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.
#8 (The Good)
The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is Thornton Springer.
This case covered the issue of Defence Costs, and more particularly an insurer’s liability for Defence Costs which relate to both insured and non-insured claims, and which are incurred in successfully defending those claims.
Thornton Springer was a firm of accountants which sought a declaration that its professional indemnity insurer was liable to indemnify it in defending a claim by a client, who alleged that one of Thornton Springer’s partners had given negligent advice in relation to a company in which that partner had an interest. The client sued both Thornton Springer and the partner. The claim against Thornton Springer was dismissed on the basis that the partner had advised in a private capacity, and not as a partner in Thorton Springer. The issue in the subsequent coverage dispute was whether Thornton Springer could recover the costs it had incurred in defending the claim from its professional indemnity insurer NEM.
The relevant clauses in the NEM Policy were:
• The Insuring Clause, which provided that NEM agreed:
“To indemnify the Assured against any claim or claims first made against the Assured during the period of insurance as shown in the Schedule in respect of any Civil liability whatsoever or whensoever arising (including liability for claimants’ costs) incurred in connection with the conduct of any Professional Business carried on by or on behalf of the Assured …” (our emphasis);
• Special Condition 1 which provided that:
“Underwriters shall, in addition, indemnify the Assured in respect of all costs and expenses incurred with their written consent in the defence or settlement of any claim made against the Assured which falls to be dealt with under this certificate …”.
NEM contended that, as the claim against Thornton Springer had been dismissed, it did not fall within the Insuring Clause and therefore Thornton Springer was not entitled to recover Defence Costs (i.e. the obligation to pay Defence Costs, said NEM, only applied to successful claims, not to ones which failed).
Thornton Springer disagreed. It argued that Speical Condition 1 extended to the costs of successfully defending a claim, provided that the claim was one which in substance could fall within the Insuring Clause.
In addition, even if Thornton Springer’s argument were upheld there remained a dispute over the apportionment of defence costs between the claims against the partner (which were not covered under the Policy) and the claims against Thornton Springer (which it alleged were covered under the Policy).
The decision, and the implications for policyholders
The Court found that, while the Insuring Clause itself was not engaged given the dismissal of the claim against Thornton Springer, Special Condition 1 did not require any actual liability on behalf of Thornton Springer. All that was required was for the claim against it to be one which in substance was capable of falling within the Insuring Clause.
In addition, the Court held that, if the work by Thornton Springer’s solicitors had a dual purpose (i.e. it related both to the claim against Thornton Springer and the claim against the partner), the indemnity for defence costs extended to the dual purpose work, and not just to the work which was exclusively for the defence of the claim against Thornton Springer. This followed the principle in New Zealand Products Limited v New Zealand Insurance Co . Therefore, Thornton Springer was entitled to an indemnity for all the Defence Costs, save where NEM was able to identify work which related exclusively to the claim against the partner.
The Court’s finding in respect of the Defence Costs for a claim which was ultimately unsuccessful is very helpful for policyholders. However, whether or not it applies in a particular case, will depend on the wording of the specific policy in question.
Perhaps of more significance is the Court’s comments regarding the apportionment of defence costs for insured and non-insured claims, and in particular the burden it places on an insurer to show that any costs which it does not wish to pay must relate exclusively to the non-insured claims.