MDIS Ltd v Swinbank & Ors

Professional indemnity cover depends on the true nature and proximate cause of the liability established by judgment, arbitration award or compromise. A third party’s description of its claim does not determine whether the loss falls within the policy. The word “alleging” in an operative clause must be read in the context of the policy as a whole and does not convert cover into protection against liabilities whose true cause is an uninsured peril. Accordingly, a claim pleaded as negligence or breach of contract may fall outside cover if the loss was in fact proximately caused by dishonesty, including dishonesty by an employee which the insured could reasonably have discovered or suspected. In a compromise, the court must ascertain the real basis of the liability recognised, rather than rely solely on the allegations made by the third party.

MDIS, a software company, sought an indemnity under a professional indemnity policy for a sum paid to compromise contractual claims brought by Silkolene Lubricants Plc. The underlying claim alleged breach of contract, neglect, error and omission, but did not allege fraud. The insurers contended that the loss was in truth caused by dishonest misrepresentations by MDIS employees and was therefore excluded.

Mance J made a declaration under RSC Order 14A as to the construction of the policy. MDIS appealed. The central issue was whether cover under clause 2(a), referring to claims “alleging” neglect, error or omission, depended upon the form of the third party’s allegations or upon the true cause of the liability established by the compromise.

The Court of Appeal unanimously dismissed the appeal, with costs. Clarke LJ delivered the principal judgment; Judge LJ agreed. Peter Gibson LJ reached the same result but adopted a different construction of the word “alleging”.

1. Nature of indemnity. The insured had established a loss by compromising Silkolene’s claim. It still had to establish that the loss was legally caused by an insured peril. Under clause 2(a), that required proof that neglect, error or omission was the proximate cause of the liability.
2. Construction of the operative clause. The policy had to be construed as a whole and in its commercial context. Although “alleging” qualified “any claim”, it could not be given a literal effect which made the insurer’s liability depend fortuitously on the way a third party chose to plead its case. The wording was therefore to be understood as referring to liability in respect of an insured peril, with the true causation of the loss remaining decisive.
3. Dishonesty. The parties could not have intended insurers to be liable where a claim was expressed as negligence but the true proximate cause was dishonesty, while avoiding liability where dishonesty was expressly alleged. The exclusion concerning dishonest employee conduct was therefore relevant to determining whether the loss was insured.
4. Compromised claims. Where liability was established by compromise, the court had to take an overall view of the real basis and causation of the liability recognised. The third party’s allegations were relevant evidence, but were not conclusive. The insurers were entitled to investigate and prove that the loss resulted from dishonest employee conduct which MDIS could reasonably have discovered or suspected.

Peter Gibson LJ considered that “alleging” retained its ordinary meaning and did not itself import causation. He nevertheless concluded that the proviso to clause 2(b) could apply more broadly, producing the same result.

• Court of Appeal (Civil Division) — MDIS Ltd v Swinbank & Ors, [1999] EWCA Civ 1884: appeal from the order of Mance J dismissed with costs.
• High Court — Mance J made an order under RSC Order 14A on 31 July 1998 declaring the true meaning of the insurance provision. The citation of that order was not stated in the judgment.