A Summary Of Recent Developments In Insurance, Reinsurance And Litigation Law - 39/10

Owners of the Dredger "Karmal XXVI" & Ors v Owners of the Arelia

Whether non-party costs order should be made against insurers/privilege and the fraud exception

http://www.bailii.org/ew/cases/EWHC/Comm/2010/2531.html

The owners of the ship Arelia successfully defended a claim brought by the owners of a dredger and a barge ("Karmal"). The judge concluded that the claim had been fraudulent from the outset. Karmal failed to meet a costs order against it and so the Arelia's owners sought a non-party costs order (pursuant to section 51 of the Senior Courts Act 1981) against Karmal's insurers. They did so on the basis that insurers supported and funded the action in pursuing recovery by way of a subrogated claim after they paid Karmal's claim under their policy, and in respect of Karmal's uninsured losses. This case concerns an application by the Arelia's owners for disclosure by insurers.

It has been established by caselaw that there are certain (non-exclusive) requirements for success on a section 51 application: "The features ... to justify seeking a costs order against the insurers include the following:

the insurers determined that the claim would be fought; the insurers funded the defence of the claims; the insurers had the conduct of the litigation; the insurers fought the claim exclusively, alternatively predominantly, to defend their own interests; the defence failed in its entirety" (see Chapman v Christopher [1998]). Arelia's owners argued that they required disclosure of communications between insurers and their lawyers and witnesses in order to ascertain the element of control which insurers had exercised over the litigation. One further argument which they raised was that they needed to investigate whether insurers had failed to investigate the claim adequately prior to the commencement of the proceedings. Insurers argued that this issue did not fall within a section 51 application and sought to rely on the Chapman decision to demonstrate that there should be no consideration of the merits of the case. Burton J rejected that argument. Chapman only concluded that it was irrelevant to look at why the claim had failed. The issue of whether insurers should and could have discovered the fraud (which was not previously litigated) was an "arguable issue" (on the question of whether it is just and equitable to make a non-party costs order under section 51) and so disclosure should be given.

There was no question that the insurers were party to Karmal's fraud (indeed, they argued that they, too, had been duped by Karmal into paying the claim) but Arelia's owners argued that the fraud exception applied so that they were entitled to see otherwise privileged documents. The fraud exception provides that there is no privilege in documents or communications which are themselves part of a crime or a fraud, or which seek or give legal advice about how to facilitate the commission of a crime or a fraud.

There is academic opinion in favour of the view that the fraud exception applies even where both the solicitor and his client are innocent but are being used as instruments by third parties (here, Karmal) to facilitate a fraud. Burton J concurred with that opinion. Here, insurers had been the "mechanism" for achieving the fraud: "But for the availability of underwriters to pay out this grossly inflated (in respect of the barge non-existent) claim, and then to pursue the insured and uninsured alleged losses, the fraud would never have been commenced, never mind perpetrated". Accordingly, neither legal advice nor litigation privilege was available to the insurers or their solicitors.

Synergy Health v CGU Insurance Plc & Ors Allegation of material non-disclosure and/or misrepresentation at renewal

http://www.bailii.org/ew/cases/EWHC/Comm/2010/2583.html

Following a fire in February 2007 at the insured's premises, a claim was made under the policy. Insurers sought to avoid the policy on the ground of material non-disclosure and/or misrepresentation but failed on inducement. On 28 December 2005, the brokers had forwarded to the insurers' underwriting agents a letter which dealt with various Risk Improvements outstanding from the insurers' earlier surveys and which stated: "Intruder Alarm. This will be completed by end December". In fact this work was not done prior to renewal of the policy in April 2006 (nor by the time of the fire). Insurers argued that this was therefore non-disclosure and/or a misrepresentation which was continuing as at the date of renewal. Flaux J held as follows:

The insured could not claim that the wording "this will be completed by end of December" was a representation as to future intention (under section 20(5) of the Marine Insurance Act 1906 ("the MIA") a representation as to expectation or belief is true if it is made in good faith). On the facts, the letter was received on 28...