Claims Co-operation clauses: what will be considered a "reasonable" time for compliance?

There has been much legal debate about the status of terms in insurance contracts that are expressed to be conditions precedent to the insurer’s liability to pay claims. In its judgment in the case of Shinedean Ltd -v- Alldown Demolition Ltd (in liquidation) [2005] All ER (D) 336, handed down on 28 October 2005, the TCC considered the issue in the context of claims co-operation clauses in a policy providing cover in relation to, amongst other things, public liability and contractors’ all risks.

The co-operation with which the TCC were concerned involved the failure by the insured to send documents to their insurers, following notification of a claim, in accordance with the conditions of the policy. The policy provided that it was a condition precedent to insurer’s liability that anything to be done or complied with by the insured should be duly observed.

In response to the insured’s failure to provide information and assistance, insurers declined to provide an indemnity in relation to the claim.

The Judge was asked to decide three preliminary issues and held:

• The claims co-operation clauses were conditions precedent to the insurer’s liability to provide indemnity under the policy.

• Notwithstanding the contra proferentem rule, it was necessary to imply a term into the insurance contract that the insured would comply with the conditions precedent regarding notification and co-operation within a reasonable time.

• There had in fact been no breach by the insured of the claims co-operation conditions in the policy and the insurers were not entitled to decline to pay the claim.

There has been much legal debate about the status of terms in insurance contracts that are expressed to be conditions precedent to the insurer's liability to pay claims. In its judgment in the case of Shinedean Ltd -v- Alldown Demolition Ltd (in liquidation) [2005] All ER (D) 336, handed down on 28 October 2005, the TCC considered the issue in the context of claims co-operation clauses in a policy providing cover in relation to, amongst other things, public liability and contractors' all risks.

The co-operation with which the TCC were concerned involved the failure by the insured to send documents to their insurers, following notification of a claim, in accordance with the conditions of the policy. The policy provided that it was a condition precedent to insurer's liability that anything to be done or complied with by the insured should be duly observed.

In response to the insured's failure to provide information and assistance, insurers declined to provide an indemnity in relation to the claim.

The Judge was asked to decide three preliminary issues and held:

• The claims co-operation clauses were conditions precedent to the insurer's liability to provide indemnity under the policy.

• Notwithstanding the contra proferentem rule, it was necessary to imply a term into the insurance contract that the insured would comply with the conditions precedent regarding notification and co-operation within a reasonable time.

• There had in fact been no breach by the insured of the claims co-operation conditions in the policy and the insurers were not entitled to decline to pay the claim.

The action arose from the collapse of a wall during demolition work by the defendant on 24 April 2002. The defendant's brokers notified its insurers (Axa) on 25 April 2002. On 5 June 2003 Axa's loss adjusters notified the brokers that no indemnity would be provided as the defendant had failed to provide Axa with information and assistance in accordance with the conditions of the policy.

Shortly afterwards, the owners of the adjoining property started proceedings against Shinedean (owners of the premises where the defendant had been working). These were settled. In the current proceedings, Shinedean sought a 100% contribution to the settlement, plus damages and costs, from the defendant. They obtained default judgment and Axa applied to be joined as second defendant to protect its position as insurer. The assessment was adjourned and the judge was called upon to decide a number of preliminary issues.

First, the judge determined that, save for some drawings and two letters, the documents requested by Axa's loss adjusters had not been provided by the defendant prior to its liquidation on 2 September 2004. The documents were eventually provided at the end of 2004 or the beginning of 2005 as an exhibit to a witness statement. The defendant was to blame for this and it offered no excuse or reason for the failure to provide the requested information. The information had first been requested at a meeting on 30th April 2002 and there had therefore been a delay of two and a half years or more.

Second, the judge considered whether compliance with the claims co-operation clause was a condition precedent to Axa's liability to indemnify the defendant under the policy.

The judge applied a statement made by the master of the rolls in a 1912 case that it is especially incumbent on insurance companies to make clear, both in their proposal forms and in their policies, the conditions that were precedent to their liability to pay. Accordingly, it had been established that the doctrine that policies were to be construed "contra proferentem" (i.e. against the person who used them) strongly applies against insurers.

In the present case the judge held that the co-operation clauses (which were labelled as being conditions precedent to liability) were sufficiently clear that the insurer would not be liable to pay a claim unless the relevant conditions had been complied with in relation to that claim.

The claims co-operation clauses did not state when the information and assistance had to be provided. The judge held that even allowing for the contra proferentem rule, there had to be a term implied in order to give business efficacy to the policy, ie that the insured would do the things required of it by way of notification and co-operation within a reasonable time. What is a reasonable time must depend on the facts in each case. It must also be interpreted generously in favour of the insured so far as it is reasonable to do so, rather than strictly in favour of the insurer. Having said this, the judge agreed with the submission that an insurer may well be unable to tell whether reasonable time has elapsed to enable it to close its books on a claim. This involves a degree of prejudice, albeit small, to the insurer which should not to be ignored.

Having set out these general principles, the judge considered whether Axa had suffered prejudice by reason of the delay and non-co-operation. Axa had argued that it had been unable to take an early view as to liability and negotiate accordingly. The judge was unpersuaded: on the facts of this particular case it could not be suggested that the insurer had suffered prejudice in relation to the claim of Shinedean against the defendant in relation to Shinedean's own losses. Further, following recent disclosure by Shinedean relating to the claim by the owners of the neighbouring property. Axa had accepted that Shinedean was entitled to an indemnity in principle for damages and costs.

Given these circumstances, the prejudice suffered by Axa over and above the prejudice suffered because they could not close their books on the claim, was described as "miniscule". The documents which ultimately came to the knowledge of Axa at the end of 2004 or the beginning of 2005 had therefore been supplied within a reasonable time. The conditions relied on by the insurer had been complied with and there were no grounds for declining an indemnity under the policy.

It is generally stated that breach of a condition precedent enables insurers to refuse indemnity regardless of whether prejudice has been suffered. This case re-introduces the issue of prejudice for conditions which do not provide a set period for compliance by making it a consideration in deciding how quickly the insured should reasonably take action on a request: the greater the potential prejudice, it seems, the shorter the time for compliance.

Insurers wishing to achieve greater certainty in the light of this decision should consider specifying a set time period for compliance or at least requesting that this takes place within a reasonable time, not to exceed a fixed minimum period.

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 17/01/2006.