Markerstudy Insurance Company Ltd & Ors v Endsleigh Insurance Services Ltd [2010] EWHC 281 (Comm)

Case No 2008 Folio 1390[2010] EWHC 281 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 18/02/2010
Before
MR JUSTICE DAVID STEEL
Between
(1) MARKERSTUDY INSURANCE COMPANY LIMITEDClaimants(2) PLANET INSURANCE COMPANY LIMITEDClaimant(3) SYMPHONY INSURANCE COMPANY LIMITEDClaimant(4) MARKERSTUDY INTERNATIONAL HOLDINGS LIMITEDClaimantENDSLEIGH INSURANCE SERVICES LIMITEDDefendant
Dominic Kendrick Q.C. & Guy Blackwood (instructed by Holman Fenwick Willan) for ClaimantsGraeme McPherson Q.C. & Helen Evans (instructed by Robin Simon LLP) for DefendantHearing Hearing dates: 12 & 13 January 2010
JudgmentMr Justice David Steel :Introduction
[1]In this action the Claimants allege widespread breaches by the Defendant of a raft of claims handling agreements which were in place between various of the parties between April 2001 and the middle of 2008. As a consequence the Claimants plead that they have suffered 6 categories of loss totalling in the region of £14 million. The categories are: i) the payment out of unnecessary sums on claims; ii) the inaccurate reserving of claims; iii) delays in passing on claims documentation; iv) disruption to business in addressing the consequences of such delays; v) the over-reserving of claims; vi) interest by way of damages.[2]The matter came before Beatson J at a case management conference on 26 June 2009 and the Court directed that a number of issues be tried as preliminary issues. A very large number of these have now been the subject of agreement between the parties and in the result only four preliminary issues need to be determined by the Court. These issues are as follows: i) Issues 3 & 4 – What is the application and effect of Article 8 of the Second Contract and Article 7 of the Third Contract ? In particular, upon a true construction of Article 8 of the Second Contract and Article 7 of the Third Contract is the Defendant exempted: a) from liability for indirect and consequential loss arising out of data input errors; or b) from liability for indirect and consequential loss and direct loss of profit and direct loss of business arising out of data input errors ? ii) Issues 7(c) & 7(e) - Upon a true construction of Articles 2.1, 2.2 & 3 of the Deeds of Termination has the Defendant been released from all or any liability for acts or omission in respect of the First Contract (as subsequently varied) and/or the Second Contract (as subsequently varied) and/or the Third Contract ? What is the effect of Article 3 of the Deeds of Termination ? iii) Issue 8(b)(i) - What is the application and effect of Article 13 of the Fifth Contract ? In particular, on a true construction of Article 13 is the Defendant exempted a) from liability for indirect and consequential loss arising out of the Fifth Contract; or b) from liability for both indirect and consequential loss and direct loss of goodwill, direct loss of business, direct loss of anticipated profit, direct loss of anticipated savings and all other direct pure economic loss which arises out of the Fifth Contract. iv) Issue 8(b)(ii) – Although it is now common ground that the Defendant’s total liability to the Claimants in contract, tort (including negligence and breach of statutory duty), misrepresentation, restitution or otherwise arising in connection with the performance or contemplated performance of the Fifth Contract is limited to the aggregate of fees received pursuant to clause 6.1 of the Fifth Contract (the agreed figure for which is £3,863,911.00), are the Claimants entitled to recover interest on damages insofar as interest increases the figure above £3,863,911 ?[3]As is apparent all these issues are essentially short points of construction. Some oral witness evidence was called by the parties but was of very limited assistance in resolving the issues before the Court.

The background

[4]In somewhat greater detail, the background is as follows. The First Claimant is and the Second and Third Claimants were insurance companies writing motor business. The Second Claimant went into voluntary run-off on 30 September 2006. The Third Claimant ceased writing business as of 1 October 2005 when it was put in voluntary run-off. The Fourth Claimant is the parent of the First to the Third Claimants.[5]The Defendant initially provided administration and claims handling services to the Claimants but latterly claims handling services only. This was pursuant to a series of agreements between the parties: i) The First Contract dated 19 and 26 April 2001 between the First Claimant and the Defendant; ii) The Second Contract dated 9 July 2001 (as amended on three later occasions) between the First Claimant and the Defendant; iii) The Third Contract dated 8 April 2002 between the Second Claimant and the Defendant; iv) The Fourth Contract dated 24 December 2004 between the Third Claimant and the Defendant; v) The Fifth Contract dated 22 July 2006 between the Fourth Claimant and the Defendant.[6]The parties also entered into two Deeds of Termination both dated 22 June 2006 which terminated the Second and Third Contracts respectively, together with a Deed of Variation of the Fourth Contract.[7]Solely by way of example, the Claimants put forward the alleged details of three claims files which were said to demonstrate defects in the handling of claims by the Defendant: i) A collision between an insured vehicle and third party vehicle occurred in October 2005. The vehicles involved were of low value. The insured failed to notify the Claimants direct. The Defendant was informed by the third party insurer and they were told that the third party had been provided with a hire car at the daily rate of £34 and that storage charges were being incurred in relation to the damaged third party vehicle (which had a value of about £650). The third party chased the Defendant for an admission of liability and the payment of the storage charges so as to release the third party vehicle and terminate the hire agreement for the replacement vehicle. There were delays in chasing the insured for a report form on the collision. This did not emerge for a further six weeks. In the result on 28 December the third party insurer invoiced the Defendant in the sum of £2800 for 61 days hire. ii) The insured’s car was a Subaru Impreza initially valued at £5000 and assessed as a total loss. The insured disputed the valuation. A revaluation led to a substantial increase to £19,000 on the basis that the car was actually a Subaru WRX22B. The claim was paid on that basis. This increased value was subsequently rejected by the Claimants’ salvage agent who advised that the car was a model of far lower specification worth in the region of £6000. iii) A third party vehicle was a Subaru Impreza which was still driveable after an accident and only required minor repairs in the region of £600. Despite the Defendant’s claim handler noting that the repairs should only take four days the car was off the road and a hire charge incurred for 18 days. Further the Defendant agreed a hire rate on the basis of a Subaru Impreza WRX which represented an enhanced hire charge of £2000.[8]These examples taken in isolation are relatively minor but due to the bulk nature of writing motor policies and the competitive nature of the market any “leakage” can, on the Claimants’ case, have a significant impact on the bottom line. Another factor of concern to the Claimants was the failure by the Defendant to reduce reserves to zero immediately after a claim had been settled. A continued open reserve was said to cause substantial harm to the Claimants by reducing liquidity and thus creating difficulties in retaining sufficient reserves to meet underwriting liabilities and designated solvency requirements.

Issue 8 (b) (i)

(b) (i)

[9]I start with what is said to be the most important or at least the most influential issue namely 8(b)(i). This concerns the application and effect of Article 13 of the Fifth Contract. Article 13.1 provides as follows: “Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profits or savings and all other pure economic loss) arising out of or in connection with this Agreement."[10]The Claimants’ case is that this article only exempts the Defendant from liability for indirect or consequential loss. The Defendant contends that it is exempted not only for indirect and consequential loss but also for direct loss in the categories of loss contained in parentheses.[11]It was (or at least became) common ground that “consequential” meant not “direct”. Croudace Construction Ltd v Cawoods Concrete Products Ltd [1978] 2 Lloyd's Rep. 55 Direct losses are those falling within the first limb of Hadley v Baxendale. Indirect (or “consequential losses”) are synonymous and are those falling within the second limb. Millars Machinery Co. Ltd v Way (1935) Comm. Cas. 204. The issue thus boils down to this. Are the specific heads of loss such as loss of goodwill freestanding in the sense that they encompass all losses within that category whether direct or indirect or are they examples of the type of losses making up indirect loss?[12]In the event this issue was reflected in two decisions. First is BHP v British Steel [1999] 2 Lloyd’s Rep 583. The relevant clause read as follows:
“14.5 Neither the Supplier nor the Purchaser shall bear any liability to the other … for loss of production, loss of profits, loss of business or any other indirect losses or consequential damages arising during and/or as a result of the performance of this Contract regardless of the cause thereof but not limited to the negligence of the party seeking to rely on this provision.”
[13]The claimants submitted that the word “other” before “indirect losses or consequential damage” led to the conclusion that the prior phrases such as “loss of production” should also be read as referring to indirect or consequential losses of that kind.

Mr Justice Rix rejected that argument:

“In my judgment the best solution is to construe the clause as though it read “for loss of production, loss of profits, loss of business or indirect losses or consequential damages of any other kind” and accept that the parties may have been in error to permit the inference that the former phrases are examples of indirect or consequential loss. At least in that way, each of the phrases is given its authoritative meaning, which is what the parties must be supposed to have given their closest attention to. If, however, only production, profit, or business which is within the second limb of Hadley v. Baxendale is intended to be referred to, then everything in the clause other than “indirect losses or consequential damages” becomes redundant and the previous phrases become dangerously misleading and potentially valueless.”
[15]The other authority is Ferryways NV v Associated British Ports [2008] 1 Lloyd’s Rep. 639. Here the relevant clause read as follows: “9. Exclusion and Limitations of Liability … (c) Where the Company is in breach of its obligations in respect of the Services or under any Contract or any duties it may have as bailee of the Goods it shall have no liability to the Customer in contract, tort, negligence, breach of statutory duty or otherwise for any loss, damage, costs or expenses of any nature whatsoever incurred or suffered by the Customer which is of an indirect or consequential nature including without limitation the following:(i) loss or deferment of profit;(ii) loss or deferment of revenue;(iii) loss of goodwill;(iv) loss of business;(v) loss or deferment of production or increased costs of production;(vi) the liabilities of the Customer to any other party. …[16]Teare J dealt with its proper construction at paragraph 83:
“83 Where a party seeks to protect himself from liability for losses otherwise recoverable by law for breach of contract he must do so by clear and unambiguous language. Clause 9(c) provides that liability for such losses as are “of an indirect or consequential nature” is excluded. In the light of the well-recognised meaning which has been accorded to such words in a variety of exemption clauses by the courts from 1934 to 1999 it would require very clear words indeed to indicate that the parties' intentions when using such words was to exclude losses which fall outside that well-recognised meaning. This is particularly so when “indirect” is used as well as “consequential”
. The use of “indirect” draws an implicit distinction with direct losses. The meaning which has been given to direct losses in the cases which I have mentioned is “loss which flows naturally from the breach without other intervening cause and independently of special circumstances” (per Atkinson J in Saint Line Saint Line ltd v. Richardsons Westgarth Co Ltd (1940) 67 Ll L Rep 62 at page 103). By contrast, indirect or consequential losses are losses which are not the direct and natural result of the breach (per Atkinson J in Saint Line at page 104). 84 The important question therefore is whether the words in clause 9 “including without limitation the following” indicate clearly that the parties were giving their own definition of indirect or consequential losses so as to include the specified losses even if they are the direct and natural result of the breach in question. In my judgment those words do not provide the sort of clear indication which is necessary for the defendant's argument. The parties are merely identifying the type of losses (without limitation) which can fall within the exemption clause so long as the losses meet the prior requirement that they are “of an indirect or consequential nature”. Had the parties intended that liability for losses which were the direct and natural result of the breach could be excluded they would have hardly have described such losses as “indirect or consequential”.[17]The clause in the present case must be construed on its own terms. There is nothing in the factual background at the time of the execution of the agreement that throws light on the intention of the parties. In my judgment the Claimants’ construction is to be preferred: i) The use of the phrase “including but not limited to” is a strong pointer that the specified heads of loss are but examples of the excluded indirect loss. ii) The elevation of all “pure economic loss” as a freestanding category for which liability is excluded potentially cuts across recovery of even direct loss: yet it is Clause 13.2 which furnishes the “limit” to direct loss recovery. iii) As in Ferryways the purported exclusion of the specified categories of loss in both direct and indirect form is not expressed clearly.

Issue 8 (b) (ii)

(b) (ii)

[18]The next issue is 8(b)(ii) which raises the question whether the limit to liability provided in Art. 13.2 includes or excludes interest. Art 13.2 provides as follows:
“Endsleigh’s total liability in contract, tort (including negligence or breach of statutory duty), misrepresentation, restitution or otherwise, arising in connection with the performance or contemplated performance of the Agreement shall be limited to the aggregate amount of fees received pursuant to clause 6.1 above.”
[19]The Claimants in summary submitted as follows: i) There is no example in the authorities where such a “cap” has been held to include interest. ii) It would give rise to prejudice to the Claimants in the event of delay occasioned by the Defendant. iii) The cap is as to “liability”: such as a matter of construction no more apt to encompass interest than costs.[20]The Defendant in summary submitted: i) The limitation applied to Endsleigh’s “total liability in contract …” ii) This clearly covered any contractual claim for interest. iii) The parties cannot have intended to treat statutory interest any differently. iv) Liability for costs is not a liability “in contract”. v) Any concern as to delay was misconceived. The Claimants had a running right of audit.[21]In my judgment, the Defendant is correct on its stance on contractual interest. But statutory interest is of a different character. It is not a “liability in contract” but a discrete statutory liability arising from the exercise of the Court’s discretion. Accordingly, in my judgment, it is excluded from the cap.

Issue 3 and 4

[22]Article 8.1 of the Second Contract and Article 7.1 of the Third Contract, which is in the same terms with logical alterations, provide as follows:
“Endsleigh will not be liable to Markerstudy [Planet] for any indirect or consequential loss or loss of profit or loss of business arising out of data input errors by Endsleigh put into Policy Schedules, Certificates of Insurance or Endorsements.”
[23]Here the Defendant is on somewhat firmer ground in asserting that the specified forms of loss are free standing and were inclusive of both direct and indirect loss. Nonetheless I prefer an approach similar to that of Rix J in BHP v British Steel leading to the effect that the introductory phrase “any direct or indirect loss” governs and defines the scope of the specified forms of loss. In short, only indirect loss of profit or business is excluded.[24]There is a further aspect to these issues. The Claimants say that the wording is only apt to cover data input errors and that these could only arise in connection with a policy administration service. However the policy administration services provided by the Defendant ceased at the end of 2002 leaving only a claims handling service.[25]I am somewhat doubtful whether this issue has any significance in regard to the claim as advanced. In my judgment the limitation potentially applies across the board but is most unlikely to arise save in the context of policy administration. Data input errors should not arise in regard to policies or endorsements in the course of claims handling.

Issue 7

[26]These issues arise under Articles 2 and 3 of the Deeds of Termination. They provide as follows:
“2. Termination of the Agreements 2.1 The parties agree that with effect from 1 January 2006 the Agreements shall terminate and cease to be of effect. 2.2 All rights and obligations of the parties under the Agreement[s] shall cease to have effect immediately upon their termination and each party now releases and discharges the other from all claims, demands, liabilities and obligations whatsoever in respect of the Agreement[s]. 3. Liability of the parties Each party shall indemnify and keep the other party indemnified against any actions, claims, demands, costs, expenses or liabilities which may arise as a result of any breach of the Agreement[s] or neglect or default by that party prior to the date of termination.”
Each party shall indemnify and keep the other party indemnified against any actions, claims, demands, costs, expenses or liabilities which may arise as a result of any breach of the Agreement[s] or neglect or default by that party prior to the date of termination.”[27]The Claimants contend that the overall effect of these provisions is that Clause 2 terminated the agreements as regards further business all with a view to consolidating a range of contracts into the Fifth Agreement but that Clause 3 retained any liabilities that had arisen (or would arise) under the earlier agreements.[28]The Defendant contends that the effect of Clause 2 was to terminate the agreements in their entirety without any reservation of claims or contingent claims. As regards Clause 3 this was solely directed at any exposure to third parties.[29]I prefer the Defendant’s construction: i) Article 2 is headed “Termination of the Agreements”. These were to cease to have effect. ii) The use of the phrase “release and discharge” is only consistent with the parties having the intention not to enforce claims against the other. iii) These expressly applied to “all claims” iv) Article 3 should not be construed so as to conflict with the express terms of Article 2. v) The commercially realistic construction of Article 3 is to the effect that it is solely directed at third party claims that have or may arise. Remaining issues.[30]I understand that all other preliminary issues have been the subject of agreement.

Cited in 1 later judgment