Ocean Finance & Mortgages Ltd & Anor v Oval Insurance Broking Ltd

The claimants in this action (collectively OFML), companies which sold secured loans and payment protection insurance (PPI), retained the defendant (Oval), an FSA registered insurance broker with experience in professional indemnity insurance (but none in PPI save for its dealing with OFML). Oval acted as OFML’s producing broker and in turn retained the third parties (which for relevant purposes means the second third party (SWIL)) as placing broker because it was a Lloyd’s broker and had connections with the professional indemnity insurance market in London. SWIL had expertise in the placement of professional indemnity insurance and financial lines but little in respect of the sale of PPI.

The events which are the subject of this action centre on OFML’s professional indemnity insurance arrangements for the period 31st October 2008 to 31st October 2009 during which time OFML had a primary layer policy with a limit of £1.7 million (the CNA 2008/09 Policy) from CNA Insurance Company Ltd (CNA) and an excess layer policy with a limit of indemnity of £3.3 million (the Hiscox 2008/09 Policy) from Hiscox Insurance Company Ltd (Hiscox). OFML threatened proceedings against Hiscox under its later 2009/10 Policy with Hiscox but did not pursue them once Hiscox had made its defence plain. Instead it brought a claim against Oval in which it alleged that Oval had breached contractual and/or tortious duties owed to it in failing to advise it to make a “block notification” to the 2008/09 policies of the entirety of OFML’s 18,000 sales of PPI policies as “circumstances that may give rise to a claim” before the expiry of the policies on 6th November 2009 (after a 7 day extension). CNA had, in circumstances to which I shall refer, paid claims both on its 2008/2009 policy and 2009/2010 policy in circumstances where a block notification had been made to it a year later in 2010, at the same time as a similar notification was sent to Hiscox under its 2009/10 excess layer policy. Hiscox declined to accept that notification and contended that any block notification should have been given in the Hiscox 2008/09 policy year under the terms of that policy and in consequence cover was excluded in the following year, by reason of a provision in its 2009/2010 policy.

SWIL had in fact made a limited notification of circumstances to Hiscox, in October 2009, under the Hiscox 2008/09 policy in respect of customer complaints already made and rejected by OFML in relation to PPI which were to be the subject of a further review by OFML (the Limited 2009 Notification). SWIL did this on the basis of information supplied to it by Oval, without, it appears, any prior discussion of the matter with Oval or with OFML or any instruction to do so. What no-one appears to have considered in the 2008/09 policy year, as opposed to the following 2009/10 policy year, was a block notification of all sales. In circumstances which I shall relate, Oval and OFML discussed making such a block notification in the summer or autumn of 2010, OFML took legal advice in relation to it and the block notification, drafted by solicitors (DLA) was made without consultation with SWIL on 29th October 2010. When Hiscox refused to pay on claims under the 2009/10 policies and put forward its reasons, OFML sought redress from Oval for sums that it said would have been recoverable under the 2008/09 policies, had a block notification been made to those policies, back in October 2009. Redress was sought on the basis that the failure to give such a block notification was the result of Oval’s failure to advise OFML that such a notification should be made.

In the main action by OFML against it, Oval admitted that it did not advise OFML to make a block notification of all sales of PPI to the 2008/09 policies but (until December 2015) denied any breach of duty or causation of loss. Oval brought a Part 20 claim against SWIL, averring that if Oval was found liable to OFML, then SWIL as placing broker had negligently and/or in breach of contract, caused Oval to incur such a liability. Alternatively it contended that SWIL was itself in breach of direct tortious duties owed to OFML and that Oval was entitled to contribution from SWIL under the Civil Liability (Contribution) Act 1978.

On 21st December 2015, Oval settled OFML’s claim and now accepts that a block notification of all PPI sales could and should have been made to the 2008/09 policy year. It accepts that if it had given advice to make such a notification to OFML it is likely that the advice would have been followed and that such a block notification would have been either accepted by Hiscox or upheld against it if it had declined it. In consequence, OFML would have recovered a full indemnity under the 2008/09 Excess Layer Policy in respect of PPI claims. Under the terms of the settlement, which SWIL accepts was a reasonable settlement (subject only to an argument about costs incurred by Oval by reason of the lateness of the settlement) Oval agreed to make a payment to OFML of £1.85 million by way of damages and interest plus £700,000 in respect of OFML’s cost. Oval also agreed to provide an indemnity of up to £1.7 million in relation to any relevant cause of action on the part of CNA against OFML, as set out in the terms of a consent order of 21st December 2015.

It is Oval’s case that the main responsibility for failing to recognise and recommend that a block notification of sales should have been made in 2008/09 falls on SWIL. Oval contends that SWIL, as the specialist placing broker, which was in direct contact with the insurers, bore the primary responsibility for recommending such a block notification of all PPI sales in 2008/09. Oval contends that it relied on SWIL for its specialist advice. SWIL denies any breach of duty, whether to Oval or to OFML and asserts that Oval never requested advice on block notification in 2008/2009 and did not pass key information to SWIL that would have alerted it to the need for any advice about or any recommendation of a block notification. It also contends that such information as was given to it on 22nd October 2009 was too late for the necessary steps to be taken to make an effective block notification.

I heard evidence from three representatives of OFML, Mr Shilton, its chief executive, Ms Kelly, its compliance officer and Mr Goodwin, the senior compliance officer. Mr Goodwin largely dealt with Mr Pinfold, the claims executive of Oval (who also gave evidence) and Mr Allen, who was the account executive for OFML (who was unwell and whose statement was admitted under the Civil Evidence Act). Mr Fitzgerald, the divisional director of Financial Lines of Oval also gave evidence. SWIL called one witness of fact, Mr O’Connor, the former claims manager at SWIL and now its assistant director (although the company has changed its name). It did not call Mr Pauley the placing broker responsible for renewal of the policies with CNA and Hiscox for the 2009/10 year.

Oval adduced expert evidence from Mr Flaxman whilst SWIL relied on the expert evidence of Mr Phillips. Expert evidence adduced by OFML from Mr McGrath, in the shape of his expert reports alone, was referred to by Oval in support of the reasonableness of the settlement it made with OFML.

The central issues of fact depend upon what SWIL ought to have known and appreciated, and the state of knowledge of the relevant persons at OFML, Oval and SWIL, namely Mr Goodwin of OFML, Messrs Pinfold and Allen of Oval and Mr O’Connor and Mr Pauley of SWIL. The communications which took place between them in which information was conveyed from one to the other are therefore of importance. As it is now accepted by Oval that it knew enough to be required to advise on and recommend a block notification in 2008/09, the main issue is the extent to which such information as it had was passed to Mr O’Connor or Mr Pauley or whether enough information was passed to them for SWIL to appreciate the need for consideration of, advice on and recommendation relating to, a block notification in that year. Whilst there are arguments relating to the existence of duties owed by SWIL, whether to Oval or to OFML in circumstances where SWIL had previously advised on “common cause” for the purposes of the aggregate excess and took it upon itself to make the Limited 2009 Notification that it did in October 2009, the findings of fact to be made in relation to communication and knowledge always seemed likely to be determinative.

Unsurprisingly, all of the witnesses of fact had limited recollection of the detailed events of the summer and autumn of 2009 and were dependent upon documents to revive their memories. They had impressions of the broader sweep of events but where there were no documents to assist, reliable evidence was hard to find. As is often the case, the contemporary documents provided the surest guide but Mr Pinfold made few, if any notes of significance and said that he had no recollection of what could be considered the critical telephone conversation which he had with Mr O’Connor on 22nd October 2009. Mr O’Connor made a note of that conversation in abbreviated form and there is correspondence emanating from Mr Pinfold, Mr O’Connor, and Mr Pauley between 22nd and 29th October 2009 which throws light upon the content of that particular conversation. The contents of other conversations around that time, if any, have not been recorded, although it seems that some must have occurred.

Because of the form which the original proceedings took with a main action pursued by OFML against Oval, much of the expert evidence was directed towards the allegation of Oval’s failure to recommend a block notification. In particular, the evidence of Oval’s expert, Mr Flaxman, was that his view was that reasonably competent brokers would not have acted any differently in the autumn of 2009 than these brokers did. It was his secondary view that, if he was wrong on that, SWIL were primarily responsible for the failure to recommend that a block notification be made. Mr Phillips’ view was that Oval failed to pass on to SWIL information which it knew, which meant that a competent broker in the position of Oval would have recommended a block notification, but a competent broker in the position of SWIL would not. The effect of his evidence therefore was that the issue of SWIL’s liability turned on the factual question of its actual knowledge and what it ought to have known or understood.

By 2009 the relationships between OFML and Oval, and between OFML and SWIL, were longstanding. SWIL had provided its services to Oval’s predecessor since 1998 and Oval’s predecessor had acted as broker for OFML’s predecessor since before 2005. Nothing turns on the contractual relationship between OFML and Oval but Oval’s relationship with SWIL was governed by the Terms of Business Agreement dated 11th September 2006 (TOBA). The TOBA included the following terms:

In my judgment, little turns upon the terms of the TOBA because SWIL did advise Oval about the terms of insurance available for the 2009/2010 year, including different options put forward by CNA and, as matters turned out, nothing turns upon any failure to disclose material information to the insurers on either layer, the key issue being the terms of the exclusion in the Hiscox policy about notification of circumstances. Although clauses 1.2(a) and (c) referred to the need for a “request” to advise on the client’s insurance needs and “notice” to act in relation to changes in cover and clause 1.3 required instructions to be made in writing, SWIL agreed to use its reasonable endeavours to explain key features of cover and to provide information to assist in relation to the client’s decision making. Any broker, whether a producing or placing broker with experience of Professional Indemnity Insurance would know, as these brokers did, of the importance of the “claims made” and the “notification of circumstances” provisions in the policies. SWIL acted on instructions for Oval in seeking the 2008/09 and 2009/10 insurances and acted in relation to claims notification to insurers generally. In a longstanding relationship between producing and placing brokers a duty to act as a prudent placing broker on the information provided to it is not easily displaced by such requests for a requirement or notice in writing. Such a request or notice was implied and was in fact acted on as appears from the history of the brokers’ relationship.

As hereafter appears, in September and October 2009, in circumstances where the Proposal Form for the 2009/2010 renewal specifically referred to the awareness of the Insured of circumstances or occurrences which might give rise to a claim, Oval and SWIL who liaised over the terms of the form and the Supplementary Information, discussed the claim situation and the information to be provided to insurers which led SWIL to consider and make the limited notification to Hiscox, informing Oval that it had done so. The history of events since July 2009 shows the two sets of brokers seeking to “manage” the claims situation with the insurers in an environment where PPI mis-selling was a hot topic in the media and there was concern about potential liability for past sales and about the Insurers’ willingness to grant cover in future years in a decreasing market of those prepared even to consider granting insurance for it.

SWIL took it upon itself to make the Limited 2009 Notification, without instructions from Oval to do so and thus assumed a duty, both in contract and tort to Oval (and potentially a duty in tort to OFML) in relation to making appropriate notification to the 2008/2009 year insurers. It cannot, in my judgment, be realistically argued that, in taking it upon itself to act in the way that it did, SWIL did not assume a responsibility to the producing broker to act with due care and skill in making any notification that was required.

Whilst there are provisions in the TOBA which required Oval to procure that its client should agree that SWIL’s liability should arise solely under its contractual relationship with Oval and that third party rights under the Contracts (Rights of Third Parties) Act were excluded, this cannot affect the duties owed by SWIL to Oval under the TOBA or any other duties that it assumed to Oval. I am therefore not concerned with the range of authorities which discussed the duties owed and the liability of a sub-broker to an insured. In its opening Skeleton Argument, SWIL accepted the existence of contractual and common law duties owed by it to Oval.

I do not need to dwell at length on any difference in the duties owed by SWIL as sub-broker to Oval and those owed by Oval to OFML. Reference can be made to the decision of Mr Justice Hamblen in Dunlop Haywards (DHL) Ltd v Barbon Insurance [2010] Lloyd’s Rep IR 149 and paragraphs 241-243 in particular for a discussion of duties in the situation with which the judge was there concerned. I was referred also to Alexander Forbes Europe Ltd v SBJ Ltd [2003] Lloyd’s Rep IR 432 which is not a case involving sub-brokers but emphasises the duty of brokers, even when dealing with an insured which was itself a broker with expertise in professional indemnity cover, to “get a grip” on a proposed notification, to appraise it and ensure that appropriate notification was made.

Although the expert evidence showed a market awareness of the unwillingness of underwriters to accept block notification, the pension mis-selling scandals which came in two waves, split by a decade or more, meant that the concept of block notification was not unfamiliar, or should not have been unfamiliar to the brokers (as validated by decisions such as J. Rothschild Assurance Plc v John Robert Collyear [1999] 1 Lloyd’s LR 6, a decision of Rix J (as he then was) and HLB Kidsons v Lloyd’s Underwriters [2009] Lloyd’s Rep IR 178 in the Court of Appeal). In my judgment, the placing broker in the position of SWIL was under a duty to review the information received by it from the producing broker Oval in the context of presentation for renewal and to consider any notification of circumstances which was required in the current year in order to ensure that the renewed insurance provided effective cover for future claims, with a view to avoiding lack of cover for any liability incurred by the insured.

Since, under the CNA policy, a “circumstance” meant something “which may give rise to a claim” and under the Hiscox policy there was an exclusion for failure promptly to notify “any circumstances which may give rise to a loss or claim” (with potential financial significance to the higher layer), the brokers had to consider whether there was a “real possibility”, as opposed to a remote risk, of a claim (see paragraphs 139-141 of Toulson LJ’s judgment in the Kidsons decision (ibid.). If an insured seeks to notify a circumstance which is too vague or remote to be reasonably capable of being regarded in itself as a matter which might give rise to a claim, an insurer would be entitled to refuse to accept such a purported notification. It is recognised that there may be cases in which different people, possessed of the same knowledge, might reasonably form different views about whether a claim was a real possibility, as distinct from a remote risk and in such cases an insurer could not reject a notification of the circumstance nor complain if the insured did not give such a notification. It is here recognised that Hiscox was justified in its stance in saying that a notification should have been made in October 2009, as SWIL’s expert accepted, so far as concerned Oval on its state of knowledge.

A key point for consideration of the position of SWIL vis-à-vis Oval arises from the terms of the Proposal Form to which I have already referred (and the notification of circumstances likely to give rise to a claim referred to in it and set out in more detail in the Supplementary Information). SWIL, as the placing broker, had particular responsibility for the presentation of the risk to renewing underwriters and it is self-evident that consideration was given by SWIL to the need to give express notification of circumstances to Hiscox under the current year so that claims arising from such circumstances would be treated as claims attaching to that year, as well as giving disclosure of material facts to the renewing underwriters for the following year. The fact that the Limited Notification was made by SWIL to Hiscox speaks for itself. The inadequacy of that Limited Notification is now apparent, but did SWIL know enough, whether from information gained from Oval or otherwise, for a competent broker to recognise that a wider notification should then have been given?

The key provision in the Hiscox 2009/2010 policy (which also appeared in the 2008/2009 policy) was as follows:

The CNA 2008/2009 policy provided for a £7,500 excess “each and every claimant (Insurance Mediation Activities) capped at £250,000 as per Wording including costs.” The Wording included the following:

The following provisions of the FSA Handbook came into effect from 1 November 2007 and were applicable to OFML:

Throughout 2007 and 2008, the FSA indicated through various publications its intention to target the sale of PPI, including:

Mr Goodwin’s evidence was that the issue of mis-selling quickly came onto the radar of the FSA following the first complaint about, and the perceived inadequacy of, sales of PPI in 2007.

In early 2008, according to his evidence, not only did OFML launch its own PPI policy but, at that stage significant changes were made to its sales documentation. Its telephone sales of PPI were conducted by sales underwriters in accordance with detailed scripts and standard documentation. Sales calls were monitored by way of audio recording of their telephone calls to ensure that sales underwriters were sticking to the scripts. As the regulatory rules and standards applicable to the sales changed from time to time, for example in relation to the disclosure of commission or the level of information which the customer needed to receive in order to ensure that he or she could make an informed choice to buy the product, so the scripts were modified and brought into line with the rules, to ensure that OFML sales processes were compliant.

There was a particularly significant exercise of rewriting the scripts in response to the introduction of the FSA’s Insurance Conduct Business Sourcebook (ICOBS) in January 2008. Mr Goodwin’s evidence was that it seemed that no sooner had they updated the scripts than new rule changes were published which required revisitation of them. That was frustrating but the compliance team at OFML was, in Mr Goodwin’s view, assiduous, and as a result OFML was confident throughout 2008 that it was in a good position to meet the increasing allegations of PPI mis-selling in circumstances where its own sales were “non-advised” rather than “advised”.

At a meeting in December 2007 with the FOS Lead Ombudsman, Mr Goodwin considered that assurances had been given that in determining whether a customer understood the information being conveyed about the PPI product, the FOS did not mind how information explaining that policy was conveyed, whether orally or in a policy summary in writing, provided that the information was clear. Mr Goodwin’s evidence was that, prior to 2009, most PPI mis-selling complaints made against OFML were not accepted by it and when referred to the FOS for adjudication, in most instances the FOS had agreed with the rejection of the complaint. When renewing its insurance for the 2008/2009 year, OFML expressed confidence that there would be a considerable reduction in allegations of mis-selling being made against it.

CNA was however nervous about the position and imposed an excess of £7,500 on each and every claimant, which represented an increase from £2,500 in the expiring policy year, with the “common cause” cap on the excess of £250,000. The average value of the PPI complaints at that stage was significantly less than the £7,500 excess, the average premium being only £1550.

The optimism which OFML expressed prior to renewal in the autumn of 2008 with regard to reduction in PPI complaints proved to be misplaced. The volume of claims increased significantly in late 2008 and the FOS began to exhibit the tendency, which later became more apparent, to find in favour of the complainant. The FOS Ombudsman’s final decision on the complaint by Mr and Mrs Lees was made on 21st November 2008 and a copy was made available to Mr Pinfold and Mr O’Connor of SWIL by January 2009. The Lees decision identified three defects in the selling process which became regular elements of subsequent complaints, namely a failure orally to set out the cost of the PPI, the failure to explain the consumer’s rights in the event of early cancellation (and that the refund of premium would not be pro-rata) and the failure to ensure that the buyers of the PPI understood that the duration of the policy was not the same as that of the loan.

Mr Goodwin’s evidence was that the Lees decision was among the first indications that OFML might be vulnerable on the question of the adequacy of the information which sales underwriters were required to provide orally to customers, as opposed to the provision of it in writing after the sales call had concluded. By the end of 2008, OFML had received 11 FOS adjudications, 6 of which had been in its favour and 5 of which were adverse. These decisions appeared to contradict the message that had been received from the Lead Ombudsman in December 2007.

The Competition Commission published a report on 29th January 2009 effectively prohibiting the sale of PPI at the time of the credit sale and OFML made the decision to cease the sale of single premium PPI with effect from 1st March 2009. By 8th April 2009, adjudications were awaited from the FOS on 110-120 complaints which had been referred to it. Mr Goodwin however was already of the view that OFML was likely to lose more cases and that the best way of mitigating loss would be to settle early to avoid referral to the FOS, for which insurers’ agreement was needed if cover was not to be jeopardised.

It was in July 2009 that 37 adjudications were received from the FOS, all of which were adverse to OFML. Copies of these decisions were supplied to Mr Pinfold at Oval and by Mr Pinfold to Mr O’Connor and his colleagues at SWIL for review. Mr Goodwin’s take on this was that the main problem which emerged from these decisions was OFML’s failure to provide adequate oral disclosure of the key terms and conditions of the PPI product being sold, although information appeared in the paperwork provided to the buyer. He and Mrs Kelly concluded that the decisions indicated that OFML would be unlikely to prevail in any complaint referred to the FOS based upon a failure to communicate orally as well as in writing. Moreover, PPI had developed such a poor reputation generally that it was perceived that whenever mis-selling was alleged, the FOS would feel that it should find in favour of the buyer. It is clear that even a cursory examination of these decisions would reveal the same constituent complaints occurring time after time, being the failure orally to state the cost of the PPI, the refund of premium provisions on cancellation and the mismatch in the duration of the policy as against the loan. Looked at broadly, the failure could be characterised as a failure to make proper oral disclosure of the terms of the policy or (as CNA regarded it) a failure to adopt appropriate selling practices for the sale of PPI cover.

As already mentioned, the relationship between OFML, Oval and SWIL was of some duration by the time of the crucial events in October 2009. It is self-evident that there must have been discussion on renewal in each of the relevant years when there was an aggregate common cause cap to the excess which applied to each claimant against OFML for PPI sales. Consideration of the likely sums involved in any claim must have been given and, in the context of claims handling, the nature of claims which were made and those likely to be made. Whilst primarily, Oval, as the producing broker with immediate contact with the insured, would be expected to have a good understanding of OFML’s mode of operation in selling PPI policies, since SWIL dealt with the insurers, it too would have had to have some understanding in order to make appropriate presentation to insurers of the risks they were taking on in providing professional indemnity. The extent to which OFML’s sales processes were known to SWIL was a matter of dispute in the proceedings.

By an email of 26th September 2008, Mr Wynne-Jones (Oval) forwarded to Mr Pauley (SWIL) a series of responses from OFML to questions which had been raised by SWIL in which OFML said that:

On 10th October 2008, Mr Pauley advised Oval:

Following inception of the 2008/2009 policies on 1st October 2008, on 18th November 2008 Mr Wynne-Jones emailed Mr Pauley asking a number of questions which had come from OFML:

The response from Mr Pauley of SWIL was to say that he had passed the matter on to Mr O’Connor saying that what was apparently a simple question about common cause was in reality a complex area of insurance law. He passed the matter over to Mr O’Connor that day, referring to him as “our technical guru” (with exclamation marks).

On 21st November 2008, Mr Pauley sent the following to Oval:

It can thus be seen that not only was the question of common cause in the mind of both sets of brokers but also the fact that defects in the sales scripts that were in use could constitute such a cause for the purposes of the aggregate excess. It is, in my judgment, self-evident that an identified defect in the sales scripts would be seen as likely to result in multiple claims to the extent that the common form of script had been used.

On 26th November 2008, Mr Goodwin of OFML emailed Oval (received by Mr Allen) asking whether the enclosed copy of the final decision by the FOS in relation to a mis-selling complaint by Mr and Mrs Lees seemed fair and how to deal with the question of redress where Mr Lees did not appear to want to cancel his PPI policy. Mr Allen forwarded the questions to SWIL and Mr O’Connor responded in terms which were then passed on by Mr Allen to OFML. Mr O’Connor’s view was that a large dose of hindsight was being used by the FOS and that, because of the publicity about PPI sales, a greater degree of harshness was being applied than would be the case for a normal insurance product. He focussed on the fact that OFML sold PPI policies on a non-advised basis, apparently considering that this was an element which the FOS were not prepared to factor in. He then offered advice as to how to deal with Mr and Mrs Lees.

The Lees decision was the first of those which identified deficiencies in the mis-selling process which were to be a recurrent theme of later complaints but made no mention of any deficiency in the script which was used.

On 16th July 2009 an internal email between Mr Pauley, the placing broker and Mr O’Connor, the claims broker at SWIL attached an email from Mr Wynne-Jones, a placing broker at Oval (before heading to a visit to OFML) in which the suggestion was made that OFML should seek quick settlements with complainants which would result in less cost than allowing matters to go to the FOS, thus using up the common cap excess more slowly. The suggestion was that the insurers’ co-operation in such action should be sought. Mr O’Connor consulted with Mr Pinfold and, in part, it appears, because he was away on holiday in the period 24th July to 10th August, a meeting was ultimately set up for 21st August with Mr Healy of CNA, with representatives of OFML, Oval (Mr Pinfold) and Senior Wright (Mr O’Connor). It was in July that 37 FOS decisions adverse to OFML were received, all of which were passed on to both sets of brokers before the meeting.

Conversations had taken place between Mr Pinfold and Mr Goodwin on 27th and 29th July which reveal the attitudes of both at the time. Mr Pinfold, having reviewed the adverse FOS decisions stated that the whole basis of the adverse decisions was the failure of the salesman on the phone to make clear the price of a loan without PPI and of the price with it. He referred to two other matters, namely the failure to make the cancellation terms clear and the period of the policy. He expressed the view, with which Mr Goodwin agreed, that OFML was unlikely to prevail in any adjudication by the FOS and the concern that the FSA would become involved and investigate the position.

In the conversation on 29th July, which took place following a meeting between OFML and the FOS, Mr Goodwin explained the FOS approach and its question as to whether the customer came away from the conversation fully understanding the product sold. He stated that no matter what OFML did and however much it tried to defend what it had done, the FOS was unlikely to be impressed. He said that if the question was asked whether OFML had disclosed the cost of the PPI in addition to the loan the answer in 99% of cases would be that it was disclosed in the paperwork but not orally on the phone. In the 27th July conversation Mr Goodwin had referred to the changed process from 2008 onwards when the costs of the premium and loan were disclosed so this might be taken to refer to the earlier sales, although there was a fear that the FOS would find reasons to decide against OFML in later years too. Once again Mr Pinfold and Mr Goodwin agreed that OFML was likely to lose every case in front of the FOS and so it was that Mr Goodwin was suggesting the development of a matrix which assessed the number of defects in the sale process and produced by reference to that number a percentage of what would amount to total redress if the matter went to the FOS. Mr Goodwin spoke specifically of the wider implications which would arise if the FSA got involved and the impact that might have upon the common cause provisions in the insurance.

In an email of 7th August 2009 Mr Pinfold referred Mr O’Connor to the adverse FOS decisions which had been sent to SWIL and the 120 outstanding matters awaiting the FOS’ decision. He said that OFML had discussed with the FOS a formula whereby it (OFML) would produce a matrix whereby all adjudicated or outstanding complaints could be reviewed in the light of findings that the FOS had been making. The matrix and review process had commenced and the results were to be the subject of discussion at the meeting with CNA in order to put a “strategic agreement in place” as to how complaints were to be dealt with going forward, avoiding FOS adjudications if possible.

For that meeting Mr Goodwin on 13th August had sent Mr Pinfold and Mr Pinfold forwarded to Mr O’Connor in revised form a spreadsheet of claims together with a draft letter to the FOS with questions in respect of adjudications received. This draft letter raised “some issues which are common to a large number of the adjudications we have received” on which clarification was sought. First, the issue of verbal disclosure or non-disclosure was raised, including the common feature of failure to confirm to the customer that only limited information would be supplied over the telephone in circumstances when no decision made on the telephone would be binding on the customer (which was the position under OFML’s sales process). Following such a conversation, full details of the insurance were sent to the customer to consider on paper. The second issue raised was the failure to disclose orally to the customer that the total borrowings included the insurance premium in circumstances where that feature was covered later by lenders. Thirdly reference was made to the inconsistent position adopted by the FOS whereby errors in the paperwork were said to mislead the customer whereas, when the paperwork contained no errors, it was suggested that the client could not be expected to rely upon that paperwork. Thus, the fundamental issues relating to verbal non-disclosure were specifically being raised with the FOS, although it was recognised that this was unlikely to result in any change in the FOS’ view.

The 13th August email to Mr O’Connor with the list of the FOS reported complaints, referred to complaints made in the 2006/2007 year which SWIL had treated as closed. Mr Pinfold pointed out that eight of the FOS complaints for that period had closed but twelve still remained to be decided. In addition he said there could be other non-FOS settlements to account for. He went on to say that he knew “the single cause debate is still in Ocean’s mind” and that the aggregate deductible for that year might yet be exceeded, though he hoped not.

At the meeting on 21st August Mr Healy of CNA approved OFML’s use of the matrix to enable it to calculate compensation offers to complainants. A note of Mr Pinfold’s exists in relation to this meeting which refers to the need to respond to the FOS and discuss the matrix adjustments with it. The object was to avoid referral to the FOS wherever possible. There was discussion of the excess and the need for CNA’s approval of individual settlements above it but there is no reference in the note to discussion of the common cause excess cap or of any systemic failings in OFML’s sales process as such. It is inevitable however, in my judgment, that the sort of failings to which the FOS decisions, the draft letter to the FOS and the matrix referred would have been extensively discussed in order to arrive at the position where agreement was reached as to the future handling of claims. The basis for agreeing to the matrix procedure was the known criteria being applied by the FOS to the sales processes adopted by OFML and the desire to minimise redress to complainants by avoiding FOS adjudications. I cannot accept Mr O’Connor’s evidence that he did not know that the sales processes involved the use of scripts by salesmen when speaking to customers on the telephone and that the calls were recorded and monitored by OFML for adherence to the scripts (if his evidence is to be taken to be to that effect). In my judgment, the discussions about the matrix with the listed deficiencies in sales process, as perceived by the FOS, must have meant that all present at the meeting appreciated that deficiencies in oral disclosure, as perceived by the FOS had to be endemic because of inadequacies in the script and only occasionally, caused by inadvertent failures by the salesmen to adhere to those scripts. Given that there were 37 decisions with uniformity in the elements of deficiency found, it must have been apparent that there was script deficiency, even if (as to which there was no evidence) the scripts were not produced and examined at the meeting as against the deficiencies identified by the FOS and by the application of the matrix. On the balance of probabilities I conclude that it must have been obvious to all present that there were deficiencies in the pre-2008 scripts.

On 24th August Mr O’Connor sent an internal email to Mr Pauley at SWIL in which he informed him of that meeting on 21st August. He said it went very well and was very positive “in what is rather a grim situation created by the FOS”. The letter went on to say that it was agreed that Ian Goodwin would provide a draft settlement letter for 12 cases where OFML had the requisite information to calculate the compensation amount and would supply a copy of the calculation used by reference to the matrix of sales deficiencies. That would enable Mr Healy to approve the settlement offers for those cases with a possibility of a more relaxed approach on the part of CNA to settlement by OFML in the future. The note recorded that Mr Goodwin had said that OFML had sold around 10,000 PPI policies since January 2005 and that “processes” from September/October 2007 onwards were much better because they had adopted the ICOBS rules which were introduced in January 2008. In the context of the knowledge gained by Oval and SWIL as to the way in which OFML sold PPI policies, this could only mean a change in the scripts used by the salesmen on the telephone.

At a meeting on 2nd September 2009 between OFML representatives and Oval’s representatives on the placing side (including Mr Allen) reference was made to the claims position in the context of policy renewal falling due on 31st October. Mr Allen’s note records CNA’s 21st August agreement to the matrix process, to the FOS approach to complaints and the uncertainties relating to that and to Mr Goodwin’s opinion that if claims could be settled quickly at more reasonable cost, this might see claimants accepting offers there and then rather than pursuing matters further through the FOS with consequent delay. That could benefit both insurers and OFML and help to deter future claims, even if (as anticipated) settlement could lead to more advertising by claims management companies.

There was discussion as to whether or not the excess layer of cover of £5 million was required since “if claims reached this level, the future for OFML would be very limited”. Concerns were raised at the possibility of a one-off compensation order issued by the FSA or the FOS requiring payment to all policy holders. So far as the 2009/2010 year was concerned, it was anticipated that the majority of the claims would be settled within the current excess per claimant of £7,500 but cumulatively they might well exceed the aggregate excess (by which they could only be referring to the common cause excess cap). Mr Goodwin suggested that insurers could consider “a flat Ocean responsibility excess of £250,000” with all claims being dealt with by Ocean up to that limit and thereafter insurers settling all further claims. Mr Allen was to raise this with insurers. Because of the current situation on potential claims, Mr Allen said that renewal negotiations would be held with existing insurers. The evidence available suggested that there was a very limited market indeed for cover on PPI selling by this stage and at various points, reference was made to CNA being “the only show in town”. Mr Allen’s note of the meeting includes a reference to him agreeing to take into account the possibility of a one-off compensation order being issued by the FSA or the FOS but agreeing not to raise the particular point with insurers at that stage. The effect of Mr Pinfold’s evidence was that SWIL was regarded as one step nearer to Insurers and it was apparent from his recorded comments he would deliberately not pass on all information he received from OFML as soon as he received it.

On 9th September 2009 Mr Shilton of OFML signed the proposal form for cover for the 2009/2010 year. In answer to question 17 which asked if the insured was “aware of any circumstance or occurrences which may give rise to a claim” the box marked “Yes” was completed. In the area on the form providing for details to be provided, the following was set out:

In the Supplementary Information attached to the proposal form, under the heading “claims against the firm”, reference was made to approximately 140 files with the FOS, the majority of which related to PPI complaints. The history of PPI, its regulation and the increasing volume of complaints of mis-selling was then set out. The following passage appeared:

The Supplementary Information continued by setting out the available options, including referring common issues to the FOS for a ruling by an Ombudsman with the expression of opinion that it was unlikely to lead to an en masse reversal of the responses previously received. The current position whereby a matrix had been developed to calculate redress in 12 of the 37 cases and the reference back to the FOS in respect of them, was then explained whilst it was said that all other cases had been put on hold pending the outcome of that reference. On 15th September Mr Wynne-Jones of Oval sent a draft of this Supplementary Information to Mr Pauley of SWIL in which he repeated Mr Goodwin’s views about a possible influx of claims but also the view that if claims could be settled quickly at more reasonable cost this would result in lower payments generally to the benefit of insurers and OFML. The point as to individual claims settling within the current excess of £7,500 was made with the possibility of accumulation exceeding the aggregate excess and the desire for a “flat Ocean responsibility excess” of £250,000 to be discussed with insurers.

On 23rd September 2009 Mr Healy of CNA emailed Mr O’Connor referring to the monthly bordereaux of claims sent to him and noting that the total paid to date (including the FOS fee) was just over £60,000 so that “£189,549.44 remains of the £250,000 aggregate excess”. Mr O’Connor noted the word “cap” on this email and it is clear that, by this stage, if not before, CNA, SWIL and Oval were all proceeding on the basis that the “common cause” cap on the excess applied to the claims which had been accepted by CNA. No distinction was being drawn between any particular complaint of mis-selling at all. Mr Healy had, of course, been present at the meeting of 21st August, when the claim matrix of deficiencies in the sales processes had been the subject of discussion in the light of the 37 adverse FOS decisions.

On 29th September 2009 the FSA published its Consultation Paper 09/23 on “The assessment and redress of Payment Protection Insurance complaints”. The paper set out proposals for guidance on the fair assessment and (where appropriate) redress of complaints relating to sales of PPI and for rules requiring firms to reassess, against the proposed new guidance, complaints about PPI sales that the firm had previously rejected. If this was to come into force, therefore, OFML would be required to re-examine all the claims which it had previously rejected and which had not been referred to the FOS. The consultation period was one month, closing on 30th October and included the following section 4:

Paragraph 4.5 contained a footnote referring to DISP. 1.3.3R, which was a provision in the FSA Rules for dispute resolution which required regulated entities which were the subject of complaint to carry out a root cause analysis of complaints and, where such a root cause was found, to reconsider and correct their unfair practices and offer redress to all those affected, whether they had complained or not.

At the same time as publishing the consultation paper, the FSA, in an open letter to the industry set out a series of common failings at the point of sale which resulted in poor outcomes for consumers and identified the three elements to which I have already referred emphasising that in face-to-face and telephone sales, where the sale was primarily conducted orally, such matters ought to be disclosed at that stage.

Oval and SWIL in due course agreed that there was no need to make disclosure of CP 09/23 to insurers because this was a public document about which the insurers could be presumed to know as a matter which an insurer in the ordinary course of his business, as such, ought to know. In my judgment they were correct in taking that view. It was OFML’s view and that of the brokers that the proposals in the consultation paper would not be revised in consequence of the consultation. It was anticipated that the proposals would come into force in January 2010 requiring a review of all past complaints, a root cause analysis assessing the common underlying causes of those complaints and consideration of whether a wider redress programme was called for by reason of that analysis, including the proactive redress of customers who had not complained about a deficiency in the sales practice.

Having read the consultation paper, Mr Goodwin drew it to Mr Pinfold’s attention and discussed it with him on the telephone on 1st and 8th October 2009. Transcripts of those discussions are available because all OFML’s telephone calls were recorded. On 1st October Mr Pinfold said he had not yet read the consultation paper and asked whether there was anything in it which was going to cause an issue. He was told by Mr Goodwin that the paper proposed a past complaints review in respect of all complaints relating to FSA regulated business (since January 2005) save those which had already been referred to the FOS. The number he thought was around 400. Mr Goodwin considered that the proposals would remain unchanged and that the requirement for such a review would come into force on 1st January 2010. There was general discussion about the common cause excess cap and its relationship to complaints originally made and notified in earlier years and a discussion as to how this consultation paper might affect renewal for the 2009/2010 year. It was considered inevitable that insurers would become aware of the consultation paper and that the draft handbook text in the back of the consultation paper would become FSA rules. Mr Pinfold said he would think about the question whether or not it was worthwhile “coming clean” with insurers anyway.

This was followed by Mr Goodwin referring to the

Mr Goodwin was envisaging the possibility of differentiating between particular failures in the sales process and telling the FSA that the root cause analysis did not, in their view, give rise to a common or endemic issue so that a past business review was not appropriate. In the light of his previously expressed view that 99% of the sales (or sales pre-2008) involved a failure to tell the customer orally of the price of the PPI policy and in the light of the matrix of deficiencies, this was a forlorn hope.

On 8th October however Mr Goodwin telephoned Mr Pinfold again and explained that OFML had come to the view that it was impossible now to use the matrix which had previously been agreed with insurers and that, following the terms of the consultation paper, OFML would have to assess full redress in the way that the FSA was suggesting. OFML had decided that it was going to seek to put into effect the FSA draft guidelines although these were not yet in force. It was recognised that OFML would need the insurers’ agreement to do so for policy purposes.

Mr Pinfold said that there were two things that had been preying on his mind, having been through the consultation paper. He referred to “the veiled threat or indeed the real threat that they will be asking you to review everything”. According to the evidence of both Mr Goodwin and Mr Pinfold “everything” meant all past complaints but, if the consultation paper had been properly understood that cannot be the case. What they had in mind or what they ought to have had in mind was the possibility of a review of all past business in the light of the root cause analysis which would be carried out as part of the proposed mandatory past complaints review which OFML was proposing to carry out at once. Putting into effect the proposed guidelines meant conducting the past complaints review with a root cause analysis which, if endemic or systemic failures were found, would, if OFML was to observe existing regulations and the terms of section 4.5-4.9 of CP 09/23, result in a full past business review, whether the FSA specifically instructed it or not.

Mr Pinfold went on to say that Oval had conducted an internal discussion because of concern about CNA’s reaction “that you’ve got to back track on every single bloody thing to double check and presumably because your systems will have been the same and come up with an offer of redress.” It was not considered by him that the consultation paper was specific to OFML and therefore a material fact to be put in front of the insurer. For obvious financial reasons he was thinking that he would not refer CNA to it though CNA should be aware of it anyway if it was doing its job properly. “We’re taking the view that we’ll let CNA make their own mind up about it without actually throwing it in front of them.”

Although CP 09/23 was only a consultation paper, it was the view of both of the telephone call participants that it would come into force. It was therefore hardly a veiled threat or a real threat that OFML would be asked to review past complaints. That was the proposed requirement. The threat was that of a review of total past business in the light of a root cause analysis, which the FSA could compel, but which was, in reality, also an obligation on OFML under DISP 1.3.3R and would be reinforced by CP 09/23 if its proposals were put into effect.

Mr Pinfold’s quick calculation was that if payment had to be made on all past complaints the figure would amount to something between £600-£800,000 which would incur liability for CNA over and above the common cause excess cap.

On the same day, SWIL was asked by CNA as to the number of PPI policies sold, the average premium per policy and the action being taken by OFML in making settlement offers and the level of such offers. Mr O’Connor was able to tell Mr Pauley of SWIL of the advice given on 21st August that the approximate PPI population was 10,000, of the matrix processing of complaints and the average settlement figures which in the 3 years from 2006 through to October 2009 gave rise to £1670.15 on cases actually settled. At this stage Mr O’Connor was unaware of the discussions which Mr Goodwin and Mr Pinfold had conducted in relation to CP 09/23, abandonment of the matrix and compliance with the proposed requirement of conducting a past complaint review.

On 12th October there was a further meeting between representatives of OFML and Mr Allen and Mr Pinfold of Oval. Mr Allen said that renewal terms were outstanding at that stage because the FSA paper had put insurers’ minds into a quandary and they were seeking to work out what the impact was before offering new terms. That information could only have come from SWIL. OFML stated that it appeared that it did not have to revisit any matter that was already with the FOS or any matter where an offer had been accepted but that all other past complaints were to be the subject of review. Mr Goodwin said they were taking on a person on a 6 month short term contract to input relevant data into the database which would help in the review and prediction of further “involvement”. In evidence this was explained by Mrs Kelly as meaning the input of complaints within categories of cause (root cause analysis). Mr Allen’s note of the meeting records that Mr Goodwin advised that “there is a veiled threat within the paper that if the past complaints review was not done correctly, the FSA could make the company revisit all sales whether or not there had been complaints”. OFML therefore proposed to co-operate in all areas. This appears to have become the line to be adopted despite the terms of CP 09/23 and DISP 1.3.3R. The note records that the worst case scenario was difficult to summarise and could only be known once the results of the past complaints review were known. Nonetheless, Mr Goodwin’s view was that, following the impact of the consultation paper, the number of complaints would drop considerably some time into the new year.

Mr Pauley of SWIL had emailed Mr Wynne-Jones of Oval on 8th October reciting the information given to him by Mr O’Connor. He received, on 13th October 2009, a reply that there were 18,000 PPI policies, not all of which were FSA governed and that the average premium was not known, save for the average premium on notified complaints, which might not be relevant. OFML were to be asked the question. There was no disagreement on the calculation of average settlement figures thus far, “although this is very much a moving position”. The email went on to state that there were implications in the current FSA proposals which would take some time to filter through into actual numbers and indications that the FOS was not playing ball with the current raft of matrix settlement offers sent to them for approval. It would probably be well into the new year before the full implications of the proposals were clearer and on that basis it was thought that renewal terms should be sought with resultant certainty of position until October 2010 when the parties would know where they stood.

On 20th October 2009 Mr O’Connor sent an email to CNA in response to other queries which had apparently been raised that day with Mr Pauley. The questions and answers related to the way in which the matrix redress calculations were operating, the FSA’s response, the frequency of PPI complaints and the like. On 21st October Mr Pauley emailed Mr Wynne-Jones to say that he had met with CNA who would be offering renewal terms but that additional claims questions had been asked to which Mr O’Connor had responded. Mr Pauley said that much of the discussion had centred on the excess and the insured’s desire to maintain the common cause excess cap which insurers wished to be removed. The expectation was that CNA would offer a range of different options for renewal terms by the end of the week and if they were not forthcoming, a short extension of 7 days might be obtainable. This message was forwarded to Mr Pinfold. On the following day Mr Pinfold spoke to Mr O’Connor on the telephone.

Mr Pinfold’s evidence was that he had no particular recollection of the 22nd October call with Mr O’Connor but had read Mr O’Connor’s contemporaneous notes of it.

Mr Pinfold did not think he had made his own notes and he thought the call was about the change in methodology of resolving claims and OFML’s decision to abandon the matrix in favour of pursing the FSA guidelines. He thought that he might have referred to “FSA wrath” but would not have used the phrase “endemic, single cause”. In his statement he said that he recalled what the general thinking process was at the time, namely that after CP 09/23 came out, OFML decided to co-operate with the FOS/FSA by proactively revisiting all past complaints, even though not actually obliged to do so then. The idea behind that approach was that, so long as OFML was seen to be complying with the proposals in CP 09/23, the FSA would have no reason to be concerned about it and it should avoid any “targeted and supervisory action” in areas of the PPI market where the FSA had specific concerns about sales practices (as referred to in paragraph 1.6 of the consultation paper). By being proactive in a past rejected complaints review, OFML anticipated it would avoid any FSA “wrath” and avoid having to do a past business review of all the sales. In his statement he said that OFML wanted to avoid such a past business review and to his knowledge did not think there was any single cause to all the complaints that might affect all the sales.

I cannot accept this evidence because it is plain from the terms of the telephone conversations between Mr Goodwin and Mr Pinfold that the latter was told that the primary issue was of failures in verbal disclosure in the telephone conversations with customers, that in 99% of the cases (or at least the earlier cases) there had not been disclosure of the cost of the PPI policies in those telephone calls and, had he read and understood CP 09/23, he would have realised that a past complaints review would involve a root cause analysis which, if conducted properly, in the light of what he had been told, should result in a past business review and redress for non-complaining customers. Furthermore, knowing that OFML sales took place by reference to scripts, deficiencies in sales information given over the telephone in line with those scripts would be repeated across the board, subject to changes in the scripts. It might well have been optimistically hoped by Mr Goodwin and Mr Pinfold, that there was some way of avoiding FSA compulsion to do a full past business review, but they must have appreciated that a proper past complaints review, coupled with a root cause analysis, would lead to a full past business review and redress being offered to thousands of claimants, if the FSA draft rules came into being and the terms of DISP 1.3.3R were followed. Mr Pinfold could not recall when cross-examined if he had mentioned to Mr O’Connor the risk of a root cause analysis being which could result in a wider redress programme.

Mr Pinfold sent an email to Mr Wynne-Jones and Mr Allen of Oval that afternoon in which he referred to his telephone call with Mr O’Connor, as a record of decisions and action taken. It sets out the common view that CP 09/23 was not a material fact which required disclosure to underwriters since CNA should have been aware of its existence. It records SWIL’s agreement to this position. It further records Oval’s view that OFML’s decision to implement the new regulations (not due until 1st January 2010) with immediate effect and the consequent effect on the number and level of complaint redress offers involved did constitute a material fact for disclosure. It had been agreed the previous day between Mr Pinfold and Mr Allen that he would speak to Mr O’Connor at SWIL to discuss the implications which he had since done so that Mr Pauley could raise the matter with the CNA underwriters. Reference was then made to 160 live cases which were the subject of review in accordance with the matrix procedure agreed with insurers which now had to be re-reviewed in accordance with the new redress guidelines contained in CP 09/23 and the draft FSA handbook attached. The revised number of “live” cases would increase to “some 460” according to OFML, all of which had been reported on bordereaux in the past. The worst case figures for this past complaints review totalled £776,000 approximately covering the years 2006/2009. Mr Pinfold’s note concluded by saying that he had given those (in broad terms) to Mr O’Connor but stressed that they were very much “worst case” and that OFML expected complaint numbers to dwindle to a trickle by the following summer because of the ability under the new guidelines to resolve redress with the lender/provider rather than customer, thus removing large cash windfalls from the equation and the concomitant incentive to claim. “We are still very much in unknown territory as far as exact data is concerned, but I have sold it as best I can to James”.

Mr O’Connor’s evidence was that it was not until the telephone conversation of 22nd October with Mr Pinfold that CP 09/23 was brought to his attention at all. He accepted that he may have agreed that it did not need to be disclosed to insurers because it was in the public forum but said he was not told about Oval and OFML’s apparent perceptions of its importance.

He understood, in the call from Mr Pinfold. Although CP 09/23 was only a consultation paper, OFML’s view was that the FSA had already made up its mind as to how redress should be calculated for PPI complaints and the circumstances in which redress should be paid. OFML therefore proposed to review all previously rejected complaints and, in order to deter claims management companies, to pay redress directly to the lender so the loan could be restructured. Although it was not required to take those steps at that time, OFML was keen to ensure that it was seen by the FSA as handling its exposure in a proactive and responsible fashion and that it was assisting and treating its customers fairly.

His handwritten note of the call showed, he said, that Mr Pinfold intended to speak to OFML to ascertain whether it had received any formal response from the FSA in respect of its proposal for dealing with PPI complaints as that would need to be advised to underwriters and that it also showed that OFML was keen to ensure that its insurers for the 2008/2009 policy period agreed to the approach taken in respect of handling of PPI complaints, especially in circumstances where OFML had decided to review all complaints in accordance with the draft FSA guidelines which were expected to be implemented in January.

From the discussion on 22nd October Mr O’Connor said he understood that OFML considered that taking these steps would avert the wrath of the FSA and avoid any risk that OFML might be required to conduct a review of all its PPI sales, including those where no complaint had been made. The sensitivity of the discussion was that, by agreeing to take such steps, OFML might be considered by its insurers as inviting claims and/or incurring liabilities and OFML thus wanted insurers’ agreement to their proposed course of action so as not to jeopardise its claims under the cover.

Mr Pinfold explained that the worst possible consequence of incurring FSA’s wrath would be the FSA compelling OFML to review all 18,000 PPI sales, which was something OFML wished to avoid.

Mr Pinfold said that it was OFML’s view that the past complaints review would be completed by the end of the first quarter of 2010 and that OFML did not intend to allocate any specific resources dealing with PPI complaints after that date since it envisaged a fall off in them.

It was Mr O’Connor’s evidence in his witness statement that nothing in the call led him to believe that there was any real risk that a general past full business review would be ordered by the FSA and that the worst case scenario was payment under the past claims review of sums of approximately £800,000.

Mr O’Connor was not challenged in cross-examination about his evidence of this telephone call and he said that OFML’s primary concern was to stay the right side of the FSA because its wrath could result in review of all 18,000 PPI sales which could result in a calamitous situation. He repeated that he was told of OFML’s confidence that, by being proactive, the situation could be contained and would effectively go away by the middle of the following year.

It appears from this evidence that Mr Pinfold did not tell Mr O’Connor:

That he had been told by Mr Goodwin that 99% of OFML sales or earlier sales were subject to the same defect in sales procedure, namely the failure to tell the customer orally on the telephone what the cost was of the PPI.

That CP 09/23, if followed, involved a root cause analysis being undertaken at the same time as the past complaints review and, should endemic or systemic root causes be found for the complaints, a full past business review would be required which could result in redress being offered to customers affected by such root cause deficiency, whether they had complained or not.

It seems unlikely that Mr Goodwin and Mr Pinfold had misunderstood the terms of CP 09/23. They may have envisaged the possibility of a fudged root cause analysis which did not give rise to identification of systemic or endemic failure, or considered that no past business review would be done unless the FSA compelled it or merely put the best spin on their hope that OFML might in some way avoid a past business review. It must have been clear to them from the terms of CP 09/23 that observing the terms of it (and of the subsequent rules which it was envisaged would come into force in the same form) would have meant that a past complaints review would involve a root cause analysis which would give rise to identification of systemic failure in providing oral sales information on the telephone in accordance with the standard script and that compliance would result in redress to vast numbers of customers who had not complained at all.

What however the terms of Mr O’Connor’s note reveal is that there was discussion of the risk of endemic failures in the sales process and of a review of all 10,000 PPI sales. There was discussion of the concern felt on this point as well as of CP 09/23. He was told of the desire to avoid escalation to a full past business review.

Later on 22nd October, Mr Pauley of SWIL emailed Mr Wynne-Jones of Oval referring to the telephone call between Mr Pinfold and Mr O’Connor regarding CP 09/23 and OFML’s intentions, stating that the change in claims information was clearly material which had to be disclosed and that he and Mr O’Connor were discussing how to approach the underwriter about it that afternoon. The result was a note which was initialled by the CNA underwriter on 22nd October 2009 which referred to the telephone conversation between Mr Pinfold and Mr O’Connor in the following terms:

CNA would be aware of CP 09/23 and its terms and could therefore be taken to know of a possibility of a full review of past sales following a past complaints review and root cause analysis. Moreover, CNA, in the person of Mr Healy, knew of the 37 decisions, the scripted sales processes and the matrix which had been discussed at the 21st August meeting for redress of sale by reference to types of deficiency. The absence of any reference to root cause analysis in this note and a possible full business review, in the light of what was known, should not therefore have escaped CNA with the concomitant risk that this presented.

This resulted in CNA offering renewal terms which were sent by Mr Pauley of SWIL to Mr Wynne-Jones of Oval on 23rd October. There were three options, one of which involved removal of the common cause cap on the excess whilst the other two involved a cap of either £250,000 or £500,000 at a higher premium and an additional excess of £3,000 per claimant in respect of all further claims after exhaustion of the excess cap. Mr Pauley commented that the terms reflected the fact that OFML was in some distress with the regulator who appeared very determined to ensure that PPI redress was made. At the same time as notifying CNA’s proposed renewal terms to Oval on 23rd October, Mr Pauley told Mr Wynne-Jones that Mr O’Connor was giving “a precautionary claims notification” to the Excess Layer Underwriters (Hiscox) and that he and Mr O’Connor would be seeing the Hiscox underwriter on Tuesday morning to discuss renewal terms.

Oval’s response later that day stated that the additional £3,000 excess per claimant, once the excess cap had been exhausted, was unacceptable since the average claim was £3,310 at that point. OFML’s counter-offer involved a common cause excess cap of £300,000 without the additional £3,000 excess per claimant after exhaustion of it. Negotiations appeared to have continued and on 28th and 29th October CNA and Hiscox each agreed to a 7 day extension to the existing cover in order to seek to agree renewal terms.

In a telephone conversation between Mr Goodwin and Mr Allen (of Oval) on 27th October in relation to renewal, CP 09/23 was discussed and the negotiation of terms regarding the excess. Mr Allen stated that underwriters were wondering about the number of complaints and Mr Goodwin commented that insurers knew about the complaints already made which OFML was now reviewing. Mr Allen said that underwriters were also worrying about “this veiled threat from the FSA that you might have to go back and sort of revisit all 18,000”. In this conversation and another of the following day, there was discussion of a six month renewal as opposed to a twelve month renewal since the position might be clearer at the end of the shorter period. The pros and cons of this were discussed and the possibility of an offer of worse terms in six months time because of the possibility that “all 18,000 have got to be done”. Mr Goodwin expressed the view that this was unlikely to happen within the six months and Mr Allen stated that it was a threat, in the way Mr Goodwin read it, which he thought was the right way, for anybody who did not comply.

On 29th October 2009 Mr O’Connor sent an email to Hiscox giving “a notification of circumstances which may give rise to a claim” on the excess layer policy. The notification was in the following terms.

This notification was therefore limited to circumstances which it appeared might give rise to claims on the past complaints which were now to be reviewed, because the aggregate appeared likely to exceed the threshold of 50% of the maximum payable under the CNA policy. No notification was made of circumstances which might give rise to claims on a full business review of all 18,000 PPI sales or 10,000 regulated PPI sales as a result of the root cause analysis which the past complaints review necessarily involved. Whilst the Hiscox underwriter could be taken to be aware of the terms of CP 09/23 for the purposes of material disclosure for renewal for the following year, the question of notification of circumstances to the existing year was a different matter.

On 30th October Mr O’Connor sent an email to CNA in the following terms:

This was the fullest explanation given to CNA in writing and revealed the possibility discussed by OFML, Oval and SWIL of a review of all 18,000 PPI sales, of which 10,000 were regulated. Whilst OFML concern at this possibility was expressed since this “would effectively bury the company”, the way in which the matter was expressed indicated that such a review would happen if the FSA felt that OFML had an “endemic or single cause/problem/issue”. Whilst not expressly saying so, the email could be read as implying that if OFML fell foul of the FSA, the latter could take that view, which would result in a full review of all past PPI sales. This might carry the further implication that if OFML did not fall foul of the FSA, the review of all past sales might be avoided. CNA were thus on notice of the possibility of a full review of past sales of which it knew already by reason of CP 09/23 and its past dealings with OFML and its claims processes, even though the email played down that possibility and could be read as suggesting that it could be avoided if OFML did not fall foul of the FSA. The conclusion arrived at was that the most pragmatic and commercial approach to adopt was thus to review all complaints that had been rejected using the FSA’s more stringent guidelines (instead of the matrix) with higher settlement values in respect of all 400-450 complaints. This email thus tallies with Mr O’Connor’s note of his telephone conversation with Mr Pinfold to a significant extent but contains the same possible ambiguity about the circumstances in which a past business review might take place. I am sure that the email was carefully drafted.

To an insurer who had read CP 09/23 and was aware that a past complaints review involved a root cause analysis with the potential for identification of an endemic or single cause/problem, this might seem no more than the best spin that could be upon the position by brokers. Underwriters, who could be taken to know of the terms of CP 09/23, would not be able to avoid a policy on the basis of non-disclosure of its full contents. Given that CNA accepted that all the mis-selling had a common cause for the purpose of the common cause excess cap, given underwriters’ knowledge of the 37 adverse decisions and OFML’s sales processes by reference to scripts, underwriters would know that there was a real likelihood of a root cause analysis being carried out with a past complaints review which would result in identification of an endemic, systemic or single cause which not only triggered the common cause excess cap in the policy but would result in a full past business review of all PPI sales with drastic consequences.

In these circumstances it would be hard for CNA to avoid the 2009/2010 policy for material non-disclosure and CNA did not do so having ultimately agreed renewal terms with a common cause excess cap and an applicable excess of £2,500 per claimant once that aggregate common cause cap had been exhausted.

Oval has accepted that it should have recommended a block notification in respect of the 2008/2009 year because of what it knew about CP 09/23 and its impact upon OFML’s business. It knew that 99% of OFML’s sales (or at least its earlier sales) were defective in the eyes of the FOS because of the failure verbally to disclose the cost of the PPI policy, and it knew that any past complaints review would involve a root cause analysis which would identify this (since it had already been identified). It also knew, or should have known, that a full past business review of all PPI sales would be required if OFML was to fulfil the proposed regulations set out in CP 09/23, even if it did not appreciate that such was already required under DISP 1.3.3R. Whether the FSA formally required it or not, this was an obligation which would fall on OFML if it acted in accordance with CP 09/23 and DISP 1.3.3R. In such circumstances, any competent broker would have appreciated the likelihood of vast numbers of claims, whether by reference to 99% of early sales, 99% of 10,000 policies or 99% of 18,000 policies and that such claims were likely to succeed in the light of experience thus far.

In such circumstances Oval rightly accepted that it should have recommended a block notification because of the excluding terms in both the CNA policy for 2009/2010 and the Hiscox policy for 2009/2010. Although CNA never did rely on the provision in its policy, Hiscox could rightly refuse to pay on the basis that there had not been prompt notification of any circumstances which might give rise to a loss or claim which appeared likely to exceed 50% of the maximum payable under the underlying policies. At the time when the notification was given to Hiscox on 29th October 2009, not only did Oval and OFML know that there would be a review of all rejected complaints but they knew that a root cause analysis of those complaints would result in something of the order of 99% of early sales being found to be defective, giving rise to the need for redress.

As set out above, SWIL was not told of the likelihood that any root cause analysis would have this effect. Nor, on the evidence, was Mr O’Connor aware of the terms of CP 09/23 and the need for a root cause analysis as part of the post complaints review. The question which arises is whether the knowledge that it did have or the knowledge which it should have had, without express notification by Oval of those matters would have required any competent insurance broker, fulfilling its duties, to recommend block notification.

SWIL drew attention to the differences in the knowledge of Oval, in the persons of Mr Pinfold and Mr Allen and that of SWIL in the person of Mr O’Connor. No evidence was adduced from Mr Pauley so that any question of his knowledge falls to be deduced from the documents. It appears that he had more extensive knowledge of regulatory matters, which he, along with Mr Allen, may have needed for renewal purposes. He liaised closely with Mr O’Connor and cannot be taken to have had any less knowledge and probably had more. The evidence of the experts was that brokers who had experience in the field of professional indemnity and put themselves forward to effect placement of such business should at the least be broadly aware of the terms of a consultation paper such as CP 09/23, certainly if it was referred to them. Whilst underwriters could be expected to know of it, as matters which, in the ordinary course of their business, they could be expected to know, any broker dealing with underwriters would need to be equipped to discuss such matters with them. It will be recalled that Mr Allen knew that insurers were “in a quandary” as to what to do about CP 09/23 in the context of renewal, which is information which could only have come from the placing brokers. The placing brokers should have familiarised themselves with the terms of CP 09/23 in order to effect placement and discuss issues raised by the underwriters about it.

It is clear that from 22nd October onwards, Mr O’Connor and Mr Pauley must have been aware of the risk of a full business review of sales, whether as the result of falling foul of the FSA and it requiring such a review to take place in consequence of a root cause analysis or from proper consideration of the terms of CP 09/23. Whilst SWIL did not know OFML’s perceptions of the extent of deficiencies in its scripted sales (the 99% figure imparted to Mr Pinfold) Mr O’Connor had attended the meeting on 21st August, knew of the basis of sales by reference to scripts, knew of the 37 adverse FOS decisions and their terms which showed repetitive failings of the same kind, knew of the agreement as to application of the common cause excess cap and knew that future FOS decisions were likely to be unfavourable. Moreover he had been told in terms that there were 18,000 PPI sales of which about 10,000 were regulated.

From the terms of 30th October email which Mr O’Connor sent to CNA, there is no doubt that SWIL knew of the possibility that there was an endemic or single cause problem/issue which could result in a review of all past PPI sales. Whether that risk would materialise simply as a result of carrying out a root cause analysis as part of the past complaints review that OFML had decided to conduct or only as a result of the FSA requiring such a review could not affect the existence of the risk but only its potential seriousness. In that respect, Oval’s knowledge of the severity of the risk was considerably superior to that of SWIL.

Mr O’Connor’s evidence was that he understood from Mr Pinfold that the hypothetical possibility of such a full past business review was not a real risk because OFML was voluntarily conducting a past complaints review. In that context reliance was placed by SWIL upon the terms in which Mr Pinfold expressed the position in his internal email to Mr Wynne-Jones and Mr Allen about the October 22nd telephone call with Mr O’Connor (see paragraph 76 above). There, he stated that he had “sold” the position as best he could to Mr O’Connor, stressing the worst case scenario in relation to the figures payable in respect of the past complaints following review. Reliance was also placed upon Mr O’Connor’s note of the telephone conversation with its reference to the “worst case”, to the ameliorating factors to the intent to resolve matters by the end of the first quarter of 2010 and to the avoidance of escalation to the whole of the 18,000 PPI sales.

As I have already stated, there are documents which clearly show SWIL’s knowledge of the number of PPI policies sold by OFML and those which were the subject of regulation after January 2005. It is also clear, in my judgment, that SWIL was aware that scripts were used in the sales process with changes made in late 2007 to improve oral disclosure from January 2008 onwards in accordance with ICOBS. Any sensible review of the 37 adverse FOS adjudications would have revealed the fundamental point being held against OFML by the FOS, namely the failure to make oral disclosure of matters in the telephone conversations with customers. Although 37 sales represented a small fraction of the total number of sales actually made, and less than 10% of the complaints which had been referred to the FOS, the uniformity of the complaints which Mr Pinfold readily identified, when taken with the fact that the process was known to be a script-orientated process should have driven any competent broker to the conclusion that there was an inherent risk that similar deficiencies would be found in a large number of the sales above and beyond those where complaint had been made. A deficiency in the sales script had been recognised as a potential common cause, as between brokers, since November 2008 and the three kinds of failure referred to as absent from oral disclosure in the 37 adverse FOS decisions were, as a matter of common sense, evidently to be ascribed to a deficiency in the script rather than to random and inadvertent failures by salesmen to adhere to the terms of the script. Whilst the preliminary root cause analysis which was conducted the following year was able to identify, at different stages, by reference to different forms of the script, some seven deficiencies in oral disclosure, the brokers knew that the underwriters were treating all OFML’s mis-selling claims as having a common cause and the failure in the sales process of telling insureds what they needed to know as the common cause. If insurers did not resile from that position and if there were deficiencies in the scripts, a large number of claims would inevitably result from a full past business review.

The Supplementary Information which had been supplied to SWIL in September 2009 had specifically identified changes to the sales scripts at the beginning of 2008 as a relevant feature and SWIL had itself formed the view that the FOS’ decisions were as much “political”, as based upon the merits of individual complaints, in circumstances where PPI sales were generally considered to be cases of mis-selling where the customer had not been told all he needed to know orally.

Mr O’Connor and Mr Pauley had both been referred to CP 09/23 (by email and in telephone conversations) at latest on 22nd October 2009. The past complaints review which was to be conducted in consequence was the basis of the “precautionary notification” to Hiscox which SWIL itself decided was required. SWIL recognised that OFML had a regulator who appeared very determined to ensure that PPI redress was made.

In the context of CNA’s expressed concerns about CP 09/23, it is hard to escape the conclusion that Mr Pauley must have taken some steps to familiarise himself with its terms. It is, in my judgment, significant that Mr Pauley did not give evidence. Although he has left SWIL’s employment and was apparently not willing to assist SWIL, and a party who calls a witness under a witness summons is at risk if it does not know what he may say, it is commonly the case that if a witness summons is threatened in advance of a trial, a potential witness becomes more co-operative. Regardless of this, it is hard to escape the conclusion that Mr Pauley, the placing broker, as opposed to Mr O’Connor, the claims broker, would have had a greater knowledge of the terms of CP 09/23 and that this may be reflected in the ambiguously drafted paragraph of the email to CNA to which I have earlier referred. If this is the case, he too was playing down the risk when broking it to CNA, whilst conscious that CNA could be expected to know the terms of the consultation paper.

Mr Flaxman, the expert whose evidence was adduced by Oval, in answer to questions from the court, said that if the paper had been referred to brokers, they ought to have a broad understanding of its terms and to be conscious of the two risks about which he was cross-examined, namely the risk of falling foul of the FSA and being required to carry out a full past business review and the risk of such a review resulting from properly effecting a root cause analysis as part of the past complaints review. Either way, SWIL could be expected to realise that there was a risk of a full past sales review.

Mr Phillips, the expert whose evidence was adduced by SWIL accepted that, if the fact of CP 09/23 was drawn to a competent broker’s attention, it was necessary for the broker to familiarise itself with the contents or ask for guidance. He went on to say that it was a long document (about 50 pages) and “it would be nice to think” that the person drawing the paper to his attention “would obviously tell him what the implications were”. There is no suggestion in the evidence that Mr O’Connor or Mr Pauley asked Mr Pinfold or Mr Allen what CP 09/23 provided, asked for any guidance on it or were unable to stake steps to familiarise themselves with it.

I am driven to the conclusion that a representative of SWIL should have taken steps to familiarise himself with the terms of CP 09/23 or at the very least asked for guidance on it. Mr O’Connor and Mr Pauley liaised with one another in relation to the notification which was actually given of the risk involved in the past complaints review and they should have considered whether there was a wider risk in the light of the information that they had about OFML’s sales processes, the scripts, the 37 adverse FOS decisions and the recognition of a common cause for insurance purposes which might to a greater or lesser extent reflect an endemic or systemic cause in the eyes of the FSA, as referred to in SWIL’s 30th October email to CNA.

When asked about that email and the terms of the ambivalent paragraph in it, Mr Phillips agreed that it identified the possibility of a full past business review and agreed that a placing broker would need to consider recommending a block notification of the 18,000 policies of which it had been told, given sufficient time to do so. The only basis upon which he could have formed this view was that there was a real risk of a full past business review because of an endemic problem in the sales processes.

Mr Phillips considered that it would have been too difficult in the time available to back up or evidence the matters required for a block notification to be made, but accepted that it should have been considered.

The extent of SWIL’s knowledge is revealed by that email of 30th October which sought to put the best “spin” upon the position in the light of information received from Mr Pinfold that although knowledge of OFML’s concern at the possible finding by the FSA of a systemic cause and a consequent review of all PPI sales is not the same as knowledge that OFML knew of the existence of a systemic cause, the likelihood or strong possibility of such a systemic cause is something which should have been apparent to SWIL, had Mr O’Connor and/or Mr Pauley applied their minds to the information that they already had as set out earlier in this judgment.

Whilst therefore I find that Mr Pinfold did play down the extent of the risk when talking to Mr O’Connor and in all probability, made no express reference to a “mandatory” root cause analysis as part of the “voluntary” past complaints review, with an inevitable resulting review of all past PPI sales, in the light of script deficiencies and sales deficiencies (however classified) any competent broker, in my judgment, in the position of SWIL would have concluded that there was a real risk of a full review of PPI sales which would reveal large numbers of cases affected by script deficiencies and failures in oral disclosure of information to the customer. On the basis of the evidence adduced, both factual and expert, I consider that a competent broker would have recognised the risk of multiple claims and considered the issue of block notification. Because of the risks involved in not doing so, the risk which eventuated with Hiscox, no competent broker would have failed to recommend that such a notification be made with the benefit of legal advice.

It was SWIL’s case that, even if it had sufficient knowledge by 22nd October 2009 of the risk of a full past business review, of the number of policies sold, of the existence or likelihood of systemic defects in OFML’s sales processes and of large scale redress being required by OFML, it could not be held to be negligent in not recommending a block notification in the circumstances which obtained at the time.

In this context it relied on a number of different factors.

A notification of 10,000 or 18,000 policies to CNA and Hiscox would be fraught with difficulties and was likely to be rejected. The extent to which it was permissible was a matter in doubt. The general perception was that insurers were understandably reluctant to accept any such notification as valid and would do their best to find reasons to reject it.

The possible effect of a block notification of such policies on renewal had not been investigated and had not been the subject of negotiation with insurers. Making a block notification to the current year’s policy could well result in the refusal of the underwriter to renew in the following year which in itself would create difficulties in a market where PPI sales had acquired such a reputation that the vast majority of insurers would simply not countenance professional indemnity cover for it.

OFML’s parent company would need to be consulted about making such a notification, given the risks.

Legal advice would be necessary on the prospects of effective notification before OFML would be prepared to make it.

There was limited time available prior to the expiry of the 2008/2009 policy for these steps to be taken and for a root cause analysis to be carried out, as was done in 2010 before a lawyer could properly advise and the pros and cons could properly be assessed.

SWIL drew attention to the circumstances in which block notification took place in 2010 where consideration was given to such notification by Oval from August onwards and by OFML, from September onwards. Formal legal advice was taken by OFML in September and a preliminary root cause analysis was conducted in October which took 2 weeks. Renewal terms were investigated, OFML’s parent company was consulted and a decision was taken by OFML in the light of legal advice and the FSA Policy Statement 10/12 which was published in August 2010 and which essentially put in place the proposals set out in CP 09/23.

SWIL pointed to an email of 31st August 2010 from Paul Allen who informed Mr Fitzgerald (who may well have been the initiator of the idea of block notification) that it was “our view” that block notification was “too risky” and could leave OFML exposed since CNA would fight the notification tooth and nail and OFML would have burned its boats by taking such action. It would then be left to pay all claims in full pending “a decision”, (by which was presumably meant a final decision made by CNA ultimately to accept the notification or a decision of the court).

Mr Pinfold denied that this was his view but at an earlier meeting on 11th August 2010, he was recorded by Mr Allen as giving his opinion that block notification was not allowed under the policy. He accepted that he was negative about the idea in general. Nonetheless it was Oval which raised the subject with OFML, stating that it should take legal advice and come to a decision whether to make a block notification or not. The expert evidence (and case law) established that similar notifications had been given in the context of pensions mis-selling and regulatory action.

When matters were discussed with OFML on 30th September 2010, following publication of FSA PS 10/12, Ms Kelly stated that they would be required by the FSA to do a root cause analysis and that OFML anticipated that it would end up doing a full past business review. It was OFML’s view, as recorded in a note, that about 30% of policy holders might make a claim and that it was the period between January 2005 and January 2008 which was seen as the exposure period, because sales post-ICOBS were compliant with the new guidelines, as the preliminary root cause analysis later appears to have illustrated.

In discussing the issue of block notification at that meeting with OFML on 30th September 2010, Oval, in the person of Mr Pinfold, stated that it was a gamble with no guarantee of success. Consequently OFML took legal advice on the subject, as recommended, and their lawyers, after considering the preliminary root cause analysis advised that it was a strong case for block notification and drafted the form of it. That notification, so far as relevant, took the following form:

On the evidence of Mr Shilton, it is clear that OFML would have followed the advice they were given by brokers and solicitors in 2009, had any such advice been given about block notification at that stage. It was unrealistic to suggest, as was put to him in cross-examination, that the matter would have been dumped in his lap on 27th October with the policy expiring on 31st, leaving insufficient time for carrying out the necessary investigations and thought processes in order to make a decision about block notification. A competent broker with the knowledge of SWIL on 22nd/23rd October 2009 would have raised the question of block notification in the same way as it was raised in 2010 by Oval and lawyers would then have been consulted and an extension of the current policy obtained. In order to satisfy themselves, lawyers might well have wished to conduct a similar preliminary root cause analysis as was done in 2010 but, in reality, a script mapping exercise would have been sufficient to identify the systemic defects which were recorded in the 37 adverse FOS decisions. A comparison of those defects and others found in complaints, as against the scripts, would show the oral non-disclosure in the selling process of which the FOS and the FSA disapproved. It is noteworthy that Mr Pinfold was able to identify three types of selling deficiency from his perusal of the FOS decisions, without, it appears, even looking at a script. A comparison of the defects as against the scripts would show that the reason for the oral non-disclosure was not a failure to stick to the script but because the scripts did not make provision for that disclosure. As Mr Goodwin knew this to be the case, as shown by his telephone call with Mr Pinfold, it was at most a matter of checking that he was broadly correct.

The script mapping exercise would have taken at most several days (as Mr Shilton said), in circumstances where Mr Pinfold himself had speedily identified three main deficiencies, where Mr Goodwin had said that 99% of sales (or older sales) suffered from one of them and OFML had, on the evidence of Mrs Kelly, taken on a person to input claims data and to classify the nature of complaints made.

Between 23rd October and the expiry of the policies which were in fact extended by 7 days to November 6th, there was enough time to take legal advice, to take the necessary steps to evaluate the position, to consult the parent company and to make the decision to block notify. An extension was obtained in the circumstances as they were in 2009 because of the uncertainty surrounding CP 09/23 and the time needed to negotiate and agree terms for renewal. There would have been no difficulty in negotiating such an extension in the hypothetical situation where OFML were considering the issue of block notification. They were not bound, if they wished to seek an extension because they were considering block notification, to let insurers into their thinking. They could merely seek an extension whilst considering the impact of CP 09/23 and negotiate renewal terms as actually happened. Mr Flaxman discussed the possibility of having candid conversations with underwriters about block notification and cover in future years but there was no need for that discussion to take place in order to obtain the extension which OFML would have wanted.

Whilst there could be no guarantee that such a notification could be accepted, the legal advice would have confirmed that it was a strong case for block notification – as strong as that perceived in 2010. As it happened in 2010, CNA actually accepted the notification but Hiscox did not. If neither had accepted it in 2009, then the matter would have been litigated and, given what is now known, OFML would have succeeded in establishing the validity of its block notification.

At the time there were obvious risks. A block notification might well result in a refusal to offer cover for the ensuing year, as Hiscox did on receipt of the 2010 block notification. Whether Hiscox would in any event have refused cover for the 2010-11 year is not apparent. CNA however, continued on risk with higher premium and excesses, with a view to recovering, by way of premium, some of the losses it was likely to pay on the previous year’s block notification. As a finance broker, OFML required professional indemnity cover or its equivalent in order to trade.

The key issue, however, was that which militated in favour of a block notification in 2010, being the risk in failing to give such a block notification and which jeopardised the following year’s cover. That risk eventuated when Hiscox rejected the 2010 block notification on the basis that it should have been given a year earlier. Any future CNA or Hiscox cover could be jeopardised by a failure to make adequate notification of circumstances because of the terms of the notification clauses in the two policies.

Under the CNA policy General Exclusions, CNA was not to be liable for any claim directly or indirectly based on or arising out of or in any way involving “any circumstance which was known to the insured prior to … inception and which the insured at such time knew or should reasonably have known might give rise to a claim against the insured”. “Circumstance” was defined in the policy as meaning any circumstances” which may give rise to a claim against the insured or any circumstance which the insured becomes aware of or should reasonably have become aware of which may give rise to a claim against the insured”. The insured was thus obliged to notify circumstances which might give rise to a claim of which he became aware and the terms of clause 6 applied where this was done. Under the Hiscox policy, no payment would be made in the absence of prompt notification of circumstances which may give rise to a loss or claim likely to exceed 50% of the underlying policy limit. (All emphasis added.)

It is clear that the “may” or “might” criteria creates a low threshold for notification of circumstances and consequent debarring of cover for failure. It is accepted by SWIL that Hiscox’s rejection of the block notification in 2010 because of failure to notify circumstances in 2009 was justified although CNA did not take the same view in relation to its policy. The failure to give notice of circumstances known or which reasonably should have been known would jeopardise cover under both policies in future years, if the appropriate financial limit was in view. The risk of not obtaining cover for the ensuing year existed regardless of block notification to the earlier year. However it is not hard to envisage circumstances which a renewal offer could be sought, obtained, and accepted, with disclosure of material facts prior to expiry of the current year, followed by block notification to the current year policy.

The factors which influenced the decision to notify in 2010 were the same as those which should have been brought to bear in 2009, once the decision was taken to treat CP 09/23 as if it were the Policy Statement which in due course emerged as PS 10/12 in August 2010.

Whilst the terms of the notification in the Hiscox policy did not require any great detail to be given or for it to take any particular form, the policy would only pay if the indemnity under the CNA policy was paid in full. In consequence, there had to be a block notification under the CNA policy to which clause 6 of that policy applied. Clause 6 is not in the nature of a condition precedent as such but the clause requires the notification to contain certain details. The clause is silent as to the position if such detail is not given. Self-evidently the purpose of giving such notification with as much detail as possible is so that the insurer can take steps to give, investigate, defend or settle claims as it was entitled to do under clause 6.2 of the general terms and conditions. That entitled the insurer to take over the conduct of the claim, although it was not obliged to do so. In the ordinary way an insurer could only reject a notification of circumstances if the notification was too vague for there to be any real possibility of a claim arising from them and clause 6 was clearly designed to ensure a degree of specificity in any notification which was made.

The clause provided that if the insured gave written notice in connection with circumstances which might give rise to a claim and that notice contained certain details, then any claim subsequently made arising out of, or connected to those circumstances was to be deemed to have been made in the earlier year to which notification was given. If the notification was non-compliant for lack of such detail, provided that there was cover in the following year on the primary layer, the consequence would appear to be that claims made in such years would be covered by those years’ policies, subject to any questions of avoidance for non-disclosure of known material fact. It would be hard for an insurer to reject a claim in the subsequent year, where he had rejected a block notification of circumstances in the previous year which gave rise to that claim.

It is self-evident that the notification of circumstances to an existing year’s policy ties in with the obligation of the insured to disclose material facts to the renewing insurers for the following year. Although the concepts and functions are different and do not necessarily require the same information to be imparted, there is clearly considerable overlap. The decision of the underwriters as to renewal on the one hand and acceptance of the block notification on the other may be linked if the same underwriters are involved. An insured which attempts to make a block notification puts an insurer on notice of the anticipation of significant claims which might not necessarily appear from material information given by way of disclosure on renewal. A block notification of circumstances is only notice that claims may arise in such circumstances but where the notification relates to all the business of the company and identifies potential endemic systemic failures in selling, the insurers will immediately be aware of a large scale issue, whether details of the kind set out in clause 6 are given or not.

As part of the renewal process, OFML disclosed the decision it had taken in the light of CP 09/23 to conduct a past complaints review. The insurers could be taken to know of the root cause analysis which should have accompanied that and which would have led to a full past business review on the identification of systemic failures, which should have been apparent to CNA as they should have been to SWIL. OFML’s perception of the extent of systemic failure was not made known to SWIL or CNA but was capable of being deduced from the material that was known to them. It seems that CNA considered that it was told enough to appreciate the risk, probably as a result of seeing the 37 FOS decisions, the meeting of 21st August, the matrix of sales deficiencies and the email of 30th October, having been told of the way in which sales took place. This may have influenced CNA’s decision to accept the later block notification in 2010 which may not have come as much of a surprise.

Hiscox’s position, however, was different when it came to consider block notification in 2010 in the light of the limited notification of the past claims review and the risk associated with that in 2009. The risk of Hiscox deciding not to renew in 2009/2010 was obvious to the brokers and discussed by them. It should have militated in favour of a block notification in order to ensure that there was cover in the current year for claims which would emerge in the future out of circumstances already known. The effect would be to limit cover to the aggregate limit to that year and risk non-renewal for the following year. But, for the reasons already given, it should not have been impossible to agree on renewal prior to making the block notification and even to have discussed it in the same way that the limited notification was the subject of discussion with the renewing underwriter also.

The details required by clause 6 included the names of potential claimants which, as notified in 2010, included all customers on sales between 14th January 2005 and 20th February 2009 – in excess of 10,000 sales. The identities of the companies engaged in the sales were also given.

The acts which formed the basis of the circumstances which could give rise to the claims were set out in a summary of the preliminary root cause analysis attached as an appendix to the letter to the insurers making the notification. That letter took the same form for both CNA and Hiscox, as set out earlier in this judgment. The appendix referred to PS 10/12 and DISP 1.3.3R and the root cause analysis which was required when reviewing complaints about PPI sales. It referred to the knock on effect of discovery of a systemic deficiency in sales practice on customers who had not complained and the possibility that further complaints would be made following notification to them. The results of the preliminary root cause analysis were set out by delineating eight potential systemic failures which might affect the listed sales between January 2005 and February 2009, as the acts or omissions which formed the basis of the circumstances giving rise to the claim.

The consequences and nature of monetary damages were not spelt out beyond those paragraphs in the letter which are set out above. Nothing was said as to the circumstances in which the insured first became aware of the circumstances which might give rise to a claim based on the acts and omissions in question, beyond the reference to the preliminary root cause analysis which had been undertaken. DLA, the solicitors acting for OFML considered that a court would not allow an insurer to escape the effects of the 2010 notification on the grounds that it was too vague and did not comply sufficiently with clause 6. I agree.

In my judgment there would have been no real difficulty in 2009 in informing insurers of the list of potential claimants, the identity of the selling companies and the systemic deficiencies identified in the 37 FOS adverse claims decisions and/or other complaints, by reference to the scripts used – script mapping. The results would have been much the same as those emerging from the preliminary root cause analysis in 2010. Whilst legal advice would have been sought, that could have been obtained quickly, the script mapping exercise done, the parent company consulted and, following insurers’ offer of renewal for 2009/2010 and acceptance by OFML, the block notification could have been given before the expiry of 2008/2009 policy year in the same way as the limited notification was given to Hiscox.

The danger of not doing so was revealed by Hiscox’s stance which it is accepted was correct. As appears above, OFML knew enough about systemic defects without the solicitors conducting a preliminary root cause analysis. So did Mr Pinfold. So too should SWIL in the persons of Mr O’Connor and Mr Pauley, given the information made available to them, though they might not have appreciated the impact in the way that Mr Pinfold did. A root cause analysis or script mapping exercise was only necessary to evidence the systemic defects of which OFML was fully aware and which it could have listed, at a moment’s notice, as circumstances which might give rise to a claim in the light of CP 09/23 and the regulatory position as understood. The notification did not require evidence to support it – merely details of the kind to which clause 6 referred, which would ensure that it was not so vague as to be void. Any assessment of the consequences of not notifying circumstances under policies which shut out claims made later, which arose from circumstances which were known or should have been known, ought to have led to the recommendation to make or at least consider making a block notification with advice from lawyers to hand.

In my judgment, had SWIL acted as any reasonably competent broker should, its personnel would, in the light of the systemic causes of which they should have been aware, have seen the risk of non-notification of circumstances as greater than any risk involved in notification, notwithstanding any playing down of the risk of systemic defects, root cause analysis and full past business review on the part of Oval’s personnel. Whatever difficulties surrounded the making of such a notification and the decision which had to be taken to make it, no competent broker would have failed to consider it and recommend to the insured that they should, subject to legal advice, take such action. None of the practicalities to which reference was made stood in the way of making such a notification which could have been made in the time available before expiry of the extended policies.

It is clear from the findings of fact that I have already made that, whereas Oval’s personnel were told in terms of the extent of the problem, SWIL’s personnel appear to have been left to work it out for themselves in circumstances where Mr Pinfold was playing down the risks of multiple claims emerging. It is said by SWIL that it should not be held liable for being misled by Mr Pinfold as to the seriousness of the risk of a past business review and large scale redress. In my judgment however this is a situation where both brokers were at fault because they each failed to grapple with the question of block notification at all in 2009 when they should have done in the light of the information each had (even though the information was different). Had the matter been raised and discussed between them and the appropriate advice given to OFML, legal advice would have been obtained and the notification made in 2009 in much the same way as it was made in 2010. It is not open to Oval to complain that SWIL believed misrepresentations made by it, but the fact remains that, as a matter of causation, it was the failure of both brokers to do what they should have done which led to OFML’s failure to make a block notification and to the loss which was incurred in consequence. Oval was entitled to look to SWIL as placing brokers, for advice about the terms of the 2009/2010 Hiscox cover which necessarily entailed consideration of notification of circumstances. SWIL took it upon itself to make a limited notification in circumstances where it ought to have appreciated that a wider notification was required. Oval however had much more knowledge than SWIL as to the widespread nature of the endemic or systemic failures in the sales process and the question of block notification should have been more apparent to it, as it appears to have been when the matter came up for consideration in 2010.

In the context of Oval’s direct claim against SWIL, comparative culpability matters in assessing negligence and contributory negligence in much the same way as an apportionment of liability for the self same damage under the 1978 Act. Of necessity a fairly broad brush approach is required and after much consideration I have concluded that the appropriate responsibility which rests on SWIL is 30% as compared with the responsibly of Oval which is 70%.

The reasonableness of the settlement between Oval and OFML is not in issue save for the question of OFML’s costs. The overall position on settlement is clear. OFML claimed £4.7107 million as the net loss in respect of sums which it would have received had a block notification been made in 2009, together with the costs of pursuing Hiscox, which it claimed as damages. Interest was claimed on that sum. It claimed £1.3 million in costs incurred in pursuing Oval. The settlement which Oval achieved resulted in a payment by it of £1.85 million in respect of damages and £700,000 in respect of costs. Additionally it provided an indemnity to a limit of £1.7 million in respect of any claim which CNA might make against OFML for recovery of sums paid in policy years subsequent to the 2008/2009 year. The likelihood of that indemnity being called on is remote.

The issue with regard to OFML’s costs arises because it is SWIL’s case that Oval should have settled with OFML not later than 30th November 2015, in the light of experts’ reports which had been exchanged on 7th September. Settlement was in fact achieved on 21st December 2015. The element of costs for which SWIL should not have any responsibility is therefore said to be those costs incurred between 30th November 2015 and 21st December 2015 by OFML.

In my judgment, when one is concerned with a settlement of this kind, it is the global figures which matter. In the context of a claim which, with costs, totalled over £6 million, a settlement of £2.55 million in all, together with the provision of an indemnity which is unlikely to be called on, constituted a very good settlement. It cannot in my judgment be said that there was any unreasonable element in the settlement, since the figures must be considered as a whole rather than broken down to the constituent parts in the way that SWIL suggests. In any settlement there is a question of give and take and the way in which sums are attributed to particular elements of the claim and costs is ultimately neither here nor there, in the absence of some extraordinary feature. In order to achieve that settlement, Oval had reasonably to incur the costs that it did, in resisting OFML’s claim.

In those circumstances, it is the sum of £2.55 million which falls to be apportioned as between the brokers so that 30% of that figure is recoverable by Oval from SWIL. Similarly, it should recover 30% of its costs of resisting OFML’s claim, such costs to be the subject of assessment on the indemnity basis, if not agreed. Likewise the provision for an indemnity should reflect the same apportionment.

The costs of this claim by Oval should reflect the degree of success achieved. If the parties cannot agree on how this should work, I will hear submissions on the subject along with any other issues which arise in relation to the form of order to be made.