Scope of an indemnity
PA v Cigna Insurance (High Court) [2023]
Indemnities are now a regular feature of commercial contracts so how they are interpreted is important
Facts:
In 2003, R&SA sold certain insurance operations to Cigna under a Business Transfer Agreement (BTA). Cigna provided to R&SA and members of the Seller’s Group, which at that time included PA, a wide indemnity in relation to potential liabilities concerning those insurance operations. In 2004, PA was sold to the Resolution Life Group, meaning it was no longer a member of the Seller’s Group.
The terms of the indemnity provided that “The Buyer shall (a) assume liability for and indemnify and keep indemnified the Seller or any other member of the Seller's Group [in respect of Liabilities of the Transferring Business except those expressly excluded]”.
Complaints of mis-selling PPI policies were subsequently made to the Financial Ombudsman Service (FOS). The FOS designated PA as the correct respondent to the complaints. Ultimately PA resolved the complaints, which were dealt with through a redress scheme.
The key question was whether those redress payments and associated costs and expenses could be passed by PA to Cigna under the indemnity in the BTA. Cigna raised a number of reasons why they said the liabilities could not be passed to it, most importantly they argued:
- the indemnity did not extend to liabilities arising from the negligence of PA, the indemnified party, in part because there was no express reference to negligence in the indemnity;
- PA could not rely on the indemnity because it was no longer a member of the Seller’s Group;
- the indemnity could only be triggered by actual legal liability (as determined by the courts) and not agreed settlements.
Decision:
The court held that PA could rely on the indemnity. There was no need for there to be an explicit reference to ‘negligence’ within the drafting of the indemnity for it to extend to negligence.
The PPI mis-selling liabilities were within the scope of the relevant indemnity on the proper interpretation of the words used. They fell within the ‘natural meaning’ of the clause in question.
The judge held that PA was not precluded from claiming under the indemnity because it was no longer a member of the relevant corporate group. There was no basis from the language of the indemnity to conclude that it was intended to be limited to subsidiaries which at the time of the claim were a member of the Seller’s Group. Business common sense supported the interpretation that the indemnity should benefit the subsidiaries who at the time of the BTA were part of the Seller’s Group, whether or not they remained a subsidiary at the time of the loss or claim. PA could enforce its rights under the indemnity under the Contracts (Rights of Third Parties) Act 1999.
The judge held that the indemnity extended to actual liabilities established by the courts and a reasonable acceptance of liability by PA (including by way of a reasonable and bona fide settlement of claims/complaints). The question of whether a settlement is ‘reasonable’ is a question of fact.
Repeatedly, the court made reference to the fact that the relevant agreement was a professionally drafted contract and therefore the breadth of the language of the indemnity should be given considerable weight. Commercial common sense was also said to support a broad interpretation of the language to encompass reasonable settlements.
The judge accepted that the indemnity would not extend to matters involving the fraud or dishonesty of the sellers (or their representatives).
Points to Note:
- This case is an interesting affirmation and application of the rules of contract interpretation in the context of a indemnity and the way in which the courts approach the importance of the words used in conjunction with the ‘factual matrix’ and ‘business common sense’. Historically judges would typically interpret indemnities very restrictively.
- One issue, mentioned only very briefly in the judgment, was that the indemnifying party did not have control of the settlement of third party claims. This will often be very important in the context of indemnities and is often addressed in the express language of an indemnity.