Adrian Bingham Partner
Misrepresentation and acceptable claimant lies: 2016 legal precedents affecting the insurance sector
How will the events of 2016 shape the insurance sector in the years to come? Ince Gordon Dadds partner Adrian Bingham examines the major legal precedents of the past year.
The task of providing an update on the significant insurance cases of 2016 is a somewhat atypical one, given the degree of attention which has rightly been given to the enactment of the Insurance Act 2015 in August this year, and the long-awaited Third Parties (Rights against Insurers) Act 1930. This has necessarily overshadowed the developments in case law. Nonetheless, there have been a number of significant decisions.
A case of importance, which reached the Supreme Court, and one not to be overlooked, is Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45. The insured vessel suffered water ingress into the engine room, which caused irreparable damage to the main engine, for which the owners sought an indemnity from the insurers. The issue was whether the owners had made untrue statements to the insurers about the circumstances of the incident which were fraudulent in nature. The claim was in itself justified, but it was contended by the insurer that the insured had embellished the facts to the extent of using “fraudulent devices” in support of its claim for indemnity, and the claim should be rejected entirely.
The Supreme Court identified three generic categories of fraudulent conduct, being: (i) an entirely fabricated claim; (ii) a genuine claim, but for a dishonestly exaggerated amount; and (iii) a genuine claim, but supported by dishonest factual statements. The situation at hand fell into category (iii). Overturning the decision of the Court of Appeal, which had held that an insurer was entitled to reject a claim entirely where the insured’s representation constituted a fraudulent device, the Supreme Court determined that whilst categories (i) and (ii) were valid grounds upon which an insurer could seek to reject a claim, this did not apply in regard to category (iii) if the insured did not gain anything financially from the collateral lies, and the insurer did not lose anything. However, if a collateral lie did benefit the insured financially, the position would be different.
The Supreme Court’s willingness to tolerate the idea that some lies are acceptable, and rejection of the Court of Appeal’s reasoning that the courts should actively rule against fraudulent conduct, even if the outcome may be draconian, has met with surprise within the insurance community. It remains to be seen whether tribunals will attempt to distinguish the case in the future.
Continuing with the theme of fraud and the moral response of the courts, the Supreme Court did not exonerate the insured in Hayward v Zurich Insurance Co Plc [2016] UKSC 48. However, the different perceptions of the successive benches which heard the matter is instructive. The insured, who had been injured at work, claimed serious back pain and restricted mobility, allegedly seriously impairing his ability to work. The insurers obtained video evidence showing he could do heavy manual work at home. On this basis, the insurers settled with the insured for about £134,000. Subsequently, it emerged that the insured had entirely recovered from the injury a year or more before the settlement. The insurers claimed for the settlement agreement to be set aside. The judge at first instance did so, and reduced the damages to about £14,000. The Court of Appeal took an entirely different approach, deciding that as the insurers had known the insured had misled them about the level of his disability before they entered into the settlement, they had not been induced by his false representations to make the settlement with him. The Supreme Court took a yet different approach, holding that the fact that the insurers did not wholly believe the insured’s representations when they settled with him did not mean that they had not been induced by representations that they did not know to be false. Accordingly, the setting-aside of the settlement was upheld. A case for the Moral Maze, indeed.
Arguments of misrepresentation are habitually met by counter-arguments of waiver and estoppel. Such was the position in IHC (a firm) v AmTrust Europe Ltd. [2015] EWHC 257 (QB). The defendant insurers granted ATE cover for their insured, Consortium, to bring an action against IHC for the recovery of undisclosed commission. IHC applied for summary judgment against Consortium in respect of part of the claim, and was successful. The insurers paid the adverse costs. Subsequently the insurers increased the limit of indemnity for the remaining issues to be taken to trial. Consortium failed on the remaining issues at trial and went into insolvency. IHC brought third party rights proceedings against the insurers for payment of their costs. The insurers defended on the basis of non-disclosures and misrepresentations by the insured. IHC claimed that the insurers were stopped from raising this defence, because having paid the summary judgment costs, and having heard the allegations, they had implicitly represented they would support the case to trial. This was rejected by the court, which held that it had not been clear at that time that the insured had been untruthful, and described the allegations as “pure Alice in Wonderland”.
This year has also produced some decisions of interest to the professional indemnity market. The principles can be stated shortly. In Burgess v Lejonvarn [2016] EWHC 40 (TCC), it was held that gratuitous services offered by an architect gave rise to an actionable duty of care, even if there was no contract. Also worth noting is the NZ case of JCT Cost Management Ltd v QBE [2015] NZCA 524, which held that a PI policy which provided indemnity for “any Valid Claim”, where this was defined as “any act, error, omission or conduct in connection with the insured’s business practice” did not respond to a claim against a quantity surveyor and project manager who was insured only for those activities, but had gone beyond them by advising on the weather tightness of a building.
Finally, for those keen on semantic interpretation, it was held in ARC Capital Partners v Brit Syndicates [2016] EWHC 141 (Comm) that a policy clause containing the words “in any way involving” was to be construed more widely, in terms of causal connection between events, than the words “arising from”, or “proximately caused by”, and in AIG Europe Ltd v OC320301 LLP [2016] EWCA Civ 367, the court determined that the words “a series of related transactions” in an aggregation clause did not all have to be “dependent” upon each other for aggregation to occur, but that there had to be “inter-connection” by way of an intrinsic relationship. Definitely a couple of decisions for mulling over during the long winter nights.