High Court confirms cover for losses based on estoppel by convention despite no cover pursuant to policy wording

The judgment in the case of World Challenge Expeditions Limited v Zurich Insurance Company Ltd [2023] EWHC 1696 (Comm) held that an insured, World Challenge Expeditions Limited (WCE), was entitled to be indemnified under its business travel insurance in respect of refunds it had paid for certain expeditions in 2020 cancelled due to Covid-19. The court found that although these losses were not technically covered by the policy wording, the right to an indemnity arose due to an estoppel by convention based in large part on how previous claims had been handled under earlier policies. The judgment also considers the application of aggregation wording in the policy to the losses to be indemnified.

BACKGROUND

WCE is a specialised travel company that provides expeditions worldwide for school students (known as Challengers). From at least 2012 to 31 March 2016, WCE had taken out personal accident and travel insurance, including cancellation cover, with Royal & Sun Alliance Ltd (RSA). From 1 April 2016, similar cover was provided by Zurich Insurance plc (later Zurich Insurance Company plc (Zurich)).

WCE's claim concerns Zurich's Z-Alert Corporate Personal Accident and Business Travel Policy in force from 1 April 2019 to 31 March 2020 (the Policy). Due to the outbreak of Covid-19 in late 2019/early 2020, WCE was obliged to cancel nearly all of its booked expeditions for 2020. WCE repaid more than £10 million which it had received from Challengers by way of deposits and advance payments.

WCE's case was that it was entitled to insurance cover for the deposits it paid back to Challengers by way of refunds. Zurich denied cover and stated that the Policy only indemnified WCE for irrecoverable costs paid out by WCE to third party suppliers (e.g. for flights, accommodation etc.), referred to by one witness as "deposits paid forward" and not the refunds paid to Challengers. On that basis, Zurich argued that WCE was entitled to an indemnity under the Policy of less than £150,000.

The principal issues in this case were:

• The correct construction of the Policy.
• Whether Zurich was precluded by estoppel or collateral contract from denying that the Policy provided the coverage which WCE thought it had.
• The application of the aggregation wording.

 

DECISION

Policy construction

The wording of the relevant section of the Policy is:

"Section 8 – Cancellation, Curtailment, Rearrangement and Replacement Expenses

If during the operative time or between the confirmed booking of the journey and the operative time any part of the pre-booked travel arrangements for a journey are cancelled, curtailed or rearranged as a direct result of any cause outside the control of you or the insured person we will pay you or the insured person up to the sum insured in the schedule and subject to the cancellation or curtailment limit for:

1. 1. Deposits, advance payments and other charges which have not been and will not be used but which become forfeit or payable under contract or cannot be recovered elsewhere; and
   2. Reasonable additional travel and accommodation expenses necessarily incurred."

Challengers were also identified as insured persons in the Policy (as well as WCE).

The parties agreed that the core principle as to construction of insurance policies was as summarised in FCA v Arch (UK) Ltd [2021] UKSC 1.

Mrs Justice Dias explained that:

"…the process of construction is concerned with an ascertainment of what the parties objectively agreed. The subjective intentions of the parties are irrelevant. Thus the court is entitled to look at such background facts as were reasonably available to the parties at the date of the contract, i.e., at 1 April 2019. In my judgment, this must mean reasonably available to the parties charged with negotiating the contract, in which respect a distinction is to be drawn between the underwriter whose business it is to write the policy and those who are charged with handling claims under it."

However, the court also found that, as the Policy wording was industry-wide standard wording, there was less scope for its meaning to be affected by factual matrix evidence and that:

"…the normal expectation of how a standard wording operates is itself part of the factual matrix and that any factual matrix evidence would have to be very clear before It could override what I have held to be the natural and ordinary meaning of the Policy."

The court found it to be relevant in this case that WCE had been advised by competent brokers throughout who would be expected to advise as to its meaning and the effect of cover.

It was not in dispute that the relevant "journey" for the purpose of this clause was the expedition to be undertaken by the individual Challenger. The court therefore found that the natural and ordinary meaning of "deposits" in sub-paragraph (a) was a reference to the deposits forfeited and irrecoverable by the person paying them (i.e. the Challengers). Given this, the "irrecoverability" required by the clause had to apply to the Challengers. In this case, deposits were refunded by WCE and so were recovered by Challengers. The court explained that WCE could not mix and match and claim based on the deposits paid by the Challengers and irrecoverability by WCE. The judge did not think this rendered the naming of Challengers as insureds as pointless – there were other heads of cover where Challengers would incur costs and expenses in their own right.

Furthermore, the court did not accept WCE's submission that the course of dealing between the parties (previous claims handling) was part of the factual matrix which informs the question of construction. The mere fact that the claims handlers may have been previously settling claims on an incorrect or concessionary basis does not constitute admissible factual matrix which can affect the construction of the policy.

On the Policy's true construction, therefore, the Policy only indemnified WCE's irrecoverable third party costs (for matters such as flights and accommodation) up to the amount of the refunds it was obliged to make to Challengers.

Estoppel

WCE advanced its case on estoppel on a number of different bases but it was WCE's claim to indemnity to estoppel by convention that was considered at length in the judgment.

There was no dispute between the parties as to the principles of law applicable to estoppel by convention which the court helpfully summarised as follows:

1. A common but mistaken assumption of law or fact which is expressly shared between the parties by means of conduct crossing the line between them.
2. An assumption by D of some element of responsibility in the sense that D conveyed an understanding that it expected C to rely on the common assumption.
3. Reliance by C in its subsequent mutual dealings with D on the common assumption, rather than on its own independent view of the matter.
4. Some detriment to C or benefit to D sufficient to make it unjust or unconscionable for D to assert the true legal position.

(emphasis added)

The court stated that the question of detrimental reliance is closely related to the question of unconscionability and that "…unconscionability is not so much a separate requirement as the prism through which detrimental reliance is to be assessed."

Common assumption

A critical difference between the parties was the formulation of the relevant assumption. WCE pleaded that the assumption was simply that it would be indemnified for customer refunds (without enquiry as to third party costs and expenses). In contrast, Zurich submitted that there needed to be an assumption that Zurich would cover customer refunds in full even if they exceeded irrecoverable outlays. The court agreed with WCE.

The court found that there was a common assumption arising from the course of previous claims handling which was sufficient in principle to found an estoppel by convention. This was based on the court's findings that:

• Both WCE and Zurich claims handlers subjectively believed and understood that WCE was covered for the amount of its customer refunds.
• There was therefore a common assumption to that effect which was sufficiently clear in its scope for the purposes of an estoppel by convention.
• There was ample conduct by which this common assumption "crossed the line" between the parties:

• • It was obvious from the claims documentation routinely submitted by WCE that it was claiming the amount of its customer refunds.
  • Zurich never suggested prior to 22 April 2020 that cover was only in respect of WCE's irrecoverable third party costs and that, previously, claims had only been agreed in error or as a concession.
  • The assumption that WCE's customer refunds were covered was demonstrated each time that Zurich agreed a claim and set it against the aggregate deductible.
  • A claims protocol stated that Zurich would flag any coverage issues such that WCE had a reasonable expectation that any coverage issues would have been positively raised by Zurich (which they were not).
• Zurich monitored the erosion of the deductible and it was unrealistic to contend they did not intend WCE to rely on these calculations. By agreeing previous claims in the amount of the refunds and setting them against the deductible, Zurich clearly conveyed to WCE that they shared WCE's assumption as to the scope of cover. This was sufficient to demonstrate that Zurich assumed some element of responsibility for the common assumption.

Reliance

WCE put its case on reliance in various ways. Two of these were unsuccessful, namely, (1) entering into the Policy and paying premium based on the claims history; and (2) failing to make alternative insurance arrangements.

The third, successful, argument was based on the range of steps WCE could have taken between mid-March and 20 April 2020. In mid-March, it was apparent cancellations would be necessary and WCE was coming under very significant pressure to cancel all trips, and indeed wanted to do so. Between then and 20 April there were a number of communications with Zurich concerning which policy applied and whether Zurich would allow a cancellation period of more than 60 days. However, the court found that by mid-March WCE would have taken steps to cancel all trips up to the end of August if it had not been for these outstanding issues. The final decision to cancel all trips up to the end of August was not made until 20 April.

Where the cancellations would have happened anyway, then there was no detrimental reliance. Examples of such cancellations include those in respect of trips in the Middle East where specific restrictions were already in place and those following an agreement by Zurich to cancel trips within 60 days (i.e. departing up to 31 May 2020) where WCE acted as it planned to do in any event and there was no relevant delay.

However, WCE did suffer detrimental reliance in waiting from mid-March to 20 April to cancel those trips departing after 31 May 2020. In mid-March WCE would have had more options at its disposal – including the possibility of achieving deferrals rather than cancellations. It therefore lost the possibility of exploring other options to preserve customer goodwill. Instead, there was loss of goodwill and alienation of customers due to their delay in acting. It would not have delayed the decision from mid-March to 20 April if it had not believed that refunds were in principle recoverable under the Policy and that Zurich shared this understanding. Importantly it was held that "…detriment for the purposes of an estoppel does not have to be financial provided it is more than trivial and leaves the claimant in a worse position."

Dias J was satisfied that it would be inequitable for Zurich to resile from the common assumption now for a number of reasons including the duration of and responsibility for the incorrect assumption and that Zurich had every opportunity to identify the erroneous understanding and failed to do so. She was quite critical, stating that: "This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way."

Decision

The court found that the effect of the estoppel was to preclude Zurich from denying the assumption i.e. it precluded Zurich from denying in principle that the Policy indemnified WCE for the amount of its customer refunds, subject to a particular recoveries argument.

As a result, WCE's claim succeeded in relation to the trips cancelled on 20 April 2020, subject to it giving credit for any third party recoveries.

Other arguments considered and rejected included promissory estoppel and the existence of a collateral contract.

Aggregation

The aggregation issue for the court to consider was whether the Cancellation/Curtailment Limit of £100,000 in the Policy applied. This was the maximum amount that Zurich could be liable for in respect of all claims under Section 8 "for loss and expense arising out of any one event". "Event" was defined as a "sudden, unforeseen and identifiable occurrence".

WCE's case was that there should be no aggregation because the cancellations did not arise out of one "event" as expressly defined. They were the result of the pandemic as a whole, or from the spread and prevalence of Covid in departure and/or destination countries and/or actual or anticipated government actions. In contrast, Zurich argued that the cancellations arose from the imposition of exit/entry travel restrictions in each relevant departure/destination country or the decisions to cancel on 20 April and that these were aggregating "events".

Aggregation was, of course, in issue in the judgments of Butcher J in Stonegate Pub Company v MS Amlin [2022] EWHC 2548 (Comm), Greggs PLC v Zurich Insurance PLC [2022] EWHC 2545 (Comm) and Various Eateries Trading Ltd v Allianz [2022] EWHC 2549 (Comm) which considered the principles governing the correct approach to aggregating provisions in the context of the pandemic.

The court ran through the principles that applied in considering what is an "event", including:

1.  the commonly adopted unity factors, which are not to be applied mechanistically;
2.  the fact that event and occurrence are usually treated as synonymous, meaning something which happens at a particular time and at a particular place, and can be contrasted with "cause"; and
3. attention must be paid to the necessary causal link.

Here, however the express definition of "event" was narrower than the generally accepted definition because of the requirements that it be both "sudden" and "unforeseen".

The court noted that the question of aggregation only arises in relation to the cancellations which were implemented pursuant to the decision taken on 20 April 2020 in relation to trips departing after 31 May 2020. The court agreed with WCE that the decision on 20 April was not based on an identified occurrence. Instead it was based on a state of affairs contributed to by a number of inter-related factors. While the judge accepted that the imposition of restrictions in a single country is capable of being an occurrence, that would not meet the express requirement of being "unforeseen" (as it was a question of "when and to what extent" and not "if"). Further, the decision to cancel cannot be said to arise from any particular set of restrictions, nor could it be said in this case that particular cancellations could be attributed to particular restrictions. While the judge considered that there might be the necessary causal connection between particular restrictions and cancellations in March, the same could not be said for the more distant departures, and it was those more distant departures which were the subject of the successful claim. In that way she distinguished Stonegate, Greggs and Various Eateries.

The judge confirmed the recent line of authority that a decision can in principle be an occurrence. However, in light of the wording of this Policy, the decision on 20 April 2020 could not be an aggregating event.

In summary, the court accepted WCE's case that the aggregation provision did not operate in relation to the cancellations for which the court held WCE was entitled to an indemnity as they did not arise out of a relevant "event" as defined.

The judge did not consider the issue of quantum as the parties agreed that they should have an opportunity to work out the consequences of her decisions on the points of principle.

COMMENT

There are a number of points of interest in this case. Most importantly, it demonstrates the potential for there to be recovery on the basis of estoppel by convention in circumstances where the objective construction of the policy did not afford cover and where other forms of estoppel were challenging. The various factual matters which supported the insured's position in support of estoppel by convention bear careful review, and include how previous claims (albeit eroding the deductible) had been handled. The court's commentary as to what is needed to demonstrate "detrimental reliance" are also of interest, as is this chapter of aggregation in relation to Covid, albeit largely based on the bespoke wording of this Policy.

The case is being appealed.