UK: Insurance E-Brief - Summer 2013

CAUSATION

Elementary My Dear Watson? Causation And The Burden Of Proof

By Simon Cooper and Carrie Radford

Would Sherlock Holmes have been a reliable claims handler? A recent decision by the Court of Appeal suggests not – and they did not think much of Hamlet either.

The Court of Appeal has had occasion twice this year to consider the test required to discharge the burden of proof for civil liability. Nulty v Milton Keynes Borough Council [2013] Lloyd's Rep IR 243 involved a dispute as to the cause of a fire at a recycling plant. Ace European Group v Chartis Insurance UK [2013] EWCA Civ 224 concerned the cause of serious cracks in components for an 'energy from waste facility' that was under construction. Both appeals were dismissed because it was held that the judges at first instance had reached conclusions that were available to them on the facts. However, in Nulty the Court of Appeal held that Mr Justice Edwards-Stuart had erred in holding that if the only other possible causes of a loss were very much less likely, by process of elimination the remaining hypothesis became in law the probable cause, however unlikely it might otherwise appear. Both decisions applied the House of Lords decision in the Popi M [1985] 2 Lloyd's Rep 1 that a finding on the balance of probabilities that a particular event was causative of the loss required the case for believing that the event occurred to be more compelling than the case for not so believing. It was not sufficient that the cause put forward was merely the most plausible of a number of improbable explanations.

Analysis

In Nulty the appellant, the estate of a deceased self-employed electrical engineer (and his liability insurers), appealed against the High Court's decision that a serious fire at a recycling centre owned by the Council had been caused by a discarded cigarette dropped by Mr Nulty when he was alone on the site investigating the cause of a power outage. In his decision at first instance, Edwards-Stuart J had painstakingly considered the possible causes of the fire, which the Council contended was a discarded cigarette dropped by Mr Nulty and which Mr Nulty's estate argued was 'arcing' from a disused electric cable that had been left live and in a dangerous condition. On the expert evidence the judge concluded that the latter theory was most improbable. By contrast, he found that there was nothing physically or scientifically implausible about the cigarette end explanation, however, he accepted the objection to this theory that the engineer would not have been expected to behave in such a way given his experience and the fact that he had formerly worked as a fireman. The judge held that neither cause, viewed on its own, seemed likely but that the arcing explanation was very much the less likely of the two and therefore that the Council had discharged the burden of proof.

The Court of Appeal held that Edwards-Stuart J had erred in law in restating a Sherlock Holmesian logic that "when you have eliminated the impossible, whatever remains, however improbable, must be the truth". This process of deduction is not a satisfactory basis for the court to find that the occurrence of an event has been proven on the balance of probabilities, bearing in mind that the evidence available may be incomplete and every possible explanation may not be known. The law requires a judge, before he or she finds that a particular event occurred, to step back from weighing up the potential causes and to be satisfied on the evidence that the last possible cause in the court's contemplation is more likely than not to have occurred.

This reasoning follows the House of Lords decision in the Popi M, which illustrates the point nicely. That case concerned a ship that had sunk in calm seas and without an obvious explanation. At first instance Mr Justice Bingham concluded that the ship was sunk by a submarine, having discounted the other possible explanations, even though there was little evidence to support this conclusion. Bingham J's decision was overturned on appeal.

The Court of Appeal in Nulty did not overturn the lower court's decision because it said that the judge had found that a discarded cigarette butt was more likely than not to have caused the fire, albeit he went further than he needed to in explaining his decision.

The question in Ace was whether damage to economisers intended for a waste facility had been caused by vibration during transportation by road (against which the Chartis marine policy provided coverage) or while they were sat on-site and exposed to the elements (in which case the Ace Erection All Risks policy would respond). The decision turned on the expert evidence and the appeal was against the judge's findings of fact that led to his conclusion that the damage had occurred during transit. It was not disputed that the judge had correctly applied the Popi M and that he had not merely dismissed the theory that the cracks occurred on-site but that he had also satisfied himself that it was more likely than not that the competing theory was the correct one.

The appellants argued that the findings were not open to the judge, relying heavily on digital photographs they had produced for the first time during the original trial. The Court of Appeal rejected this argument and, as well as disagreeing with the appellants about the significance of the photographs, firmly criticised them for adducing new evidence at trial, after the claimant's expert had given evidence and without providing complete metadata, making the photographs unreliable. In a further example of the need to beware the lessons of literature, Lord Justice Moses said that the judge should have been invited to exclude the evidence altogether, ignoring the cautionary tale from Hamlet that too much protest "may prompt a Gertrudelike judicial response to the protestations of the Player Queen".

Comment

These cases provide a reminder to claims handlers that when the cause of a loss is open to dispute, in deciding whether the policy provides coverage it is necessary to ask which (if any) of a range of possible explanations is more plausible than not (and not which is the least implausible). Ace is also noteworthy for the court's strongly-worded criticism of the production of late and incomplete evidence.

GOOD FAITH

The Inexorable Rise Of Inducement

By Rebecca Axe and Kate Buttrey

If an assured fails to disclose material facts or makes a material misrepresentation when negotiating an insurance policy, the insurer may avoid that policy ab initio. The effect of avoidance is that all unpaid claims on the policy become irrecoverable and all past claims (and, in the absence of fraud, the premium) must be returned.

In looking at the Marine Insurance Act 1906, one could be forgiven for thinking that material non-disclosure or misrepresentation are all that an insurer needs to prove in order to avoid the contract. However, since the landmark House of Lords decision in Pan Atlantic v Pine Top [1994] 2 Lloyd's Rep 427, it has been clear that the insurer must also show that its actual underwriter was 'induced' to write the policy by that non-disclosure or misrepresentation. In this article we consider the key elements of the inducement requirement.

The test of inducement

The test of inducement is whether the insurer would have underwritten the risk on precisely the same terms as those which he did, had the assured made full and accurate disclosure of all material matters. The non-disclosure or misrepresentation need not be the sole cause of the inducement but it must be an effective cause of the insurer entering into the contract (Assicurazioni Generali v ARIG [2003] Lloyd's Rep IR 131).

A presumption of inducement?

It is sometimes suggested that inducement may be presumed once the materiality of any non-disclosure or misrepresentation has been proven. In Assicurazioni, however, the Court of Appeal held that "there is no presumption of law that an insurer or reinsurer is induced to enter into the contract by a material non-disclosure or misrepresentation. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him." In other words, it is not a universal inference but will depend on the facts.

Proving inducement

In the absence of any presumption, the question of how inducement may be proved has become increasingly pertinent. The Court of Appeal ruling in Laker Vent v Templeton [2009] Lloyd's Rep IR 704 indicates that an insurer will not be excused from proving inducement simply because it is in dispute with the individual underwriter who wrote the risk. Here, the former underwriter had not given evidence at trial; he had already left the company and was in dispute with it. The trial judge decided that he was not prepared to speculate, in the absence of any direct evidence, about how that underwriter would have acted if full and accurate disclosure of the risk had been made at placement. The insurer had therefore failed to prove inducement. On appeal, the Court of Appeal was prepared to assume there was a good reason for the former underwriter not to be called but it also found that there was no reason why other members of the underwriting team who had also been engaged on the renewal could not have given evidence. In such circumstances it held that the judge's conclusion could not be faulted.

In Crane v Hannover Ruckversicherungs-Aktiengesellschaft [2010] Lloyd's Rep IR 93, the insurer purported to avoid the contract for breach of the duty of disclosure. However, the actual underwriter had not been consulted about whether he had been induced by the alleged misrepresentations and non-disclosures before court proceedings were commenced. At trial, his evidence was that he could not recall what he had read or thought at placing. His efforts to reconstruct his thought processes did not withstand scrutiny when compared with the facts apparent from the documents. It was not, therefore, difficult for Mr Justice Walker to draw the conclusion that he was not influenced by the representations relied on.

In Lewis v Norwich Union Healthcare [2010] Lloyd's Rep IR 198 the insurer had pleaded that its underwriter had been induced. She appeared to give evidence. In cross-examination it turned out that she had not been involved in the underwriting process after mid November 1999. Inconveniently for the insurer, the critical decision to accept the risk had been taken in December 1999 and by someone else entirely. That person, who had still been employed when the insurer had decided to avoid, was not called to give evidence. Unsurprisingly it was held by Recorder West-Knights QC that inducement had not been proved.

By contrast, the decision in Persimmon Homes Ltd v Great Lakes Reinsurance (UK) [2011] Lloyd's Rep IR 101 illustrates that the absence of evidence from the actual underwriter is not necessarily fatal to his employer's prospects of success. The insurer served no evidence from the underwriter who had taken the decision to enter into the contract, who had since left its employ. Mr Justice Steel was nonetheless prepared to find that inducement had been established. The documents showed that the underwriter had approached the underwriting task with diligence and care and both his supervisor, who had reviewed the original proposal, and the underwriter who took over responsibility for the file gave evidence that they would not have written the risk if full disclosure had been given.

Conclusion

The need to prove inducement will, in most cases, put the underwriter into the witness box where, pre-Pan Atlantic, she or he was not needed. Inducement turns a spotlight on the underwriter's thought processes; it took less than a year after Pan Atlantic for a judge to describe an underwriter who had given evidence as having "mental processes which left much to be desired"! Whilst this may be unpalatable, an insurer who attempts to avoid without consulting, or failing to serve evidence from, the actual underwriter, may be heading for a fall.

LIMITATION

Know Your Limits: The Accrual Of A Cause Of Action In Tort

By Ben Ogden and Roderic Jones

In Berney v Saul (t/a Thomas Saul & Co (Solicitors)) [2013] EWCA Civ 640, the Court of Appeal had to determine when the claimant's cause of action against the defendant solicitor arose in order to ascertain when the six year limitation period for a negligence claim commenced. For the cause of action to crystallise in tort, the potential claimant must suffer "damage". The question of what constitutes "damage" in negligence cases has often vexed the courts and in this case, whilst the two Court of Appeal judges who gave reasoned judgments broadly agreed on the legal test, they disagreed on its application: despite the agreed facts, they did not agree when the limitation period commenced.

The claimant (Ms Berney) brought proceedings against the defendant, her former solicitor, alleging that she had settled a previous personal injury claim at an undervalue because of the solicitor's failure to serve Particulars of Claim for her personal injury claim in time (together with other delays in obtaining medical evidence). She asserted that the settlement sum was lower than she would have obtained if the claim had gone to trial or been settled without the additional hurdle of the need to apply to serve her Particulars of Claim out of time. Counsel had advised that she had a negligible chance of succeeding in such an application. The question was when she had suffered damage. The crucial dates were:

• 11 August 2002, the last date for service of the Particulars of Claim in the personal injury action in accordance with the Civil Procedure Rules;
• 10 January 2005, the date six years before Ms Berney issued her negligence claim against her solicitor, on 10 January 2011. If damage occurred before 10 January 2005, then Ms Berney's claim would have been time-barred;
• 25 January 2005, when the solicitors defending the personal injury claim withdrew their assurance that they would take no point on the late service of the Particulars of Claim; and
• 1 November 2005, the date on which Ms Berney settled her personal injury claim.

District Judge Liston had dismissed the claim, partially on the basis that it was time-barred. On appeal to the High Court, HHJ Simpkiss agreed that the claim was time-barred "long before" 1 January 2005 because there had been a "measurable loss by reference to the diminution in the value of the [personal injury] claim" before then, though he did not say exactly when or on what basis that diminution occurred.

Lady Justice Gloster, giving the first judgment of the Court of Appeal, analysed the complex and (in her words) "arguably inconsistent approaches of this Court" in previous cases dealing with 'failed litigation' claims against solicitors. She settled on a "realistic and fact–dependant" test to be applied in assessing when time began to run, based on Lord Hoffman's judgment in Nykredit Mortgage Bank v Edward Erdman Group [1998] 1 All ER 305, which she expressed as "when was Ms Berney financially worse-off as a result of [the solicitor's] breach of his duty of care than she would otherwise have been?" At that point she certainly would have suffered damage.

Critically, Gloster LJ refused to characterise Ms Berney's claim as one for "diminution of the value of her chose in action" (the chose in action being, essentially, Ms Berney's right to sue), stating that such an approach was "unreal" "on an objective analysis of the facts". That must be a fact sensitive decision, but at first sight is a little surprising. A right to sue would lose some of its value if subject to increased litigation risk as a result of, for example, the need to apply for permission to serve Particulars of Claim out of time. Gloster LJ characterised the claim instead as one "for loss as a result of having to settle her claim in November 2005". In other words, she found that the damage was caused when the claim was settled, not when the facts which led to the settlement were in place. This was principally because she did not agree with Ms Berney's Counsel's assessment that Ms Berney had only a 20% chance in succeeding in an application to serve the Particulars of Claim out of time. Gloster LJ held on the facts that any such application would have succeeded.

Lord Justice Moses also agreed to allow the appeal, and agreed with Gloster LJ's characterisation of the test for when time should start to run.

However, his primary reason for permitting the appeal was that the defendant in the personal injury action assured Ms Berney that it would "take no point" on the late service of the Particulars until 25 January 2005. Only on that date, when the assurance was withdrawn, was Ms Berney exposed to increased litigation risk. Until 25 January 2005, therefore, there was "no risk" that she would not be granted permission to serve the Particulars late, nor that the court would consider limiting the quantum of her claim. She could not have suffered any damage as a result of the negligence of her solicitors before that point. Since that was less than six years before Ms Berney issued her negligence claim then she was not time-barred. This seems to be an orthodox approach.

That orthodoxy continues because, in direct contrast to Gloster LJ, Moses LJ held that Ms Berney's claim was indeed one for "diminution of the value of her chose in action". He held that "[i]f in fact the value of [Ms Berney's] claim was diminished before settlement then her cause of action arose before settlement." Moses LJ was of the view that "there was a real risk that prior to the date of settlement" an application to extend time for service of the Particulars of Claim would have led to Ms Berney being at risk. The decision in Price v Price [2003] 1 All ER 305 allows the court a discretion to limit the damages available when applying for an extension in order to maintain the efficiency of the administration of justice. She was, therefore, "financially worse-off" as soon as her solicitors had failed to serve the Particulars in time and the personal injury defendants had withdrawn their concession on 25 January 2005; at that point the value of her chose in action was lower than it would have been if it were not subject to an application of the principles in Price. Lord Justice Rimer agreed with the reasoning of Moses LJ.

Conclusion

This case shows that despite the existence of an ostensibly simple test to ascertain the moment at which a claim in tort accrues, the factually sensitive nature of the test means that there is often room for disagreement between judges as to when that test is triggered. For example, some judges may have thought that Ms Berney was at risk of a reduced claim as soon as the solicitors were late in serving the Particulars of Claim: there was a risk, even if it was a small one, that an application to serve them late would have failed or that she would have been limited in her damages. That must have preceded the concession and it is difficult to see why in those circumstances her damage did not arise before 25 January 2005, even if it was temporarily suspended by the defendant's concession. This case may well be seen as another example of the courts using innovative reasoning to prevent an otherwise meritorious claimant being struck out on the basis of limitation.

LITIGATION

Improper Interference With A Witness?

By Joe O'Keeffe and Elle Young

The claimant ship owner in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG and others [2013] EWHC 581 sought an injunction against the defendant insurers and their solicitors to prevent them from allegedly seeking to impede the claimant's access to the defendants' surveyor for the purpose of obtaining evidence and information from him.

On the defendants' instructions the surveyor surveyed the vessel following a casualty, interviewed the crew, reviewed repair options, attended meetings at the claimant's office and liaised with average adjusters. He prepared two preliminary reports and a further detailed report, all of which were shared with the claimant, who had not appointed its own surveyor. Throughout this process the claimant had unfettered access to the surveyor.

The surveyor then attended meetings with the defendants' solicitors and experts during which he discussed the factual background to the case and provided technical input and his opinion on various matters. Consequently, he was privy to "privileged trains of enquiry and thought processes" which attract litigation privilege.

Following disclosure and exchange of witness statements, the claimant's solicitors sought to arrange a meeting with the surveyor to gain his factual evidence and technical judgment on a range of matters. The surveyor asked the defendants' solicitors whether he could attend. The defendants' solicitors responded noting that whilst there was nothing to stop the claimant's solicitors from approaching him, the surveyor should appreciate that he had been appointed by the defendants to provide not only factual but also technical evidence and it would be inappropriate for the claimant's solicitors to question him about the latter. They provided the surveyor with a draft message to send to the claimant's solicitors explaining that they had asked him to decline the interview request.

The defendants were concerned that the surveyor (who was Dutch and not legally qualified) may not appreciate the niceties of English law of privilege and considered that the appropriate time and place for the claimant to question him was during cross-examination at trial, at which time the judge would protect him from being compelled to breach privilege or confidence.

The defendants' solicitors offered various options to the claimant's solicitors. They invited them to address any questions of fact they wished to put to the surveyor to the defendants' solicitors. Alternatively they suggested that the claimant's solicitors meet with the surveyor in their presence. Finally, they offered to seek the defendants' agreement for the claimant's solicitors to interview the surveyor without the defendants' solicitors present, provided that the claimant's solicitors undertook not to discuss matters that might be subject to confidentiality or privilege and agreed to provide a full note or recording of the interview.

No agreement was reached and so the injunction application went to a hearing. The claimant's solicitors relied on the maxim that there is 'no property in a witness' and argued that any attempt to prevent them having "free and unimpeded access" to the surveyor amounted to a contempt of court.

The judge said that consideration needed to be given as to what the maxim meant in light of other relevant considerations such as questions of confidence, privilege, the position of the witness himself and the impact of the Civil Procedure Rules. He held that it may be a contempt to interfere with attempts to interview a potential witness or to prohibit the other side from obtaining his factual evidence. Whether or not there was a contempt would depend on whether the interference was "improper". This was "fact-sensitive" and the court would need to look at the "reality of what has occurred". Because of this, he noted, it was not possible to be prescriptive as to what circumstances would, and would not, constitute improper interference.

He did, however, cite some scenarios which would constitute improper interference. Threats or promises made to persuade a witness to decline an interview with the opposition (or its solicitor) would be improper, as would an order or instruction not to attend such an interview. Likewise it would be improper to tell a witness that he has no real choice in the matter or to make it appear that he can only be interviewed if the principal or its solicitor consents. The position is that, before trial, whether or not a witness chooses to cooperate with either party (absent a witness summons) or any relevant contractual or fiduciary obligations) is a matter for the witness. On the other hand, a party to whom obligations of confidence are owed, or who is the beneficiary of legal privilege, is entitled to raise legitimate concerns about questions of confidence and privilege and to tell a witness that he may not reveal information which is truly confidential or privileged. Further, a party (or its solicitors) is entitled to express a point of view or a preference so long as it does not amount to pressure and remains apparent that the witness has a free choice on the matter.

Applying these principles to the facts, the judge held that the conduct of the defendants and/or their solicitors in this case did not amount to a contempt.

Comment

Litigants and their legal representatives should tread carefully when seeking to balance the competing interests of free access to witnesses on the one hand and the legitimate concerns of confidentiality and privilege on the other.

Ince & Co acted for the defendant underwriters in this matter. To read our briefing note on the judgment on the substantive issues – causation and the remedy for use of a 'fraudulent device' – please click here.

International Litigation: Where Is Your Risk?

By Nilam Sharma and Rachel Bernie

Underwriting multinational risks presents potential problems but detailed due diligence and analysis of where the exposure may arise goes some way towards minimising that risk. Recent court decisions in the US, however, illustrate how difficult this task can be in a shifting legal landscape.

On 17 April 2013, the US Supreme Court issued its decision in Kiobel v Royal Dutch Petroleum No. 10-1491 (U.S. 2012). This case was brought by Ester Kiobel, who filed a class action lawsuit alleging that Royal Dutch Shell had "aided and abetted" attacks on Ogoni civilians by providing vehicles, food, transportation, compensation and staging areas for attacks.

The basis for this action was the Alien Tort Statute (ATS), a US law enabled in 1789, which granted jurisdiction to federal courts for "any civil action by an alien for a tort only committed in violation of the law of nations or a treaty of the United States". The legislative history behind this statute is unclear but scholars suggest that it was designed to allow US courts to hear human rights cases brought by US citizens in relation to conduct committed outside the US. From 1789 until 1980 the ATS was not commonly used; there are only two reported decisions dating from this period. In more recent times, however, two questions have arisen. The first is whether the ATS allows non-US as well as US citizens to bring actions and the second is whether it permits claims to be brought against US corporations as well as against individuals.

In 1980, the US Court of Appeals for the Second Circuit dealt with the first question when they decided Filartiga v Pena-Irla 630 F.2d 876 (2d Cir. 1908), a case which has encouraged a revival in the use of the ATS. This case was brought by two Paraguayan citizens against a Paraguayan former police chief who was living in the US. The court held that, through the ATS, they did have jurisdiction in a case between two aliens. This case therefore allowed a non-US individual to use the ATS to bring a claim in the US courts.

In Kiobel the court was required to consider the second question: whether the ATS could be used to bring a claim against a US corporation. The court held that it should not. For an ATS claim to survive a motion to dismiss, the court said that it must touch and concern activities occurring inside the territory of the US with sufficient force to displace the presumption that the ATS would not apply.

However, whilst Kiobel was a case in which it was relatively easy for the court to apply the above rules (as all the relevant conduct took place outside the US) it was noted that "it would reach too far to say that mere corporate presence [in the US] suffices". The court therefore left it open for claimants to bring cases with a greater nexus to the US than was present in Kiobel.

The case currently causing controversy is DaimlerChrysler AG v Bauman (docket 11-965). It has been brought by 22 residents of Argentina, who have sued DaimlerChrysler, a German corporation, in a federal court in California. The claimants allege that one of DaimlerChrysler's subsidiaries, Mercedes-Benz Argentina, is guilty of human rights violations.

DaimlerChrysler has no facilities in the US, although it does have a subsidiary, Mercedes-Benz US, which distributes DaimlerChrysler's manufactured vehicles in California.

The Supreme Court is expected to explore whether a wholly-owned US subsidiary can be used to create a territorial nexus between a foreign corporation and the US sufficient to justify the exercise of jurisdiction in circumstances where the subsidiary had no involvement in the alleged violation.

The District Court originally dismissed the case for lack of jurisdiction, reasoning that there was no agency between DaimlerChrysler and its wholly owned subsidiary, Mercedes- Benz US. However, the Ninth Circuit Appeals Court reversed this decision.

DaimlerChrysler's petition now urges the Supreme Court to overturn the Ninth Court's ruling. DaimlerChrysler argues that it is a German public stock company which does not manufacture or sell products, own property or employ workers in the US. It is undisputed that DaimlerChrysler and its US subsidiary, Mercedes-Benz US, adhere to all the legal requirements necessary to maintain their separate corporate identities.

The respondents in turn request the Supreme Court to uphold the Ninth Circuit's ruling as they contend that DaimlerChrysler maintains a very close control over its subsidiary. They assert, for example, that the companies have the same chairman and that Mercedes-Benz US is unable to replace key personnel, alter management control or set prices without DaimlerChrysler's permission.

Summary

Although there have been exceptions, the trend in US litigation has previously appeared to show a reluctance to encourage jurisdiction shopping. In Kiobel, the Supreme Court concluded that the presumption against extraterritoriality closed the door on ATS suits brought against corporations which have no nexus in the US. The case left a window open, however, as to what could displace this presumption in the event that a corporation could demonstrate a relevant connection to the US "with sufficient force".

DaimlerChrysler means that there is a real danger that foreign corporations will be able to use the ATS as a tool to bring claims against non-US companies. The US courts are expected to use this case as an opportunity to explore the issue of corporate presence and determine when the ATS might apply to foreign companies.

As has been frequently seen in the past, lawyers for the claimant can be very creative and there is no doubt that they will continue to find ways of issuing proceedings on behalf of claimants against foreign corporations where there is a chance of obtaining more compensation than in the claimant's home jurisdiction. The unfortunate thing is that the courts may agree...

No Second Bite Of The Cherry On Issues Of Fact

By Simon Cooper and Marcus Gwyer

In Mutual Holdings (Bermuda) Ltd and others v Hendricks and others [2013] UKPC 13, the Privy Council determined that the Court of Appeal of Bermuda was unjustified in making a finding of fraud and overturning the decision of the trial judge.

Background

The respondents, Mr and Mrs Hendricks, owned and controlled an insurance broker, AMPAT, that established an insurance product called 'Roofers' Advantage' which covered roofing contractors against workers' compensation, automobile and general liability.

Between 1997 and 2001, the Hendricks and AMPAT participated in a packaged 'rent-a-captive' scheme devised and managed by the MRM Group. The case at first instance concerned negotiations that took place in the year 2000 for the renewal of the programme for a fourth year. In 2002, two former employees of the MRM Group, Mr Bossard and Mr Agnew, approached the Hendricks and AMPAT and alleged that the fourth year renewal had been procured by fraud. Both former employees offered to give evidence in support of these allegations.

In the court proceedings the allegations made by Mr and Mrs Hendricks and AMPAT were that the appellants had proposed (i) to induce the Hendricks to buy additional reinsurance, for which they would in due course be charged up to US$1 million, (ii) to renew the programme for a fourth year and (iii) to amend the programme documents so as to place on the Hendricks an obligation to meet all liability in excess of an 'Aggregate Attachment Point' up to the limits of the direct policies. These allegations were denied by MRM.

The trial

At trial, Mr Justice Bell reviewed the evidence and rejected the allegations of fraud against MRM. The main reason for this was that Bell J did not regard Mr Bossard and Mr Agnew as reliable witnesses and did not believe the critical parts of their evidence. Bell J also found that Mr Bossard's offer to provide evidence was conditional on being paid a substantial sum.

Court of Appeal of Bermuda

The Court of Appeal of Bermuda overturned the judgment made by Bell J, holding that he should have accepted the evidence of Mr Bossard and Mr Agnew. The Court of Appeal concluded that Bell J's findings about what happened at a crucial informal meeting were "incomplete" and went on to accept the evidence of Mr Bossard and Mr Agnew and to rule that a fraudulent conspiracy had taken place.

The MRM Group appealed to the Privy Council.

Privy Council

The Privy Council set aside the order of the Court of Appeal and restored the judgment of the trial judge.

Lord Sumption gave a judgment that was highly critical of the Court of Appeal's approach. He held that the material upon which the Court of Appeal relied for its findings of fraud was "wholly inadequate for that purpose, and their reasoning came nowhere near to justifying it". The Court of Appeal failed to address Bell J's criticisms of the witnesses and provided insufficient reasons for accepting the evidence. The Privy Council agreed with Bell J's considerations that the evidence of Mr Bossard and Mr Agnew should be treated with "great reserve". Lord Sumption referred to an observation of Lord Hoffmann's in Biogen Inc v Medeva Plc [1997] RPC 1, 45 that "the need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy". He went on to state that an appellate court is "rarely justified in overturning a finding of fact by a trial judge which turns on the credibility of a witness". This is especially the case where fraud is alleged to have taken place at an informal, undocumented meeting a number of years ago.

Conclusion

This case is a reminder that parties can only expect appellate courts to overturn findings of fact by the first instance judge in the rarest of circumstances. It also emphasises again the high burden of proof which courts will require in cases where fraud is alleged.

INDUSTRY LOSS WARRANTIES

ILWs: Whose Finger Is On The Trigger?

By Kiran Soar, Johanna Ewen and Lorraine Fernandes

ILW contracts are just one of the products that are changing the way the reinsurance market does business. The advent of new sources of capital into the reinsurance market has led to the growth in alternative reinsurance protections. But can these allegedly simpler, cheaper products really offer a true alternative to traditional reinsurance protection? A number of recent catastrophes, both man-made and natural, have called into question the efficacy of ILWs and, in particular, the parties' respective expectations in the event of a major loss event.

The problems and pitfalls of ILWs

The trigger is the cornerstone of any ILW contract. It must be carefully selected for the risk in question to ensure that the ILW contract responds in accordance with the reasonable expectations of both parties.

The concept of an ILW is relatively simple. A recovery under an ILW policy is contingent upon a certain event (usually a natural catastrophe but not always) which causes losses to the entire insurance industry equal to or in excess of a predetermined amount. This industry loss is referred to as the "trigger". To try to avoid issues as to whether the industry loss reaches the predetermined level, the parties often agree to use an external "index" prepared by an independent third party as their reference source.

In the circumstances, not knowing the ins and outs of the specific industry loss index used in an ILW policy can materially affect whether or not the policy responds to a given loss situation as anticipated. Many of the disputes which have arisen in relation to ILWs have focused upon the trigger mechanism used. In particular, disputes have arisen because independent trigger indices which are unsuitable for the loss in question have been selected or because one or both parties wishes to challenge the operation of the chosen index.

Practical problems

There are a number of established indices which report industry loss estimates. Each index is different and it is thus essential that all parties are familiar with the index, the methodology used to calculate the estimate and what is covered/excluded from such estimates. The main four indices are:

• PCS: reports insured property losses resulting from catastrophes in the US, Puerto Rico, the US Virgin Islands, and Canada.
• Sigma: reports insured property and business interruption losses (but excludes liability and life insurance losses) on a worldwide basis resulting from natural catastrophes and man-made disasters.
• PERILS: reports property losses resulting from European Windstorm, UK Flood and Italy Earthquake and Flood.
• NatCatSERVICE: reports loss events due to natural hazards resulting in property damage or bodily injury.

The indices generally exclude liability losses from their published estimates because property losses tend to be ascertained quite quickly, allowing the index to publish its estimate sooner (which should translate into a swift settlement of any claim under an ILW policy). By contrast, it can often take many years for the true extent of liability losses to be quantified. Further, for natural catastrophes, the likelihood of liability claims and losses is limited, again emphasising the focus of all indices on first party loss statistics. However, in the case of man-made disasters, where there are likely to be significant liability losses, relying on an index which excludes liabilities can cause issues.

Many ILW contracts retain a degree of flexibility, allowing a purchaser to challenge the figures produced by the referenced index. This has given rise to a number of arbitrations over the suitability and accuracy of certain indices, and the thorny question of whether liability losses should be included or excluded.

Problems can also arise with regard to captives. Are losses protected by a company's captive included as part of the insured market loss? Given that the risk was not placed in the commercial arena, it is arguable that the losses of a captive should be excluded from the calculation. At the same time, some captives insure significant sums and whether their losses are included or excluded could be critical in calculating the size of a loss to trigger payment under an ILW policy.

These are just a few of the issues which can and do arise from a poorly drafted ILW policy; it is worth being mindful of these potential pitfalls in order to minimise the chances of a dispute arising. For a more in-depth review of ILWs, please click here.

REGULATORY

Making Longevity Transactions Work Cross-Border

By David Grantham

Increasing regulatory capital requirements have meant that the banks have lost some of their enthusiasm for longevity risk transactions, which contain long-dated obligations. Insurers have thus been taking advantage of the new market by providing insurance or reinsurance cover that assumes longevity and other specified risks. The recent BAE Systems/L&G/ Hannover Re transaction, which will reportedly see Hannover receive premiums of £2.2 billion, and the Rolls-Royce/Deutsche Bank/SCOR deal, are illustrative of activity in the sector.

(Re)insurers wishing to do deals of this nature have to consider a number of regulatory issues, particularly if the deal is to be done on a cross-border basis.

Structural considerations for a (re)insurer

(Re)insurers in many countries, including the UK, are only permitted to enter into contracts of (re)insurance. For this reason longevity cover provided by a (re)insurer will usually need to have the legal characteristics of a contract of (re) insurance, even if the economic characteristics are different (for example, a swap). Alternatively, and subject to local regulation, the (re)insurer may be able to establish a non-insurer subsidiary.

To qualify as a contract of insurance, legal and regulatory tests are likely to involve questions of insurable interest, risk transfer and premium, depending on the insurer's jurisdiction. Careful drafting will be needed to meet these requirements, for example to show that a premium will always be paid.

This is in contrast to the position for a bank or other non-insurer, as, again depending on the country, such providers are prohibited from issuing contracts of insurance. Instead, in order for these providers' products not to constitute insurance, they may need to be written on a parametric rather than indemnity basis, so that payment is by reference to a deterioration in a longevity index rather than by reference to a loss suffered.

Structural considerations for the cedant/insured

The cedant, or insured, will want to take full regulatory capital credit for the transaction, and, as a minimum, achieve no less favourable regulatory treatment than that afforded to the assets it currently holds to support its obligations. Depending on the local law, an insurance contract which responds more directly to losses may be more highly favoured for these purposes than a derivative-style product which responds simply to changes in an index irrespective of actual loss.

The quality of the protection provider will also be key. For example, local regulations may require that the (re)insurer be located in approved countries or blocs (such as the EEA).

Licensing requirements

The need for the (re)insurer to obtain a licence in the cedant/ insured's jurisdiction will in large part depend on how that jurisdiction prohibits unauthorised (re)insurance. For many countries with no general bar on non-admitted insurance (such as the UK), the focus will be on whether the (re)insurer is actually performing, or deemed to be performing, regulated activities in that territory. In contrast, other jurisdictions have traditionally prohibited non-admitted insurance (and sometimes reinsurance) based on the location of the risk/insured.

There is also the separate point, already highlighted, that local authorisation of the provider may improve the regulatory capital treatment of the product in the hands of the cedant/ insured.

Security

Each party will wish to ensure that the other has sufficient assets to meet its obligations, particularly where rules on security and insolvency differ cross-border. In problematic jurisdictions there may be a heightened appetite for separate custodian or trust arrangements for any posted collateral. The form of collateral (in terms of liquidity and quality), and the frequency of recalculation, will depend on the legal and regulatory implications of insolvency in the relevant counterparty's jurisdiction.

Other cross-border considerations

Other issues that gain additional significance in a cross-border arrangement include:

• exchange rate risk upon payments – it will most probably be the (re)insurer who bears this risk, consistent with the cedant/insured's desire for certainty;
• the possibility of a change of law (in either country) that renders the transaction ineffective, necessitating appropriate unwind provisions in the documentation;
• data protection issues, if policyholder data is to flow cross-border; and
• the effect of tax, to the extent the cedant/insured's country can impose any insurance premium tax or withholding tax on any claims payments.

FOCUS ON UAE

The Battle For Jurisdiction

By Brian Boahene, Anna Fomina and Jacqueline Wright

In Allianz Risk Transfer AG (Dubai Branch) v Al Ain Ahlia Insurance Co PSJC (CFI 012/212), the DIFC Court of First Instance has for the first time considered jurisdictional issues in a reinsurance policy, asserting its jurisdiction in a dispute involving an international reinsurer's DIFC branch and a UAE based insurance company.

The DIFC Courts are the common law based, English language courts within the UAE's otherwise civil law legal system. The DIFC Courts started as a specialist forum servicing the Dubai International Financial Centre, but have undergone a transformation over the last few years through a series of legislative and judicial pronouncements. The effect has been to elevate the DIFC Courts into an international judicial forum available to deal with a wide range of international disputes. This particular judgment clarifies some aspects of competing jurisdiction between the DIFC Courts and other courts in the UAE.

Background

The dispute concerned a contract of reinsurance entered into between Allianz (the claimant) and Al Ain Ahlia Insurance Company (the defendant) for damage to property and business interruption cover, for risks located in Egypt. The reinsurance policy contained neither a jurisdiction clause nor a governing law clause.

The defendant challenged the jurisdiction of the DIFC Courts, contending that the proper forum for determination of the dispute was the Abu Dhabi Courts for two reasons. Firstly, that the defendant is an Abu Dhabi domiciled entity and according to the UAE Civil Procedure Code, this gives jurisdiction to the Abu Dhabi Courts. Secondly, that the DIFC Courts should reject jurisdiction for the reasons of forum non conveniens in favour of the Abu Dhabi Courts, where the has defendant started parallel proceedings. The doctrine of forum non conveniens is a common law principle whereby a court may decline jurisdiction in a dispute if it considers that there is another forum available to the parties better suited to hear it.

Judgment

The Court of First Instance of the DIFC Courts (the court) referred to Article 5 (A)(1) of Dubai Law No 12 of 2004, as amended, which provides that the DIFC Courts have jurisdiction over claims in which DIFC entities are parties. As the claimant is a foreign recognised company in the DIFC, the court considered that it had jurisdiction over it.

The court also relied on the previous DIFC Court of Appeal judgment in Corinth Pipeworks SA v Barclays Bank Plc (CA 002/2011). In that case it was held that once it is shown that one of the parties to a dispute is a DIFC Establishment, the DIFC Courts have exclusive jurisdiction over such a dispute regardless as to whether the underlying transaction is connected with the DIFC. Therefore, in the absence of a jurisdiction clause to the contrary, the court found that the dispute fell within its jurisdiction.

As to the forum non conveniens argument, the court decided that this doctrine applied only to international disputes where the claimant had a choice between two or more countries in which to bring an action against a defendant. It was not applicable, the court considered, at a national level where the two potential fora are both UAE courts and the legal framework exists within the UAE to regulate such conflicts of jurisdiction. In the UAE the power to resolve such conflicts lies with the Union Supreme Court after two conflicting judgments are obtained.

Comment

The judgment confirms that the DIFC Courts will accept jurisdiction where the claimant company has a branch in the DIFC, even if the defendant does not and even if the dispute is not otherwise linked to the DIFC. In this case the reinsurance contract was also signed in the DIFC, providing a further gateway to jurisdiction, but the basis of the court judgment is that even if the contract was not made in the DIFC, this would not have affected the result.

The judgment serves as a useful reminder when issuing policies to ensure that an appropriate law and jurisdiction clause is included. In this case, in the absence of a jurisdiction clause, it is possible that the Abu Dhabi Courts will also accept jurisdiction, which would lead to duplication of costs in two sets of proceedings and may eventually result in conflicting judgments between the two courts. Resolving this conflict would require an application to the Union Supreme Court, incurring further costs.

New Cyber Crimes Legislation

By Brian Boahene and Oliver Williamson

The UAE has introduced new federal legislation directed towards combating increased cyber criminal activity experienced in the region. This article addresses specific issues which arise out of this new law and what impact those issues might have on the insurance cover available.

New law

In November 2012 UAE Federal Law No 2 of 2012 Concerning Combating Information Technology Crimes (the New Law) came, unexpectedly, into effect. Prior to being published in the official gazette, no draft version of the law had been circulated, suggesting to some a response influenced in part by recent events in the Middle East. The New Law contains a number of amendments to the position previously provided under Federal Law No 2 of 2006 on the Prevention of Information Technology Crimes which the New Law has repealed.

Data protection

Under the New Law, privacy of all information published online has been granted legal protection. This extends to all data, information, credit card numbers and bank account details as well as all online and electronic payment methods. Any attempt to use private information obtained by electronic or online means or to forge or create duplicates of credit cards and civil cards is expressly prohibited.

Additionally, all data, irrespective of whether it is personal or not, is protected from misuse or unauthorised access by means of information technology, which is interpreted to include the use of websites, social networks, computer programs, smart phone applications and tablets. However the New Law does not directly confer rights upon individuals regarding the use of their data. Furthermore, no data protection commissioner is established and reporting obligations for breaches of the New Law to competent authorities have not been imposed. It should be noted, however, that the UAE criminal procedures law requires anyone aware of a crime, which does not require the victim to file a claim in order to be actionable (which may apply to many of the crimes in the New Law), to report that crime to the public prosecutor or to the police.

Whilst the New Law does not, in the first instance, provide individuals with personal rights, it should be noted that the UAE criminal procedures law allows a 'victim' of a crime (including by inference, a breach of the New Law), to pursue their civil rights before the criminal courts where that victim has suffered damage as a result of the crime. Notably, the New Law contains a prohibition on disclosing data relating to a medical examination, potentially an area in which a breach of the New Law could result in a civil claim by a private individual. It also prohibits the breach of an individual's privacy by online means and "publishing statements or information even if they were correct and real".

With respect to data protection issues, regard should also be had to the specific data protection regimes in free zones in the UAE, for instance Dubai Healthcare City and the DIFC. There is also specific legislation directed towards certain industries in the UAE (for instance the telecommunications sector).

Social media

The New Law ensures that use of modern communication tools such as the various forms of social media are now recognised and better regulated. The use of these tools may have a significant impact on the service providers themselves. By way of example, under certain provisions of the New Law, Facebook could be held accountable for content posted to its network by individual subscribers which falls foul of a number of those provisions. Indeed, the New Law provides that an owner or operator of a website that has stored or made available any illegal content must respond to a request from a relevant authority to remove that content, failing which that owner/ operator will be fined and/or imprisoned.

The New Law contains a number of provisions which relate to political dissent, defamation and state security. These provisions may be seen as a response to the recent upheavals in the MENA region, particularly those movements which had their origins in social media. It is often noted that the magnitude of the unrest in the MENA region could not have occurred without the involvement of social media, which spread dissatisfaction and encouraged mass demonstration. This risk has been recognised by the authorities in the UAE and, through the New Law, strict measures have been introduced in an attempt to curb unrest (with origins in social media) from occurring within the UAE.

Security compromise

In the past two years, the Middle East has seen several complex cyber attacks. One of the reported incidents was an attack on Saudi Aramco, the largest oil and gas producer in the world. In August 2012, the company advised that a group of hackers had managed to infect some 30,000 computers associated with the company. Just two weeks after this attack, Qatar's RasGas, a JV between Qatar Petroleum and ExxonMobil, was targeted by a similar group.

A business which suffers from a cyber attack can be significantly affected by that activity. Whilst a focused cyber attack may not in itself significantly affect the systems of a business or even successfully compromise intellectual property, the repercussions have the potential to be much more significant. A compromised business may be exposed to a considerable period of business interruption or indeed loss of a trusted client base which could seriously affect its ability to perform its business post-attack.

Ramifications for the insurance industry

As the objective of the New Law is to regulate criminal activity committed online, rather than lawful commercial activity, the effect of the New Law on the insurance industry remains to be seen.

It is expected that coverage offered will become more comprehensive, with a focus on increasingly detailed cyber policies being made available to those businesses, offering greater protection than that afforded under traditional general policies.

Of concern to businesses exposed to cyber risks are the penalties which can be imposed by the New Law, with a significant exposure to those who manage and undertake the day to day running of a company. This may present a new challenge for the providers of management liability insurance in the UAE, already billed as a growth line for insurers in the region in the near future.

Whilst the full impact of the New Law is yet to be felt, to keep with the times in an ever changing technological world, insurers and buyers of insurance should carefully evaluate the level of cover afforded for cyber and related exposures and ensure that the cover is specifically tailored to the risks faced by those buyers.

New Companies Law: Implications For Management Liability Insurance

By Brian Boahene and Oliver Williamson

This article addresses how a proposed new UAE commercial companies law will adopt stricter corporate governance requirements for businesses operating in the UAE and how this might impact upon the perception and uptake of management liability insurance in the region.

Proposed changes to the existing UAE Companies law

The existing federal legislation governing the conduct and performance of companies, the Commercial Companies Law 1984 (the Current Companies Law), contains very little specific guidance on corporate governance. Indeed, legal provisions dealing with directors' duties and performance presently exist in piecemeal legislation such as criminal repercussions following certain activities pursuant to the UAE Penal Code and civil remedies for falling foul of provisions contained within the UAE Civil Code and the UAE Commercial Code.

The new commercial companies law (the New Companies Law) was approved by the Federal National Council (FNC) in late May 2013 and seeks to bring the issue of corporate governance up to international standards and to offer a more transparent means of undertaking business in the region.

Whilst it is not clear precisely when the draft law will be issued, the general consensus is that it will be sometime later this year. It would therefore be prudent for businesses, and specifically those individuals/groups of individuals that manage them (and their insurers), to be fully aware of the anticipated effect of the New Companies Law.

Corporate governance

The New Companies Law contains express provisions regarding corporate governance and sets out in succinct, plain language, the duties of those who manage the affairs of a company.

Article 5 of the New Companies Law states that, as a general rule, the Board of Directors of a company or, as applicable, its managers "shall be responsible for the application of the rules and criteria of Governance."

Article 6 continues this theme, stating that "resolutions regulating Governance in Article 5 include penalties to be imposed on the company and their Chairmen, Directors, managers and auditors in the event of contravention provided that such shall not exceed AED 10 million [approximately US$2.75 million]."

At Article 21 of the New Companies Law, the general, internationally understood and respected duties of those that manage companies are described. Article 21 requires that "Persons authorised to manage a company shall preserve its rights and work for the benefit of the company honestly and faithfully and in agreement with the objectives of the company and the powers granted to them under an authorization issued by the company."

The expression "powers granted to [the directors] under an authorization issued by the company", takes the present position (pursuant to article 111 of the Current Companies Law), which limits powers to those derived under a public joint stock company's regulations (effectively the company's Memorandum of Association), to a much broader level. This means that powers derived from all documents conferring powers upon the directors, including the company's Articles of Association and powers of attorney also appear to be covered by the provisions of the New Companies Law.

In addition to the requirements of Article 21, under Article 22, a company shall be bound by "any act or thing by the person authorized to manage the company upon conducting the affairs of management in a usual manner."

The company shall also be bound by "any act by any of its employees or agents authorized to act on behalf of the company, [where] a third party relies thereon in its transaction with the company."

It is therefore clear that pursuant to the terms of the New Companies Law, the scope of duties owed by those that manage a company in the UAE will be significantly expanded from those that are presently expected under the terms of the Current Companies Law.

Indemnity

Under Article 23 of the New Companies Law, there is no ability to contract out of the duties/obligations mentioned in Articles 21 and 22, with any attempt to do so being deemed to be void. Depending upon how this Article will be construed, this provision could have a significant hindrance on indemnities offered by a company to the directors/persons authorised to manage it, which indemnity is currently available to directors of public joint stock companies under Article 110 of the Current Companies Law. Only time will tell how this provision of the New Companies Law will be interpreted and how the expression 'indemnification' will be construed.

What is apparent is that pursuant to Article 23, the generally recognised position of allowing a company to offer an indemnity to its directors and officers for any wrongdoing does not appear to be available under the New Companies Law. This means that greater reliance will need to be placed on insurance products protecting the interests of company directors/officers. The provision of management liability insurance has significant potential for the region and the availability of dedicated insurance protection to those exercising management functions may be the difference between decisions being made whether or not to operate in the region both on a corporate level and an individual level. Management liability insurance helps to mitigate against the personal liability of those individuals in a company who exercise management functions. One consequence of the financial crisis is that the region has become more litigious with claimants now looking at a range of possible defendants to satisfy their claims. If the region is to continue to attract and retain the talent required to make the jurisdiction a prosperous business hub, it is important that management liability cover is made properly available.

The impact on insurance

It is not compulsory for companies (private or public) in the UAE to obtain and maintain management liability insurance. This appears to be the case in most other jurisdictions in the MENA region. However, given the steps being taken by the international community to better police the operations and affairs of the corporate world, it would be prudent for a business to ensure that they have in place management liability insurance cover.

Some management liability policies available in the MENA region contain provisions that require a company to indemnify director(s) before a policy will provide the indemnity. However, indemnity provisions are often not contained within a director's service contract or even the company's governing documents, an issue further compounded when one factors into the equation that within a number of jurisdictions in the GCC, companies are expressly precluded from indemnifying management, which appears to be how the position will be in the UAE once the New Companies Law has been signed into law.

Summary

Corporate governance remains a buzz-phrase in the business world and the UAE is making attempts to upgrade its corporate legislation to a level more in line with a modern international business environment. The precise date that the New Companies Law will come into force in the UAE is currently unknown although is likely to be this year. Without the New Companies Law, the region would be at a disadvantage as it is clear that the view internationally is that the corporate world requires a better system of corporate governance to curtail the potential for events which led to the on-going global financial crisis.

It appears that the GCC region is seeing a marked increase in regulatory investigations and action being taken against companies/their managers with respect to business decisions and performance of companies. Management policies, and in particular management liability policies, can assist greatly, particularly with the associated legal costs involved in responding to action taken by the authorities which can sometimes even outweigh the penalties/fines actually imposed on conclusion of regulatory action/investigation.

Once the New Companies Law is signed into law, the repercussions for management liability insurers will not be insignificant, with exposure of businesses (and those that run them) to regulatory penalties and indeed claims in tort likely to increase sharply.

FRANCE – MARITIME CLAIMS

Limitation Of Liability For Maritime Claims

By Jerome DeSentenac, Mathieu Croix and Marie-Noelle Raynaud

In two decisions dated 11 December 2012, the French Supreme Court set out the conditions whereby an insurer can validly invoke the limitation fund as set out under the Limitation of Liability for Maritime Claims (LLMC) Convention of 19 November 1976 (the Convention).

France, like the United Kingdom, is party to the Convention. The Convention aims to limit the liability of the owner, charterer, manager or operator of a sea-going vessel for damage occurring on board or in direct connection with the operation of the ship.

The background to the decision

The French Appeal Court was presented with two cases relating to personal injury caused by and occurring on board pleasure crafts. In the first case, a passenger of the "Chrisflo" was struck by the sudden movement of the boom and suffered serious injuries. In the second case, a diving fisherman was fatally injured when run over by the "Dizzy" and the master was convicted of involuntary manslaughter by the criminal court for failing to maintain the proper speed of his craft. Both claimants argued that (i) the limitation of liability provisions in the Convention did not apply to pleasure crafts; (ii) in any case the circumstances of the events were not directly connected to the operation of the ship; and (iii) the insurer could not invoke said limitations.

The Convention was introduced into French law in the Code of Transportation. Under French domestic law, the benefit of limitation of liability was extended to all seagoing vessels, including pleasure crafts. Additionally, the Captain, crew members or onshore representatives can also benefit from a limitation of their liability for any damage caused during the navigation or the general use of the ship (Article L.5121-3 of the Code of Transportation).

The wording of these provisions reflects the desire to limit liability for all instances involving damage caused by a ship, except when the damage results from a personal act or omission committed with the intent to cause the damage or recklessly with the knowledge that the damage would probably result.

The court hence ruled that the provisions of the Convention did extend to matters involving pleasure crafts and that the events occurred during the operation of the ships. The court further recognised that neither were guilty of acts or omissions of a character depriving them of the benefit of limited liability. The insured could therefore validly rely on the limitations of liability.

A debate arose regarding the ability of the insurer to invoke the limitation of liability of his insured in circumstances where the insured had not yet constituted the limitation fund, according to Article 10.1 of the Convention. Logic would dictate that the insurer could take the same benefit of limitation of liability as was available to its insured. French domestic law reflects this principle and the Convention considers that the insurer of liability claims is entitled to benefit from the limitations to the same extent as the insured himself (article I.6 of the Convention).

The insurer rejected the claims on the grounds that (i) the insured was entitled to take the benefit of the limitation of liability under the Convention; and (ii) pursuant to article L. 173-24 of the French Code of Insurance, no action may be brought against the insurer once a limitation fund has been constituted.

Considering that the above provisions only referred to instances where the fund would likely be constituted, the first instance court and the Appeal Court stated that the insurer could invoke the limitation of liability in accordance with the Convention, regardless of whether or not a limitation fund had actually been constituted at the time. The decision was overturned by the French Supreme Court on the grounds that the Appeal Court had deviated from the exact wording of the internal provisions which state that the limitation fund must have been constituted before the insurer can validly seek to limit its liability to the claimants.

Comment

The judgment creates a disparity between the rights available to insurers and those available to ship-owners and operators in general. The insured can rely on limitation at any stage of the procedure, but the insurer can only do so after the fund has been constituted. Yet, French law allows a victim to claim directly against the insurer without first having to make a claim against the insured. This was the option chosen by the claimants acting on behalf of the first victim and the second victim's successors when they proceeded before the first instance courts.

This situation is particularly difficult for insurers: they do not benefit from the same conditions for limitation as their insureds and are denied the right to petition for the establishment of the limitation fund of their own initiative, yet they can be sued directly by the victims without being able to take the benefit of the insured's right to limit, unless the insured has established a fund. Evidently, this places no incentive on the insured to constitute the limitation fund when only the insurer has potential liability exposure.

To avoid the situation where an insurer is held fully responsible for damages caused by its insured because the insured has failed to constitute a limitation fund, the insurer can either (i) directly constitute the fund himself on behalf of the insured by filing a petition in the name of the insured or (ii) impose on the insured an obligation to constitute a limitation fund by either inserting a clause to this effect in the insurance contract or by stipulating in the insurance contract that the insurer's liability is limited to the amount equivalent to the amount of the fund under the Convention.

PRC – INTERPRETATION OF INSURANCE CODE

New Interpretation Of The Insurance Code

By Kelvin Lee and Yubing Liu

The PRC Supreme Court has recently issued the Second Judicial Interpretation of the PRC Insurance Code (the Interpretation), which came into force on 8 June 2013. It covers a number of issues relating primarily to coverage disputes and its publication is timely, since developments in the Chinese economy have reportedly brought forth a surge in insurance claims.

The key features of the Interpretation are as follows:

1. If an insurance contract is not signed or executed by the applicant or its agents but rather by the insurer or its agents purportedly on behalf of the applicant, the insurance contract is not binding on the applicant, unless he ratifies the execution by paying premium under the insurance contract.
2. When an insurer receives an insurance application form/ proposal from an applicant as well as the premium and an insured incident occurs before the insurer indicates its intention to insure or not, the insurer is still liable for indemnification and payment under the policy if the risk is insurable or satisfies underwriting criteria. If not, the insurer will not be liable but the premium received must be returned. The burden is on the insurer to prove the risk is not insurable or does not satisfy underwriting criteria.
3. Article 16 of the Insurance Code requires an applicant to disclose information about the risk at the underwriting stage. With the exception of marine insurance, to which a general duty of disclosure still applies, the Interpretation is unequivocal in confining the duty only to those issues about which an insurer specifically inquires. The burden is on the insurer to prove the scope and content of its inquiries.
4. If an insurer knew or ought to have known that the applicant did not discharge its duty of disclosure but nonetheless chose to accept the premium, the insurer will lose its right to rescind the contract for the applicant's breach.
5. Article 17 of the Insurance Code imposes upon insurers proposing to use its standard terms a duty to (a) draw attention of the applicant to "clauses exempting the insurer's liability" and (b) clearly explain either orally or in writing the content of those clauses. Now the Interpretation provides some specific examples of "clauses exempting the insurer's liability".
6. The time limit for insurers to pursue subrogated recovery actions from third parties starts to run only from the date they acquire such right. Prior to the Interpretation this issue had been the subject of much controversy. Some judges considered that the right of subrogation could not be superior to that enjoyed by the insured, and could not be pursued if the insured himself was already barred from pursing the claim against the third party.

This caused a lot of difficulties to insurers due to the relatively short limitation periods applicable under PRC law – generally two years for claims by an insured against an insurer and claims against third parties. The Interpretation seeks to address these difficulties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.