England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		22nd July 2004

Mr. Justice Moore-Bick :

Background

1. The claimant in this case, Friends Provident Life and Pensions Ltd, is the purchaser of the business, and successor to the rights and obligations, of London & Manchester Assurance Co. Ltd ("LMA"). The defendants are insurance companies which provided professional indemnity insurance to LMA for the period 1^st February 1993 to 31^st January 1994.
2. LMA's professional indemnity insurance for the 1993-94 year took the form of a primary layer providing cover in respect of losses of up to £1 million any one claim and in the aggregate (subject to various deductibles) and an excess layer providing cover of £4 million in excess of £1 million any one claim and in the aggregate. The primary layer was underwritten by Syndicate No. 657 at Lloyd's through an agent, Resource Underwriting Ltd. The first excess layer was underwritten in part by a group of Lloyd's Syndicates, including Syndicate 657, and in part by the defendants, all of whom were members of the London companies' market. Both layers were placed by the brokers Bowring Marsh & McLennan Ltd ("Bowrings") and were written on a "claims made" basis, that is, the policies were expressed to provide an indemnity against losses arising from claims made against the insured during the period of the policy.
3. The business of LMA included giving financial advice to individuals in relation to personal pension plans. On 28^th January 1994 in the context of negotiations for the renewal of cover for the year beginning 1^st February 1994 Mr. Harvey, the Legal Services Manager of LMA, wrote to Lloyd's underwriters at the address of Bowrings in Exeter in the following terms:

"I confirm that after due enquiry I know of no circumstances likely to give rise to a claim under the Group's Professional Indemnity Policy save as follows:-

1. Matters which are currently under investigation but are not likely to exceed the deductible under the policy.

2. Pensions Transfers and Opt Outs which are a matter of public record and relate to all pensions providers. Detailed investigation will be conducted into pensions related transactions in accordance with any SIB/LAUTRO guidelines and notification of any potential claims given to underwriters in the usual way."

4. The reference to "pensions transfers and opt-outs" was a general reference to LMA's involvement in giving financial advice to employees who were considering whether to transfer from, (or, in the case of new employees, opt out of), private pension schemes run by their employers in favour of personal pension plans available in the market. By the latter part of 1993 the regulatory bodies had expressed concern that the advice given to many clients by their financial advisers was inadequate and had led to what was later to become known as "pension mis-selling". They had already indicated their intention to conduct an investigation, but its precise nature and scope had yet to be determined. In the event, as a result of those investigations LMA was required to pay sums totalling over £9 million to various clients by way of compensation.
5. Clause 2 of the General Conditions forming part of the primary layer policy obliged the insured to notify the underwriters as soon as possible of any circumstances that might give rise to a claim. It also provided that any claim arising from circumstances notified to the insurers in accordance with that clause should be deemed to have been made during the period of the policy. Accordingly, the claimant sought to recover its loss from the underwriters for the 1993-94 year on the grounds that, although the claims themselves had not been made during that year, they arose out of the circumstances described in Mr. Harvey's letter of 28^th January 1994 and were therefore to be treated as having occurred during the period of cover. The Lloyd's Syndicates have accepted liability in respect of those claims, both under the primary and excess layer policies, but the defendants have declined to do so on the grounds (among others) that their policies only cover claims actually made within the policy period and that even if they do extend to claims arising out of circumstances notified during the policy period, LMA failed to notify them of any such circumstances within that time.
6. By orders made on 25^th February 2004 and 30^th April 2004 directions were given for the trial of a number of preliminary issues relating to the construction and effect of the excess layer policies. Before identifying those issues, however, it is necessary to set out the material terms of the various policies.

The policies

7. The material parts of the primary layer policy provided as follows:

"Now we, the underwriters, to the extent and in the manner hereinafter provided, hereby agree:-

1. To indemnify THE ASSURED against any claim or claims first made against them during the period of insurance set forth in the First Schedule in respect of any Civil Liability whatsoever or whensoever arising . . . . . . .

. . . . . . . . . . . . . . . . . . . .

EXCLUSIONS

The Policy shall not indemnify THE ASSURED against any claim or loss:-

. . . . . . . . . . . . . . . . . . . .

2. Arising out of any circumstances or occurrence . . . . . . . . which were known to THE ASSURED prior to the inception of this Policy

. . . . . . . . . . . . . . . . . . . .

GENERAL CONDITIONS

. . . . . . . . . . . . . . . . . . . .

2. THE ASSURED shall as a CONDITION PRECEDENT to their right to be indemnified under this Policy give to the Underwriters notice as soon as possible during the period of this policy as set forth in the Schedule:-

2.1 Of any circumstance of which THE ASSURED shall become aware which may give rise to a claim or loss against them or any of them.

2.2 Of the receipt of notice from any person whether written or oral of an intention to make a claim against them or any of them.

. . . . . . . . . . . . . . . . . . . .

Such notice having been given to Underwriters THE ASSURED shall give to the Underwriters as soon as possible full details in writing of the circumstances which may give rise to a claim or loss against them or any of them. Any claim or loss to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the First Schedule shall be deemed for the purposes of this Policy to have been made during the subsistence hereof."

8. The leading excess layer policy was underwritten by the Lloyd's Syndicates and was known as the 'Co-insurance policy' because it was referred to by that name in each of the other excess layer policies. It incorporated a set of clauses known as the A W G S Excess Wording which provided as follows:

"To indemnify the Assured for claim or claims which may be made against the Assured during the period of insurance . . . . ."

and contained the following clauses:

"1. Liability to pay under this Policy shall not attach unless and until the Underwriters of the Underlying Policy/ies shall have paid or have admitted liability or have been held liable to pay, the full amount of their indemnity.

2. It is a condition of this Policy that the Underlying Policy/ies shall be maintained in full effect during the currency of this Policy.

3. If by reason of the payment of any claim or claims by the Underwriters of the Underlying Policy/ies during the period of this Insurance the amount of indemnity provided by such Underlying Policy/ies is:-

(a) Partially reduced, then this Policy shall apply in excess of the reduced amount of the Underlying Policy/ies for the remainder of the period of insurance;

(b) Totally exhausted, then this Policy shall continue in force as Underlying Policy until expiry hereof.

. . . . . . . . . . . . . . . . . . . .

5. Any claim(s) made against the Assured or the discovery by the Assured of any loss(es), or any circumstances of which the Assured becomes aware during the subsistence hereof which are likely to give rise to such a claim or loss, shall, if it appears likely that such claim(s) or loss(es) may exceed the indemnity available under the Policy/ies of the primary and Underlying excess Insurers, be notified immediately by the Assured in writing to the Underwriters hereon.

. . . . . . . . . . . . . . . . . . . .

7. Except as otherwise provided herein this policy is subject to the same terms, exclusions, conditions and definitions as the Policy of the primary Insurers. No amendment to the Policy of the primary during the period of this Policy in respect of which the primary Insurers require an additional premium or a deductible shall be effective in extending the scope of this Policy until agreed in writing by the Underwriters."

9. The first to fourth defendants' proportions of the excess layer cover was written on the policy form issued by the London Insurance & Reinsurance Market Association Ltd ("LIRMA"). It described the interest insured as

"Excess Professional Indemnity Insurance in accordance with the Policy referred to in the Coinsurance Clause below."

The Coinsurance Clause provided as follows:

"It is warranted that this Policy shall run concurrently with and be subject to the same terms, provisions and limitations as are contained in Policy No. 509/QF404093 issued by certain Lloyd's underwriters covering the identical subject matter and risk."

10. The fifth defendant issued its own policy by which it agreed to indemnify the claimant against

"Loss as more fully set forth in the Policy detailed in the said Schedule covering the identical subject matter and risk (hereinafter called the "Co-insuring Policy") . . . . . . Provided that:-

(1) . . . . . . . . .

(2) the Policy shall be subject to the same terms, provisions, conditions and limitations as are contained in the Co-insuring Policy."

The Co-insuring Policy was identified in the schedule as Lloyd's Policy No. 509/QF404093.

11. Thus each of the defendants' policies purported to incorporate the terms of the Co-insurance policy which, by virtue of clause 7 of the A W G S Excess Wording, purported in turn to incorporate the terms of the primary layer policy.

The preliminary issues

12. Directions were given for the trial of the following preliminary issues:

1. Whether the cover provided under the excess policies:-

(1) included the extension of cover contained in General Condition 2 of the primary policy in respect of claims made after the policy period arising out of circumstances notified within the policy period; or

(2) Only provided cover in respect of claims made within the policy period.

2. Whether, in the event that cover provided under the excess policies included the extension of cover referred to above:-

(1) The notice required in order to extend cover to the claims arising out of the circumstances thus notified had only to be given to the insurers subscribing to the primary policy; or

(2) It was necessary for such notice to be given to the insurer on the particular policy in the excess layer in question.

3. Whether the provision of Schedule 1 to the primary policy identifying Bowring as the person to whom claims were to be notified was incorporated, expressly or by implication, into the excess policies with the result that, in the event that the excess policies incorporated the extension of cover referred to above but that the relevant notice needed to be given within the policy period to the insurers subscribing to the excess policies, this requirement was satisfied by the giving of notice to Bowring.

4. Whether LMA's letter of 28^th January 1994 constituted notice of the circumstances identified therein to

(1) the insurers subscribing to the primary policy; and

(2) the insurers subscribing to the excess policies.

5. In the event that cover provided under the excess policies included the extension of cover referred to above and the requisite notice of the relevant circumstances was given within the policy period, what (if any) further requirements as to the giving of notice were imposed on LMA by

(1) General Condition 2 of the primary policy (to the extent that it was incorporated into the excess policy); and/or

(2) Clause 5 of the Co-insuring policy.

6. Whether any such further requirements as to the giving of notice as may be identified in answer to question 5 above was

(1) a condition precedent to liability under the excess policies;

(2) an innominate term, breach of which might if sufficiently serious excuse the insurers subscribing to the excess policies from liability; or

(3) a term breach of which gives rise to a right to damages only.

7. Without prejudice to the above, whether, on the true construction of the excess policies, the provisions of the excess policies extend to claims in respect of which the claimant seeks an indemnity.

8. Whether, in the event that clause 5 of the Co-insuring policy is an innominate term and assuming that LMA (or the claimant) has committed a repudiatory breach of clause 5 by failing to notify claims to the defendants in accordance with its provisions

(1) the defendants have a defence to the claims the subject of such repudiatory breach irrespective of whether or not they have accepted such breach; or

(2) the defendants have a defence to the claims the subject of such repudiatory breach provided that they have accepted such breach; or

(3) the defendants have a defence to the claims the subject of such repudiatory breach provided that they have accepted such breach and that the losses the subject of such claims occurred after such acceptance.

Issue 1: Do the excess policies cover claims arising out of any circumstances notified to the underwriters during the policy period?

13. It is now well established that when construing commercial documents of this kind it is important to have regard to all the background knowledge reasonably available to the parties at the time: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 per Lord Hoffmann at page 912. In the present case it was not in dispute that among the background knowledge available to the parties was the general practice of the insurance market in relation to the underwriting of professional indemnity risks and the insuring of large risks by means of primary and excess layer policies. Two aspects of that practice, as described by Mr. Carey who gave evidence for the claimant, are relevant to the present dispute. The first concerns the practice of the market in relation to liability insurance. It is now almost invariable for liability underwriters in general, and professional negligence underwriters in particular, to issue policies that provide cover on what is known as a "claims made" basis, that is, which provide the insured with an indemnity against losses arising from claims made against him, as opposed to events occurring, during the policy period. This has an advantage for underwriters in that they are less exposed to unforeseen losses arising long after the period of cover has expired, but it poses a serious problem for any insured who becomes aware during the policy period of circumstances that may give rise to a claim in the future. When seeking insurance for the following year he would be bound to disclose the existence of any circumstances, but might well find it impossible to obtain insurance in respect of that potential loss at a commercially acceptable premium, if indeed at all. As a result the practice has grown up of including in "claims made" policies a term extending cover to losses arising from circumstances that may give rise to a claim in the future provided that they have been notified to the underwriters during the period of cover. So significant are these factors that in J. Rothschild Assurance Plc v Collyear [1999] 1 Lloyd's Rep. I. R. 6, 22 Rix J. expressed the view that a "claims made" policy could hardly work on any other basis. Mr. Hancock suggested that Rix J. put the matter too high, but having regard to the current practices of the market I do not think that he did and I respectfully endorse his view. It is worth noting that the primary layer policy in this case expressly excluded liability in respect of any claim or loss arising out of any circumstances known to the insured prior to its inception.
14. The second matter of background knowledge that was reasonably available to the parties at the time is that where substantial risks are covered by the use of primary and excess layers of insurance it is generally assumed in the market, in the absence of any indication to the contrary, that the scope of the cover provided under the excess layer is intended to be the same as that provided under the primary layer, apart, of course, from the individual policy limits. Although a material difference between the scope of the primary and excess layers might not render the cover wholly unworkable, the insured would inevitably bear a greater part of the risk himself if the scope of the cover provided by the excess layer were more limited than that provided by the primary layer. That is sufficiently unusual for there to be a broad assumption that the scope of the cover provided by the different layers is intended to be the same.
15. With these matters of background in mind I turn to the policies themselves. Each of the policies issued by the defendants provided (albeit in slightly different language) that it was subject to the same terms as the Co-insurance policy which in turn provided that it was subject to the same terms as the policy of the primary insurers. In each case general words of incorporation were used and Mr. Hancock Q.C. was right, therefore, to remind me of the care that must be taken when seeking to determine which of the terms of the contract to which reference is made the parties can be taken to have intended to incorporate by the use of such general language. He submitted that General Condition 2 of the primary layer policy was not effectively incorporated into the Co-insurance policy, and therefore not into the other excess layer policies, for two principal reasons: first, because the parties can be taken to have intended only to incorporate those clauses that are germane to the risk and General Condition 2 is not of that kind; secondly, because General Condition 2 is inconsistent with the express terms of the excess policies.
16. The first of these arguments is based on the fact that the bulk of the condition deals with the insured's obligation to notify the insurers of circumstances which may give rise to a claim, a matter which Mr. Hancock submitted was essentially collateral to the definition of the risk. In many cases it may well be appropriate to regard a notice clause as dealing with matters collateral to the risk, though where (as here) the giving of notice is expressed to be a condition precedent to the insured's right to be indemnified under the policy it differs little in its effect from a substantive limitation on the scope of cover. In the present case, however, the fact that the extension of cover is tucked away at the end of the clause tends to disguise its substantive effect. Mr. Hancock accepted that if the last sentence of General Condition 2 had formed a separate clause it would clearly be germane to the risk and would therefore have been apt for incorporation into the excess layer policies by general words of this kind. I am sure that is right, but it makes it impossible to reject the condition as a whole on the grounds that it is concerned only with matters collateral to the risk. Clearly it is not. I am therefore unable to accept that part of his submission.
17. The next question is whether General Condition 2 is inconsistent with the express terms of the excess layer policies. Mr. Hancock submitted that it is inconsistent with the insuring clause in the Co-insurance policy which provides an indemnity only against claims made against the insured during the period of the insurance, but that fails to take account of the language of the condition itself or its obvious purpose. The insuring clause in the primary layer policy is worded in the same way and is itself sufficient to explain the terms of General Condition 2 whose purpose is both to impose certain obligations upon the insured coupled with restrictions on his right to obtain an indemnity and to extend the scope of cover. It achieves the latter object by deeming certain claims, which would otherwise fall outside the period of cover, as falling within it. The clause must therefore be understood as supplementing, rather than contradicting, the insuring clause and does not give rise to an inconsistency of the kind that would render it unsuitable for incorporation into the excess layer policies. Indeed, there are strong grounds for concluding that the parties to the excess layer policies intended that it should be incorporated into those contracts, since a failure to do so would give rise to the very difficulty for the insured to which I drew attention earlier.
18. Mr. Hancock also submitted, however, that the provisions of General Condition 2 are inconsistent with clause 5 of the A W G S Excess Wording and it is certainly necessary to consider how these two clauses can be read together if General Condition 2 is incorporated into the excess layer policies. The question arises in a more acute form under issue 2, but since it has a direct bearing on the issue of incorporation it is necessary to consider it in this context.
19. The final sentence of General Condition 2 forms an integral part of the clause as a whole; it assumes the existence of the preceding provisions from which it cannot easily be divorced. In my view it is therefore not possible to treat the final sentence as a separate clause for the purposes of incorporating it into the excess layer policies; either the whole clause is incorporated, or none of it is. The usual starting point when deciding whether a clause can be effectively incorporated by reference is to construe it as if it were written out in full in the contract into which it is said to be incorporated. It will then become apparent whether it makes sense in that context (with or without an acceptable degree of verbal manipulation) and whether it is consistent with the other clauses of the contract. If it does not, it must be rejected: see HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co. [2001] EWCA Civ 735; [2001] 2 Lloyd's Rep 161.
20. General Condition 2 contains provisions relating to the insured's obligation to notify the underwriters of any notice of intention to make a claim and of any circumstances which may give rise to a claim or loss. Not surprisingly, the insured is bound to notify the underwriters of any of these matters as soon as possible in order to inform them of a potential liability and to enable them to make appropriate arrangements for handling any claim if it has not already been made. The corresponding provisions of the excess layer policies are to be found in clause 5 of the A W G S Excess Wording. This reflects the different position and interests of the excess layer underwriters who will not be affected unless the loss ultimately exceeds the indemnity available under the primary layer policy. The insured is not required to notify them until it becomes apparent that that may happen. Moreover, unlike General Condition 2, clause 5 does not make compliance with its terms a condition precedent to the insured's right to recover under the policy. The question then is whether General Condition 2 can be read in the context of the excess layer policies in a way which makes sense and is not inconsistent with clause 5 of the A W G S Excess Wording. This depends on how one is to construe the word "underwriters" when reading the clause in the context of the excess layer policies. It is the question raised by the second of the preliminary issues to which it is convenient to turn at this point.

Issue 2: Was notice to the primary layer underwriters sufficient to bring the claim within the excess layer policies?

21. This issue turns on the construction of General Condition 2 and proceeds on the assumption that it is effectively incorporated into the excess layer policy. However, I think Mr. Hancock was right in saying that in reality it has a direct bearing on the issue of incorporation itself. Mr. Weitzman Q.C. submitted that it was sufficient for LMA to give notice to the underwriters of the primary layer policy of circumstances that might give rise to a claim in order to bring any subsequent claim within the excess layer policies.
22. General Condition 2 simply requires that notice of the relevant circumstances be given to "the underwriters". In the context of the primary policy that expression can only mean the underwriters of that policy, but it does not follow that when read in the context of the excess layer policies it should still be read as referring to the primary layer underwriters rather than the excess layer underwriters. Mr. Hancock submitted that in the context of the excess layer policies the expression "the underwriters" naturally refers to the underwriters of the policy in question, that is, the relevant excess layer policy, not to the underwriters of the primary policy and as a matter of the ordinary use of language I think that is right, but there may be considerations pointing in another direction. Mr. Weitzman submitted that it should be read as referring to the primary layer underwriters because that is its meaning in the primary layer policy from which it was drawn and verbal manipulation was not permissible in this case, but that argument would only assist him if the clause referred in terms to "the primary layer underwriters", not simply to "the underwriters". The fact that words of a general nature take on a different meaning in a different context does not involve manipulation of any kind; it is simply the result of reading them in their new context. On the face of it, therefore, I would accept that if incorporated verbatim into the excess layer policies the clause would naturally require notice to be given to the excess rather than the primary layer underwriters.
23. If General Condition 2 were incorporated into the excess layer policies without any manipulation at all, therefore, it would in my view be in conflict with clause 5 of the A W G S Excess Wording. That does provide an argument for rejecting its incorporation altogether, of course, despite the strong grounds for concluding that the parties intended to incorporate the extension of cover into the excess layer policies, but Mr. Weitzman submitted that to read the reference to "the underwriters" in the context of the excess layer policies as referring to the underwriters of those policies would lead to a result that is uncommercial and contrary to the intention of the parties.
24. The main plank of his submission was that to construe the clause as referring to the excess layer underwriters would require the insured as a condition of its right to an indemnity to notify those underwriters of circumstances that might give rise to a claim (and give full details in writing as soon as possible) at a time when there might be no reason to think that the loss would exceed the indemnity available under the primary layer. That would be of no advantage to the excess layer underwriters since the handling of the claim would remain with the primary layer underwriters until cover was exhausted and would be contrary to the expectation of the market that notices of that kind will only be given to excess layers when there are grounds for thinking that their interests may be affected.
25. Under General Condition 2 the provision of cover in respect of claims arising outside the period of the policy is dependent upon notification to the underwriters during the policy period of the circumstances which eventually give rise to them. From the point of view of the primary layer underwriters this limitation serves at least two valuable purposes: it provides a clear line of demarcation between losses attributable to different policy years and it enables them to make a provisional assessment of their potential liability and to take steps as necessary towards dealing with any claim that may emerge. The first of these would also be of interest to excess layer underwriters, but it is apparent from clause 5 of the A W G S Excess Wording that it is not information which they need to be given as soon as the insured becomes aware of circumstances that may give rise to a claim. As to the second, any assessment of potential exposure would necessarily be much more conjectural as far as the excess layer underwriters are concerned. Not only could they not know whether a claim would be made; it would often be impossible to tell from the nature of the information they received whether any claim was likely to exhaust the underlying layer.
26. I am satisfied that there would be no practical difficulty in giving notice to the excess layer underwriters at the same time as it is given to the underwriters of the primary layer. Usually the insured will notify the broker who could without difficulty give notice to all interested underwriters at the same time. Mr. Carey's evidence suggests that the market would not normally expect the excess layer insurers to be notified of claims, or circumstances likely to give rise to claims, unless and until there is reason to think that the loss may exhaust the underlying layers, but that is no more than a general expectation. The insured's obligation in this respect is governed by the terms of the policy rather than by any market expectation. In the present case clause 5 of the A W G S Excess Wording reflects the market expectation which Mr. Carey described.
27. In my view the key to this question is to be found in the nature of the relationship between the excess layer and the primary layer as set out in the A W G S Excess Wording. Clauses 1 and 2 of that wording oblige the insured to maintain the primary layer policy in effect during the currency of the excess layer policy and render liability under the excess layer policy dependent upon liability being established under the primary policy. If one ignores for a moment the final sentence of General Condition 2, one can see that the purpose of that clause is to ensure that the primary layer underwriters are informed at the earliest possible moment of any claim and of any circumstances that may give rise to a claim. However, the terms of clause 5 of the A W G S Excess Wording show that the excess layer underwriters are not concerned to receive such notification until it appears that their interest may be affected. That applies as much to claims actually made within the policy period as it does to circumstances that may give rise to a claim. In effect, the excess layer underwriters are content to leave it to the primary layer underwriters to handle the matter, no doubt because they have the assurance that the claim is subject to the terms of the underlying policy which to that extent operates for their benefit also and whose terms are, as far as appropriate, incorporated into their own policy.
28. The effect of clause 3 of the A W G S Excess Wording is that when the primary layer is exhausted the excess layer "drops down" so as to become in effect the primary layer. In those circumstances it is important for the insured to retain cover against claims arising out of circumstances notified during the period of the policy and for the underwriters to obtain the benefits of prompt notification. It might not become apparent for some time whether the indemnity available under the underlying policy had been exhausted, but if that situation were to occur early in the life of the cover, the excess layer underwriters in their capacity as primary layer underwriters would no doubt wish to receive prompt notification of further claims and circumstances as provided for in General Condition 2.
29. In my view these considerations, coupled with the strong presumption that the parties to the excess layer policies intended the scope of cover provided by them to be the same as that afforded by the primary layer, all point to the conclusion that the reference to "the underwriters" in General Condition 2 is to be construed as referring to the primary layer underwriters even when read in the context of the excess layer policies. Reading the clause in that way requires little manipulation and promotes the commercial object of the excess layer policies by defining the scope of cover under them by reference to the scope of cover under the primary layer policy and the obligations owed by the insured to the primary layer underwriters for the time being. The reference to "this policy" in the last sentence of General Condition 2 is quite capable on this basis of referring to the excess layer policy into which the clause as a whole has been incorporated. This construction also has the consequence that there is no conflict between General Condition 2 and clause 5 of the A W G S Excess Wording. Mr. Hancock objected that to read the clause in this way involves imposing an additional liability on the excess layer underwriters in respect of claims arising out of circumstances notified within the policy period without giving them the corresponding benefit of prompt notice of those circumstances, but in my view that is entirely consistent with the philosophy underlying the excess layer policy that whether a claim is to be treated as falling within the terms of the policy depends on whether it falls within the terms of the primary layer policy. If it does, the excess layer insurers are content to accept it as falling within the scope of the excess layer policy as well and do not require notice to be given to them unless and until it becomes apparent that their policy may be affected.
30. For these reasons I am satisfied that it was the intention of the parties that General Condition 2 should be incorporated into the excess layer policies in order to provide the same scope of cover as afforded by the primary layer policy and that it can be incorporated so as to make sense in the context of those policies with only a modest and acceptable degree of verbal manipulation by construing the reference to "the underwriters" as a reference to the primary layer underwriters. I am satisfied, therefore, that General Condition 2 is effectively incorporated into the excess layer policies and that notice to the primary layer underwriters of circumstances that may give rise to a claim, if given within the period of the policy, is sufficient to bring any claim arising out of those circumstances within the scope of the excess layer policies.

Issue 3: Was notice to Bowrings notice to the excess layer Insurers?

31. In view of the conclusions to which I have come on issues 1 and 2 this issue does not arise in relation to the extension of cover, but since it was fully argued and since it may in any event arise in relation to other issues it is appropriate for me to express my view on it.
32. It is necessary for present purposes to assume that the excess layer policy requires notice to be given to the excess layer underwriters of circumstances that may give rise to a loss if any resulting claim made after the end of the policy period is to be covered. In those circumstances notice would only be effective if given to the excess layer underwriters themselves or to an agent authorised to accept notice on their behalf. In the schedule to their policy the primary layer underwriters appointed Bowrings to accept notice of claims on their behalf and Mr. Weitzman submitted that that provision was incorporated into the excess layer policies. I am unable to accept that. The appointment of an agent to accept notice of claims is not a matter that is germane to the risk. It is purely a matter of administration in relation to which each set of underwriters may quite properly wish to make their own arrangements. Although as a matter of convenience the excess layer underwriters may be prepared to treat the insured's broker as their agent for this purpose, I can see no compelling reason why they should do so and no need therefore to construe the general words of incorporation as extending to this part of the primary layer policy. Notice to Bowrings, therefore, did not in my view constitute notice to the excess layer underwriters.

Issue 4: Did the letter of 28^th January constitute notice of the circumstances referred to therein to the primary and excess layer underwriters?

33. There was some doubt about the precise scope of this issue, in particular whether it encompassed the question whether LMA's letter of 28^th January 1994 was capable of amounting to notification of circumstances that might give rise to a claim. However, since that question lies at the heart of the dispute between the parties, and since both counsel were fully prepared to deal with it, I thought it right to hear argument on it.
34. Mr. Hancock made two submissions in relation to the letter of 28^th January: that it was not a notice of claims or potential claims at all; and that even if it was, it was not directed to the defendants. It is convenient to deal with the latter point first.
35. The letter is addressed to Lloyd's Underwriters c/o Bowrings. On the face of it, therefore, it is not directed to the present defendants, all of whom are part of the companies' market. Mr. Weitzman recognised that difficulty, but he submitted that if notice could be given to Bowrings as agents for the excess layer underwriters, the letter could, and should, be construed as being addressed to them in their capacity as agents for those underwriters as well.
36. Since I have already held that Bowrings were not appointed as agents to receive notification of claims and circumstances on behalf of the excess layer underwriters, nothing turns on this point. I should say, however, that having regard to the way it was addressed, I find it difficult to construe this letter as being directed either to Bowrings personally or to any insurers other than the relevant Lloyd's underwriters. I would hold that the letter was not directed to the defendants and it is common ground, for what it is worth, that they were not informed of its contents at the time, if at all.
37. Mr. Hancock also submitted that the letter was not addressed to the underwriters for the then current policy year but to underwriters who were contemplating providing cover for the following year. There had been discussions a few weeks earlier between LMA, Bowrings and representatives of the primary layer underwriters concerning the renewal of the cover. Problems over pension mis-selling had surfaced only recently and the notes of those discussions show that one of the matters giving rise to concern was LMA's potential liability for losses arising out of pensions business in circumstances where it was still unclear what the regulatory bodies would require by way of investigation. Those discussions provide the background to the letter of 28^th January in which LMA confirmed that it knew of no circumstances likely to give rise to a claim other than matters already under investigation and its involvement in pensions transfers and opt-outs which would be the subject of investigation in accordance with guidelines issued by the regulatory bodies.
38. I think Mr. Hancock was right in saying that this letter was addressed to the prospective insurers for the 1994-95 policy year, but I do not think that prevented it from providing adequate notice of the matters to which it refers for the purposes of the current policy to the extent that the same underwriters were involved. What the insurers required was prompt notification of any circumstances that might give rise to a claim. Provided they were given the information required by General Condition 2 in a form that made it clear that they were being notified of circumstances that the insured thought might give rise to a claim, it was immaterial that the information was contained in a letter directed to renewal of cover. Since the prospective insurers at Lloyd's for the ensuing year were the same as for the expiring year, this letter was in my view capable of constituting notice to them of the circumstances described in it.
39. Finally Mr. Hancock submitted that the letter was not a warning that claims might be forthcoming but an assurance that they would not and so did not amount to notification of circumstances that might give rise to a claim. The fact that the letter was addressed to the prospective insurers for the ensuing year inevitably meant that it was directed as much to the risk of claims being made during the period of that policy as to the notification of circumstances that might give rise to claims that would fall under the current policy. The two were directly related. I see no reason, therefore, why the same letter should not be capable of satisfying both objects where the same underwriters are involved. In my view the letter was both notification of circumstances that might give rise to a loss and an assurance that the insured was not aware of any other circumstances that might do so. The underwriters could therefore proceed on the basis that any claims arising out of those circumstances would fall within the expiring policy and could be excluded from the ensuing policy.

Issue 5: Was the insured under any further obligation to give notice of claims or circumstances to the excess layer insurers?

Issue 6: What is the nature of any such obligation?

40. It is convenient to deal with these two issues together. It follows from what I have said already that the excess layer policy extended to claims arising out of circumstances notified by the insured to the primary layer underwriters during the policy year in accordance with the terms of General Condition 2. The insured was also obliged to give the primary layer underwriters as soon as possible full details in writing of circumstances that might give rise to a claim. It was also obliged under clause 5 of the A W G S excess Wording to notify the excess layer insurers of claims, or circumstances that might give rise to a claim, as and when it appeared likely that the loss might exceed the indemnity available under the primary layer policy.
41. General Condition 2 makes it clear that giving notice to the primary layer underwriters of circumstances which may give rise to a claim is a condition precedent to the insured's right to recover in respect of any claim arising out of those circumstances, but it does not expressly provide that the obligation to give written details is of the same order. Moreover, the final sentence does not make it entirely clear whether, in order for a claim made after the end of the policy period to be deemed to have been made during that period, it is sufficient for notice of the relevant circumstances to have been given to the underwriters, or whether the insured must also have provided them with full details in writing.
42. Whether an obligation is to be regarded as a condition precedent depends on the construction of the term which gives rise to it, but where the same clause expressly characterises some obligations as conditions precedent and others not, it is generally fair to assume that the parties did not intend to attribute the same significance to those other obligations. It would have been simple in the present case to have made the provision of written details an express condition precedent to the insured's right to an indemnity, but the parties have not chosen to do so and I think it would be wrong to construe that obligation as if they had. That being so, the contract itself points to the conclusion that it is the notification to the underwriters of circumstances that may give rise to a claim rather than the subsequent provision of details in writing that is of primary importance and that in turn provides a strong indication that notification of circumstances is sufficient to bring any claim subsequently arising out of them within the scope of the cover.
43. Mr. Hancock submitted that, if giving notice of circumstances to the primary layer underwriters is sufficient to bring a subsequent claim within the scope of the excess layer policy, compliance with clause 5 of the A W G S Excess Wording should be construed as a condition precedent because it is only on receipt of such a notice that the excess layer underwriters will be made aware of the existence of the claim. This argument faces two difficulties, however. In the first place, compliance with clause 5 is not expressed to be a condition precedent to the insured's right to be indemnified under the excess layer policies. That is not fatal to the argument, of course, if it is clear from the language of the clause as a whole or the nature of the contract that that is what the parties intended, but in the present case there is nothing that points clearly to that conclusion. Clause 5 is designed to operate both in those cases where the claim is made within the policy period and in those where it arises out of circumstances notified within the policy period. There is no compelling reason to construe clause 5 as giving rise to a condition precedent in relation to claims made during the policy period and the fact that the extension of cover under the excess layer policy depends on notice of circumstances being given promptly to the primary layer underwriters does not in my view provide any additional reason for construing the requirement as a condition precedent in relation to claims arising after that period out of circumstances previously notified. I am satisfied that clause 5 should not be construed as giving rise to a condition precedent to the insured's right to recover under the excess layer policy.
44. That leaves for consideration the precise nature of clause 5. In Alfred McAlpine Plc v BAI (Run Off) Ltd [2000] 1 Lloyd's Rep 437 the Court of Appeal held that a similar kind of notice clause was to be construed as an innominate term, a breach of which, if sufficiently serious, would entitle the insurer to defeat the claim. It will be necessary at a later stage to consider in more detail the precise nature of a clause of this kind, the circumstances in which a failure to comply with its requirements will result in the loss of the right to an indemnity and the principles which underlie the insurer's right to reject the claim. For present purposes, however, it is sufficient to say that the nature of clause 5 of the A W G S Excess Wording is essentially the same as that considered by the court in McAlpine v BAI and that in my view it should be construed in the same way.

Issue 8: If compliance with clause 5 is not a condition precedent, does a repudiatory breach of the clause by the insured provide the insurers with a defence in any, and if so what, circumstances?

45. This issue was added by the order of Morison J. in April this year and it is convenient to deal with it next. It arises out of the decision of the Court of Appeal in McAlpine v BAI and because the dispute turns mainly on the precise language used by Waller L.J. in reaching his conclusion about the nature of the notice clause in that case, it is necessary to quote the material parts of his judgment in full. However, it is first necessary to describe as briefly as possible the background to this part of the court's decision.
46. Under the policy in question the insurer had agreed to indemnify the insured against all sums which it became liable to pay as compensation arising from bodily injury to persons other than its own employees. Clause 1(a) in the section headed 'Claims Conditions' required the insured to give notice to the insurer as soon as possible in the event of any occurrence which might give rise to a claim under the policy. On 1^st May 1991 an accident occurred as a result of which a workman suffered serious injury in respect of which he was likely to, and eventually did, make a claim against the insured. The insured failed to give notice of the accident as soon as possible, or indeed at all prior to June 1992. The judge at first instance held that the insured had wholly failed to satisfy the requirements of the notice clause, but that compliance with the clause was not a condition precedent to its right to an indemnity. He held that the insurers were liable under the policy. On appeal there was no challenge to the judge's conclusion that compliance with clause 1(a) was not a condition precedent to the insured's right to be indemnified under the policy. The Court of Appeal held that it was an innominate term, breach of which, however serious, would be unlikely to result in the repudiation of the policy as a whole, but that a breach which demonstrated an intention not to pursue a claim or which had very serious consequences for the insurer would entitle the insurer to reject the individual claim.
47. The relevant passage in the judgment of Waller L.J. (with whom Peter Gibson and Buxton L.JJ. agreed) is to be found at pages 443-445. He said this:

"26. I do not myself think that the choice should necessarily lie between a construction which would involve condition 1(a) being a condition precedent, and condition 1(a) simply giving rise to a claim for damages. It seems to me that once a condition such as condition 1(a) is construed as something less than a condition precedent, it will still be important to ascertain precisely what its contractual effect is intended to be and what the effect of a breach of that term will be. For example, if no details of the incident in relation to which RCCL was making its claim were ever supplied, despite the insurers' requests for them, would BAI still be bound to pay, and simply be left with a remedy in damages for breach of the condition? Certainly if the consequences for BAI were that they had been seriously prejudiced, it seems to me unreasonable that that should be so. Accordingly it seems to me one should consider the possibility that a breach of condition 1(a) might in some circumstances be so serious as to give a right to reject the claim albeit it was not repudiatory in the sense of enabling BAI to accept a repudiation of the whole contract. The very fact that condition 1(a) is aimed at imposing obligations in relation to individual claims which BAI might be obliged to pay, ought logically to allow for the possibility of a "repudiatory" breach leading simply to a rejection of a claim.

27. I accept, I should say, that it is possible for the terms of a policy by express language to be clearer than this term as to what its intended effect should be. The authorities supplied to us by Mr. Walker following argument demonstrate that point. Hiddle v. National Fire and Marine Insurance Co. of New Zealand, [1896] AC 372 and Banting v. Niagara District Mutual Fire Insurance Co., (1866) 25 U.C.Q.B. 431 are examples of terms being conditions precedent. Weir v. Northern Counties of England Insurance Co., (1879) 4 L.R. Ir. 689 is an example of a term not being a condition precedent, but on its language being a term which, until it is complied with, entitles the insurer not to meet the claim. Condition 1(a) does not expressly provide for either of the above consequences and one must consider where in the spectrum it falls. . . . . . . . . .

. . . . . . . . . . . . . . . . . . . .

32. I see no reason however why condition 1(a) should not be construed as an "innominate" term as per Hongkong Fir Shipping Co. Ltd. (sup.) where the consequences of a breach may be so serious as to entitle BAI to reject the claim albeit the breach is not so serious as to amount to a repudiation of the whole contract . . . . . . . . It seems to me that the payment of individual claims are severable obligations and that where an insured is bound to carry out one obligation in order to receive the benefit of the insurer's obligation by implication the insured is accepting that if he fails in a serious way to carry out his part of that bargain he will not receive what he has bargained for.

33. Thus the correct analysis of condition 1(a) I would suggest should be as follows. Compliance with condition 1(a) is not by the policy made a condition precedent to liability, thus it is not enough for BAI to establish a failure to supply full details as soon as possible in order to resist the claim. That much is conceded.

34. Condition 1(a) is however an innominate term. Breach of it, however serious, would be unlikely to amount to a repudiation of the whole contract of insurance. Furthermore, it is not a term the breach of which, or any breach of which, would entitle the insurer not to pay the claim because that would simply make it a condition precedent. But, in my view, a breach which demonstrated an intention not to continue to make a claim, or which has very serious consequences for BAI, should be such as to entitle BAI to defeat the claim. If a term is a condition precedent to liability, any breach defeats liability but does not lead to a repudiation of the whole contract. I see no reason why although a term is not a condition precedent so that any breach defeats liability, it cannot be construed as a term where a serious breach defeats liability.

35. It has not in fact been pleaded in this case that there was a breach with serious consequences entitling BAI to reject the claim as opposed to accept repudiation of the whole contract. However during argument some attention was focused on this aspect and it may be said that it formed part of the argument based on Taylor. On a proper understanding of Taylor it was however bound to fail unless BAI could demonstrate that there was a serious breach of condition 1(a) which had serious consequences and that in reliance on such a breach the claim had been rejected. In my view the breach of condition 1(a) in this case was very limited in that BAI had sufficient details to enable them to investigate the claim. Furthermore, by the time BAI had at least some details of the claim they had not suffered any irremediable prejudice. It was BAI's choice not to pursue the liquidator for details in June, 1992, and again in June, 1994. I am also doubtful whether BAI's conduct in 1992 or 1994 could be said to amount to a final rejection of the claim, but if it did, it was not justified."

48. In the present case the defendants were not given notice of the claims or of the possibility that there might be claims arising out of pension mis-selling by LMA at any stage and did not learn about them until the spring of 2002 when the matter was brought to their attention by the solicitors acting for another party. However, in the light of the decision in McAlpine v BAI Mr. Weitzman submitted that they could not rely on any failure on the claimant's part to comply with the requirements of clause 5 of the A W G S Excess Wording to reject the claim because they had not formally accepted that breach as discharging their obligation to indemnify the insured. Moreover, he submitted that even if they had done so, the claimant's right to be indemnified had accrued before any attempt was made to reject the claim on those grounds and could therefore not be defeated in that way, it being well established that discharge of a contract by repudiation has no effect on the parties' accrued rights.
49. It will be seen at once that Mr. Weitzman's argument depends on the application in this context of the ordinary principles applicable to repudiation and the discharge of contracts by breach. Mr. Hancock submitted, however, that despite using the language of repudiation Waller L.J. was simply recognising that a serious failure to comply with a notice provision such as clause 1(a) in that case was capable of being treated as a failure to comply with a condition precedent and that his choice of language was simply a succinct way of describing the kind of breach that could properly be treated as having that consequence.
50. The issue considered by the court in McAlpine v BAI concerned the essential nature of the obligation to which clause 1(a) gave rise. Having accepted in paragraph 33 that compliance was not a condition precedent to the insurer's liability, in the sense that any failure on the part of the insured to give notice would defeat the claim, Waller L.J. concluded in paragraph 34 that the nature of the term was such that a serious breach would defeat liability and entitle the insurer to reject the claim. This appears most clearly from the final two sentences of that paragraph in which he contrasted the nature of a condition precedent, any breach of which releases the insurer from liability, with the nature of a term such as that under consideration, a breach of which will only release the insurer from liability if it is sufficiently serious. It is true that in paragraph 35 Waller L.J. used language reminiscent of the principles of discharge by breach, in particular by referring to the need for BAI to demonstrate that there had been a serious breach with serious consequences and that the claim had been rejected in reliance on that breach, but I do not think that detracts from what he had said in the earlier paragraphs. What he was seeking to do, as I understand it, was to identify and explain the nature of the obligation contained in clause 1(a), which is essentially a matter of construction.
51. In my view Mr. Hancock was right in saying that the principles relating to discharge by breach are not directly applicable to a situation of the kind that arises in this case. As I understand the passages from his judgment quoted earlier, Waller L.J. was drawing on those principles by analogy to explain how the breach of a term such as that contained in clause 1(a) could have different consequences depending on its gravity. I do not understand him to be importing from the law on repudiation the necessity for the insurer to "accept" the breach as terminating his liability to pay, much less the principles governing accrued rights. If, as paragraphs 33 and 34 suggest, a serious breach of clause 1(a) has the same consequences as a failure to comply with a condition precedent, no "acceptance" is necessary; the insurer is simply entitled to reject the claim on that ground. Moreover, there is another reason why I am unable to accept Mr. Weitzman's argument. The submission that in the present case the claimant already had an accrued right to be indemnified by the defendants at the time when they decided to reject the claim for failure to comply with the notification requirements proceeds on the assumption that that right was unconditional. In fact, however, it was conditional on its complying, at least substantially, with the requirements of clause 5. If the claimant failed to comply with clause 5 in a manner that was sufficiently serious to entitle the defendants to reject the claim, its right to be indemnified remained at best conditional until the underwriters elected not to rely on their rights or in some other way lost their right to reject the claim on those grounds. However, neither of those events occurred.
52. For all these reasons I have reached the conclusion that if the claimant has committed a "repudiatory", that is a serious, breach of clause 5, the defendants are entitled to treat it as equivalent to a failure to comply with a condition precedent without the need for any formal "acceptance" of the breach and are relieved of liability regardless of when the claim was made or the loss occurred.

Issue 7: Do the provisions of the excess Policies extend to claims in respect of which the claimant seeks an indemnity?

53. It was agreed that this issue adds nothing of substance to the other issues and I need say no more about it.

Summary

54. For the reasons given earlier in this judgment I hold that the questions raised by the preliminary issues should be answered as follows:

Question 1: The cover provided by the excess policies extends to claims arising out of circumstances notified during the policy period.

Question 2: It is sufficient that notice of the circumstances giving rise to the claim was given to the primary layer insurers.

Question 3: Notice to Bowrings was not sufficient to constitute notice to the defendants.

Question 4: The letter of 28^th January 1994 was sufficient to constitute notice to the Lloyd's underwriters on both the primary and excess layers, but did not constitute notice to the defendants.

Question 5: The claimant was obliged to give notice to the defendants of claims and circumstances in accordance with clause 5 of the A W G S Excess Wording.

Question 6: The obligation to give notice to the excess layer underwriters is an innominate term breach of which, if sufficiently serious, entitles the defendants to reject liability for the relevant claim.

Question 7: No separate answer required.

Question 8: If the claimant has committed a serious breach of clause 5, the defendants are entitled to treat it as equivalent to a failure to comply with a condition precedent and have a defence to the claim without the need for any formal "acceptance" of the breach and regardless of when the claim was made or the loss occurred.