Contra Proferentem after Impact Funding and Zurich v Maccaferri: When to construe an exclusion clause narrowly

Impact Funding

In Impact Funding, the Supreme Court has provided welcome clarity to the correct approach to the interpretation of exclusion clauses. Following this decision, it is clear that the mantra that such clauses are to be interpreted narrowly against the insurer, or contra proferentem, is unduly simplistic.

Background

The dispute arose out of the funding of personal injury claims. A firm of solicitors, Barrington, offered potential claimants who could not afford to pursue such claims a funding package, consisting of "no win no fee" Conditional Fee Agreements (CFAs) combined with After the Event insurance (ATE) policies. Impact Funding agreed to lend clients the money required for Barrington to pay for disbursements, as long as Barrington had assessed the merits of the claims as having at least 51% prospects of success. In addition, Barrington undertook to repay Impact in the event that the client defaulted on the loan.

It emerged that Barrington had been negligent in its assessment of the underlying claims, and indeed had misused some of the loans advanced for purposes other than paying disbursements. Impact obtained judgment against Barrington; and, following Barrington’s insolvency, pursued Barrington’s professional indemnity insurers, AIG, via a claim under the Third Parties (Rights Against Insurers) 1930 Act.

Barrington’s professional Indemnity policy was on standard, mandatory, terms. Thus the Insuring Clause was very broad:

“The Insurer will pay on behalf of any Insured all Loss resulting from any Claim for any civil liability of the Insured which arises from the performance of or failure to perform Legal Services”

However, that indemnity was subject to various exclusions, including any Claim or Loss:

“arising out of, based upon, or attributable to any breach by any Insured of the terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing Legal Services.”

The Supreme Court Judgment

The Supreme Court agreed with AIG’s argument that the provision by Impact of funding to cover disbursements enabled Barrington to obtain instructions to pursue personal injury claims. Given the obligations under the loan agreements, the provision of that funding by Impact constituted a service by Impact to Barrington in the course of providing legal services. Therefore, on its plain words Impact’s claim was excluded by the Exclusion clause. Impact had argued that exclusion clauses ought to be construed narrowly, or contra proferentem. The Court pointed out that a narrow approach to construction of an exclusion clause is only appropriate when such a clause “excludes or limits a legal liability which arises by operation of law, such as liability for negligence or liability in contract arising by implication of law”. This was not such a case. Rather, the function of the Exclusion was, when read in combination with an otherwise very broad insuring clause (covering “any civil liability” arising out of the performance of legal services), to define the extent of the indemnity. This was not a case where the exclusion sought to remove “part of the benefit which it appears to have been the purpose of the contract to provide”.

Lord Toulson drew an analogy with a contract by which a decorator agreed to paint the outside woodwork of a house, except the garage doors. The drafter of the contract could draft the clause defining the scope of the painting obligation in alternative ways. First, he could define the obligation to paint all of the woodwork of the house other than the garage doors in a single clause. Alternatively, he could provide in one clause that the decorator’s obligation was to paint the outside woodwork of the house; but, in a separate clause, he could exclude the decorator’s obligation to paint the garage doors. In the latter case, there could be no sensible suggestion that the second clause should, in the event of a dispute as to whether the decorator was in breach of contract for having failed to paint the garage doors, be construed narrowly, just because it might be labelled an “exclusion clause.” The so-called “exclusion clause” was in reality simply an alternative way of defining the scope of the main obligation.

In Impact Funding the Supreme Court held that the Exclusion was simply such a confining clause; on a plain reading, Impact was providing a service to Barrington and, therefore, Impact’s claim was caught by the Exclusion. There was no justification for reading the Exclusion narrowly, in favour of Impact. Furthermore, the Court held that such a reading was consistent with the social policy underlying the Law Society Minimum Terms and Conditions, namely that there should be insurance in favour of true clients of solicitors. Impact did not fall within that category, so AIG’s ability to decline cover did not offend against that underlying policy consideration.

Zurich v Maccaferri

By contrast with Impact Funding, this case, decided shortly afterwards, is an example of the Court applying a restrictive approach to the interpretation of an exclusion clause.

Background

Maccaferri provided stapler guns to construction companies, one of which caused injury in 2011. At the time of the accident, Maccaferri did not know of the severity of the injury, although did receive some information approximately a year later indicating that the user had been blinded. It did not notify Zurich, the insurers of its public liability policy for the year 2011/12, of the accident. Maccaferri did not notify Zurich until it received service of proceedings in 2013.

The policy underwritten by Zurich insured Maccaferri against liability for personal injuries occurring in 2011/12. It contained a notification clause which made it a condition precedent to Zurich’s obligation to indemnify that Maccaferri should notify Zurich,

“as soon as possible after the occurrence of any event likely to give rise to a claim with full particulars thereof.”

Zurich declined cover. It argued that Maccaferri had breached the condition precedent by failing to give notice as soon as possible after the accident, alternatively after hearing further details of the accident a year later. Zurich argued that Maccaferri’s obligation was to notify as soon as possible after becoming aware of facts which made a claim likely, even if these were only learned some time after the accident itself.

By contrast, Maccaferri argued that, on a proper construction of the notification clause, the only question was whether the accident was, or was not, likely to give rise to a claim at the moment it occurred; if so (and assuming Maccaferri knew of the relevant matters), the obligation to notify arose then. If not, then there was no additional obligation for Maccaferri to notify Zurich if it was only sometime after the occurrence that they learned of matters which made a claim likely.

The Court of Appeal Judgment

Christopher Clarke LJ treated the notification provision as being akin to an exclusion clause of the kind which (as per the Supreme Court in Impact Funding - see above) sought to remove “part of the benefit which it appears to have been the purpose of the contract to provide”. He said:

“This is a condition introduced by Zurich into its policy which has the potential effect of completely excluding liability in respect of an otherwise valid claim for an indemnity. If Zurich wished to exclude liability it was for it to ensure that clear wording was used to secure that result.”

The Court accepted that the clause might be capable of being construed as contended for by Zurich. However, since (where it was breached) the notification clause removed with one hand the cover given by the policy with the other, the Court applied the narrower interpretation and held in Maccaferri’s favour.

Conclusion

These two cases provide useful guidance, first, as to which clauses are to be treated as true exclusion clauses in the first place. The label attached to the clause will not necessarily be determinative. Thus (as in Impact Funding) a claim labelled “Exclusion” in the policy may in essence be a part of the scope of the indemnity, to be read as a necessary adjunct to the insuring clause. On the other hand (as in Maccaferri), a notification provision may, in effect, be an exclusion clause if non-compliance removes or cuts down the indemnity.

Secondly, and directly connected to the first point, these cases provide guidance on when it is appropriate to construe narrowly a clause which has the effect of excluding liability. Broadly speaking:

• where the function of the clause is, when read in conjunction with an otherwise very wide insuring clause, to confine the scope of that wide liability without negating the underlying purpose of the insurance or cutting back a liability or remedy which would otherwise arise as a matter of law, the correct approach is probably to read the words literally, without applying the contra proferentem rule, and
• where, by contrast, the clause appears to want to curtail the insurers’ indemnity for a liability that arises as a matter of law and/or goes to the very purpose of the contract, then the contra proferentem rule is likely to be the appropriate approach.

In some cases, it may be clear into which category a given clause will fall. However, there are also likely to be cases where it is hard to tell. In those cases, it may come down to a question of feel: does the clause seem to want to take away with one hand what, according to the overall purpose of the policy, it appears to give with the other (in which case, apply a narrow construction)? Or, on the other hand, would the insuring clause be unduly wide bearing in mind the type of liability insurance in question, without the confining effect of the exclusion (in which case, no need for a narrow construction)?

To answer that question, it may help to consider whether the clause under consideration is of the kind which, in the Supreme Court’s analogy, would help the decorator to know whether or not he was obliged to paint the garage doors.