The Developments of Insurance Litigation over 25 years

The last 25 years have shown increasing judicial anxiety as to how the state of insurance law, accompanied by a total failure by the legislature to carry out the reforms which require legislation. This is particularly true in respect of the duty of utmost good faith.

In July 1980 the Law Commission published its paper "Insurance Law - Non disclosure and Breach of Warranty", with a draft Bill. Despite mounting criticism from the insurance industry, from insurance lawyers and from the judiciary, nothing has been done to implement these or other reforms.

You will know that your Association has set up a sub-committee to consider the reform of insurance contract law, which I have the privilege of chairing. But I am in this talk looking back, nostalgically and rather subjectively, over the litigation over the last 25 years or so.

When I was young - well over 25 years ago - I used to think that judges started by analysing the law and the facts, and then by logical deduction came to their conclusion. Of that I am far from sure now. They do seek a just conclusion. But in many cases I feel that the judges decide on just the result, and then set about finding a basis for that conclusion in fact and law. Accordingly the successful litigant must find a way - not too obviously - to win over the heart of the judge, before presenting him or her with a convincing legal case to follow his or heart. In this talk I shall touch, not too seriously, on the influence that can be exercised in the litigation respectively by the merits, being right in law and the power of prayer. The insured/reinsured would, no doubt, pray for the implementation of the Law Commission Report, which requires more than judicial intervention.

One feature that strikes me as I look back over the past quarter of a century, is the increasing number of disputes in reinsurance, where principles have developed which affect all branches of insurance law

Twenty - five years ago, reinsurance was a subject on which I had advised, but I believe that the first case in which I got to Court was Everett v. Hogg Robinson [1973] 2 L1. Rep.217, where Basil Edmunds bravely sued successfully the brokers who owned his agency, because the brokers had misrepresented the risk to the Syndicate's reinsurers. A broker gave evidence that "…. No reinsurer had ever sought to avoid a contract on the ground of the non-disclosure of the insured underwriters' claims experience".

Let me move on a few years to CTI v. Oceanus [1982] 2L1. Rep. 178 (Lloyd J.) and [1984] 1 L1. Rep476 (CA) and Commonwealth v. Groupe Sprinks [1983] 1 L1. Rep 67. By then there was no reluctance of reinsurers to seek to avoid for misrepresentation or non-disclosure. During the 33 days of the trial in the Groupe Sprinks case, again tried by Lloyd J. (now Lord Lloyd), I took the opportunity of the complex third party proceedings in which I was not directly involved to draft, gratuitously, the Reinsurers' Prayer:

"Ineffable Anthony Lloyd. The basis of cover's destroyed, We've lost all our profit, And want to come off it, Please say this insurance is void"

The prayer was not in the Group Sprinks case or, at first instance, in the CTI case. But the Court of Appeal did answer the prayer in the CTI case, and reversing Lloyd J on the facts, said that the reinsurance was void.

The CTI case was not a popular decision, and was subject to judicial and academic criticism. I myself gave a talk, which found its way into print in Insurance & Reinsurance Law, September 1985, called "Avoidance of liability on the grounds of misrepresentation and non-disclosure or the rise and rise of avoidable reinsurance". This came back to haunt me in Pan Atlantic v. Pine Top [1985] 1 AC 501, where my opponent, Michael Beloff QC, understandably cited it against me, as I maintained that the CTI decision was good law. Lord Lloyd (as he had become) adhered to the law for which I had successfully argued in the Groupe Sprink case. All their Lordships held that the actual underwriter had to be induced by the misrepresentation or non-disclosure. In the end it did not matter in that case, because on the findings of the trial judge we won on any version of the law. What were the crucial facts? Non-disclosure of the insured underwriters' claims experience! Shades of Everett v. Hogg Robinson!

There were not too many merits on either side, but the balance of merits was on the side of the reinsurers, in that the reinsured had failed to disclose recent alarming figures. That satisfied the test for avoidance, on either version of the law. So Pine Top secured the draconian remedy of avoidance. Pine Top was, in any case, already in liquidation. The end result was an improvement of the law, but hardly in terms that many would regard as ideal.

A bare majority of the House of Lords decided against the decisive influence test, put forward by Lord Lloyd, in favour of materiality in the sense of affecting the judgement of a prudent underwriter. But it remains an historic anomaly that the insured, who in original insurance is not an underwriter, must decide what a prudent underwriter would regard as material. In reinsurance the problem is not so acute, as the reinsured is himself an insurer and will be assisted by a broker.

The avoiding underwriter must prove he was induced by the non-disclosure or misrepresentation, but Lord Mustill's presumption of inducement stated in Pan Atlantic, will help where the actual underwriter cannot give evidence: see Marc Rich v. Portman (1996) 1 L1. Rep 430 per Longmore J.

What about the following market? There may well be found to be a further presumption of inducement, in favour of following underwriters.

So far no way has been found to mitigate the severity of avoidance. Can a proportionate remedy be found? Not, I am confident, by the judges.

As Lord Diplock once said " the beauty of the common law is that it is maze not a motorway". A plan of the maze would not come amiss!

The duty of good faith is neither a motorway nor one way street - it is mutual. The insurer owes a duty of good faith to the insured. In Banque Keyser Ullman v. Skandia [1990] 1 QB 665, [1991] 2 AC 249 Steyn J held that the insurer, by non-disclosure, was in breach of its duty of good faith to the insured bank, and awarded damages to the bank. I do not believe that merits played much part. This success was peeled away in the higher courts. The Court of Appeal decided that the 'duty' did not sound in damages. The House of Lords decided the duty had not been broken, but agreed with the Court of Appeal that there was no right to damages. The House of Lords in the "Star Sea"[2001] 1 AER 743 treated that decision as "finally and authoritatively" deciding that there was no remedy in damages. The sole remedies are avoidance of the policy and a defence to a claim. It was interesting example of the adversary system of law, but hardly a tribute to the certainty of the law. How far then does the duty of good faith continue into a claim and/or litigation? That was one of the two issues of law in the "Star Sea" - the other was privacy of the insured under s.39 (5) of the Marine Insurance Act 1906. Despite arguing the case at first instance, I shall not develop the latter point here.

The duty of good faith arose dramatically as the trail started. By a pure mistake (as all the courts found) the Owners' solicitors had failed to disclose a survey report on another of the Owners' vessels, which had had a somewhat similar fire. It was disclosed as soon as it was found, and full explanation was given. " Too late" said the insurers - we avoid all the policies of the Owners' fleet for breach of the good faith. The Owners' answers were:

(1) On the facts, no breach of any duty of good faith.
(2) In any case as matter of law fraud had to be proved, and no fraud had been alleged or proved.
(3) In any case once a claim had been rejected and gone to litigation, the rules of the court decided.

I and my successors won for the Owners all along the line. The majority of the Court of Appeal in Orakpo v. Barclays Insurance Services [1995] LRLR 443 had for differing reasons decided that it was a defence to a claim if the claim was positively and substantially fraudulent. In the "Star Sea" the House of Lords said that for the insurers to succeed, they had to show that the claim was made fraudulently, which they had singularly failed to do. Lord Hobhouse said " For the defendants successfully to invoke s.17 (of the Marine Insurance Act 1906) so as to avoid the policy ab initio and wholly defeat the claim would be totally out of proportion to the failure of which they were complaining". He further held: "I am therefore strongly of the view that once the parties are in litigation it is procedural rules which govern the extent of the disclosure which should be given in the litigation, not s.17 as such, though s.17 may influence the court in the exercise of its discretion" Game, set and match!

Incidentally, Lord Scott adopted a dictum of Mance J in Standard Steamship v. Oceanfast [1996] (Unreported) describing as "extravagant…. [the] proposition that mere negligence in the presentation of a claim could lead to avoidance of the whole contract of insurance".

The lessons of that case are:

(1) Judges from 7 King's Bench Walk are well trained.
(2) The merits were critical.
(3) The law followed the merits.
(4) Prayer was unnecessary.

In Econimides v. Commercial Union (1997 unreported), the Court of Appeal said that in relation to questions " to the best of my knowledge and belief", the insured could not give a "blind guess", but his duty was not to be assessed on reasonable belief, but whether it was honest. Furthermore Simon Brown LJ said that "where material facts are dealt with by specific questions in the proposal form and no sustainable case of misrepresentation arises, it would be remarkable indeed if the policy could then be avoided on the grounds of non- disclosure".

The power of prayer did not avail those insurers. So much for the duty of utmost good faith.

In many cases one can see the judges struggling against both the obscurity of the drafting of the contract documents, and principles entrenched into the law by commercial judges less user friendly than their successors. Let us take Vesta v. Butcher [1980] 1 L1. Rep 331, where the House of Lords, particularly Lord Griffiths called for the reinsurance documents to be redrafted in intelligible form. The House, by a purposive use of the surrounding circumstances, was able to produce a just result, but only by applying Norwegian law to the relevant warranty. Lord Griffith considered the unsatisfactory principles applied to warranties in English law:

"It is one of the less attractive practices of English Insurance law that breach of warranty in an insurance policy can be relied on to defeat a claim under the policy even if there is no causal connection between the breach and the loss."

Similar considerations and concerns produced a similar result in Groupama v. Catatumbo [2001] LRLR 142, where the Court of Appeal, including Tuckey and Mance LJJ, stressed the importance of insurance and reinsurance being back to back.

The Law Commission had 21 years ago recommended that this anomaly in English law should be removed. But the anomaly remains, albeit mitigated by the ABI Code of Practice.

At least in that case it was the prayers of the reinsured - prayers I have not drafted - which were answered. But the merits were decisive.

Another anomaly has recently been removed by purposive interpretation in the Court of Appeal in Dodson v. Dodson Insurance Services (The Times 24/01/01) where Mance LJ, giving judgement of the Court of Appeal decided that a motor insurance policy survived the sale of the insured vehicle, so that the insured continued to have cover when driving other vehicles with the consent of the owner. The previous House of Lords decision was not, of course, overruled, but the terms of the policy found to be distinguishable. The law moved with the times.

As I, personally and subjectively, look back over the 25 years, memories flood back; of the Zinovia [1984] 2 L1. Rep. 264 not scuttled on one side of the Red Sea and the Captain Panagos DP [1989] 1 L1. Rep 33, scuttled on the other side, the common feature being that I won them both.

In the Captain Panagos DP, the owners called as an expert on fires an engaging Irishman called Kelly. My first question in cross-examination was "Mr Kelly, do you really put yourself forward as an expert on fires?". The startling reply was "Sure, I don't think that I put myself forward as an expert in anything". That posed a dilemma for me: dare I sit down and submit that his lack of expertise eliminated his evidence altogether? I did not, and cross-examined, successfully, on the substance of his evidence.

In the Miss "Jay Jay" [1987] 1 L1. Rep 32, I argued successfully that the seas in a force 4 wind constituted perils of the sea. To succeed I had to convince Lawton LJ that seas which would cause no problem to a Cornish lugger, were perils of the sea, which caused the delamination of the plastic Miss Jay Jay. We got home on the law, and just a suspicion of prayer.

My finale as an insurance advocate involved the arcane mysteries of the Aggregate Extension Clause (Denby v. English & Scotland Maritime Insurance [1998] LRLR 343). It was a topic beyond prayer. We had to win on the law, with a sniff of merits.

Overall, how the insurance litigation has developed over the last 25 years? There is no doubt the commercial judges have become far more protective of the claimant, insured or reinsured.

Lord Hobhouse said in the The "Star Sea" [2001] 1 AER at p.770-1 that "….suitable caution should be exercised in making any extensions to the existing law of non- disclosure and that the courts should be on their guard against the use of the principle of good faith to achieve results which are only questionably capable of being reconciled with the mutual character of obligation to observe good faith".

In the Econimides case the judges recognise that where an insurer asks specific questions in the proposal form, to be answered to the best of the insured's knowledge and belief, all that is required is an honest answer. An insurer will find it hard to make out a case of non-disclosure, where no question has been asked.

In the end, however, there remain principles of law too deeply enshrined in our law to be displaced by judicial interpretation, or the power of prayer. Legislative reform is essential and urgent. I have no doubt that the judges will welcome this - as one can see from Longmore LJ Pat Saxton Lecture on 5th March 2001
 
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