Spire and RSA contest aggregation again

In Spire Healthcare Limited v Royal & Sun Alliance Insurance Limited [2022] EWCA Civ 17, the Court of Appeal overturned the High Court’s decision and held that two groups of claims based on the negligent practice of the same surgeon should be aggregated. Irrespective of which group the claims fell into, the unifying factor between them was the surgeon’s dishonest improper conduct.

Background

The Claimant (Spire) claimed against the Defendant insurer (RSA) under a policy (the Policy) providing cover for liabilities arising from the acts and omissions of employees and those providing medical or surgical service at its hospitals.

The underlying claims arose from the much-publicised activities of Consultant breast surgeon, Ian Paterson, who was sentenced in 2017 for carrying out unnecessary surgery on patients between 2004 and 2011. A large number of claims were brought against Spire by former patients of Mr Paterson in respect of surgeries performed at two of its hospitals.

There were two groups of claimant patients. One group of patients had required surgery but Mr Paterson had performed sub-total mastectomies, a negligent procedure where some breast tissue was left behind (Group 1). The other group of patients were the victims of entirely unnecessary surgery (Group 2).

The relevant aggregation provision in the Policy provided as follows:

“The total amount payable by the Company in respect of all damages costs and expenses arising out of all claims during any Period of Insurance consequent on or attributable to one source or original cause irrespective of the number of Persons Entitled to Indemnity having a claim under this Policy consequent on or attributable to that one source or original cause shall not exceed the Limit of Indemnity stated in the Schedule” (emphasis added).

Spire argued the cause for the Group 1 claims was Mr Paterson performing a negligent procedure where a mastectomy was clinically indicated, and the cause of Group 2 claims was Mr Paterson carrying out surgery where none was necessary. Spire therefore argued there were two separate causes so two separate limits of indemnity should be applied. This would allow Spire to claim £20 million in cover (the maximum cover available) as opposed to a single limit of £10 million (which was available “any one claim”) if the cause was the same.

RSA argued there was “one source or original cause” of the claims; namely Mr Paterson and his conduct, and therefore Spire could only claim a single limit of £10 million.

First instance decision

The High Court agreed with the Spire and accepted the aggregation language was broad, necessitating the widest possible search for a unifying factor in the history of the losses. Nonetheless it held that there must be a causative link between what is contended to be the originating cause and the loss and there must be a limit to the degree of remoteness. The High Court rejected the argument that Mr Paterson’s negligence could be the initial cause. It held there were clear causative differences between Group 1 and Group 2 cases. In the Group 1 cases, the negligent procedure was the result of careless surgery. Conversely, Group 2 claimants were subjected to unnecessary surgery for Mr Paterson’s financial gain. The dishonesty of Mr Paterson was different between the cases, as were his mis-appreciations.

It also held the management issues within Spire that caused the two different strands of misconduct were also different in nature. Group 1 cases involved a failure to apply controls to prevent the development or continuation of the negligent procedure. The management failure in relation to Group 2 cases consisted of the failure to challenge the need for the unnecessary surgery.

Court of Appeal decision

In giving the leading judgment, Lady Justice Andrews upheld RSA’s appeal. With regard to the wording “consequent on or attributable to one source or original cause“, she reiterated that a wide search should be conducted for a unifying factor. In searching for a unifying factor, one must not go so far back in the causal chain that one enters the realm of coincidental/remote causes that provide no meaningful explanation for what has happened.

Andrews LJ noted the observations of Mr Justice Phillips in Cox v Bankside [1995] 2 Lloyd’s Rep 437 (which considered the negligence of Lloyd’s underwriters) that the negligence of one individual can be an originating cause for the purpose of an aggregation clause of this type, even though his negligence may take different or multiple forms. She criticised the High Court’s decision that an individual’s reason for acting in a particular way is capable of being an originating cause if there were different mis-appreciations resulting in one individual concerned committing the negligent acts or omissions. The claims were not based on mis-appreciations; they were based on deliberate and dishonest conduct with a cavalier disregard for welfare. There may be cases in which, on the facts, the behaviour of one individual would be too remote or too vague a concept to provide a meaningful explanation for the claims, but this was not one of them given the deliberate and dishonest conduct.

She also agreed with RSA’s argument that because Spire’s liability to patients for an indemnity was the same across both Groups, a distinction should not be drawn between the two Groups. The question of whether the patient did or did not require surgery should have no bearing on Spire’s liability for the claims.

These factors led to a conclusion that any or all of (i) Mr Paterson, (ii) his dishonesty, (iii) his practice of operating on patients without their informed consent, and (iv) his disregard for his patients’ welfare could be identified either singly or collectively as a unifying factor in the history of the claims for which Spire was liable in negligence, irrespective of whether the patients concerned fell into Group 1 or Group 2 (or both).

As such, it was held there was one source and originating cause for each of the Groups of Claims identified by Spire and so the Claims were aggregated. Therefore Spire could recover only one £10 million limit.

Comment

Spire has attempted to access a £20 million aggregate limit under its policy with RSA more than once. It had previously argued that the aggregation clause did not apply to unify the claims for the purposes of the limit of indemnity. That argument failed before the High Court and later the Court of Appeal: both courts held the language was unquestionably aggregation language that unified claims for the purposes of the limit of indemnity. Spire then argued that there were two different sets of claims: an argument which ultimately failed.

The decision provides a helpful illustration of the approach to aggregation provisions where the conduct of an individual takes a range of forms.  If policyholders wish to ensure such claims are aggregated by cause, type or category rather than original cause, that will need to be communicated and reflected in the choice of aggregation language in the policy in question.

 

Alexander Oddy
Alexander Oddy
Partner, London
+44 20 7466 2407
Nikita Davé
Nikita Davé
Associate, London
+44 20 7466 2766

Aggregation considered in Court of Appeal under the Minimum Terms and Conditions for solicitors’ professional indemnity insurance

In Baines & Anor v Dixon Coles & Gill (A Firm) & Ors [2021] EWCA Civ 1211, the Court of Appeal has upheld the first instance decision and found that claims brought by clients against a law firm following the misappropriation of money by a partner of that firm over a series of years could not be aggregated. This is because an extended course of dishonest conduct committed by the same person is insufficient to satisfy the requirement that the acts or omission are “related”.

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Supreme Court clarifies proper approach to determining scope of duty of care owed by a professional adviser

In what is now the leading authority on the application of the decision in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (SAAMCO), the Supreme Court has held that a mutual building society’s claim for damages for economic loss fell within the scope of its auditor’s duty of care in giving (admittedly) negligent advice regarding the accounting treatment of interest rate swaps: Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20.

The appeal was heard by an expanded constitution of the Supreme Court, in order to provide general guidance regarding the proper approach to determining the scope of duty and the extent of liability of professional advisers in the tort of negligence, including the proper application of the SAAMCO principle. As such, the outcome and reasoning of this decision will be significant for advisers facing claims for economic loss due to alleged negligent advice and their liability insurers.

The Supreme Court overturned the Court of Appeal’s decision which had found that, in applying SAAMCO, the court should consider at the outset whether it is an “advice” or “information” case, ie whether the professional is providing advice on the merits of a transaction overall, to guide the client’s whole decision-making process, or merely providing information on which the client’s decisions will be taken. If the latter, the Court of Appeal found, applying SAAMCO, the adviser would be responsible only for the foreseeable consequences of the information being wrong, and so the claimant would have to prove that the loss would not have been suffered if the information had been correct.

The majority of the Supreme Court said that the descriptions “information” and “advice” should be dispensed with as terms of art in this area. Instead, the court’s focus should be on the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given. In practice, this means that, when looking at the case of negligent advice given by a professional adviser, one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk. The counterfactual test, as to whether the loss would have been suffered if the information had been correct, should be regarded only as a tool to cross-check the result in most cases, and should not be regarded as replacing the decision that needs to be made as to the scope of duty of care.

In the present case, the purpose of the auditor’s advice was to provide technical accounting advice as to whether the mutual building society could use hedge accounting in order to implement its proposed business model within the constraints of the regulatory environment. As a result of the auditor’s negligent advice, the building society adopted the business model, entered into further swap transactions and was exposed to the risk of loss from having to break the swaps, when it was realised that hedge accounting could not in fact be used and the building society was exposed to the regulatory capital demands which the use of hedge accounting was supposed to avoid. That was a risk which the auditor’s advice was supposed to allow the building society to assess, and which their negligence caused the building society to fail to understand. Accordingly, the losses suffered by the building society when breaking the swaps were within the scope of the duty owed by the auditors. However, the damages should be reduced by 50% on the basis of the building society’s contributory negligence.

For more information see our Banking Litigation Notes blogpost on the decision.

Paul Lewis
Paul Lewis
Partner
+44 20 7466 2138
David Reston
David Reston
Partner
+44 20 7466 2244

 

The PI insurance crisis in construction: not just a supply chain issue

In March 2021, the Construction Leadership Council published its findings of a recent pan-industry survey of over 1,000 firms, which confirmed a widespread problem experienced by many construction and architecture firms in obtaining professional indemnity insurance (“PII”) cover1.

The survey found that companies were being prevented from taking on projects, and even having to change the nature of their work, due to significant cost increases, claims excesses and tougher restrictions, particularly in relation to cladding and fire safety. This was notwithstanding that two thirds of respondents said that less than 5% of their work involved high rise residential projects. The survey also revealed, among other things, that almost half of respondents had been declined insurance by three insurers or more, and premiums had increased nearly 4-fold at the last renewal, having doubled the year before.

Whilst there are some indications that the construction industry has started to address these issues2 the current challenges arising from the general unavailability of adequate PII cover in respect of fire safety and cladding claims are likely to remain a significant issue for the industry for some time to come. This is particularly true given the ever-increasing incidence of claims.  Furthermore, although the common perception is that unavailability of adequate PII cover is a supply chain issue, our recent experience shows that it has wider contractual implications for developers as well as third party stakeholders, such as leaseholders and funders.

Nicholas DowningEmma Spence and Noe Minamikata consider how recent changes in the PII market have impacted the negotiation of new professional appointments as well as those already in place on existing developments. They also explore the various approaches being taken by consultants in light of the restrictions on cover relating to fire safety and cladding claims, as well as the broader implications for risk allocation between main contractors and developers and the impact on third party stakeholders. Click here to read the full article.

[1] See the press release for the Construction Leadership Council Professional Indemnity Insurance Survey and survey results.

[2] For example, RICS has recently introduced new Minimum Policy Wording and insurance rules for PII which they say will provide greater fire safety cover for chartered surveyors – see here.

This blog was first posted on HSF Construction Notes.

 

Nicholas Downing
Nicholas Downing
Partner, Head of Construction & Engineering, London
+44 20 7466 2741
Emma Spence
Emma Spence
Associate, London
+44 20 7466 2270
Noe Minamikata
Noe Minamikata
Professional Support Lawyer, London
+44 20 7466 2838

Aggregation considered under the Minimum Terms and Conditions for solicitors’ professional indemnity insurance

In Baines v Dixon Coles and Gill [2020] EWHC 2809 (Ch), the High Court has ruled that a number of claims brought against a law firm following the misappropriation of money from client accounts could not be aggregated under the Minimum Terms and Conditions for solicitors professional indemnity insurance. This was on the basis that each theft resulted in separate losses and could not be linked either by the method of concealment or by an overarching motivation for the acts.

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Court of Appeal decision provides further helpful guidance on the application of the key legal principles on notification of circumstances to claims made policies

The Court of Appeal recently allowed RSA’s appeal in Euro Pools Plc (in administration) v Royal & Sun Alliance Insurance Plc [2019] EWCA Civ 808 (click here for the full judgment). Overturning the first instance decision, the Court of Appeal’s decision provides further valuable guidance on the key principles relevant to the question of whether there has been a notification of circumstances to a claims made liability insurance policy.

Background

The Claimant, Euro Pools Plc (in Administration) (Euro Pools), was a company specialising in the installation and outfitting of swimming pools. In particular, it fitted a system of movable “booms” in swimming pools. Booms are vertical walls that rise and sink and which are used to divide a pool into different swimming zones. Euro Pools was insured by the Defendant, Royal and Sun Alliance Insurance Plc (RSA), under two materially identical professional indemnity policies providing cover between 30 June 2006 and 29 June 2007 (the First Policy) and 30 June 2007 and 29 June 2008 (the Second Policy).

The issue in dispute was whether expenses incurred in installing a new hydraulic system to power the booms at several pools were incurred to mitigate potential claims arising from circumstances notified under the First Policy or whether the potential claims in respect of which the expenses were incurred arose from circumstances notified under the Second Policy.

Euro Pools contended that the expenses attached to the Second Policy; RSA contended they attached to the First Policy. The judge at first instance found in favour of Euro Pools (see our article on the first instance decision here). RSA appealed against that decision.

The Policies

Both policies provided cover for the costs of remedial works intended to mitigate the risk of claims by third parties. The limit of indemnity under each policy was £5 million. The limit of liability under the First Policy had been eroded by other claims up to £4.3 million. Both policies imposed an obligation on Euro Pools to notify RSA of any circumstances that might give rise to a Claim:

[Euro Pools] shall as a condition precedent to their right to be indemnified under the insurance give written notice to [RSA] as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… for which there may be liability under this Insurance. Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given.”

The policies also excluded RSA from liability in respect of:

the consequence of any circumstance 1) notified under any insurance which was in force prior to the inception of this Insurance [or] 2) known to [Euro Pools] or which should have been known to [Euro Pools] at the inception of this Insurance which might reasonably be expected to produce a Claim.”

The Notifications

By February 2007 Euro Pools had been informed of problems with the steel tank system used in booms that it had installed at two sites. A notification of circumstances was made to the First Policy as a result and Euro Pools informed RSA that it would attempt to fix the problem by installing inflatable bags in the booms.

In June 2007 Euro Pools sought to renew its insurance with RSA. The completed proposal form referred to the problem with the steel tanks and the intention to fix these with inflatable bags. Euro Pool’s broker, Aon, noted to RSA that it was anticipated that the costs of the remedial works would fall within the policy excess but that “the insured wish to ensure the matter is logged on a precautionary basis should there be any future problems”.

Euro Pools soon identified problems with the inflatable bag system and in May 2008 it notified RSA of the same. Euro Pools thereafter attempted to use a number of different methods to fix the original problem of the booms failing to rise and fall, none of which were successful. In August 2008 Euro Pools contacted RSA noting that it had concluded that the only realistic option was to install a hydraulic system. RSA consented to costs of the remedial work of installing hydraulic systems under the First Policy. RSA made regular interim payments in respect of the same.

In May 2013, Euro Pools and RSA met, and Euro Pools expressed the view that its claims for indemnity for mitigation work attached to the Second Policy (which had not been eroded by other claims made by Euro Pools).

Euro Pools’ position was that its notification in February and/or June 2007 related only to the use of steel tanks, whereas the indemnity claimed related to the replacement of both bags and tanks in favour of a hydraulic system and it should therefore attach to the Second Policy.

RSA’s position was that the costs of remedial works in respect of which an indemnity was claimed arose from the circumstances notified in February and/or June 2007 and that the claim therefore attached to the First Policy.

The judge at first instance held that in February 2007 Euro Pools was only aware of a problem with some (not all) of the stainless steel tanks installed in the booms and not the wider problem with its air drive system. Accordingly, Euro Pools could not have notified RSA of the circumstances leading to the decision to adopt a hydraulic system. The mitigation costs attached to the Second Policy in light of the notification made in May 2008.

Decision

In a unanimous decision, the Court of Appeal allowed RSA’s appeal and determined that the mitigation costs attached to the First Policy.

The key principles on notification of circumstances

The legal principles from the authorities applicable to the question of whether there has been a notification of circumstances under a claims made liability insurance policy were not substantially in dispute between the parties. However, Dame Elizabeth Gloster, giving the leading judgment, helpfully summarised the key principles from the authorities:

  • A deeming provision in the policy is to be construed and applied with a view to its commercial purpose which is to provide an extension of cover for all claims in the future which flow from the notified circumstances (HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds Policy No 621/PKID00101 & Ors [2007] EWHC 1951 (Comm)).
  • The test that notified circumstances “may” give rise to claims set a deliberately undemanding test. It required only a possibility of claims in the future (J Rothschild Assurance Plc v Collyear [1999] 1 Lloyds Rep IR 6). Dame Elizabeth Gloster did not consider that the materiality threshold was impacted by the word “reasonably”.
  • The insured may give a “can of worms” or “hornet’s nest” notification i.e. a notification of a problem, the exact scale and consequences of which are not known (Kidsons).
  • The insured does not need to know or appreciate the cause or all the causes of the problems which have arisen, or the consequences which may flow from them (Rothschild and McManus v European Risk Insurance Co [2013] Lloyd’s Rep IR 533).
  • There has to be some causal, as opposed to merely some coincidental, link between the notified circumstances and the later claim (Kajima UK Engineering Limited v The Underwriter Insurance Company Limited [2008] EWHC 83 (TCC)).
  • When construing a communication to determine whether it is, or its scope as, a notification, one applies conventional principles of interpretation (Kidsons).

Application of the principles

i. Scope of the circumstances notified by Euro Pools in 2007

Dame Elizabeth Gloster concluded that the circumstances notified in 2007 were that the booms, which were powered by an air drive system, were not rising and falling properly rather than that there was a problem with the steel tanks. She concluded that it would not be appropriate to “over-analyse” the problem by dissecting every potential cause of the problem as a different notifiable circumstance. The fact that Euro Pools did not know at that stage what the fundamental cause of the problem was with the air drive system did not make any difference. It was sufficient that Euro Pools knew that there was a problem in that the booms failed to rise and fall properly and that it might face potential claims from third parties as a result.

She also concluded that the potential third party claims in respect of which Euro Pools undertook the mitigatory works were claims based on booms in supplied pools failing to rise and fall, rather than claims in respect of failure of the booms to rise and fall because of defects in the steel tanks. In her judgment, it would not have mattered to the claimant what the technical reason for the non-functioning boom was.

ii. Was there a sufficient causal link between the circumstances notified in 2007 and the potential third party claims?

Dame Elizabeth Gloster was satisfied there was a sufficient causal link. Given her conclusions on the circumstances that had been notified, and the nature of the potential third party claims, she was comfortable that the claims “arise from” the circumstances notified in 2007. Applying the test in Kajima, she found it impossible to say that there was no more than a “purely coincidental” connection between the problems notified in February and June 2007 and the work carried out from mid-2008 to install hydraulics, which was intended to solve the same problem as had been notified in the 2007 policy year. She concluded that there was an “air of unreality” about Euro Pools’ suggestion that there was no such causal connection and indeed internal meeting and loss adjuster notes traced the decision to install hydraulic cylinders back to the failures in early 2007.

iii. Does notification of circumstances under the First Policy preclude indemnification under the Second Policy?

Dame Elizabeth Gloster also concluded that the effect of the exclusion in the Policies (quoted above) in respect of any circumstance previously notified was that, if a potential third party claim (or mitigation costs to avoid such a claim) arises from circumstances notified under the First Policy, it is also a “consequence” of that circumstance. Accordingly, the Policies precluded Euro Pools from demanding an indemnity under the Second Policy in respect of costs incurred mitigating such a claim.

Comment

The Court of Appeal’s judgment provides not only a useful summary of the key legal principles relating to notification of circumstances under claims made liability policies, but also valuable insight into their proper application. While the insured must be aware of the circumstances in question, it may be able to do little more than point to the fact that something is not working for a reason which has not yet been ascertained (a “can of worms” or “hornet’s nest” notification). There is no reason why in principle a notification should not be made in these terms provided that the circumstance might reasonably be expected to give rise to a claim. The Courts will not “over-analyse” or “dissect” the problem that has been notified. Once there has been a notification of such circumstances, the question will be whether any future claim which materialises is one arising from such circumstances. This requires some causal link but is not a demanding causation test.

Anthony Dempster
Anthony Dempster
Partner, London
+44 20 7466 2340
Antonia Pegden
Antonia Pegden
Senior Associate, London
+44 20 7466 2530

Supreme Court considers loss of a chance in professional negligence claim

In Perry v Raleys Solicitors [2019] UKSC 5, the Supreme Court considered a professional negligence claim against a firm of solicitors arising out of advice they had given an individual in connection with his claim against the National Coal Board (later British Coal) for Vibration White Finger (VWF).

Lord Briggs (with whom the rest of the Supreme Court panel agreed) restated the approach to causation which was set down in Allied Maples v Simmons & Simmons (a firm) [1995] 1 WLR 1602, namely that in cases where a claimant alleges that a breach of duty caused him to lose an opportunity: (1) the claimant must prove what he would have done on the balance of probabilities; (2) when looking at what a third party might have done, the court undertakes a loss of a chance analysis.

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Coverage for ‘Doomsday or Armageddon’ data breach class actions: insurance implications of the Court of Appeal’s decision to confirm Morrisons’ vicarious liability for employee’s deliberate actions

In the recent judgment in Wm Morrisons Supermarkets Plc v Various Claimants [2018] EWCA Civ 233 the Court of Appeal has dismissed an appeal against the High Court’s decision that Morrisons was vicariously liable for its employee’s misuse of data, despite: (i) Morrisons having done as much as it reasonably could to prevent the misuse; and (ii) the employee’s intention being to cause reputational or financial damage to Morrisons itself. It is understood that Morrisons intends to appeal to the Supreme Court. Our full analysis of the Court of Appeal’s decision can be found here.

Companies now find themselves exposed to potential UK data breach class action claims, including for distress-based damages, based on vicarious liability, even if they have appropriate safeguards in place and even if they are the intended victim of the breach. Day by day businesses find themselves responsible for higher volumes of personal data; and the risk of data breach claims is exacerbated by the legislative changes made by the GDPR, increasing public awareness of data protection issues and the publicity that this case has attracted. In addition, the facts of Morrisons were such that the company had been found not to be in breach of data protection laws. Future class action claims may be even easier to launch in circumstances where a company has been found to breach the GDPR, for example, by not having appropriate security measures in place. It is understood that Morrisons intends to appeal to the Supreme Court.

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Brokers’ negligence – guidance on the scope of the duty and causation

In Dalamd Limited v Butterworth Spengler Commercial Limited [2018] EWHC 2558 (Comm), Mr Justice Butcher considered a negligence claim against the Defendant insurance broker arising out of a fire at a waste recycling facility. The insured’s claim succeeded in part.

In his decision, the Judge provided a useful recap on brokers’ duties, in particular their duty to advise clients on their pre-inception duties of disclosure. Of particular note, he also considered how causation should be analysed in brokers’ negligence cases where the insured has not pursued the claim against its insurer to settlement, judgment or award. His conclusion – which will be well received by brokers – was that whether a good defence to the policy claim was available to an insurer will be assessed on the balance of probabilities (i.e. a yes/no basis), and not a loss of a chance basis. Whether there was another defence available to the insurer, for which the broker was not responsible, will likewise be assessed on the balance of probabilities, although the issue of whether the insurer would have pursued that point is to be assessed based on loss of chance.

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HIGH COURT RULES THAT BROKER WAS NOT IN BREACH OF DUTY IN FAILING TO PROVIDE ORAL ADVICE IN RELATION TO THE DUTY TO DISCLOSE

In holding that a broker was not in breach of duty by failing to give oral advice in relation to the disclosure of criminal convictions the Court has provided a useful reminder of the extent of a broker’s duty to advise in relation to disclosure. The Court also held that a lack of expert evidence materially limited, but did not exclude, the possibility of a finding that the broker breached its duty to act with reasonable care and skill.

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