Insurance policies as a form of fortification

Fraud
A cross-undertaking in damages is generally the ‘price’ of being granted an injunction. This is to compensate the injunctee for any loss suffered should it later turn out that the injunction was incorrectly granted.‎ Where there are doubts about a party’s ability to pay any damages awarded as a result of the undertaking, the court may order that party to “fortify” their undertaking. This could be by way of security or payment of money into court.

In Candy v Holyoake, which concerned a notification injunction, the injunctors sought to fortify their undertaking with an insurance policy. Such fortification was ordered to be in a form reasonably satisfactory to the injunctees. Concerns were raised that the insurer could be able to avoid liability should the injunctor later lose the claim and be found to have been fraudulent and dishonest i.e. the insurers may argue that the injunctors were dishonest in presenting the risk. The insurance policy did not explicitly preclude the insurer from avoiding the policy on the basis of any fraud or dishonesty although it contained a clause which stated that the “Insurer will not exercise any right to void, reduce or deny its liability to pay on the Insured’s behalf Loss on any grounds whatsoever”.

The Court of Appeal held that there was an objectively reasonable apprehension of risk of avoidance because the terms of the policy did not expressly exclude an insurer’s remedies arising from dishonesty or fraud. Furthermore, there was a real prospect that the insurers could properly argue that public policy would entitle them to avoid the policy, despite any express terms to the contrary. In light of these factors, the Court found that the insurance policy was an unsatisfactory form of fortification.

Any insurer wishing to issue policies underwriting cross-undertaking in damages, especially for cases involving allegations of fraud and/or dishonesty, would be advised to include express terms excluding their remedies for fraud should they wish for those policies to be considered adequate fortification. In fact, the Court suggested that a policy in which the duty of disclosure is waived, along with an express term and representation by the insurer that they would not avoid for fraud of the insured, may be good fortification. However, as the Court declined to express a firm view on whether public policy will always prevent parties from contracting out of the consequences of fraud, question marks still linger over whether insurance policies can ever be good fortification. Some guidance, however, can be taken from the area of security for costs where the courts have allowed for the provision of security by way of ATE insurance policies in principle.

http://www.bailii.org/ew/cases/EWCA/Civ/2017/92.html