Court Cases Flashcards

Question

Forster & Sons Ltd vs. Suggett (1918)

Answer 1

Contracts in restraint of trade The works manager of a glass-making company had agreed not to work for a rival firm for five years after leaving his present job. Here, the restraint was held to be valid because the manager knew of a secret manufacturing process which would be valuable to a rival.

Answer 2

Illegality in life insurance Here the insured committed suicide, intending that the policy money be used to pay off his heavy debts, at a time when suicide was a criminal offence. It was held that the policy did cover suicide and that the insurers could extend the policy to cover acts of wilful misconduct if they wished (the first principle mentioned above). Nevertheless, the court held that public policy (the second principle) would prevent a recovery being made, because payment would allow the insured a 'benefit' from his criminal act in the sense that his estate would be freed from debts.

Answer 3

Illegality in property insurance The insured had not stolen the insured property (some items of jewellery) but had smuggled it into the UK without declaring it and paying the necessary excise duty: this made them liable to forfeiture. The items were subsequently stolen, but the court held that the claimant could not recover for the theft under his insurance as this would (at least indirectly) allow him to profit from his criminal act.

Answer 4

Illegality in motor/liability insurance A man shot and killed his wife's lover. He had deliberately taken a loaded gun with the intention of frightening his rival, who was killed when the gun accidentally went off in a scuffle. He was acquitted of murder and manslaughter in the criminal trial but was successfully sued for damages by the wife of the dead man. He claimed an indemnity under the personal liability part of his household policy, but the court refused to allow him to recover because of a deliberate and dangerous use of the loaded gun. Recovery under insurance would be against public policy to allow him an indemnity against the consequences of his conduct.

Answer 5

Mistake - concerning the subject matter of the contract The proposer wished to insure the life of her mother, Mary Ellen Ince, but the company's agent thought that the policy was to be on the life of her grandmother, Mary Ann Ince. The policy was issued in the name of Mary Ellen Ince but the details were appropriate to the grandmother and the premium was calculated on the basis of the grandmother's age. The Industrial Assurance Commissioner dismissed a claim for payment on the death of the mother because there was no consensus ad idem between the parties and a valid contract was, therefore, never made. The company agreed to return the premiums paid.

Answer 6

Law of agency - conflict of interest 'The role of an insurance broker is notoriously anomalous for its inherent scope for engendering conflict of interest in the otherwise relatively tidy legal world of agency. In its simplest form, the negotiation of insurance, the broker acts as agent for the insured, but normally receives his remuneration from the insurer in the form of commission; he may, in certain circumstances, act for both. Where there is reinsurance of an insured risk, the same broker may act on behalf of the insured in placing the insurance and on behalf of the insurer in placing the reinsurance.'

Answer 7

Law of agency - conflict of interest A broker negotiating a claim settlement on behalf of the insured was held in the Court of Appeal to be the agent of the insurer when he was shown documents by the latter which were the basis of the repudiation of the claim. Therefore, the broker was not at liberty to disclose the contents of the documents to the insured.

Answer 8

Producing and placing broker The claimant pursued legal action against the insurer for refusing to meet a claim for abandonment of their yacht after it caught fire. The claimant also brought in the producing broker and the placing broker, on the basis that the placing broker's negligence led to the insurer's refusal, and that one or both parties were responsible for this. It was held that the producing broker was liable to the claimant, because their duties were of a 'non-delegable' kind, and liability extends from what has been contractually agreed (vicarious liability was also considered, and ruled out on the basis this does not ordinarily extend to independent contractors). Where the producing broker does not agree to arrange insurance for its client but agrees to get another broker to do so, the duty of the producing broker, both in contract and in tort, is limited to taking care to choose a competent sub-broker and giving it appropriate instructions.

Answer 9

Law of agency - good faith The principal engaged an agent to buy a yacht for him. The agent found a suitable yacht, bought it himself and then tried to sell it to the principal for a higher price. The court held that the principal was required to pay no more than the amount which the agent himself had paid for the boat.

Answer 10

Apparent authority - restricted authority of validly appointed agent The defendant appointed a manager of his public house. The licence was taken out in the name of the manager (a Mr Humble) whose name appeared over the door. The manager bought cigars on credit from Watteau. This transaction was within the usual authority of a public house manager, although Fenwick had, in fact, forbidden him to buy cigars. Watteau was successful in his claim against the defendant for the cost of the cigars because he had no knowledge that the usual authority of the agent had been restricted.

Answer 11

Insurable interest must be current, not an expectation Here, the Crown Commissioners insured a number of enemy ships which had been captured in the Napoleonic wars when they were still on the high seas. The authority of the Commissioners to take charge of the ships began only when the vessels reached port and so the court held that the Commissioners had no interest in ships which were lost before they did so. Up until that point, they had merely an expectancy of taking charge of the vessels. One of the judges in the case put forward the following example to illustrate the point: ... Suppose the case of the heir at law of a man who has an estate worth £20,000 who is ninety years of age, upon his death bed intestate, and incapable from incurable lunacy of making a will, there is no man who will deny that such an heir at law has a moral certainty of succeeding to the estate, yet the law will not allow that he has any interest, or anything more than a mere expectation.

Answer 12

Insurable interest must be a legal interest Macaura had insured a quantity of timber on his estate under a fire policy in his own name. He had already sold the timber to a company of which he was the only shareholder. When the timber was destroyed in a fire, the insurers refused to meet the claim on the grounds that Macaura had no insurable interest in the assets of the company. The House of Lords supported the insurers, holding that the insured had an interest in his shares but none in the timber which was owned by the company, a separate legal entity. The fact that the insured would clearly suffer an economic loss as result of the fire, because the value of his shares would go down, was regarded as insufficient to give him an insurable interest.

Answer 13

Insurable legal interest is defined broadly The case concerned a pub which was owned by a company that went into liquidation due to financial difficulties. The liquidators agreed to sell the pub to B, who had been a manager at the pub, and insisted that B obtain buildings insurance for the pub. The pub was destroyed in a fire prior to the completion of the sale. B's insurer asserted that B had no insurable interest and therefore did not have to meet the claim. The Court of Session, however, ruled that B did have an insurable interest as the evidence indicated that B and the liquidator had entered into a binding agreement under which B was granted a licence to use the property pending the purchase (on the condition she obtained insurance).

Answer 14

Insurable interest in life insurance Dalby involved the reinsurance of a life policy rather than life insurance itself. The claimant's company had insured the life of the Duke of Cambridge and reinsured the risk with the defendant reinsurer. Although the original insurance was cancelled, the reinsurance contract was kept in force until the Duke died. The defendant reinsurer then denied liability on the grounds that the claimant no longer had an interest because, the original insurance having been cancelled, they themselves did not have to pay out. The court ruled that the requirements of the Life Assurance Act 1774 were satisfied because it did not require that the interest, necessary at inception, should still exist at the time of the loss.

Answer 15

Policy void due to lack of interest An insurance on the life of the policyholder's mother was held to be illegal for lack of insurable interest. The mother lived with her son and kept house for him, and he insured her life for the express purpose of funeral expenses. However, the insurance was held void for lack of insurable interest because the mother had no legal obligation to keep house for her son and he, in turn, had no legal obligation to bury her when she died. The result was that he could not recover his premiums.

Answer 16

Positive duty of disclosure As the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured...to make a full disclosure to the underwriter without being asked of all the material circumstances. This is expressed by saying it is a contract of the utmost good faith.

Answer 17

'Influence the judgment of a prudent insurer' The Court of Appeal held that insurers do not have to prove that knowledge of that fact in question would have changed the decision of a reasonable insurer. They held that the words 'influence the judgment' simply mean that the fact must be one which a typical, reasonable underwriter would have wanted to know about when forming their opinion of the risk.

Answer 18

Affirmed the judgment of 'influence the judgment' as decided in Container Transport International Inc vs... However, their Lordships considered a second question in the Pine Top case and introduced a second element. - What if the fact in question was material, in that a typical, reasonable underwriter would have wanted to know about it, but it would have made no difference to the decision of the actual underwriter who took the risk – perhaps because the actual underwriter was not especially 'prudent'? - In answer to this question their Lordships held that, in order to avoid the contract, it was not enough to show that a material fact was not disclosed. • It was also necessary to show that the underwriter in question was induced by the non-disclosure into entering the contract on the relevant terms.

Answer 19

Material facts - inducement presumed Three of the four different underwriters who had subscribed to the same risk proved inducement, but the fourth was unable to produce evidence to this effect. The court accepted presumption of inducement in this case. Another situation in which the presumption may arise is where the leading underwriter and the following underwriters have to prove inducement.

Answer 20

Test for misrepresentation - ‘what would the insurer have done if there had been no misrepresentation?' In The Galetea, the subject matter insured was a yacht which was purchased in 2007 for €13m. It was insured for the same amount from year to year, without any thought being given to whether this was still the appropriate insurance value. When the yacht was insured in 2011 for the same amount, the actual value was approximately €7m. Leggatt J decided that if the insurer had been told the actual value of the yacht, it would not have insured the yacht for €13m. However, if misrepresentation had not been made and, for example, the value on the proposal form had been left blank, this would not have made any difference to the insurer as it regularly insured yachts without being given such information.

Answer 21

Moral hazard - criminal act A twelve-year-old conviction for armed robbery was held material to a proposal for household buildings insurance.

Answer 22

The insured, K Investment Ltd, insured its commercial premises in Glasgow. A fire damaged the premises and upon the insured's claim the insurer purported to avoid the insurance contract for material non-disclosure. The insurance cover was placed by the insured's brokers who prepared electronically a market presentation of some 20 pages which included a moral hazard declaration. There were also boxes to be ticked in respect of a list of propositions. One of those propositions was that: 'no proposer, director or partner of the insured under the contract in question has ever been made bankrupt, insolvent, or subjected to such proceedings'. The box was left unticked, and so when the form was received by the insurers it simply saw the word 'none' in response to the moral hazard declaration. The insurer did not know to which questions 'none' referred to. The presentation was followed by an email from the insurer which stated: 'Insured has never ... been declared bankrupt or insolvent ... [or] had a liquidator appointed'. The broker confirmed that it was accurate. The insured had been the director of four companies which had been dissolved after insolvent liquidation, or had been placed into insolvent liquidation in the previous five years. The assured breached the duty of disclosure. The court held that the words 'insured has never been declared bankrupt or insolvent' were not be construed as seeking confirmation and thereby waiving further disclosure. The tenor of the email was that the insurer had regarded the presentation of the risk as complete via the market presentation and was merely stating the terms and conditions of coverage.

Answer 23

Good faith in the claims process In The Star Sea, the insured vessel of that name put to sea in what was held to be an unseaworthy condition because of defects in its fire-fighting equipment and the master's ignorance regarding the operation of the equipment. Failure to extinguish a fire on board caused the loss that was the subject of the claim. In fact, two other vessels owned by the insured had previously been lost as a result of engine-room fires and two experts' reports had drawn the attention of the insured to the defects involved. However, these reports were not disclosed to the insurers at the time of the claim in respect of The Star Sea, which would not have been valid if the insured had known of the ship's unseaworthiness when it put to sea. The insurers argued that failure to disclose the reports was a breach of the insured's continuing duty of good faith. In fact, the insurers failed to prove that the insured knew of the unseaworthiness, but the case is important because it clarified the extent of the duty of good faith in the context of claims.

Answer 24

Fraudulent claim A case in which a burglary claim for £16,000 was genuine up to £14,000 but fraudulent for the balance of £2,000, the court held that the whole claim was forfeited.

Answer 25

Fraudulent claims H made a claim against his employers, asserting that he had suffered a serious back injury at work. The employer's liability insurers, Zurich, argued that the claim of £419,316.59 was excessive. However, on trial H succeeded on liability and later settled for £134,973.11. In 2005, H's neighbours approached his employer and stated their belief that his claim of having suffered a serious back injury was not consistent with his conduct and activities, and that he had recovered fully from the injury about a year before the settlement. Zurich commenced proceedings for damages for fraudulent misrepresentation and, in the alternative, avoidance of the settlement agreement. On trial, the judge found that H had deliberately exaggerated the extent of his injuries at the original trial. The judge, therefore, set aside the settlement money and instead awarded H damages in the sum of £14,720. H was required to repay the balance. The Supreme Court later supported this decision in its ruling that it was enough that Zurich was able to show that the misrepresentation was a material cause of it entering into the settlement.

Answer 26

Proof of breach of duty The insurer argued that the assured breached the duty either deliberately or recklessly but the courts held that the assureds were careless, but not either deliberate or reckless in breaching their duty

Answer 27

Pre-contractual breach by the insurer This concerned non-disclosure on the part of the insurers. The insurers were aware that insurance brokers had fraudulently issued cover notes for credit insurance to their clients when the cover had not been completed and were sued by the insured for failing to disclose this fact to them. The case confirmed the previous position under the MIA 1906 that the only remedy for the insured in such a case was to avoid the contract and recover the premium. It was held that there was no right to claim damages in addition.

Answer 28

A fire policy covering a shop excluded liability for loss or damage occurring 'while gasoline is stored or kept in the building insured'. The policyholder did, in fact, have a small quantity of gasoline which he used for cooking but the court held that the exclusion did not apply because the words 'stored or kept', in their ordinary meaning, implied storage in large quantities, for the purpose of trade.

Answer 29

The importance of context in insurance policies The court held that seepage of water from a meadow into a downstairs lavatory to a depth of no more than a few centimetres was not a 'flood' within the meaning of the insured's household policy. The perils 'storm, tempest or flood' were grouped together in the policy wording, suggesting that 'flood' meant (as one of the judges put it) 'something which has some element of violence, suddenness or largeness about it', like the other two perils. The application of the contra proferentem rule rather than the noscitur a sociis rule would have produced a result in favour of the insured rather than the insurer. That is, the word ‘flood’ could have been viewed as ambiguous, in which case the insured would have been given the benefit of the doubt. In fact, the judges in Young were almost persuaded to apply the contra proferentem rule but in the end did not do so.

Answer 30

The importance of context Here damage was caused by the escape of water from the roof, which had accumulated over a nine-day period when there was very heavy rainfall. In this case, the court held that the rapid accumulation and subsequent ingress of water was sufficiently abnormal to constitute a flood.

Answer 31

Contra preferentum In this case an exception in a motor policy stated that cover would not apply when the vehicle was 'conveying any load in excess of that for which it was constructed'. The insurers argued that because the insured had carried six passengers in the insured vehicle (which was designed for only five) the exception operated and the loss was not covered. However, the court accepted the alternative interpretation put forward by the insured, that the clause operated only where a weight load was exceeded, which had not happened in this case.

Answer 32

Warranty breach The House of Lords held that a breach of warranty terminated cover automatically from the date of breach and, to all intents and purposes, except for the obligation to pay the premium, terminated the insurance policy. Although the House of Lords did not state that this rule applied to non-marine insurance, it was assumed that it did in subsequent cases.

Answer 33

'Basis of contract' clauses The proposer stated incorrectly the address at which his vehicle was garaged, in response to a question on the proposal form. In this case there was no mention in the policy that an untrue answer would render it void, but merely a statement that the proposal would be the 'basis of the contract'. The court held that this in itself was enough to turn the statements on the proposal into warranties.

Answer 34

Suspensive conditions The claimant insured two taxi cabs, and in answer to a question on the proposal form as to whether the vehicles were driven in one or more shifts each day answered: 'Just one'. When the accident in question happened, the vehicles were only being used for one shift per day, but some time earlier one of the vehicles had been driven in two shifts for a short period. It was held that the statement on the proposal form did not create a continuing warranty that the vehicles would only be driven in one shift, but meant that cover would not apply when the vehicles were being driven in more than one shift.

Answer 35

Breach of collateral ('mere') condition The insurer had to indemnify the insured despite the breach of a (mere) condition, but was also entitled to deduct 15% from the indemnity to reflect the prejudice suffered as a result of the breach.

Answer 36

Joint and composite insurance Provides a good illustration of the approach taken by the courts when there is doubt about the nature of a policy covering several parties. n this case the defendant insurers provided professional indemnity insurance to JDW, a company that carried out estate agency and valuation business. The claimants obtained judgment for breach of professional duty against JDW but the insurers repudiated liability to indemnify the firm. They did so on the basis of non-disclosure and breach of warranty, based on the assumed fraud by JDW’s managing director (B) in making valuations for the claimant. Under the policy, various persons were included within the definition of the insured, including the company itself and its directors. Company directors do not have a common interest, and are not jointly and severally liable for each other’s defaults, and the court ruled that this was a composite insurance that covered the company and each of its directors individually. The company JDW was vicariously liable for the fraud of the managing director (B) and, while B could not claim an indemnity, the insurers were liable to indemnify JDW.

Answer 37

Recovery under joint insurance The owner's fraud did not nullify the claim by the co-assured bank against the insurer.

Answer 38

Recklessness of the insured in claims Conditions requiring the insured to take 'reasonable care to avoid loss' in a personal all risks policy and a travel policy were interpreted in this way. The insured had been travelling to France and, arriving at the Dover ferry with time to spare, left his car in an unattended car park for 15 minutes. Valuables worth £50,000 were locked in the glove compartment of the car and these were stolen when the car was broken into. The Court of Appeal decided that the insured was entitled to claim because his conduct, although careless, was not reckless.

Answer 39

Late claim payment The insured's business was invaded by thieves or vandals and the machinery wrecked. The insured needed the insured amount to save his business. Initially, the insurer denied liability, but it then decided to pay the insured amount three-and-a-half years later. During this time, the insured lost his business. The Court of Appeal rejected the insured's claim from the insurer for damages for late payment. The only option recognised by the court for the insured to be compensated for late payment was claiming interest.

Answer 40

Proximate cause This concerned a ship that was damaged by a torpedo (excluded as a war risk) which, after reaching the port of Le Havre, sank while trying to move to an outer berth during a storm (insured as a peril of the sea). The established approach at this time would have been to treat the last event to occur as the proximate cause, but the House of Lords held that the cause needed to be 'proximate in efficiency', not 'closest in time'. As a result, the torpedo was treated as the proximate cause, because the damaged caused had been effective throughout.

Answer 41

One insured and one excluded event Here the insured company had built a storage tank at a plasticine factory. A fire started in the tank and destroyed the factory, so that they had to pay damages to the owners, Harbutt's Plasticine Ltd. The fire for which they were legally liable arose from a combination of two causes. First, from the defective state of the equipment installed (a source of liability which was excluded by the public liability policy) and, second, from the negligent act of an employee who switched on equipment so that it was left on all night (a source which was insured). These causes were independent (neither one led to the other) and also interdependent (neither would have caused the fire on its own). The court held that the proximate cause of the loss was the defective state of the equipment but it was noted, obiter, that had both causes been equally powerful the insurers would still have escaped liability since one 'peril' was excluded.

Answer 42

One insured and one uninsured event In this case, damage to a yacht was caused by two concurrent proximate causes. First, heavy weather (a peril of the sea which was insured) and, second, defective design (which was an uninsured peril – neither insured not excluded). Neither cause would have brought about the loss on its own and, since the former was insured and the latter was not excluded, the insurers were liable in full.

Answer 43

Insured vs excluded peril The Court of Appeal considered claims under a business interruption policy arising out of the Hatfield rail disaster. In this case, the Court of Appeal had to consider whether train operators' business interruption losses were caused by unusual levels of wear and tear (an excluded peril) or speed restrictions (introduced by Railtrack as a result of the wear and tear). It was held that there were two possible ways of viewing the situation – (a) that wear and tear (an excluded risk) was the sole proximate cause of the loss, even though the speed restrictions were the immediate cause; and (b) that there were two causes of roughly equal effectiveness (the wear and tear and the speed restrictions) and, therefore, two proximate causes. Whether the wear and tear was the single proximate or both were proximate causes, the insurer was entitled to rely on the exclusion and refuse the claim. It may be worth noting that this case differs from Wayne Tank and Miss Jay Jay in that the two possible causes of the loss (the wear and tear and the speed restrictions) were not independent, since the first led to the second. On this basis, the first analysis (wear and tear the sole proximate cause) seems a better explanation.

Answer 44

Covid-19 and proximate cause The UK Supreme Court applied the concurrent causes rule to independent causes, although the concurrent causes rule had never applied to independent causes before. The matter at stake was that all the cases of Covid-19 nationally caused the imposition of the Government restrictions which caused loss of profit to many small businesses and enterprises. Whilst an individual case of Covid-19 independently could not cause the loss of profit, the combination of all the Covid-19 cases did. Assume that a business has a business interruption insurance which provides cover for loss of profit caused by an infectious disease, such as Covid-19, if occurred within 25 mile of the premises. For the business it would be impossible to prove that only the cases occurred within the 25 mile of the premises caused its business interruption. All the cases of Covid-19 made the loss inevitable. The Supreme Court held that each case of Covid-19 was necessary to cause the business interruption losses and each Covid-19 case was a proximate cause of the loss.

Answer 45

Claim prevention costs The claimants incurred expense in repairing an embankment in order to prevent sewage sludge from escaping into the adjacent river. They tried to argue that there was an implied term that required them to take action to prevent or minimise insured losses, and that it was also an implied term that they would be indemnified for any expenditure involved in complying with this term. The Court of Appeal rejected this argument, on the basis that it was open to the parties to agree expressly that such expenses would be recoverable. In addition, there was an express term that required the insured to take reasonable precautions to prevent a loss event, maintaining buildings etc., at their own expense. The suggested implied term would therefore be inconsistent with the express wording of the contract. This case established that it is not an implied term in an insurance contract that the insurer would indemnify the insured for the expenses incurred to prevent or minimise an insured loss. An express term to this effect is required.

Answer 46

Claim prevention costs outside liability The passenger protection insurance policy was ‘to indemnify the Insured Persons in respect of their net ascertained financial loss sustained arising from the cancellation or curtailment of the declared trip travel arrangements arising solely from the event of the insolvency of [Hebridean International Cruises Limited (HICL)]’. HICL entered administration before it performed the contracts it had entered into with its clients to provide them with cruises on board Hebridean Princess. The cruise ship was sold to another company by HICL’s administrators. The purchaser of Hebridean Princess offered

Answer 47

War as an excluded remote cause The insured was killed in the darkness by a train while inspecting sentries guarding a railway, the lights having been extinguished under wartime regulations. War was excluded as an indirect as well as a direct cause and so the insurers were not liable, even though war was only a remote cause of the accident. The effect, therefore, was to widen the exclusion and reduce the scope of the cover.

Answer 48

Claim prevention costs The claimants incurred expense in repairing an embankment in order to prevent sewage sludge from escaping into the adjacent river. They tried to argue that there was an implied term that required them to take action to prevent or minimise insured losses, and that it was also an implied term that they would be indemnified for any expenditure involved in complying with this term. The Court of Appeal rejected this argument, on the basis that it was open to the parties to agree expressly that such expenses would be recoverable. In addition, there was an express term that required the insured to take reasonable precautions to prevent a loss event, maintaining buildings etc., at their own expense. The suggested implied term would therefore be inconsistent with the express wording of the contract. This case established that it is not an implied term in an insurance contract that the insurer would indemnify the insured for the expenses incurred to prevent or minimise an insured loss. An express term to this effect is required.

Answer 49

Claim prevention costs outside liability The passenger protection insurance policy was ‘to indemnify the Insured Persons in respect of their net ascertained financial loss sustained arising from the cancellation or curtailment of the declared trip travel arrangements arising solely from the event of the insolvency of [Hebridean International Cruises Limited (HICL)]’. HICL entered administration before it performed the contracts it had entered into with its clients to provide them with cruises on board Hebridean Princess. The cruise ship was sold to another company by HICL’s administrators. The purchaser of Hebridean Princess offered to perform the contracts but requested the clients make a claim against HICL’s insurers and pay the cost of the cruise from the insured amount. The court held that the beneficiary of a travel policy providing cover in the event of the cancellation of a cruise was not required to accept an alternative cruise on identical terms but offered by another provider.

Answer 50

Proximate cause modified by the words of the policy, but the effect was to widen the scope of the cover rather than narrow it A Mrs Bentley had parked her car at the side of a major road, having run out of petrol. After about ten minutes a colleague stopped on the other side of the road. Mrs Bentley rushed across the road to talk to her colleague but ran into the path of a car driven by Dunthorne. Mrs Bentley was killed and Dunthorne was seriously injured. Dunthorne brought an action in negligence against the estate of Mrs Bentley, and her motor insurers were called upon to pay the claim. The motor policy covered liability 'caused by or arising out of' Mrs Bentley's use of her motor vehicle. However, the motor insurers denied liability, pointing out that Mrs Bentley's car had been properly parked about ten minutes before the accident occurred and, therefore, the accident was not 'caused by or arising out' of her use of the car. The Court of Appeal accepted that the accident for which she was liable was not 'caused by' the use of the car; that is, the use of the car was not the proximate cause of the accident. Nevertheless, the court held that the accident did 'arise out of' the use of the car – and so the insurers were liable. The inclusion of the words 'arise out of' indicated that the doctrine of proximate cause was not to be applied strictly and that cover operated where the use of the car was only a remote cause of the accident.

Answer 51

The standard for establishing fraud is likely to be higher than for other types of civil action. It was held by the High Court that: ..if a defendant or plaintiff is to allege fraud, then the standard of proof is somewhat higher than that ordinarily applicable to civil matters, but not as high as that relating to criminal matters. The nature of what is being alleged means that the burden of proof is very much with the insurer to prove that fraud has taken place.

Answer 52

The insurers bore the burden of proof of the assured's deliberate cast-away of the insured ship. Teare J held that the civil test of 'balance of probabilities' varied with the seriousness of the allegations charged so that in effect it was close to the criminal standard of beyond reasonable doubt. A strong suspicion of guilt did not suffice.

Answer 53

Fraudulent device The claim was for a loss that the insured genuinely suffered – he lost the machinery as a result of a fire in the bakery that he was running. However, he could not find the original receipt for the price he paid for it and issued a fake invoice. This was use of fraudulent means and device.

Answer 54

Fraudulent devices In the Versloot Dredging case, the insured's loss was genuine. Water had frozen in the ship's pipes and, once the ship sailed towards a warmer climate, it flooded into the ship's engine room. The engine was repaired and the loss was caused by an insured peril. The insured was entitled to indemnity under the insurance contract. The insured worried that the insurers might argue there was negligence on the part of the insured's senior management. Therefore, the insured claimed that an alarm had gone off on the ship before the flood had occurred and that the crew had ignored it. Hence, if there was any negligence in the case, it belonged to the crew. In fact, there had been no such alarm. Discovering this lie, the insurers argued the fraudulent means and device rule: that the insured told a lie to improve their situation towards the insured under the insurance contract. The court initially held that where the insured had given a false representation in support of their claim, which turned out not to be relevant, the claim should fail. This position was upheld by the Court of Appeal on the basis of the need to deter fraud. However, the Supreme Court overturned this decision. In their judgment, the Supreme Court decided that the lie must be relevant to the existence or the amount of the insured's entitlement – this could only be determined at the end of a trial once all the facts were known rather than the situation as it was seen by the insured at the time the lie was told. The insured was entitled to be indemnified for their claim. While the lie was immoral, the judges felt that the likelihood of having to pay third party legal costs and the difficulty of obtaining insurance in the future amounted to an adequate punishment.

Answer 55

Appropriate basis of indemnity depends on a number of factors The claimants had bought, in 1969, an old maltings (buildings used for processes employed in the brewing of beer) and insured them for £18,000, which was a little more than the original purchase price. Subsequently, the sum insured was increased to £628,000 to cover the probable cost of rebuilding in the event of the building being totally destroyed. A fire then occurred which destroyed a substantial part of the building and a dispute arose as to the appropriate basis of indemnity. The judge outlined three alternative bases: • market value; • the cost of erecting a modern replacement building (around £50,000); and • the cost of reinstatement, i.e. rebuilding the damaged part in its original form (which would amount to more than £250,000). The market value of the building would have been difficult to assess, but would probably have been far less than the cost of rebuilding. The cost of a modern replacement would also have been much lower than the rebuilding cost. Nevertheless, the court held that the appropriate basis of indemnity was the third alternative: the cost of rebuilding in the original form. This was because the insured had a genuine and reasonable intention of rebuilding.

Answer 56

Appropriate basis of indemnity In this case, the court held that the claimant was not entitled to claim for the costs of rebuilding, as their cottage was up for sale at the time it was destroyed by fire. The correct basis of indemnity was the market value, which was considerably less than the cost of rebuilding.

Answer 57

Cover on a reinstatement basis At the time of the trial, no reinstatement had occurred as the insurers denied all liability and asserted that the insured was not entitled to be compensated on the basis of reinstatement. The court held that, in most cases, the insured’s loss was the cost of reinstatement although it recognised that the position would be different if the insured was trying to sell the property at the time of the loss, intending to destroy it or if no one in their right mind would reinstate. It was doubtful whether a claimant who had no intention of using the insurance money to reinstate was entitled to claim the cost of reinstatement as the measure of indemnity unless the policy so provided.

Answer 58

Partial loss in agreed value policy In this case, a large house was insured under a fire policy for an agreed value of £106,850 although its actual value was only £18,000 at the time when it was damaged by fire. The effect of the fire was to reduce the value of the building to £12,600: a reduction of 30%. The court held that the insured was, therefore, entitled to 30% of the agreed value, namely £32,055. Under the rule, the insured is thus entitled to a proportion of the agreed value which is equivalent to the degree of depreciation in actual value caused by the loss.

Answer 59

Insurer's election to reinstate a property The insurers elected to reinstate a partial loss but were prevented from doing so because the Commissioners of Sewers, using their statutory powers, ordered that the buildings should be demolished owing to their dangerous condition. The court held that the insurers were liable to pay the full value of the building to the insured as damages for breach of the contract to reinstate.

Answer 60

Subrogation Here, the seller of a house recovered £330 from his insurer when the property was damaged by fire between the signing of the contract and the completion of the sale. The buyer afterwards completed the purchase and, despite the fire, paid the full price of £3,100, which he was bound to do by the terms of the contract. It was held that the seller had to pay to his insurer £330 from the money that he had received from the buyer, otherwise the seller would have 'made a profit from his loss'.

Answer 61

Subrogation Insurers had paid £409 to the motor vehicle repairers who had carried out repairs on the insured's car. However, even though three attempts had been made to repair the car, the work was not satisfactory, so the insured sued the person who caused the damage and recovered £350, which he used to get the work done properly. The motor insurers attempted to claim this £350 by way of subrogation but failed because the repairs they had paid for were useless and no satisfaction note had been signed by the insured. The judge held that the insurers were not entitled to recover and stated: 'So far as the insured was concerned, they (the insurers) might have thrown £409 in bank notes into the Thames.'

Answer 62

Subrogation - surplus In this case insurers had paid an agreed value of £72,000 for the loss of a ship in a collision in 1945. The insured sued the Canadian Government, who owned the other ship, and damages of £75,000 were awarded. This sum was converted into Canadian dollars at the exchange rate prevailing in 1945. However, when the dollars were converted into sterling they produced £126,000, because the pound had been devalued in 1949. It was held that the insurers were entitled to £72,000 only, the sum they had paid out. The insured thus benefited from the £55,000 surplus (and the insurers, effectively, lost the interest that they could have earned on their money over 13 years).

Answer 63

Market agreements waiving subrogation - employers' liability Where a worker injured a fellow employee (who was his father) in the course of his employment. The injured employee recovered damages from the employer because the latter was vicariously liable (see Vicarious liability on page 2/22) for the son's negligence. Having indemnified the employers, the employers' liability insurers brought a successful action against the negligent employee to recover what they had paid. The court accepted the argument that the son had broken an implied term of his contract of employment (to take reasonable care) in injuring his father, giving the employer a right of recovery in contract which the insurers pursued by way of subrogation. Concern at the harsh effects of the decision, particularly in view of the relationship between the parties (because the compensation given to the father was taken back from the son), and accompanying criticism of the industry led insurers generally to agree to give up their subrogation rights in such cases.

Answer 64

Subrogation - co-insureds Rix LJ held that (in the absence of an express subrogation waiver clause) whether or not the insurer has subrogation rights depends on the underlying contract between the contractor and the subcontractor. If the underlying contract exempts the sub-contractor’s liability, there will be no subrogation rights but otherwise, the insurer subrogates into the contractor’s rights despite the co-insurance.

Answer 65

Subrogation - co-insurance The owners of the vessel Ocean Victory chartered the vessel by a demise charterparty dated 8 June 2005 to Ocean Line Holdings Ltd. On 2 August 2006, Ocean Line Holdings Ltd time chartered the vessel to time charterers. All of the charters contained a safe port clause under which the vessel was to be used at safe ports. Clause 12 of the demise charter required the demise charterer to put insurance in place for the joint account of the owners and demise charterers. On 24 October 2006, the vessel was lost in a storm at Saldanha Bay. The insurers indemnified the owners and demise charterers, and took an assignment of the demise charterers’ rights against the time charterers and sought damages for breach of the safe port warranty in the time charter. The Supreme Court unanimously rejected the claim on the basis that the port was safe. On the basis that there had been a breach, the Supreme Court divided 3:2 on the question of whether the demise charterers had a claim that was capable of being assigned. The majority held that there was no such claim – the insurance arrangements in the demise charter operated on the basis that there was an implied term in the demise charter so the owners had no cause of action against the demise charters for risks covered by the insurance. The minority view was that the safe port warranty took priority, and that although a payment by the insurers discharged the liability of the demise charterers to the owners, the insurance could not be relied upon by the time charterers to resist a claim by the demise charterers.

Answer 66

Subrogation - public policy The injured claimant worked for a cleaning firm (Cameron) that was contracted to clean at a Ford location. The claimant successfully recovered damages from Ford, which was vicariously liable for its employee's negligence. Ford then sought an indemnity from Cameron, relying on the indemnity clause in the contract, which led to Cameron trying to bring (through subrogation) a legal claim directly against the negligent Ford employee. The Court of Appeal rejected Cameron's claim, on the grounds of public policy, and highlighted that industrial relations would be harmed if there was a right to sue employees in such cases.

Answer 67

Contribution - 2 policies A policy which ended at 4pm on 4 September 2010 was not renewed with QBE, and the insured took out a new policy with Allianz that started at 4pm that day. The QBE policy included an 'excess' clause, under which, if there was any other insurance in place, the other insurance would respond first and QBE would only be liable for loss in excess of the cover of the other policy. There was a similar clause in the Allianz policy. At 4.35am on 4 September 2010, the property was severely damaged by an earthquake. QBE paid the claim but it sought 50% contribution from Allianz on the basis that Allianz had been on risk at the same time. The judge dismissed the claim and held that the Allianz policy should be construed as incepting at 4pm on 4 September 2010. The intention had been to provide seamless continuing cover rather than overlapping cover. If necessary, a term would be implied to that effect.

Answer 68

Contribution - a common interest In this case, merchants had deposited grain with a granary, the owners of which were treated as bailees of the grain. The grain was damaged by fire and, as the granary owners were strictly liable by custom of trade, they claimed against their own insurance. The insurer then tried to bring a claim against the merchants' insurer under contribution but the claim failed because the interests of the bailee and owner of the grain were different.

Answer 69

Contribution - insurers cannot always rely on a breach of condition The insured had two similar motor policies with the claimant and defendant insurers. He was involved in an accident in which a third party was injured and Legal and General negotiated a settlement of £65,000 with the third party. Having settled, they claimed a 50% contribution from Sphere Drake. Their claim failed at the Court of Appeal because the Legal and General policy included a 'rateable proportion' clause, the application of which meant that Legal and General should only have paid 50% of the loss (£32,500), and had therefore paid the other 50% on an ex gratia basis. Just as no subrogation rights exist in respect of a voluntary payment so there are no rights of contribution. The judges also considered whether Sphere Drake could rely on the fact that the insured had failed to notify them of the loss, in breach of a policy condition, to reject a contribution claim. The Court's view was that this argument would not have succeeded, as contribution was based on an equitable right and on balance allowing recovery would have been less unfair.

Answer 70

Other non-contribution clauses Loyst had caused an accident while driving Gale's car and his liability was insured under Gale's Motor Union policy, which gave 'any driver' cover. However, Loyst was also insured under the 'driving other vehicles' extension of his own policy, issued by General Accident. Although both policies excluded liability for losses that were insured elsewhere, the judge ruled that the loss should be shared equally by the two insurers.

Court Cases Flashcards

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