Policy construction and the importance of clear language

The High Court’s ruling

ABN AMRO Bank NV (ABN) brought a claim against its 14 insurers for about £31.3 million, after it sustained financial losses because two major supplier customers defaulted and became insolvent. The dispute arose because ABN’s all risks marine policy predominantly provided cover for physical loss and damage to cargo but contained an unusual clause referred to as the Transaction Premium Clause (TPC). The bespoke clause, whilst uncommon, provided cover for credit risks and/or financial defaults. ABN also brought a claim against its insurance broker (Edge), alleging breach of contract and negligence in placing the policy in case all or part of the claim against the insurers failed.

The High Court found in favour of ABN, deciding that:

• The insurers were liable (save for Ark and Advent) to indemnify ABN for its financial loss by virtue of the bespoke TPC within the all risks marine
• Ark and Advent were not liable – ABN was estopped by convention from relying on the TPC due to misrepresentation by the broker to the insurers that the policy was “as expiry”.
• The broker was therefore liable to ABN for £3.3 million – the amount they would have recovered from Ark and Advent.

Court of Appeal’s decision

The insurers appealed the interpretation of the TPC and the finding that it provided cover for financial defaults. They argued that the TPC applied only to calculate the measure of indemnity if there is physical loss or damage, that it did not provide cover for lost profits, and that the nature of the insurance market in which the policy was placed ought to have been considered.

This was rejected by the Court of Appeal, who reaffirmed the decision of the first instance judge. The TPC had been included in the policy in two places – the fact that an insurer had not read the policy properly was not a bar to coverage. As for Edge, the Court allowed their appeal, finding that two insurers could not rely on an estoppel defence arising from non-fraudulent misrepresentations to reject ABN’s claims for loss against them.

Conclusion

The decision of the Court of Appeal provides a warning to insurers and underwriters to read the policies they write, particularly those containing bespoke clauses. Even in cases where unique wording is used, the Court makes clear parties will be bound by the terms of the contracts they enter.

Our dedicated insurance team has experience advising insurer and broker clients. If you need help with policy drafting/interpretation, or have questions on any of the above, don’t hesitate to get in touch at c.povey@capitallaw.co.uk.