In the High Court, ABN Amro Bank N.V. (the Bank), represented by Reed Smith LLP and Ms Sabben-Clare and Mr Parker of 7KBW, obtained judgment in respect of its £35 million insurance claim relating to losses suffered as a result of defaults by the Transmar Commodities Group under cocoa commodity repo transactions.
The central and most important issue in the case was the scope and extent of cover available under an all-risks marine cargo insurance policy that contained a bespoke ‘Transaction Premium Clause’ (the TPC). The Bank and Edge Brokers submitted that the TPC was designed to provide for financial loss arising from default by a borrower under a repo transaction irrespective of whether there had been physical loss or damage to the goods. Marine cargo underwriters that had subscribed to the risk baulked at the notion that they had agreed to provide stand-alone credit risk/financial default cover – they blamed the broker, Edge, for failing to make the extent of the clause properly known to the underwriting market, and certain underwriters said they had not read the policy. One thing was clear – the underwriters contended that they did not intend to cover losses where there had been no physical loss or damage to the goods.
Following a five-week trial in November and December 2020, the judgment of Mr Justice Jacobs was handed down on 26 February 2021. The court found in favour of the Bank and against Royal & Sun Alliance Insurance plc (the lead underwriters), 11 of the 13 following underwriters and, to a more limited extent, the Bank’s insurance broker, Edge Brokers (London) Limited. In a considered and lengthy judgment, Mr Justice Jacobs found that the TPC provided credit risk/financial default insurance to the insured Bank and thus the Bank’s £35 million losses from defaulting repo transactions fell to be covered.
Royal & Sun Alliance and 11 of the following underwriters appealed the decision. The underwriters’ appeal concerned the construction of the TPC. They reiterated that the clause simply did not provide stand-alone credit risk/financial default cover and tried to put forward an alternative interpretation of the clause relating to the basis of valuation in circumstances where there had been physical loss or damage to goods. The Court of Appeal rejected the underwriters’ appeal, handing down judgment even though the appeal had been settled between the parties shortly after the hearing. The Master of the Rolls reaffirmed the reasoning of the first instance judge who had comprehensively summarised the well-established approach to the proper interpretation of contracts including, importantly, the need for clear policy language. Here, the policy language was clear to a reasonable reader – the TPC had been included in the policy in two places and was the subject of scrutiny by the Bank, specialist insurance lawyers and the broker. The fact that an insurer had not properly read the policy they were scratching was not a bar to coverage.
Edge also appealed the decision of Mr Justice Jacobs on narrower grounds. The second appeal concerned a finding that the Bank was estopped by convention from relying upon the TPC against two of the 14 insurers, Ark and Advent. That finding was based upon a misrepresentation made by Edge to two underwriters in which Edge confirmed to the underwriters that the policy was “as expiry”. The TPC had been introduced into the policy in the prior year and the broker believed that the policy was therefore “as expiry”. However, Ark and Advent’s underwriters did not know that the TPC had been introduced during the expiring year (the earlier year’s policy was not properly circulated to the following market). Ark and Advent therefore took “as expiry” to mean that the policy was the same as when they last saw it – without the TPC.
Mr Justice Jacobs rejected the underwriters’ avoidance case based upon the “as expiry” misrepresentation, in part because the policy contained a non-avoidance clause that prohibited avoidance save in a case of fraud. In any event, Mr Justice Jacobs found that the “as expiry” representation by Edge created an estoppel by convention because Edge acquiesced in the underwriters’ assumption that the policy was “as expiry”. As a result, Edge was liable to the Bank for the shares of Ark and Advent (as opposed to the insurers being liable themselves to the Bank).
Edge appealed against the estoppel finding on the basis that the non-avoidance clause not only prohibited avoidance but also the rejection of a claim on the grounds of any non-fraudulent misrepresentation. The finding of estoppel by convention was therefore prohibited under the policy. The Court of Appeal allowed the appeal on that basis, which was also an answer to Ark and Advent’s case on estoppel by representation.
The Court of Appeal judgment provides further confirmation that insureds and insurers alike should consider bespoke clauses carefully. Underwriters have been reminded again that they ought to read the policies they scratch. Even if they do not read the policy, they may still be bound by its terms.
The judgment of the Court of Appeal is now available.
Client Alert 2021-340