Warranty and indemnity insurance – Court of Appeal highlights the importance of consistency in policy wording

9 minute read
14 June 2024

In Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors [2024] EWCA Civ 446 the Court of Appeal dismissed the claimant's appeal, agreeing with the Commercial Court's earlier decision - that as the insured under a buy-side warranty and indemnity insurance policy, they had failed to show that an apparent inconsistency between the insured obligations and the policy exclusions was the result of a clear drafting error.

Our Commercial Disputes team take a look at the decision and highlight some key takeaways.

Key points in Project Angel Bidco's claim

As detailed in our earlier article on key considerations when interpreting warranty and indemnity insurance policies – which explored the first instance decision in this case – Project Angel Bidco Limited (Project Angel) purchased a warranty and indemnity policy (W&I Policy) in relation to a Sale and Purchase Agreement (SPA) entered into for the acquisition of a construction company (the Company). The purpose of the W&I Policy was to insure against the risk that the target business was not in the state as warranted and was worth less than the purchase price.

Project Angel alleged that there were breaches of the Anti-Bribery and Anti-Corruption warranties (ABC Warranties) given by the sellers, as a result of which the Company was placed into liquidation and a claim was made under the W&I Policy.

Under the policy, the ABC Warranties were marked as one of the Insured Obligations “covered” under the cover spreadsheet. ABC is often an area of underwriting focus for W&I insurers when they are deciding whether or not to offer cover, and the terms on which to do so; and in this case the policy also contained an ABC Exclusion clause that excluded any loss “to the extent that it arises out of… any ABC Liability”, with ABC Liability defined as, “any liability or actual or alleged non-compliance…in respect of Anti-Bribery and Anti-Corruption Laws”. Axis Managing Agent Ltd and Others (together the Insurers) argued that cover under the W&I Policy was excluded as a result of the ABC Exclusion clause.

Project Angel argued that there was a “plain contradiction” between the scope of the Insured Obligations and the ABC Exclusion Clause. A literal reading of the definition for ABC Liability would mean that no loss arising out of a breach of ABC warranties would ever be covered by the policy, even though the cover spreadsheet marked those warranties as included in the conclusive list of Insured Obligations.   Project Angel asserted that the contradiction stemmed from a mistake in the drafting of the definition of ABC Liability. It argued that the wording should be reinterpreted as “any liability for actual or alleged non-compliance…in respect of Anti-Bribery and Anti-Corruption Laws”. This would confine the ABC Exclusion Clause to cases of liability only.

Project Angel commenced proceedings against Insurers and the extent of cover provided by the W&I Policy was decided by the Commercial Court as a preliminary issue. The Court agreed with Insurers and held there was no contradiction between the scope of the Insured Obligations and the ABC Exclusion Clause. The various parts of the W&I Policy, when read together, did not give rise to an obvious error, there was no need for the policy to be corrected and no cover was provided for the ABC Warranties.

Project Angel appealed to the Court of Appeal.

Court of Appeal decision

Lord Justice Lewison (giving the leading judgment) confirmed the Court of Appeal needed to decide whether there was an obvious error in the policy wording and, if so, whether there was also a clear means of curing that error (either provided within the contract itself or a remedy that the Court could impose).

In reaching a decision, three questions needed to be considered:

1. Is there an apparent inconsistency, as alleged?

Both sides agreed that the interpretation of the W&I Policy was an iterative process, which required consideration of the policy as a whole. 

On the face of it, the ABC Warranty and the ABC Exclusion did appear to be in conflict. The W&I Policy provided cover for the ABC Warranties with one hand, but then took it away again with the ABC Exclusion Clause.

However, there were other warranties that were capable of falling outside the ABC Exclusion, and that breaches of which would give rise to losses to which the W&I Policy would respond.   The fact that there was only a partial contradiction was a consideration.

2. If there is an apparent inconsistency, does the contract itself answer the question as to which of the inconsistent clauses is to prevail?

The rubric at the head of the Cover Spreadsheet provided as follows: "Notwithstanding that a particular Insured Obligation is marked as "Covered" or "Partially Covered", certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy."

This clearly showed that the exclusions in clause 5 took precedence over the Cover Spreadsheet, at least to some extent.

3. If not, what is the Court's response?

Lewison LJ did not accept there had been an obvious mistake in the ABC Liability Exclusion.   The Supreme Court had previously held that complex commercial documents may "contemplate and provide for the possibility of inconsistency". It is not sufficient that some inconsistency between policy terms was demonstrated.

Any mistake had to be common to both parties. In this case the loss the W&I Policy responded to was a loss in share value, it was not intended to cover the insured against the risk of third party liabilities. While the proposed correction was only one letter, if accepted it would bring  within the scope of the loss covered by the W&I Policy any diminution in share value attributable to an allegation of non-compliance with anti-bribery laws – even if the allegation was never proven or investigated. It was not difficult to see why Insurers would want that loss excluded. Lewison LJ accepted that the definition was not a masterpiece of drafting, but there was not enough to persuade him that there was a clear drafting error.

In any event, even if there was an obvious mistake in the drafting of the W&I Policy, it should also be clear as to how that mistake could be cured. In this case, there was no clear cure. It was not clear whether the mistake was in the drafting of the ABC Liability Exclusion, or in including the ABC Warranty in the 'covered' Insured Obligations. While Project Angel's proposed correction appeared to be minor – just the addition of one letter – that does not make it clear that the drafting mistake was in the ABC Liability Exclusion, as opposed to in the Cover spreadsheet. The quantity of 'red-ink' used did not matter. What mattered was the impact any amendment would have on the W&I Policy.

The Court of Appeal held there was no obvious error in the W&I Policy as drafted. The appeal was dismissed.

Key points to consider when drafting warranty and indemnity insurance policy wording

This decision again highlights the importance of reading a W&I Policy, indeed any policy (or contract), as a whole and taking advice on its terms. It also demonstrates, when the time and cost of this case is considered, the importance of ensuring that inconsistencies between different parts of a policy or contract (particularly where made up of interacting documents and schedules) are avoided. The fact that a warranty is stated to be 'covered' in an appendix does not mean it could not be excluded still by a specific exclusion clause elsewhere in the policy, and particular note should be taken of any drafting that provides supremacy to certain parts of the policy wording.

In this case, the Court acknowledged that there could be a degree of inconsistency between clauses in a policy (and, given the way policy documentation is put together, this is perhaps not surprising), but in the absence of clear evidence as to a mistake in the drafting, and the existence of a clear cure to remedy the mistake, a policy will not be amended. Importantly, you need both – showing a clear cure (as was possible here with the addition of a single letter) without evidencing the mistake will not suffice. Falling into these traps may result in a party being left with the bad bargain it had already entered into and without the remedy or commercial protection it thought it had acquired through taking out the W&I Policy in the first place.

To discuss the key outcomes of this case further or any other commercial litigation issues more generally, please contact Samantha Holland, Susannah Fink or Sean Adams.

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