News

February 18, 2020

Fenchurch Law expands property coverage disputes team

Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Nicola Bowen as an associate in its Property Risks practice group.

Nicola has spent a number of years working in insurance litigation with a specific focus on property related matters. She has acted for leading insurers on first party and liability claims disputes and complex defendant matters. She has also acted jointly for insurers and their insureds in a number of large subrogated recovery actions.

Nicola joins Fenchurch Law from BLM, where she was a solicitor in their property damage team and was previously a property damage solicitor with DAC Beachcroft.

Joanna Grant, partner and head of the Property Risks group practice at Fenchurch Law, said: We are delighted to welcome Nicola whose  dedicated property damage litigation experience expands the coverage disputes capabilities the team can offer our clients.

Nicola Bowen is an associate at Fenchurch Law

February 5, 2020

Fenchurch Law celebrates a hat-trick!

Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes has received its third consecutive ‘gold’ award from customer experience experts, Investor in Customers (IIC).

There were many complimentary comments from their happy clients, some of which included:

• “Fenchurch provide myself, my team and my clients with an excellent service and give an honest and balanced response. I rate them as the best in the business.”

• “Service focused, excellent knowledge, great at communicating sometimes difficult points.”

• “I believe the firm offers a unique service in this market and hence is vital to a number of clients.”

• “The service we receive from Fenchurch Law is second to none so we would have no hesitation whatsoever in recommending them to any client – in fact we actively do recommend them.”

• “They offer offer a service that is quick, personable and professional. I would add that they know my industry back to front.”

IIC is an independent assessment organisation that conducts rigorous benchmarking exercises. These exercises determine the quality of client service and relationships across several dimensions, including how well a company understands its clients, how it meets their needs and how it engenders loyalty. IIC also compares the internal views of staff to identify how embedded the client is within the company’s thinking.

Sandy Bryson, Director at Investor in Customers commented: “I am absolutely delighted for the whole Fenchurch Law team. They are rightly thrilled and proud to have achieved a third consecutive IIC Gold award, evidencing that they continue to provide their clients with an exceptional experience. The firm clearly cares deeply about its clients and its employees. The Fenchurch Law management team has embedded a culture of continuous improvement within the firm and they are passionate about making the marginal improvements identified within the IIC report to improve further still. They are a genuine pleasure to work with.”

David Pryce, Managing Partner of Fenchurch Law added: “Providing an exceptional level of client service is something that the whole team at Fenchurch Law cares deeply about. But we know we can always do better, and Investor in Customers give us the insights and the tools to help us keep improving our clients’ experience”.

January 8, 2020

Fenchurch Law expands coverage dispute team with Le Marquer appointment

Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Aaron Le Marquer as partner expanding its capabilities and international expertise.

Aaron specialises in insurance disputes for policyholders with a focus on product liability and recall and complex international losses. His experience extends to all commercial lines of business and he has handled many significant London market losses and represented manufacturers and insurers in high-profile cases in the tobacco, automotive, consumer electronics, pharmaceutical, and medical device sectors.

He joins Fenchurch Law from Tilleke & Gibbins, a leading Southeast Asian regional law firm, where he established a leading insurance practice and subsequently became a partner based in Thailand. Previously, he was assistant general counsel for Asia Pacific with AIG in Singapore. He originally trained and practised as an insurance and product liability lawyer with City and US firms based in London.

Managing Partner of Fenchurch Law, David Pryce said: “The start of 2020 marks a period of growth in our capabilities. Aaron is recognised for his insurance disputes work in Asia and now brings this substantial experience acting for policyholders and brokers on large scale and complex claims disputes together with strong insurance industry expertise and multi-jurisdictional experience. There is no doubt both Fenchurch Law and our clients will benefit significantly from his appointment. We will be making further announcements about the expansion of our team in the coming weeks.”

January 7, 2020

Unoccupied Buildings conditions – a trap for the unwary

Properties become unoccupied in a number of different scenarios. In a residential context, this might be because the home is not the policyholder’s main residence, or because the policyholder is going on an extended holiday. Similarly, for buy-to-let landlords, a property may become unoccupied for lengthy periods between tenancies.

This short article will explore the requirements that insurers impose where a property is left unoccupied, and how those requirements have been interpreted by the courts.

Home insurance

Standard home insurance policies exclude claims where properties are left unoccupied for extended periods. The rationale is simple: an unoccupied home represents a greater risk as it is more likely to attract thieves, vandals or squatters. Equally, there is a greater chance of structural damage in an unoccupied home because no one is available to deal with, say, a burst pipe or a fire. For those reasons, home insurance policies usually require policyholders to tell their insurers if the property is/becomes unoccupied.

“Unoccupied” is typically defined as: “not being lived in.” The case law suggests that this means actual use as a dwelling. So, in Simmonds v Cockell [1920] 1K.B. 843, a warranty requiring a property to always be occupied did not mean that there would always be someone present, but rather that it would be used as a dwelling house.

Most policies say that the cover will cease if the property is not being lived in “for more than [30] consecutive days” (although the precise number of days will vary from policy to policy). As long as the property is regularly being occupied, temporary unoccupancy will not invalidate the cover. Therefore, in the case of Winicofsky v Army & Navy General Assurance [1919], a condition requiring premises to remain “occupied” was not breached where the policyholder sought temporary refuge in a shelter during an air raid.

Once an insurer is told that a property is unoccupied, it will, if the change is accepted, be entitled to vary the premium and terms, and may raise a small administration charge for the variation. If the change is not accepted, the policyholder will need to arrange specialist unoccupied property insurance.

Commercial insurance

In commercial insurance, unoccupied buildings conditions take on a different character. Commercial policies usually impose a number of obligations, some of which may be quite onerous, which must be complied with if cover is to remain in force despite the property becoming unoccupied.

For example, landlords may be required to ensure that an unoccupied property, or a part of it, is inspected once a week (often with a requirement that a record of the inspection is kept), secured against illegal entry, kept free of combustible material, and disconnected from any mains services. The consequence of a failure to comply with the condition depends on whether it is expressed as a condition precedent to the insurer’s liability. If it is, the condition must be complied with absolutely, and any breach will entitle the insurer to deny liability for the claim. If it is not, the position will turn on whether the insurer has suffered prejudice.

A common scenario is that a property becomes unoccupied without the policyholder’s knowledge. This might occur in a landlord’s policy, where, say, a tenant vacates the property without giving notice. Commercial policies usually cater to that scenario by including “non-invalidation clauses”. These are terms which provide that cover will not be invalidated in the event of any act, omission or alteration which is either unknown to the policyholder or beyond its control. To gain the benefit of those clauses, the policyholder will be required to notify its insurer immediately of the act, omission or alteration.

Application of Section 11 of the Insurance Act

Section 11 of the Insurance Act is intended to prevent an insurer from disputing a claim for non-compliance with a term which is unconnected to the actual loss. The Law Commission has said that a causation test is not required; rather, the test is simply whether there is a possibility that the non-compliance could have increased the risk of loss.

Since Section 11 is capable of applying to Unoccupied Buildings conditions, how might it apply in this context?

Let us suppose that a landlord owns a property which has two floors, and the upper floor is unoccupied. A fire then starts on the ground floor, which spreads to the upper floor. Insurers then discover that the landlord breached the Unoccupied Buildings condition by failing to keep the building free of combustible materials, and refuse to pay the claim. There are not yet any authorities on the meaning and application of Section 11.

On an orthodox interpretation of section 11, it would not be open to the policyholder to argue the upper floor would have caught fire in any event, even if the condition had been complied with. However, on a non-orthodox interpretation, section 11 should arguably come to the policyholder’s rescue: the fire started on the ground floor, which was occupied, and compliance with the condition would not have made a difference to the loss.

Conclusion

Almost all property owners, whether acting as private homeowners or in a commercial context, will need to consider the implications of unoccupied buildings conditions at some point.

We would recommend that policyholders check the fine print of their policies in order to understand (a) when they need to notify their insurers if a property becomes unoccupied; and (b) the steps which need to be taken in order to comply with Unoccupied Buildings conditions. A failure to do so may be the difference between an insurer paying, or refusing to pay, a claim.

Alex Rosenfield is a Senior Associate at Fenchurch Law

December 19, 2019

Appeal Courts Triumph for Structural Defects Policyholders: Manchikalapati v Zurich

Leaseholders of flats in a development in Manchester have secured a major victory against Zurich Insurance under a standard form defects policy, in a case with significant implications for new build home owners affected by inadequate construction works. Following a long running Court battle over claims first notified in 2013, policyholders have been awarded approximately £11 million to rectify failures by the insolvent developer to comply with technical requirements and building regulations.

Residents moved into New Lawrence House from 2009 but were forced to leave following a prohibition notice issued shortly after the Grenfell Tower disaster in June 2017, in view of structural deficiencies including missing lifts and balconies, a collapsing roof deck and complete lack of fire stopping measures. The Court of Appeal judgment handed down last week essentially upheld the decision of HHJ Davies, requiring Zurich – through run-off insurers East West – to pay out under the Standard 10 New Home Structural Defects Insurance Policy (the Policy), aside from overturning the maximum liability cap of around £3.6 million applied below.

The development contains 104 flats and the Claimants between them own only 30, with many others left empty. The Policy limited Zurich’s liability for new homes forming part of a continuous structure by reference to “the purchase price declared to Us”, which had been construed as restricting the Claimants’ recovery to the combined sums paid for their own flats. The Court of Appeal disagreed and recalculated the cap based on the total purchase price of all flats in the block, since the Policy enabled a single leaseholder to recover the entire cost of rectifying a danger to the health and safety of occupants and the previous approach would prevent them from doing so. The Policy wording was ambiguous and should be construed “in a manner which is consistent with, not repugnant to, the purpose of the insurance contract”.

Zurich advanced a number of grounds of appeal relating to interpretation of the Policy, all of which were rejected. Lord Justice Coulson found that:

“what [Zurich] suggest as the proper interpretation of the words used in their own policy is, on analysis, nothing of the kind, and is instead a strained and artificial construction (often requiring the interpolation of words not present) with the result that it becomes impossible to see any circumstances in which [Zurich] would ever pay out under the terms of the policy.”

In particular, the Court of Appeal decided:

1. It is not necessary for the costs of rectification work to have been incurred before a claim can be made under the Policy – otherwise insurers could take advantage of leaseholders’ impecuniosity to avoid liability altogether;

2. The fact that funds recovered would in part be used to pay the Claimants’ lawyers and funders was irrelevant. An insured can apply the insurance proceeds as they wish and it would be unjust to hold otherwise, penalising the Claimants merely because they do not have pockets as deep as Zurich’s. The legal and funding costs would never have been incurred had Zurich acknowledged their proper liabilities at the outset;

3. The Policy does not require the insured to sue any third parties against whom the insured might have a possible claim before pursuing Zurich under the Policy;

4. The underground car park and balconies at the development fall within the scope of cover;

5. The condensation exclusion in the Policy does not apply where the condensation which causes damage is caused by a defect. The proximate cause of damage is the defect, not condensation.

6. The trial judge’s application of Policy excess provisions could not be challenged on appeal.

New build developments are usually constructed by single-purpose corporate entities with limited assets, and purchasers of defective properties have restricted rights of recourse against those responsible for the construction or building control approval process in the absence of contractual claims under collateral warranties (Murphy v Brentwood DC [1991] 1 A.C. 398, Herons Court v Heronslea Ltd [2019] EWCA Civ 1423). The decision in this case is an important step forward in protecting the interests of new build home owners, in light of wider concerns about regulatory oversight and industry standards under contractor-led procurement methods.

The Zurich Policy was a standard wording indirectly descended from the original NHBC scheme and widely used across the country at the relevant time, with the intention of providing peace of mind for the purchasers and mortgagees of new build properties. The policyholder-friendly interpretation upheld by the Court of Appeal serves as a welcome reminder of this commercial context, limiting the extent to which insurers can seek to rely upon unrealistic arguments to avoid liability or delay payment for outstanding claims. Home owners with the benefit of structural defects policies should notify potential claims as soon as possible, to maximise the prospects of effective recoveries.

Manchikalapati & others v Zurich Insurance plc & others [2019] EWCA Civ 2163

https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2019/2163.html&query=(MANCHIKALAPATI)

https://www.itv.com/news/granada/2019-12-05/legal-victory-for-residents-of-unsafe-tower-block-in-manchester/

Amy Lacey is a partner at Fenchurch Law

November 27, 2019

Consumer Insurance – A reminder of your rights and why you should not “avoid” fighting back

Consumer insurance accounts for a large percentage of insurance purchased in the United Kingdom. It is therefore unsurprising that many insurance disputes involve consumers, and the implications for an individual who has a claim declined can be catastrophic.

A recurring issue is an insurer avoiding a policy for an alleged non-disclosure or misrepresentation. Our experience is that, in a worryingly large number of cases, insurers appear to rely on a consumer’s lack of knowledge and resources to properly challenge the avoidance. In other words, Insurers raise with a consumer what appears to be an unanswerable case and present a declinature/avoidance as a fait acompli. However, in reality, the matter is very rarely as clear cut as the Insurer seeks to present.

The Financial Ombudsman Service (which is available to all consumers) has recently increased the size of the awards it can make from £150,000 to £350,000. It is, therefore, now even more important for consumers to be familiar with their obligations and rights in relation to their insurance policies given the wider scope of cost-free redress.

The Law

The Consumer Insurance (Disclosure and Representation) Act 2012 (CIDRA) came into force on 6 April 2013, and applies to all insurance policies which began or were renewed after that date. CIDRA applies to all types of insurance where the policyholder is acting in a personal (as opposed to commercial) capacity.

CIDRA governs the duties of consumers prior to inception of an insurance policy. It was introduced to address the vulnerability of consumers based on outdated law which imposed an unfair disclosure burden on them.

While CIDRA has been in force for a number of years, the more recent Insurance Act 2015 (“the Insurance Act”) has increased awareness both within and outside of the insurance market of the obligations of policyholders before entering into an insurance policy. As a result, CIDRA and the Insurance Act are often confused (by both policyholders and insurers). While there are similarities between them, particularly in relation to the remedies available to an insurer for non-disclosure disclosure, it is important for consumers to have an understanding of CIDRA because it is even more favourable to them than the Insurance Act.

CIDRA: Duty of Disclosure

Prior to CIDRA, if a consumer had either given incorrect information or failed to disclose something important to an insurer when applying for insurance, the insurer could “avoid” the policy (effectively cancelling the policy and treating it as if it had never existed). A heavy burden rested on the consumer (who had a duty of “utmost good faith” towards the Insurer) to disclose to an insurer all material facts. This duty was particularly onerous for unadvised individuals who purchased insurance directly from an insurer or through, for example, price comparison websites without the assistance of a broker.

CIDRA replaced this onerous burden with a new “duty to take reasonable care not to make a misrepresentation”. The effect was that a consumer was no longer obliged to volunteer information to an insurer, but rather to take care not to answer any of the insurer’s questions incorrectly.
The bottom line for individuals who have had a claim declined is that it is not enough for an insurer to establish that an incorrect answer was given to it when the policy was simplywritten – under CIDRA, that is only the first hurdle the insurer needs to overcome.

The insurer must also prove that the consumer failed to take “reasonable care” when making the misrepresentation and that, if the correct information had been given, the insurer would either not have written the policy on any terms at all, or would have written it on different terms or with a different premium. A misrepresentation which would have caused the insurer to act differently is referred to in CIDRA as a “qualifying misrepresentation”.
Alternatively, In order to avoid the policy and retain the premium, the insurer will need to show that the consumer acted deliberately or dishonestly in making a misrepresentation.

If the insurer cannot show that, but can show that there was a qualifying misrepresentation, the insurer will be entitled to a proportionate remedy. If it can show that it would not have written the policy at all, it can avoid the policy but must return the premium. If it would have written the policy on different terms, the policy may be amended to reflect those terms. If it would have charged a higher premium, the insurer is entitled to proportionately reduce the amount it pays on a claim by reference to any such hypothetical premium.

The bottom line for consumers

The overarching point for consumers to remember is that the burden is on the insurer to prove:

1. The consumer failed to take “reasonable care” not to make a misrepresentation;

2. If he/she did, that the misrepresentation is a “qualifying misrepresentation”; and

3. That the Insurer is entitled to the appropriate remedy.

Given the heavy burden on the insurer under CIDRA, consumers faced with the avoidance of their policies should not avoid fighting back, particularly now that the Financial Ombudsman Service has a much wider remit to consider larger disputes. In fighting back, and availing themselves of the Ombudsman’s enlarged jurisdiction, consumers may find that an insurer’s confidence in its position is, when properly scrutinised, rather misplaced.

Daniel Robin is an associate at Fenchurch Law

November 11, 2019

Government to fund replacement of Grenfell-style cladding

Almost 2 years after the Grenfell Tower tragedy, the government has stepped in to speed up the removal and replacement of unsafe aluminium composite material cladding (“ACM cladding”) on privately owned, high-rise buildings. What are the implications for building owners?

On 9 May, the government announced its intention to make around £200m available to remove and replace ACM cladding from approximately 170 privately owned, high-rise buildings. The decision was driven by the slow pace by building owners to replace ACM cladding on their buildings, and the government’s view that ACM cladding represents an unparalleled fire risk.

Guidance on the Fund was published on 18 July. There are three eligibility criteria:

1. The Fund is available for the benefit of leaseholders in residential buildings over 18m in height;
2. Applicants will need to confirm that they are replacing cladding with materials of limited combustibility.
3. The government expects owners to actively pursue “all reasonable claims” against those involved in the original cladding installations, and to pursue warranty claims “where possible”.

Applications to the Fund can only be made by the “responsible entity”. This will usually be the building owner, head leaseholder, or Management Company with responsibility for the repair of the property. If a responsible entity does not apply or refuses to apply to the Fund, the Guidance states that local authorities and fire and rescue services are likely to take enforcement action under the Housing Act 2004.

What is a warranty claim?

Warranty claims refer to claims made under latent defect insurance policies. Those policies provide cover for newly built properties in the event of an inherent defect which was not capable of being discovered through inspection before completion.

Typically, latent defect policies are triggered in the event of (a) a non-compliance with the relevant Building Regulations which applied at the time of construction/conversion; and (b) which causes a present or imminent danger.

Unsafe ACM cladding which has been installed in high-rise residential blocks will meet those requirements.

What other claims might be available against those involved with the original cladding installations?

Those involved with the original cladding installations are likely to include Main Contractors, Architects, and specialist cladding subcontractors. The type of claims that can be brought against them will differ in each case, and will depend upon the nature of the relationships between the parties, and the specific work which was undertaken.

One route to making a recovery against those involved with the original cladding installation is under the Defective Premises Act 1972.

The Defective Premises Act imposes a duty on builders and any other professionals who take on work in connection with the provision of a dwelling. It requires the work to be done in a professional or workmanlike manner, with proper materials, and that the dwelling is for habitation when completed. The duty is owed to every person who acquires a legal or equitable interest in the dwelling.

Summary

The message from the government is clear. Responsible entities that are eligible to apply to the Fund must do so at the earliest possible juncture, and must pursue claims available under latent defect insurance policies as a pre-requisite to any funding.

The Guidance does not explain what a “reasonable claim” against those involved with a building’s original construction/conversion would look like, and this is likely to be assessed on a case by case basis.

Our recommendation is that building owners investigate the roles played by those parties, and the availability of any claims against them. Even where a party is no longer in business, there may be insurance cover that would still respond.

Alex Rosenfield is an associate at Fenchurch law

October 11, 2019

Fenchurch Law launches “The Associate Series”

Fenchurch Law’s new initiative, The Associate Series, is being launched with a view to sharing our knowledge and experience of coverage disputes with junior-mid level brokers. In doing so, we hope to enhance brokers’ ability to add value to their portfolios.

Fenchurch Law are specialists in coverage disputes. We act exclusively for policyholders and work shoulder-to-shoulder with (and never against) brokers.

The associates, whose specialisms span across a number of classes of insurance, are now sharing their expertise to assist junior-mid level brokers and claims handlers in their own careers. The associates are well-placed to do so as coverage specialists with prior experience as either brokers or insurer-side lawyers.

The Associate Series will enable us to share our knowledge and encourage you to cultivate relationships. Talks are being delivered to brokers across the UK between now and Christmas, with more seminars being planned for 2020.

The (free!) talks will be no more than 30 minutes each and focus on practical issues affecting the junior-mid tier. The fact that the talks are being delivered by your peers will, it is hoped, allow for relaxed interactive sessions.

The menu of talks will be regularly updated to reflect market developments but retain some core topics. The current menu is:

  • Notification
  • Coverage Disputes 101
  • Damages for late payment
  • A claims handler, broker and lawyer’s perspective
  • Property Risks
  • Third Party Rights against Insurers
  • D&O
  • Combustible cladding
  • Contractors and traps for their brokers

Some of these talks will also be the subject of webinars, and there will be regular blogs looking at issues and trends in the market. Keep an eye out for our events and material!

If you have any queries about The Associate Series please contact James Breese on 020 3058 3075 or via james.breese@fenchurchlaw.co.uk.

September 19, 2019

Fenchurch Law adds Goodship to Construction Risks team

Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Rob Goodship as an associate further expanding its coverage dispute team capabilities.

Rob specialises in insurance disputes and has considerable experience in property damage, construction and professional indemnity coverage issues. He joins Fenchurch Law from Kennedys where he was an associate in their property, energy and construction team.

He has acted for several leading insurers in relation to coverage disputes across a broad range of first party and liability claims, as well as defending claims against professionals. He has also acted jointly for insurers and their insureds in a number of large subrogated recovery actions.

Managing Partner of Fenchurch Law, David Pryce said: “Rob is an experienced insurance litigator and his background in advising both insurers and insureds in coverage disputes in some of our core business areas, makes him an important addition to what is the UK’s largest team of policyholder–focused insurance disputes solicitors”.

Rob Goodship is an associate at Fenchurch Law

September 9, 2019

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #7 (The Good). Woodford and Hillman -v- AIG

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#7 (The Good)

Woodford and Hillman -v- AIG [2018] EWHC 358

There are few cases dealing with coverage issues under D&O policies. This isn’t necessarily because D&O policies are rarely the subject of dispute. It is more likely a reflection of the fact that if directors have to fund hefty legal costs in defending complex civil, criminal or regulatory actions because insurers are being difficult about costs or refusing outright to pay them, their personal finances are depleted to the point where suing the insurer is out of the question (and the Financial Ombudsman’s service is no help because that avenue of remedy is closed off to company directors). The consequence is that insurers’ obligations to fund defence costs are rarely scrutinised in court.

Occasionally, though, directors will take D&O insurers on, notwithstanding the power imbalance and the personal financial risk.  Two such directors were Mr Woodford and Mr Hillman. They had been directors of the Olympus Corporation. They left in 2011 when Mr Woodford blew the whistle on a financial scandal.

In 2015 Olympus launched proceedings against them in the High Court in London for £50m, claiming that their involvement in an Executive Pension Scheme while at Olympus breached their duties as directors.

Olympus had D&O cover which covered past directors.  Woodford and Hillman notified the claim to the D&O insurers, AIG, seeking an indemnity.

AIG’s resistance to Defence Costs

AIG refused to fund Woodford and Hillman’s defence costs (£4m and counting) claiming they were not reasonable. The policy was governed by German law but disputes fell to be determined in England.

The D&O policy made AIG liable for legal defence costs “provided these are reasonable with regard to the complexity and significance of the case”.

AIG argued that their liability for costs should be determined by a costs assessment. This is an assessment by a costs judge, normally undertaken when litigation ends, to determine how much of the winning party’s costs the loser should pay. The costs judge very critically examines the costs being claimed.  The party whose costs are being assessed should expect to take a hair-cut on their recovery. A discount of 30% is not unusual and full recovery is very unlikely. On any view, therefore, a referral to costs assessment, as insisted on by AIG, would have involved Woodford and Hillman being left significantly out of pocket.

The Judge held that a costs assessment was not the right way to determine AIG’s liability for defence costs. Such an assessment was appropriate at the end of litigation as part of the court’s general discretion in relation to costs. An indemnity for defence costs under a D&O policy was “very different”. The Judge said that an insurance policy is intended to indemnify the directors for defence costs. Indemnity was a contractual right which meant that the court had no inherent discretion in relation to such costs. This meant that the (discretionary) costs assessment process had no application.

Instead, the court should assess the right to defence costs in the same way it would assess any issue of quantum. The criteria set out in the policy was that the costs were payable if “reasonable with regard to the complexity and significance of the case”.

The basis for the assessment of the “complexity and significance” of the case faced by the insureds was that it:

  • would involve a three-week High Court trial;
  • dealt with complex issues in a specialist area of law (pensions);
  • was for a significant sum (£50m);
  • had reputational significance for insureds because of the seriousness of the allegations.

AIG’s particular objection was to the charge-out rates of the insureds’ city lawyers:  £508 for partners and senior lawyers; £389 for mid–level lawyers and £275 for junior lawyers. The Judge held that the complexity and significance of the matter meant it was reasonable to use a City firm at the rates charged. The Judge rejected AIG’s suggestion that the Guideline Hourly rates published by the Court Service for use in a costs assessment (rates significantly lower than City lawyers charge) had no application.

AIG’s determined resistance to paying the fees did not stop there. They complained of duplicated work, excessive billing, failure to delegate appropriately, churning of costs (an allegation that AIG dropped) and engagement of two QC’s. The Judge found that the QC appointments were reasonable in the context, the fees were reasonable and AIG’s other complaints were unsubstantiated.

Woodford and Hillman were awarded all their defence costs: they had been incurred reasonably in view of the complexity and significance of the case against them.

Implications

It is standard for a D&O insurer’s liability for costs to be qualified on grounds of reasonableness. It is now clear that an insurer’s attempts to call in aid the cost assessment process with a view to chipping away ultra-critically at the defence costs claimed by insureds should not work and there are better prospects of the directors’ outlay on defence costs being matched by insurance cover.  Insureds now have a case to use when firing back at insurers’ attempts to lowball them, giving them some hope of prising the insurer’s purse open that little bit wider.

Enterprise Act Angle

Woodford and Hillman had to fund their defence costs from their pension funds because the D&O insurer was not responding.  They incurred significant tax consequences as a result.  Had the policy been governed by English law (and had it been taken out after May 2017) they may also have had a claim against AIG for damages for breach of the obligation to pay claims within a reasonable time (an obligation introduced by the Enterprise Act 2016) equal to the tax charge they suffered as a result of accessing their pension funds. Application of the Enterprise Act might have had an impact on the insurer’s approach to the case.

John Curran is a partner at Fenchurch Law