A Euro-spanner in the P&I works: direct actions allowed against insurers in EU courts, and no argument allowed.

UK-based P&I clubs will be hopping mad at the decision of the ECJ today in Assens Havn (Judicial cooperation in civil matters) [2017] EUECJ C-368/16, and will doubtless be joining a number of others in saying that Brexit can’t come soon enough. The problem can be summed up thus: as regards events in the EU the Assens Havn decision has blown out of the water their carefully-crafted provisions aimed at ensuring that all proceedings against them in respect of their members’ liabilities are sorted out in England.

The background (see here in this blog) arose out of events ten years ago in the Danish port of Assens. A Danish tug, entered by bareboat charterers with Navigators Management (UK) Ltd, negligently damaged shore installations. The charterers being insolvent, the port sued Navigators in Denmark under a Danish direct action statute. Navigators relied on the English law and jurisdiction clause in their agreement and insisted on being sued in England. The port relied on Arts 10 and 11 of Brussels I (now Recast 12 and 13, there being no relevant difference), saying that in matters of insurance the club could be sued in Denmark as the place where the damage occurred. Navigators said that Art.13.5 (recast Art.15.5) allowed the relevant jurisdiction to be ousted by agreement, including agreement between the insurer and the insured. It was only fair, they argued, that if the port wanted to use a direct action provision to sue them, the port had to take the insurance contract warts and all. The Danish courts sided with Navigators, but referred the matter to the ECJ.

The ECJ was having none of it. True, the plain words of Art.13.5 said that the provisions of Part 3 of the Regulation could be contracted out of in the case of (inter alia)  marine third-party insurance contracts. True also that the Brussels provisions dealing with direct actions against insurers — Arts.8-10 and 11.2 — indubitably formed part of Part 3. Nevertheless, the Court managed to interpret the Regulation as forbidding any contractual ouster of the direct action provisions. This it did on two grounds. One, flimsy enough, was that the direct action provisions contained no specific saving for Art.13.5. The other was that the victim of an accident always had to be protected in its claims on the basis that it was likely to be the weaker party (!). This can best be described as bizarre: not only is the right of contracting-out under Art.13.5 carefully limited to insurance against solidly commercial risks, but the victims are likely to be substantial businesses or authorities and / or their property insurers, none of which one would have thought deserving of any particular solicitude.

Discounting any entirely unworthy thoughts connected with ideas such as sour grapes and Brexit, one can only speculate that the Court regarded the regime that previously protected P&I clubs as a tiresome anomaly, to be removed almost at any cost. In any case, the position now appears clear. In EU jurisdictions that allow direct actions against insurers, P&I clubs will have to resign themselves to being sued wherever bad things happen. Only in the case of other EU jurisdictions, and outside the EU, where they have in addition the useful weapon of the anti-suit injunction available to them (see here) — can they continue as before and benefit from the savings in costs and trouble of one unique English forum.

Product liability EU-style: bad news for liability insurers

The ECJ today made life more difficult for insurers covering risks arising under the Product Liability Directive. This Directive, you will remember, says that the victim of a defective product need not prove negligence, but must prove defectiveness and causation. W v Sanofi Pasteur [2017] EUECJ C-621/15 was a vaccine damage case. A couple of years after beginning a course of anti-hepatitis vaccination, W had multiple sclerosis. There being no clear medical evidence as to how the disease came about, a French court was prepared to infer from the proximity between vaccination and disease and the lack of any other explanation that the vaccine had been defective and had caused the injury. It therefore gave judgment for W, a view held justified by the Cour de Cassation. After a few further procedural skirmishes, Sanofi — or, one suspects, its insurers — went to the ECJ, alleging that inferences of this sort were contrary to the explicit requirement in Art.4 that the claimant actually prove these matters, and that strict proof in every particular ought to be required.

The ECJ, as expected, was having none of it. The Directive existed to make life easier for  injured consumers; furthermore, the real complaint related not so much to the burden of proof as to the means of proof, which was a matter of procedure left up to national courts.

Stand by underwriters, as we said, for increased payouts under our home-grown version of the Directive, Part I of the Consumer Protection Act 1987.

Arbitration post-Brexit

The Lord Chief Justice a couple of days ago gave a bullish speech in Beijing about London as an arbitration centre post-Brexit. Despite the self-serving nature of the speech, one suspects he may well be right. At least post-Brexit we should with a bit of luck get shot of the ECJ control over jurisdiction; be able to abandon The Front Comor [2009] EUECJ C-185/07, [2009] 1 AC 1138 and go back to issuing anti-suit injunctions against Euro-proceedings that infringe London arbitration agreements; and possibly get rid of tiresome Brussels I provisions that make life difficult for P&I clubs which want to insist on arbitrating here (see, for details, this post). But as usual, to know the details we have to wait and see.

Liability insurance — holders can sleep easier

Confirmation from the CA today in Zurich Insurance Plc v Maccaferri Ltd [2016] EWCA Civ 1302 that insurers can’t expect second sight from their policyholders without the clearest words. Maccaferri, suppliers of outsize staple guns for use on wire fencing, hired one to Jewson, who hired it to construction company Drayton. Maccaferri were insured against product liability by Zurich, under a policy requiring the insured to “give notice in writing to the Insurer as soon as possible after the occurrence of any event likely to give rise to a claim with full particulars thereof”. On 22/9/2011 an employee of Drayton, in an incident whose details were not entirely clear, suffered an eye injury from the gun; Maccaferri was told a few days later. In March 2013 the employee sued Drayton, alleging that there had been something wrong with the gun; on 22/7/2013 Maccaferri were told that they had been joined as third parties, and promptly notified Zurich. In the event Maccaferri settled the proceedings against them for something over £200,000. Zurich refused to pay, on the basis of late notification. Maccaferri retorted that although they had known of the accident in September 2011 there had until 2013 been no indication of any potential liability. Question: was the duty to notify triggered by knowledge of the accident, or by knowledge of the accident plus its propensity to spawn a claim? Agreeing with Knowles J, the CA plumped for the latter. And, in our view, quite rightly so. Do we really want notifications being given to underwriters of every piddling accident, just in case, in order to avoid the risk of argument later? Probably not. Nor, one suspects, do sensible insurance companies really want it either.

2017

 

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Happy New Year to all our followers on the first working day of 2017. We will continue to look closely at what matters in maritime and commercial law. Once the minor matter of Brexit is out of the way, there are at least three rather important Supreme Court decisions in the pipeline — on safe ports, combined dangers, and (vitally) the effect of joint names insurance on liability (The Ocean Victory [2015] EWCA Civ 16); on “per claim” limits in insurance (AIG v Woodman [2016] EWCA Civ 367); and on the right to recover more by way of commercial damages than the losses that appear on any balance sheet (the combined appeals in The New Flamenco [2015] EWCA 1299 and Swynson v Lowick Rose [2015] EWCA Civ 629). And much more. As ever, watch this space.

How to read the Inter-Club Agreement: order a ship around at your own risk

Teare J today faced a neat point of interpretation of the ICA. In Transgrain Shipping (Singapore) PTE Ltd v Yangtze Navigation (Hong Kong) Co Ltd [2016] EWHC 3132 (Comm) Transgrain sold soya bean meal to Iranian buyers. To transport it they chartered 45000 grt bulker MV Yangtze Xing Hua on a NYPE time charter trip. The ICA was expressly incorporated. The vessel arrived: the buyers were decidedly leisurely about paying for the cargo or collecting it. Transgrain in response ordered the vessel to wait for four months, it being cheaper to pay hire and/or demurrage (which could then be billed to the buyer) than to warehouse the cargo ashore.

At the end of the period the cargo overheated. The owners settled a cargo claim by the consignees for about € 2.6 million, and then turned on Transgrain. In arbitration proceedings neither Transgrain nor the owners were found to have been at fault; the overheating had been caused, unsurprisingly, by sitting for about 18 weeks off the Iranian coast. As a result Transgrain argued that this was a case of “all other cargo claims” and argued for a 50-50 split under s.8(d) of the ICA. Owners countered that under the proviso to s.8(d) claims caused by the “act or neglect” of one or other party were for that party’s account: Transgrain argued that “act”, yoked as it was to “neglect”, implied “negligent act” and that, there being no fault in anyone, the proviso fell away.

Teare J sided with owners: “act”, he said, meant “act”, no more and no less. Probably rightly, in our view. If you insist on using a vessel in a particular way – for example as a floating warehouse – and a third-party claim results, there is much to be said for the idea that this is something you do at your own risk. Mind you, this result now leaves plenty of work for lawyers in future cases in arguing about how far a given claim is caused by a given (faultless) act: but we can leave that for another day.

Direct actions against insurers — EU-style

P&I clubs already have their issues with the EU, as regards (for instance) Solvency II: see our post here. Now another cloud looms. P&I clubs based in the UK jealously guard their English law and jurisdiction clauses. But where a direct action is brought in an EU state, is the jurisdiction clause compatible with EU law?

The point has arisen in Denmark and is headed for the ECJ. A Danish tug, entered with Navigators Management (UK) Ltd, caused mayhem in the Danish port of Assens. The tug’s bareboat charterers being insolvent, the port sued Navigators in Denmark under the Danish direct action statute: Navigators relied on the English law and jurisdiction clause and insisted on being sued in England. The port relied on Arts 10 and 11 of Brussels I (equivalent to Recast 12 and 13, there being no relevant difference between the two here), saying that in matters of insurance the club could be sued in Denmark as the place where the damage occurred. Navigators said that Art.13 (recast Art.15) allowed the relevant jurisdiction to be ousted by agreement. The port retorted that this was all very well, but a term in the contract between the charterers and the club could not in the nature of things be binding on it as a third party. Whereupon the club riposted that if the port wanted the advantage of the contract between it and the charterers then the port had to take that contract warts (i.e. jurisdiction clause) and all.

At this stage it’s not clear why the port wanted so much to sue in Denmark. We can only presume that, despite the cover being written under English law, Danish law would apply to the exclusion of English law to at least some aspects of the direct claim and deprive the club of some advantage or defence otherwise available.

What the ECJ will hold is anyone’s guess. One hopes it will side with the insurer: one way P&I clubs keep costs down and liabilities in check is to avoid entanglements with foreign law as far as possible, and keep in reserve the possibility of insisting on “pay to be paid” provisions — something many EU jurisdictions take a poor view of. There’s certainly some logic on that side. In particular, the right under Art.13 to exclude jurisdiction is specifically stated not to apply to direct personal injury claims against liability insurers: something that seems to suggest that but third party direct claims in general can be excluded. On the other hand, logic (if one may say so) has not always been the ECJ’s strong suit when the court has been presented with the opportunity to extend EU control over commercial activities.

If the decision goes against Navigators, we may see yet another item added to the already long UK Brexit wish-list.

Many thanks to HFW (who give the arguments in detail) for the tip-off. More detailed coverage of the affair (in English) from the Copenhagen law firm Gorrissen Federspiel can be found here.

Might you need a specialised drug-smuggling insurance clause?

Another worry for hard-pressed shipowners operating in the Caribbean and bits of South America. If someone tries to use your ship as a mechanical “mule” for drug-smuggling and the vessel gets seized, you can lose insurance cover. In Atlasnavios Navegação Lda v Navigators Insurance Company Ltd [2016] EWCA Civ 808 this happened to an elderly  bulker, the B Atlantic. While she was loading a cargo of coal in Venezuela, enterprising drug smugglers strapped nearly 300 lb of cocaine to her hull for later retrieval. The drugs were found, and the vessel seized and condemned.

The loss was prima facie covered under the Institute War & Strikes Clause, which gave cover for capture, seizure and arrest; against persons acting maliciously; and against confiscation and expropriation. But specifically excluded under Clause 4.1.5 was detainment, confiscation or expropriation by reason of infringement of customs or trading regulations, which led the insurers to decline to pay. Flaux J decided for the owners, essentially on the basis that the substantial cause of their loss was the malicious acts of the smugglers and not the resulting infringement of the Venezuelan customs code. The Court of Appeal disagreed: the exclusion of infringement of customs or trading regulations should be given its ordinary meaning, and in the circumstances excluded liability.

As we said at the beginning, a big headache for owners (and in future a matter for consideration by their insurance brokers).

 

Farewell to the “Fraudulent Devices” Doctrine!

The recent decision of the Supreme Court in Versloot Dredging BV v. HDI Gerling Industrie Versicherung (The DC Merwestone) [2016] UKSC 45 has hit the insurance market like a bombshell! For more than a decade, it has been assumed that if a fraudulent device (such as a “lie”) is used to promote an honest claim, as long as the device used is material in the sense that it is likely to provide an advantage to the assured in securing a settlement, the claim will be treated as a “fraudulent” one. The Supreme Court ruled with a majority (4:1) that this is not the case!

The facts are relatively straightforward. The assured’s vessel, The DC Merwestone, suffered a flooding incident in January 2010. The incident resulted in irreparable damage to her engine, located at the aft end, even though water ingress was through the bow thruster space at the forward end of the vessel. The assured claimed from its hull insurer for the cost of replacing the damaged engine. The coverage defences put forward by the underwriters were rejected by the first instance judge, Popplewell, J, but he held that the assured had forfeited its otherwise valid claim as he used fraudulent devices in advancing said claim. During the casualty investigation, the underwriters’ solicitors sought the assured’s explanation for the ingress, its spread from the bow thruster room to the engine room and the reason why the crew were unable to control it using the vessel’s pumps. The assured’s General Manager responded in a letter which contained a representation that the crew had reported that they had heard a bilge alarm (which would have alerted the crew to the flooding) at noon on the day of the casualty but had failed to investigate the alarm on the basis that its sounding had been attributed to the rolling of the vessel. The representation was untrue in that the crew had never heard or reported a noon alarm and had never given an explanation for not investigating. This representation was held to be a reckless untruth.

The majority of the Court – Lord Sumption, Lord Clarke, Lord Hughes and Lord Toulson – appreciating that this is essentially a policy question considered it to be “a step too far” and “disproportionately harsh” to deprive an assured of his claim by reason of his fraudulent conduct if at trial years later it turns out that the fraudulent device used at the claims stage had been unnecessary because the claim was in fact always recoverable. Their Lordships seem to be influenced by the fact that an assured utilising fraudulent devices to advance his claim still has a genuine belief in the accuracy of the claim whilst the same cannot be said for an assured who creates the loss in order to make a claim or who exaggerates the extent of his claim. It is worth noting that Lord Mance delivered a dissenting judgment arguing that “Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or questionable claim can tell lies with virtual impunity.”

This decision means that an insurer will not be able to defend against a claim in a case where the assured uses fraudulent invoices to secure a quick settlement for his claim (see, for example, Sharon’ Bakery (Euorope) Ltd v. AXA Insurance UK plc [2011] EWHC 210 (Comm)) unless, of course, the policy contains an express clause indicating that the claim will be forfeited if promoted by making use of fraudulent devices. Such express terms are common in fire policies but perhaps, in the light of this decision, insurers should consider incorporating them into marine and energy policies as well. Institute Hull Clauses 2003 could lead the way. Clause 45.3 stipulates:

“It shall be a condition precedent to the liability of the Underwriters that the Assured shall not at any stage prior to the commencement of legal proceedings knowingly or recklessly
… mislead or attempt to mislead the Underwriters in the proper consideration of a claim or the settlement thereof by relying on any evidence which is false
… conceal any circumstance or matter from the Underwriters material to the proper consideration of a claim or a defence to such a claim.”

Settlement of fraudulent insurance claims – Insurers 1, Fraudsters 0.

Among a slew of important commercial cases this week is the Supreme Court’s decision in Hayward v Zurich Insurance plc [2016] UKSC 48, which will we suspect gladden the hearts of underwriters everywhere.

A work accident victim, CH, took the opportunity grossly to overstate his disability and claimed some £400,000 from Zurich, the employer’s insurers. Zurich thought the claim might well be a wrong ‘un, and indeed pleaded that it was. But they settled it for about £135,000. Tipped off later that CH had indeed been lying all along, they sued to undo the settlement for fraud. The judge obliged, substituted an award of about £15,000 and ordered CH to repay the rest. The Court of Appeal reversed. Having themselves had suspicions about the claim, the insurers (it was held) couldn’t put their hand on their heart and say that they thought CH had been telling the truth: it followed that they couldn’t show the necessary reliance for the purpose of invoking CH’s fraud.

This holding was, to say the least, worrying for underwriters, and not only in injury cases brought against liability insurers. Theoretically, it seemed to mean that if any insurer thought a claim by a commercial policyholder was fraudulent and said so in the course of negotiation or litigation, the claimant was nevertheless safe in possession of his loot once he had extracted an agreement to settle.

The Supreme Court were understandably unhappy with this prospect. It accordingly restored the first instance judgment. To succeed in a claim of fraud, a person did not have to show that he had believed in the truth of what the defendant had said; he merely had to show that the untruths he had been told had acted as an influence on him. Since Zurich had clearly been influenced into settling by what CH had said, the necessary reliance was present; CH retained only the damages he was actually entitled to and had to return the rest.

This result is, it is suggested, welcome. It will add to the armoury available to insurers against fraud (already augmented, in the case of fraudulently exaggerated personal injury claims, by s.57 of the Criminal Justice and Courts Act 2015 allowing their dismissal in toto), and do something to make up for their loss last week in Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors [2016] UKSC 45 of the ability to decline payment on the basis of collateral lies told by the assured.

Note: the Supreme Court left open the question whether a court settlement could only be reopened for fraud on the basis of evidence not reasonably detectable at the time. It is to be hoped that the answer to this is No, as already suggested in Australia. Why, one might ask, should a settling underwriter owe any duty whatever to a fraudster to check for possible evidence of the latter’s dishonesty at the time of settlement?