Christopher John Hughes and Another v Hogg Insurance Brokers Ltd

JurisdictionEngland & Wales
Judgment Date18 December 1998
Judgment citation (vLex)[1998] EWHC J1218-9
Docket NumberNo. 006099/96
CourtQueen's Bench Division (Administrative Court)
Date18 December 1998

[1998] EWHC J1218-9

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Before:

The Hon. Mr. Justice Carnwath

No. 006099/96

In The Matter of the Continental Assurance Company of London Plc (In Liquidation) and

In The Matter of the Insolvency Act 1986

Between
(1) Christopher John Hughes
(2) David Julian Buchler
Applicants
and
Hogg Insurance Brokers Limited
Respondent

Miss E. Gloster Qc And Mr Stephen Atherton Instructed By D.j. Freeman For The Applicants

Mr G Moss Qc And Miss F. Taube Instructed By Clyde And Co For The Respondents

Hearing date: 1.12.98

This is the official judgment of the court and i direct that no further note or transcript be made

(signed)……………………………………..

The Hon. Mr Justice Carnwath

DATED: 18th December 1998

This is an application seeking directions under section 112 of the Insolvency Act 1986 relating to the winding up of The Continental Assurance Company of London PLC ("Continental"). The two joint liquidators, Mr Hughes and Mr Buchler, take separate sides for the purpose of the application and are respectively applicant and respondent. I understand that Mr Buchler is in part funded by the reinsurers who would be affected by the decision, although they are not parties to the application.

Background

Continental went into creditors' voluntary liquidation on 27th March 1992. It had specialised in writing business which was essentially "short-tail" business, including prize indemnity insurance and reinsurance, and promotional contingency insurance.

The prize indemnity policies with which I am concerned were designed to indemnify football clubs against the additional expense that might be incurred in the event of success, for example, in winning a league divisional championship, gaining promotion to a higher division or qualifying for one of the European competition. The insurance was designed to protect against additional costs, such as higher wages of players and other staff, larger win bonuses and the costs of stadium improvements. There are eight such policies, three relating to English football clubs, four to Italian clubs and one to a Swiss club. They are all related to the 1991/1992 football season, which ended after the company had gone into liquidation. In each case the club won the prize, or achieved the success, against which the insurances had been taken out, and made a claim under the policy after the end of the season.

There is one promotional contingency policy. Such policies are designed to indemnify retailers against the additional expense that might be incurred as a result of a retail promotion being more successful than was anticipated. This policy relates to a promotion of Ovaltine by Wanda Ltd over the period 1991 to August 1992. A summary of the nine contracts is set out in Appendix 1 to this judgment.

The issues

The joint liquidators have valued and admitted claims under the nine contracts on the basis of "a just estimate" of value, pursuant to paragraph 2(2)(b) of Schedule 1 to the Insurance Companies (Winding-up) Rules 1985 ("the 1985 Rules"). In view of the well-established principle that hindsight may be taken into account in making such a valuation (see below), this basis results as I understand it in the full amounts of the claims being admitted. This basis of valuation has been challenged by the company's reinsurers. They contend that they should be valued on a "return of premium" basis, under paragraph 2(2)(a). This would, as I understand it, result in no liability falling on the reinsurers since they are responsible for liabilities relating to claims, not for returns of premium. The joint liquidators intend to pay an interim divided to the company's creditors but cannot do so until these issues have been resolved.

The parties have agreed a list of 10 issues, which are set out in Appendix 2 to this judgment. In summary they can be reduced to two principal issues:-

(1) Do the 1985 Rules apply at all to the liquidation?

(2) If so, does paragraph 2(2)(a) apply?

If the answer to either question is no, it is common ground that the valuation must be on the "just estimate" basis. This would be either under paragraph 2(2)(b) (if the 1985 Rules apply), or under rule 4.86 of the Insolvency Rules 1986 (if the 1985 Rules do not apply). Neither party has contended that there is any material difference in a valuation under paragraph 2(2)(b) and one under rule 4.86.

Before considering the issues it is necessary to say something about the history of the legislation.

History of the Insurance Companies' Legislation

Miss Gloster and Mr Atherton, for the applicant, have provided a useful summary of the development of the legislation from the Life Assurance Act 1872 up to the Insurance Companies Act 1982. I include this as Appendix 3 to the present judgment.

The history was reviewed by Hoffmann J in Transit Casualty -v—PPB [1992] LILR 358. That concerned companies specialising in casualty, professional indemnity and property insurance in the United States. The policies were "occurrence" policies, the liability depending first upon a specified occurrence during the policy period, and secondly the successful claim arising out of that occurrence at a later date. The existence and extent of the liability might not be ascertained until long after the policy had expired. The companies were proposing a scheme of arrangement, the feasibility of which depended on the participation of the Policy-holders' Protection Board, set up to indemnify policy holders prejudiced by insolvency of UK insurance companies. They needed to know the extent of their potential liability, under the relevant rules. The proceedings before Hoffmann J were intended to resolve that issue.

Hoffmann J noted that insurance business had been entirely unregulated until 1870. Claims fell to be valued in accordance with the general law which provided for "a just estimate". As he described it:

"The contingent debt was valued at the date of the winding up order, but subsequent events were taken into account for the purpose of retrospective adjustment of its value. … this did not mean that the company continued to be liable on the policy after the winding up. The winding up order effected the termination of the policy but the subsequent loss was treated as evidence of the value of the contingent claim at the date of the winding up. There was no limit to the period during which hindsight could be used to adjust value of contingent claims except that prior dividends could not be disturbed and ultimately the completion of the winding up would render the distribution final." (p 359).

Hoffmann J described how special rules were introduced by legislation, first to deal with life assurance and then for non-life policies. The so-called "return of premium basis" was introduced for fire policies and certain other categories by the Assurance Companies Act 1909. The rule was expressed in the 6th Schedule as follows:

"The value of a current policy shall be such proportion of the last premium paid as is proportionate to the unexpired portion of the period in respect of which the premium was paid."

In Re Law Car and General Insurance Corporation [1913] 2 Ch 103 the Court of Appeal held that, where the return of premium approach applied, it excluded the hindsight principle. As Hoffmann J pointed out, the Court of Appeal distinguished between "the value of a policy" and "the value of … a liability under such a policy"; he said:

"This language was intended to distinguish between the value of the cover afforded by the unexpired part of the policy at the date of the winding up and the value of the indemnity in respect of events which had occurred before the winding up." (p 360).

The return of premium basis applied only to the former. As to that, he referred to Kennedy LJ's justification of the formula:

"The assured is paid the portion of the premiums which is proportionate to the unexpired portion of the policy, and so receives a sum with which, in respect of that unexpired portion, he can effect a policy with other insurers to cover the same contingencies as were covered by the policy of which he has lost the benefit…" ( [1913] 2Ch at p 134)

Hoffmann J observed:

"It might be objected that this takes no account of the policy holder who suffers a loss before he is able to obtain alternative cover but, as in the case of the valuation of life policies under the 1872 Act, some degree of injustice may have been regarded as acceptable in the interest of a simpler and cheaper winding up." (p. 361).

Hoffmann J then summarised the position as it was under the Insurance Companies Act 1958, immediately before the coming into effect of the 1985 Rules. He said:

"The position under the 1958 Act would appear to be clear. The first task would be to ascertain the "value of the policies", which in accordance with the Law Car case means the value of the unexpired portions of the current policies. These claims would be estimated in accordance with paragraph (4) of the Third Schedule, i.e. as a proportion of the premiums paid. The next stage would be to value the 'liabilities under policies', which means claims for indemnity arising out of relevant events which occurred before the winding up, whether in respect of current or expired policies. The relevant event is that designed by the policy itself as having to occur before its expiry date: in Law Car it was the accident and in the present case it is the occurrence or claim. The Schedule contains no method for the valuation of these claims and they have therefore to be valued on the basis of a "just estimate" under the general law, taking into account events subsequent to the winding up in accordance with Macfarlane's claim."

In Scher -v—Policyholders' Protection Board [1994] 2AC 57, Lord Donaldson MR, adopted the reasoning of Hoffmann J in the Transit...

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