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Your exclusion clause won't benefit from hindsight

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In Nesbit Law v Acasta Insurance the Court of Appeal held that an insurer could not rely on an exclusion clause in order to avoid paying out under its policy.

The claimant personal injury solicitors were members of a funding scheme run by the defendant insurer and a bank. On joining the scheme the solicitors' firm entered into: (i) an umbrella agreement with the bank; (ii) irrecoverable costs loan agreements (ICLAs) for each loan with the bank; and, for each ICLA, a financial guarantee indemnity (FGI) policy underwritten by the insurer.

Each FGI policy contained an exclusion clause stating that the insurer would not cover irrecoverable costs “where the terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by [the solicitors] and [the bank] to repay a Loan.”

The solicitors' firm got into financial problems and the bank terminated the umbrella agreement. The solicitors' firm entered a refinancing agreement with the bank but then defaulted on that agreement. The solicitors' firm (who had been sued by the bank) brought a claim against the insurers under the FGI policies.

The Court of Appeal said that the exclusion clause did not exclude breaches of the refinancing agreement and only applied to the original ICLAs. This was because:

  • The funding scheme was a highly structured arrangement established by the umbrella agreement.
  • The refinancing agreement was a completely new arrangement that had been entered into almost a year after the scheme had ended.
  • The scheme documents did not envisage that a global refinancing arrangement would replace the umbrella agreement after the funding scheme ended and there was nothing to indicate that the parties contemplated such a refinancing. The insurer’s interpretation was driven by hindsight (it had only taken the exclusion point just before trial).

There have been a number of cases in recent years where the courts have held a party to an exclusion clause in a negotiated commercial contract, however, that does not mean that the courts will allow hindsight to make a clause mean what one party claims business common sense says it means.