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Professional Indemnity: Defence costs cover under accountants’ minimum terms
Oldham v QBE Insurance (Europe) Ltd – Court of Appeal, Commercial Court
In many cases, indemnity for defence costs is the most significant head of cover in professional indemnity insurance. In a recent judgment, the High Court has interpreted the minimum terms of the Institute of Chartered Accountants of England and Wales (“ICAEW”) (the “Minimum Terms”) in favour of insurers in respect of their right to be repaid defence costs by a policyholder. Andrew Schütte reviews the case.
The claimant, Mr Oldham, was an accountant and insolvency practitioner who was alleged to have misappropriated company funds while acting as joint administrator of MK Airlines Limited. A £1.03 million judgment was entered against him in connection with the misappropriation, but execution of the judgment sum was stayed pending appeal. Mr Oldham's defence costs, meanwhile, had been paid by his professional indemnity insurer QBE.
Mr Oldham notified the claim to QBE on 2 October 2014. On 10 August 2015 QBE declined cover to the current policy year on the basis that the claim had been first notified in 2011. QBE did accept that, under clause 10.2 of the Minimum Terms (*see below), it was liable to fund Mr Oldham’s defence costs of the misappropriation claim pending a tribunal’s ruling on coverage, but also said it would seek to recover from Mr Oldham whatever defence costs it paid out if its denial of coverage was upheld.
An arbitration ensued between Mr Oldham and QBE over whether Mr Oldham had cover under QBE’s PI policy. The resulting award stated there was no cover and ordered Mr Oldham to repay to QBE his defence costs of the misappropriation claim. He challenged that award in the High Court .
Mr Oldham argued that QBE had no right to require him to reimburse defence costs under the Minimum Terms. Clause C5 of the Minimum Terms states that, subject to clause C10.2, insurers will indemnify the insured in respect of defence costs as and when they are incurred (with the proviso that defence costs shall be reimbursed if the insured is found guilty of any alleged dishonest or fraudulent act or omission, or admits the same).
Clause C10.2, headed ‘Dispute Resolution’ says that, if there is a coverage dispute between insurers and the insured, insurers will advance defence costs ‘pending resolution’ of such a dispute.
Clause C10.2 is silent as to what should happen following resolution of the coverage dispute and Mr Oldham argued that, as a result, QBE had no right to be reimbursed for the defence costs (for, if that had been the intention, C10.2 would have said so). Mr Oldham supported his argument by contrasting clause C10.2 with clause C5 which expressly says an insured must repay defence costs if he is found guilty of a dishonest or fraudulent act.
Mr Justice Popplewell ruled that Mr Oldham must reimburse the defence costs QBE had paid.
The judgment confirmed the approach to be taken in interpreting policy language. Pursuant to Wood -v- Capita Insurance Services Ltd , the tribunal’s task is to ascertain the objective meaning of the language used. Where wording has been devised by a regulator setting minimum terms, the court will take account of the need to balance public protection with the cost and availability of professional indemnity insurance. If there are rival meanings to a clause, the court is entitled to reach a view consistent with business common sense.
Popplewell J disagreed with Mr Oldham's interpretation of the policy on various grounds:
- Clause C10 did not expand the scope of cover. It concerned only dispute resolution in connection with the policy itself.
- If clause C10.2 did, as Mr Oldham argued, give the insured an unfettered right to defence costs that could not be clawed back if there was a coverage dispute, the insured would simply be able to assert a right, no matter how weak, to coverage under the insurance and trigger unqualified cover for defence costs.
- In clause C10 the words ‘pending resolution of the dispute’ did not mean defence costs were covered, with no right of claw back, until the date on which a coverage dispute was resolved. It would be ‘absurd’ to construe the policy wording to mean there would be no right to reimbursement of such payments where policy cover was correctly denied. Payments made ‘pending resolution of the dispute’ simply meant payments were made provisionally and subject to repayment.
In connection with construing the policy in accordance with "business common sense", Mr Oldham argued that a limited pool of insurers were approved to offer policies on the ICAEW Minimum Terms, and that this limited number of specialist insurers might be prepared to accept less than commercial terms to access this market. The court was unconvinced by this argument.
Underwriters of professional indemnity, directors and officers and other classes of business where defence costs may be payable on a provisional basis (e.g. pending a finding of dishonesty against the insured or a determination of cover) will welcome the fact the court has upheld the insurers’ right to claw back “provisional” defence costs payments.
The judgment confirms that clear wording can require insureds to repay defence costs if coverage is successfully declined. Although the court found clause C10.2 was sufficiently clear, the case arguably demonstrates that it could be revised to be clearer still.
Of course, the ability to claw back defence costs is only as valuable as the policyholder’s ability to repay those costs but this case may encourage underwriters to ensure their intentions regarding payment (or, indeed, repayment) of defence costs in liability insurance are clearly expressed.
**Note that, in the meantime, his defence costs continued to be funded by his 2011 professional indemnity insurers under clause 10.2 of the Minimum Terms, albeit those insurers also disputed coverage. The judgment does not record how matters now stand between Mr Oldham and his 2011 insurers.