CONSTRUCTION OF EXCLUSIONS IN INSURANCE POLICIES

In Crowden and Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm) the Commercial Court found in favour of the Defendant insurer on the disputed construction of an "insolvency" exclusion in a professional indemnity insurance policy.  The case is a useful reminder of the approach which the English Courts take to the construction of exclusions in insurance contracts.

Background

The Claimants (husband and wife) were the trustees of a self-administered pension scheme and the sole beneficiaries thereunder. The claim arose out of two investments made by the Claimants (a husband and wife) on the advice of a firm of professional financial advisers, Target Financial Management Ltd ("Target").

Target was insured at the relevant time under a professional indemnity policy (the "Policy") issued by QBE. The Policy afforded Target the usual professional indemnity cover but, crucially, included an exclusion (the "Insolvency Exclusion") in the following terms:

"This Insured section excludes and does not cover any claims, liability, loss, costs or  expenses:
…
arising out of or relating directly or indirectly to the insolvency or bankruptcy of the  Insured or of any insurance company, building society, bank, investment manager,  stockbroker, investment intermediary, or any other business, firm or company with whom  the Insured has arranged directly or indirectly any insurances, investments or deposits"

The investment products in which the Claimants were advised to invest were known as the "Keydata Bond" into which the Claimants invested £200,000 in 2009 and the "Meteor Plan" into which the Claimants invested £150,000 in 2008. Keydata defaulted on payment returns and subsequently entered administration in June 2008. Under the Meteor Plan the Claimants acquired securities issued by Lehman Bros which entered into insolvency proceedings in the US in September 20008. It was alleged that the Claimants had suffered losses of £150,000 on the Keydata Bond and losses of £50,000 on the Meteor Plan.

In 2009, rather than pursuing Target, the Claimants first made complaints and applied for compensation to the Financial Services Compensation Scheme ("FSCS") in respect of the two investment products (not in respect of Target). In respect of the Keydata Bond the Claimants' claim was upheld in the amount of £84,642.92. It was a condition of the payment by the FSCS that the Claimants would assign all rights against Target in respect of the Keydata Bond to the FSCS (although the extent of that assignment was in issue). The Claimants' complaint in respect of the Meteor Plan was not upheld by the FSCS.

In August 2011 the FSCS purported to reassign to the Claimants the rights which had been assigned as a condition of the payment in respect of the Keydata Bond.

At the end of 2011 Target entered administration and in February 2012 the Claimants made a further complaint to the FSCS in respect of Target (as opposed to the specific investment products). That second complaint was also upheld (as regards Keydata) and the Claimants received £77,598.11 from the FSCS. Again the payment was conditional on an assignment of the Claimants' rights against Target. No decision was reached by the FSCS on the Claimants' complaint against Target in respect of the Meteor Plan.

On 30 May 2013 Target entered liquidation. In May 2014 the Claimants commenced proceedings against Target. Target's liquidators did not defend the claim and judgment was entered for the Claimants in the sum of just under £200,000 in February 2015 (the "Target Judgment"). Importantly, QBE had declined to take over conduct of the defence of the claims against Target on the basis that it was not obliged to indemnify Target under the Policy.

Proceedings

In August 2016 the Claimants issued proceedings directly against QBE under the Third Parties (Rights Against Insurers) Act 1930 (the "1930 Act"). The fact that Target entered insolvency proceedings and incurred a liability to the Claimants prior to 1 August 2016 meant that the Third Parties (Rights Against Insurers) Act 2010 (the "2010 Act") did not apply.

The Claimants alleged that Target's liability to the Claimants was established by the Target Judgment and that accordingly Target's right to an indemnity from QBE was assigned or transferred to the Claimants.

QBE defended the claims on two principal bases, namely:

1.     that by virtue of the Insolvency Exclusion the Claimants' claims against Target were not covered under the Policy (the "Exclusion Point"); alternatively

2.     that as a result of the Claimants having assigned their claims against Target to the FSCS the Claimants did not have locus to bring the claim against QBE under the 1930 Act (the "Assignment Point").

QBE applied for strike out or alternatively summary judgment in respect of the Exclusion Point and the Assignment Point.

Argument

The Exclusion Point

QBE's case on the Insolvency Exclusion Point was that the Insolvency Exclusion was widely drafted and clear in its application:

• The Claimants' claims (and Target's liability) were "arising out of or relating directly or indirectly to" either (i) the insolvency of Keydata and Lehman; or (ii) the insolvency of Target. There was no need for the insolvency to be a proximate cause of the claims. Thus the Claimants' claims (and Target's liability) were sufficiently causally connected with the insolvency either of the "Insured" (Target) or "any other business, firm or company with whom the Insured has arranged directly or indirectly any…investments or deposits" (Keydata or Lehman).
• The Insolvency Exclusion was incorporated into Target's insurance cover immediately following the 2008 global financial crisis. This evidenced that Target's and QBE's intention was for QBE's exposure to losses connected with the insolvency of financial institutions to be limited.
• The expiring insurance wording for the year prior to the Policy incorporated a different insolvency exclusion which was much more narrowly drafted. This evidenced that Target and QBE had intended for there to be a change in the scope of QBE's exposure to losses connected with insolvency under the Policy.

The Claimants argued that the Insolvency Exclusion did not apply to the Claimants' claims against Target.

• On its proper construction the Insolvency Exclusion (i) did not apply to negligent investment advice given by Target; and/or (ii) was intended to apply only to investments made by Target for its own account and not for or on behalf of its customers.
• QBE's construction of the Insolvency Exclusion would have the effect of excluding "wide tracts of ubiquitous financial business from the scope of the Policy".
• The Policy was designed to afford Target the minimum level of cover specified under the FSA Handbook (Chapter 13 of IPRU) and did not do so by virtue of the Insolvency Exclusion.
• The change in the scope of the Insolvency Exclusion compared to the equivalent exclusion in the expiring cover was not brought to Target's attention.
• "Insolvency" should be construed as meaning a formal insolvency process. Keydata had not entered such a process when the Claimants' cause of action against Target accrued.

The Assignment Point

QBE's case on the Assignment Point was that, notwithstanding the Target Judgment, the Claimants had not established Target's liability to them. The true position was that the Claimants had assigned any cause of action against Target (in respect of the Keydata Bond) to the FSCS and thus the proceedings leading to the Target Judgment were an abuse of process.

The Claimants' counter arguments were as follows:

• The assignment of the Claimants' rights to the FSCS only applied in respect of losses which were actually paid to the Claimants and the Claimants had not been reimbursed in full by the FSCS.
• The FSCS had acknowledged that it had reassigned the relevant rights of action to the Claimants. Alternatively in the absence of a legal reassignment, the facts established an equitable assignment.
• QBE was not entitled to go behind the Target Judgment to dispute Target's liability to the Claimants.

Decision

Peter McDonald Eggers QC (sitting as a judge of the London Circuit of the Commercial Court) found in favour of QBE on the Insolvency Exclusion Point but declined to express a view on the Assignment Point. Accordingly QBE was given leave to enter summary judgment against the Claimants.

Exclusion Point

The judge drew a distinction between exclusion clauses in an insurance contract and clauses which purport to limit or exclude liability in other commercial contracts. The construction of insurance exclusions had to be considered in light of the Supreme Court decision in Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57. The Supreme Court decision made clear that the purpose of an exclusion in an insurance policy may be simply a way of delineating the scope of the insurer's primary liability. Accordingly there was no basis on which to follow a contra preferentem approach in reliance on the line of authorities arising from Canada Steamship Lines Ltd v The King [1952] AC 192 in the context of non-insurance contracts.

Turning to the parties' respective arguments on construction:

• The judge noted that the "language of the Insolvency Exclusion" was relatively clear and that accordingly "the causative effect of the relevant insolvency need not be as strong or efficient so as to constitute a proximate cause."
• He rejected the Claimants' arguments for a more restricted scope, noting that for the Insolvency Exclusion to be applicable to negligent acts only would give the exclusion an odd effect (protecting Target from acts over which it had control but not from acts over which it had no control).
• He did not accept that the Insolvency Exclusion was intended only to deal with Target's own investments – the use of the word "arranged" in the Insolvency Exclusion suggested Target acting on behalf of a third party. Moreover this construction was supported by the wording of the exclusion in the expiring policy which included a "carve-back" for claims which were arose directly from Target advising a third party to invest in the relevant insolvent entity.
• There was no basis for construing "insolvency" narrowly – the parties could have defined the term as denoting only a formal insolvency process but had not done so.
• The effect of the Insolvency Exclusion was not so wide ranging that it would deprive Target of substantial cover under the Policy.
• Nothing on the face of the Policy or the surrounding factual matrix evidenced that QBE and Target intended the Policy to discharge Target's regulatory obligations and, in any event, the Insolvency Exclusion arguably did not put Target in breach of such obligations.

Assignment Point

The factual background to the Assignment Point was complex and, given his view on the Insolvency Exclusion Point, the judge was not minded to express a view in the context of an interlocutory hearing on whether the Claimants had retained a cause of action against Target following the payments made by the FSCS.

However, the judge did express some obiter views on the question of whether the Target Judgment was binding on QBE. Referring to AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660 the judge noted that the established position is that an insurer is entitled to contest the existence of its insured's liability, notwithstanding that there has been a court judgment or other award against the insured. The judge endorsed this approach, but noted that in his view there might be two circumstances in which an insurer might be bound by a third party obtaining judgment against the insured, namely:

1.     Where the insurance policy contains a term requiring the insurer to be bound by a judgment; or

2.     Where the insurer was a party to or otherwise privy to the proceedings which led to the judgment in question.

The judge noted that in the present case QBE had been given the opportunity to participate in the Claimants' claims against Target but had refused to do so on the basis that QBE was not liable to indemnify Target in any event. The judge's view was that this refusal to participate would entitle QBE to refuse to accept the Target Judgment as evidence of the existence of Target's liability to the Claimants.

Comment

The judgment is a useful restatement of the law on the interpretation of exclusion clauses in insurance contracts and the differences between such clauses and clauses in other commercial contracts which seek to exclude or limit liability. It also serves as a reminder to policyholders that they should not assume, simply because an exclusion is very widely drafted, that it will not be upheld by the courts in the event of a dispute.

The case also sounds a note of caution for policyholders and their brokers in relation to insurance renewals and changes to the terms and conditions of the policy. Policyholders and their brokers should ensure that they understand the rationale behind any change in the wording of key terms (in particular insuring clauses, conditions and exclusions). Brokers should ensure that the impact of any such changes is brought to the attention of their clients.

Finally, the judge's obiter comments about the circumstances in which an insurer might not be entitled to challenge its insured's liability to a third party, although they do not change the law, are nonetheless of interest. In particular, the judge envisaged an insurer being bound by a finding against its insured where the insurer participated in or was privy to the proceedings brought by the third party. Although the claim was made under the 1930 Act, the judge also noted that under the 2010 Act, it is now open to the third party claimant to establish the relevant liability by obtaining a declaration in the proceedings against the insurer that the insured is liable to the third party.