Episode 4
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Welcome to Risk Matters, the insurance podcast brought to you by DWF and your
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global guide to the latest trends and issues in the insurance and reinsurance industry.
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Join us as we explore topical issues, emerging technologies and the innovative
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strategies that are shaping the global future of insurance.
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Welcome to the next episode of our DWF Risk Matters podcast series titled We
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Live in Interesting Times, where myself, Jennifer Kleiser, will be talking with
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Simon Herman Cooper, about two recent court judgments of note to the insurance community.
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And this is a community that's seen shifting sands of late, facing fresh challenges
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and evaluating risk in view of global warming, increased global conflict and
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political instability, with
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around half of the world's population voting in elections during 2024.
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And it's important to remember the contract wording will always be the starting
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point for what terms have been agreed between insurers and insured,
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and what risk insurers have agreed to accept.
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Yes, although insurers are operating in a dynamic environment as far as risk
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is concerned, the terms of the policy remain key.
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And it's these contractual terms which are often central when a dispute gains traction.
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And two recent court decisions have been apt reminders of this.
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So I understand Simon will be looking today at the two decisions,
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Scott Beef against DNS Storage and Technip Saudi Arabia against the Mediterranean
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and Gulf Insurance and Reinsurance Company.
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Yes, that's right. The Scott Beef case is not only a reminder of the rules of construction,
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but it's also a great example of the way in which the Insurance Act of 2015,
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has changed the approach to warranties in an insurance contract,
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as well as the sort of evidence that insurers need their underwriters to demonstrate,
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if they want to argue that they would have written the risk on a different basis
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if a fair presentation had been made.
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Judgements applying the Act have been few and far between since 2016,
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and it's important to learn the lessons we can from cases like Scott Beef.
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Our second case today, the Technic case, focuses on the importance of policy definitions.
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Lawyers do love a definition. Yeah, we do.
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And it's interesting about this case that it highlights that just because a
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wording is a market standard wording, it doesn't mean it's perfect and arguments
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about its correct interpretation can still gain traction.
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And the case also contained some interesting commentary on insurance exclusions
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and on clauses requiring consent to settlement in the reinsurance context.
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So taking the Scott Beef case first, this judgment might come as something of
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an unpleasant surprise to insurers.
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Yeah, I think so, because the court found
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that the effect of the Insurance Act was such that a condition precedent to
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liability written into the policy concerning the insured's trading conditions
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was unenforceable as a contractual condition precedent and should instead be
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treated as a pre-contractual representation,
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which could only operate, if at all, as a warranty subject to the new rules set out in the Act.
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The background to the case was that DNS Storage, who is the plaintiff,
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that's wrong actually, can I go back?
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The background to the case was that DNS Storage provided warehousing facilities
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for meat processing companies in Scotland.
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It contracted with its clients on the basis of industry standard terms,
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known as the UKWA terms, and subsequently the FSDF terms.
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That's a lot of acronyms. Yeah, we love our acronyms as well as our definitions, don't we?
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So, DNS purchased Warehouse Keepers Liability Insurance from Lonham, the insurance company.
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And the policy noted that the insured's trading conditions were FSDF terms and conditions.
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And the policy also contained a duty of assured clause, which is at the heart of this dispute.
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Okay, so this is where the all-important so-called condition precedent comes into play.
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So the duty of assured clause provided, I understand, that it was a condition
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precedent to the liability of insurers, that the insured would firstly make
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a full declaration of all current trading conditions at inception,
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during the currency of the policy, continuously trade under the conditions they
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had declared and had been approved by insurers in writing,
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and take all reasonable and practical steps to ensure that their trading conditions
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were incorporated in all contracts that the insured entered into,
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presumably for the duration of the policy.
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I mean, that seems fairly clear drafting to me.
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Yes, and the clause seemed to provide a bit of a get-out at the end as well,
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because it said that if a claim under the policy arose,
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and it concerned an underlying contract where the insured had failed to incorporate the conditions,
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the insured's right to indemnity would not be prejudiced if they could show
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that they'd taken all reasonable and practicable steps to incorporate the conditions
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into the relevant contract.
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The difficulty arose because there was a clause later in the wording,
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I think it was a couple of pages further on, that set out the effect of a breach
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of this condition precedent,
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and it said that if insurers could identify a breach of condition precedent,
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then they'd be entitled to avoid the claim in its entirety.
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And how did the claim that was the subject of this dispute arise? What were the facts?
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Well, DNS made a claim following allegations against it by Scott Beef,
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which was a red meat product provider, as its name might suggest.
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And Scott Beef alleged that meat had been inadequately stored in the DNS warehouses
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and had therefore become damaged.
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And whilst the claim was being investigated by the insurers,
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it transpired that DNS's contract with Scott Beef was not on the SFDF terms
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and conditions as had been required by the insurance contract.
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And on that basis, insurers rejected the claim and they said there had been
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a breach of the condition precedent set out in the duty of assured clause.
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And given the drafting of that clause was pretty clear, how did the insured
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try and argue that the claim should still be paid?
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Well, DNS's case was that the requirements of the duty of assured clause were
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not on their true construction, conditions precedent, but instead were pre-contractual representations.
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And the court agreed with that argument.
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Looking at the requirements of the duty of assured clause, the court felt that
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although these were badged as conditions precedent, so insurers had described
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them as condition precedent in the actual contract,
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that wasn't conclusive and the clauses Causes could be properly interpreted
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as pre-contractual representations which had intended to be incorporated into the contract.
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That was partly because they represented promises by the insured about the situation
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at inception where they declared that all trading conditions then in use satisfied various criteria.
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And then they said that they would only trade under those conditions for the duration of the policy.
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Of course, if these requirements were indeed pre-contractual representations
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rather than conditions precedent,
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then the only way for them to be enforced once the contract had been entered
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into is for them to be treated of warranties by the insured for the purposes of the contract.
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But the Insurance Act has obviously changed the way warranties are treated in insurance contracts.
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Yes, that's right, because Section 9 of the Insurance Act states that a pre-contractual
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representation can't automatically be turned into a warranty,
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and any attempt to do so in the wording,
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for example by a basis of contract clause, will be unenforceable.
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There was a bit more of a debate about the third part of the clause,
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which requires the insured to take reasonable steps to ensure that conditions
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are incorporated into the contract the insurer has entered into on an ongoing basis,
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as well as in contracts that existed at the time that the policy was entered into. you.
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But the court held that this couldn't be relied upon as a freestanding condition
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precedent to liability, as
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it didn't comply with the transparency requirements of the Insurance Act.
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Ah yes, so where you have a clause that puts the insured in a worse position
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than would have been the case under the Act, you have to make sure the clause
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is drafted in a clear and unambiguous way,
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and also draw the attention of the insured specifically to the relevant clause
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prior to the policy being entered into.
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Yes, that's right. And none of those conditions had been satisfied here.
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And they needed to be because the third part of the duty of assured clause entitled
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insurers to reject a claim unless the insured took all reasonable and practicable
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steps to ensure that their trading conditions were incorporated into the contracts they entered into.
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If the wording was allowed to stand as is, the insured would be in a worse position
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than under the Act, which provides that insurers are only off-risk whilst the
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insured is in breach of any warranty,
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or condition precedent is in breach of any warranty, and a condition precedent
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is in breach of any warranty.
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And furthermore, breach of warranty or breach of a condition precedent...
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If you can also go through it, and then go before it.
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Okay, I'll start the whole thing again. If the wording was allowed to stand as is,
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the insured would be in a worse position than under the Act,
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which provides that insurers will only be off risk for a breach of warranty
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while the insured is in breach and once the breach has been remedied, cover will be restored.
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And it's also the case under the new Act that a breach of warranty or a condition
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precedent can be disregarded altogether under Section 11 if the warranty is
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intended to reduce the risk of loss of a particular kind,
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in a particular place, or at a particular location,
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and if breach of the warranty didn't increase the likelihood of the loss which
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actually occurred occurring.
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So for the clause to be effective, the Section 17 transparency requirements
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had to be adhered to, and as the judge found, they hadn't been.
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So presumably that left insurers with only an argument for breach of the duty
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of fair presentation under Section 3, on the basis that the insured had misrepresented
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its trading practices during placement.
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Well, that's right. And as you know, if insurers want to argue that there's
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been a breach of the duty of fair presentation, they have two choices.
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They can either try and make an argument that the breach was deliberate or reckless.
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And if they do that, they'd be entitled to avoid the policy from inception and keep the premium.
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Alternatively as here they can argue that
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the breach was not deliberate or reckless and
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in those circumstances their remedy will depend on what the actual underwriter
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would have done if he or she had received a fair presentation of the risk at
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placement so for example if the actual underwriter says that he or she would
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not have written the risk and can establish that on the balance of probabilities,
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then the contract will be treated as void.
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Alternatively, if the underwriter's evidence is that they would have written
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the risk on different terms, then those terms will be incorporated into the
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contract from inception.
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But in order to prove what the underwriter would have done under different circumstances,
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insurers will, if possible, need evidence from that underwriter because it's a subjective test.
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And if that underwriter isn't available, as unfortunately for insurers was the
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case here, then they'll need evidence such as applicable underwriting guidelines,
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evidence of corporate practice from more senior underwriters of the class in
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question, or evidence from someone with previous experience of the account.
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In this case, as I say, the original underwriter wasn't available to give evidence
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and so insurers relied on evidence from the underwriter who'd been responsible
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for writing the risk in previous years.
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That underwriter claimed that insurers had always based their underwriting decisions
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for this risk on the assumption that the standard terms would apply to the contract
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between the insured and its customers.
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And her case was that if insurers had been told that the insured was not always
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applying those standard terms, insurers would have declined the risk completely.
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It seems like quite a lot rests on that evidence that you put forward as to
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what the underwriter's decision would have been.
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How did the court receive the evidence in this matter? Well, you're right,
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and this is a big change from the position under the old Marine Insurance Act,
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because now the underwriter has to prove on the balance of probabilities what
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would have happened if a fair presentation had been made.
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And in this case, the underwriter accepted under cross-examination that important
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provisions of the standard terms,
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and particularly the provisions relating to limits of liability in the original
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contract between the insured and its customers,
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could have been incorporated into the insurance itself.
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But nonetheless, she still maintained that the risk would not have been written
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without the representation by the insured that standard terms were being applied.
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But the judge couldn't accept that, and the reasons for that were first of all
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that the FSDF terms were not in fact industry standard, as had been argued by the insurers,
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and furthermore, and perhaps even more damningly, insurers didn't even know
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what was in the FSDF terms when they wrote the risk in the first place.
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And finally, as the underwriter conceded in cross-examination,
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the judge found that important provisions of the FSDF terms could have been
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incorporated into the insurance had insurers actually considered them to be
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important and they hadn't done that.
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And all of that undermined the case that underwriters' decision to participate
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in the risk was determined by the insurer's representation that they would always
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incorporate these terms into their underlying contract.
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And on that basis, then, the judge found that insurers had failed to show that
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they wouldn't have written the contract at all had a fair presentation been
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made, and they therefore weren't entitled to avoid the risk and had to pay the underlying loss.
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So I think this shows the real importance of the evidence of the underwriter
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and the importance of having anything that will back that up as well as the
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individual's testimony, such as underwriting records, things like that.
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Yeah, I agree. And it's an important reminder of the significance of maintaining
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clear underwriting records and internal underwriting guidelines so that insurers
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are in a strong position to prove what it is that they would have done had a
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fair presentation been May.
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Often, they may be required to give that evidence some years down the line.
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If it's not supported by documentation, obviously, that can be difficult. Okay.
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Let's move on then to our second case we're discussing in this podcast,
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the Technip Saudi Arabia against the Mediterranean and Gulf insurance and reinsurance company MATA.
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Just looking at the facts of this one, Technip, which was the insured,
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contracted to carry out work on offshore assets, which were owned by a joint venture company.
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And I understand that as part of the transaction, Technit entered into a standard
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form all risks insurance policy covering offshore construction in the form of
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an amended Wellcar 2001 offshore construction project policy.
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So kind of a standard term policy.
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And the JV company and the other contractors were also insured under this same policy.
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Now, in terms of the facts that led to the loss, So whilst the offshore works
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were underway, a vessel that Technip had charted collided with an unmanned offshore
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wellhead that was owned by the JV company.
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Technip claimed on the policy, but I understand insurers rejected liability.
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And on that basis, they advised Technip to act as a prudent uninsured in their
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discussions with the JV company about the loss.
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And Technip, you know, accordingly went on to do just that and negotiate a settlement
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of 25 million US dollars.
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Once that settlement had been agreed, the insured once again approached insurers
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for indemnity under the policy and cover was once more rejected,
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this time on the basis that the loss was excluded.
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But they also raised the argument that Technip had failed to obtain insurer's
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consent to the settlement, which I understand was a requirement of the policy.
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So let's have a look at the exclusion point in the first instance.
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Yeah, so and this is where our all important definitions become relevant.
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Because the relevant exclusion carved out any claim for damages to any property
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which the principal assured, with an A, owned that was not otherwise provided for in the policy.
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But the policy didn't define a principal assured,
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what it did was define principal insured, and the principal insured,
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with an I, was defined in a way that included both Technic and the JV company,
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which of course had owned the damaged wellhead.
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Okay, so slightly different terminology, principal insured versus principal
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assured, where only principal insured is defined.
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That's right. And the policy furthermore distinguished between principal insureds and other insureds,
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which was also a defined term in the policy and referred to another category
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of insureds who were covered by the policy,
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presumably to a lesser extent or for lesser covers or lesser amounts.
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So the insurers argued that the principal assured in the exclusion should have
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the same meaning as the defined term principal insureds.
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And that meant, of course, that the exclusion would bite because the property
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which had been damaged was the property owned by one of the principal ashwards
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– in other words, the JV company.
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Technic's position, on the other hand, was that the term principal assured in
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the exclusion should be read as applying only to the principal insured making
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the claim, in other words, Technic.
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And where the property forming the subject of the claim was not the property
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of Technic, the exclusion didn't bite.
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So all of this turns on whether you use an A or an I, which is the sort of point
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that lawyers love and everyone else thinks is probably rather silly.
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But nonetheless, £25 million or US dollars turned on this one issue. you.
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Teknik also tried to make the argument that because the policy was a composite policy,
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in other words, it covered a number of different insureds, under which insured
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party should be treated as a separate distinct insured, when considering the exclusion,
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the court should consider the term as if there was only one insured.
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Okay, but am I right that Teknik lost at first instance.
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Yeah, despite all those arguments, Technic did indeed lose at first instance
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and the court found for insurers holding that the exclusion applied and the
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court then went, or the case then went to appeal,
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but unfortunately for Technic, they lost again in the court of appeal.
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And it's at the court of appeal where the issues surrounding the principles
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of construction were really addressed in detail because the court of appeal.
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If you start from the beginning okay yeah
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so the court found for insurers they found
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that the exclusion applied but the case then
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went to appeal at the court of appeal but nonetheless
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the court of appeal also found in favor of insurers and technic lost once again
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and it was at the court appeal level that the issue of construction interpretation
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of the policy was set out in terms of basic principles and basic rules.
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And what the Court of Appeal reminded everybody of is that the words of the
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contract have to be given their natural and ordinary meaning as far as possible.
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And that's the natural and ordinary meaning that would be understood by an objective
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person in the position of the parties to the contract.
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It's not something that would be understood by a lawyer's undertaking a microscopic
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examination of the wording, looking at the I's and A's and so on.
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What we're looking for is the natural and ordinary meaning of the words on an objective basis.
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The court acknowledged that the drafted clause was a market standard wording,
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but nonetheless they said that it's not a model of clear drafting,
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and so the first lesson for us here, I think, is that just because the wording
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is a market standard doesn't necessarily mean it's going to be clear.
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But nonetheless, the Court of Appeal found that insurers' interpretation of the exclusion,
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which involved reading principal insureds instead of principal assureds,
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did much less violence, as they put it, to the wording than the approach suggested by Technic.
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Technic's approach involved adding extra words to the clause,
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which was always, I think, probably going to be an uphill battle.
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Because what they said was that the court should effectively agree to amend
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the exclusion to refer not to any claim for damages to any property which the
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principal assured owned,
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but instead to any claim for damage to any property which the principal assured making the claim owned.
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So you see they wanted to add in some extra words and the court said that that
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did more violence, as they put it, to the wording than the interpretation suggested by the insurers.
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And it was also a factor, looking more broadly at the policy wording,
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that Technic's interpretation wouldn't work in the event of a claim by one of
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the other insureds who didn't, of course, actually own any property covered by the policy.
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Okay, so in that scenario, there wouldn't be any property which the principal
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assured making the claim owned because another insured would be making the claim. Yeah, exactly.
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So did the fact that this was, you mentioned earlier, it's a composite policy,
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it covers a number of named insureds, as we discussed earlier,
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but each should be treated distinctly. Did that argument hold any sway?
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No, it didn't. I mean, that was an argument that the technique tried to make,
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as you know, but the approach to the exclusion would be the same,
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whether this was a composite policy or not.
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And what about the consent to settlement point? Yeah, the relevant clause in
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the policy provided that insurers would only be liable to indemnify the insured
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in respect of damage where the insurers had consented to the underlying settlement.
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And in this case, they hadn't consented to the underlying settlement between Technic and the JV.
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But insurers had rejected the claim, if I remember correctly,
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and then told Technic to behave as a prudent uninsured. Can they really rely
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on a consent to settle clause in those circumstances? Well, the answer to that is no.
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The court found that insurers had either waived their right to rely on the consent
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to settle clause or stopped from doing so because of their denial of coverage earlier.
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So insurers couldn't effectively have their cake and eat it.
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And do these findings about the consent to settle clause still apply where the
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case had already been resolved on the basis of the exclusion?
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There was no cover anyway. way?
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Well, strictly speaking, the judge's comments on the point are non-binding on
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other judges, but they're still certainly persuasive and they'll be taken into
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account by courts facing similar issues in the future.
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And quite frankly, in my view anyway, it's so blindingly obvious that that is
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the right interpretation that I wouldn't want to be in the position of trying
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to argue something different.
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So just in terms of kind of takeaways from those two cases and some Some of
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these, I think, are reminders of things we already know, but just have been
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hammered home by the court again.
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So make sure a clause has the effect that you want it to based on the drafting.
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So labelling a condition precedent doesn't by itself make the clause a condition precedent.
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You know, it's the substance rather than the label, that old story.
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And I think this is also a salutary reminder about the transparency requirements
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under the Act. If you want the clause to do something more than the act itself
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allows, just make sure you're ticking those section 16 and 17 boxes.
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As I understand it, we talked about this earlier, keep clear underwriting records.
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It's one of those things that probably seems like another job at the time.
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But if you do find yourself, as you said, potentially years later,
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wanting to make out a breach of fair presentation argument, you're going to
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need to have that evidence to back it up.
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And finally, if you do, as many policies do, have a consent to settle clause,
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give careful thought as to how any rejection of coverage,
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kind of email or letter is worded, if actually the coverage position is still
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a bit uncertain, so that you can preserve your entitlement to rely on that consent
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to settlement clause down the line.
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Yeah, I agree with all of that. And I think more generally, these cases illustrate
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that wordings are dynamic or should be considered a dynamic because the nature
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of risk is always changing,
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because the legal and commercial background is evolving.
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So we've seen, for example, in our first case, the Scott Beef case,
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a failure by insurers to respond properly, arguably to the effects of the Insurance Act.
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And one needs to bear in mind, therefore, that the legal background to your
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wordings is always ways evolving.
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And it's important on that basis to review existing wordings regularly to ensure
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they remain up to date and fit for purpose.
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And that is the position whether they're market standard clauses or other bespoke
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products, because it's interesting here that in our second case, the Technic case,
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the court was concerned with a market standard wording, but nonetheless found
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it to be poorly drafted and in many ways not really fit for purpose in the circumstances of this loss.
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So new wordings and clauses should be prepared on the basis of existing circumstances
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and not just on what's gone before.
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Interesting times indeed. So thanks to anyone who's listening and please do
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join us for the next episode in our Risk Matters podcast series.
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Thank you for listening to Risk Matters, the DWF insurance podcast.
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We hope you join us again soon for future podcasts in our series.
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