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Say what you mean! Legg v Sterte Garage Ltd underlines the importance of avoiding ambiguity in insurance policies

The recent decision of the Court of Appeal in Legg v Sterte Garage Ltd [2016] EWCA Civ 97 is a helpful reminder to practitioners of the importance of avoiding ambiguity in insurance policies and of the dangers inherent in relying on such clauses.

The Facts

The essential facts were as follows.  The claimants lived in neighbouring properties on Sterte Road, in Poole.  Next door was a garage owned by the defendant (“Sterte”).  In 2003 the claimants began to notice diesel smells in their gardens and homes.  The diesel undoubtedly originated in the garage.  It was caused either by a single and substantial leak in 1997, or by a more gradual process of leakage over the course of some time.  The garage’s public liability policy would cover liability arising from the former, since it involved “a sudden identifiable unintended and unexpected incident”, but the latter was an excluded risk.

The claimants issued proceedings that identified the 1997 incident as the cause of the damage, and on that basis the garage’s insurers, Aviva, took over conduct of and funded the garage’s defence.  This was despite the fact that Aviva (whose role was crucial since Sterte was insolvent) had previously told the claimants that the policy did not respond, its investigations having concluded that the 1997 incident was not the cause of the damage.

In due course the claimants obtained expert evidence, and as a result of its conclusions amended their claims to incorporate as a (potential) cause gradual leakage from underground storage tanks or associated pipe work.  This amendment prompted Aviva to abandon their defence of the claim, and the claimants duly obtained against Sterte – which, being insolvent, took no part in the proceedings – judgments in default totalling £191,654 and costs orders totalling £85,450.

Claim for Costs Against the Insurers

The claimants sought to recover their costs from Aviva.  They did so on two bases: first by way of a third party costs order under section 51(3) of the Senior Courts Act 1981, and second via the Third Party (Rights Against Insurers) Act 1930.  (There is no indication that they also sought to recover their damages under the 1930 Act.  The judgment does not say why, but one assumes it is because the claimants thought that they would struggle to prove that the cause of the damage was an insured event.)

The first instance judge, Deputy District Judge Coppen, granted the claimants’ application and ordered Aviva to pay the costs.  He did so principally by way of a third party costs order; but he would also have held that Aviva was liable under the 1930 Act.

Aviva appealed to the Court of Appeal (the Deputy District Judge’s decision was a final decision in multi-track proceedings), contending that the judge got it wrong on both bases.

This article is concerned with the issues under the 1930 Act.

Aviva’s Liability to Indemnify Sterte

Under the 1930 Act the claimants are treated as having taken an assignment of Sterte’s cause of action against Aviva for an indemnity under the policy.  The claimants’ right to recover from Aviva the costs which Sterte was ordered to pay thus depends on the terms of insurance policy.

The relevant insuring clause was as follows:

“Contingency

In the event of accidental

1   Personal injury

2   loss of or Damage to Property

3   obstruction trespass nuisance or interference with any right of way, air, light or water or other easement

which arises in connection with the Business and which occurs during the period of insurance and within the Territorial Limits

The Corporation will indemnify the Policyholder against

1   legal liability for Compensation up to the Limit of Indemnity

2   Costs and Expenses.

“Costs and Expenses” was defined as follows:

“1   any claimant's legal costs for which the Policyholder is legally liable

 2   all costs and expenses incurred with the Corporation's written consent

 3   all solicitors' fees for legal representation at

     (a) any Coroner's Inquest or Fatal Accident Inquiry or

     (b) proceedings in any Court of Summary Jurisdiction arising out of any alleged breach of statutory duty

          in connection with any event which is or may be the subject of indemnity under the Section.”

The claimants’ case was, of course, that Sterte’s costs liability fell within item 1 of Costs and Expenses.

The issue that divided the parties was the interplay between the insuring clause and the definition clause.  Aviva’s argument was that its obligation to indemnify Sterte against either substantive liability or “Costs and Expenses” arose only if and when one of the three insured perils actually occurred.

Pausing there, Aviva’s argument, if correct, would have seemingly startling consequences.  It would mean that policyholders would do better to lose third party claims than successfully to defend them – for, if their defence were successful, ex hypothesi no insured peril would have occurred and Aviva would be under no obligation to pay defence costs and indemnify against adverse costs.  However such a commercially undesirable result is not unknown to the market: see for example the recent decision of the Court of Appeal in AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660, where Christopher Clarke LJ held that the policy in question only covered defence costs if the claim against the insured succeeded.  (He did, however, go on to observe that it was “no doubt unusual for defence costs only to be recoverable in the event of an unsuccessful defence”.)  There is also authority that the law does not imply a term to help insureds under such policies: see Thornton Springer v NEM Insurance Co Ltd [2000] Lloyd’s Rep. I.R. 590.

Returning to the case, Aviva lost its argument because of the final clause of the definition of Costs and Expenses – “in connection with any event which is or may be the subject of indemnity under the Section.

David Richards LJ, who gave the lead judgment, said that “on any footing” these words meant that costs were covered even if there had been no insured loss or damage.  His rationale for saying that must be that it would otherwise render otiose the words “or may be”.  This is despite the fact that Costs and Expenses are strictly speaking only payable on the occurrence of one of the three ‘contingencies’ specified in the insuring clause.

Aviva’s argument in response to this was that the final clause in the definition of Costs and Expenses qualified only the third of the three items, i.e. solicitors’ fees for representation at coroners’ inquests etc.  David Richards LJ disagreed.  Whilst it was correct that the typographical layout of the policy appeared to link the clause only to that item, the context or sense of the clause in question displaced this:

If the insurers in this case were right, it would mean that they were not liable to pay the costs covered by paragraph 2 ("all costs and expenses incurred with the Corporation's written consent"), if the claim against the insured failed. This would produce an extraordinary result in a typical case. Proceedings are issued against the insured for a claim which, if successful, constitutes an insured risk. As would normally be the case, the insurers conduct the defence on behalf of the insured and do so successfully. No doubt part of the insured's costs would be recoverable from the unsuccessful claimant, but an order for costs is unlikely to cover the entirety of the defence costs and in any event the claimant may be unable to pay the costs. In those circumstances, according to the insurers' submission, the insured would have no cover for its costs, even though incurred with the written consent of the insurer. In my judgment, it is highly unlikely, looking at the matter objectively, that the parties could have intended this result.” (Paragraph 71.)

In many ways it is hard to disagree with this logic, since as a matter of principle surely an insurer could not be allowed to refuse to pay defence costs (or indemnify adverse costs liability) in the event the claim against the insured fails?  The logic is, however, not altogether easy to reconcile with the reasoning in the Thornton Springer decision referred to above, where Colman J referred to the essential principal of liability insurance that it covers the insured’s ascertained, not potential or alleged liability.  Indeed, the existence of this principle is precisely why it is necessary to make express provision for cover against the cost of defending claims that are or could be the subject of an indemnity.

Nevertheless, few would disagree with the result, for it is hard to imagine a good reason why the final clause of the definition of Costs and Expenses should relate only to item 3, rather than all items of cost and expense.

Conclusion

The moral for both policyholders (and their brokers) and insurers to draw from this case is simple: ensure that your policy wording is clear and unambiguous.  As an insurer, if your intention is to provide cover for defence costs and adverse costs liability only in the event of a successful claim against the insured, then the policy should make this clear, especially since this would go against most people’s (and most courts’) commercial instincts.  Likewise, if as an insured you want cover against not only valid third party claims, but also having to pay lawyers to defeat unmeritorious ones, check that this is expressly provided for.

Finally, if you are a litigator faced with an ambiguous policy wording, be wary of interpretations of the policy that either strain its language or flout its commercial sense.