A Year in Insurance Law

Since the FCA test case, a series of COVID-19 BI insurance and other disputes have presented the English court with many opportunities to consider questions of policy interpretation.  The essential principles applying to the construction of insurance contracts can be distilled into the following.

• The policy must be construed objectively by asking what a reasonable policyholder (note not the reasonable insurer), with all the background knowledge which would reasonably have been available to both parties when they entered into the contract, would have understood the language of the policy to mean.

• This does not involve "a literalist exercise focussed solely on a parsing of the wording of the particular clause"...; it is essential to construe contractual words in their context.

• The court can consider which of two rival constructions is more consistent with commercial common sense, but commercial common sense should not be invoked retrospectively, or to rewrite a contract. The court isn't there to relieve a party from a bad bargain.

For more on contract law, including interpretation, catch up here on our 2023 Contract Masterclass webinars.

What news from 2023?

Outside of BI disputes (see more on those below) the courts had cause to construe policy wordings by applying the above principles in different contexts.

In ERS Syndicate 218 at Lloyds v Motorshifter Ltd (In Liquidation), the court considered the relationship between an insurance certificate and the policy documents (including in particular the policy schedule) in a motor insurance policy. The schedule identified cover applying only where vehicles were used for business purposes, whereas the certificate expanded cover to include use for social, domestic and pleasure purposes. The Court held that the schedule defined the cover - the certificate did not. Rather, the certificate provides evidence of cover (similar to a cover note in other classes of insurance). This is a requirement under s.147 of the Road Traffic Act 1988.

On the policy's true construction, insurers were therefore not liable to indemnify a driver and/or his employer in respect of any liability for injury loss and damage arising out of an accident which occurred while the employee was not driving the insured vehicle for business purposes.

In Cuckow v AXA Insurance UK plc , the court construed claims notification and claims procedures clauses to be conditions precedent, so that AXA was entitled to refuse indemnity upon breach. Both were under the heading "Policy Conditions" and stated that the insured "must" do various things, including to furnish evidence,  under the warning "if you do not comply with this condition we have the right to refuse to pay your claim". Any request to provide information had to be reasonable. Whether a request is reasonable, and whether the clause has been breached, were related questions.

Where an insured (or a third party exercising third party rights against insurers) refused to provide the document(s) reasonably requested, that would amount to a breach and allow insurers to refuse cover. The position was more difficult where the documents were no longer in the insured's (or in fact it's liquidator's) possession. The court nonetheless concluded that the requirements were not limited to documents that were in the insured's possession when the request was made. They did not include documents that had never existed. But they did include those that it had had at some point but were no longer in its possession. If the insured had (a) actual or constructive knowledge of the importance of the document to the insurer; and (b) had disposed of the document deliberately or recklessly (or possibly carelessly - the point was conceded in this case but not decided) then failing to provide the document upon request from the insured would amount to a breach of the clause. Where, however, disposal or loss of the document was innocent, that would not amount to a breach.

What does this mean for you?

It is clear in construing a policy that it is necessary to consider the documents objectively but from the perspective of a reasonable insured.

The ERS case demonstrates that where multiple documents are provided to an insured, it is essential to make clear which terms apply to define the scope of cover.  Further, if insurers want to ensure that certain policy terms are to be conditions precedent clear language is needed. Labelling clauses as conditions precedent is clearly very helpful, albeit not definitive. So is explaining the consequences of breach; the clauses in Cuckow were accompanied by clear warnings. The terms were labelled as conditions, but, crucially, "the labelling on the tin matched the contents of the tin".

Clear drafting is crucial. This should ideally be tested both prior to launch of a policy wording and on an ongoing basis to ensure that the drafting remains clear, effective and achieves the insurers' aims. This can become particularly important where multiple documents are used, some of which may have been amended but others may not have been.

The decision in Cuckow also serves as a reminder that insureds should be very careful when disposing of documents that they know (or ought to know) an insurer would consider material.

As mentioned above, the English court has been asked to construe a number of business interruption cover wordings since the Covid-19 pandemic. 

Our analysis of the Supreme Court's 2021 FCA test case decision (FCA v. Arch Insurance (UK) Limited and others) in relation to "disease clauses" can be found here and here. The Supreme Court was careful to make it clear that each clause turns on its own wording. In that case, the Supreme Court held that:

1. the disease clauses in those cases only provide cover for the effects of infectious diseases within the radius specified in the relevant policy (and not the incidence of disease nationally); but that

2. each individual case of Covid-19, whether occurring within the specified radius and covered, or outside the radius and not covered, was a separate and concurrent proximate cause of the national restrictions and the consequent BI losses.

The Supreme Court rejected arguments that the occurrence of one or more cases of COVID-19 within the specified radius cannot be a cause of business interruption loss if the loss would not have been suffered but for those cases, because the same interruption of the business would have occurred anyway.

This applies the well-established legal principle that if a proximate cause of a loss is covered and there are other proximate causes that are not covered but are not excluded, the policy will (subject to there being no other coverage issues) respond. The position is different if the two (or more) competing causes are made up of covered and excluded (rather than simply not covered) causes.

We subsequently looked at a number of Covid BI decisions beyond the FCA Test Case in our podcast series here. 

What news from 2023?

Last year, a number of preliminary issues were heard in six expedited test cases in relation to "at the premises" disease cover between 24 April and 4 May 2023. The key question was whether the decision of the Supreme Court on causation in the FCA Test Case relating to vicinity or radius clauses (disease occurring within a defined distance from the insured premises) also applies to "at the premises" disease cover (where the disease must occur or manifest at the insured premises). The answer to this given in London International Exhibition Centre Plc v Royal & Sun Alliance Insurance Plc & Or was yes. Attempts to distinguish between "radius clauses" and "at the premises" clauses were rejected. The size of the radius can be shrunk practically to nothing (i.e. to the premises itself) without changing the approach to causation.

The court also decided in that case that where the insured peril refers to an occurrence of a "notifiable" disease, that means the policy is only triggered once the disease has become notifiable and occurs in the particular area. It does not retrospectively create an earlier trigger in the event that a disease occurs in that area before it was designated as notifiable.

Meanwhile, in PizzaExpress Group Ltd v Liberty Mutual Insurance Europe SE the court considered the AON Trio Property and BI wording. It concluded that per occurrence aggregation language which related to the overall policy limits also applied to the relevant policy sub-limits. This was based on the language in the AON wording where the sub-limits "...form part of the Limit of Liability and do not apply in addition to it" and "all Limits of Liability apply any one Occurrence;...unless otherwise stated."

In Bellini (N/E) Ltd (t/a Bellini) v Brit UW Ltd it was held that on the ordinary meaning of wording in which "Damage" was defined as physical loss, physical damage or physical destruction. This language did not cover BI losses caused by closure as a result of government lockdown measures since there was no physical loss etc in that situation.

A trial considering non-damage prevention or denial of access clause wording was heard in Gatwick Investment Ltd v Liberty Mutual in late 2023. Judgment is awaited. In addition, an appeal was heard last year against the 2022 preliminary issue decisions on aggregation in Various Eateries v Allianz. At the time of writing, judgment has not been handed down (the associated first instance decisions in Stonegate v MS Amlin and others [2022] EWHC 2548 (Comm) and Greggs v Zurich [2022] EWHC 2545 (Comm) settled before the appeal was heard).

What does this mean for you?

The extent to which BI cover will pick up claims arising from Covid, and aggregation and quantum questions relating to Covid exposures, remain issues which are still working their way through the courts. Insurers and reinsurers should expect to see numerous cases progressing to first instance and/or appellate hearings over the next few years.

Each policy will be construed based on the language used in the context of the policy overall and the permissible factual matrix. Whilst, therefore, each decision brings greater clarity to what remains a complicated area of law and claims adjusting, it is crucial to review each policy and individual clauses within policies on their own terms.

The FCA continues to examine claims handling relating to Covid-19 claims with a particular focus on product value and compliance in line with the new Consumer Duty (covered below). Clear and fair policyholder communications and prompt settlement of covered claims will be important in demonstrating compliance with regulatory expectations.

Insurers should also ensure that any future cover offered for BI is clearly defined, and that policy extensions in that regard are drafted to interact properly with the remaining terms of the policy. Stress testing new and existing wordings using Covid-19 and other scenarios will be very helpful to guide whether wordings enhancements are required.

Subject to policy wording, an insurer is only liable for losses which have been "proximately caused" by perils which are covered by the relevant policy.  Multiple factors may combine, alongside one another or in sequence, to lead to a loss. The key is to find the real, or "efficient" cause of the loss.

As confirmed in the FCA Test Case, where multiple causes act together and are of equal efficacy, they can be considered concurrent proximate causes of a loss. Where one proximate cause is insured and another is not (but is not excluded) the claim will be covered. Where, however, one of the concurrent proximate causes is excluded from cover, the general rule is that the exclusion will prevail. Human actions are not generally regarded as intervening to negative a causal connection, as long as the actions taken were not unreasonable.

What news from 2023?

Beyond the Covid-19 cases, two decisions last year examined the question of proximate cause. One was in the context of construing a pollution exclusion. The other concerned a war exclusion.

In our article here, we considered the Court of Appeal decision in Brian Leighton (Garages) Ltd v Allianz Insurance Plc, in which a pollution exclusion in a Motor Trade policy was held not to exclude losses incurred after a leak from a fuel pipe. The policy covered Material Damage, with Damage being defined as "accidental loss, destruction or damage to Property Insured", and excluded "Damage caused by pollution or contamination". Where the words "caused by" (without more) are used, and a loss results from a combination of causes, the traditional approach is to seek out the proximate cause of any loss. It was accepted (on the assumed facts) that the proximate cause of the loss was a sharp object rupturing the pipe, which was not itself pollution or contamination, albeit that that a process of contamination or pollution was then part of the causative chain. The loss was therefore covered.

We also consider here a decision in which the Court of Appeal upheld the TCC's view ([2023] EWHC 630 (TCC)) that damage following the controlled explosion of a WWII bomb fell within a war exclusion: University of Exeter v Allianz Insurance PLC. The policy  excluded losses "occasioned by" war, the interpretation of which required identification of the proximate (meaning dominant, or "efficient") cause of the loss. There were two concurrent proximate causes of the loss of approximately equal efficacy. The first was the dropping of the bomb in 1942. The second was the detonation in 2021. Neither event would have caused the loss without the other, and the combination made the damage inevitable, at least in the ordinary course of events. The Court of Appeal confirmed that these were concurrent causes of approximately equal efficiency. One was an insured peril. The other was excluded. In those circumstances, the exclusion prevailed.

What does this mean for you?

Causation issues remain very fact and wording specific. They can be very complex and can, sometimes at first glance at least, produce surprising outcomes.

Words like "caused by" or "arising from" will usually require identification of the proximate cause of a loss. The proximate cause analysis can be displaced by using clear language, such as the commonly used "directly or indirectly caused", but otherwise it will be a question of what is considered to be the efficient cause i.e. that which made the loss inevitable in the ordinary course of events. The courts will not necessarily view the most recent, or perhaps the most obvious to a layman, event as that which has proximately caused a loss. A note of caution; insurers should be careful if using different wording in different parts of a policy. In the Bryan Leighton decision, the use of different language elsewhere in the policy was a factor pointing to a proximate cause analysis of the exclusion in question.

The Bryan Leighton decision also highlighted two further key points. The first is that there are likely to be increasing issues with pollution-related claims and exclusions. The second is that the court seems to have been influenced by the fact that losses from fuel leaks were amongst the "most obvious" risks the owner of a petrol filling station would wish to insure against.

A party might be estopped from relying on its rights under a strict interpretation of the policy terms, where both insurer and insured have had (i) a common assumption (ii) dealings or communications based on the common assumption, and (iii) where one party has relied on that common assumption to their detriment. This is known as estoppel by convention.

A party might also be prevented from relying on its rights based on a promise it has made not to enforce them which is relied on by the representee to the representee's detriment. This is a promissory estoppel.

Claims handlers, in particular, should beware communications and conduct with an insured in relation to claims which may not fully accord with policy terms, but which may bind insurers in future.

What news from 2023?

In World Challenge Expeditions Ltd v Zurich Insurance Plc , the court construed a group travel policy to cover only irrecoverable third party costs (e.g. flights). It did not cover, as the insured had believed, refunded customer deposits. Costs of both types were incurred when the insured travel company had been forced to cancel almost all of its expeditions for 2020. Despite the decision on cover, it was held that there had been a common assumption by the insured and the insurers' claims handlers that customer refunds were covered. This was considered sufficient to found an estoppel by convention. The insurer's claims team had routinely settled all previous cancellation claims (albeit that prior to Covid these stayed within the deductible) on the basis that they were covered, by reference to "refunds" and without mention of costs or recoveries. This understanding had been relied upon by the insured to its detriment as it had delayed making a decision to cancel trips, thereby risking prejudicing customer goodwill.

George on High Ltd v Alan Boswell Insurance Brokers Ltd concerned a property policy which included insurance for contents, stock and business interruption. The insured was identified as one company "The George on High Ltd trading as The George in Rye" which owned the hotel. In fact, the business was run by another company in the same group ("George on Rye Ltd") which was not named as an insured. The court held that: (a) the contract should be construed to cover George on Rye Ltd; and (b) the policy should be rectified to include the George on Rye Ltd. The court also concluded that insurers should be estopped by convention from denying liability to George on Rye Ltd in relation to the claims. There was a common assumption that the insurance was to cover the business of operating the hotel, as well as the building it operated from. The insured had relied on this in paying its premium. Further, a number of previous claims had been accepted relating to the hotel business.

Meanwhile, the first instance decision in Technip Saudi Arabia Ltd v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company contained some interesting comments around the interaction between claim settlement clauses and an insurer's instruction to a policyholder to "act as a prudent uninsured". That case concerned damage caused to an unmanned wellhead platform in the Khafji Field, offshore Saudi Arabia as a result of an allision with a vessel chartered by the claimant insured. Insurers declined cover on various bases, including an exclusion of cover for damage to property other than that identified in a buy-back clause. The platform was not contained in the buy-back schedule. The court upheld the insurer's declinature.  However, an additional coverage argument run by the insurers was that cover only extended to amounts settled by an insured where the insurer's approval to that settlement was obtained. It was argued that absent approval from the insurer, any settled amount was excluded even if it reflected a genuine liability. This argument was rejected by the court. In doing so, the court concluded that the insurer could not tell the insured to act as a prudent uninsured and subsequently reject a claim because it had been settled without the insurer's approval. The prudent uninsured would have no insurer from whom to seek settlement. The judge commented that he would have no difficulty in concluding that the insurer had waived the requirement for, or was estopped from requiring, prior consent to any settlement.

What does this mean for you?

Insurers should be mindful of what seems to be an increasing risk of findings of waiver and estoppel in the insurance context.

Clear communication between underwriting and claims teams on the scope of cover offered by a particular policy is important. Claims teams, even when considering small claims or those that fall within an insured's retention, need to ensure that they understand the nature and scope of cover and communicate in appropriate terms with their insureds. In some instances, this may mean declining claims that fall within the insured's retention. In other cases, this means appropriate reservations of rights and/or non-waiver language to minimise the risk of a waiver or estoppel argument being made out in future.

Insurers should also be careful when instructing insureds to act as prudent uninsureds where there are coverage arguments available. Whether this generates a waiver or estoppel will depend in part on the subsequent coverage point it is alleged is waived.

Legal or equitable title to insured property isn't necessary to found an insurable interest, but an insured must have sufficient interest that he will suffer loss as a result of its damage or destruction.

What news from 2023?

In Quadra Commodities SA v XL Insurance Co SE and others, the Court of Appeal considered the issue of insurable interest in the context of a cargo policy. The insured purchased grain, but in fact the same bulk stock of grain was purportedly sold to multiple traders using fraudulently produced warehouse receipts.

The court held that the insured has a sufficient insurable interest by virtue of payment of the purchase  price even if the insured neither owned nor possessed nor had the right to possess the assets. To establish insurable interest in relation to an asset, three characteristics must normally be demonstrated. First, the insured would benefit from the safe delivery or holding of the asset or be prejudiced by its loss or damage or detention. Secondly, the insured stands in a legal or equitable relationship to the asset. This is satisfied following payment of the purchase price. Thirdly,  the benefit or detriment faced by the insured must arise in consequence of the legal or equitable relationship of the insured to the asset. These requirements were satisfied by the insured in the Quadra case.

Furthermore, the court held that under Ukrainian law, the insured in any event had an immediate right to possession of the grain based on the warehouse receipts.

Leave to appeal to the Supreme Court has been granted.

What does this mean for you?

The English court will recognise insurable interest over an asset even if the insured neither owns nor has a right to possess that asset when the loss occurs. This reflects the desire of the court to avoid claims being declined on the "technicality" that the insured does not have a sufficient insurable interest when it clearly has a legal or equitable relationship with that asset, and would suffer a loss, or not achieve a benefit, on damage to or loss of that asset. The court is also keen to ensure the bargain of the parties is enforced, especially where this is clearly reflected in the policy terms and/or the commercial methods of the insured and/or the market in which the insured operates are well known. As matters stand, payment of a purchase for an asset is likely, in the ordinary course, to be sufficient to generate insurable interest in that asset.

Contractors on a  construction project will routinely obtain cover which names a number of the parties involved as (co) insureds.

Where parties are co-insured, they cannot claim against one another in respect of insured losses, irrespective of fault, but may only seek recovery of any losses through the insurance policy itself. Nor can insurers pursue subrogated recoveries in the name of one co-insured against another co-insured. However, this applies only to the extent that the loss in question is covered under the insurance policy.

What news from 2023?

In FM Conway Ltd v Rugby Football Unionthis year, which we considered more fully in this article, the Court of Appeal held that despite being co-insured, a contractor (Conway) could not rely on an insurance policy as a defence to a claim which an employer (RFU) sought to make against it for defective work, as the relevant losses were not insured.

Conway had carried out works under a form of the JCT Standard Form of Building Contract which required RFU to take out and maintain "a Joint Names Policy for All Risk Insurance". This excluded losses caused by defective works. 

Conway argued that the mere fact that it was insured under the policy was sufficient to preclude an action by RFU (and insurers by way of subrogation) to recover losses arising from Conway's defective work. This was rejected. The scope of cover was determined by the underlying contract between the RFU and Conway, and the RFU's authority to obtain cover for Conway, which helped determine the intentions of the policyholder (RFU) and the insurers. The cover did not stretch to liability for defective workmanship. That was the proximate cause of the loss, therefore there was no bar to the RFU and insurers claiming against Conway. The policy included a waiver of subrogation clause. That did not apply to claims against Conway that were not insured in the first place.

In Sky UK Limited (formerly British Sky Broadcasting Limited), v. RiverStone Managing Agency Limited & Ors (including Berkshire Hathaway, RSA and Munich Re) the court sought to resolve a dispute as to the  scope and effect of a syndicated construction all risks policy. It was common ground that the construction contract (an amended JCT Design and Build Contract 2011) was part of the factual matrix to be considered when construing the policy. All parties were aware of the terms of the construction contract at the time when the policy was underwritten. The claim related to the costs of carrying out remedial works to fix a leaking roof at Sky's HQ caused by defective design on the part of a contractor who was an additional insured under the CAR policy.  

Again, the court referred to the underlying construction contract to determine the intentions of the insurer and the insured and thereby the scope and extent of cover. It concluded that:

1. The CAR policy covered physical damage, but excluded the costs of repairing or rectifying design or workmanship defects.

2. The contractor was covered for losses during the period in which it had a possessory interest in the property but not thereafter i.e. up to practical completion, and not beyond.

3. Cover only extended to physical damage caused by the defect. Physical damage in the policy meant a change in the physical state of the property which means a "tangible physical change has occurred to the property insured (irrespective of whether that is visible or not) that has impaired the commercial value of that property in the sense of rendering it less valuable or of less utility".

4. Investigation costs were covered only to the extent that they revealed physical damage. The insured could not recover the costs of "lifting the lid" on all the cassettes in the roof structure simply to investigate.

What does this mean for you?

The line between joint insurance (where multiple parties are jointly insured on the whole risk) and co-insurance (where each party is insured in respect of and to the extent of its own individual interest) may not always be clear. The distinction largely turns on the terms of any underlying contract which is considered pivotal in determining the intentions of the insured and the insurer. Where a contract obliges one party to take out insurance on behalf of another, this is likely to point to co-insurance. That said, being co-insured on a project may not provide protection from claims. The protection is limited by the extent of the cover obtained and that, in turn, will depend on the policy terms and the terms of the underlying contract(s) between the parties.

In Conway, the terms of the underlying contract were key; the cover did not extend to defective workmanship, so the protective principles in relation to claims between co-insureds did not apply. Nor therefore were insurers preclude from pursuing a subrogated recovery. Similarly, in Sky, the underlying construction contract was important in determining that that the named insured contractor's interest was limited to the period to practical completion and not beyond. That case also demonstrates that the definition of physical damage remains an area of controversy between insureds and insurers.

Cyber and data security remained a key risk for insurers and insureds throughout 2023. As regulated financial services businesses, and as underwriters, improving cyber security is a key focus. This is both in terms of policy coverage for those writing cyber cover (whether deliberately or where there may be silent cyber exposure) and in terms of insurance firms' own cyber exposure.  

As the risks evolve and expand, the extent of insurance policy cover for any losses continues to form a growing focus insurers (and their insureds) globally.

What news from 2023?

Geopolitical cyber risks have risen, accelerated not least by the war in Ukraine. Supply chain attacks are now a recognised risk. Ransomware is becoming a key tool for politically motivated or linked malicious actors, and a significant source of losses for insureds. A December 2023 report of the Joint Committee on the National Security Strategy warned of ransomware danger to the economy, national security and critical infrastructure.  Given the interconnectedness of businesses and financial services in the digital space, exposure to third party and outsourced risks is not underestimated by the industry. Lloyd's modelled a hypothetical but plausible cyber-attack on a major financial services payments system for its systemic risk scenario, with estimated economic losses of US$3.5trn.

The application of war exclusions to allegedly state-sponsored cyber-attacks has been much discussed. Insurers in the UK are watching developments in the US closely.  In Merck Co. Inc. et al. v. ACE American Insurance Co., the New Jersey Superior Court rejected attempts by insurers to rely on a war exclusion to exclude from cover Merck's losses arising from the infamous NotPetya cyber-attack. The cyber attack did not qualify as a "hostile" or "warlike" action as contemplated by the policy wording. Permission has been granted to appeal to the New Jersey Supreme Court, so this will be one to watch this year.

As the Ukraine war raised the risks of malicious actors perpetrating cyber-attacks, Lloyd's announced in August 2022 (by Market Bulletin Y5381) that, as of March 2023, all standalone cyber policies must include a suitable clause excluding liability for losses arising from any state backed cyber-attack. In January 2023 the LMA updated its cyber war clauses (LMA5564, 5565, 5566 and 5567 - both A and B versions). The B versions do not contain agreement as to how a cyber operation is attributed to a state in order to determine whether the exclusion operates, so do not comply with Market Bulletin Y5381 and must be agreed by Lloyd's. The LMA also issued revised LMA cyber and data exclusion clauses (LMA5528, LMA5529, LMA5530, LMA5468 and LMA5470). (we look at several English Court decisions on the scope of war exclusions and proximate cause above).

2023 also saw the Capita data breach. This has prompted numerous downstream issues and claims continue to be pursued against Capita. Meanwhile some sources have reported that the DarkBeam data breach in or around September resulted in the theft of around 3.8bn records. This was alongside numerous other international data breaches.

Poor data management is also a major regulatory, commercial and disputes risk. Equifax was fined £11m by the FCA in October 2023, for failing to manage and monitor the security of UK consumer data which it had outsourced to its parent company based in the US. Regulated firms' operational resilience, and in particular vulnerability to cyber attacks, was one of the main areas of regulatory focus identified in the FCA's portfolio letters in September 2023.

What does this mean for you?

Cyber insurance remains a crucial class of business, where clarity in insurance wordings is hugely beneficial.

Insurance policies often state that they provide cover for a fine to the extent that the fine is legally insurable. Whether or not it is possible to insure fines has been much discussed (not least by us, for example here), particularly in the context of cyber and data risks. It is generally accepted that the illegality defence prevents the insurability of fines, at least in relation to anything other than strict liability offences. This results from both the construction of policies and, in any event, from the public policy rationale that a person should not be able to insure against a fine for criminal or quasi-criminal conduct and thereby escape the punitive intent of the sanction. Safeway v Twigger is the leading decision regarding the insurability of fines. This concerned a fine imposed by the Office of Fair Trading (OFT) on Safeway for anti-competitive pricing of dairy products. Safeway sought to argue that its liability was not direct, but vicarious through the actions of errant employees, whose D&O insurance cover might therefore respond. As the wrongdoing was found to be Safeway's own, Safeway's claim was barred for illegality, and the fine was not insurable. There is still debate, however, on where the line is; for example might it be legitimate to cover a fine where the acts in question are those of an employee, and the company is not the real wrongdoer, so a fine is imposed without finding fault at company level? Similarly, might it be possible to insure against strict liability offences where there is no need to show any kind particular degree of culpability for the insured to have been in breach?

More generally, ongoing reports of breaches demonstrate that the threat of cyber attacks remains a massive issue, both financially and reputationally. Arguably breach is inevitable (or at least likely) for any company at some point, and has become a business as usual risk management issue. This does, though, place greater emphasis on having robust risk management and mitigation in place, including cyber insurance. As part of that, we would advocate for comprehensive scenario testing and "war gaming" of cyber breach scenarios. The FCA, PRA and Lloyd's are acutely aware of this. Firms should expect enhanced scrutiny of contingency planning and operational resilience over the next few years. The FCA has given firms until 31 March 2025 to show that they can remain within impact tolerance levels in response to severe but plausible scenarios (see the FCA's Operational Resilience Policy PS21/3). They expect proper scenario testing to have taken place.

For insurers who write cyber insurance (and those that might have silent cyber exposure), in addition to their own resilience, the requirement for robust modelling and reserving in relation to insured cyber exposures (two notoriously difficult areas) remains.

Our team tracks data and cyber disputes through our regular UpData publication, and AI developments through AI View. Our Predictions 2024 include a look ahead to what may come this year in tech, cyber and data disputes.

The focus on building safety and increased regulation of the construction industry following the tragic events of Grenfell led to the Building Safety Act 2022 (BSA 2022), with implementation through secondary legislation.

Efforts to alleviate the difficulties faced by leaseholders in affected buildings have been twofold; continued pressure to remediate affected buildings, and both regulatory and government pressure to improve access to, and the pricing of, buildings insurance for multi-occupancy properties.

DLUHC has made enforcement of remediation works a central focus. The Recovery Strategy Unit has been set up and funded with a view to using the sanctions and enforcement routes in the BSA 2022 to pursue those who "obfuscate their responsibility" to pay for the remediation of unsafe buildings.

What news from 2023?

We saw a raft of secondary legislation and guidance in 2023 to implement the provisions of the BSA 2022. In addition, insurers and brokers have been subject to scrutiny in relation to the availability, pricing and scope of buildings insurance.

• Liability and compliance risk for design & construction insureds:

New regulations create new duties and obligations on designers & contractors in relation to the performance of design work and building work in England, including new "Dutyholders" regulations. In relation to higher-risk residential projects, there's an entirely new "building control" process. The Building Safety Regulator (BSR) is a new division of the HSE. HSE guidance has been published on a number of aspects of the BSR's role.

Government guidance on the legal criteria for determining a "higher-risk building" for construction purposes, and (a different test) for "occupation" purposes is now available.

Regulations will also impose new obligations on "accountable persons" (e.g. building owners or  property managers) of existing or newly-built occupied high-rise residential buildings. This includes for example, the obligation to register their building with the BSR, to maintain a "golden thread" of information and to assess and manage building safety risks, and report to the new BSR (although some of these duties are not yet in force). Amongst other things, the Higher-Risk Buildings (Key Building Information etc.) Regulations 2023 set out what key information must be provided to the BSR as part of the registration process. Draft regulations have been published regarding accountable persons' other duties.

• Remediation:

Following the voluntary Developer Remediation Contract (DRC) process (under which developers committed to remediating their qualifying buildings and to repay government funding in relation to properties developed by them), the Government introduced the Building Safety (Responsible Actors Scheme and Prohibitions) Regulations 2023 in July 2023. These require eligible persons to enter into the DRC, or else face prohibitions on obtaining planning permission or building control approval for building works in England.

At the beginning of this year, we saw the first Remediation Order under the BSA (our summary is here). DLUHC has issued Guidance for local authorities and fire and rescue services on the use Remediation Orders.  As the year progressed we also saw the first "Remediation Contribution Orders".  Claimants are also beginning to issue claims for "Building Liability Orders" under the BSA, and also to take action under the Defective Premises Act 1972 that relies on the extended 30 - year retrospective limitation period that has been created for such claims.

On quantum, in Radcliffe Investment Properties Ltd v Meeson theFTPT held that the costs of a waking watch were not payable by the leaseholders. This was one part of the cost of making the building safe.

• Insurance:

Following concerns from financial regulators and pressure from interest groups about year-on-year pricing increases for multi-occupancy buildings insurance, a Treasury Sub-Committee on Financial Services Regulations inquiry heard evidence in July 2023 from representatives of the FCA and others.

A number of insurance brokers have signed up to a pledge relating to residential buildings over 4 storeys/11 metres with identified fire safety issues. This involves a commitment to (i) stop sharing commissions with those who place insurance (ii) cap retained commission at 15% of premium and (iii) to disclose commissions to leaseholders on request.

FCA policy statement PS23/14 means that from 31 December 2023 insurance firms will be banned from recommending an insurance policy based on commission or remuneration levels, and must act in leaseholders' best interests and treat leaseholders as customers when designing products. This is likely to have a particular impact where the consumer duty applies, particularly where it would otherwise not apply (for example given the size of a corporate landlord). The First Tier Tribunal decision in Insurance S27A - Canary Riverside held that leaseholders were not liable to pay service charges considered to have been overcharged insofar as they related to secret insurance commissions. The Leasehold and Freehold Reform Bill also proposes limits to the ability of landlord's to charge insurance costs, and mandates the provision of information to tenants about insurance.

What does this mean for you?

Implementation of the new regulations in relation to the design and construction of new works may lead to a period of increased risk while insureds adjust to the new rules.

New avenues under which residential building landlords and developers may be faced with obligations to remediate buildings which they had not expected to remediate may in turn lead to an increased risk of further claims regarding such properties against design & construction insureds (and/or entities associated with them, should a BLO claim be possible).

Increased involvement by accountable persons in identifying relevant building-related information, and in assessing and managing building safety risks at their properties (which may include the performance of remedial works), may increase the risk of potential PI claims against design & construction insureds.

Our regular updates on building safety can be found on our Cladding Feature. In our Predictions 2024 we look ahead to potential future building safety disputes, which may affect insurers.

The Consumer Duty includes new rules and guidance (albeit building on a number of previous initiatives) that ultimately require firms to be able to demonstrate positive customer outcomes. This is enshrined in the new Principle 12 set out in PRIN 2: "A firm must act to deliver good outcomes for retail customers".

Firms will no doubt remain wary of how the FCA will deliver the "paradigm shift" they have said that the duty represents.

What news from 2023?

The Consumer Duty came into force on 31 July 2023 for new and existing products and services that are open to sale or renewal. Firms have until 31 July 2024 for the implementation of the Duty for closed products and services.

Amongst other things, the rules require firms to ensure that:

• products and services are designed to meet the needs, characteristics and objectives of a specified target market;

• products and services provide fair value with a reasonable relationship between the price consumers pay and the benefit they receive;

• firms communicate in a way that supports consumer understanding and equips consumers to make effective, timely and properly informed decisions; and

• firms provide support that meets consumers' needs throughout the life of the product or service.

At the same time, the FCA also brought in new ICOBS 2.7. This provides guidance for firms on how to deliver good customer outcomes for customers in financial difficulty. This specifies, amongst other things, that where a firm identifies a customer in financial difficulty, it should ensure that the customer is provided with "good outcomes-focussed support that is appropriate given the needs and characteristics of the customer".

Earlier in 2023, during the Consumer Duty implementation process, the FCA published letters with information on the duty for both general insurance and pure protection firms and life insurance. Initially, insurers were asked to focus on ensuring the effectiveness of product governance arrangements, communication with consumers and the claims process and outcomes.

The FCA considers insurers should, by now, be ready, but the FCA's September 2023 letters to insurance firms on its priorities for the insurance market 2023-2025 warned that it had found 'significant failings' in relation to a variety of consumer outcomes, and that action must be taken to ensure compliance with the Consumer Duty. It may also be noteworthy (and of concern) that the FCA's language moved beyond the requirement in the regulations to demonstrate positive customer outcomes. Instead, they started talking about the need to put customers' interests first.

Home and motor insurers were warned in July 2023 to improve their treatment of vulnerable customers and claims handling, the FCA having uncovered examples of lengthy complaints handling times and people not given appropriate settlements. In September 2023, the FCA raised concerns about value measures data published in relation to GAP insurance products.

The ABI and Fairer Finance published A Guide to Clear Communication last year, covering all aspects of insurer communications with customers, including email, text, and policy documents

As a 1 November 2023 FCA speech made clear, the Consumer Duty "isn't a once and done event", but requires firms to ensure that customers' interests are central to their culture and purpose, and embedded in all strategy and policies.

What does this mean for you?

Whatever the FCA's view of things, there is no doubt that the introduction of the Consumer Duty has created challenges for all financial services. Insurance is no exception. There remain real concerns around areas of uncertainty in both the regulations and how they will be interpreted. For example, how wide with the FCA cast the net in terms of defining "customers" or in its expectations of firms? How do firm's allocate responsibility in the distribution chain? Firms also continue to wrestle with collection of data, how to appropriately analyse root cause issues flagged by that data and what appropriate enhancements look like.  

One area of particular concern relates to vulnerable customers, including those in financial difficulty. It is clear that one of the consequences of the Covid-19 pandemic was to highlight to the FCA risks associated with customers facing financial difficultly. They have reacted, but market concerns are repeatedly raised as to how far an insurer (or intermediary) must go to identify vulnerability, and what then happens.

In our Predictions 2024 we anticipate that we will see FCA enforcement investigations into complaints handling and fair value this year, and a push for firms to provide redress particularly where a consumer protection need for retail customers is in play.

Alongside increased regulation for, in particular, construction, financial and legal professionals, last year saw a steady flow of decisions looking at professionals' duties.  We have selected just several of these to highlight below.

What news from 2023?

• The scope of a professional indemnity insurance policy, subject to mandatory solicitors' professional indemnity terms in Northern Ireland, was considered in the Court of Appeal decision of Royal and Sun Alliance Insurance Ltd v Tughans. Our fuller analysis can be found here, but, in summary, a solicitor's firm was entitled to an indemnity in respect of a claim for damages in the amount of a success fee which, its client claimed, had been paid as a result of a misrepresentation by one of the firm's partners. According to the Court of Appeal, the firm had done the work, and acquired a contractual right to the success fee, and would suffer an insured loss if it was deprived of it by having to pay it away in damages. Moreover, the court considered this logic would apply even if the claim made was restitutionary rather than a compensatory damages claim.

• The question of how far a professional should go in the performance of his or her duties, and whether there is a "duty to warn", is often a point of contention. In Lewis v Cunningtons Solicitors it was held that a law firm had been negligent in divorce proceedings, when it had failed to ensure that the claimant, in agreeing to a divorce without full financial disclosure, fully understood her options. The principles set out in Minkin v Landsberg state that whilst a solicitor only has a contractual duty to carry out the tasks which the client has instructed and the solicitor has agreed, it is implicit that he or she will also proffer advice which is reasonably incidental to that work. What is considered "reasonably incidental" will depend on the circumstances, including the character and experience of the client. An inexperienced client will expect to be warned of risks which are (or should be) apparent to the solicitor but not to the client.

• As a general rule, professionals only owe duties only to their own clients, not to the opposite party to a transaction or to third parties. This was held to be the case in McClean v Thornhill in which a leading tax silk was found not to have owed duties to the investors in a film finance scheme on which he had advised (see our analysis here). Exceptionally, professionals may owe a duty of care beyond that to their a client. For lawyers, this may be the case (i) where the very purpose of the retainer by client A is to confer a benefit on a particular third party B; (ii) where a solicitor steps outside his/her role for a limited purpose (as in Al-Kandari v JR Brown & Co) or (iii) where he or she has assumed responsibility for third parties, requiring reasonable reliance by the representee, and that it was foreseeable that the third party would so rely. For the defendant in this case, none of these exceptions applied.

• On the scope of potential design liability for construction professionals, in URS Corporation Ltd v BDW Trading Ltd attempts by a structural designer to avoid responsibility for structural defects were rejected. The designer did owe a duty of care to the developer and original landowner, despite the fact that BDW no longer had a proprietary interest in the developments at the time defects were discovered, and was subject to standard contractual and concurrent tortious dutiesas imposed on design professionals. Further, a claim under the Defective Premises Act is open to the developer. Recoverability of damages under the DPA "is not linked to or limited by property ownership", and the designer was "a person taking on work for or in connection with the provision of a dwelling" under s.1(1)(a). We understand that permission is being sought to appeal to the Supreme Court.

What does this mean for you?

The RSA v Tughans decision has caused some consternation in the market that it has expanded coverage to include fee claims that are considered excluded. It is worth insurers (and brokers) reviewing wordings to assess how far fee claims are recoverable. This may prompt redrafting of some wordings, particularly so that insurers can enhance exclusions of fee claims or claims in restitution. Of course, where an insured professional has the benefit of mandatory terms, it may not be possible to influence this.

As ever, professionals need to ensure that they are aware of the terms of their retainer and any professional duties. Careful thought needs to be given to where those duties start and end. The circumstances - including the nature of an instruction, or of a client - may create additional duties either to a client or to third parties which need to be anticipated and addressed.

PII insurers will also be watching regulatory developments in multiple sectors with interest. Construction professionals are subject to the new building safety regime.  For example, stricter requirements to comply with building safety regulations will apply to designers, and HSE is introducing new professional conduct rules and a draft code of conduct for all registered building inspectors and approvers.

Enhanced regulatory requirements and scrutiny of financial service firms is also likely to increase PII exposures. This includes the Consumer Duty rules, including a greater expectation on firms to offer redress where issues arise. Both financial and legal regulators have stepped up their focus on non-financial misconduct this year. We are likely to see enforcement action in 2024 and beyond (see our Predictions 2024).

A standard insurance broker's contractual (and common law) duty is to use "reasonable skill and care" in obtaining insurance on the client's behalf.

What news from 2023?

In Infinity Reliance Ltd (t/a My 1st Years) v Heath Crawford Ltd it was held that a broker had been negligent and in breach of duty in relation to advice given to an insured business about the cover provided under a commercial combined  policy. Summarising the principles from the authorities, the court said that a broker's duties include to:

(i) take reasonable steps to understand the client's business (but not necessarily a detailed investigation), and its insurance needs;

(ii) aim (reasonably) to match as precisely as possible the risk exposures with coverage available in the market;

(iii) take reasonable steps to ensure that the client understands the key terms of the cover that is being obtained;

(iv) explain the range of available cover and the advantages and disadvantages of each.

The insured online retailer had suffered physical damage and business interruption due to a fire at a warehouse, and when it claimed from its insurer the application of average meant that the insured only recovered 74% of its adjusted losses. Re-fit costs were only partly insured, and BI sum insured was based on an underestimate of the forecasted gross profit.  It was held that a reasonable broker would have advised the insured that "declaration linked" BI cover would have been more appropriate. On a balance of probabilities, if the broker had made proper enquiries the result would have been the addition of more comprehensive and appropriate cover under the BI policy.

The court said that a "major part of the broker's role is to bridge a gap between the client's knowledge and its own. .... The broker must learn enough about the client's needs and business to make sensible recommendations." The need for alternative (properly fitted out) premises in the event of damage to the warehouse was an obvious issue. 

What does this mean for you?

Brokers must take reasonable care to obtain and maintain a "detailed" understanding of the client's business; the broker is not expected to second-guess or audit the information it is given, but should follow up reasonably obvious gaps or uncertainties. As the court in Infinity made clear: "[i]ntelligent follow-up must be part of the dialogue." A broker shouldn't force on a client cover that it doesn't want, but must make sure (including at renewal) that the client's decision is an informed one, and that it understands the implications (here, risk of under-insurance).

Warranty and indemnity (W&I) policies are designed to insure against breaches of the representations and warranties provided by sellers in contracts for the sale of businesses. Two decisions during 2023 reinforced this point, whilst throwing light on the fact that W&I policies are not designed simply to compensate an insured for a bad bargain or to pay out when an insured would have purchased the target company at the same price in any event.

What news from 2023?

For the first time since 2014, the courts in England and Wales considered (in two cases) coverage issues under W&I insurance policies.

Absent breach of the representations or warranties in an SPA, there can be no claim under either a seller side or buyer-side W&I policy.  In Finsbury Foods Group Plc v Axis Corporate Capital UK Ltd insurers were entitled to decline cover where there was no breach of any insured warranty or indemnity; recipe changes and price reductions by a bakery business post-SPA were not breaches of warranty.

In addition the court concluded that the insured would have purchased the target company at the same price in any event. Therefore even if there had been a breach of representation or warranty, that breach would not have caused any loss. The quantum of any claim is the difference between the 'as warranted' value of the target company and the actual value the insured would have paid. If it would have paid the same amount anyway, the insured has suffered no loss.

The decision was also noteworthy for the discussion around what "material" means in the context of a trading warranty that there had been "no material adverse change in the trading position" of the target company since the accounts date. The court concluded that a material adverse change meant a reduction of more than 10% of total group sales of the target.

Our article here provides more detailed analysis.

Meanwhile, the insured's claim in Project Angel Bidco Limited (in administration) v Axis Managing Agency Limited & Ors was declined because the breaches in question were expressly excluded by a term in the W&I Policy that excluded any Loss to the extent that it arose from "any ABC Liability". ABC Liability was defined as being "any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws." Allegations of breach of warranty centred on the fact that, following the acquisition of shares in a construction company, allegations of bribery and corruption (which is now subject to a police investigation) were made against the target company and individuals working for the target.

Amongst other things, the decision was noteworthy because whilst the main body of the policy excluded liability for breach of the ABC warranties in the SPA, the insured warranty schedule stated those warranties were covered. The court was able to reconcile this because the insured warranty schedule was expressly made subject to the main body of the policy, and thus the ABC warranty liabilities were excluded.

Our article here considers the focus this year on both SPA warranty and indemnity claims and W&I insurance cover.

What does this mean for you?

Insurers can be comforted that the English courts remain focussed on determining what the term of an insurance policy was intended to mean, rather than trying to re-write contracts where the insured finds itself without cover for losses incurred after purchasing a business.  W&I policies serve to protect buyers and sellers against the consequences of inaccurate representations and warranties in SPAs, but not against poor due diligence or bad bargains.