Project Angel: High Court affirms ‘proper’ construction of W&I insurance exclusions

In our article Finsbury Food: a W&I claim free-from Breach and Loss, we observed that it’s rare for W&I insurance disputes to proceed all the way to judgment. Perhaps that trend is turning as, in recent weeks, the Commercial Court has ruled on a W&I claim at preliminary issue stage in Project Angel Bidco Limited (in administration) v Axis Managing Agency Limited & Ors (2023) EWHC 2649.

The claim was fully dismissed at preliminary issue due to the operation of an exclusion to cover. The case serves as a helpful reminder of the key principles of construction of insurance exclusions. Specific to W&I policies, the case also helpfully confirms that the function of the “Cover Spreadsheet” is to identify those warranties for which cover is in principle provided, but which nevertheless remains subject to the wider policy terms, conditions and exclusions. In particular, it’s now clear that a policy isn’t self-contradictory (or absurd) if an exclusion operates to negate the effect of a warranty marked as “Covered”.

 

The facts

The Target (trading as King Construction) was a civil engineering and general construction services business. The Insured purchased the entire issued share capital of the Target on 19 November 2019 for approximately GBP16.65 million.

This case involved a Buyer-Side Warranty and Indemnity Insurance Policy issued by a number of Underwriters. The Policy insured various warranties given by the Target’s Sellers to the Insured under the SPA.

The full facts of the claim have been kept confidential. Suffice it to say that, in developing relationships with its customers, concerns arose about the Target’s compliance with anti-bribery legislation, giving rise to allegations that certain of the Sellers’ warranties relating to compliance with such laws had been breached causing the financial demise of the Target’s business. The Insured claimed the full Policy Limit of Liability of GBP5 million.

 

The Preliminary Issue

Forming the crux of this preliminary issue Judgment, Underwriters asserted that, if there was any Breach proven and any Loss established (which was denied), they had no liability for the claim by operation of an exclusion in the Policy.

The relevant exclusion in the Policy read: “The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…any ABC Liability”. Of relevance, “ABC Liability” was defined as meaning “any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”. It was common ground between the parties that, if Underwriters were correct to rely on the exclusion, then the claim must be dismissed – this led to the Judgment on limited preliminary issues.

 

Construction Of The Words Used

The Judge noted that the Insuring Clause provided for Underwriters to indemnify the Insured for Loss “subject to the terms and conditions”of the Policy. The Policy sets out various exclusions, which formed part of the terms and conditions of the Policy. Due to the exclusion, Underwriters were not liable to indemnify the Insured in respect of otherwise insured Loss that arose out of any ABC Liability.

The Insured’s case was that the Loss did not arise out of ABC Liability, as defined, because the definition of ABC Liability contained an “obvious minor error” in drafting and it should have read “any liability [f]or actual or alleged non-compliance…in respect of Anti-Bribery and Anti-Corruption Laws” – thereby removing a formulation of the exclusion relating to “any liability…in respect of Anti-Bribery and Anti-Corruption Laws”.

The Judge helpfully reminds us that: (i) the framework principles that apply to the construction of an insurance contract are those that apply to the construction of any other contract; (ii) an exclusion clause must be read in the context of the contract of insurance as a whole; and (iii) where there is an alleged error in a contract, the general principle is that the literal meaning can be corrected if it is clear both (a) that a mistake has been made, and (b) what the provision is intended to say, although such mistakes are not easily established.

The Judge rejected the Insured’s case, finding no inherent absurdity or obvious nonsense in the drafting that required correction. An ordinary policyholder - who, on entering into the contract, is taken to have read through the policy conscientiously - would have read the word “or” as having the same meaning throughout the definition of ABC Liability. Confirming the exclusion to operate for Loss arising out of “any liability”, in the Judge’s view, was consistent with the warranties in question, which referred to both damages suffered by the Insured directly or resulting from third party liability.

The Judge favoured Underwriters’ construction of the exclusion, without reliance upon underwriting witness evidence served. The Judge noted that the witness evidence was largely inadmissible and irrelevant to the issues on the basis that it was, for example, (i) opinion evidence, (ii) subjective, (iii) not shared with the Insured, and/or (iv) did not assist in resolving the construction issues beyond suggesting that it was in the Underwriters’ interests to exclude any ABC Liability whereas it was in the Insured’s interest for all such liabilities to be covered.

 

Construction Of The Policy

The Policy was structured conventionally, with a schedule and detailed policy wording followed by a Cover Spreadsheet. The Insured argued that Underwriters’ application of the exclusion caused an “obvious conflict” with the Cover Spreadsheet, where the relevant warranties were marked as “Covered”. The Judge found that the function of the Cover Spreadsheet is to identify those obligations for which cover is ‘in principle’ provided and, further, that an exclusion can apply only to a warranty that is otherwise covered. It follows that Loss from what would otherwise be an insured warranty (one marked as Covered) may nevertheless be excluded from cover by operation of the exclusions in the Policy.

 

Final remarks

Project Angel serves as a helpful reminder of general construction principles for insurance exclusion clauses and specifically in the structure of a W&I policy.

There are, of course, often circumstances where underwriters seek to exclude from the scope of cover identified aspects of risk relating to the target’s operations. Whether the resulting exclusion will subsequently be said to apply to any claim will necessarily be case and fact specific – it will invite the question: what would a reasonable person with all the relevant background information conclude about how the parties had chosen to manage the risk that has now arisen?

 

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