Spot the wording error

How small mistakes in a policy’s wording can have big consequences.

Poorly drafted insurance policies can lead to nasty surprises when a dispute ends in litigation, especially if the disagreement is over the limits of indemnity available, as a recent example proves.

“the total amount payable…in respect of…all claims … consequent on or attributable to one source or original cause shall not exceed the limit of liability stated in the Schedule”. 

This resulted in £10 million less cover for the client than they thought and they were liable to pay an extra £725,000 in excesses.

The case

Spire Healthcare Ltd. v Royal and Sun Alliance Insurance plc [2018] EWCA Civ 317 concerned a private healthcare company facing claims from over 700 patients alleging that a surgeon had carried out unnecessary and negligent operations.  

The key issue

Whether the claims resulting from the consultant’s activities could be aggregated – that is, whether the multiple claims arose from a single cause.

The wording

A poorly drafted and untitled clause in the policy attempted to address aggregation, by providing that “the total amount payable…in respect of…all claims … consequent on or attributable to one source or original cause shall not exceed the limit of liability stated in the Schedule”.  The word “claim” was not defined and there was no similar clause relating to the policy excess.

Spire’s liability policy schedule showed an indemnity limit of £10 million for any one claim, subject to a total policy limit for all claims of £20 million.  The excess was shown as £25,000 for each claim, but the “aggregate insured’s contribution” would be capped at £750,000 if there were numerous claims.

The word “claim” was not defined and there was no similar clause relating to the policy excess.

Spire argued that its indemnity limit should not be aggregated while its excess should. This would give them a full limit of £20 million for just one excess payment of £25,000. 

The judgment

The judge decided that aggregation clauses should be construed neutrally, without any assumption that they should favour one party or the other. It’s a well-known fact that aggregation benefits the insured when applied to the excess, whereas it favours the insurer when it comes to the limit of indemnity.  

The judge held the provision noted above was effectively an aggregation clause, meaning that all of the claims against the surgeon should be treated as one claim and Spire would therefore only be able to recover £10 million from its policy.

The judge decided that aggregation clauses should be construed neutrally, without any assumption that they should favour one party or the other.

The judge also ruled that Spire’s excess was not to be aggregated in the same way – there would be no “parity of aggregation”.  Spire would have to pay an excess of £25,000 on each claim up to the capped amount of £750,000 specified in the policy.

So, Spire, which had argued it was entitled to cover of £20 million in return for payment of a single excess of £25,000, was held to have only £10 million and be liable to pay £750,000 in excesses.

The lessons

This case turned on the meanings of two everyday words: “claim” and “event”.  Both the original trial judge and the Court of Appeal recognised that policy wordings are often not as clear as they could be but that the actual words used in them are crucial. If those words effectively amount to an aggregation clause then they should be treated as such, even if they are not explicitly called an aggregation clause.

Policy wordings are often not as clear as they could be but that the actual words used in them are crucial.

Also, the Court decided that there should not be a general presumption that aggregation should work in the same way for both limits and excesses; and it emphasises the need for insurers, brokers and insureds to be absolutely clear about their intentions.