The UK House of Lords has overturned a Court of Appeal decision as to whether the avoidance of a composite policy in respect of one party negates another party’s cover

Brit Syndicates Ltd v Grant Thornton International UKHL 18 concerned an appeal by the insured, GTI, against a Court of Appeal decision in favour of its insurers. GTI was an umbrella corporation which managed various member firms practising under the Grant Thornton name. GT Italy was a named member firm in the schedule to a professional indemnity policy. GTI was not itself listed in the schedule but Extension 3 to the policy provided that it was included as an insured firm solely in respect of claims made against it arising from claims made against a member firm. Following notification of a claim against GT Italy and GTI arising out of the well publicised Parmalat frauds, the claimant avoided GT Italy’s insurance for non-disclosure and sought a declaration that there was no coverage available to GTI on the basis that, since GT Italy was to be treated as never having been insured, the claim against GT Italy had not been made against a member firm for the purposes of Extension 3. At first instance it was held that there was no reason why the composite nature of the insurance should not extend to GTI. The words “member firm insured by the terms and conditions of this policy” in Extension 3 were found to be descriptive of the member firms concerned and the extension continued to provide cover to GTI even if the policy had been avoided against GT Italy. Click here to read more about the High Court decision.

On appeal, it was held that the Extension 3 wording was not as descriptive as the High Court had considered. The proper interpretation was that the word “insured” meant “covered”, so that GTI’s cover was limited to claims against it that arose out of a claim against a member firm covered by the policy. A claim under a policy that had been validly avoided would not be covered since there would be no existing cover. Extension 3 was intended to be “parasitic on claims already covered by the policy” and was not intended to provide independent and far-reaching cover to GTI. Click here to read more about the Court of Appeal decision.

The House of Lords has now overturned the Court of Appeal decision, finding that the High Court’s construction of Extension 3 was to be preferred. The effect of the wording was to define who was an insured firm and who could therefore take advantage of the cover afforded by the insuring clauses in respect of claims made directly against them. Extension 3 was to be construed as providing cover to the organisation as a whole, even if the policy had been avoided in respect of the member firm against which a claim had been made. This decision confirms the composite nature of most professional indemnity programmes, whereby each insured’s cover is protected from the conduct of the others.