Brit Syndicates Ltd & Ors v Italaudit SpA & Ors

The House of Lords construed a Lloyd's professional indemnity policy and in particular extension 3 which "included" Grant Thornton International (GTI) as an Assured Firm. The court held that extension 3 incorporates GTI into the policy so as to give GTI the protection of the second main insuring clause (liability by reason of membership in Grant Thornton International) without requiring that any claim against a member firm be itself shown to be insured under the main insuring clauses. The phrase "insured by the terms and conditions of this policy" in extension 3 is descriptive of those member firms appearing to be insured at the relevant time and does not operate to deprive GTI of cover by reason of undisclosed defects in another member firm's insurance unless the insurer has validly avoided cover ab initio. The court also explained the effect of a breach of warranty: a breach may prevent cover attaching as between insurer and insured but, until avoidance is effected, a firm remains an Assured Firm for the descriptive purposes of the policy.

This case concerned the scope of cover under a multinational professional indemnity policy taken out for the Grant Thornton family of accounting firms for 15 December 2003 to 14 December 2004. Parmalat's collapse led to United States litigation against Grant Thornton SpA (GT Italy) and claims also named Grant Thornton International (GTI). The insurers avoided GT Italy's policy for alleged non-disclosure and brought proceedings seeking declarations that the policy had been avoided; Langley J granted summary judgment in favour of GTI that it was entitled to indemnity under extension 3; the Court of Appeal allowed the insurers' cross-declaration and denied cover to GTI; the House of Lords allowed GTI's appeal.

Nature of the claim: insurers sought declarations that they had validly avoided the policy (and alternatively that there had been breach of warranty) and were discharged from obligations; GTI sought summary judgment that it was entitled to indemnity under extension 3.

Issues before the House of Lords:

• How is extension 3 to be construed: does it include GTI as an Assured Firm under the second insuring clause, and if so on what terms?
• Does the phrase "insured by the terms and conditions of this policy" require that the member firm against which a claim is made must itself be validly insured at the time, or is that phrase descriptive of those firms appearing to be insured?
• What is the effect of avoidance ab initio or breach of warranty on GTI's entitlement to indemnity?

Court's reasoning: the court treated the policy as a claims-made professional indemnity policy and analysed the structure and language of the insuring clauses and extensions. It concluded that extension 3 was intended to include GTI as an Assured Firm for the purpose of the second insuring clause (liability by reason of membership) and that the qualifying phrase was descriptive of the member firms as appearing to be insured under the policy. The court rejected a construction that would require the claim against the member firm to itself be insured under one of the main insuring clauses before GTI could recover. The court recognised that avoidance ab initio would remove a firm from the policy, but held that until avoidance is effected the firm remains an Assured Firm and GTI should not be prejudiced by undisclosed defects of which it was unaware. The court therefore allowed the appeal and restored Langley J's order in favour of GTI.

The court also directed parties to make submissions on costs in 21 days.

Appeal allowed. The House of Lords held that extension 3 should be construed to include Grant Thornton International as an Assured Firm for the purposes of the second insuring clause (liability by reason of membership in Grant Thornton International). The qualifying words "insured by the terms and conditions of this policy" are descriptive of member firms appearing to be insured and do not require that a claim against a member firm be itself shown to be insured under the main insuring clauses before GTI can claim; however, valid avoidance ab initio would remove the member firm from cover. Accordingly the Court of Appeal's order was set aside and Langley J's summary judgment for GTI was restored.

Respondent insurers obtained judgment in default against GT Italy (21 February 2006). Langley J granted summary judgment for GTI (3 March 2006). The Court of Appeal allowed the insurers' claim and gave summary judgment for insurers ([2006] EWCA Civ 1661; 6 December 2006). The House of Lords allowed GTI's appeal ([2008] UKHL 18; 12 March 2008).