INSURANCE E-BRIEF AUTUMN 2015

INSURANCE E-BRIEFAUTUMN 2015

02 INSURANCE E-BRIEFAUTUMN 2015

CONTENTSPROPERTYRing the alarm again 03

REINSURANCEIn to escrow or out of escrow? The Commercial Court decides in Teal v WR Berkley (again) 05

POLICY INTERPRETATIONNotifying insurers about likely claims 07

LIABILITYAvoidance: materiality and inducement 09

Liability for the unstable of mind 11

JURISDICTIONLocation, location, location: three recent decisions on governing law and jurisdiction 13

CYBERCyber risk – issues involving physical damage 16

W&I INSURANCEIntroduction to W&I insurance 18

IN BRIEFInsurance Act 2015 21

Costs recovery in civil litigation is compatible with human rights 22

Costs budgeting 22

Mesothelioma claims under Guernsey law 23

Aggregation and solicitors’ PI insurance 23


PROPERTYRing the alarm again

The Court of Appeal has confirmed Mr Justice Jay’s judgment in Milton Furniture Ltd v Brit Insurance Ltd. In doing so, the Court opined on both the approach to take to construing clauses that cover similar grounds in the same document and what

“attended” means in the context of a property policy.

The factsIn April 2005 a fire destroyed most of the furniture in the Claimant’s warehouse.

Milton submitted a claim under its Commercial Combined Insurance policy taken out with Brit Insurance Ltd. The policy contained two terms that came under particular scrutiny: Protection Warranty 1 (PW1) and General Condition 7 (GC7).

PW1 provided:

“It is a condition precedent to the liability of the Underwriters in respect of loss caused by Theft and/or attempted Theft that the Burglar Alarm shall have been put into full and proper operation whenever the premises... are left unattended and that such alarm system shall have been maintained in good order throughout the currency of this insurance policy under a maintenance contract with a member of NACOSS” [emphasis added].

GC7 stated:

“The whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interests of Underwriters without their prior consent” [emphasis added].

On the night of the fire, two individuals were sleeping at the premises. The burglar alarm, which had been monitored by SECOM until February 2005 when monitoring ceased due to non-payment of invoices, was not set. Brit rejected Milton’s claim on the basis that it had failed to comply with GC7, which Brit claimed was a condition precedent.

Interaction between PW1 and GC7Milton argued that PW1 (which did not itself apply as the damage in question was not caused by “Theft and/or attempted Theft”) was an individually agreed special condition and, as such, GC7, which was a standard policy term, must be subordinate to it.


There was no hint of Jay J’s reluctance at the decision he came to at first instance that recovery under the policy was not possible. In commercial insurance at least, insurers can continue to rely on the protections they design for themselves in their policies as long as those protections are clear.

The Court of Appeal’s comments on the meaning of “attended” are of general application to property insurance and will be welcomed by insurers.

Would the case have been decided differently under the Insurance Act 2015? We do not think that it would. Section 11 of the Act prevents an insurer from relying on the insured’s breach of any contractual provision (including conditions precedent) which is intended to reduce the risk of a loss of a particular kind or at a particular time or place if the insured can prove that its breach could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. In this case, Milton may well have sought to argue that its breaches of the alarm warranty could not have increased the risk of loss by fire. In response, Brit would no doubt have pointed out that while the cause of the fire was unknown, it was thought to have been started by an intruder and that the breach of the burglar alarm condition precedent could have increased the risk of loss because, if the alarm had been working, the arsonist may have been detected at an early stage.

Kiran Soar Partner

Roderic Jones Solicitor

On this question, the Court of Appeal confirmed that when there are two contractual provisions which cover similar ground, the task of the court is to give effect to each, save insofar as they are actually inconsistent. The burglar alarm served two purposes: to reduce the risk of theft and also to protect against the risk of an intruder who could damage the property by fire. Since the loss was caused by fire and not theft, it was clear that the requirements of GC7 applied.

Breach of GC7 The Court held that Milton was in breach of both requirements in GC7. Business hours ended at 20.30 on the evening of the fire but the fire alarm was not set in the part of the complex that suffered the fire. The fact that two people were sleeping in different, but linked, parts of the complex did not prevent Milton from setting the alarm in the part where the fire occurred, as was its duty under the policy and as Milton had done in the past.

The Court went on to hold that although two people were sleeping at the premises, the premises were in fact “unattended”. It refused to follow Jay J’s construction at first instance that “unattended” was broadly akin to “unoccupied”. Instead, it held that

“attended” was akin to “under observation” and thus the two sleepers could not in any meaningful sense be held to be “attending” at the building.

Milton was also held to be in breach of the second limb of GC7. By failing to pay SECOM’s invoices and permitting the monitoring service to end, apparently without Milton’s knowledge, Milton was in breach of a strict obligation to avoid the withdrawal or variation of a protection that benefitted underwriters.

CommentThe Court of Appeal took a strict approach to the construction of the relevant terms and found against Milton on every point, including those where Jay J had found for it.


REINSURANCEIn to escrow or out of escrow? The Commercial Court decides in Teal v WR Berkley (again)

The Court was asked to look at a preliminary issue in the ongoing Teal Assurance Co v (1) WR Berkley Insurance (2) Aspen Insurance proceedings, namely, whether the insured’s loss occurred when money was paid into an escrow account (set up to pay claims under a settlement agreement) or when the money was drawn down from the escrow account by the third party claimant.

This dispute arose from Black and Veatch Corporation’s (BVC, the original insured) layered liability insurance programme, comprised of one base policy underwritten by Lexington, three excess layers underwritten by Teal (the captive insurer of BVC) and a top and drop policy also underwritten by Teal, but reinsured equally by WR Berkley and Aspen (Reinsurers). BVC notified Teal of various claims, with four in excess of $1 million. Two of these were US/Canada claims and two were non-US/Canada claims, brought by Ajman and PPGPL. This was significant because the top and drop policy specifically excluded US or Canadian loses.

The Commercial Court, Court of Appeal and Supreme Court had all previously held that BVC and its captive, Teal, were not able to choose which claims were met by the lower levels so that the claims remaining were not USA or Canadian claims and therefore possible to pass onto the reinsurers. Click here to read our article on the Supreme Court decision.

The main issue in this round of the litigation was whether BVC suffered a loss, for the purposes of its entitlement to an indemnity under its professional indemnity insurance, when (i) it paid the sums into the escrow account; or (ii) as and when money was drawn out of the escrow account. This was important to Teal – scenario (ii) would be advantageous to it to the tune of over $11 million, as the Reinsurers would be liable to indemnify Teal by this method of calculation but not if the date of payment into escrow was the relevant date.

“...there was no material difference between an interim payment order and an escrow agreement...”

http://incelaw.com/en/knowledge-bank/publications/how-do-your-claims-stack-up


Unsurprisingly, the Reinsurers argued that there was no material difference between an interim payment order and an escrow agreement and that a court order for an interim payment ascertained liability at the time of the interim payment. By analogy, therefore, BVC’s loss occurred when it paid monies into the escrow account. This argument was rejected by Eder J, who also noted that BVC had voluntarily entered into the escrow agreement, thus distinguishing it from a court order for an interim payment.

Teal put forward a number of arguments in support of its contention that the payment of money into the escrow account did not mean that liability had been established and ascertained. These were that:

1. the payment into escrow was not a payment to the organisation making the claim (Ajman, in this case);

2. the money held in the escrow account was subject to conditions which meant that it might never be paid to Ajman;

3. the escrow agreement did not determine the insured’s liability to the claimant – the claimant had to provide evidence that the reparatory work had been completed.

Simon Cooper Partner

Joe Snell Trainee Solicitor

Eder J rejected the first of Teal’s arguments, but agreed that BVC had no liability to make any payments to Ajman unless and until certain conditions were fulfilled. Therefore, BVC did not suffer a loss until Ajman satisfied these conditions and drew money from the escrow account. As a result, the Court held that BVC’s loss/liability was only ascertained when Ajman drew down funds from the escrow account, and not when BVC paid into the escrow account.


POLICY INTERPRETATIONNotifying insurers about likely claimsIn Maccaferri Limited v Zurich Insurance Plc [2015] EWHC 1708, Mr Justice Knowles held that an obligation on an insured to notify as soon as possible an event which is likely to give rise to a claim as soon as possible does not import a duty on the part of the insured proactively to make enquiries for such events.

BackgroundIn September 2011, a worker suffered a serious eye injury while he was using a Spenax gun. He sued his employer who in turn sued the company that hired the gun to them who in turn sued the claimant, Maccaferri Limited, which had originally supplied the gun. Maccaferri claimed an indemnity from its public and product liability insurer, Zurich.

The accident occurred on 22 September 2011 and Maccaferri was aware of the accident soon afterwards. It was not until 18 July 2013, however, that Maccaferri was notified that a claim was to be brought against it when it received a solicitors’ letter of claim. On 22 July 2013, Maccaferri notified its broker of the threatened claim and the broker advised Zurich.

Zurich refused to indemnify Maccaferri on the grounds of late notification. Zurich contended that the Claimant failed to comply with the policy’s notice provision, compliance with which was a condition precedent to liability. The relevant clause stated:

“The Insured shall give notice in writing to the Insurer as soon as possible after the occurrence of any event likely to give rise to a claim with full particulars thereof. The Insured shall also on receiving verbal or written notice of any claim send same or a copy thereof immediately to the Insurer and shall give all necessary information and assistance to enable the Insurer to deal with, settle or resist any claim as the Insurer may think fit…”

The first sentence delineates the insured’s duty to notify where there is an event that “is likely to give rise to a claim”. The second sentence deals with the situation where there is an actual claim.

There was no dispute that Maccaferri had complied with its obligation under the second sentence to notify the insurer immediately on receipt of a claim. Zurich contended, however, that Maccaferri should have given notice under the first sentence in the clause by October 2011 or by July 2012 as they were the points in time which were “as soon as possible after the occurrence of any event likely to give rise to a claim”.


JudgmentZurich contended that the words “as soon as possible” in the clause indicated that the obligation to notify arises when an insured could with reasonable diligence discover that an event was likely to give rise to a claim. It argued that this meaning was supported by the obligation to provide “full particulars” which imported an obligation for the insured to be ‘proactive’, or which implies a duty of inquiry.

Mr Justice Knowles rejected this interpretation. He found that it was necessary to establish that an “event” had occurred and that the event must be “likely to give rise to a claim”. He held that the phrase “likely to give rise to a claim” described an event with at least a 50% chance that a claim would be made. The words “as soon as possible” referred simply to the promptness with which the notice in writing was to be given if there had been an event likely to give rise to a claim. Unless expressly provided in the policy, there is no requirement for a “rolling assessment” of claim likelihood required of a policyholder.

In this case, Knowles J found that at the time of the accident there was not at least a 50% chance that a claim would be brought against Maccaferri. It was a possibility that the accident had been caused by the fault of the Spenax gun but it was also a possibility that there was fault in the way the gun was used, or that there was no fault at all. The accident was serious, but that seriousness did not increase the likelihood of an allegation that there was a fault in the gun. The likelihood of a claim could not be inferred from the happening of an accident and a mere possibility of a claim was not enough to require notification under the clause.

When the accident occurred in September 2011 Maccaferri had not been blamed so there was not an event “likely to give rise to a claim”. Therefore, there was no failure on the part of Maccaferri to comply with the condition precedent to liability

– it had notified the insurers immediately when it was aware of the claim being made against them and it was held that Zurich was obliged to indemnify its insured under the policy.

CommentApart from the factual nicety of whether there was a likely claim, this decision shows that the courts will not require of a policyholder a continuing or “rolling assessment” of claim likelihood when the policy does not provide for it.

Ben Ogden Partner

Christopher Crane Solicitor


LIABILITYAvoidance: materiality and inducementIn a rare case concerning the avoidance of liability under a combined liability policy (Brit UW Limited & F&B Trenchless Solutions Limited), the insurer Brit was held to have validly avoided the policy on the grounds that it was induced to enter into the contract as a result of F&B’s (the insured’s) material non-disclosure and misrepresentation. The key issues were the materiality of the information not disclosed and the allowable period of time before an insurer is deemed to have affirmed the policy/waived its right to avoid.

BackgroundThe defendant insured, a specialist tunnelling sub-contractor, entered into a contract with Brit for employers’ liability, product liability and public liability insurance for its work of building micro-tunnels for cables underground railway tracks in Nottingham.

Brit did so on the basis that the works would settle the ground between 2-4mm (which was less than the 5mm limit determined by the relevant rail authority (Network Rail) and agreed to by the head contractor, Morgan), and on the basis of F&B’s statement that the works would at no point in time take place underneath an active railway.

Before contracting with the insurer, the insured knew of an actual ground settlement of up to 15-18mm and the creation of a visible void in the ground in the vicinity of the works. The insured was also undertaking works under an active railway line.

Eight days after the insurance contract had been entered into, a freight train derailed when passing over a level-crossing above the insured’s construction site. The derailment was determined to have been caused by severe settlement of the railway tracks as a result of the insured’s works. The main contractor filed a claim against F&B which in turn attempted to claim an indemnity from Brit.

Brit sought a declaration that it had validly avoided the policy on the grounds of non-disclosure of the actual ground settlement of which the insured was already aware and misrepresentation concerning the undertaking of works below active railway lines, both being material circumstances.

What is material?In determining whether the difference between the expected settlement of 2-4mm and actual settlement of 15-18 mm, as well as whether conducting works around active railways, was ‘material’ information that ought to have been disclosed by the insured, the court noted that it was a question of fact from the objective perspective of a ‘prudent’ insurer. The issue was whether knowledge of the actual facts would, on the balance of probabilities, have influenced the decision of a prudent insurer to enter into the policy or alter its terms. If the answer is in the affirmative, then the information is sufficiently material to raise the question of inducement into a contract.


Brian Boahene Partner

Arwinder Dhillon Solicitor

Circumstances of inducementThe question of whether there was inducement depends on whether the information not disclosed and/or misrepresented was a substantial cause of the underwriter’s decision to write the risk on the terms on which he or she did. The increased settlement and undertaking of works under active railways were held to be “matters which would clearly influence the judgement of a prudent insurer”. The Judge accepted the underwriter’s evidence that had he been told about the settlement and the void, in the lead up to writing the risk, he would have excluded the site from the policy and asked F&B what it would do to prevent similar issues arising in the future.

Affirmation? It was alleged against the insurer that it had affirmed the policy by not avoiding when all the matters relied upon for avoidance were known, five months before it actually sought to avoid. It was held that the issuance of policy documentation and its endorsement during that five month period did not amount to an affirmation of the policy, since these acts did not unequivocally represent a waiver of the right to avoid. The Judge also concluded that “A period of 4 to 5 months to carry out investigations, take legal advice and the decision to avoid cannot be said to have been unreasonable.”

ImpactThis case does not change the duties of both the insurer and insured in terms of conducting due diligence and making a fair presentation when entering into an insurance policy. While all cases are fact specific and the five month period cannot be considered as applicable in every case, this decision does reaffirm the legitimate interests of an insurer in conducting adequate enquiries before it is deemed to have waived its right to avoid a policy.

Had this case been decided in accordance with the proportionate remedies regime set out in the Insurance Act 2015 for breach of the duty to make a fair presentation, it is likely that the claim would not have been recoverable because the site would have been excluded from the policy (though the insured would still have had the benefit of cover for its remaining operations). This is because the underwriter’s evidence was that had he received a fair presentation (namely, one without the misrepresentation and non-disclosure) he probably would have been prepared to write the risk but with an exclusion in respect of the Nottingham site.


Liability for the unstable of mindDunnage v Randall & UK Insurance Limited is a decision of the Court of Appeal concerning the duty of care owed by a person suffering from mental illness and the liability of insurers under a household policy for injuries caused by that person to another. In this particular case the insured died of injuries sustained during the incident which also caused serious injuries to the Claimant. The proceedings were brought by the Claimant against the insured’s estate and insurers. The policy covered injuries if caused accidentally but not if they were caused deliberately or maliciously. At first instance the Judge found that the injuries were accidental but ruled that the insured did not breach any duty that he may have owed because his illness meant he was not acting voluntarily. The Court of Appeal disagreed with that and found that irrespective of illness the objective standard of care had been breached.

The background facts

This is a tragic case of mental illness and family conflict. The Claimant was a nephew of the insured (Vince), a troubled individual who was diagnosed post-mortem as suffering from florid paranoid schizophrenia. The extent of Vince’s mental illness was unknown to his nephew and an argument at the nephew’s home seemed to have been defused until Vince left and returned shortly afterwards with a can of petrol and a cigarette lighter. The argument, created by Vince’s paranoid suspicions, resumed and having made threats to set fire to all present Vince then poured the petrol over himself. His nephew desperately tried to drag Vince from the premises but in the ensuing struggle the lighter ignited and both Vince and his nephew were engulfed in flames. The nephew managed to escape by jumping from a balcony but sustained serious injuries; Vince died at the scene from the injuries he had sustained. The proceedings were brought by the nephew against Vince’s estate and UK Insurance Limited who had provided household insurance to Vince under a policy which included the following wording:

“we will indemnify ... your family against all sums which you become legally liable to pay as damages for ... accidental bodily injury ... to any person ... in the circumstances described in the contingencies.”

The policy excluded liability arising from any wilful or malicious acts committed by Vince. Unlike the Judge at first instance the Court of Appeal had little difficulty in finding that Vince did owe a duty of care to his nephew and the issue which exercised the Court of Appeal was whether the standard of care owed pursuant to that duty should be adjusted to take account of the personal characteristics of the person accused of breaching the duty, in this case Vince’s mental illness. The Court of Appeal was firmly against allowing any such adjustment, distinguishing Vince’s situation from cases where an entirely unheralded and unforeseen physical or mental incapacitating attack strikes and causes injury (the classic case of the lorry driver who suffers a hypoglycaemic attack).


The first instance trial in this case was unusual in that the evidence, including the expert medical evidence, was submitted on paper with no cross-examination. The experts were in agreement that Vince did not have rational control over his actions at the time when the events took place, but the Court of Appeal was taken by the absence of any evidence that Vince lacked physical control; on the contrary, he was, for example, able to fetch the petrol and the lighter and to pour the petrol over himself. Accordingly, the Court of Appeal was satisfied that Vince’s acts were voluntary even though irrational.

Policy coverageDespite concluding that Vince was sufficiently in control of his physical actions so as to establish the existence of a duty of care and a breach of that duty, the Court of Appeal was satisfied (as the first instance Judge had been) that the cause of the injury was accidental and not wilful or malicious within the meaning of the policy. The primary basis for that finding was the agreed medical evidence that because of his schizophrenia Vince had lost control of his ability to make a reasoned and informed judgement. Without that ability it could not be said that Vince had intended to cause injury to his nephew. As further support for its conclusion the Court of Appeal considered also the possibility that the cigarette lighter had ignited accidentally in the course of the struggle between Vince and his nephew.

So, Vince’s estate and insurers were held to be liable to the nephew. The Court of Appeal accepted that this was a difficult case in the context of public policy and emphasised that the decision was not intended to discriminate unfairly against those suffering from mental illness. The imposition of liability in law on Vince (and thus his insurers) represented the price for Vince being allowed to live freely in society despite his paranoid schizophrenia.

“...Vince did not have rational control over his actions at the time when the events took place...”

Kiran Soar Partner

John McGowan Litigation Manager


JURISDICTIONLocation, location, location: three recent decisions on governing law and jurisdictionExecutive summaryThe governing law and jurisdiction applicable to an insurance contract can have an important impact on how it is interpreted and, therefore, on the outcome of an insurance claim.

The decisions in the three recent cases summarised in this article:

1. highlight the hazards of failing to make governing law and jurisdiction provisions consistent where a contractual relationship (between an insurer and a broker) is governed by more than one contract;

2. clarify the exception to the usual rule on jurisdiction for tortious claims for “matters relating to insurance” in the EC Brussels Regulation; and

3. examine when an injured party can bring an action directly against the wrongdoer’s insurer, even where the governing law of the insurance contract would not permit such a direct action, pursuant to the ‘Rome II’ Regulation on the law applicable to non-contractual obligations.

One relationship, two agreements on law and jurisdictionIn AMTRUST Europe Ltd v Trust Risk Group SPA, Mr Justice Andrew Smith refused to grant an anti-arbitration injunction to restrain brokers, TRG, from continuing their arbitration reference in Italy against insurers, AMTRUST.

A dispute had arisen between the parties about the way that premiums were accounted for and commissions deducted by TRG. The relationship between the parties was governed by two agreements:

> a Terms of Business Agreement (ToBA), subject to English law and jurisdiction, which required premiums to be paid into a designated account subject to TRG’s right to deduct commission;

> a ‘framework agreement’, subject to Italian law and containing an agreement to arbitrate in Milan, under which TRG would pay AMTRUST a proportion of the overall premium in return for AMTRUST’s agreement to deal exclusively with TRG for all medical malpractice insurance it wrote in Italy.

TRG commenced arbitration in Italy to resolve the dispute, however, AMTRUST disputed the tribunal’s jurisdiction, because it said the dispute turned on the terms of the ToBA, not the framework agreement. In turn, AMTRUST commenced proceedings in England and, in an earlier decision of the High Court, upheld by the Court of Appeal, it obtained an order for a payment into court by TRG of the premiums missing from the designated account, on the basis that both courts found AMTRUST had a good arguable case that the claim was governed by the ToBA.

Despite these earlier judgments, Andrew Smith J refused to grant an anti-suit injunction restraining TRG from pursuing the Italian arbitration because: (1) the previous judgments did not definitively decide that the dispute before the arbitration tribunal was properly subject to English Court jurisdiction, rather they only found that AMTRUST had a good arguable case; (2) it is for a tribunal itself to decide whether it has jurisdiction under an arbitration agreement to hear a claim, not the court; (3) the court should only grant an injunction restraining foreign arbitration proceedings in exceptional circumstances, essentially where there is no room for argument that the court’s jurisdiction applies, and there is no relevant arbitration agreement.


The upshot for the parties is that they face proceedings arising from the same facts in two jurisdictions, subject to different procedural and governing laws. This can only be costly and there is a real risk of inconsistency. However, this decision is the latest in a long line that makes it clear that the English Court will respect arbitration agreements and take a light touch where parties have agreed to arbitrate. The moral of the story is to make governing law and jurisdiction clauses consistent where multiple agreements govern the same relationship, even though they may relate to different aspects.

The “matters relating to insurance” jurisdiction gatewayIn Hoteles Piñero Canarias SL v (1) Mapfre Mutualidad Compania de Seguros Y Reaseguros SA & (2) Godfrey Keefe the Court of Appeal upheld the lower court in finding that the British domiciled claimant injured party could join the Spanish insured tortfeasor as a co-defendant to proceedings brought in England by the claimant against the hotel’s Spanish liability insurer.

EC Regulation 44/2001 (the Brussels Regulation) applied to whether the English court had jurisdiction to hear the case against the hotel, where the claimant had been severely injured in 2006. The jurisdiction question was important because the measure of damages depended on the law of the place where the claim was tried and English law was significantly more favourable to the claimant than Spanish law. Further, there was a cap on liability under the policy and so whilst the insurer had been sued directly, a sizeable uninsured claim lay against the insured itself.

Under the Brussels Regulation, the starting point is that persons domiciled in a Member State shall be sued in their home country. Section 3 (articles 8-14) contains exceptions “in matters relating to insurance”. Article 11(2) permits the injured party to bring proceedings against the insurer in the claimant’s own courts (provided that

such a direct action against the insurer is permitted by the law governing the claim). Article 11(3) states that in the case of direct action against the insurer, the same court shall have jurisdiction over the insured.

The hotel argued that article 11(3) did not apply in this case, so that it could not be sued in England as a co-defendant, because the exception was for “matters relating to insurance” and the claim against the hotel (for the uninsured excess) was simply a tort claim.

In a long and nuanced leading judgment, Lady Justice Gloster held that there was nothing in the language of article 11(3) to limit its application to situations where the dispute against the insured related to the meaning or effect of the policy. Further she placed emphasis on the objectives of the Brussels Regulation, firstly to guarantee better protection to the weaker party than the general rules of jurisdiction provide and secondly to minimise the possibility of irreconcilable judgments being given in concurrent sets of proceedings in different Member States.

The governing law of the tort dictates whether direct action against an insurer is permittedThe European Court of Justice decision in Prüller-Frey v Brodnig and Axa Versicherung AG examines the two limbs of article 18 of EC Regulation 864/2007 on the law applicable to non-contractual obligations (Rome II), which states:

“The person having suffered damage may bring his or her claim directly against the insurer of the person liable to provide compensation if the law applicable to the non-contractual obligation or the law applicable to the insurance contract so provides” (emphasis added).


The underlying claim was brought in the Austrian Court by the injured party, who was resident in Austria, against the Austrian pilot of a light aircraft, in which the claimant had been injured in an accident occurring in Spain.

In finding Austrian law to be applicable, the court followed article 4(2) of Rome II, which provides for the applicable law to be that of the country where the claimant and defendant both had their habitual residence.

This was important because under Austrian law, unlike under Spanish law (which would have applied absent the article 4(2) exception) or German law (the governing law of the defendant’s liability insurance policy) it was permissible for an injured party to sue the defendant’s insurer directly.

The Austrian Court asked the ECJ for guidance on the effect of article 18 and the ECJ’s decision was that if the applicable law of the tort (here, Austrian) allows direct action against an insurer, it does not matter if the law applicable to the insurance contract does not. The two limbs of article 18 are separate and compliance with either is sufficient for a direct action against an insurer to be brought.

Re-cast Brussels RegulationThe Re-cast Brussels Regulation came into force in January 2015 (click here to view our earlier article). It enacted a number of changes to the rules on jurisdiction applicable to Member States’ courts. The Hoteles Piñero case, discussed above, was decided under the old Brussels Regulation. It is almost certain, however, that the case would have been decided in the same way had the Re-cast Brussels Regulation been applicable.

Carrie Radford Senior Associate

“...it was permissible for an injured party to sue the defendant’s insurer directly.”

http://incelaw.com/en/knowledge-bank/publications/ecj-upholds-anti-suit-injunction-ordered-by-arbitral-tribunal


CYBERCyber risk – issues involving physical damage

The idea that cyber risks are new is wearing thin, leaving behind the harsh reality that exposures to cyber risk are serious, are here to stay and seem only to be getting worse. Both the severity and frequency of cyber events are increasing, be it a hacking attack, extortion or human error.

Whilst many of the biggest and most costly cyber events have involved data breaches, DDOS attacks and theft of industrial secrets, we have now entered an era where thought must be given to the risk of cyber events causing real damage to physical things or even bodily harm to people. Critical infrastructure and utilities are ever more reliant on complex computer systems.

Although the frequency of such events is considerably lower than the frequency of data leaks caused by malicious attacks, any event that is able to cause physical damage could have far reaching consequences.

It is not surprising, then, that in recent months there has been more emphasis on monitoring such risks, particularly in the insurance industry, which will inevitably end up facing claims from an ‘physical cyber event’.

Extent of lossesThe types of loss that might arise from a physical cyber event are varied. Losses to physical property may not be restricted to the thing that is hacked but could quite easily be more widespread, for example, damaging other items of property, which may or may not belong to the insured itself, thereby giving rise to additional third party liabilities. A basic example of how this might arise is a cooling system for a server room being hacked, causing the computer equipment to overheat and malfunction. The extreme heat then causes a small fire to break out, which spreads and damages the building and potentially adjacent properties or different floors within a larger block. This may seem exceptional but there are occasions of physical damage having been caused by hacking attacks, both intentionally and unintentionally. Moreover, with the constant developments in technology that are being achieved, more exposures and areas of risk can arise. One such example is the development of self-driving cars.

Sector focus and examplesSome sectors are more at risk than others. The energy sector has long been identified as a high-level target for both hack attacks and for other system exposures, including those which are not the result of malicious attacks. Similarly, the aviation, shipping, manufacturing and automotive industries are at particular


risk, as well as any large scale national infrastructure such as utilities. These areas all have in common a great reliance on computer systems to manage and control physical processes and operations. Whilst a cyber event involving physical damage may be considered low frequency at this point, for these areas in particular any loss is likely to be high value and quite possibly a significant market event for the affected insurers.

Stuxnet became widely known as the first cyber event of its kind. It was a sophisticated ‘worm’ specifically designed to infiltrate programmable logic controllers, which commonly form part of the systems installed in control machinery. The launch of this attack allegedly caused significant physical damage to Iranian nuclear centrifuges.

Sony Pictures was hacked in November 2014 and whilst the vast majority of the damage done was as a result of data leaks, there were reports of collateral damage to hardware, which was rendered useless by the attacks.

Shortly after, in December 2014, there were reports of a cyber attack on a German steelworks. Targeted hacking techniques were used to gain access to the control systems and a blast furnace was shutdown improperly, causing extensive physical damage.

Earlier this year, a pair of researchers managed to remotely hack and take control of a Jeep Cherokee via its WiFi-enabled entertainment system. Once they had gained access to the car’s system, the hackers were able to control key functions, including the transmission, stopping the car in motion and rendering it useless. Chrysler subsequently recalled 1.4 million vehicles to install a software patch.

More recently, there have been reports of vulnerabilities in the Google Car, which leave it exposed to hacking attacks. It has been proven that the Lidar system on Google’s self-driving car, which is responsible for analysing the environment around the car, can be hacked, causing it to sense objects which are not actually there.

Insurers’ protectionIt is important that all insurers are fully aware of the full scope of cover offered by their products. It is advisable to undertake reviews of non-cyber specialist insurance policies to ensure that they mitigate the risk of unintentionally covering a cyber event. Whilst this may be achieved by narrowing definitions or including market-standard exclusions in wordings, insurers might also consider more broader exclusions for all cyber-related risks, however arising.

Underwriters might also consider including sub-limits where an element of cyber risk is intended to be assumed, to limit their exposure. It may also be appropriate to engage cyber specialists to aid in risk reviews.

In any event, the exposure of insurers and their insureds to cyber-related losses is prominent and is increasing. As the nature of cyber risk changes, so must insurers to ensure that they do not assume unwanted and unmeasured risks.


Sam Batchelor Solicitor


W&I INSURANCEIntroduction to W&I insuranceNegotiation of a corporate acquisition is not simply a discussion of what, when, where and, of course, how much. It is also a careful balance of the buyer’s and seller’s priorities and the way in which they agree to apportion risk between them. As for any sale of an asset, a seller will want to limit the risk of facing any unknown liability following the sale, whilst the buyer will want both to ensure that it is buying what it thought it was buying and to limit the possibility of unknown costs arising following the acquisition.

In a share purchase transaction, warranties and indemnities relating to every aspect of the company and its business are negotiated and included within the documentation. In this context, warranties are statements made by the seller in respect of the assets or business being purchased, which are relied on by the buyer. Indemnities will relate to specific potential exposures, the liability for which the buyer does not want to assume. Transaction insurance solutions, such as warranty and indemnity (W&I) insurance, can be a means of resolving the different requirements of the parties to enable the acquisition to proceed.

PurposeSo, why do buyers and sellers purchase W&I insurance? First and foremost, W&I insurance can enable the parties to a transaction to reduce their exposure following completion of the deal. Sometimes a seller will be able to achieve a clean break with virtually no exposure at all. In some cases, the parties may not be able to agree the form that the warranties and indemnities should take. This may, for example, be because they cannot reach a common ground on the apportionment of risk. W&I insurance is, therefore, a commercial tool designed to mitigate these risks to enable the parties to conclude a deal that they may otherwise not have been able to finalise.

Some examples of sellers’ and buyers’ reasons for purchasing W&I insurance are below.

Reasons for sellers:

> A seller may not want to or may be unable to put more than a certain amount, if any, of its capital at risk as security against issues discovered or claims made after the sale;

> Improve chances of achieving a “clean exit”; and

> Seller may not wish to keep funds in escrow.

Reasons for buyers:

> Concerns that the seller is unable to satisfy any potential warranty claims;

> Issues regarding enforceability and potential for legal disputes;

> Improve prospects in an auction; and

> Provides additional assurance if investing in foreign jurisdiction.

W&I insurance policies can be designed to address any of the above concerns of buyers and sellers, providing a long-term cover for liabilities that the parties do not want to assume.


MechanicsW&I insurance covers damage or loss sustained by one party resulting from a breach of the warranties or a payment obligation arising under the indemnities in the share purchase agreement (SPA).

There are two key types of W&I insurance policy: a seller-side policy and a buyer-side policy. The seller-side policy is designed to protect the seller and provide insurance cover for the seller’s liabilities to the buyer under the warranties and indemnities. If one of the warranties given by the seller is incorrect and the buyer successfully brings a claim against the seller for breach of warranty, the policy (subject to it covering the warranty in question and the policy limits) will respond to cover the seller for any damages due and defence costs.

The buyer-side policy is designed to cover the buyer for sums incurred as a result of the breach of warranty by the seller or where an amount is covered by an indemnity under the SPA. This is also an attractive option for buyers who may have concerns over a seller’s financial condition or the enforceability of their indemnities. The insurer will only be required to cover amounts over the limit of liability or warranty cap in the SPA where a claim is proven to exceed this level.

Each policy is tailored to the transaction. The goal is to put a policy in place that is back-to-back with the warranties and indemnities in the SPA. This is not always achievable and elements such as de minimis amounts and warranty caps will not necessarily be mirrored in the policy, depending on the outcome of the underwriting process and the appetite of the insurer. Similarly, whilst an insurer may be comfortable writing a certain type or aspect of cover, it may not necessarily commit to writing the cover to the same level as the transaction may specify.

To help provide some further context, to the right are two real-life case studies which involved the application of W&I insurance and illustrate the use of the product.

Private equity exit

A private equity firm was exiting its investment in a technology company of £500m.

The Buyer required substantive warranties with an aggregate cap of £100m, which the private equity owner was unable to give.

Placing part of the purchase funds into escrow to cover potential warranty claims would prevent a clean exit for the private equity firm and they were not prepared to consider a reduction in the consideration.

The buyer was able to purchase a W&I insurance policy with a limit of £50m to meet the first £50m potential exposure.

Auction

The Buyer was one of several bidders for a target at auction. Strategic suitability meant that the buyer was prepared to offer a relatively high purchase price of £150m.

Internal guidelines required them to obtain customary warranties and a warranty cap of 20% of purchase price, backed by escrow. The strategic buyer feared that these conditions may not have been attractive to the seller despite the high offer price; resulting in a competitive disadvantage against bidders demanding fewer warranty protections.

W&I insurance permitted the buyer to offer to the seller the full £150 million purchase price, together with a small seller-retained £1.5 million warranty cap, with the insurer providing the buyer with a £30 million limit policy above the seller’s cap to satisfy the internal guidelines.



Sam Batchelor Solicitor

CommentHistoric perceptions of transaction insurance products like W&I insurance have been that they are intrusive and ‘clunky’. That is certainly no longer the case. W&I insurance now plays a vital role in facilitating many corporate transactions and is becoming a well-established and widely used product. The economic downturn has seen W&I insurance develop considerably and it has been a commercial tool used by many so that they are able to take advantage of opportunities that would otherwise have been missed. W&I insurance continues to offer benefits to those wishing to engage in deals, especially in light of the increased caution now instilled in many businesses.


IN BRIEFInsurance Act 2015Currently, where an insurer has unreasonably refused to pay a claim or has caused unreasonable delay in settling the claim, the insured is entitled to recover only that which they are owed under the policy plus interest. There is no provision for the insured to recover any additional losses suffered due to the delay. This has caused problems for insureds, most notoriously in the case of Sprung v Royal Insurance, where late payment of a claim to Mr Sprung by his insurers resulted in the loss of the family business.

In July 2014, the Law Commission presented a series of recommendations for reform in four areas of insurance law, the majority of which were implemented in the Insurance Act 2015, which received Royal Assent on 12 February 2015. Their proposed provisions in relation to late payment of insurance claims were, however, deemed to be too contentious to be included. In a surprise move, they have now been incorporated into the Enterprise Bill which was introduced to Parliament on 16 September 2015. If enacted, they will be implemented by way of an amendment to the Insurance Act 2015.

The Enterprise Bill 2015 will, if enacted, insert additional provisions into the Insurance Act 2015, introducing an implied term into every insurance contract that insurers must pay claims within a “reasonable time”.

The key aspects are as follows: > A “reasonable time” will always include time to investigate and assess the claim.

> What is reasonable in a given case will depend on all the relevant circumstances, including the type of insurance, size and complexity of the claim, compliance with relevant statutory and regulatory rules or guidance and factors outside the insurer’s control.

> An insurer will not be in breach of the implied term where it fails to pay a claim and has reasonable grounds for doing so. However, the manner in which the claim is handled may be a relevant factor in deciding whether the term was breached. Thus, in principle, an insurer might breach the implied term even though it had reasonable grounds for contesting a claim (which is subsequently proved to be valid) – where, for example, the insurer has conducted the investigation unreasonably slowly, or has been slow to change its position when new facts come to light.

> An insured which has suffered loss as a result of the insurer’s breach of the implied term will be able to claim damages from the insurer (over and above the primary sums due under the contract and interest). This means, of course, that the insured will have to satisfy the usual causation test and be able to prove the quantum of its loss.

The new provisions place greater emphasis on how insurers deal with claims and they may wish to take a number of steps now to prepare for the new regime.

For advice on this and any other issue under the Insurance Act 2015, please contact Simon Cooper or your usual Ince contact.

http://incelaw.com/en/ourpeople/simon-cooper


Costs recovery in civil litigation is compatible with human rightsIn Coventry v Lawrence, the losing party argued that its liability to pay the winner’s success fee and ATE premium under the Access to Justice Act 1999 (AJA) infringed its rights under Article 6 of the European Convention on Human Rights (ECHR), which protects the right to a fair trial.

By a majority of 5-2, the Supreme Court held that the AJA regime is compatible with ECHR. It is, they said, a proportional, rational and coherent method of achieving legitimate aims – containing the rising cost of legal aid, improving access to the courts for members of the public with meritorious claims and discouraging weak claims – and so it could not be said to be incompatible with Article 6 even if it operated harshly in individual cases. The dissenting Justices argued that the AJA regime was disproportionate because it imposed liabilities far beyond the bounds of what was reasonable or proportionate on those defendants who happened to have been sued by CFA/ATE funded litigants.

The AJA regime has now been replaced by the scheme under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), the legislation bringing into effect many of the ‘Jackson reforms’. However, the AJA will continue to apply for cases commenced before LASPO came into force on 1 April 2013.

Costs budgetingAs readers of this E-Brief will know, the aim of the ‘Jackson Reforms’ introduced in April 2013 was to improve efficiency and reduce the cost of legal proceedings. The parties to most civil claims are now required to submit, at an early stage of the litigation, budgets setting out their costs incurred to date and, more importantly, estimates to the end of trial. If a party’s budget is approved it will usually be prohibited from recovering additional costs save where these have been sanctioned by the court in advance.

In GSK Project Management v QPR Holdings, the claimant submitted a budget totalling £825,000, where the value of the claim was £805,000. In what should prove a salutary lesson to litigants and their lawyers, Mr Justice Stuart-Smith slashed the budget to £425,000. He described the original budget as “so disproportionate to the sums at stake or the length and complexity of the case that something has clearly gone wrong” and described the process of halving it as necessary to make clear “the court’s determination to exercise a moderating influence on costs.”


Mesothelioma claims under Guernsey lawThe Supreme Court has overturned the Court of Appeal’s decision in Zurich Insurance v International Energy Group. The issue in the case was whether, as a matter of Guernsey law, an insurer was liable to indemnify an employer for the entire compensation the employer had paid out to an employee who had died from mesothelioma, despite the insurer only insuring the employer for six out of 27 years of the employee’s employment.

In Fairchild v Glenhaven Funeral Services the House of Lords held that a victim of mesothelioma could hold liable all employers who had negligently exposed him to asbestos dust. However, the House of Lords subsequently held, in Barker v Corus, that each employer was only liable pro rata to the period which exposure by it bore to the total of all periods of exposure. The Government responded swiftly, passing the Compensation Act 2006 which restored the pre-Barker position but giving employers rights of contribution among themselves. Guernsey has no equivalent piece of legislation.

The Supreme Court unanimously held that the pro rata liability rule continues to apply in Guernsey, such that the defendant insurer was only liable to indemnify the employer for the six year period.

Aggregation and solicitors’ PI insuranceIn AIG v OC320301 the Commercial Court held that, on a proper construction of the aggregation clause contained in the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors (MTC), underlying claims against an insured firm of solicitors were not to be aggregated as one claim under the liability policy issued by the firm’s insurer. The decision turned on the interpretation of the phrase “series of related matters or transactions” in the aggregation clause. Mr Justice Teare held that the natural meaning of this phrase, in the context of solicitors’ PII, was a series of transactions which were related because they were in some way dependent on each other. On the facts, the firm’s acts or omissions were not so related.

This is the first judicial authority on the construction of the aggregation clause in the MTC.

Ince & Co is a network of affiliated commercial law firms with offices in Beijing, Dubai, Hamburg, Hong Kong, Le Havre, London, Monaco, Paris, Piraeus, Shanghai and Singapore.

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LEGAL ADVICE TO BUSINESSES GLOBALLY FOR OVER 140 YEARSThe information and commentary herein do not and are not intended to amount to legal advice to any person on a specific matter. They are furnished for information purposes only and free of charge. Every reasonable effort is made to make them accurate and up-to-date but no responsibility for their accuracy or correctness, nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are welcome to speak to their usual contact.

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INSURANCE E-BRIEF AUTUMN 2015