25/06/2015
Welcome back to our continuing our series discussing insurance broker negligence. Last week we talked about the standard of care owed by an insurance broker to their client and the insurer. This week’s article focuses on the wording of an insurance policy, and how the courts interpret policy wording when a dispute arises.
Does Anyone Read an Insurance Policy in Full?
Hudson (page 1424) considers that insurers:
“expend considerable ingenuity in drafting and designing policies which on the surface appear to offer, but on informed and close analysis do not, the full protection expected and required by the assured, and also in implying any device of subrogation, or of settlement of claims in return for assignment of rights, in order to transfer, reduce or eliminate their own liability”.
Professional insurance brokers are fully aware that busy construction and engineering clients may fail to read lengthy, wordy insurance policy documents from beginning to end. However, the insured party needs to remember that insurance is a contractual arrangement. An insured party is contracting with the insurer that their claim will be properly considered, not merely hoping that the insurer will use their discretion to pay out a claim if required. Prudent clients have their solicitor read over the policy, especially if it is providing cover for a large construction project.
An Example of a Dispute Caused by Insurance Policy Wording
Many insurance cases prove the point that insurance cover is only as wide as the wording of the policy permits, and this may be narrower than the liability owed by the policyholder to third parties.
In the case of Horbury Building Systems Limited v. Hampden Insurance NV [2004] EWCA Civ 418, Horbury Building Systems had constructed a cinema complex’s ceilings. One of the ceilings subsequently collapsed, causing the entire complex to be closed for a period. The insurance policy stated that Hampden Insurance would indemnify Horbury Building Systems “in respect of … damage to the Property”. Horbury Building System argued that the loss of profit caused by the closure of the entire cinema complex arose as a consequence of the damage to one of the cinemas. The insurance company argued that the damage related only to the cinema with the collapsed roof and not the whole complex. The judge found for the insurance company and Horbury appealed.
The Court of Appeal upheld the judge’s decision, stating that the insurance policy indemnified the appellant for economic and/or physical loss caused to the cinema with the collapsed ceiling, not the entire cinema complex.
How the Courts Decide on Disputes Caused by the Wording of an Insurance Policy
The rule of Contra Proferentem is a general rule of contractual interpretation which says that Courts should construe a contractual provision against the party to litigation who seeks to rely upon it. The rule has two sides to it:
a) If there is ambiguity surrounding the application of a particular clause in a contract, then the clause will be construed against the party seeking to rely on it; and
b) Contracts should be interpreted against the interests of the party who drafted the clauses.
It is important to note that the rule of Contra Proferentem only comes into play if the wording cannot be interpreted by applying the ordinary rules of construction.
In the case of Youell v Bland Welch & Co Ltd [1992] 2 Lloyd's Rep 127, Lord Justice Staughton emphasised the two arms of the rule of Contra Proferentem within the context of a duty of care dispute surrounding the wording of an insurance policy. He stated:
“There are two well-established rules of construction, although one is perhaps more often relied on with success than the other. The first is that in the case of doubt, wording in a contract is to be construed against a party who seeks to rely on it in order to diminish or exclude his basic obligation or any common law duty which arises apart from contact. The second is that again in the case of doubt; wording is to be construed against the party who proposed it for inclusion in the contract: it was up to him to make it clear”.
Application of the Rule in Practice with Regards to Insurance Broker Negligence
In the case of Standard Life Assurance Ltd v Oak Dedicated Ltd [2008] 2 All ER (Comm) 916, Tomlinson J made clear that an insurance broker has a duty to obtain insurance cover that meets his or her client’s needs. If the coverage is found to be unclear (in that it leaves room for debate on the extent of the coverage) and exposes the client to the unnecessary risk of litigation, then the broker has breached his or her duty of care. However, Tomlinson J did point out that the mere act of the insurer debating the cover was not enough to make the broker automatically liable for breach of duty.
In Summary
When drafting an insurance policy, the onus is on the insurance broker to ensure the policy covers the client’s requirements to the full extent possible. If there is a dispute as to the wording of an insurance policy, and there is room for doubt as to how the wording should be construed, then the meaning of the debated clause will be construed against the party who included it in the contract.
Due to the complications and complexities involving insurance cover, especially when it comes to large construction contracts, it is imperative that parties to the policy obtain legal advice.
To find out more about the duty of care surrounding the wording of an insurance policy, please phone our London office on 0207 993 6917.
The next article in this series discussing insurance broker negligence will cover conflicts of interest that can arise in the relationship between an insurance broker and their client, which could give rise to a breach of duty.
Fisher Scoggins Waters is a leading construction, engineering and manufacturing litigation firm, specialising in disputes and disasters. For further information on this article or any of our litigation services, please contact us on +44 (0) 207 993 6960.