Payback time

Michael Jonathan Christopher Oldham v QBE Insurance (Europe) Ltd [2017]

Professional indemnity insurer successful in claiming reimbursement of defence costs advanced pending resolution of a coverage dispute. This case emphasises the need for insurers to have such disputes determined quickly, and procedurally correctly, when faced with an impecunious insured.

Background

This dispute concerned an accountant and insolvency practitioner, Mr Oldham, who was subject to a claim arising from his performance as the joint administrator of a company, MK Airlines Limited, between June 2008 and March 2009 (the Claim).

QBE had issued Mr Oldham with a professional indemnity insurance policy for the 12 months commencing 19 February 2014 (the Policy). The Policy, which contained a difference of conditions clause, was subject to the minimum approved policy wording issued by the Institute of Chartered Accountants of England and Wales (the Minimum Terms).

The Minimum Terms in force at the time (at Clause 10.2) provided that in the event of a dispute concerning the liability of insurers to indemnify the insured, insurers would advance defence costs to the insured pending resolution of the dispute.

QBE declined to indemnify Mr Oldham under the Policy on the basis that the claim against him was made prior to the Policy’s inception. Mr Oldham challenged QBE’s position (the Coverage Dispute).

However, in accordance with its contractual obligations, QBE indemnified Mr Oldham in respect of his legal costs of defending the Claim pending resolution of the Coverage Dispute. At the same time, QBE referred the Coverage Dispute to arbitration pursuant to the arbitration clause contained within the Policy.

Arbitration

Agreeing with QBE, the arbitrator found that there was no cover under the Policy in respect of the Claim, which was held to have been first made prior to the Policy’s inception.

QBE then advanced submissions seeking reimbursement of the defence costs that it had advanced to Mr Oldham in respect of the Claim prior to the arbitrator’s determination of the Coverage Dispute.

Before the notional deadline for Mr Oldham’s submission in response, the arbitrator issued a second award in favour of QBE, ordering Mr Oldham to reimburse QBE in respect of the defence costs that had been advanced and to make payment on account of the arbitration costs within 28 days.

Court proceedings

Mr Oldham issued proceedings in the High Court, challenging the arbitrator’s second award on the basis that:
There had been a serious irregularity in the second award, in that he had not been given the opportunity to address QBE’s submissions as to why the payments should be made.

The arbitrator had erred on a point of law in determining that the Minimum Terms required reimbursement of the defence costs.
In respect of the serious irregularity, the court held that Mr Oldham had been deprived of his opportunity to advance potentially “meritorious challenges” as to the payments and reverted the matter back to the arbitrator for reconsideration. Mr Oldham did not, however, enjoy the same success with his arguments on the point of law.

The court found that Clause 10.2 of the Minimum Terms concerned a means of dispute resolution, whereby payment was to be advanced “pending resolution of the dispute”. Clause 10.2 was not to be read as effecting a change in the scope of cover. The court commented that if Mr Oldham’s submissions were accepted, the effect would be to create a right to cover for defence costs, where one did not otherwise exist, simply by asserting that there was a right to cover.

Finding for QBE, the court held that, in the absence of clear words to the contrary, an insurer’s liability for defence costs only arose in circumstances where there was cover under the policy. In circumstances where there had been found to be no right to indemnity, the defence costs which had been advanced by QBE pursuant to the dispute resolution clause would fall to be repaid by Mr Oldham. Clause 10.2 was merely concerned with provisional payments, “ultimate liability for which are to be determined by the coverage dispute when resolved.”

Comment

Coverage disputes between professional indemnity insurers and their insureds are most commonly determined by arbitration which is generally confidential as between the participants. As such, disputes such as that between QBE and Mr Oldham concerning the repayment of defence costs advanced without prejudice to questions of coverage are usually resolved without wider visibility.

That said, the approach adopted by the court reflects the conventional wisdom concerning the application of advancement of defence cost clauses, which are common within professional indemnity policies. Such policies can work against insurers when faced with the need to advance defence costs to an insolvent or otherwise impecunious insured and, in those circumstances, emphasise the need to have coverage disputes resolved as quickly as possible.

Notwithstanding the desirability of a swift conclusion to a coverage dispute through arbitration, the need for procedural compliance by those involved, including the arbitrator, is also important. In this instance, a procedural failing by the arbitrator played a part in QBE being drawn into to a piece of satellite litigation which could perhaps otherwise have been avoided.

Read other items in the Professions and Financial Lines Brief - March 2018