The High Court has held that the words "in any way involving any act, error or omission" before a certain date in an exclusion clause in a professional indemnity policy meant "indirectly caused by". The act, error or omission must be part of the chain of causation leading to the insured's liability for the underlying claim, not merely part of the historical context or background, for the exclusion to bite. The policy in question also included (a) a notification clause providing that notification as soon as practicable was a condition precedent to recovery; and (b) a continuity of cover clause. On the facts the insured had given notice under the 2013/2014 policy in accordance with the notification clause. The Court stated, obiter dicta, that even if the insured should have notified the claim under the 2012/2013 policy, it would have been entitled to cover under the 2013/2014 policy by virtue of the continuity of cover clause.
This case concerned a claim by ARC Capital Partners Limited (the "Manager"), a fund manager, under its professional indemnity insurance policy.
The Manager managed investments for ARC Capital Holdings Limited (the "Fund"). In December 2010, the Manager invested approximately RMB 480 million (about US$75 million) in a property business on behalf of the Fund. The shares in the property business were never transferred to the Fund.
The Fund's solicitors stated in a letter to the Manager dated 2 April 2013 (the "April Letter") that the Fund had a "strong claim against the Manager for recovery of the Payment and all related losses, costs and interest". The stated purpose of the letter, however, was to agree a process to seek recovery of the payment. The Fund stated the Manager should pay the costs of pursuing the return of the payment. The Fund reserved its rights against the Manager and stated the agreed process for seeking return of payment was not a waiver of any claim against the Manager. The Manager did not inform its professional indemnity insurers on the October 2012 to October 2013 insurance programme (the "2012/2013 Policy") of the April Letter.
In January 2014, the Fund's solicitors sent a letter to the Manager's solicitors enclosing draft particulars of claim for negligence and breach of contract and expressing the Fund's intention of bringing proceedings against the Manager. The Fund informed its professional indemnity insurers on the October 2013 to October 2014 insurance programme (the "2013/2014 Policy") of the claim shortly thereafter.
The Fund and Manager reached a settlement agreement in principle, subject to the consent of the second excess layer insurers on the Manager's professional indemnity policy (the "Insurers") (who had subscribed to both the 2012/2013 Policy and 2013/2014 Policy, which were on the same terms).
Insurers raised questions regarding cover. The Court was asked to determine whether:
- The Fund's claim against the manager was a claim "arising out of or in any way involving any act, error or omission committed or alleged to have been committed prior to 5th June 2009", cover for which was excluded under the second excess layer of the Manager's professional indemnity policy programme.
- The April Letter contained or constituted a "Claim" within the meaning of the policies. If it did constitute a Claim, it was common ground that it had not been notified in accordance with the relevant notification provisions.
- If the April Letter did contain or constitute a "Claim" which should have been notified under the 2012/2013 Policy, cover was nonetheless available under the 2013/2014 policy pursuant to a continuity of cover extension.
Did the claim "in any way involve" acts, errors or omissions occurring before 5 June 2009?
The second excess layer policy wording excluded cover for claims "arising from or in any way involving any act, error or omission committed or alleged to have been committed prior to 5th June 2009" (the "Retroactive Date Clause") (when the second excess layer incepted).
The Fund advanced two cases against the Manager in its particulars of claim.
- The Manager's negligence and breach of contract in 2010 caused the Fund to suffer losses.
- In the alternative, the Fund's loss arose from negligent acts or omissions in 2008.
The Retroactive Date Clause therefore excluded cover for the Manager's liability under the alternative claim, but not for its liability under the primary claim.
The Judge rejected Insurers' argument that acts, errors or omissions "in any way involving" meant acts, errors or omissions which had "any connection of any kind with the past history". The result of this argument would be the exclusion of a claim on the basis that its historical context included transactions pre-dating 5 June 2009, irrespective of (i) whether those transactions contributed to the insured's liability; (ii) whether the acts or omissions were wrongful; and (iii) whether the acts or omissions could give rise to liability. Cooke J held that excluding cover simply because part of the historical context of a claim against the insured pre-dated the inception date of the policy would require "clear wording". He held that there must be a direct or indirect causal connection between the acts, errors or omissions and the claim or liability alleged for the exclusion to apply.
The Judge then referred to Coxe v Employers' Liability Assurance Corporation Limited  2 KB 629 ("Coxe"), in which Scrutton J (as he then was) found that "arising from" in an exclusion clause meant "proximate cause". Coxe further held that a clause excluding loss caused "directly or indirectly" by an excluded peril, excluded losses with a more remote degree of causal connection to the excluded peril than a clause referring to direct losses only. The Judge interpreted "arising from" as "proximately caused by" and "in any way involving" as "indirectly caused by". This construction, he said, gave the phrases recognisably distinct meanings.
The phrase "act, error or omission" in the Retroactive Date Clause had to be read in the context of the insuring clause, which insured against loss from claims for "Wrongful Acts", defined as "acts or omissions". The only acts, errors or omissions occurring before 5 June 2009 which could have a causative effect were wrongful acts which could in principle give rise to liability. Thus the Retroactive Date Clause excluded cover for acts, errors or omissions which could give rise to liability, occurred prior to the Retroactive Date, and were "genuinely part of a chain of causation which leads to liability for the claim in question."
On the facts, the events which gave rise to the Manager's liability on the Fund's primary case had no causal connection with events before 2009, and accordingly this claim was not excluded under the Retroactive Date Clause. The Judge found that the alternative case was "not the case being actively pursued", nor "the case that the Manager wished to settle. It is not in truth a liability which is maintained either by the Fund or the Manager". The true nature of the claim was therefore that stated in the primary case and the claim was not excluded.
Was the April Letter a "Claim"?
The Judge found that the April Letter was not a "Claim" as defined in the policy wording (a demand for monetary damages or non-pecuniary relief). The letter's expressed purpose was to agree arrangements for pursuing a claim against the property business and seeking recovery of the payment, not to assert or expand on the Fund's claims against the Manager. The Fund's suggestion that the Manager should meet the costs of seeking to recover the payment was not a claim for money, either. The Fund reserved its rights to claim against the Manager and stated that cooperation in seeking re-payment was not a waiver of rights. It was not a written demand for monetary damages or non-pecuniary relief. The Manager had therefore not breached the notification condition in failing to notify insurers of the April Letter.
If the April Letter was a Claim, was cover extended under the Continuity of Cover clause?
The Judge went on to consider whether, if the April Letter were a Claim, the continuity of cover extension meant the Manager could bring its claim under a subsequent policy.
An extension to the policies described as the "Continuity of Cover" clause provided:
"…[C]overage is provided for Claims or circumstances which could or should have been notified under any policy or coverage section of which this Coverage Section is a renewal or replacement or which it may succeed in time", subject to certain conditions which were met in this case. Cover provided by the extension was on "the terms and conditions of the policy or coverage section under which the Claim or circumstance could and should have been notified".
Another clause provided that it was a condition precedent to the Manager's right to recover under the policy that Insurers be given written notice of any Claim as soon as practicable, and in any event within 60 days of the expiration or termination of the policy (or such longer period as Insurers agreed) (the "Notification Condition"). The parties agreed that written notice had not been given in accordance with the Notification Condition. The Manager nonetheless argued that the Continuity of Cover clause meant it was entitled to cover in a subsequent policy year. The policy was subject to a term which provided that Insurers could not avoid the policy for non-disclosure, so there was no scope for Insurers to avoid the 2013/2014 Policy for the Manager's failure to disclose the April Letter.
Insurers argued that claims made under the Continuity of Cover extension nonetheless had to be notified to them as soon as practicable, in accordance with the Notification Condition. The Continuity of Cover clause could not "permit the Manager to notify a claim to a later policy period without any restriction of time".
The Judge rejected this argument. The purpose of the extension was to cover late-notified claims. This purpose would be defeated if the Notification Condition applied to late notified claims. Moreover, the reference to "Claim" in the Notification Condition was a reference to claims made against the insured under that policy year. The Continuity of Cover clause, however, applied to claims made against the insured under the previous policy year. As a matter of construction, the Notification Condition did not apply to claims which fell within the Continuity of Cover extension. Renewal of the policy on terms including the Continuity of Cover extension meant that the policy covered claims which should have been notified under an earlier year policy, irrespective of when the insured notifies insurers of the claim in a subsequent year. The Continuity of Cover extension was intended to provide cover for claims notified late, and on the Judge's construction this is what the extension did.
It is helpful that the Court has clarified that an exclusion of liability for claims "in any way involving" an act, omission or error does not simply mean facts which are part of the historical background to an insurance claim, but requires an element of causation (albeit indirect). Moreover, it must be right that it would take clear words to exclude cover for an event which merely formed part of the historical context of a claim.
- The case provides a timely reminder of the potential consequences for insureds of claims-made policies which are subject to a retroactive date.
- Provisions of polices must be interpreted in the light of the context of the policy as a whole, as the Judge's approach to the construction of the Retroactive Date Clause and Continuity of Cover clause demonstrates.
- In the same vein, parties should when agreeing extensions to insurance policies consider the interaction between the proposed extension and the original policy wording. If they wish for specific provisions of the original policy wording (for example in relation to notification) to apply to extensions as well, it may be worthwhile for them to include specific wording to that effect.