Hailsham Chambers Professional Indemnity Insurance Seminar

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Hailsham Chambers Professional Indemnity
Insurance Seminar

• 14 October 2009

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RUNNING FOR COVER

• Julian Picton
• Hailsham Chambers

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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.

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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.

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The 3 Primary Questions

• Does the Policy respond?
• If yes, are any of the Policy Exclusions
  engaged?
• If no, do any of the Policy Conditions operate
  to limit or reduce the indemnity?

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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.

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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.
• 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).

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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.

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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.

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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.

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Question 2

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

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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?

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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.

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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.

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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.

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RICS Remedy for breach of clause 3.6

• Where the INSUREDs breach of or
  non-compliance 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.

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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.

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Dishonesty and Exclusion from Cover

• Michael Pooles Q.C.
• October 2009

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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

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The procedure - 1

• Reservation of position
• Jointly instructed solicitors
• Beware conflicts abound
• Insurers desire for economy
• A dishonesty investigation requires separate
  representation

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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

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The procedure 3 Interview

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

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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

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Hints for detection - 2

• Claims to encourage or not?
• Start your database early establish patterns

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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

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AGGREGATION

• Spike Charlwood

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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

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• 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

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IMPORTANCE

• Standard Life 2008 EWHC 222 (Comm)
• Pensions mis-selling claims averaging lt10k
• ... but leading to a total payment gt100m
• Cover 75m xs 25m
• Hence, recovery
• 0 if separate claims
• 75m if claims aggregated

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Lloyds TSB introduction

• Multiple pensions mis-selling claims lt35,000
• ... but leading to compensation gt125m
• 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.

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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.

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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)

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Lloyds TSB House of Lords

• The only unifying factor in the clause was that
  the acts, etc resulted 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

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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)

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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.

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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
• 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.

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• Material relevant to the change to the
  solicitors wording
• Law Society Guidance, Jan 2005
• The Law Society Gazette, 30/6/05 21/7/05

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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

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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?

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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

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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

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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

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