comunenforceable if they are contrary to public policy.
The public policy exercise involves weighing up access to justice against abuse of the legal system and recently, the courts appear to be taking a more pragmatic approach. In Mansell v Robinson (2007), it was held that the claimant’s action had not been champertous as the mere fact that litigation services had been provided
in return for a promise of a share of
the proceeds was not, by itself, sufficient to justify that promise being held to
be unenforceable.
Indications of abuse which might render an agreement champertous include
the claimant demonstrating no interest in suing on its own initiative, the funding agreement being manifestly unfair or
an overzealous funder controlling
the litigation.
In the headlines
A wealth of funders have launched recently, including IM Litigation Funding, Allianz ProzessFinanz and Harbour Litigation Funding. Brokers Calunius Capital LLP have been authorised by the Financial Services Authority to arrange funding (which they term “dispute risk hedging”) on the capital markets. This not only covers litigation funding but also outcome hedging, where a company has a contingent legal liability against which it seeks protection. Juridica also attracted attention as the first specialist litigation fund to be listed on AIM in the UK at
the end of 2007.
As a result, the Civil Justice Council has also recently looked into this area and recommended to the Government that properly regulated TPF should be recognised as an acceptable option for mainstream litigation. At a forum convened by them only last month, it was broadly agreed that there should be a twin-track approach to regulation. For large commercial cases, the Civil Procedure Rule Committee should be asked to beef up the security for costs regime so that both claimants and defendants can be sure that the funder will not default on its obligations.
It was also recognised that there
should be some disclosure of the
funding agreement. Extra measures for group actions, where claimants may require greater protection, will be addressed separately.
In relation to cases backed by TPF, Stone & Rolls’s £70m negligence claim against accountants Moore Stephens brought TPF to the attention of the business world last year. TPF was also behind the claim by original members of Status Quo who sought royalties due from the 1980s.
How does it work?
The standard assessment formula requires consideration of the value at stake, the merits of the claim (typically requiring a 70% chance of success), the ability of the opponent to pay and the timelines associated with the outcome.
The minimum claim value acceptable to funders ranges from £100,000 to £3m. The standard approach is to take a cut of 25-50% of the proceeds or three to four times the funding provided. However,
it is reported that in Germany, while
the cut taken by the funder started at 50%, competition soon brought it
down to 20-30%.
Risk can also be transferred by passing
it on to solicitors through conditional
fee agreements and complemented by ATE insurance.
Where the funded party is not successful, the Court of Appeal ruled in Arkin v Borchard Lines (2005) that the “professional” funder’s liability for the successful party’s costs should be limited to the amount of funding provided. As regards ‘pure’ funders (who do not seek any commercial gain), the courts have not imposed any liability for costs - see Hamilton v Al Fayed (2002).
“One area on which TPF may impact is class actions, which may expose defendants to claims that would not previously have been brought…”
Ken Forsyth
Third party funding (TPF) is the investment in claims with which the investor has no other connection. In return for their outlay and the associated risk, the investor expects to make a financial profit.
Champertous and against
the law?
The ancient legal principles of champerty and maintenance prohibit a party with no legitimate concern in a case from supporting and profiting from it without just cause or excuse. The Criminal Law Act 1967 abolished criminal and civil liability for champerty but contracts remain champertous and therefore
Continued on page 2
Long live
insurable interest?“instinctive discomfort” about being able to insure another person’s life. Whether such practice, referred to as ‘death pooling’, would happen in practice is another matter.
A separate issue was raised as to whether credit derivatives would be able to be distinguished if the concept of insurable interest was abolished. While it does not require the concept of insurable interest in particular to define insurance, a substitute would be needed. The Law Commission made it clear, however, that it does not propose to provide a definition of insurance.
Should the requirement remain for non-indemnity insurance, concerns were voiced about the efficacy of creating further categories of insurable interest which could create more problems than they solve in terms of where the line should be drawn.
As a next step, we await the summary of the responses to the first Consultation Paper (which included non-disclosure and misrepresentation, warranties and intermediaries). The next and probably last Issues Paper on post-contractual good faith and damages for late payment is expected later in the year.
Richard Evans, Partner,
Commercial & Property Risks Group
The real effect
One area on which third party funding may impact is class actions, which may expose defendants to claims that would not previously have been brought, although we imagine that such litigation may be less attractive to funders. In practice, however, we anticipate that TPF will be focused on situations where the claimant has solvency issues or inhouse counsel are having to manage a tight budget. We do not therefore envisage that TPF will significantly increase the overall number of claims.
Ken Forsyth, Partner,
Commercial & Property Risks Group
Charlotte Shakespeare, Associate,
Commercial & Property Risks Group
While insurable interest may not be a common issue for general insurers, 88% of the responses to the initial scoping paper commented that this was an area that needed to be reviewed. The key proposals were summarised at the event by Law Commissioner David Hertzell.
In relation to non-indemnity insurance (e.g. life), it is not proposed that insurable interest should be abolished but rather that the categories of insurable interest should be extended (e.g. to cohabitants), with consent providing an alternative ground.
For indemnity insurance, the Gambling Act 2005 is treated as having abolished the requirement for insurable interest and there is no reason for it to be reintroduced. In response to fears that this may, for example, prevent claims being rejected where a policyholder insures a car they don’t own which is said to have been stolen, the indemnity principle will still apply so that an insured cannot recover as they will have suffered no loss.
While Chatham House Rules applied at the event, we can report that there appeared to be considerable interest around the table in abolishing the requirement for insurable interest across the board, although this was not subsequently borne out in a poll taken during the discussions. The Law Commission put this down to
Continued from page 1
At the invitation of the Law Commission, senior representatives of the insurance industry recently attended a private round-table meeting, hosted by Beachcroft LLP, to discuss insurable interest. This is the latest in a series of issues to be tackled, both here and in Scotland, as part of the review of insurance contract law. Richard Evans, London, outlines some of the key points raised at the event.
at risk?
TPF also raises issues for professionals and their indemnity insurers, writes Naomi Park, Leeds.
If a funding claim is unsuccessful, funders may look for targets from whom they can recover their outlay. For example, they may argue they relied on over-optimistic advice on the merits from the solicitors, but for which they would not have funded the claim. As claims pursued with the benefit of TPF are likely to be high value and high cost, any professional negligence claim is also likely to be expensive. Insurers may wish to consider asking additional questions on their proposal forms dealing with TPF and the steps which the professional firm proposes to take to manage its risk in this area.
Naomi Park, Solicitor,
Professional Risks Group
“...there appeared to be considerable abolishing the requirement for insurable interest...”
Richard Evans
Insurance FOCUS SPRING 2008
© quayside -
Over the limit
Commercially irresponsible
The CA accepted that PZP wanted to defend the claim, and that it relied on legal advice that the prospects were good. Following that advice, PZP invested in its business, fully participated in trial preparation and endorsed the decision to reject the MIB’s offer. However, the CA upheld the Section 51 order. By August 2003, the Klunk Klip business had collapsed and PZP was almost insolvent. In reality PZP had no commercial interest in defending the claim: Lord Justice Rimer opined that PZP’s wish to defend the claim was “commercially irresponsible”.
Its insurers knew that a judgment of
£2 million would spell the end for PZP, and that admission could not be reconciled with the assertion that there was a mutual interest in defending the claim.
The decision also suggests the insurers have a duty to consider the objective “best interests” of the insured, even if
that is inconsistent with the insured’s explicit instructions.
If an insured is faced with a claim that may exceed the limit of indemnity, it is difficult to see when it will ever make commercial sense to fight, and insurers are at serious risk of a Section 51 order. Yet such situations are not uncommon, still less exceptional. The commercial pressure on insurers to settle such claims, even where they genuinely believe them to be without merit, seems to be at odds with the standard set for claimants: their entitlement to access to the courts is
well enshrined.
Mike Willis and Naomi Park, Leeds, warn of the courts’ increasing disposition to make costs orders against insurers when the losing defendant lacks the resources
to pay up.
Insurers involved in litigation will be familiar with the court’s power, under Section 51 of the Supreme Court Act 1981, to order a non-party to pay litigation costs. They will also be aware that this can mean insurers personally finding themselves on the receiving end of a costs order.
Traditionally the courts would only exercise their Section 51 discretion in ‘exceptional circumstances’. Yet the recent Court of Appeal decision in Kylie Palmer v Kevin Palmer and Others (February 2008) suggests that, in the insurance context, the circumstances may not have to be very ‘exceptional’ and that the frequency of such orders seems likely to rise.
The claimant was seriously injured in
the car crash which killed her father,
who caused it. When the father’s
insurers avoided his motor policy, a
claim proceeded against the MIB,
which then required proceedings also to be brought against PZP, the manufacturer of a seat belt device
(the Klunk Klip) which they argued
was defective. PZP was found liable
at trial, but it had just £500,000 of insurance cover and quantum was expected to exceed £2 million. Shortly before trial PZP’s insurers had rejected the MIB’s proposal that they contribute £300,000 towards the claim and bear their own costs, without PZP’s instructions. On the back of that, after trial the MIB obtained an order that PZP’s insurers personally pay the costs of the claim against PZP.
Reducing the risk
The message for insurers is clear: if there is a risk that the indemnity limit will be exceeded and the insured may not be able to pay, insurers should review their reserves to accommodate the potential Section 51 risk. They should also weigh up their options at every strategically critical time. These include: (1) the economic sense of tendering limits, if the insured can fight on; (2) buying off the claimant for the maximum indemnity if they cannot; or (3) fighting on, having factored the Section 51 risk into reserves. Serious consideration should also be given, during the currency of the litigation, to documenting the commercial and other justifications for fighting the case, and perhaps to communicating them to the other parties in open correspondence.
Given the risk that insurers will be left with a liability that greatly exceeds that which they bargained for when agreeing policy limits with their insured, it would not be surprising if the added cost of insurance is passed on to all policyholders through higher premiums.
Mike Willis, Partner,
Professional Risks Group
Naomi Park, Solicitor,
Professional Risks Group
“If an insured is faced with a claim that may exceed the limit of indemnity, it is difficult to see when it will ever make commercial sense to fight, and insurers are at serious risk of a Section 51 order.”
Mike Willis
Once again the dominating topics in the last few months have been in connection with asbestos and limitation. It is too early to say what the final outcome will be for pleural plaques, and no sooner has one suggestion been made or step taken and commented on than the situation has changed again. For now it is appropriate to say no more than that pleural plaques remains a political hot potato.
The Mesothelioma Practice Direction, which supplements CPR Rule 3.1, officially came into force on 6 April 2008, with the aim of speeding up the procedure. Early April also saw an increase of 3.9% to the level of payments that can be made under the Pneumoconiosis (Worker’s Compensation) Act. It had been anticipated that from April the relevant provisions allowing for the recoupment of these payments by the Department for Work and Pensions would be effective. That now seems likely to be delayed so, in the meantime, when settling damages in claims for mesothelioma, the paying party continues to be able to offset
these payments from monies paid to
the claimant and not have to make payment elsewhere.
The House of Lords’ judgment in A v Hoare (the so called ‘lotto rapist’ case) in January 2008 led, as widely anticipated, to the earlier decision in Stubbings v Webb being overturned and a new take on the law of limitation.
Disease update
In summary, the judgment now applies a three year limitation period from date of injury, knowledge or majority, where there has been personal injury as a consequence of a deliberate act of assault. This is in contrast to the previous approach of a fixed six year period from the injury or majority. While the limitation period is shorter, the importance of the decision is that the three years can run from date of knowledge, which is often much later than the injury itself. The court can also now exercise its discretion to allow a claim to proceed out of time, subject to consideration of the relative prejudice to either party. Cases with facts similar to those of A v Hoare are likely to be limited. The real significance of this decision comes with regard to claims resulting from alleged childhood abuse.
Commentaries have predicted a deluge of such claims; the next six to twelve months will reveal whether, in reality, this will happen. If there are more claims, careful consideration of, and possibly litigation about, the extent to which defendants are vicariously liable for the acts of volunteers seems likely; when and where it is appropriate to argue that there was the closeness of connection between the employment and the abuse to justify vicarious liability; and where responsibility for abuse ends if the abuse occurs arguably totally outside a defendant employer’s control, for example at a time and place that has no connection at all with the abuser’s employment.
In April, the House of Lords will hear further arguments in abuse cases, this time in connection with alleged abuse in Scotland. Further comment will follow on the outcome of the appeals in S v Poor Sisters of Nazereth (2007). Finally on limitation the Government has again signalled its intention to consult on this issue. Proposals for consultation on changes to limitation are currently awaited.
Industrial deafness test litigation
It is understood that the claimant’s application for public funding via the Legal Services Commission was unsuccessful following the withdrawal of insurance funding. The claimant has applied to the Court of Appeal to reconsider its previous order striking out the appeal if it could not find alternative funding. This application will be heard in June/July 2008.
Paula Jefferson, Partner and Head of Disease, Injury Risk Group
Paula Jefferson, London, draws together the
latest developments.
© Thomas Brostrom -
Insurance FOCUS SPRING 2008
Fatal driving
Marshall Lamb, London, examines the recently published sentencing guidelines for new motoring offences and warns of the rising cost for insurers of defending drivers involved in fatal road accidents.
The Road Safety Act 2006 introduced two new offences: causing death by careless driving; and causing death while disqualified, unlicensed or uninsured. Both offences, neither of which is yet in force, were created to supplement the existing offences of causing death by dangerous driving and causing death by careless driving while under the influence of drink or drugs.
The new offence of causing death by careless driving caused much debate, with many observers suggesting that this offence criminalises negligence. In other words, an unintentional act, albeit with such a tragic outcome, becomes an offence for which you can be imprisoned. Thus, a driver, whose minor error of judgment or momentary lapse in concentration causes a fatal road traffic accident, will be facing a penalty of up to five years’ imprisonment.
A very worrying prospect for drivers.
It is therefore very welcome to read the recently publicised guidance and consultation from the Sentencing Advisory Panel (SAP) and the Sentencing Guideline Council (SGC).
All the offences that involve causing death as a result of driving have been examined. The current guidance on the existing offences, which both carry a maximum penalty of 14 years’ imprisonment, has been reviewed and modified. In addition, there is new guidance for the two new offences. It was anticipated that both new offences would come into force in April 2008, with the guidance taking effect at the same time. But latest Home Office information is that implementation has been delayed and neither offence is likely aggravating features, such as previous motoring convictions.
Nevertheless the guide sends out a clear message. No longer can a driver who kills, even as the result of an ‘oops’, expect to receive just a fine. A custodial penalty or community order will almost certainly be the punishment with a period of disqualification from driving and in most cases a requirement to take an extended driving test.
No doubt drivers faced with such penalties will be reluctant to plead guilty and are likely to be tried at the Crown Court, as magistrates tend not to deal with cases involving a death where the case can be transferred to the higher court. Therefore insurers should be aware that there will be an increase in the costs of defending such cases under the cover provided by most motor policies.
Marshall Lamb, Legal Assistant,
Injury Risk Group
“...latest Home Office information is that implementation has been delayed and neither offence is likely to be in force until autumn 2008.”
Marshall Lambto be in force until autumn 2008. This is not the first time the implementation has been delayed. The stumbling block this time seems to be consultation with the Home Office over whether a driver’s actions following an accident, such as running away, should be considered an aggravating feature of the offence.
The new sentencing guidance will assist judges in identifying the appropriate starting point and range of penalties for each offence. Broadly each offence has three starting bands, reflecting the degree of carelessness, dangerousness and aggravating and mitigating features. Of great interest was the guidance in respect of causing death by careless driving. Here the starting point for a minor lapse with no aggravating features is a community penalty. Imprisonment will be the most likely penalty only when the degree of carelessness is just under the threshold for the dangerous driver or there are other
© khz -
06Regulations and the issue of compliance in two recent cases: Gloucestershire County Council v Evans & Others (2008) and Jones v Wrexham Borough Council (2007). In the Gloucestershire case (ironically not a PI case) the court found that a discounted rate CCFA, that also allowed for a success fee, was not in breach of s.58A of the Courts and Legal Services Act 1990.
The CCFA set a basic rate of £145 per hour, discounted to £95 per hour if the Council lost. If they won, a success fee of 100% applied on top of the basic rate, leading to a success fee of £145 per hour.
The defendant argued that the effective uplift applied in the CCFA was more than 100% (the maximum permitted by statute) and therefore in breach of s.58A. The claimant would pay £95 per hour in any event with an uplift of £50 if they won, putting the costs “at risk” at £50. This was the sum against which the success fee should be judged, so an uplift of £145 was actually equivalent to an uplift of 290%.
If this argument was right, the CCFA
was unenforceable.
The court disagreed, finding that the CCFA did fall within the s.58 definition, because it provided for the basic charges of £145 to be increased in the event of a win. The strict requirements of the CCFA Regulations, less onerous than the individual CFA Regulations, had been complied with and the court was disinclined to look further.
In Jones the court went on to consider the issue of compliance raised in respect of Regulations 4(2)(c) and (e), even though the CFA in question was a CFA deemed to be a CFA “Lite” and therefore outside
CFA compliance
Joanna Folan, London, explains why compliance is still a problem area.
Conditional fee agreements and the recovery of success fees from a losing defendant remain contentious, eight years on from the introduction of recoverability in April 2000. The problem has been most acute in the personal injury arena where the effective withdrawal of legal aid led to hundreds of thousands of cases being funded under CFAs with success fees, leading to significant cost inflation. Insurers fought back with challenges on failure to comply with the technicalities of the CFA Regulations, culminating in Garrett v Halton Borough Council (July 2006), where the solicitor’s failure to comply led to the
CFA being unenforceable and the profit costs disallowed.
The Court of Appeal has attempted to provide further clarity on interpreting the the Regulations (such agreements are relatively rare in practice). Insurance was already in place with the claims farmer, CBUK, in Jones before the solicitors were instructed and the court held this meant that Regulations 4(c) (d) and (e) should be applied cumulatively.
As the solicitors were required to use CBUK’s operations manuals and precedents, which included recommending the CBUK policy, “it is an obvious inference not requiring any evidence that, if the solicitors ignored the operation manual and recommended a different policy....considerable damage would be done to the solicitor’s business relationship with CBUK”.
This is an extension of the principle outlined in Garrett, where the financial interest not disclosed was more obvious.
It seems clear that in many cases claimants’ solicitors may have paid only lip service to the requirement for transparency: a requirement that the Court of Appeal is still prepared to enforce. The consequences may appear harsh in individual cases but this is simply the effect of the regulatory regime then put in place.
The contrast with Gloucestershire is also a stark one. CCFAs are normally used by bulk purchasers of legal services and may not involve the purchase of After the Event insurance. There is much less need for consumer protection: the benefit for the Council in the CCFA’s structure is obvious.
Since November 2005 the individual CFA Regulations have been eased, but there remain many cases in the system where the CFA was entered into before November 2005 – and plenty of work
for the courts to vet compliance with
the Regulations.
Joanna Folan, Solicitor,
Strategic Litigation
© ELEN -
Insurance FOCUS SPRING 2008
Defective equipment?
…then prove it
The courts have recently made it clear that responsibility rests with the claimant to prove that a machine or piece of equipment that injured them was definitely defective. If they can’t, their claim is likely to fail, as Adela Carrasco, London, explains.
In many cases concerning workplace injuries from machines or equipment, the claimant will allege that the equipment was defective. They will seek to prove this simply by giving evidence of the injury and blaming the machine, without having to identify where the equipment was defective or what the employer could have done to avoid the injury arising. This has been almost the accepted view of the courts since the case of Stark v Post Office (2001).
In the recent case of Pritchard v British Airways (2008), the courts have re-emphasised that a claimant must demonstrate where the machine or equipment was defective to support their claim. If the claimant cannot, and the defendant has good evidence that there was no defect, the claimant is likely to fail in their claim.
Pedal power
In this particular case the judge had to consider whether the claimant’s account that there was a violent kickback of a rudder pedal constituted a defect or malfunction in a training simulator. The defendant relied on expert evidence from an engineer who was a leading authority on flight simulators. He concluded, after an extensive analysis of the simulator parts, that there was no defect in the simulator. The claimant, however, presented evidence from a pilot with no engineering experience. The claimant’s expert identified a list of possible causes but could not conclude that any of them had caused the rudder pedal to kick back.
In reaching his conclusion, the judge considered the contemporaneous records and the defendant’s expert evidence. The case was distinguished from Stark v Post Office and Galashiels Gas Co Ltd v Millar (1949) because, in those cases, examination of the equipment had established that there was a defect. In the British Airways case, despite an exhaustive investigation, no one could account for the failure. The judge therefore concluded that any movement of the rudder pedal at the time was not a defect and dismissed the claimant’s case at the end of a four day trial.
This case emphasises the importance of contemporaneous records and investigations following allegations of defective equipment and the need for appropriately qualified expert evidence. The defendant relied on well-chosen expert evidence which meant that the judge needed very powerful reasons to dismiss the defendant’s evidence and prefer the claimant’s.
This case is also a useful reminder that evidence on causation and quantum is often very powerful in damaging the claimant’s credibility to the extent that it impacts on the judge’s findings on liability. The claimant here exaggerated his quantum and the impact of his injury. In cases of value, care should always be taken so that decisions on liability are made with a full review of the case, including the quantum element. In many cases, it is inappropriate and often dangerous to separate the issues of liability and quantum.
The clear message to insurers with injury cases involving defective equipment is that, by using expert engineering evidence and contemporaneous records in relation to liability and quantum, these cases can be successfully fought.
Adela Carrasco, Solicitor,
Injury Risk Group
“ using expert engineering evidence and contemporaneous records...these cases can be successfully fought.”
Adela Carrasco
© Yali Shi -
“…it remains to be seen whether an English court would enforce waiver in relation to an exclusion clause...”
Brendan McCarthy
Can an insurer waive its right to rely on an exclusion clause contained in a policy and, if so, why? Brendan McCarthy, London, and Daniel Abbey, Birmingham, compare the US and UK positions.
Did you waive?
If an insured is informed pre-inception that his insurer does not intend to enforce an exclusion clause or that the clause works in a certain way, he can later rely on that statement to prevent the insurer from enforcing the exclusion or to ensure that it operates in the way represented, because the representation can become a term of the contract.
If the statement is made after the policy has been entered into, it seems that the insured can probably still rely on this to found a waiver argument.
But why should this be so? Contracts require consideration from both parties to be binding. If an exclusion clause is waived, that will often result in an enlargement of the cover provided (there is then consideration provided by the insurer), but there has been no reciprocal consideration from the insured for the extension of the cover. Thus, in the absence of additional premium, is it right that an insurer can be held to have waived their rights to rely on an exclusion clause? Is this not particularly so when the effect of the enforcement of waiver can be that the insurer has to provide cover where there was never cover in the first place?
This has been the position adopted in the United States and Canada.
American and Canadian decisions
Various American authorities confirm that, in the United States, the doctrine of waiver cannot operate to prevent an insurer from relying on an exclusion. This is on the basis that waiver should not be allowed to operate in circumstances where to allow it to do so would be to enlarge or extend the cover provided, without reciprocal consideration (premium) from the insured. Waiver also cannot create a new contract of insurance, since a cause of action cannot be based on a waiver. The same arguments have been upheld in a Canadian case: Pentagon Construction (1969) Co. Ltd. v United States Fidelity & Guaranty Co. (1978).
However, in Kane v Aetna Life Ins (1990) the court held that waiver may be enforced in relation to ambiguous exclusions, such that the application of waiver does not extend the coverage but instead merely results in an interpretation of it.
English law
There is no direct common law authority on this issue in English law. The most relevant case is one relating to general contract law: The Kanchenjunga (1990). Here, the House of Lords had to consider whether ship owners had waived their right to reject the charterers’ nomination of an unsafe port. The relevant clause in the charter provided: “If owing to any war, hostilities, warlike operations...entry into any such port of loading...or the loading...of cargo at any such port be considered by the master or his owners in his or their discretion dangerous or prohibited...the charterers shall have the right to order the cargo to be loaded at any other safe port…”
The House of Lords held that the owners, by their conduct, had waived their right
for their ship not to be taken into an
unsafe port.
Why then does this impact on waiver of exclusion clauses? The argument goes that the clause in the charter is best characterised as an exception, i.e. a term
© P.Tilly (waugi) -
Insurance FOCUS SPRING 2008
of the contract which demarcates and limits the liability or risk assumed under the contract, just as most if not all exclusion clauses do. Accordingly, as waiver has been enforced in respect of an exception, so should it be enforced in relation to an exclusion clause, regardless of whether the intended operation of the exclusion is clear or not. There are a number of legal arguments that can also be advanced to support this conclusion:
• Waiver (or estoppel) is regularly applied by English courts, with the effect that in many cases cover is extended without any reciprocal consideration from the insured, and in any case English law does not investigate the adequacy of consideration.
• Warranties can also be seen as defining risk just as exceptions do, and an insurer
can be held to have waived a breach
of warranty.
• Under English contract law, someone may defend an action on grounds that there is no contract, and if they do not do so, they may then be estopped from asserting that position later, with the result that they are bound in contract where they were not bound before.
Until such time as a judgment is given on this issue, it remains to be seen whether an English court would enforce waiver in relation to an exclusion clause and whether this would depend on how clear its intended operation is.
However, the decision in The Kanchenjunga is likely to be a persuasive factor. Unless there are very clear reasons for a court not to follow that decision, it would be bound by it. Thus, it appears more likely than not that an English court would enforce waiver in relation to an exclusion clause regardless of how clear the intended operation of the exclusion clause is.
Brendan McCarthy, Partner,
Commercial & Property Risks Group
Daniel Abbey, Solicitor,
Commercial & Property Risks Group
Julian Miller and Parminder Badhan, London, examine how the High Court case of Kajima UK Engineering Limited v The Underwriter Insurance Company Limited (January 2008) has further clarified the scope and operation of notification clauses in claims-made policies.
A clearer note
In Kajima, the insured (K) gave a valid notification to its professional indemnity insurer (U) but there was an issue as to what circumstances were covered by the notice. The policy was on a claims-made basis, which included cover for circumstances “which might reasonably be expected to produce a claim” notified during the period of insurance ending 19 May 2002.
Extent of cover
K was a contractor employed to design and build a block of flats comprising “accommodation pods”. In February 2001, K notified U that the pods were settling and moving excessively, causing adjoining roofing, balconies and walkways to distort. The notification also referred to other possible damage and risk and to the fact that an investigation was under way to identify cause and potential effects or risk. The court had to determine to what extent the notification covered the defects/damage which later emerged (up until 2005).
The court held that the notification was only effective in relation to the specific circumstances which were notified and of which K was aware, namely the settlement or movement of the pods and distortion of the adjoining balconies, walkways and roofing. It was not effective in relation to any matters, loss, defects or damage which did not relate or contribute to the circumstances notified, or which were not caused by the notified circumstances. The notified circumstances could not be expanded by the later discovery of unrelated defects or damage, even if there was a historical “continuum” of investigation which coincidentally revealed defects or deficiencies which did not or may not have anything to do with the notified circumstances. The investigation referred to in the notification was and could only be into the notified circumstances. To the extent that the notified settlement, movement or distortion was not attributable to, or did not give rise to, any of the later discovered defects/damage, there was no claim.
Timely and under review
It is essential for an insured to give notification as soon as it becomes aware of any circumstance, whether general or specific, which might give rise to a claim. Where there is uncertainty as to what the precise problem or potential problem is, an insured can give notice of a “hornets’ nest” or “can of worms” type of circumstance provided there is a reasonable and appreciable possibility that it will give rise to a loss or claim against the insured. Kajima emphasises the importance for an insured to keep any relevant situation constantly under review and to keep its insurer well informed about what is happening. A further notification is required where the insured becomes aware of new circumstances. In some cases a series of notifications flowing from a single situation may be necessary.
Julian Miller, Partner,
Reinsurance Group
Parminder Badhan, Solicitor,
Reinsurance Group
10up their valuable rights under Clause 21. While the amount of loss was uncertain at that date, there was a crystallised disadvantage. Accordingly, the claim was statute barred.
The judgment contains a useful summary of the case law on the accrual of a cause of action. While the decision is unsurprising, it is nevertheless a welcome confirmation that where a claimant has acquired an asset (or bundle of rights) when entering into a transaction, but they are worse off than they ought to have been, the cause of action (for limitation purposes) will usually accrue on the relevant transaction date (subject always to the factual circumstances).
Are the rules cracking?
In Charlton v Northern Structural Services (February 2008), the Technology and Construction Court found that the defendant structural engineers were in breach of duty, and awarded the claimants diminution in value to their property as at the date of trial (2007), rather than the date of the causative breach (2000).
Engaged by the claimants to conduct a pre-purchase survey, the defendant recommended removal of trees in the property’s vicinity, but failed to warn that the relevant soil conditions necessitated this being done gradually under technical supervision . The consequential ground heave settled down by 2002, although the claimants continued monitoring until 2004, and proceedings were not issued until 2006.
A review of recent professional risks cases compiled by Mike Willis and Naomi Park, Leeds.
In court
Limitation argument on shaky ground
In Law Society v Sephton (2006) the House of Lords found that a cause of action in tort cannot accrue, so the limitation period for commencing an action cannot start, if the alleged loss is merely contingent. In Watkins v Jones Maidment Wilson (March 2008) the claimants sought to rely on that reasoning to avoid limitation difficulties.
The claimants alleged that their solicitors had negligently advised them:
• on entering into a building contract in April 1998; and
• on 6 August 1998 when they gave up some contractual Clause 21 rights against the builder, which dealt with the position if the property was not completed by 31 August 1998.
Proceedings, however, were not issued until 26 August 2004, more than six years after the last negligent act complained of. The claimants argued that the loss from surrender of Clause 21 rights was merely contingent until the 31 August 2004 deadline, so that the cause of action did not accrue until the builders had in fact failed to complete on time. The Court of Appeal agreed with the trial judge that the claimants had, in fact, suffered actual loss on 6 August 1998 when they gave
There was no evidence before the trial judge of diminution in value to the property either at the date (1) of breach (May 2000), (2) when the movement ceased (2002), or (3) when the monitoring ceased (2004). However, Judge Thornton QC found “There is nothing inherently wrong in principle in valuing a diminution in value loss at a later date than the date of breach. The guiding principles are that the base date of valuation must be...reasonable...directly linked to the which results from no breach in the causal chain and...not attributable to any failure to mitigate...” Accordingly, the judge held it was reasonable to award diminution in value at the trial date (2007) in view of the uncertainties that resulted from the defendant’s negligent advice, and his finding that the claimants acted reasonably in deferring the issue of proceedings until 2006 as they had limited means, and had tried since 2004 to resolve matters with the defendant without litigation.
This is an odd decision, and may lead to claimants regularly arguing that loss should be measured on a date other than the date of the relevant breach of duty. Insurers should therefore watch out for such arguments, and keep an eye on whether this decision is appealed.
Insurance FOCUS SPRING 2008
Pre-action costs
and tactics
Parties in modern litigation are encouraged by weighted rules of procedure and costs to treat court action as a last resort and to try to resolve matters in lieu of formal proceedings. A critical aspect is that claimants do not usually become at risk for the defendant’s costs, even if they abandon their claim, until they file a claim form. But once they do, all costs in the action may be payable to other parties if the claim fails.
In Lobster v Heidelberg (March 2008), however, judicial reluctance to burden claimants with the risks of pre-action defence costs has been clearly signalled. While deciding a security-for-costs application, Judge Coulson has refused to treat costs incurred in a pre-action mediation as costs of the action for purposes of setting the amount against which the claimant had to put up security. If this approach is followed in cases of costs assessment, successful defendants may find their prospects of costs recovery being substantially reduced by the extent to which their charges applied to a mediation, especially when the parties agreed contractually to bear their own costs of it, rather than in respect of the claim which developed into the court proceedings. The case is a warning to parties to take care to be clear about precisely what costs they are agreeing to pay when they make their arrangements for mediations.
Mike Willis, Partner,
Professional Risks Group
Naomi Park, Solicitor,
Professional Risks Group
Clearing the hurdles
Two recent, otherwise very different, cases carry reminders of the importance of clearing the necessary evidential hurdles in order to succeed with a
point at trial.
In Fulham Leisure Holdings v Nicholson Graham & Jones (CA, February 2008) the trial judge declined to exonerate the defendant solicitors for deleting a crucial provision in a commercial contract because they could not disprove that they had been instructed by the claimant to do so. But the Court of Appeal overturned this approach, holding that in the absence of evidence either way it was for the claimant to prove its case, on the balance of probabilities, that the clause had been deleted without instructions, and there was nothing to cause the evidential burden – of disproof – to shift to the solicitors to prove their alternative scenario (so long as it was not speculative).
The boot was on the other foot, however, in Furniss v Firth Brown Tools (CA, March 2008) where the burden was on the defence to prove their limitation case. The Court of Appeal overturned the trial judge’s dismissal of Mr Furniss’s deafness claim, on the basis that he had been aware of his work-related symptoms for many years, because the evidence was too inconclusive and the defendants had failed to prove that the claimant had the requisite knowledge, not only of his deafness injury but also of his rights of action against them, long enough ago to time-bar his claim.
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“Solvency II presents a significant step towards the creation of a single insurance market...”
Julie Nazerali
Solvency IIand European insurance industries, in particular insurance groups, support the simpler and more risk-sensitive ‘compact approach’ which derives the MCR as a percentage of the level of capital that enables an insurance undertaking to absorb unforeseen losses. This may particularly affect insurers that invest in long-term assets, since measuring capital percentages takes place over a relatively short period of time. Members of the European Parliament recently indicated support for this calculation method.
Insurance groups
The proposal foresees insurance groups, i.e. related insurance undertakings that operate in multiple Member States, being supervised by the regulator in the jurisdiction in which the group’s head office is located (the “lead supervisor”). Many industry players believe that this approach is consistent with the centralised manner in which risk management is performed within a group structure. However, Southern and new Member States, which host group subsidiaries, fear being forced to take a back seat. They argue that the lead supervisor is not in a position to evaluate the real situation of group members in these Member States. A new “group support regime”, which will allow groups to pool capital and allocate this across the group according to need, is also backed by the industry.
When and how?
The Lamfalussy four-level process that is used to develop financial service industry regulations in the EU is also being applied to Solvency II.
Level 1 of the framework, which sets out the key principles of the new regime in a Directive, was published in July 2007. It is currently being debated in the European Parliament and by the European Council of Ministers. EU Internal Market Commissioner Charlie McCreevy recently called for the swift adoption of the Directive without its substance being compromised, so as to avoid losing the expected benefits of the measures. The final agreement between the two institutions is expected before the June 2009 European parliamentary elections.currently undergoing wide consultation among stakeholders. Two issues receiving particular discussion are minimum capital requirements (MCR) and group activities.
Minimum capital requirements
Important decisions still need to be taken in relation to MCR, which is the level of capital below which ultimate supervisory action will be triggered. Several alternative models of the MCR will be considered by the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) in a Fourth Quantitative Impact Study (QIS4), due to take place between April and July 2008. The UK
Through the introduction of a revised set of rules on capital requirements and risk management, the Solvency II Directive and its forthcoming implementing rules seek to create a level playing field for insurance firms across the EU, to increase transparency and thereby improve policyholder protection.
The European Commission published its proposal for a Directive in July 2007 and, although recently amended, there were no fundamental changes. Since the publication of the initial proposal, certain aspects of Solvency II have already taken shape, with more controversial provisions
Solvency II, the EU’s regulatory proposals for achieving a fundamental overhaul of the European insurance and reinsurance sectors by 2012, are well under way. Julie Nazerali and Joy Albert, Brussels, outline recent developments.
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The level 2 measures, which implement the principles of the level 1 Directive, are currently being developed by the Commission together with CEIOPS. In February 2008, CEIOPS launched public consultations on the application of the proportionality principle and the treatment of insurance groups. In April CEIOPS will begin the QIS4 consultation process to test ideas further for the MCR and on groups. QIS4 is likely to be the last impact study and also the final opportunity for stakeholders to have a say in the development of key Solvency II aspects.
Level 3 of the architecture will aim to deliver supervisory convergence through national regulators, while level 4 will ensure effective and consistent enforcement of the legislation beyond the target implementation date of 2012.
Significant step
Solvency II presents a significant step towards the creation of a single insurance market and will allow industry players to operate more freely throughout the EU. UK firms are relatively well prepared for the transition as a result of the FSA’s independent capital adequacy (ICA) standards. As the last bones of contention are dealt with in Brussels over the coming months, insurance companies should lobby the European institutions on the content of this important legislation.
Julie Nazerali, Partner,
European & Competition Practice Group
Joy Albert, Paralegal,
European & Competition Practice Group
Lord Hunt publishes his
report into the Financial Ombudsman Service
On 9 April 2008, Lord Hunt, chairman of the Financial Services Division at Beachcroft, published his independent report into the Financial Ombudsman Service (FOS). In it, he called on the FOS to be much more open and transparent, to improve its outreach activities and to refocus on its founding principles of speed, informality and independence.
“I should now like to see the FOS evolve into an authentic “one-stop shop” for individuals with legitimate complaints against financial services firms, along the lines well established in local government and elsewhere,” he commented. “As matters stand, I believe the FOS still looks too much like a middle-class service, for middle-class people. To become truly accessible, the FOS must endeavour to change this perception.
“Throughout the process, my presumption has been in favour of making much more information publicly available, enhancing transparency wherever possible and making the FOS itself more approachable and accessible.
“If my conclusions are accepted and my recommendations implemented, I believe the demographic profile of those using the FOS should, must and will broaden, as the organisation thinks not only in terms of its traditional areas of activity – dealing with
matters such as mortgages, insurance and pensions products – but also in terms of the problems that typically afflict our less affluent citizens.”
Copies of the report, which runs to over 34,000 words and contains 73 conclusions
and recommendations, is available on the Financial Ombudsman Service’s website
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