Elborne Mitchell Solicitors LEGAL HOTSPOTS FOR CLAIMS HANDLERS by Ed Stanlley These notes are derived from the talk by Ed Stanley, a partner in Elborne Mitchell, given at Lloyd's Library on Thursday 5 July 2007, relating to six claims-related issues which have interested the Court so far this year. Where specific reference is made to the law it is to English law as at 5 July 2007. For specific advice, you should please contact Ed Stanley or the partner with whom you usually deal at Elborne Mitchell. Disclaimer: These Notes are for information only and nothing in them constitutes legal or professional advice. They should not be considered a substitute for legal advice in individual cases; always consult a suitably qualified lawyer on any specific legal problem or matter. Elborne Mitchell assumes no responsibility to recipients of these Notes. Elborne Mitchell One America Square, London EC3N 2PR Tel: +44 (0) 20 7320 9000 Fax: +44 (0) 20 7320 9111 DX: 1063 London/City E-mail: lawyers@elbornes.com
Legall hotspots for cllaiims handllers The above title is a pretty big one and could provide me an excuse to canter through epic insurance cases of 2007. However, I ll resist that temptation, since there haven t really been any. What I will talk about however are 6 claims-related issues that have interested the Courts recently that shed light on some issues about which we are often asked and throw up the odd unexpected surprise. These are: 1 Late notification and conditions precedent 2 Incorporation of onerous terms (onerous to the insured, naturally) 3 The partially fraudulent claim 4 What are damages in a liability policy? 5 The spiking of multi-year claims into one year 6 Arbitration and the European (re)insurer 1. Late Notification Insurance is all about claims management and it is therefore crucial that claims (or circumstances which might give rise to a claim, depending on the wording of your cover) are notified properly and on time. Otherwise, reserving gets messed up and reinsurers get very unhappy. Most insurers would like to see strong legal sanctions against insureds who present late notifications. Unfortunately, the Courts don t agree and in essence, unless the notification provision is formulated in the contract as a condition precedent to liability, all the Courts will do is award damages against the insured, see Sirius v Friends Provident (2005). That is frankly, a pretty lame remedy. Not that the Courts particularly like conditions precedent. However, in our first case (Kosmar Villas v The Trustees of Syndicate 1243 - aka Euclidian) the condition precedent regarding notification was crystal clear. Kosmar were holiday operators whose cover with insurers contained the following notification provision (bold parts for emphasis only); It is a condition precedent to insurers liability under this insurance that (1) the insured shall immediately after the occurrence of any injury or damage give notice in writing with full particulars thereof to insurers. Every letter, claim, writ, summons or process shall be notified or forwarded to insurers immediately upon receipt. 1
(2) Upon receipt by or on behalf of the insured of notice of an intention by any person or body to make a claim against the insured or of any allegation of negligence which might give rise to such claim or on discovery of any such act of negligence, the insured shall notify insurers as soon as practicable and shall provide full information.. The first clause is particularly burdensome on Kosmar; you can imagine how many occurrences of injury or damage will fall on a holiday tour operator s watch. And in fact, the evidence was that in pre-contractual discussions, Kosmar s claims handlers had agreed with insurers that they wouldn t notify them of all occurrences, but only in respect of actual nondisputed claims. Mr Evans was a 17 year old who took a holiday at apartments run (but now owned) by Kosmar in Kavos, Corfu in August 2002. At 4am, he dived into 18 inches of water in a pool by the apartments, breaking his fifth cervical vertebra. Mr Evans was rendered tetraplegic. He sued Kosmar and in 2006, Kosmar were found liable but subject to contributory negligence on Evans s part of 50%. It may seem on its face an odd decision but Kavos is a very much a young person s resort, not for the likes of Saga-louts such as myself. The Judge painted a wistful picture of a place where young guests regularly drank copious cheap cocktails and slept to the crack of noon. There was a poolside bar that generally remained open until the last man staggered home and people regularly fell into the pool at night. Evans was unable to sleep one night because of the noise, decided that if you can t beat them, join them and decided to go for a 4 am dip. Unfortunately, he went in the shallow end. The lighting round the pool was insufficient and there were no warning signs to say where the pool was shallow. The Judge concluded that bearing the sort of resort Kavos was, the bar/pool area was negligently managed. He took a very dim view of Kosmar s tour rep witnesses. In fact, he said they were liars trying to save their own skins. They had fabricated evidence that Evans and his pals were drunk and been warned about their behaviour. They also hastily made up warning signs and posters the next day and tried to make out they had always been there. Kosmar did not immediately notify insurers of Evans injury, but that was because the lady charged with insurance matters at Kosmar knew nothing about the incident until a year after, when she received a letter before action from Evans solicitors. It was thought possible that the local reps had wanted to keep the incident quiet. Anyway, she telephoned insurers and passed them the solicitor s letter straightaway. So, prima facie, this was a breach of the condition precedent. But remember that prior to the contract, Kosmar thought they had squared it with insurers that they only needed to advise in respect of claims (and claims which Kosmar weren t disputing, at that). And then, it transpired that on no less than 16 occasions after inception of the policy, insurers had accepted claims notwithstanding late notification of the occurrence! 4 of those involved fractures (but, admittedly, nothing on the scale of the Evans injury). Over the next 3 weeks, insurers continued corresponding with Kosmar regarding the claim, eventually posing them 25 questions about the hotel and advising Kosmar that they planned to deny the claim. They also wrote to Evans solicitors asking them to note their interest. 2
A few days later and out of the blue however, insurers raised the notification point and wrote to Kosmar reserving their rights. Kosmar wrote back effectively saying don t be so stupid; we agreed we can t tell you about every occurrence, but if an injury is obviously turning into a claim, we ll tell you. Insurers however instructed solicitors formally to repudiate the claim. Kosmar pointed to the pre contractual discussions. The Judge, not surprisingly, held they had no contractual force. It then pointed to the 16 other instances where insurers hadn t taken the notification point. Again, no joy. There is a long strand of legal authority here that starts with the Suffragette case (London and Manchester Plate Glass Company v Heath) in 1913. The insured was covered for damage caused directly by or arising from civil commotion or rioting. The suffragettes would regularly break windows with a hammer before quietly surrendering themselves to the nearest policeman to be arrested. Insurers paid until eventually it dawned on them that these might not be instances of civil commotion or rioting and they shouldn t pay. Insurers were perfectly at liberty to take the point and were not estopped by their previous decisions to pay other claims. The past is no guide to the future. However, the Judge held that after insurers were notified, there was scope for an election as to whether insurers would take the notification defence or not. By their conduct, insurers had elected to accept liability for the claim, rather than deny it. So, they had to pay. The obvious lesson is to reserve your rights at the outset if there is a late notification that is in breach of a condition precedent! But it s not all bad news. The Court re-affirmed the principle that if you let the insured off first time around, you can still take the same point against him on another claim later. You owe that one to the Suffragettes. 2. Incorporation of Terms Anders & Kern v Norwich Union (now CGU) Now to example of where the Court could not find a way round a tough clause in insurer s favour. The incorporation of insurers standard terms and conditions into the contract document is an essential feature of insurance. Without it, contract certainty would be a total impossibility. The insured were wholesalers of home cinema systems with a warehouse in Suffolk. They changed their insurers to Norwich Union in 2004. Four months into cover, on 16 April, they suffered a burglary in which 195k worth of merchandise was stolen. When the broker approached insurers, insurers responded with a quotation that stated normal terms conditions of our standard wording; a specimen of the policy and endorsement wordings are available on request. However, neither broker nor insured requested a specimen policy. The policy documents were sent in February 2004 to the broker and sent on to the insured s risk manager. The policy was stated to be subject to survey, and this was duly undertaken in March. A schedule of improvements was prepared; under burglary, the survey report merely said at the close of each wording day, all ground floor windows are to be closed and the key operated window locking devices put into operation. 3
The policy wording ran into 70 pages, and hidden in there was an Intruder Alarm Condition ( IAC ) as follows (again bold for emphasis); While the premises are unattended, you must ensure that (1) the premises are protected by an intruder alarm system and means of communication used to transmit signals from such an intruder system designed, installed and maintained as agreed by us (2) the protected premises must not be left without at least one responsible person in attendance (i) unless the intruder alarm system is set in its entirety with all means of communication used to transmit signals in full operation In the event of any activation of the intruder alarm system or interruption of any of the means of communication during any period that the intruder alarm system is set, a keyholder shall attend the premises as soon as reasonably possible in order to confirm the security of the premises and reset the intruder alarm system in its entirety. If the intruder alarm system cannot be reset in its entirety or all the means of communication used to transmit signals are not in full operation, a key-holder must remain at the premises unless we agree otherwise in writing. Early in the evening of 16 April, the BT telephone line used for the alarm system was cut (by the about-to-be burglars, but no-one knew that at the time). The cleaner noted that the alarm was bleeping and called the managing director, who meanwhile got a call from Chubb (who maintained the system) to say there was a fault on the BT line. He returned to the warehouse, called Chubb and BT (who said they couldn t tell him when an engineer would turn up) and alerted the police that something might be afoot. He checked every window and parked a forklift truck in front of the front roller doors for security. He stayed outside the premises until 9.30pm, when he no longer felt safe on his own. The burglary took place overnight. The alarm sounder was ripped from the wall and as the telephone line had been cut, the whole system was disabled. Plainly, the MD had done all he reasonably could in the circumstances. However, technically the IAC had not been complied with. And, to add insult to injury, the insured did not even realise the IAC was a policy condition. The insured tried in vain to argue that the requirement that a key-holder must remain on the premises when the alarm system was down was subject to an implied term as to reasonableness and that it would be suspended if the key-holder felt in personal danger. They were left to argue that the IAC had not actually been incorporated on the basis that it was sufficiently onerous to have merited being specifically brought to their attention. They relied on an old Lord Denning case called Spurling v Bradshaw (1956) in which he said 4
I agree that the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient The Judge firmly rejected that argument. He did not buy into the notion that the condition was particularly onerous. It shows that the Courts will give force to tough clauses in insurers favour, even if they haven t particularly been brought to the client s attention. And now to something lighter 3. The Partially Fraudulent Claim The duty not to make a fraudulent claim on your insurance is so fundamental that its legal provenance is actually unclear! Fraudulent claims are obviously not recoverable. However, the legal consequences of a fraudulent claim are not avoidance or rescission of the contract. The present state of the law is that fraud does not necessarily deprive the insured of all benefit under the contract. So, in Axa v Gottleib (2005), four claims were made and paid on a household policy. It was later discovered that 2 had been fraudulently exaggerated. On appeal, insurers were allowed to claw back the payment they had made in respect of the 2 fraudulent claims but not the other 2. Churchill Car Insurance v Kelly Kelly was in a car crash caused by 3 rd party insured by Churchill. Most people regard a prang as a nuisance. Kelly however regarded his as a career opportunity. Churchill agreed the costs of repair to Kelly s car at 1,500. However, Kelly s aspirations went further than that. He wanted; 8,000 for deterioration in value 7,500 for a replacement vehicle 2,000 for loss of earnings for losing his job because of the accident loss of remuneration for refereeing (yes, I kid you not) Damages for pain, suffering and loss of amenity. Do you like a Challenge Churchill? Oh, yes! Kelly represented himself in the Stafford County Court. The Recorder didn t believe much of his claim but bought into some of it and awarded him; 1,500 for the repairs which were agreed 1,000 for loss of earnings 1,000 for pain and suffering 800 for inconvenience Churchill were most unhappy and sent in some investigators, who found that Kelly was sacked for theft; theft of a tax disk belonging to his employers; and the vehicle he was driving at the time of the accident was displaying the stolen disk (so 5
when Kelly told the Court he was sacked because of the accident, it was sort of right but missed out some key elements of the story!) The letter of dismissal Kelly produced to the Stafford Court was a forgery Churchill petitioned the High Court for leave to appeal and at the leave application, the Judge advised Kelly of the seriousness of the allegations and the likely consequences of his being found guilty of perjury. Kelly was never heard of again and did not attend the appeal. The Judge on the appeal hearing said I am satisfied that the respondent embarked upon a calculated and dishonest scheme to obtain money from the appellant by fraud and forgery and this scheme necessarily involved a deliberate deception of the court and the giving of perjured evidence. Churchill argued that Kelly should be disallowed all compensation, including the damage to the car which was admitted ( 1,500), because; 1. the cause of the accident was Kelly using a stolen tax disk 2. ex turpi causa non oritur actio, a Latin maxim (of the sort we are not supposed to use any more); literally, no action can arise from an unlawful cause. The first was a logical non-starter. The second was a step too far. The damage to the vehicle was proven and admitted. However the remainder of the award in Kelly s favour was set aside, including the claim for pain suffering and loss of amenity, on the basis that if Kelly had forged the evidence about his dismissal, he had probably lied to his doctors too! So, the Court allowed the appeal in respect of everything bar 1,500 but awarded all the costs at first instance and of the appeal against Kelly. For good measure, the Court ordered that the papers be sent to the Staffordshire Chief Crown Prosecutor. 4. Liability Insurance and the meaning of Damages Liability insurance usually protects in respect of liability for damages. This doesn t mean any old liability; it means damages for legal liability in tort to a 3 rd party. Therefore, remedial or preventative work is not recoverable as was held in Yorkshire Water Services v Sun Alliance (1998); there the claimant allowed sludge to escape from its factory and spent heavily on remedial work. Even though the remedial work potentially saved insurers millions, it was not recoverable because Yorkshire Water was not legally liable to a 3 rd party to incur the cost of the works. It is however different in the world of marine insurance where there is a statutory duty under the Marine Insurance Act on an assured to take such measures as may be reasonable for the purpose of averting or minimising a loss. Therefore, marine insurance provides cover for the costs of sue and labour. Yorkshire Water shows us that no sue and labour clause will be implied into non-marine insurance. Neither for that matter are fines and levies recoverable as damages. This follows from a series of old maritime authorities involving (principally) wreck removal. In those cases, vessels had collided with and damaged other vessels, resulting in the relevant authority 6
having to undertake the costs of wreck removal to clear the waterway. The owners of the vessels that had caused the damage were duly presented with the bills and attempted to pass them onto insurers. The Courts disallowed the claims as the fines or levies were not damages for legal liability in tort to a 3 rd party but in respect of liability under statute (or equivalent thereof) to a government agency. These principles were recently revisited in Bartoline v Royal Sun Alliance Bartoline was a manufacturer of adhesives and packer of hydrocarbons (e.g. turpentine, white spirits) in Beverley, East Yorkshire. In May 2003, the factory caught fire and a cocktail of fire-fighting foam and polluting chemicals entered into two neighbouring watercourses, Swinemore and Barmston Drains. The Environmental Agency got involved almost immediately and under its powers under the Water Resources Act 1991, carried out emergency works to clear the drains (and in so doing, caused physical damage to the embankments and adjoining pasture land). It then issued works notices compelling Bartoline to remove all remaining contaminated water and material from the watercourses. The agency sent Bartoline its bill, approx 620,000. The cost to Bartoline of undertaking the works required under the works notices was a further 148,000. Bartoline had a combined policy under which the PL sector protected against legal liability for damages in respect of accidental loss of or damage to property Could the bill for work done by the Agency be damages? Consistent with the old wreck removal cases, the answer was a firm no. The Agency was a body exercising public law functions. Its powers were for preventing or minimising or remedying or mitigating the effects of pollution of the environment and not for the obtaining of civil compensation. The Judge drew a clear distinction between the purpose of the statutory powers exercisable by the Agency to act in the public interest by protecting the environment - and the law of torts which is to provide compensation for loss and damage sustained by individuals for unlawful interference with their private rights and interests. Damages must refer to the liability that arose to a 3 rd party under the law of torts. To the extent that the costs were analogous to the costs of prevention, they were unrecoverable under the principle established in Yorkshire Water. There was an interesting twist. After the action was heard, some enterprising individual unearthed an email from the underwriter to the broker that noted fires at premises of this type not only result in material damaged losses but the pollution and contamination clean up costs following such incidents can run into millions!! So, it was argued that the underwriter certainly thought insurers were on the hook for the clean-up costs! The Judge ducked the issue by holding that the point had been raised too late in the day but opined that the email, in isolation, wasn t persuasive enough evidence of anything to change his mind on the substantive issues. 7
5. Multi Year Exposures and Spiking This is an issue has been with us for years, but a number of recent developments have put it in the spotlight. Spiking is to do with allocation. Where insureds are faced with exposures over many years due to one continuous loss or losses that can t be divided up can they allocate the whole lot into one year of cover so as to pierce the policy deductible? And can insurers do the same to their reinsurers? This is of particular relevance to those faced with APH losses. There is a tendency for US Courts to hold insurers jointly and severally liable where there is a continuous loss, e.g. a site pollution incident. So, for example, as happened in Lexington v Wasa, if the pollution started in 1942, all insurers from 1942 are jointly and severally liable. The one insurer that still exists faces liability for all loss since 1942, subject to a (valueless) right of recovery from the others. It is highly relevant also to claims in relation to UK mesothelioma. Mesothelioma is the least pleasant of all the asbestosis family of industrial diseases. It is a tumour in the pleura, the membrane that surrounds the lungs. It develops when a malignant cancerous cell is created in the body (following the usual genetic patterns of cell division, mutation etc). The presence of asbestos fibres in the pleura will facilitate but not necessarily cause the creation of a malignant cell. Also, once the condition is caused, it is unaffected by further exposure. Mesothelioma is an indivisible disease, i.e. there is no way of identifying the source of the fibre(s) that initiated the genetic process that resulted in the malignant cell being created. There is usually a long time-lapse between exposure and the development of the malignant cell; and a similar time-lapse until development of symptoms. The symptoms are horrific and after manifestation, victims face a very short life expectancy. Mesothelioma claims are on the rise but were initially beset by problems when victims had been employed by a number of companies that exposed them to asbestos fibres. Who is responsible? How do you prove causation? Those issues held up the settlement of otherwise valid claims made by needy and deserving claimants. Government legislation has now intervened in the shape of the Compensation Act 2006 to address the problems. Wasa v Lexington is described in a little more detail in Elborne s new newsletter, Recap. Lexington believed it had back to back facultative reinsurance with Wasa in respect of its insurance between 1977 and 1979 of the US company Alcoa. Alcoa were found to have polluted a site from 1942 and Lexington was to be held liable jointly and severally with all other insurers from that date. The reinsurance however covered all risks of physical loss or damage occurring during the 3 year period of cover. The Judge held that Wasa could not be liable for loss that occurred outside that period, notwithstanding a full follow settlements clause. Turning now to mesothelioma, there is some history to review. The modern legal regime started with the seminal House of Lords decision in Fairchild v Glenhaven (2002). It was held that because of the indivisible nature of the disease, the usual but for rules of causation did not apply. Therefore, it was not necessary for a victim to prove that he contracted the 8
condition during the employment of a particular employer. It was enough to show that the victim had been exposed to asbestos fibres during his employment with the defendant. It was widely believed at the time that this meant that any employer who had exposed the victim was jointly and severally liable with other employers. That was however held not to be the case by the House of Lords in Barker v Corus (2006); individual employers were only liable pro rata by reference to how long the victim worked with them (in insurance parlance, for time on risk ). So, if the victim worked for X and Y for 5 years each, and each of X and Y exposed him to asbestos fibres, X would only be liable for his (50%) share of the time on risk. This caused consternation among those who lobby for the interests of mesothelioma claimants. Government swiftly intervened and the Compensation Act establishes statutory joint and several liability on all employers who exposed victims to asbestos fibres. In the above example, employer X would now be liable for all the damages suffered by the victim. X s Employers Liability insurers look set to foot the bill. However, most EL covers cover in respect of injury or disease caused during the period of cover. This is interesting because the whole premise of Fairchild, Barker and the Compensation Act is that causation cannot be proved in an indivisible disease such as mesothelioma. Public Liability covers may also face exposure for those instances where the victim was not employed as such by X. PL covers however tend to be in respect of injury occurring during the period of cover and insurers were boosted by the decision in Bolton v MMI last year which held that the condition could not have occurred on exposure, but only at the later stage when a malignant cell had formed. The trigger date was therefore outside the period of coverage. However this all pans out, there are inevitably issues as to whether EL/PL insurers can pass these type of joint and several liability obligations onto their excess of loss reinsurers. 6. Arbitration and the European (re)insurer This is covered in Recap on the second page and discusses the West Tankers case. For a while it has been acknowledged that under the applicable European law on jurisdiction (Council Regulation 44/2001), even if the English courts have exclusive jurisdiction or are the most obviously suitable forum for hearing a dispute, if proceedings have nonetheless been first issued elsewhere in the EC, your only practical option is to ask the Court first seized of the dispute to stand down. The English court cannot grant an anti-suit injunction. Does this apply to English arbitration, however? The English courts have since 1911 (Pena Copper Mines v Rio Tinto) exercised jurisdiction to grant an anti-suit injunction to restrain a party from conducting proceedings abroad in spite of an English arbitration clause. However, in West Tankers, the House of Lords has grudgingly accepted the possibility that its jurisdiction under Pena Copper might contravene Council Regulation 44/2001 and has referred the question to the European Court of Justice. Until a decision is given by the ECJ, no anti-suit injunction will be given to enforce London arbitration against a party in the EC. 9