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Session 2007 - 08 Publications on the Internet Judgments PDF Print Version 
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| Judgments - Brit Syndicates Limited for and on behalf of Brit Syndicate 2987 at Lloyd's for the 2003 year of account and others (Respondents)v Italaudit SpA (in liquidation) (formerly Grant Thornton SpA) and others (Appellants)
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HOUSE OF LORDS SESSION 2007-08 [2008] UKHL 18 on appeal from: [2006] EWCA Civ 1661
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Brit Syndicates Limited for and on behalf of Brit Syndicate 2987 at Lloyd’s for the 2003 year of account and others (Respondents)v Italaudit SpA (in liquidation) (formerly Grant Thornton SpA) and others (Appellants) Appellate Committee Lord Hoffmann Lord Scott of Foscote Lord Walker of Gestingthorpe Lord Mance Lord Neuberger of Abbotsbury Counsel Appellants: Guy Phillipps QC (Instructed by Ashurst LLP) Respondents: Colin Edelman QC Colin Wynter QC (Instructed by Mills and Reeve) Hearing date: 14 FEBRUARY 2008 ON WEDNESDAY 12 MARCH 2008 HOUSE OF LORDS OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE Brit Syndicates Limited for and on behalf of Brit Syndicate 2987 at Lloyd’s for the 2003 year of account and others (Respondents) v Italaudit SpA (in liquidation) (formerly Grant Thornton SpA) and others (Appellants) [2008] UKHL 18 LORD HOFFMANN My Lords, 1. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Mance. For the reasons he gives, with which I agree, I too would allow this appeal. LORD SCOTT OF FOSCOTE My Lords, 2. I have had the advantage of reading in advance the opinion of my noble and learned friend Lord Mance. I agree with it and, for the reasons he gives, I too would allow this appeal. LORD WALKER OF GESTINGTHORPE My Lords, 3. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Mance. I agree with it, and for the reasons which Lord Mance gives I would allow this appeal. LORD MANCE Introduction 4. This appeal raises points of construction on a Lloyd’s accountants’ professional indemnity policy which are of some difficulty, though no general importance. They relate to the scope and existence of cover afforded to the appellant, a “not for profit” umbrella corporation based in Illinois called Grant Thornton International (“GTI”). GTI had responsibility for managing and maintaining the worldwide organisation of Grant Thornton firms. The policy was taken out for the period 15 December 2003 to 14 December 2004. It covered as the “Assured Firm” some 93 listed members of the Grant Thornton family, not including GTI itself. By an extension (“extension 3”), GTI was “included as an Assured Firm but solely in respect of claims made against Grant Thornton International arising from claims made against a member firm of G[r]ant Thornton International insured by the terms and conditions of this policy". This meaning of extension 3 is central to this appeal. 5. The context of the proceedings is the collapse in December 2003 of the Italian company Parmalat Finanziaria SpA (“Parmalat”). This followed the revelation that its Cayman Island subsidiary, Bonlat Financing Corporation, did not have the credit balance with Bank of America, New York branch (of about Euro 3.95 billion) which had appeared in its and the Parmalat group’s accounts. Those accounts had been audited by Grant Thornton SpA (“GT Italy”), subsequently known as Italaudit SpA in liquidation. 6. The collapse of Parmalat led in January 2004 to class action lawsuits filed by investors in Parmalat in the United States District Court for the Southern District of New York against inter alia GT Italy and GTI. The claims against GTI asserted inter alia that GTI was liable as an entity “in control” of GT Italy. By letter dated 1st August 2005 Mills & Reeve, solicitors for the respondent insurers subscribing to the policy wrote to GT Italy avoiding the policy for alleged non-disclosure of matters known to GT Italy relating to Bonlat’s supposed credit balance, and relying “alternatively, and without prejudice to insurers’ claim to have validly avoided the Policy” upon such non-disclosure as a breach of a warranty constituted by the basis of contract provision in the proposal signed by GT Italy dated 16th October 2003. By a second letter of 1st August 2005 Mills & Reeve advised GTI that, since GT Italy’s insurance had been avoided ab initio, there was no cover available to GTI. 7. Also on 1st August 2005, the respondent insurers issued the present proceedings against GT Italy and GTI, seeking primarily a declaration that insurers had validly avoided the policy, and “alternatively, and without prejudice to the first sought declaration, a declaration that they are discharged, as from the date of the making of the contract of insurance, alternatively as from the date of its inception (15th December 2005), …… by reason of ….. breach of warranty", and in either case that they were discharged from all obligations under the insurance. On 21st February 2006 insurers obtained judgment in default against GT Italy for the declarations sought. On 3rd March 2006 Langley J granted an application by GTI (made on 21st November 2005) for summary judgment in its favour on the ground that, even if insurers were to succeed as against GT Italy, GTI would be entitled to an indemnity, inasmuch as the claims made against it arose from claims made against GT Italy and were within extension 3. On 6th December 2006 the Court of Appeal (Waller LJ, Jonathan Parker LJ and Wilson LJ) allowed insurers’ claim and gave summary judgment in insurers’ favour, declaring that “if and so far as the [insurers] have validly avoided their insurance of [GT Italy], any claims made against [GTI] do not ‘arise from claims made against a member firm of Grant Thornton International insured by the terms and conditions of [the] policy', since any claim against [GTI] does not arise from a claim that is insured under the terms and conditions of the policy. [GTI] is thus not entitled to be indemnified under the terms of the policy.” The policy 8. It is appropriate to set out the policy wording in some detail. It read: “IT WILL BE NOTED THAT THIS POLICY SUBJECT TO ITS TERMS, CONDITIONS, EXCLUSIONS AND LIMITATIONS IS DESIGNED FOR APPLICATION TO CLAIMS MADE DURING THE CURRENCY OF THE SAID POLICY AGAINST ASSUREDS AS DESCRIBED HEREIN. ……. PROFESSIONAL INDEMNITY POLICY I. WHEREAS the persons carrying on business under the name of the Assured Firm as stated in the Schedule attached to this policy have made to Us who have hereunto subscribed our names as Underwrites written proposals bearing the dates stated in the said Schedule and containing particulars and statements which it is hereby agreed are the basis of this contract and are to be considered as incorporated herein and have paid to Underwriters the premium specified in the said Schedule: THIS POLICY IS to indemnify an Assured Firm against any claim or claims solely in respect of International Work made against an Assured Firm during the period set forth in the said Schedule by reason of any negligent act, error, omission, breach of duty or libel or slander or any allegation thereof whenever or wherever the same was or may have been committed or alleged to have been committed on the part of the Assured Firm or their predecessors in business or any Partner of the Assured Firm or any person at any time employed by the Assured Firm or their predecessors in business or any other person or entity for whose negligent act, error, omission, breach of duty or libel or slander or any allegation thereof the Assured Firm is legally responsible in or about the conduct of any Professional Services solely in respect of International Work conducted by or on behalf of the Assured Firm or their predecessors in business or any other person or entity for whose negligent act, error, omission, breach of duty, or libel or slander or any allegation therefore the Assured Firm is legally responsible whether assumed by contract or otherwise. This policy is also to indemnify an Assured Firm should an Assured Firm by reason of its membership in Grant Thornton International be held legally liable for any negligent act, error, omission, breach of duty, or libel or slander or any allegation thereof whenever or wherever the same was or may have been committed or alleged to have been committed on the part of another member firm of Grant Thornton International, their predecessors in business or any Partner of such other firms or any person employed by such firms or their predecessors in business in or about the conduct of any Professional Services conducted by or on behalf of such other firms. II. DEFINITIONS 1. The words ‘International Work’ are understood to mean: - a. Work referred by one Grant Thornton International member firm to another Grant Thornton International member firm where the client is a subsidiary or related company to the referring firm’s client. b. Work performed by one Grant Thornton International member firm for a client subsequent to that client being taken over by the client of another Grant Thornton International member firm c. Work performed by one Grant Thornton International member firm for a subsidiary or related company of a client of an accounting firm subsequent to that accounting firm becoming a Grant Thornton International member firm. d. Work performed of a general nature, not necessarily relating to a specific client, by a Grant Thornton International member firm at the request of another Grant Thornton International member firm where the cost for such work is billed by the Grant Thornton International member firm to the referring member firm. e. Claims arising from cross border floatation work performed by one Grant Thornton International member firm for or on behalf of a client of another Grant Thornton International member firm ….. 2. The words “Professional Services” are understood to apply to advice given or services performed of whatsoever nature undertaken by or on behalf of an Assured Firm or any other person or entity for whose negligent act, error, omission, breach of duty or libel or slander or any allegation thereof an Assured Firm is legally responsible, provided always that the fee or a portion of the fee accruing from such work shall inure to the benefit of that Assured Firm. …… III. EXTENSIONS 1. This policy shall indemnify: a. An Assured Firms Partners and Employees, but only in respect of any negligent act, error, omission, breach of duty or libel or slander or any allegation thereof committed or alleged to have been committed in the course of their being a Partner of or employed by an Assured Firm in the conduct of Professional Services undertaken on behalf of that Assured Firm. b. Partners and Employees no longer with an Assured Firm, the legal representatives of Partners and Employees in the event of their incompetency, insolvency or bankruptcy and the estates of legal representatives of Partners and Employees deceased at the time of discovery but with that Assured Firm at the time the negligent act, error, omission, breach of duty or libel or slander or any allegation thereof was committed or alleged to have been committed in the conduct of Professional Services undertaken on behalf of that Assured Firm; c. an Assured Firm’s Partners and Employees and the estates or legal representatives of deceased Partners and Employees for Professional Services conducted subsequent to retirement provided that such Professional Services have been undertaken on behalf of, and with the approval of, that Assured Firm; d. (i) an Assured Firm’s Partners and Employees against any claim or claims made by reason of Professional Services conducted in their own name, and (ii) an Assured Firm against any claim or claims made by reason of Professional Services conducted by that Assured Firm’s Partners and Employees in their own name, provided always that the fee, or a portion thereof, accruing from such work shall inure to the benefit of that Assured Firm and such work is undertaken on behalf of, and with the approval of, that Assured Firm. 2. This Policy covers the head office and all branch offices of an Assured Firm. 3. Grant Thornton International is included as an Assured Firm but solely in respect of claims made against Grant Thornton International arising from claims made against a member firm of G[r]ant Thornton International insured by the terms and conditions of this policy. 4. [Deals with merger of a firm into or acquisition by an Assured Firm] 5. It is understood and agreed that cover is automatically provided for any newly established member firm for a period of 30 days. Cover will apply to the new firm only for Professional Service provided from the date of establishment. During this period the Assured will provide such information as the Underwriters may require in order to provide cover beyond this period. Coverage agreed beyond the automatic 30-day period is at the discretion of the Underwriters. 6. [Assured Firms to be indemnified against claims made against any Partner or Employee appointed as Trustee, Trustee in Bankruptcy, Receiver or Liquidator, or in similar capacity, “but only to the extent that such sum would have been payable under this Policy if an Assured Firm had the legal responsibilities arising from such appointment"] 7. Notwithstanding Clause IV Exclusions 3 and 4 of this Policy, an Assured Firm shall be protected within the terms of this Policy for costs, charges and expenses incurred in defense of or in connection with any claim covered by this Policy (whether or not such claim also includes a demand for fines, penalties, punitive or exemplary damages) or any inquiry or investigation which may lead to or be connected with or arise from any covered claim or potential covered claim or circumstance which may lead to a covered claim. 8. ….No coverage shall apply in respect of any negligent act, error, omission, breach of contract or duty or libel or slander or allegation thereof prior to the effective date of an entity becoming a member firm of Grant Thornton International. 9. Coverage under this Policy shall apply to any member firm of Grant Thornton International, whether declared under this Policy or any predecessor policy to this policy, that ceases, for whatever reason, to be a member firm but only in respect of any negligent act, error, omission, breach of contract or duty or libel or slander or allegation thereof, committed by such member firm prior to the effective date of cessation of such membership. No coverage shall apply in respect of any negligent act, error, omission, breach of contract or duty or libel or slander or allegation thereof, committed after the effective date of cessation of such membership. IV. EXCLUSIONS” This Policy excludes: - 1. … 2. any claim or claims which are insured by any other existing valid policy or under policies under which payment of the claim or claims is actually made, except in respect of the excess beyond the amount or amounts of such payments under such other policy or policies ....... 11. any claim or loss arising out of negligent acts or omissions committed by any Member Firm of Grant Thornton International that is based in the USA or the UK; ……” 9. The policy schedule identified the “Assured Firm” as “the member firms of Grant Thornton International - as detailed in the attached Schedule of Member Firms” and “Proposal Forms Dated: As per the attached Schedule of Member Firms". The reference to “member firms of Grant Thornton International” and the policy references to “membership in Grant Thornton International” and “Grant Thornton International member firm[s]” are more readily understood as references to the Grant Thornton family of firms as a whole rather than specifically to GTI, although GTI’s role as an “umbrella” organisation blurs the distinction. The policy went on to state that the sum insured was US$ 20 million each and every claim and in the aggregate including costs and expenses, with a US$1 million retention each and every claim, giving a maximum amount recoverable under the insurance of US$19 million in the aggregate including costs and expenses. The attachment listed the 93 member firms insured (who did not include the United Kingdom and United States’ firms), and the dates of their proposals. In the case of GT Italy, the proposal consisted of a completed and signed questionnaire dated 16th October 2003. The questionnaire, in a standard form evidently for use with this policy wording, requested and as completed gave information under the following heads: (A) information about staff generally and about income for “inbound International Referred Work", (B) “Client Information - Cross Border Floatations", (C) “Client Information - Inbound International Referred Work", (C)[bis] “Local Policy Information” and (D) “Claims Information", in respect of International Referred Work only. In section (C) bis, GT Italy confirmed that it bought professional insurance locally and that this did not exclude work performed by GT Italy on behalf of another Grant Thornton member firm, but did exclude cover for work referred out by GT Italy and performed by another Grant Thornton member firm; GT Italy also answered negatively question 18: “Does the local policy specifically exclude cover to your firm for claims arising by virtue of your association with Grant Thornton International or any other member firm even though no work has been performed by your firm?” The rival cases 10. Insurers’ case, accepted by the Court of Appeal, is that, for GTI to have cover under extension 3, the claim made against GTI would have to arise from a claim made against GT Italy, in respect of which claim GT Italy was itself insured by the terms and conditions of the policy. Accordingly, if either the claim is one in respect of which GT Italy is not insured by the policy, or, more fundamentally, GT Italy has no insurance at all under the policy, GTI can enjoy none. However, the Court distinguished non-compliance with policy conditions entitling insurers to reject a claim subsequent to its being made from avoidance ab initio on grounds existing at the time of the claim made. Non-compliance with policy conditions by a member firm such as GT Italy would not, the Court thought, disentitle GTI from recovering an indemnity. Although the declaration made by the Court of Appeal was expressed only to apply on the assumption that insurers had validly avoided GT Italy’s insurance, the debate in the Court of Appeal thus ranged wider; indeed, on insurers’ primary case, irrespective of any avoidance GTI would not benefit by any cover unless the claim against GT Italy fell within one of the two insuring clauses found in the second and third paragraphs of part I of the policy wording set out above. 11. GTI’s case is that extension 3 includes GTI as an Assured within the insuring clauses - more particularly the second clause found in the third paragraph of part I - and that the wording of extension 3 is to be seen as a shorthand reference to that second insuring clause. “Solely” emphasises that GTI’s cover is only in respect of that second clause. The words “arising from claims made against a member firm of Grant Thornton International” reflect the limitation of cover under the second clause to legal liability incurred by reason of membership in Grant Thornton International for any negligent act, etc, on the part of another member firm of Grant Thornton International. The phrase “Insured by the terms and conditions of this policy” limits the member firms of Grant Thornton International whose negligent act, etc. is relevant for this purpose to those insured by the policy, in a manner which, although not express in the reference to “another member firm of Grant Thornton International” in the second clause, applies nonetheless under the second clause as a result of the definition of “Professional Services". The phrase is descriptive, rather than introductory of a positive requirement that either the claim or the member firm should be validly covered. 12. Both sides invoked commercial considerations. In the absence of any evidence at all about the background to the policy or other insurance arrangements within both parties’ knowledge, they set about deriving these solely from the policy and proposal wording. Like Waller LJ in the Court of Appeal, I do not find this very satisfactory. We are asked to construe the policy in an almost complete vacuum. However, the House, like the Court of Appeal, is left with no choice. 13. The Court of Appeal was influenced in its approach by the limitation of the cover afforded under the first insuring clause to “International Work", and by the likelihood, as the Court perceived it, that any claim under the second insuring clause would be likely only to arise in the context of International Work: it thought that, in these circumstances, “to provide GTI with cover for wrongs committed by member firms in their domestic business would have been a vast extension of the cover, in relation to which no proposal form provided any details to enable an underwriter to assess the risk” (para. 35). It was also influenced by the consideration that extension 3 was just that, an extension, which read as though intended to be parasitic upon claims already covered by the policy. Discussion and analysis 14. The rival arguments are finely balanced. This is a claims made policy, as its opening language in capitals emphasises; and the double use of the phrase in extension 3 may be said to point in favour of insurers’ construction, particularly when followed by the final words “insured by the terms and conditions of this policy". The phrase “claims made against a member firm of Grant Thornton International” may be said to suggest a claim made under the policy; and to have no parallel in the second insuring clause, which does not (strictly) require a claim to have been made against the other Grant Thornton member firm, for whose negligent act, etc, the Assured Firm claiming indemnity is said to be liable “by reason of its membership in Grant Thornton International". The phrase “claims made arising from” can also be read as going wider than the words “by reason of its membership in Grant Thornton International …. held liable” in the second insuring clause. The detail of the reference to being “insured by the terms and conditions of this policy” may be said to be surprising if the only intention was descriptive. Mr Colin Edelman QC in his thoughtful argument for insurers relied upon all these factors to differentiate the cover afforded by extension 3 and by the second main insuring clause. If the intention in extension 3 was in effect to add GTI as an additional Assured Firm under the second main insuring clause, this could, he points out, easily have been done by expanding the wording of that clause. All these are on their face points of some persuasive force. 15. Mr Edelman’s further argument that the cover intended by extension 3 is essentially parasitic does not appear to me so persuasive. The cover under extension 1, in respect of partners and employees, etc, can be described as parasitic, and it must be limited to claims of a kind in respect of which the relevant Assured Firm would be insured under one of the main insuring clauses. Such partners and employees would have, or be expected to have, cover for other claims under the local policies taken out by member firms such as GT Italy. The effect of extensions 2, 4, 5 and 6 and indeed 8 and 9 is, on the other hand, to define who counts as an Assured Firm and who can therefore take advantage of the cover afforded by the insuring clauses in respect of claims made directly against them. That it seems to me is also the natural meaning of the opening phrase of extension 3, whereby “Grant Thornton International is included as an Assured Firm". |
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