Abstract

Circumstances of which Added Insured is Aware - Implied Promise to Indemnify for Costs of Defence - Time for Indemnity when Insured is Obliged to Pay Loss - Insured's Right to Allocate Interim Payments - Estoppel by Convention

Article

Circumstances of which Added Insured is Aware

 

Several issues were decided in Euro Pools PLC (in Admin) v Royal & Sun Alliance Insce PLC [2018] EWHC 46 (Comm).

In respect of an extension of a claims made policy to cover possible claims from circumstances of which the insured is aware and gives notice to the insurer during the policy period, in Kajima UK Engineering Limited v The Underwriter Insurance Company Limited [2008] 1 All ER (Comm) 855, it was said:

It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification. The factual context is important, not only as a matter of interpretation of the notification but also, because it is only matters of which the insured is aware that can form the basis of a valid notification. There must be some causal, as opposed to some coincidental, link between the notified circumstances and the later claim. The claim which is later pursued must arise not only from the notified circumstances but also only from the circumstances of which the Insured was aware. It can not arise from any other circumstances which may have happened or been discovered either after the notification or in any event after the expiry of the insurance cover.

A blanket notification is sufficient: McManus v European Risk Insurance Co and [2013] Lloyd's Rep IR 533 in which, the insured solicitors' firm gave notification of circumstances in relation to every file of a firm whose work it had acquired, based upon several sample files which indicated a consistent pattern of breaches of duty and evidence that some employees were not qualified and might not have had sufficient expertise.

Materiality supporting notice need be only weak: J Rothschild Assurance Plc v Collyear [1999] Lloyd's Rep IR 6 at 22, and the knowledge threshold is low: Kajima para 111.

 

 Indemnify for Costs

 

If under a policy condition the insurer commences an action in the insured’s name against a third party for indemnity or contribution for the insured’s liability, the insurer expressly or impliedly promises to indemnify the insured for liability for costs of the proceeding. If the condition promises such indemnity only if the insurer had prosecuted the claim, then if the insured excludes it from the conduct of the proceedings, they cease to fall within the condition and an implied indemnity does not extend to adverse costs orders made at a time when the insurer is no longer prosecuting the claim, but only to the proportion of the costs which are related to the claim covered by the policy and would not extend to the costs which related to claims which are outside the scope of the policy.

The test for an implied term is whether it is an obvious incident of the contract or commercially necessary: Marks & Spencer v Paribas [2016] AC 742 UKSC. Necessity for business efficacy involves a value judgment: it is not absolute necessity. The term can be implied only if, without it, the contract would lack commercial or practical coherence, and not merely because it appears fair.

If the policy indemnifies the insured against losses suffered arising out of his role as a director or officer, including legal costs, it is in the nature of the policy to indemnify him for costs arising out of the insured event. He can claim for the costs of lawyers retained to defend claims brought against him, subject, where there is no scale of fees, to the qualification of reasonableness.

This is to be distinguished from the situation where in legal proceedings between two parties, one seeks to recover the costs from the other. There, the court has a discretion as to the award of costs and taxation is the usual method of establishing them, even though there may be a contractual entitlement in addition to the court's discretion. If the losses for which an indemnity is sought under the policy comprise costs which are not costs incurred in current proceedings before the court, it is for the court to determine the validity and the quantum of the claim under the policy. As to quantum, the court does not refer it to a taxing master but has to determine the quantum under the policy as it would determine any other issue of quantum not comprising legal costs. There is thus no scope for importing rules which would apply on detailed assessment to the determination of quantum under the policy.

A reference to reasonableness "with regard to the complexity and significance of the case" does not evoke a requirement of proportionality, which would be consistent only with standard basis costs. The test of proportionality in the Rules has regard to a number of factors and is not limited to complexity and significance; to import the rules of standard basis assessment would impose a test unjustifiably different from that of the express language of the policy. That reasonableness is judged from the perspective of the receiving party: Woodford & Ors v AIG Europe Limited [2018] EWHC 358 (QB).

Time for Indemnity When Insured is Obliged to Pay for  Loss

The insured’s cause of action for indemnity under Liability insurance for third party liability does not arise until liability has been established by judgment, settlement or award, but a claim for mitigation costs is a claim for first party loss: Teal Assurance Co v W R Berkley Insce (Europe) [2013] 4 All ER 643 UKSC. If the insured is obliged  to pay money for a covered loss, the insurer’s obligation to indemnify the insured has not been performed and a right of action for damages for breach of contract has accrued. The payment is to be set against the policy retention and deductible, then within the insurance provided and thereafter, potentially within any successive excess layers: Teal. 

Once a quantified expense is incurred, the indemnifier is in breach of contract having failed to hold the indemnified person harmless against it:The Fanti [1991] 2 AC 1 at 35 – 36, and for such a claim a limitation time begins to run from the time that it is incurred. The insurer’s liability can arise though it has not be told the amount of the claim. Nor, unless the policy so provides, need the insured give the insurer prior notice of an intention to incur such expense and the cause of action arises from the date on which the expense is incurred.

There seems to be no reason why this should not apply to the insurer’s promise of indemnity for costs of a defence of a third party claim, since it is first party cover though it is contained in a third party insurance policy.

Insured’s Right to Allocate Interim Payments made by the Insurer

As to the insured’s right to allocate interim payments made to it by the insurer, the same rules on the appropriation of debts also apply to damages claims: Otkritie v Uromov [2014] EWHC 755 (Comm). The insured may appropriate monies received up to the very last moment; Seymour v Pickett [1905] 1 KB 715), but if receiving an indemnity for particular liabilities to third parties, cannot decide the order in which indemnifying payments of an insurer attach or the order in which claims attached to the policy: Teal Assurance Co v W R Berkley Insce (Europe) [2013] UKSC 57; [2013] 4 All ER 643.

In awarding damages, the court gives credit for sums already paid by the insurer in satisfaction of its obligation. If other recoveries have been received by the claimants and are to be allocated to the judgment sum between different insurers, the insured has a choice as to how the recoveries are to be appropriated so long as it is bona fide and without collusion, and not obviously unsustainable: Otkritie. Appropriation may be exercised up to the very last moment, but if the claim is time-barred, it may not be done after the commencement of proceedings.

Estoppel by Convention

Estoppel by convention requires a common express assumption between the parties. The defendant must have conveyed an understanding of expectation that the claimant would rely upon it, the claimant must in fact have relied upon it; that reliance must have occurred in connection with some relevant subsequent mutual dealing, and thereby suffered some detriment: HMRC v Benchdollar Ltd [2009] EWHC 1310 (Ch).