Hailsham Chambers Professional Indemnity Insurance Seminar

14 October 2009

RUNNING FOR COVER

Julian Picton Hailsham Chambers

Denying Cover Insurers arguments fall into 5 principal categories: 1. Avoiding the Policy. 2. Scope of Insuring Clause. 3. Condition Precedent. 4. Policy Exclusions. 5. Aggregates and Deductibles.

Health Warning conflicts of interest Take no steps capable of ratifying policy or waiving right to avoid. Deal with coverage at first opportunity. If point arises during defence of claim, consider for whom you act. If for both Insurer and Insured, you are conflicted out. See TSB Bank Plc v. Robert Irving & Burns [2000] 2 All ER 826.

The 3 Primary Questions 1. Does the Policy respond? 2. If yes, are any of the Policy Exclusions engaged? 3. If no, do any of the Policy Conditions operate to limit or reduce the indemnity?

Question 1
Does the Policy respond? Tension between MDIS Limited v. Swinbank and Others [1999] EWCA Civ 1884 and London Borough of Redbridge v. Municipal Mutual Insurance Limited [2001] 1 Ll LR Ins 546.

MDIS Insuring Clause

2. Operative Clause The Underwriters will indemnify the Assured to the extent and in the manner detailed herein against any claim for which the Assured may become legally liable, first made against the Assured and notified to the Underwriters during the period of the Certificate arising out of the professional conduct of the Assureds business as stated in the Schedule alleging: Neglect Error or Omission Any neglect or omission including breach of contract occasioned by same. (b) Dishonesty of Employees Any dishonest, fraudulent, criminal or malicious act(s) or omission(s) of any person employed at any time by the Assured. The Assured will not be indemnified against any claim or loss, resulting from the dishonest, fraudulent, criminal or malicious act(s) or omission(s) perpetrated after the Assured could reasonably have discovered or suspected the improper conduct of the employee(s).

(a)

Per Clarke L.J

In my judgment, when clause 2(a) is read in the context of clause 2 as a whole and when it is borne in mind that this is an indemnity policy, the correct construction of it is clear. It is that underwriters will be liable where the proximate cause of the loss ascertained by judgment, award or compromise was one of the perils set out in clause 2. .. Underwriters liability depends upon the true facts and not simply upon the way in which the claimant chooses to put its case.

Per Tomlinson J.
In my judgment, it is normally neither permissible nor possible to look beyond or outside the four corners of the determination itself for the basis of the liability to which the Insured has become subject it is simply not a logical possibility that the imposition of liability in fact arose from different facts and matters The fact that the former Chief Executives conduct might be characterised as criminal is beside the point. It was enough for the pensioners purposes that he was allowed to mislead them.

Solicitors Minimum Terms

1. Scope of Cover 1.1 Civil Liability The Insurance must indemnify each Insured against civil liability to the extent that it arises from Private Legal Practice in connection with the Firms Practice, provided that a claim in respect of such liability: (a) Is first made against an Insured during the Period of Insurance; or (b) Is made against an Insured during or after the Period of Insurance and arising from circumstances first notified to the Insurer during the Period of Insurance.

Question 2
If the loss falls within the Insuring Clause, do any of the Policy Exclusions avail Insurers?

Question 3 If Insurers cannot rely on any Policy Exclusions, can they nevertheless take advantage of any Policy Conditions to limit or reduce the indemnity?

Categories of Condition 2 categories: Conditions precedent, breach of which entitles Insurers to decline indemnity. Conditions for breach of which Insurers remedy is limited to damages and/or a reduction in the amount of the indemnity.

Condition Precedent

The assured shall as a condition precedent to their right to be indemnified under this policy give to the insurers immediate written notice of (i) any claim made against the assured; (ii) any loss discovered by the assured.

RICS Minimum Term

3.6 Claims control and co-operation 3.6.1 The INSURED shall give to INSURERS all such information and assistance as INSURERS may reasonably require and that are in the INSUREDS power to provide and will concur in doing all such things as INSURERS may reasonably require.

RICS Remedy for breach of clause 3.6

Where the INSUREDs breach of or noncompliance with any provision in clauses 3.1, 3.4, 3.5 or 3.6 of this policy has resulted in prejudice to the handling or settlement of any CLAIM, INSURERS shall be entitled to reduce the indemnity afforded by this policy in respect of such CLAIM (including DEFENCE COSTS) to such sum as in INSURERS reasonable opinion would have been payable by them in the absence of such prejudice.

Insureds costs - model provision

If the amount paid to dispose of a claim includes any sum representing the return to the claimant of costs paid to the Insured and to which the Insured was not entitled for whatever reason (the Refunded Costs) then the Insured shall be liable to reimburse the Insurer an amount equal to the Refunded Costs together with such part of the Claimants costs and expenses and of the Defence costs as are attributable to the Refunded Costs.

Dishonesty and Exclusion from Cover

Michael Pooles Q.C. October 2009

The Legal Test Calm descends not yet Twinsectra v. Yardley [2002] UKHL 12 Barlow Clowes v. Eurotrust [2005] UKPC 37 Abou- Rahmah v. Abacha [2006] EWCA Civ 1492 Bryant v. Law Society [2007] EWHC 3043 Admin Be prudent

The procedure - 1 Reservation of position Jointly instructed solicitors Beware conflicts abound Insurers desire for economy A dishonesty investigation requires separate representation

The procedure - 2 Do insurers want to chase? Is it worth it? Effect on claim Size of insured? Potential for recovery? SRA notification - when Investigation Interview

The procedure 3 Interview Voluntary Ensure notification letter is unambiguous One chance Report of decision to SRA Value of process Subsequent challenge taking control.

Hints for detection Speed is of the essence Be pro-active - attend the premises Do not expect SRA co-operation Follow the money Ledgers, bank statements File copies where possible Find the water-cooler

Hints for detection - 2 Claims to encourage or not? Start your database early establish patterns

Elephant traps TSB v. Robert Irving & Burns [2000] 2 All ER 826 - beware the actual conflict Judges take a keen interest Zurich v Karim [2006] EWHC 3355 Would you advise a client to attend an interview Lord Ouseleys report

AGGREGATION

Spike Charlwood

INTRODUCTION
What is aggregation?
The purpose of an aggregation clause [is]: to enable two or more separate losses covered by the policy to be treated as a single loss for deductible or other purposes when they are linked by a unifying factor of some kind.
Lloyds TSB, HL, per Lord Hoffmann (at para.14), approving Moore-Bick J at first instance

 A preliminary question:
How many claims are there?
Haydon v Lo & Lo [1997] 1 WLR 198

The impact of fraud, etc on that issue

Context
Overall limit of cover Limit of cover per claim / series of claims Excess / deductible

IMPORTANCE
Standard Life [2008] EWHC 222 (Comm) Pensions mis-selling claims averaging <10k ... but leading to a total payment >100m Cover: 75m xs 25m Hence, recovery =
0 if separate claims 75m if claims aggregated

Lloyds TSB: introduction

Multiple pensions mis-selling claims <35,000 ... but leading to compensation >125m The aggregation clause:
If a series of third party claims shall result from any single act or omission (or related series of acts or omissions) then, irrespective of the total number of claims, all such third party claims shall be considered to be a single third party claim for the purposes of the application of the deductible.

Lloyds TSB: some law

much will turn on the policy wording [16-17] Some clauses require a unifying cause, some an event [16] Cause clauses are likely to be wider than event clauses [16] Because they may favour the insured or the insurer, aggregation clauses are to be construed in a balanced fashion giving effect to the words used [30] Where a choice between well established alternative clauses has been made, that choice should be respected [31] Note also the following (from Scott v Copenhagen Re [2003] 1 LR 696):
[The] question can only be answered by finding and considering all the relevant facts carefully, and then conducting an exercise of judgment.

Lloyds TSB: lower courts

Moore-Bick J: failures to establish training schemes and monitor performance were the cause of all the claims, which therefore aggregated CA:
The unifying factor had to be the act or omission constituting the cause of action (HL agreed [23]) Nonetheless, the acts or omissions could be related and form a series if they had a single underlying cause / common origin, which they did and so the claims aggregated (HL disagreed [25])

Lloyds TSB: House of Lords

The only unifying factor in the clause was that the acts, etc result[ed] in a series of claims Accordingly, the acts or events form a related series if they together resulted in each of the claims [27]
(NB this may turn on the precise wording of the policy, including its definition section, rather than defining the words act or omission)

The claims therefore did not aggregate

MINIMUM TERMS
Accountants (ICAEW):
B.1. The total liability of the Insurers in any Period of Insurance shall not exceed in the aggregate the sum specified in Item [ ] of the Schedule.

RICS:
A1.3. The maximum indemnity available ... In respect of each CLAIM or any SERIES OF CLAIMS shall (...) not exceed the INDEMNITY LIMIT ... G20. SERIES OF CLAIMS Shall mean a number of CLAIMS (...) that arise directly or indirectly from the same originating cause. (See Lloyds TSB, para.[48])

MINIMUM TERMS
Solicitors (2000-4):
The insurance may provide that all Claims against any one or more Insured arising from the same act or omission or from one series of related acts or omissions will be regarded as one Claim for the purposes of the [sum insured and the excess].

MINIMUM TERMS
Solicitors (2005-8):
The insurance may provide that, when considering what may be regarded as one Claim for the purposes of the [sum insured and the excess]: (a) all Claims against any one or more Insured arising from: (i) one act or omission; (ii) one series of related acts or omissions; (iii) the same act or omission in a series of related matters or transactions; (iv) similar acts or omissions in a series of related matters or transactions and (b) all Claims against one or more Insured arising from one matter or transaction will be regarded as one Claim.

 Material relevant to the change to the solicitors wording

Law Society Guidance, Jan 2005 The Law Society Gazette, 30/6/05 & 21/7/05

Aggregation and notification (1)

Scenario:
Claim 1 is made and notified in year 1 Claim 2 is made and notified in, apparently, year 2 Claim 2 would aggregate with Claim 1 if they had been made in the same year

Aggregation and notification (2)

Questions:
Can Claims 1 and 2 be aggregated? Does it matter whether the year 1 and year 2 insurers are the same? Does it matter whether the Claims are for fraud or for negligence? What if there are not just 2 claims across 2 years, but, say, 50 in multiple years?

Aggregation and notification (3)

In my view:
The fact that the Claims would have aggregated had they been made in the same year does not of itself mean that they may be aggregated across years Whether they can will turn on:
The wording of the policy Whether the Claim 1 notification in fact encompasses Claim 2

Aggregation and notification (4)

Obvious clauses to consider:
Insuring clause Notification clause Aggregation clause Definition of claim Limit of cover

NB the possibility of a series of aggregate limits, one for each year

Application in lenders claims

Claims by borrower and lender arising from same transaction Multiple claims by a lender against the same firm Claims by multiple lenders against the same firm When will there be a series of related matters or transactions? (Solicitors Minimum Terms)
Forney v Dominion Insurance [1969] 1 LR 502 Countrywide v Marshall [2003] LRIR 195