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Navigating 'Interesting Times': Challenges and Opportunities for the Insurance Industry in 2024

16 September 2024
We are living in 'interesting times' with all the ambiguity that phrase implies. The world, including the insurance industry, faces many new challenges but it is important not to lose sight of the fundamentals.

Global warming presents an ever growing threat and insurers have seen an increase in risk from natural catastrophes as well as a continuing evolution of the nature of that risk – extreme temperatures, wild fires and extreme thunder storms in Southern Europe for example.  We are also experiencing prolonged hot wars in Europe and the Middle East which have already engaged the world's major economies and which have the potential to spread further.  These conflicts have placed a strain on war risk insurers and their reinsurers which may necessitate a review of policy wordings and risk definitions. This is particularly true in relation to 'asymmetrical' warfare and cyber warfare which challenge conventional policy definitions. Furthermore, approximately half of the world's population is voting in elections in 2024 which is likely to cause further political instability and uncertainty.

Not all of 2024's 'interesting' developments are negative, however.  The rapid expansion of artificial intelligence brings with it many opportunities for insurers including reductions in acquisition cost, accelerated underwriting and the ability to expand into new markets and faster, more accurate claims handling.  There are, of course, challenges too in the use of AI.  For example, the increased use of AI by insureds can impact the nature and extent of the risk which insurers are taking on.  Thus, a professional indemnity policy issued to a solicitor's practice in 2026 may have to take into account the increased use of AI by solicitors in conveyancing or contract drafting.

Among all of these challenges and opportunities it is important not to lose sight of the basics of insurance.  One of the most fundamental of these is, of course, the contract wording which sets out the agreement between the parties and defines the scope of the risk which insurers have accepted.  Recent cases show us that this is still an area in which vigilance is required.  We have discussed two of these cases below.  Interestingly, it is also an area in which AI may be able to assist underwriters in avoiding some more common pitfalls.

The first recent case we have highlighted is Scotbeef v. D&S Storage. It is a reminder that the Insurance Act 2015 has changed the way in which insurance contracts are interpreted with regard to warranties and, also, what evidence may be required of an underwriter who contends that he or she would have behaved differently had they received a fair presentation of the risk.  The second case, Technip Saudi Arabia v. The Mediterranean & Gulf Insurance & Reinsurance Co. is an illustration, among other things, of the importance of clear policy definitions and a reminder that, just because a wording is a market standard, it would be wrong to assume that it is without flaws. It is interesting to consider whether the drafting problems illustrated by this case could have been avoided if the policy wording had been reviewed by AI instructed to highlight areas of potential uncertainty and inconsistency.  The case also provides a useful reminder of the rules of construction of insurance exclusions and the approach to consent to settle clauses where insurers have already declined cover. 

Scotbeef v. D&S Storage

It is nearly 8 years since the Insurance Act 2015 came into force and in that time, the Courts have rarely been called upon to consider the application and operation of the Act.  The High Court's decision in Scotbeef Ltd v D&S Storage Ltd (in liquidation) and another [2024] EWHC 341 may, therefore, come as an unpleasant surprise to insurers and a reminder of the extent of the change wrought by the Act.  In the case, the Court found that as a consequence of the Act a condition precedent to liability concerning the insured's trading conditions, was unenforceable as a contractual term and should instead be treated as a pre-contractual representation.  It is unlikely that the result would have been the same before the Act came into force and the case illustrates that old assumptions about the operation of certain contract terms may no longer be valid.

Background

D&S Storage Ltd (D&S) provided warehousing facilities for meat processing companies in Scotland.  At various times it contracted with its clients on the basis of industry standard terms known as the UKWA terms and, subsequently, the FSDF terms.

D&S bought warehouse keepers' liability insurance with Lonham.  The policy noted that the insured's 'trading conditions' were FSDF terms and conditions.  The policy also contained a 'Duty of Assured' clause which provided in relevant part that:

It is a condition precedent to the liability of Underwriters hereunder:-

  1. that the Assured makes a full declaration of all current trading conditions at inception of the policy period;
  2. that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;
  3. that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured..

If a claim arises in respect of contract into which the Assured have failed to incorporate the above mentioned conditions the Assured's right to be indemnified under this policy in respect of such a claim shall not be prejudiced providing that the Assured has taken all reasonable and practicable steps to incorporate the above conditions into contracts.

Notwithstanding the wording in the last paragraph, however, a subsequent claim clause stipulated that the effect of a breach of a condition precedent is that underwriters are entitled to avoid the claim in its entirety.

D&S made a claim on the policy following allegations by Scotbeef that meat had been inadequately stored at a D&S warehouse.  During the course of the claim, it emerged that D&S's contract with Scotbeef was not on the FSDF terms and conditions and insurers therefore sought to reject the claim for breach of the condition precedent set out in the Duty of Assured clause.  In the subsequent litigation, D&S argued that the terms of the Duty of Assured clause were not conditions precedent on their true construction but amounted to pre-contractual representations the breach of which did not entitle the insurers to reject the claim or cancel the contract.  The Court agreed with the insured's submissions.

Reasoning

The Court found that sub clauses (i) – (iii) should be read together in the context of the duty of fair presentation and in the context of the remedies for breach of that duty.  Further, although the declaration by the insured at (i) of the Duty of Assured clause was badged as a condition precedent, it could not be interpreted as such. On a proper reading of the term it was a pre-contractual representation which could only take effect in the contract as a warranty.  However, section 9 of the Insurance Act means that such a pre-contractual representation cannot automatically be turned into a warranty and any attempt to do so in the wording will be unenforceable.  If the insurers wanted to pursue a remedy for breach of the representation, therefore, they would have had to do so on the basis that it amounted to a breach of the duty of fair presentation.

Although the declaration at sub clause (iii) should be read as applying to contracts which existed at the time of the placement of the insurance as well as to future contracts, insurers could not rely on breach of the sub-clause because it did not comply with the provisions of the Insurance Act.  The reason for that was that the clause put the insured in a worse position than it would have been if the Act applied because a breach would allow the insurers to reject the claim out right whereas under the Act an insured has an opportunity to remedy a breach of warranty and, further, a breach of warranty may be disregarded altogether under s.11 of the Act if the breach is not relevant to the loss in the circumstances in which the loss occurred.  In contrast, sub clause iii of the Duty of Assured clause would allow insurers to reject a claim even if the insured's contact with its customer contained the FSDF terms if the insured had not taken all reasonable and practicable steps' to have the clauses incorporated. To be effective, therefore, the clause had to comply with the transparency provisions set out at section 17 of the Act.  These provisions require the new term to be clear and unambiguous and, also, to be drawn to the attention of the Assured prior to the contract being entered into.  Neither of these requirements had been met in this case.

Breach of the Duty of Fair Presentation

The Court's finding that the insured had misrepresented its trading practices during the placement of the insurance provided another interesting insight into the operation of the Insurance Act.  In the event of a breach of the duty of fair presentation which is not deliberate or reckless, the insurers remedy will depend on what the underwriter would have done if he or she had received a fair presentation of the risk.  This is a subjective test which will ideally require the evidence of the particular underwriter involved.  In some cases, of course, the original underwriter is not available as a witness and the insurers must rely on alternative secondary evidence.  In appropriate circumstances, that may take the form of applicable underwriting guidelines, evidence of corporate practice from more senior underwriters of the class in question or previous experience with the account. 

In this case, the insurer sought to rely on the evidence of the underwriter who had been responsible for the risk in earlier years.  She gave evidence that the insurer always based its underwriting decisions on the assumption that the standard terms would apply to the contract between the insured and its customers. If the insurer had been told that the Assured was not always applying the standard terms, therefore, it would have declined the risk completely.  Under cross examination, the underwriter accepted that the important provisions of the standard terms which related to limits of liability in the underlying agreement, could have been incorporated into the insurance itself but she maintained that the risk would not have been written without the representation that the standard terms were being applied by the insured.  This evidence was, however, rejected by the judge on the basis that the FSDF terms were not in fact in the industry standard, that the insurer did not know what was in the FSDF terms until the loss arose and that the important provisions of those terms could have been incorporated in the insurance had the insurer considered them to be sufficiently important so that if a fair presentation had been made then the likelihood in the judge's view was the contract would have been written on different terms rather than rejected completely.  This is an important reminder of the difficulties that can arise for insurers in seeking to prove what they would have done if a fair presentation of the risk had been made and highlights the significance of maintaining clear underwriting records maintaining internal underwriting guidelines.

Technip Saudi Arabia v. The Mediterranean & Gulf Insurance & Reinsurance Co

This case raised an interesting issue with regard to the clarity of policy definitions as well as commenting upon widely used consent to settlement clauses.

The insured, Technip Saudi Arabia, contracted to carry out work on offshore assets owned by a Joint Venture Company (the JVC). Technip entered into a standard form policy for off-shore construction all risks in the form of an amended WELCAR 2001 off shore construction project policy.  The JVC and other contractors were also insured under the policy. 

During the off-shore work, a vessel charted by Technip allided with an unmanned off shore well head owned by the JVC.  Technip claimed on the insurance but liability was rejected by the insurers who advised Technip to act as 'a prudent uninsured' in negotiating a settlement with the JVC in respect of the damage to the wellhead.  In due course Technip did indeed negotiate a settlement of US$25 million with the JVC in respect of the damage.

When Technip sought to be indemnified by insurers for the settlement amount, coverage was again rejected.  The rejection was on the basis that the loss was subject to a specific policy exclusion and, further, that there was no coverage in respect of the US$ 25million in any event because Technip had failed to obtain insurers' consent to the settlement as required by the policy.

The Exclusion

The policy contained an exclusion in respect of '…any claim for damage to … any property which the Principal Assured owns … that is not otherwise provided for in the policy…'.  Elsewhere, the policy defined the term 'Principal Insureds' in a way which included both Technip and the JVC. These Principal Insureds were distinct from 'Other Insureds' which was also a defined term referring to another category of insureds covered under the policy.

Insurers argued that 'Principal Assured' in the exclusion should have the same meaning as the defined term 'Principal Insureds' and, since the wellhead was owned by the JVC, which was a Principal Insured, there was no coverage for the loss.

Technip's position was that the term Principal Assured in the exclusion should be read as applying only to the Principal Insured making the claim, in other words, Technip not the JVC. Since Technip did not own the well head, the exclusion did not bite with respect to this claim.  In support of this submission, Technip pointed to the fact that this was a composite policy under which each insured party should be treated as a separate insured and it followed that when considering the application of the exclusion the Court should consider the term as if there was only one insured. This argument was, however, rejected by the trial judge who found in favour of insurers and held that Technip's claim was excluded. The matter then went to appeal.

The object of interpretation is to give the words of the contract their natural and ordinary meaning in so far as that is possible.  Adopting this approach, the Court of Appeal upheld the Judge's finding at first instance.  They held that insurers' interpretation of the exclusion, which involved reading the definition of 'Principal Insureds' in place of Principal Assured in the exclusion did much less 'violence' to the wording than the approach urged by Technip.  In part, this is because Technip's interpretation implicitly involved adding the words '…which was making the particular claim concerned' after 'Principle Assured' in the exclusion but these words were entirely absent from the exclusion.

Furthermore, the interpretation argued for by Technip would not work in the event of a liability claim by one of the 'Other Insureds'.  In such a situation, the term Principle Assured could not be read as 'the Principal Insured' who is making a claim under the policy' because there would not be a Principal Insured making a claim.

The Court of Appeal did not consider that the fact this was a composite policy had any impact on the construction of the exclusion because the approach to the exclusion, the substitution of 'Principal Insureds' for 'Principal Assured' would be the same in any event.

The Court of Appeal observed that this wording, albeit that it was a market standard, was 'not a model of clear drafting' as illustrated by the mixed use of 'Insured' and 'Assured' as well as the unexplained use of  singular and plural terms unhelpful. 

Consent to Settle Clause

The policy at issue contained a 'Consent to Settle Clause' which provided that insurers would only be liable to indemnify the insureds in respect to damages where the insurers had consented to any underlying settlement. In this case, the insurers had rejected Technip's claim on the policy and instructed it to behave as a 'prudent uninsured'. Nonetheless, when Technip made a claim for an indemnity having settled its dispute with the JVC, underwriters sought to argue that they were not liable for the claim because they had not consented to the settlement. This raised the issue of whether or not underwriters can rely on a consent to settle clause in circumstances in which they have denied coverage. 

The judge found that in these circumstances the insured did not need to obtain the insurers' consent to settle and that insurers had either waived their right to rely on the clause or were estopped from doing so by the earlier denial of coverage. Strictly speaking, the judge's decision on this point is non-binding since he had already decided the case on the basis of the exclusion. Nonetheless it is undoubtedly persuasive and will be taken into account by courts faced with similar issues in the future. In the circumstances, insurers with policies containing consent to settle clauses may wish to give careful thought to how any rejection of coverage is worded if the coverage position is in fact uncertain so that there may be a need to rely on clauses such as this at a later date.

Summary

What general lessons can we extract from these cases? Perhaps the most important is the reminder that wordings are dynamic because the nature of risk is always changing and the legal and commercial background in which it exists is evolving constantly. That means that existing wordings need to be reviewed regularly and kept up to date whether they are market standards or more bespoke products. New wordings and clauses should similarly be prepared on the basis of existing circumstances and not just on what has gone before. It is interesting to consider how the broader use of AI in the industry may help with this process. Interesting times indeed!

Further Reading