Liability insurance

Supreme Court orders non-party’s liability insurers to pay both parties’ costs of a wills dispute

In the recent case of Marley v Rawlings and another [2014] UKSC 51, the Supreme Court held that a non-party solicitor’s liability insurers should bear both parties’ costs of the proceedings, in circumstances where the solicitor was responsible for the error which had prompted the dispute. Natasha Hawkins, an associate in our London office, considers this case and the wider circumstances in which liability insurers might be exposed to a non-party costs order in English litigation.

The Marley v Rawlings case

This case concerned an appeal against the Court of Appeal’s refusal to admit to probate the will of Alfred Rawlings. Mr Rawlings’ solicitor had drafted the wills of both Mr Rawlings and his wife (who predeceased Mr Rawlings), but had mistakenly presented the Rawlings with each other’s wills for signature, meaning that Mr Rawlings had signed his wife’s will, and vice versa. Mr Marley was named as the beneficiary under Mr Rawlings’ will, and therefore would have been entitled to the inheritance if the will had been validly executed. Mr Rawlings’ two sons would have been entitled to the inheritance under intestacy rules if the will had not been validly executed. A dispute arose therefore between Mr Marley and Mr Rawlings’ sons, the respondents, over the validity of the will.

Although the solicitor responsible for the error was not a party to the litigation, the solicitor’s liability insurers agreed to underwrite Mr Marley’s costs of bringing proceedings to have the will upheld as valid, after Mr Marley intimated a claim for professional negligence against the solicitor.

The Supreme Court held that the will had been validly executed, and therefore that Mr Marley was entitled to the inheritance, which amounted to around £70,000. While, in the usual course of hostile litigation, the losing party would be expected to pay the successful party’s costs, the Supreme Court noted that, where the litigation concerns the validity of a will and where both parties pursue a reasonable argument, it would generally be appropriate to order that the costs of the dispute be paid out of the estate. In this case, however, the Supreme Court was concerned that, given the size of the estate and the level of costs incurred, this would deprive the successful party, Mr Marley, of any benefit from the litigation or from the estate.

In light of this, the Supreme Court considered whether to issue a non-party costs order against Mr Rawlings’ solicitor (or its insurers). Insurers raised defences that:

the Court should only issue non-party costs orders in exceptional cases;
it would be unfair to require the solicitor (or insurers) to pay the respondents’ costs in circumstances where the solicitor owed no duty of care to the respondents; and
it was not the solicitor’s (or his insurers’) fault that the respondents had chosen to fight the claim
The Supreme Court was not persuaded by these arguments, finding that:

it is not unusual for costs to be awarded against a non-party who funds or is responsible for litigation;
the respondents’ decision to fight the litigation was not unreasonable, and it would be unfair if they had to pay substantial costs; and
it was foreseeable that the respondents would contest the claim to the Supreme Court, given that they had been successful in the High Court and the Court of Appeal.
The Supreme Court decided that, rather than ordering the parties to recover their costs from the estate (leaving Mr Marley to pursue a claim against his solicitor, and the solicitor to be indemnified by insurers), a practical shortcut would be to order insurers to pay all of the costs of Mr Marley up to and including the Supreme Court, and the costs of the respondents up to and including the Court of Appeal. The respondents’ solicitors and counsel had acted under a conditional fee agreement in respect of the Supreme Court proceedings, and the Supreme Court held that the respondents were entitled to recover also from insurers their solicitors’ disbursement costs in relation to the Supreme Court proceedings, including counsel’s base fees.

This case is a reminder to solicitors and their liability insurers that, even where rectification proceedings are successful, they may be liable for significant adverse costs (particularly where they have agreed at the outset to fund one of the party’s costs of the proceedings).

Wider circumstances in which liability insurers might incur non-party costs orders

The English Court has wide jurisdiction to grant costs orders against parties and non-parties to litigation. Under section 51(3) of the Senior Courts Act 1981, the County Court, High Court and Court of Appeal ‘…have full power to determine by whom and to what extent the costs [of the litigation] are to be paid’. Similarly, under its rules, the Supreme Court is entitled to make any costs orders ‘as it considers just’.

While the starting point when considering potential liability for a non-party costs order is that such orders are ‘exceptional’, the threshold for defining what is ‘exceptional’ has been lowered gradually since the landmark House of Lords decision in Aiden Shipping v Interbulk Limited (The Vimeira) (No 2) [1986] 1 AC 965, and the Court has shown increasing willingness to order non-parties to pay litigation costs. ‘Exceptional’ is now accepted to mean ‘no more than outside the ordinary run of cases where parties litigate for their own benefit and at their own expense’ (see Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others [2004] UKPC 39).

Of course, it is common (and thus not ‘exceptional’) for liability insurers to fund and/or control litigation, and the Court has held that this would not usually render insurers liable for adverse costs where their interests overlap with those of the insured (as they generally would). However, where the interests of insurers and the insured are not aligned, and where the insured has no interest in the dispute and/or no reputation to protect, insurers may be at risk of liability for adverse costs. In the case of Plymouth and South West Co-operative Society Ltd v Architecture, Structure and Management Ltd [2006] EWHC 3252 (TCC), for example, the Court issued a non-party costs order against insurers of the insolvent defendant, in circumstances where insurers had funded the entirety of the defence and where the defendant had wanted to put the company into liquidation and had no desire to defend the claim.

In Marley v Rawlings, the Supreme Court was persuaded by the fact that the solicitor’s insurers had required Mr Marley to bring the proceedings as a step in mitigation (in respect of his potential claim against the solicitor) and had underwritten the costs of doing so.

In summary, liability insurers should be alive to the risk of a non-party costs order where they not only fund litigation, but where:

insurers control or are set to benefit from the litigation and where the litigation is pursued against (or in the absence of) the insured’s interests; and/or
insurers are responsible for the litigation taking place and/or for a party incurring costs that would not otherwise have been spent.

For further information contact Natasha Hawkins.

Teal Assurance Company Ltd v WR Berkley Insurance (Europe) Ltd [2013] UKSC 57

Black & Veitch (BV) was insured against professional indemnity liabilities above a self-insured retention of $US10 million. The primary layer of US$5 million was with Lexington. Above that layer was the “PI Tower”, consisting of three excess layers insured by Teal, the captive insurer within the BV Group. The layers were, in respect of any one claim, for US$5 million, US$30 million and US$20 million respectively. Finally, there was a top layer, consisting of a “top and drop” policy of US$10 million. The primary and excess layers provided worldwide cover, but the top and drop policy excluded any claims emanating from the US and Canada. The PI Tower was reinsured with various reinsurers, and the top and drop policy was reinsured with Berkley and Aspen each for 50 per cent. The reinsurance followed the underlying cover issued by Teal.

Four claims were brought against BV: 

  1. in respect of the Ajman Sewerage Plant (Ajman) in the United Arab Emirates – BV had paid US$20.5 million and had settled for a further US$14 million;
  2. in respect of the Phoenix Park Gas Processing (PPGP) facility in Trinidad, liabilities amounting to some US$9.5 million; 
  3. in respect of liability to American Electric Power (AEP), the sum paid being US$10.5 million; and 
  4. in respect of further potential liability to AEP, potentially up to US$240 million.  

Claims 3 and 4 fell outside the reinsurance coverage provided by the top and drop policy, but all four claims were within the other policies. Teal claimed that the AEP claims exhausted the PI Tower, so that the Ajman and PPGP claims fell within the top and drop policy and thus the reinsurance, so that Teal had two claims of up to £10 million.

The reinsurers asserted that the Ajman and PPGP claims were covered by the PI Tower, and that the only claims falling within the top and drop were the two AEP claims, both of which were excluded from the reinsurance.

At first instance, Andrew Smith J, on a trial of preliminary issues, held as follows: 

Claims were to be allocated to the PI Tower in the order in which losses were suffered by BV, based on the date on which BV’s loss for a claim was established and quantified. Clause 1 of the general policy did not operate to postpone Teal’s liability by reference to the time at which it either paid claims or admitted liability for those claims. The purpose of Clause 1, along with the drop clause, was not to require payment or admission of liability before a claim could be treated as attributable to the cover under the PI Tower. 
Teal was not permitted to disregard the order of the losses by aggregating its losses and then treating the excess sum as falling within the general policy insofar as those sums did not flow from excluded American losses. 
The PI Tower cover was not eroded by the order in which claims were notified to Teal. 
It was left open, but doubted, whether there was a general principle that a reinsured could allocate losses so as to maximise recovery under its reinsurance.
The Court of Appeal upheld the judgment of Andrew Smith J. It ruled that any construction of the policies which allowed Teal to determine how to allocate the losses was uncommercial, and that it made more sense for the cover to be exhausted in an orderly manner depending upon when liability was established against BV.

The Supreme Court upheld the judgment of the Court of Appeal. The ascertainment, by agreement, judgment or award, of the assured's liability gave rise to the claim under the insurance, and to that extent exhausted the coverage. It was not the case that cover was eroded by the actual payment of the claim by the insurers. A claim against the assured which was not notified to the insurers did not go towards exhausting the cover, but once a claim was notified then its priority would be determined by reference to the date on which the assured’s liability was established and quantified. The terms of the policies in the present case were consistent with that principle in that they defined the amount of liability but not its timing. The result was commercially sensible in that it prevented adjustment of liabilities to maximise reinsurance coverage.

For further information: Teal Assurance Company Ltd v WR Berkley Insurance (Europe) Ltd [2013] UKSC 57.

Aspen Insurance UK Ltd v Adana Construction Ltd [2013] EWHC 1568 (Comm)

The assured, Adana, were the sub-contractors of Bowmer & Kirkland (BK) for various ground works. The work included the supply, delivery and installation of crane bases for tower cranes to be erected on site to facilitate the building work. A crane was installed, but it collapsed on 6 July 2009. Although expert investigation showed that the fault was probably not that of Adana, it was joined in proceedings against BK by the injured crane driver.

The claimant liability insurers accepted that the risk of liability was low, but brought the present proceedings for a declaration of non-liability. Under the policy Adana was insured against public liability, other than liability caused by any product, and it was insured against product liability other than for the product failing to fulfil its intended function. The court refused the declaration of non-liability.

  1. The crane base was a lump of concrete with no component parts.
  2. If the crane base was a product, then the claim was not one based on the crane base failing to fulfil its purpose. The purpose was to transfer the weight of the crane down into the piles, and that purpose was achieved. In any event the crane base had not caused the loss or damage.

For further information: Aspen Insurance UK Ltd v Adana Construction Ltd [2013] EWHC 1568 (Comm).

Joyce v O’Brien [2013] EWCA Civ 546

The claimant and defendant were respectively nephew and uncle who on occasion worked together in gardening/labouring work. The parties had together stolen some extending ladders and had loaded them onto the defendant’s Ford Transit van. The ladders were too long to fit inside the van with the doors closed, and so the back rear door was left open with the ladders protruding. The claimant stood on the rear foot plate of the van, holding onto the van with his left hand and the ladders with his right hand. As the van negotiated, at some speed, a sharp left turn at a road junction, the claimant lost his grip and fell off. The defendant subsequently pleaded guilty to a charge of dangerous driving, in that although he was not exceeding the speed limit he was driving at a speed which was unsafe in the circumstances.

The claimant commenced proceedings against the defendant. The claim was defended by the defendant’s liability insurers. They pleaded two defences. First, there was no duty of care owed to the claimant, in that it was impossible for the law to lay down an appropriate standard of care in such circumstances. Secondly, even if there was a duty of care and it had been broken, the claimant was precluded by his own conduct from recovery, on the basis of the maxim ex turpi causa non oritur actio. Cooke J held that both defences succeeded, and that in cases such as the present the defences were interchangeable. He rejected the claimant’s argument that the defence did not apply where the criminality and the injury were disproportionate.

On appeal, the Court of Appeal upheld the ruling, but only on the basis of causation: where the character of the joint criminal enterprise was such that it was foreseeable that the claimant might be subject to unusual or increased risks of harm as a consequence of the activities of the parties in pursuance of their criminal objectives, and the risk materialised, the injury could properly be said to be caused by the criminal act of the claimant.

For further information: Joyce v O’Brien [2013] EWCA Civ 546.

Fairclough Homes Ltd v Summers [2012] UKSC 26

The claimant suffered broken bones in his hand and heel from an accident at work. The defendant employers, through their insurers, admitted liability. On 10 May 2006, the claimant commenced proceedings against the employers. He obtained a judgment dated 28 August 2007, with quantum to be assessed. The defendants were ordered to pay interim costs of £2000 and voluntarily made an interim payment of £10,000. The claimant served schedules of loss accompanied by statements of truth. The initial claim was £838,616, but when confronted with undercover surveillance evidence this was reduced to £251,481. By his judgment on 23 February 2010 the judge drew the inference of fraud against the claimant, based on his behaviour and the unreliability of his evidence, and awarded a total figure of £88,716.76. The defendants sought to have the entire claim struck out for fraud. The Supreme Court held as follows:

  1. It was rarely appropriate to strike out a claim after judgment under CPR 3.4(2). It was generally disproportionate to deprive a claimant of a substantive right which he had established after a fair trial.
  2. A party who fraudulently or dishonestly invented or exaggerated a claim would have considerable difficulties in persuading the trial judge that any of his evidence should be accepted, thereby reducing his chances of establishing both liability and quantum.
  3. A fraudulent claimant should be ordered to pay the costs of any part of the process which had been caused by his fraud or dishonesty, and on an indemnity basis. Such costs might even leave the claimant out of pocket.
  4. It would not help the defendant to make a Part 36 offer representing the genuine loss, because such an offer requires the defendant to pay the fraudulent claimant’s costs. However, it remained possible for a defendant to make a Calderbank offer under which there was an offer to settle the genuine claim but on the basis that the claimant will pay the defendant’s costs incurred in respect of the fraud on an indemnity basis.
  5. The court could also reduce interest that might otherwise have been awarded to a claimant where time had been wasted on fraudulent claims.
  6. Contempt could be an effective sanction. Those caught should expect to go to prison. There was no reason why contempt proceedings should not be a part of the substantive proceedings themselves, because the trial judge would be best placed to hear both.
  7. There was also a possibility of criminal proceedings, in that the judge could refer the matter to the Criminal Prosecution Service or the Director of Public Prosecutions.

On the facts of the present case a striking out would not be ordered, instead, judgment would be given for the claimant, because he had suffered serious injury. The effect of the costs and interests awards, plus the deduction of the £10,000 previously received, would be that the claimant would see very little of the award of £88,716.76. That aside, the Supreme Court thought that this was a case in which, had permission for contempt proceedings been granted, such proceedings would have had every prospect of success.

For further information: Fairclough Homes Ltd v Summers [2012] UKSC 26

Employers’ Liability insurance “Trigger” litigation: Supreme Court brings clarity to exposure or manifestation issue


The Supreme Court of the United Kingdom has unanimously upheld the 2008 decision of Burton J, in the Employers’ Liability Policy Trigger Litigation (Durham v BAI (Run-Off) Limited [2012] UKSC 14) in holding that insurance policies providing indemnity against employers’ liability (EL) on the basis of either “disease contracted” or “injury sustained” to their employees are triggered by exposure to asbestos rather than the manifestation of disease - in other words, both types of policy respond on a causation rather than an occurrence basis.  

The Supreme Court has gone further than the majority of the Court of Appeal, which had held that an “injury sustained” wording did not respond to the causal origin of that injury but only to its manifestation, which in some cases took place years after exposure when tumours appeared. The Supreme Court judgment is consistent with the finding of the majority of the Court of Appeal that the commercial purpose of EL insurance is to provide employers with cover to meet any liability which arises from their activities as employers during the period of insurance.  

By a 4-1 majority (Lord Phillips dissenting), the Supreme Court also held that the special causation rule concerning employers’ liability to employees for mesothelioma (see Fairchild v Glenhaven Funeral Services [2002] UKHL 22 and Barker v Corus [2006] UKHL 20 - as modified by the Compensation Act 2006) should apply equally to the question of proof of the employers’ liability for purposes of claiming indemnity under EL policies.

The facts

The claimants were employees who had been exposed to asbestos in the course of their employment, and who had thereafter contracted mesothelioma. The medical evidence showed that, following exposure, the disease did not actually occur for up to 40 years, and it was only when the body’s defence mechanism failed that a mutated cell would become cancerous and develop into mesothelioma. First diagnosis was only possible approximately five years after disease occurred, and thereafter the disease would be fatal in around 14 months. There was therefore in many cases a period of some 35 years between exposure and the onset of the disease. Furthermore, the disease was not dose-related, although the risk of injury was necessarily greater the longer the period of exposure.

Employers had, at the time of exposure, taken out policies against liability to employees for injury. Some of those policies were written on a "causation" basis, so that they responded to the event which caused the disease (i.e. the exposure). Others were written on an “injury sustained” or “disease contracted” basis.

The judgment

Burton J at first instance held that the "sustained" wording was to be construed in the same way as the causation wording, so that there was cover at the date of inhalation rather than the date that tumours appeared. The Court of Appeal, by a majority, allowed appeals by the insurers in part, holding that “sustained” meant “suffered” and that policies with a "sustained" wording responded only on an occurrence basis. The Supreme Court has affirmed the Court of Appeal’s ruling that “contracted” in the policies meant caused, but has reversed the Court of Appeal to hold that “sustained” also meant caused and that the insurers were therefore liable on the basis of either form of wording.

No view was expressed on the correctness of the decision in Bolton MBC v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50, where it was held that “sustained” meant suffered in the context of a Public Liability (PL) policy. EL and PL might mean different things because the policies operated on different bases and had different backgrounds, terms and purposes.

The Employers Liability (Compulsory Insurance) Act 1969 required insurance on a causation basis. The Supreme Court ruled that policies issued in accordance with the Act were to be construed as complying with its terms.

The decisions of the House of Lords in Fairchild v Glenhaven Funeral Services Ltd and Barker v Corus UK Ltd (as modified by the Compensation Act 2006, section 3) created a special rule that when a victim contracted mesothelioma, each person who had, in breach of duty, been responsible for exposing the victim to a significant quantity of asbestos dust and had had thereby created a “material increase in risk” of the victim contracting the disease was jointly and severally liable in respect of the disease. This was an example of the relaxation of the ordinary “but for” causation test. In Durham v BAI (Run-Off), the majority of the Supreme Court took the view that once it was held that employers were liable to their employees, it would be remarkable if the insurers were not in turn liable under EL policies that they had issued to the employers. Accordingly, for the purposes of such policies, the negligent exposure of an employee to asbestos during the policy period had a sufficient causal link with a subsequent diagnosis of mesothelioma to trigger the insurer’s obligation to indemnify the employer.

Lord Phillips dissented from the majority of the Supreme Court in relation to the application of Fairchild to insurers' liability. The decision in Fairchild created a new tort of materially contributing to the risk of injury: in accordance with the special rule of causation established in that decision, the victim can recover against the employer on developing the disease. That did not mean, however, that the employer was no longer required to prove that the exposure took place within a given policy year in order for the employer's EL insurance to respond. In Lord Phillips' judgment, Fairchild decided that exposure to the mere risk of mesothelioma gave rise to liability on the part of the employer; it did not decide that that the defendant's liability for actually causing mesothelioma was established by proof of negligent exposure. Additional or different considerations came into play when the question was the liability of insurers to indemnify the employer. In the absence of damage at the time, neither the injury nor causation requirements could be satisfied for the purposes of policies written on a causation basis. The consequence was that a claimant who had to show that mesothelioma was initiated in a particular policy year in order to establish that a particular insurer was liable would fail for want of proof of causation.

Our thoughts on the case

Michael Mendelowitz, partner at Norton Rose LLP and head of the contentious insurance and reinsurance practice in London, comments:

The Supreme Court has delivered a commonsense judgment and one that accords with the policy behind the UK legislation regulating EL insurance (and the previous claims handling practice of the market). It brings clarity to an issue in relation to which the claims of the appellant insurers involved had given rise to significant uncertainty. In practical terms, it means employers should now be able to claim on older policies that they held when their employees were first exposed to asbestos. It also means that employees can claim direct against the original insurers in instances where the employer has gone out of business by reason of insolvency.

The judgment does, however leave one area of conflict unresolved. The Court of Appeal came to different conclusions on the issue of what triggers an insurer’s liability to indemnify in respect of mesothelioma in Durham v BAI and in the earlier case of Bolton MBC v Municipal Mutual Insurance Limited. Whilst the Durham decision concerns EL policies, the Bolton decision dealt with PL policies, and departs from Durham in holding that the trigger of cover is the onset of malignancy rather than exposure. The Supreme Court has not resolved the conflict, stopping short of expressing a view on the correctness of the Bolton decision, and holding that the cases are distinguishable.

For further information: Employers' Liability Insurance “Trigger” Litigation: BAI (Run Off) Ltd v Durham & Ors [2012] UKSC 14 (28 March 2012)

AXN v Worboys [2012] EWHC 1730 (QB)

W, a taxi driver, sexually assaulted a number of women in his taxi after persuading them to accept alcoholic drinks laced with sedatives. It was accepted that his conduct was deliberate and fell outside his licensed activities as a taxi driver. The victims brought claims against W for damages. The question was whether W’s motor liability insurers, who had issued compulsory motor cover complying with the Road Traffic Act 1988 (RTA), were liable to meet the claims. Silber J held that they were not.

  1. The injuries did not arise out of the use of a vehicle on a road or other public place in accordance with RTA, section 145(3)(a). The term “arising out of” contemplated more remote consequences than the phrase “caused by”, and it required a relationship between the injuries and the use of the vehicle. In the present case the injuries of the claimants were caused by the criminal acts of W in administering sedatives and then in attempting to or actually assaulting the claimants. They did not arise out of the use of the taxi on a road.
  2. The liabilities incurred by W were not required to be covered by a policy of insurance under RTA, section 145(3)(a). Although cases where the vehicle was used as a weapon were covered by RTA, this was a case in which the injuries did not arise out of the use of the taxi on the road.
  3. The policy itself – which was restricted to “accidents involving your vehicle” – did not extend to deliberate acts. Further, the restriction of cover to “private hire” and to “social, domestic and pleasure purposes” meant that the policy did not apply. It was necessary to assess the essential character of the journey at the time of the occurrence of the incident leading to the claim. By the time of the assaults, the essential character of the journey had changed and the primary purpose had become the assaults.

For further information: AXN v Worboys [2012] EWHC 1730 (QB)

Sienkiewicz v Greif (UK) Ltd [2011] UKSC 10

In Sienkiewicz v Greif (UK) Ltd‚ Mrs Costello died of mesothelioma on 21 January 2006. She worked for the defendants from 1966 until 1984, during this period she was exposed to asbestos dust, although the exposure was very light. The evidence showed that even if Mrs Costello had not been employed by the defendants, she would have been subject to environmental exposure, and that her employment had increased the risk of disease from 24 cases per million to 28.39 cases per million, an increase of risk of 18 per cent.

In Willmore v Knowsley Metropolitan Borough Council, Mrs Willmore died of mesothelioma on 15 October 2009. Before her death Mrs Willmore asserted that she had been exposed to asbestos at the secondary school at which she had been a pupil, by reason of work involving ceiling tiles containing asbestos and the storing of those tiles in a girl’s lavatory at the school.

The Supreme Court, upholding the decision of the Court of Appeal, held that the defendants were liable in tort.

  1. In mesothelioma cases the law recognised that, where there were consecutive exposures by different defendants it was impossible to prove which exposure was the cause of the disease and accordingly a defendant was liable if his exposure constituted a material increase in the risk of the disease being contracted. That meant that, in a multiple exposure case, every defendant faced liability (Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22).
  2. Under the Compensation Act 2006, section 3, reversing Barker v Corus UK Ltd [2006] UKHL 20, every defendant was 100 per cent liable to the claimant for the loss.
  3. Section 3 did not lay down any principle of causation, but merely provided that if a defendant had exposed the claimant to asbestos and the claimant had contracted mesothelioma, that defendant was 100 per cent liable. The question of causation remained a matter for the common law, the test being whether there was a material contribution to the risk of injury.
  4. There was no distinction to be drawn between multiple exposure cases, such as Fairchild, and single exposure cases such as the present, where there was only one defendant and the competing causes were either exposure by the defendant or environmental exposure due to asbestos dust in the general atmosphere. The question was whether the defendant had materially contributed to the risk of injury.
  5. The “double the risk” test – whereby if statistical evidence showed that the defendant had doubled the risk of injury, then it followed that it was more likely than not that the defendant had caused the injury – had no part to play in mesothelioma cases, and (the majority view) had no part to play in other cases. Epidemiological evidence had to be used with great caution in the context of establishing liability.

For further information: Sienkiewicz v Greif (UK) Ltd [2011] UKSC 10 (9 March 2011).

Halliwells LLP v Nes Solicitors [2011] EWHC 947 (QB)

The claimant solicitors commenced proceedings against the defendant solicitors to enforce an undertaking given by the defendants to pay the sum of £1.5 million on behalf of a client. Judgment was obtained and the claimants sought to enforce the judgment against the defendants’ liability insurers under the Third Parties (Rights against Insurers) Act 1930.

The court ruled that the insurers were not liable under the policy.

  1. The undertaking had been given dishonestly on behalf of the defendants and was thus excluded by the express terms of the policy.
  2. Any liability had to arise out of “Private Legal Practice in connection with the Insured's Practice”, the latter term being defined as “the provision of services in private Practice as a solicitor.” In the present case the guarantee was not given in that capacity – the defendants had been retained only to give the guarantee, and did not form part of any other commercial transaction in which the defendants had acted as solicitors for the client.

For further information: Halliwells LLP v NES Solicitors [2011] EWHC 947 (QB) (23 February 2011).

Beazley Underwriting Ltd v Travelers Companies Inc [2011] EWHC 1520 (Comm)

On 16 May 1997 Travelers sold the Minet Group of insurance brokers, to Aon, and issued a deed of indemnity to Aon. Under clause 2.1 of the deed, Travelers agreed to indemnify Aon against any loss, liability, claim or cost arising directly or indirectly out of any event or matter occurring on or before 16 May 1997. The indemnity excluded any obligations of any subsidiary of Aon arising out of its own negligent act, breach of duty, error or omission. Clause 4.14 of the deed provided that where there was a continuing series of related events, occurrences or matters which amounted to, or would amount to, an indemnified claim then such events occurrences or matters occurring during the period of 12 months following completion would be deemed to have arisen or occurred prior to completion.

A claim was made against Aon by Standard Life in respect of a professional indemnity policy. The excess in the policy in 1994 permitted aggregation of claims arising from a common cause or source. But, when the insurance was renewed in 1995, the excess was amended so as to read “claim and/or claimant”, and was raised from £2.5 million to £25 million. The policy was renewed by Minet in 1997, and was renewed for the period 1998-2001 by Aon as purchasers of Minet. In Standard Life Assurance v Oak Dedicated [2008] Lloyd’s Rep IR 552 Tomlinson J held that the policy excess applied separately to each claimant making a claim against Standard Life so as to preclude aggregation of separate claims arising from a common cause, so that Standard Life were prevented from making any recovery at all under its insurance. Aon claimed against Travelers under the deed, and Travelers settled Aon’s claim in the sum of US$32.5 million. Travelers sought to recover this sum from its own insurers, who had issued two liability policies for US$20 million. The policy wording applied “in respect of any claim arising out of a wrongful act of any of the Minet Companies and/or liability it may incur under the Deed of Indemnity”. Clause 2.1 stated that “a series of events, occurrences or matters occurring during the 12 months following the date of sale related to any wrongful act occurring prior to the date of sale shall be deemed to have arisen or occurred prior to the date of sale”. Christopher Clarke J held that the insurers were not liable to Travelers.

  1. Travelers were as a matter of law not liable under the deed of indemnity. The only act of negligence relevant to the loss occurred in respect of the placement of the 1998 renewal and the earlier negligent renewals could not be regarded as a series of related events. The earlier negligent placements had not given rise to any claims. Further, Aon’s liability to Standard Life arose out of its own negligence, and not that of Minet.
  2. The policy did not respond to the claim by Standard Life against Aon. The cover afforded by the policy was one in respect of liability in relation to claims made against the Minet companies for breach of duty arising out of and in the course of the activities of the Minet Group in respect of wrongful acts committed prior to the date of sale by Minet. It reflected the deed of indemnity.
  3. In any event, Aon’s negligence occurred more than 12 months after the date of the sale, 16 May 1997, in that Standard Life’s professional indemnity policy was not placed prior to 16 May 1998. The slips scratched prior to that date were subject to satisfactory reinsurance, proposal forms and completion of a millennium (Y2K) questionnaire. The reinsurance subjectivity was not removed before 16 May, and the proposal forms and Y2K subjectivities were in force until the final placing slip without subjectivities which began to be scratched on 11 June 1998. The slips scratched before 16 May 1998 were quotation slips and they were not unconditionally accepted. The inclusion of subjectivities meant that the acceptance was qualified and that there had been no acceptance of the offers. The three subjectivities were not routine or administrative. The subjectivities could not be regarded as giving rise to binding but conditional contracts. The subjects themselves were matters which, of their nature, were required to be satisfied before underwriters accepted the risk. In those circumstances the natural construction of the scratches with accompanying subjects was that the underwriters were not on risk until the subjects were satisfied. Further, the scratches did not create a held covered insurance under which the insurers agreed to hold the assured covered for a finite period pending the satisfaction of the subjectivities.

For further information: Beazley Underwriting Ltd & Ors v The Travelers Companies Incorp. [2011] EWHC 1520 (Comm) (17 June 2011)

AXA General Insurance Ltd v Lord Advocate [2011] UKSC 46

The Damages (Asbestos-Related Conditions) (Scotland) Act 2009 provides that pleural plaques and related conditions constitute, and are deemed always to have constituted, actionable harm for the purposes of claims for damages for personal injuries. The Act came into force on 17 June 2009, and was designed to reverse Rothwell v Chemical & Insulating Co Ltd [2007] UKHL 39 which held that pleural plaques did not constitute damage and, further, that a claim could not be brought for anxiety in respect of the risk that actual injury might develop. A similar Act was passed in Northern Ireland on 21 March 2011. The UK government did not follow suit but instead introduced a statutory compensation scheme under which £5000 would be paid to any person who had commenced proceedings at the time Rothwell was decided.

The Pleural Plaques Former Claimants Payment Scheme was launched on 2 August 2010 and required applications to be made by 1 August 2011. An action was brought by the applicant employers’ liability insurers seeking a declaration that the Act was unlawful on two grounds: it was incompatible with the Protocol to the European Convention on Human Rights (ECHR), in that it interfered with the existing rights of the applicants and thus outside the competence of the Scottish Parliament; and it was open to judicial review on the grounds that it was an unreasonable, irrational and arbitrary exercise of the legislative authority conferred by the Scotland Act 1998.

The Supreme Court dismissed the applications.

  1. The competence of the Scottish Parliament was not removed by the ECHR. The applicants had the right to bring the proceedings because they were victims for the purposes of the ECHR in that their rights were affected. However, the legislation could be regarded as a matter of social justice on which the Scottish Parliament was entitled to legislate as a matter of public policy. The legislation was proportionate to the problem addressed, in that insurers were liable only if negligence was shown and in any event the insurers had entered into a commercial venture which was inextricably associated with risk and the nature, number and value of claims were always unpredictable. It might have been different had the law on pleural plaques been settled by judicial decision when the policies were written
  2. The Acts of the Scottish Parliament were not subject to judicial review at common law on the grounds of irrationality, unreasonableness or arbitrariness.

For further information: AXA General Insurance Ltd & Ors v Lord Advocate & Ors (Scotland) [2011] UKSC 46 (12 October 2011).

International Energy Group Ltd v Zurich Insurance Plc UK [2012] EWHC 69 (Comm)

The assured employer exposed an employee to asbestos for a period of 27 years. In that period the defendant insurers were on risk as employers’ liability insurers for six years. The employee contracted mesothelioma, and judgment was obtained against the employer in the sum of £278,451.60. The claim was governed by the law of Guernsey. The employer claimed the full sum from the insurers.  

Cooke J held that, because the claim was governed by the law of Guernsey, the Compensation Act 2006 was not applicable. That meant that the claim had to be apportioned to each exposure, with the result that – assuming regularity of exposure – the assured was in the period of insurance liable for only 6/27ths of the loss. That meant that the insurers were liable for only 6/27ths of the liability. Had the employee’s claim been governed by English law, the Compensation Act 2006 would have applied and the employer would have been 100 per cent liable for each exposure, so that the insurers would equally have been 100 per cent liable (subject to the right to claim contribution from other insurers on risk in the period of exposure).

For further information: International Energy Group Ltd v Zurich Insurance Plc UK [2012] EWHC 69 (Comm) (24 January 2012)

Standard Life Assurance Ltd v Ace European Group [2012] EWHC 104 (Comm)

Standard Life operated a Life Pension Sterling Fund, which included a substantial proportion of asset backed securities. From 2007, asset backed securities became increasingly illiquid and, with effect from 14 January 2009, Standard Life took the decision to switch to a different source of prices. This led to a one-day fall of 4.8 per cent in value of units in the fund. Following complaints by customers, Standard Life concluded that some 64 per cent (by value) of customers (worth £124 million) would have mis-selling claims. Standard Life decided that it would restore the 4.8 per cent fall and then invite claims, and it paid those sums into the fund.

Standard Life sought to recover the payments from its liability insurers. The policy was for £100 million and covered Mitigation Costs defined as “any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid a third party claim or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this Policy”. There was a deductible of £10 million in respect of a single claim, defined as “All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together”. The assured claimed that its payment constituted Mitigation Costs. Eder J gave judgment for Standard Life.

  1. The payments were a “cost” and/or a “payment of loss”. The Clause did not import the concept of “purpose” but was concerned only with whether the intended effect or result was to reduce the number of claims. It would suffice that the payment was reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims otherwise covered by the policy.
  2. On the evidence, the payments were made in order to avoid or to reduce third party claims of a type which would have been covered under the Policy within the meaning of “Mitigation Costs”.
  3. The sum recoverable was not to be apportioned by the consideration that Standard Life may have had the mixed motive of reducing claims (insured) and protecting its own reputation (uninsured). The argument for apportionment was novel outside the field of marine insurance and, in particular, in the context of liability insurance, and was largely derived from the principle of average which applied to under-insurance.
  4. All of the actual and potential claims could be aggregated so that Standard Life had to bear only one deductible. All of the claims that Standard Life faced arose out of the (actual or alleged) misrepresentation of the nature and risk profile of the fund and that was a “unifying factor” justifying aggregation. Clause 2 was very widely worded and it was difficult to envisage a more widely drawn form of aggregation clause. The phrase “in connection with” was extremely broad and indicated that it was not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their “originating cause or source”, and that some form of connection between the claims and the unifying factor was all that was required.

The liability insurers have been given leave to appeal. However, the case is unlikely to be heard until autumn.

For further information: Standard Life Assurance Ltd v Ace European Group & Ors [2012] EWHC 104 (Comm) (01 February 2012)