Discovery Land Company LLC -v- Axis Specialty Europe SE: A reminder that the market needs a specific Pre-Action Protocol (or does it?)

Go Back 01.12.21 INSIGHTS

The purpose of all Pre-Action Protocols generally is to try and assist the parties in resolving claims without the need for proceedings, which includes the parties exchanging sufficient information to understand each other’s case, to make informed decisions about how to proceed and to reduce the cost of claims.

The decision of HHJ Railton QC in Discovery Land Company LLC -v- Axis Specialty Europe SE [2021] whilst not unsurprising in its outcome following the Defendant’s application to amend it Defence to the claim, does raise broader questions regarding what is expected of the parties to an insurance coverage dispute prior to the commencement of litigation.

The facts

The case concerned a professional indemnity insurer’s late amendment to its defence by seeking to deny liability based on “dishonest or fraudulent acts … committed or condoned by the insured” [‘the condonation defence’].  The defendant insurer took five months to respond to the claimants’ pre-action letter of claim and, whilst denying the claim on one ground, reserved its position on the condonation defence whilst it continued to investigate the claim. 

The claimants then issued proceedings and, in its defence, the defendant denied the claim on its original ground but maintained its right to amend the defence to plead the condonation defence at a later stage when it had sufficient information.

The trial was listed for a 6-day hearing in July 2022 and, in July 2021, the defendant applied to amend its defence to rely upon the condonation defence. 

The issues

The claimants resisted the application. At the heart of its complaint was the suggestion that the defendant had not taken the terms of the Practice Direction – Pre-Action Conduct and Protocols seriously and that had caused prejudice to the claimant it was said.

The claimants argued the amendment was put forward late in the day because the defendant’s investigation of the condonation defence had not been initiated during the pre-action stage.  It only commenced the investigation after proceedings were issued, when some information regarding the condonation defence was available much earlier. The defendant had sat back and waited to see if the claimants would issue proceedings. 

Principles to be applied

The principles to be applied in considering the Defendant’s application to amend were not in dispute. They were conveniently summarised by Carr J in Quah Su-Ling v. Goldman Sachs International [2015] EWHC 759 (Comm) as follows (at [38]):

  1. whether to allow an amendment is a matter for the discretion of the court. In exercising that discretion, the overriding objective is of the greatest importance. Applications always involve the court striking a balance between injustice to the applicant if the amendment is refused, and injustice to the opposing party and other litigants in general, if the amendment is permitted;
  2. where a very late application to amend is made the correct approach is not that the amendments ought, in general, to be allowed so that the real dispute between the parties can be adjudicated upon. Rather, a heavy burden lies on a party seeking a very late amendment to show the strength of the new case and why justice to him, his opponent and other court users requires him to be able to pursue it. The risk to a trial date may mean that the lateness of the application to amend will of itself cause the balance to be loaded heavily against the grant of permission;
  3. a very late amendment is one made when the trial date has been fixed and where permitting the amendments would cause the trial date to be lost. Parties and the court have a legitimate expectation that trial fixtures will be kept;
  4. lateness is not an absolute, but a relative concept. It depends on a review of the nature of the proposed amendment, the quality of the explanation for its timing, and a fair appreciation of the consequences in terms of work wasted and consequential work to be done;
  5. gone are the days when it was sufficient for the amending party to argue that no prejudice had been suffered, save as to costs. In the modern era it is more readily recognised that the payment of costs may not be adequate compensation;
  6. it is incumbent on a party seeking the indulgence of the court to be allowed to raise a late claim to provide a good explanation for the delay;
  7. a much stricter view is taken nowadays of non-compliance with the Civil Procedure Rules and directions of the Court. The achievement of justice means something different now. Parties can no longer expect indulgence if they fail to comply with their procedural obligations because those obligations not only serve the purpose of ensuring that they conduct the litigation proportionately in order to ensure their own costs are kept within proportionate bounds but also the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionately, and that the courts enable them to do so.
The Decision

The judge held that it was not unreasonable for the defendant to put off taking stock of the claimant’s position before making further investigations because the costs of making a full investigation would be expensive and time consuming (as had proven to be the case), particularly where the Defendant had reserved the right to do so expressly in correspondence. It was therefore entitled to know whether the claimants would issue proceedings before embarking on further and costly investigations.

Fortunately, for the defendant, no adjournment of the trial date would be required if the amendment was allowed.  There was sufficient time for the necessary steps to be taken following the amendment and the claimant had a real prospect of success.

At first glance it seems that the defendant was able to ride roughshod over the Protocols with impunity.  However, this belies the unusual circumstances of the case because the solicitors IT servers had to be reconstituted at considerable expense, the SRA had intervened and closed the solicitors practice, and there was then a lengthy and costly review of the files by independent counsel before they could be released to the defendant.  All this meant the costs of investigating the claim  by the defendant fully would be substantial and take considerable time. It was therefore not unreasonable for the defendant to hold off from incurring the very costly further investigations until it was known whether the claimants were pursuing the claim. Had it not been for these factors the claimants’ arguments may have carried more weight.

Wynterhill Comment

The outcome was not unsurprising on the facts with such sums at stake nor was the Claimants’ stance to the Defendant’s application to amend. It is always frustrating as policyholder lawyers to overcome an initial coverage defence articulated by insurers or their legal team in the pre-action stage, only to be met with further and more considered arguments following an initial challenge or more importantly after proceedings have been commenced and the potential cost risk to the policyholder has been activated.

The Defendant’s alleged failure to take the Pre-Action Protocol seriously raises wider questions about whether insurance coverage disputes should be shoe-horned into the general Practice Direction – Pre-Action Conduct and Protocols. The Pre-Action Protocol was not drafted with insurance coverage disputes in mind and, given the specific issues that arise in such disputes, arguably it is not fit for this purpose.  We believe there should be a bespoke Pre-Action Protocol for insurance coverage disputes that takes into account the many nuances involved with these disputes.

Wynterhill LLP

Dan Brooks and Roger Jones are Partners and coverage lawyers specialising in difficult or unusual coverage disputes for policyholders. They work with Top 100 Insurance Brokers across a broad spectrum of product lines.

This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.

This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.