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(i) Enforcement of judgments. There is no point in a party going to court and obtaining a judgment unless that judgment can be enforced against the defendant. So each party should consider, at the outset, where is it likely to wish to enforce any judgment? This will usually be a place where the other side (the potential defendant) has substantial assets, perhaps its country of incorporation. The potential claimant will want any disputes to be heard in a court whose judgments will be recognised and applied in the country of enforcement. There are several bilateral and multilateral treaties which establish which countries recognise which other countries’ judgments. The detail of these is outside this chapter, except to note that EU and European Free Trade Area (‘‘EFTA’’) Member States recognise and enforce each other’s judgments. (ii) The judiciary. If an insurance dispute is adjudicated by judges who are familiar with the complexities of the insurance industry and the relevant legal principles, then less time needs to be spent bringing the judge up to speed on this area, and the judge’s decision is likely to be more predictable than that of someone without relevant experience. The Commercial Court in London is very experienced in dealing with large and complex insurance matters. By contrast, in many jurisdictions insurance cases are assigned to non-specialist judges who may have little experience in this area. In virtually all U.S. states, claims for damages may be decided by juries, which could increase the uncertainty of the outcome. Punitive damages may also be awarded in the U.S., whereas they are not awarded in England. (iii) The speed and cost of bringing proceedings. Some countries have faster court proceedings than others. There are also differing approaches to rules regarding costs: for example, in England the winning party is usually able to recover some of its legal costs from the losing party, whereas in the U.S. the winning party usually bears its own costs. (iv) The location of factual witnesses, experts and documents. If a dispute arises out of complicated facts in a particular country, and most of the parties and the documents are in that country, then for reasons of convenience and economics it may make sense for any litigation to be heard there. (v) Procedural rules. Procedural rules differ from country to country. Examples are: who bears the burden of proving particular matters, what disclosure of documents is required, and rules of evidence. Although in practice these factors are likely to have a considerable effect on how the action proceeds, they tend to carry less weight in the parties’ minds than the factors previously mentioned when they are considering which court they would like to have jurisdiction in the event of a dispute.

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For these reasons, when negotiating a contract the parties should consider which court should have jurisdiction to hear any dispute which could arise. Jurisdiction should also be one of the first issues to review if a dispute arises. THE FOUR SETS OF RULES ON JURISDICTION In deciding whether to accept jurisdiction, the English court will follow rules laid down in four sources: (i) The original rules on jurisdiction developed as part of the English common law. These rules remain relevant today whenever the legislation described in (ii) to (iv) below does not apply. (ii) In 1968 the Members of the European Community signed a Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters signed in Brussels (the ‘‘Brussels Convention’’). The purpose of this convention was to make judgments given by the courts of any Member State enforceable in any other Member State. To help to make this arrangement workable, the various Member States included in the convention a standardised set of rules which all of the national courts would follow when deciding whether to assume jurisdiction over a dispute. The Brussels Convention differed from the approach of the common law, in that it laid down several strict, binding tests for whether to accept jurisdiction, whereas the common law approach involved considerable subjectivity and flexibility. The Brussels Convention was implemented into law in the United Kingdom by the Civil Jurisdiction and Judgments Act 1982. (iii) In 1988 another international convention was opened for signature by the EC Member States and those of the EFTA, namely Iceland, Norway and Switzerland (the ‘‘Lugano Convention’’). It has now also been signed by Poland. The Lugano Convention was implemented into law in the United Kingdom on 1 May 1992 by the Civil Jurisdiction and Judgments Act 1991. Its provisions are very similar to those of the Brussels Convention. The Lugano Convention was implemented into law in the UK by the Civil Jurisdiction and Judgments Act 1991. (iv) In 2002 the Council of the European Union adopted a Regulation, Council Regulation (EC) No. 44/2001 of 22 December 2000 (the ‘‘Brussels Regulation’’). The Regulation applies in all of the EU Member States apart from Denmark (which opted out of it), and largely supersedes the Brussels and Lugano Conventions. The Brussels Regulation was implemented into law in the UK by the Civil Jurisdiction and Judgments Act Order 2001, amending the Civil Jurisdiction and Judgments Act 1982.

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Figure 1 is a summary of whether the rules of the common law, the Brussels Convention, the Lugano Convention or the Brussels Regulation apply to any particular dispute. Because the Brussels Convention and the Lugano Convention are now of relatively limited importance, the rest of this chapter will focus on the Brussels Regulation. In any event, the rules of the Brussels Convention, the Lugano Convention and the Brussels Regulation are largely identical. Figure 1: Which rules apply? Defendant domiciled in an EU Member State apart from Denmark?

Yes

Brussels Regulation

No Defendant domiciled in Iceland, Norway, Poland or Switzerland?

Yes

Lugano Convention

No Defendant domiciled in Denmark?

Yes

Brussels Convention

No Common law rules apply Although if the dispute is outside the scope of the relevant Convention or Regulation, for example because an exclusion applies, then the common law rules will still apply.

GENERAL OBSERVATIONS REGARDING THE REGULATION The Brussels and Lugano Conventions were accompanied by official reports which gave guidance on the meaning of some of the conventions’ provisions, and which could be used as an aid to interpreting the conventions. Since the jurisdictional rules in the Brussels Regulation are largely identical to those of the two conventions, these reports may also be of assistance in interpreting the Regulation. The courts have regard to the spirit and purpose of the Regulation. They do not take a pedantically literal approach to its interpretation, and will where appropriate regard expressions as having a ‘‘community-wide’’ rather than a narrow English law meaning. For example, where it is consistent with the objectives of the Regulation they might interpret the word ‘‘contract’’ to include agreements which do not fulfil the strict English law requirements as to valuable consideration. National courts may refer questions of interpretation on the Regulation to the European Court of Justice (the ‘‘ECJ’’). The ECJ may also give judgments on the Brussels Convention, and its judgments on such questions will bind all Member States’ courts.

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Scope of the Regulation There are a number of limitations on the scope of the Regulation, including the following: (i) Civil and commercial matters. The Regulation applies only to ‘‘civil and commercial matters’’ (which includes insurance). (ii) International element. The Regulation applies only where the dispute contains an international element. Even if the parties to a contract are situated in the same country, if they choose a different jurisdiction to hear their disputes this creates a sufficient international element for the Regulation to apply. (iii) Insolvency. The Regulation does not apply to insolvency proceedings. (iv) Arbitration. The Regulation does not apply to ‘‘arbitration’’. In the context of insurance, this is a significant exclusion, because the use of the arbitration is quite common. The European Court of Justice has held (in a case involving the Brussels Convention) that this exclusion means that the rules do not determine the jurisdiction for court proceedings relating to an arbitration. In The Atlantic Emperor (Marc Rich & Co. v. Societ`a Italiana Impianti PA, Case C-190/89, [1991] ECR I-3855) a seller sued a buyer in Italy in relation to a contract of sale. The buyer applied to the English court for an order appointing an arbitrator under a purported arbitration agreement. The English court queried whether it should decide its jurisdiction under the Brussels Convention (in which case it probably would have had to decline jurisdiction) or the rules of common law, and referred this question to the ECJ. The ECJ held that the English court proceedings relating to arbitration were excluded from the scope of the Convention: in other words, faced with proceedings relating to an arbitration, an English court would apply the rules laid down by common law, not the Convention, to determine whether it had jurisdiction. The Regulation’s rules also do not determine where an arbitration should be held. (v) Defendant not domiciled in a Member State. Most of the rules in the Regulation apply only if the defendant in a dispute is domiciled in a Member State. For example, an English court would apply the Regulation when determining whether a New York insured could start proceedings in England against its French-domiciled insurer (because the defendant would be domiciled in a Member State); but it would apply the common law rules when determining whether the French-domiciled insurer could sue the New York insured (because the defendant would not be domiciled in a Member State).

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THE COMMON LAW RULES ON JURISDICTION Having identified the sets of rules which the English court follows to decide whether it has jurisdiction (namely the common law and the Conventions/ Regulation) and the circumstances when each of those sets of rules applies, it is time to outline the actual rules. First, the position under the common law is considered, and then under the Regulation. The common law rules are summarised in Figure 2. Figure 2: Common law rules of jurisdiction

Is the defendant present in England?

Yes

Defendant can be sued in England as of right

No Leave is needed to sue the defendant in England

Leave to sue in England will be refused

No

Does defendant show (a) case is within a special jurisdiction category and (b) reasonable prospect of succeeding and (c) England is the most appropriate forum?

Special jurisdiction categories include: Joining new party to English proceedings Contract made in England Contract made through an agent in England Contract governed by English law English jurisdiction clause Contract breached in England Tort: act or damage in England

("forum conveniens")

Yes Leave to sue in England is granted

Defendant may then challenge English jurisdiction

English proceedings will be stayed

Yes

Does defendant show that there is another country which has jurisdiction and which is clearly a more appropriate forum? ("forulII nOll corrveniens")

No

English proceedings will continue

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General jurisdiction The English courts will allow English proceedings to be started if the defendant is present in England. Companies are present for this purpose if they are incorporated in England, or have a registered office, or a place of business, or if they appoint agents in England to accept service of suit or to carry out transactions on their behalf.

Special jurisdiction Where the defendant is not present in the U.K., the English courts may still allow proceedings to be started. The claimant must obtain the leave of the court, and will have to satisfy the court of three matters: First, that there is a good, arguable case that the situation falls into one or more categories. The categories most relevant to insurance disputes are as follows: (i) A claim has already been made against someone in England and the potential new defendant outside England is a necessary or proper party to add to that claim. (ii) The dispute relates to a contract which was made in England. (iii) The contract was made by or through an agent trading or residing in England. This would allow a claimant to sue a foreign insurer where the insurer had used a London broker to negotiate the contract, even though the contract was actually executed elsewhere. (iv) The contract is governed by English law. (v) The contract contains a choice of English jurisdiction. (vi) The claim is in respect of a breach of contract committed in England. (vii) The claim is in tort and either (a) damage was sustained in England or (b) damage was sustained from an act committed in England. The second matter which the claimant must establish is that there is a ‘‘reasonable prospect’’ of the claim succeeding: in other words, that there is a serious issue to be tried. Third, the claimant must persuade the court that England is the appropriate forum in which the dispute should be heard (‘‘forum conveniens’’). The claimant must establish that substantial justice would not be done if the case were tried in another forum: Spiliada Maritime Corporation v. Cansulex Ltd [1987] 1 Lloyd’s Rep. 1 (H.L.). The test of ‘‘forum conveniens’’ is a flexible one, and the key point to note is that it involves the court’s discretion. The court is entitled to take all of the circumstances into account, for example the convenience of the forum for the parties and witnesses, the time and cost involved in obtaining evidence, and the speed of obtaining judgment. The court may also take account of the law applicable to the contract: for example, if the applicable law of an insurance

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contract is English law and the dispute relates to Lloyd’s market practice, the court may consider that it would be appropriate and helpful for the dispute to be resolved in an English court, by judges who are familiar with English law and market practice. If a defendant is unhappy with proceedings going ahead in England, it may apply to the court for a ‘‘stay’’ (i.e. a suspension) of the English proceedings. The defendant would have to persuade the court that the English courts are ‘‘forum non conveniens’’: that is, that there is some other country whose courts have jurisdiction and that those courts are clearly a more appropriate forum in which to hear the case. Unless the defendant establishes this, the English proceedings would be allowed to go ahead. Some vocabulary: ‘‘jurisdiction clauses’’ What are jurisdiction clauses? A contract can stipulate which courts are to have jurisdiction to hear any dispute. Such a stipulation is called a ‘‘jurisdiction clause’’. The following is a typical example: ‘‘The courts of England and Wales shall have exclusive jurisdiction to hear any dispute arising out of or in connection with this agreement.’’ The rules which the English courts follow when a contract contains a jurisdiction clause are discussed later in this chapter, and those which they follow when the contract is silent on the matter.

Exclusive and non-exclusive jurisdiction clauses An ‘‘exclusive’’ jurisdiction clause is one whereby the parties agree that they shall (i.e., they must) submit all disputes to a particular country’s courts. A ‘‘non-exclusive’’ jurisdiction clause is one where the parties give themselves the right, but do not bind themselves, to bring claims in a particular court: in other words, a claimant has the option of starting proceedings in that court, but may sue elsewhere if it prefers.

One of the factors which the English court takes into account in weighing up whether it is the appropriate forum is whether the parties have agreed to a jurisdiction clause. This factor is usually given great weight, and is often conclusive, because the courts will generally consider it appropriate to hold the parties to their bargain. In Ace Insurance SA-NV v. Zurich Insurance Company [2000] 2 Lloyd’s Rep. 423, a Swiss reinsured provided cover to a Texan company in respect of an oil well. Reinsurers brought proceedings in England against the reinsured. The reinsured was to ‘‘follow the original [insurance] in all respects’’, and the original policy contained an exclusive jurisdiction clause for Texan law. The reinsured subsequently brought competing proceedings in Texas pursuant to a clause (Non-Marine Association 1998) which provided that ‘‘Underwriters hereon . . . will submit to the Jurisdiction of a Court of competent jurisdiction within the United States’’, and sought to have the English proceedings

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325

stayed. The English court stayed its proceedings, and this decision was upheld unanimously by the Court of Appeal ([2001] 1 Lloyd’s Rep. 618). Rix L.J. observed that, whilst the service of suit clause contained in the reinsurance policy is not an exclusive jurisdiction clause, if ‘‘a party agrees to submit to the jurisdiction of the courts of a state, it does not easily lie in its mouth to complain that it is inconvenient to conduct its litigation there’’. In BAS Capital Funding Corporation Ltd et al. v. Medfinco Ltd et al. [2003] EWCH (Ch.), Lawrence Collins J. stated that there was a very strong presumption in favour of upholding the parties’ choice of jurisdiction. Where the parties had chosen English jurisdiction, a party asserting that the English courts should decline jurisdiction would face a ‘‘heavy burden’’, and there would have to be ‘‘exceptional circumstances’’ to justify this. In this situation, the other factors which are usually weighed up in considering jurisdiction had very little, if any, role to play. However, the presumption might be somewhat easier to displace if the jurisdiction clause provided for non-exclusive jurisdiction, and one factor which might be relevant was the existence of concurrent proceedings in another jurisdiction (concurrent proceedings are considered later in this chapter). The English court may allow a case to proceed in England even if there is a jurisdiction clause in favour of another jurisdiction, but it will rarely do so. Citi-March Limited et al. v. Neptune Oriental Lines Ltd et al. [1997] 1 Lloyd’s Rep. 72 is one such rare case. The claimant sued three defendants who were located in England and one in Singapore. The Singaporean defendant asked the English court to stay the proceedings against it on the basis of a Singaporean exclusive jurisdiction clause. The claimant would not have been in a position to pursue its claim in Singapore, because the claim was already timebarred. Colman J. considered that there was strong cause not to stay the English proceedings, on the grounds that if the jurisdiction clause were applied it could have led to proceedings in both Singapore and London with the risk of inconsistent judgments over the same subject matter.

THE REGULATION’S RULES ON JURISDICTION IF THE CONTRACT CONTAINS NO JURISDICTION CLAUSE This section provides an overview of the Regulation’s rules on jurisdiction. These rules are set out in Title II Section 3 (Articles 8 to 14) of the Regulation, which deals specifically with matters relating to insurance. It is important to note that for this purpose reinsurance disputes are not regarded as matters relating to insurance, and accordingly such disputes are dealt with by the provisions of the Regulation which deal with normal, non-insurance disputes: for reasons of space and clarity, we do not discuss those rules in this chapter. It will be seen that the main difference between the common law approach and the Regulation is that the common law involves the court exercising its

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discretion to weigh up the relevant factors to determine whether it is appropriate for it to accept jurisdiction. The Regulation’s approach does not involve such discretion. For the most part, it sets out fixed tests under which the court is obliged to accept (or decline) jurisdiction. The Regulation’s rules depend on whether it is the insurer who is suing the insured or vice versa. The principle is that the insured is generally entitled to be sued in its home country, whereas the insurer has no equivalent protection. We consider these rules below. The next section will then consider how having a jurisdiction clause affects the position. Some vocabulary: policyholder, insured and beneficiary The Brussels Regulation uses the expressions ‘‘policyholder’’, ‘‘insured’’ and ‘‘beneficiary’’. The official reports on the Brussels and Lugano Conventions indicate that the policyholder is the person who originally took out the insurance. Thus under a life policy provided by an employer to an employee, the policyholder would be the employer, the insured would be the employee and the beneficiary would be the person nominated by the employee to receive the policy proceeds. For most types of insurance, the policyholder, insured and beneficiary will be the same person.

Actions by insurers against the policyholder, insured or beneficiary An insurer must usually sue a policyholder, insured or beneficiary in the Member State in which he or she (the defendant) is domiciled (Article 12(1)). This is to protect the insured, who will typically be in a much weaker position than the insurer, and may find it difficult to bring proceedings anywhere other than his own home country. There are three exceptional situations in which the insurer may bring proceedings in a state other than the one in which the policyholder, insured or beneficiary is domiciled: (i) If the claim arises out of the operations of the defendant’s branch, agency or other establishment in a different Member State, the defendant may be sued in that Member State (Article 5(5)). Example: A French company pays its insurance premiums out of its branch office in Belgium. Insufficient premium is paid. The insurer may sue the insured in Belgium. (ii) The insurer may bring a counterclaim in the court where the original claim against it is pending (Articles 6(3) and 12(2)). Because the original proceedings against the insurer will usually have been brought in the courts of the Member State where the insured is domiciled, and the insurer already has the right to sue the insured in that State, this provision is unlikely to be used often. Example: An insured in France sues its insurer in England for non-payment of claims. The Insurer counterclaims against the

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327

insured for non-payment of premium. The insurer may bring its counterclaim in England. An insurer is not permitted to use this provision to obtain jurisdiction against any person who is not a claimant in the original action. (iii) If the insurer has been sued in a direct action by a third party (for example, where an accident victim has a right to sue the driver’s insurer directly), the insurer may join the policyholder, insured or beneficiary into those proceedings if the law governing the direct action allows this (Article 11(3)). Actions by insureds (or others) against insurers domiciled in a Member State When it is the insurer who is being sued in a matter relating to insurance, the plaintiff has a wider choice of fora. The courts in which proceedings may be brought are as follows: (i) The Member State where the policyholder is domiciled (Article 9(1)(a)(2)). So, for example, a policyholder who is domiciled in England could sue its French-domiciled insurer in England. This is the most important rule for insureds, since it means that that they are entitled to sue their insurer in their own home State, without the added costs and inconvenience of litigating abroad. (ii) The courts of the Member State in which the insurer is domiciled (Article 8(1)). Example: An insured is domiciled in England and its insurer is domiciled in France. If the insured wished to do so, it could sue the insurer in France. (iii) Where the insurer is a co-insurer, the courts of a Member State in which proceedings are brought against the leading insurer (Article 9(1)(c)). Example: An insurance programme is led by a London company and the following market is in Germany. The insured could sue the leading insurer in England and the following insurers in Germany pursuant to Article 8(1), but the insured could, if it preferred, sue all the insurers in England pursuant to Article 9(1)(c). (iv) In disputes arising out of the operations of the insurer’s branch, agency or other establishment, the courts for the place where the establishment is situated.

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Example: The Belgian branch of a French insurance company provides cover to an insured in the Netherlands. The branch refuses to pay a claim. The insured may sue the insurer in Belgium. Although the Regulation’s jurisdiction rules do not usually apply where the defendant is not domiciled in a Member State, there is an important exception to this. Where an insurer is not domiciled in a Member State but the dispute arises out of the operations of its branch, agency or other establishment in a Member State, the insurer will be deemed to be domiciled in that Member State for the purposes of the Regulation. Example: The English branch of a New York insurer provides cover to a French company. A dispute arises out of the operations of the branch. The insurer would be deemed to be domiciled in England and could be sued there. (v) In respect of liability insurance or insurance of immovable property, the courts for the place where the harmful event occurred (Article 10). This provision also applies if movable and immovable property are covered by the same policy and both are adversely affected by the same contingency. Example: A holiday home and its contents in Italy are insured by a French insurer. The house is damaged by a windstorm. The insured may bring proceedings in Italy. (vi) In respect of liability insurance, the insurer may be joined in proceedings brought by the injured party against the insured (Article 11). Example: A road accident victim sues the driver in a Member State. That court’s law allows the joinder of insurers as third parties. The insurer could be enjoined in the proceedings.

Jurisdiction by submission If a plaintiff brings proceedings in a court in a Member State and the defendant enters an appearance, then the fact of the defendant having appeared will give that court jurisdiction, even if it otherwise would not have had jurisdiction. The only exception to this is where the defendant’s appearance is made solely to contest the court’s jurisdiction. Example: An insurer starts proceedings against its insured in the English courts when, under the jurisdictional rules, only the French courts have jurisdiction. The insured acknowledges service of the writ and serves a

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329

defence on the merits of the claim. The English courts would have jurisdiction to hear the case. This rule constitutes a serious risk for defendants, as they may inadvertently commit themselves to defending in a forum which is unfavourable to them by, for example, entering a holding defence whilst they are still considering jurisdictional or other issues.

THE REGULATION’S RULES ON JURISDICTION IF THE CONTRACT CONTAINS A JURISDICTION CLAUSE The Regulation’s rules which apply to jurisdiction agreements in matters relating to insurance are set out in Article 13(5). The key point is that in insurance matters jurisdiction clauses will often be void (remember, however, that these restrictive rules do not apply to reinsurance). The rationale for this is that it prevents insurers from using their (typically) superior bargaining strength to impose an unfavourable jurisdiction clause on their insureds. A jurisdiction agreement will be effective to confer exclusive jurisdiction if, and only if, one or more of the following five requirements is satisfied: (i) If the policyholder is not domiciled in a Member State, then the parties may make a free choice of forum. This is an important exception. For example, if a New York-domiciled policyholder enters into an insurance contract with a Luxembourg-domiciled insurer, and the contract contains an English jurisdiction clause, then the insured could sue the insurer in England. (There are exceptions to this if the insurance is of a kind which is compulsory or relates to immovable property in a Member State.) (ii) The agreement allows the policyholder, insured or beneficiary to bring proceedings in courts other than those indicated in the Regulation’s insurance jurisdiction rules discussed above. As the objective of this rule is to protect the weaker parties in insurance transactions, this provision should be interpreted as widening the policyholder, insured or beneficiary’s choice of forum, but not the insurer’s. Example: An insurer and insured enter into an insurance contract which contains a jurisdiction clause in favour of the English courts. The insured could, if it wished, rely on the jurisdiction agreement to bring proceedings in England. The insurer could not rely on the jurisdiction agreement. (iii) The agreement is concluded between a policyholder and an insurer, both of whom are at the time of the conclusion of the contract domiciled or habitually resident in the same Member State, and has

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the effect of conferring jurisdiction on the courts of that state even if the harmful event were to occur abroad. This provision permits the parties to agree that any disputes must be brought in the courts of the Member State in which they were both domiciled or habitually resident, provided that such an agreement is allowed by the law of that State. Because the chosen courts will then have exclusive jurisdiction either party would be precluded from beginning proceedings in other fora which would otherwise have been available under the Regulation. Like the rest of the Regulation, this provision applies only where the case has an international element. Example 1: A life assurance contract entered into between a French-domiciled insurer and a French-domiciled policyholder names a Belgian domiciliary as the assured. The contract stipulates French jurisdiction. It is likely that the contract has the requisite international element and the Convention therefore applies. Subject to the jurisdiction agreement being effective under French law the insurer, policyholder and assured could sue only in the French courts. Example 2: An English-domiciled insurer provides cover to an English-domiciled person. The contract stipulates English jurisdiction. The insured subsequently becomes domiciled in New York. The English courts would have exclusive jurisdiction. (iv) The agreement was entered into after the dispute arose. This provision will rarely be relevant, because once a dispute arises the insurer will be unlikely to be able to persuade the insured to agree to a choice of courts other than those of the State in which the insured is domiciled. (v) The agreement relates to a contract of insurance in so far as it covers certain commercial risks. Where the insurance relates to these risks the parties are presumed not to require protection and are free to choose their forum. The Court of Appeal (declining to interpret the words ‘‘in so far as’’ literally) has held that freedom of choice under this provision is available only if the contract relates exclusively to such risks: Charman v. WOC Offshore BV [1993] 2 Lloyd’s Rep. 551. These risks are as follows: (a) Loss of or damage to sea-going ships, off-shore installations or aircraft, arising from perils which relate to their use for commercial purposes. ‘‘Sea-going ships’’ has a broad meaning, covering floating apparatus which cannot move under its own power and all vessels which are intended to travel on the sea.

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(b) Loss of or damage to goods in transit where the transit consists or includes carriage by such ships or aircraft. This does not, however, grant freedom of choice where the insured risk is loss of or damage to passengers’ baggage. (c) Liability arising out of the use or operation of ships, installations or aircraft. This does not grant freedom of choice where the insured risk is liability for bodily injury to passengers or loss of or damage to passengers’ baggage. In relation to aircraft, the liberal regime does not apply if the law of the Member State in which the aircraft is registered prohibits agreements on jurisdiction regarding the insurance of such risk: this is intended to leave the Member States free to provide protection for the policyholder and the victim if they consider it appropriate. (d) Liability for loss or damage caused by goods in transit described in point (b) above. The liberal regime does not apply if the insured risk is liability for bodily injury to passengers or loss of or damage to passengers’ baggage. (e) Any financial loss connected with the use or operation of ships, installations or aircraft, in particular loss of freight or charter-hire. (f) Any risk or interest connected with any of those listed above. (g) Any ‘‘large risk’’ (see ‘‘The Non-Life Directive’s Rules on Applicable Law’’ below for an explanation of this expression). This is an important exception.

CONCURRENT PROCEEDINGS—INTRODUCTION The complexities which can arise when disputes relating to the same matter are litigated in separate proceedings in different jurisdictions are now addressed. Such multiple proceedings are common in insurance disputes, where parties often ‘‘forum shop’’ for a jurisdiction which holds some advantage to them (usually their home country). As mentioned at the start of this chapter, the place where a dispute is heard can have a significant effect on the conduct of the proceedings, for example it will impact on the speed and cost of the proceedings and the ease of obtaining evidence. It is obviously undesirable for the same issue to be litigated in more than one forum for reasons of costs and inconvenience, but perhaps the greatest concern is the possibility of the different courts giving conflicting judgments. Where the English court is considering concurrent proceedings which are not in a Member State, it will apply principles of common law: see Re Harrods (Buenos Aires) Ltd [1992] Ch. 72 (C.A.). Where the court is considering concurrent proceedings in the courts of a Member State, it will apply the rules

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in the Regulation. The rules under common law and the Regulations to deal with this situation are now considered. CONCURRENT PROCEEDINGS—THE COMMON LAW RULES The two tools which the English courts use to deal with concurrent proceedings are stays (i.e., stopping actions from proceedings within England) and anti-suit injunctions (i.e., injunctions to restrain a party from pursuing proceedings elsewhere). Consideration is now given to the position under the common law (cases involving a conflict of jurisdiction between the English courts and the courts of a non-Member State) and the procedural tools which are applied. Next, the rules under the Brussels Regulation are considered. Under the common law, when should proceedings be stayed? English courts may stay English proceedings which are concurrent with proceedings pending in a foreign court. In the context of disputes involving a conflict of jurisdiction between the English courts and the courts of a nonMember State, this power is exercised where it can be shown that England is not the appropriate forum—Spiliada Maritime Corp v. Cansulex Ltd [1987] A.C. 460. This principle was discussed in ‘‘The Common Law Rules on Jurisdiction’’ above. As was seen, it is a flexible test, involving the court in weighing up all the factors, and the existence of parallel proceedings elsewhere is a factor which is often given considerable weight. The following are two examples of the weight which the English courts have given, when considering whether to stay their own proceedings, to concurrent proceedings in foreign jurisdictions: New Hampshire Insurance Company v. Philips Electronics North America Corporation [1999] Lloyd’s Rep. IR 58 (C.A.) An insured, based in Illinois, presented claims to its English insurer, who issued proceedings in England seeking a declaration that losses claimed by the insured were excluded under the policy terms, which were governed by English law. The insured subsequently commenced proceedings in Illinois in respect of its claim and sought to stay the English action. At first instance the stay application was refused and this decision was upheld by the Court of Appeal. In the Court of Appeal’s view, as the policy was governed by English law, the English courts were the more appropriate forum in which to resolve issues relating to policy construction. Of particular relevance was the fact that a determination on the construction of the policy was likely to obviate the need for a full trial. This case should not, however, be seen as representing a hard and fast rule in terms of these types of stay applications, as it was determined very much upon its own facts, particularly that the construction issues were complex and that the determination of these construction issues was likely to resolve the dispute. A further point of relevance was that the insured had been tardy in commencing its proceedings in Illinois. Indeed the Court of Appeal commented that it was undesirable for matters of fact and matters of construction to be determined in different jurisdictions.

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HIB Limited v. Guardian Insurance Company [1997] 1 Lloyd’s Rep. 412 (Q.B. Com. Ct.) This case involved a dispute between a reinsured based in the U.S. Virgin Islands, an English reinsurer, and an English broker. The reinsured entered into communications with the reinsurer and the broker, alleging that the broker had been negligent and had breached his duties to the reinsured. The broker issued proceedings in England seeking a declaration that he was not in breach of his broking duties. In response, the reinsured commenced an action in the U.S. Virgin Islands. Following from this both parties sought stays of the proceedings commenced by the other. The reinsured’s application to have the English proceedings stayed was unsuccessful. Longmore J. concluded that as the broking agreement was governed by English law, and the negligent acts were alleged to have taken place in England, England was the appropriate forum.

When should anti-suit injunctions be granted? Another tool which can be deployed by an English court in respect of concurrent proceedings is the anti-suit injunction. Anti-suit injunctions prohibit a party from either filing or continuing proceedings in a foreign jurisdiction, the rationale being that disputes should be litigated and determined only once and in the appropriate forum. Importantly, anti-suit injunctions will be granted against a party only if they will be effective. This means that it will be possible for an anti-suit injunction to be granted only against a party which is present in England or which is already a party to English proceedings. In the context of disputes involving a conflict of jurisdiction between the English courts and the courts of a non-Member State, the English courts will invoke anti-suit injunctions where the applying party can show that: (i) the English courts are the appropriate forum for determination of the dispute, and in addition; (ii) the foreign proceedings are vexatious or oppressive. The following case demonstrates the English courts’ application of this test. Donohue v. Armco Inc & Others [2000] 1 Lloyd’s Rep. 579 (C.A.), [2002] 1 Lloyd’s Rep. 425 (H.L.). An anti-suit injunction was applied for, arising from proceedings commenced in New York relating to management buy-out contracts which contained English exclusive jurisdiction clauses. At first instance an anti-suit injunction was refused on the basis that not all of the issues present in the New York proceedings fell within the ambit of the exclusive jurisdiction clauses in the relevant contracts. Further, not all of the parties to the New York proceedings were signatories to the contracts, and indeed only some of the claims fell within the ambit of those contracts. In these circumstances it was held that England was not the appropriate forum and that the New York proceedings were not vexatious and oppressive. The Court of Appeal overruled the first instance decision and granted an anti-suit injunction, placing more emphasis on the existence of the exclusive jurisdiction clause. In the Court of Appeal’s view it was vexatious and oppressive to pursue proceedings other than in the agreed forum. The Court of Appeal also appears to have considered it relevant that the instigating of the issues in New York exposed certain of the parties to treble damages and higher litigation costs.

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The House of Lords overturned the Court of Appeal’s decision and discharged the anti-suit injunction. The House of Lords held that the English court should decline to grant an anti-suit injunction even where an exclusive English law jurisdiction clause existed, where parallel proceedings would take place in any event: here, as there were parties who were not subject to the relevant contractual provisions but were nevertheless party to the New York proceedings, the New York proceedings would proceed regardless of any anti-suit injunction, leading to the risk of inconsistent decisions.

CONCURRENT PROCEEDINGS—THE REGULATION’S RULES The common law doctrine of forum conveniens involves a high degree of judicial discretion. The Regulation’s rules on concurrent proceedings are less flexible. In essence, where proceedings involving the same cause of action and the same parties have already been brought in another Member State then the English courts must decline jurisdiction: there is no discretion. Where the two concurrent proceedings do not fulfil these criteria, but are related, the English courts may decline jurisdiction to avoid the risk of irreconcilable judgments. Mandatory declining of jurisdiction Under Article 27 of the Regulation, where proceedings involving ‘‘the same cause of action and between the same parties’’ are brought in the courts of different Member States, any court which is not the court which is ‘‘first seised’’ of the dispute must decline jurisdiction. This encourages a ‘‘race to the court house’’ as parties to disputes aim to bring proceedings in their preferred forum before their opponents, thus gaining jurisdiction in that forum. Under Article 30 of the Regulation, a court is first seised: ‘‘1. at the time when the document instituting the proceedings or an equivalent document is lodged with the court, provided that the plaintiff has not subsequently failed to take the steps he was required to take to have service effected on the defendant, or 2. if the document has to be served before being lodged with the court, at the time when it is received by the authority responsible for service, provided that the plaintiff has not subsequently failed to take the steps he was required to take to have the document lodged with the court.’’

The effect of this provision is that the English court is first seised when a claim form is issued. ‘‘The same cause of action’’ The Regulation does not define ‘‘the same cause of action’’. One question is whether a claim for a declaration (for example, a declaration that a policy is void by reason of non-disclosure) constitutes the ‘‘same cause of action’’ as a claim for payment under a contract. Proceedings seeking declaratory relief on the construction of a policy, and proceedings seeking damages under the same

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policy, have been held to share the same cause of action: The Maciej Rataj [1991] 2 Lloyd’s Rep. 458 (Q.B.), [1992] 2 Lloyd’s Rep. 552 (C.A.). A party which fears being sued for non-payment in an unfavourable jurisdiction will therefore often be able to start a pre-emptive action in a more favourable forum, seeking a declaration of non-liability. That court having been seised, proceedings subsequently started elsewhere would be stayed. ‘‘The same parties’’ The interpretation of the expression the ‘‘same parties’’ is important to insurance disputes. These can often involve multiple parties who, while being signatories to the same policy, may not have the same involvement in proceedings issued in separate jurisdictions. For tactical or substantive reasons, one particular party may not be named in proceedings seeking declaratory relief relating to a policy interpretation point, but may be party to proceedings claiming damages under that policy. The ECJ has concluded that the parties to the competing actions must be identical for the ‘‘first seised’’ rule to apply: The Maciej Rataj [1995] 1 I.L. Pr. 81. So if the second proceedings involve some but not all of the parties in the first action, the second court need only decline jurisdiction in respect of the parties common with the first proceeding. Optional stay for ‘‘related’’ actions If the concurrent proceedings do not satisfy the above test (i.e., they do not involve the same cause of action or are not between the same parties) but they are so similar that there is a risk of conflicting judgments, then the Regulation provides that the English courts may stay proceedings: ‘‘Article 28 1. Where related actions are pending in the courts of different member states, any court other than the court first seised may stay its proceedings. 2. Where these actions are pending at first instance, any court other than the court first seised may also, on the application of one the parties, decline jurisdiction if the court first seised has jurisdiction over the actions in question and its law permits the consolidation thereof. 3. For the purposes of this Article, actions are deemed to be related where they are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.’’

APPLICABLE LAW—INTRODUCTION Insurance contracts are often entered into by parties in different countries with different legal systems, covering risks around the world (or, indeed, in space). Determining which law governs the contract may make a huge difference to the way in which the contract works, and to the parties’ rights and

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obligations: for example, if there is a breach of warranty this may entitle the insurer to avoid the entire contract ab initio (if the applicable law is English law) or merely to some lesser remedy such as a reduction in the amount of a claim (if another law applies). How do the English courts determine which law governs the contract? Historically, this was determined by following rules developed as part of the common law. However, the principles have now been changed by three international instruments. For contracts of direct insurance of risks situated in the European Economic Area (‘‘EEA’’), the applicable law is determined by applying rules set out in the Second Non-Life Insurance Directive (as amended) (hereafter, the ‘‘Non-Life Directive’’) or the Second Life Insurance Directive (as amended) (hereafter, the ‘‘Life Directive’’), depending on whether the insurance relates to non-life or life business. For other contracts, including contracts of reinsurance and contracts of direct insurance of risks situated outside the EEA, the principles are laid down by the Convention on the Law Applicable to Contractual Obligations signed in Rome (the ‘‘Rome Convention’’). These three bodies of rules, and the circumstances in which they apply, are illustrated in Figure 3. The Non-Life Directive and the Life Directive were enacted into English law by the Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2001 (S.I. 2001, No. 2635), and the Rome Convention was enacted into English law by the Contracts (Applicable Law) Act 1990.

Figure 3: Which choice of law rules apply? Direct insurance or reinsurance?

Reinsurance

Rome Convention

Direct Insurance Risk situated inside or outside EU?

Outside

Rome Convention

lnEC Non-IJfe

Second Non-IJfe Directive

IJfe or non-life risk?

IJfe

Second IJfe Directive

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The following sections outline the rules relating to applicable law laid down in the Non-Life Directive, the Life Directive and the Rome Convention. (The common law rules relating to applicable law are now relevant only to contracts predating the Rome Convention, the Non-Life Directive or the Life Directive as applicable, and are not considered here.)

Where are risks situated? Risks are usually situated where the policyholder has its habitual residence (if an individual) or, if the policyholder is a legal person, in the Member State where its relevant establishment is situated. There are a few exceptions to this: – buildings (or buildings and their contents) are considered to be situated in the Member State where the property is situated; – motor vehicles are considered to be situated in the Member State of registration; and – travel or holiday insurance (where the risk is four months’ duration or less) are considered to be situated in the Member State where the policyholder took out the policy. Choice of law clauses A ‘‘choice of law clause’’ is one where the parties select the law which is to apply to a contract. A typical choice of law clause is as follows: ‘‘This contract is governed by and shall be construed in accordance with English law.’’ The clause should nominate a clearly defined system of law. For example reference should be made to ‘‘English law’’ (or, more accurately, ‘‘the laws of England and Wales’’) rather than ‘‘the laws of Great Britain’’ or ‘‘the laws of the United Kingdom’’ as the latter expressions are ambiguous (England and Wales have one law and Scotland and Northern Ireland have their own). Similarly, reference should be made to (for example) ‘‘the laws of New York’’ rather than ‘‘the laws of the United States’’.

THE NON-LIFE DIRECTIVE’S RULES ON APPLICABLE LAW The rules for determining the applicable law which are laid down in the NonLife Directive apply to contracts of direct insurance covering non-life risks situated in the EEA. For a few contracts, where protection of the insured was considered to be unnecessary, the Non-Life Directive permits the parties to choose the law of any country to govern their contract. However, in most cases the Non-Life Directive identifies a limited range of laws which may apply.

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(i) Situations in which the parties may freely choose the applicable law The parties to an insurance contract have complete freedom to choose the applicable law in any contract insuring large risks. ‘‘Large risk’’ has the meaning given to it in Article 5(d) of the First Non-Life Insurance Directive (as amended), and covers: railway rolling stock, aircraft, ships, goods in transit, and liability for ships and aircraft; credit and suretyship insurance which relates to a business carried on by the policyholder; and, where the policyholder satisfies the required condition as to size (as to which see below), insurance of land vehicles, insurance against fire and natural forces, insurance against damage to property, insurance in respect of motor vehicle liability, general liability insurance and insurance in respect of miscellaneous financial loss. (To satisfy the condition as to size, the insured must meet at least two of the following three criteria: balance sheet total of at least â6.2 million, net turnover of at least â12.8 million, and at least 250 employees.) Example: A large corporation insures a factory in the EEA in respect of fire risks. The Non-Life Directive would permit the parties to choose any law (e.g., New York law) to govern their contract. (ii) Situations in which the parties’ choice of law is restricted In contracts insuring risks other than ‘‘large risks’’, the parties have only limited freedom to choose the applicable law. The following rules apply. (a) Where the policyholder’s habitual residence or central administration is in the Member State in which the risk is situated (Article 7(1)(a)) Where a policyholder has its habitual residence (if an individual) or its central administration (if a legal person) in the same Member State where the risk is situated, the parties may choose the law of that Member State to govern their contract. Under this article, they may also choose any other law which that country’s law allows to be chosen. English courts will allow the parties to choose any law, so, for example, if a policyholder in England insures its buildings in England, the parties may choose English law to govern the contract, or may choose any other law. Example: A policyholder who is habitually resident in Portugal insures goods in a warehouse in France. Under the rules regarding situation of risk, the risk would be deemed to be situated in Portugal. The policyholder has his habitual residence in the same Member State as the risk (Portugal), and the parties may choose Portuguese law to govern the contract. However, if Portuguese law permits them to choose some other law then such a choice would be valid.

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It is necessary to bear in mind that (apart from buildings, motor vehicles, travel and holiday risks) risks are considered to be situated in the Member State where the policyholder has its habitual residence (if an individual) or its ‘‘establishment, to which the contract relates’’ (if a legal person). Therefore, if the policyholder is an individual then the policyholder will have its habitual residence in the Member State in which the risk is considered to be situated and the contract will be governed by the policyholder’s home law (or a law which the home law permits to be chosen). (b) Where the policyholder’s habitual residence or central administration is not in the Member State in which the risk is situated (Article 7(1)(b)) Where the policyholder’s habitual residence or central administration is not in the Member State where the risk is situated, the parties may choose either the law of the country in which the policyholder has his or her habitual residence or central administration or the law of the Member State in which the risk is situated. Example: A policyholder who is habitually resident in France insures a house in Portugal. The parties would be free to choose Portuguese law or French law to govern the contract. (Additional choices may also be available as a result of Article 7(1)(d) as described at point (d) below.) Because of the rules on situation of risks, this article is most relevant where the insured risk comprises buildings, motor vehicles, or travel and holiday risk or where the policyholder’s habitual residence or central administration is not in an EEA Member State. (c) Where the policy insures two or more risks situated in different Member States which relate to the policyholder’s commercial or industrial activity or profession (Article 7(1)(c)) Where the policyholder pursues a commercial or industrial activity or a profession, and the contract covers two or more risks which relate to these activities and which are situated in different Member States, the parties may, as an alternative to any other choice which may be permitted under Article 7(1), choose the law of the country where the policyholder has its habitual residence or central administration or the law of any of the Member States in which the risk is situated. (d) Where the Member States referred to in Articles 7(1)(b) and (c) grant the parties greater freedom to choose the applicable law (Article 7(1)(d)) Article 7(1)(d) of the Non-Life Directive provides that where ‘‘the Member States referred to’’ in Articles 7(1)(b) and (c) grant greater freedom of choice,

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the parties may take advantage of this freedom. Thus the parties may have a choice of a wider range of laws than would otherwise be permitted under Articles 7(1)(b) and (c). Example: A policyholder who is habitually resident in New York insures a house in England. The parties would be able to choose English law or New York law under Article 7(1)(b). Under Article 7(1)(d) they would also be permitted to choose any law which English law permits to be chosen (the parties may not take advantage of any additional freedom of choice which would be available under the law of New York as New York is not an EEA Member State).

(e) Where the risks are limited to events occurring in one Member State other than the one in which the risk is situated (Article 7(1)(e)) Article 7(1)(e) provides that where ‘‘the risks covered by the contract are limited to events occurring in one Member State other than the Member State where the risk is situated, as defined in Article 2(d), the parties may always choose the law of the former State’’. This rule therefore provides the parties with an additional choice to those discussed above. Example: An individual who is habitually resident in England insures a painting in respect of damage occurring to it in France only. By virtue of the rules on situation of risk, the painting is considered to be situated in England. Article 7(1)(e) would permit the parties to choose French law. (Additional choices may also be available under the other rules discussed above, notably Article 7(1)(a).) (iii) Under the directives, what happens if the parties have not made a choice of law, or have made a choice which is not allowed by the above rules? Under the Non-Life Directive, any choice of law will be upheld only if the chosen law is one of those permitted under the above rules. The choice must be ‘‘expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case’’. If the parties have not made a choice of law which satisfies these requirements, then the court will apply the law of the country (out of those above) with which the contract is most closely connected. There is a rebuttable presumption that the contract is most closely connected with the Member State in which the risk is situated. This is usually the Member State in which the insured is habitually resident or has its establishment to which the contract relates, except where the risk comprises buildings, motor vehicles, or travel and holiday risks.

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Example: A policyholder in France insures its French liability risks. The contract is silent as to the applicable law. The risks are deemed to be situated in France (because that is where the policyholder is situated). There will be a presumption that French law applies. The Non-Life Directive gives no indication of the circumstances in which the presumption may be overruled. One circumstance in which it may be appropriate to override the presumption is where the policyholder and insurer are situated in the same country and insure a risk which is situated in a different country (for example, where a policyholder in England enters into a contract with an insurer in England to insure a house in France). Cr´edit Lyonnais v. New Hampshire Insurance Company [1997] 1 Lloyd’s Rep. 191 The presumption was considered in Crédit Lyonnais v. New Hampshire Insurance Company. A U.S. insurance group participated in the worldwide insurance programme of a multinational policyholder whose central administration was in France. Under the programme each of the policyholder’s foreign branches or subsidiaries had its own policies, issued by U.S. insurers which were members of the group. The terms of the policies were agreed in France between the policyholder, the policyholder’s broker and the insurance group (all of whom were in Paris) and were imposed on the local branch or subsidiary: the branch or subsidiary had no autonomy regarding the cover provided. The policyholder’s U.K. branch or subsidiary had the benefit of two policies under the programme. These were broked by an English broker in London and issued by an English underwriting agency. They expressly provided that all premiums were payable through the brokers in London, and all claims were paid in England. The deductibles, limits of cover and premiums were expressed in French currency and one of the policies referred to provisions of the French Penal Code ‘‘or any other similar legal provisions outside France’’. Neither policy contained a choice of law or jurisdiction. The policyholder brought a claim under the policies which was within the limitation period under English law but which would have been time barred if the policies were governed by French law. It was common ground that the insured risk was situated in England and thus that the presumption was in favour of English law, but the insurer argued that the presumption should be overridden because the policies were most closely connected with France. Barbara Dohmann Q.C., sitting as a Deputy Judge in the Commercial Court, stated that the court had to determine the country with which the two policies, and not the worldwide programme as a whole, were most closely connected. The fact that the precise terms of the local contracts were dictated by the policyholder’s head office in another country did not mean that the contracts were governed by the law of the head office. The Deputy Judge drew attention to the fact that the policyholder was unlikely to have been in a weak bargaining position and could have attempted to stipulate French law and jurisdiction in the policies in order to ensure the homogeneity of its scheme worldwide if this had been its intention, but it had not done so: this left the impression that such homogeneity was neither attempted nor achieved. In view of the fact that the policies in question were issued in England by an English underwriting agency to a U.K. branch or subsidiary, expressly and exclusively with respect to that UK business, the Deputy Judge concluded that the presumption was not rebutted and the contracts were governed by English law. The Court of Appeal ([1997] 2 Lloyd’s Rep. 1) upheld the finding that the contract was governed by English law, but on a slightly different basis. Lord Justice Hobhouse pointed out that, once it had been determined that the parties had not chosen the

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applicable law, it was not appropriate to consider the intention of each of the parties to the contract: the relevant question was to consider the country with which the contract was most closely connected, and this involved looking at objective issues such as where it was to be performed and where the parties were located, not at what each of the parties would have wished to be the applicable law.

THE LIFE DIRECTIVE’S RULES ON APPLICABLE LAW The rules on applicable law laid down by the Life Directive apply to any contract of direct insurance covering life risks where the policyholder’s habitual residence (if an individual) or ‘‘establishment, to which the contract relates’’ (if a legal person) is in an EEA Member State (this state is known as ‘‘the Member State of the commitment’’). The rules for determining the applicable law are set out in article 4. The applicable law is generally that of the Member State of the commitment. There are two exceptions to this. First, where that law permits the parties to choose the law of another country the parties may take advantage of this freedom. Example: A Dutch national who is habitually resident in Belgium insures his life with a French insurance company. Belgian law prima facie applies, but the parties could instead choose Dutch law. Alternatively, pursuant to the above exception, the parties could choose any other law if Belgian law permitted such other law to be chosen. Secondly, if the policyholder is an individual and resides in one Member State but is a national or citizen of another, the parties may choose the law of the latter state.

THE ROME CONVENTION’S RULES ON APPLICABLE LAW The Second Non-Life and Life Directives rules, which apply to contracts of direct insurance where the risks are situated in the EEA, have been described above. For other contracts, including contracts of direct insurance where the risks are situated outside the EEA and contracts of reinsurance, the rules are laid down by the Rome Convention. In outline, the Rome Convention’s rules are as follows: the parties are free to choose any law to govern their contract. If they have expressed their choice it will be upheld. If no express choice was made, the court will consider whether the parties made a choice of law without expressing it, and if so will give effect to that choice. If the court finds that the parties made no choice, it will apply the law with which the contract is objectively most closely connected, as to which the Rome Convention provides a rebuttable presumption. These principles are illustrated in Figure 4. They are considered in more detail below.

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(i) Applicable law where the parties have made an express choice of law The Rome Convention gives the parties the freedom to choose any law to govern their contract. The chosen law need not be the law of an EU Member State. So, for example, a choice of New York law in a contract between a German insurer and a French insured would be upheld.

(ii) Applicable law where the parties have made a choice but not expressed it Where the parties have not made an express choice of law the court will consider whether the parties made a choice of law which they did not express. If so, it will uphold the choice. Such a choice must be ‘‘demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case’’. The official report on the Rome Convention states that this provision applies only if the parties have made a ‘‘real’’ choice of law: it ‘‘does not permit the court to infer a choice of law that the parties might have made where they had no clear intention of making a choice’’; in other words, the parties must have addressed their minds to the question. By way of illustration of terms and circumstances which may lead the court to conclude that the parties had made a ‘‘real’’ choice of law the report cites the following: (i) that the contract is in a standard form which is known to be governed by a particular system of law even though there is no express statement to this effect, such as a Lloyd’s policy of marine insurance; (ii) that there has been a previous course of dealings between the same parties under contracts containing an express choice of law and the choice of law clause has been omitted in circumstances which do not indicate a deliberate change of policy; (iii) that the parties have chosen a particular forum (but any presumption that they intended the law of the forum to apply must always be subject to the other terms of the contract and all the circumstances of the case); (iv) that the contract refers to the provisions of a particular law such as specific Articles of the French Civil Code; (v) that there is an express choice of law in related transactions between the same parties; and (vi) that there is a choice of the place of arbitration in circumstances which indicate that the arbitrator should apply the law of that place. Some of these examples seem to confuse situations where the parties have made a real choice with situations where they have not. For example, the fact that the parties have used a Lloyd’s marine policy does not in reality show that they have given any thought to the question of the applicable law. Moreover, the suggestion that the law applicable to Lloyd’s marine policies or any other contract should be determined, in effect, by custom appears to conflict with the Rome Convention’s aim of providing a consistent framework of rules by which to determine the applicable law.

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Implied choice of law under the Rome Convention was considered in the English case Egon Oldendorff v. Libera Corporation [1996] 1 Lloyd’s Rep. 380. In that case Japanese owners agreed to charter two vessels to a German partnership. The form of charterparty incorporated an arbitration clause providing for disputes to be resolved in London by arbitrators conversant with shipping matters. In a judgment on an interlocutory application Mance J. considered that this indicated that the parties intended the arbitrators to apply English law. The question was raised again as a preliminary issue before Clarke J. The judge found that the arbitration clause was a strong indication of the parties’ intention to choose English law. The principal reason for this decision was that it was reasonable to infer that the parties, having agreed a neutral forum, intended that forum to apply a neutral law, namely English law rather than German or Japanese law. The judge took account of further factors, such as the use of terms in negotiations which had established meanings in English maritime law.

(iii) Applicable law where the parties have made no choice Where the parties have not made a choice of law which is expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case, the Rome Convention provides that the contract is governed by the law of the country with which the contract is most closely connected. The Rome Convention provides a rebuttable presumption as to the country with which the contract is most closely connected. The presumption involves two stages. The first step of the presumption is to identify which of the parties to the contract gives the ‘‘characteristic performance’’. This is a concept which originated in Swiss law, and means the performance which is being bought: in the context of insurance, the ‘‘characteristic performance’’ is the provision of insurance coverage. So the first step in the presumption will always point to the insurer (or, in the case of reinsurance, the reinsurer). The second stage of the presumption is to identify the country in which (at the time of conclusion of the contract) that party’s principal place of business was situated (or if under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated). The presumption is that the contract is most closely connected with the law of this second country. So, in short, the presumption is that the insurer’s law applies. Example: An individual in New York purchases insurance cover for his art collection from an insurance company which has its principal place of business in England; the contract does not specify which of the insurer’s branches is to effect performance. The contract would, in the absence of

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an express or implied choice of law, be presumed to be governed by English law. Article 4(5) allows the presumption to be rebutted where the contract is more closely connected with some other country. One situation where it may be appropriate to override the presumption is where it would lead to a transaction involving insurers in many different countries being governed by many different laws. In such a situation, it may be more convenient to treat the presumption as having its focus in one country. The presumption was rebutted in a comparable situation in the English case Bank of Baroda v. Vysya Bank Limited [1994] 2 Lloyd’s Rep. 87. There, Mance J. considered three contracts. In respect of two of the contracts, he found that English law applied in each case because the characteristic performance was to be given by a company through its office in London. However, he refused to apply the presumption to the third contract where this would have led to that contract being governed by Indian law. The application of the presumption would, he said, have led to a ‘‘wholly anomalous’’ situation whereby a single credit would have been governed by different laws as between different parties. The Rome Convention ‘‘was not intended to confuse legal relationships or to disrupt normal expectations’’ in this way, and the judge therefore held that English law also applied to the third contract. The judge also took into account the fact that the ‘‘object or focus’’ of the third transaction (the confirmation of the credit) was to be performed in England. This decision suggests that the English courts will follow their pre-Rome Convention approach whereby, in the absence of a choice of law, insurance contracts have been held to be governed by the law of the place where the various transactions had their ‘‘centre of gravity’’. This approach permits the courts to find that a single law, for example the law of the place where the brokers placed the risk, applies even where there are several contracts involving parties in different jurisdictions.

(iv) The Rome Convention’s special consumer-protection rules Article 5 of the Rome Convention provides that in a contract to supply goods or services, including a contract of insurance, where no choice of law has been made the applicable law will be the law of the consumer’s habitual residence. If a choice of law has been made, that choice cannot deprive the consumer of the benefit of any mandatory rules which would otherwise have applied. Article 5 applies only in fairly limited circumstances, which may be summarised as follows: – The services must have been supplied for a purpose which can be regarded as outside the consumer’s trade or profession. – The services must not have been supplied exclusively outside the consumer’s habitual residence.

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– An approach must have been made to the consumer, for example an advertisement which was posted in the consumer’s country.

Figure 4: Rome Convention's Rules Yes

Is there an express choice of law?

Choice will be upheld

No Can court discern a choice which was not expressed but is nevertheless demonstrated?

Yes

Choice will be upheld

No Applicable law is law of country with which contract is most closely connected

Rebuttable presumption is that this is law of insurer's (or reinsurer's) country

MANDATORY RULES Where an action is proceeding in England, the English court may apply certain ‘‘mandatory’’ rules of English law even if the contract is otherwise governed by some other law. Mandatory rules are likely to comprise consumer protection legislation such as the Unfair Contract Terms in Consumer Regulations 1999. Example: An individual who is habitually resident in England insures an apartment situated in London with an American insurer under a contract which is expressly governed by New York law (this choice would be valid under Article 7(1)(a) of the Non-Life Directive); the insurer refuses to pay a claim, relying on a term which would be in contravention of the Unfair Terms in Consumer Contracts Regulations 1999; the dispute is heard by an English court. New York law would govern the policy generally. Section 7 of the Regulations provides that the Regulations ‘‘shall apply notwithstanding any contract term which applies or purports to

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apply the law of a non member State, if the contract has a close connection with the territory of the Member States’’. The Regulations are therefore mandatory rules and the court could strike down the offending term, regardless of whether it is valid under New York law.

TEST YOUR UNDERSTANDING Jurisdiction 1. Which factors may make one jurisdiction preferable to another? (Select all which apply.) (a) whether judgments given in that jurisdiction would be recognised and enforced in the place where the defendant has assets; (b) the speed and cost of bringing proceedings; (c) the skill and experience of the judiciary; (d) in a fact-intensive case, how easy it is to bring factual evidence (documents and witnesses) to the forum. 2. What is the main body of rules for determining jurisdiction if the defendant is domiciled in the European Union? (a) (b) (c) (d)

Geneva Convention; Warsaw Convention; Brussels Regulation; common law.

3. What is the main body of rules for determining jurisdiction if the defendant is not domiciled in the EU? (a) (b) (c) (d)

Geneva Convention; Warsaw Convention; Brussels Regulation; common law.

4. Under the common law rules, if the defendant is not present in England, which three of the following must the plaintiff show to enable proceedings to be brought in England? (a) one of the ‘‘special jurisdiction’’ categories applies (e.g., the contract was made in England); (b) there is a reasonable prospect of the claim succeeding; (c) England is the most appropriate forum (‘‘forum conveniens’’); (d) the plaintiff is located in England.

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5. Under the Brussels Regulation, the insurer can always sue the insured in which country? (Select one.) (a) (b) (c) (d)

the the the the

insurer’s home country; insured’s home country; country where the risk is situated; country of the insurer’s choice.

6. Under the Brussels Regulation, the insured can sue the insurer in which countries? (Select all which apply.) (a) (b) (c) (d)

the insured’s home country; the insurer’s home country; the country where insured immovable property is situated; any country where the insured wishes to bring proceedings.

7. Under the Brussels Regulation, jurisdiction clauses in insurance contracts are usually ineffective. In which circumstances will a jurisdiction clause be upheld? (Select all which apply.) (a) (b) (c) (d)

the the the the

policyholder is not domiciled in a Member State; agreement was entered into after the dispute arose; agreement covers loss of ships or aircraft; insured has consented to the agreement.

Applicable law 8. When deciding which law applies to a reinsurance contract, or to a contract of direct insurance covering risks situated outside the EEA, the English court applies the principles set out in which instrument? (a) (b) (c) (d)

Geneva Convention; Prague Convention; Rome Convention; Brighton Convention.

9. Under the Rome Convention’s rules, where the parties have made an express choice of law, will that choice be upheld? (a) yes; (b) no.

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10. Under the Rome Convention’s rules, where the parties have made no express or implied choice of law, which law will be presumed to apply? (Select one.) (a) the law of the insurer’s country; (b) the law of the insured’s country. 11. Under the Second Non-Life Insurance Directive, when do the parties have complete freedom to choose the law which applies to their contract? (Select one.) (a) where the contract insures ‘‘large’’ risks; (b) in any situation; (c) where the contract insures small risk. 12. Under the Second Non-Life Insurance Directive, where the parties have not made a choice of law which law is presumed to apply to their contract? (Select one.) (a) the law of the country where the risk is situated; (b) the law of the country where the insurer is situated; (c) the law of a neutral third country.

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ANSWERS TO TEST YOUR UNDERSTANDING QUESTIONS Chapter 1—An Introduction to Insurance and Insurance Law 1. Which one of the following statements is false? (a) insurance contracts transfer and distribute risk; (b) an insurance contract usually indemnifies the insured only to the extent of his actual loss; (c) wagers are not legally enforceable; (d) all insurance contracts must be in writing in order to be enforceable. Answer: (d). 2. Which one of the following statements describes the effect of s. 53 of the Marine Insurance Act 1906? (a) it provides a window period for renewal of an expired policy; (b) it entitles the agent to bind the insurer to the issue of a policy on any terms; (c) it renders the broker personally liable to the insurer for payment of the premium in marine policies; (d) it requires all contracts to be in writing in order to be enforceable. Answer: (c). 3. Which one of the following statements describes an insurable interest? (a) an insured’s duty of utmost good faith; (b) a cover note issued by the broker; (c) a legal or equitable right of the insured person in the subject matter of the insurance; (d) an agent’s fiduciary duty. Answer: (c). 4. Which one of the following statements describes the effect of ‘‘scratching the slip’’ most accurately? (a) it represents the insurer’s rejection of the proposal; (b) it symbolises the unilateral withdrawal of the insured from the contract; (c) it indicates the receipt of the premium; (d) it creates a contract of insurance between that insurer and the insured. Answer: (d). 5. Which one of the following is not a function usually performed by a broker? 351

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(a) (b) (c) (d)

the collection of premiums; the issue of cover notes; the completion of proposal forms; finding how risky the contract is and setting the level of premium accordingly. Answer: (d). 6. Which one of the following statements best describes the effect of the Third Parties (Rights Against Insurers) Act 1930? (a) it gives third parties the right to claim directly against an insured’s insurers where the insured is insolvent; (b) it gives a third party a statutory right to avoid the policy for nondisclosure or misrepresentation; (c) it establishes intermediaries’ duties in contract and tort. Answer: (b). 7. Which one of the following statements is true? (a) an insurer is always liable for any loss which occurs prior to the inception of the insurance policy; (b) the issue of a cover note usually provides immediate insurance cover; (c) a life policy is a contract of indemnity, so the assured cannot insure for an unlimited amount. Answer: (c). 8. Which one of the following statements is false? (a) only persons authorised by the FSA (or exempt from authorisation) may carry on a regulated activity in the U.K.; (b) insurers established and authorised elsewhere in the EEA have ‘‘passport’’ rights and are exempt from the requirement of authorisation in the U.K.; (c) an unauthorised insurer may underwrite in the U.K. without committing a criminal offence; (d) an insurer should obtain permission from the FSA for each individual class of business it wishes to insure. Answer: (c). Chapter 2—Utmost Good Faith 1. Which of the following statements are correct? (a) the insured must disclose all material facts whether or not he is aware of them; (b) the insured must disclose all material facts which he ought to have discovered by making inquiries; (c) the insured must disclose all material facts which he knew or which he turned a blind eye to;

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(d) the insured must disclose all material facts known to his agents. Answer: (c). See Carter v. Boehm; s. 17 and s. 18(1) of the MIA 1906; Joel v. Law Union; and Australia and New Zealand Bank Ltd v. Colonial and Eagle Wharves Ltd. 2. Which of the following statements are correct? (a) any material false statement made by the insured is a breach of the duty of utmost good faith; (b) a material false statement made by the insured is a breach of the duty of utmost good faith only if the insured acted fraudulently or negligently in misstating the fact; (c) a material false statement made by the insured is a breach of the duty of utmost good faith only if the insured was aware that the fact was material; (d) non-disclosure of a material fact by the insured is a breach of the duty of utmost good faith only if the insured was aware that the fact withheld was material. Answer: (a). See s. 18(1) and (2) of the MIA 1906; and CTI v. Oceanus. 3. In which of the following circumstances is a fact material? (a) it was regarded as material by the insurers involved; (b) it would have been regarded as material by a prudent insurer; (c) it was regarded as material by the insured involved; (d) it would have been regarded as material by a prudent insured. Answer: (b). See Carter v. Boehm; and s. 18(2) of the MIA 1906. 4. Which of the following must be shown to give rise to inducement? (a) the insurers must show that they would have wanted further information before writing the risk; (b) the insurers must show that the risk would on the balance of probabilities have been written on different terms, or not at all, had full disclosure been made; (c) the insurers are, by reason of a presumption of inducement, always entitled to rely upon proof of materiality as evidencing inducement; (d) the insurers can rely upon the presumption of inducement only if they are unable to give their own evidence on inducement. Answer: (b) and (d). See Pan Atlantic; Assicurazioni Generali SpA v. Arab Insurance Group (BSC); and St Paul’s Fire and Marine Insurance Co. v. McConnell Dowell Constructors Ltd. 5. Which of the following facts are material for insurance purposes? (a) the insured’s claims experience; (b) rumours that events giving rise to possible losses have occurred; (c) the dishonesty of the insured.

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Answer: (a), (b) and (c). See Facts Material to Insurance Contracts, i.e. physical and moral hazard and the cases noted thereunder. 6. Which of the following statements are true? (a) a fact need not be disclosed if it was known to the insurers; (b) a fact need not be disclosed if it ought to have been known to the insurers in the ordinary course of their business; (c) a fact need not be disclosed if the insurers could have discovered it on making reasonable inquiries; (d) a fact need not be disclosed if the insurers have failed to ask any questions relating to it. Answer: (a) and (b). See Carter v. Boehm; and s. 18(3) of the MIA 1906. 7. Which of the following statements describes the insured’s post-contractual duty of utmost good faith? (a) the insured is never required to disclose facts after the contract has been entered into; (b) the insured is required to disclose facts after the contract has been entered into only if there is a contractual obligation to provide information; (c) the insurers may avoid the policy if there is a breach of the continuing duty; (d) the obligation not to make fraudulent claims forms a part of the continuing duty. Answer: (b) and (c). See A Post-Contractual Duty of Good Faith?; Pim v. Reid; Kausar v. Eagle Star Insurance Co Ltd. 8. Which of the following statements concerning the insurers’ remedies for breach of the duty of utmost good faith are correct? (a) the insurers can avoid the policy; (b) the insurers can claim damages; (c) the insurers are entitled to rely upon breach of duty even though at the time of avoidance they are aware that the facts have proved to be immaterial; (d) the right to avoid will be lost if the insurers insist upon the insured adhering to the claims procedure without reserving their rights. Answer: (a). See Remedies for Breach of Duty; s. 17 of the MIA 1906; and Brotherton. 9. The insurers are entitled to avoid the contract for non-disclosure by the insured’s brokers in which of the following circumstances? (a) the facts were not known to the broker but were known to the insured; (b) the facts were known to the insured’s producing broker but not to the insured’s placing broker;

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(c) the facts were known to the insured’s placing broker and were derived from his relationship with the insured; (d) the facts were known to the insured’s placing broker but were derived from general market knowledge. Answer: (a), (c) and (d). See Agents and the Proposal Form; s. 19 of the MIA 1906; and Newsholme. 10. The insurers are free by contract term to waive their rights under the duty of utmost good faith in which of the following circumstances? (a) innocent or negligent by the insured to disclose material facts; (b) innocent or negligent failure by the insured’s broker to disclose material facts; (c) fraudulent failure by the insured to disclose material facts; (d) fraudulent failure by the insured’s broker to disclose material facts. Answer: (a) and (b). See s. 18(3)(c) of the MIA 1906; PCW Syndicates v. PCW Insurers; and HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank. Chapter 3—Terms of Insurance Agreements 1. Which of the following statements accurately reflect the approach of the courts to the construction of insurance terms? (a) the courts will interpret words according to their ordinary and natural meaning; (b) the courts will resolve any ambiguities in the terms in favour of the insured; (c) the proposal form may be taken into account in construing the words of the policy; (d) the courts must take account of the surrounding circumstances against which the policy was written. Answer: (a) and (b). 2. Which of the following statements is accurate in relation to warranties? (a) minor breaches of a warranty do not provide insurers with a defence; (b) it is not necessary to show that breach of warranty contributed to the insured’s loss; (c) the warranty that was breached need not be material to the risk in order to provide insurers with a defence. Answer: (b) and (c). 3. What is a continuing warranty? Answer: A warranty which continues throughout the period of the insurance and does not just apply to the time the insurance contract is entered into. 4. What is a suspensive condition?

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Answer: A suspensive condition is one that delimits the circumstances in which the insurer is on risk so that if a loss occurs when the condition is being complied with, the insurer faces liability, whereas, if the condition is not being complied with at the date of the loss the insurer is off risk. 5. Which of the following statements are accurate in relation to warranties? (a) breach of warranty results in automatic termination of the policy; (b) breach of warranty results in a claim for damages; (c) breach of warranty renders the policy void ab initio. Answer: (a). 6. What is the difference between a condition precedent as to enforceability and a condition precedent as to recovery? Answer: If a condition precedent to enforceability is not met, the risk may not attach or contract of insurance may not be created, and so no insurance contract can be enforced against insurers. If a condition precedent to recovery is not met, the insurers are not liable to meet the claim under an insurance contract. 7. Which of the following are true statements regarding The Unfair Terms in Consumer Contracts Regulations 1999? (a) they only apply to terms in insurance contracts with consumers; (b) they apply to warranties and conditions precedent; (c) they do not apply to exclusion clauses in policies. Answer: (a) and (b). 8. Which of the following statements are accurate in relation to breaches of innominate terms? (a) breach of an innominate term never results in repudiation of the policy; (b) breach of an innominate term may result in repudiation of a claim if the breach has serious consequences for insurers; (c) breach of an innominate term may result in insurers only having a claim in damages against the insured. Answer: (b) and (c).

Chapter 4—Measurement of Indemnity 1. Which of the following statements correctly describe constructive total loss? (a) it applies to all forms of insurance; (b) it applies to damage which cannot be repaired other than at a cost greater than the value of the subject matter; (c) it applies whenever the subject matter is seized by a third party. Answer: (b).

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2. In which of the following circumstances can goods be said to have been lost? (a) they have been manufactured with a defect and do not function properly; (b) they have been seized by a third party; (c) they have been sold to a third party who has refused to pay for them. Answer: (b). 3. Which of the following statements accurately describes a valued policy? (a) the assured is entitled to recover the agreed value in the event of the subject matter being lost or destroyed; (b) a valued policy is created where the policy fixes the maximum sum recoverable; (c) a false statement by the assured as to the actual value of the insured subject matter will always render the policy voidable. Answer: (a). 4. Which of the following statements is accurate? (a) the sum recoverable for partial loss under an unvalued policy is the diminution in value of the subject matter; (b) the value of the insured subject matter may vary depending upon whether it is for resale or for use; (c) insurers who replace or repair the subject matter are entitled to deduct a sum representing any additional benefit obtained by the assured in receiving new or better subject matter. Answer: All the statements are accurate. 5. Which of the following forms of consequential loss are recoverable under a policy on property? (a) loss of use of the property pending its repair; (b) interest on the sum payable by the insurers; (c) damages for breach of contract by insurers who have refused to pay a valid claim within a reasonable time. Answer: (b). 6. Which of the following statements accurately describes the term ‘‘event’’ in an aggregation clause? (a) it means the same as ‘‘occurrence’’; (b) an event is something which happens at a particular time, at a particular place and in a particular way; (c) a propensity to negligence is an event; (d) it means the same as ‘‘originating cause’’. Answer: (a) and (b). 7. Which of the following statements is true? (a) the assured under a non-marine policy can recover for the costs of averting loss from a threatened insured peril;

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(b) the assured under a marine policy can recover for the costs of averting loss from a threatened insured peril; (c) the assured under a non-marine policy is under a duty to the insurers to take steps to avoid loss from a threatened insured peril; (d) the assured under a marine policy is under a duty to the insurers to take steps to avoid loss from a threatened insured peril. Answer: (b) and (d). Chapter 5—Claims 1. On the current state of the authorities, a term that the insurer will act with reasonable efficiency in assessing and paying claims is implied: (a) on grounds of business efficacy; (b) on grounds of obviousness; (c) arguably, where the purpose of the policy is to provide for the immediate repair of damaged plant and equipment; (d) where the insured is not entitled to interest. Answer: (c). 2. The insured is entitled to an interim payment: (a) in every case; (b) only where the policy expressly says so. Answer: (b). 3. Notification clauses are: (a) always conditions precedent; (b) sometimes conditions precedent; (c) always innominate terms; (d) sometimes innominate terms. Answer: (b) and (d). 4. The Unfair Terms in Consumer Contracts Regulations 1999 apply: (a) where the insured is a natural person acting for purposes related to his trade, business or profession; (b) where the insurer is a natural person acting for purposes related to his trade, business or profession; (c) where the insured is a natural person acting for purposes outside his trade, business or profession; (d) where the insurer is a legal person acting for purposes related to its trade, business or profession. Answer: All statements are correct. 5. Where a notification clause requires the insured to provide information to insurers and the insured wishes to be sure that it has fulfilled the notification requirements, the information should be provided by: (a) the insured; (b) the insured’s agent;

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(c) any reliable source; (d) a third party with an interest in the claim. Answer: (a) and (b). 6. Insurers should reserve their rights in relation to a claim by an insured: (a) in every case; (b) as soon as a claim is made; (c) as soon as any uncertainty arises as to whether the claim will be accepted; (d) whenever they need time to pursue enquiries to decide whether to accept a claim or to avoid the policy. Answer: (c) and (d). 7. A letter of notification written by an insured to insurers is likely to be privileged: (a) in every case; (b) where the policy of insurance is a liability policy; (c) where the policy of insurance is first party insurance (e.g. fire or theft); (d) where the letter contains a request that the insurer obtain legal advice on behalf of the insured. Answer: (b) and (d). 8. Video evidence obtained by secret surveillance of an insured or a third party claimant in his or her own home is admissible in legal proceedings involving that person: (a) always; (b) never; (c) if the court exercises its discretion in favour of admitting the evidence. Answer: (c). 9. An insured who is found to have exaggerated the amount of his loss is entitled to: (a) the amount he claimed; (b) the amount he could have claimed honestly; (c) the amount he could have claimed honestly unless the claim is substantially fraudulent. Answer: (c). 10. Using a ‘‘fraudulent device’’ may discharge the insurer from liability to pay the claim (whether or not it also entitles the insurer to avoid the policy ab initio): (a) if it would, if believed, yield a not insignificant improvement in the insured’s prospects of recovering an indemnity from insurers; (b) if it is used before litigation is commenced; (c) if it is used after litigation is commenced. Answer: (a) and (b).

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11. Solicitors acting jointly for insurer and insured in respect of a third party claim under a liability policy: (a) may do so if there is a potential conflict of interest; (b) may do so if there is an actual conflict of interest; (c) may do so only if the insured has been informed of the potential conflict and been given time to decide whether to instruct separate solicitors; (d) may do so only if the insured has been informed of the actual conflict and been given time to decide whether to instruct separate solicitors. Answer: (a), (b) and (d). Chapter 7—Marine Insurance 1. The rules of common law including the law of merchant: (a) do not continue to apply to marine insurance contracts; (b) are outlawed by the MIA 1906; (c) continue to apply to marine insurance contracts in so far as they are consistent with the express provisions of the MIA 1906; (d) continue to apply to marine insurance contracts. Answer: (c). 2. According to the MIA 1906, a person has an insurable interest if: (a) the marine insurance contract expressly says so; (b) he stands in any legal or equitable relation to the adventure or to any insurable property at risk; (c) he has an economic expectation of loss; (d) he has a factual expectation of loss. Answer: (b). 3. Which of the following statements are accurate in relation to marine warranties? (a) breach of warranty renders the policy voidable ab initio; (b) breach of warranty is a repudiation of the policy; (c) breach of warranty automatically terminates the contract; (d) breach of warranty automatically terminates the risk. Answer: (d). 4. Which of the following statements is true? (a) there is no need to demonstrate the cause of ingress of water if the assured argues that the loss is attributable to ‘‘perils of the seas’’; (b) once it has been shown by the assured that a fire has taken place, the insurer bears the burden of proving that the fire was not fortuitous; (c) a person who is regarded as ‘‘pirate’’ in marine insurance can, in some cases, have a political motive;

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(d) the definition of ‘‘theft’’ in the MIA 1906 includes clandestine theft. Answer: (b). 5. Which of the following is not a peril excluded from marine insurance coverage by the MIA 1906? (a) wilful misconduct of the assured; (b) delay; (c) inherent vice; (d) war. Answer: (d). 6. In which case is the assured not under an obligation to give notice of abandonment to be able to claim constructive total loss? (a) if he has doubts about the cause of the loss; (b) if he does not initially consider the loss as ‘‘serious’’; (c) if, at the time the assured receives information of the loss, there would be no possibility of benefit to the insurer; (d) if the loss is not attributable to a peril insured against. Answer: (c). 7. If the policy is a valued policy, the measure of indemnity in case of total loss is: (a) the sum fixed by the policy; (b) the market value of the subject-matter insured at the time of loss; (c) the market value of the subject-matter insured at the inception of the policy; (d) the sum determined by the court. Answer: (a). Chapter 8—Property and Financial Insurance 1. Which of the following statements accurately describes an all risks policy? (a) such policies are confined to marine cargoes; (b) the insurers are under an absolute liability to make payment; (c) the insurers are free to include specific exceptions to all risks cover; (d) the assured is required to identify the peril which has caused his loss. Answer: (c). 2. Which of the following statements is accurate? (a) there can be a storm without any wind; (b) there can be a flood only where the ingress of water is the result of a violent, sudden and abnormal event; (c) there can be a fire even though there is no physical conflagration;

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(d) an explosion requires some physical or chemical reaction. Answer: (a), (b) and (d). 3. Which of the following statements are accurate? (a) there is theft if the assured is defrauded into voluntarily parting with his goods; (b) if the policy requires theft by violent and forcible entry, physical damage to the premises is required; (c) there can be robbery if goods are handed over by the assured in the face of threats of violence to someone not on the premises. Answer: (a) and (b). 4. Which of the following statements accurately describes a fidelity policy? (a) it indemnifies the assured for liability to a third party where an employee steals property belonging to a third party; (b) it extends to all persons working for the assured, including independent contractors; (c) it applies only to the theft of tangible property; (d) it only covers thefts which occur during the currency of the policy. Answer: None of them. 5. Which of the following statements accurately describes a legal expenses policy? (a) it may be taken out before or after the assured becomes involved in legal proceedings; (b) insurers can never be liable for a sum in excess of their policy limits; (c) if the assured’s action succeeds, the amount of his premium can be awarded to him by way of costs against the other party. Answer: (a) and (c). 6. Which of the following statements is correct? (a) a reasonable care clause in a policy of insurance prevents recovery where the assured has negligently caused his own loss; (b) a reasonable care clause is superfluous as it reflects the common law; (c) the assured cannot recover for damage to property proximately caused by wear and tear. Answer: (b) and (c). 7. Which of the following statements is accurate in respect of war risks? (a) losses caused by terrorism always fall within the definition of ‘‘war’’; (b) the term ‘‘riot’’ implies a political objective on the part of the rioters; (c) the term ‘‘civil commotion’’ implies a political objective on the part of the participants. Answer: (c).

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Chapter 9—Motor and Other Liability Insurance 1. Which of the following statements are true in relation to notification under claims made liability policies? (a) if the assured notifies circumstances likely to give rise to a future claim then the insurers are liable to meet the claim even though it is made after the policy has expired; (b) the assured is required to inform the insurers once he is aware that proceedings have been commenced against him; (c) each individual claim made against the assured must be notified to the insurers. Answer: (a) and (b). 2. In the absence of any specific policy terms on the point, which of the following will not be covered by a liability policy? (a) loss caused by a criminal act; (b) loss caused by an act which is fraudulent or reckless; (c) loss caused by a breach of contract; (d) loss caused by negligence. Answer: (b). 3. In the absence of any specific policy terms on the point, which of the following types of defence costs are payable under a liability policy? (a) those incurred in defending a claim in respect of an uninsured peril; (b) those incurred concurrently with another defendant who is uninsured; (c) those which, when added to the sum payable by way of liability, exceed the sum insured under the policy. Answer: (b). 4. Which of the following risks must be insured under the Road Traffic Act 1988? (a) use of a motor vehicle on private land; (b) use of a motor vehicle by any other person; (c) personal injuries suffered by the driver; (d) property damage suffered by the driver. Answer: None of them. 5. Where the owner of a vehicle authorises another person to use his motor vehicle and that other is not insured, which of the following statements are true? (a) the owner is guilty of a criminal offence; (b) the owner may be sued in tort by any victim of the driver; (c) the owner may be required to indemnify the insurers for any payment that they made to a victim. Answer: All of them.

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6. The passenger in a vehicle will be unable to claim from the driver’s insurers in which of the following circumstances? (a) the vehicle was stolen; (b) the driver was intoxicated; (c) the vehicle was being driven while unroadworthy; (d) the passenger has agreed that the driver is not to be liable for any negligence. Answer: (a). 7. Which of the following statements are true in respect of the victim of a negligent driver to recover compensation? (a) the victim can sue the driver and then enforce the judgment against the insurers; (b) the victim can sue the insurers directly without proceeding against the driver; (c) the policy must cover all personal injury and property damage suffered by the victim; (d) the insurers are liable even though the vehicle is being driven by a thief. Answer: (a), (b) and (d). 8. The Motor Insurers Bureau is liable to compensate victims in which of the following circumstances? (a) the driver could not be traced; (b) the driver was uninsured; (c) the driver’s insurers have avoided liability under the policy; (d) the victim was a passenger in a vehicle which he knew to be uninsured or stolen. Answer: (a), (b) and (c). 9. Which of the following statements in relation to compulsory employers’ liability insurance are true? (a) the policy must cover all personal injuries suffered by employees to an unlimited amount; (b) the insurers cannot avoid the policy for breach of the duty of utmost good faith; (c) the employers’ controllers are personally liable in tort if there is no insurance in place; (d) the insurance industry will pay compensation to the victim of an uninsured employer. Answer: None of them. 10. In the event that an assured defendant has become insolvent, which of the following statements are accurate in relation to the rights of a person wishing to claim against the assured under the Third Parties (Rights against Insurers) Act 1930? (a) the assured must provide details of his insurance;

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(b) a direct action may be brought against the insurers in order to establish the assured’s liability; (c) the insurers can rely on a policy term which reduces their liability in the event of insolvency; (d) the insurers can only be liable for claims in tort as opposed to claims in contract. Answer: (a). Chapter 10—Choice of Law Jurisdictional Issues 1. Which factors may make one jurisdiction preferable to another? (a) whether judgments given in that jurisdiction would be recognised and enforced in the place where the defendant has assets; (b) the speed and cost of bringing proceedings; (c) the skill and experience of the judiciary; (d) in a fact-intensive case, how easy it is to bring factual evidence (documents and witnesses) to the forum. Answer: All of them. 2. What is the main body of rules for determining jurisdiction if the defendant is domiciled in the European Union? (a) Geneva Convention; (b) Warsaw Convention; (c) Brussels Regulation; (d) common law. Answer: (c). 3. What is the main body of rules for determining jurisdiction if the defendant is not domiciled in the EU? (a) Geneva Convention; (b) Warsaw Convention; (c) Brussels Regulation; (d) common law. Answer: (d). 4. Under the common law rules, if the defendant is not present in England, which three of the following must the plaintiff show to enable proceedings to be brought in England? (a) one of the ‘‘special jurisdiction’’ categories applies (e.g., the contract was made in England); (b) there is a reasonable prospect of the claim succeeding; (c) England is the most appropriate forum (‘‘forum conveniens’’); (d) the plaintiff is located in England. Answer: (a), (b) and (c). 5. Under the Brussels Regulation, the insurer can always sue the insured in which country?

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(a) the insurer’s home country; (b) the insured’s home country; (c) the country where the risk is situated; (d) the country of the insurer’s choice. Answer: (b). 6. Under the Brussels Regulation, the insured can sue the insurer in which countries? (a) the insured’s home country; (b) the insurer’s home country; (c) the country where insured immovable property is situated; (d) any country where the insured wishes to bring proceedings. Answer: (a), (b) and (c). 7. Under the Brussels Regulation, jurisdiction clauses in insurance contracts are usually ineffective. In which circumstances will a jurisdiction clause be upheld? (a) the policyholder is not domiciled in a Member State; (b) the agreement was entered into after the dispute arose; (c) the agreement covers loss of ships or aircraft; (d) the insured has consented to the agreement. Answer: (a), (b) and (c). 8. When deciding which law applies to a reinsurance contract, or to a contract of direct insurance covering risks situated outside the EEA, the English court applies the principles set out in which instrument? (a) Geneva Convention; (b) Prague Convention; (c) Rome Convention; (d) Brighton Convention. Answer: (c). 9. Under the Rome Convention’s rules, where the parties have made an express choice of law, will that choice be upheld? (a) yes; (b) no. Answer: (a). 10. Under the Rome Convention’s rules, where the parties have made no express or implied choice of law, which law will be presumed to apply? (a) the law of the insurer’s country; (b) the law of the insured’s country. Answer: (a). 11. Under the Second Non-Life Insurance Directive, when do the parties have complete freedom to choose the law which applies to their contract? (a) where the contract insures ‘‘large’’ risks; (b) in any situation;

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(c) where the contract insures small risk. Answer: (a). 12. Under the Second Non-Life Insurance Directive, where the parties have not made a choice of law which law is presumed to apply to their contract? (a) the law of the country where the risk is situated; (b) the law of the country where the insurer is situated; (c) the law of a neutral third country. Answer: (a).