Court of Appeal interprets scope of a policy exclusion
The appellant issued a series of Financial Guarantee Indemnity ("FGI") insurance policies to the respondent firm of solicitors. Each policy related to a loan agreement entered into between the solicitors and a bank. The loans financed an underlying litigation funding scheme and there was a framework "umbrella" agreement between the solicitors and the bank. When the solicitors ran into financial problems, the bank terminated the umbrella agreement and entered into a Refinancing Agreement which refinanced the earlier series of loans.
The solicitors subsequently claimed under the insurance policies (following a breach of the Refinancing Agreement) and the insurers sought to rely on a policy exclusion which excluded cover "where the terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by [the solicitors] and [the bank] to repay a Loan". At first instance, the judge held that this exclusion did not cover the Refinancing Agreement and the insurer appealed.
The Court of Appeal has now rejected that appeal. The insurer had argued that even if the first part of the exclusion clause referred only to the individual loan agreements and the umbrella agreement, the second part was wide enough to extend to the breach of any agreement to repay the loans (ie the Refinancing Agreement"). Although the Court of Appeal said that that interpretation was "beguilingly attractive for its simplicity", it went on to find that regard had to be had to the context of the litigation funding scheme. Furthermore, because it held that the second limb was ambiguous, it was also permissible to look at business common sense (ie the approach adopted in Rainy Sky v Kookmin where it was said that "where there are two possible constructions, the court is entitled to reject the one which is unreasonable and, in a commercial context, the one which flouts business common sense").
The Court of Appeal held that nothing in the original litigation funding documentation had envisaged a global refinancing agreement replacing the umbrella agreement and other documentation after the termination of the litigation funding arrangements themselves: "The Refinancing Agreement was a completely new arrangement between [the bank] and [the solicitors] entered into nearly a year after the litigation funding scheme had ended so as to find some means by which [the solicitors] could repay its outstanding debt. There were still outstanding loans and personal injury claims, but no new loans or FGI Policies were being entered into". Nor was there anything in the policies themselves to indicate that the parties contemplated a future refinancing.
COMMENT: There is no discussion in the judgment as to whether the words "including but not limited to" extended further the types of agreements which might fall within the second limb, but presumably the Court of Appeal did not feel that they did. Of crucial importance to the Court of Appeal here, it seems, was that the particular agreement in question wasn't felt to be within the contemplation of the parties when the policies were entered into. That might seem somewhat harsh, given that refinancing agreements are not an uncommon feature in a loan context. It is unclear whether a further appeal will be brought.
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