Reimbursement of Defence Cost if Claim Not Covered by Policy
Oldham v QBE Insurance (Europe) Ltd  EWHC 3045 (Comm)
In the English case of Oldham v QBE Insurance (Europe) Ltd  EWHC 3045 (Comm), the Court considered whether an insurer was entitled to the reimbursement of defence costs which it had funded after it was determined that the claim was not covered under the policy. The Court found in favour of the insurer and held that an insured who is unsuccessful in showing that the claim is covered under the policy must reimburse the insurer for the advanced defence costs.
The Insured, Mr. Oldham, is an accountant and insolvency practitioner. He had taken out a professional indemnity insurance policy with QBE Insurance ("QBE") which was subject to the minimum indemnity requirements of the Institute of Chartered Accountants in England and Wales ("ICAEW"). Mr. Oldham was sued by the liquidators of a company for which he had acted as a joint administrator.
QBE declined cover on the claim on the ground of late notification, and Mr. Oldham disputed this. This dispute was referred to arbitration pursuant to the terms of the policy. Pending the coverage dispute between Mr. Oldham and QBE, QBE accepted that it had to fund the defence costs by virtue of Clause 10.2 of the policy, which provides that if there is a coverage dispute between the insured and the insurer, the insurer will advance defence costs "pending resolution" of such dispute. QBE advanced over £40,000 in defence costs.
In the arbitration, the arbitrator found in favour of QBE, and determined that Mr. Oldham’s claim was not covered under the policy and that QBE should be entitled to the reimbursement of the defence costs. He also ordered Mr. Oldham to pay the costs of the arbitration, which were significant.
The Court took as a starting point the fact that the insurer is only liable for defence costs if there is coverage under the policy. It held that Mr. Oldham's arguments would alter the meaning of Clause 10.2, such that defence costs would be covered for ineligible claims provided they were incurred prior to the resolution of the coverage dispute. This would be an "unbusiness-like consequence". The Court similarly rejected the argument that the lack of an express claw-back provision prevented QBE from claiming reimbursement. It held that it was clear that the payment of defence costs was provisional and subject to reimbursement. If there is no coverage, then the defence costs do not fall within the scope of what is indemnified, and have to be repaid.
Mr. Oldham was successful in one respect, which was that the arbitrator's decision to award the costs of the arbitration against him was remitted back to the arbitrator for reconsideration. The Court held that Mr. Oldham had not been given a fair opportunity to advance an argument that might have convinced the arbitrator to rule differently. Mr. Oldham challenged the arbitration award in the High Court on grounds that QBE did not have a right to repayment as this was not expressly provided for under the policy and that the interpretation of "pending resolution" under clause 10.2 should mean "until resolution".
The High Court held that QBE was entitled to the reimbursement of the defence costs. It was necessary for the Court to consider the minimum indemnity requirement, which took precedence over the policy terms. The Court also observed that where wording is drafted by a regulator setting minimum terms (as is often the case with mandatory professional insurance), there will be a balance between protecting the public versus the cost and availability of cover.
This decision confirms that, even in the absence of an express right to seek reimbursement of defence costs following a determination that the claim is not covered, an insurer will be able to be reimbursed. The case turns to some extent on the specific wording of the policy in question, but this kind of wording is not unusual in professional indemnity policies. Of course, it is preferable for insurers to include an express claw-back provision in the policy. Insurers should also consider including in their initial coverage letter a statement to the effect that defence costs are subject to coverage being confirmed, and that any defence costs paid in advance may have to be repaid.
This case also illustrates the difficulties that insureds can face when dealing with a coverage dispute whilst defending a claim. QBE's costs of the arbitration (which the arbitrator ordered Mr. Oldham to pay) were greatly in excess of the defence costs that were in issue.
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