Archive for the ‘U.K.’ Category

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

Boom or Bust: Third Party Rights Against Liability Insurers of Bankrupt Entities in Bermuda and the U.K.

Friday, February 1st, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Re Kingate Management Limited (in Provisional Liquidation) [2012] SC (Bda) 52 Com, the Supreme Court of Bermuda considered the statutory rights of third party claimants to assert direct claims against liability insurers of insolvent and bankrupt insureds in Bermuda.

This is the first occasion that the Court has considered and applied Bermuda’s Third Parties (Rights Against Insurers) Act 1963, a piece of legislation modeled on the U.K.’s Third Parties (Rights Against Insurers) Act 1930.  The Court confirmed that the effect of Bermuda’s legislation is that the benefit of insurance policies taken out by an insolvent company (or bankrupt individual) with respect to third party liabilities are directly transferred to any third party to whom the company is liable, by operation of law.  The transfer of rights takes place when a winding-up order is made or a liquidator is appointed.

The Court also confirmed that the Act imposes discovery obligations on an insolvent insured and its liquidator, receiver or trustee in bankruptcy, as well as its insurer.  A third party who asserts a disputed claim against an insolvent company which is insured against the relevant liability is entitled to obtain from the insolvent insured, and its insurer, such documents and information as may reasonably be required for the purpose of ascertaining and enforcing such rights, if any.

Importantly, the Bermuda Court followed and applied the English Court of Appeal’s decision in Re OT Computers Ltd (in administration) [2004] 3 WLR 886, which made clear that, under English law, a third party claimant did not need to have conclusively established liability before it was entitled to documents and information relating to the insurance position.

It should be noted that the U.K. Act is due to be significantly reformed by the Third Parties (Rights Against Insurers) Act 2010. However, the implementation date for the U.K. reforms has been delayed, and the new legislation is not currently expected to come into force until later this year.

Be Prudent with Privilege: Legal Advice From Non-Lawyers is Not Privileged Under English and Bermuda Law

Wednesday, January 23rd, 2013

By Alex Potts

In its first major judgment of 2013, R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another [2013] UKSC 1, the United Kingdom Supreme Court has confirmed the common law principle that legal professional privilege only applies to communications passing between a client and its lawyers in connection with the provision of legal advice.

As a matter of English law, privilege does not apply to communications between a client and other professional service providers, such as accountants or consultants, even if their advice is legal or quasi-legal in nature (as tax, corporate, restructuring, regulatory and compliance advice often is).

The case arose out of a U.K. tax avoidance scheme devised by PricewaterhouseCoopers (‘PwC’) for the Prudential group in 2004. The U.K. tax authorities investigated the scheme, and served document requests on Prudential. Prudential refused to give disclosure of certain sensitive documents, claiming that legal professional privilege attached to communications between Prudential and PwC relating to the tax advice given by PwC, and it sought to challenge the tax authorities’ request by way of judicial review.

The English High Court and the Court of Appeal both rejected Prudential’s claim to legal professional privilege. Prudential appealed to the Supreme Court (supported by the U.K. accountancy profession), the appeal being heard by a panel of seven Supreme Court judges. By a majority of five to two (Lord Sumption notably dissenting), the Supreme Court dismissed Prudential’s appeal, and confirmed that legal professional privilege should not be extended to non-lawyers (unless Parliament enacts primary legislation to that effect).

This judgment is likely to be followed in other jurisdictions that follow English common law, such as Bermuda. Indeed, Bermuda courts have confirmed that legal professional privilege is a fundamental right, protected both at common law and by Bermuda’s constitution, which can only be specifically overridden by statute, or by the client waiving its privilege (IRS & Minister of Finance v Braswell [2001] Bda LR 41, [2002] Bda LR 51; R v Hoskins [2003] Bda LR 25; and Fidelity Advisor Series VIII v APP China Group Ltd [2006] Bda LR 70).

U.S. and international businesses should continue to ensure that they take advice from properly qualified lawyers on both English law and Bermuda law matters, if they want to keep their legal, tax, and regulatory advice privileged from inspection.

The full judgment and a summary can be found here.

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