Archive for the ‘U.K.’ Category

UK Court: Directors Insured Under D&O Policies Cannot Avail Themselves of the Financial Ombudsman Service

Tuesday, December 2nd, 2014

By Luke Johnson and Tristan Hall, Sedgwick London

The question of whether directors insured under D&O policies are entitled to complain to the Financial Ombudsman Service (“FOS”) in respect of an insurer’s handling of a claim has been a frequent discussion point for those involved in D&O insurance.  R (on the application of Bluefin Insurance Services Ltd) v Financial Ombudsman Service Ltd [2014] EWHC 3413 (Admin) establishes that it is unlikely that the FOS will be able to entertain such complaints, and directors must rely on the dispute resolution provisions in their D&O policy.

This case concerned the handling of a complaint to the FOS by Mr Lochner (a former director of Betbroker Limited) against Bluefin Insurance Service Limited (“Bluefin”) in connection with the notification of a potential claim to Mr Lochner’s D&O insurer.  Some years after the notification, a claim was actually pursued against him that was not covered under his D&O insurance.

The FOS considered they had jurisdiction to hear the complaint on the basis that Mr Lochner was a consumer.  Bluefin brought judicial review proceedings of that decision.

The court rejected the FOS’s arguments that Mr Lochner was acting as a consumer and determined that the FOS had no basis on which to assert jurisdiction over Mr Lochner’s complaint.  In reaching this view, the Court considered that the claim against Mr Lochner arose out of acts which were undertaken by him as a director and in the course of his (former) business.  Therefore, “the subject matter of his complaint was wholly concerned with the potential loss arising from lack of insurance cover in respect of a liability which [Mr Lochner] has incurred in the course of his trade, business or profession”.

In light of this judgment it is unlikely that the FOS will be entitled to determine complaints made by directors in respect of the main potential liability D&O policies insure against: claims against them arising from actual or alleged wrongful acts committed in their capacity as directors or officers of a company.

However, this is not to say that all disputes in relation to D&O policies will fall outside the FOS’s jurisdiction.  For example, spouses of directors and officers are routinely covered under D&O policies (but only in respect of the directors/officers’ wrongful acts) and their potential liability does not necessarily arise in the course of any trade, business of profession.  Whilst such claims are rare, the court suggested in obiter that it may have reached a different conclusion if Mr Lochner’s spouse had sought to complain.

UK Securities Claims Update

Wednesday, November 26th, 2014

By Tristan Hall. Sedgwick London

At our financial lines seminar in London on 16 October, we considered the question of whether UK Securities claims are finally coming of age.  As part of that presentation, we reviewed the group action brought by investors against RBS and its directors and officers under Section 90 of the Financial Services and Markets Act 2000 (“FSMA”) regarding alleged misstatements made in a prospectus issued by RBS in connection with its rights issue in 2008.  The remedy afforded under Section 90 of FSMA is similar to that provided for under sections 11 and 12 (a) (2) of the Securities Act 1933 in the US.

It now seems likely that another high profile securities claim will be brought before the English Court as, on 25 November, it was reported that the law firm¹ representing one of the Claimant groups in the RBS case intends to file proceedings against Tesco and certain of its directors and senior management in connection with its recent announcement that the company had overstated its profit by £263 million.

It seems probable that the Tesco claim will proceed under Section 90A of FSMA, which covers misstatements or omissions in an issuer’s periodic financial disclosures or in information published to the market by means of a recognised information service.  The remedy afforded under Section 90A of FSMA is similar to that provided for under sections 10b and 18 of the Securities Exchange Act 1934 in the US.  Indeed, a putative class action already has been filed against Tesco and certain of its directors in New York federal court for and on behalf of purchasers of Tesco ADRs alleging violations of the Securities Exchange Act 1934.

Assuming the Tesco claim proceeds, then there will be two high profile claims before the English Courts that, for the first time, seek to test the remedies afforded to investors under FSMA.  The outcome of both claims will therefore be of significant interest to UK publicly traded companies, their directors and D&O insurers.

Another interesting feature of both claims is that they are being supported by litigation funding.  As we suggested at our seminar, the availability of litigation funding is likely to be a driver of UK securities litigation in the future.

 


 

¹ Stewarts Law – http://www.stewartslaw.com/tesco-to-face-legal-claim-from-shareholders-over-its-overstatement-of-profits.aspx

 

Lost Cargo is Dead Weight: Insurer Avoids Coverage Due to Breach of “Deadweight Warranty” in Marine Policy

Friday, October 3rd, 2014

By Alex J. Potts, Sedgwick Bermuda

In Hua Tyan Development Ltd v Zurich Insurance Co Ltd [2014] HKCFA 72, the Hong Kong Court of Final Appeal dismissed a marine insurance claim on grounds of breach of warranty by an insured.

The parties entered into an insurance contract with respect to a shipment of a cargo of logs from Malaysia to the People’s Republic of China.   The contract contained a clause warranting the vessels’ deadweight capacity to be no less than 10,000 tons (the “Deadweight Warranty”).

In mid-January 2008, the vessel sank and the cargo was lost.  The insurers rejected the insured’s claim in connection with the loss on the basis that the Deadweight Warranty had been breached, as the vessel only had a deadweight capacity of about 8,960 tons.

The court held that insurers are entitled to rely on the Deadweight Warranty, despite the insured’s various arguments based on estoppel, waiver and rectification. The court found no inconsistency in the insurance contract with respect to the identification of the vessel by name and the existence of the Deadweight Warranty.

The judgment provides considerable certainty and clarification to insurers operating in the Hong Kong marine insurance market, to the effect that insurance contracts will be enforced in accordance with their terms. Although a Hong Kong court decision, the judgment should be of interest to London and Bermuda insurers and P&I clubs for a number of reasons:

  1. Hong Kong’s Marine Insurance Ordinance of 1961 largely follows the UK’s Marine Insurance Act 1906, which was in turn a codification of the common law. As in England and Bermuda, breach of a marine insurance warranty discharges an insurer’s liability automatically as of the date of breach.
  2. This is a topical area of law which is the subject of review, and likely statutory reform, in the UK.
  3. The dismissal of the appeal means that the insured’s brokers have been found liable to indemnify the insured with respect to the vessel’s insured value. The precise circumstances giving rise to the broker’s liability were not fully explored in the judgment; however, the case demonstrates the liabilities that brokers face in practice, when cover is successfully denied by insurers.

Business Interruption Insurance: Clearing up the Confusion

Tuesday, September 16th, 2014

By Alex J. Potts, Sedgwick Bermuda

In Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm), the English Commercial Court has confirmed the nature of an insurance broker’s duties to its clients when obtaining Business Interruption Insurance (BII) cover.

This case arose out of a broker’s negligence claim, brought by a waste recycling company that had suffered significant losses following a fire. The court dismissed the claim on the basis that the broker had satisfied its duty of care, and it was the company’s own acts or omissions that had resulted in it being under-insured.

The court summarized the broker’s obligations as follows:

  • A broker is not expected to calculate the BII sum insured or choose an indemnity period (which are matters for the commercial client).
  • A broker must, however, explain to the client the method of calculating the sum insured, technical policy terms such as “estimated gross profits” and “maximum indemnity period,” and relevant considerations when choosing a maximum indemnity period.
  • A broker will need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but not necessarily by way of detailed investigation. The nature and scope of a broker’s obligation to assess a commercial client’s BII needs will depend upon the circumstances, including the client’s sophistication, and the number of times the broker has met the client in the past.
  • Although BII is for commercial clients, the level of client sophistication will vary enormously. It cannot be assumed that a small or medium-sized enterprise (an SME) will have any understanding of the nature of BII cover.
  • If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
  • Having satisfied these obligations, a broker must exercise reasonable care to adhere to express instructions as to the BII cover to be obtained.

Although the outcome of the case turned on its own facts, the legal principles are important to the way in which insurance brokers conduct themselves when placing BII risk in the London market, and they should be of interest to brokers’ professional indemnity insurers.

The court made two observations of relevance to the London market collectively. The court noted that, notwithstanding the contract certainty initiative in the London market, there were certain aspects of standard BII policy wordings, such as the definition of gross profit and the calculation of indemnity periods, which still remained unclear for clients, brokers, loss adjusters, and even some insurers. The court also noted that the insurance industry, unlike other parts of the financial services industry, did not yet have standard procedures in place for the identification and recording of sophisticated clients.

It remains to be seen whether the same standard of care is imposed on brokers in the Bermuda insurance and reinsurance market, given certain differences in market practice in London and Bermuda, and the sophisticated nature of many Bermuda (re)insureds.

England and Wales Court of Appeal: Do Not Disclose At Your Peril

Friday, April 25th, 2014

By Andrew Milne, Sedgwick London

The Court of Appeal in England and Wales recently affirmed the High Court’s decision in Alan Bate v Aviva Insurance UK Ltd [2014] EWCA Civ 334, which held that Aviva was entitled to rescind or avoid a domestic property insurance policy taken out by Alan Bate.

Mr. Bate took out a policy covering a substantial property he owned called the Long House, which he was converting into five separate dwellings. The Long House was damaged in a 2001 fire, and a claim was made with Mr. Bate’s previous insurers. At the time Mr. Bate sought coverage from Aviva, he represented in his application that the 2001 fire had occurred at a “previous address,” and failed to disclose the renovation being done to his property and that the company performing the work was based at the property.

In June 2006, the Long House was largely destroyed by a second, accidental fire following which Mr. Bate submitted a claim to Aviva. Aviva did not accept the claim, and informed Mr. Bate it had decided to rescind and/or avoid the policy on the grounds of misrepresentation and non-disclosure. Mr. Bate commenced proceedings against Aviva, and the High Court ruled in Aviva’s favor.

The judgment is interesting because it concerns a claim that arose before the Consumer Insurance (Disclosure and Representations) Act 2012 came into force. The Act replaced a consumer’s duty to voluntarily disclose material facts with a duty to take reasonable care not to make a misrepresentation during pre-contractual negotiations. Although a similar decision probably would have been reached in this case even if the Act had been in effect when Mr. Bate filed his claim with Aviva given the misrepresentation he made about the 2001 fire, it is unlikely to be long before we see reported cases where insurers are prevented from rescinding or avoiding consumer insurance policies in circumstances where they would have been able to do so before the Act took effect.

Eye on Insurance: A Look Back at 2013 and Forward to 2014

Monday, February 3rd, 2014

2013 was a year characterized by continued pressure on the financial sector, a new regulatory landscape and further challenges for the insurance industry branching into emerging risks and economies. The lawyers in our London office authored this update which reviews the key developments and trends for various classes of business during 2013, together with commentary on what we can expect from 2014.

To view and download a PDF copy, click here.

Another Victory for Arbitration: The UK Supreme Court

Thursday, June 20th, 2013

By Mark Chudleigh, Sedgwick Bermuda

The United Kingdom’s highest court, the Supreme Court, has confirmed that English courts may intervene to issue an “anti-suit” injunction to restrain a party from bringing court proceedings in violation of an arbitration clause even if there are no arbitration proceedings in existence. This will be welcome news to the many insurers and reinsurers who incorporate London arbitration clauses into their policies, including carriers in the Bermuda market who frequently stipulate for coverage disputes to be resolved through arbitration in London under the English Arbitration Act 1996.   

The appeal arose out of a high value dispute involving the operation of a hydroelectric power plant in Kazakhstan and a concession agreement that provided for disputes to be arbitrated in London.  The owner of the plant issued court proceedings in Kazakhstan and obtained an order declaring the arbitration agreement invalid.  The operator then filed court proceedings in England seeking a declaration that the arbitration agreement was valid and enforceable and an anti-suit injunction to restrain the owner from continuing the Kazakhstan proceedings in violation of the arbitration clause. However, the operator chose not to file arbitration proceedings seeking any relief in relation to the concession agreement.

The English court granted both the declaratory and injunctive relief sought. The owner then appealed to the Supreme Court on the grounds that English courts have no jurisdiction to restrain foreign proceedings brought in violation of an arbitration clause where no arbitral proceedings have been commenced or are proposed.  In dismissing the appeal, the Supreme Court affirmed that the English courts have a long-standing and well-recognized jurisdiction to restrain foreign proceedings brought in violation of an arbitration clause even where no arbitration is on foot or in contemplation.

While the Supreme Court’s ruling is unlikely to come as a surprise to most arbitration practitioners, its unequivocal support of the arbitration process – even in light of a contrary ruling by a foreign court – will provide comfort to the many insurers and reinsurers who chose London as the venue for any arbitrations arising under their polices.  

Ust-Kamenogorsk Hydropower Plant JSC (Appellant) v AES Ust-Kamenogorsk Hydropower Plant LLP (Respondent) [2013] UKSC 35

An American Export: Contingency Fees Adopted in the UK

Thursday, April 4th, 2013

By Mark Chudleigh, Sedgwick Bermuda

It has taken nearly 20 years for the United Kingdom to move from a time when it was unlawful (or champertous) for a lawyer to share in the fruits of litigation, to the introduction of U.S.-style contingency fee arrangements.  Although the legislators have shied away from using the expression “contingency fee” – instead naming them “Damages-Based Agreements” or “DBAs” – they are in all respects a contingency fee arrangement whereby lawyers can retain a percentage of the damages of up to 25% in personal injury cases, 35% in employment cases, and 50% in most other cases. These arrangements are now lawful in the U.K. with effect from April 1, 2013.

The impact on litigation and on insurers is likely to be significant, as a U.S.-style plaintiff bar develops and seeks to make                U.S.-style returns from litigation.  This will be fueled by the growth of the litigation funding industry, which includes the use of bespoke “after-the-event” insurance solutions to protect plaintiffs from the risk of adverse costs exposure in the event litigation is unsuccessful.

Where the U.K. leads, other countries may follow.  Several countries – Australia, New Zealand, Hong Kong and Bermuda for example – have legal systems based on English law and may look to enact similar legislation.  Insurers and reinsurers with exposure to these countries should watch developments closely, as will we, and will provide updates on any developments.

Causation is Not Elementary, My Dear

Friday, March 15th, 2013

By Chen Foley, Sedgwick Bermuda

Sherlock Holmes famously said, “when you have eliminated the impossible, whatever remains, however improbable must be the truth.”  This reasoning has been adopted by trial judges seeking to resolve questions of causation.  In Nulty & Others v Milton Keynes Borough Council [2013] EWCA Civ 15 [Here*] the English Court of Appeal found that a judge was wrong to do so.  It concluded that, where there are multiple causation scenarios, each of which is unlikely, the court is not entitled to favor the scenario that is the least unlikely.

Mr. Nulty carried out repair work at a recycling plant.  While on a break, a fire broke out in the area where he was working, causing extensive damage.  The owner blamed Mr. Nulty for the fire and sued him. His liability insurers defended the action.

The trial judge indentified three possible causes of the fire: (1) a carelessly discarded cigarette, (2) arcing from a live cable, and (3) arson.  He concluded that, although it might be unlikely that an experienced electrical engineer would discard a cigarette in a dangerous manner, the two other scenarios were even more unlikely.  Having eliminated the two most unlikely scenarios, he concluded the remaining one was the true cause of the fire.

The insurers appealed.  The Court of Appeal found that the judge’s reasoning was flawed.  The claimant must prove on the balance of probabilities the cause of its loss; and it is for the judge to examine the evidence produced by the claimant to determine if causation has been proved.  If the judge is unable to reach a decision on the evidence, he is required conclude that the claimant has not proved its case.  Where the evidence suggests a scenario is improbable, a finding by the court that it was nevertheless more likely to have occurred than another does not accord with common sense.

Trial judges have been cautioned against reaching conclusions on causation by merely seeking to eliminate implausible scenarios.  Doing so runs the risk of the judge settling on the least unlikely cause, without having regard to whether there is sufficient evidence establishing that it is, in fact, the true legal cause.

The decision is a helpful reminder to insurers engaged in defending their insureds of the evidentiary burden that must be satisfied when establishing causation.  This is particularly so where, as in Nulty, the claimant relies on circumstantial evidence alone to do so.

Twin Towers: Two Events, Two Occurrences under English law

Friday, February 15th, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Aioi Nissay Dowa Insurance Company Ltd v Heraldglen Ltd & Advent Capital (No 3) Ltd [2013] EWHC 154 (Comm), 8 February 2013, the English Commercial Court upheld an arbitration tribunal’s award that the 9/11 terrorist attacks on the Twin Towers of the World Trade Center were properly described as two separate occurrences arising out of two separate events, for the purposes of an aggregation clause under a retrocession excess of loss reinsurance programme governed by English law.

Applying the ‘unities’ doctrine to the facts of the case, the arbitration tribunal (made up of Mr Ian Hunter QC as Chairman, Mr David Peachey and Mr Richard Outhwaite) concluded that the losses arising on the 10 inward reinsurances were caused by two separate occurrences arising out of separate events. The Commercial Court agreed with the tribunal’s reasoning and its conclusions on the agreed primary facts, which had been taken from the Final Report of the National Commission on Terrorist Attacks upon the United States.

The ‘unities’ doctrine is an English law test that derives from Mr Michael Kerr QC’s award in the Dawson’s Field Arbitration in 1972. It has been applied and developed by Rix J in Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664, and subsequently affirmed by the English Court of Appeal in Mann v Lexington Insurance Co [2001] 1 Lloyd’s Rep 1 and Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR 696. The ‘unities’ test of aggregation has been stated to depend on the position and viewpoint of an informed observer (placed in the position of the insured), and it involves consideration of the degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible. The ‘unities’ test must be assessed by finding and considering all the relevant facts carefully, and then conducting an exercise of judgment and analysis. The exercise should be performed on the basis of the true facts (even if they are only discovered subsequently), and not simply on the basis of the facts as they may have appeared at the time.

Although specifically dealing with reinsurance contracts subject to LSW (London Standard Wording) 351, this judgment of the Commercial Court, and the underlying arbitration award, provide some welcome certainty to the reinsurance market generally on the issue of aggregation under English and Bermuda law.

A copy of the judgment can be found here: http://www.bailii.org/ew/cases/EWHC/Comm/2013/154.html

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