Professions and Financial Lines Brief: latest decisions October 2024

A roundup of the latest court decisions touching on the following issues:

AI washing, Sections 10 and 11 of the Insurance Act 2015, the construction of policy wordings and policy interpretation

SEC Enforcement Action Against Investment Adviser for AI-washing

SEC v Rimar Capital Entities and Itai Liptz [10.10.24]

The US Securities and Exchange Commission (SEC) has, in recent months, been looking closely at the use of artificial intelligence (AI) tools by regulated firms and taking enforcement action against firms that exaggerate their use of AI or machine learning in the provision of investment services – so-called “AI-washing”.

In its latest enforcement action in this space, on 10 October 2024, the SEC announced the settlement of charges against Rimar Capital USA and associated entities (Rimar), its owner Itai Liptz and board member, Clifford Boro. The SEC alleged that the parties misrepresented Rimar’s purported use of AI to perform automated trading in clients’ accounts and defrauded investors by raising nearly $4 million for the development of its AI-based trading platform. The use of elaborately produced marketing materials including pitch decks and buzz words about the latest AI technology were cited by the SEC has having been used by the entities to engage in AI-washing.

Although the charges were not admitted, the entities agreed to cease-and-desist orders against them. Mr Liptz was ordered to pay disgorgement and interest of USD213,000 and a civil penalty of USD250,000. Mr Boro was ordered to pay a civil penalty of USD60,000.

Whilst we are yet to see a similar focus on AI-washing by the UK Financial Conduct Authority (FCA), it has rules and regulations that are relevant to consumer protection in the context of AI-washing, such as those pertaining to the firms’ governance and accountability arrangements, rules relating to financial promotions and advertising and the Consumer Duty.

The FCA is likely already working with other regulators (such as the Advertising Standards Authority) on issues arising from AI-washing. In the meantime, it can be expected to use the tools at its disposal, including enforcement action, when faced with similar instances of misconduct as that seen in Rimar.

In addition, as has been seen with green-washing, there is the potential for investor / shareholder disputes to arise in respect of AI-washing.

Authors: Ariane Kim Gonzalez, Jennifer Kusiak

Applying section 11 of the Insurance Act 2015 to a Breach of Warranty

MOK Petro Energy FZC v Argo (No. 604) Limited  [26.07.24]

This High Court (Commercial) decision is the first to comment (albeit in obiter) on sections 10 and 11 of the Insurance Act 2015 (IA 2015).

The claimant, MOK Petro Energy FZC (MOK), was an oil trading company that purchased a cargo of gasoline. London market insurers (the defendants), reinsured Cedar Insurance & Reinsurance Co. Ltd on back-to-back terms and were directly liable to MOK for valid claims under an all-risks marine cargo open policy (Policy). Relevantly, the Policy contained a survey warranty, requiring ‘inspection’ and ‘certification’ of the cleanliness of the vessel and shore tanks.

MOK claimed the cargo was contaminated during loading. The defendants succeeded on their primary case that the cargo was never on specification, irrespective of any subsequent water contamination. In the alternative, the defendants argued that any claim under the Policy was precluded by MOK’s breach of warranty on the basis that there had been an inspection but no separate certification.

Given the extensive submissions by the parties on the interpretation and application of sections 10 and 11 of the IA 2015, the court commented on whether MOK’s claim was precluded due to the breach of warranty or whether section 11 applied. Section 11(3) of the IA 2015 releases an insured from the ordinary consequences of a warranty breach if the insured can prove that non-compliance with the warranty did not increase the risk of loss.

MOK argued that unlike a breach of the inspection requirement, failure to comply with the certification requirement was not a breach that increased the risk of the loss which actually occurred (being the water contamination) and therefore was not relevant. The court disagreed and accepted the defendants’ argument that the relevant warranty clause must be considered as a whole (i.e. both inspection and certification) rather than as a specific breach (i.e. the impact of failing to obtain certification only). Having found that compliance with the entire term was capable of minimising the risk of the loss, the court concluded that section 11 of the IA 2015 did not apply and the defendants therefore had a valid breach of warranty defence.

Although a marine cargo case without precedential value (regarding the application of the IA 2015 to breaches of warranty), the court’s commentary on the interpretation and application of the IA 2015 to warranty breaches apply equally to financial lines policies.

Authors: Maneeka Sangha, Charlotte Lewis

The Importance of Insurance Policy Wordings

MS Amlin Marine NV v King Trader Ltd & Others [16.07.24]

The recent High Court ruling in this case has provided the insurance and reinsurance sector with further valuable insight into the construction of insurance policies.

The case involved a condition within an insurance policy, requiring the insured to pay in advance for the liability in question before  insurers would provide coverage; otherwise known as a ‘pay to be paid’ condition.  When the insured became insolvent, having failed to satisfy a liability to a third-party, insurers declined to pay

on the basis of the above condition.

The insured’s creditor argued, relying on the Third Party’s (Rights against Insurers) Act of 2010, that the condition was not properly incorporated and did not comply with the principle aim of the policy. The court rejected the creditor’s arguments, upholding that the condition was valid.  In doing so, the court emphasised

its high regard for the importance  of careful drafting and the intentional placement of provisions to avoid ambiguity and contention. In reaching this decision, the court found that:

• Clarity is integral - the court placed enormous impetus on the clear incorporation of terms to prevent contention
• Placement is integral - a term or condition found within a policy can massively alter its interpretation, therefore it is necessary to ensure that placement is fit for purpose
• Regulatory compliance is integral - insurers must ensure that regulatory requirements are strictly adhered to, including considerations surrounding restrictions and policy exclusions
• Bespoke language in provisions will rarely be challenged by the court, as opposed to standard wordings, as they point towards a more blatant insight into the agreement and intentions of the parties
• The incorporation of hierarchical language into policy wordings is a valuable tool to prevent legal challenge.

Although this case was rooted specifically in Maritime Insurance, the court reaffirmed that these were generally applicable principles regarding the importance of construction in insurance policies and the methods by which to best prevent inconsistency and, therefore, challenge to a policy. This is applicable to professional

liability, in particular, when advising clients on coverage issues that require consideration of structure and language.

Authors: Isobelle White, Kate Courtman

Reaffirming the approach to the interpretation of insurance policies

Bellini (N/E) Ltd v Brit UW Ltd (Insurers) [30.04.24]

This decision involved a dispute over the interpretation of a clause purporting to provide business interruption (BI) cover for “murder, suicide or disease”. The judgment will be of interest to professional indemnity Insurers for its exploration of the limits on the court’s ability to reinterpret “clumsily drafted” clauses. 

Bellini (the Insured) claimed under the Policy for BI losses caused by Covid-19. Clause 8.2.6 of the Policy provided cover for BI arising from “any human infectious or human contagious disease”, subject to the provision that it must be “caused by damage, as defined in clause 8.1” and “in consequence of the damage”. Clause 8.1 did not define “damage”, but said that BI cover was provided where there was “damage to property used by [the Insured]”. Clause 18.16.1 defined damage as “physical damage and physical destruction”.

The Insured argued that clause 8.2.6 was only comprehensible if it was amended by removing “caused by damage” and replacing “in consequence of the damage” with “in consequence of the insured perils”. Insurers argued that the Policy provided BI cover only where there was physical damage to the property.

The Court of Appeal dismissed the appeal, concluding that there was no obvious mistake in the Policy wording. It did not matter that the clause provided only very limited extensions of cover for disease. The clause applied only where there was physical damage to the property and, since there was no physical damage, the claim failed.

Since nothing had “gone wrong with the language” used, the court refused to rewrite the wording. A reasonable reader, at the time of the policy’s inception, would have understood the policy to have only provided damage-based cover. 

This decision illustrates that when interpreting an insurance policy, the court will only interfere to correct an error if: (i) there is a clear mistake on the face of the instrument; and (ii) it is clear what correction ought to be made to cure that mistake.

Authors: Abbie Law, Nick Read

Read other items in Professions and Financial Lines Brief - October 2024