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Guilty as charged? Berkshire Assets (West London) Ltd v AXA Insurance UK PLC

In one of the first cases to be decided under the Insurance Act 2015 (“the Act”), the High Court was asked to consider whether an insured breached its duty of fair presentation under the Act by failing to disclose criminal charges against one of its directors.

Background

In 2018, Berkshire Assets (West London) Limited (“Berkshire”), purchased a Construction All Risks and Business Interruption Policy (“the Policy”) underwritten by AXA Insurance UK Plc (“AXA”) for a property development project in Brentford.

The quote contained a number of provisions, including the following:

The proposer for insurance, its partners or directors or any other person who plays a significant role in managing or organising the business activities, have not, either personally or in any business capacity, been convicted of a criminal offence or charged (but not yet tried) with a criminal offence.”

The policy renewed in 2019. Unbeknown to the director who was tasked with handling its insurances, one of its other directors, Mr Sherwood (and various other companies and individuals), had criminal charges filed against him by the Malaysian public prosecutor in August 2019 in connection with a $4.3bn fraud.

In January 2020, an escape of water resulted in substantial damage to the development. Berkshire thereafter made a claim under the Policy.

After investigating the claim, AXA avoided the Policy on the basis that Berkshire failed to disclose the charges against Mr Sherwood at renewal, and, had it done so, said that cover would not have been provided.

Berkshire argued that Mr Sherwood was not personally involved in the planning, approval or execution of the transactions which gave rise to the charges. To the contrary, the charges related solely to his capacity as a director of an investment banking company.

Issues for the Court

There were two issues for the Court to consider:

  1. Were the charges against Mr Sherwood material, for the purposes of the duty of fair presentation?
  2. If they were, and had they been disclosed, would AXA have agreed to insure Berkshire?

Materiality

The Court considered the definition of a material circumstance under section 7(3) of the Act. This provides that a circumstance is material if it would influence the judgment of a prudent insurer in determining whether to take the risk, and if so, on what terms.

The Court agreed with AXA that the principles relevant to material circumstances were already well established, and there was no reason to suggest that the Act had changed those principles.

There was, however, a debate about whether the charges against Mr Sherwood amounted to a moral hazard which Berkshire was required to disclose.

The Court considered there to be no settled definition of ‘moral hazard’, as each case will necessarily depend on its own facts. It was therefore preferable, in this instance, to rely on the statutory definition of material circumstance when considering the facts of the case before it.

In considering materiality, the Court found that being charged with a criminal offence will often constitute a material circumstance (March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep. 169). Also, the time such facts are to be considered is at the time of the renewal, and not with the benefit of hindsight (Brotherton v. Aseguradora Colseguros (No. 2) [2003] EWCA Civ 705, 1 Lloyd’s Rep. IR 746). Therefore, the fact that the charges were dismissed was ultimately irrelevant.

The fact that the charges did not relate to deceit or dishonesty was equally irrelevant, as AXA could not be expected to resolve the issue of whether or not they involved allegations of deceit or dishonesty at renewal. Facts raising doubt as to the risk were, without more, sufficient to be material, and the Court therefore found they should have been disclosed.

Inducement

It was common ground between the parties that AXA’s branch office had no authority to write the risk under an internal practice note that had been disclosed. The Court found that there was no reason to suppose that the regional or London offices would have considered the matter any differently if the charges against Mr Sherwood had been disclosed, nor was there a reason that the conclusions of the underwriting team would have been any different.

Comment

The case is a salutary reminder for policyholders and brokers that questions around criminal conduct and charges, whether proven or otherwise, are likely to be material. A thorough investigation into all directors’ backgrounds is advisable at each renewal, and when in doubt, it is better to err on the side of caution.

Authors:

Alex Rosenfield, Senior Associate

Anthony McGeough, Associate


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Stonegate v MS Amlin & Ors

Commercial Court Claim no. CL-2021-000161

Background

Fenchurch Law is representing Stonegate Pub Company Limited in its claim for Covid-19 business interruption losses against three insurers: MS Amlin, Zurich, and Liberty Mutual.

Stonegate owns and operates over 4,500 public houses, bars, restaurants and other hospitality businesses in the UK and, like all hospitality businesses, suffered interruption and interference to its business as a result of the emergence of the Covid-19 pandemic, and the government’s actions in response.

The three insurers in the case provided coverage for 760 of Stonegate’s establishments under a policy issued using the Marsh Resilience wording, which was one of the representative sample of wordings considered by the Court in the FCA test case. The test case confirmed that the Resilience wording was capable of responding to business interruption losses arising from the Covid-19 pandemic under three insuring clauses, and insurers have not challenged those findings. Coverage is therefore not in dispute.

The Issues in the Case

Stonegate’s case focuses on the limits of liability available to meet Stonegate’s losses, which itself turns on four issues of principle:

(i) Aggregation

The case will determine how Stonegate’s losses suffered at different locations, at different times, and in different ways are to be aggregated for the purposes of the relevant (sub)-limits of liability. Insurers contend that Stonegate’s losses are to be aggregated as one ‘Single Business Interruption Loss’, and that its claim for Business Interruption Loss is therefore subject to a single (sub)-limit of liability of £2.5m. Stonegate claims that it is entitled to claim multiple (sub)-limits of liability. The outcome of the issue will depend in part on the court’s determination of the meaning of the term “occurrence” in the context of Stonegate’s policy.

(ii) Causation of Post Policy Period Losses

The policy provides a Maximum Indemnity Period of 36 months. Stonegate, like all hospitality operators, continued to suffer loss after the expiry of its policy period. The case will determine the applicable indemnity period(s) to Stonegate’s claim, and specifically how long the indemnity period extends after the expiry of the policy period.

(iii) Additional Increased Costs of Working

In addition to cover for Business Interruption Loss, the policy provides cover for Additional Increased Costs of Working. The case will determine the limit of liability under this cover, and the nature of the costs that may be claimed.

(iv) Government Support

Insurers contend that as a matter of law and/or the proper construction and/or application of the policy, governmental support (including Coronavirus Job Retentions Scheme payments or “furlough” payments, and Business Rates Relief) is to be taken into account for the insurers’ benefit when calculating any Business Interruption Loss and/or other sums recoverable under the policy. Stonegate denies that insurers are entitled to make any deduction from its claim in respect of these kinds of governmental support.

The respective positions of the parties are set out in detail in the statements of case, which are documents of public record, and may be downloaded below:

Amended Particulars of Claim

Defence

Reply

Updates

Because of the relevance of these issues to many other policyholders with unresolved Covid-19 business interruption claims, including those insured under the Marsh Resilience wording as well as those under other policy wordings, Stonegate recognises that the outcome of the case is of significant interest to many market stakeholders.  Fenchurch Law will therefore share regular updates on the progress of the case.

Current Procedural Status

The case is currently listed for a Case Management Conference on 29 October. At that hearing, the Court will hear the parties’ proposals for the management of the case, and may give directions as to timetable, procedure and any other preliminary matters.

A further update will be posted sharing any Order granted by the Court following the CMC.


Webinar - FCA Test Case: The Supreme Court Judgment

 

Agenda

Following the Supreme Court’s announcement that it will hand down its judgment in the Test Case on Friday 15 January, our webinar will give an overview of the key findings of the Supreme Court, including the final determination of business interruption coverage provided under Disease, Prevention of Access and Hybrid covers. Our session will also cover next steps for policyholders and consider some of the further issues that may arise in the adjustment and settlement of outstanding Covid-19 BI claims.

Presenters

Aaron Le Marquer, Partner

James Breese, Senior Associate


Fenchurch Law construction

You have to be pulling my LEG(3)

An unwelcome consequence of the London Market’s preference for including arbitration clauses in most types of commercial insurance policies, is that disputes regarding the meaning of clauses in those policies are frequently resolved in private, rather than in a public forum where the decision of a Court could assist policyholders and insurers in avoiding similar disputes in the future.

In a Construction All Risks context, insurers’ preference for arbitration clauses has had the remarkable effect that in the nearly 25 years since the London Engineering Group (“LEG”) first introduced its suite of defects exclusions, there has not been a single Court decision, anywhere in the world, on the meaning of the defects exclusion which LEG intended to be the most favourable for policyholders: LEG3.

So, if there are no reported cases on LEG3 then where can one look for guidance?  The current (2nd) edition of Paul Reed QC’s excellent book “Construction All Risks” doesn’t consider LEG3 in any detail.  Whilst we understand that the omission will be corrected in the forthcoming 3rd edition, at present Mr Reed’s book refers to LEG3 as being an equivalent of the most favourable of the “DE” defects exclusions: DE5.  That equivalence, however, is not accepted in all parts of the insurance market.

As noted in an article published by Iftikhar Ali of DWF in 2019, the absence of the word “additional” from LEG3 (as opposed to DE5, which explicitly excludes “additional costs of improvement”) has encouraged some to interpret LEG3 as excluding all costs which relate to works which have the effect of improving the original works.  If this interpretation was correct then it would produce particularly harsh results for policyholders where the contract works have suffered damage as a result of defects in design, as in one sense all remedial works carried out according to a different design must necessarily be an improvement if the remedial works are defect-free as a result.  For that reason Mr Ali (correctly in our view) reaches the view that such an interpretation, whilst consistent with a literal reading of LEG3, would be “a commercial nonsense”.  Unfortunately, in our experience, that does not always prevent insurers from running the argument, to the surprise and disappointment of any policyholder or broker who is familiar with how the market ordinarily approaches the clause.

Whilst other texts and commentaries are consistent with the guidance notes produced by the London Engineering Group itself, that LEG3 was intended by the underwriters who drafted it to provide the “the widest form of cover, for physical damage caused by defects”, none of the texts or commentaries discuss how, precisely, one should determine: (i) what constitutes an improvement for the purposes of LEG3; and (ii) what cost is thereby excluded.  This article attempts to address that gap.

What is an improvement for the purposes of LEG3?

For the purposes of this article the relevant part of LEG3 provides that:

“the cost of replacement or rectification which is hereby excluded is that cost incurred to improve the original material workmanship design plan or specification” (our emphasis).

It seems to us that for remedial works to constitute an improvement as compared with the original works:

  • The remedial works must be different in some way from the original works; and
  • That difference must be more than an equally valid way of performing the works, and must produce a tangible benefit (for instance an improved factor of safety, or a longer design life, or superior functionality - in all cases as compared with the original works as completed, as opposed to the outcome desired by the employer).

The requirement for the difference to produce a tangible benefit in order to constitute an “improvement” is important.  The fact that remedial works are different to the original works does not on its own mean that they are an improvement, even if the remedial works are more expensive.

In the context of a Construction All Risks claim, if an insurer cannot identify a tangible benefit produced by the remedial works as compared with the original works, then it will not be able to show that the remedial works are an improvement, and any difference in cost between the remedial works and the original works will be irrelevant, and should not result in a deduction under LEG3.  It is only if the insurer is able to identify a tangible benefit produced by a way in which the remedial works are different from the original works that one is required to consider what cost is thereby excluded by LEG3.

What cost is excluded?

Once one has a taken a view not just on how the remedial works are different from the original works, but also in what way that difference relates to a tangible benefit (i.e. what is the “improvement”), one can then try to identify the cost that relates to that improvement.  Pausing there, it is of course entirely possible that there may be no “cost” of improvement, because a policyholder may find a different way of approaching the remedial works which, although producing a tangible benefit as compared with the original works, is nevertheless cheaper than the original works.  In that situation whilst there is an “improvement”, there would be no “cost incurred to improve”, but rather a saving.

Any other interpretation would be precisely the “commercial nonsense” referred to by Mr Ali, and we doubt that there is a single CAR underwriter who, when writing a risk, would want to encourage their policyholder to carry out remedial works more expensively than a cheaper and better alternative if one was available.

Assuming, then, that remedial works are both an improvement, and are more expensive than the original works, it seems to us that the “cost incurred to improve” can then be identified in one of the two following ways.

Item by item comparisons

Depending on the facts, it may be possible to identify excluded costs on an item by item basis.  For instance, there will be occasions when:

  • Some elements of the remedial works are different to the original works, but produce no tangible benefit (“Differences”);
  • Some elements of the remedial works are exactly the same as the original works; and
  • Some elements of the remedial works are different to the original works, and do produce a tangible benefit (“Improvements”).

In that situation, the Differences may occasionally be cheaper than the comparable items of the original works.  However, there wouldn’t be any justification, in our view, for offsetting any such savings against the cost of the Improvements if those were more expensive than comparable items of the original works.  Rather, the cost excluded by LEG3 in that situation would be the un-discounted difference in cost between the Improvements, and the comparable items of the original works.

Equally, if the Differences are more expensive than the comparable items of the original works we can see no justification for excluding the difference in cost relating to them: what is excluded by LEG3 remains the difference in cost between the Improvements, and the comparable items of the original works.

It should be obvious, we hope, that any differences in cost which relate to elements of the remedial works which are exactly the same as the original works, are unaffected by LEG3.

The approach of separating Differences and Improvements should, in our view, be applied not only to separate items of work, but where required by the facts can also be used to identify the excluded costs where individual items of work may contain both Differences and Improvements.

Items of work containing both Differences and Improvements

How this would work in practice in relation to individual items of work can be illustrated by considering a length of steel pipe which was under-specified, has suffered damage by becoming deformed under expected pressure, and has been replaced by thicker steel pipe.  In that situation:

  • There is a difference between the original works and the remedial works, in that a thicker steel pipe has been used in the remedial works; and
  • The fact that the steel pipe used in the remedial works is thicker than that used in the original works produces a tangible benefit, in that is more robust and less likely to become deformed under expected pressure (i.e. the pipework constitutes an Improvement in that it is thicker).

Suppose the thicker steel pipe used in the remedial works is more expensive for two reasons:

  • Because more steel has been used to make it thicker; and
  • Because the cost of steel has increased since the original works were carried out.

In that situation LEG3 would only exclude the cost of making the pipe thicker by using more steel, as it is only that cost which is related to the way in which the thicker steel pipe is superior to the original steel pipe.  The increased material cost is not related to the way in which the thicker steel pipe is superior to the original steel pipe, and so that difference in cost is not, in our view, excluded by LEG3.

Holistic comparisons

There will be other occasions where individual items of remedial work cannot sensibly be compared with any items of the original works (for instance, where the remedial works follow a substantially re-designed scheme).  In that situation it will be necessary to compare the overall (remedial and original) schemes with each other.

Even in that situation, however, care needs to be taken not simply to subtract the cost of the original works from the cost of the remedial works in order to identify the cost excluded by LEG3, because that would risk including Differences (i.e. which don’t relate to the way in which the remedial works improve the original works).  Rather, the cost of any Differences (e.g. fluctuations in material costs), need to be identified and disregarded.

Ordinarily the most appropriate way to do so in order to produce a reliable holistic comparison, is to compare the cost of the remedial works against not the cost of the original works, but against the cost that would have been incurred if the original works had been re-performed (in exactly the same way) following the occurrence of damage instead of the remedial works which were actually done.


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FCA Test Case Update – Judgment

Today’s judgment in the FCA’s Test Case on Covid-19 Business Interruption coverage has provided some welcome good news for many policyholders – as well as disappointing findings for others. The court’s findings were very clearly divided between the policyholders seeking coverage under Disease clauses, and those claiming under Prevention of Access or similar extensions.

Disease

With the exception of two of the QBE wordings under consideration, it is unquestionable that the judgment is favourable for those policyholders that have one of the Disease Wordings that has been assessed as part of the FCA Test Case. Critically, the court found that the occurrence of the disease did not need to occur only within the radius contemplated in the policy. Provided that the occurrence of the disease extended into the specified radius, the coverage would be triggered.  This has been one of the first coverage issues that policyholders have had to overcome, and which insurers have strongly resisted.

Furthermore, for those policyholders that do not have the benefit of the specific Disease Wordings looked at the FCA Test Case, but instead some other Disease wording, the consistency of the findings is likely to provide persuasive authority to support the ongoing claims under those other wordings.

Prevention of Access and Public Authority wordings

The position, however, is surprisingly less favourable for the majority of those policyholders with Prevention of Access and Public Authority Wordings that were considered as part of the FCA Test Case.

The starting point for these particular wordings appears to be that they would only in principle respond to localised occurrences of the disease. Interestingly, the Court reached a very different and narrower conclusion on the meaning of the term ‘vicinity’ in the context of the Prevention of Access wordings, compared to that under the Disease clauses.  Each particular wording will have to be closely scrutinised, however, as the judgment affects different wordings in different ways, as may the application of the facts pertaining to individual policyholders.

While it is clear that this aspect of the judgment is unhelpful for affected policyholders, it remains to be seen whether the FCA will appeal any aspect of it, and whether the judgment is as unhelpful for those policyholders that have Prevention of Access/Public Authority wordings other than those specifically looked at as part of the FCA Test Case.

Causation

A striking aspect of the judgment is the way the Court neatly dispatches with the  complicated causation arguments raised by insurers, by making it a part of their very clear finding on the construction of the coverage clause.  Because, the court says, the insured peril is the composite peril of interruption or interference with the Business caused by the national occurrence of COVID-19, the causation arguments ‘answer themselves’. There is only one cause of loss. For the same reasons, trends clauses are largely irrelevant and the principle in Orient Express has no application.

The court’s finding that Orient Express was wrongly decided and that they would not have followed it even had they not found it to be distinguishable, will certainly raise eyebrows, and will surely lead to an appeal from Insurers on this issue at least. In deciding whether also to appeal on the policy trigger issues, Insurers will have to weigh up the potential further reputational damage they may suffer from being seen to resist the Court’s very clear findings.

Our detailed analysis of the judgment and commentary on next steps will follow.

James Breese & Aaron Le Marquer