This is an appeal from the judgment of Langley J given on 3^rd March 2006 by which he gave summary judgment in favour of Grant Thornton International (GTI) in an action brought against them and Italaudit S.p.A. (GT Italy) by insurers Brit Syndicates Limited (Brit). The summary judgment was by way of dismissal of Brit’s claim against GTI.

Under a policy dated 21^st January 2004 Brit had insured GTI member firms including GT Italy, and had agreed by extension 3 to extend cover to GTI in the following terms:-

It was the true construction of this extension with which Langley J was concerned and on which the appeal turns.

Brit had issued proceedings claiming (i) a declaration against GT Italy that they, Brit, had successfully avoided the policy as against them; alternatively (ii) a declaration against GT Italy that, by reason of a breach of warranty on the part of GT Italy, Brit were discharged “prior to the making of” or “at the inception of” the insurance; and (iii) a declaration against GTI that, by reason of the valid avoidance as against GT Italy and/or breach of warranty of GT Italy, GTI is not “included as an assured firm in respect of claims made against [it] arising from claims made against GT Italy,”, that GT Italy is not a “member firm of GT International insured by the terms and conditions of insurance”, and that GTI was thus “not entitled to be indemnified by [Brit] in respect of claims brought against it arising from claims made against GT Italy.”

Brit in their points of claim relied purely on avoidance or breach of warranty as an answer to any claim that GT Italy might have had, and as an answer to the claim being made by GTI. Brit obtained judgment in default against GT Italy and then made an application for summary judgment against GTI relying on their avoidance of the policy as against GT Italy and/or their discharge from liability as against GT Italy for breach of warranty. GTI’s application was responsive, and was to the effect that Brit had no real prospect of succeeding against it insofar as it relied on avoidance and/or breach of warranty as against GT Italy.

It followed that no issue was actually joined as to whether GT Italy ever would have had a claim under the policy, even if Brit had not taken the avoidance or breach of warranty points, and/or as to what the effect of GT Italy not having a claim might have had on the position of GTI. But, as arguments developed before Langley J as to the proper construction of extension 3, the precise ambit of the policy became a significant ingredient of the arguments addressed by both sides. This was not perhaps very satisfactory because the court was being asked to construe the policy in a vacuum without any surrounding circumstances. Of course the question of admissibility would have to have been resolved but some surrounding circumstances might have assisted in gauging the strength or otherwise of certain of the submissions made by Mr Guy Philipps QC on behalf of GTI and indeed by Mr Colin Edelman QC on behalf of Brit as to what they suggested were the “obvious commercial purposes of the policy”.

Neither side suggested however that we should do anything other than struggle as best we could with the competing arguments. But what I would emphasise at the outset is that, whereas it is clear Brit had at first contemplated that the case would simply turn on their submissions that avoidance renders a contract of insurance void ab initio and that such would lead to GT Italy not being an “Assured Firm” (and on a somewhat similar argument based on breach of warranty), all leading to the suggested conclusion that extension 3 did not apply to the claim against GTI, it became clear that matters would be unlikely ultimately to be quite as simple as that.

I can take the position, with minor adaptations, from the judge’s judgment. GTI is a not for profit corporation incorporated in Illinois, USA. It is the “umbrella” corporation which manages and maintains a worldwide organisation of member firms which practise under the Grant Thornton name. GTI has no practice or clients of its own. GT Italy was, until 8 January 2004, when it was expelled, a member firm, then under the name Grant Thornton S.p.A.

GT Italy was, along with 93 others, a named member firm in a schedule to the Policy and so an “Assured Firm” as defined in the Policy. The insuring clause (clause 1) provided professional indemnity cover for two interests, which I will hereafter refer to as ‘limb one’ and ‘limb two’:

The judge emphasised that GTI was not listed in the schedule of member firms to the policy, and quoted clause 3 of Section III of the policy (extension 3), underlining the words which he rightly took the view gave rise to the issues before him. It is convenient to requote extension 3 with the words as underlined:-

The policy was entered into on or about 15^th December 2003, and covered the period 15^th December 2003 to 14^th December 2004.

It seems that the financial woes of a company, Parmalat Finanziaria S.p.A., an Italian company, were disclosed to the public in December 2003. These problems led to allegations against GT Italy, as auditors of a subsidiary of Parmalat, which resulted in its expulsion from membership of GTI. GT Italy never made a claim under the policy, and indeed it is questionable whether it had any claim under the policy since its involvement with Parmalat was not “International Work” as defined by the policy, and it was not being held responsible for the activities of another firm by reason of its membership of GTI.

Proceedings were however commenced in the United States, also on 8th January 2004, naming GT Italy and GTI as defendants, GTI being alleged to be liable as an entity in control of GT Italy.

GTI gave notice of the claim made against it to Brit by letter dated 29^th March 2004 albeit some prior notification of the claim may have been made on 4^th or 5^th January 2004 (this I deduce from the letter of 14^th March 2005 at page 98).

In discussions which I am unable to date and then by letter dated 14^th March 2005 underwriters informed GTI they were investigating “policy coverage issues in respect of this notification and also the matter generally”.

During this period GTI incurred substantial defence costs – estimated at $2,221,422.55 according to a letter dated 18^th May 2005. Indeed underwriters were prepared to pay some of the costs incurred but only on the basis that they should be returned in the event of investigations resulting in GTI not being covered.

By letters dated 1^st August 2005 Brit notified GT Italy that it was avoiding the policy as against GT Italy for non-disclosure or relying on a breach of warranty said to give rise to discharge of all Brit’s obligations to it thereunder. On the same date it notified GTI that avoidance ab initio as against GT Italy had the consequence that GTI was not to be included as an Assured Firm, and that thus there was no insurance coverage for GTI.

It was not and is not in issue that (i) GT Italy was stated in the schedule to the policy to be a member firm of GTI; (ii) Brit validly avoided cover as against GT Italy; and (iii) the policy was a composite policy at least in the sense that each member firm was insured separately and thus avoidance against one did not avoid as against another.

The judge stated that so far as the composite policy issue was concerned it was in issue “whether or not GTI was separately insured in this sense”. I am not sure that this was an issue, at least before us, because I do not understand Mr Edelman’s argument to be that avoidance against GT Italy leads to avoidance against GTI. I understand the argument to be simply one of construction, albeit the way Brit were putting that point in their pleadings was rather different from the way in which they ultimately formulated it.

The judge also stated that it was not in issue that “the claims made against GTI arise from claims made against GT Italy”. Factually that is of course entirely accurate. Furthermore, as the judge recorded, not all members of GTI were included in the schedule, e.g. the UK and USA member firms were not.

Both parties accepted (as is obvious) that the wording of extension 3 imposed some restriction on coverage for GTI by reference to the question whether it arose from a claim made against a member firm insured by the terms and conditions of the policy. Mr Philipps submitted before the judge and before us that “member firm … insured” was simply descriptive, and thus that since GT Italy was a “member firm … insured” described in the schedule when the claim against GTI was made, cover for GTI existed. He submitted that it made no commercial sense for a claim against GTI to be parasitic in the sense of having to arise out of a claim that a member firm such as GT Italy would succeed in bringing. If GT Italy could succeed, why would GTI need its own claim?

Mr Philipps argued that under the second limb member firms could recover if they were faced with claims holding them liable for the wrongdoings of another assured firm. He argued that the cover provided to GTI by extension 3, read with the second limb of the policy, was intended to place GTI in the same position as other assured firms. He submitted that, because GTI did not do any professional work, it would never have a claim under the first limb, whether by virtue of extension 3 or at all. Limb two, he said, provided the only cover to GTI. So he submitted the intention was to place GTI in the same position as the members of GTI named in the schedule.

An example of how Mr Philipps suggested the policy worked was as follows. If a client had claimed against GT Italy even in relation only to domestic Italian business which it had conducted and joined GT Germany on the basis that it was also liable as a member of GTI, GT Germany would have been covered under the second limb. He submitted that limb two is not confined to International Work and that thus, if GT Germany was liable for the domestic business of GT Italy, GT Germany would be covered. The same, he suggested, should go for GTI by virtue of extension 3.

Mr Edelman did not accept that construction. He submitted that GTI was only intended to be covered when the claim against the Assured Firm would be covered. On this basis GTI had at the very least to establish that the claim against GT Italy was within the ambit of the cover provided by the policy. His primary argument went further and suggested that “insured” meant not only within the ambit of the cover, but recoverable under the policy by the member firm, being a point to which I shall return in paragraph 34 below. But as a starting point he submitted that GTI at the very least would have to show either that the claim arose out of International Work (limb one of the policy), or that GT Italy was being sued for the wrongs of another member firm as a result of its membership of GTI (limb two). He submitted that, although it is true the words International Work do not appear in limb two, the reality is that GT Germany would be joined as responsible for the defaults of GT Italy only in the International Work context, and that the joining of GT Germany in respect of GT Italy’s domestic business was not a realistic proposition. He submitted that the cover which GTI is contending for, namely cover when held responsible for alleged defaults of member firms, for all business carried out by member firms, whether domestic or international, was not the subject matter of his policy and one for which (I think he would add) GTI had not paid any premium.

These arguments on the true construction of the ambit of the cover under the policy could provide an answer to the question whether GTI would have a claim even if Brit had not avoided the policy as against GT Italy, but they were not arguments placed before us for that purpose nor were they arguments pleaded as providing an answer to the construction of extension 3, but as I have indicated the parties were content that we should deal with them in the context of the construction of extension 3.

Brit’s pleaded case was that the effect of avoidance was that GT Italy must be treated as never having been in the schedule i.e. to be an argument that, even if the words “member firm . . . insured” in extension 3 was simply descriptive, the result of avoidance was that GT Italy must be treated as never having been a “member firm … insured”. But their argument developed before Langley J, and Mr Edelman’s argument before us, concentrated more on a submission that the word “insured” was not simply descriptive, but connoted a member firm being “covered” by the policy. The argument on this basis is different from the pleaded case in that it does not involve expunging GT Italy’s name from the schedule: it involves saying instead that GT Italy may be on the schedule but that they have no cover for the claim being made.

Both sides had what I would call their “commercial arguments” for supporting their constructions. Mr Edelman submitted that it would be very strange if insurers had agreed to cover a claim when they had been deceived into providing cover for a member who should never have had cover and in relation to whom GTI should never have been able to have a claim arising from a claim against that member. A claim by GTI had he submitted to be parasitic upon a claim recoverable by GT Italy, and he submitted it was unsurprising that that should be so since GTI did not put in its own proposal form or, as it seems, pay any additional premium.

He further submitted the judge was wrong to say this construction provided only a limited commercial benefit to GTI since, in any circumstances where GTI was joined to an action against an assured firm, GTI would be likely to incur substantial costs ( as exemplified by the instant case), and it was a real benefit to GTI to be covered to that extent in relation to claims against member firms covered by the policy. Although his primary submission was that the claim had to be “recoverable”, so that if GT Italy failed in any way to fulfil a condition of the policy that too would affect GTI’s right to recover, he had an alternative, less draconian, submission. That submission was that “insured” meant “covered” in the sense that that GT Italy would have been covered even if they could not recover because, for example, they failed to give notice in time, but would not have been covered if the policy could be avoided against them or if they were never covered as a result of a breach of warranty.

Mr Philipps emphasised what he would term the inequitable consequences of Brit’s argument. On the facts of this case, GTI were sued and incurred very substantial costs but the result of Brit’s argument, submitted Mr Philipps, was that the rug could simply be pulled from under the feet of GTI by an avoidance many months after the costs have been incurred.

Furthermore, in an argument which found favour with the judge, he submitted that it would be extraordinary if GTI could be prejudiced by the activity of an assured member for which it had no responsibility. For example if a member firm failed to give the insurers notification of a claim within the period of 28 days as required by Section V Condition 1 (a), it would be quite unfair if insurers could hold that against GTI, and argue that, since notification was a condition precedent to the right of an assured firm to claim, GTI’s claim failed as well. It was some recognition of the force of this argument that led Mr Edelman to his less draconian, alternative argument

Mr Philipps accepted that the draftsman in extension 3 had not just used the words an “Assured firm” (terminology used in the remainder of the policy as a description of those in the schedule), but had apparently deliberately used the words “member firm … insured under the terms and conditions of this policy”. He suggested that the draftsman had done that to take account of extension 5 and condition 9 which provided for certain entities to become insureds albeit that they would not have appeared in the schedule.

Mr Edelman in relation to this last point suggested that the consequence of Mr Philipps’ arguments would appear to be that entities who became insureds for only limited periods under extension 5 and condition 9 became “insureds” under extension 3, and that the effect would be that GTI would have cover arising from a claim against one of those entities even during periods when it did not itself have cover. That he said would be absurd.

Resolution of the issues I admit I have not found easy but I can begin by saying that I do not believe that they can be resolved simply by reference to the law relating to avoidance or breach of warranty. I do not think it can be right that, if the words “member . . . insured” were simply descriptive, the effect of avoidance or reliance on breach of warranty in some way requires to the schedule to be read as if from the commencement of the policy the name of the member had never been included in it. If the words are simply descriptive, in my view the judge’s conclusion would be right for the reasons he gave. But the critical point is whether he was right.

The issue is confined at the end of the day to the proper construction of the words underlined by the judge in extension 3, and in particular the words “insured by the terms and conditions of this policy”. The alternatives as to the proper meaning of those words seem to me to be these.

the word “insured” qualifies the prior words “member firm” and so its effect is simply descriptive in the sense of identifying an assured in the schedule;

the word “insured” qualifies the prior word “claims” and so GTI’s cover is limited to claims against it which arise out of claims against member firms covered by the policy. But in this instance the word “covered” could have different shades of meaning. It must mean a claim against a member firm within the ambit of the cover provided by the policy; thus, if the cover was confined (as I appreciate it was not) to negligence, a claim for slander would not be a claim “insured by the terms and conditions of this policy”. But it could then either be (a) a claim against an Assured Firm which is within the ambit of existing cover and which Brit is bound to pay, the Assured Firm having complied with the terms and conditions of the policy; or (b) a claim against an Assured Firm which is within the ambit of existing cover and which Brit would be bound to pay subject to compliance by the Assured Firm with the terms and conditions of the policy. Thus, for example, a claim within the ambit of existing cover but of which the Assured Firm failed to give proper notice would not fall within (a) but would fall within (b). Similarly, a claim under a policy which has been validly avoided would not fall within either (a) or (b) since in such a case there would be no existing cover.

In my view (ii)(b) is the proper construction of the term. I reject (i) for the following reasons. First, it seems to me that Mr Philipps’ argument that the words “member firm … insured under the terms and conditions of this policy” might there relate to extension 5 and condition 9, is unpersuasive and might lead to the unintended result that Mr Edelman suggests. Second, I do not think that it can be said that extension 3 was obviously put there to provide cover in the same situations as assured firms under limb two of the policy. This policy was concerned essentially with cross-border liabilities and although limb two does not refer in terms to International Work, it seems to me that what limb two contemplated was that an action against a member firm for the wrongs of another because of its membership of GTI was only likely to occur in the context of International Work. It was not envisaged that GT Germany (for example) would be likely to be held liable for GT Italy’s wrongs in a domestic context. To provide GTI with cover for wrongs committed by member firms in their domestic business would have been a vast extension of the cover, in relation to which no proposal form provided any details to enable an underwriter to asses the risk. Third, extension 3 is indeed just that, namely an extension, and reads as though it is intended to be parasitic upon claims already covered by the policy and not as though it is intended to provide totally independent and far-reaching cover to GTI. There must be a claim within the ambit of the policy or against a member firm before GTI can make a claim; simply putting GTI in the place of a member firm under the second limb was not what was intended. Putting it another way, the word “insured” naturally reads as “covered”.

I reject (ii)(a) however because it seems to me most unlikely that the parties would have agreed that a failure by, say, GT Italy to notify a claim could prejudice GTI’s position, and it would seem to me most unlikely that the parties would have agreed that any breach of condition by GT Italy or of any other Assured Firm should lead to GTI having no claim of its own under extension 3. Mr Philipps’ submissions in this regard were in my view well-founded. I should perhaps add for the avoidance of doubt that that would not mean that there may not be conditions on which Brit could rely as against GTI. An example of what I have in mind could be exclusion 6, which excluded liability for damages “arising from fraud or dishonesty on the part of an Assured Firm or its Partners”. That might (and I stress might because the point has not been addressed in argument) be a condition on which Brit could rely as against GTI even though the fraud or dishonesty was that of the assured member firm.

That then leaves (ii)(b) which it seems to me makes logical sense. If GT Italy never had cover because they had failed to disclose matters such as those alleged against them, then they were not insured or covered for that claim and any claim by GTI does not arise out of a claim insured under the terms and conditions of this policy.

I accept that at first sight it may appear harsh that (as in the instant case) GTI can be sued and incur expenditure and then “have the rug pulled from under them”, but that harshness simply flows, as in any other case, if there is a dispute about the ambit of the cover. If the claim against GT Italy was not within either limb of the policy (as indeed it seems it was not), then still GTI might have expended money before being informed that there was in fact no cover.

For the reasons I have endeavoured to give I would allow the appeal and grant Brit the declaration they seek.