The facts
Watford Community Housing Trust (Watford) faced a data breach when one of its employees mistakenly sent an email disclosing tenants’ and employees’ personal data, which resulted in claims.
The defendant broker had arranged three insurance policies for Watford:
1. Cyber Policy: Lloyd’s underwriters (limit £1m + defence costs)
2. Combined Policy with QBE (limit £5m)
3. PI Policy with Hiscox (limit £5m).
The broker advised Watford to notify the Cyber Policy insurers but failed to advise Watford to notify QBE and Hiscox at the same time. These insurers were only notified later and both declined cover because of late notification. QBE subsequently withdrew its declinature, but Hiscox maintained its denial. It was common ground between the parties that Hiscox was entitled to decline the claim.
The data breach claims fully exhausted the Cyber Policy and nearly eroded the £5m Combined Policy with the total claims expected to exceed that amount. Accordingly, Watford brought a claim against the broker for negligence, arguing that it would have had the benefit of all three policies (i.e. £11m) if all three insurers had been notified in time.
The broker disagreed and their overall argument was that the interrelationship between the three policies which all contained ‘other insurance’ clauses meant that Watford was effectively limited to £5m of insurance cover: since they had £6m available from the Cyber Policy and Combined Policy they had received more than they would have been entitled to if all insurers were properly notified. Consequently, any breach of the broker’s duty had not caused Watford any loss.
Relevant policy provisions
Each of the policies contained a clause dealing with the effect of other insurance (‘other insurance clause’) as follows.
Cyber Policy
This insurance shall apply in excess of any other valid and collectible insurance available to You, including any excess or deductible portion thereof, unless such other insurance is written only as specific excess insurance over the limit of liability of this Policy.”
Combined Policy
“non-contribution
If at the time of any claim under this policy there is any other valid and collectible insurance available to the insured… other than insurance that is specifically stated to be in excess of this policy… then the insurance afforded by this policy will be in excess of and will not contribute with such other insurance.”
PI Policy
“Other insurance
We will not make any payment under this policy where you would be entitled to be paid under any other insurance if this policy did not exist except in respect of any amount in excess of the amount that would have been payable under such other insurance had this policy not been effected.”
None of the policies contained a rateable proportion clause.
The court’s decision
The effect of the ‘other insurance’ provisions in the policies was heard as a preliminary issue.
Effect of the triple insurance: court held that the policies formed a horizontal primary layer
The broker argued that a literal reading of the ‘other insurance’ clauses in each of the three policies would make each contract of insurance an excess policy with the result that Watford would have no primary cover and none of the insurers would have been liable. However, since such an outcome would be absurd and/or commercially repugnant, the ‘other insurance’ clauses should be construed as if they cancelled each other out. The effect of this was that Watford had triple insurance providing a horizontal layer of primary cover for £1m, £5m and £5m.
Watford argued that the wording of the ‘other insurance’ clause in the PI Policy differed from the other two policies, because of the provision that it would apply where there would be cover under another policy ‘if this [i.e. the PI Policy] did not exist.’ The effect of this wording made the PI Policy into a contract of excess insurance providing Watford with a vertical layer of excess cover for £5m on top of a horizontal primary layer of double insurance consisting of the Cyber Policy and the Combined Policy
David Bailey K.C, sitting as a Deputy High Court Judge (DHCJ) disagreed with Watford and held that the three policies formed a horizontal primary layer.
The DHCJ considered the three classes of ‘other insurance’ clauses as set out in The National Farmers Union Mutual Insurance Society Limited v HSBC Insurance (UK) Limited [2011] Lloyd’s Rep. 86 : “and the third class [of ‘other insurance’ clauses] comprises those clauses that provide that, in the event of other insurance, the subject policy operates as an excess policy and only responds if and when the insured loss exceeds the amount of coverage recovered or recoverable under the other policy – ‘excess’ provisions.”
The DHCJ considered that the ‘other insurance’ clauses in each of the policies in this case were ‘excess provisions’ , and noted that ‘other insurance’ clauses are rarely encountered in isolation and typically, when two or more clauses are in play, each ‘pointing the proverbial finger’ at one other with the question then being how to interpret and apply multiple ‘other insurance’ clauses to the same risk.
The court followed the principle of construction set out in Weddell v Road Transport and General Insurance Co. [1932] 2 K.B. 563. This required each policy to be construed independently and “if each insurer would be liable as a primary insurer but for the existence of the other policy, then the ‘excess’ other insurance clauses are to be treated as cancelling each other out with the consequence that the insured has the benefit of double insurance in the form of a horizontal layer of primary cover”. For the DHCJ, the focus was on the objective of the ‘other insurance’ clause: if it was to transform the policy from a primary insurance into an excess cover in the event of other insurance, then the precise wording deployed to achieve this objective was unlikely to affect the result. Such an approach promoted certainty, and ‘other insurance’ clauses should be interpreted through the view of a reasonable policy holder rather than a pedantic minute textual analysis.
No general principle of rateable contribution, absent specific wording
The broker had argued that in a case of double (or, as here, triple) insurance, there was a generally applicable principle of rateable contribution which limited the liability of the insurers to the insured. Based on this argument, the maximum total indemnity to which Watford would have been entitled under all three polices was limited to £5m even if its total losses exceeded that amount.
During the case, the broker revised this stance, asserting that, where an insured had double insurance in the form of a horizontal layer of two or more primary liability policies the effect of the ‘other insurance’ clauses was that the maximum total indemnity recoverable by the insured could not exceed the highest limit of the horizontal layer.
Applying this to the facts, the broker argued the three insurers would have been liable to Watford for one third each of the first £1m of the loss, and QBE and Hiscox would have been jointly liable to Watford in equal shares for losses between £1m and £5m with a limit of £5m in total. Therefore, even though Watford’s loss was likely to exceed the £6m already provided by the Cyber Insurers and QBE, if the insurers were all held to their strict legal rights the maximum indemnity to which the claimant would have been entitled under all three policies was limited to £5m in total (£333,333.33 under the Cyber Policy and £2,333,333.33 under each of the PI). This was a greater amount than Watford would be able to recover from the Cyber Insurers and QBE and therefore Watford had suffered no loss as a result of the late notification.
The DHCJ disagreed with the broker on this point and concluded that, in the absence of a specific provision in the policies, there was no general principle or legal rule that in the case of multiple insurance a principle of rateable proportion applies. Instead, an insured party was at liberty to claim against its insurers in whatever order it wished: to suggest otherwise was to confuse the rights of contribution between insurers amongst themselves with the rights of an insurer against its insurer. Watford had paid premium for a total of £11m of coverage, and there was no legitimate basis on which its entitlement to an indemnity should be reduced to £5m. However, the principle of indemnity meant that the insured could not recover more than their actual or (in the case of a valued policy, their agreed) loss.
Effect of the aggregation provisions
The policies contained different aggregation provisions. The court held that, having decided the other points, it was not necessary in this case to decide whether this affected the operation of the ‘other insurance’ clauses.
Loss of a chance?
The broker had argued that the claim was one for loss of the chance of recovering an indemnity under the PI Policy and that it would therefore impossible to answer the preliminary issue without a further trial to determine whether or not the insurers would have complied with their legal obligations to the claimant. This argument found no favour with the DHCJ. If it was clear that the insurer would have been legally liable to an insured but for the broker’s negligence, there was no need to apply any discount to reflect any uncertainty in recovery.
Conclusion
This case demonstrates a pragmatic approach of the court to a messy situation, favouring the approach of a reasonable policy holder rather than an overly legalistic construction. It serves as a reminder to insureds and brokers to ensure that prompt notifications are made to all insurers potentially at risk of a claim.
Key Contacts
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2025.