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Rectifying Slip-Ups
London & Bermuda Newsletter
Rectifying Slip-Ups
Errors in preparing a slip form the basis of all too many disputes before the courts. (Sedgwick reported on one such case in the Spring issue of its London & Bermuda Newsletter.) The fallout takes a fairly uniform shape: insurers seek to stand by their rights as set out in the slip; the insured denies the insurer’s reading, or argues the slip is vitiated by a mistake which it says the court should rectify; the broker, having been sued by the insured just in case the insurer is right, frequently sides with its client.
The problem for an insured seeking to “rectify” the slip is that courts normally treat the slip as a groundbreaking stage in contract formation. It marks the quantum leap from non-binding negotiations to the birth of a freestanding creature of law. It has a life (and meaning) of its own, independent of the parties’ opinions on the matter.
The slip cannot be a mere transcription of terms set out elsewhere (e.g., in negotiations). That would transfer the touchstone for interpreting the slip away from the slip itself to something external and altogether more evidentially murky.
This means the insured may struggle to persuade the court to look beyond the four corners of the document, and compare it with what was negotiated. Even if it succeeds in persuading the court to do this, it then faces a new hurdle: to prove that the prior common intention persisted all the way up to the slip stage. Because of the primacy of the slip, the court will often conclude not that a discrepancy between negotiated terms and slip indicates a mistake, but that the parties simply had a change of heart, opting for the terms in the slip.
However, the Court of Appeal was prepared to take a versatile approach in Dunlop Haywards Limited (DHL) and Erinaceous Commercial Property Services Limited v Erinaceous Insurance Services Limited. The case, which shows a flexible approach to the rule, also demonstrates how crucial it is for brokers to take particular care when checking slips.
Facts
The insured property management company instructed its broker to renew group professional indemnity insurance. Ostensibly following instructions, brokers agreed to terms with underwriters, which were then acknowledged in a “firm order noted” endorsement (FON).
However, the broker then prepared a slip containing a limitation clause that was not present in the FON. Following a loss, excess insurers relied on the limitation clause to deny liability. The insured sued the broker for failure to procure the right cover.
The broker submitted that excess insurers were wrong about the scope of the limitation clause, and that the insurance provided the cover requested. Alternatively, it said the court should rectify the slip to accord with the parties’ common intentions.
Dispute between broker and excess insurers
The broker sought to join excess insurers to the proceedings. Excess insurers resisted on the basis that the broker’s case on construction and rectification was not seriously arguable, and that it would accordingly not be “desirable” for them be added as parties.
First instance decision
At first instance, the court adhered closely to the primacy-of-the-slip approach. If the limitation was absent from the quotation but present in the slip, that was most likely because the parties changed their minds. The court held the rectification claim was so weak that the underwriters should not be required to participate in the trial. Execution of the slip was not merely a matter of recording terms of the FON contract. It constituted a fresh contract.
As to construction, joinder was undesirable as the parties’ intentions were to be ascertained “objectively” from the terms of the slip. Subjective evidence of actual intentions was unnecessary.
Since this related to an interlocutory decision, the Court was not determining whether the case for rectification had been made out. It only had to consider whether the rectification case met the lower test of being seriously arguable.
The broker appealed.
Court of Appeal’s decision
The Court of Appeal allowed the appeal and ordered excess insurers to be joined to the proceedings.
In reaching this conclusion, the Court of Appeal considered the background and circumstances of the insurance renewal and the intentions of the parties behind the original quote and the FON endorsement.
The Court took a more flexible approach on rectification. A key reason for this was that it was pretty clear that the terms of the renewal were almost wholly agreed upon by the time of the slip. Taking into account the prior year’s policy, the fresh quotation, the FON, the gradient of the leap to slip was not quite as acute as that where the slip followed extensive renegotiation. In fact, the very circumstances of the preparation of the slip indicated, on this occasion, it was little more than a transcription. Thus, for example, preparation of the slip was placed in the hands of more junior members of the broker.
Other circumstantial matters were relevant. Thus, a name change of one of the insured companies seemed objectively likely to give rise to error. Additionally, the presence of the alleged limitation clause lacked commercial common sense, given the claims made basis of the policy. There was also a good arguable case that the lead underwriter considered the slip continued on the same basis as the FON.
Lessons to be learned
It is encouraging to see the Court of Appeal using a case-by-case approach, refusing to be hide-bound by rules of thumb which can threaten to become straitjackets.
The Court of Appeal saw clearly the need to break a potential vicious circle. It cannot be right that the courts should decide every rectification case on the basis that the disputed term cannot be rectified because it is different from the prior agreement and thus represents a deliberate superseding of that prior agreement. If that were right, then there would never be a case for rectification.
That said, although the broker has secured a victory in joining the excess insurers to the proceedings, it still faces a long road ahead. The parties must return to court in order to determine the meaning of the limitation clause, which will in turn determine liability under the insurance contract and of the broker.
The case serves as a warning of the consequences that can arise from the transition of insurance agreements onto the final slips when there is a discrepancy between the two. Here, the addition of one small clause in the slip that was not present in the FON led to complex litigation.
Dunlop Haywards (DHL) Limited and Erinaceous Commercial Property Services Limited v Erinaceous Insurance Services Limited ([2009] EWCA Civ 354)
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