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Cite as: [2008] ScotHC HCJAC_172, [2008] HCJAC 172

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OUTER HOUSE, COURT OF SESSION

[2008] CSOH 172

A730/07

OPINION OF

LADY CLARK OF CALTON

in the cause

DEREK CRIGHTON and ELEANOR CRIGHTON

Pursuers;

against

(FIRST) CATLIN (FIVE) LIMITED; (SECOND) BRIT UNDERWRITING LIMITED; (THIRD) GREAT LAKES REINSURANCE (UK) PLC; (FOURTH) GE INSURANCE SOLUTIONS AND (FIFTH) BESTPARK INTERNATIONAL LTD (FORMERLY TRENWICK INTERNATIONAL LTD)

Defenders:

________________

Pursuers: Logan; Morisons L.P.

Defenders: Moore, Solicitor Advocate: HBM Sayers

12 December 2008

Summary

[1] In this case the pursuers are a married couple who trade as partners. The pursuers seek a declarator conclusion that the defenders are obliged to indemnify the pursuers for their respective shares of losses arising from a flood on 15 and 16 November 2002 of their premises at the Kingsmill Inn, Elgin in terms of policy of Home Saver Certificate of Insurance issued by or through Lloyds Broker Giles Insurance Brokers on or about 20 September 2002. In addition there are conclusions for payment and expenses. Averments are made on behalf of the pursuers that the first named defenders are the lead syndicate in relation to the policy of insurance which is the subject of dispute and that the second, third, fourth and fifth named defenders are also Lloyds syndicates or representatives of the underwriters of the syndicates which underwrote the said policy. It is admitted on behalf of the defenders that the first named defenders as the lead syndicate have undertaken to represent the other syndicates underwriting the policy.

The pleadings

[2] The pleadings are set out in the Closed Record (11 of process). Prior to the commencement of the procedure roll, of consent, I permitted the defenders to amend the closed record in terms of minute of amendment for the defenders (17 of process).

[3] In Article 2 of condescendence, the pursuers aver that:

"On or around 6^thSeptember 2002 Giles Insurance Brokers Ltd, 37/39 Bank Street, Irvine ("Giles") offered to renew the pursuers' insurance policy. The terms of the renewal were set out in a letter of that date which enclosed a summary of cover. The letter advised that the premium to be paid by the pursuers was to be increased. The summary of cover provided for all risks to be covered including storm or flood damage with an excess of £500. The policy was renewed on 20^th September 2002 by the payment of premiums in terms of a direct debit that the pursuers had with Giles. In 2001 Giles had advised the pursuers that the policy, which they operated under the name 'Giles Insurance Brokers Insurance Scheme' had been transferred to Lloyds of London. The policy in 2002 was also placed there with the defenders being the underwriters of the policy and syndicate 2020 being the lead syndicate aforesaid."

In response to these averments, the defenders admit that they were the underwriters of the policy which was issued in 2001 and renewed on 20 September 2002.

[4] In Article 3 of condescendence the pursuers narrate the circumstances in which their premises suffered damage by flooding and that the defenders denied cover under the insurance policy on the basis that it was not intended to cover flood risks. This is admitted by the defenders.

[5] Article 4 of condescendence narrates that:

"Giles are an authorised Lloyds broker. They had written authority from the Lloyds syndicates underwriting the policy to issue policies for cover subject to certain limitations. They had ostensible authority to issue policies for flood damage. They did so and the pursuers accepted that offer in good faith. This created a binding contract between the pursuers and the underwriters of the policy, namely the defenders. In terms of that policy the defenders were obliged to indemnify the pursuers for flood or storm damage subject to an excess of £500. The pursuers are accordingly entitled to declarator as first concluded for."

In response the defenders aver in answer 4:

"Admitted that Giles are an authorised Lloyd's Broker and had written authority from the Defenders to issue policies for cover subject to certain limitations. Quoad ultra denied. The written authority provided by the Defenders to Giles excluded any authority to provide cover in respect of flood damage to the Pursuers' premises. The defenders believe that Giles wrote to the Pursuers in September 2002 intimating that their policy fell due for renewal, advising of the premium demanded to renew and attaching a document entitled 'Summary of Cover'. This "Summary of Cover" did not exclude the risk of damage by flood. This was the result of a mistake by Giles. The Pursuers renewed their policy and did so on the basis that they were renewing a policy which excluded cover in respect of flood. The 'Summary of Cover' was not a contractual document. Esto Giles entered into a binding contract entitling the Pursuers to indemnify in respect of flood damage (which is denied) they did so in excess of the authority provided to them by the Defenders. The Pursuers are called upon to specify the basis on which they allege that Giles had ostensible authority from the Defenders to issue Policies for flood damage. Their failure to do so will be founded upon." I refer to this as the defenders first alternative case. "Esto Giles had ostensible authority from the Defenders (which is denied) and esto said ostensible authority extended to cover in respect of flood damage (which is also denied) Giles wrote to the Pursuers on 11^th September, 2000. A copy of said letter will be lodged in Process and is referred to for its terms and founded upon. Giles informed the Pursuers that it would be in their best interests to transfer cover from their existing Insurers, Iron Trades Insurance Company, to Lloyds of London. The letter stated inter alia that 'With effect from this year's renewal cover, cover in respect of flood is excluded.'". I refer to this as the defenders' second alternative case.

[6] In response to the defenders' averments in answer 4, the pursuers admit documentation which entitled Giles to write cover for flood cover but not in circumstances that apply to the pursuers where there had been a previous claim for flood damage. It is averred that the actual authority of Giles was not known to the pursuers and that the pursuers relied upon and were entitled to rely upon the offer of insurance issued on 6 September 2002 by Giles on behalf of the defenders enclosing the summary of cover. It is averred that "the said offer had to be read in the context of a certificate of insurance booklet which set out the terms of the policy. The said booklet, confirming insurance with Lloyds, allowed for flood damage with irrelevant exceptions. In 2001 there had been a specific exclusion of flood cover in the summary of cover. In 2002 there was no such exception. It is averred that the said summary of cover, read in the context of the certificate booklet therefore constituted an offer of insurance on specified terms. The said offer was accepted by payment of the premium. There then follows esto averments dealing with the issue of uninduced unilateral error by Giles. A further esto case at page 7 of the Closed Record avers that esto the summary of cover was not a contractual document (which is denied) the said survey of cover together with the letter of 6 September 2000 induced the pursuers to enter into the contract of insurance in the belief that it would provide them with flood cover

[7] Articles 5 and 6 of condescendence deal with damages and the claim. These pleadings were not the subject of submission.

[8] The first plea-in-law for the pursuers is a general plea to the relevancy. The second plea-in-law relates to the issue of error. The third plea-in-law supports the declarator conclusion. The first plea-in-law for the defenders is a general plea to the relevancy on the basis of which the defenders seek decree of dismissal.

Submissions on behalf of the defenders

[9] The Solicitor Advocate for the defenders accepted that following the pursuers'notice to admit, documents 6/1, 6/2, 6/4 and 6/5 were to be taken as true copies of the said documents. He also accepted that the case should proceed on the basis that the defenders admit that the pursuers continued to pay their premiums after the renewal date of 20 September 2002 by standing order until a date after the flood.

[10] The main submission made on behalf of the defenders was that the pursuers' case was irrelevant in particular because there were no averments which would allow the pursuers to lead evidence that what was done fell within the obvious and clear ostensible authority of Giles. The legal submission on behalf of the defenders may be summarised in this way. The pursuers make no relevant averments to set up ostensible authority. They make no averment to the effect that there was any representation by the defenders, or by Giles on the defenders' behalf, that Giles had authority to bind the defenders to provide insurance cover, including cover in respect of flood damage. Giles as the pursuer's brokers were agents for the pursuers in arranging insurance cover on their behalf. The fact that they were authorised by the defenders to write cover, in terms of a specific written authority granted to them by the defenders, is not relevant to the issue of ostensible authority unless that authority was communicated in some way to the pursuers.

[11] The Solicitor Advocate for the defenders set out the legal principles in relation to ostensible authority under reference to the following cases: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964 2 Q.B. 480, in particular Diplock L.J. at page 502-506: Armagas Ltd v Mundogas SA 1986 A.C. 717: Lord Keith of Kinkel at 777A-C and 778A-B: British Bata Shoe Company Limited v MM Shah Ltd 1980 S.C. 311, in particular Lord Jauncey at page 317: Dornier GmbH v Cannon 1991 S.C. 311, in particular Lord President Hope at page 314-315 in which he discusses Freeman: John Davidson (Pipes) Limited v First Engineering Limited (unreported), 10 November 2000, in particular Lord Macfadyen at paragraphs 28-31: ING Re (UK) Ltd v R & V Versicherung AG 2006 2 All E.R. (COMM) 870, in particular paragraph 99. It was submitted that the principle to be taken from these authorities is that there requires to be some form of representation by the principal to the contractor (in this case the pursuers) to the effect that the agent (Giles) had authority to bind the defenders to provide insurance cover, including cover in respect of flood. It was submitted that Giles was acting as agent for the pursuer and that a remedy may exist for the pursuer in relation to Giles. But that did not give the pursuers a remedy against the defenders. Reference was made to Arif v Excess Insurance Group 1986 SC 316 at 318 to support the proposition that prima facie an independent agent or broker is the agent of the insured and not the insurers.

[12] The Solicitor Advocate for the defenders submitted that properly analysed the pursuers' averments were to the effect that the pursuers obtained a Lloyds' policy through the agency of Giles who were acting for the pursuers. The Solicitor Advocate emphasised that there were no factual averments which could found a case of ostensible authority. In their pleadings the pursuers admitted that there was no actual authority. It followed that there being no relevant averments to found ostensible authority, the pursuers' case was irrelevant and should be dismissed.

[13] The Solicitor Advocate for the defenders explained that the defenders' first alternative case about mistake in Answer 4 were factual averments. There was no intention on the part of the defenders to aver a defence based on mistake of their agents Giles.

[14] In relation to the defenders second alternative case in Answer 4, it was submitted on behalf of the defenders that, even if there were relevant averments of ostensible authority, that authority was limited by the terms of the letter dated 11 September 2000 which informed the pursuers that cover in respect of flood damage would be excluded from renewal in September 2000.

Submissions on behalf of the pursuers

[15] Counsel for the pursuers sought declarator in terms of the first conclusion and invited the Court to sustain pleas-in-law 1-3 and restrict proof to quantum.

[16] Counsel for the pursuers founded upon the admissions made on behalf of the defenders in Answer 2 to the effect that the defenders were the underwriters of the policy issued by Giles and renewed on 20 September 2002. In Answer 4 the defenders admit that Giles is an authorised broker and had written authority from the defenders to issue policies subject to certain limitations. Counsel founded on 6/2 of process as a true copy of the offer of the new terms of insurance sent by Giles on 6 September 2002 with a summary of cover attached. Secondly he relied on 6/4 as a true copy of the certificate of insurance which contains inter alia conditions (except insofar as they vary from time to time) governing the insurance obtained by the pursuers from the defenders. Counsel submitted that the correspondence of 11 September 2000 (part of 7/2 of process) does not limit the contractual arrangements in 2002 as submitted on behalf of the defenders. The said letter did not put the pursuers on notice that Giles did not have the authority to issue flood cover to them. The pursuers aver that a contract of insurance in writing was entered into. This is not denied by the defenders. In essence the defenders dispute the scope of the written contract based on averments that the defenders' agent Giles exceeded the authority given by the defenders to them. The defenders make no relevant averments that the pursuers were aware of any limitation of the actual authority of Giles at the time contractual arrangements were made. The defenders make no averments to explain why they say Giles did not have ostensible authority to issue insurance cover in September 2002. Counsel submitted that the defenders' call in Answer 2 in respect of ostensible authority and the averments about limitations in Giles' actual authority are irrelevant and should not be admitted to probation. It was submitted that where the defenders' insurers had issued a policy through Giles as their agent, clients such as the pursuers are entitled to assume that Giles have the authority to do that. The policy issued covered flood damage. It was submitted that the defenders by permitting their agent to act in such a way, must take responsibility.

[17] Counsel for the pursuers did not wish to dispute the general principles of the case law relied on by the defenders. I understood that his position was that the case law did not assist the defenders and required to be understood in the context of the particular facts of the cases cited. Counsel for the pursuers referred to First Energy v HIB 1003 3 LLR 194 at 196, 201 and 203. He particularly relied on Lord Justice Steyn at 196

"A theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or a principle of law. It is the objective which has been and still is the principle moulding force of our law of contract. It affords no licence to a judge to depart from binding precedents. On the other hand, if the prima facie solution to a problem runs counter to the reasonable expectation of honest men, this criterion sometimes requires a rigorous re-examination of the problem to ascertain whether the law does indeed compel demonstrable unfairness. These general considerations are of some relevance to a question of ostensible authority which is the principal matter to be considered in this appeal. If we were to accept the implications which the appellants have placed on observation, in the House of Lords in Armagas Ltd v Mundogas SA, [1986] 2 Lloyd's Rep 109; [1986] 1 AC 717 our decision would in my view frustrate the reasonable expectations of the parties. Moreover our decision would have to be based on an unreal premise as the way in which commercial men transact business of a particular kind involved in this case. I shall attempt to show that the application of orthodox principles does not compel such a result."

[18] In relation to the authorities cited by the defenders, counsel for the pursuers accepted as a general proposition that an agent cannot himself obtain ostensible authority. There must be some involvement of the principal. It was submitted that involvement can be by the principal allowing the agent to act in a certain way. That is what happened in the present case. The defenders have allowed the schedule of cover to come from their agent Giles. Having allowed Giles as their agent to issue the cover, they are obliged to honour the cover which was issued. It is plain from the correspondence and documents that the defenders permitted Giles to issue documents creating an insurance contract with the parties. Counsel referred to Bowstead & Reynolds on Agency 18^th Ed. para. 8-047. This deals with reservations in authority not known to a third party in which the principal remains bound by the contract entered into by the agent. Referring to Freeman and Lockyer I was invited to consider the facts. It was submitted that the facts were similar to the present case and demonstrated that where the principal allowed the agent to act within the ordinary ambit, the principal would be held liable if the agent exceeded his authority. Referring to British Bata Shoe Company Ltd and Dornier Gmbh, counsel for the pursuers submitted that the facts in said cases were very different from the present case. In the present case, the contract of insurance was issued in the normal course of business by Giles as the admitted agent for the defenders. The situation was different in the said cases because what was being done was out of the ordinary and "should have rung alarm bells" for third parties.

[19] In conclusion, counsel for the pursuers submitted that there was a contract in writing. The written offer 6/2 of process was accepted by the admitted payment by the pursuers of the premiums. Where there is a written contract and no attempt to reduce the contract in whole or in part ope exceptionis, the Court is bound by the terms of the written contract.

[20] Counsel for the pursuers did not expand on paragraph 2 of his Note of Argument which dealt with uninduced unilateral error in view of the concession made on behalf of the defenders and referred to in paragraph [13].

[21] Counsel then dealt with the only other issue which he said arose. That

was the issue raised in the amendment by the defenders. This relates to the defenders' averments that

"Giles wrote to the pursuers on 11 September 2000.... Giles informed the pursuers that it would be in their best interest to transfer cover from their existing insurers, Iron Trades Insurance Company Ltd, to Lloyds of London. The letter stated, inter alia, that 'with effect from this year's renewal cover, cover in respect of flood is excluded'."

Counsel for the pursuers submitted that the terms of cover varied from year to year. Albeit the renewal cover in 2000 was limited by the exclusion of flood cover, the exclusion could not properly be interpreted as applying to 2002 when the clear terms of the written contract in 2002 did not exclude flood cover.

Discussion

[22] The solicitor advocate for the defenders in this case submitted that the pursuers' pleadings were irrelevant and sought dismissal. I was invited to dispose of the case on the procedure roll. It was agreed that I should hear submissions firstly on behalf of the defenders. If the solicitor advocate was correct in his submissions, the relevancy of the defences would not then be a critical issue. The attack on the pursuers' pleadings was focussed on the averments made by the pursuer in relation to ostensible authority. That issue is introduced by the pursuers in the pleadings in relation to the defenders' averments about the lack of actual authority of the defenders' agent, Giles. These are matters averred by the parties in Article 4 and Answer 4. The averments about ostensible authority are not part of the pursuers' case as set out in Article 2 of condescendence. In my opinion, the averments in Article 2 are central to the pursuers' case.

[23] I regard it as critical for present purposes that the solicitor advocate for the defenders accepted that as a matter of law, a contract of insurance existed between the pursuers and the defenders. He disputed only one term of the contract, that is the inclusion of flood cover. That concession in law is in line with the defenders' explicit pleadings in plea-in-law 3. This states that:

"the pursuers having a contract of insurance with the defenders which did not provide indemnity in respect of damage by flood, the defenders are entitled to decree of absolvitor".

It was submitted by the solicitor advocate for the defenders that there was and remained in existence a contract of insurance between the pursuers and the defenders covering certain specified risks but not flood cover. In answer 4 the defenders aver that the Summary of Cover was not a contractual document. It was not clear whether this averment was adopted by the solicitor advocate for the defenders in submissions. There were no averments and no submissions on behalf of the defenders to set out some alternative basis of contract. There is also an admission by the defenders in Answer one to the effect that the defenders underwrote the policy of insurance.

[24] The defenders plead in answer 2 that "it is not known and not admitted what correspondence took place between Giles Insurance Brokers Limited and the pursuers". This predated the notice to admit on behalf of the pursuers. It was not disputed on behalf of the defenders that 6/1, 6/2, 6/4 and 6/5 are to be regarded as admitted for the purposes of the cause. In my opinion, the letter 6/2 of process amounts to an offer to the pursuers of a renewal of insurance on the terms set out which includes flood cover. The offer is made in the context that the policy document is 6/4 of process. That offer was made to the pursuers by the admitted agent of the defenders. This offer was accepted by the pursuers, without alteration, by payment of the premiums sought in said letter. In my opinion there is a contract in re mercatoria with agreed terms set out in writing. One of the terms set out in writing in 6/2 of process is the inclusion of flood cover as specified. I did not understand the solicitor advocate for the defenders to dispute that, if the flood cover term was properly to be regarded as part of the contract, the pursuers would be entitled to declarator as craved. In my opinion, that appears to be a clear and obvious conclusion if one interprets the terms which have been set out in writing in 6/2 of process. But it was submitted on behalf of the defenders that, despite the inclusion of flood cover in 6/2 of process, the term does not form part of the contract between the parties. It was submitted that the flood cover term was not part of the contract because the defenders' agent, Giles, exceeded the express authority granted by the defenders to him. He did not have authority to include flood cover in the contract.

[25] The mere assertion of an undisputed fact that the defenders agent, Giles, had exceeded his express authority does not in my opinion mean that I could merely ignore the terms of the parties' contract expressed in writing, excise the flood cover terms and rewrite the contract. The submission on behalf of the defenders appears to be that their agent having offered to the pursuers, terms of insurance with the defenders with premiums, which may or may not have reflected the additional cover for flood damage, are entitled to maintain that only part of the contract is valid and retain the premiums because their agent wrongly exceeded the express authority granted by the defenders. I do not consider that Arif v Excess Insurance Group assists the defenders. In this case it is not disputed that Giles was the agent of the defenders with authority to issue an insurance policy underwritten by the defenders. Even if Giles was also acting as agent for the pursuers that does not alter the position that it is the defenders who seek to depart from the written terms of the contract. I do not consider that the defenders' approach is sound in law. There may be various circumstances in which a party may seek to reduce a contract which the agent of the party has entered into because the agent has exceeded express authority. That might be in circumstances, for example, where the other party had been aware of the limited authority of the agent at the time the contract was concluded. But if the defenders seek reduction of a contract, it is for the defenders to set out averments which would be relevant at proof to the discretionary remedy of reduction. In this case the defenders do not seek to do this.

[26] The solicitor advocate for the defenders, in my opinion, correctly conceded as a matter of law, that the failure to exclude flood cover because of a mistake by Giles was not a sound basis of a defence for the defenders.

[27] There was a separate submission on behalf of the defenders which I have summarised in paragraph [14]. That is based on averments that the pursuers had or ought to have had some knowledge that the authority of the defenders' agent, Giles, was limited and did not extend to providing cover in respect of flood damage. Such averments might be relevant to found a defence of reduction. In the present case, however, the wording of the letter dated 11 September 2000 (7/2 of process) cannot in my opinion be read in the way contended for by the solicitor advocate for the defenders. The sentence relied on in the context of the letter states, "Please note that, with effect from this year's renewal, cover in respect of flood is excluded". That is followed by a passage which states:

"Please also note that, with effect from this year's renewal, the excess applicable to section 1 and 6 (contents and buildings), has been increased to £250 in line with most business insurances. The excess remains at £100 in respect of claims for glass, goods in transit, frozen food and public liability".

I am unable to read into that letter some warning or information that the authority of the defenders' agent is restricted. In my opinion the plain meaning is that the terms offered "from this year's renewal" are as set out. I cannot interpret this letter as providing information about the express or limited authority of the defenders' agent nor does it state or imply that the terms will not or cannot be departed from at a later date if a new offer of insurance is made.

[28] In my opinion, the written terms of the contract regulate the relationship of the pursuers and defenders unless and until reduced. The pursuer is founding on a written letter issued by the admitted agent of the defenders as a writing forming part of the contract. If the defenders wish to challenge the validity of the contract in whole or in part, that must be done by averring facts and circumstances to justify the equitable remedy of reduction. Depending on the basis put forward by the defenders for reduction, ostensible authority might at that stage become a relevant issue. For present purposes however I am of the opinion that ostensible authority is not critical to the decision in this case.

[29] In case I am in error about that, I turn to consider the submissions about ostensible authority. The starting point for this case is that the defenders accept that their agent Giles brought about a contract of insurance between them and the pursuers. There are no averments by the defenders which I accept to form the basis of a legal case to the effect that the issue of flood cover was or ought to have been known to the pursuers as "unusual" or outwith the normal course of business. The defenders' position is that as a matter of fact their agent, Giles, made a mistake and acted beyond the express written authority which the defenders had given to Giles as their agent. This is a case therefore in which the agent has no actual authority to bring about a contract of insurance with flood cover between the pursuers and the defenders. In my opinion however that would not necessarily be fatal to the pursuers' case if ostensible authority existed. The pursuers aver that there was ostensible authority and aver the circumstances in which it came about that a contract of insurance between the parties was created through Giles. I do not consider that a concluded view on ostensible authority can be formed in this case without proof of the facts and circumstances surrounding the relationships which the parties had with each other and with Giles. Prima facie Freeman v Lockyer appears to be of assistance to the pursuers rather than defenders who relied on the case. I refer in particular to Diplock L.J. at page 502 - 503. At page 503, he states "the representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, that is, permitting the agent to act in someway in the conduct of the principal's business with other persons". As stated by Steyn L.J. in First Energy v HIB, at page 201, "a principal may clothe an agent with apparent authority in more than one way". In the present case the defenders, as principal, permitted Giles to issue insurance documents to the pursuers which the defenders accept resulted in some form of contractual arrangement. In my opinion no concluded view about ostensible authority in this case can be reached without evidence of the facts and circumstances. There is sufficient in the pursuers' pleadings to permit inquiry.

[30] In any event, I do not consider that I could accede to the motion on behalf of the solicitor advocate for the defenders to dismiss the action even if I accepted his submissions. At the end of page 7 of the Closed Record, the pursuers have averments that:

"Esto the summary of cover was not a contractual document (which is denied) the said summary of cover together with the letter of 6 September 2002 induced the pursuers to enter into the contract of insurance in the belief that it would provide them with flood cover. It was for that reason they immediately intimated a claim and invited loss adjustors to attend after the flood as hereinafter condescended upon.".

The solicitor advocate for the defenders did not make any submissions in relation to these averments and for that reason alone, I would not be persuaded to grant dismissal.

[31] The pursuers have averments about a contract in writing which in my opinion are relevant to entitle them to indemnification in terms of the declarator sought. For the reasons explained I am not satisfied that any relevant defence is pled. I therefore refuse the defenders' motion to dismiss the action and repel plea-in-law one for the defenders. I sustain pleas-in-law one to three of the pursuers and grant decree in terms of the first conclusion. I grant a proof in relation to quantum. I reserve the question of expenses.