Interpretation of insurance policies and duties of the broker

The judgment of the High Court in Standard Life Assurance Ltd v Oak Dedicated Limited and Others [2008] EWHC 222 (Comm) highlights the dangers for insureds and potential liabilities faced by their insurance brokers if careless words or language are used in policy documentation.

In interpreting commercial contracts such as insurance policies there has been a judicial trend over the past couple of years where the courts have strived to look at the commercial context of the contract and interpret the contract in a commonsense way which gives business efficacy to the instrument. This judgment represents a significant departure from this trend as the High Court applied a strict interpretation of words found in a schedule to the insurance policy which rendered the cover effectively meaningless. Further, the Judge applied this strict interpretation despite accepting that neither the insured nor the insurers would have intended the words to have that meaning as the policy was consequently devoid of commercial effect. The placing broker was found to have acted in clear breach of its duties to the insured in allowing this situation to arise. The judgment contains a full examination of a placing broker’s legal duties and should be viewed as a salutary lesson to all insurance brokers.

BACKGROUND

This case arose from the mis-selling of endowment mortgages during the 1990s by Standard Life Assurance Ltd (or Standard Life Assurance Co (SLAC) as it then was). In common with other mortgage providers, SLAC realised that errors made by its employees and agents when selling these products had left it liable for numerous relatively small “retail claims” brought by policy holders.

SLAC had professional liability cover of £75 million in excess of £25 million for the relevant period (1998 to 2001). The cover was placed by Aon. As is common with policies of this nature, SLAC had the benefit of an aggregating clause whereby related claims would be considered as one claim for the purpose of the application of the policy excess and the limit of indemnity. SLAC was faced with around 97,000 claims from policy holders, none of which alone would come close to £25 million but which would, if aggregated, exceed £100 million. On this basis, SLAC expected to be indemnified for the full £75 million under the policy.

Underwriters denied cover on several grounds, principally the wording found in the placing slip and schedule to the policy which provided that the “Excess” was £25 million “each and every claim and/or claimant” inclusive of costs and expenses. SLAC commenced proceedings arguing that the policy, on its true construction, allowed claims arising from the mis-selling of endowment mortgages to be aggregated and that there was not a £25 million excess “per claimant” which would effectively prevent any recovery being made against underwriters. Aon were joined as a defendant to the proceedings on the basis that any failure by SLAC to recover under the policy was as a consequence of Aon’s negligence in placing the cover.

The Court ordered a staged trial. The construction issue relating to the wording of the excess provision as well as the issue of whether Aon had acted in breach of duty were decided in this judgment. Other issues, such as whether SLAC would have been entitled to aggregate the mis-selling claims as arising from the same originating cause, and thus would have had a valid claim under the policy but for the construction issue, are to be heard separately in July 2009.

DECISION

The construction issue

The first question was whether the policy permitted the aggregation of related claims made by separate claimants.

The policy wording contained a standard aggregation clause and excess provision in the following terms:

• Claim was defined as “each Claim or series of Claims (whether by one or more than one Claimant) arising from or in connection with or attributable to any one act, error, omission, or originating cause… [which] shall be deemed to be one claim for all purposes under this Policy”.
• The Excess was defined as “in respect of each and every Claim and/or Loss the amount as specified in item 4(ii) of the Schedule which amount … shall be borne by the Assured at their own risk … and Underwriters shall only be liable to indemnify the Assured in excess of such amount”.

The effect of these provisions when put together was that underwriters had agreed to cover a claim or series of connected claims which exceeded an excess sum specified in the schedule. It was the wording of the schedule which was problematic in that item 4(ii) of the schedule stated that the excess was £25 million each and every claim and/or claimant, including costs and expenses. This wording was also found on the slip.

Since the relevant wording did not appear in the policy wording per se, the first argument advanced by SLAC was that the schedule and slip could not properly be considered part of the policy. SLAC’s case was that the slip wording was irrelevant because it was superseded by the policy wording and that the schedule was a highly abbreviated summary of the policy terms, rather than an operative part of them.

Both of these contentions were rejected. The case affirms the decision in HIH Casualty and General Reinsurance Limited v New Hampshire Insurance Co that a slip forms “part of the matrix or surrounding circumstances of a later contract” not least because, as in this case, the parties will often have the slip but not the wording in their hands at the point of contract. As such, whilst the slip cannot contradict the provisions of the policy wording which is intended to supersede the slip, the slip is a legitimate aid in reaching the proper construction of the policy. The Judge also found that the schedule was an operative part of the policy, and thus had to be read alongside the main body of the policy and could qualify the meaning of the policy wording.

The first conclusion reached by the Judge was therefore that the words ‘and/or Claimant’ found in the excess provision were terms of the cover. The Judge then had to consider the meaning that should be attributed to those words as they formed part of the policy. It should be observed that there was no argument that the words “and/or Claimant” had been inserted into the policy as
a result of a common mistake and thus the policy should have been rectified. The Judge found that these words had been incorporated into the policy with meaning and the words were intended to have some function.

The parties then adduced a substantial volume of factual and expert evidence as to the history of the policy wording and what the insurance market would understand to be the meaning and effect of the excess provision.

While he drew upon certain aspects of this evidence, the Judge held that much of this evidence was inadmissible and substantial parts of what remained were unhelpful. The judgment also confirms the usual principle of English law in relation to the construction of commercial contracts that while the factual background to a contract may assist the Court in reaching a proper construction, the subjective intentions of the parties (evidenced by the history of their negotiations) are “classically inadmissible”. Further, the Judge found the beliefs and intentions of the parties to be of even less than usual assistance in this case, owing to his conclusion that neither SLAC nor underwriters had properly considered the wording “and/or Claimant” in the excess provision or developed a coherent understanding of the effect of that wording. As a result, the Judge held that much of the evidence of fact “supported the position of no party because it is apparent that insufficient attention was given to the effect of the amendment. I cannot conclude that the language in the contractual documents was used advisedly”.

The Judge was therefore left to interpret the words “and/or claimant” without any meaningful background information. The Judge held that the only natural meaning that could be given to the expression “each and every claim and/or Claimant” was that it created a per claimant deductible of £25 million.

The practical result of this construction of the policy was that the retail claims could not be aggregated to overcome the £25 million deductible as none of the individual policyholders was claiming in excess of £25 million. The policy thus did not provide SLAC with any effective cover for its liabilities in respect of endowment policy mis-selling (or indeed any liabilities for the mis-selling of financial products to consumers). The Judge was sympathetic to SLAC’s view that this interpretation deprived the policy of its commercial purpose (as understood by both SLAC and underwriters) but business efficacy could not overcome the words actually used in the policy, which could only have the meaning which the Judge had attributed to them, in his view.

The Judge’s decision on the construction issue was subject of an appeal by SLAC which was ultimately dropped before it reached the Court of Appeal.

The negligence issue

Compared with the construction issue, the question of Aon’s negligence was dealt with relatively simply. The Judge began by setting out what he considered to be an uncontroversial list of the duties which an insurance broker owes to the insured following the decisions in FNCB v Barnet Devanney and Talbot Underwriting v Nausch Hogan & Murray. Although only the second duty was determinative of this case, the full list of duties of the broker stated by the Judge were:

• to advise the insured on the type and scope of cover it needs;
• to arrange cover which clearly meets those requirements;
• if appropriate cover is unavailable, to ensure the precise nature of what is not covered is made clear to the insured;
• in preparing the policy, to ensure the language encompasses the insured’s needs; and
• to act with the same standard of care on renewal as on original placement (ie, the duties of a broker remain the same on each subsequent placement).

The second duty was found to operate on two levels; the broker must not only arrange cover to meet its client’s requirements, but do so on terms of sufficient clarity to avoid the unnecessary risk of denial of cover and/or litigation. This subdivision of this element of the duties is relevant, because it follows that Aon may have been found in breach of duty even if SLAC had been successful on the construction issue since the wording used was unnecessarily open to argument. The Judge formulated the relevant test as follows:

“would a reasonably competent broker in Aon’s position reasonably have concluded that the words ‘each and every claim and/or Claimant’ used to describe the excess in the slip and wording were sufficiently clear to meet SLAC’s requirements without exposing SLAC to an unnecessary risk that insurers might argue that the cover granted was on a per Claimant basis only?”.

The Judge found that Aon had clearly acted in breach of duty when he applied this test to the conduct of Aon in this case. Aon had clearly understood that it was essential to SLAC that the policy permitted the aggregation of claims from different claimants. Aon were in breach of duty because the words used in the policy left far too much room for doubt as to this aspect of SLAC’s cover. On this basis, Aon would almost certainly have also been found in breach of duty even if SLAC had been successful on the construction issue (although obviously the quantum of loss flowing from the breach would have been different in that case and probably would have been limited to SLAC’s legal costs).

It is also noteworthy that Aon failed in an argument that SLAC had been contributorily negligent in not spotting the anomaly in the wording. As is frequently the case when brokers rely on a contributory negligence defence, the Judge found that SLAC had quite properly relied upon Aon in this matter and the most SLAC would be expected to do would be to check key dates and figures in the policy documents, not assess the effect of the contractual provisions.

COMMENT

The judgment is significant on a number of levels and from several perspectives:

• In terms of the principles of the construction and interpretation of English commercial contracts (including insurance policies), the decision emphasises that, whilst the English Courts may consider business efficacy of the contract as part of the construction exercise, that can only be a factor in cases where there is genuine ambiguity in the words used.
• If the words used are clear and can have no other meaning (as the Judge found in this case), the Court will strictly apply that meaning even if that meaning makes no commercial sense.
• Careless language in insurance policies and other commercial contracts can be particularly dangerous as the parties may be held to the literal meaning of the words used in their contract if they have failed to give proper attention to the effect of those words as part of their agreement (and rectification of the contract will not be an available remedy as it will not be the case that the parties meant something else by their words).
• The judgment emphasises the importance of the careful reading and checking of insurance policy documents, in particular to check that the policy schedule reflects what is required from the cover.
• The responsibility for any careless language in the policy will most probably lie with the insurance broker.
• Even if it is determined that the policy does perform its intended function, if the insured is in dispute with insurers because of unclear wording in the policy and incurs costs to resolve that dispute, the insurance broker may have a legal liability to the insured in respect of those costs.