Insurers can recover defence costs where the claim is not covered

Royal Courts of Justice_2014 (B&W)
The High Court has ruled that an insurer who funded an assured’s defence costs in a professional indemnity claim was entitled to reclaim those costs following an arbitration decision that the claim was not in fact covered by the insurance policy. 

Mr Oldham, an accountant and licensed insolvency practitioner, faced proceedings arising out of events in 2008 and 2009. QBE Insurance (Europe) Limited were Mr Oldham’s professional indemnity insurers for 12 months from February 2014 and they disputed coverage on the basis that the claim against Mr Oldham had been notified to him before the policy’s inception. However, the policy was subject to the Minimum Terms of the Institute of Chartered Accountants of England and Wales and so the insurers were obliged to fund Mr Oldham’s defence costs pending resolution of the coverage dispute.

QBE therefore paid Mr Oldham’s defence costs in the High Court and referred the coverage dispute to arbitration. As well as ruling that the claim was not covered, the arbitrator held that QBE was entitled to reimbursement of the £43,775 of defence costs which it had funded. In Oldham v QBE Insurance, Mr Oldham brought an application to the High Court against this aspect of the arbitration award, arguing that as a matter of law QBE had no entitlement under the terms of the policy to recover this money. He also brought an alternative challenge to the award on the ground that he was not given fair opportunity by the arbitrator to question such entitlement.

The focus of Mr Oldham’s challenge was the wording of clause C10.2 of the Minimum Terms which states that in the event of any dispute concerning liability, “Insurers will advance Defence Costs … pending resolution of any such dispute”. Mr Oldham argued that in this context the word “pending” meant “until”, relying also on the fact that there was no express right to repayment provided for by the clause. However, Popplewell J held that the “unbusinesslike consequence” of this reading could not have been what the policy draftsman intended. He ruled that the correct reading must be that “in each case the payment is to be provisional and subject to repayment in the event that the dispute is resolved in favour of there being no coverage”

It was therefore held that the arbitrator had not erred in law and so the appeal in relation to defence costs was dismissed. However, Popplewell J did accept Mr Oldham’s argument that he had not been given fair opportunity to address various aspects of the award against him and that a substantial injustice had arisen from this irregularity. He therefore allowed Mr Oldham’s requested extension of time to make a payment on account of costs. This in large part arose because Mr Oldham was not represented at the arbitration hearing. In the court proceedings he appeared as a litigant in person. This illustrates again the necessity for insurers (and arbitrators) to be seen to grant considerable flexibility to such individuals.

Simon Cooper

Clare Birchenhough