The court also found that the indemnity could be enforced by companies that were in the seller’s group at the time of the sale but had since left that group.

In reaching its decision, the court examined the rules for interpreting a contractual indemnity, including the principles that apply when deciding whether an indemnity extends to a party’s negligence.

Three key take-aways

• Where a term of a contract is unclear, the court will try to interpret it by trying to understand what the contract parties intended.
• To achieve this, the court will look at both the literal text of the contract and the factual context, balancing all factors against each other and giving them appropriate weight.
• In reaching its conclusion, the court may start with the assumption that a party will not surrender or limit its rights or assume liability for someone else’s negligence without clear wording. However, this is not an absolute rule, but merely one of the factors the court will take into account, and it may be trumped by other factors. 

What happened?

PA (GI) Ltd v Cigna Insurance Services (Europe) Ltd [2023] EWHC 1360 (Comm) concerned the sale of an insurance business. The background is as follows.

Royal and Sun Alliance Insurance (RSA) sold and administered a number of insurance products. In particular, RSA provided payment protection insurance (PPI), which was sold direct to customers through a number of retailers.

RSA had an indirect subsidiary (PAGI), which was the insurer under certain RSA master insurance policies, including PPI policies.

In April 2003, RSA sold certain of its insurance operations to Cigna as part of a management buy-out. The sale encompassed (among other things) its private medical insurance, travel insurance and “creditor insurance” operations.

The terms of the sale were set out in a business sale agreement (BSA) between RSA and Cigna. In the BSA, Cigna agreed to:

“assume liability for and indemnify and keep indemnified [RSA] or any other member of [RSA’s] Group against the payment or performance of the Liabilities with effect from the Completion Date”

This is not unusual (see box “Indemnities in a business sale agreement” below).

The BSA went on to define certain expressions that fed into that indemnity:

• “Liabilities”: “all liabilities of the Business (but [excluding] the Excluded Liabilities)”.
• “Business”: “the business conducted by [RSA] or another member of [RSA’s] Group prior to Completion of marketing, underwriting and servicing: … (d) Creditor Insurance products; … but does not include the Excluded Business”.
• “Creditor Insurance”: “insurance … cover in respect of a borrower's inability to repay … any credit made available … by a lender, as a result of the occurrence of a specified event”.
• “Excluded Business”: “the business conducted by [RSA] or another member of [RSA’s] Group (whether before or after Completion) of underwriting: … any Creditor Life Insurance products …”
• “Seller’s Group”: “[RSA], its subsidiary undertakings, its holding companies as at the date of this agreement and the subsidiary undertakings from time to time of such holding companies".

At the time of the sale, Cigna was not yet an authorised insurer. RSA and Cigna therefore also entered into a risk carrying and underwriting agreement (RCUA) for a transitional period. In connection with this arrangement, RSA transferred its own risk of liability under historical policies to Munich Re under a reinsurance agreement.

In September 2004, RSA sold various companies in its group that operated its principal life assurance business to Resolution Life. These companies included PAGI, so that, following that sale, PAGI left the RSA group and became a direct subsidiary of Resolution Life Limited.

In due course, customers of one of the retailers through which RSA’s PPI policies were sold raised complaints that they had been mis-sold policies. This turned out to be just one part of the now-well-known broader problem of the mis-selling of PPI products provided by various insurers across the UK.

As a result of the complaints, PAGI incurred liability in respect of the mis-selling.

PAGI consequently claimed against Cigna under the indemnity in the BSA.

Cigna argued that it was not liable under the indemnity for three reasons:

• The business of selling PPI was not part of the “Business” that was sold to Cigna. Specifically, it was part of the “Excluded Business” because it was a “Creditor Life Insurance product”. As a result, the indemnity did not apply.
• Even if it was, the wording of the indemnity was unclear and, based on previous case law – specifically, the Canada Steamship line of authority (see box “How are limitations of liability for negligence interpreted?” below) – the court should assume that the parties did not intend for Cigna to indemnify PAGI against PAGI’s own negligence.
• Even if the indemnity did transfer risk to Cigna, the indemnity was given to RSA and members of its group from time to time. PAGI had left the RSA group by the time it claimed under the indemnity and so was no longer entitled to benefit from it.

To resolve the arguments, the court had to interpret the various terms of the BSA to understand how RSA and Cigna had intended to apportion liability for negligent mis-selling.

Did the PPI business transfer to Cigna and the indemnity apply?

Yes.

The judge examined the definitions of “Business” and “Excluded Business” and noted the following:

• “Business” included the business of “marketing, underwriting and servicing” “Creditor Insurance products” (which included PPI). So, the business of selling PPI policies would have transferred to Cigna unless it fell within the definition of “Excluded Business”.
• “Excluded Business” extended to “underwriting” Creditor Life Insurance Products (including PPI), but not to “marketing” or “servicing” them. As a result, the business of marketing PPI policies had not been excluded from the sale and had transferred to Cigna.
• Liability for mis-selling PPI arose in the context of the sale of those policies and therefore came within the concept of “marketing”.

The result is that (subject to Cigna’s other arguments) the indemnity did apply to losses incurred as a result of PPI mis-selling.

Did the indemnity cover historical negligent mis-selling?

Yes.

The judge felt that the language of the contract was broad enough to cover mis-selling by PAGI’s agent for the following reasons:

• The indemnity covered "all liabilities" of the Business, except those that amounted to "Excluded Liabilities" (which the court concluded did not included liability for PPI mis-selling).
• The definition of "Business" expressly referred to liability incurred "pursuant to any … Distribution Contracts" and so explicitly contemplated liability as a result of an agent mis-selling PPI policies.
• The BSA was a complicated, professionally drafted contract with many interlinking definitions. It had not been produced in haste or with any informality. Although professionally drafted documents may contain ambiguous provisions, any clear language must carry considerable weight in those circumstances.
• A similar indemnity in the RCUA did expressly exclude liability for negligence. Similarly, the scope of the reinsurance agreement did not cover “mis-selling or maladministration” of insurance policies. However, no such similar wording appeared in the BSA. This suggested that, if the parties had intended to exclude liability for negligent mis-selling from the indemnity in the BSA, they would have done so.
• From the overall context, it was clear that RSA was selling an entire business to Cigna as a going concern. Both the BSA and the RCUA described Cigna as carrying on the business “in succession to” RSA.

Overall, in the judge’s view, in transferring its business as a going concern, it made sense that RSA would have looked to divest itself of its entire business and not to retain any liabilities unless it was indemnified against the risk.

Was PAGI entitled to rely on the indemnity?

Yes.

PAGI was not a party to the BSA. However, the BSA contained a third-party rights clause, allowing any member of “the Seller’s Group” (i.e. RSA’s group) to enforce the indemnity.

The term “Seller’s Group” (see above) was problematic. It included RSA’s holding companies “as at the date of the [BSA]” and the subsidiary undertakings of those holding companies “from time to time”.

But it did not expressly state whether it extended to RSA’s subsidiary undertakings as at the date of the BSA or from time to time.

However, noting that the words “from time to time” had been used to identify the subsidiary undertakings of RSA’s holding companies but not those of RSA itself, the judge concluded that the parties must have meant to refer to RSA’s subsidiary undertakings at the time of the BSA.

The court also noted that a separate clause in the BSA permitted the parties to assign their rights under the BSA to members of their respective groups “from time to time”, and that the assignment was to be reversed if that assignee left the relevant party’s group.

This suggested that, where the parties intended to capture companies “from time to time”, they had made this specific and clear in the BSA.

As a result, the reference to RSA’s subsidiary undertakings was to its undertakings at the time of the BSA. Although PAGI was no longer a subsidiary undertaking of RSA when the indemnity claim was made, it had been a subsidiary undertaking of RSA at the time of the BSA.

What does this mean for me?

The judgment shows the need for care and attention when drafting a complex contract.

Commercial agreements of the kind in this case often employ complicated and interlacing definitions and mechanisms. It is important to ensure the contract makes it clear how its different terms interact with one another.

This is not only good for avoiding litigation. It also helps to clarify that the parties share a common understanding of their commercial bargain and are “on the same page”.

Although the Canada Steamship rule has diminished over time, there is still a risk that a court will interpret an indemnity, exclusion or limitation such that it does not cover negligence. Parties should therefore make it clear, when drafting such a provision, whether they intend to apportion risk for historical negligence or lack of due care.

In this case, had the indemnity made it clear whether or not it extended to negligent mis-selling, there would have been little or no room for argument over its scope.