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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


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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