Compensation vs. Civil Liability: Key Distinctions
HC Suit 376/2021
Indemnification of sums paid pursuant to settlement agreements – A pragmatic approach to considering civil liability under PI policies.
This case write-up is a short summary on the latest case law on the interpretation of a few common clauses found in PI policies, and should be read by brokers, insurers and any insureds who might benefit from having PI cover.
Summary
Insuring clauses in Professional Indemnity policies frequently define Cover for “Civil Liability”, which is “any legal liability to pay Compensation… arising from any civil liability resulting from a Claim for breach of professional duty…”.
In this case, the Singapore High Court has held that “Compensation” is distinct from the “civil liability” (even though the former arises from the latter). To meet the requirements to trigger cover, a plaintiff must show that the civil liability gave rise to its obligation to pay “Compensation”.
In the specific context of claims by an insured for indemnification of sums paid out under settlement agreements, while actual liability needs to be established, the insured need not show that every single element of a tortious claim would be satisfied.
Instead, the Court takes a pragmatic approach in assessing whether it was reasonable to enter into a settlement agreement, applying the considerations laid out in Britestone Pte Ltd v Smith & Associates Far East, Ltd [2007] 4 SLR(R) 855 (“Britestone”).
Separately, the Court also took the position that whether the obligation on an insured to cooperate with insurers’ investigations is read as a condition precedent depends on whether there is a clear expression of intent that it is intended to be so.
Brief facts
The Plaintiff is an engineering company, which was engaged to act as the consultant and QP for a construction project by a builder. Neighbouring properties were damaged during the course of the works, which resulted in claims being made against the builder and developer.
These claims were settled by the developer and builder, who in turn made claims in Suit 417 of 2019 against the Plaintiff and its director Mr Ng (who acted as the QP). The Defendant, QBE, who insured the Plaintiff and Mr Ng under a Professional Indemnity policy, was brought in as a third party even though they had already denied cover under the policy prior to the commencement of the said Suit 417.
Consent judgment for $3,010,264.53 (plus interest and costs) was entered against the Plaintiff and Mr Ng pursuant to a settlement agreement which the Defendant QBE was not a party to.
The Plaintiff then sought to recover their policy limit of $2m against QBE by commencing the present suit.
Issues
- Whether policy cover is engaged when the claim for compensation on the policy arises out of a settlement agreement.
- Whether exclusions applied on the basis that:
(a) Mr Ng acted dishonestly/ wilfully in breach of his duties; and/or
(b) the Plaintiff failed to provide all information and assistance needed by QBE to investigate and defend the claim.
- Public policy considerations.
On the first issue, the Court held that the indemnity provided in Cl 2.1 of the Policy does not refer to any compensation whatsoever. Instead, it pertains to compensation, which arises from any civil liability, which must be demonstrated by a plaintiff (see [41] and [42]).
The Court then referred to Cl 3.2 of the Policy, which set out specific types of civil liability covered, and which also contained the common exclusion of cover against voluntarily assumed liability (see [43]).
The Court’s view is that an insured plaintiff “must show actual, as opposed to arguable, tortious liability”, but this does not extend to requiring the plaintiff to show that every element of the tortious claim has been established.
Instead, a pragmatic approach should be taken. An insured who has settled a claim need only establish that the settlement was reasonable, following the considerations set out by the Singapore Court of Appeal in Britestone Pte Ltd v Smith & Associates Far East, Ltd [2007] 4 SLR(R) 855 (see [52]).
On the facts of the case, the Court found that the settlement was not reasonable, and consequently the Plaintiff had not proven that liability under the consent judgment would have attached in the absence of the settlement agreement. There was therefore no cover under the policy and the Plaintiff’s claim fails.
Nonetheless, the Court went on to examine the other two issues raised. On the second issue, the Court found that Mr Ng was aware that there was a deviation from the as-planned earth retaining works, but was not dishonest (or acting wilfully in breach of his duties) when he failed to indicate these in the forms he submitted to the BCA as he believed these were minor deviations.
As for the failure to cooperate, the Court found that while the Plaintiff was in breach of Cl 7.7 (ie. viz the duty to cooperate), that was not a condition precedent to cover.
Lastly, the Court found that there were no public policy reasons to enforce a Professional Indemnity Policy where no cover has been found (as argued by the Plaintiff).
Significance to the insurance industry
All stakeholders need to study the considerations set out in Britestone, particularly when assessing whether coverage will be afforded for any amounts paid out under settlement agreements. Whilst not expressly stated, it can be expected that the Court would take a similar approach to other lines of insurance and not limit the applicability of this approach to Professional Indemnity claims only.
Insurers should also review their policy wordings on the obligations of insureds to cooperate with investigations and provide information. This obligation is found commonly in all lines of insurance, and any difficulty in enforcing this would negatively impact insurers’ exercise of subrogation rights.
