What happens when coverage of an insurance policyholder’s claim turns upon what they claim is an error in drafting the policy wording, such that the document does not reflect the parties’ true (or objective) intention? In this article, Head of Policyholder Disputes Aaron Le Marquer examines recent Court of Appeal decisions that have clarified and illuminated the courts’ approach in the face of such a dilemma.
It is a truth universally acknowledged that most insurance policy documents are poorly drafted. Inconsistent use of defined terms, overlapping and inconsistent insuring clauses, extensions and exclusions, and ambiguous or meaningless clauses are commonplace, and the cause of much head-scratching among policyholders, brokers and claims handlers when claims fall to be considered.
Before reviewing the two recent Court of Appeal decisions, it is useful to recall the 2023 first instance decision in George on Rye, in which the policyholder successfully overcame a drafting error to establish coverage for its claim.
George on High Limited & George on Rye Limited v (1) Alan Boswell Insurance Brokers Limited (2) New India Assurance Company Limited [2023] EWHC 1963 (Comm)
In George on High, the policyholder sought coverage for property damage and business interruption losses flowing from a fire at its hotel and restaurant in Rye. The issue under dispute was whether the entity that operated the business was insured under the policy as the named policyholder was “George on High Limited t/a The George in Rye”, but the hotel business was operated by George on Rye Limited, which was not named as an insured under the policy.
The insurers claimed, therefore, that George on Rye Limited was not entitled to an indemnity for its business interruption losses. The policyholder argued that it was obviously intended that the insurers provide coverage for George on Rye’s business interruption.
Alternative cases in construction and in rectification were mounted, summarised succinctly by the judge as follows: “…in very broad terms construction is analysing, objectively, what the contract means. Rectification is, on the other hand, changing the contract so that it means what it should have meant.”
Starting with the case in construction, the judge cited and applied the relevant test set out in Chartbrook Ltd v Persimmon, in which the House of Lords approved Mr Justice Brightman’s conditions for “correction of mistakes by construction” in East v Pantiles, :
“Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”
“…what was said in negotiations is irrelevant and thus inadmissible”
“…the fact that the natural meaning of the words appears to produce a “bad bargain” for one of the parties or an “unduly favourable” result for another, is not enough to justify the conclusion that something has gone wrong. One is normally looking for an outcome which is “arbitrary” or “irrational” before a mistake argument will run.”
In relation to the first limb of the test, the court concluded that the relevant words were not on their face clearly wrong or nonsensical. However, because the court found that the insurers objectively knew at the time of the contract that the named entity did not operate the business described, the court concluded that a reasonable person would have concluded a mistake had been made. As a matter of construction, the parties’ objective intention was therefore to insure the operating entity of the hotel for its business interruption losses.
Turning to rectification, the court also relied upon Chartbrook to discern the applicable test:
“(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
(2) there was an outward expression of accord;
(3) the intention continued at the time of the execution of the instrument sought to be rectified;
(4) by mistake, the instrument did not reflect that common intention.”
The test for rectification therefore depends far more heavily on factual evidence around the circumstances in which the contract was negotiated, in contrast to the objective test to be applied in the case of construction. In George on Rye’s case, the court found that the test for rectification was also satisfied and would have entitled the policyholder to indemnity even if its claim founded on construction had failed.
Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors [2024] EWCA Civ 446
The claim in Project Angel Bidco was brought under a warranty and indemnity policy purchased by the buyer of a construction company. The share purchase agreement included warranties relating to bribery and corruption (the “B&C Warranties”), which were expressly noted as ‘covered’ in the cover summary of the policy.
However, the policy also contained an exclusion for any loss arising out of ‘ABC Liability’, defined as “any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.
The claimant alleged that breaches of the B&C Warranties had taken place and sought an indemnity for its losses under the policy. The insurer declined coverage in reliance on the ABC Liability exclusion.
The claimant’s case was that on a plain reading of the ABC Liability definition, any claim for breach of the B&C Warranties would always be excluded. As the warranties were expressly noted as ‘covered’ in the contract documentation, there must have been a mistake.
The claimant proposed that the obvious and only way to correct the mistake was by adding a single letter to the drafting of the exclusion, changing the words “any liability or actual or alleged non-compliance” to “any liability for actual or alleged non-compliance”, thus narrowing the scope of the exclusion. The claimant argued that such a change gave commercial effect to the exclusion to enable it to be engaged in certain circumstances without entirely eliminating the cover granted in respect of breaches of the B&C Warranties.
At first instance and in the Court of Appeal, the principles in Chartbrook and East Pantiles were again approved and followed, with the Court of Appeal noting Lord Justice Brightman’s further comment in East Pantiles: “…the principle applies where a reader with sufficient experience of the sort of document in issue would inevitably say to himself ‘Of course X is a mistake for Y’.”
The court concluded that the apparent contradiction between the cover spreadsheet and the ABC Liability exclusion did not mean there had been an obvious error. The cover spreadsheet delineated the prima facie scope of cover granted, while the exclusions then acted to restrict cover in certain circumstances. There was nothing unusual about that, even if it meant that, in practice, a breach of the B&C Warranties would never be covered. Further, even if there had been an obvious mistake, there was no obvious correction since it was not clear whether the cover spreadsheet or the ABC Liability exclusion should be amended to either preclude or allow coverage respectively. Accordingly, the test in East Pantiles was not satisfied. As a matter of construction, the court (by a majority decision) was unable to read the ABC Liability exclusion in the way advocated by the claimant. On the plain terms of the policy, the claim was excluded.
It is notable that all three judges found that the arguments were finely balanced, and in a dissenting judgment, Lord Justice Phillips found that he would have allowed the claimant’s claim. Adopting a more purposive approach, Lord Justice Phillips noted that the policy’s intended commercial function was to release the company’s sellers from liability to the buyers. Against this background, Lord Justice Phillips considered there was an obvious mistake in the drafting. He said the claimant’s proposed correction was the only obvious cure since amending the cover spreadsheet was far more dramatic and difficult to justify and would have left linguistic difficulties in the drafting of the ABC Exclusion unrectified.
Nonetheless, in this case, the more textual approach preferred by the majority prevailed.
Bellini (N/E) Ltd v Brit UW Limited [2024] EWCA Civ 435
A similar approach was taken both at first instance and by the Court of Appeal in Bellini, the latest in a long line of Covid-19 business interruption cases.
In Bellini, the policyholder was insured under a ‘murder, suicide or disease’ clause, which appeared to provide cover for business interruption caused by infectious disease occurring within 25 miles of the insured premises. As such, it was similar to many of the ‘non-damage’ extensions considered by the court in the FCA Test Case (FCA v Arch). However, the clause in Bellini’s policy contained a crucial difference in that it required the interruption or interference of the business to be caused by “damage, as defined in clause 8.1”. Damage was defined, not in cause 8.1, but elsewhere in the policy as “physical loss, physical damage and physical destruction”.
It was common ground that there had been no physical damage to the insured property and that, on a strict reading of the terms of the clause, there was no cover for Bellini’s business interruption losses flowing from the pandemic. Bellini argued, however, that there was an obvious mistake in the drafting of the clause since disease occurring within 25 miles of the premises would never lead to physical damage causing business interruption. The clause as drafted was, therefore, a nonsense that required correction.
At first instance, the court found there had been no obvious mistake, and the insurers had not intended to provide non-damage cover. The fact that it was “less likely” that a notifiable disease off the premises would cause physical damage did not justify giving the word “damage” a different meaning.
The Court of Appeal returned to the principles in Chartbook and East Pantiles. Starting with the first question, Sir Geoffrey Vos, Master of the Rolls, did not consider that anything had gone wrong with the language of the clause, whether obviously or at all. The clause clearly required physical damage to property, and the fact that this rendered the coverage provided by some limbs of the clause as entirely illusory did not make it absurd. This was simply a common fact of life in insurance policies.
As there had been no obvious mistake, it was not necessary to consider the second limb, but the question was discussed. In relation to that, the insurer argued that there was no one clear correction to be made to the alleged mistake, a fact underlined by the fact that the claimant had argued for two different corrections to be made at first instance and appeal, respectively.
The court did not need to determine the point but did note that “…if it were clear that something had gone badly wrong with the language the parties had used, and if were obvious that non-damage cover was intended by the parties to be provided, it would be harsh to deprive the insured of that intended cover because there was more than one way to give it effect. I would prefer to leave that question for a case in which it actually arises.”
While it was of no assistance to the policyholder in Bellini, the court does, therefore, appear to have anticipated the potential softening of the second limb of the East Pantiles test; so that a claimant would not necessarily have to establish that only a single obvious correction exists to rectify an obvious mistake. This will no doubt be explored and clarified in future cases.
Discussion
The Court of Appeal decisions in Project Angel and Bellini undeniably produced harsh outcomes for the policyholder, and it is therefore important to study and understand the reasoning carefully.
What appears to have saved the policyholder in George on Rye was the insurers’ actual knowledge of the risk and the fact it had paid claims under the policy in the past. This provided the policyholder with a route to recovery not only as a matter of construction but also by way of rectification and estoppel. In Project Angel’s case, a claim in rectification had also initially been pursued but was ultimately abandoned. Presumably, this was because the policyholder could not discharge the demanding evidential burden.
Together, the three cases establish a clear pathway for policyholders wishing to establish that their claim is covered despite the words of the policy erroneously falling short of providing the intended coverage.
If the policyholder wishes to establish that its favoured interpretation of the contract is correct simply as a matter of objective construction, it will need to show (i) that the mistake is obvious and (ii) that there is only one obvious correction (although there is some apparent room for manoeuvre on the second question). These questions must be answered as a matter of law (ie, objectively and not by reference to the actual parties’ intentions at the time). If the answer to either question is unclear or if there are multiple possible answers, the claim will fail.
In that case, the policyholder may be able to pursue the alternative and more challenging path of rectification, in which the court will ‘correct’ the drafting to reflect the parties’ true intention. If so, the court will carry out a more detailed factual inquiry to establish the parties’ actual intention, and the contract’s negotiating history will become admissible (and crucial) evidence. The policyholder will need to demonstrate that on the balance of probabilities, there was a common continuing intention on both sides of the fence. It will therefore need to marshall cogent and credible evidence in support of its case.
Absent such a case, these decisions emphasise that the court will be reluctant to rewrite the terms of a contract that is capable of enforcement on its terms. Most importantly, the decisions reiterate that in the context of a commercial contract agreed between professionally advised parties, the law provides scant remedy for a bad bargain.
The key takeaway for policyholders and brokers is therefore that while legal remedies exist, the only sure way to ensure the coverage provided reflects the intended bargain of the parties is to check that the contract is accurately and realistically drafted.
You can find further information regarding our expertise, experience and team on our Policyholder disputes page.
If you require assistance from our team, please contact us.
Subscribe – In order to receive our news straight to your inbox, subscribe here. Our newsletters are sent no more than once a month.