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Expert Evidence and Insurance
  • Feb 26, 2021
  • Latest Journal

Insurance is notoriously reviled by the majority of the population as both a ‘necessary evil’ and the grand-master of the small print ‘get out of jail’ card. Insurance protection is nevertheless very often lurking behind a commercial complaint or claim; and its influences can too easily be overlooked by the lawyer dealing with the main issue; which typically has nothing to do with insurance. Very few people or businesses can find money to pay a debt or damages without such protection as their insurance might pay and so they rely upon it when negotiating the legal settlement. Consequently, influences of an insurer behind the ‘main issue’ should be taken into account at an early stage. It must be remembered that a litigant depending on an insurer behind the scenes is virtually powerless to agree or settle anything. Expert evidence and / or early expert evaluation in insurance issues can therefore be priceless in discovering the influences that can often block a settlement agreement to either or both sides of the litigation.

However, ‘insurance’ is notoriously difficult to understand because the words in the contract (policy) are only a part of that contract; the rest is in the process of proposing for insurance, the conduct of negotiations between the parties, the interpretation of the obligations and Conditions imposed upon the Insured and in the treatment of the Insured by the insurer and its agents. The effect of these can frustrate the outcome of a legal ‘action’ but early attention to the dynamics of insurance influences can often turn a case around. Reading the policy, alone, is rarely sufficient to gauge the real implications of insurance dynamics behind the scenes.

Not what it seems
Legal logic and insurance practice are not happy bedfellows. A contract of insurance is evidenced by the policy but the policy’s words, phrases, expressions, and even punctuation, conveys only the superficial elements of what the contract is really all about. This is partly because the foundation of a contract of insurance is in the principles of disclosure of ‘material facts’ that would influence a prudent underwriter and partly in the industry’s last three hundred years’ development of practices, protocols and precedents that the insurance industry relies upon for interpreting what is often an inexact contract; as Covid 19 is proving in matters of ‘business interruption’ and travel insurances, in particular.

“It doesn’t work like that”
A few years ago I was asked to give expert evidence in connection with a professional liability matter concerning the merger of two banks. The past liability of one bank had not been taken into account when the new insurance was arranged for the merged banks and the question of me was ‘how much would it cost to retrospectively include the cover, after the event?’  By this time the loss had crystalized; and a very large sum was at stake. After my consideration of the facts, which were unusual and ‘international’, I had to advise that under the circumstances there would have been little or no prospect of ever getting cover for the past liability of the, now uninsured, bank; and to explain why. Already, some two and a half years had been spent in preparing the claim and the pleadings were in the third stage of amendment.

I recall saying to counsel, who was surprised by my explanation, “well it just doesn’t work like that in practice.”  I was fortunate also that an expert underwriter had been called as well and unbeknown to me he had said almost exactly the same words. “that’s not how it is done”.
There could be no criticism of the legal team for not knowing, beforehand, what we had just told them because there is no ‘legal-logic’ to the way that the insurance market works in some cases; it purely a matter of long-standing practice and ‘ insurance pragmatism’.

Why the pragmatism?
Insurance is a commercial commodity, first and foremost. It is often used and sometimes abused, as a means of transferring risk that no sensible businessman would take in the first place; and this is a constant worry for prudent insurers. The implication here is of course dishonesty and fraud by the policyholder. It happens, and in fact, rather more than is generally known. To combat it the industry has developed pragmatic means of identifying the ‘hazard’, and restricting or excluding cover for hazards that are foreseeably likely to encourage dishonest or fraudulent acts. It goes further than that. Some risks are fundamentally commercial or moral-hazard risks that the Insured is hoping to transfer to an unsuspecting insurer as a means of cutting the cost and risk of their own business deal.

In the case of the banks the insurer of the merged banks had no interest at all in insuring the past liability risks of the acquired bank. It was being taken over for a reason. Since no-one asked about the past liability cover during negotiations the Insurer didn’t volunteer to offer any.

Another example of insurance being used for transfer of moral hazard risk is in the construction sector. The tragic Grenfell fire in June 2017 exposed the working practices of the sector in what is known as ‘value engineering’, or in plain English, cutting costs and corners. The risk of the owner and the primary lender of most building projects is habitually transferred to the professional team that design, inspect, supervise and sign–off the ‘works’ such that when a fire occurs the owner  has transferred the risk to, in the main, Professional Indemnity insurers. Grenfell has brought that practice to a shuddering halt as insurers say ‘no more!’

The insurers of any risk may pay out a claim for, say, fire damage loss and possibly Business Interruption loss as well but then they try to recover their loss by suing the party that was responsible for it. Rights of subrogation are an integral part of an insurance contract and the insurers engage specialist lawyers to pursue legal action against the parties responsible for the loss. These actions are not always evident to the parties trying to deal with the ‘main issue’  but an experienced insurance practitioner will usually sniff out the likely goings on behind the scenes; and knowing that that can often beneficially influence the  legal negotiations.

Early-Evaluation Benefits
From the perspective of an experienced expert witness of some 20 years I have found on numerous occasions that I am being instructed at the last minute before trial. Understanding the commercial reasons for that I can accept it for what it is but on numerous occasions I have lighted on facts or recognition of circumstances that would have made a significant difference to the negotiations and sometimes the pleadings, if they had been known from an early start.

Lawyers dealing with commercial or consumer matters where there is loss or damage or third party liability issues in the mix would benefit from examining the likelihood of insurance influences is likely to be involved in the background or the foreground of the matter and if so get an early-evaluation ‘heads–up’ (not a CPR 35 report) from an experienced insurance practitioner and decide how that may assist the resolution of the ‘main issue’.

Roger Flaxman, ACII Chartered Insurance Practitioner, is an experienced expert to the courts and a member of the Academy of Experts. He has given advice and evidence in over 200 cases and is actively involved day to day in insurance claim resolution for policyholders.