Insurance/Reinsurance- United Kingdom

Insurance policies commonly provide an exclusion or carve-out from cover “where uninsurable by law”. As this phrase suggests, there are situations where, regardless of what a policy says, the courts will not allow an insured to enforce its entitlement to indemnity: the rules of public policy relating to acts uninsurable by law effectively give insurers an automatic exclusion which overrides the contract. What is the scope of this public policy exclusion and how will it be applied in different situations?

Public Policy Exclusion

It is an ancient principle of English common law that no person may benefit from his or her own wrong. In the context of insurance, this principle has been applied to preclude recovery by an insured of an indemnity against the consequences of his or her deliberate crime. However, there is a marked lack of modern authority concerning the application of the prohibition beyond deliberate crimes; the majority of the few relevant cases were decided in previous centuries in very different circumstances. The ambit of the prohibition might be considered to relate to criminal wrongdoing, civil damages and regulatory fines and penalties as follows:

• The consequences of deliberate crimes are uninsurable. However, many professionals are subject to criminal offences based on negligence or even strict liability. Some very old authority suggests that all criminal conduct is uninsurable, but the modern position is probably that the prohibition will apply only to non-deliberate crimes which the court considers sufficiently anti-social.
• The prohibition probably applies to civil damages resulting from deliberate or intentional wrongdoing. What counts as ‘intentional’ for these purposes is likely to depend on the specific context and may therefore involve the same assessment of whether an act is sufficiently anti-social. Recklessness may be sufficient in some cases, but in others actual intent may be required in relation not only to the wrongful act, but also to the specific loss.
• The same principles should apply to regulatory fines and penalties. The courts will not assist the recovery of regulatory fines imposed for deliberate wrongdoing, but should do so where the wrongdoing was merely negligent, especially where the fine takes the form of compensation to the victims. However, many regulators prevent reliance on insurance in other ways: the Financial Services Authority (FSA) has a general prohibition in its rulebook, whereas the Securities and Exchange Commission prefers to approach the issue on a case-by-case basis, where possible by agreement.

The following general points concerning the application of the prohibition are reasonably clearly established:

• The prohibition does not apply to purely vicarious liability for the deliberate wrongdoing of an employee or agent; the relevant wrongdoing must be by the principal itself.  
• Insurers are entitled to look behind the particular way the claim is put to the real facts giving rise to the liability. In general, assuming that they can prove it, insurers can allege fraud even if the claimant does not.
• In principle, the prohibition applies to defence costs as well. However, different considerations may arise, depending on, for example, the precise trigger for advancement in the contract and any final adjudication restriction in the dishonesty exclusion. In the regulatory context, the FSA rulebook permits insurance for defence costs (although not for fines), whereas other regulators have been known to take a harsher line.  
• The prohibition applies only to enforcement - there is nothing to stop an insurer from paying the indemnity if it chooses to do so, as it may do in the captive context, for example. However, insurers that do not take this point may find their reinsurers resisting payment.

International Dimension

How would the English courts apply the prohibition in cases involving significant international aspects? The following issues might form the basis of an approach:

• An English court is likely to apply the prohibition in the same way to deliberate conduct that is illegal or wrongful under the law of the country where that conduct occurred, even if it is not illegal or wrongful in England.
• The parties may have chosen an applicable law that, unlike English law, would allow an indemnity to be enforced in respect of deliberate wrongdoing. Save in exceptional cases, however, an English court is likely still to apply the prohibition, as to do otherwise would effectively permit the parties to 'contract out' of English public policy.
• The corollary is that an English court is likely to allow an indemnity to be enforced even if it is unenforceable abroad, provided that it is normally enforceable in England. There may be an exception in the relatively unlikely case where the only possible method of performing the contract would be illegal abroad; however, alternatives will usually exist, such as effecting payment outside the relevant jurisdiction. There is nothing to stop an insurer from providing in its policy for the best of both worlds by expressly applying the public policy restrictions of both English and one or more foreign laws.

Entities Acting Deliberately

How do these principles apply to an entity, such as a limited liability partnership (LLP) or a company? Traditional 'innocent partner' clauses in professional indemnity policies may not work in the same way for corporate entities as they do for individuals. The prohibition against allowing an indemnity to be enforced will apply to an entity where the court treats the acts of certain individuals as if, for legal purposes, they were the acts of the entity itself. Such an attribution happens easily in situations giving rise to vicarious liability (eg, employer/employee), and this will not prevent an indemnity from being enforced - this requires personal liability of the entity itself, for which far more restrictive rules of attribution apply. One of the common tests for personal liability is to establish who was the corporate entity’s 'directing mind and will' in relation to the acts in question, but this concept can mean very different things depending on the context. The high-water mark for insureds probably came with the 1999 case of Arab Bank v Zurich, which concerned a liability policy that indemnified a company and its directors. The dishonesty of an insured who was the managing director and significant shareholder of a company (which was also an insured) was attributed to the company for the purpose of the company’s liability to a third party, but was not attributed to the company for the purpose of the preservation of the company’s right to recover under an indemnity.

To what extent can an insured have its cake and eat it? The result in Arab Bank partly reflects the underlying rationale of liability insurance - namely, to ring-fence each insured’s right to indemnity from being prejudiced by other insureds, and also to protect third parties injured by the insured’s wrongdoing. However, the decision turned on the particular provisions of the insurance policy involved in that case. Policy forms - and classes of insurance business more generally - approach these issues in a variety of ways; some traditionally say nothing about attribution. However, with the rise of LLPs as professional service providers, this is an area of increasing importance which places emphasis on fitness for purpose of provisions concerning issues such as severability, attribution and dishonesty exclusions. As always, therefore, the exact policy language may be crucial, particularly when the court is considering the application of public policy.

International Law Office