HLB Kidsons (A Firm) v Lloyd's Underwriters subscribing to Lloyd's policy No 621/PK1D00101
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lord Justice Toulson,Sir Richard Buxton |
| Judgment Date | 05 November 2008 |
| Neutral Citation | [2008] EWCA Civ 1206 |
| Docket Number | Case No: A3/2007/2450 A3/2007/2546 |
| Court | Court of Appeal (Civil Division) |
| Date | 05 November 2008 |
[2008] EWCA Civ 1206
Before: Lord Justice Rix
Lord Justice Toulson and
Sir Richard Buxton
Case No: A3/2007/2450
A3/2007/2544
A3/2007/2546
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT QUEEN'S BENCH DIVISION
MRS JUSTICE GLOSTER
Mr Nicholas Davidson QC & Mr William Godwin (instructed by Messrs Holman Fenwick & Willan) for the 1st Appellants
Mr Michael Harvey QC and Mr John Greenbourne (instructed by Herbert Smith) for the 2 nd Appellant
Mr Graeme McPherson QC (instructed by Eversheds) for the 3 rd Appellant
Mr Gavin Kealey QC and Mr Craig Orr QC (instructed by Fishburns) for the 1 st to 5 th Respondents
Hearing dates: 17 th 18 th 19 th & 20 th June 2008
Lord Justice Rix:
Introduction
This litigation is, as the judge, Mrs Justice Gloster, remarked, a contest about notification. It arises out of a professional indemnity insurance policy, made on a “claims made” basis, incepting on 1 May 2001 and terminating on 30 April 2002 (the “policy”), under which the claimant, here the primary appellant, a firm of chartered accountants, formerly known as HLB Kidsons, was the insured (“Kidsons”). As of 1 April 2002, shortly before the expiry of the policy, Kidsons merged with another firm of chartered accountants, Baker Tilly, and the merged entity took the name of Baker Tilly.
There are in fact three policies and five defendant underwriters, now respondents to this appeal (the “underwriters”). Nothing turns on any distinction between the policies. One is a Lloyd's policy 621PK1D00101 subscribed to by lead syndicate 839, second lead syndicate 683, and a following market of other syndicates (collectively the first defendants and here the first respondents). The second is an IUA policy to which the Underwriter Insurance Company Limited and Royal and Sun Alliance Insurance plc subscribed, respectively the second and third defendants and here the second and third respondents. The third was a Companies Collective Policy to which International Insurance Company of Hannover Limited and Great Lakes Reinsurance (UK) plc subscribed, respectively the fourth and fifth defendants and here the fourth and fifth respondents. The two company policies incorporated the terms of the Lloyd's policy.
Apart from Kidsons and the underwriters, there are two other parties to this appeal. One is Millers Professional Risks Limited, who were Kidsons' insurance brokers and are now called Millers Insurance Services Limited (“Millers”). Millers are seventh defendants, but in this appeal appellants alongside Kidsons as third appellants. The other is CMS Cameron McKenna, a firm of solicitors which provided Kidsons with a claims handling service (“Camerons”). Camerons are sued as sixth defendants, but here appear, like Millers, as (second) appellants alongside Kidsons.
The essence of a “claims made” policy is that it provides cover for claims first brought against the assured during the policy year. As is common with such policies, however, it extends cover to claims first brought against the assured after the policy year provided such claims arise out of circumstances previously notified to the insurers of which the assured became aware during the policy year. The rationale of such policies has been described in J Rothschild Assurance Plc v. Collyear [1999] 1 Lloyd's Rep IR 6 at 22 and in Friends Provident Life and Pensions v. Sirius [2005] 1 Lloyd's Rep IR 135 at 142.
In the present case the clause in question by which this extension of cover was granted was General Condition 4 (“GC4”) which provided as follows:
“The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof.”
GC4 is central to the issues in this litigation, in which Kidsons sue underwriters for a declaration that they are entitled to be indemnified in respect of claims which have been made against them, after the expiry of the policy period, by clients in relation to the activities of Solutions @ Fiscal Innovation Limited (“S@FI”), a company formerly owned and managed by Kidsons, which marketed tax avoidance schemes. S@FI's work was known as “fiscal engineering”. The essence of these claims, or many of them, is said to be that the clients had negligently been advised to enter into flawed schemes (“mis-selling” claims). The essential issue in this appeal is whether Kidsons gave to the underwriters effective notification of circumstances for the purposes of GC4 such as might cover such subsequent claims or some of them. Kidsons submit that they did, and that such notification embraced the full extent of concerns relating to the whole of S@FI's fiscal engineering work, both as regards the tax schemes marketed and as regards the implementation of such schemes, which had been voiced by a tax manager employed in Kidsons' Edinburgh office by the name of Mr Iain Torrance.
In 2001 Mr Torrance persevered in forcing to the attention of the S@FI board and of Kidsons' national executive committee (“NEC”) his concerns that the tax avoidance schemes or “products” marketed by S@FI were fundamentally flawed and that the administrative procedures by which they were implemented were also liable to fall foul of the Inland Revenue. His strongly expressed criticisms, summarised in his memoranda of 23 and 24 August 2001 and elsewhere (eg “recipe for disaster”…”DOS, SHEP Selling, the CRC Scheme and the Conditional Share Award scheme…all represent unacceptable tax avoidance…It represents an assault on the Treasury…”), were considered at a NEC meeting on 29 August and at a specially convened S@FI board meeting on 30 August. As a result, the NEC resolved to set up an independent review body (or “IRB”) to investigate and review Mr Torrance's complaints, starting with a product known as the Discounted Option Scheme (or “DOS”), about which Mr Torrance had a particular concern, especially relating to its implementation. The S@FI board concurred with that decision and also resolved to suspend the marketing of DOS. The S@FI board also resolved to give notice of circumstances to its insurers. The board minutes recorded:
“In regard to professional indemnity, circumstances existed that might lead to a claim, particularly in relation to the discounted option schemes, and a notification should be made to PII underwriters”.
In the immediate run-up to these meetings Mr Colin Tyre QC, Scottish tax counsel, had been consulted on 20 August 2001 in relation to DOS and in particular its implementation: two such cases had been put before him. His advice broadly supported Mr Torrance's views on the problematic residency of the IOM companies which were set up as part of the scheme and thus of the returns and disclosures to be made to the Inland Revenue if as a result their residency was to be regarded as being in the UK. On 27 August Mr Tyre prepared a written opinion regarding the advice he had given in consultation. His opinion was circulated to the NEC on 30 August. It caused great consternation. He said that if full disclosure was not made, there was a risk that the Inland Revenue would take criminal action. He also opined that the merits of the scheme were open to challenge by the Inland Revenue.
Kidsons' letter of 31 August 2001
In the event a letter was drafted by Mr T J Patten, Kidsons' national partnership secretary, in collaboration with Mr Flaxman, an independent insurance consultant who regularly advised Kidsons on professional indemnity matters. This letter, dated 31 August 2001, is at the heart of the litigation and of this appeal. It was addressed to Mr Marcus Elwes who was a placing broker at Millers. Kidsons' claims broker at Millers was Mr Steve Salter, who will figure later.
The letter (the “31 August letter”) read as follows:
“S@FI Limited
You will recall that the fiscal engineering activity of the practice has been channelled through S@FI, which is manned in entirety by partners and staff of HLB Kidsons. Fiscal engineering work has been developed significantly over the last year or two and now forms about 7% of the turnover of the practice.
The products marketed by S@FI have all been validated by virtue of Counsel's opinion (in some cases two opinions) but a tax manager in Edinburgh, Iain Torrance, has expressed the view that the Inland Revenue, if minded, could be critical of some procedures followed in certain cases.
The Board of S@FI and the National Executive Committee of HLBK intend to investigate this view fully and have approached Ray Armstrong, who I gather has been a senior Inland Revenue official and has retired as a partner in PWC, to invite him to carry out the investigation and submit a report.
The Board has taken the view that this might be regarded as material information for insurers. There is no sign of a claim arising at the present time but the Board feels that it is appropriate in the circumstances to advise what is happening and to take your instructions.”
It was submitted at trial by Mr Gavin Kealey QC on behalf of the underwriters, and accepted by the judge, that there is no express mention in that letter –
“(a) of any possible issue about the validity or essential technical efficiency of [S@FI's] products; or (b) of any possible issue about the fundamental...
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