Accountants' PI: ICAEW minimum terms and defence costs

A recent first instance decision on the ICAEW minimum terms (Oldham v QBE Insurance (Europe) Ltd) has confirmed that accountants may be liable to reimburse insurers for any defence costs advanced pending resolution of a coverage dispute.

The claimant was an accountant and an insolvency practitioner (the “Accountant”) who had acted as an administrator of an international freight airline, who faced a judgment in excess of £1,000,000 by the airline’s subsequent liquidators. The Accountant’s professional indemnity insurers disputed that they were liable to indemnify him, since the claim had been made or notified to him prior to inception of the policy, but agreed to fund defence costs whilst the coverage issue was resolved. The dispute was referred to arbitration. In his award, the arbitrator agreed with insurers that the claim was not covered; the Accountant did not take issue with this, but did dispute other aspects of the award, including whether insurers were entitled to reimbursement of defence costs incurred prior to the arbitration award.

The reimbursement issue

This focused on the provisions of the ICAEW minimum terms dealing with disputes as to liability (C10.2; the relevant minimum terms were an earlier version than the current edition, albeit this provision remains in force in the current edition). Clause C10.2 of the minimum terms provides that:

“In the event of any dispute concerning liability to indemnify the Insured (including without limitation a dispute as to the policy year under which any Claim or circumstance might fall to be dealt with between (a) Insurers and (b) any insurer(s) subscribing to the policy corresponding to this policy in respect of a previous period of insurance), the Insured and the Insurers agree that Insurers will advance Defence Costs and indemnify the Insured in accordance with clauses A1 - A3 and clause C5 above pending resolution of any such dispute.”

The argument advanced on behalf of the Accountant was that the word ‘pending’ meant that insurers would fund defence costs ‘until’ a dispute was resolved. On that analysis if a dispute was resolved in favour of insurers, insurers could cease funding defence costs but could not then seek reimbursement of previously incurred costs. The Accountant relied, in particular, on the fact that there was no specific provision permitting reimbursement in the ICAEW’s minimum terms.

The High Court judgment rejected the Accountant’s argument on the following grounds:

1. The starting point was that insurers’ liability for defence costs arose only to the extent there was cover for the related claim under the policy.
2. If the Accountant’s argument were accepted, this would be an effective extension to the scope of cover; the court held that this could not have been the intended effect of clause C10.2, which was concerned with dispute resolution, and was not an insuring clause. The Accountant’s interpretation would allow an insured to establish a right to cover which did not properly exist simply by asserting a right to it pending resolution of any dispute over cover. This could apply either to primary liability or defence costs. The court found the suggestion that clause C10.2 required insurers to fund a liability payment pending resolution of coverage, with no right to reimbursement, was an absurd interpretation. The same had to apply to defence costs.
3. The natural interpretation was that advancement of defence costs ‘pending’ resolution of a coverage dispute meant that any indemnity payments were to be provisional and subject to repayment if the resolution meant that cover was not afforded under the policy.
4. The fact that there was no reimbursement mechanism in the minimum terms did not convince the court that there was no right to reimbursement.

The court found that the arbitrator had made no error in relation to his findings in relation to reimbursement (although there were criticisms of the approach taken to costs).

Comment

This is an interesting decision, both for insurers who write insurance, and for accountants (and other professionals) who buy insurance subject to the ICAEW minimum terms. Whilst the minimum terms do not provide a specific right to reimbursement such as, for example, in the SRA’s minimum terms and conditions applicable to solicitors, it is perhaps not surprising that the court reached the view that it did concerning the provisional nature of an indemnity where there is a coverage dispute yet to be resolved. This decision does provide helpful clarity in making clear that the requirement on insurers to fund defence costs pending resolution of a coverage dispute does not amount to an effective extension of the insuring clause. The court’s starting point of the indemnity available under the insuring clause was uncontroversial, and in interpreting the policy it had in mind the recent Supreme Court authorities of Wood v Capita Insurance Services and AIG Europe Ltd v Woodman, including reference to the fact that in interpreting minimum terms, the court will bear in mind the regulator’s desire to balance the protection of the public with the cost and availability of professional indemnity insurance.

The detailed reasoning behind the arbitrator’s award in relation to whether the claim was covered was not the subject of the High Court judgment. However, the ICAEW’s minimum terms have since changed, in part to take account of the provisions of the Insurance Act 2015. The claim was not covered as it had been “made against him or notified to him” in a prior year. Special condition D1 now reverses the burden of proof in relation to pre-inception non-disclosures, and it is now insurers who must show that any breach of the duty of fair presentation was not free of fraudulent conduct; the provision also makes clear that where an insured has prior knowledge of a circumstance that should have been notified to an earlier policy, insurers will not exclude the claim but the indemnity will be limited to that which would have been available under the prior policy. It is not clear whether this would have changed the outcome in this arbitration, but the changes to the minimum terms have restricted the circumstances in which insurers can rely upon an insured’s prior knowledge in excluding or reducing the indemnity available for a claim.

Further reading

Oldham v QBE Insurance (Europe) Ltd [2017] EWHC 3045 (Comm).
Supreme Court ruling in AIG v Woodman.
Supreme Court rules again on interpretation of contracts.