Brit Syndicates Limited for and on behalf of Brit Syndicate 2987 at Lloyd's for the 2003 year of account and others (Respondents)v Italaudit SpA (in liquidation) (formerly Grant Thornton SpA) and others (Appellants)

Where a professional indemnity policy included an umbrella organisation as an assured solely for claims arising from claims against an insured member firm, the provision gave the umbrella organisation the benefit of the policy’s association-liability cover. Its indemnity did not depend on the underlying claim against the member firm itself being covered.

A member firm remained insured for this purpose unless and until insurers exercised a right to avoid its insurance. An unknown breach of warranty affecting the member firm’s own cover did not deprive the separately insured umbrella organisation of its indemnity.

Following the collapse of Parmalat, investors brought United States class actions against its Italian auditor, a Grant Thornton member firm, and Grant Thornton International (GTI). The claim against GTI alleged liability arising from its control of, or association with, the Italian firm.

The respondent insurers sought declarations that the policy had been avoided for the Italian firm’s non-disclosure or that breach of warranty discharged them from liability. Langley J granted GTI summary judgment, holding that extension 3 afforded it an indemnity. The Court of Appeal, in [2006] EWCA Civ 1661, reversed that decision.

The central questions were whether GTI’s cover depended on the underlying claim against the Italian firm being insured, and whether avoidance or breach of warranty affecting that firm defeated GTI’s cover.

1. Disposition. The House unanimously allowed GTI’s appeal. Lord Mance delivered the leading speech, with which Lord Hoffmann, Lord Scott of Foscote, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury agreed. The Court of Appeal’s summary judgment for insurers was set aside and Langley J’s summary judgment for GTI was restored.
2. Construction of extension 3. Per Lord Mance, extension 3 included GTI as an Assured Firm and gave it the protection of the second insuring clause, which covered liability arising from association within the Grant Thornton organisation. The phrase “insured by the terms and conditions of this policy” described the relevant member firm. It did not qualify “claims made” or require the claim against that firm to be covered under either principal insuring clause.
3. The contrary construction produced an unlikely patchwork of cover. Member firms received broad protection against vicarious or partnership-type liability arising merely from their association within the organisation. It would be commercially odd for GTI, the umbrella organisation, to receive narrower protection for the same recognised risk. Extension 3’s opening words also naturally treated GTI as an assured able to invoke the insuring clauses, rather than making its cover parasitic on another firm’s successful claim.
4. Avoidance. A valid avoidance exercised before a claim against GTI would remove the member firm from the policy, so that it could no longer answer the description of an Assured Firm or insured member firm. Until insurers exercised avoidance, however, the firm remained within those descriptions. A subsequently exercised retrospective avoidance did not alter that position for the relevant purpose.
5. Breach of warranty. Per Lord Mance, compliance with an insurance warranty ordinarily operates as a precondition to the insurer’s liability, and breach may mean that cover never attaches. Nevertheless, references in this multi-assured policy to an Assured Firm described firms listed and apparently insured. GTI’s separate cover was not prejudiced by an unknown defect in another member firm’s insurance. Accordingly, an assumed breach of the basis-of-contract warranty by the Italian firm did not defeat GTI’s indemnity.

1. House of Lords: The appeal was allowed unanimously. The order of the Court of Appeal was set aside and Langley J’s order granting GTI summary judgment was restored.
2. Court of Appeal: In [2006] EWCA Civ 1661, the court allowed the insurers’ appeal and granted them summary judgment, holding that GTI had no indemnity if the insurers had validly avoided the Italian member firm’s insurance.
3. High Court: Langley J granted GTI summary judgment, holding that claims against it arising from claims against the Italian member firm fell within extension 3 even if insurers succeeded against that firm.