Spire Healthcare Limited v  RSA [2022] EWCA Civ 17

Insurance policies commonly contain an aggregation clause, providing that two or more claims are to be treated as a single loss for the purpose of the deductible and policy limit where they are linked by a contractually-defined unifying factor.  Such clauses can have a major impact on the amount recoverable.

The issue in this case was whether losses must be aggregated when they arose from two very different  types of breach of professional duty by a single individual.

The Facts

Mr Paterson was a consultant surgeon at hospitals managed by Spire for some years, until he was suspended from practice by the General Medical Council.

A number of former patients, both private and NHS, who had been medically required to undergo mastectomies, claimed that Mr Paterson failed to remove all breast tissue, thereby exposing them to an unnecessary risk of recurrence and metastasis.  Mr Paterson’s motive for this practice of performing sub-total mastectomies, or “STMs”, was never adequately explained, although he may have regarded it as “cleavage sparing”.  The psychological and sometimes also the physical effects on the claimants were profoundly damaging.

Meanwhile, it was found, in relation to a second group consisting mainly of private patients, that Mr Paterson had falsely reported pathology test results as indicative of the presence of cancer and then carried out unnecessary surgical procedures on the patients concerned.  His motivation here appeared to have been financial gain.  The victims of this practice suffered assault and mental distress as well as economic loss.

In all, some 750 former patients made claims against Mr Paterson, Spire and the Foundation Trust that employed him for NHS work. The claims were managed in the form of group litigation, which was settled when a compensation fund was set up for the victims.  Spire’s outlay by way of defence costs and contribution to the fund was over £37m. 

The Insurance Cover

Spire had a combined liability insurance policy with Royal & Sun Alliance, covering its legal liability for accidental injuries arising out of medical negligence at its hospitals.  The policy provided that,

“The total amount payable by [the Insurer] in respect of all damages costs and expenses, arising out of all claims during any Period of Insurance consequent on or attributable to one source or original cause irrespective of the number of Persons Entitled to Indemnity having a claim under the Policy consequent on or attributable to that one source or original cause shall not exceed the Limit of Indemnity stated in the Schedule.” (Our underlining)

The limit of indemnity stated in the policy schedule was £10m and the policy was subject to an overall limit of £20m.

Whatever Mr Paterson’s motives may have been in carrying out the procedures, it was common ground that the injuries to patients were accidental from the perspective of Spire.   The sole issue before the Court of Appeal was whether the insurer could aggregate all the underlying claims together and rely on the limit of indemnity per loss of £10m, or whether there had been two originating causes of the losses and Spire could recover up to the overall policy limit of £20m.

The Decision

It is well established that clauses specifying that losses are to be aggregated where they are attributable to one original cause require the widest possible search to be made for a unifying factor in the history of the claims in question.  The original cause does not itself have to be an insured risk under the policy and it need not be the sole cause, but there must be a causative link between the original cause and the loss.  Moreover, the “original cause” as identified must not be expressed in such general terms that it fails to make clear the causal link between the original cause and the claim.

In Cultural Foundation v Beazley (2018) the Commercial Court had held that a claim against an architect for negligently designing defective structural engineering did not arise from the same original cause as a claim for failing to include in its designs detail and provision for the efficient execution of the project, which impacted only on cost. The two claims could not both be characterised in general terms along the lines of “poor initial design” since this was not useful in the context of searching for an effective original cause.

In the present case, the Commercial Court adopted the same approach, by focusing on Mr Paterson’s differing motivation: for Group 1, the original cause of the claims was Mr Paterson’s wrongful adoption of the practice of carrying out STMs; for Group 2, the original cause of the claims was Mr Paterson’s dishonest practice of  misrepresenting the need for  surgery.  Therefore, Spire was entitled to claim for two full losses, i.e. for £20m.

Decision of the Court of Appeal (CA)

However, the Court of Appeal analysed the matter from the perspective of how the claim was covered under Spire’s insurance.  The insurance did not cover any responsibility Spire might have for the negligence of surgeons or consultants.  Therefore, Spire’s ability to claim under the insurance depended on establishing its own negligence or the negligence of employed persons other than Mr Paterson.  This it did by persuading the insurers that (a) it was liable for the acts and omissions of one of its employees who facilitated and failed to report Mr Paterson’s conduct, (b) it had failed to investigate Mr Paterson’s conduct and take action and (c) it had breached an implied term to provide services to patients with reasonable skill and care. 

Based on this analysis and the caselaw requiring the widest possible search to be made for a unifying factor, the CA held that the Commercial Court’s decision had been wrong because the fact that Mr Paterson may have had differing motives in carrying out the injurious acts, and the fact that the claimants were in groups, had no bearing on Spire’s liability for the injuries sustained in consequence of the surgery that was carried out.  The CA held that the claims against Spire were all attributable to one original cause, namely Mr Paterson’s conduct in disregarding the welfare of his patients and performing operations on them without their informed consent. Therefore, Spire was only entitled to recover for one loss, up to the per loss limit of £10m.

For further information, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.

ABN Amro Bank v RSA and Others (Court of Appeal, 2021)

One of the less attractive features of insurance from the policyholder’s point of view is that, when it comes to making a claim, insurers can raise the defence of misrepresentation of the risk or breach of a ‘warranty’.

However, it is possible, when buying insurance, to gain greater protection against claims being declined, by inserting a so-called non-avoidance clause (‘NAC’) into the terms and conditions of cover.  When the insurance market is soft (i.e. hungry for business), this may not be expensive to obtain.

Duties on the purchaser of insurance –  To explain, the law used to be that an insurance was a contract of utmost good faith, which insurers could avoid (i.e. rescind the contract) on the grounds of non-disclosure or misrepresentation of any matter material to the underwriter’s evaluation of the risk.  Meanwhile, a breach of a warranty either suspended or actually terminated cover.

Consumer insurance – In recent years, certain protections have been introduced by statute.  Thus, individuals who buy insurance for purposes mainly unrelated to their business now have the benefit of the Consumer Insurance (Disclosure and Representations) Act 2012.  Put very broadly, in the area of providing information to the insurer this Act modifies the law such that the consumer’s duty is to take reasonable care not to make a misrepresentation (for example, when completing a proposal form) before the contract is entered into or varied.

Non-consumer insurance – Other types of insured, i.e. those taking out commercial non-consumer policies, have the benefit of the Insurance Act 2015 (which covers consumer insurance as well).  For both types of insureds, the  characterisation of utmost good faith has been removed.  However, and again put very broadly, here the pre-contractual duty to provide information is re-cast as a duty of fair presentation, requiring the insured to disclose every material circumstance which the insured knows or ought to know; failing that, the insurer must be provided with sufficient information to put a prudent insurer on notice that it needs to make further enquiry for the purpose of revealing those material circumstances. 

Although the legislation is intended to ensure a better balance of interests between policyholders and insurers, the provisions in the 2015 Act specifying what an insured is taken to know, or ought to know in the sense of what should have been revealed by a reasonable search of information available to the insured, could provide insurers with a basis for declining a claim.  It may not be easy for an insured to be confident that a reasonable search of available information has been made, as such a search could involve having to seek information from employees or third parties and an evaluation of what circumstances are material in the context of the proposed insurance.

Under both statutory regimes, new remedies are available to the insurer in the event of the insured’s breach of duty, such as a lower level of indemnity or amended terms of cover.

Non-avoidance clauses (‘NAC’s) – Given these potential difficulties, various forms of clause have been developed for policyholders to insert into the insurance, to the effect that insurers will not seek to avoid, or seek damages, for non-disclosure or misrepresentation or to rely on breach of warranty, this being subject to a proviso permitting insurers to use their remedies in the case of deliberate or fraudulent misrepresentation or non-disclosure. 

Such clauses are effective in accordance with their terms.  However, they are in the nature of exclusion clauses.  Accordingly they will be construed strictly against those they protect. 

In particular, in order to be effective under judicial scrutiny, the drafting of such clauses needs to match the statutory regime now operating. For example, it may be prudent to provide specifically in a NAC that insurers will not decline cover on the grounds of (a non-fraudulent) failure to undertake a reasonable search of available information.  Also, to provide that insurers’ waiver includes all of the various alternative remedies now available to them and not just avoidance.

Cases on non-avoidance clauses

The caselaw is building up to clarify the meaning and effect of NACs.  For example,

• A NAC which at best contained the insurer’s general agreement not to raise ‘defences’ (but not referring specifically to breach of warranty) was insufficient, given the terms of the NAC as a whole, to prevent insurers from relying on breach of a warranty (HIH v New Hampshire (2001, Ct of Appeal).

• The proviso to the NAC, whereby the insurer was not bound by the NAC in the event of the insured’s  own deliberate or fraudulent non-disclosure could, in the context of the policy as a whole, only be relied upon by the insurer in the case of a deliberate decision not to disclose a matter which the insured knew should be disclosed: the term ‘deliberate’ did not permit the insurer to rely on the proviso in the case of a merely honest mistake by the insured (Mutual Energy v Starr (2016, TCC).

• A broker informed two following underwriters that the renewal of an insurance was ‘as expiry’.  In fact, because these underwriters had not been shown or agreed an endorsement adding certain additional clauses during the previous year of the cover, the renewal was not as expiring insofar as these two underwriters were concerned.  When a claim was made under the additional clauses, the two underwriters argued that the insured was estopped from relying on the clauses because the broker had acquiesced in the underwriters’ understanding that the cover was as expiring.  However, the court held that the brokers had simply made a misrepresentation as to the terms of the renewal.  The two underwriters could not rely on this as a defence to a claim because the NAC in the policy was not confined to the remedy of avoidance but also  prevented them from seeking to ‘reject a claim’ for loss on the grounds of misrepresentation, which words covered an argument based on estoppel by representation (ABN Amro v RSA and Others (2021 Ct of Appeal).

Lovetts’ comment

This note is intended to provide guidance of a practical nature but should not be taken as containing legal advice or any recommendation as to any course of action. 

However, Wendy Miles, Chris Earl and William Sturge will be pleased to provide such advice should you require assistance in drafting any specific policy wording.