“Only connect”: Insurance contract drafting guidance from the English court

It is a truth universally acknowledged that a contract with dodgy drafting must be in need of a judge.

Until judge and contract make contact, however, insurers don’t always know what policy drafting will ‘work’.

One part of a policy that really must work is the language describing the connection needed between the risk or ‘peril’ on the one hand, and the loss the insurer agrees to pay for on the other.

Fortunately, the courts have provided some guidance in this particular area.

The FCA test case

Paragraph 162 of Hamblen and Leggatt LLJ’s Supreme Court judgment in the Financial Conduct Authority test case ( FCA v Arch and others[2021] UKSC 1) surveys the landscape of wide and narrow connectors between a peril and a loss:

Many different formulations may be found in insurance policy wordings of the required connection between the occurrence of an insured peril and the loss against which the insurer agrees to indemnify the policyholder. This may be illustrated by the variety of phrases used in the sample wordings [at issue in the case] … “following”… “as a result of”... “arising from” and … “in consequence of”.

We do not think it profitable to search for shades of semantic difference between these phrases. Sometimes the policy language may indicate that a looser form of causal connection will suffice than would normally be required, such as use of the words “directly or indirectly caused by …”. The same may arguably be said in the present case of the word “following”. But it is rare for the test of causation to turn on such nuances.

The requirement of ‘proximate’ causation is based on the presumed intention of the contracting parties … But it is a presumption capable of being displaced if, on its proper interpretation, the policy provides for some other connection between loss and the occurrence of an insured peril.

In other words, a peril must be the proximate (or efficient or effective) cause of a loss for the loss to be covered unless the policy clearly says otherwise.

There is much to be said for making proximate cause the necessary connector between peril and loss, not least that English law now has oodles of precedent on what constitutes a proximate cause (for a recent example, see HHJ Pelling KC’s carefully considered decision in Sky UK Limited v Riverstone[2023] EWHC 1207 (Comm) affirming Butcher J’s finding in Stonegate v MS Amlin[2023] Lloyd’s Rep IR 672 that a decision – for example, at a Cobra meeting about what to do about Covid – can be the effective cause of a loss).

Brian Leighton (Garages) Limited

So, how to make proximate cause the required connector between peril and covered loss in an insurance contract? Enter Popplewell LJ in his Brian Leighton (Garages) v Allianz[2023] EWCA Civ 8 judgment.

This confirmed it is a “natural presumption” that the words “caused by” signify proximate cause.

Popplewell LJ also said in the same judgment that (a) the words “results from” can indicate something other than a proximate cause and (b) there are conflicting authorities about whether the words “arising from” signifies proximate cause.

Furthermore, Popplewell LJ gave a steer on what might oust proximate cause, saying that it is typically done “by a clause referring to losses caused ‘directly or indirectly’ by the insured or excepted peril”, citing in support Coxe v Employers’ Liability Assurance Corporation[1916] 2 KB 629 where the death of a soldier killed by a train was excluded under a policy because it was a loss “directly or indirectly caused by, arising from or traceable to war” and the court found he was killed during his military duties although war was not the proximate cause of his death.

What does all this mean for policy drafting?

Based on these cases, we can extrapolate to say that:

  • English courts will look for proximate, efficient or effective cause unless the policy language says otherwise.
  • To maximise the chances of a judge or arbitrator finding that a peril must be the proximate cause of a loss in order to be covered, use “caused by” as the connector.
  • Other formulations like “resulting from”, “as a result of”, “arising from” or possibly “in consequence of” or “due to” may indicate a looser connection but may not be enough to oust the presumption of proximate cause.
  • For a looser connection, use “directly or indirectly caused by” (possibly together with “arising from or traceable to”).

Per FCA v Arch the word “following” might also be construed widely although the authority for this is a little less secure. In this writer’s view, “in connection with” is also wide – perhaps even the widest – connecting language.

Something insurers may want to consider in drafting exclusions (and perhaps brokers drafting insuring clauses, for that matter!).