Legal Focus: Wording must be clear, court rules once again

The recent UK Commercial Court judgment handed down on June 9, 2023 in the case of PA (GI) Ltd v Cigna Insurance Services (Europe) Ltd (2023) is a reminder to the insurance market to be very certain and clear in how it drafts indemnity language, to give effect to the rights and obligation it believes they contractually assume.

The case and dispute concerned the legal construction of two contractual indemnities given by the defendant insurer, Cigna, first in a business transfer agreement (BTA) entered into in 2003 and in a deed of warranty and indemnity (DWI) granted in 2006.

The claimant, insurer PA (GI), sued to recover compensation and costs it had paid out and incurred following the mis-selling of payment protection insurance (PPI) policies. The PPI policies were sold to customers between 1991 and 2004 by Next plc, acting as agent for PA (GI) as the insurer.

Relevant background was the corporate history concerning the parties. In 1996, PA (GI) became an indirect subsidiary of RSA as a result of the merger between the Sun Alliance and Royal Insurance groups and in September 2004 it was sold to the Resolution Life Group.

Cigna was established as part of a management buy-out from RSA in 2003 and it was under the BTA that RSA sold certain insurance operations to Cigna, including the PPI policy business that was being managed on behalf of Next. 

In 2006, PA (GI) transferred its creditor insurance business, including the PPI business, with court approval to Groupama. It was in connection with that business that Cigna entered into the DWI.

Complaints of mis-selling were first made after 2006 and the entering into of the DWI. Both the Financial Ombudsman and then the High Court ultimately ruled PA (GI), not Groupama, was the correct respondent to those complaints and PA (GI) remained liable.

PA (GI)’s liabilities for the PPI mis-selling had not transferred to Groupama. Consequently, PA (GI) claimed against Cigna, arguing it had the benefit of indemnities Cigna had given under the BTA or DWI.

Cigna’s principal defence was PA (GI)’s liabilities arose because of negligence and the indemnities properly construed did not extend to indemnifying for negligence. Cigna relied on the case Canada Steamship Lines Ltd v The King (1952). Cigna argued this established an underlying legal principle based on what is regarded as the “inherent improbability” of one party agreeing to assume liability for another party’s wrongdoing and so such inherent improbability requires clearly expressed words to be used for one party to be held liable in agreement for the wrong­doing of the other.

The Canada Steamship judgment is more than 80 years old. PA (GI) argued the principles enunciated from that case were out of date and were to be disregarded in construing the indemnity wording. Specifically, the word “negligence” did not have to be used expressly in indemnity wording to provide for an indemnity arising from liabilities incurred negligently. All the court had to do was look at the words used by the parties to see what was meant.

Looking at more recent case law, the judge broadly concurred. She agreed, so far as covering liabilities arising from negligence was concerned, the court should bear in mind a party is unlikely to have agreed to give up a valuable right it would otherwise have had without clear words.

However, no higher threshold than that was implied by the “inherent improbability” principle. It is not a pre requisite for express words to be used in an indemnity wording to exclude liabilities for negligence.

Accordingly, the PPI liabilities were indeed caught by the wording of the indemnities given on proper construction. Other contractual provision supported this construction. Of note was that elsewhere in the agreements, where the parties wanted to exclude liability for negligence, this was expressly stated. The construction made commercial business sense.

Cigna also argued PA (GI) could enforce the indemnities even though it was no longer in the corporate group to which the indemnities were given. The judge disagreed. On construction there was nothing to suggest such limitation by the language used.

It made common business sense for the indemnity to cover subsidiaries that were in the group when the indemnities were given, but left that group subsequently. Furthermore, PA (GI) could also sue directly further to the Contracts (Rights of Third Parties) Act 1999 because the indemnity agreements on construction permitted PA (GI) to sue under them.

The case confirms if a party wishes to ensure certain construction outcomes, clear language is absolutely needed. Of course, parties may not always fully appreciate what factual scenarios may play out following agreement. 

While not overruling the Canada Steamship case, and the principle of inherent improbability, the case makes clear an omission to state expressly certain types of liability are included within an indemnity will not necessarily be fatal to arguing they are.

Also, it is often the case contracting parties exclude operation of the 1999 act but in this case they did not. This is therefore a relatively rare example of a case where the act was deployed to support the enforcement of rights by, on its face, a third party to contractual agreements. 

Stephen Netherway is a partner at Devonshires