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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16.  While it is true that GTI could have been specifically added into the second insuring clause, extension 3 does not seem to me a surprising place for a provision with similar effect, bearing in mind that GTI is, on any view, only intended to be covered for some and not all policy purposes. Further, on insurers’ primary construction, extension 3 does not include GTI as an Assured Firm under the main insuring clauses, as the opening phrase of extension 3 would lead one to expect; rather it includes GTI at a higher level which requires GTI, before it has any cover, to show that some other Grant Thornton International member firm has received a claim and is covered under those insuring clauses. (The only alternative proffered by Mr Edelman involved the proposition that the purpose of extension 3 might be to insure GTI as an Assured Firm under the first main insuring clause, against claims made in respect of International Work done by other member firms, who might for this purpose be regarded as persons or entities for whose negligent act, etc, GTI “is legally responsible". Not only is this approach to extension 3 quite inconsistent with insurers’ primary approach, it also applies the phrase “is legally responsible” to the relationship between GTI and member firms in an artificial manner which they would certainly not accept as correct, however much a third party might try to allege that it was so.)

17.  The most cogent consideration on this appeal is, in my opinion, the general nature of the cover that would result from insurers’ construction. The Court of Appeal took the view that the second insuring clause was likely only to be relevant in relation to International Work as defined in the policy. I am not persuaded by this. Question 18 in the proposal addresses the risk of liability arising from mere association in or with the Grant Thornton International family. Allegations of vicarious or partnership liability of this nature, however tenuous they might appear to an English lawyer, are a foreseeable risk of such association. (Indeed, in the present New York litigation, GTI is said to be liable “as an entity …. in control of [GT Italy]", i.e. simply because of the association between them within the Grant Thornton family or organisation. There is also a claim against GTI for violating United States securities laws, but GTI does not suggest that that this can be covered by the second insuring clause, read with extension 3.)

18.  The scheme of the policy appears to be to cover by the first insuring clause claims against an Assured Firm by reason of its own negligence in respect of International Work performed by it, and by the second insuring clause claims by virtue of association in the Grant Thornton family. For the purpose of the first insuring clause, International Work is defined quite narrowly, as work performed (a) after being referred by another member firm, or (b) for a client of another member firm, or (c) for a subsidiary or related company of an accounting firm after that firm becomes a member firm, or (d) at the request of another member firm, or, finally, (e) consisting in cross border floatation work for the client of another member firm. The second insuring clause provides indemnity only where an Assured Firm is held liable “by reasons of its membership in Grant Thornton International", in other words where some form of partnership or vicarious liability is held to exist as between the two firms, so that one can be held liable for the other without itself being negligent or indeed having had any involvement at all in the work alleged to have been negligently performed by the latter.

19.  All that question 18 of the proposal form asks regarding the risk of claims “by virtue of …. association with Grant Thornton International or any other member firm” is whether the local policy excludes cover for such claims. On that very limited basis, the second insuring clause then gives, on its face, full cover for all and any such claims, whatever their nature or origin. I do not think that the risk can be said to be confined to international work, still less to International Work in the limited policy sense.

20.  If individual member firms are as between themselves given full cover in respect of liability for such claims incurred by reason of their membership in Grant Thornton International, it would seem very odd that GTI itself should not enjoy similarly full cover in respect of claims holding it responsible on a vicarious or partnership for or with one of the insured member firms in its international family. The submission that this would not fit, because GTI is not, as the umbrella entity, itself a member of Grant Thornton International, and that it cannot therefore incur liability “by reason of its membership in Grant Thornton International", is formalistic in the extreme; and anyway ignores the different potential shades of meaning attaching to “Grant Thornton International".

21.  If insurers are right, then GTI, in respect of the acknowledged risk of claims (however tenuous) made against it, only achieved cover under this policy in two particular situations: one where a member firm received a claim relating to International Work as defined, the other where a member firm was itself the recipient of a claim that it was liable for another member firm on some vicarious or partnership basis by reason of its membership in Grant Thornton International. GTI would then have cover if, “arising from” the claim made against a member firm, GTI itself also received a claim. This limited patchwork cover would mean, on insurers’ case, that GTI needed another policy insuring it for vicarious or partnership type claims arising in other circumstances, such as (it appears) the present. In the vacuum surrounding the present policy, all that can be said is that there is no indication of any relevant gap-filling insurance, and that insurers’ construction appears on any view to postulate an unlikely allocation and splitting of insurance risks.

22.  In these circumstances, I have come to a different conclusion to the Court of Appeal. I consider that GTI’s construction of extension 3 is to be preferred. It gives to GTI as an Assured Firm the protection of the second insuring clause, without any need to show that the claim against GT Italy is itself one which is insured under either of the two insuring clauses. This means that the phrase “insured by the terms and conditions of this policy” do not relate to the earlier words “claims made", but rather to the words “a member firm of Grant Thornton International".

Avoidance and breach of warranty

23.  This does not however fully resolve the question, with which these proceedings started, whether the phrase “insured by the terms and conditions of this policy” indicates that the member firm must have valid insurance. Pursuing the theme that the phrase was descriptive, Mr Guy Phillipps QC for GTI went so far as to submit that, even if the policy had been validly avoided as against GT Italy prior to any claim made against GTI, GTI could still have claimed indemnity under extension 3 in respect of any claim made against it arising from its association with GT Italy in Grant Thornton International. That goes further than I would. The concepts of an “Assured Firm” or a “member firm insured by the terms and conditions of this policy” would have I think to reflect the reality that such an avoidance would in effect strike GT Italy from the policy. The description of GT Italy as an Assured Firm or an insured would no longer apply. But retrospective avoidance ab initio is a different matter. There is no obligation on insurers to avoid. Unless and until insurers avoid, the firm remains an Assured Firm or a “member firm insured by the terms and conditions of this policy".

24.  As to breach of warranty, Mr Phillipps points out that this was not the primary case in respect of which insurers obtained summary judgment for a declaration against GT Italy. Strictly, breach of warranty does not call for any action by insurers. Compliance with the warranty operates as a pre-condition to any liability as insurers under the contract; and insurers can therefore simply rely on any breach of warranty as a defence: Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Limited (The Good Luck) [1992] 1 AC 233. Where a basis of the contract clause makes the correctness or completeness of the insured’s disclosure into a warranty, a breach of that warranty has the effect that the insurance cover never attaches under the contract: cf e.g. Thomson v. Weems (1884) IX App Cas 671.

25.  Here, however, assuming that there was a breach of the warranty constituted by the basis of contract clause, the question is whether GT Italy ceased ipso facto to be “a member firm of Grant Thornton International insured by the terms and conditions of this policy” within extension 3, so as to deny GTI coverage under that extension in circumstances where neither it nor insurers knew of this. This question falls, for the reasons already given, to be considered on the basis that GTI is under extension 3 itself an Assured Firm, able as such to invoke the cover afforded by of the second insuring clause. Similar questions might also be said to arise in the context of the main insuring clauses. On insurers’ present case, it might be suggested that one Assured Firm had no insurance in circumstances where another Assured Firm (e.g. an Assured Firm for whom it was undertaking International Work or an Assured Firm for whom it was held liable “by reason of its membership in Grant Thornton International”) was, because of some unknown breach of warranty, not in reality insured at all. In the context of the main insuring clauses, such a suggestion seems particularly implausible. The references to an Assured Firm must be understood as descriptive of those firms currently listed and appearing to be insured. I would reach a similar conclusion, despite the somewhat different wording, in relation to extension 3. The purpose in extension 3 of the phrase “insured by the terms and conditions of this policy” is to identify or describe the member firms, claims against whom may trigger cover in favour of GTI; and GTI should not be prejudiced or affected by defects in the insurance cover apparently afforded to such other member firms, of which defects it would not know.

Conclusion

26.  I would therefore allow the appeal, set aside the order for summary judgment in insurers’ favour made by the Court of Appeal and restore the order made by Langley J for summary judgment in GTI’s favour on the claim against it. The parties should have 21 days in which to make submissions in writing on costs.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

27.  I have had the advantage of reading in draft the opinion of my noble and learned Lord Mance and for the reasons he gives I too would allow this appeal.

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