Supreme Court Provides Further Example of Narrow Construction of Exclusion Clauses in Insurance Policies

Morgan Lewis
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Morgan Lewis

The UK Supreme Court handed down its judgment on 23 April 2021 in Burnett or Grant v International Insurance Co of Hanover Ltd [2021] UKSC 12, which arose within the context of a “deliberate acts” exclusion in an employer’s public liability insurance policy. Nonetheless, this decision provides a welcome source of clarity for policyholders with regard to the interpretation of exclusions in all classes of insurance policies.

This case provides another example that exclusion clauses in insurance policies are to be interpreted narrowly and, in what will be seen as a positive for policyholders, it will likely prove difficult (in certain circumstances) for insurers to rely on them.

In this instance, the Supreme Court ultimately concluded that a “deliberate acts” exclusion will apply only in respect of acts which are intended to cause injury, which is not necessarily the injury in question. Absent any specific wording in the policy to the contrary, “deliberate acts” do not include reckless acts.

THE FACTS

On 9 August 2013 at a bar in Aberdeen, a door steward, who was the employee of Prospect Security Services Limited (the Insured), applied a neck hold to a customer following his ejection from the bar. The customer, Mr. Craig Grant, subsequently died from mechanical asphyxia as a result of the restraint. As the Insured was in liquidation, the widow of the customer commenced a claim in damages against (inter alia) the Insurance Company of Hanover Ltd (the Insurer) under the Third Parties (Rights Against Insurers) Act 2010, in respect of the Insured’s vicarious liability for the (alleged) wrongful acts of its employee. The door steward was not found to be guilty of murder; rather, he was convicted of assault.

THE INSURANCE POLICY

The Insurer provided the Insured with insurance cover under an English law-governed policy (the Policy). The public liability insurance section of the Policy provided cover to the Insured in respect of “all sums which the INSURED shall become legally liable to pay as compensatory damages and claimant’s costs and expenses arising out of accidental … INJURY to any person.”

However, the Policy included at clause 14 an exclusion for “[l]iability arising out of deliberate acts wilful default or neglect by the INSURED … or EMPLOYEE of the INSURED…”. The effect, the Insurer argued, of this “deliberate acts” exclusion is that the Insurer will not be liable to provide cover under the Policy where the injury arises out of a “deliberate act” of the Insured or, as in the instant case, an employee of the Insured.

THE QUESTION FOR THE SUPREME COURT

At first instance and in the Scottish appeal court, it was decided that the “deliberate acts” exclusion could not apply because the outcome giving rise to liability (such outcome being the customer’s death) was not the intended objective. The Insurer appealed against this decision.

The primary issue for the Supreme Court to determine was whether the Insurer was entitled to rely on an exclusion under the Policy for “liability arising out of deliberate acts” of an employee of the Insured. In other words, was the death of the customer caused by a deliberate act of the door steward within the scope of the exclusion under clause 14 of the Policy, such that the Insurer was not liable to indemnify the customer’s widow? In order to answer this question, the Supreme Court was required to consider the meaning of a “deliberate act.”

The Insurer sought to argue that “deliberate acts” are “acts which are intended to cause injury, or acts which are carried out recklessly as to whether they will cause injury.”

Conversely, the customer’s widow contended that “deliberate acts” are “acts which are intended to cause the specific injury which results, in this case death, or at least serious injury, but that on any view it does not include reckless acts.”

The Supreme Court unanimously dismissed the Insurer’s appeal.

COMMERCIAL CONTEXT AND INTERPRETATION

The Supreme Court commenced its analysis by reference to the principles of interpretation applicable to insurance policies as set out in Wood v Capita Insurance Services Ltd [2017] UKSC 24: “The policy is to be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. This involves a consideration of the words used in their documentary, factual and commercial context. This approach applies equally to exclusion clauses.”

The Supreme Court adopted the view that, if the effect of clause 14 of the Policy was to exclude liability as a result of reckless acts causing injury, “it would seriously circumscribe the cover provided.” The Supreme Court observed that there is a “clear risk that door stewards will use a degree of force in carrying out their duties and that vicarious liability for their tortious acts may result.” Such liability is “inherently likely” in light of the Insured’s business of “Manned Guarding and Door Security Contractors” which, as noted at first instance, would often involve “deliberate physical acts of one kind or another.” The Supreme Court therefore concluded that if it were to accept the Insurer’s stance that “deliberate acts” included recklessness, a “commercially unlikely exclusion” would apply. The result would be that coverage under the Policy would be “stripped of much of its content” as the Policy would fail to respond to any act which was reckless as to the causing of any injury.

The Supreme Court also noted the decision of the Court of Appeal in Hawley v Luminar Leisure Ltd [2006] EWCA Civ 18, in which it was held that “whether the injury was ‘accidental’ was to be considered from the perspective of the [Insured]”, in other words, the employer of the door steward as opposed to the door steward himself.

DELIBERATE ACTS

Against that background, the Supreme Court was tasked with interpreting the meaning of “deliberate acts” in the clause 14 exclusion in the Policy.

The Supreme Court agreed with the Insurer that “deliberate acts” means “acts which are intended to cause injury” as opposed to acts which are intended to cause the specific injury that results from such an act (here, death) as the Policy wording does not differentiate between particular kinds of injuries or injuries of differing seriousness. In order for the exclusion to apply, it is sufficient to deliberately cause the injury. This was deemed to be “the most natural interpretation” of the clause because, to focus on the specific injury intended would give rise to “unsatisfactory and arbitrary results” which would not reflect the intention of the parties when entering into the Policy. The Supreme Court illustrated the inherent difficulty in proving the requisite intention with the following example: a punch intended to break a nose might be excluded if the specific intention was achieved. However, the exclusion would be inapplicable where a punch intended to break a nose caused a greater or lesser injury. Furthermore, it is unlikely in a number of cases that there will be an intention to cause a specific injury.

RECKLESSNESS

Contrary to the assertion of the Insurer, the Supreme Court was restrictive in its approach and held that the “deliberate acts” exclusion in clause 14 of the Policy did not go beyond an intention to cause injury and extend to reckless acts.

The Supreme Court explained that “the starting point is the natural meaning of “deliberate acts,” which is “consciously performing an act intending its consequences,” in other words, carrying out an act with the intention to cause injury. This involves “a different state of mind to recklessness.” The Supreme Court noted that the Insurer could not refer to any case in which “deliberate” was held to encompass recklessness. In the exceptional circumstance that deliberate was in fact intended to include recklessness, the Supreme Court would expect that the wording of the relevant policy would make this clear in the context. As noted above, if the parties intended to incorporate the notion of recklessness into a “deliberate acts” exclusion, such a broad exemption would place a significant limitation on the insurance cover available under the Policy when taking into account the nature of the Insured’s business.

WILFUL DEFAULT OR NEGLECT

The Insurer submitted that, although different words qualify the positive acts and omissions within the scope of the exclusion (“deliberate” qualifying “acts” and “wilful” qualifying “neglect or default”), the wording of the Policy intends that both acts and omissions are qualified in the same way. In support of this position, the Insurer drew upon case law in which “wilful” had been construed to include “recklessness.” In the view of the Insurer, it followed that the meaning of “deliberate” should include “recklessness.”

The Supreme Court rejected this argument on the grounds that: (i) “while the natural meaning of wilful includes deliberate, wilful is capable of having a wider meaning, depending on the context”; and (ii) “wilful may well have a wider meaning where it relates to a breach or duty,” meaning that default or neglect in clause 14 may refer to a breach of duty instead of a mere omission. The meanings of “deliberate” and “wilful” cannot be conflated because an “act” is not the counterpart to a breach of duty.

CONCLUSION ON THE FACTS

Notwithstanding the fact that the Court found in favour of the Insurer on their argument that “deliberate acts” are acts which are intended to cause injury (rather than the specific injury in question), the Insurer could not establish the application of the “deliberate acts” exclusion in clause 14. There was no express or implied finding of intention to cause injury. Rather, “[t]he conviction for assault does not establish any intention beyond an intention to perform the act of assault, namely the neck hold.” The sentencing judge stated that the acts of the door steward were “badly executed, not badly motivated.” The same conclusion would follow in the event that recklessness fell within the scope of “deliberate acts.”

KEY TAKEAWAYS

Policyholders across all classes of insurance can find comfort in the continued approach of the Court in narrowly construing exclusion clauses in insurance policies.

Policyholders should note the following key points:

  • The courts will adopt a narrow interpretation of “deliberate acts” exclusions, based on the natural meaning of the wording in the policy (as opposed to interpreting the exclusion against the party seeking to rely on it)
  • The courts will be alive to the commercial context underpinning insurance policies
  • Although “deliberate” was not held to include recklessness in this case, the parties to insurance policies can use clear language in the contract to reflect their intentions as to the meaning of “deliberate acts”
  • Parties can rely on the helpful guidance provided as to the difference between “deliberate”, “wilful”, and “reckless” acts

Trainee solicitor Charlotte Warke contributed to this LawFlash.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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