UK: Insurance: Waiver Of Breach Of Condition Precedent

A recent decision in the Commercial Court examined whether:

1. an insured’s breach of a condition precedent to promptly notify insurers of an incident giving rise to a liability could automatically discharge insurers from their liability to pay a particular claim under a policy; and
2. whether the breach could ever in fact be waived by the insurer as a result.

In finding for the insured the judge held that the condition, which related to "non-performance of obligations relating to the procedure for making claims", did not amount to a promissory warranty affecting the cover as a whole. As a result there was no automatic discharge of liability of the Insurer from its entire liability under the policy, with the result that the insurer could, and had through its actions and representations, elect to accept the claim.

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A recent decision in the Commercial Court examined whether:

1. an insured’s breach of a condition precedent to promptly notify insurers of an incident giving rise to a liability could automatically discharge insurers from their liability to pay a particular claim under a policy; and
2. whether the breach could ever in fact be waived by the insurer as a result.

In finding for the insured the judge held that the condition, which related to "non-performance of obligations relating to the procedure for making claims", did not amount to a promissory warranty affecting the cover as a whole. As a result there was no automatic discharge of liability of the Insurer from its entire liability under the policy, with the result that the insurer could, and had through its actions and representations, elect to accept the claim.

In Kosmar Villa Holidays Plc v. Trustees of Syndicate 1243 the insured ("Kosmar"), a specialist tour operator, sought an indemnity under its combined liability policy from the defendant insurer which was the successor to Euclidean Direct Ltd. The indemnity was sought for a claim by a Mr Evans who had dived into a swimming pool in Corfu tragically fracturing his spine which resulted in incomplete tetraplegia.

The case centred on a claims cooperation clause the first limb of which provided that it was a condition precedent to liability that Kosmar "shall immediately after the occurrence of any injury or Damage give notice in writing with full particulars to Insurers". The second limb of the clause provided that "Upon receipt by or on behalf of the Insured of notice…of an intention by any person or body to make a claim against the Insured…the Insured shall notify insurers as soon as practicable". Kosmar failed to notify the insurer immediately of Mr Evans’ accident which occurred on 22 August 2002 in accordance with the first limb and it was not until they received a letter of claim from Mr Evans’ solicitors on 4 September 2003 that they notified the Insurer, thereby complying with the second limb of the claims cooperation clause.

Over the course of September 2003 the insurer was fully involved in the handling of the claim. This included receiving further information from Kosmar regarding the accident and corresponding with Kosmar and Mr Evans’ solicitors. On 30 September however the insurer wrote to Kosmar stating Kosmar had not notified it of the underlying occurrence and accordingly it was reserving its position. On 21 October the insurer’s then solicitors, Hill Dickinson, wrote to Kosmar stating they were in breach of the condition precedent to notify the injury immediately and as such the insurer was repudiating the claim under the policy. The letter also stated, "Policy cover does remain in force and premium will be retained."

Goss J rejected arguments put forward by Kosmar that the insurer was somehow estopped from relying on the first limb of the co-operation clause due to the previous dealings between the parties and representations the insurer had made to this effect. He did however accept Kosmar’s argument that through its actions the insurer had elected to accept the claim on the basis that:

1. from the moment it was notified of Mr Evans’ claim the insurer had sufficient knowledge of the facts to make an informed choice as to whether to accept or reject Kosmar’s claim;
2. the insurer knew it had that choice;
3. in the period of 17 to 23 September the insurer corresponded with Kosmar and Mr Evans’ solicitors (without reserving its rights) in a manner inconsistent with rejecting Kosmar’s claim which, as accepted by the Insurer’s underwriter in evidence, would have given both Kosmar and Mr Evans’ solicitors the impression that the insurer was dealing with the claim; and
4. at the date of the correspondence a reasonable amount of time had passed for the Insurer to decide on its stance in relation to Mr Evans’ claim.

The insurer’s argument was that no such choice over whether or not to accept the claim could arise because Kosmar’s breach of the co-operation clause (the fact of the breach was not disputed) which was a condition precedent to liability resulted in the insurer being automatically discharged from liability. In rejecting this argument Goss J sought to distinguish the breach of this co-operation clause from a breach of a promissory warranty by stating that:

1. in a breach of a promissory warranty cover as a whole ceases to be applicable, whereas in this case the effect of a breach impacted only on the claim in question;
2. the wording of the co-operation clause did not state that if it is breached the insurer is automatically discharged from liability in respect of a claim and there was no reason to suggest that in the circumstances of a breach the insurer should not be free to elect whether to reject or accept the claim; and
3. the above reasoning was in line with the decision in Diab v. Regent Insurance which clearly contemplated that there was scope for election in a case concerning non-compliance with a procedural condition precedent dealing with the giving of notice on the happening of any loss and damage.

It followed that the onus in October 2003 was on insurers to accept or reject the claim and, on the facts, they had elected to accept it.

The insurer’s final argument was that it was entitled to a reasonable time to consider its position and that time had not elapsed when it sought to reserve it’s position on 30 September. Goss J dismissed this argument by stating that due to the unusual facts of the case the insurer knew all it needed to know upon notification of the claim to justify denying liability or at least reserving its position. By continuing to deal with the claim insurers were exposing themselves to the risk of being held to have elected to accept the claim.

The court’s rejection of what might be considered a logical deduction from the authorities on the effect of a breach of condition precedent has merit in the light of the express provision in the Marine Insurance Act that even a breach of warranty (which specifically discharges an Insurer from the date of breach) can be waived.

The decision is, perhaps, more surprising on its facts given that insurers lost their rights of declinature in relation to a delay of over a year during the course of a single month. The case illustrates the need for an early, express and clear reservation of rights in the event that there are any policy points requiring investigation.

In order for insurers not to be deemed to have waived their rights, they must act quickly to investigate the claim or occurrence and if a breach of a condition precedent is suspected insurers should reserve their rights accordingly, before deciding on what position they will take in relation to that breach.

Further reading: Kosmar Villa Holidays Plc v. Trustees of Syndicate 1243 [2007] EWHC 458 (Comm).

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 27/09/2007.