Case notes

Author Wenhao Han

The recent UK Supreme Court decision in Gard Marine and Energy Limited v China National Chartering Company Limited & another (The “Ocean Victory”) [2017] UKSC 35 considers whether an insurer can bring a subrogated claim against a co-insured to recover loss paid to another insured, in light of the terms of the contract pursuant to which the insurance was arranged.

Background

The Ocean Victory, a Capesize bulk carrier, was demise chartered on the Barecon 89 form and then time chartered to China National Chartering Co Ltd (Sinochart). Sinochart in turn sub-chartered her to Daiichi Chuo Kisen Kaisha (Daiichi) for a time charter trip. On October 24, 2006, the vessel grounded at the port of Kashima in Japan and became a total loss. Gard Marine & Energy Ltd (Gard), one of the vessel’s hull insurers, after paying the loss, took assignments of rights from the owners and the demise charterers in respect of the grounding and total loss of the vessel, and subsequently brought a claim against Sinochart who in turn sought to recover from Daiichi. Gard’s case (as assignees of the demise charters) was that the demise charterers had a liability to owners, which in turn enabled demise charterers to claim damages down the charterparty chain.

At first instance, Teare J held that the casualty was caused by the unsafety of the port and that the owners, although indemnified by the insurers, had a subrogated claim against demise charterers for breach of the safe port undertaking, which entitled Gard to recover damages for breach of the safe port warranty from Sinochart who in turn were entitled to recover an indemnity from Daiichi. On appeal by Daiichi, Teare J’s decision was overturned by the Court of Appeal. Gard were granted permission to appeal to the Supreme Court.

The Supreme Court upheld the Court of Appeal’s decision that there was no breach of the safe port undertaking. As a result, it was not strictly necessary for the Supreme Court to consider the insurance issue but the Justices recognized the importance of the issue.

The Supreme Court decision

As a general principle of English law, co-insureds cannot bring claims against each other in respect of an insured loss. This means that an insurer cannot bring a claim in the name of one insured (to whom an indemnity has been paid) in order to recover loss paid to another co-insured. The juridical basis of the principle is, however, not settled. Some earlier authorities suggest that the doctrine of circuity of action or the implication of an implied term into the insurance contract forms the basis of this principle, whereas more recent authorities suggest that construction of the underlying contract rather than the terms of the insurance policy made pursuant to the contract is the more favorable basis.

In this case, the Supreme Court endorsed that construction of the underlying contract of the parties should determine whether a subrogated insurer can claim against the co-insured in respect of an insured loss. Nonetheless, the Justices are divided in their construction of the underlying Barecon form which creates the co-insurance.

The Supreme Court considered Barecon 89 (clause 12) which provided that marine and war risks insurances were to be taken out by the charterers at their expense to protect the interests of owners, charterers and any mortgagees, and to be in the joint names of owners and charterers, as their interests may appear.

The majority of the Supreme Court (Lord Mance, Lord Toulson, and Lord Hodge) took the view that clause 12 was clearly intended comprehensively to deal with the risks of loss or damage to the vessel and what was to happen in such an event. Lord Mance noted that the principle that insurers cannot claim against their own co-insured in respect of an insured loss rested on a natural interpretation of or implication from the contractual arrangements giving rise to such co-insurance. In agreement, Lord Toulson added that:

“[T]he question in each case is whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss. Like all questions of construction, it depends on the provisions of the particular contract…”

Lord Toulson agreed with the Court of Appeal that the proper construction of clause 12 was that there was to be “an insurance funded result in the event of loss or damage to the vessel by marine risks” and that, had the demise charterers been in breach of the safe port clause, they would have been under no liability to the owners for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation. He concluded that “the insurance arrangements under clause 12 provided not only a fund but the avoidance of commercially unnecessary and undesirable disputes between the co-insured”.

However, Lord Sumption and Lord Clarke, in the minority, considered that clause 12 did not contain an express exclusion of liability on the part of the demise charterer for breach of the safe port undertaking and there was no need to imply a term to the contrary. Lord Sumption noted that under clause 12, the demise charterer’s liability for the loss of the ship was not excluded but satisfied through the insurance payment. It followed that the demise charterer could claim against the time charterer who is not party to the insurance or any of the contractual arrangements connected with it. In his view, a different question arose in this case as between a co-insured (or his insurer) and a third party wrongdoer, which none of the existing English authorities purports to answer. He also raised the question what if an insurer becomes insolvent after a loss – in other words, if owners and demise charterers look to an insurance funded outcome, what happens if the insurance does not or cannot pay? Would owners still be precluded, as a matter of principle, from recovering against demise charterers? Lord Mance and Lord Toulson regarded that as a remote eventuality which cannot be a guide to the meaning of clause 12.

The demise charterers also relied upon clauses 13 and 29 of Barecon. Under clause 13 (if chosen), owners maintain marine and war risks insurance while demise charterers have to maintain P&I insurance. It contains express exclusion of a right of recovery or subrogation in the context of insurances taken out by owners. Clause 29 contains the safe port undertaking for employment “only between good and safe berths, ports or areas where vessel can safely lie always afloat”. It was submitted that unlike clause 13 there was no express exclusion of subrogation in clause 12 and that charterers must have some liability towards owners under clause 29 because otherwise there can be no back-to-back claim down the charterparty chain. Lord Mance dismissed these submissions. In his view, there was no reason to think that clauses 12 and 13 were devised as anything other than two routes to the same substantive allocation of responsibilities for repairs and total loss, irrespective of fault, and clause 29 cannot have been intended to give rise to a system of recourse for loss of the hull, by way of damages for breach of contract, separate from the no fault scheme of responsibility and insurance recovery for a hull loss introduced by clause 12.

Comments

This decision should be heeded by underwriters. Although it is a decision on a particular (albeit important) provision of Barecon 89, it may well have wider implications on the ability of Underwriters to subrogate where the contract pursuant to which joint insurance is purchased is in similar terms and where the subrogated claim itself relies on an ability to pass a claim down a contractual chain. What seems clearer now is that the underlying contractual arrangement between the parties which gives rise to the co-insurance in their joint names will dedicate whether any such subrogated recovery claim will succeed at the end of the day.

The High Court has quashed a decision of the Financial Ombudsman Service (FOS) against Aviva on the basis that it was inadequately reasoned but confirmed that it is open to the FOS to depart from the law in reaching its decisions on the basis of what is “fair and reasonable”. The complaint will now be re-determined by the FOS.

The complaint related to Aviva’s handling of two life insurance policies taken out in 2006 and 2013. Following cancellation of the first joint policy in 2013, a second single life policy for £500,000 was taken out and a claim on this second policy was made in December 2013. In April 2014, Aviva declined the claim and avoided the second policy on the basis of failure by the insured to make relevant disclosures regarding his health. A complaint was made to the FOS in relation to both policies.

The Ombudsman determined that Aviva’s decision not to reinstate the first policy was fair but that the misrepresentations in relation to the second policy were innocently made and so the information that was not disclosed should be disregarded, the second policy should be reinstated and the claim should be considered.

Aviva applied for judicial review of this decision. The FOS agreed that more detailed reasoning could have been given and that the complaint should be considered afresh but did not accept that the decision was, in any event unreasonable and tantamount to a money award of £500,000.

The Court considered the jurisdiction of the FOS under s. 228(2) of FSMA, which provides that complaints are to be determined by reference to what the Ombudsman considers to be fair and reasonable. The FCA Handbook also provides that, in considering this, the Ombudsman will take into account relevant laws, regulations, codes of practice and where appropriate, what the Ombudsman considers to have been good industry practice at the time (DISP 3.6.4 R). The Court held that

• The Ombudsman did not, and was not required to, follow relevant law, guidance and practice but that, when departing from the relevant law, the Ombudsman should say so in the decision and explain why.
• The Ombudsman’s decision should be entirely quashed and the complaint should be re-determined.
• It would be open to the FOS’s Ombudsman, when reconsidering the complaint, to reach a different decision on the 2006 joint policy as well as the 2013 single life policy;. the question for the Ombudsman was whether Aviva had acted fairly and reasonably in all the circumstances of the case. The Ombudsman might decide that Aviva did not do so even where it adhered to sound legal principle, guidance and practice.
• An Ombudsman might rationally conclude that it was fair and reasonable for Aviva to reinstate the joint policy and a differently reasoned decision upholding the complaint in relation to the single life policy would not necessarily be irrational.
• If the complaint was upheld and Aviva had to pay out under the policy, its liability would be limited to £150,000 (and it would be good practice to spell this out in the decision).

In reaching its decision, the court recognized that it was unclear as to whether the FOS was now applying a general policy to the effect that insurers should be bound where innocent representations are made and that the FOS may have to explain its broader rationale as the breadth of its jurisdiction did not absolve it from consistency in decision-making. The judge also commented that he had “personal concerns” regarding the jurisdiction of the FOS which “occupies an uncertain space outside the common law and statute” where “the relationship between what is fair and reasonable and what the law lays down is not altogether clear”. He queried who or what defined the contours and content of fairness and reasonableness and commented that it might be said that the jurisdiction of the FOS was “penumbral because its shadows cannot be illuminated”.

Author Amy Teece

On May 12, 2017 the Court of Appeal considered an appeal against summary judgment dismissing an insured’s claim for an indemnity under a Residential Let Property Owners insurance policy.

The insured, Mr Mohammed Ashfaq, owned a residential property in Huddersfield which he let out to students. On July 6, 2012, a fire broke out, causing extensive damage to the property and the insured claimed under the policy. By April 2013 the insurer, International Insurance Company of Hannover PLC, had made two interim payments totalling £38,232 before becoming concerned that the claim was fraudulent. Upon investigation of the suspected fraud, the insurer became aware that the information provided on the insured’s proposal form was incorrect as the insured had a prosecution pending at the time that the application for insurance was made. Consequently, the insurer declined to make any further payments to the insured and avoided the policy for material non-disclosure and misrepresentation.

The insured issued proceedings in October 2014 and the insurer counterclaimed for the return of the interim payments. The judge at the summary judgment hearing held that the insured had no realistic prospect of succeeding in his claim at trial and gave judgment for the insurer on the counterclaim for the return of the interim payments, less the amount of the premium.

The insured appealed on the basis that the judge had erred in failing to appreciate that the Unfair Terms in Consumer Contracts Regulation 1999 (UTCCR 1999) and the Insurance Conduct of Business Sourcebook (ICOBS) rules were relevant in determining the insurers application for summary judgment as he was a consumer for the purposes of those rules; had the judge done so, he would have found that the “basis of the contract” and “subject to” clauses were unenforceable against the insured.

However the Court of Appeal dismissed this argument and held that the insured had no real prospect of successfully establishing that he was a “consumer” within the meaning of either UTCCR 1999 or ICOBS. The online proposal form completed by the broker was clearly an application for a policy under the Residential Let Property Owners Scheme regarding a property let to students, not an application for ordinary domestic house insurance. The purpose of the insurance was related to the insured’s trade, business or profession of property letting, and he was not a consumer.

In addition, the fact that the insured was carrying on the trade or profession of company director did not mean that he was not also carrying on the trade, business or profession of a building’s owner letting out a property for profit. A person who takes out a policy covering property bought under a buy to let mortgage is a “commercial customer” for the purposes of classification under ICOBS and, as Flaux LJ noted, “it is neither here nor there that the person may also be a company director of a company whose business is unrelated to property letting”. Furthermore, the language used on the proposal form, such as “home” and “you and all members of your Family”, did not mean the insurance was taken out as a consumer, nor did it convert business insurance into consumer insurance.

Moreover, the insured had not sought to adduce any further evidence to support the assertion that he was a consumer within the meaning of the UTCCR 1999 or ICOBS, nor did he present any evidence from which the Court of Appeal could infer that the property being let to students was a temporary arrangement.

While the circumstances of this case may seem straightforward, it raises a number of interesting questions in relation to the sharing economy, such as “do you cease to be a consumer from the moment you rent out your flat, your car, or any other personal asset?” The Court of Appeal certainly seems to think so. However, the lines between acting as a consumer and as a business continue to blur as technology develops and offers more opportunities for consumers to make money from their personal assets. Customer interaction with and reliance upon such technology is driving their expectations of other services, including insurance providers. Consequently there will be an increase in demand for insurance products that can instantly and seamlessly switch between commercial and domestic coverage, keeping pace with customer lifestyles, behaviors and circumstances.

A recent decision of the NSW Court of Appeal highlights some pitfalls with targeted industry insurance policies where insurers ultimately accept undisclosed risks. Underwriters of an insurance package targeting the adult industry and insuring premises operating as a brothel were found to have accepted the risk that persons operating or frequenting the premises may have affiliations with criminal networks.

Background

Stealth Enterprises Pty Ltd (Stealth) owned and operated a brothel in the ACT under the name “The Gentlemen’s Club”. The premises were damaged by fire in 2012.

At the time of the fire, Stealth was insured by Calliden Insurance Limited (Calliden) through a policy described as a “Business Pack, Adult Industry Insurance Policy”.

At first instance, Calliden successfully reduced its liability to nil by claiming Stealth had failed to disclose that its sole director and manager were members of the Comancheros bikie gang and that, at the time of renewal, Stealth’s registration under the Prostitution Act 1992 (ACT) had lapsed.

Unsatisfied with the result, Stealth appealed.

Issues on appeal

The issues to be decided on appeal were

• Whether a reasonable person in Stealth’s circumstances could have been expected to know that the association with the Comancheros was relevant to Calliden’s decision whether to accept the risk by renewing the policy.
• Whether, had that association been disclosed to Calliden, it would have renewed the policy
• Whether at the time of renewal, Stealth knew the company’s registration as a brothel had lapsed and, if so, had that disclosure been made to Calliden, whether it would have renewed the policy and been on risk at the time the premises was damaged by fire.

The industry specific hypothetical person test – should Stealth have expected the link to criminal organizations to be relevant to Calliden’s decision?

The test for disclosure in s 21 of the Insurance Contracts Act 1984 (Cth) is whether a hypothetical reasonable person, in the circumstances of the insured, would know the undisclosed matter would have been relevant to the insurer in deciding whether, and on what terms, to grant insurance.

In determining the circumstances of the hypothetical reasonable insured in this case, the Court considered the “nature of the business conducted by Stealth, the type of insurance sought, the identity of the insurer, the circumstances in which the insurance was entered into and renewed, as well as the fact of the association between the insured’s director and general manager and the Comancheros”.

The Court found that a reasonable insured could understand that an insurer specializing in the insurance of brothels would expect that people with criminal connections were likely to be involved in the use of the premises. If it was relevant to the insurer to know of any particular association between the insured and any particular criminal activity or organization, a reasonable insured would expect the proposal to contain questions directed to the subject.

In this instance, the proposal directed specific questions to the claims histories of the insured and the criminal history of its directors. Quite crucially, however, the proposal did not direct any questions to any criminal or other associations of the directors.

The Court therefore found that a hypothetical reasonable brothel owner in Stealth’s circumstances would not have been expected to know the association with the Comancheros was relevant to Calliden in renewing the policy, given it did not feature anywhere in the questions asked in the proposal. Rather, the Court saw this as “the sort of association the insurer would expect and take into account as part of the general risk of insuring a brothel”.

Failure to disclose lapse of registration

Though the Court found Stealth was aware of the fact its registration as a brothel had lapsed, there was evidence from Stealth that the issue would have been remedied. It was otherwise not established that, had such disclosure been made, Calliden would not have renewed or otherwise insured the premises at the time of the fire.

Calliden was therefore unable to reduce its liability to nil and judgment was awarded in Stealth’s favour.

The takeaway message

It is clear from the Court’s reasoning that insurers should be aware of inherent risks for targeted policies having regard to the nature of an insured’s business. If insurers want to place any weight on these risks, questions need be directed towards the issue in the proposal.

In this instance, had Calliden asked more probing and specific questions in its proposal the outcome might have been quite different.

Post script – further developments?

Just prior to publication, an interesting development arose. On June 6, 2017, Calliden was successful in staying enforcement of the judgment pending determination of Calliden’s special leave application. This was in part because Justice Macfarlan accepted that, once paid, Calliden was unlikely to see its money again even if successful.

Further, in granting the stay, his Honour stated Calliden’s application for special leave was “strongly arguable” and had a “significant chance of success”. His Honour’s comments made clear that should the High Court choose to address this question, its judgment is “likely to provide guidance to practitioners in an important area of insurance law and practice”.

We’ll be keeping a close eye on this one.

The due observance of and compliance with the terms, provisions and conditions of the policy by the insured was a condition precedent to liability by the insurer to make payment. This was an after-the-event legal costs policy where the premium was payable once the matter was finalized and the costs could be determined.

The court held that there is no rule that premium is payable at any particular point in time and the policy attached no time limit to the payment of the premium. There was nothing in the policy that imposed a condition precedent for the premium payment which was only calculated once the costs had been established. There had been no request for payment of the premium and the insurers could not rely on non-payment to defeat the claim.

If insurers want the premium paid on a particular date, and if they want to make the cover subject to that payment (subject to days of grace) the policy must say so explicitly.

[The case is Denso Manufacturing UK Ltd v Great Lakes Reinsurance (UK) PLC]

An exclusion for claims “arising out of asbestos” was upheld by a US appeal court because it is unambiguous and therefore enforceable.

The appeal court overturned a US$36 million judgment against the insurer, which is only part of the policyholder’s liability for US$120 million worth of asbestos-related claims. The court did not accept the argument that the exclusion was ambiguous and that it only related to raw asbestos in its unprocessed form. The court held that the phrase “arising out of” is unambiguously satisfied by the “but for” causation test. Because the losses relating to the underlying asbestos suits would not have occurred but for asbestos, raw or within finished products, the exclusion was upheld and the local court’s judgment was set aside.

This decision comes after a ten yearlong battle between the insured, General Refractories Co, and insurers relating to tens of thousands of claims brought by plaintiffs who say they were injured after being exposed to the company’s asbestos-containing products.

[The case is General Refractories Co. v First State Insurance Co.]