Insurance: construction of exclusion clauses

The Commercial Court has held that the contra proferentem approach should not automatically be applied to exclusion clauses in insurance policies. Following the Supreme Court’s decision last year inImpact Funding Solutions Ltd v AIG Europe Insurance Ltd, the courts will not routinely take a narrow approach to the interpretation of exclusion clauses and the principles of construction that apply to exemption clauses (provisions designed to relieve a party of liability that it would otherwise have for breach of contract or in tort) are not appropriate when considering exclusion clauses designed to define the scope of cover under the policy.

In Crowden v QBE Insurance (Europe) Ltd the claim was brought directly against the professional indemnity insurer of an insolvent financial advisor under the Third Parties (Rights against Insurers) Act 1930. Although the 1930 Act has been repealed by the 2010 Third Parties (Rights against Insurers) Act 2010, it continues to apply where, as in this case, the insured became insolvent and incurred liability to the claimants before 1 August 2016.

Under the 1930 Act, the third party claimant's rights against the liability insurer are only as good as the insured's rights would have been. One of the grounds on which the insurer applied to strike out the claim was that the insured’s liability to the claimants was excluded from cover under the insolvency exclusion in the policy. The insurer argued that, as it was not liable to indemnify its insured, under the 1930 Act it could not be liable to the claimants.

Background

The insured financial advisor had advised the claimants in relation to investments in a Keydata bond and securities issued by Lehman Brothers. Following the administration of Keydata (and liquidation of the company that had issued the underlying bond) and Lehman entering into Chapter 11 protection in the US, the claimants suffered significant losses. They obtained judgment against the insured for negligent advice and, as the insured was by that time in liquidation, issued proceedings against the financial advisor’s PI insurer.

The professional liability policy contained an exclusion of cover for 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 insurer applied for summary judgment, alternatively to strike out the claim against it.

Decision

The general principles that apply to the construction of insurance contacts were not in dispute: where the parties have used unambiguous language, even if contrary to commercial common sense, the courts will give effect to it. If, however, there is a genuine ambiguity so that there are competing constructions of a contractual provision, the court will favour the construction most closely aligned with business sense.

The claimants argued, however, that the exclusion clause should be interpreted narrowly, pointing to the principles governing the construction of exemption clauses in ordinary contracts (including the Canada Steamship line of authorities). The judge, Peter MacDonald Eggers QC, disagreed, noting that he was not aware of any authority where that line of cases had been applied to exclusion clauses in insurance policies. This, he said, was unsurprising as such clauses were not the same. Exclusion clauses in insurance policies define the risk that the insurer is prepared to assume, rather than excluding, restricting or limiting a party’s legal liability.

This follows the approach of the Supreme Court in Impact Funding Solutions Ltd v AIG Europe Insurance Ltd (2016), which concerned the construction of a Trade Debts exclusion in a solicitors' professional indemnity policy. In Impact Funding, the Supreme Court held that the terms of the policy, including the exclusion clause, had to be construed against the factual matrix and in the context of the contract of insurance as a whole. In particular, the court rejected the argument that a term expressed as an exception meant that it should be approached with a pre-disposition to construe it narrowly and, where there was no ambiguity, the court should not adopt the contra proferentem approach (that in the case of ambiguity a clause will be construed against the party who drafted it).

In the present case, the judge found that the language of the insolvency exclusion was relatively clear and rejected the claimants’ arguments for a narrow interpretation. The combination of the use of two differently expressed causative links ("arising out of" and "relating... to") and the use of the phrase “directly or indirectly” indicated that the relevant insolvency could be more remote than a proximate cause, although it nevertheless had to “stand out as a contributing factor”.

The conclusion that, on the facts of the case, the exclusion applied, was reinforced by the fact that the policy covering the previous year (underwritten by the same insurer) had contained an exclusion clause in materially different terms. In both policies, the exclusions had been set out in the wordings (and not incorporated by reference) and the court was entitled to assume that the parties had read the terms and been aware of the difference. That was especially so where the insured had been represented by a professional insurance broker. Further, although the exclusion had a broad effect, it did not leave the insured without substantial cover.

Comment

The decision confirms the trend of the courts in rejecting a narrow approach to the interpretation of exclusion clauses. Except in the case of genuine ambiguity in the language used or potentially, where the language is unambiguous, where the result would be absurd or where something has clearly gone wrong with the language of the contract, the courts will give effect to the words of the clause.

Insurers will also welcome that the court was willing to determine the issue on a summary judgment/strike out application, without the need for (and cost of) a full trial. The judge dismissed the claimants’ arguments that summary judgement would be inappropriate because there were factual matters that should be explored at trial relating to (1) the extent to which the insurer had represented that the policy was compatible with the insured’s obligation to maintain professional indemnity insurance under the FSA Handbook, and (2) whether the change in the wording of the insolvency exclusion had been drawn to the insured’s attention. The proper construction of the exclusion did not depend on either point and there was no reason not to grant summary judgment.

Further reading:

Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm).

Law-Now: Impact Funding Solutions Ltd v AIG Europe Insurance Ltd.