ABN Amro v RSA (and others): Courts give important guidance on policy interpretation, misrepresentation / non-disclosure and non-avoidance clauses, and sue and labour clauses
The ABN Amro v RSA (and others) judgments at first instance and appeal level provide useful direction on key topics for all those operating in the insurance sector including underwriters, claims managers and brokers, as well policyholders.
The case concerns a marine cargo policy that was held to extend cover to trade credit risks through a transaction premium clause, although the court guidance is relevant to all lines of business. The key issues are:
- On policy interpretation, the Court reiterated the now well-established approach which focuses on the primacy of the language of the policy and emphasised that, where language is clear, it must be applied, even if it leads to a commercially unwise result for one party. On the facts, the factual matrix of the policy did not displace the natural meaning of the language of the policy. It remains the case that the parties' individual intentions are not relevant to policy interpretation.
- On the insurers' alternative arguments for rectification, collateral contract or estoppel by convention, it was held that, on the facts, there was no mutual understanding between the parties that the transaction premium clause only applied where there was physical loss. Therefore, these arguments failed.
- On misrepresentation and non-disclosure, the non-avoidance clause prevented insurers from avoiding the policy even where a misrepresentation had induced certain underwriters into renewing the risk. This was because the clause only allowed avoidance of the policy or rejection of a claim under the policy for fraudulent misrepresentation or non-disclosure. The Court also found that, in any event, insurers had affirmed the policy through certain actions and could not therefore avoid it. Significantly, on appeal, the Court confirmed the non-avoidance clause also prevented insurers rejecting the claim on the grounds of estoppel, since the estoppel was founded on the same non-fraudulent misrepresentations; that kind of defence was precisely what the non-avoidance clause prevented the insurers from running.
- On sue and labour clauses, the first instance judge found that a breach of the clause in this type of policy required recklessness, not negligence, and the duty to mitigate does not only apply after the peril has struck.
In this article we first set out the facts, then consider each of the above issues in detail, before wrapping up with some key takeaways from these judgments.
- The marine cargo policy provided cover to ABN Amro for damage to goods in transit or goods stored in warehouses. Prior to and in the 2016 renewal, additional clauses were added into the policy, including the transaction premium clause and non-avoidance clause, which was brokered by Edge.
- ABN Amro's special purpose vehicle, Icestar BV, provided structured commodities finance through repurchase agreements (known as “repo” agreements) with cocoa suppliers. Under the repo agreements, Icestar provided working capital to the cocoa suppliers by buying their cocoa products for a set period of time, after which the cocoa suppliers would buy their products back.
- Two of the main cocoa suppliers suffered financial collapse and were unable to buy the cocoa products back from Icestar, defaulting on the repo agreements in late 2016. Icestar was able to sell the cocoa products, but the poor quality of some of the products led to a shortfall between the sums advanced and the sale proceeds.
- ABN Amro claimed recovery of the shortfall – approximately GBP31.3 million – under the marine cargo policy. Insurers denied cover on various grounds.
- The case was decided in favour of ABN Amro at first instance in February 2021. Certain insurers and Edge appealed to the Court of Appeal, which gave judgment on 2 December 2021. The first appeal by insurers was settled after the hearing, but ahead of judgment; however, the Court decided it was appropriate to still hand down its judgment given the issues it addressed and because it had already been written. The second appeal, by Edge, and against two of the insurers only, was granted. Since not all issues were appealed, both the first instance and appeal judgments provide important guidance.
The main policy interpretation argument concerned the transaction premium clause, and whether it provided ABN Amro with trade credit cover for non-physical loss (monetary loss) arising from the financial default of Icestar's customers. Both the first instance decision and the appeal found in favour of ABN Amro on this point.
Approach to Interpretation
The first instance judge summarised the well-established approach to the proper interpretation of contracts, including insurance policies. Whilst this is not new law it is helpful to reiterate.
The driving principle is the primacy of the language used in the contract. The court must look to what the reasonable person would have understood the parties to have meant by the language used in the policy. The reasonable person is deemed to have all the background information which would reasonably have been available to both parties at the time of contracting. The subjective intention of the parties is disregarded.
The first instance judge highlighted that, although the contractual context was relevant to interpretation, if the language used is clear, the court must apply it. This is true even if the result is commercially unwise for one party: the court should not reject the natural meaning of a clause. This was relevant because insurers argued that any conclusion which provided ABN Amro with the additional credit risk cover would provide a large amount of additional cover for free. However, the judge found that the language of the policy was clear.
Insurers also argued that the language used was not clear enough to overcome the presumption that marine cargo insurance is limited to physical loss. Although the first instance judge accepted this presumption, he held that it was displaced by the clear language of the clause. Further, he noted that the clause did not appear to be an additional basis of valuation clause, as argued by insurers, nor could he see any other satisfactory alternative meaning of the clause.
The first instance judge also commented on the factual matrix, referring to two reasons why insurers would have been more likely to accept the extra risk. First, there were three additions to the policy which covered non-physical loss, so this was not a “plain vanilla” policy.
Second, the insurance market at the time had been soft, with the result that there was more competition between insurers for the same risks. Where there is increased competition, policy wordings tend to be wider and, here, the first instance judge accepted that this meant it was more likely that insurers would have accepted the additional risk encapsulated within the transaction premium clause.
Of note, the judge confirmed the settled approach that, where the language is clear, it is unlikely that arguments based on factual matrix would result in a different conclusion being reached.
Intention of the Parties
Under the settled approach, it is only where the language used by the parties is unclear, that the court can consider an alternative meaning which more accurately reflects what a reasonable party with both parties' actual and presumed knowledge would conclude the parties had meant by the language they used. As already noted, the subjective intention of the parties is disregarded.
In the first instance decision, insurers brought three alternative arguments in the event that their arguments on interpretation of the transaction premium clause were unsuccessful. These arguments were all based on the alleged mutual understanding between the parties that the clause only applied where there was physical loss and therefore it (merely) only operated as an additional basis of valuation clause; insurers relied on representations made in conversations between the parties to advance these views.
- Rectification, which provides a remedy where the policy either failed to give effect to a prior concluded contract, or the parties had a common intention which, by mistake, the policy did not accurately record. The judge explained that the court is concerned with what the parties actually communicated to each other rather than presumed intentions. The judge also noted that convincing proof is required to displace the natural presumption that the policy is an accurate record of the parties' agreement.
- Collateral contracts, which can be established where a party has made a statement which it intended to have contractual effect as a separate contract collateral to the main transaction. This allows the court in certain circumstances to find that the statement amounted to a separate contract, collateral to the main contract.
- Estoppel by convention, which can be established as a defence where there has been either a shared assumption of the parties, or an assumption of one party which the other party accepted, and it would be unjust for that second party to go back on the assumption.
Both ABN Amro and Edge argued that there was never any shared assumption that the transaction premium clause was intended to be a basis of valuation clause, and the discussions between the parties were inconclusive. The first instance judge found that, on the facts, there was no evidential foundation for a case of rectification, collateral contract or estoppel. This point was not appealed.
The outcome of these points demonstrates the importance of communicating in writing to the other party any intentions regarding the cover, and clearly recording the details of shared assumptions. This is especially true where the language indicates something different to what is ordinarily assumed to be the case, or what is standard market practice.
Misrepresentation and Non-Disclosure
At first instance, insurers argued that there had been various misrepresentations and non-disclosures which entitled them to decline cover. These arguments were unsuccessful for the majority of insurers for a number of reasons:
- Non-avoidance clause – The policy contained a non-avoidance clause which prevented avoidance of the policy for anything other than fraudulent non-disclosure or misrepresentation, which was not alleged. The judge noted that this clause was comprehensive, and that insurers were bound by it on the basis of the general principle that a person who signs a legal document is bound by its terms whether it has read them or not.
- Affirmation – It was held that insurers had affirmed the policy by: (i) not relying on or seeking to preserve any avoidance argument; (ii) not returning premium; and (iii) by serving their defence which relied on terms of the policy and did not make an avoidance case. Insurers were thereby barred from bringing an avoidance case.
- Duty of disclosure – In respect of the misrepresentation and non-disclosure arguments it was held that ABN Amro did not have to disclose the existence of the transaction premium clause or the non-avoidance clause; neither did they have to disclose the intended purpose of the transaction premium clause. The judge stated that where an insurer has signed a policy it could usually be presumed to know the contents.
However, there was a different outcome at first instance for two of the insurers. It was found that misrepresentations had been made by Edge to Ark and Advent that the policy was "as expiry", which induced them to renew the policy. The judge accepted that these misrepresentations were the basis of an estoppel by convention, which could circumvent the non-avoidance clause. Therefore ABN Amro was prevented from asserting against Ark and Advent that the policy covered credit risks and/or financial defaults. Edge was found liable to ABN Amro for the loss which could not be recovered from these two insurers.
Edge appealed and the decision with respect to Ark and Advent was overturned. It was held that the non-avoidance clause not only prevented avoidance of the policy where there was no fraudulent misrepresentation, but it also prevented rejection of a claim where there was no fraudulent misrepresentation. Since Ark and Advent were relying on non-fraudulent misrepresentations to decline coverage on the grounds of estoppel, the non-avoidance clause also applied, preventing them from doing so.
Sue and Labour Clause
Insurers argued that Icestar breached the sue and labour clause in the policy by failing to take reasonable measures to minimise or avoid potential loss. Icestar's alleged failure was argued to have occurred at the point of entering into the repo agreements by Icestar not checking the quality or market price of the cocoa products; and subsequently, after the initial customer default, by failing to hedge its exposure.
It was held in the first instance that a breach of the sue and labour clause in the policy could only be established if there was recklessness, not negligence. This decision was based on the fact that the policy intended to cover negligence of the bank, so a threshold of mere negligence would negate a core part of the cover. It was found that ABN Amro and Icestar's conduct conformed with standard practice, and they had not been reckless. There was therefore no breach of the sue and labour clause. This point was not appealed.
Whilst this decision was limited to the sue and labour clause in the policy, it was stated to be a standard clause, so there could be implications for other policies which also cover negligence.
Although it did not affect the result, the judge rejected ABN Amro's argument that the sue and labour clause only imposes a duty after an insured peril has struck.
Our key takeaways are:
For insurers and the insured alike:
- Convincing proof is required to displace the presumption that the policy is an accurate record of the parties' agreement. Even if clear language produces a commercially unwise result, the courts will look to apply it.
- So, all parties need to read the policy carefully, before agreeing its terms.
- Beware the risks of amalgamating cover for distinct and different types of perils (e.g. physical damage vs third party credit risk) into one policy, if it has not been designed for that purpose.
For underwriters especially:
- Even if you do not read the policy, you will still be bound by its terms.
- Consider bespoke clauses carefully. There will be limited circumstances where you can deny coverage on the grounds that the insured or the brokers failed to draw your attention to new and/or bespoke clauses.
And for the legal advisers:
- If your clients get as far as court proceedings, consider the Court of Appeal’s request that the Court is informed on an informal basis where there are serious negotiations going on after the hearing or trial has concluded; understandably, the Court would prefer to concentrate its resources on those cases where a judgment is needed to resolve the parties' differences.
If you have any questions, please contact the authors who would be happy to help.
Jane Childs is a Partner, Alexandra Lyons is a Senior Associate and Charlotte Marks is an Associate in the Insurance and Reinsurance department at DLA Piper based in the UK. The department forms part of DLA Piper's pre-eminent, multidisciplinary insurance network, consisting of over 400 lawyers representing major insurance and reinsurance companies globally on all aspects of contentious, transactional and regulatory matters.
This publication is intended as a general overview and discussion of the case and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.