Key Take-aways
- The wording in insurance policies is often taken from precedent wording that has evolved over time. Accordingly, we often see inconsistencies in the wording of policies and/or ambiguity in the provisions setting out the scope of cover. There are often many different interpretations that can be applied to inconsistent wording in a policy, and it should not be assumed that the correct interpretation of any inconsistency is obvious or clear. When reviewing insurance policies, policyholders should look out for any inconsistencies between provisions in the policy and discuss them as a matter of priority with the broker and insurers in order to remedy the inconsistency.
- Parties should pay particular attention to provisions setting out the order of priority in the event of a conflict, particularly regarding the scope of cover, to ensure that they understand how the provisions of the policy will be interpreted in the event of a conflict.
- The English Court of Appeal’s judgment handed down in May this year, offers a timely reminder of the limited circumstances in which the English Courts will intervene in altering contractual terms agreed between the parties. In short, the Court will not re-write a bad bargain or correct drafting errors; in order for a court to intervene it must be shown that there is a clear and obvious drafting error and that there is a clear and obvious correction to that error.
Factual background
On 19 November 2019, Project Angel Bidco Ltd (the “Buyer”) acquired the entire issued share capital of a civil engineering and general construction company (the “Target Company”). The Buyer took out a buyer-side warranty and indemnity insurance policy (the “Policy”), which provided an indemnity for breach of the bribery and corruption warranties in a share and purchase agreement (“SPA“).
The purpose of a buyer’s side warranty and indemnity policy is to insure against the risk that the target company or business was not in the state warranted by the sellers and, therefore, worth less than the purchase price at the date when the sale took place.
Following the acquisition, the Buyer alleged that the sellers had breached certain warranties in the SPA relating to the Target Company’s compliance with anti-bribery and anti-corruption legislation (“ABC Legislation”) and made a claim under the Policy.
Nature of the drafting error
The Buyer sought to argue that the cover provided by the Policy extended to cover the warranties given in respect of compliance with ABC Legislation by virtue of the warranties being listed and marked as being “covered” in the “Cover Spreadsheet”, which was appended to the Policy.
However, the Policy included certain exclusions, including losses arising out of “any ABC Liability”, which was defined as:
“any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.
The Buyer argued that there was a plain contradiction between the “Cover Spreadsheet”, which identified the ABC Legislation warranties as being covered, and the exclusion of “ABC Liability”, which stemmed from a mistake in the draft of the definition of “ABC Liability”. The Buyer argued that the “ABC Liability” definition was missing a letter and should have read:
“any liability for actual oralleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws.”
The Buyer contended that this amendment would have confined the exclusion to liability only.
At first instance, the English Commercial Court ruled in favour of the Insurers holding that in order for the Policy to be re-written in the manner suggested by the Buyer, the Buyer would have needed to have demonstrated either (i) that there was a mistake that is “obvious on the face of the document” or (ii) that the “language is clear but makes no rational sense or leads to an irrational outcome that could not possibly have been what is meant”. This was a high threshold, that the Court held was not overcome in the circumstances of this case.
In particular, the Court found that there was no contradiction between the Cover Spreadsheet and the Policy wording, when read together. In reaching this conclusion, the Court pointed to the introductory wording of the Cover Spreadsheet, which expressly addressed the order in which the sections of the Policy were to be read if there was a conflict:
“Notwithstanding that a particular Insured Obligation is marked as “Covered” or “Partially Covered”, certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy.”
The Court of Appeal’s Judgment
The Buyer went on to appeal. The crux of the appeal was whether there was a drafting error so stark that it gave the Court permission to wade into the commercial realm of negotiations and alter the terms that had been recorded between the parties. For the Court to change the wording of the Policy, the a) drafting error needed to be clear; and b) the correction needed to be obvious.
Lord Justice Lewison of the Court of Appeal held that there was an apparent conflict between the inclusion of the whole of the relevant warranty in the Cover Spreadsheet on the one hand, and the scope of the definition of “ABC Liability” on the other. Nevertheless, Lewison LJ concluded that the alleged drafting error was not clear enough to warrant the Court’s intervention. In particular, it was noted that the Insurers had coherent and rational reasons for wanting to exclude losses arising out of ABC Liability and, as such, it was not clear whether, if there was any mistake, it lay in the drafting of the ABC Liability exclusion or the inclusion of the relevant warranty in the Cover Spreadsheet. Lewison LJ also noted that the ABC Liability clause had been specifically negotiated and that the Court should not lose sight of the fact that the provision may have been a compromise or that the parties were unable to agree more precise terms; inconsistency can exist in such complex policies and the Policy in question should be considered as a whole, within its contractual context. Accordingly, the appeal was dismissed.
Conclusion
Buyers of complex commercial insurance should read policies carefully. The English courts are reluctant to intervene in cases where lengthy negotiations would, or should, have taken place. Policyholders should work closely with their brokers and insurers to understand the exact scope of coverage and what would happen in the event of an inconsistency between the policy provisions.